The Oligarchs (95 page)
Authors: David Hoffman
38
Potanin, interview by author, October 14, 1997.
Potanin, interview by author, October 14, 1997.
40
Chubais, remarks to reporters, December 2, 1997, author's transcript.
Chubais, remarks to reporters, December 2, 1997, author's transcript.
41
Jordan's Renaissance Capital contributed about $200 million of the offered price. But he had brought in outside investors for the consortium, and if they won the auction, he stood to reap about $39 million in commissions, according to internal memos. The commissions would be even higher if the winning bid was over $1.5 billion.
Jordan's Renaissance Capital contributed about $200 million of the offered price. But he had brought in outside investors for the consortium, and if they won the auction, he stood to reap about $39 million in commissions, according to internal memos. The commissions would be even higher if the winning bid was over $1.5 billion.
42
Credinstalt investment bank estimated at the time the average value for telecommunications companies in emerging markets was $2,500 per line. “State Nets $1.9 Bln from Svyazinvest Sale,”
Moscow Times
, July 26, 1997, p. 1.
Credinstalt investment bank estimated at the time the average value for telecommunications companies in emerging markets was $2,500 per line. “State Nets $1.9 Bln from Svyazinvest Sale,”
Moscow Times
, July 26, 1997, p. 1.
43
Leonid Rozhetskin, interview by author, October 8, 1997; Sergei Zverev, interview by author, June 23, 2000.
Leonid Rozhetskin, interview by author, October 8, 1997; Sergei Zverev, interview by author, June 23, 2000.
44
Except where otherwise indicated, all quotations from broadcasts have been taken from verbatim transcripts.
Except where otherwise indicated, all quotations from broadcasts have been taken from verbatim transcripts.
46
The second sale of Norilsk, the last chapter in loans for shares, had come just ten days after Svyazinvest. Potanin sold it to himself, as expected.
The second sale of Norilsk, the last chapter in loans for shares, had come just ten days after Svyazinvest. Potanin sold it to himself, as expected.
47
The context for this scandal had been set earlier. Minkin disclosed on August 4, 1997, in
Novaya Gazeta
the transcript of a conversation between Nemtsov and the advertising mogul Lisovsky. Nemtsov was quoted as saying he was owed $100,000 for an autobiographical book,
Provincial
, and he wanted the money urgently in order to declare it on his disclosure form. The financial disclosure forms were Nemtsov's own idea. Nemtsov says he is in a tight spot because Yeltsin is about to sign the decree requiring the disclosures, and he is afraid that if he leaves the money off his form, there will be criticism later. The public reaction to the disclosure was negative: $100,000 seemed like a huge sum for a book. Minkin's story on Kokh appeared soon thereafter. “Kokh Left His Chair to Avoid Going to Jail,”
Novaya Gazeta
, August 18, 1997, p. 1.
The context for this scandal had been set earlier. Minkin disclosed on August 4, 1997, in
Novaya Gazeta
the transcript of a conversation between Nemtsov and the advertising mogul Lisovsky. Nemtsov was quoted as saying he was owed $100,000 for an autobiographical book,
Provincial
, and he wanted the money urgently in order to declare it on his disclosure form. The financial disclosure forms were Nemtsov's own idea. Nemtsov says he is in a tight spot because Yeltsin is about to sign the decree requiring the disclosures, and he is afraid that if he leaves the money off his form, there will be criticism later. The public reaction to the disclosure was negative: $100,000 seemed like a huge sum for a book. Minkin's story on Kokh appeared soon thereafter. “Kokh Left His Chair to Avoid Going to Jail,”
Novaya Gazeta
, August 18, 1997, p. 1.
48
Correspondent Yelena Masyuk and her NTV crew were kidnapped May 10, 1997, in Chechnya. They were released August 18 after Berezovsky paid a $1 million ransom.
Correspondent Yelena Masyuk and her NTV crew were kidnapped May 10, 1997, in Chechnya. They were released August 18 after Berezovsky paid a $1 million ransom.
50
Smolensky, interview by author, October 10, 1997.
Smolensky, interview by author, October 10, 1997.
51
The Yeltsin comments about Kokh and Potanin's offer were disclosed that evening by Khodorkovsky in a television interview by Kiselyov.
Hero of the Day,
NTV, September 16, 1997.
The Yeltsin comments about Kokh and Potanin's offer were disclosed that evening by Khodorkovsky in a television interview by Kiselyov.
Hero of the Day,
NTV, September 16, 1997.
56
Kokh, interview by author, May 14, 2000. An investigation by the Moscow prosecutor was closed in December 1999 because the Duma passed a broad amnesty for minor offenses that precluded prosecution.
