The New Tsar (52 page)

Shell, which owned the project with Mitsu & Company and Mitsubishi Corporation in Japan, took the hint. It not only acquiesed to a new agreement, but sold a controlling share of the entire project to Gazprom for $7.45 billion, considerably below market price. At Putin’s insistence,
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Van der Veer then had to return to the Kremlin with the executives of Mitsu and Mitsubishi to validate the agreement before the cameras, a ceremony intended to show that Putin’s mastery extended beyond Russian officials and businessmen. “All of the world’s largest companies are benefiting from their work in Russia,” Putin told those gathered around a table in a conference room near his office. As for the massive environmental damage, Putin said the issue would “be regarded as almost settled in principle.”
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The foreign executives had lost control of the project, but they kept the oil and gas reserves on their books and millions in profits for their companies. And so, one by one, they welcomed
Gazprom as the project’s new owner and thanked Putin for his efforts to support international partnership, just as Kraft had.

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ach new acquisition emboldened Putin. At the end of 2005, Gazprom hiked the price of natural gas it delivered to Ukraine from a heavily discounted $50 per 1,000 cubic meters to $230, in line with prices charged in the rest of Europe. The increase was transparent retribution for Yushchenko’s flirtation with the West after taking power. Putin had negotiated the lower price ahead of the election, hoping to boost Yanukovych’s prospects, but now with the contract up for renewal and Yushchenko orienting the country toward Europe, Putin would make Ukraine pay more. It was not politics, Putin insisted, just business, but he sounded spiteful. “Why should we pay for that?” he said of Ukraine’s embrace of the West.

On New Year’s Eve, Putin offered a three-month reprieve and a loan to help Ukraine cope, but when the country continued to balk, Gazprom shut off the gas on New Year’s Day, with Putin’s blessing. As a hardball tactic, it backfired. Since most of Russia’s natural gas to Europe flowed through pipelines traversing Ukraine, the decision rippled across the continent at the height of winter. Instead of letting the rest of Russia’s gas continue to flow to Europe, Ukraine siphoned off what it needed, causing disruptions in pressure in Austria, France, Italy, Moldova, Poland, Romania, Slovakia, and Hungary. Russia had principle on its side, but Putin’s tactics rattled even those who had argued that Russia deserved respect. He also undermined his own strategy of showing Europe that Russia would be a dependable and indispensable energy source.

Putin had to retreat. He offered a compromise that would raise gas prices overall, but install as a middleman RosUkrEnergo, the shadowy trading company he had created with Leonid Kuchma in the months before the Orange Revolution. Gazprom owned half of it; the other owners, who remained secret then, included Dmitri Firtash, a Ukrainian businessman who acknowledged ties to one of the world’s most notorious mob bosses, Semion Mogilevich.
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Mogilevich, who was on the FBI’s Ten Most Wanted list because of a fraud case, had deep contacts with Ukraine’s government, including Yushchenko, and was said to have known Putin in the 1990s. According to one of the taped recordings of Kuchma, he lived in Moscow under a false identity with Putin’s protection in exchange for having worked as an intelligence agent for the Russians.
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The agreement gave Gazprom even greater control over
Ukraine’s gas supply, which might have been the point of the dispute in the first place, securing Russia’s control inside a country bent on turning away from it.

