The Oligarchs (21 page)

Kryshtanovskaya recalled that the possibilities multiplied as the bright young fellows came up with new self-financing tricks. “They started to think, ‘How can we get money?' That is, you had to convince the director of the enterprise that he
had
to do some kind of work. And these teams were created around people like Khodorkovsky
and others who were very young and cynical, who offered to the directors, ‘We will bring you this groundbreaking research!' Or ‘we'll put some kind of business plan in place!' They used a sort of intellectual preemptive strike. They foisted it on people. And very often they would take that so-called ‘research' and sell it to many enterprises for profit. And practically all of them became very rich people.”

Khodorkovsky was making money from thin air. No manufacturing was involved; no widgets rolled off assembly lines. Andrei Gorodetsky, who worked with Khodorkovsky in the early days and later headed the trading desk at a Russian bank, told me that the science centers often did not pay the institutes or factories for use of the equipment, laboratories, or space where the work was done. “In reality, these NTTM were making money while using state property. But the state generally closed its eyes to this.” He added, “All these centers did not really produce anything. They were middlemen. We simply worked as middlemen. There was no business—purchase and sale did not exist.”
¹⁶

By 1990 there were forty-seven youth science centers in Moscow. The same techniques were being applied to other Komsomol activities—rock concerts and beauty contests were a favorite way to churn noncash into cash. Any group of people could be turned into a “temporary creative collective” and used to funnel the useless noncash into real money.

Khodorkovsky went farther and faster than many others, constantly hustling to think up new avenues for making easy money. But he needed help. “The money didn't do the trick,” Khodorkovsky once said. “Old friendships did the trick.”
¹⁷
Khodorkovsky's hunting ground was the upper echelons of Soviet industry and science. In 1994 Khodorkovsky told an interviewer, “I invented several financial methods that were broadly used and that in the best days allowed me to conduct up to five hundred contracts for scientific research simultaneously. Five thousand people were working there.”
¹⁸

Later I asked Khodorkovsky what had been his big breakthrough, because clearly he had zoomed ahead of his generation. I had spoken to dozens of people who worked with Khodorkovsky, but the kernel of his success was always elusive. Khodorkovsky was a workaholic, they said. He was well-connected. He hustled, he shared his rewards, he was never flashy.

Many of those who came to the youth science center recalled that
Khodorkovsky multiplied their income for doing the same work as before. But Khodorkovsky's own account revealed a moneymaking machine that was more ambitious and audacious than I had imagined. He told me he had turned the noncash not only into ruble cash but also into hard currency—into dollars.

“A separate breakthrough for us, in comparison with all the other NTTMs, was that, all the others said, what do we need this
beznalichnye
for? And they were trying to increase the share of cash. And to do a little work, trying to maximize the share of cash, through many things, and get them in the form of wages. Our real breakthrough was that, we said, okay, all the cash will be given to the working labor collectives. And we collect the
beznalichnye.
”

What did Khodorkovsky do with it? “We were saving the
beznalichnye
,” he told me. “People just didn't care about the
beznalichnye
, they were not interested, because nothing could be done with it.” The reader is reminded that Khodorkovsky was already a world apart from many other young men of his generation. At twenty-four years of age, he possessed a bulging supply of Soviet government noncash rubles. “I was saving it,” he said. “I knew for sure that we would be able to come up with something. We saved, accumulated a lot of it.” Since the
beznalichnye
was a virtual money that existed on ledgers only, Khodorkovsky must have had permission to keep it in an account or perhaps got control of someone else's account. It was not the kind of money that could be kept in a shoebox.

In the next stage, Khodorkovsky went on, he found some enterprises that would exchange the noncash for valuable foreign hard currency. These were export companies—primarily in timber—that had plenty of hard currency. “We went to the Far East, and we bought a lot from timber people,” Khodorkovsky said. “It took us a year to save the money and get this idea.” Although Khodorkovsky left it unsaid, the process was obviously immensely lucrative: he was trading relatively worthless noncash for very valuable hard currency. Since the Soviet Union had rigid exchange rates and restrictions on hard currency, Khodorkovsky was probably offering the timber companies a hugely advantageous rate that allowed them to get more for their hard currency than if they had to trade it at the official rate. The fact that Khodorkovsky was dealing in hard currency was a clue that his money machine was accelerating to new levels and that he had patrons in high places.

