Vodka Politics (70 page)

“And if they don’t?”

“Well,” Feshbach blinks. “Then they’ll die. More and more—at younger and younger ages. That’s all.”

22

The Rise and Fall of Putin’s Champion

Samokatnaya ulitsa—Bicycle Street—in eastern Moscow isn’t one of the city’s biggest or best-known thoroughfares. Compared to the noise of the busy capital, it is relatively serene. A quick ride uphill from the meandering Yauza River below is to be transported back in time one hundred years. Crowning the hill stands a sprawling, imperial-era red-brick industrial complex contrasted against the expressionless Soviet-era buildings that have grown up around it. This is the Kristall Distillery—the largest and most famous vodka manufacturer in Russia. Towering over the dozens of interconnected tin-roofed buildings loom a pair of smokestacks, evoking the mystery of Willy Wonka’s chocolate factory from the 1971 Gene Wilder movie.

“Moscow State Wine Warehouse No. 1” was built in 1901 as part of Tsar Nicholas II’s vodka monopoly. There was no better location: this was once the German quarter of taverns and whorehouses where the young Peter the Great learned to imbibe unthinkable quantities of alcohol. The grandiose palaces that Peter had built for his mistress Anna Mons and his drinking buddy Franz Lefort lie just across the river (
chapter 4
).

The Kristall plant has quite a history of its own. Even during Nicholas’s disastrous World War I prohibition, Kristall kept producing alcohol for foreign diplomats and for export to allies in far-off France (see
chapter 13
) before returning to maximum capacity when Joseph Stalin resurrected the state monopoly. It was a prime target of Nazi bombers during World War II, since it supplied both vodka and Molotov cocktails to the front. Like so much of Russia, it was severely damaged in 1941 but kept working anyway (
chapter 15
). In 1953—the year of Stalin’s death—the factory began producing Stolichnaya, which would gain worldwide fame as the quintessential Russian vodka. Only during
perestroika
in 1987 did the factory get the name Kristall. Following the collapse of communism, it was quickly privatized and became embroiled in a contentious legal battle over the rights to the Stolichnaya brand.
¹
But none of
this compared to the surreal events of the summer of 2000, Russia’s first year under Vladimir Putin.

On August 4, 2000, truckloads of heavily armed men in black ski masks rolled up Bicycle Street. In broad daylight they forced their way past plant security and stormed the factory: truncheons and pistols drawn, AK-47 Kalashnikovs at their side. But these weren’t gangster thugs or Chechen terrorists—it was the Russian Federal Tax Police Service, and they were there to confiscate evidence of tax evasion.

Tax evasion? How could that be? The plant had
just
been hailed as “Russia’s Outstanding Taxpayer of 1999,” contributing $89 million in taxes on $142 million in profits. Plus, even after privatization, a controlling fifty-one percent stake in the factory was held by the Moscow city government of longtime mayor Yury Luzhkov.
²

So—the government was not only charging its most heralded taxpayer with tax evasion but was actually raiding
its own
firm? What was really going on here?

International business reports dismissed it like so many business-related shoot-outs and
mafiya
drive-bys of Russia’s wild capitalist frontier under Boris Yeltsin. But Yeltsin was gone now, and his successor, Vladimir Putin, was intent on reining in the political and economic power Yeltsin devolved to others. So instead of cops versus crooks, or right versus wrong (in Russia, such absolute distinctions quickly get hazy), the drama on the Kristall factory floor was part of a larger Kremlin battle to recentralize power. Kristall was Moscow’s version of the local vodka monopolies that had become cash cows for struggling governors across Russia (see
chapter 20
). Thanks to Yeltsin’s goodwill toward his loyal mayor Luzhkov, even though the Kremlin retained the controlling fifty-one percent stake in Kristall after privatization, they allowed the mayor’s office to manage it and profit by it.
³
That was all about to end.

Return To Center

“
How can you govern a country with 246 different types of cheese?
” French President Charles de Gaulle famously proclaimed in a moment of French exasperation with French politics. His apt
précis
weighed on later Russian commentators, who wondered how the newly elected President Putin could govern a country with 180 vodka producers from across the country making some five thousand (supposedly) different types of vodka, each of which had become “a business as profitable as diamonds or oil” for
mafiosi
and regional governments alike.
⁴

Apparently Putin had a plan.

On the eve of the new millennium—December 31, 1999—a tottering Boris Yeltsin surprised the world by tearfully resigning as Russia’s first democratically elected president. His recently appointed Prime Minister Vladimir Putin would take his place until new elections could be held in March—elections that Putin would win in a landslide.

The iconic red-brick Kristall vodka factory in Moscow. ITAR-TASS/Vitaly Belousov.

On May 7, 2000, Putin strode confidently into the Kremlin’s opulent Andreyevsky Hall to take the oath of office. “We must not forget anything,” Putin boldly proclaimed in his inauguration speech. “We must know our history, know it as it really is, draw lessons from it and always remember those who created the Russian state, championed its dignity and made it a great, powerful and mighty state.”
⁵

Of course, vodka politics helped to create the mighty Russian state but was also its Achilles heel. Now, at the depth of Russia’s economic despair, it seemed that Putin was eyeing vodka to make Russia great again. The day before his inauguration, Putin’s administration created Rosspirtprom (an acronym for “Russian Spirits Industry”) to centralize control over the dozens of vodka factories in which the federal government retained a controlling interest, with Kristall as the ultimate prize.
⁶
Indeed, Rosspirtprom would become Putin’s first “national champion company.”

