The Oligarchs (37 page)

She heard them talking about “shares.” They were standing in line to buy a piece of paper that promised huge returns in a year. The shares were issued by Bank Menatep. “We have been here for several days, standing in line to buy shares,” Zlatkis was told by the first woman she met. “They are selling shares. They are going to pay a big interest on them. We are investing a thousand rubles. And they promise that in a year, they are going to pay ten thousand rubles.” The women were waiting for easy money.

Zlatkis did not dare mention that she was chief of a Finance Ministry department for securities. But she could not remain quiet. She tried to persuade the women that it was all a mistake, a rip-off. They would never see the money again. Her driver tugged at her coat, saying it was useless to persuade them all by herself. But Zlatkis persisted, despite the cold air and the hostile looks. Sadly, they were being deceived. The shares were not legal. They would lose the money. Couldn't they see?

The women huddled closer, closing their circle against her entreaties. They told Zlatkis to get lost. They would not listen to her. They glanced anxiously over their shoulders as she begged them to realize that the shares were worthless. “They were very angry,” Zlatkis remembered. “They just drove me away. I couldn't do anything. I was talking to people who were absolutely not ready to hear me, to understand me.”
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Soon the scene in the snow would come back to haunt her—and them.

The great inflation of the early 1990s did not subside in Russia as it had in Poland. Every month in 1992 and 1993, the ruble's value fell as the Central Bank recklessly pumped billions in fresh credits into the system. A full year after Gaidar had set prices free, consumer inflation in Russia was still galloping ahead at 25 percent a month.
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By the end of 1994, consumer prices were 2,000 percent higher than they had been in December 1990.
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Viktor Gerashchenko, chairman of the Russian Central Bank, thought in Soviet fashion that pumping more money into the economy would save it. Instead, he was wrecking it.

Gaidar was not completely blind to the damage to the economy, even though he had trouble displaying sympathy for the population. “Hyperinflation is the most terrible monetary catastrophe of all,” he recalled years later. “It occurs when the public has lost all faith in its own national currency and rushes to get rid of it, buying up whatever comes to hand.”
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That is precisely what happened in Russia. Hyperinflation destabilized the economy and wiped out the savings of a population. It was cruel and unusual punishment. A scientist, whose salary in Soviet times may have been two hundred rubles a month, who may have saved five thousand rubles over a career, saw the value of his entire life savings shrink to a loaf of bread. But for the most cunning and daring businessmen, the wave of inflation was an incredible opportunity. It heralded an age of fantastically easy money, of fortunes spun out of thin air. The lure was especially strong for those who already had connections, such as the cooperative businessmen, nascent bankers, Komsomol activists and ex-KGB agents, and those who had guts, including intrepid university students who had never known the Soviet system.

Russia was a broken country that needed to attract investment, build confidence in its currency, and establish the basic institutions of the market. The wave of easy money was enormously destructive to all these goals. It taught all the wrong lessons, and the damage lingered throughout the 1990s. The mind-set of these years was that it was far more profitable to wheel and deal with finance, to leverage money, and to exploit the distortions of inflation than to build a business brick by brick. The profits were astounding for Russia, but so were the costs—easy money put off the hard work until later.

In the Soviet system, money played a secondary role in the economy. In the years after the revolution, a few Bolsheviks even fantasized
that money would disappear altogether in the workers' paradise. Soviet industry was geared first and foremost toward meeting production targets and plans, and money was not generally critical to success or failure. If the goods from a factory were shoddy or unneeded, the factory still got subsidies. A whole panoply of notions about money and its relation to private ownership—profit, loss, debt, interest, shares and dividends—did not exist. Moreover, for consumers as well as factories, goods in the shortage economy existed beyond the reach of money; the key factor was access or privilege, not cash.

When it came to money, Russians harbored a deep and abiding distrust of their rulers. Soviet leaders had periodically confiscated people's savings to soak up the so-called monetary overhang, the excess rubles that accumulated because there was nothing to buy. The last confiscation was still fresh in public memory, inflicted by Prime Minister Valentin Pavlov, who suddenly withdrew fifty and one hundred ruble banknotes from circulation in 1991.

When Yeltsin launched shock therapy by freeing most prices, his central goal was to ensure that money and prices, and not the dictates of central planning, would play the leading role in the complex drama of economic life. For the Yeltsin revolution to work, it had to impart a profound new meaning to the definition of money, to infuse the ruble with value and bury the Soviet legacy. In theory, money and prices would become the chief indicators of success or failure, separating good from bad.

But when shock therapy began, the first results did little to establish faith in the currency. The initial surge of inflation heightened mistrust of the ruble. In 1992–1994, the Russian people showed they were indeed rational actors in response to economic change: they got rid of their rubles as fast as possible. The dollar became king. Primitive barter trade took hold, as refrigerators were traded for pickles and coal for flour, and nothing for rubles. Those who had the means sent their money abroad, creating a river of “capital flight” out of Russia that continued for years. But most ordinary people just looked for somewhere else to put their money—perhaps in dollars under the mattress.

