The Oligarchs (26 page)

For Berezovsky, the sprawling Avtovaz plant in Togliatti was fertile ground for his human networking talents. “When he got to Avtovaz, he started to search,” Aven told me. “What did the executives need? They needed connections in Moscow, and they didn't have them. They wanted to go abroad with an Academy of Sciences delegation, and he could help them.”

His first major break came with Alexander Zibarev, who was then a deputy general director of the factory in charge of spare parts. Berezovsky made a classic connection: he brought Zibarev to the institute to work on a dissertation, which was essential for any up-and-coming Soviet industrial manager. In 1987 Zibarev received a candidate of science degree from the institute based on his thesis, “Perfecting the Centralized Mechanism of the Distribution of Spare Parts for Automobiles,” using Avtovaz as an example. Zibarev later defended his doctoral dissertation too. Berezovsky told me that he took a “very active part in the work on that dissertation.”

Zibarev “wanted to be respected,” Berezovsky recalled. “And to defend a candidate's dissertation, that means respect.” Berezovsky insisted that Zibarev wrote the dissertation himself, although “he discussed very many things with me.”

In turn, Zibarev helped Berezovsky, bringing him to the executive suites of Avtovaz, where Berezovsky met Vladimir Kadannikov, the head of the enterprise. Kadannikov was considered part of a new generation of
perestroika
industrial managers and had become director in 1986. Berezovsky wanted the factory to serve as one of the founders, as well as a client, of his new company, Logovaz. According to Boguslavsky, the powerful Kadannikov at first didn't see the point—why did he need an intermediary with the Italians? But finally, Boguslavsky said, Kadannikov agreed to give Berezovsky money just to get him out of his hair. “Initially, he was very skeptical,” recalled Boguslavsky, who became deputy director of Logovaz. Later Kadannikov became more enthusiastic.

Dubov, the author, told me that Berezovsky came across to the Avtovaz executives as someone who could think big, as they did. “He simply understood that, of course, you could first create a cooperative, a small one, and then come to Avtovaz and say, ‘I have a small cooperative, let's work.' But you could also come to Avtovaz and say, ‘Let's
create an enterprise together.' What sense did it make to come to Avtovaz with another cooperative? Some fifty cooperatives would have already been there, and he would have been the fifty-first. But he was the only one to come and say, ‘Let's work together.'” Both Zibarev and Kadannikov eventually became part of Logovaz while keeping their positions at the factory. Kadannikov proved key in making deals that were profitable for Logovaz at the expense of his own factory, Avtovaz. But this awkward position was not unusual for the times—most top executives were scrambling for a piece of the action on the side.

In his novel, Dubov described the first meeting with Kadannikov as a seminal moment. The director “didn't retain in his memory any details of the meeting and failed to feel anything important about it. But he should have. Precisely at that moment a small knot was tied, and a tiny thread began to stretch. And this thread was to develop into a net, sometimes visible, sometimes not, but a very solid one, that would later seize the fate of the country, that of the factory, and the fate of many people, including the director himself. And very likely some of these people, having a more fine intuition, would have flinched at that minute and looked at their watches. Because the first brick was laid in the foundation of the financial empire.” That empire, in real life, was called Logovaz.

With the Logovaz structure in place, Berezovsky began to build an automobile empire. “In the first stage,” Berezovsky told me, “everything that Logovaz did, I tried to do myself. That is, I wanted to see how it worked.” For example, Berezovsky planned to sell secondhand imported cars. He went to Germany, bought a Mercedes, and drove it back to Moscow, where the car could be resold at a fantastic profit.
¹⁹
He made the trip to Germany and back ten times.
²⁰

The future tycoon discovered that business required guts and risk taking. But he retained his early impulsiveness. Without much advance planning, he decided to import a fleet of 846 small Fiats. Berezovsky recalled that he persuaded Avtovaz to give him a loan of $5 million to buy the Fiats. How he got the loan is not clear, but Berezovsky had connections with the company's top brass, including Kadannikov. What sounds like a simple transaction—importing foreign cars—was not at all simple in Soviet times. Berezovsky said he brought in the cars “absolutely officially, put them through customs, and organized their transportation” from Europe to Moscow. “Brought them to Moscow, sold them, and we at that time earned more or less
$3 million. At that time, this was colossal money. That was the first real business that I had done except for software.”

