The Oligarchs (66 page)

The Russian government failed to sell 25 percent of Svyazinvest in 1995. The Italian state-owned telephone company, Stet, had offered $640 million for the stake plus a promise to invest $754 million over two years. But the deal fell apart. The publicly stated reason was that the Italians made certain last-minute financial demands, but the real reason was objections from the military and security services to a foreigner buying up Russia's telephone lines.
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After the 1996 elections, Gusinsky set his sights on winning Svyazinvest. He went to Alfred Kokh, the blunt-spoken director of the federal property agency, who was a Chubais man. Gusinsky wanted to organize another attempt to privatize Svyazinvest. He suggested making Svyazinvest a stronger company by combining it with Rostelecom, the Russian long-distance provider. Then, Gusinsky told Kokh, he would try to persuade the generals and security agencies to approve the sale. Gusinsky told me that Kokh let him go ahead because Kokh thought the military would never agree to the deal. Naturally, Gusinsky also knew that if he organized the privatization—as the presale “consultant”—he could expect to have the inside track on winning the company. Those were the rules of the game the oligarchs had already established. Vladimir Potanin had organized Norilsk and won; Mikhail Khodorkovsky had organized Yukos and won. Why couldn't he?

Gusinsky contributed only a small portion of the finances behind the deal. He brought in a foreign strategic investor, the Spanish telephone giant Telefonica SA, the investment bank Credit Suisse First Boston, and Mikhail Friedman's Alfa Group. One of the big private investors in Gusinsky's group was Benny Steinmetz, an Israeli financier and diamond tycoon. Gusinsky's role was to lead the political charge for the deal—to be the influential point man for a consortium of investors. If they won the Svyazinvest auction, the actual day-to-day work of running the company would be in the hands of Telefonica.

Gusinsky worked hard at his role. He drank vodka with the generals
and gently persuaded them that the Spanish telephone company would not threaten their prerogatives. It was certainly not a disadvantage that Filipp Bobkov, the former KGB general, was now on Gusinsky's corporate team. Soon Russia's military and security agencies signed off.

Gusinsky's real worry was not the military but the other oligarchs. He constantly fretted about Potanin. In the early months of his preparations, Gusinsky pressed Chubais to keep Potanin's fast-growing bank, Uneximbank, out of the bidding for the phone company while Potanin was first deputy prime minister. Chubais agreed and went to Potanin, asking him to remove himself from the competition. Potanin consented, but he revoked the pledge as soon as he quit the government on March 17. He wanted to play, and he said the promise to stay out was good only as long as he was a government official.
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The atmosphere among the oligarchs grew tense. Malashenko told me at the time: “It's funny when people talk about the seven bankers ruling the country; they
hate
each other. They have conflicting interests. When they sit together, around the same table, you can feel the tension in the air.”
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Gusinsky nervously watched Potanin's money. He believed he could compete against rational outside investors for Svyazinvest because they would take a cold-eyed look at the company based on its assets and the potential value of the telephone lines. But he feared it was hopeless to compete against someone like Potanin, who commanded so much cash he could practically throw it at the deal. He knew Potanin's bank held an enormous deposit, more than $1 billion, from the federal customs service. Gusinsky also believed that Potanin had obtained, through a leak, Gusinsky's complete documentation about the Svyazinvest deal. That documentation would give Potanin a big advantage.

Gusinsky and Friedman went to see Chubais again, privately. According to Gusinsky, they told Chubais that they believed Kokh, the privatization chief, was taking money from Potanin. Chubais defended his man, saying Kokh was honest. The disagreement was the first dark hint of the explosion to come.
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Gusinsky's anxiety about Potanin was well founded. In addition to sitting atop a mountain of cash, he had access to even more money
through Boris Jordan, the hyperactive young financier and broker who scored big in vouchers and later helped conceive loans for shares. Jordan recruited superfinancier and philanthropist George Soros into Potanin's deal for buying Svyazinvest.
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Potanin did not meet Soros until much later; the Svyazinvest deal was the result of Jordan's hustle. “I sold him on the business deal,” Jordan recalled of Soros. “But I know what sold him on Russia—it was Nemtsov.”
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Soros was deeply ambivalent about investing in Russia. As a rule, he did not like to invest in countries where he was a philanthropist. His contributions to Russia were substantial. Among other things, he singlehandedly helped publish new, honest history textbooks for Russian schoolchildren, provided stipends for scholars and scientists, and rescued the “thick journals,” a rich tradition of Russian literary magazines such as
Novy Mir
whose circulation had plummeted. Soros also displayed an acute understanding of the importance and difficulties of building civil society in the post-Soviet world. Soros shunned Berezovsky's solicitation for Sibneft in 1995, fearing the political risks. But two years later he was ready to sink real investment into Russia. When I met Soros for breakfast in Moscow at the Metropol Hotel one morning in June 1997, I was fascinated to hear his analysis of the Russian economy; Soros had earned billions making the right calls at the right time. Russia, he said, “moved from the excesses of the Soviet system to the excesses of laissez-faire capitalism, or, more appropriately here, robber capitalism.” The oligarchs? “They are pretty crude and pretty rapacious.”

