The Oligarchs (70 page)

This was a risky game because Khodorkovsky did not own all of the oilfield extraction companies. They were still partially in the hands of Kenneth Dart, the foam cup magnate who had bought his shares in the early 1990s. Khodorkovsky's transfer pricing was pumping value away from Dart's holdings. Khodorkovsky's strategy demonstrated what became a fundamental rule of Russian capitalism in the late 1990s—control over a company was winner take all. Under Russian law, to control the key decisions, especially to put your people in management, you needed to own at least 51 percent of a company. If
you owned less than that, you were vulnerable to losing the value of your holdings. Minority shareholders were at the mercy of the boss—their rights were often trampled and their profits stolen. Dart owned 12.85 percent of the shares of Yuganskneftegaz and 12.3 percent of Samaraneftegaz, the two big oilfield extraction companies that were the core of Yukos. He watched angrily as Khodorkovsky drained off the black gold and left him empty-handed.
⁵
Dart's representative, E. Michael Hunter, said that Yukos was “illegally looting its partially owned subsidiaries.” Western lenders, anxious to court Khodorkovsky, didn't care. Goldman Sachs, Wall Street's biggest and richest partnership, was especially avid. When Dart complained that the lenders were making loans based on oil that was being wrongly taken from him, the lenders brushed aside the complaints.
⁶

In search of still more cash to finance the purchase of Eastern Oil Company, Khodorkovsky borrowed $236 million from a consortium of three international banks, Daiwa of Japan, West Merchant, a subsidiary of WestLB of Germany, and Standard Chartered of London. This loan, also arranged by Goldman Sachs, later turned explosive. The loan was not secured by oil, but by shares of stock in Yukos itself. In this arrangement, known as a “repo” deal because the shares could be repossessed by the lender if the borrower defaulted, Khodorkovsky pledged about 30 percent of Yukos shares as security. The loan obligation was not taken directly by Yukos but by Menatep, the Khodorkovsky bank, and the money was used to help buy Eastern Oil Company.

Westerners were tripping over themselves to get money into the hands of Russian companies, often overlooking the pitfalls, lack of experience, poor management, corruption, and misleading or missing financial data. “People were throwing hundreds of millions of dollars at Menatep,” a former Bank Menatep official told me. When the repo deal was being put together, this official was assigned to help with the “due diligence,” in which the lenders carry out an investigation of the borrower in order to discover any hidden problems. A “due diligence” investigation is like a house inspection—you need to know whether there are any cracks in the walls before you close the deal. In Russia's speculative, booming economy, these investigations were often superficial. The lenders were so hungry for a piece of the action that they practically gave money away. In this case, the three lending banks sought to discover who owned Menatep. According to my source, who was present at the conversation, the lenders were given some
absolutely uninformative piece of paper about the bank's shareholder structure, but
not
information about who really owned Menatep. “You don't need to know who owns this bank; it's not your business,” a high-ranking Menatep official told them. “We need $200 million and we need it in forty-eight hours.” My source added: “And you know what is amazing? They turned around and gave the money.”

Who was at fault when the loan later blew up—the lenders or the borrowers? At the outset, the lenders failed to check for cracks in the house. But as long as the good times were rolling in Russia, neither lender nor borrower wanted to check anything. A crisis in East Asia? Lack of confidence in emerging markets? Declining oil prices? Why worry? For Khodorkovsky, another blockbuster deal was in the works.

On January 19, 1998, Khodorkovsky announced plans to combine Yukos, the second-largest Russian oil company, with Sibneft, a smaller but still formidable oil company Berezovsky had created for himself in the last days of loans for shares. The new oil giant, to be called Yuksi, would be Russia's largest vertically integrated oil company, with 22 percent of the country's production and the world's largest reserves. Khodorkovsky would head the new colossus, with the owners of Yukos controlling 60 percent and the Sibneft owners 40 percent. Yuksi would be “world-class,” Khodorkovsky declared, and the announcement contained a hint of Khodorkovsky's motives: both he and Berezovsky wanted to compete for the upcoming privatization of the last major oil holding company not yet privatized, Rosneft. If they were together, their oil companies could pull in more Western lending and would stand a better chance of winning Rosneft than if they were apart. They faced possible competition from global energy firms such as British Petroleum and Royal Dutch/Shell. The lust for Western capital was palpable.

