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Putin's Best Offer

Khodorkovsky was ignoring the rules Putin had issued in earlier meetings with the oligarchs. To obtain at least an uneasy peace, Putin offered a policy of "live and let live." He was willing to turn a blind eye to the origins of the oligarchs' wealth, and he would allow them to accumulate more. But he knew he had to protect himself from the influence their wealth could buy. So, in return for his forbearance, Putin insisted that the oligarchs deny financial support to his political opponents.

It was a classic Putin maneuver: Dangle the carrot, but keep the stick at hand. Those who went along stayed rich; those who declined the offer...

Still moving to expand his business empire, Khodorkovsky announced that Yukos would merge with Sibneft—another oil company that, on its own, was already larger than Rosneft, which was Putin's pet. Fellow oligarchs Roman Abramovich and Boris Berezovsky had acquired Sibneft during Yeltsin's Loans for Shares auctions, each paying $100 million for a half interest, which they rapidly turned into billions. Abramovich later bought out Berezovsky, and at the time of the planned merger, he owned most of Sibneft.

The new entity, which was to be known as YukosSibneft Oil Company, would have produced 30 percent of Russia's oil, and it would have held the third-largest privately owned oil reserves in the world, right behind Exxon Mobil Corporation and Royal Dutch Shell. In addition to the merger, Khodorkovsky was also in talks to sell the company to Exxon Mobil or Chevron. At one point, he was secretly shuttling between rooms at two hotels as he tried to drum up a bidding war between the two. He planned to become the largest shareholder in one or the other of the American petro-giants and to become rich and powerful on a Rockefeller scale.

The oligarch knew he wasn't going to get Putin's support for his dalliance with a foreign company, but he felt strong enough—and was greedy enough—to try to make an end run around the president. If

Putin found out, he would be furious. That the deal involved the sale of energy rights would make it doubly offensive.

In the emerging system, widely known as Kremlin Incorporated, striking a deal with foreign partners was simply not the prerogative of a private businessman. Proper procedure would have been for Khodorkovsky to seek Putin's blessing before advancing such an initiative. As with any big deal, it wouldn't become official until a TV broadcast featured the president signing off on it.

Putin did find out. The Exxon representative—then-CEO Lee Raymond—became suspicious of the game Khodorkovsky was playing and phoned the president to ask whether the deal had his backing. Absolutely not, Putin said. He wasn't aware of the negotiations at all.

That was enough for Raymond, who recognized that Putin's magic wand was never going to be waved over Khodorkovsky's proposal and that the deal was dangerous. So Exxon backed off. Shortly thereafter, negotiations with Chevron also collapsed.

Nevertheless, the slight wasn't forgotten. Khodorkovsky had gone too far. He had shown major disrespect to Russia's leader.

That the Yukos/Sibneft merger threatened Putin's plan to steer Russia's oil industry was by itself enough of an insult. But in addition to Khodorkovsky's growing domination of oil, other factors—his great wealth, his outspoken scorn for Putin's policies, his eagerness to throw his financial might behind Putin's competitors, his readiness to flout protocol, and his overt disdain for the natural resources industry that had given him his power—made him an adversary too dangerous and irritating for Putin to ignore.

The conflict reached a crescendo in February 2003. At a public, media-attended meeting at the Kremlin between Putin and the oligarchs, Khodorkovsky sparred recklessly with Putin, challenging him on questions of government misconduct and implying that state officials were pocketing millions in bribes. He all but accused Putin of involvement in the theft of state assets.

It was a left hook to the jaw: Khodorkovsky versus Putin, broadcast live for all of Russia to see.

The president did not dispute the accusations, which was widely taken to mean that Khodorkovsky was correct.

But Putin clearly understood how damaging the allegations would be if left unanswered, so he quickly mounted a counteroffensive. He turned the tables on Khodorkovsky by pointing out the enormity of Yukos's oil reserves and asked how the company obtained them. He also referred to Yukos's history of tax issues and the question of whether those issues had been disposed of through bribery. Right uppercut from Putin.

Everyone—from the media to government to business to ordinary Russian viewers—understood Putin's veiled threat. He was stronger than the richest of the rich. Any disfavored oligarch would be prosecuted and held accountable for his anything-goes behavior in the 1990s. As of that pivotal day, all of Russia's wealthy were on notice that they would always be subject to Putin.

He stood as the man of steel, a man cut out for the times, just the sort Russians were looking for in their leadership.

Unfortunately for Khodorkovsky, he did not have the charisma for an effective media personality. He was no match for Putin as a propagandist, and his high-pitched voice was a poor instrument for delivering any message. Like most of the oligarchs, he was a Jew, which for many Russians made him a ready scapegoat for the country's problems. The public never saw him as one of them, as opposed to Putin, who seemed a latter-day Slavic warrior straight from the pages of their history books—despite his diminutive stature and even though almost nothing was known of Putin's ancestry before his grandparents.

Despite Khodorkovsky's offensive, Putin came out victorious in his first big media battle.

Later, privately, Putin would tell Lord John Browne, the former head of British Petroleum, "I have eaten more dirt than I need to from that man."

Indeed. No one could be allowed to challenge the authority of the state in so many ways. And now, unforgivably, Khodorkovsky had offended the president in front of the whole nation. Putin had no choice but to take him out.

 
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