The Oligarchs (34 page)

On June 11, 1992, the Supreme Soviet approved the privatization law.
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It was the last time parliament approved privatization; after that, opposition intensified, and Chubais relied solely on Yeltsin's decrees. This was a seminal moment for Chubais. For all his steely self-confidence and determination, he decided to make a crucial trade. He gave up one of his most cherished ideas at the time, the importance of outside owners, to achieve his larger goal of transferring the property out of the hands of the state. The deal was a precursor of what was to become a trademark Chubais method, one that led to a corrosive weakening of his own principles later on.

Still, at this point, Chubais was single-minded. “Every enterprise ripped out of the state and transferred to the hands of a private owner was a way of destroying Communism in Russia,” he told me. “This is how we understood the situation, without any exaggeration. And every extra day we worked, we could privatize another ten, twenty, or
thirty enterprises. And at that stage, it didn't matter at all to whom these enterprises went, who was getting the property. It was absolutely unimportant whether that person was ready for it.”

 

In
Another Life,
his visionary
samizdat
text in the early 1980s, Vitaly Naishul had described the key role the
nomenklatura
and factory managers played in the Soviet industrial empire. They were the “guiding nucleus” of its success, he acknowledged, and could not be ignored, even in a shift to the market. But Naishul speculated, with remarkable prescience, that it was possible to redistribute—very widely—the entire property of the Soviet state, so it would not just wind up in the hands of the directors and the elite. He proposed that every person in the country would be given five thousand “special personal investment rubles” which they could then invest in factories, stores, and enterprises, possibly chosen from a list published in the newspaper. Naishul's underground manuscript described mass privatization with a dreamy romanticism, trying to popularize the idea of creating millions of shareholders, the equivalent of a class of stock hounds watching their dividends. “Your enterprise will function, sell and buy,” he wrote. “You and other owners will get the profit and split it among yourselves, and mind the enterprise like your personal belonging.” Naishul was years ahead of his time.

Chubais and Gaidar had once poured scorn on Naishul's privatization plan, saying his ideas were too complex, entirely unworkable, and too radical. But in the summer of 1992, the environment had changed dramatically, and Chubais found a new enthusiasm for Naishul's vision. Mass privatization was a political weapon that Chubais could use to blunt the land grab by the nomenklatura and the factory directors. Moreover, he could create at least the impression that millions of people had become property owners—he could coopt the angry shop workers they had seen in Nizhny Novgorod, putting a share of stock in their hands instead of a placard.

Inspired by the popularity of a privatization scheme being used in Czechoslovakia at the time, the Chubais team decided to give away property to the whole country—all at once—in 148 million checks, or vouchers, which could then be traded at auctions for shares of companies.
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Critics later called them “worthless candy wrappers,” and Chubais never lived down his absurd promise that a voucher would be
worth enough to buy two Volga automobiles.
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In fact, the vouchers themselves were less an economic tool than a political gambit by Chubais to make all people feel they were getting a piece of the pie. The Chubais agenda was simply to win popular support for privatization and thereby make it irreversible.

The vouchers were handsomely printed in a rich brown to look like currency, with an etching of the Russian White House by the Moscow River, which then housed parliament. They were called “privatization checks” because Yeltsin hated the word “voucher.” At cabinet meetings, Yeltsin forbade officials from using “voucher” because he thought the English word was vulgar, but it stuck nonetheless. Each voucher had a face value of ten thousand rubles and could be picked up at the local bank for twenty-five rubles, or about ten cents. They could be traded for an employee's shares of his company, deposited in mutual funds, or simply sold or exchanged. “The share is a real right to property . . . a sort of ticket to a free economy for every one of us,” Yeltsin promised when he announced the voucher scheme on August 19, 1992, a year after the failed coup against Gorbachev. From October until the following January, 144 million vouchers, or almost 98 percent of the total, were picked up.

