Next to go was Putin’s economics adviser, Andrei Illarionov – the man he had taken on despite his views on the futility and brutality of the Chechen campaign. Illarionov walked out in December 2005 after five years with Putin, delivering a devastating verdict on the country Russia had become. The country was no longer free and democratic, he said, but run by state corporations acting in their own interests. Until recently, he said, he could express his views freely, but now the political and economic system in Russia had changed, and he could no longer stay in post.
In the year following the arrest of Mikhail Khodorkovsky, the siloviki moved to grab his assets for themselves, even before he was found guilty of anything. The sell-off of his oil company Yukos to the state was accomplished in a stunningly cynical way. Claiming that it was owed more than $27 billion by Yukos, the government arranged an auction on 19 December 2004 to sell off the company’s main production unit, Yuganskneftegaz, to cover the tax claim. The state gas monopoly Gazprom registered to participate in the auction through a new oil subsidiary, Gazprom Neft. So did a company called Baikal Finance Group, which had only been created on 6 December. Its registered office was at an address used by a vodka shop, a mobile phone operator and a travel agency in the city of Tver, north of Moscow. Who its owners were, no one knew. Nonetheless it secured a massive loan from the state-owned Sberbank in order to participate in the auction. On the day, Gazprom Neft declined to place a bid, leaving the obscure Baikal Finance Group to buy Russia’s largest oil company for $9.3 billion.
Two days later, on a visit to Germany, Putin declared with a breathtaking pretence of innocence that the shareholders of Baikal Finance Group were ‘people who have been in the energy business for many years’, and that ‘as I have been informed, they intend to develop some sort of relationship with other energy companies in Russia, which are interested in this stock’. He didn’t know which companies they might be, of course, but ‘state companies have the same right as other players in the market’.
At his annual press conference on 23 December, Putin couldn’t quite remember the name ‘Baikal Finance Group’ any more. That day it had been bought in its entirety by none other than Igor Sechin’s Rosneft. Sechin, it is thought, was the founder of the mysterious and short-lived Baikal Finance Group. ‘Today, the state, using absolutely legal, market mechanisms, is ensuring its interests,’ said Putin. ‘I consider this perfectly normal.’
Meanwhile the trial continued of the man who had built Yukos into an oil giant in the first place. In May 2005 Mikhail Khodorkovsky was found guilty of fraud and sentenced to nine years in jail.
The energy weapon
Western governments – and Western investors – watched these events unfold with some trepidation. But there was worse to come. The repercussions of the Orange Revolution were far from over.
The new Ukrainian president, Viktor Yushchenko, headed straight for Moscow on 24 January 2005, the day after his inauguration, and President Putin seemed to appreciate it. When the Ukrainian referred to Russia as a ‘permanent strategic partner’, Putin noted, with a hint of surprise, ‘What you just said about strategic partnership is a very good and very pleasant sign.’
Nonetheless it was a meeting without smiles. Yushchenko felt misunderstood. He said in an interview: ‘My major concern was that all the steps we were taking, especially when it came to our democratic reforms, or the revival of our history, or the integration of Ukraine into the rest of the civilised world – Russia took all of these as anti-Russian steps.’18
It was a perfunctory visit, lasting only half a day. Then Yushchenko headed straight for Strasbourg to the Council of Europe, and to Brussels for a speech to the European Parliament. When he went to Washington in April he was received as a hero. He earned rapturous applause when he told Congress: ‘Today Ukraine is looking into the future with great hope and expectation. Free and fair elections have brought to state office a new generation of politicians not encumbered with the mentality of the Soviet past.’
Then he was taken to the Oval Office to meet George W. Bush. The president’s chief Ukraine adviser, Damon Wilson, recalled in an interview that Yushchenko seemed to lack focus. ‘He began the conversation by discussing the challenges he was facing as president of Ukraine, in particular the relationship with Russia. He began to set out, I think it may have been 12 points or so, a whole series of particular issues that he saw he needed to work through with Russia. And as he began to enumerate these challenges in a rather longwinded way, President Bush stopped him. He said, you don’t need to worry about these 12 challenges, you have one challenge you need to be concerned about with Russia – is Moscow prepared to see an independent sovereign democratic Ukraine make decisions about its own future? That’s the strategic challenge you face.’19
Wilson says the Americans were rather worried after that first visit. ‘We were quite concerned whether he understood the scale of the task before him – whether he understood how to go about addressing these issues. And, you know, while there was still a lot of enthusiasm and a lot of support, and a commitment in policy terms to figure out how to help him succeed in his task, his visit to Washington really did raise the first alarm bells – that we might have more difficulty than we thought, and how he could follow through on the promise of the Orange Revolution.’
The alarm bells rang louder at the end of the year when Yushchenko surprisingly struck a shady deal that the Americans thought stank of corruption, in order to dig himself out of a major crisis over Russian gas imports.
The first of Putin’s ‘gas wars’ began in March 2005, when the Russians apparently decided to punish the Ukrainians for their Orange Revolution by announcing that, from the following January, Gazprom would more than quadruple the price of its exports to Ukraine from $50 per 1,000 cubic metres to around $225. The situation was complicated by the fact that Gazprom also supplied 25 per cent of the European Union’s gas, mainly through pipelines crossing Ukraine, for which Kiev charged Gazprom transit fees. (Some countries relied 100 per cent on Russian supplies through Ukraine.) Russia supplied gas to all its former Soviet republics at prices far below world levels. But now that Ukraine was snubbing it and declaring itself to be allied with the West, Moscow saw no reason to continue to subsidise it.
In October Yushchenko’s chief of staff, Oleh Rybachuk, was summoned to Moscow and given a stern warning: agree to the price hike, or your gas will be turned off. ‘Putin was warning us that this isn’t a threat, we’re not bluffing,’ Rybachuk recalls. ‘If we don’t do a deal by 1 January, our supplies will be cut.’20
Two days before the deadline, Putin offered a solution: a Russian commercial loan worth $3.6 billion to enable Ukraine to adjust to the new price. Yushchenko turned it down. On New Year’s Eve, Putin made another last-minute offer: a three-month price freeze if Kiev would agree to the higher price after that. Yushchenko said he would pay no more than $80. Early on New Year’s Day, Gazprom engineers turned the taps on the pipelines entering Ukraine, and the gas stopped flowing.
It stopped flowing to Europe too. Hungary and Poland quickly saw their supplies disrupted. The export pipelines should not have been affected, but Gazprom claimed the Ukrainians were stealing supplies from the transit routes to make up for the shortfall in its own deliveries. European governments were livid. Moscow claimed it had no choice, that it was a commercial dispute. But the West saw it as a strong-arm tactic, retribution for Kiev’s display of independence.