The Oligarchs (20 page)

“So,” Khodorkovsky recalled, “in a trembling voice, I said:
‘self-financing tricks.'
At the institute they looked at me as if I was crazy.”

“Many years later,” he added, “I talked with people and asked them, why didn't you start doing the same thing? Why didn't you go into it? Because any head of an institute had more possibilities than I had, by an order of magnitude. They explained that they had all gone through the period—the Kosygin thaw—when the same self-financing system was allowed. And then, at best, people were unable to succeed in their career and, at worst, found themselves in jail. They were all sure that would be the case this time, and that is why they did not go into it. And I”—Khodorkovsky let out a big, broad laugh at the memory—“
I did not remember this!
I was too young! And I went for it.”

 

One of Khodorkovsky's first targets for his business was a prestigious Soviet research facility. The Institute of High Temperatures spread out over seventy-five acres on the northern edge of Moscow, a vast complex of laboratories for the study of high-temperature physics, rocket propulsion, and lasers. This prominent institute played a role in the space race and the Cold War arms race, especially the final, futile quest for laser weapons. It was also an incubator for another more promising wave of the future: capitalism.

Founded in the 1960s, the Institute of High Temperatures grew rapidly and by the 1980s had four thousand workers. The leader was Alexander Sheindlin, an academician (the highest rank for a Soviet scholar) and one of the country's foremost experts in high-temperature physics. Sheindlin, a polite, easygoing man with large blue eyes, enjoyed not only stature at home but prestigious overseas contacts, which brought him valuable resources. “Our institute was a rich institute,” he recalled.

One day, Khodorkovsky and one of his young associates arrived at the polished, laminated conference table at Sheindlin's office.
¹⁰
Sheindlin called them
rebyata
, an affectionate term for young fellows. “They were very young, I liked them a lot. I liked to see little sparks
in their eyes,” Sheindlin recalled. The young men were looking for scientific projects that they could carry out for his institute. They may not have used the words “self-financing tricks,” but that was what they were interested in. “They were energetic people,” Sheindlin recalled. “They were well-known Komsomol workers—they were refined, clean people, not petty thieves.”

“They offered me nothing,” he recalled. “They were good guys. They said, ‘give us a little bit of money. We will look for something interesting. But we will work honestly.' There:
honestly,
they said.” Sheindlin told me that Khodorkovsky wanted some “start-up capital,” and Sheindlin quickly drew a comparison with the American industrialist David Packard, who started his business in a garage. Moreover, he said the bright young fellows had told him they had already received some help from the State Committee on Science and Technology, an influential government agency that oversaw scientific research—a calling card Sheindlin quickly recognized.

“Well, maybe I forget now,” Sheindlin recalled, “but it seems to me I gave them 170,000 rubles.” This was an enormous amount of money at the time. “We made an agreement,” Sheindlin said, “that they had to do some kind of scientific research.”

Sheindlin told me he never really expected them to do any scientific work for his institute. Perhaps he gave them the money because he expected simply to earn a profit from financial dealings, or perhaps Khodorkovsky's friends in high places had pressed Sheindlin into making the payment. The real reason is simply not known. When I asked Sheindlin, he acknowledged, “I knew that no kind of science was going to come from this. I knew that. I fully understood that they, realistically, could do nothing for my institute.”
¹¹

For the next two years, Sheindlin did not hear a word from the bright young fellows. But he figured they were busy with his money. “To this day I don't know the details,” Sheindlin told me. “They used this money to increase the money—many, many times. And the knowledge of working with money was not simple. All the laws that existed in the country! To work with lots of money, you had to know how to maneuver.”

This was Khodorkovsky's secret: he knew. The episode at Sheindlin's institute was just one small window on a hugely important discovery that Khodorkovsky had made about the Soviet financial system. He discovered how to exploit the way money was controlled
and used—and turn it into more money. And he was able to do it because the system let him experiment.