As Wellesley emeritus professor Marshall Goldman has explained, “these national champions would most likely be more than 50 percent owned by the Russian government” and “would put promotion of the state’s interest over profit maximization.”
⁷
Just as industrial giants like Rosneft and Gazprom served the Kremlin’s interests in oil and natural gas (while making their Kremlin-appointed
directors money hand over fist), Rosspirtprom came first, consolidating state control over the lucrative vodka market. “Vodka may not be gas or oil,” later explained the journal
Ekspert
, “but it too is a strategically important product. So important that to control its production it was necessary to create an alcohol equivalent of Gazprom.”
⁸

In every case, building a “champion” meant first unseating the existing ownership. In their first attempt, the Kremlin instructed Kristall’s director, Yury Yermilov, to quietly buy up shares from employees. But instead of being transferred to the state, these stocks were shuffled to offshore shell accounts. “I admit that 19 percent of the stock belongs to an offshore company in Cyprus,” said Yermilov’s sweat-browed chief accountant Vladimir Svirsky. “But this is a friendly company, and the stocks never vanished: they are working for the collective.”
⁹

Perhaps that would appease the feds. In the past, they had certainly looked the other way for worse. It was then revealed that, of the 700 million rubles that Kristall earned on domestic sales in 1999 (to say nothing of its lucrative Stolichnaya exports), the firm only reported earnings of 292 million rubles.

So—what happened to those other millions?

Time after time, the government-controlled board of directors attempted an audit. Time after time Yermilov headed them off—even using armed guards to bar entry to the plant. The board then elected a new director—Aleksandr Romanov (no relation)—to depose the corrupt Yermilov, who was now facing two to seven years in prison for tax fraud. Yermilov did what any upstanding businessman would do: he checked himself into a local hospital and bequeathed the job of factory director to his chief accountant Svirsky, who quickly hired a small army of shaved-head guards to hold off the auditors. But even they had to stand aside when the Federal Tax Police stormed in.
¹⁰

Within minutes of the Tax Service raid of August 4, the state’s recently approved director Romanov—with his own personal army of some twenty Kalashnikov-toting officers—announced his arrival to “re-establish the state’s control” of the factory’s executive offices.
¹¹
While Romanov held the central offices, Svirsky’s troops occupied the rest of the factory. In addition to their guns, Svirsky defended himself with a local court ruling that invalidated Romanov’s election. And so, a farcical, months-long armed standoff ensued between Kristall’s two managers and their personal armies: Romanov’s in green fatigues, Svirsky’s in blue. Both managers refused to leave the premises. And still, the plant churned out its two million gallons of vodka every month like clockwork.

“I don’t know whose orders we’re obeying—some director or other. Maybe they’ll kick us all out,” dismissively lamented one assembly line worker. “We don’t talk about it, we don’t have time—we do everything manually, as you can see. We don’t have time, we have to make a lot of vodka—our job is to work, to work and that’s all.”
¹²

Such indifference was not shared by the combatants. His phone lines having been cut by the blue opposition, Romanov hunkered down in his office day and night, afraid to leave. “I see many men with guns out there.”
¹³

“I never saw such a situation as this,” one guard told a reporter, chuckling and nodding toward his rival down the way. Surrounded by journalists on the factory floor, Svirsky pleaded ignorance: “We’re giving the state and the country fuel, in the form of liquid energy (vodka), we pay our taxes—and all of the sudden they decide to change the leadership. We don’t understand what happened. There was a court decision and the court said [Romanov’s claim] was illegal.”
¹⁴

Unaware of the Kremlin’s plans for a national-champion vodka company, Svirsky was blindsided. After a monthlong standoff across production lines of rattling vodka bottles, the Moscow court that previously annulled Romanov’s appointment suddenly—and suspiciously—reversed its decision and upheld the power of Romanov and the federal government. After weeks of futile appeals, armed with a court mandate and a local police battalion, Romanov swept the entire plant without incident. In one fell swoop, Svirsky was deposed, the plant was wrestled out of Mayor Luzhkov’s hands and squarely put in the federal government’s pocket.
¹⁵

Tax raids and confrontations soon became the standard operating procedure for Putin’s recentralization, often at the expense of the so-called oligarchs—the super-rich power brokers of the Yeltsin era—who would not play ball with the Kremlin. Closed-stock company Soyuzplodimport—the lucrative, former Soviet alcohol export agency held by Yeltsin-era oligarch (and Putin foe) Boris Berezovsky—was likewise investigated for fraud and embezzlement. Investigations into his shady business dealings pushed Berezovsky out of the inner circle of power and into self-imposed exile in London. “It looks as though the Federal Government is making it known that it intends to hold the vodka industry in its own hands and not allow anyone to compete,” wrote one Russian commentator: “not Yury Luzhkov, not Boris Berezovsky.”
¹⁶

The vodka industry was among the first in line for recentralization, alongside the Media-MOST company of Vladimir Gusinsky. Not only had Gusinsky bankrolled Putin’s political opposition, but his independent television network, NTV, was openly critical of Putin’s government and the recently resumed Chechen war. Following the storming of NTV headquarters by the tax police, Gusinsky was pressured to sell to another state-controlled national champion, Gazprom. Within months, Russia’s main independent media outlet was back under state control, and Gusinsky fled into European exile.
¹⁷

Gusinsky and Berezovsky were the first to violate Putin’s so-called “
shashlik
agreement.” In May 2000, Putin invited many of the Yeltsin-era oligarchs to his presidential dacha outside Moscow. Over shish-kebabs (
shashlik
), Putin reportedly laid down the rules: he would not mess with their businesses so long as
these neo-boyars did not interfere in politics. Political apathy was acceptable—opposition was not.
¹⁸