The Oligarchs (38 page)

There was another trick. The AVVA papers were not imprinted with the name of the bearer, as required by law for a real share of stock. This made the papers, like privatization vouchers, easier to trade on the street. But consequently there would never be a proper list of those who bought them because there were no names. Thus it would be extremely difficult to pay dividends, as promised.

In public, Berezovsky's ambition was sky-high. The “people's car” project, he announced, would build a new factory in Togliatti to manufacture 300,000 cars a year. The project was estimated to cost between $1.5 billion and $3 billion, although Berezovsky initially hoped to raise about $300 million from selling the AVVA certificates and the rest from a foreign investor, who was portrayed as just around
the corner. Kadannikov frequently and prominently suggested the possibility of a joint venture with General Motors. A team of industrial and factory specialists at AVVA worked out dozens of different scenarios for the envisioned factory and visited auto parts suppliers all over Russia.
¹²
Zlatkis recalled that Berezovsky “was planning to become a Ford,” a pillar of the Russian auto industry. “It was his favorite topic to talk about. I'm convinced he was planning to build it.” President Yeltsin signed a decree in late December 1993 awarding AVVA substantial tax breaks over the next three years.

Berezovsky's public declarations about the “people's car,” however, were not the whole story. As early as 1994, Berezovsky was also planning, with Kadannikov, to buy a sizable chunk—perhaps all—of the Avtovaz factory, which was being privatized.
¹³
Berezovsky shrewdly realized that Avtovaz was an industrial crown jewel of Russia but would be sold cheaply in the privatization giveaway. So he and Kaddanikov essentially created a scheme to raise the necessary money from people on the street, and they used it to buy shares in Avtovaz.

Yuli Dubov, author of the thinly disguised novel about Berezovsky,
Bolshaya Paika,
wrote that the takeover had to be plotted in secret, “so that the people in the factory wouldn't understand” the real intention, “and so that the poor Russian people, intended to be the main source of the operation's financing, would head for the cash collection points.”

Dubov's novel contains some remarkably precise details about the AVVA scheme that are supported by other evidence. Berezovsky deliberately created the hybrid security so he could sell as many certificates as possible while bypassing laws that required shares to be registered in someone's name. “We won't be selling shares, we'll be selling securities,” the Berezovsky character says in Dubov's book. “Did you get that? The law doesn't say a word about that sort of paper!” When the operation was over, “the only shareholders will be us, ourselves, and we,” he added. “And we will be making all the decisions. And meanwhile, the rest of the people will be sitting with their wrap papers. And it will be even better if they keep their papers to themselves, for good.”
¹⁴

At the Finance Ministry, the responsibility for registration of a new security fell to Zlatkis. Berezovsky lobbied her for permission to sell the AVVA certificates. Zlatkis knew that the new security was not covered by existing law. “The lawyers, who saw that issuance, said it was legal,” Zlatkis told me. “It was in accord with Russian legislation
at that time.” The law didn't even mention these new types of securities, known as bearer certificates. Berezovsky drove right through the gap.

He then lured two of Zlatkis's deputies to come to AVVA and made her a tempting offer. Zlatkis said her salary at the time was the equivalent of $30 a month. Berezovsky offered her a job at $15,000 a month. “I couldn't even imagine such a salary could exist,” she told me. “Had I believed in all those things, in all those projects, I would have taken the offer. And for a long time I had doubts.” But Zlatkis told me she ultimately turned Berezovsky down because she thought AVVA's financial plan would never work—they could never collect the kind of money Berezovsky dreamed of.

At first, Berezovsky's plan looked like a winner. Outside the Manezh exhibition hall, right next to the Kremlin, long lines formed to buy the certificates; AVVA also accepted vouchers in payment. “Let's go!” implored the AVVA television advertising. The AVVA certificates soon became some of the most traded papers in the Moscow commodity exchanges. The venture reaped about $50 million between December 1993 and mid-1994. All together, 2.6 million people gave their money and vouchers for a piece of paper that did not even have their name written on it. Then Lyonya Golubkov took to the airwaves, and Berezovsky's automobile alliance ran out of gas.

