They were doing their own TLS handshake - that's how the attack was discovered (the attacker presented a different certicate, which eventually expired, presumably due to negligence). They were decrypting and re-encrypting.
I don't know what jabber.ru's policy is, it's running a very old version of ejabberd. But you would be hard-pressed to find an XMPP server that would allow authentication without TLS. Starttls makes no difference.
> they would have to do their own client-side TLS handshake
By intercepting the STARTTLS port the attacker can merely decrypt -- rather than, as you wrote, decrypting and re-encrypting.