The Oligarchs (32 page)

But for all the revelry, the Gaidar crew brought to dacha 15 some profound shared assumptions, forged in Soviet times when they were little-known mathematicians, economists, and professors. They were saddled with the baggage of their past experience, and they were not quite prepared for the entirely different challenges of a new economic and political system.

Just the fact that the Gaidar brain trust isolated itself at the dacha reflected the insular method they had adopted in the Soviet years. When Chubais first created his small cadre of freethinking economists in Leningrad, it was done in great secrecy to avoid attracting the attention of the KGB. The same mood prevailed when they retreated to a stairwell to debate Naishul's radical ideas. The Soviet system had forced them to be conspirators; it crushed those who did not conform. Mikhail Dmitriev, the young economist who had been called on the carpet for the notes he took at the 1987 seminar, told me that Gaidar and Chubais had learned everything about politics under a regime that would immediately destroy any far-reaching new ideas. “By definition they were successful because they were conspirators, they were not open, they were mainly acting in a very narrow circle,” he said. “And all these habits couldn't be changed quickly because by the end of the 1980s both Gaidar and Chubais were already in their mid-thirties, and people don't change easily in this respect.”
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Another legacy of their past was their shared disdain for politics. In the 1980s, Gorbachev had unleashed freedom but lagged behind on economic change. They were determined to avoid Gorbachev's quagmire of politics—endless plans that went nowhere, such as the five-hundred-day plan to turn the Soviet Union into a market economy, which was never adopted. Instead, they thought of themselves as technocrats, pure economists who would find the right thing to do and
smash through the old barriers to getting it done. They believed, Soviet-style, that they only needed to please one man, the boss at the top, Boris Yeltsin.
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They also believed that the problem of the old system was too much political interference; certainly, a more purely economic approach would be more successful.
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Although their economic ideas were modern, capitalist, and radical, their political tactics were often arrogant and naive. They bypassed the parliament, which grew alienated, and Gaidar was especially poor at communicating with the public. The more determined and cunning Chubais turned out to be a sharper political operative, but both of them, along with Yeltsin, neglected from the outset to lay a grassroots base for their revolution. Gaidar later acknowledged it was a serious miscalculation that left them at sea and vulnerable. It might have been impossible to build such a popular base anyway, given the excruciating pain they were about to inflict on Russian society, but Gaidar told me they saw themselves as economic professionals, not politicians. “We had Yeltsin, who was an extremely efficient politician at the time, very popular and very active and a strong Russian politician,” he said.
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But Yeltsin was not enough, considering the enormity of their revolution.

Yet another fundamental belief among the Gaidar brain trust was that Russia, despite its backwardness and terrible history of autocracy, would be fertile soil for a market economic system. Russia, they believed, was not an exception to the basic rules of human behavior. Gaidar and Chubais were certain that if they created free choice, people would take advantage of it and respond to incentives. They hoped that all the collectivism, passivity, paternalism, and destruction of initiative and entrepreneurship that was a legacy of Russian and Soviet history would melt away as a beachhead of free markets, free trade, private property, and free prices was established. This assumption—that Western market economics could take root in Russia despite its peculiar cultural and historical experience—was one of the most fateful and daring of their time. It was a gamble. A decade later, the validity of this idea was still vigorously debated.

The Gaidar team also realized that no one would be building monuments to them for the transformation they intended to impose on their country. They often described themselves as kamikaze pilots, because they would certainly destroy themselves in trying to tear down so many entrenched interests. Not only would they battle old-school bureaucrats, party bosses, the military and security establishments
; they were setting out to destroy the mindset of millions of Russians who knew no other political or economic life other than what they had experienced during Soviet Communism. The kamikaze idea emboldened them because they had no careers, no promotions to worry about. But it also weakened them because it gave their opponents the idea that it would only be a matter of time until the reformers disappeared from the scene.

Gaidar and his brain trust knew that time was not on their side. The Soviet legacy was formidible: dozens of government ministries lorded over branches of industry; within them, the bureaucrats wanted to preserve their bastions of power. In the factories, the powerful “red directors” stood to lose their prominent status and sprawling empires. They all wanted to stop the radical reformers. The special interests insisted: why not restructure industry more slowly, factory by factory? Why not wait until a reliable legal and financial system was established ? Why not free prices later, after private property rights are guaranteed, and after the huge Soviet monopolies are dismembered?

But Gaidar and Chubais believed that gradualism was akin to death; it would strengthen the vested interests and doom any real chance at reform. Chubais said it was only an illusion that change could be done “gently, slowly, and painlessly, so that everybody should be happy.”
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Gaidar and Chubais had no intention to be gentle, slow, or painless. Later they would be criticized over and over again by those who said there was another way—if only they had taken more time, if only they had been more careful, if only they had rebuilt industry case by case, if only they had taken care to build institutions first. Many of these arguments were correct in a theoretical sense but were far removed from the real world that Gaidar and Chubais confronted. The reformers feared they did not have more time—to wait was to fail. I think their fears were not imagined. All around them were signs of utter collapse. At any minute, they could be history too.

