So Gref made his speech, as quickly as he could, while communist deputies hammered their fists on their desks and drowned him out with their chants. The vote was held, the law was passed… and the chamber instantly turned into a battlefield. Opposing deputies punched, kicked and head-butted each other.
‘It was a historic moment,’ Gref reminisced later with a smile. ‘That’s how we won the right to own land in Russia.’
Hands off Gazprom
The initial effect of the package of reforms was impressive. Russians did start to pay their taxes. Inflation fell from 20 per cent in 2000 to 9 per cent in 2006. The economy grew steadily at around 6–7 per cent a year. With the help of rising world prices for oil and gas (Russia’s principal exports) the government did not just balance its books but went into surplus. It began paying off its huge foreign debt, which amounted to 130 per cent of GDP in 1998, reducing it by 2006 to just 18 per cent.
As petrodollars poured into the exchequer, the government faced a dilemma. There was those, including Gref, the economy minister, who wanted to spend the windfall on infrastructure: roads, railways, education and the healthcare system. Kudrin, the finance minister, on the other hand, feared that this could fuel inflation. He proposed instead the creation of a Stabilisation Fund, which would soak up surplus liquidity and build up a substantial cushion to protect the country if the price of oil should slump in the future. Most ministers wanted money straightaway for their industries. Regional governors complained to Putin that Kudrin was depriving the economy of cash. ‘We had hot discussions about this,’ said Gref. In the end both were satisfied. An Investment Fund was set up, which would plough up to $3 billion into infrastructure each year. ‘It was a public–private partnership,’ said Gref. ‘If there was private money, the state financed it. It allowed big factories, power stations and so on to be built with private money.’
But the big winner was Kudrin with his Stabilisation Fund, which reached 522 billion roubles ($18.5 billion) by the beginning of 2005, allowing Russia’s debts to the IMF ($3.3 billion) to be paid back in full. Oil revenues continued to pour in. By August 2006 Russia had also paid back its entire Soviet-era debt of almost $40 billion to the Paris Club of foreign government creditors – saving $7.7 billion in servicing costs. Even with these massive outlays, the Stabilisation Fund continued to accumulate as oil prices soared, giving Russia a healthy cushion to fall back on when prices slumped during the world economic crisis of 2008.
Putin’s prime minister for most of his first presidential term was Mikhail Kasyanov, a charming, English-speaking free-marketeer with a booming voice, who oversaw the implementation of the Gref Plan. He has since become one of Putin’s fiercest critics and a leader of the opposition. In 2008 he tried to run for president, but the Kremlin machine put paid to his plans by discovering alleged falsifications in the two million signatures collected to back his candidature. Back in the days of the ‘Putin spring’, however, he and the president saw eye to eye on almost everything. Even today he admits that Putin was at that time fully signed up to liberal reforms: ‘It seemed to me that Vladimir Putin and I were allies, building – maybe not without mistakes – a democratic state with a market economy.’5
Only in one major endeavour did the reformers fail – and it proved to be highly significant. Asked whether Putin interfered much in the day-to-day work of the government, Kasyanov replied: ‘In 90 per cent of cases he didn’t interfere. The other 10 per cent concerned Gazprom and almost everything connected with it.’6
Gazprom was the country’s largest company, and the biggest natural gas producer in the world. Created from the former Soviet Ministry of Gas, it was privatised under Yeltsin, but the state retained 40 per cent of the shares. It was in a parlous state, a hotbed of corruption, asset-stripping and tax-evasion.7 Putin came to power vowing to sort things out, and appointed two St Petersburg cronies – Dmitry Medvedev and Alexei Miller – as new chairman of the board and CEO respectively. Miller knew next to nothing about the gas industry: according to Kasyanov, he spent his entire first year in the job learning. But that was only half the trouble. For the Gref team, the main problem was that Gazprom was a Soviet-era behemoth whose grip on the entire process of exploration, extraction, distribution and sales stifled competition. The oil industry, by contrast, had been broken up into a large number of competing companies in the 1990s.
Vladimir Milov was the young deputy energy minister who was tasked with reforming the gas sector. The idea, Milov said in an interview, was to ‘break up the monopoly, separating distribution companies from production companies, turning them into smaller businesses, which were supposed to be privatised and compete with each other.’8 Putin supported similar plans for the de-monopolisation of the electricity industry, despite protests from his own adviser, Illarionov. But Gazprom was different.
In the autumn of 2002 Milov drafted a plan for the reform of Gazprom. It won Gref’s approval, and Kasyanov’s. ‘It used to seem to a lot of people,’ says Kasyanov, ‘that splitting up the production and transport of gas could lead to the disintegration of the whole sector, which was such an important part of the country’s life-support system. They still try to frighten people, saying that without Gazprom in its existing form, the whole of Russia would collapse. That was just scare-mongering. In fact, all competent economists and industrialists knew that you could carry out a gas reform safely and painlessly. Everything was ready for that.’
According to Milov, the plan was sent to Gazprom’s CEO, Alexei Miller, who at once raised it directly with Putin: ‘He wrote Putin a furious memo, saying it would be disastrous and we were threatening national security. Putin then wrote on the letter, “I basically agree with Mr Miller. Mr Kasyanov please take that into account.”’
Milov says he expected nothing else. ‘Putin had shown a very specific interest in Gazprom since his early days. It was quite clear that he thinks of this company as one of the ultimate attributes and sources of power.’
Kasyanov tried to present the plan three times to his cabinet, but Putin insisted that it needed more work and the prime minister should discuss it further with Miller. ‘Listen to Miller, listen to him personally,’ he told Kasyanov. ‘Don’t listen to these people who’re egging you on.’
Finally, in 2003, Putin simply ordered Kasyanov to drop the subject. ‘Literally five minutes before the start of the cabinet meeting he called me and told me to remove the item from the agenda.’ Gazprom, as we will see in later chapters, would become one of Putin’s most effective levers of power – in the media, economy and foreign policy.
The good life
Putin’s first term as president, largely thanks to the economic reform package, saw the first signs of growing foreign investor confidence. On the consumer side, giant multinationals, such as the French supermarket chain Auchan and the Swedish furniture outlet IKEA, pioneered huge retail parks in the Moscow suburbs. Each new IKEA store cost $50 million to open – but they hoped to recoup the investment quickly because, astonishingly, Muscovites seemed to have the cash to spend in them. The only thing that held back even greater investment was the vast amount of red tape and corruption that all entrepreneurs still faced in Russia – and few foreigners had the stamina or knowhow to overcome. (Chapter 12 will look at the crushing effect of corruption in Russia.) Still, IKEA’s huge blue and yellow furniture stores were like flags of modern life, fluttering all around the Moscow suburbs – and soon in other cities too.