The Oligarchs (35 page)

Rudloff hired Jordan and sent him to Moscow. “I smell change,” he told Jordan. “Go there and find out.”

Jordan was paired with Steven Jennings, a tall, square-jawed New Zealander, then thirty-two, who was as calm as Jordan was excitable. Jennings, a policy wonk who made his mark in New Zealand's 1980s privatization, had been working on a World Bank project to restructure Hungary's banking system when Rudloff recruited him for Russia. “When I walked into the office the first time, Steven had books everywhere,” Jordan told me, recalling their first meeting in London. “He wrote books about privatization, and he loved the stuff. I wasn't interested in it. I was interested in how to make money.”

Yet Jordan's first impressions of Moscow on his exploratory trips were discouraging. There were no markets yet. “Steven,” he told Jennings, “unless this country creates markets I am not going to have anything to do here.”

Once they moved to Moscow, Jordan and Jennings were familiar faces in the cold, empty offices of the State Property Committee. They brought the needy Russian staff office supplies, coffee, and ideas. “We had a lot of lazy, arrogant investment bankers come and offer to work for money,” recalled a Westerner who witnessed the early months. But Jordan and Jennings seemed different: they were always hanging around. Credit Suisse First Boston became a support branch of the privatization
agency. The Westerner remembered of Jordan and Jennings: “They were six foot three, in your face, and ready to go.”

The pair went to Chubais and made a deal: they would help advise on the first auctions for free, which was Rudloff's idea. “Don't take any money from anybody,” Rudloff told his young charges. “If we are going to risk this thing, which has a 20 percent chance of success, we might as well not take any money. So they can't accuse us of profiting off a failed program.” Rudloff recalled, “We said we can't miss the biggest emerging market in history, but we can't go in saying we are going to make money. We will see what comes out of it in two or three years. I told them, don't worry about profits.”
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Chubais took them on. Jennings was amazed when he got to Moscow and saw that all of Russia was about to be sold off by a “tiny group of people with these tiny shreds of legislation.” It was “like the first step walking up Mount Everest, that's what it felt like.”
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Their goal was to organize the first sale of a factory, the venerable Bolshevik Biscuit Company in Moscow. Founded in 1855 by a Swiss baker and later nationalized by the Soviets, the factory was well known for its elaborate cakes and cookies. Jordan and Jennings spent a month working around the clock trying to indoctrinate and cajole the management and workers. Over endless cups of tea and cookies, Jordan explained the basic concepts such as equity and the meaning of outside ownership. In this first sale, management and workers kept 51 percent of the company and the remaining 49 percent was offered to the public for vouchers. Jordan and Jennings set up an exhibition hall on the Moscow River for the big event, expecting thousands. They were not trampled, but hundreds came on the first day, offering their vouchers in a bid for shares. In a back room, Jennings and Jordan watched apprehensively as a computer tallied the auction. They could not believe what they saw. Jennings had earlier worked on a sale of an almost identical cookie company in Eastern Europe, which was sold to Pepsi for about $80 million.

Bolshevik Biscuit had just sold for $654,000.

Jordan recalled, “We looked at each other and said, ‘We are on the wrong side of this deal. We shouldn't be representing the government. We should be buying the stuff!'”

“We quit!” they said to each other.

What Jordan and Jennings had seen was the dawn of Russia's transformation. Not only was the enormous stock of factories, mines, and
smelters about to be sold, but judging by any comparison around the rest of the world, it was to be sold dirt cheap. Chubais didn't care; to him, the important fact was the process of redistribution. But soon the smell of money lured all kinds of investors—mega-moneyed foreigners, sharks, vultures, and gamblers—to the scene.