Kokh, interview by author, May 14, 2000. An investigation by the Moscow prosecutor was closed in December 1999 because the Duma passed a broad amnesty for minor offenses that precluded prosecution.
57
These included Yumashev, who was Yeltsin's chief of staff, and later Alexander Voloshin, who succeeded him. Both had worked with or had been close to Berezovsky, not to mention Berezovsky's ties to Dyachenko from the 1996 campaign onward.
These included Yumashev, who was Yeltsin's chief of staff, and later Alexander Voloshin, who succeeded him. Both had worked with or had been close to Berezovsky, not to mention Berezovsky's ties to Dyachenko from the 1996 campaign onward.
58
Lisovsky, interview by author, December 15, 2000.
Lisovsky, interview by author, December 15, 2000.
59
Chubais, remarks to reporters, December 2, 1997, author's transcript.
Chubais, remarks to reporters, December 2, 1997, author's transcript.
61
Chubais, remarks to reporters, December 2, 1997, author's transcript.
Chubais, remarks to reporters, December 2, 1997, author's transcript.
63
Yeltsin's press secretary, Sergei Yastrzhembsky, said at the time that Yeltsin was taken to Barvikha, but later it was disclosed he had also been taken to the hospital where he had his heart operation.
ROAR OF THE DRAGONSYeltsin's press secretary, Sergei Yastrzhembsky, said at the time that Yeltsin was taken to Barvikha, but later it was disclosed he had also been taken to the hospital where he had his heart operation.
1
Eric Kraus, interview by author, January 22, 2001.
Eric Kraus, interview by author, January 22, 2001.
2
In one sign of this expansion, Khodorkovsky was poised to gain full control of a giant Siberian oil field. In 1993 Amoco won an international tender for 50 percent of the huge Priobskoye field, which was then held by Yuganskneftegaz. When Khodorkovsky took over Yuganskneftegaz and its holding company, Yukos, in 1995, he proposed new terms. Amoco refused to accept the new terms and the deal was paralyzed for several years. In 1998 Amoco was merged into BP, and the joint company abandoned the Priobskoye field on March 19, 1999, after investing more than $100 million.
In one sign of this expansion, Khodorkovsky was poised to gain full control of a giant Siberian oil field. In 1993 Amoco won an international tender for 50 percent of the huge Priobskoye field, which was then held by Yuganskneftegaz. When Khodorkovsky took over Yuganskneftegaz and its holding company, Yukos, in 1995, he proposed new terms. Amoco refused to accept the new terms and the deal was paralyzed for several years. In 1998 Amoco was merged into BP, and the joint company abandoned the Priobskoye field on March 19, 1999, after investing more than $100 million.
3
Andrei Sheatov, “Russian Oil Tycoon Plans to Place Among Ten World Oil Firms,” Itar-Tass dispatch from Khodorkovsky's appearance before the Russian-American Business Council in Washington, October 23, 1997.
Andrei Sheatov, “Russian Oil Tycoon Plans to Place Among Ten World Oil Firms,” Itar-Tass dispatch from Khodorkovsky's appearance before the Russian-American Business Council in Washington, October 23, 1997.
4
Yukos consolidated financial statements for the year ending December 31, 1997, published June 26, 1998, by Price Waterhouse; “Preliminary Information Memorandum,” Yukos Oil Corporation, Five-Year Export Secured Credit Facility, March 1998.
Yukos consolidated financial statements for the year ending December 31, 1997, published June 26, 1998, by Price Waterhouse; “Preliminary Information Memorandum,” Yukos Oil Corporation, Five-Year Export Secured Credit Facility, March 1998.
5
This practice, transfer pricing, was controversial yet widespread in the Russian oil industry at the time. According to analysts Nat Moser and Peter Oppenheimer, Yukos recorded an after-tax profit in 1996 of $91.5 million while the oil
extraction companies Yuganskneftegaz and Samaraneftegaz lost $345 million. In 1996 Yuganskneftegaz lost $195 million alone through transfer pricing. Moser and Oppenheimer, “The Oil Industry: Structural Transformation and Corporate Governance,” in Brigitte Granville and Peter Oppenheimer, eds.,
Russia's Post-Communist Economy
(Oxford: Oxford University Press, 2001.)
