The Oligarchs (53 page)

In April 1993, Potanin, still on a roll, created the United Export-Import bank, known as Uneximbank, which also enjoyed explosive growth. Potanin's license for Uneximbank was approved with unprecedented speed by the Russian government and Central Bank, with support from the reformist finance minister at the time, Boris Fyodorov. Potanin clearly had friends in high places. The early founders of Uneximbank included Potanin and his business partner Mikhail Prokhorov, who had been a foreign trade official in Soviet times and was also a son of the
nomenklatura.
Prokhorov also worked at the failed state bank from which Potanin got his $300 million. They put together about forty major Russian exporters and foreign trade organizations. One of them was Techmashimport, a state-owned oil and chemicals import-export firm. When I asked Gari Titarenko, vice
president, how he had come to join Potanin's bank, he recalled, “Potanin himself was always a very humble and smart boy. He was very respectful; during meetings he always paid a lot of attention to Techmashimport.” Why? “He wanted all our money to go through Uneximbank.”

Soon the smart boy demonstrated that his real talent was in the easy money scheme of “authorized” banking. Potanin once said Uneximbank was a “commercial bank with a state mentality,” and the state mentality meant the state's cash flow. While the others were no slouches at milking the state, Potanin seemed to have a golden touch. In the summer of 1994, when he was invited to the club on Sparrow Hills, Potanin was rapidly burrowing into one of the richest lodes of the government, the State Customs Committee. The customs service was bulging with cash it had accumulated from import duties. Potanin somehow persuaded the customs service to put the cash in his bank, in return for creating a system to ease shipments by importers and exporters through customs—by paying duties in advance on their goods. If they sent Potanin money before their goods reached the border, Potanin could switch the money quickly to the customs service accounts to pay the duty. This wasn't very difficult because the customs service accounts were in his own bank. Potanin provided the Customs service with computers too, so they could keep track of the incoming payments. It was convenient, especially for Potanin, since the crossroads of all the money was in Uneximbank. Potanin's balance sheet swelled further as authorized bank for the Finance Ministry, the tax service, the arms control export agency, the City of Moscow and others. Potanin was also serving the accounts of Norilsk Nickel, which became a shareholder in Uneximbank. In 1994 Uneximbank began the year with $322 million in assets, and it ended the year with $2.1 billion.
²⁰
Potanin was rocketing to the top of the banking charts and by December and had his eyes on Norilsk Nickel itself, a lucrative industrial prize. But how to get it?

Potanin went to Boris Jordan, the whiz kid who had shouted for joy in the first voucher auction when he realized how cheaply Bolshevik Biscuit had been sold. Jordan was setting up his own firm, Renaissance Capital, with partner Steven Jennings in early 1995. They left Credit Suisse First Boston to make their own fortunes as stock brokers in the Russian market.

“I have this idea,” Potanin told Jordan one day. The Russian government
was desperate for cash to pay overdue wages and pensions. Potanin had the cash, although much of it was actually the government's own deposits. Potanin suggested, to Jordan, making the government a deal: give it a loan and take some factories as collateral. “He needed someone to write it up,” Jordan told me. Jordan and Jennings, who had played a key role in launching voucher auctions and had made a small fortune as voucher speculators, were once again on the ground floor of Russia's great sell-off. “Steven and I sat down and started thinking,” Jordan recalled. One late night in Jennings's apartment, they sketched out the plan. In this early version, they proposed that banks loan money to the state and take the shares as collateral. If the government failed to pay back the loans, they could sell the shares for a very handsome commission. The plan called for a 30 percent fee, which was generous indeed. “Don't forget our background,” Jordan said when we talked about it years later. “We were brokers!” They thought getting a fee for selling the shares would be the point of the whole scheme. “I always thought that I am going to do something and earn my fee,” Jordan said. “We never perceived it as a vehicle to take the companies for
themselves,”
he said of the tycoons. “At least I didn't.”

Potanin had another idea.