 

Gaidar, the “kamikaze” reformer who thought he would only last a few months, was ousted under pressure from the Congress of People's Deputies in December 1992, after less than a year in office, just as Chubais was selling off Bolshevik Biscuit. To appease the industrial lobby, Yeltsin replaced Gaidar with the stolid Viktor Chernomyrdin, the one-time Soviet natural gas minister who transformed his monopoly into Gazprom, Russia's largest company. For the young reformers, the appointment seemed ominous. Chernomyrdin's first words stunned them: “I am in favor of reforms, of a real market,” he said, “but not of a bazaar.”
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Even worse, Gaidar's nightmare scenario, hyperinflation—when prices zoom upward—was fast becoming a reality. The inflation was fueled by massive subsidized credits that the Russian Central Bank was pumping into the economy, at the behest of the “red directors,” the Soviet-era factory bosses, and their patrons in the Supreme Soviet. The parliament had installed Viktor Gerashchenko as chairman of the Central Bank in the summer, and the former Soviet banker cheerfully opened the sluice gates to new credits. The Central Bank was giving out credits to factories at 10 or 25 percent a year while inflation was raging at 25 percent
a month
.
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The flood of credits did little to revitalize industry but had a perverse effect on the economy, triggering inflation that became political poison as people saw their money evaporate. Berger recalled trying to persuade Gaidar to show some sympathy for people who suffered. Gaidar insisted that from an economics point of view, the ruble savings were just figures on paper; in fact, they had long ago been used up by the Soviet Union on the arms race. The money was just a “line on people's accounts.”

“Yegor,” Berger insisted, “we need to at least promise people that in five or seven years, you will pay them back. Not you, but others, it does not matter.”

Gaidar refused to make the pledge, saying he could not deceive people.

“Don't deceive, but use a little populism!” Berger implored Gaidar, with growing exasperation. “Say, ‘Yes, we will return it later, the red bandits stole it all.'”

“No,” Gaidar replied somberly, “I know we won't be able to return it later. I cannot deceive the people.”

“PROMISE IT!” Berger shouted. “Or you won't be able to work.”

“No,” Gaidar said. “We have no right to do it.”
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Gaidar's departure left Chubais vulnerable and worried about the deepening opposition to reform. Chubais had briefly pondered quitting with Gaidar but agreed to stay on to finish the job he had begun.
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The Supreme Soviet was considering a bill that would totally stymie privatization. Yeltsin had warned in December that reform was in “serious danger,” and the danger seemed to only grow deeper as Yeltsin squared off against his Communist and nationalist critics in parliament. Those critics were led by Khasbulatov and Yeltsin's vice president, Alexander Rutskoi, the Afghan war veteran and former general who derided the young Gaidar government as “little boys in pink shorts.” Yeltsin called for a referendum on reforms, and Chubais poured himself into making it a success. By the winter of 1992, Chubais had launched the privatization of small shops but had not yet sold off the factories. The process was not yet irreversible; “it can be strangled in the cradle yet,” he said.
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Tensions between Yeltsin and the parliament ran high. Vladimir Shumeiko, then first deputy prime minister, showed Chubais a gun that he was carrying around with him. “He said he got it recently and if Khasbulatov tried to arrest him, he would shoot and he would definitely kill five or ten people,” Chubais recalled. “And while on the one hand it was nonsense, on the other hand I think it was the truth; he would have really shot and killed about five people. The situation was rather hot.”
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The referendum on Yeltsin's reforms was set for April 25, 1993, and became a turning point. The voters were asked four questions: (1) do you support Yeltsin, (2 ) do you support Yeltsin's economic policy, (3) do you want early elections for president, and (4) do you want early elections for parliament? The whole idea of a referendum was risky: had Yeltsin lost, it would have been a defeat for all he stood for. The Yeltsin team campaigned with a snappy string of answers to the referendum questions: “Da, Da, Nyet, Da” (yes, yes, no, and yes). Chubais portrayed the referendum as a case of the people against the
politicians. “Our main support is the people,” he insisted at a press conference four days before the vote. “The people who have become stockholders at their own enterprises, the people who have swapped their privatization vouchers for stocks of enterprises, the people who have won contests to buy shops or restaurants.”

