The Oligarchs (40 page)

The saga of the All-Russian Automobile Alliance offers a glimpse of the easy money years but does not tell the whole story. Easy money could be plucked from the hands of bureaucrats, found on the rudimentary commodity exchanges, or reaped by streetwise youths in seedy currency exchange booths. Easy money was an era, a culture, an experience—and for some with exceptional guts and savvy, a defining moment.

Andrei Melnichenko was one of them. He progressed nicely through the best schools—he was a champion of the Olympiads, Soviet-era academic contests—and enrolled in physics at the prestigious Moscow State University. Tall and a bit awkward, with a soft complexion and straight hair parted down the middle, Melnichenko, often dressed in jeans and T-shirts, had the innocent looks of a teenager but the wits and cunning of a financier. In the final years of the Soviet Union, from his dormitory room in the dark labyrinth of the university building, Melnichenko became a youthful trailblazer in the era of easy money.

In his second year, 1991, as the Soviet system disintegrated, the school turned into an informal commodity exchange. The hallways and courtyard buzzed with people selling a ton of copper or oil, usually stored in a state-run factory or warehouse. But everything was traded for cash, and the traders needed a secure, swift, and mobile source of currency. Melnichenko became their man—the premier moneychanger of the Moscow university traders, helping them switch from dollars to rubles and back again, often within hours. Melnichenko and two friends worked out of their dorm room, where they kept a single paper notebook to record the transactions and a large wooden box to store the money. “The university dorm no longer looked like a place where students lived, studied, and did homework, but it resembled a stock exchange,” Melnichenko recalled. “All over the place there were announcements, people buying and selling things. There was a big turnover of commodities and goods—automobiles, trucks, sugar, metals—whatever you wanted.” For three years, Melnichenko paid little attention to his studies but devoted all his energy to hustling rubles and dollars. At first, the day brought in as little as $100 profit, perhaps $2,000 on a very good day. But within a year, the business exploded, and the three students were handling $100,000 a day.

The great inflation of 1992–1994 was like an escalator. Every day, relentlessly, the ruble's value declined against the dollar. Melnichenko and his friends discovered how to use the escalator to make a fortune.
The trick was to take rubles, change them into dollars for a short period, and then pay back the same amount of rubles, which were now worth less, and pocket the profit. The rubles could be borrowed for 10–13 percent a year, but inflation was eroding their value at 25 percent a month. Money fell into their hands out of thin air. All they needed was the guts—and sometimes it required steel nerves—to be a trader. Melnichenko told me that trainloads of commodities were being bought and sold at the university. Because buyer and seller often did not trust each other, they arranged for a deposit in cash. Melnichenko collected these deposits too, and his capital soared. He didn't even have a safe for storing the cash, but the dorm room had a heavy door, which he locked very carefully. The boys in jeans and T-shirts started to think about life after graduation.

Melnichenko and his friends followed their clients when they moved off campus to nascent city commodity exchanges. Melnichenko opened a tiny office in a shabby two-room apartment and put a two-line advertisement in
Moskovsky Komsomolets,
a popular broadsheet newspaper: “We buy currency. We sell currency.” The phones never stopped ringing. Customers arrived in the first room with bags of cash, and the deals were closed in the second room, where Melnichenko installed a money-counting machine and a real safe. The boys started to get rich. “We all rented very nice apartments, bought ourselves cars, and lived decently,” Melnichenko remembered.

When the laws changed and they needed a formal license in 1992, Melnichenko found a minuscule one-room bank, Premier Bank, and struck a deal with the owner. He would function under the protection of their license, paying a fee while expanding his money exchange points in the city. For a brief time, he also traded in vouchers and in cigarettes, which were in such demand that cartons of them or whole truckloads could be substituted for currency. When I met Melnichenko years later, I asked him if he recalled having any hobbies or pastimes in those years. He could remember none: just hours and hours on the phone, checking rates, changing money.