This practice, transfer pricing, was controversial yet widespread in the Russian oil industry at the time. According to analysts Nat Moser and Peter Oppenheimer, Yukos recorded an after-tax profit in 1996 of $91.5 million while the oil
extraction companies Yuganskneftegaz and Samaraneftegaz lost $345 million. In 1996 Yuganskneftegaz lost $195 million alone through transfer pricing. Moser and Oppenheimer, “The Oil Industry: Structural Transformation and Corporate Governance,” in Brigitte Granville and Peter Oppenheimer, eds.,
Russia's Post-Communist Economy
(Oxford: Oxford University Press, 2001.)
6
Hunter of Arrowhead Enterprises Ltd., an investment company of Dart, made the “looting” comment to the
Financial Times
, March 11, 1998. Hunter further detailed the allegations in two letters to Jon S. Corzine, chairman and chief executive officer, Goldman Sachs, January 28 and February 17, 1998. The three banks replied perfunctorily that they could not disclose “any information” about the loan.
Hunter of Arrowhead Enterprises Ltd., an investment company of Dart, made the “looting” comment to the
Financial Times
, March 11, 1998. Hunter further detailed the allegations in two letters to Jon S. Corzine, chairman and chief executive officer, Goldman Sachs, January 28 and February 17, 1998. The three banks replied perfunctorily that they could not disclose “any information” about the loan.
7
Nezavisimaya Gazeta
, a broadsheet newspaper written for the intelligentsia,the first truly independent paper born in
perestroika
, fell on hard times in the mid-1990s. After an internal staff dispute, the paper locked its doors and stopped publishing. Editor Vitaly Tretyakov went to a tiny Greek island for a holiday. Berezovsky flew a helicopter to the island, flew him back to Moscow on a chartered plane, paid for guards to break open the doors, and took over as financial sponsor of the paper, which had virtually no advertising. Vitaly Tretyakov, interview by author, March 10, 1997.
Nezavisimaya Gazeta
, a broadsheet newspaper written for the intelligentsia,the first truly independent paper born in
perestroika
, fell on hard times in the mid-1990s. After an internal staff dispute, the paper locked its doors and stopped publishing. Editor Vitaly Tretyakov went to a tiny Greek island for a holiday. Berezovsky flew a helicopter to the island, flew him back to Moscow on a chartered plane, paid for guards to break open the doors, and took over as financial sponsor of the paper, which had virtually no advertising. Vitaly Tretyakov, interview by author, March 10, 1997.
8
Andrew Higgins, “Insufficient Funds: How a Russian Banker Outfoxed Creditors to Rebuild an Empire,”
Wall Street Journal
, October 4, 2000, p. 1.
Andrew Higgins, “Insufficient Funds: How a Russian Banker Outfoxed Creditors to Rebuild an Empire,”
Wall Street Journal
, October 4, 2000, p. 1.
9
Foreign liabilities of the Russian banking systemâmoney raised abroadârose from 11 percent to 17.5 percent of total liabilities during 1997. “Ruble Crisis Again,”
Russian Economic Trends
, June 1998.
Foreign liabilities of the Russian banking systemâmoney raised abroadârose from 11 percent to 17.5 percent of total liabilities during 1997. “Ruble Crisis Again,”
Russian Economic Trends
, June 1998.
10
Credit Suisse First Boston, in a research note on the merger, made a similar point: “In our view, the main benefits of the merger to the group are greater political clout and greater visibility. The combination of the political clout of Mr. Khodorkovsky and Mr. Berezovsky will make Yuksi a powerful lobbyist within Russia.”
Credit Suisse First Boston, in a research note on the merger, made a similar point: “In our view, the main benefits of the merger to the group are greater political clout and greater visibility. The combination of the political clout of Mr. Khodorkovsky and Mr. Berezovsky will make Yuksi a powerful lobbyist within Russia.”
12
Anatoly Chubais, “I Am Against the Board of Directors of Russia,” interview by Yevgenia Albats,
Kommersant Daily
, March 5, 1998, p. 1.
Anatoly Chubais, “I Am Against the Board of Directors of Russia,” interview by Yevgenia Albats,
Kommersant Daily
, March 5, 1998, p. 1.
14
Nezavisimaya Gazeta
, “Venal Newspaper, Venal Journalists, Venal Chief Editor !” March 8, 1998, p. 1.
Nezavisimaya Gazeta
, “Venal Newspaper, Venal Journalists, Venal Chief Editor !” March 8, 1998, p. 1.
15
Berezovsky said on
Itogi
(NTV) on March 22 that he suffered a broken spine and underwent surgery in Switzerland. He was discharged from the hospital March 13, 1998, but continued to undergo rehabilitation until returning to Moscow.
Berezovsky said on
Itogi
(NTV) on March 22 that he suffered a broken spine and underwent surgery in Switzerland. He was discharged from the hospital March 13, 1998, but continued to undergo rehabilitation until returning to Moscow.