Just as hyperinflation began to roll through the economy, just as people began to think about getting rid of their rubles as fast as possible, Chubais opened the door for an alternative place for their money—the voucher and voucher mutual funds. The voucher funds
soon evolved into all manner of get-rich-quick temptations and climaxed in 1994 in a wave of popular but destructive financial pyramid schemes. If the voucher was a legal financial instrument, given to everyone as a gift by the state, it was not such a big leap to imagine that other pieces of investment paper could be legal too and satisfy the hunger for quick rewards in a time of runaway inflation. Gaidar feared at the outset that the vouchers would lead to massive speculation—the gambling kind. He was absolutely right. The voucher funds soon began to play on people's expectations for easy money, sprinkling their names with the words “diamonds” and “oil” and offering annual returns over 500 percent.

The voucher had opened a door, and beyond it was a wonderland of unregulated securities, surrogate money, and wild finance, a period that was a perfect illustration of what happens when the market has no rules. A population that for seven decades had been lectured about the ills of bourgeois capitalism was suddenly told, “Get rich quick!” They were not just invited but exhorted to get rich. The exhortations were carried by ads in the newspapers and on television, followed by an army of people to help make the dreams come true. Voucher traders became brokers, speculators, and in some cases thieves. Yevgeny Myslovsky, a veteran Soviet-era prosecutor who later investigated many of the dubious financial schemes of the early 1990s, chronicled a typical rip-off by one voucher fund, Astron. The director collected a thousand vouchers from 254 people between December 1992 and March 1993. He then sold them for 5 million rubles, of which he spent 1 million on himself and paid out some of the remaining money to lure more investors. But he invested in nothing—it was strictly a trick.
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Psychologically, Russians were totally unprepared to resist the new temptations of wealth. They knew practically nothing about real money or investment; many had never seen a personal check or stock certificate. Alexander Oslon, a leading pollster, described the first post-Soviet years as similar to a man released from prison. When the prisoner first gets out, he is overwhelmed by the blinding light, the fresh air, the euphoric freedom, and the sense of being weak-kneed and naive in a strange new world. The Russian people went through the same transformation. “They emancipated themselves from censorship; they freed themselves from the pressure of the authorities; they emancipated themselves from economic monotony,” Oslon explained.
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“Their
initiatives and their desires, which were always imprisoned, were set free.” But they didn't know how to handle it.

“In that time, elements of a new language appeared,” Oslon recalled. “Words like ‘business,' ‘limited,' ‘joint stock company,' ‘funds market,' ‘dollar exchange rate.'” The new language was followed by alluring, stark, and unrealistic ideas of how the market economy would function. “At the beginning of the period was a fairy-tale concept of capitalism, ‘a field of miracles,'” Oslon told me. He remembered that millions of people were captivated by a television advertisement for one investment fund in which a father and son are sitting, fishing. The son says, “Papa, we are sitting here, and the money is coming!” The message: you can sit and do nothing, and money springs up on its own accord. This yearning for a miracle, for dreams to come true, was fertile ground for the man with big ideas, Berezovsky.

 

Berezovsky's brainchild was the All-Russian Automobile Alliance, known by its Russian acronym, AVVA. The alliance was an ingenious scheme that would both tap into public anxiety about high inflation and exploit the pent-up desire of millions of people to own their own car. Berezovsky was general director of the alliance, and the handsome certificates he would sell to the public were signed on the reverse by Kadannikov, director of the huge Avtovaz factory in Togliatti, who became the new chairman of AVVA.

One day after the December 13, 1993, election, in which Yeltsin won approval of the new Russian constitution and a new parliament, the securities went on sale in the vast exhibition hall on Manezh Square next to the Kremlin.
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The certificates were printed in Switzerland on paper fine enough for any national currency, with special protection against counterfeiting. Each one was engraved with a portrait of a famous prerevolutionary Russian industrialist, such as Savva Mamontov, a patron of the arts and literature, iron magnate, and the largest shareholder of the Moscow-Yaroslavl-Archangelsk railroad. The certificates were specially flown to Moscow from Zurich in heavy wooden crates and stored under tight security.

The certificates said quite clearly on the front side: “One Share.” The nominal face value was ten thousand rubles, and each certificate carried eight perforated coupons attached to the bottom, labeled
“Check to Receive Dividends.” Berezovsky promised that the first dividends would be paid in 1995, even though the new auto factory would not go into operation for a few years.

But the back of the certificate held a clue that not everything was as it seemed. The certificate was not a share of stock in the legal or traditional sense. Rather, it was a new kind of security, a hybrid called a “bearer certificate.” The bearer certificate gave the person who held it only one right: to exchange it for one genuine share of AVVA. However, trading in the bearer certificate was very difficult, and all the shares not claimed (meaning most of them) would be controlled by AVVA itself. In other words, AVVA was selling papers that said “One Share” on the front but said they were not a share on the back. The certificate holder had no voting rights. Real control rested with the founders of AVVA, a series of companies and banks close to Berezovsky and Kadannikov.
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Berezovsky added a special twist to discourage people from trading in their certificates. With much hype, AVVA promised to give away 100,000 Avtovaz cars and big discounts on car purchases in a lottery for those who held the certificates. Berezovsky personally announced the first lottery on February 18, 1994, saying 6,500 cars were being offered—every tenth car for free, and the others with 25 percent and 50 percent discounts.
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But the rules of the lottery were that only people who did
not
trade in their certificates could participate. In the end, the car giveaway lotteries were held just three times. The gambit worked: most people did not trade in their certificates and just stashed them in a drawer. This was good for Berezovsky because it meant he could keep the money and keep control of AVVA too.