The Oligarchs (69 page)

Yeltsin dismissed Berezovsky November 5. Berezovsky went to Echo of Moscow radio station to fire back at Chubais, saying he had a Bolshevik mentality. “He believes that ends justify means.”

If Chubais thought that getting Berezovsky fired would be the end of it, he was mistaken. “I had a feeling,” Yeltsin said, “that Chubais was about to get his head chopped off.” He was right.

In late October, Chubais mentioned to a group of reporters traveling with him to London, at the end of an interview, that he and several of his deputies were writing a “monograph” about privatization. Chubais said 95 percent of the honorarium from the book would be given to charity, but he did not mention specifically how much they were being paid or by whom. Chubais said the book was originally designed to celebrate the fifth anniversary of the beginning of mass privatization. The interview was published on the front page of
Kommersant Daily
, the influential newspaper, on October 28 under the headline “Chubais Is Not a Reader; Chubais a Writer.” The story hardly caused a ripple, but it set in motion a chain of events that would boomerang against Chubais.

Sergei Lisovsky, the advertising magnate who had worked on the 1996 campaign, recalled being invited to a strategy session by the
Berezovsky-Gusinsky camp to plan a counterattack on Chubais. The attack was to be based on new documents that the Berezovsky team had obtained about the Chubais monograph. The documents showed that Chubais and four members of his team received $90,000 each, or $450,000 altogether, for the book. The information could blow up into a scandal because it would reinforce the impression, created by the Kokh disclosures, that the young reformers were lining their own pockets. The amounts were relatively small compared to the gargantuan profits and payoffs in the years of easy money, but the symbolism was awful.

Lisovsky said there was a “detailed scenario” for the attack on Chubais, including “who was to start first, who was to pick it up.” Lisovsky said he refused to participate. “You are committing suicide,” he warned the Gusinsky-Berezovsky camp. “If you kill Chubais, you will eliminate yourself in several years' time, because in the long run, Chubais will never sink you, never jail you—he has created you as Russian capitalists. And anyone else in his place will treat you very cruelly.”
⁵⁸

The plotters decided to make the material public through Minkin, the investigative journalist close to Gusinsky who earlier questioned the $100,000 book fee paid to Kokh. I knew Minkin from a few years earlier when he had told me a harrowing story of how he was attacked by pipe-wielding goons in the middle of the night for a story he had written. In the
perestroika
years, Minkin was known for some really penetrating stories about the Soviet Union. But there was another kind of investigative reporting that involved simply taking handouts of compromising materials from commercial interests or security services—the
kompromat—
and publicizing it. The use of
kompromat
was a sleazy business; it might be true, it might be forged, it might be half true, but it was always distributed to tarnish someone's reputation at the behest of a foe.

In this case, Minkin told me that the information about Chubais was given to him outright. He would not say who his source was, but he had no qualms disclosing the materials because he shared the same “principles.” And, he said, he knew that Berezovsky and Gusinsky were behind it. The same documents were already on the desk of Anatoly Kulikov, the interior minister, Yeltsin recalled in his memoir. Minkin immediately went public in an interview on Gusinsky's radio station, Echo of Moscow, on November 12. Not by chance, Minkin's
appearance on the radio station was covered by Berezovsky and Gusinsky's television stations. The fees for the book were “exorbitant,” Minkin reported. “This is a veiled form of a bribe” and “a method of money laundering,” he said.

Where had the money come from? Minkin said the publisher of the monograph was Sevodnya Press, which had been affiliated with the newspaper
Komsomolskaya Pravda
(and was not part of the newspaper
Sevodnya
). Sevodnya Press had been purchased that year by Potanin's Uneximbank, but it was not owned by Potanin until after the Chubais team had made the contracts to publish the book. Minkin correctly reported that money for the book had come from the fund that Chubais set up during the 1996 campaign, when he had received the $5 million from the tycoons. However, this accurate suggestion by Minkin, that Chubais was somehow laundering the campaign money, was totally overlooked in the ensuing uproar. The word “bribe” stuck out. So did the tenuous link to Potanin. Chubais and his team kept quiet about the true source of the money because they did not want to reopen the far more sensitive issue of the “black cash” and how Yeltsin's 1996 campaign was financed. A source close to Chubais told me that the book was actually a hastily conceived cover story for the planned transfer of the leftover 1996 campaign money to the team.