For a few more days, Jordan and Jennings hammered out their plan and wrote up a white paper for Potanin. They put no names on it. Jennings claimed there was a “certain logic” to the scheme from the Russian government's point of view, since it would bring badly needed cash to the budget to pay pensions and teachers. Moreover, the young Russian stock market had gone through its first major decline in late 1994. Share prices were way down. Under the Jordan-Jennings plan, the government could hope to fetch a higher price for the factories later on, when presumably share prices would again be higher. Also, it was possible that top managers from the private sector would be brought in to improve the performance of the factories. But Jennings told me he insisted that the deals must be completely transparent and open to international competition. If not, he said, “it will be a disaster.” Jordan gave the white paper to Potanin. “This is how you do it,” he said.
²¹

But what happened next did not follow Jordan's script. Potanin took their paper but “destroyed the concept,” Jordan said. In the end, the process was not open to foreigners, was not transparent, and turned out
to be rigged. It also had one profound consequence that they did not foresee: the white paper was the beginning of a merger between the Russian tycoons and the government. The tycoons found their political patron, an answer to their search on the Sparrow Hills. He was Boris Yeltsin, and they were about to graft their wealth to his power.

 

In the 1990s, no other civil servant, no other reformer, oil general, red director, or politician had quite the same survival skills as Chubais. He exhibited extraordinary determination under fire, and he believed the ends justified the means. But Chubais was a survivor for another reason as well. He would push, drive, and force his way forward, but then he usually spotted the moment for a compromise. This was the secret to his success in mass privatization. The famous compromise with the Supreme Soviet, allowing insiders to control the newly privatized companies, served the larger goal of getting property out of the hands of the state.

Now Chubais, one of the two deputy prime ministers, was on the verge of another remarkable demonstration of his iron will. He was going to harness the power of the tycoons to that of the ailing Russian president and try to save them both. Once again, he was willing to pay a price, for it meant subverting his own ideals in pursuit of the larger goal. He did it without evident hesitation.

Chubais was quite certain of those ideals in the early years of mass privatization, when he and Yeltsin championed a populist slogan: “We do not need hundreds of millionaires, but millions of property owners.” Chubais was a crusader out to break the grip of the old
nomenklatura
and halt the wild, “spontaneous” privatization by the factory directors. He was dead certain that the way forward lay in the magic of the market. It was the market that would choose winners and losers; it was the market that would determine who would become an “effective” owner of the new property taken from the state. The market was the boxing ring that would sift out those who deserved to survive, by dint of their ingenuity, and those who should go broke. For Chubais and the reformers, the lesson of Soviet socialism had been that no single politician or bureaucrat, acting arbitrarily, can be as effective at making decisions as the collective wisdom of the marketplace. Chubais and his generation of reformers believed the overly politicized decisions of the Communist Party had proven totally ineffective. The
way out lay in rigorous market competition, and to be competitive the market had to be open. This is why Chubais was so enamored of the small business auctions he and Gaidar had witnessed in Nizhny Novgorod: it was pure, elementary competition.

On March 30, 1995, Potanin appeared before the Russian cabinet. Down both sides of a long, horseshoe-shaped table, cabinet members sat shoulder to shoulder, small bottles of mineral water, note pads, and sharpened pencils neatly arrayed before them. The prime minister sat at one end, his voice amplified by a microphone, while aides and visitors were seated in an open section of the room at the opposite end. Potanin had prepared carefully for the meeting. He outlined an early version of his loans for shares plan, drawn from the Jordan-Jennings white paper. In a session that lasted four hours, Potanin, joined by Khodorkovsky and Smolensky, told the ministers that a consortium of commercial banks was prepared to loan the government 9.1 trillion rubles, or $1.8 billion, in exchange for collateral in shares of some of Russia's largest enterprises. This was no small change. The budget called for raising 8.7 trillion rubles from privatization during the year, but so far the State Property Committee had taken in a paltry 143 billion rubles.
²²
Wages and pensions were going unpaid across the land. The bankers were offering the government a plan to reap the whole year's privatization revenue in one fell swoop.

