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thebusinessonline: Yeltsin dismantled the Soviet Union but Putin is building a new empire

EXTRACT: A consortium led by Royal-Dutch-Shell ceded half of the $21.4bn (£10.7bn, e15.7bn) Sakhalin-2 oil and gas project to Gazprom earlier this month, following months of bullying by the state on spurious environmental grounds.


A free, democratic and prosperous Russia closely associated with the West – that was the vision the country’s former president, Boris Yeltsin, who died this week, so splendidly incarnated when he defiantly stood on that tank in Moscow in August 1991. But Yeltsin’s dream of a liberal Russia died long before him. While he deserves eternal gratitude for ending the Soviet Union with minimal bloodshed and for all his unstinting work in the earlier defeat of communism, Yeltsin’s great tragedy was that he also laid the seeds for the return of authoritarianism.

In 1996, in one of the worst political errors committed in any country in recent history, he effectively handed over state assets to a select few businessmen, the so-called oligarchs, in exchange for them funding his re-election campaign. This was the original sin of Russian democracy, the consequences of which the world will have to live with for years to come. The decision tainted both private enterprise and the electoral process.

It destroyed the credibility of privatisation, persuaded ordinary Russians that profits were inherently corrupt, that economics was a zero-sum game (you could only benefit at somebody else’s expense) and that democracy was as much of a conspiracy against the people as communism had been. Yeltsin should have ensured that privatisation was about the creation of a shareholder democracy and the dispersing of economic power; instead, by botching it, he set back the cause of economic and political liberalism in Russia by many decades.

The consequences have been terrible: Vladimir Putin, the current Russian president, can have a kangaroo court sentence Mikhail Khodorkovsky, the former head of Yukos, to nine years in prison and have his company swallowed up by state-run firms as a warning to those who would fund any opposition to him, because there is no public sympathy for the oligarchs. He can clamp down on freedom of speech because the people feel that they never gained anything from democracy anyway.

Mr Putin, for whom Yeltsin resigned, is repressive at home, aggressive abroad and a roadblock to effective action against rogue nations. The recent arrest of Garry Kasparov, the chess champion turned political activist, confirms that the regime will now brook no dissent. That a leader with an 80%-plus approval rating feels the need to go to such lengths shows how far Russia has slipped from the democratic ideals Yeltsin once fought for.

No alternative power centre to the Kremlin is permitted in Mr Putin’s Russia. His authority is enforced by fellow security service alumni (ie KGB) who account for around three-quarters of the country’s top officials, the so-called siloviki. Anything or anybody that could be a threat to the Kremlin’s control has been systematically silenced. Freedom House – the widely respected arbiter of human rights around the world – recently concluded that Russia is not a free country and is fast sliding to the level of a Belarus or a Burma.

Since 2003 all national television channels have been either under direct government control or run by state-owned companies. Indeed, such is the measure of control that the airtime given to senior figures is a more reliable guide for Kremlinologists than those grainy photos of the May Day parade ever were. Non-governmental organisations can be banned on a whim with the result that they now self-censor. Those that receive money from abroad, which include all major human rights organisations, are constantly harassed. Even the independence of the Russian Academy of Sciences has been curtailed. Pro-Kremlin youth groups intimidate those, including British diplomats, who question Mr Putin’s policies and 13 journalists have been assassinated during his presidency: no one has been convicted for any of these murders.

As always, domestic authoritarianism is mirrored in foreign policy. Mr Putin is determined to restore the Russian empire as evidenced by his intimidation of those countries in its “near abroad” – such as Georgia and Ukraine – that broke with Moscow. The Kremlin also wants to make Russia a superpower again. Key to both of these ambitions is energy: Russia produces 12% of the world’s oil supplies, second only to Saudi Arabia, and has 27% of the world’s proven gas reserves, more than any other country.

To ensure the state’s control of the commanding heights of the economy, Mr Putin has taken Russia’s energy production back under government control, hoping to profit from rising prices and use it as a strategic weapon by cutting off supplies to countries that refuse to kowtow to Moscow. By May, about 55% of Russian crude oil will be produced by the state, either directly or indirectly, up from 28% in December 2004. This has been achieved by the expropriation of Yukos and by pressuring western firms to hand over assets.

A consortium led by Royal-Dutch-Shell ceded half of the $21.4bn (£10.7bn, e15.7bn) Sakhalin-2 oil and gas project to Gazprom earlier this month, following months of bullying by the state on spurious environmental grounds. BP and TNK may have to do the same in their joint venture at the Siberian gas field Kovykta. No project without Gazprom involvement is allowed to export gas from Russia.

