The New Tsar (62 page)

On the day after voters in the United States elected Barack Obama in November 2008, a moment widely celebrated around the world as the end of the Bush era of unbridled American aggression, Medvedev delivered his first national address since his inauguration. After the poisonous relations at the end of the Bush presidency, in which Putin even suggested that the United States had instigated the war in Georgia to boost the chances of Obama’s opponent, John McCain, it might have been a moment to welcome the change in administrations. As he spoke in the Grand Kremlin Palace, though, Medvedev did not even mention Obama. He blamed the United States for the war in Georgia and threatened to deploy ballistic missiles in Kaliningrad, the Russian enclave in Eastern Europe annexed as tribute after the Great Patriotic War, if the Americans built their missile defense system in Europe. Instead of coming across as tough-minded, Medvedev sounded tone-deaf. It was not even clear he believed his own bluster.

The making of Russia’s foreign policy had been notoriously opaque and unwieldy since Yeltsin’s era, but with two centers of political power it became even more so. Medvedev apologized for his remarks during his first visit to Washington two weeks later, where he met President Bush, though not the young president-elect. He claimed it had been a simple oversight to deliver his provocative warning on the day that
leaders around the world were congratulating Barack Obama. “With all my respect for the United States, I absolutely forgot about the important political event that had to take place that day,” he said, improbably. “There’s nothing personal here.”
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As with the war in Georgia, Medvedev seemed to trip over his own feet—or Putin’s.

A second crippling blow to Medvedev’s nascent presidency came only weeks after the war in Georgia ended. The windfall from the steady increase in oil and gas revenues had stimulated the country’s economic boom, driving up retail sales of everything from foreign cars to furniture and food. The economy had grown by an average of nearly 7 percent a year during Putin’s presidency; Putin had paid off the country’s foreign debt, amassed hundreds of billions of dollars in currency reserves, and, resisting pressure to spend freely, built a stabilization fund that would shield the country from any downturn. Newly installed in his post as prime minister, Putin acted as if his greatest legacy was irreversible. Coinciding with the political transition in 2008, however, Russia’s economy began to slow. With inflation rising, the new prime minister sought to exert his will on the market and the oligarchs. In July, prodded by complaints from energy executives about the rising costs of steel for pipelines, he convened a meeting of the metals industry in Nizhny Novgorod, the purpose of which became clear when he singled out the billionaire owner of Russia’s largest steel manufacturer, Mechel, for selling its coking coal on the domestic market for higher prices than abroad, thus avoiding taxes. (Igor Sechin was the one who had brought the matter to his attention, reportedly because of the economic pain Rosneft was feeling.) The company’s owner, Igor Zyuzin, already under pressure from clients and competitors, made the mistake of skipping the conference and checking into a cardiac hospital. Putin’s response was cutting. He suggested that perhaps the anti-monopoly authorities, even the prosecutor general, should inquire into the company’s affairs. “Of course, illness is illness, but I think he should get well as soon as possible,” he said. “Otherwise, we will have to send him a doctor and clean up all the problems.” By the end of the day, Mechel’s shares, traded on the New York Stock Exchange, lost more than a third of their value—nearly $6 billion—dragging down Russia’s already slumping markets.

Mechel swiftly released a contrite statement promising to address the prime minister’s concerns, but Putin had sent a clear message. He had no intention of taking his hands off the tiller of Russia’s command economy, intervening whenever he felt the impulse and undercutting Medvedev’s
early efforts to nurture a more attractive climate for investments. Medvedev and his aides appeared surprised by Putin’s assault. One of his senior aides, Arkady Dvorkovich, sought to calm the markets, but days later Putin reiterated his accusations that Mechel was evading taxes, sending its shares plummeting a second time. Putin acted as if Russia were invincible, an island of rising prosperity impervious to the financial storm that had been brewing all summer, from the moment the price of oil peaked at more than $140 a barrel.

