Scammed though it was, the state was not entirely a fool either. Yeltsin and his team had good reason to go along with Loans for Shares aside from the revenue stream it produced. Privatizing the oil industry would break up the “red directorship,” the party bosses who controlled the industry and were not about to go gently into history’s good night. The support of the oligarchs was essential to Yeltsin in the 1996 elections, in which it was feared that an already weary, cynical electorate would veer hard left to the Communist Party.
Khodorkovsky was a man with a tendency to get religion. Beneath his placid, “corporate” exterior, he had a deep need to find something to which he could dedicate himself utterly. He became an apostle of the gospel of wealth. Suddenly it was obvious—the most glorious thing in the world was to be gloriously rich. Khodorkovsky even went so far as to say that there had to be something wrong with a person who did not aspire to be an oligarch. Yet he was not oblivious to the transformations that had occurred within himself, which he could regard with distance and irony: “If the old me met the new me, he’d shoot him.”[232]
But Khodorkovsky was undergoing other changes as well, some exactly those hoped for and predicted by the young team around Yeltsin busily dismantling the old command-and-control Soviet economy. Because of its own internal logic, ownership engenders a desire for law and order to protect property. Pride of ownership can in turn engender a desire to maintain and improve what is owned. This is, of course, far from automatic—many in Russia were content to rip off and resell and the devil take the hindmost. Most were not like the American robber barons whose extravagant wealth was at least based on the building of something—steel mills, banks, railroads. But Chubais and Yeltsin really believed in the market, in its power, over time, to shape mentality and behavior.
Khodorkovsky was someone who reacted in the very way the reformers hoped. He saw his newly acquired oil company, Yukos, as a challenge to his powers to envision and enact. A maximalist in the best Russian tradition, he strove to build the biggest, most efficient, most Western and transparent oil company in the country. He was loyal and generous to those around him, but woe to anyone who got in his way. At Yukos headquarters he had closed-circuit TV secretly installed to monitor the workers and abruptly fired a third who had been found not up to snuff. Later, there would be rumors and innuendos about Yukos-sponsored violence, but no evidence was ever brought forward, nothing ever proved.
Khodorkovsky faced many obstacles, not least of which was himself. The veteran Siberian oilmen could only snort with contempt at a city slicker with aviator glasses and a lounge-lizard mustache. He changed his look to something more modern and corporate, losing the mustache and switching to transparent-framed glasses. He fired some of those old-timers and won some over. He had come into the oil business just as it was hitting bottom. Production in 1996 was just about half what it had been in the peak Soviet year of 1987. Urals crude hit a low of $8.23 a barrel on June 15. This, however, also had its good side—the price for exports was now quite competitive, and since little oil was consumed at home, most of production could be exported in return for hard currency.
After the financial crisis of 1998 oil prices began an almost linear upward surge. Though Khodorkovsky’s fortunes as the head of Yukos were of course bound up with the price of oil, he still charted his own course. He broke cleanly with the Soviet past, refusing to have his company play the paternalistic role of providing social services like housing, hospitals, and schools. He brought in Western technology and specialists. He used computers to control the flow of oil and revenue, which had been haphazard, to say the least, under the Soviets.
During the financial crash of 1998, which essentially bankrupted the country, Yukos survived for two reasons—the improving cash flow it had from its newly streamlined computer-monitored production system, and Khodorkovsky’s creative reneging on his own financial obligations. Like many other banks in the country, Khodorkovsky’s Menatep went belly-up during the crisis, but not before he had switched its few remaining assets to a financial entity he owned in St. Petersburg. The Western banks that had loaned Khodorkovsky tens of millions of dollars were left holding the bag. A bewildering labyrinth of offshore shell companies guaranteed that he would always be several steps ahead of his creditors. Other, less subtle tricks were also used: in May 1999 a truck containing 607 boxes of Menatep documents somehow ended up in the Dubna River.
But Yukos was the end that justified the means. A year and a half after the financial crisis of 1998 its income had doubled and it costs fallen sharply. By the end of 2000 Yukos was holding $2.8 billion in cash.
But other things had also changed by the year 2000. Vladimir Putin had completed his unlikely rise to power, “a suave cop who had lucked into a big job” as Strobe Talbott, deputy secretary of state under Clinton, had described him.[233] Russian society was sick of the turmoil and larceny of the Yeltsin years. There was a palpable yearning for law and order. The bloom was definitely off the idea of democracy and privatization, foreign-enough-sounding words to a Russian ear anyway.
Not only was there a sentiment against the 1990s and its disappointments, but a doctrine had emerged in the late nineties that would in time put Khodorkovsky and Putin on a collision course. In those years there was an odd confluence in the thinking of Putin and the security types for whom order and control were paramount, and of liberal economists, who wanted a free market. At that point no contradiction was seen between a strong state and a free market. On the contrary, only a strong state could guarantee the regularity and tranquillity needed for markets to function. And there could be no state power if the state did not control the country’s natural resources.
As Putin said: “Russia will not soon become, if ever, a second edition of the USA or England…. In our country the state, its institutions and structures have always played an exceptionally important role in the country’s life and people. For the Russian people a strong state is not an anomaly, not something to be struggled against, but on the contrary a guarantor of order, the initiator and chief moving force of all changes.”[234]
In late July of 2000 the newly elected president of Russia, Vladimir Vladimirovich Putin, invited twenty-one oligarchs to the Kremlin to deliver his message: Keep your money, pay your taxes, stay out of politics. Khodorkovsky, one of those present, was probably not much impressed by Putin. He was short and had some of officialdom’s grayness about him, and his ascent seemed more a matter of dumb luck than of smart moves. Putin would soon prove perilous to “misunderestimate.”
By 2000 oil prices had doubled since hitting bottom in the years 1996–98. The government was deriving increased income from taxing sales rather than profits, which the Russians were masters at concealing. And then again the Kremlin had to ask itself: why tax oil companies when you could own them?
Yukos was growing richer all the time and its CEO, Mikhail Khodorkovsky, was increasingly an irritant for Putin on every level, from the personal to the political. He did not show the respect due a president. He took the wrong tone. Something haughty and dismissive entered his demeanor, especially when China and its voracious appetite for energy were concerned. Khodorkovsky wanted to build a pipeline to China, and to Putin’s objections he replied, in front of others: “Vladimir Vladimirovich, you do not understand the importance of developing relations with China.”[235]