The Oligarchs (36 page)

Browder had an advantage. He knew an oil trader in Moscow who had rudimentary information about the companies that were being privatized, especially in oil. “At the time, just knowing the names of the companies and roughly what the production and reserves were was huge, valuable information,” Browder recalled. He had the facts on a spreadsheet but was careful not to show it to anyone. He had the first crack at the best investments, since everyone else was in the dark.

At the time, not everyone could see through the fog of despair that blanketed the Russian economy. There were almost daily stories of factories failing, workers without wages, idled assembly lines, and industrial misery. Who wanted to buy an old Soviet factory with no competitive markets, aging equipment, no serious accounting, and thousands of dependent workers? It was not a pretty sight. Rutskoi, the rebellious Yeltsin vice president, declared that the reformers had “turned Russia into an economic dump.”

Indeed, the big money was not in property, but in finance. Currency speculation, trading in gold and precious metals, arbitrage in oil—these were the new gushers of the first post-Soviet years. Smolensky, devoting himself to his banking business, was distinctly uninterested in Russian factories. He was making a mint running dollar-ruble speculation, changing money back and forth every day and gambling on tomorrow's exchange rate. Gusinsky was cementing his alliance with Luzhkov, making money from real estate and using the city government deposits in his bank.

But some Russians had a clue of what lurked behind the door Chubais was opening. Khodorkovsky bought up a huge quantity of vouchers. His Bank Menatep was a major player in the voucher market, even
though Khodorkovsky knew Russian industry was in deep distress. “Idealism,” Khodorkovsky recalled of his decision to buy vouchers. “Since my childhood I wanted to be director of a plant. My parents worked at a plant their whole lives. I was sure and I am still sure that the most important thing is industry.” But like many others, Khodorkovsky was shooting in the dark. He could not figure out which factories were potentially lucrative, so he bought many. Using his connections, he was able to pick up many factories in so-called investment tenders, in which the winner promised to make investments later on but rarely did. The journalist Yulia Latynina said Khodorkovsky turned Menatep into the first Russian investment bank, with fierce determination. “No other bank dug up industry with such rage and omnivorousness,” she recalled.
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Khodorkovsky purchased large blocks of shares in timber, titanium, pipe, copper smelting, and other industries, more than one hundred companies in all. Khodorkovsky told me that he hired Andersen Consulting to survey the crazy-quilt industry he had assembled, and the management consultants told him he had gathered up the equivalent of a South Korean conglomerate. They described for Khodorkovsky how it could work, like Samsung. The comparison did not appeal to him. “When it was done,” Khodorkovsky recalled, “I said, this cannot work.” He would soon decide to go after the richest single treasure, oil.

Behind the shuttered factory gates, a mammoth fire sale was getting under way. Judging by the number of vouchers and their street price, the total value of Russian industry was under $12 billion. In other words, the equity of all Russian factories, including oil, gas, some transportation, and most of manufacturing, was worth less than that of Kellogg or Anheuser-Busch. In a privatization carried out with special restrictions against foreigners and outsiders, Gazprom came out of the voucher auction with a value of under $228 million, or about one-thousandth of the value put on it by foreign investment banks. The market value of Zil, the famous truck and limousine maker with 100,000 workers, was $16 million. The market value of the giant Gorky Automobile Works, known as GAZ, which manufactures the Volga car, was $27 million. Indeed, the auto factory was so lucrative that the managers used state credits to buy up 1.8 million vouchers through dummy firms and then tried to grab the factory for themselves, but they were stopped when the scheme was uncovered. The market value of two household names in Russian manufacturing,
Uralmash and Perm Motors, were $4 million and $6 million respectively. Whereas American firms typically have market values of $100,000 per employee, Russian firms obtained voucher auction values of between $100 and $500 per worker, or two hundred times less.
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Jordan was scouring Russia for vouchers, which he bought every day from a small circle of Russian brokers and then sold to foreign investors at a giant markup. Even though he had spotted the ludicrously low factory values, Jordan never invested in factories, instead working frenetically as a middleman speculating in vouchers, for which there was often a sudden demand before a big auction. Jordan had trouble finding a safe place to store the mountains of vouchers and eventually settled on a vaultlike room in the tall high-rise building across from the Russian White House. This distinctive building in Soviet times had housed the Socialist bloc economic association, the Council on Mutual Economic Assistance. It was the same building where Luzhkov and Gusinsky had set up their offices. Every night, after buying up vouchers, brokers would take the risk of delivering them to the underground room, and Jordan would go there to inspect the paperwork. With hundreds of thousands of vouchers, the process was a logistical nightmare. One evening Jordan noticed the clerks slicing up condoms with scissors and then using them to bundle the vouchers. They had no rubber bands.

