The Oligarchs (11 page)

Smolensky spent years fighting one case. In 1992, the first year after the Soviet collapse, the banking system was still immature and crude. From the southern Russian republics of Dagestan and Chechnya the Central Bank received, by fax, a series of wire transfer orders known as “avisos.” The avisos ordered the Central Bank to immediately transfer millions of dollars to various Moscow commercial bank
accounts. The Central Bank, which at the time was still using the creaking teletype, complied—and the money flowed out, including about $30 million to Stolichny. Later, the Central Bank discovered that the avisos were faked, and it tried to recoup by taking the money back from reserve accounts maintained by Smolensky's bank in the Central Bank. A criminal investigation was opened against Smolensky. The whole affair was laced with questions that were never answered—such as why the Central Bank would give out so much money on the basis of a fax in the first place.

Smolensky told me he saw the case as a struggle between the new capitalists and the old guard, although it may have been a more mundane struggle over corruption and theft. Smolensky insisted he was wrongly targeted by the criminal investigation, which was closed in 1999 without charges. “It cost me a lot of blood,” he recalled. After the case was closed, however, a Russian newspaper,
Sovershenno Sekretno,
which often had sources in the security services, published what it described as details of the case, alleging that Smolensky and another man had taken $32 million through the false aviso and stashed $25 million in a company in Austria owned by Smolensky's wife. Later, the newspaper said, Smolensky's bank acknowledged a “mistaken” borrowing of $4 million and repaid that sum.
²⁴

Throughout his career, Smolensky waged a bitter war with the state. The Central Bank chairman, Viktor Gerashchenko, was his nemesis. Smolensky complained Gerashchenko “deluged commercial banks” with “1928-model instructions,” such as, “limit the issuing of cash.” Or, Smolensky fumed, another Central Bank official sent a message, “I authorize the payment of wages.” Smolensky retorted, “Don't my clients have the right to dispose of their own money?” Bekker told me that “the state hated Smolensky and his bank more than any other. He didn't bow to the KGB. He didn't bow to the bureaucrats. He didn't bow to the militia. Gerashchenko didn't like this independent and freewheeling banker.”

Smolensky enjoyed unusual autonomy in the late Soviet period and the first few years of the new Russia. He fought back against the government, kicked out the Central Bank auditors, and refused to answer questions about his bank, and yet he survived. What was the source of his impunity? The answer is unclear. As we shall see later, the most successful tycoons often enjoyed mysterious, high-level protection, the details of which never became known. If he had it,
Smolensky still did not feel secure. Krasnyansky, Smolensky's old army pal, who eventually came to work at Stolichny Bank, recalled that he and Smolensky had their most candid conversations in the car. Smolensky was on his way to becoming one of the leading bankers in the new Russia. But one day, in the car, he turned to Krasnyansky. “Edik,” he said, using an affectionate nickname, “we shouldn't be seduced by this. At any moment, even in our free Russia, they can still come and squash you like a bug.”

Still, Smolensky had come a long way. In 1992 his bank earned 2.4 billion rubles on revenues of 6.1 billion. Not bad for a scrawny young man who started out printing Bibles at night, for a construction boss who was ordered to open one of the first cooperatives, for a dacha builder who filled a gap in the shortage economy.

I
F THERE WAS a nightmare of the late Soviet years, a place that captured all the cumulative absurdity and folly of “developed socialism,” it was the reeking, rat-infested vegetable warehouses of Moscow. These twenty-three mammoth storehouses were monuments to the Bolsheviks' peculiarly misguided distrust (and cruel oppression) of the Russian peasantry. From Lenin's early battles with the peasants to Stalin's forced collectivization, much of Soviet history was a war against the countryside to feed the cities. Although the mass violence ended after Stalin, the giant machine of central planning rolled on, confiscating the output of the peasants year after year and shipping it to the cities for storage until it was distributed. Huge quantities of vegetables and fruits—a year's supply—were brought from the farms into the Moscow warehouses just because of the state's monumental distrust of the peasants.

