As the section below indicates, Putin's primary hold on power is via control of the Russian and global energy markets. Putin is not one to be underestimated. He is a brilliant politician, and an extremely capable leader. He is the diametrical opposite of our current leader.
However, I imagine that even Putin did not see the hydraulic fracturing revolution coming, and I bet that it could very well be his undoing, if the U.S. has the foresight to capitalize on it before the technology is replicated elsewhere. Sadly, we are mired down in a self-defecating push for green energy, thereby probably passing on our one chance to slow Putin down.
Either way though, this book is exactly up my alley of interest and I am going to buy it. Besides, it is only 22 USD!
The Colder War
By Marin KatusaI am going to tell you a story you’ll wish weren’t true.
Sometime soon, likely in the next five years or so, there is going to be an emergency meeting in the White House Situation Room. It probably will start in the wee hours of the morning, when the early risers among Europe’s oil traders and currency speculators have already begun to scramble out of the way of what’s coming. None of the worried participants in that meeting will have a good solution to propose, because there will be no way for the United States to turn without embracing calamity of one kind or another.
The president will listen as his closest advisers lay out the dilemma. After a long silence, he will say, “You’re telling me that everything – everything – is coming unglued.”
He’ll be right. At that point, there will be no good options, only less awful ones.
Don’t count on the wise and worldly who occupy the highest echelons of government power to know what they are doing when they sit in that meeting. Solving the puzzle of what to do will fall to the same kind of people who today are standing by and letting the disaster build.
Some of them just don’t know any better. They see all of mankind’s turmoil as cartoonlike conflicts between white hats and black hats. Others know that reality is more complex, but choose to feign ignorance – it’s so easy, and often politically convenient, to let everything boil down to good guys battling bad guys.
For years, political power players in the United States have joined their media allies in portraying Vladimir Putin as a coarse bully, a leftover from the KGB, a ruthless homophobic thug, a preening would-be Napoleon who worships men of action – especially himself. Even Hillary Clinton, who should know better, likened him to Hitler.
The ruthless part is quite real, but there is so much more to the truth. I’ve been studying Putin’s moves for as long as I’ve immersed myself in analyzing world energy markets – over a decade now. He’s a complicated man whom Americans have been viewing through the simplifying lens their leaders like to hold up. He is less of an ogre but far more dangerous than politicians and the media would lead you to believe.
It has been a terrible mistake for Washington’s political circles to dismiss him for so many years as just a hustler temporarily running a country, to cast him as a shooting star destined to flame out in the unforgiving world of Russian politics. It has been to his advantage that short people tend not to be taken seriously, even if, like Putin, they are martial arts champions and have a chiseled physique to display at age 62. And his less-than-dignified moments posing as He-Man have played into our readiness to treat him more as a clown than as a dangerous competitor.
But Washington should never have thought of him as a Cold War relic, any more than it should have thought of Russia as a once-lionlike country that had devolved into a goat. It should have seen that Putin has a long-range plan for Mother Russia – a map covering decades, not the four-year election cycles that dominate the attention of U.S. politicians – and both the vision and the resources to make the plan work. For 15 years, Putin has been formulating, bankrolling, and directing Cold War: The Sequel. Or, as I like to term it, The Colder War. He’s in it to win it.
And the way he plans to win it isn’t through the sword, but through control of the world’s energy supplies.
There’s no undoing the U.S. government’s failures to date. What I can do now is tell you the true story of the Colder War. I can trace the connections of world events you’ve read about and that only seemed unrelated. I can explain why Putin does what he does, so that you can anticipate what he’s likely to do next. I can show you the worldchanging power shift that is little recognized even though it is unfolding in plain sight, right before our eyes.
It’s all about energy – oil, gas, coal, uranium, hydroelectric power. Today, when you’re talking about energy, you’re talking about Putin. And vice versa.
Energy is what makes the world go round. For most of the past 60 years, the United States has prospered, largely because it has dominated the energy market but also because it issues the currency in which energy and other resources are traded – a nice monopoly to have. The United States has been top dog for so long, it’s a shock to imagine that things might soon be different.