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T
he global economic crisis triggered by the mortgage defaults in the United States in 2008 seemed at first to pose little threat to Russia’s economy since its banks had not issued the sort of subprime mortgages that had turned toxic. But the bankruptcy of the American investment bank Lehman Brothers on September 15—the same day oil slipped below $100 a barrel—reverberated around the world, and it hit Russia harder than most. By the end of the following day, the main stock index had dropped 17 percent. Panicked selling forced the suspension of trading repeatedly over the coming weeks, and even with government intervention to prop up shares, the market lost $1 trillion in a matter of months. Between October and December, $130 billion in capital flooded out of the country. While fewer Russians were invested in stocks compared, for example, to Americans, many of whom saw their life savings evaporate, the crisis hit Russians hard from the poorest to the richest. Disposable incomes fell almost immediately, as companies slashed costs, dragging down consumer spending, which only made production shrink more. Even the swaggering oligarchs “were pawning their yachts and selling their private jets.”
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Russia’s booming economy went bust so precipitously that Putin found himself presiding over a meltdown as grave as the crisis of 1998. It seemed like a bookend to the decade of prosperity that had undergirded his presidency.

Within days, the government had approved $40 billion in credits to shore up banks and another $50 billion in loans for 295 companies that accounted for 80 percent of the country’s economy. The Central Bank struggled to slow the decline in the ruble’s value, draining nearly $200 billion from the currency reserves, a third of the peak of $598 billion reached in August. Putin’s conservative macroeconomic policies—balancing budgets and building up reserves and a rainy-day fund, despite populist appeals from some in the Kremlin to spend more freely—proved prescient. Even now Putin felt pressure to bail out the
favored oligarchs and renationalize distressed companies ripe for taking over on the cheap. Yet he sided with the advisers who urged caution, “shifting more decision-making power to those who knew about and could do something for the economy,” as one of the government’s economic advisers, Sergei Guriev, later wrote.
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The liberals allied with Medvedev, including the finance minister, Andrei Kudrin, seemed to have prevailed in the short term, and none of the worst predictions of economic collapse came true. The effort was costly, though. Russia’s economy contracted 8 percent in 2009, the worst performance among the world’s twenty largest economies. For the first time Putin’s popularity slipped significantly, dragged down by popular discontent that at times spilled into the street as workers protested unpaid wages.

In his eight years as president, Putin had always been able to deflect criticism toward the government, which was headed by the prime minister. Now he held the post, and he deflected the blame elsewhere. He lashed out at what he saw as the external cause of Russia’s woes: the United States. In October, he took the unusual step of visiting the Duma to meet the Communists as a bloc of delegates for the first time in all his years in power. The gesture reflected his apprehension about the impact of the crisis on voters—pensioners, laborers, and those still nostalgic for the Soviet era—who supported the only opposition party holding elected office. The Communist leader, Gennady Zyuganov, dutifully called for more spending on key industries like agriculture, lamenting that Russia’s production of harvesters and tractors had fallen behind that of Belarus, and denounced as ineffective Kudrin’s “monetarist policy” to control the circulation of rubles. (He also used the opportunity to plead with Putin to ease up on the harassment of his party’s candidates in regional elections.) Putin had little interest in the Communist proposals, though. Zyuganov and his cadre were simply a foil for Putin to deliver a populist message. When the United States plunged into the Great Depression, Zyuganov noted in a long, rambling discourse, Franklin Delano Roosevelt had sent “his best economic advisers” to the Soviet Union to learn a thing or two, but now reckless American capitalist greed had brought calamity to the world. Putin, with the cameras rolling, was happy to agree. “You made a good point when you said that the faith in the United States as the leader of the free world and market economy has been shaken, as well as the trust in Wall Street as the center of this world,” he told him. “And it will never be restored. I agree with you here. Things will never be the same again.”