Melnichenko's most important commodity was information. He and his team started each day counting their cash and then deciding what direction the ruble-dollar exchange rate would probably take. They called competitors to see what rates they were offering. There were no computer networks, no exchange floors or flashing tickers, only the telephone. Then clients began calling; a factory needed to
change $100,000 in earnings from a shipment of titanium into rubles—fast. For several years in the early 1990s, all such deals were made in cash, which was a boon to Melnichenko. As the rate gyrated during the day, they worked swiftly, constantly telephoning, counting banknotes, buying and selling. “From dawn till dusk,” Melnichenko said. “And often at night as well, because there were night flights, people coming here from the regions, and they needed to catch a flight back home.” They soon reached several hundred thousand dollars a day in trades and hardly ever suffered a loss. The mechanism was as good as a printing press: it cranked out profits all the time. No messy factories to bother with, no aging equipment to replace, no troublesome socialist legacy or red directors to worry about. “To lose was quite difficult,” he recalled. Melnichenko, who was thirteen years old when Gorbachev launched
perestroika,
started wearing a tie.

Melnichenko had set up a currency exchange in Moscow, United Currency House. On October 11, 1994, known later as “Black Tuesday,” the ruble exchange rate plunged from 3,081 per dollar to 3,926. Melnichenko told me that one day before the crash, “we foresaw that it could happen the next day. We bought a lot at the exchange.” Then when the ruble took a nosedive, Melnichenko moved in for the kill. “We sold at maximum,” he recalled. “On that day we made more than $10 million.”

Melnichenko's secret was not his alone. Ruble-dollar speculation became a mainstay of the easy money era in the early 1990s.
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The incentives were stark: industry was flat on its back and would require massive amounts of capital investment, but currency speculation involved low overhead, high profits, and no property. Who could resist? “Good money was earned on speculation. It was easy money, easy capital,” recalled Alexander Smolensky, who in those days was running ruble-dollar operations with cash from Moscow retail clients. Smolensky collected rubles and changed them to dollars, and back to rubles again. “You give money in the morning and collect earnings in the evening,” he said. “It required whoever was the fastest. We spent whole days in the bank—it was like a race, like a machine that was printing money. Every day, it brought more and more money. The most important thing was not to make a mistake. God took mercy. Converting, trading, earning, converting, trading, earning—it was like that every day.”
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The profits from currency speculation were not the only way to make easy money. The combination of a weak government and high
inflation spawned other schemes to score a quick fortune, especially for those with political connections, including the early cooperative businessmen, veterans of the party and Komsomol, and their patrons in the former KGB. These were the cream of the elite and, their pipeline for easy money came directly from the government.

In the early 1990s, Russia had no central treasury and came to rely on “authorized” commercial banks for deposits and disbursement of the state's money. The system was corrupt from the outset but lingered on for years. The banks cozied up to underpaid bureaucrats to snare the lucrative business, with bribery and coercion. The bureaucrats looked the other way as huge sums were “deposited” with the financiers. The bankers then did not disburse the money as they were supposed to, but used it instead for their own purposes. They often repaid the money to the state much later, or not at all. The fleet-footed bankers exploited a simple premise: money has value over time. The corrupt government officials willingly ignored this concept, allowing the financiers to feast on the state's riches.

The authorized bank system is another example of how the easy money years distorted the formative years of Russian capitalism. Why would banks want to get involved in the risky business of lending to troubled Russian factories or wobbly new businesses if they could simply feed at the trough of the Russian state? They were spoiled by free money from the government, which postponed the day when they—and all the others in the easy money generation—would have to learn how to invest in the real economy and earn profits the hard way.

