The Oligarchs (76 page)

During the long night, Chubais called in the oligarchs—Berezovsky, Khodorkovsky, Aven, Friedman, and Potanin. He explained the plan. The ruble would be allowed to sink to 9.5 to the dollar. More painfully, their GKOs would become worthless paper. The tycoons just sat there, in dreadful silence.
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The consequences were clear: they
were about to be hit hard, especially the banks. “They are all bankrupt,” Jordan recalled of the scene. “All they wanted to do was protect themselves for as long as they could.”

Berezovsky had supported the idea of a gradual devaluation earlier in the year; his newspaper,
Nezavisimaya Gazeta
, provided a platform for Illarionov's warnings. But at this late hour, Berezovsky was alarmed that Chubais was acting against the advice of the IMF. Vinogradov, the most vulnerable, recalled he was furious about the devaluation, since his dollar-forward contracts, now up to $2.5 billion, would crush him. He had gambled on a stable ruble and lost. “Why do you have to conduct devaluation now and so drastically?” he pleaded. “This will lead to windows of banks being broken, stores being robbed!”
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But some of the others were spared from utter destruction. Those who had natural resources—Khodorkovsky and Berezovsky had oil, while Potanin had metals and oil—would still enjoy ample cash flow from hard-currency exports. However, the banks would go up in smoke; both Khodorkovsky and Potanin had large banks.

The three-month moratorium was a lifeline thrown to the tycoons by their creator, Chubais. It gave them enough time to protect at least some of their assets. Chubais recalled the oligarchs pointing to the wrecked banking system and imploring him to “make at least some reciprocal step, help us at least in some way to escape the obligations that we have.” Chubais agreed. That reciprocal step was the moratorium. It was supposed to be ninety days protection from their creditors, but in fact the tycoons got more. Some loans were never repaid, just forgotten; others paid just pennies on the dollar.

“It is a gift to the people whose arms and legs you have just cut off,” Chubais recalled. “Then you give them crutches.”

 

The default, devaluation, and moratorium were announced the next morning, August 17. The crutches were just what Khodorkovsky needed to walk away from loans he had taken on earlier, and that is what he did. According to a former Menatep official, the bank's leadership anxiously watched on Friday, August 14, to see if Imperial Bank would fail to make its payments. A default by Imperial could trigger a crisis and relieve them of a loan payment due Monday. Khodorkovsky still had Yukos, and he still had the ocean of oil in western Siberia. But for the loans, his answer was, Too bad—
force majeure
—and good-bye.
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“Menatep treated the West as they had always treated the Russian
government, as a free source of funds,” the Menatep banker told me. “We can get all the money we want by saying the right things. They presold the oil and pledged the oil, and borrowed from all sorts of programs, and played off the heated competition from the foreign banks that wanted to establish a client base here. They simply overleveraged themselves. They were thirty-four-year-olds who suddenly had hundreds of millions of dollars thrown at them and they overborrowed.”

The glittering, go-go days of the Moscow boom were over, for a while. In the first few weeks, the Central Bank tried to hold the ruble at about 9.5 to the dollar but on September 2 let the currency float freely. It eventually settled at more than twenty to the dollar. An eerie mood settled over the city in those first days, a sense of opportunity lost. The autumn billboard advertising campaigns were all launched in late August, as if nothing had happened. The Italian designer Ermigildo Zenga opened a fancy boutique as if there might still be customers. In
Kommersant Daily
, ads beckoned for Gucci, DeBeers, Luis Vitton, as if the party would still go on. The neon lights in the city kept flashing in the month after the ruble devaluation, but on the streets was an emptiness, a stillness, like a commercial neutron bomb had gone off. It left all the symbols of prosperity but destroyed the people, and their money.

