The Oligarchs (39 page)

Once Mavrodi and Berezovsky began, others followed and Russia turned into a bazaar of easy money temptations. One widespread scheme, Russky Dom Selenga, carried as its motto: “Every grain of sand of your deposit, we turn into a pearl.”
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On a typical day of advertising in the popular
Moskovsky Komsomolets
newspaper, the First Financial Construction Company offered “up to 1,600 percent in rubles.” Another, ALD Trust, promised investors 500 percent on rubles, or 60 percent annual return on dollars. In a Moscow weekly free newspaper,
Extra-M,
the Mosimportbank offered 30,000 percent interest on five-year ruble deposits, although it was later pointed out the sum was a math trick taking advantage of the difference between simple and compound interest.
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The proliferation of easy money traps and lures crept into every corner of life. Soon shares of pyramid schemes were being traded in the Finance Ministry cafeteria, the very institution that was supposed to be policing them. In the cafeteria, employees could buy certificates for “Tibet,” AVVA or MMM. No one could dampen the frenzy; the ministry workers were caught up in Lyonya's dreams. Zlatkis said, “As soon as I emerged from my office, someone would catch me in the corridor, I mean some ministry official or employee, and would start asking me: ‘Bella, tell me honestly, what do you think, if I sell my
apartment and invest all the money in Tibet, will I be later able to buy an apartment for my daughter?' I began to explain that you will lose your apartment. But the woman said, ‘You don't want to help us!'” Zlatkis only slowly—too slowly—began to realize the frenzy had become an epidemic. Even the esteemed halls of the Russian Constitutional Court were not immune; court justices bought paper in an outrageous pyramid called Vlastilina. The mastermind was Valentina Solovyova, a one-time barbershop cashier who created her pyramid without any advertising at all, just word of mouth. She promised returns of 100 percent a month, a Zhiguli car for half the market price in the same period, or a Mercedes at one-third the price over three months. A river of cash began arriving at her offices. She used the cash to reward the first depositors in order to attract more. Yevgeny Kovrov, who later investigated the case and headed a government commission to represent the victims, told me that Solovyova's word-of-mouth approach was as evocative and phenomenally successful as Mavrodi's massive advertising. “The rumor about this firm spread all over Russia,” he recalled. The first car giveaway ignited a burst of enthusiasm. One person told a friend, and the friend came running. Vlastilina seemed to be especially attractive to the elite—pop star Alla Pugachova reportedly lost $1.7 million. Solovyova set a minimum deposit of 50 million rubles, and still people came. “People got that money together from entire factories,” Kovrov recalled, “and transported it there in bags. And, judging by the accounts of witnesses, they would sleep in front of her offices, making campfires.”
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Solovyova was convicted in 1999 and sentenced to seven years in prison for taking the ruble equivalent of $130 million from 16,500 victims, although no one knows where the money went and the investors got nothing back.

Zlatkis recalled that the frenzy finally seeped in to her own home. One day her husband asked her about the pyramids. “He couldn't understand why everybody around us was getting rich, and he was not.”

 

In July 1994, the Russian authorities began to raise questions about MMM. “Lyonya is getting on my nerves,” Yeltsin grumbled. The State Antimonopoly Committee asked television stations to stop broadcasting MMM commercials, to no avail. Then the tax inspectorate said one of Mavrodi's subsidiaries, Invest-Consulting, owed 49.9 billion rubles in taxes, payable immediately. Prime Minister Chernomyrdin
weighed in, saying, “We must warn those like Lyonya Golubkov and Marina Sergeyevna, the opportunities for easy money in the market will soon disappear.” But the voice of Chernomyrdin, who had presided over a growing backlog of wage arrears in the real economy, was faint in comparison with the wonderland of riches offered by MMM. On July 27, Mavrodi fired back in a newspaper advertisement: “So, the authorities do not like Lyonya Golubkov and Marina Sergeyevna. But do Lyonya Golubkov and Marina Sergeyevna like the authorities? No one's asked about that. Yet.”

The next day, the pyramid collapsed. The MMM certificates had been trading at over 100,000 rubles, but at 11:00 A.M., Mavrodi announced that the new price—which he alone set—was only 1,000 rubles. Thousands of angry shareholders blocked the Varshavskoye Shosse, the wide boulevard where MMM was located, and riot police were called out to control the crowds. Mavrodi issued a reassuring statement that investors need not worry, the share price would climb back up to 125,000 in a few months. He urged everyone to hold onto their papers. “We, unlike the state, have never deceived you,” Mavrodi declared. “And never will.” Many people were still prepared to believe Mavrodi. “The papers are saying MMM are charlatans, but I trust them over President Boris Yeltsin and his government any day,” a pensioner, Maria Vasilievna, told a reporter. “What has the government ever done for us, except trick us with their money reforms?”
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Days later, Mavrodi began to issue a new security, MMM “tickets,” which were emblazoned with Mavrodi's portrait. Hundreds of investors returned, hoping that the bubble had not really burst. They too were fooled. Mavrodi had been authorized to sell 991,000 shares, but in the end he deceived between 5 and 10 million people. He was later arrested for tax evasion in a high-profile police raid and was held two months. But he was released after he won an off-year election to parliament and thus received immunity from prosecution. He disappeared and was never prosecuted for the pyramid scheme; six years later Russian authorities said he was still being sought.
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The collapse of MMM threw into sharp relief the near total passivity of the state. Yeltsin and his reformers had let capitalism run untethered, and it had gone berserk. “The government had absolutely nothing to do with it, gave no guarantees, and will not interfere at all,” Yeltsin said after the crash of MMM. Zlatkis was overwhelmed and complained in June that proliferating pyramids were “out of control” and
“coming down on our heads like an avalanche.”
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Zlatkis told me the government didn't really have a clue what was going on; in the ministry, some of her aides even asked if she wanted help in getting one of Vlastilina's cars at half price. “No one understood anything, not even in one of the divisions of my department,” she recalled. Myslovsky recalled that he saw huge files on the cases, but the general prosecutor was ordered by someone in power at the time not to proceed. “The main slogan at the time was ‘get rich,'” he recalled. “The legislative base was very unclear. These companies were conducting very aggressive advertising, they had a lot of money, and the state reaction was weak, toothless.”
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Vyacheslav Mavrodi, Sergei's brother and partner in MMM, later told a television interviewer, “If the law enforcement bodies thought I was a swindler, why did they let me do it?”
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Zlatkis recalled, “I had a feeling of helplessness all the time. I knew perfectly well how it was going to end, and I couldn't do anything about it.”