Among the forty-four companies that the bankers wanted, it was no accident that both Norilsk Nickel and Yukos were on the list: Potanin had put them there. Just the day before, Potanin had been carefully going over the details of his plan with Kokh, the blunt-spoken privatization chief. Potanin already had the support of deputy prime minister Soskovyets, whose realm included heavy industry and who was part of the reactionary group around Korzhakov, Yeltsin's security chief and leader of the so-called party of war. But the question remained, What about Chubais, the other deputy prime minister?

The young reformers on the Chubais team were privately disgusted by the obvious corruption in the loans for shares scheme. Dmitry Vasiliev was Chubais's original deputy at the State Property Committee and in 1995 was chief of the Russian federal securities commission. He told me that Jordan came to him one day with an early draft of the loans for shares white paper. “I said I think this scheme is corrupt,” Vasiliev recalled. “What actually happened was even worse than we ever expected.”
²³

Everything about loans for shares was the opposite of what the reformers had once stood for. It reeked of picking winners and losers arbitrarily instead of letting the market decide. It meant that the new owners were being selected, once again, by politicians, not by market competition and not by the testing of strength in the “boxing ring.” And the loans for shares deals were carried out not in the open but largely in secret, by offshore shell companies and hidden accounts. Even the auctions were corrupt: the auctioneer himself, in most cases, turned out to be the winning bidder. The auctions were rigged, and Chubais let it happen.

If Chubais had any doubts, they were fleeting. On the day of Potanin's presentation to the cabinet, Chubais recalled, “I understood immediately that I was going to support this idea at any cost.”
²⁴
Sergei Belyaev, another Chubais recruit from St. Petersburg, told me that Chubais's only concern was whether the banks were really serious about coming up with so much money. Chubais wasn't questioning the plan, just whether the tycoons would pay. “He saw a certain danger here that the banks would deceive us,” Belyaev told me. “They would take the packets of shares and won't give any money.”
²⁵

But evidently Chubais swallowed those doubts quickly because in the autumn of 1995, another threat loomed—loss of the whole privatization drive. The political atmosphere had turned gloomy. Yeltsin suffered two heart ailments during the year, the Chechen war was dragging on, and Yeltsin seemed to have lost his way as a champion of the democratic movement. The polls showed that every week the Communist Party was coming closer to a victory in the December elections for the lower house of parliament, the State Duma. The Russian Communists were led by Gennady Zyuganov, a one-time Soviet party propagandist. Zyuganov liked to present himself to Westerners as a modern social democrat, but at home he was an ideologue who sounded harsher themes of nationalism. Zyuganov's positions on the economy were hazy; he talked about renationalizing some banks but also declared his support for “mixed” forms of property ownership. When Zyuganov said he would reverse privatization, Chubais took the threat seriously.

Chubais, who became extraordinarily unpopular among Russian voters in these years, felt increasingly isolated in his post as deputy prime minister. He was marginalized under Chernomyrdin; there was a “complete blockage” of his goals by the other deputy, Oleg Soskovyets.
Chubais told me he felt Chernomyrdin had 50 percent of the government in his hands, Soskovyets had 40 percent, and he had only 10 percent. “Privatization was practically stopped,” Chubais recalled. The Russian reformers had envisioned a second phase of privatization, after vouchers, in which state-owned factories, refineries, and mines would be sold for cash to the highest bidders. Chubais saw the failure to get this phase of privatization off the ground as a major setback, not only for the budget but for his larger hopes of creating a new class of private owners. At the time, he recalled, “There was no consolidation, no political force standing behind private property.”
²⁶

Jordan and Jennings traveled constantly around Russia, poking their noses into aging factories and debating how to best sell off shipyards and mines. They always stopped in the office of the factory director. They kept track of what they half jokingly called the “Lenin index,” a tally of how many pictures of Lenin they saw still hanging in the general directors' offices. One might assume, with the collapse of the Soviet Union, that the “Lenin index” would decline. But in fact, they discovered, it did not. One reason was that in mass privatization, Chubais had compromised by giving insiders, the Soviet factory directors, a chance to keep control of their factories. The pictures of Lenin remained in place. The “red directors” still ruled Russian industry. This, coupled with public discontent, was what made Zyuganov a powerful figure and worried Chubais.