The Oligarchs (9 page)

The cooperatives sprouted up surrounded by many unknowns. Basic rules simply did not exist. Previously, Soviet planners had mapped out economic activity in the corridors of Gosplan. An enterprise simply was told to meet the goals dictated to it from above. But the cooperatives were allowed to make their own decisions and keep their gains. A most remarkable aspect of the Law on Cooperatives was a brand-new definition of personal freedom. The law said any activity not specifically prohibited would be permitted—a complete reversal of the decades of heavy-handed dictates of the state.
¹⁰

Often the cooperatives simply brought into the open what was already going on in the shadow economy. Viktor Loshak, a soft-spoken,
thoughtful journalist, was the economics editor of
Moscow News,
a newspaper that became a champion of
perestroika,
and he began to devote all his time to chronicling the growth of the new cooperatives. He wrote an influential series of articles from Armenia, where underground workshops, which had always existed in the Caucasus, now came into the open. He visited one cooperative making handkerchiefs.

“What made them happy most of all was that they could send their products by mail,” he recalled. “At first, I didn't understand. But then I realized that when they were inside the shadow economy, the most difficult thing was the path from their production to distribution—because it was criminal. On any stage of that route, the police could catch them. And when they legalized themselves, they could send their products openly by mail. A lot of people were happy to tell others about what they had been doing secretly all their lives.”
¹¹

The original idea was that cooperatives, given the new freedoms, would produce scarce goods such as the handkerchiefs or provide badly needed services like car repairs. But this rather quaint vision of small workshops humming with craftsmen was soon overtaken by more ambitious schemes. Some cooperatives found ways to get cheap or subsidized supplies, from the state or shadow markets, and sold them for fast profits. Somewhat later they pioneered importing scarce goods like computers and exporting natural resources for immense windfall profits. Cooperatives charged higher prices than the old state stores, spawning resentment in a population that was accustomed to a patriarchal state which supposedly gave them everything nearly for free and had regarded all private enterprise as immoral “speculation.”

According to Anders Åslund, then a Swedish diplomat who served in Moscow, “A few bold entrepreneurs skimmed the market and did very well indeed because shortages were immense, competition and taxes were minimal, most regulations were unclear, and no one knew how long the feast would last.” As it turned out, the feast was just beginning.

 

In 1987 Smolensky was summoned to the city party committee, the
gorkom,
where a functionary who supervised his construction unit, Remstroitrest, gave him an order: “Urgently establish a cooperative!” Ever the rebellious one, Smolensky, then thirty-three, replied, “Why me? Go yourself and do it!” But the
gorkom
threatened to fire him if
he didn't follow instructions. This was a campaign by the party, and the word had come from the top: Smolensky must obey!

The problem was that Smolensky didn't have a clue what a cooperative was. “I was a state employee,” he recalled. “All of us were state employees, and I had all kinds of plans, and directions and instructions, and it was like dropping me on the moon.” Krasnyansky recalled later that Smolensky had been chosen precisely for his street smarts and hustle, which the party bosses had noticed. “Apparently, the party bosses were not idiots. They saw who was capable and who was not. They could have come to me a hundred times and I would never be able to do it. And they went instead to Smolensky. They saw that he had that fire, that he knew how to organize people, take risks.”

Smolensky went to register as a cooperative at a small, barren office in central Moscow that had been set up to give permits to the new businessmen. There he was met by Yelena Baturina, a recent university graduate who was in charge of what was called “public catering,” including bakeries, shoe repair shops, and hairdressers, among other things. Baturina was the assistant to a short, bullheaded official who had been put in charge of the cooperatives, Yuri Luzhkov, a veteran chemical industry manager who had become a deputy chairman of the Moscow city council. It was a chaotic time, and a motley crowd of hustlers spilled out into the hallways, struggling to fill out the proper forms to start their own business.
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Smolensky got his paperwork in order, but he felt completely out of place and was a little fearful of Luzhkov. He had trouble thinking up a name for his new cooperative. In Soviet times, state construction enterprises often just had a number, such “SU-6.” Smolensky scribbled on the application the name of his proposed cooperative, Moskva. He came into the room where Luzhkov, in shirt sleeves, was sitting at a simple, empty table and submitted his documents.

