The Oligarchs (75 page)

Chubais admitted that he lost touch with market sentiment. “We were sure we could break out of the situation with this package” from the IMF, he said. “I was mistaken. It didn't break the situation.” Gaidar said they failed to realize how profoundly the markets had lost confidence in the government. “A lot of people, including myself, thought that the July package would change the attitudes of the market,” he recalled. They were wrong, but Gaidar was so preoccupied by the day-to-day financial firestorm that he didn't even contemplate the possibility that they were fighting a losing battle.

Yeltsin was also restless and feeling helpless. According to his aides' memoir, “When the Central Bank said everything was under control, worse things had happened, we'll make it, he was nervous and tormented by doubts but still believed it.” Yeltsin did not understand economics, but he was haunted by fears he had erred with the one currency that he profoundly understood, political power. He wondered—to whom had he not given enough authority? Whom had he failed to support?
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The doomed Kiriyenko could do little to salve the wrath of the markets. He had tried to draw up responsible, long-term plans, but they were useless in the face of a brutal, immediate crisis, and no amount of promises could soothe the panic. “The markets proclaimed their own verdict,” he lamented later. “They can read our balance sheet as well as we can.”

Kiriyenko was clobbered on the morning of August 13 by a letter that was published in the
Financial Times
from Soros. Known to all as the man who broke the Bank of England for his bet against the British pound in 1992, Soros wrote, “The meltdown in Russian financial markets has reached the terminal phase.” Soros called for an immediate injection of $15 billion by the Western industrial democracies, a devaluation of the ruble by 15 to 25 percent, and creation of a currency board, a complex mechanism in which a troubled currency is backed up by a more solid one such as the dollar. Soros said he intended his letter to be a “wake-up call” to Western governments and was not trying to profit from the situation. Ironically, Soros had written the letter in part because the Russian government had quietly come to him
seeking another “bridge loan” prior to the planned sale of the next packet of shares in Svyazinvest.
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His letter hit like a thunderclap. The Russian stock exchange took a nosedive and trading was stopped; soon the first signs of disquiet appeared on the streets. Modest lines began to form at currency exchange points—the Russian Everyman was once again fleeing his own currency and trying to buy dollars.

On the morning of Friday, August 14, Yeltsin flew to Novgorod to begin a vacation. As soon as his helicopter landed at 10:00 A.M., journalists shouted questions to him. Would there be a devaluation? Yeltsin: “There will be no devaluation, I state this loudly and clearly.”

Yeltsin added, “It's not that I am making it up, or it's a fantasy.” No, he reassured the journalists, “We'll keep control.” Yeltsin said he would not cut his vacation short and return to Moscow. “If I am back, they'll be saying this means things are in a real mess, that a disaster has started, and that things are really going to pieces.... No, on the contrary, everything's going the way it ought to.”
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But by this time the dragons were roaring louder than Yeltsin. During the week, several banks, including Smolensky's SBS-Agro, had failed to meet margin calls. Tokobank, once considered a model Russian bank, which had been in trouble since May, defaulted on a $60 million loan on Wednesday. Then on Friday, Imperial Bank defaulted on a $50 million syndicated loan. Menatep was next—on Monday, Khodorkovsky's bank had a payment on an $80 million loan coming due that it could not possibly make. Jordan told
Kommersant Daily
in an interview published August 12, “Today all our great oligarchs are bankrupt. Why, for example, is Menatep fighting for Tokobank, which is in the hole for $250 million? Why do they need this bank? Because for the reconstruction of Tokobank, the Central Bank is giving $100 million, and Menatep hopes to solve their problem, make payments on their credit this way.” Menatep executives were furious at Jordan.

On August 14, the same day that Yeltsin insisted there would be no devaluation, the Russian government and Central Bank faced the reality that devaluation was inevitable. Aleksashenko recalled that at a meeting at Kiriyenko's office in the Russian White House, “the final diagnosis” was acknowledged. “Long lines of people appeared at currency exchanges in all the big cities of Russia,” he said. “The Central Bank took it as a sign that people had lost faith in the ruble.” The bank might be able to fight off market psychology, but not mass psychology, he said. Moreover, it became clear that the debt dragon was
also on the verge of attack: there were no more sources of money to pay off the GKOs coming due the following week. The Central Bank reserves were low. Foreign countries and investors refused to help. No one would lend money to Russia under any circumstances.
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Chubais was trying to enjoy his summer vacation, driving around Ireland on that Friday, when his mobile telephone kept ringing. He abandoned the vacation and flew back to Moscow, arriving at 5:00 A.M. on Saturday morning. The government's brain trust assembled at Kiriyenko's government dacha, including Chubais, Gaidar, Dubinin, Aleksashenko, the finance minister, Mikhail Zadornov, and others. They acknowledged that devaluation was “inevitable,” Aleksashenko said, but the real debate was over the GKOs. Should the government walk away from its obligations? They decided to “restructure” the GKOs, issuing new bonds at a later date. (That plan was never implemented; the government effectively defaulted and stopped paying GKOs altogether.) Were there alternatives? Yes. They could force the Central Bank to use its reserves to pay off the GKO debts, but no one knew how long the bank could hold out. They could print money to pay off the debts and risk hyperinflation. No one wanted to even contemplate that, haunted by the inflation disaster of the early 1990s.

The Saturday meeting did not settle the most sensitive issue—what to do about the banks. The fear of a banking crisis was real. On Sunday, under pressure from some of the oligarchs, in circumstances that have never been fully clear, Kiriyenko agreed to protect the banks. He consented to a “moratorium” under which Russian banks and companies would not have to pay back any foreign debts for three months. It was an invitation for the tycoons to run away from their obligations forever, more than $16 billion in loans, according to an estimate made soon thereafter by Chubais.
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It meant that the Russian state was participating in the rape of foreign investors.

