In early 1816 at Fort Ross, while the Channel Islands hunting operations were still ongoing, Tarakanov and one of his hunting parties boarded ''Il'mena
, bound for Sitka under the American captain and RAC employee William Wadsworth. Once well at sea, Captain Wadsworth discovered the Il'mena'' was leaking badly and was in danger. In May 1816, Kaumualiʻi, seeking freedom from Kamehameha's overlordship, agreed to become a
protectorate of Russia. A written report of the event was composed by Tarakanov and others. Kaumualiʻi also gave permission for three RAC forts on Kauai.
Fort Elizabeth, was built with stone at the mouth of the
Waimea River. The other two,
Fort Alexander and Fort Barclay-de-Tolly were smaller earthen works. Tarakanov was involved in building and operating Fort Elizabeth. Schäffer also assigned Tarakanov to deliver letters to Kaumualiʻi and engage in diplomatic negotiations. As the alliance between Kaumualiʻi and Schäffer grew stronger over 1816, Kaumualiʻi and other Kauai nobility made many land grants and other gifts to RAC, Schäffer, Tarakanov, and others. Among other gifts, Tarakanov was granted a village with eleven Native Hawaiian families on the left bank of the
Hanapēpē River. The various grants were voided when the Schäffer affair fell apart. Nevertheless, for a short period, Tarakanov had been granted status akin to Hawaiian nobility while still being a Russian serf. For various complicated reasons, Kaumualiʻi turned against Schäffer and the RAC. Schäffer tried to make a stand at Fort Elizabeth but was forced to flee to
Honolulu,
Oahu. Tarakanov and others on Kauai joined him on board ''Kad'iak'', which barely made it to Honolulu and became stuck in the harbor.
Native Hawaiians and Americans in Honolulu would not allow the Russians to disembark unless Schäffer surrendered for arrest. He refused and a standoff ensued. In July 1817 the American Isaiah Lewis, captain of the
Panther, offered to take Schäffer away from Hawaii. This would end the "affair" but allow Schäffer to avoid arrest and escape to Europe. Schäffer put the question to his men on ''Kad'iak
. Tarakanov and others urged him to take the deal and leave. On 7 July 1817 Schäffer left for China, then Europe, on Panther
. He left behind a committee, headed by Tarakanov, to look after Kad'iak'' and the many remaining RAC employees and goods on Kauai, Oahu, and other Hawaiian islands. Also on 7 July, just before Schäffer departed, a letter asking for reinforcements and military aid was written. It was signed by Schäffer, Tarakanov, Captain Lewis, and others. After Schäffer left and those on ''Kad'iak
were freed, Tarakanov took charge of salvaging the situation. He prepared an inventory of RAC property, including the land grants on Kauai. Still having a cordial relation with most American shipmasters in Hawaii, Tarakanov was able to make a deal with Captain Myrick of the Cossack
to take two Russians and 41 indigenous Alaskan hunters from Oahu to Sitka. Payment for the trip was secured by stopping in California and hunting sea otters for the American shipmaster. Tarakanov himself returned to Sitka in December 1817 on board the American ship Eagle'', under
William Heath Davis Sr. In January 1818 the RAC officer and Russian Naval officer
Ludwig von Hagemeister, who had arrived in Sitka in early 1817, took over as the RAC's Chief Manager and governor of Russian America. Baranov was dismissed and left Alaska, but died on the voyage. When Tarakanov arrived in Sitka in December 1817, Hagemeister had already replaced Baranov. Tarakanov had had a good relationship with Baranov, but the much more elitist and autocratic Hagermeister found fault with Tarakanov. Hagermeister believed Tarakanov had not had the authority to make deals with American captains that involving hunting sea otters for them, and reprimanded him for acting "contrary to instructions from superiors". But Hagermeister needed Tarakanov to help repair the situation in Hawaii. In February 1818, on Hagermeister's orders, Tarakanov accompanied Fleet Lieutenant I.A. Podushkin, captain of
Otkrytie, to the Hawaiian Islands with the goal of reestablishing friendly relations with Kamehameha, and to recover as much RAC property as they could. Hagermeister's instructions to Podushkin make it clear he did not trust Tarakanov and thought him careless and unreliable. The results of his voyage were reported by Hagermeister in August 1818. All RAC personnel apart from a few deserters were returned to Sitka, but none of the property was recovered. The land grants were void. The ''Kad'iak'' was abandoned to slowly rot in Honolulu's harbor. A few small items, like the rigging of ''Kad'iak'' were recovered. But the overall financial loss of the Schäffer Affair was calculated at over 200,000
rubles, an enormous sum for that time. ==Later life==