Slowly but surely, however, U.S. strength has been ebbing as Putin positions himself for the final push. While the United States dithers over green energy, Russia has a Slavic tiger in its tank.
To understand where Vladimir Vladimirovich Putin is taking Russia, you need to go back to the country’s lost decade, the years after the collapse of the Soviet Union in 1989. If you were a Westerner, it was a time of prosperity and of self-congratulation for having won the Cold War. But if you were an average Josef Vodka caught up in the chaos that followed the demise of communism, it was a time of hardship, dislocation, and frightening uncertainty. And if you were Vladimir Putin, it was a time of anger and hardening – and preparing.
Given the country’s stunning rise since the 1990s, it’s easy to forget how bad things were.
It was 10 dismal years of lawlessness presided over by politicians who had been left bewildered by the task of bringing their country into the modern world. The sad decade was marked by the ascent of wildly profitable criminal syndicates and a coterie of oligarchs who fed on the government’s naïve plans for turning state enterprises into private ones. Operating as barely legal businessmen, they became billionaires almost overnight.
While the few celebrated, morale among ordinary Russians sank. They had just suffered through a long war in Afghanistan and its humiliating end. Then came the implosion of the Soviet Union, the grand empire they’d been told had been built for the ages. National pride had become a painful memory.
When the communist economy ground to a halt, no one in the government of the newborn Russian Federation knew what to do. Free markets were just beginning to emerge. Sizable and mature private businesses didn’t exist. There were no banks competent to judge credit risks. Almost no one understood stocks, bonds, commodities, or any kind of market other than the black one that had long flourished – and continued to do so. Property rights were a slogan with uncertain application. The ruble was worthless outside the country while internally inflation ran wild. Jobs disappeared, leaving millions unemployed. Infrastructure was crumbling. Millions of Russians fell into destitution.
It was the very definition of hard times. People’s prospects were so bleak that many clamored for a return to communism, the despised regime under which they at least knew where they stood (“We pretend to work; they pretend to pay us,” as the Soviet-era joke went). And the problems weren’t just with the economy.
There was, in particular, Chechnya. A secessionist movement of Islamic Chechens was reading the disorganization in Moscow as an invitation to press their bid for independence. They accepted the invitation, and in late 1994 the First Chechen War began.
Putin’s predecessor, Boris Yeltsin, was still in office at the time. Despite Moscow’s superior manpower, weaponry, and air support, the ragtag Chechen guerrillas fought Yeltsin’s mighty Russian army to a bloody, embarrassing stalemate.
By late 1995, Russian forces were utterly demoralized. That, along with a Russian public still smarting from the Afghanistan disaster and deeply opposed to the present conflict, led Yeltsin’s government to declare a ceasefire at the end of the following year.
Putin had been watching the debacle from afar, and it ground away at him. During most of the conflict, he was just another minor political figure in St. Petersburg, far removed from Kremlin politics. But he was filled with ambition and had already set his sights on higher office. To that end, he gathered together a circle of close confidants and in 1996 moved to Moscow, where a former colleague had invited him to join the Yeltsin administration.
Surrounding himself with loyal supporters was a shrewd strategy, or it might have been simply a matter of caution, given the hazards of Russian politics. Either way, it insulated him from potential enemies and would give him an unassailable base when he later moved to consolidate power.
Later came soon.
By 1998, Vladimir Putin – a formerly-obscure, low-level KGB agent – had become an ascendant political star to whom Yeltsin had taken a liking. First, in July 1998, Yeltsin had installed him as head of the Federal Security Service (FSB, successor to the KGB). Then, barely a year later, he appointed Putin to the office of prime minister.
In retrospect, it seems a meteoric rise. At the time, though, no one thought much of Putin. After all, he was Yeltsin’s sixth prime minister in eight years; it was a dead-end job. The new guy wasn’t expected to last longer than any of his predecessors.
Not for the last time, Putin was badly underestimated.
Becoming prime minister immediately drew Putin into the Chechen fray, which had heated up again. But rather than see it as a hopeless mess, he saw an opportunity to prove how different he was from the indecisive Yeltsin, whom he already felt confident he could replace. And the first milestone on that path was to engineer an ending very different from the first Chechen conflict.
Which he did.