Minkin's words on the radio touched off a new storm. Chubais was defiant at first, insisting, “I do not see any crime against humanity here” and repeating that 95 percent of the money was being given to a “charity,” which he described, puzzlingly, as a fund to protect private property rights headed by Yegor Gaidar. The promise to give the money to “charity” was rather vague, and Gaidar was furious that Chubais had roped him into the scandal when he had nothing to do with it. Two days after Minkin went public, Chubais said “the fee is high . . . and we must admit this.” Chubais wrote Yeltsin a letter saying that although the book was real, he “considered himself guilty.” Yeltsin immediately fired Alexander Kazakov, a Chubais ally, from his post in the Kremlin and then sacked Maxim Boiko, another Chubais protégé who headed the privatization agency, and Pyotr Mostovoi, head of the federal bankruptcy agency. All were Chubais men in the government and coauthors of the book. The fifth coauthor was Kokh. Finally, Chubais was relieved of his Finance Ministry portfolio, a major setback, although Yeltsin said he refused to give up on Chubais altogether and kept him in the government. “The book scandal was
the banana peel on which the whole team of young reformers slipped,” said Yeltsin. Chubais later sued Minkin for slander but lost.

The bankers' war was extraordinarily destructive for everyone. The young reformers and the tycoons squandered most of the year in their struggle. Chubais and Nemtsov never got back on track. Their reform agenda died. The irony was that outwardly Russia seemed to be on the comeback trail. “The year 1997 is one of missed opportunities,” Vasiliev lamented. Arkady Yevstafiev, the Chubais aide, said the oligarchs were to blame. “They wanted to rule the country because they were greedy and wanted everything for themselves. There is a proverb: The appetite comes in the eating. And their appetite became huge. Berezovsky didn't need Chubais for one simple reason: he didn't give him an opportunity to grab everything in this hands. Chubais stood in his way.”

“We lost 1995–1996—we can excuse that,” said Steven Jennings, the investment banker who was Jordan's partner. “But we had a year of no change in 1997. That was when they should have gone for the jugular.” Instead of aggressive reforms, the credibility of Chubais and Nemtsov was besmirched, their attention diverted, their energy sapped. If anything, the events served to etch oligarchic capitalism more deeply into the public consciousness—and demonstrated how powerful the tycoons and their television weapons had become.

Potanin also suffered. After he won the Svyazinvest auction, his plan for taking over the company and making a quick fortune fell apart. The government never let him in the door. The second stake was not sold off, and the value of the $1.87 billion investment collapsed. Soros later called Svyazinvest the worst investment he ever made. From a business standpoint, Gusinsky was lucky he lost, but he made lasting enemies in 1997. Kokh never forgot the wounds Gusinsky inflicted on him and later sought revenge. The rancor of Svyazinvest came back to haunt Gusinsky when he was in desperate trouble three years later. Gusinsky, who had doubts about the 1996 fling with Yeltsin, told me that he was also unsettled by the Svyazinvest debacle. “Exactly then, I realized that the further away I distance myself from the authorities,” he recalled, “the safer my business is going to be and the more honestly I can look in the eyes of my children.”

Even worse than the soiled reputations and bruised egos, the bankers' war crippled Russia's economic and political leadership. Chubias complained, “The major players on my team are being investigated.
Enormous numbers of telephone calls are bugged. My closest relatives are being investigated.... My son is constantly being followed. And much else is happening nonstop. What has yet to be done? I haven't been shot at.”
⁵⁹
Casting worried glances over their shoulders every day, the Russian reformers were unprepared to look ahead at a critical time, a period when even the most experienced seaman would have had difficulty navigating the ship. A financial crisis broke out in East Asia while they were fighting over Svyazinvest. When Russia's economy began to slow in the autumn, Chubais and the reformers were so wrapped up in the Svyazinvest deal that they completely failed to see that Russia was vulnerable—and exposed—to nasty global trends.