16
Boris Berezovsky, interview by author, February 28, 2001.
Boris Berezovsky, interview by author, February 28, 2001.
17
Vladimir Gusinsky, interview by author, June 7, 2001.
Vladimir Gusinsky, interview by author, June 7, 2001.
18
Berezovsky, interview by author, February 28, 2001.
Berezovsky, interview by author, February 28, 2001.
20
Sergei Karaganov, interview by author, November 9, 2000.
Sergei Karaganov, interview by author, November 9, 2000.
21
Itogi,
March 22, 1998. Berezovsky later told me that when he taped the interview, he did not know Yeltsin would announce the decision to fire Chernomyrdin
on Monday. Kiselyov, who conducted the interview, recalled that Berezovsky flew back to Switzerland for more back treatmentsâwhich he might not have done had he known Yeltsin was about to act.
Itogi,
March 22, 1998. Berezovsky later told me that when he taped the interview, he did not know Yeltsin would announce the decision to fire Chernomyrdin
on Monday. Kiselyov, who conducted the interview, recalled that Berezovsky flew back to Switzerland for more back treatmentsâwhich he might not have done had he known Yeltsin was about to act.
22
Alessandra Stanley, “Shake-up in Russia: The Meaning; The Reformers Did It. No, Blame the Bankers,”
New York Times,
March 24, 1998, p. 8.
Alessandra Stanley, “Shake-up in Russia: The Meaning; The Reformers Did It. No, Blame the Bankers,”
New York Times,
March 24, 1998, p. 8.
23
Kiriyenko was confirmed on April 24 in a secret ballot by a vote of 251 to 25 in the 450-member chamber.
Kiriyenko was confirmed on April 24 in a secret ballot by a vote of 251 to 25 in the 450-member chamber.
24
Berezovsky said in an interview on NTV's
Hero of the Day,
April 16, that Yeltsin had called him and they had had a “friendly and constructive conversation.”
Berezovsky said in an interview on NTV's
Hero of the Day,
April 16, that Yeltsin had called him and they had had a “friendly and constructive conversation.”
25
Andrei Bagrov, “Yeltsin Threatens Berezovsky with Deportation,”
Kommersant Daily
, April 15, 1998, p. 1.
Andrei Bagrov, “Yeltsin Threatens Berezovsky with Deportation,”
Kommersant Daily
, April 15, 1998, p. 1.
26
Andrei Piontkovsky, interview by author, May 1998.
Andrei Piontkovsky, interview by author, May 1998.
27
Repeated attempts to fiddle with the currency led to panic and public distrust. The Soviet government decreed on January 22, 1991, that all fifty- and one hundred-ruble banknotes would have to be exchanged in three days in order to reduce the money supply, setting off a panic. Many people could not change their money in time. In 1993 Yeltsin's government stumbled badly over a plan to force everyone to change their Soviet-era rubles into new Russian banknotes. In addition, hyperinflation during the early 1990s wiped out the savings of millions of people. And on “Black Tuesday,” October 11, 1994, the ruble plunged 27 percent against the dollar. The lesson many Russians took from this period was, Keep your money in dollars.
Repeated attempts to fiddle with the currency led to panic and public distrust. The Soviet government decreed on January 22, 1991, that all fifty- and one hundred-ruble banknotes would have to be exchanged in three days in order to reduce the money supply, setting off a panic. Many people could not change their money in time. In 1993 Yeltsin's government stumbled badly over a plan to force everyone to change their Soviet-era rubles into new Russian banknotes. In addition, hyperinflation during the early 1990s wiped out the savings of millions of people. And on “Black Tuesday,” October 11, 1994, the ruble plunged 27 percent against the dollar. The lesson many Russians took from this period was, Keep your money in dollars.
29
Glifford G. Gaddy and Barry W. Ickes, “Russia's Virtual Economy,”
Foreign Affairs
, September-October 1998, p. 53. This important article called attention to the powerful distortions caused by barter and nonpayments.
Glifford G. Gaddy and Barry W. Ickes, “Russia's Virtual Economy,”
Foreign Affairs
, September-October 1998, p. 53. This important article called attention to the powerful distortions caused by barter and nonpayments.