Summer vacations were still winding down, but in early September, when people dragged themselves back into the city from their dachas, panic began to set in. The banking system was locked up tight and payrolls were stalled. The automatic teller machines turned cold and silent; the most common sign in store doorways was “closed for technical reasons,” which meant, no money today. The city felt aimless, in free fall, especially as the supply of imports began to dwindle and prices rose suddenly.
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Shoppers panicked over shampoo, raiding store shelves as if they would never see L'Oreal again. The memories of the old brown soap of Soviet times—one chunk for a family of four—suddenly flooded back. Crazy buy-anything moods gripped people for weeks. In the outdoor markets, simple things like salt, sugar, flour, and matches disappeared. Every hour, currency exchange points posted new ruble-dollar exchange rates. The gyrations took on an otherworldly dimension in September. When some of the dollar-forward contracts came due, the ruble suddenly and strongly appreciated in value and then just as mysteriously fell back again. Living standards took a tumble, falling by 40 percent. The economic shock wave hurt everyone, but it was especially cruel to the middle class, which had just barely put down
roots in the new market economy. They were people who had given up their state jobs to work for themselves, who traveled to Paris and bought jeans and cosmetics and dined out late at Moscow's fancy restaurants. They were part of a hardworking entrepreneurial class that tasted the fruits of the first prosperity, mostly in Moscow, and contributed to it. “It's really been very shaky,” sighed Natalya Toumashkova, an advertising and personnel consultant who saw her business collapse almost overnight after the devaluation. “I remember in the first coup, in 1991, we were really scared. We felt it could go back. But the second time, in 1993, we already felt things were irreversible. Now we are in shock—that things could change back so fast!” We were talking in the almost empty cavernous dining hall of Le Gastronome, a restaurant of marble pillars and tinkling chandeliers that was once filled shoulder to shoulder with designer-suited business executives. Marina Boroditskaya, a writer and translator who was a longtime friend of Toumashkova, sadly surveyed the immaculate white tablecloths, shining crystal wine goblets, and empty chairs, as the sun glinted in through the massive arched windows. “I went out and bought fifteen rolls of toilet paper,” she said, “just in case.” The crash hit especially hard at small businesses like Toumashkova's that were built from scratch and prospered on the energy of the financial community—banks, advertising, the exchanges, and all that went with them. In the year of the dragons, the trade and catering business in Russia fell 46 percent, while entrepreneurial small businesses declined 31 percent from the boom year of 1997.
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The oligarchs were restive in the days after the crash. On August 20, Kiriyenko recalled, Berezovsky, Gusinsky, Smolensky, and some other bankers came to him seeking a bailout for Smolensky's SBS-Agro bank. Berezovsky wanted the bailout without changing the ownership of the bank, Kiriyenko said. Kiriyenko refused. “We will make sure you are dismissed,” Berezovsky replied. “Just try,” Kiriyenko said.
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Berezovsky later denied that this meeting took place. “Absolute stupidity,” he said of Kiriyenko's claim.

On August 23, Yeltsin dismissed Kiriyenko, setting off a strange free-for-all in which Berezovsky again rushed in to play his hand at power broker. Yeltsin reappointed Chernomyrdin as acting prime minister, a proposal that Berezovsky said he made to Yeltsin through Yumashev.
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Months earlier, Berezovsky helped engineer Chernomyrdin's firing, but now he brought Chernomyrdin back. On the day of
the appointment, according to an eyewitness, when Chernomyrdin arrived and walked down the long carpeted corridor at the Russian White House, he paused before entering the prime minister's office. There Berezovsky was waiting for him. It was fitting that Berezovsky went in first—and Chernomyrdin followed. Berezovsky was still thinking about the 2000 election, which would pick Yeltsin's successor. “Our interests for 2000 are to ensure the continuity of power,” he said. Yeltsin, in language that suggested Berezovsky was pulling the strings, repeated what the tycoon had said, almost word for word, in appointing Chernomyrdin. “One important consideration” favoring Chernomyrdin, Yeltsin said, is “to support the continuity of power.” Berezovsky was back in business, snapping his fingers and choosing who would run the country.

Rumors swept Moscow that Yeltsin was being urged by members of his own family and by the tycoons to step down once Chernomyrdin was confirmed by parliament. Looking terribly weak and vulnerable, Yeltsin appeared on television on August 28 seated at a small round table in the Kremlin. “I want to say that I'm not going anywhere, I'm not going anywhere,” he said, speaking slowly but clearly. “I'm not going to resign.” A few days later, Berezovsky openly broached the idea of Yeltsin's resignation in a radio interview. “If there is no strong authority, Boris Nikolayevich will have to resign before his term expires to clear the field for the creation of such strong authority.”