The impact of easy money lingered through the 1990s. Sergei Yegorov, the chairman of the Association of Russian Banks, offered a revealing look at the distortions in early 1997. He reported that of $21 billion in banking credits issued in 1996, only 1.2 percent were long-term loans to businesses, while 90 percent were disbursed for short-term transactions on government debt, and the rest went to import-export operations. In other words, the commercial banks were barely making any loans at all in the real economy. They were little more than casinos, thriving on easy money.
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One study found that from 1994 to 1996, half of the banks' profits were generated from easy money. Almost no one got big loans, and the longest term for a loan was one year.
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Smolensky, Khodorkovsky, Gusinsky, and Berezovsky all capitalized in the early 1990s on the system of “authorized” banks. Gusinsky, with support from Luzhkov, dominated the burgeoning Moscow
municipal accounts for several years. Smolensky serviced accounts for the Kremlin administration, among others. Berezovsky used the same tactics to garner the cash flow of the national airline, Aeroflot.

Khodorkovsky had once boasted that his bank, Menatep, could survive under any regime, and a former vice president of Menatep told me why: the bank was structured to parallel the government. Khodorkovsky and his lieutenants all had direct lobbying links to key ministers, and their deputies to the deputy ministers. The bank thrived on a web of government lending programs, ranging from defense spending to food purchases; the Russian Finance Ministry was one of its major clients and loans for the state made up more than half of Menatep's lending activity in 1995.
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The former Menatep vice president tried his hand at Western-style investment banking but later concluded, in frustration, that it was futile when the bank earned millions of dollars in profit for doing nothing as an “authorized” bank. “There was just no point” in the painstaking work of investment banking, he said, “when you could go have a
banya
session with your buddy at the Finance Ministry and they would put in $600 million.”

“The Ministry of Finance would put that money on deposit in Menatep Bank and then instruct them to disburse it to the regions. What Menatep would do was take that $600 million, not pay the ministry anything, and they would delay the start of payment to the regions. When the people came to get the money, they would just delay it for three weeks. Then they would issue not cash but promissory notes—Menatep promissory notes—instead of cash!”
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During the interval, Menatep put the money into high-yielding investments, reaping millions of dollars in easy profits for which they had done absolutely nothing except willfully ignore the government's instructions. No one was caught, no one was punished.

“The thing was that the crazy money was being made on special relations with the government,” Vladimir Vinogradov, the founder of Inkombank and one of the leading commercial bankers of the 1990s, told me years later after his financial empire had collapsed. “For example, money was taken from the government to finance some programs. Those programs were not financed or were financed just one-tenth of what had to be paid. And the money was invested into vouchers, and they were changed for shares.”
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Presto! Easy money was turned into private property.

In the early 1990s, one of the Westerners who got a ringside seat in
the age of easy money was Victor Huaco, a one-time Citibank expert on the Latin American debt crisis, who ran his own ruble-dollar currency business in Moscow. He later helped large Western investors navigate the murky world of Russian banking and investments. Huaco, an immaculately dressed financier who saw many parallels between the Russian chaos and the Latin economic upheavals of the 1980s, told me that one of the enduring mysteries was who really picked the winners and losers in the age of easy money. Huaco said he always sensed that there was a “magic hand” behind every deal, that politicians and bureaucrats helped their friends drain the lifeblood of the state itself. The “magic hand” was another sign of what would become the single most destructive phenomenon of the first decade of Russian capitalism, the corruption of power by wealth. The seeds were planted in Soviet times, in the shortage economy and the traditions of
blat
and
svyazi
. But the trend accelerated in the years of easy money, when the Russian state was so weak and so bereft of rules and institutions that it was blown away by the forces of wild capitalism that it had unleashed. Later a coterie of financiers became so powerful that they nearly took over the state itself.

Huaco told me that the “magic hand” of power was often hidden from view. The pyramid schemes had stolen from people with great fanfare, and the currency traders were in the open, but the authorized banks worked in secret. The winners got special insider information, which they used to strike it rich. According to the journalist Yulia Latynina, a deputy minister of finance once announced that bonds from a state bank would not be paid. The price plunged. Khodorkovsky then bought them up. Several days later, the deputy minister announced that, in fact, they would be paid. The price surged.
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