For a few sweaty hours during the violent October 1993 confrontation between Yeltsin and hard-liners at the Russian parliament, Jordan and the Chubais staff suffered a terrible scare—they feared the rebellious nationalists and hard-liners, led by Rutskoi and Khasbulatov, might storm the room where the vouchers were stored, just across the street. Tens of millions of dollars worth of vouchers were lying there—the guts of the whole privatization program!—and in one moment they could have gone up in smoke. But the anti-Yeltsin forces at the White House never discovered it. The voucher vault was safe.
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At the beginning of 1994 came a dawning realization in the West that Russian industry was going to be a new Klondike. Yeltsin won a new constitution that gave him broad powers and a new legislature. The old Supreme Soviet was history. Jordan recalled that he had tried, in vain, in March 1993, before Yeltsin won the referendum, to interest foreign investors in the vouchers. “I would go out and tell people about Russia, and no one would let me into their office,” he recalled. “Nobody cared. All around the world I went for three weeks. And in
November, I went on another roadshow. Then people started to open their doors to me. And in March 1994, every person in the world wanted to know who I was.”

Between December 1993 and June 1994, when the voucher phase ended, Jordan and Jennings had traded 16,346,070 vouchers—more than 10 percent of the total. Foreign investors were hungry for Russian stocks, even though they often knew nothing about the companies they were buying. Even an oil major like Lukoil had barely one page of financial data to share with investors.

A turning point came in May 1994 with the publication of an article in the
Economist
titled “Sale of the Century,” which laid out the stark math: Russian assets were very, very cheap compared with similar property elsewhere in the world. The article noted that shares in Bolshevik Biscuit were trading at $53 each, or three times the price at the 1992 privatization. Still, Bolshevik's market value per ton of output was $9, while a Polish biscuit maker, Wedel, was valued by its stock market then at $850 a ton.
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Right after the
Economist
article appeared, Browder recalled a flood of interest in Russia among his colleagues in London, who earlier would not give him the time of day. “I was sitting on the trading floor and all of a sudden all the managing directors are around my desk. ‘Bill,' they said, ‘Interesting stuff you are doing there. Can you get us some Lukoil?'”

Despite two years of political crisis, Chubais had delivered on his core promise to put state property into private hands. About fourteen thousand firms went through voucher auctions in twenty months, and thousands more small shops and businesses were privatized; all told, about 70 percent of the economy was put into a new private sector.

Would the new owners prove more effective than the Soviet masters? At the end of the period of mass privatization, in mid-1994, there were plenty of danger signs. Rozhetskin traveled the back roads of Russia, looking at factories, and many of the owners he encountered were not interested in building the businesses they had purchased cheaply. Instead, they were just stripping the assets and sucking out the cash flow. The whole idea of corporate management skills, boardroom discipline, and effective ownership seemed distant, the concepts inchoate.

But Chubais was not concerned with that. The lessons of management and ownership would come later. If the owners were bad, they
would fail. “That's all there is to it,” he said. “And if the second owner is bad also, he will go broke. If he is good, he won't.”
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In late 1994, Chubais was ebullient about the future of the property he had freed from the state. “Everything that we've done already has convinced me that our country is on the doorstep of an investment boom,” he said. “And these are not my fantasies.”

One day after mass privatization was complete, Rudloff found himself sitting across the table from Chubais. Ever the gruff skeptic, Rudloff looked at Chubais and asked him point-blank, “What have you really done for Russia?”

Chubais, who had steely nerves and an unshakable sense of mission, replied, “I have privatized power. I finished off the Communist system.”