Boguslavsky said the Fiat deal originated with Berezovsky's joint venture partner, Logosystem, in Turin. “It really was a hell of a job; it was so risky!” Boguslavsky recalled. “And this was one story that shows Berezovsky's mentality. Basically, other people would probably spend months just checking everything, trying to understand if they would fail or not.” But Berezovsky “jumped on the opportunity immediately.” Boguslavsky recalled that “a real crisis” ensued because Logovaz was not prepared to receive the cars, which were obsolete by Western standards and had been parked in a lot in Scandinavia for a year. Boguslavsky's memory was that Logovaz got a bad deal with the Fiats and earned no profit, only “three million dollars of experience rather than three million dollars of cash.”

Dubov described a far more colorful account of the Fiat deal in
Bolshaya Paika
, although it may be slightly exaggerated. The cars were approaching the Russian border, he wrote, when someone noticed a government rule that such cars could not be imported for retail sale; they could only be imported for “internal use” by an authorized importer, of which there were only one or two—and Logovaz was not among them. The Berezovsky character in Dubov's account was in Italy, and when the Logovaz office called from Moscow to tell him of the snafu, he replied, “Stay cool, guys.” The next day, the Berezovsky character discovered a state enterprise next door to the institute that was authorized to import cars, and he called the director.

“It was Friday,” Dubov wrote, “and so for two days and two nights, they wined and dined the director and two of his deputies, called up girls for them from the Metropol Hotel, gave them gifts, and by Sunday evening they signed documents” allowing the cars to be imported.

Boguslavsky said the deal for the Fiats whetted their appetite for the real gold mine: becoming a nationwide dealer for the sought-after Zhigulis. To Berezovsky the cars were a symbol of potential riches. He did not have good connections in other industries, but he had built them in the auto factory. “For him, the car business was always associated with big business,” Boguslavsky recalled.

 

Once the pride of young Komsomol construction workers with a glint of socialist idealism in their eyes, the factory was literally coming apart at
the seams in the last year of the Soviet Union. The managers began to form their own companies, taking advantage of their connections. They bought the cars cheaply off the assembly line or the rail cars and resold them for quick superprofits, often out of lots elsewhere in Togliatti. They were nothing more than middlemen, and the trade was so lucrative that they found themselves jockeying with criminal gangs for the right to claim the cars still coming off the assembly line every day. The old system of distribution by
svyazi
was falling apart and the new system was chaotic, violent, and exceedingly lucrative. “In Togliatti, they started growing like mushrooms,” recalled Yuri Tselikov, a midlevel Avtovaz executive, referring to the middlemen and a wave of crime and violence that swept through the factory city in those days. “Cars were given to them, and they started to stuff their pockets.”
²¹

The factory was a state enterprise that had been built by the state and received state subsidies. The Zhigulis came out of the gate with artificially low, subsidized state prices. Then they were sold at a huge markup. The traders were effectively sucking the value out of Avtovaz, but they were doing it with the permission of the managers inside. In some cases, they
were
the managers. Valery Ivanov, a tall, dark-haired, harried, and courageous journalist for a local weekly newspaper, the
Togliatti Review,
documented the many ways in which the factory began to fall apart in the 1990s. The result of his probing articles was a spate of angry threats. He recalled that the mushrooming private firms arranged a deal with Avtovaz management. They would take a batch of cars—one hundred or two hundred—on “consignment,” meaning that they could take the cars now for a small sum and pay the rest back later, or not at all. “It was a theft scheme, crudely put,” Ivanov recalled. The bureaucrats who worked in the factory took bribes to grease the way for the deals, which were measured in a special code: the height in centimeters of a stack of dollars. “And so they would say, for that contract, well, five centimeters of dollars.”
²²