In late September of 1999, newly-installed Prime Minister Putin ordered Russian warplanes to strike the Chechen capital of Grozny. A week later, Russian armored battalions that had been amassed on the border for months rolled across it. The Second Chechen War was on.
This time around, following a scorched-earth strategy, the Russian military turned its weapons on civilian targets. To avoid a repeat of the heavy Russian casualties sustained in the First Chechen War, they advanced slowly and in overwhelming force, using artillery and air power to soften Chechen defenses. Nearly 300,000 of Chechnya’s 800,000 civilians fled from the Russian advance and sought refuge in neighboring Russian republics.
The early success of the campaign in Chechnya positioned Putin perfectly for the stunner that came next: On December 31, 1999, Boris Yeltsin – whose approval rating had fallen to single digits – abruptly resigned. As provided in the Russian constitution, Prime Minister Putin succeeded Yeltsin and became acting president. Putin had jumped from an appointment as head of the FSB in July 1998 to an appointment as prime minister barely a year later, and then to acting president three months after that. It was an astonishing rise, unprecedented in Russian political history.
Had Putin expected to move so far so fast? Was it all planned? Of course we can’t know. But whether it happened mostly by design or mostly by chance, we can see that he played carpe diem masterfully.
He knew the kind of leader Russians had been pining for, so he gave priority to advancing his persona as the fearless tough guy. The one who pushed the take-no-prisoners approach in Chechnya. The one who would leave the president’s office to fly into the war zone to express his support of, and solidarity with, the troops. That was something Yeltsin never would have done.
The Russian people notice shows of strength, and they like them.
In an August 1999 poll, Putin had garnered less than 2 percent support as a presidential candidate despite (or perhaps because of) Yeltsin’s backing. By the time Election Day arrived in March 2000, his situation had changed entirely. Putin faced a lot of opposition. But none of the other candidates had a prayer. Russian troops had captured Grozny in February and the lightning victory in Chechnya was fresh in people’s minds. Putin was riding a wave of popularity. He took 53 percent of the vote and became president.
The reign of Vladimir Putin had begun. Like Peter the Great, the historical figure he most admired, he vowed to restore his country as a power of consequence. He knew that it wasn’t going to happen easily. But he believed he had been endowed with all the right qualities to bring it off: physical stamina, a keen intellect, a deep understanding of the ways of politics in the real world (and the role that energy plays), and an unwavering boldness of vision. It was time to tighten his hold on power by dealing with his enemies.
Next in Putin’s sights: the oligarchs
Chapter 2: Humbling the Oligarchs
For a national leader wishing to cement a hold on
power—especially a would-be autocrat—nothing beats war. Turning the
children of the common folk into soldiers and sending them to do battle
with a feared or hated enemy tends to unite those folk in support of
whoever is in charge, no matter what the actual reason for the fighting.
It works in any country.
Putin is always ready for the next move, the zag after the zig. He recognized that as quickly as war wins the population over to your side, the advantage can just as quickly be lost. The longer a war goes on, the more likely people are to turn against it. Lose a war, and everyone decides they were against it all along. So to gain from a bloody conflict, a leader needs a swift, decisive victory.
The First Chechen War had left Russians with a sour taste in their mouths. It went on for two years and ended with their well-equipped, modern army failing against a posse of back-country guerrillas—a replay of Afghanistan in Russia’s own backyard. No one was in the mood for more of the same.
The people rallied behind Putin because they detected his willingness to do whatever it took to get the job done. What else would you expect from an ex-KGB officer?
Predictably, Putin went at the Chechens with maximum firepower and subdued them with minimum loss of Russian lives. After that, Russia’s lingering troubles with the republic hardly mattered. The war had ended quickly, and it had ended in victory, a demonstration of Putin’s strength for all to see. No more wishy-washy leaders in the Kremlin. A real man was back at the helm. The people cheered.
Disposing of an outside threat was important as a first step toward Putin’s goal of reestablishing Russian might, with himself as the revered leader. It was the relatively simple part, however.
Next, he had to deal with his political enemies. Some were easy to identify. The drifting policies of the Yeltsin years had fostered a small class of crafty and often violent billionaires, a wild bunch known as the oligarchs.