Chubais was sure that if they lost the referendum, his privatization struggle would be in vain. In the weeks before the vote, he had fought tooth-and-nail against bills and resolutions in the Supreme Soviet that would bottle up privatization. At one point, without telling Yeltsin or Chernomyrdin, he secretly wrote up an order to abruptly cancel the whole privatization program and took it in his pocket to parliament, where, if necessary, he was ready to blow up his entire project and let the blame fall on Khasbulatov. He never carried out the stunt, but no tactics were off-limits for Chubais. When Communists in Chelyabinsk, in the Urals, tried to start a regional revolt against privatization, Chubais immediately flew there and publicly challenged them. What the public did not see was a four-hour long harangue against the Chelyabinsk governor back in Moscow. Chubais threatened to block the governor at every turn. “I will simply strangle you,” Chubais threatened him.
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Chubais never let it be told, but he had deployed a secret weapon to help Yeltsin win the April referendum. Chubais privately met with George Soros, the Hungarian-born superfinancier and philanthropist, who was in Moscow to launch a program to help scientists. Soros agreed to bankroll the pro-Yeltsin referendum campaign, the first but not the last time he would come to the rescue of the reformers. A Chubais representative, a Westerner, went to Switzerland and made the financial arrangements for a $1 million transfer from Soros to offshore accounts that Chubais could draw on for the campaign. The money helped the Yeltsin forces buy advertising to drown out the voices of the opposition.
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Chubais was no longer on speaking terms with Khasbulatov. In the halls of parliament, “they talked openly about prison cells being readied for us.” Chubais told me that on April 24, the night before the vote, “I was sitting in my ministers' office, destroying documents, because I understood if Yeltsin were to lose the election, Khasbulatov would not pity his opponents.”

As it turned out, Yeltsin won the referendum, with 58 percent expressing confidence in him and 52 percent approving of economic
reform. The threats to privatization eased. The referendum provided Yeltsin some political breathing space before his confrontation with parliament turned violent in October. By then, however, much of Russian industry was already on its way to being sold. There was no turning back.

 

“If the problem is only that the rich will buy up the property,” Chubais mused at one point, “I am sure that is the way it must be.”
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The privatization slogan had been to create millions of shareholders, and indeed the voucher plan had touched millions. But in the next step, the ownership of Russia's property was reshuffled once again, this time into fewer hands, including a few millionaires. These were men who had daring and smarts, who had come to the same realization that struck Jordan and Jennings on the day Bolshevik Biscuit was privatized—that Russia held incredible treasure and Chubais was practically giving away the keys to anyone who was farsighted enough to take them.

William Browder was one of them. He was the grandson of Earl Browder, leader of the American Communist Party (1932–1945). Bill Browder yearned to see the Russia of his family roots, and after Stanford Business School and a stint working privatization in Poland, he joined the Eastern Europe team of Salomon Brothers in London to specialize in Russia. Browder, who has a wry but incisive sense of humor and a sharp eye for finance, found it lonely work: no one believed there was any business in Russia. The boss threw some expense account sheets at him and told him to go to Russia and see what he could find.

Browder snared an assignment to advise the trawler fleet in the northern port city of Murmansk on privatization. The manager of the fleet told him there were one hundred ships, and each cost $20 million new. But management was entitled to buy its 51 percent of the company for the equivalent of just $2.5 million. Browder took out a sheet of blank white paper and did some quick calculations. His scratch-pad math practically screamed off the page: huge assets were for sale, cheap. “I thought to myself at that moment,” Browder recalled, “I cannot make a lot of money as an investment banker in Russia, but I can make a lot of money as an investor in Russia.” Browder went back and started to sketch out the value of other companies, especially in the oil industry. “Sure enough, the same thing in oil!”
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Browder eventually built up the largest private investment fund in Russia. But in these early days, the picture of riches in Russia was hazy, the prospects dim. Companies had no open financial data, managers were distrustful, marketing or business plans did not exist. The risks were imponderably large. Back in London, Browder at first met with skepticism and disbelief. “I was running around Salomon Brothers trying to find someone who would listen that this was going to be the most unbelievable investment opportunity there ever was,” he told me. Eventually, he got permission to invest $25 million, a tiny sum for one of the world's largest investment houses, but a large commitment for Russia at the time. Browder bought as many vouchers as he could, and then bought shares in little-known companies.