Nonetheless, Soros was greatly encouraged by the appointment of Nemtsov. The young reformer persuaded Soros that the time had come to invest in Russia. “I can see the path by which robber capitalism can turn into legitimate capitalism,” Soros said.
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Although I didn't know it at the time, a few days after our breakfast, Soros personally extended a helping hand to the cash-strapped Russian government. Chubais and Nemtsov had pledged to pay off government workers' back wages by July 1, but they were short of funds. Kokh called Jordan, saying the government was desperate. Jordan then called Soros in New York—but his office said he was in Moscow at the Metropol. Jordan went to the hotel and talked Soros into making a quick personal loan of several hundred million dollars between June 25 and July 3, until Russia received the proceeds of a Eurobond issue.
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Another secret I didn't discover at the breakfast was that Soros was
also making a large investment with one of the robber barons he denounced, putting $980 million into Potanin's bid for Svyazinvest. The stock market boom made every investment seem like a sure thing. Soros later disclosed that his total investment in Russia was $2.5 billion, making him by far the largest Western portfolio investor in Russia at the time.
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He too was chasing black gold.

Potanin's investment consortium for Svyazinvest was, typically, an offshore web of shell companies. The chain of transactions flowed from a company called Bidco, based in Cyprus, through another company, Investco, in the British Virgin Islands, which was a front for another company, Svyaz Finance Ltd.; then to another company, IFCI (Cyprus) Ltd., based in Cyprus. It also included Mustcom Ltd. in Cyprus. Russia's economy may have been on an upswing, but when it came to big money, investors still wanted to remain in the relative safety of offshore havens.
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Potanin claimed that Svyazinvest was a “strategic investment,” but his preparations spoke otherwise. Potanin was a speculator. He was putting in only about $200 million of his own cash. Jordan contributed another $200 million from Renaissance. The rest was raised from outside investors, including Soros. Ultimately, Potanin was gambling on quickly reselling the company to someone else who might pay twice as much for it. “It was getting something for nothing,” one of Potanin's investors told me later. “If he spent $1.5 billion, he could sell it a year later for $5 billion.” The premise was not outrageous in the superheated boom of that summer.
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Potanin, like Gusinsky, staked everything on his own sway as an oligarch. According to documents that he gave to investors, Potanin's game plan was a gutsy one, built entirely on his own clout. After winning the first 25 percent of Svyazinvest, he promised he would elbow into the management suite and assume control over sale of the next 24 percent, which was going to be offered within nine months. Potanin told his investors that he could appoint managers, get the company's books, and sell off the next chunk of Svyazinvest to a strategic investor.
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The unspoken calculation was that this would fatten up the price of his own stake. It all depended on Potanin's ability to move quickly into the company. “We never thought we would buy that second stake,” Jordan told me. “It was always in the plans to sell that second stake to a strategic investor, which would have boosted the value of our stake.” He added, “Let's be honest, George Soros is no
long-term investor. He never held anything longer than a week! He's a trader. George Soros was going to trade that baby out to a strategic investor right after the next deal.” Potanin surely would have liked to do the same. Potanin promised to hold the shares for two years, but I think he would have gladly sold them sooner.

Gusinsky also longed to make a killing on Svyazinvest. Only days before the auction, a friend of mine recalled, Gusinsky was openly talking about the billion dollars he was going to make on the deal. Gusinsky differed from Potanin in that he had already brought in Telefonica, an experienced phone company that intended to actually build telecommunications in Russia, whereas Potanin was playing for casino profits.