In the final months of its existence, the Soviet Union slid into utter economic chaos. After the failed August coup, the country was rife with predictions of famine, catastrophe, and collapse. Grain deliveries to the state dropped by a factor of four. “People simply weren't hauling it to the elevators,” Gaidar recalled. “Why should they? To get some piece of paper that, out of habit, everyone still calls money?” Both Gaidar and Chubais were haunted by what they saw on the streets of Moscow: the worst shortages ever. “Moscow in December
1991 is one of my most painful memories,” Gaidar said later. “Grim food lines, even without their usual squabbles and scenes. Pristinely empty stores. Women rushing about in search of some food, any food, for sale.... Expectations of disaster were in the air.”
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The chaos deepened as the Soviet state itself—the vast chain of commands and controls that stretched from Moscow to the most distant province—seemed to tear apart. The military and security organizations were in a “state of shock,” Gaidar recalled, while the republics went their separate ways. Yeltsin was a popular leader, but in the final months of the Soviet Union, he had “no levers of control.”
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Gaidar was strongly influenced by the example of Poland, which had launched shock therapy on January 1, 1990, by freeing prices and trade. Poland's “big bang” was led by a reform economist, Leszek Balcerowicz, and it bore immediate dividends; consumer shortages gave way to brimming street markets, and the initial burst of inflation was relatively short.
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Poland's shock therapy was in part the handiwork of the Harvard economist Jeffrey Sachs, who, along with a group of other Westerners, urged Russia to take the same route. The role of the Westerners—both individuals and governments—in Russia's transformation later was hotly debated. But the most important actor was Yeltsin himself, who made the first big leap. According to Berger, Gaidar and his brain trust drafted a speech for Yeltsin in which they deliberately did not name a day when prices would be freed. They feared a specific date would lead to hoarding and panic, which they could hardly afford. Yeltsin sent back a draft in which he had scrawled that prices would be freed by year's end. “Everybody was shocked, that was something that could not be announced beforehand,” Berger recalled. “They kind of persuaded Yeltsin to cross it out.” But when he gave the address on October 28, 1991, Yeltsin reinstated the remark. He declared plans for a “one-off unfreezing of prices in the current year.” That meant before January 1, 1992, just two months away. The Gaidar brain trust could do nothing more. “Yeltsin just pulled the lever,” Berger told me.

In this landmark speech, Yeltsin fully embraced shock therapy. “A large-scale reformist breakthrough is needed,” he declared, promising that “we shall finally begin, in reality and not just in words, to haul ourselves out of the quagmire that is sucking us in deeper and deeper.” Yeltsin endorsed the basic Gaidar plan for free prices, free trade, and mass privatization. He optimistically—even foolishly—promised that “people's lives will gradually get better” by the next autumn.

When his father stopped by the dacha, Gaidar mentioned that he
might join the Yeltsin government. His father blanched, Gaidar recalled, “an expression of stark fear on his face.” Timur Gaidar knew the job was political suicide but urged his son to go ahead. The following week, Yeltsin formally appointed Gaidar a deputy prime minister to lead the revolution.
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Late one night, Gaidar took Chubais aside. Gaidar worried about money, prices, finance, and the looming prospects of panic buying, hunger, and a devastating winter. He would lead the first wave of radical reform, but he knew that if they made it to spring, there would be a second wave that would be far more difficult. The goal of the second wave was to profoundly change the underlying structure of the economy. It would involve carrying out the largest transfer of property to private hands ever attempted in modern times. Privatization was going badly in Poland and Hungary, and Gaidar needed someone who would see it to the end. He asked Chubais.

“Yegor,” Chubais replied, with a deep sigh. “Do you understand that regardless of what the result will be, I will be hated for the rest of my life because I was the person who sold off Russia?” Gaidar replied that they would all “have to drink from that poisoned chalice.”

 

In earlier years, Chubais had paid little attention to privatization, which he found more of a dull organizational chore than an economics challenge. There wasn't a single economics textbook he had seen about privatization, and few members of his team were interested in a field that had been nonexistent in Soviet times.
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One of the most basic tenets of Soviet Communism was the nationalization of all means of production except for individual labor; the very words “private property” came to the fore only in the final years of Gorbachev, and few of the young academicians really understood its implications. In the brief period in St. Petersburg city government, among those on the Chubais team, only Dmitri Vasiliev had worked on privatization, and he had focused on small businesses.

Once he was given the assignment of carrying out the grand transfer of property, however, Chubais characteristically turned it into an intense crusade. He championed private ownership as the equivalent of personal freedom. “We need to free the economy from the state,” he declared. “To free the country from socialism. To shake off the terrible chains of that gigantic, all-pervading, bureaucratic, ruinous, and ineffective state.”
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The first thing Chubais discovered was that someone else was already feasting at the table. Property was being grabbed, stolen, and gobbled up by the old guard, factory managers, and party elite, who were taking advantage of chaos in the country. Chubais called it “spontaneous privatization,” and it was out of control. As the reins of central authority were loosened in Gorbachev's years, factory managers gained ever more power over their own domain and lined their own pockets. Using cooperatives and joint ventures, and later shell companies and offshore havens, they leeched the cash or raw materials out of state enterprises. Their overlords, bureaucrats in the government ministries, were also carving up the spoils for themselves. It was common for a state enterprise, such as a steel factory, to give birth to a small “pocket” bank, perhaps on the factory grounds. Then the bank would give birth to a trading company, which would take over the sale of the factory's output—state property—and the profits would disappear into the offshore accounts of the director and his friends, perhaps using the pocket bank. There was nothing to stop it. In his landmark October speech, Yeltsin had noted that while the reformers debated privatization, “the party and state elite, meanwhile, were actively engaged in their own type of privatization. The extent of it, and the enterprise and hypocrisy, are simply amazing. Privatization in Russia has long been under way, but wildly, spontaneously, and not infrequently on a criminal basis.”

“In reality, it was theft of state property,” Chubais recalled, “but was not illegal because there was no legal basis for the transfer of property into private hands.”
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The result of spontaneous privatization was a spoils system that rewarded the factory managers and political bosses and left out everyone else. Chubais was offended at the rude, defiant way the old guard was going about it. The essence was that “if you are cheeky, daring, and resolute you will get everything,” he recalled. “If you are not very cheeky and not very daring, just sit quietly.”