Baturina scowled. “We already have Moskva, take away your documents !” She had a firm, no-nonsense voice. Smolensky wondered briefly if this was going to be like the antialcohol campaign and thought to himself, “Oh no, not all over again!” He paused and asked if he could name the cooperative Moskva-2.

“No!” she said. “We've already got Moskva-2.”

Smolensky then pleaded. “Can it be Moskva-3?”

“Okay,” Baturina relented. “Let it be Moskva-3.” She wrote in the digit 3 next to Smolensky's handwritten Moskva.

On that day, Smolensky later recalled, “Communism was over for me.”

 

Moskva-3 was a private enterprise, set up in Pervomaisky District, one of Moscow's thirty-three administrative areas, where Smolensky had worked at Remstroitrest. But he had precious little idea what he was supposed to do as a private entrepreneur. He had three thousand rubles saved up and wondered whether he was supposed to use his own money. He wondered where he would get supplies and what he would build. The party had ordered Smolensky to start a cooperative, but actually doing it came down to his own individual initiative. No one else had a clue.

Loshak, the
Moscow News
journalist, recalled that the very first cooperatives gathered scrap materials for resale. They tried to make crude kitchen furniture out of scrap lumber or flower boxes from used tires. Loshak said his first memory of Smolensky was collecting scrap materials. “He hired students, and they dismantled houses that were to be demolished and sorted out the door frames from the bricks. And they sold those things to people who were building country cottages.”

Smolensky soon decided to make his own garages and small cottages, the dachas in the countryside. They were in high demand as Muscovites desperately sought refuge from the overcrowded city. Again, Smolensky saw a gap and filled it. The state construction enterprises would never build dachas; they couldn't even keep up with the demand for simple twenty-eight-square-meter apartments in the city.

But the immediate problem for Smolensky was the same one he had faced as a construction boss working for the state. In a universe of chronic shortages, raw materials were difficult to come by. There were no wholesalers who could sell him planks and nails. The state theoretically controlled all materials, but the practice was different. The competition for supplies was just another aspect of the vast, disorganized bazaar of Soviet socialism. The first private entrepreneurs had to rely on their wits—on
blat
and
svyazi
, on theft, bribes, and bargaining—to get supplies.

Alexander Panin, secretary of the city commission overseeing the cooperatives, recalled that the cooperatives started out desperate for the most basic things. “They needed a location to work from,” he said. “They needed some stuff from which to sew things—cloth. Or if they wanted to make furniture, they needed to buy the wood or whatever—
planks. But the problem was the state distribution system existed. You couldn't buy a table, or wood, or planks, because everything was
distributed.”
The commission headed by Luzhkov tried to help the new entrepreneurs by demanding that state enterprises supply bricks or cement to a cooperative.
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It was not so simple. Smolensky recalled the bureaucrats in Moscow provided little help. “In those times, it was impossible to buy planks and nails in Moscow. It was just impossible. Not for money, not for anything.” Money could not, by itself, purchase something in shortage. But Smolensky knew how to beg, bargain, and hustle in the socialist bazaar. He was soon sawing planks at an outdoor pavilion and building small structures—simple one- and two-room cottages, sheds, and garages in the countryside.

As an example of the new generation of cooperatives, Smolensky was selected one day to be a showcase for an American television news crew, in advance of President Reagan's summit meeting in Moscow. The film crew arrived at an open pavilion and watched as Smolensky's men hauled logs to a saw and then took the cut planks away, all of it by hand. The journalists quizzed Smolensky about why it was so primitive. They had no idea that what they were watching was a triumph for Smolensky—he was proud that it existed at all.

When I suggested to Smolensky years later that his early success was due to the imminent death of the Soviet state, he brought me up short. “We were not thinking about the death of the state,” he said. Rather, they were worrying about their own fate. If Gorbachev were thrown out, would they be jailed and shot as speculators? Far from the death of the state, “we were thinking about
our
death!”