The terms of the deal and the murky ties between the middleman company and Yushchenko and his allies provoked a political furor in Ukraine that Putin easily exploited. When asked, he suggested that it was the Ukrainian leader who was behind the shadowy owners of RosUkrEnergo. “Ask Viktor Yushchenko,” he said. “I don’t know any more than you do, and Gazprom does not know either, believe me.” Putin was having his cake and eating it too. Gazprom got half the profits of selling its own natural gas to Ukraine, while Yushchenko was tarred with the implication of corrupt ties to a deal that was so controversial at home that it split the coalition that had led the Orange Revolution. By the time Ukraine held parliamentary elections in March 2006, Yulia Tymoshenko, the “gas princess” who had her own experience with the energy trade in Ukraine, railed against the agreement and the president she had helped win office. As a result, Yushchenko’s party fared dismally, forcing him to seek a new coalition with the man he had beaten, Viktor Yanukovych, who now began his political comeback.
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t was becoming unclear where the affairs of state and business diverged; people in Russia started to call the government Kremlin, Inc., with Putin as the CEO. He presided over not just Gazprom, but all the “national champions” at home, granting prerogatives that included protection from tax inspectors who were often unleashed against other businesses, small and large. And he lobbied for their interests abroad with a zeal that would have been unimaginable coming from Yeltsin in the 1990s.
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By 2005, the extent of his control over the state’s monopolies became evident, and it coincided with the elimination of the last political checks against his power in the parliament or the judiciary. Putin, who had vowed to eliminate the brash oligarchs as a “class,” had become the patron of a growing part of Russia’s economy. He did not dictate every business deal across Russia, but all the major ones required at least tacit approval from the Kremlin. The oligarchs from the 1990s who survived the transition to the Putin era showed their obsequiousness with acts of fealty and charity—as when Viktor Vekselberg bought and repatriated nine of the famous Fabergé eggs or the bells of the Danilov Monastery that rang for nearly a century at Harvard University’s Lowell House.

There were certainly other acts few knew about, quiet exchanges of
favors and gifts done to preserve their fortunes. One that had been meant to be secret would eventually leak out, providing a rare glimpse of how fortunes were made behind the scenes. In 2000, Nikolai Shamalov, one of Putin’s colleagues in the Ozero dacha cooperative at Lake Komsomolskoye, struck a deal with the owners of a small medical supply company that Putin’s committee in Petersburg had helped create in 1992. It was called Petromed, and though the city of Petersburg eventually sold its majority shares, the company had flourished. Shamalov arranged with its owners to accept donations from oligarchs who were “coming forward” to offer help to the new president. Roman Abramovich pledged $203 million, for example, while Aleksei Mordashov, the owner of the metal and mining conglomerate Severstal, offered $15 million. The donations would be used to purchase medical equipment, but part of the receipts would be funneled into offshore bank accounts that were then used to acquire other assets in Russia, including, allegedly, shares in Bank Rossiya. The arrangement started out relatively small and entirely secret, but by 2005, Shamalov told the owners of Petromed that the proceeds from the donations—estimated by then to amount to nearly half a billion dollars—would now be funneled from the offshore accounts into a new investment company in Russia, called Rosinvest. And its principal investment became the construction of a luxury home on the Black Sea coast near Sochi, where Soviet rulers had vacationed in luxury and Putin already had the run of the presidential retreat. The home would be a palace “fit for a tsar,” with an estimated cost of $1 billion.
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None of this became public at the time. It was known only to a few businessmen and government officials who were discreet enough or corrupt enough not to divulge what was going on. It was here in the murky nexus where the state met business that a new class of oligarch would emerge from the shadow periphery of the economy—and from Putin’s past.

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uri Kovalchuk, the physicist Putin had worked with in some of Petersburg’s early experiments in capitalism, had continued to operate Bank Rossiya, an institution founded in the Soviet era. In the early part of the decade, it remained little more than a small provincial institution handling the assets of its shareholders with no discernible part in the economic boom that followed Putin’s rise to power. The bank, however, united the circle of men Putin had befriended in the 1990s and with whom he remained close even after his political fortunes catapulted him far higher than anyone expected, including his partners in the dacha
cooperative. Like their fortunes, the cooperative had grown with Putin’s rise, expanding at the expense of neighbors, allegedly in order to install the necessary security measures. The owners faced legal challenges from neighbors who complained that their access to the lake had been expropriated. One complained that the cooperative’s head, Vladimir Smirnov, whom Putin had appointed to head the nuclear export agency, had throttled her when she tried to exercise her right of way to the shore by crossing through a fence.
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By the end of his first term, though, Putin was said to have sold his share, having far more ambitious plans for his own personal space.