It was an extraordinary measure—a gift for the tycoons. Aven recalled that Berezovsky called him in Italy, where Aven was vacationing, urging him to fly back to Moscow immediately. Berezovsky told me he urged Aven to return to Moscow to help Chubais with the impending difficulties of devaluation. Berezovsky said he felt Chubais and his aides “didn't understand what they were doing.” Khodorkovsky also sought the moratorium, Aven recalled. Menatep faced the Monday deadline for a loan payment it could not make.
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Aven had expected a ruble devaluation, and his bank carefully
avoided the dollar-forward contracts, but he was stunned that Chubais and Kiriyenko had decided on both devaluation and default at the same time. “It was an absolute surprise,” he said. “We had $100 million of GKOs, so we figured with a devaluation we might lose 20 percent of their value. We had no idea about a default—absolutely no idea.”

Malashenko, who was the political eyes and ears for Gusinsky, had heard rumors but recalled that he also did not think that the government would carry out default and devaluation at the same time. “I didn't take it seriously,” he told me, “because it was incredible. What the hell—you are going to have default and devaluation simultaneously? Every expert was just laughing at this because it never happens. So I thought that maybe it was not actually going to be that bad. I can tell you only one thing: there are probably some insiders who simply knew what was going to happen, but nobody else understood. And that's why so many Russian companies and oligarchs found themselves in such deep shit after August 17.”

On Sunday, August 16, Kiriyenko and Chubais flew by helicopter to Yeltsin, who was at Rus, a hunting lodge about sixty miles northwest of Moscow. They outlined their plan and offered their resignations, but Yeltsin refused to accept them. Two days after he promised the country there would be no devaluation, Yeltsin agreed to the twin measures of default and devaluation, without even waiting for Kiriyenko to explain the details. “Go ahead,” Yeltsin cut off Kiriyenko, “Take the emergency measures necessary.”
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When Kiriyenko and Chubais returned to Moscow, they went directly to the White House. It was late, nearly midnight, and the parking lot outside the imposing white stone tower was filled with the black monster jeeps that the tycoons used as security chase vehicles. The oligarchs' own limos had been allowed inside the perimeter gates, but their thick-necked, black-jacketed bodyguards waited outside. The rest of the country slept—as the oligarchs and the government gave each other one last, hearty embrace.

Across Russia, the millions of people who would feel the impact of devaluation and default got no warning, while a handful of businessmen, who had once gathered at the villa on Sparrow Hills, were invited to witness the final act and even shape it to save their own skins. Their very presence at such a delicate moment—the onset of Russia's biggest economic crisis since the Soviet collapse—was testimony to the bonds between wealth and power. For the oligarchs, it
marked the peak of their authority, the zenith of their collective might, but in many ways it was a crisis of their own making. Their noisy quarreling over Svyazinvest, their kingmaker games in the Kremlin, their addiction to easy money and foreign loans—all this brought them and Russia to the precipice. In the broad carpeted hallways on the fourth and fifth floors of the White House, the oligarchs lingered into the early morning hours and wondered what was in store. The world they had built was about to change with a ferocity they had not foreseen. Could their system survive? Could they?

At midnight, a weary Chubais retired to an office on the fourth floor. Gaidar was with him. Dubinin, the Central Bank chairman, drifted in and out. Coffee and tea were served; Chubais still wore a tie from the meeting with Yeltsin and opened his laptop computer. In a file named Meeting, Chubais had made notes the day before, reconstructing what happened the previous week. He wrote:

Chubais knew they could not go on like this, but he dreaded what was coming. He looked defeated, felt at rock bottom. The default
meant that Russia cheated foreign investors out of billions of dollars they had brought to Russia's boisterous new markets for debt and equity. True, they had come out of greed, seeking obscene profits, collecting handsome fees, and overlooking the serious risks. But they also had come because Chubais made it possible; indeed, he beckoned them to a promised land. In his own mind, Chubais often replayed this landscape, where he had seen only great promise. The GKOs, Eurobonds, stocks, and dollar-forwards were all signs of how far they had traveled in so few years. They were crazy about markets and the markets were crazy about Russia. Then the romance fell apart. “Financial markets are very neurotic creatures,” Chubais mused later. “Like a young lady, they respond sharply to doubtful news—they faint.” Chubais also insisted that the government had no choice, at the end, but to lie to investors about impending devaluation.
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Late Sunday night, a new difficulty arose. Earlier in the day, Chubais believed he had received a green light from the IMF for Russia's default and devaluation plans, and he told this to Yeltsin while they were at the hunting lodge. On his return to the White House, however, the IMF began to object. Chubais telephoned Michel Camdessus, managing director of the fund, Fischer, Summers, and the undersecretary of the Treasury for international affairs, David A. Lipton. The IMF officials said, Don't do it. They suggested asking the Duma for new tax increases and appealing to parliament for a special session. Chubais said it was impossible. Tense hours of phone negotiations followed. The IMF threatened a “divorce” from Russia if the plan went ahead. Finally, the steely Chubais just exploded. “Do you realize what might happen here?” he shouted over the phone. “We will have Indonesia here. It's not just the miners banging their hats outside the White House. There will be a collapse of the banking system of Russia. A real collapse!” Chubais was emotional, severe, uncompromising. Chubais said the plan could not be stopped and would be announced the next morning, August 17. The long night of phone calls ended. Before hanging up, one of the Westerners said simply to Chubais, “Good luck.”
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