In the months that followed, Smolensky's cooperative became a booming success. The dachas were popular, and the Communist Party bosses again took notice. They pressed Smolensky to start a special waiting list for party chiefs to get dachas. Smolensky quickly complied ; they may well have had some leverage over his lumber supply. “They started sort of putting their names on the list,” Smolensky said of his new, elite customers, who were also curious about Smolensky's new business. Before long, the party would decide to experiment with private businesses too.

 

The cooperatives began on thin ice. The brief relaxation of the New Economic Policy in the early 1920s had lasted only two years; could
the new Soviet cooperatives last longer? “These first people were just working within very rigid limits,” Loshak recalled. “A step to the left, a step to the right, and they shoot.” Yet a kind of deep-seated force was being released from the depths of the system, a trembling of the Earth so profound that it would provide an immense boost toward launching Russia on its way to a capitalist future. That force was money. In the shortage economy, when there was almost nothing to buy, when the decisions about allocating scarce goods were made arbitrarily without the forces of supply and demand, money had little significance. But on a sandy sawmill site, Smolensky, the angry young man, began to make money. He accumulated piles and piles of rubles—so much that he had no place to keep it all. He distrusted the state banks, so he kept his money in cash.

In the early Gorbachev years, the Soviet financial system was still run by the state. At the center of the banking system was one giant institution, Gosbank, which controlled the flow of money and credit. Smolensky was accumulating cash, but he knew that putting it in the bank would lead to unpleasant questions. Where had he earned so many hundreds of thousands of rubles? Why wasn't he paying more in taxes? The KGB was just waiting for Smolensky to walk into Gosbank. A second tier of five new Soviet state banks was not much better, but Smolensky was assigned, probably by the party, to use one of them, Promstroibank. He was required to use the bank for some transactions. He recalled that every time he wanted to make a small payment through the bank, he had to explain himself over and over to the bureaucrats. “My chief accountant was practically living there,” he recalled. “She was an elderly woman, and she would go there with a bag full of chocolate, sausage, perfume. The system was the following: you had to visit several counters and put seals everywhere. You had to give something to each person. That was the system; otherwise nothing worked.”

Moreover, the rigid Soviet financial system made it practically impossible for Smolensky to use his money as he wanted to, such as paying a supplier, without seeking permission from the state. “The state bank was so strong that it could destroy all the fruits of my labor with just one signature,” Smolensky recalled. “I couldn't pay wages on time; I couldn't settle for goods; I had to bring all kinds of documents ; I had to pay bribes; or maybe if not bribes, ‘gifts.' I was fed up and felt it could not last.”

One day in 1988, Smolensky decided to start his own bank, as some other cooperatives had recently done. He looked at the Law on Cooperatives, officially approved in May, and found the single line that allowed cooperatives to open their own banks. He went out and filed the papers, he recalled, “in order to stop the diktat of the state bank.” Smolensky was again at the front lines of change. By the end of the year, forty-one new commercial banks had registered with Gosbank, and by the end of the next year, the number had risen to 225.
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Bank Stolichny, which would become the core of Smolensky's business for the next decade, was registered on February 14, 1989, eight months before the Berlin Wall fell.

Just as he had plunged into the cooperatives, Smolensky began his quest to become a banker in total ignorance. “For several months I had a big desk and all my friends made jokes. On one side of my desk, I was chairman of this cooperative, Moskva-3. And on the other side I was director of a bank.”

In 1989 the progressive newspaper,
Moscow News,
held the first ever roundtable discussion with the nascent commercial bankers, who were unknown to most of the public and deeply distrusted. A leading participant was Vladimir Vinogradov, one of the first commercial bankers, who was smooth and well tailored. It was rumored at the time that Vinogradov had made so much money so fast that he stashed it in his refrigerator. By contrast to the experienced Vinogradov, Smolensky was a rough-hewn construction boss who did not appear very wealthy. His manner was blunt. He demanded that the authorities leave the bankers alone. He was hardly the picture of a modern banker.