In the words of a former deputy chairman of Russia’s central bank: “All Russian oligarchs are fiendishly ingenious, fiendishly strong, malicious, and greedy—tough customers to deal with.”
Land of Opportunity
During the 1990s, the country was struggling to adopt the ways
of a free-market society. After 70 years of enforced collectivism,
suffocation by central planning, and the quashing of individual
initiative, Russia’s freedom makeover wasn’t going smoothly.
The transition from centralized command and control to free markets was hindered by a massive flight of domestic capital, foreign investors deserting the country, a sharp rise in unemployment, widespread failure to meet payrolls for those who actually held jobs, and a precipitous drop in the foreign-exchange value of the ruble (which hit its all-time low in late 1993). Before the early 1990s, there wasn’t even a stock market.
Three generations of Russians had toiled under the threat of communism’s gulags and been trained to look to Moscow for decisions in all matters. And that was after three and a half centuries of submission to czarist rule. Suddenly, people were thrown into a situation they weren’t prepared for and had no experience with. That they were overwhelmed by their first whiff of freedom was hardly a surprise.
Most were utterly lost, but not all. As state control of enterprises withered, a few crafty individuals saw they could exploit what was happening. Some were already wealthy, whereas others simply seized the opportunity to start a fortune. What they all had in common was an aptitude for business that was in such short supply in Russia.
The best that can be said of the oligarchs is that they were ready for economic freedom when almost no one else was. They certainly helped with the transition to a market economy. But in a society where cronyism, bribery, extortion, and murder for hire are normal, it would be a stretch to argue that these newly minted billionaires came by their fortunes in an honest way.
They were utterly ruthless. But they would soon learn that someone else was even more so: Vladimir Putin.
Nailing Khodorkovsky
Putin realized early on that the key to Russia’s rebirth was its
vast wealth of natural resources. Oil, gas, uranium—the country had
them all in abundance. All figured into his master plan. And because of
their importance, energy companies could not be allowed to fall under
the control of foreign investors, no matter what. Even domestic private
owners would have to answer to the state or, more to the point, to
Putin.
The oligarchs mattered to Putin not merely because of their wealth but because energy was precisely the industry in which they were most prominent. Mikhail Khodorkovsky was the richest and most powerful of them, with a fortune of $18 billion. In his struggle with the oligarchs, Putin’s contest with Khodorkovsky was the decisive battle.
When it ended—with Khodorkovsky and others stripped of their wealth and imprisoned, exiled, or dead—there was no doubt that Putin would be the overlord of Russia’s energy sector. And he would be thanked for what he did. As with Chechnya, attacking the oligarchs was a hit with the public, who resented both their great wealth and how they had gotten it. Seeing them humbled amped up Putin’s popularity yet again.
The Khodorkovsky match was not the only front in Putin’s war with the oligarchs. But it was the splashiest, and it best illustrates his methods. Like Putin, Khodorkovsky had spent his childhood in a shabby communal apartment and, also like Putin, he had ambition to spare. After working as a leader in Komsomol, a communist youth organization, he opened the Youth Center for Scientific and Technological Development. Later he founded an import/export firm.
As he transitioned from communist to capitalist, Khodorkovsky came to believe that the new Russian economy should be centered on high-tech industries rather than on natural resources. That put him in conflict with Putin’s notion that resources are the natural engine for Russia’s economic progress.
Khodorkovsky became a prominent advocate for a free market. In 1993, he published the Russian capitalist manifesto, The Man with the Ruble. In it he wrote: “It is time to stop living according to Lenin! Our guiding light is Profit, acquired in a strictly legal way. Our Lord is His Majesty, Money, for it is only He who can lead us to wealth as the norm in life.”
Khodorkovsky’s compliance with the law was noticeably far from strict. But that was the norm at the time. Several of his early millionaire colleagues had gotten so closely involved with criminals that they eventually had to flee the country to save their lives and the lives of their families. Shootings in public view were common, as were kidnappings of women and children. It was all part of the cost of doing business. That Khodorkovsky’s import/export company was known to violate dozens of laws surprised no one, and by comparison with many others he was a goody-goody.