Some of the dacha owners, like Smirnov, had followed Putin to Moscow to take on public roles in the government. Andrei Fursenko became a deputy minister, then minister of industry, science, and technology, and finally, in 2004, minister of education and science. Vladimir Yakunin took over Russian Railways in 2005. Others, including Kovalchuk and Nikolai Shamalov, who had worked as the director in Russia for the German manufacturer Siemens, kept a much lower profile. Their bank had lost its privileged access to the government coffers after Sobchak’s defeat as governor nearly a decade before, but with Putin’s accession things looked much brighter.

In Putin’s first term as president, men like Kovalchuk and Shamalov, along with Gennady Timchenko, all remained largely unknown. Putin’s first prime minister, Mikhail Kasyanov, could not recall ever having heard the name of either the bank or its owners in the many government deals he oversaw.
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Kovalchuk’s name surfaced in connection with Putin’s only in 2004, coincidentally the month Kasyanov was fired, when the doomed presidential challenger Ivan Rybkin published an ad in
Kommersant
accusing Putin of being in business with him, along with Timchenko and Roman Abramovich. Rybkin’s odd disappearance days later overshadowed his claims, and nobody paid much attention to these men, because on the scale of big business in Russia, they were inconsequential outsiders, minor players from the provinces. The bank reported scant profits the year Putin came to power, but like so much else in Putin’s Russia, that would soon change.

Kovalchuk took over as chairman of Bank Rossiya in 2004 after one of the country’s biggest oligarchs, Aleksei Mordashov of Severstal, deposited $19 million in the bank and then took an 8.8 percent share in exchange. It was then the equivalent of the bank’s entire capital.
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Many assumed Mordashov was trying to buy favor with Putin in the midst of
a struggle with a business rival, as he had happily donated funds to Petromed to buy hospital equipment. With its resources swelling, the bank then quietly bought nearly half of Gazprom’s insurance arm, Sogaz, on the stock market in July 2004. The total sale was $58 million, which was later argued to be significantly less than its value. It was the first sale by Gazprom of one of its non-core assets. Officials and analysts had long argued that the company should sell them, but this sale seemed puzzling, especially since the bidding was closed and the buyers remained behind the scenes. Putin intervened directly in the deal, ordering that the shares go to Bank Rossiya. “Putin said, ‘Bank Rossiya,’ that’s it,” a former deputy minister during Putin’s first term, Vladimir Milov, recalled later. The liberals in his cabinet seemed shocked or confused,
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as Bank Rossiya’s role in the purchase did not become public until January 2005. It now controlled Sogaz through a series of shell companies, including one created in Petersburg in 2002 called Aksept, which was owned by Mikhail Shelomov, the grandson of Putin’s uncle, Ivan Shelomov, who had helped evacuate Putin’s mother during the Nazi invasion. To those in the know, the bank clearly had a privileged status, with ties to the very top.

Now business simply flowed toward the bank. Sogaz soon became the insurer of choice for major state companies like Russian Railways, headed by Yakunin, and Rosneft, now controlled by Igor Sechin. That in turn fueled a phenomenal expansion, as Bank Rossiya quietly acquired more and more of Gazprom’s assets, including its banking subsidiary and ultimately its media holdings. The bank’s expansion began as a stealth operation, executed patiently and secretly, its ownership structure obscured in layers of offshore companies stacked like matryoshka nesting dolls, hiding, some would suspect, Putin’s personal stakes in them.

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n his first term Putin had moved slowly to set the economy on its feet, benefiting enormously from the unexpected surge in the price of oil (which in turn affected the price of natural gas), but his second term represented a significant shift, one that coincided with the departure of some of his liberal advisers and the consolidation of the Kremlin’s control over the branches of government, as well as over the media and business. Now, with the country increasingly solvent, he began to redistribute the proceeds to a new generation of tycoons in waiting, those who had not had the privileged, insider track to amass fortunes in the 1990s. None of them were billionaires then, flashing their wealth ostentatiously. They were a new generation of oligarchs, made in the Putin
model: dour, colorless, secretive, and intensely loyal to the man who brought them out of relative obscurity. Those who had not joined Putin in the ranks of government soon followed in business.