By the early days of
perestroika,
in the mid-1980s, these “vegetable bases” had become an organizational monster. The vegetables had to be brought in, sorted, stacked, packed, and preserved, sometimes for many months. The twenty-three warehouses, holding up to 1.5 million tons of fruits and vegetables, or enough provisions for a city of 10
million people, suffered all the symptoms of the shortage economy and all the underlying distortions of central planning. “Terminal filth, stench, mold, rats, flies, cockroaches—there was nothing so vile that it did not find its home in these warehouses,” recalled Yuri Luzhkov, a seasoned Soviet industrial manager, after first visiting the warehouses.

Even the newer warehouses were stripped down and ruined by the workers, Luzhkov observed, “brought to such a degree of negligence that you could explain it only by some crazy idea, that the employees were obsessed with intentionally destroying everything, like an army retreating in the face of an attacking foe. Nothing should be left standing for the enemy.”

The chain of rot began far away, on the farms. Stripped of any incentives, the 120,000 growers who served Moscow had long since stopped caring about the quality of the vegetables and fruits they shipped. They reluctantly brought their vegetables to a collection point, to be hauled away in a truck carrying a bill of loading that read simply “Moscow.” By the time it got to the city, much of the cargo had begun to rot. The potatoes were infested with beetles. “The warehouses became dungeons whose contents were destroyed, not preserved,” recalled Luzhkov. The rotting vegetables were then distributed to the state stores, where customers could only curse at black carrots, decaying greens, and moldering potatoes. There was a well-worn refrain by the store clerks as they handed out the rotting vegetables: “If you don't like it, don't eat it.”

The vegetable bases, as they were known, were a triumph of collectivist labor. Everyone worked there, supposedly, for the “common good,” and yet the reality was that no one did. The vegetable bases were run like army boot camp: every day twenty thousand Muscovites were drafted to re-sort, repack, and restack the spoiling, rotting produce. It was mandatory duty, dreaded for the filth and the rats. The hundreds of thousands of workers forced into the system simply stole what they could.

“The whole system was so deeply and pervasively corrupt that it made absolutely no sense to bother with any investigations,” Luzhkov said. This was because the police were in on the deal. Financial controllers and inspectors just wrote off the losses, and party officials saw the mess as just another opportunity. They stole the best of what there was.

The stealing was so common and pervasive as to defy definition as
criminal. “Here we are approaching the very core of socialism,” Luzhkov observed. “To a certain degree, everybody was involved, and everybody participated—and under socialism, this means nobody. That was the crucial point, the most corrupting effect of the ‘developed socialism.' Since everybody believed that they did not create this evil, coming home with bags stuffed with stolen products was not wrong.”
¹

In December 1985, Gorbachev brought a new boss to Moscow, the rugged Sverdlovsk regional party chief, Boris Yeltsin. Soon Yeltsin began to take the city by storm in a very unconventional way—standing in line with average people, riding the trolley, poking into factories and stores unannounced, prodding the stale, atrophying socialist system. The growing shortages of food in the capital were a special concern to Yeltsin. Hearing there was veal at a butcher shop—exceedingly rare—he once went and stood in line for it. He insisted on a kilo of veal and was told the store had none. Yeltsin then forced himself behind the counter and, through a small window, spied the back room—where they were handing out chunks of veal to special clients.
²

Yeltsin touched a populist nerve when he publicly criticized the system of
raspredelenie
, in which the party elites had access to special stores and quality goods that were denied to the general public. He became a genuinely well-liked figure among Muscovites, but populist rhetoric could not fix Moscow's ailing food distribution system. One after another, bureaucrats were given the job of straightening out the vegetable bases, and they were forced out in failure. In the summer of 1987, as the food situation in Moscow worsened, the fruit and vegetable bases were on the verge of collapse.

Yeltsin turned to Luzhkov, a stocky, bullet-headed industrial manager, who had been working as a senior-level administrator in the city government. Luzhkov was one of two deputies to the chairman of the Moscow city executive committee, the managers who dealt with the day-to-day affairs of the metropolis. He was the city official who handed out licenses for the first cooperatives.