 

Golubkov was the name of a character in a television commercial. He was slightly pudgy, with unkempt, greasy black hair and a dull metal tooth. Unassuming and disheveled yet brimming with enthusiasm, Golubkov became the prophet of the easy money age. Supposedly he had once been a tractor driver, but his life changed overnight when he bought shares in a company called MMM and struck it rich. He bought a pair of boots for his wife, then a fur coat, and finally splurged on a trip to San Francisco to watch Russia play in the World Cup. Golubkov's fictional adventures were the centerpiece of a phenomenally successful television advertising campaign that took Russia by storm in the spring of 1994. Golubkov sold dreams, and the weary Russian people bought them, spending billions of rubles to purchase certificates in MMM promising instant wealth at 3,000 percent interest a year. Golubkov played on Russian television screens night after night for months—2,666 ads aired on Russian television in March, April,
and May alone—in spots that always featured the same sprightly music, a simple white backdrop, and a slapstick style and usually ended with the ubiquitous MMM logo.
¹⁵

Behind the curtains of MMM was a reclusive former mathematician, Sergei Mavrodi, who traded in jeans, records, and other goods in the Soviet days and later started a cooperative in the
perestroika
years, selling computers. Mavrodi was a quiet figure; when his apartment was later searched, police found it relatively modest, filled with butterfly collections and a stuffed bat on the wall. In 1993, when vouchers appeared, Mavrodi moved into the world of securities, and his voucher investment fund, MMM-Invest, became one of the largest and loudest in Russia. “MMM Invest turns your vouchers into gold!” promised the television commercials.
¹⁶
However, Mavrodi was to make a far greater contribution to Russian capitalism than just speculating in vouchers. He showed an entire country how to make money out of thin air.

On June 11 and June 16, 1993, Mavrodi officially registered the MMM joint stock company, with 991,000 authorized shares at a nominal price of a thousand rubles each. In the following months, Mavrodi then spun a web of associated companies—named after jewels, such as Diamond and Sapphire—which would trade in hybrid securities, the same “bearer certificates” that Berezovsky had used in setting up AVVA. Although the government had approved the issuance of 991,000 MMM shares, Mavrodi really sold millions of these bearer certificates, each of which was not actually a share but a claim on a bit of a share.

At least Berezovsky promoted his partnership with a famous industrialist, Kadannikov. Berezovsky had a tangible, if unrealistic, goal of building a factory, with the promise of dividends sometime in the future. By contrast, Mavrodi produced nothing but the lure of quick riches. In one memorable advertisement, Golubkov and his older brother Ivan are in San Francisco for the soccer match. Ivan sits in the stands, his head in his hands. He moans despairingly: I worked my whole life and got nothing! And Lyonya, this little brat, did nothing, and he's rich.

Mavrodi's company opened branch offices where investors could buy the certificates. In a few weeks, or even days, a purchaser could trade in the certificates for cash at the MMM central office at 26 Varshavskoye Shosse in Moscow. The redemption price was set by
Mavrodi, who was making a market in his own securities and sent the price higher and higher. The securities soared from 1,600 rubles, or the equivalent of a dollar at the prevailing exchange rate, in February to 105,600 rubles, or $50, in late July 1994. It was a classic pyramid scheme, in which money from the new investors was used to pay off earlier investors.

Mavrodi was imitating a famous American con artist, Charles Ponzi, a dapper rogue who in 1920 collected an estimated $15 million in eight months by persuading tens of thousands of Bostonians that he had unlocked the secret to easy wealth. Ponzi claimed to have found a way to profit by speculating in international postal reply coupons, a form of prepaid return postage for use in foreign correspondence. After he had paid off his first round of investors—he had paid 50 percent interest in ninety days—new money was rolling in. He was simply reshuffling the money from new investors to old ones, which came to be known as a Ponzi scheme. Ponzi snared forty thousand investors before the scheme crashed.
¹⁷

In Mavrodi's case, the visible payout was a key part of the marketing trick. Myslovsky, the prosecutor who later investigated the scheme, pinpointed the central deception of Mavrodi: he alone controlled the market in MMM certificates. The company created wild demand for the certificates but “kept silent about the fact that it had a right to stop buying the papers any minute or drastically cut down the quotes,” Myslovsky said. For those who got the huge payouts, the game was lucrative, but there was always a big risk that the music would stop suddenly and everyone holding the certificates would be cheated.