The Soviet financial system was a legacy of the Stalin years. In the command economy, money and finance were not the major factors in decisions made by factories and enterprises. Rather, factories strove to meet output targets set by central planners, and they received subsidies to do so. In the shortage economy, money alone could not always buy more supplies or lead to more output. What mattered was bargaining for scarce supplies and meeting the output quotas.

The Soviet system had two kinds of money. One was simple cash. This was real money that came in banknotes and coins. In the command economy, strict rules governed how enterprises and factories could use their cash, or
nalichnye
, which was used chiefly for wages. It was scarce, but a factory manager who could get some extra cash might also use it for something additional he needed, such as a truck or building a shed.

The Soviet system also had another kind of funds, known as non-cash, or
beznalichnye.
This was not banknotes or coins, but a kind of virtual money that was widely distributed as government subsidies to factories. The
beznalichnye
, or noncash, existed only as an accounting unit. A factory would be transferred subsidies in
beznalichnye
, which it would record on its books and might use to pay another enterprise—but it was not something you could put in your wallet.

The key dilemma for a factory manager was that the system was rigid: mixing the two kinds of money was prohibited. The factory manager was not allowed to take the
beznalichnye
and turn it into real cash. Both kinds of money were controlled by Gosbank, the official state bank, and by the central planners.

However, factory managers almost always needed more cash than they could get out of the system. The supply of cash was tight, but the supply of
beznalichnye
was very plentiful—maybe because there was not much use for it. The result was an imbalance in the value of the two kinds of money. Cash was much more valuable and sought after. By some estimates, a cash ruble was worth ten times a noncash ruble.

This imbalance was an invitation to huge profits. Someone who figured out how to turn the
beznalichnye
into cash would make a fortune. The planners' greatest nightmare was that someone would do this and pump the relatively worthless state subsidies into real cash rubles.

Khodorkovsky figured it out. Starting in 1987, he began to churn
the relatively useless
beznalichnye
into sought-after cash and, even better, into even more valuable hard currency. The full story, even a decade later, is a bit of a mystery, and I discovered that many of those who participated in Khodorkovsky's money machine were reluctant to talk about it. The process obviously was trial and error, but for Khodorkovsky it was far more lucrative than the youth café.

The crack in the system started with the Komsomol, which was looking for a way to stay afloat and wrangled a special privilege for its businesses, including the cafés and discos. On December 28, 1987, the central committee of the Komsomol gave its local organizations a new set of financial rules, allowing them to raise and spend money as they pleased and set up their own bank accounts. This was in keeping with the spirit of self-financing. One of the rules was extremely significant: Komsomol organizations could, in certain cases, mix the
nalichnye
and
beznalichnye
. (It is possible that the new rule came out after the practice had already begun that year.) The youth groups could do what no factory director dared: turn the useless noncash into cash and pay more people with it or build a nice dacha in the woods outside of Moscow. This opened up new horizons for making money—and making it virtually out of nothing. All that was needed was the right permits, and perhaps payoffs for the proper authorities, and suddenly a small privilege turned into something very valuable indeed: cranking the state subsidies into cash.
¹²

At approximately the same time, Zatulin's idea of students doing work for factories became a reality with the opening of a new kind of business known as Centers for Scientific-Technical Creativity of Youth, or NTTMs by the Russian acronym. Khodorkovsky in 1987 transformed his youth club into an NTTM, which operated, broadly, under the auspices of the Komsomol. The NTTM was supposed to perform scientific and technical research. But the real core—the attraction that brought the young researchers to Khodorkovsky's door—was money.