The bureaucrat who previously headed the vegetable bases had just had a nervous breakdown. Yeltsin summoned Luzhkov. A mechanical engineer by training, Luzhkov did not want to take over the miserable vegetable bases, which he later recalled would be “an absolutely nowin situation.” But when he met Yeltsin, he softened. “He didn't look at all the way I expected,” Luzhkov said of Yeltsin. “He seemed tired, depressed.” Yeltsin told Luzhkov the job would not be easy and then added, “I beg you.”

Luzhkov knew the assignment could be the end of his career. But he said yes to Yeltsin and began his own voyage, a remarkable and tumultuous one, out of Soviet socialism.

 

When he was a nineteen-year-old engineering student in Moscow, Luzhkov was assigned to a temporary student work brigade in Siberia to help bring in the harvest. It was October 1955. The weather was generally warm during the day, when they gathered and dried the hay, but it turned unexpectedly cold at night, often dropping below zero. The students got stranded; someone had failed to arrange their transportation back to school. For several nights, they slept in hay, shivering, many of them becoming ill.

Then, by chance, a member of the Politburo showed up from Moscow. He was touring the harvest and made some perfunctory remarks, paying no attention to the complaints of the students. They asked to go home, saying they had no food, no medicine, no water.

Suddenly, out of the pack of students, Luzhkov rushed toward the Politburo member. Before anyone could stop him, the pugnacious young Luzhkov punched the party man on the shoulder. “You might go far in your career if nobody stops you—but you will definitely be stopped!” Luzhkov bellowed, then turned and ran.

“Luzhkov simply hit him on the shoulder,” recalled his old friend, Alexander Vladislavlev, who was head of the work brigade. “That man yelled as if he had been stabbed with a knife.”

The embarrassed, angry Politburo man demanded to know who was the boss of the brigade. Vladislavlev stepped forward. The party man signaled for Vladislavlev to get in his car and drove him twenty minutes across the barren Russian plain. A rain storm hit, and hail pelted the car under dark threatening clouds. Vladislavlev had no idea what was going to happen to him. Then, abruptly, the Politburo man told Vladislavlev to get out of the car, walk back in the hail, shirtless, and “finish the guy.”

Vladislavlev didn't ask how to “finish” his friend Luzhkov. He just trudged back across the open fields, and when he returned to the camp, he recalled, he drank a bottle of vodka to keep himself from shivering to death. Soon the Politburo man called, “asking me what I had done to the guy. I said, ‘I finished him!'” In fact, he did nothing.
³

The truculent Luzhkov of that day was to become a leader of the new Russia. Luzhkov had suffered through a childhood of poverty.
Born September 21, 1936, he was the middle of three sons. His father was a carpenter and his mother a boiler room worker. The family lived on the first floor of a wooden barrack near the Paveletsky railroad station in Moscow. The three boys, their parents, and his father's mother all shared one drafty room without heat or running water. All three sons shared one coat that their father had brought back from the war. Luzhkov's memories were of constant hunger during the years of World War II and after. “I can't describe this,” he recalled. “We always wanted to . . . not even eat, but to devour no matter what. Kids around us swelled and died from hunger.” Once the boys were so desperate they ate—and salted—“white clay” they found along the railroad tracks and became dreadfully sick.

Luzhkov's most vivid memories revolved around the
dvor
, the courtyard, the center of his life as a youth. The courtyard was a world apart from the outside, “a small, self-organized community in opposition to the city and the state.” In the space between the buildings, they set the rules, the ethics, and the morals. “There were intellectual courtyards, but there were sporty and even thievish courtyards as well,” he recalled. “Ours was a hooligan courtyard, meaning that it provoked a special, risky mood—to get into a fight with somebody, to make yourself visible, to show some pluck.” Luzhkov said his mother was so busy working—she took two, then three jobs—that she gave the boys “total freedom to secretly indulge our passion for dangerous games.” Luzhkov was left to the “risky, reckless mood of the courtyard.” They often disassembled artillery shells from the war front that they found on railway cars nearby. They would take out the gunpowder, make a fuse with a trail in the dirt, and set off a small firecrackerlike explosion. Once Luzhkov had an idea: Why not set off the whole shell? He set the fuse and ran. A huge explosion followed, shattering windows. The police arrived, but the courtyard had its rules. No one gave him away. “The courtyard was as silent as the grave to the authorities,” Luzhkov remembered.