It was entering the financial arena that put Khodorkovsky on track to join the billionaires’ club. And it was through Bank Menatep that he positioned himself to become the richest man in the new Russia.
Vouchers
Bank Menatep, which Khodorkovsky established in 1989, made
significant profits, reportedly enhanced by diverted state funds. The
bank also operated a lucrative market for trading state privatization
vouchers, which turned out to be more than just another profit center.
Though it seems crazy now, the voucher program must have made sense to Boris Yeltsin at the time. He initiated it in 1992 on a day when, perhaps, he was heavily into the vodka.
Yeltsin proposed that every man, woman, and child in Russia be issued a voucher that could be exchanged for shares in one of the state enterprises undergoing privatization. That way, Yeltsin was convinced, every citizen would gain a stake in the emerging capitalist economy. However, consistent with capitalist principles, everyone would be free to trade or sell his or her voucher if one chose to.
The voucher idea had been imported to Russia by consulting economists from the United States. It made good sense in a textbook kind of way. But it made no sense at all if the vouchers were going to be issued to people who didn’t understand what the pieces of paper represented.
Over 140 million Russians participated in the grand voucher program, the great majority of them cash poor and lacking even a rudimentary comprehension of capital markets. Most chose to capture a little cash immediately by selling their vouchers.
That played right into the hands of anyone with a bit of investment sense—especially the oligarchs. They were ready and able to accommodate the millions of Russians who knew nothing about the vouchers except that they could be turned into instant cash. Buying on the very cheap, they gained control of formerly state-run companies, which concentrated an astronomical amount of wealth and power in the hands of a very few.
Khodorkovsky topped the list of those who made the people’s ignorance his gain. Through Bank Menatep and a separate holding company, he took control of a string of companies for mere kopecks on the ruble. It wasn’t quite theft, but it was a process in which informed consent played no role whatsoever.
In 1995, Group Menatep moved on Yukos, a major petroleum conglomerate. Yukos had been assembled by the Russian government in 1993 to roll up dozens of state-owned production, refining, and distribution assets, including one of the most productive oil fields in western Siberia. Like most other Russian companies struggling to adapt to a market economy, its performance had been dismal. Oil production rates were declining, employees were months behind in getting paid, and financial controls were haphazard.
Khodorkovsky set out to grab Yukos and fix it.
He captured Yukos in two bold moves and in so doing demonstrated that he was a wily businessman, someone to be reckoned with. Vladimir Putin—at the time still working for the mayor of St. Petersburg, but with his eye on higher office—took notice. Perhaps, given his dispassion in separating ends from means, he even admired how Khodorkovsky operated.
It happened this way: First, knowing that the Yeltsin administration was strapped for cash, Bank Menatep participated in the ill-fated “Loans for Shares” program. Under the arrangement, Yeltsin’s government pledged shares in several of Russia’s most profitable companies as collateral for loans from oligarch-controlled banks. The value of the collateral was several times more than the value of the loans secured. If the state defaulted—and its debilitated condition made that likely—the lending bank was supposed to auction off the shares. But the auctions that actually took place were rigged. Everything was carefully planned to exclude anyone who might outbid the lending bank.
In this instance, Bank Menatep lent the Kremlin $159 million under conditions that virtually ensured default. For collateral, the Kremlin pledged 45 percent of Yukos, which at that point was worth over $3 billion, or some 20 times the size of the loan. Then, when the government indeed defaulted, Khodorkovsky effectively swapped the IOU Bank Menatep was holding for nearly half of Yukos.
Days later, to gain full control, Menatep purchased another 33 percent of Yukos from Yeltsin’s desperate government for just $150 million, or about 15 cents on the dollar.
Over the next several years, Khodorkovsky brought the company back to health. In 2002 Yukos became the first Russian oil company to pay dividends to its shareholders, and by 2003 it was accounting for 20 percent of all Russian oil production and 2 percent of the world’s. It had become the country’s second-largest taxpayer, covering 4 percent of the Russian federal budget.
This was quite a high standing for a company about to be smashed. Whether Putin could have succeeded in moving on Khodorkovsky in a different political and economic climate is difficult to judge. But he clearly made savvy use of the man’s past.
Marin Katusa’s The Colder War is available here.
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