The crisis highlighted the underlying structural weaknesses in Russia’s economy, its dependence on energy resources, the crumbling industrial base, the pervasive corruption, the eroding infrastructure. (The country had fewer miles of paved roads in 2008 than it had had in 1997.)
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Economists like Sergei Guriev argued that Russia should heed the lessons of the crisis and enact meaningful changes, and advisers to Medvedev’s Kremlin, like Arkady Dvorkovich, agreed.
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Russia’s economy needed the rule of law, the protection of property rights and contracts, real competition and transparency, and some constraints on predatory and corrupt officials who would shake down companies and bleed their profits into their own pockets, hiding the illicit proceeds in foreign property and secret offshore accounts. Medvedev’s team in the Kremlin had drafted proposals to address at least some of these issues. In his first national address, the one he delivered the day after Barack Obama’s election, he called for a liberalization of the economy, freeing it from the bureaucracy that had grown under Putin’s leadership. “The state bureaucracy, as 20 years ago, is being guided by the same old mistrust in the free individual and in free enterprise,” he said in the speech, which had been twice postponed because of the financial crisis. “A strong state and an all-powerful bureaucracy is not the same thing. The former is an instrument which society needs to develop, to maintain order and strengthen democratic institutions. The latter is extremely dangerous.”
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The twin crises of the summer and fall, however, deflated Medvedev’s political aspirations. His closest aides blamed the crises for derailing his agenda, but Putin was the biggest obstacle. Putin had vetted drafts of Medvedev’s first major address in November 2008, a role no prime minister had played when he was president. He insisted on hawkish language toward the United States and the West generally that made Medvedev uncomfortable—hence the threat to put missiles in Kaliningrad.
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Worried about the political fallout from the economic downturn, Putin had also insisted on inserting another proposal in his protégé’s speech, one designed as a potential safety valve in the event the economic chaos threatened the political system itself. Early drafts did not include it; Putin had proposed it while meeting with Medvedev the day before the speech. When Medvedev dropped it into his remarks—almost as an aside, a single sentence in a speech of more than eight thousand words—not even his closest aides knew it was coming.
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Medvedev called for revising the Constitution, something Putin had steadfastly resisted for years despite numerous entreaties, insisting that altering it would
undermine political stability. The proposed change would extend the president’s term in office from four years to six and the term of Duma members from four to five. Medvedev offered no explanation for the change, only the justification that many democracies, like France, had longer presidential terms. He later insisted that the amendments, the first changes to the Constitution since it was drafted in 1993, were only “adjustments” that did not “change the political and legal essence of the current institutions.” In fact, they further strengthened the presidency and reduced the frequency of the election cycles that Putin had feared would become the focus for a “color revolution.”

The proposal stunned the political elite, especially since no one then understood the rationale behind it. Speculation swirled that the ultimate goal was to clear the way for Putin’s return to the presidency following a surprise Medvedev resignation. The change was carried out like other Putin special operations, swiftly and surreptitiously. Within nine days, the proposal barreled through the Duma, with only the Communists, his pliant prop only weeks before, opposing it. By the end of the year, the change had passed both houses of parliament with little debate, and certainly no input from the public. The beleaguered democrats tried to muster protests against the amendments, as well as against the government’s failure to turn around the staggering economy, but they faced relentless harassment from the Kremlin and its proxies, especially the youth groups that the Kremlin had nurtured.

In that winter of discontent Garry Kasparov, Boris Nemtsov, and Vladimir Milov and others tried to form a new opposition coalition, hoping to use the economic crisis to fuse together a dissident movement. They called it Solidarity, after Poland’s opposition group, formed in the grimmest years of martial law, but the opposition remained deeply atomized, consumed by personal rivalries and divided over tactics. Some of Putin’s critics still hoped to work within the system to bring about change. Others wanted to spark a revolution. Still others refused to join out of a personal dislike for Kasparov or Kasyanov. Solidarity held a founding congress one weekend in December, but had to go to extraordinary lengths to keep its location and timing secret. Previous efforts to meet had been scuttled when venues canceled after phone calls from the authorities. The tactics against even a marginal opposition movement underscored the Kremlin’s anxiety, but at the same time demonstrated its ability to smother any effort to organize anti-Putin sentiment. When Solidarity’s leaders finally met at a conference center in the suburb of
Khimki, a busload of activists from the Youth Guard, affiliated with United Russia, arrived to harass the attendees. Their bus was loaded with sheep, wearing hats and T-shirts with Solidarity’s emblem. Other protesters wore masks and threw bananas, the first of what would be many racist allusions to the new American president, the first of African heritage to hold the office. The message was crude but clear: Putin’s opponents were animals shepherded by the nefarious hand of the United States. The activists pushed the sheep from the bus, many of them injured or ill. The sheep staggered bleating on the pavement, where several of them died.
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