The voucher was a forced redistribution of property, designed to forever end state control and halt spontaneous privatization by the elite. Chubais was boldly creating a new group of stakeholders: the general population. The voucher scheme “signifies the death of the command economy and the political system that was built on the basis of total state property ownership,” Chubais told reporters.
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Later he recalled that “the beginning of mass privatization—privatization based on the ‘rules'—meant the end of stealing state property by the high and mighty.”
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However, the voucher was just an interim step in the redistribution of property, a way station en route to a new class of owners. How long it would take to reach the goal, who those owners would be, and whether they would be “effective owners” was still uncertain. Private companies would be created out of the voucher auctions, and those companies would issue shares that would be bought and sold freely. That was a goal in and of itself, Vasiliev told me. But what came next? He said it was obvious that “the effective owner would appear only after the property was redistributed, after some serious period of time.”
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As the opposition rallied in the Supreme Soviet, Chubais began a political counteroffensive for the voucher phase of mass privatization. Paul Bograd, a political consultant then working for Sawyer-Miller, a Boston firm, came to Moscow in August to help Chubais engineer a public relations and advertising campaign for the vouchers. Bograd immediately got a taste of what he was up against. He suggested a television advertisement for vouchers featuring Chubais. An older, Soviet-era bureaucrat told Bograd that advertising by the state was always anonymous. Chubais couldn't do it
personally
!

“Chubais listened,” Bograd recalled. “He said, I will take responsibility for this. Failure, good or bad, someone has to own it.”
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On the day the commercial was filmed, Bograd's heart sank: Chubais was sitting behind a desk with a flag behind him, looking like a stale Soviet
apparatchik.
“I said, try it a different way, maybe without your coat on? Or maybe standing, or leaning on your desk?” recalled Bograd, who wanted to put a little flair into Chubais. “People have had years of watching Soviet officials sitting behind their desk with their jacket on, flag and all! They have been completely discredited.”

“Okay,” Chubais said, “I will stand.” He stood. “But I am not taking my jacket off!” Chubais felt that he had to talk to people in their own language, and that meant talking to millions who were shaped by the Soviet mind-set.
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He was also sensitive about appearing too Western. He got ready to start his speech. Then he looked back at Bograd, smiled, and unbuttoned the jacket.

As a political gambit, the vouchers galvanized the population and became the single most important symbol of the reform years. Although experts suggested the voucher be denominated in abstract “points” rather than money, Chubais insisted they must have a monetary face value, since the whole point was to make vouchers look like a gift to the public.
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“They seized the nation's imagination,” recalled Leonid Rozhetskin, a Wall Street lawyer and Russian émigré who arrived in Moscow in 1992 to begin working with Chubais and Vasiliev. “It was at the time an absolute public relations boon to the reforms. Every newscaster, every channel was asking people on the street five or six times a day, ‘What are you going to do with your voucher?' And for a period of time, the voucher may have been the most liquid form of security in the world. It could be bought and sold at every street corner kiosk and metro station from Vladivostok to St. Petersburg.”
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The vouchers were traded by the bushel at Moscow's nascent commodity
exchanges. On the largest floor, the Russian Raw Materials and Commodity Exchange, a scruffy bus station–like hall in central Moscow that traded commodities in the morning and vouchers in the afternoon, volume reached 60,000 to 100,000 vouchers a day, or about $1 million. At the end of the process, the volume reached $10 million. Traders hauling shopping bags and suitcases stuffed with vouchers often roamed the hall.

In the twenty months of the voucher program, the price gyrated widely, reaching a high of $20 and a low of $4, largely depending on the wild shifts in Russian politics. In metro stations, people lined the walls with signs pinned to their coats: “I will buy vouchers.” Or, written on the flip side: “I will sell vouchers.” The vouchers were freely tradable, and many millions were immediately exchanged for a bottle of vodka or sold for a song. Brokers began scouring the country for vouchers, which they stuffed in suitcases and took on overnight trains to Moscow for trading and speculating, since the street price often varied from place to place.