What was fascinating about the Yuksi announcement, however, was not the hype but the cast of characters who showed up that day at the dreary Foreign Ministry press center. Viktor Chernomyrdin blessed the merger with a short speech. Down in the front row, four tycoons who were almost never seen together in public were sitting shoulder to shoulder: Vladimir Gusinsky, Alexander Smolensky, Boris Berezovsky, and Mikhail Khodorkovsky. As I watched, it was hard to escape the conclusion that Berezovsky's vision had come true. The oligarchs had become a new “board of directors” of Russia, and they were beginning to divide up spheres of influence: Gusinsky as media magnate,
Smolensky as banking king, Khodorkovsky as oil baron, and Berezovsky as their ever watchful coach. On the day of the Yuksi announcement, the tycoons were, tentatively, making still more ambitious plans. Gusinsky and Smolensky lent Khodorkovsky a hand to buy Eastern Oil Company, and discussions took place about a merger of their three banks. Gusinsky's Most and Khodorkovsky's Menatep would be folded into Smolensky's SBS-Agro, making Smolensky the banking king, while Khodorkovsky and Gusinsky could then devote time to their respective oil and media empires.

Gusinsky was also expanding rapidly and looking to the West for finance. His NTV-Plus satellite television service was already on the air, and he had placed an order for a high-powered digital satellite from Hughes Space and Communications International. The $143 million financing for the satellite, which was to be launched later in the year, came from abroad—a loan from the Exim Bank of the United States, guaranteed by the Russian Finance Ministry. Gusinsky also launched a new regional television network, TNT, to connect local stations with the flagship NTV and started a new international broadcasting service to carry NTV to Russian speakers in Israel. Most importantly, Gusinsky was intensively preparing an initial public offering of NTV stock in the United States in the summer. The offering would have valued NTV at between $1 billion and $1.5 billion. Gusinsky hoped to raise about $120 million in fresh capital at the outset, and more later. Gusinsky was expanding into movies too, founding a new movie production company and planning construction of an eleven-screen megaplex in the center of Moscow. He had high expectations that NTV-Plus would become the television of choice for the middle class, although the level of subscribers, about 130,000 at the turn of the year, was disappointing. He wanted millions.

Berezovsky's businesses were in the shadows; his holdings were a mysterious empire shielded by layers of shell companies and offshore havens. He was known to have obtained a major block of the oil company Sibneft created in loans for shares. Berezovsky never owned Aeroflot shares, but he reaped profits from millions of dollars in hard currency ticket sales. He acted as a middleman, making loans back to Aeroflot out of cash he had accumulated from the company's own revenues. He still owned the Logovaz car dealerships, and his media holdings were expanding beyond ORT television to include about a quarter ownership of TV-6, a Moscow channel, the newspaper
Nezavisimaya
Gazeta,
and the glossy magazine
Ogonyok
.
⁷
The publications and television gave Berezovsky an outlet for his views; his passion was politics, not business. After the bankers' war, when he lost his job at the Kremlin Security Council, Berezovsky remained an adviser to Valentin Yumashev, Yeltsin's chief of staff.

Smolensky was also addicted to Western loans. In 1997 he borrowed $55 million from West Merchant Bank Ltd. and $113 million from Chase Manhattan Corporation, and he floated his $250 million Eurobond.
⁸
Smolensky later admitted to me he was not really sure what to do with the money from the big Eurobond—he was borrowing because the lenders told him he could. “In retrospect, all experts say the bank should not have entered the international capital markets for another ten years. It was a strategic mistake, and I agree with that,” Smolensky said. “We didn't need the capital.”