Khodorkovsky worked from a small, shabby office, set just slightly below street level on 1st Tverskaya-Yamskaya Street in central Moscow. At the time, a Komsomol activist was supposed to look like a good party man and dress nicely. But Khodorkovsky did not fit the party mold.
¹³
He was always uncomfortable in suits and ties and more commonly appeared in jeans and a sweater; he had worked jobs sometimes as a freight loader and carpenter, and recalled that his childhood
ambition was to become director of a big Soviet factory. His father, who worked at a high-precision machine tools plant, was Jewish, which meant Khodorkovsky was probably barred from ever obtaining a high-level party position, even though he held a junior post in the Komsomol at Mendeleev. After the Mendeleev Institute, he studied at the law institute for a few years, telling friends that it was necessary to be able to understand and exploit decrees issued by the government.

The youth science centers were sprinkled throughout Moscow's thirty-three districts. Khodorkovsky found a home in the Frunze District, a prestigious central area, because he had a good connection there.
¹⁴

What kind of business did the youth science center carry out? The key was churning noncash into cash. Spread across the Soviet Union was a vast archipelago of research institutes—many, but not all of them part of the Cold War military machine—which had a lot of extra noncash. Khodorkovsky, using the privileges of a Komsomol man, could set up what were called “temporary creative collectives.” These were simply a group of workers, often the same workers who were already inside the institute or enterprise or sometimes a truly temporary group from outside. The key advantage was that the “temporary creative collective” could legally be paid in cash. Then Khodorkovsky, again because of his Komsomol affiliation, could draw up contracts for the collective to perform some kind of research project, write software, or build something for the institute. Sometimes it was just a pro forma arrangement to work on a project on which they already labored, sometimes it was a new project. The important point was the money machine: Khodorkovsky could take the noncash from the institute and turn it into cash to pay the “temporary creative collective.” This was not just peanuts, but real money churning from idle state subsidies into hard cash.

Khodorkovsky probably received special permission at the bank—special patronage was important at every turn—to transfer the non-cash into cash. In reality, the cash he got was spread around: to the workers, to the institute and its director, to Khodorkovsky's science center, and a percentage rebated to the Komsomol. The tightly regimented control of cash had just sprung a leak, but it was not some wild-eyed radical who had breached it. Rather, it was a zealous child of the Soviet system.

An early recruit to Khodorkovsky's youth science center was Leonid
Nevzlin, a computer programmer. Nevzlin told me that he spotted a newspaper advertisement for Khodorkovsky's science center and went to investigate. He arrived there in November 1987, when the operation was just a few small rooms—being hastily repaired—and a dozen people. Nevzlin, with hair brushed across his forehead and large green eyes that gave him rock-star good looks, was working in a state geological research institute, drawing the usual meager state salary. However, he had written a computer program to help enterprises keep track of accounting and deliveries. After he signed up for Khodorkovsky's science center, Nevzlin began to “sell” the software—which he already had created—over and over again to various institutes and factories. He was using Khodorkovsky's process to churn the relatively worthless noncash held by the factories and institutes into cold, hard cash.

The alluring alchemy of Khodorkovsky's system was that he shared the cash with the participants such as Nevzlin—many times more money than any of them had earned before in their official jobs. After a few months of this, Nevzlin recalled, he felt wealthy.
¹⁵
Dozens of hungry young researchers began showing up at Khodorkovsky's door.

The directors of enterprises and institutes who used Khodorkovsky's services were also grateful—Khodorkovsky had a magic channel that could give them added cash too, since they usually got a slice of the proceeds. For the factory bosses, the risks were minimal because Khodorkovsky came with a seal of approval from the system itself.

Kryshtanovskaya, the sociologist who studied the Russian elite, told me that the industrial directors who cooperated with Khodorkovsky knew “that they were working with the authorities, that it wasn't con artists.” In this case, the transaction was a breeze, a simple bank transfer, which would have been difficult or impossible if not for Khodorkovsky's good connections. “There is an institute. The institute has an account at the bank,” Kryshtanovskaya told me. “There is an NTTM. It has an account at the bank. So money from bank number one is transferred to bank number two. And the NTTM, they take money from that bank.” She added, “The process of privatization had begun—the first kind of privatization was that of money itself.”