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Big Money in the New Russia

Say what you like about Russia in the 1990s, at least it was never boring. Anything was possible, and, indeed, most things happened. Laws and institutions crumbled before an onrush of greed and desperation. As David Hoffman and Stephen Kotkin recount, the events of the period included hyperinflation, a financial boom, a catastrophic bust, the looting of national wealth through privatization, a civil war, the unseating of four prime ministers in eighteen months, a president at death’s door, and the shelling of a parliament.

It all got rather wearying toward the end, whether you were winning or losing. By the close of the decade even the winners were ready to call a truce, so they could have some relative peace in which to consolidate their gains. They welcomed Vladimir Putin to power and let him calm things down. The federal parliament, the regional governments, even the business tycoons accepted a new and more restrictive regime in which the Kremlin set the rules. Two tycoons who could not or would not adjust to the new order, Boris Berezovsky and Vladimir Gusinsky, were hounded out of the country.

For David Hoffman, the emergence of such tycoons at the start of the 1990s was one sign of a transformation sweeping Russia, when it became in many respects a new country and the ways to power and wealth were opened suddenly to new people. Stephen Kotkin places his emphasis differently. He believes the new Russia can best be understood by recognizing the extent to which its determining characteristics have been those inherited from the old Soviet Union—essentially, obsolete industry and thieving government. This calls for treating the period from 1970 to 2000 as “an integrated whole,” he says, during which the “death agony of an entire world comprising non-market economics and anti-liberal institutions” was played out.

These two approaches may be more complementary than contradictory. They both support the proposition that little changed for most people when Russia staggered free of the Soviet Union. Most remained the victims of a long-term national decline. But for a relatively few people, everything changed. If you had strong nerves, quick wits, and good connections, then bliss was it in that dawn to be alive.

1.

Hoffman tracks six Russians as they rise, through the perestroika and the Yeltsin years, toward the heights of financial and political power. One of them, it cannot be otherwise, is Boris Berezovsky, the most daring, extravagant, and outspoken of all the new Russian tycoons. “He is one of those people,” a Berezovsky associate accurately tells Hoffman, “who can exist calmly and comfortably only in extreme situations, in which not a single other person would feel comfortable.”
Berezovsky was a relatively obscure figure, even in Russia, until the middle of 1996, when he announced himself as leader of a team of tycoons backing Boris Yeltsin’s reelection campaign. Intoxicated by Yeltsin’s victory, the tycoons began publicly claiming state power as their reward.

They were called “oligarchs” first by their critics, but they adopted the name themselves even while professing to use it ironically. It was a successful move, suggesting a grandeur and lineage that, almost without exception, the tycoons otherwise lacked. Its lingering usage today still gives them an extra dose of zest and mystique, even though they have variously failed, fled, or become respectable.

Berezovsky’s genius for wheeling and dealing helped him to make his first fortune from selling cars, a second from oil, and a third—or so the Russian government alleges—from dipping into the cash flows of Aeroflot, the Russian airline, a charge that Berezovsky denies.1 With a Russian arrest warrant outstanding against him, Berezovsky now lives in London, where he denounces Putin’s government, most recently by sponsoring a film accusing the Russian secret services of complicity in the wave of terrorist bombings in Moscow in 1999 that helped bring Putin to power.

Nor could Hoffman easily have avoided taking Vladimir Gusinsky as another of his six. Gusinsky also made himself a highly visible public figure by building up a banking and media empire centered on NTV, the television station he created from nothing. He lost it all in 2001 in a battle with Putin, who visibly hated him to a point of obsession. He fled to Spain, where he managed to fight off a Russian extradition warrant, and he remains a leading shareholder in the Israeli newspaper Ma’ariv.

To these Hoffman adds two lower-profile oligarchs, one of whom failed as spectacularly as the other succeeded. The failure is Alexander Smolensky, whose bank, SBS-Agro, the second-biggest in the country, crashed in the financial crisis of 1998, taking depositors’ money (but not his own) with it. The success is Mikhail Khodorkovsky, whose bank, Menatep, also went under in the crash of 1998, but who managed to hang on to his oil company, Yukos, and who by virtue of his controlling stake in Yukos is probably the richest man in Russia today.2

Hoffman’s final two choices are politicians. One is Yuri Luzhkov, mayor of Moscow since 1992, who emerges here as a sympathetic but fairly lim-ited man. “Luzhkov is not Yeltsin. If he says he will do it, he will,” says one admirer, catching the essential difference between Luzhkov and not only Yeltsin but almost every other politician in Russia then and now.3

The last is Anatoly Chubais, the economist-turned-politician from St. Petersburg whose sweeping privatization program made the riches of the Russian state available for the oligarchs to grab, and who now runs the national power company, UES. Chubais is commonly criticized for having privatized Russian factories and natural resources too cheaply, too quickly, and only to a favored few. Those charges can be amply justified, as Chubais himself would be the first to agree. In defense he refers to the political conditions of the time, and the absence of available alternatives. As Chubais tells Hoffman:

Every enterprise ripped out of the state and transferred to the hands of a private owner was a way of destroying Communism in Russia. This is how we understood the situation…. And at that stage, it didn’t matter at all to whom these enterprises went, who was getting the property. It was absolutely unimportant whether that person was ready for it.