All along the chain, Khodorkovsky had protection from above. Even though he decided not to become a Komsomol careerist, the Komsomol was critical to his early gains. Moreover, the Komsomol affiliation functioned as an umbrella, offering Khodorkovsky legitimacy and access at a time when many young, hustling businessmen feared that at any minute the KGB would take them away. The cooperatives were just beginning, and they faced many of the same uncertainties, without the benefit of Komsomol protection.

Another source of Khodorkovsky's support was the imprimatur of the State Committee on Science and Technology, which was, in theory, cosponsor of the youth science centers. This powerful agency was a conduit between the Communist Party and the state scientific research institutes, and it had enormous influence over Soviet science and how scientists worked. Just mentioning that he had support from the State Committee opened doors for Khodorkovsky. “I could always refer to it,” he told me. Several earlier accounts by journalists suggested that Khodorkovsky received money from the State Committee. Khodorkovsky told me that he did not, saying that the officials there had made promises but were too high up in the Soviet system to worry about some young
rebyata
playing capitalist games. But Khodorkovsky acknowledged that on one occasion he got valuable protection from the committee. “Our law enforcement agencies at that time did not quite understand what
perestroika
was,” Khodorkovsky recalled. Under Soviet law, entrepreneurship was criminal, and the law had not been repealed, even as entrepreneurship was gradually being spawned by the system. The law was not widely enforced but could be a pretext for harassment. “The militia came to us,” Khodorkovsky recalled, “and started inquiring how we got our profit.” Khodorkovsky said he appealed to the chairman of the State Committee. “I told him in detail what we did and what we were doing, and he called some militia boss and asked him to leave the NTTM alone.” That kept the authorities off his back for two years, he recalled. Those were the two most important years of his fledgling money machine.

Khodorkovsky told Peter Slevin, then a reporter for the
Miami Herald,
that at one time he had enthusiastically embraced all the old Communist Party ideology; he “totally believed that capitalism was decaying, that Lenin was right and that the future lay in Communism.” But then Khodorkovsky said he went through a “total rethink” and emerged a full-blooded capitalist. This rethinking happened in the
years when Khodorkovsky was discovering how to turn the relatively useless
beznalichnye
into real money. It completely changed his views, he said. “The people who had known me before the change didn't recognize me after.” He added, with a bit of hyperbole, “If the old Mikhail had met the new one, he would have shot him.”
¹⁹

While most of the world was asking in the late 1980s whether Gorbachev's
glasnost
and
perestroika
reforms were irreversible, at the street level change was unfolding with incredible swiftness. Within a few months of starting the science center, Khodorkovsky decided to transform it yet again, this time into a cooperative, the quasiindependent businesses that could set their own prices. The cooperatives were already emerging as the next wave, and they were another step removed from his original Komsomol sponsors. Moreover, as Smolensky had discovered, a small provision in the law on cooperatives permitted them to start their own banks.

But first Khodorkovsky had to register the cooperative with the city authorities. He visited the Mossovet building, where licenses for cooperatives were being given out by the stolid Luzhkov, who rejected his first application. The cooperatives were generally, until that time, engaged in concrete activities such as construction, pie baking, or car repairs. They were not engaged in amorphous “scientific-technical” work. Luzhkov had doubts about the scheme, according to Panin, Luzhkov's staff assistant on the cooperative licensing commission. Luzhkov had spent his entire career in the chemical industry and knew the Soviet system from the inside out. But that experience only added to his worry about Khodorkovsky. Luzhkov recognized that behind the scientific research, Khodorkovsky was churning noncash into cash. “Luzhkov sensed it very well, like no one else, because he had been director of an enterprise, and he said these two systems, non-cash and cash systems, must not be combined,” Panin recalled.
²⁰

Khodorkovsky was persistent, however, and despite Luzhkov's misgivings, he received permission to start a cooperative in a few months. How he overcame Luzhkov's doubts is not known. But Khodorkovsky clearly was not one to be intimidated by roadblocks. He just jumped—or was lifted with an invisible hand—right over them. He had gone very far, very fast in eighteen months, from graduation in the summer of 1986 to running the youth science center and its financial network in late 1987 and establishing a cooperative after that. His pace did not slow down—he had a wheelbarrow full of money and
needed to do something with it. The “self-financing tricks” were working, but they were not enough.