In a real competition, the winner isn't chosen before the race begins. But in the crude culture of Russian capitalism in the 1990s, the winner was usually chosen in advance by the participants. The Svyazinvest auction was set for July 25. The Kremlin was jittery about deepening tensions among the oligarchs. Yeltsin sent Yumashev, his chief of staff, who had replaced Chubais, to suggest to the tycoons that they solve the issue “peacefully, without the news wars and without planting bombs under the government.” Amazingly, Yeltsin's own man did not suggest a fair competition. Rather, as “a last resort,” the two sides should divide up the spoils fifty-fifty, among themselves. This was a remarkable glimpse of how oligarchic capitalism had entrenched itself in 1997—the president himself wanted the boys to share the loot, quietly. They refused.
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Russian law required a minimum of two bidders for an auction to be legal, but many auctions were rigged anyway. The winner was agreed upon beforehand, and the second bidder was a dummy corporation. The trick had been used often in loans for shares. Frequently a serious second bidder would deliberately walk away, for a price. Gusinsky recalled that at one point Potanin came to his office and proposed to pay him several hundred million dollars to stay out of the auction. Potanin proposed that after he won, he would hire Gusinsky to run the company for him. “We will hire you because you are the only man who understands it,” Potanin said, according to Gusinsky.
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But Gusinsky repeatedly refused to cooperate with Potanin. All he wanted was to get Potanin out. This was
his
deal! Both sides hardened as the deadline drew closer. Neither would walk away. They were getting locked in with foreign investors. Gusinsky warned Potanin: “If
you participate, then everything that I know about your loans for shares auctions and all about your deals and relations will be made public after this!” It was an angry threat, typical of many that brought Gusinsky his share of enemies.

Potanin refused to back down. He suggested that they take the case to Chubais. Chubais was the arbiter they all trusted to be fair. Gusinsky agreed. Potanin told me the oligarchs were well aware that Chubais wanted “new rules of the game” in the Svyazinvest auction. “But I would say that, for different reasons, we were not sure this was serious.”
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They also agreed to bring Berezovsky, then deputy secretary of the Kremlin Security Council, to the meeting with Chubais. Berezovsky had, in theory, given up his business interests while serving in government, but he was active in promoting the oligarchy and his own ambitions, both political and financial. At one point in June, Berezovsky tried, unsuccessfully, to recruit Soros into a bid to make Berezovsky chairman of the natural gas monopoly Gazprom. Berezovsky flew Soros to Sochi, the Black Sea resort, to see Chernomyrdin, the former chairman of Gazprom, and later Berezovsky lunched with Soros at the Logovaz Club. Soros recalled that Berezovsky grew terribly angry when Soros informed Nemtsov, a harsh critic of Gazprom, about Berezovsky's maneuvering to take over the company. Nemtsov vowed, “Over my dead body.”
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The deal never happened.

Berezovsky had become the coach of Team Tycoon and was constantly scrutinizing and guiding his players. “Berezovsky has to be number one everywhere,” Gusinsky told me later. “He has to be the best man at every wedding, the grave digger at every funeral. If something happens somewhere without Berezovsky, he is full of anxiety.” Berezovsky had no formal participation in Gusinsky's deal but had asked Gusinsky whether, in the event he won Svyazinvest, he could become a partner. “We'll discuss it later,” Gusinsky said.

On July 23, 1997, the tycoons—Gusinsky, Potanin, and Berezovsky—secretly flew out of Moscow on Gusinsky's private business jet to Nice, and then on to Saint-Tropez. They took a boat to a seaside estate where Chubais was vacationing at the home of a friend. The mood was relaxed as they sat in a pleasant garden for six hours, replaying their arguments for Chubais. “They came with the same question,” Chubais recalled. Was he serious about the new rules of the game? According to Chubais, the tycoons proposed a deal. They would carve up the forthcoming privatization riches among themselves. In
this plan, Gusinsky would win Svyazinvest in a rigged auction, since he had made all the preparations. Then the next big company to come up would go to Potanin—Unified Energy Systems, the mighty nationwide electric power grid and generating company. Chubais remembered that they had all the details ready: the shares, the volumes, the conditions. “We came to an agreement,” they said, turning to Chubais. “And do you agree?”