30
Tax dodging was endemic, in part because the taxes were punitive and the code unreformed. However, economist Al Breach pointed out an additional factor. In an economy that was awash in barter transactionsâa factory would trade its refrigerators for a two-month supply of electricity or swap metal pipe for a truckload of socksâit was extremely difficult to collect taxes in cash. Breach calculated that cash made up only 60 percent of the tax revenues in 1997, and trying to extract more in the barter economy was like “trying to suck water out of a stone.” It was impossible in this environment to raise enough taxes to balance the budget, he said; the only thing to do was slash spending further, which is the one thing Russian politicians refused to do. Kiriyenko tried, but it was too late. Al Breach,
Russia: Now a Competitive Exchange RateâThe Revival of the Real Economy,
Global Economics Paper no. 22, Goldman Sachs, July 23, 1999. The problem of demonetization of the economy, the disappearance of cash, was severe and plagued enterprises as well as the government. Chubais said in Washington on July 21, 1998, that Unified Energy Systems, the electricity monopoly that he headed, collected only 14 percent of its payments in cash and 86 percent in barter, “which is awful.”
Tax dodging was endemic, in part because the taxes were punitive and the code unreformed. However, economist Al Breach pointed out an additional factor. In an economy that was awash in barter transactionsâa factory would trade its refrigerators for a two-month supply of electricity or swap metal pipe for a truckload of socksâit was extremely difficult to collect taxes in cash. Breach calculated that cash made up only 60 percent of the tax revenues in 1997, and trying to extract more in the barter economy was like “trying to suck water out of a stone.” It was impossible in this environment to raise enough taxes to balance the budget, he said; the only thing to do was slash spending further, which is the one thing Russian politicians refused to do. Kiriyenko tried, but it was too late. Al Breach,
Russia: Now a Competitive Exchange RateâThe Revival of the Real Economy,
Global Economics Paper no. 22, Goldman Sachs, July 23, 1999. The problem of demonetization of the economy, the disappearance of cash, was severe and plagued enterprises as well as the government. Chubais said in Washington on July 21, 1998, that Unified Energy Systems, the electricity monopoly that he headed, collected only 14 percent of its payments in cash and 86 percent in barter, “which is awful.”
31
The IMF loans were supposed to be linked to conditions that Russia would make key reforms, but the conditions were often softened or bent when Russian reforms fell short. Between the admittance of Russian to the IMF on June 1,
1992, and September 1, 1998, the International Monetary Fund provided Russia with about $18.8 billion. The loans approved in approximate dollar terms were as follows: a standby arrangement, August 5,1992, to January 4, 1993, $1.1 billion; systemic transformation facility, July 6, 1993, to April 10, 1995, $2.9 billion; standby arrangements, April 11, 1995, to March 26, 1996, $6.8 billion; extended fund facility, March 26, 1996, to March 25, 1999, $10 billion (not including the rescue package approved by the IMF in 1998, which was only partially disbursed). Andrei Illarionov, director, Institute of Economic Analysis, testimony before the House Banking and Financial Services Committee, General Oversight and Investigations Subcommittee, September 10, 1998.
The IMF loans were supposed to be linked to conditions that Russia would make key reforms, but the conditions were often softened or bent when Russian reforms fell short. Between the admittance of Russian to the IMF on June 1,
1992, and September 1, 1998, the International Monetary Fund provided Russia with about $18.8 billion. The loans approved in approximate dollar terms were as follows: a standby arrangement, August 5,1992, to January 4, 1993, $1.1 billion; systemic transformation facility, July 6, 1993, to April 10, 1995, $2.9 billion; standby arrangements, April 11, 1995, to March 26, 1996, $6.8 billion; extended fund facility, March 26, 1996, to March 25, 1999, $10 billion (not including the rescue package approved by the IMF in 1998, which was only partially disbursed). Andrei Illarionov, director, Institute of Economic Analysis, testimony before the House Banking and Financial Services Committee, General Oversight and Investigations Subcommittee, September 10, 1998.
33
More than twenty regions issued their own bonds. One of the more bizarre debt schemes was the agro-bond, a short-term debt paper that represented restructured federal agricultural loans to the regions. By some estimates $830 million in these bonds was outstanding at 1998 precrash exchange rates, and 90 percent of them later went into default. Sujata Rao,
Moscow Times
, April 27, 1999, p. 15.
More than twenty regions issued their own bonds. One of the more bizarre debt schemes was the agro-bond, a short-term debt paper that represented restructured federal agricultural loans to the regions. By some estimates $830 million in these bonds was outstanding at 1998 precrash exchange rates, and 90 percent of them later went into default. Sujata Rao,
Moscow Times
, April 27, 1999, p. 15.
34
The Crisis of the Russian Financial System: Key Factors, Economic Policies, and Initial Results,
Institute for the Economy in Transition, 2000, p. 26.
The Crisis of the Russian Financial System: Key Factors, Economic Policies, and Initial Results,
Institute for the Economy in Transition, 2000, p. 26.
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