Nonetheless, Smolensky and the others were gulping down Western money as fast as they could, and they constantly jetted to London and New York financial centers to make new deals. In 1997, for the first time, the loans taken out from foreign sources by Russian banks grew larger than the assets that the banks kept abroad. The banks were madly taking in overseas loans and using the money to buy high-flying stocks and bonds
inside
the country.
⁹

The Yuksi merger itself was so hastily prepared that Khodorkovsky asked journalists not to inquire about too many details. One of Khodorkovsky's close associates later told me the real reason for the Yuksi merger was not to win Rosneft or borrow more money, although both would have been nice. “It was all about Khodorkovsky's ambition,” he said, “to create the biggest oil company in Russia. The motives were not economic, but ambition.”
¹⁰
The merger fell apart in five and a half months. Oil prices were falling because of dropping demand in East Asia. The tycoons sitting in the front row were smiling merrily, even as they floated down the river in a raft together—straight for a waterfall.

 

The ghost of the bankers' war still lingered in the spring. Angry and smarting from the autumn conflict, Berezovsky and Chubais faced off against each other. Their conflict paralyzed the political elite, undermined the confidence of investors, and left Russia unprepared for the approaching disaster. Both men gave a series of impassioned newspaper
interviews in early March, savaging each other. The Chubais era “is over,” Berezovsky declared. “Big capital is the Russian government's strongest mainstay now.”
¹¹
Chubais shot back: “We will have to drag ourselves away” from the tycoons, “literally by the hair.”
¹²
Chubais taunted Berezovsky, saying the oligarchs' plan to destroy him after Svyazinvest “failed to produce the desired result.” Chubais portrayed Berezovsky as an evil power broker who “with the snap of his fingers” can replace a vice prime minister. Berezovsky's entire business, Chubais said, is “political influence.”
¹³

In a remarkable performance, Chubais gave a resentment-filled interview to
Nezavisimaya Gazeta
, which Berezovsky had used to attack him the previous fall. “Lies, all lies,” Chubais said. “It's a sold-out newspaper, sold-out journalists, and a sold-out chief editor.” Chubais acknowledged that he was sick of work in the government. “Government service—I can't stand it,” he complained. In Berezovsky's search for
kompromat
to use against him, Chubais reported, “My wife's friends were offered money—quite decent money—for any sleaze against me. They asked all my acquaintances in St. Petersburg—fifty or sixty people—if they could tell something about me.”
¹⁴

Berezovsky fell off a snowmobile racing at night at high speed on February 15, injured his spine, and was hospitalized in Switzerland in March.
¹⁵
Restless, he began an ambitious new political gambit, even more audacious than Chubais imagined with his comment about Berezovsky snapping the fingers to replace a vice premier. Berezovsky began plotting to choose Yeltsin's successor. The next elections were two years away, but Berezovsky did not want to wait until just a few months beforehand, as they had in 1996. He wanted to install his
bolshoi kapital
model in the Kremlin now, a model in which businessmen would call the shots and serve as the “board of directors” of Russia Inc. The prime minister would take orders, as a good chief executive officer should.

Berezovsky's insatiable ambition, his desire to set the bar as high as possible, was completely in character with his past, from his erstwhile visions of winning a Nobel Prize to his superdeals for the Zhiguli cars and his rescue mission for Yeltsin. But this time something was different. Russia was drifting toward an economic precipice. None of the oligarchs appeared to realize that danger lay ahead. Berezovsky did not grasp that his games would fuel instability when coolheaded stability was desperately needed. The bankers' war had already
left a casualty-strewn battlefield. The constant infighting and mudslinging in the autumn of 1997 had made investors skittish about Russia, and the stock market declined. Now Berezovsky stirred up the chaos again.

His precise actions in this period are not completely clear. He loved intrigue and backroom maneuvering, and his public statements were often oblique. But what caught my ear was a phrase—typically indirect—that Berezovsky began to use over and over again. The oligarchs, he insisted, had to ensure the “continuity of power.” What Berezovsky meant, but didn't dare say directly, was that they wanted a strong hand in determining Russia's next president. The voters? They would do what they were told, and they would be told on the oligarchs' television channels. More importantly, the tycoons wanted to install a leader who would broadly continue the same reform path as Yeltsin but would heed their demands, someone they could trust and manipulate. They needed a leader who would play by the rules of oligarchic capitalism.