The more time that has passed, the stronger this defense has come to look. During the past three to four years Russian industry has become more profitable, thanks in part to a weaker ruble. Big companies are improving their quality of management; they are treating their shareholders and workers better, and they are reinvesting profits in their business. As Chubais said in another recent interview:

What we finally have is what we were thinking about then…. But it took much more effort, it brought much more pain, it cost far more than we had hoped.4

2.

From 1996 onward, when they had declared themselves and their ambitions, the oligarchs were much discussed in the Russian and Western press.5 Hoffman’s book takes in this later phase, but its originality and main value lie in its exploration of the early careers of his subjects, before their names were so widely known. Hoffman spent almost six years writing from Moscow for The Washington Post (where he is now foreign editor), and he interviewed more than two hundred people for this book. He has made many discoveries.6 And, knowing something of the difficulties of researching the recent past in Russia, I sympathize with his occasional dead ends.

His book may well be the most authoritative account we will ever get of the early days of the four true “oligarchs” among Hoffman’s subjects—Berezovsky, Gusinsky, Khodorkovsky, and Smolensky. The more time that passes, the more difficult it will get for anybody else to sift out further truths from the contemporary debris of conspiracy theories, propaganda wars, and double-bookkeeping left behind by the oligarchs themselves.

As Hoffman notes, the oligarchs owned and used the Russian media, including newspapers and television stations, making them unreliable sources. They and the Russian security services trafficked feverishly in kompromat, or compromising materials, mixing real and fake documentary evidence, whose purpose was to make scandalous claims that could never be authenticated. By lowering his standards of evidence, Hoffman could easily have written a racier book. It stands to his credit that he has resisted the temptation.

Instead, he acknowledges preemptively that

even the most aggressive research on my part often ended in disappointment. The reader will notice moments when the inexplicable happens—when a bank suddenly inherits a windfall, when a factory is given away for nothing, when a tiny company explodes from zero to $1 billion. What occurred at these critical junctures was often impossible to reconstruct, and it remains part of the mystery of the new Russia.

This rings true, and it is a generous admission for a writer to make about his own work. But if anything Hoffman is a touch hard on himself. He describes and analyzes so well the methods by which money and power were grabbed in the new Russia that the absence of a concrete detail here or there is rarely troubling.

In particular, Hoffman is unduly modest about his portrait of Khodorkovsky—one of the most elusive of the oligarchs in the 1990s, yet now the one most likely by far to count for something more in the future. His Yukos oil company is developing into what may well prove to be Russia’s first world-class, internationally diversified business group. Bankers and investors will have to read Hoffman’s account of Khodorkovsky’s formative years in business and decide for themselves whether they can quite feel at ease with him, even now. It will be a very difficult question to answer.

Hoffman writes that he talked with “dozens of people who worked with Khodorkovsky, but the kernel of his success was always elusive.” I am not sure there is much more to be found. Hoffman describes persuasively a young Khodorkovsky whose method was to study the political system, know its rules, adopt its camouflage, learn its weaknesses, and work it from the inside. Thus he continued with a part-time law course even when his business was already flourishing, “telling friends that it was necessary to be able to understand and exploit decrees issued by government.” He told an early interviewer: “It is possible to find loopholes in every law, and I will use them without an instant of hesitation.”

Which he did. His first object of study, in the perestroika years, was Soviet-era currency laws and regulations. These segregated the budget funds of state companies and institutions (notional money which existed only on paper, as bank balances and transfers) from cash rubles, and both from foreign currency. Khodorkovsky’s aim was to find ways of turning non-cash budget funds, with limited use and value, into cash that he and his partners in a transaction could spend however they wanted.

  1. 1

    The fullest account of Berezovsky’s business career remains Paul Klebnikov’s book, Godfather of the Kremlin: Boris Berezovsky and the Looting of Russia (Harcourt, 2000), reviewed in these pages on October 19, 2000.

  2. 2

    In its issue of March 18, 2002, Forbes magazine ranked Khodorkovsky 101st by wealth in a list of the world’s billionaires. It estimated his fortune at $3.7 billion.

  3. 3

    The speaker is a priest commenting on Luzhkov’s promise to reconstruct Moscow’s Cathedral of Christ the Savior, destroyed by Stalin in 1931. The cathedral was indeed completed in 1997, a monument both to its dedicatee and to Luzhkov’s system of “persuading” firms doing business in Moscow to donate generously to his pet projects. Smolensky, for example, gave fifty-three kilos of gold for gilding the domes. One wonders whether he knew that only twenty kilos were actually used, or so Hoffman reports, because the patriarch of the Russian Orthodox Church approved a new and cheaper method of gilding.

  4. 4

    Financial Times, February 16, 2002.

  5. 5

    Besides Berezovsky, Gusinsky, Khodorkovsky, and Smolensky, the inner circle of “oligarchs” included Vladimir Potanin, boss of Uneximbank, and Mikhail Friedman, boss of the Alfa banking and investment group.

  6. 6

    Including some amusing trivia. I did not know that Smolensky spent eight years studying Hindi, for example. Or that Gusinsky made his first fortune in copper bracelets.

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