The Russian Trading System index began the year at 213, and it reached a peak of 571 on October 6. In the midst of the good times, there was a sudden drop in temperature: the world's stock markets crashed on October 27. Russian markets went down with them, but the event was not seen as a catastrophe. Chubais was sanguine, even upbeat, about the year ahead: “This is the beginning of a turn,” the beginning of a “long, ever more steep and powerful trajectory of growth, which will be clear and obvious . . . to every person's family. They will judge by his wages, his income, his ability to buy a modern car and have a proper vacation in summer.”
⁶⁰

When I saw Chubais on December 2, he was still wounded and angry about the bankers' war. He said he was paying attention to East Asian financial statistics but predicted that the Asian crisis would be a small setback for Russia, perhaps a six-month postponement of economic recovery.
⁶¹
“Nothing can happen to the ruble,” he insisted. Later in that month, Chubais said, “Today we really have every reason to say that the most dangerous point is behind us, that it occurred early in December.”
⁶²

On December 10, Yeltsin was admitted to the hospital again.
⁶³
The bear went back into his winter hibernation. A financial hurricane was bearing down on Moscow, and neither the father of Russian capitalism nor his quarrelsome children were ready for it.

T
HE YEAR 1998 arrived with Mikhail Khodorkovsky riding high. Known for his modest personal tastes, Khodorkovsky preferred polo shirts and sport jackets to suits and ties, but he celebrated New Year's Eve in elegant style at Nostalgia, a Parisian eatery in the middle of Moscow. With an understated interior of antique furniture, the restaurant's pride was an unsurpassed cellar of six hundred exquisite French wines. On New Year's Eve, Eric Kraus, a stockbroker and loquacious Frenchman, caught sight of Khodorkovsky and his party of a dozen people at Nostalgia—and Kraus could not believe his eyes. On Khodorkovsky's table was a bottle of a prized Bordeaux, Château Haut-Brion. Curious, Kraus asked the waiter for the wine list. Château Haut-Brion was $4,000 a bottle. “Russia could do no wrong in 1997,” Kraus remembered. “It was a country being reborn. Even the journalists were misty-eyed. We all felt like we were part of some grand social experiment.”
¹

Khodorkovsky had reason for optimism. He was expanding by leaps and bounds.
²
In October he unabashedly told a business crowd in Washington that he wanted to be among the top ten world oil companies within a decade. Only thirty-four years old, he commanded
Yukos, with Russia's largest oil reserves, 100,000 workers, and a market capitalization of $9 billion. And his quest was not yet over.
³
In the next few months, he won control of another Russian oil trophy, Eastern Oil Company, at a government privatization sale. Unlike the bargain-basement purchase of Yukos, Khodorkovsky paid full price for Eastern, $1.2 billion for 45 percent of the company plus 9 percent bought on the open market, which gave him control. He planned to fold the company into Yukos.

Khodorkovsky got hooked on a new, alluring kind of easy money—loans from abroad. He borrowed heavily from the West to finance the acquisition of Eastern Oil Company. His ability to borrow was magnified many times over because he now controlled an ocean of oil in western Siberia. In October 1997 he took out a $300 million line of credit from Credit Suisse First Boston with no collateral. He took out three loans from Credit Lyonnais during the year, all based on a promise of future oil revenues, of which $299 million was still outstanding at year's end. Then on December 7, 1997, Khodorkovsky signed a megadeal with three major underwriters, Goldman Sachs, Merrill Lynch, and Credit Lyonnais, to borrow $500 million against future sales of oil. They paid Khodorkovsky upfront in exchange for revenues from 600,000 metric tons of oil each quarter to be sold through two French oil companies, Total and Elf Aquitaine.
⁴

As he took these loans, Khodorkovsky was using transfer pricing to get the oil cheaply. He was demanding that the oilfield extraction companies, Yuganskneftegaz and Samaraneftegaz, sell the oil at dirtcheap prices to his parent company, Yukos. Once he had purchased the cheap oil, Khodorkovsky pledged it, at much higher export prices, to secure the loans. He was using a clever means of stripping value out of the extraction companies, which were left with debts and expenses while he got the benefit of the new loans.