Yet Berezovsky again lost the initiative. Yeltsin's authority was at a nadir, and parliament voted Chernomyrdin down after nearly two weeks of bickering. The economy slid further. Markets and banks were paralyzed. Luzhkov denounced the State Duma for inaction. “I am terribly upset that for two weeks they can't make one concrete decision,” he said. “As two mice might say, why do we need cheese? Right now, we need to get out of this mousetrap.” Facing a recalcitrant parliament, Yeltsin abandoned Chernomyrdin on September 10 and nominated Yevgeny Primakov, the foreign minister and staid symbol of the old school, who was confirmed. Berezovsky's latest fling with power politics was over—for a while.

 

Smolensky did not have an ocean of oil, just a sea of depositors, and they turned angry at the doors to the SBS-Agro branch on Pushkin
Square in the center of Moscow. In early September a mob besieged the office, demanding their deposits. Smolensky's dream of becoming the Russian equivalent of the Bank of America was going up in smoke; his hopes of winning over the trust of millions of depositors was vanishing before his eyes. Two weeks after the crash, I saw him at the bank's offices, and he bore the baleful look of a man under stress, nervously folding a small sheet of white paper in his hands, ever tighter and tighter. “At the moment,” he acknowledged, “I do not know what can make people keep their money in banks. I do not see what can motivate people to do it.”

After the crash, Smolensky's bank, SBS-Agro, with its 1,200 branches, 5.7 million depositors, automatic tellers, credit cards, and aspirations to become a commercial retail banking giant, became the symbol of all that went wrong. It was hit by a classic bank run as panicky depositors begged for their money back. The tycoons may have won protection from foreign creditors with the moratorium, but they didn't have protection from their own people. In August, Russians pulled 17 billion rubles out of the thirty largest banks, or about 10 percent of all deposits, compared to just 2 billion the month before.
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By mid-September, Kiriyenko's fears were realized: the banking system was crashing. Payments just stopped, even though the Central Bank tried furiously to inject more rubles into the system. Crowds of cheated depositors angrily spat epithets at Smolensky from the streets. He had fooled them. “Banks cannot expect depositors back in the near future,” Smolensky sighed, “and they are right, because they were deceived.”

Inside, Smolensky's bank was also a strange house of funny money. In the first week of September, Smolensky told me that SBS-Agro held $1 billion in GKOs that had been frozen. It also had $1 billion in obligations to foreign investors, including the Eurobond, syndicated loans, and credits. Smolensky said payments of $162 million were overdue. He was ruined, he said, by the GKO default. “Like Bolsheviks, they just took away this money. We saw this in 1917.” But when I saw Smolensky a year after the crash, he told me a different story. He said that SBS-Agro really had only kopeks in GKOs, and it was the Western loans that wrecked him. Smolensky was always secretive, and the truth was impossible to find out. He took a $100 million stabilization loan from the Central Bank on August 14, three days before the crash.

Dubinin said that Smolensky came to him after August 17 and demanded 2 billion rubles immediately and “afterward maybe 8 or 10
billion more.”
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Other banks were also demanding liquidity, and the Central Bank made a series of mysterious “stabilization loans,” the fate of which was never clear. The Central Bank dished out a $345 million loan to SBS-Agro, guaranteed by 40 regional governments, in October 1998. But when the Central Bank attempted to impose a temporary administration on SBS-Agro, trying to take it over, Smolensky barred the door, just as he had done to Central Bank auditors in 1993. He simply refused to let the Central Bank come in.

Dubinin claimed Berezovsky rose to the defense of Smolensky, warning the Central Bank not to try and take over SBS-Agro. “We will not let you do it,” Berezovsky said.
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Dubinin could not get a fix on what SBS-Agro assets could be seized, if any. “The holding company is built in such a way that it looks as if nothing belongs to the bank,” he said. “So if we bankrupt, roughly speaking, the bank, then we can't legally get near this property.”
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Smolensky had deliberately built his empire that way, and the murky structure would bedevil those chasing Smolensky's wealth in the months and years ahead. Dubinin failed to get in the door, and he resigned on September 7, accusing Smolensky of “sabotage.” He was replaced with Viktor Gerashchenko, the former Central Bank chief who had been Smolensky's arch foe in the early 1990s.