Thuggery and theft erupted at Avtovaz in other ways as well. When criminal groups stood on the assembly line and claimed the cars as they rolled off, anyone who interfered would suffer; violence spread. Anatoly Ivanov, a union leader and an electronic technician at the factory, told me how he spoke out once in a newspaper interview against a scheme, which was widely used, of false exports of Zhiguli cars. Since markets in Eastern Europe were growing more competitive, Avtovaz often shipped cars there and sold them at a loss. The official
explanation was that Avtovaz was cutting prices in an attempt to hold on to its share of the market. But Ivanov and many others suspected that the scheme was designed to suck the lifeblood out of the factory. He believed that the cars were not really exported. The documents were taken over the border and stamped, but the actual cars were resold on the domestic market at a huge markup. Ivanov asked, “If the factory has no money, why are we sending these cars out to export, an export where the cars don't even arrive?” A week after these remarks were published, Ivanov was leaving for work before dawn. A hired killer lurked at the entrance to his apartment. The gunman fired and wounded Ivanov in the leg. Ivanov later was elected to the Russian parliament from Togliatti.
²³

Dubov, in
Bolshaya Paika,
offered a graphic description of the chaos at the factory. He wrote that the police no longer needed to cultivate sources to learn about the Russian criminal world. “It was enough to spend just one week at the factory. Without hiding, representatives of all criminal groups wandered about the factory.”

“The cars were distributed among them at the assembly line,” he went on. “An agreement had been made not to carry out
razborki
(violent showdowns) on the factory premises; that is why everybody behaved quietly, closely observing their competitors' actions. Meanwhile, outside the factory, explosions and shots rang out. The big automobile war invaded half the country.”

“The chronicle of actions was horrifying. In Moscow . . . a real battle took place, with no fewer than fifty people involved. Result: six people killed, unknown number of wounded, three cars burned, and a police car blown up from a grenade launcher.... A series of explosions in ‘pocket banks' that were providing services to this or that criminal group. People disappearing. Raids on saunas and restaurants where the leaders of the criminal world were celebrating automobile deals. It smelled of blood and gunpowder.”
²⁴

The suppliers were also caught in the web of violence and coercion. “The director of one tire factory, who didn't sense the situation right away, was put on the window sill and asked whether he knew on what floor his office was located, and how long was the distance to the pavement. The director flinched and immediately signed approval for a shipment of train cars with tires, not even asking how and when they would be paid for.”

As the factory sank into the mire of lawlessness, the methods used
to drain value out of the enterprise multiplied. One of the most common was the reexport scheme. Ivanov and others have suggested that Berezovsky was part of this scheme. Berezovsky insisted to me that it “was never done” by Logovaz. But it was one of the most common methods of making a fortune from the factory in the years Berezovsky was associated with Avtovaz.

Berezovsky described for me his own ambitious plan. He struck a deal with Avtovaz and Kadannikov that would multiply his capital many times over and launch him on the path to becoming one of Russia's richest men. Instead of small consignments of one hundred or two hundred cars, Berezovsky persuaded the factory to give Logovaz a huge fleet of cars on consignment—tens of thousands. Ivanov put the first batch at thirty-five thousand Zhigulis. Berezovsky told me the terms were 10 percent down and the remainder to be paid two and a half years later.

The hidden trick in the deal was that Berezovsky was going to repay Avtovaz in rubles—and hyperinflation was just around the corner. The hyperinflation meant that he would pay back for the cars in rubles that were worth far less than they had been when he bought the cars.

For example, in January 1993, the wholesale price of a basic Zhiguli, the model VAZ 2104, was 1.9 million rubles, or about $3,321.
²⁵
The Logovaz retail price for this car, also in January 1993, was $4,590, or a markup of $1,269 per car.
²⁶
Over the next two and a half years of inflation, the ruble went from 527 to the dollar, when Berezovsky made the deal, to 4,726 to the dollar.
²⁷
The deal meant that Berezovsky was getting the cars for a song and paying for them in currency that was rapidly turning to toilet paper. (Another way to look at the deal was this: after the down payment, he agreed to pay the ruble equivalent of $2,989 later for each car, but in fact, after two and a half years of inflation, he would pay back only the ruble equivalent of $360 for each car.) He knew what he was doing. If he took a consignment of thirty-five thousand cars and made, conservatively, $3,000 on each—between the markup and the currency margin—that was a $105 million deal.