For the reformers, the public reaction to vouchers reaffirmed their basic assumption: Russians would respond to market incentives, and they would adopt the new ideas of shares and property ownership. Chubais later boasted, “You can ask a
babushka
in the Smolensk region what dividends are, and I think she will reasonably explain to you what they are. You would agree, that a year or a year and a half ago, the same
babushka
might have told the questioner to pack it.”
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Some enterprising businessmen were soon setting up voucher mutual funds. Chubais and Vasiliev were euphoric. “There was a feeling, this is our victory!” Chubais recalled. The hope was that investment funds would collect vouchers from the population, invest them in companies, demand good management and profits, and distribute dividends to the investors. Chubais predicted the investment funds would be ideal for “people who just want to make a reliable investment and receive a return on it.” Chubais recalled how strange and sudden it all was. Even in frozen Yakutia, in the far northeastern corner of Siberia, thousands of miles from Moscow, there was a voucher mutual fund! When first told about voucher funds, an official there was puzzled. “It took me six months to run around the tundra trying to distribute the vouchers.” Then he asked Chubais, “Now, should I run back to collect them?”
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The early euphoria faded when Chubais realized that he had liberated
an unpredictable, voracious monster. Over the coming months, dozens and then hundreds of voucher funds sprung up, with loud and insistent advertising. Many of the voucher funds were just covert attempts by companies to buy up their own shares. But others were independent and aggressive; the largest Moscow fund, First Voucher, collected 4 million vouchers.
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Soon the funds got out of control. They were completely unregulated, and Chubais failed to anticipate how fast they would proliferate. In the end, about six hundred voucher funds collected 45 million vouchers. The market that had started without institutions had become a jungle. Unscrupulous funds promised outrageous dividends, took vouchers, and never returned anything to investors, just selling the vouchers and stealing the proceeds. The managers of one fund, Neftalmazinvest, which had promised to invest in oil and diamonds, made off with about 900,000 vouchers. In the end, ninety-nine of the voucher funds disappeared without a trace.
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People felt deceived, and they were.
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It was just the beginning.

 

The voucher program was launched in October 1992 under enormous pressure. The Congress of People's Deputies, the broader legislature that met twice yearly, was set to reconvene on December 1, 1992. A new avalanche of criticism was certain, and Chubais did not yet have a single actual sale of a factory to show for it. He was desperate to complete a showcase sale before the congress began and urgently sought help from Western investment bankers.

One of them was Hans-Joerg Rudloff, president of Credit Suisse First Boston, who was a visionary financier. Rudloff had taken his firm into huge gambles as Communism collapsed, making deals with the struggling new states of Eastern Europe. He was accustomed to being wooed by prime ministers and to making fateful decisions about their ability to borrow on world markets. Rudloff, son of a German leather manufacturer who had memories of rebuilding the family factory after World War II, had sharply conflicting feelings about the chaos he saw in post-Soviet Russia. Rudloff clearly understood the lingering legacy of Soviet Communism. He knew the absolute power that the Communist Party had once held over the country, the fear that it had sometimes instilled, and the vacuum that was created when it disappeared. Who would seize the enormous inventory of factories, mines, shops, and warehouses that were up for grabs? Rudloff had grave doubts that
it could be done rationally, but he was also drawn by the prospect of making a fortune.
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His first encounter with the young Russian reformers, in early 1992, had gone badly; they seemed arrogant and turned down his offer of help. He left thinking they were hopelessly naive and vowed not to come back. But come back he did, believing that “we can't miss the biggest emerging market in history.”

Through an acquaintance, Rudloff recruited a young finance specialist, Boris Jordan, who came from a family of fiercely anti-Communist Russian émigrés in New York. Jordan, a pink-cheeked, baby-faced young man, then twenty-five years old, was an incredible hustler, whose grandfather fought against the Bolsheviks with the White Army. Jordan longed for a chance to go to Russia. He grew up speaking Russian at home and passed the Foreign Service examination, but the State Department said he would never be sent to Russia as a diplomat. At the time, he was making airplane finance deals in Latin America. “I loved the deal-making environment,” Jordan recalled. “But wouldn't it be better to do it somewhere I actually speak the language?”
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