While the price soared, Mavrodi was secretive about how he was able to generate such handsome returns, and it appeared that millions of people did not want to know the truth. They lined up—sometimes by the hundreds—to buy the certificates. The government too was passive and mystified. Zlatkis told a journalist at the time that the returns were amazing, but she saw nothing illegal. “They must be working really hard with their securities and the money every day to manage it,” she said.
¹⁸
Another time, she declared, “There will always be a financial product offered to the market. We cannot ban this process.”
¹⁹

What Mavrodi had really mastered was marketing. His television advertising was created by Bakhyt Kilibayev, a thirty-six-year-old Kazakh film director who touched the raw nerves of post-Soviet Russia.
The advertisements were brief and rather crudely produced but poignant in message; they offered a powerful antidote to the prevailing cynicism, pessimism, and worry about daily life. The advertising also dealt head-on with ignorance and naïveté about finance and securities. In one of the initial spots, an elderly man is seen buying an MMM certificate for the first time. “Indeed, a strange piece of paper,” acknowledges the cheerful announcer, as the old man peers through his broken eyeglasses at the document. Later, eyeglasses repaired, he collects his cash. In another spot, newlyweds Igor and Julia, both students, quarrel over their meager budget. “Not a simple solution, but a decision is taken,” intones the announcer as they slap their cash on the counter at MMM. When they return three weeks later to collect, Julia's eyes light up and they embrace. “It's better than a stipend!” exults Igor. In another commercial, a lonely single woman, Marina Sergeyevna, believes in no one, says the announcer. But then she collects her cash at MMM and declares, “They did not fool me!” She later gets a boyfriend on the strength of her winnings. “Here, we don't fool people,” declares the announcer. The message was clear: MMM paper is strange but worth real money. It is better than government stipends, and we won't fool you as Prime Minister Pavlov did.

But the most powerful television huckster was Golubkov himself, the erstwhile construction worker now living the high life.
²⁰
In one of the early advertisements, he is shown dressed in an ill-fitting suit, holding a pointer, and motioning toward a chart, plotting the ever rising path of the family's fortune and acquisitions: boots, fur coat, furniture, and a car next month. At the top of the chart: a house.

“House in Paris?” inquires his wife, Rita, sitting in her housecoat in an overstuffed chair and munching chocolates.

“Why not?” says the announcer, as Golubkov looks up dreamily at the ceiling.

In yet another spot, Lyonya and his older brother, Ivan, who is a tattooed coal miner, argue at a kitchen table, a bottle of vodka and pickled cucumbers between them. Ivan declares that Lyonya is a freeloader, a
khaliavschik
. “You blockhead!” Ivan declares. “Don't you remember what our parents taught us? To work honestly. And here you are running around and making a fuss buying stocks. You're a
khaliavschik!”

Lyonya answers slowly. “You're wrong, brother. I'm not a
khaliavschik,
brother. I earn money honestly, with my excavator. And I buy
shares that bring profit to me. You wanted to build a factory. You can't build it on your own. But if we all chip in, we can build one that will bring profit to us and feed us. I'm not a
khaliavschik
, I'm a partner.”

The announcer then intones, “That's true, Lyonya, we're partners. MMM.” Lyonya's explanation was completely false—there was no factory—but it contained a kernel of Mavrodi's philosophy, which was to get everyone to “chip in.” Another spot showed the family at the kitchen table as Lyonya's wife, Rita, cheerfully draws a diagram on a piece of paper to explain MMM—a large square—and then arrows pointing inward. “Like a huge pool!” exclaims Ivan. “And it is always full.” Everyone chips in! It was the essence of a pyramid scam.

The advertising was so successful only because the real economy was such a mess. As hyperinflation destroyed savings, as factories closed down and workers went unpaid for months or even years at a time, the Lyonya saga, broadcast day after day, beckoned viewers to new heights of optimism and prosperity. It was no contest—the sorry Russian people could hardly resist the fantasy offered by Mavrodi, and the Russian state was too weak to do anything about it.