Rudloff was speechless, because what Chubais said was both breathtaking and true.

B
ORIS BEREZOVSKY, full of plans, came to the Russian Finance Ministry several times in 1993. He wanted to see Bella Zlatkis, a career bureaucrat, a stocky woman of Latvian descent, with short, black hair and an authoritative tone. In the early 1990s, Zlatkis had been appointed to head a new department in the ministry. It was called the Department of Securities and Financial Markets, although no one really knew much about securities and the financial markets were just beginning to take shape.

Berezovsky was a fountain of ideas, she recalled, and ever so insistent. In her small office, Zlatkis listened as Berezovsky described his latest dream. He wanted to construct a new auto factory, to create a “people's car” like the Volkswagen. Berezovsky's company, Logovaz, was already Russia's leading car dealer, taking thousands of Zhiguli cars from the Avtovaz factory in Togliatti and paying for them much later, in deflated rubles. Now Berezovsky was proposing to go further. He told Zlatkis he needed to raise $2 billion to build a factory to manufacture the people's car. Imagine how Russians would flock to the showrooms! A car was the dream of the Russian Everyman, and Berezovsky had a financial plan to match his imagination.

The privatization voucher had blazed a trail through the consciousness of the Russian people. On the streets, vouchers were ubiquitous; the exchanges hummed with voucher trading. The public was learning fast about shares, pieces of paper with a real value. Voucher funds, promising lucrative returns, spread like wildfire, beckoning new investors.

A thought occurred to Berezovsky: if the state could issue securities—the vouchers—then why couldn't he? The people would finance the “people's car.” They would buy shares.

The Avtovaz factory in Togliatti was troubled, overrun by petty criminals and robbed blind by its managers. But the director, Vladimir Kadannikov, stood behind Berezovsky's dream. The sandy-haired Kadannikov, who had taken the helm of Avtovaz in 1986 at the beginning of
perestroika,
was one of the country's most prominent industrial generals, and he lent an air of authority to Berezovsky's scheme. Kadannikov recalled how Volkswagen—the German people's car—had also gotten started with small individual investments before World War II.
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“What's good for Avtovaz is good for Russia,” Kaddanikov had boasted, borrowing a famous slogan of American capitalism.
²
The boast came, oddly, as Kadannikov's own manufacturing kingdom was being dismembered and was collapsing under the weight of theft, violence, and hyperinflation.

Zlatkis was skeptical about Berezovsky raising the money from shares to build his dream factory. The Russian financial markets were still inchoate, a grab bag of small commodity exchanges, without controls, selling vouchers and a handful of company shares in between tons of steel pipe. They were growing faster than the rules, the government, or the laws could keep up. Zlatkis was being thrust onto the frontier of wild capitalism, the kind without institutions or rules. Berezovsky was proposing to create a new, private financial instrument, with certain unique features that would make it behave like real money. He implored Zlatkis to approve it. The new security would be a huge precedent, a leap into the unknown. It was so new, Zlatkis concluded, that there were no laws governing it.

“I saw the flaws of the investment project,” Zlatkis later told me. “They needed $2 billion to establish what they wanted. But the financial market can give just so much. They could collect $100 million; they couldn't possibly have collected more. But with that money, they couldn't build anything. Maybe a garment factory, but not anything in auto manufacturing that would be interesting.”

Berezovsky would not give up. “He was sure that he would be able to collect $2 billion in Russia,” Zlatkis recalled. Berezovsky wanted to sell shares. At the mention of the word, Zlatkis recalled a snowy night back in December 1991 when she had just taken the job in the Finance Ministry. The Soviet Union was collapsing and Yeltsin was coming to power at the beginning of shock therapy. Zlatkis was heading home from her office at 11:00 P.M. on a winter night; the streets were dark and the sidewalks icy. As Zlatkis shivered, her driver took the wheel of the unheated, aging Zaporozhets and rounded a dark corner near Red Square. Zlatkis saw a familiar sight: in the cold, a long line of people, just standing and waiting, under a single lamp. She told the driver to stop. She got out to see what might be at the end of the line. She saw mostly elderly women, bundled against the cold.