 

When he was invited to go abroad on a business trip in 1988, Igor Primakov, a scientist living in Moscow, pondered what to bring back from the West: shirts? jeans? Primakov, a specialist in using computers to predict earthquakes, finally decided to bring back a personal computer, which he knew could be resold in Moscow at a huge profit. By scrimping and saving up his travel allowance, he managed to buy an Amstrad 286 desktop computer for about $3,000 in Italy. Once home, Primakov sold the computer for 70,000 rubles. “It was my salary for forty-eight years!” he recalled.

Why did Primakov's computer bring such a high price? The Soviet Union was caught in a time warp. The economy stagnated in the late 1970s and early 1980s, precisely at the moment when the West was going through the silicon chip revolution. While personal computers blossomed in the West, they barely existed inside the Soviet Union. The demand for them was enormous.

Primakov sold the computer through a cooperative to an institute. Once again, noncash was turned into cash. The institute had an abundance of noncash to purchase the computer with, and the cooperative acted as the middleman, turning the non-cash into real rubles to pay Primakov. He recalled nervously going to the state savings bank to collect his payment. The bank office closed for an hour just to count out the 70,000 rubles, which he took home in a bag. “When I did it once,” Primakov told me, “I had no plan to go back there and buy two or three computers, make the same profitable deal again and again. But I know now that dozens of people made these deals, one or two years before me. When they did it once, they understood there was a window of opportunity, that you can buy one, two, then eight.”
²¹

Khodorkovsky was always on the lookout for new opportunity, and, flush with money-machine profits, he plunged into trade in personal computers, spending his hard currency to buy them abroad, importing them, selling them for
beznalichnye,
and changing the non-cash back into cash or hard currency again. “We started circulating money very fast, especially when the computers started,” Khodorkovsky recalled. The financial chain had grown longer, and delays or interruptions could break it. There were constant uncertainties about
getting the computers into the country and changing the money. But Khodorkovsky was calm. According to a young man who worked with him on the computers, “Khodorkovsky could think, more than talk. He could listen to ideas.”
²²
Khodorkovsky was a closed, almost secretive person about his business but attentive to the winds of capitalism swirling around him. He read every decree and announcement carefully, looking for loopholes, and he knew about the unwritten loopholes too. “It is possible to find loopholes in every law, and I will use them without an instant of hesitation,” he once boasted.
²³
Personal computers were one of the most profitable means of arbitrage—taking advantage of the enormous differences in prices inside the Soviet Union and outside it. Khodorkovsky had added a new dimension to his money machine. He was now trading in not only cash but goods—in this case computers that were as good as gold.

Khodorkovsky recalled that at some point his money-and-trade machine was growing so fast that its finances began to fray. He was stretched thin because of the long chain of conversion and transfers, from noncash to cash to hard currency to computers and back again. “We needed someone who could sell the hard currency, pay them the rubles, get the currency, again buy the computers. As you see, the cycle was quite long.”
²⁴
The cycle also included other commodities that could be profitably traded. At the time, arbitrage was such a simple way to make money that a multitude of commodity exchanges opened their doors in Moscow. Yulia Latynina, a hard-digging journalist and novelist who delighted in exposing skullduggery in Russian finance and industry, recalled that Khodorkovsky's early years were characterized by rumors of all kinds of deals for scarce goods. They included importing fake Napoleon brandy and bogus Swiss vodka bottled in Poland, as well as stonewashed jeans, which were in huge demand, and laundering Communist Party money. Of all the myths, Latynina recalled, Khodorkovsky and his team would later admit only to the work of their science center and the computers. But, Latynina recalled, she had been told by Nevzlin that they also brought in the fake cognac: “‘Okay,' Khodorkovsky's deputy Leonid Nevzlin waves his hand. ‘We financed the cognac. No one, ultimately, was poisoned by it.'”
²⁵