What is most depressing is that the situation will get worse after Mr Putin steps down in 2008. In February this year, he promoted the hardline defence hawk, Sergei Ivanov, from defence minister to first deputy prime minister – marking out him or his fellow first deputy prime minister, Dmitry Medvedev (also the chairman of Gazprom), as his likely successor. Since then, however, coverage of Mr Ivanov on state TV has almost doubled while Mr Medvedev’s has remained constant, suggesting that Ivanov has the advantage.

Mr Ivanov, like Mr Putin, is a graduate of the elite School 101 run by the KGB and is the favoured candidate of the security elite. He shares his boss’s views on the need for “strategic sectors” to be brought under state control, democracy to be managed and Russian influence expanded. Mr Ivanov is a fierce opponent of Nato’s eastward expansion, the promotion of democracy in Russia’s near-abroad and America’s desire for a missile defence shield to protect against attack from rogue states. He will be an explicit opponent of the West as president. His influence can be seen in the recent Russian dismissal of American offers to cooperate on missile defence.

In his last address as president, Yeltsin apologised “for having failed to jump in one leap from the grey, stagnant, totalitarian past to the clear, rich and civilized future”. But today such a future seems even further away than it did eight years ago. Such is the tragedy of Yeltsin and of Russia and the reality that global investors and western politicians must now confront.{648AA2E5-F658-4B89-B621-EDDDD0BBEB18}

Comment submitted for publication.

Your article mentions Russia’s seizure of Shell Sakhalin2 project. I innocently played a significant role in the Russian assault on Sakhalin Energy, the company in which Shell was the majority shareholder.  I co-own with my father, Alfred Donovan the website described by the so-called “Kremlin attack dog” Oleg Mitvol, as an anti-Shell website. More information about our activities can be found on

Mr Mitvol, acting in his capacity as Deputy Head of the Russian environmental agency RosPrirodNadzor, led the campaign against Shell. He has gone on record as stating that I supplied the evidence on which the Russian government was bringing a multibillion dollar lawsuit against Sakhalin Energy on alleged environmental grounds. Mitvol threatened a claim for $5 billion which later increased to $30 billion immediately prior to Shell’s surrender. The quotes from Mitvol can be read in a recent Prospect Magazine article which correctly stated that my involvement cost Shell billions:

I hoped when I supplied the information that Mitvol was acting out of legitimate genuine concern for the environment, rather than part of a ruthless plan to seize control of the Sakhalin2 project by Gazprom/Putin. I had in mind the plight of the endangered Western Pacific grey whale. The population is down to about 100 and of those only two dozen or so are females of breeding age. The only feeding ground is around Sakhalin Island. I also wanted to embarrass Shell. However, I soon had doubts about my contact with Mitvol and these grew as a result of subsequent events.

In the interview Mitvol said that he had called in Russian “special services” to investigate the authenticity of the information I had supplied to him. It struck me as being odd at the time that he did not ask if I could put him into direct contact with the Shell insider who supplied the Shell internal documents which I had passed on to him, or if I could supply any original documents for forensic examination. I heard nothing from Mitvol. I deduced that the reference to “special services” was to intimidate Shell management. There had been allegations in the press about the untimely demise of perceived enemies of the Kremlin.

I later offered further evidence to Mitvol and subsequently to Mark Stephens of Finers Stephens Innocent, the London law firm acting for RosPrirodNadzor.  I received no response from Mitvol. I did receive a reply from Mark Stephens, but it tended to confirm my suspicion about the bone fides of the campaign which the Russians had mounted against Shell. I also carried out some Internet research into Mitvol. The information revealed was interesting to say the least.

On reflection it is now plain that I played a key role in an event which set a precedence for what looks likes turning into a renationalisation programme (perhaps better described as a privatisation by Putin/Gazprom) of most of the huge gas and oil reserves in Russia.  Without the documentary evidence I supplied, the Putin government might not have felt sufficiently emboldened to risk the wrath of other nations. Without its success in forcing Shell to surrender, it might not now be turning the screws on other oil company projects in Russia. The Putin regime already has BP, ExxonMobil and Total projects in their sights.


Posted by John Donovan, co-owner of the website and its sister websites,,,,, and are all owned by John Donovan. There is also a Wikipedia article.

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