Dmitri Vasiliev, the Chubais deputy, saw the episode in much darker terms. The reformers had neglected to build the institutions of a market, and as a result chaos was spreading. Vasiliev believed the Finance Ministry had “totally failed” to control the pyramids and was unable to regulate the financial markets. The derivatives used by Mavrodi were no more than “lottery tickets,” he told reporters the week after the collapse, “these scraps of paper are not securities.” Vasiliev warned that without stronger government regulation, “scandals will snowball.” As early as 1992, the reformers had discussed whether to build an independent securities commission, but no one had been interested. Now the wreckage of unbridled capitalism was strewn across the landscape. In the autumn of 1994, Chernomyrdin agreed to set up a securities commission, with Vasiliev as its chairman, to regulate the market. Mavrodi, Vasiliev later recalled, was “the mother of our commission.”

After Mavrodi ran into trouble, his top lieutenants from MMM came to see Zlatkis, demanding approval of a huge new share issue, knowing full well the proposal would be rejected. It was a trick—if the share issue was denied, Mavrodi would try to shift blame for his troubles to the government. Zlatkis saw through the ruse and stalled, saying that the papers were not in order. She asked one of the visitors, “Are you a lawyer or an economist?”

He replied threateningly: “Neither. I am an athlete. Target shooting is my line.”

The collapse of Mavrodi's pyramid destroyed confidence in Berezovsky's automobile alliance, but the real damage had begun earlier, in the spring of 1994. Mavrodi was a better huckster than Berezovsky. Promising instant returns, Mavrodi siphoned off the easy money, as did the other high-yielding schemes, and sales of the AVVA certificates fell off. Still, Berezovsky had done quite handsomely in the year of the pyramids; according to financial records that were made public later, AVVA had collected 25.3 billion rubles from selling its certificates in 1994, or about $15 million. Kadannikov and Berezovsky later put the total raised at $50 million, although that appears to include interest and profits from reinvestments. In effect, AVVA used the cash it gathered and immediately recycled it, speculating in privatization vouchers, high-yielding bank certificates, and other quick-money schemes, doubling and tripling the winnings. Easy money was easy.

Although the public may have believed during 1994 that it was seeing the birth of a “people's car,” in fact Berezovsky put the money elsewhere: in buying up partial control of the Avtovaz factory. Financial reports show that AVVA spent 6.1 billion rubles, or about $3.1 million, to buy a third of Russia's largest car factory, an astoundingly tiny payment for such a huge industrial asset. Berezovsky used two separate methods. First, AVVA used vouchers to buy shares in the factory. Second, AVVA was the winner of an August 8, 1994, investment tender for Avtovaz. The tenders were supposed to be competitions in which the winner made sizable investments in the future in the enterprise, but one official told me later that AVVA was the only bidder.
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At some point, Avtovaz then issued new stock, and a further chunk was given to AVVA. After all this, AVVA owned 34 percent of the factory. On July 23, just seven months after AVVA had been launched at the exhibition hall in Moscow, Berezovsky was placed on the elevenmember board of Avtovaz. The people's money had helped put him there. It was the perfect plot: he collected money from the public and used it to bootstrap himself and Kadannikov into private ownership of the factory. According to Yuri Zektser, who later became general director of AVVA, inside the company it was absolutely clear by the late summer of 1994 that the Berezovsky scheme had not collected enough money to build an auto factory. Moreover, negotiations with General Motors were bogging down because it feared the political risks of investing in Russia. (Also, there were signs of a war looming in Chechnya, and Russia went through a one-day currency panic in
October.) Kadannikov hinted at the difficulties on November 2, 1994, in a newspaper interview, suggesting that General Motors had proposed a tiny project to make twenty thousand cars a year, which “doesn't suit us.” However, he reassured people that “the anticipated absence of the foreign participation won't disturb the realization of the AVVA project.”
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What Kadannikov didn't say was that months earlier Berezovsky and he had used the people's money to buy Avtovaz shares, and there wasn't going to be a “people's car” any time soon. Then, in mid-January 1995, Kadannikov publicly acknowledged a delay, saying the project would be scaled down; in mid-February, he said it was impossible to start building the factory and that AVVA had raised only $50 million out of a planned $300 million. The final acknowledgment that the project was dead came in a May newspaper announcement that AVVA had held its annual meeting on April 7, 1995. The announcement blamed “negative tendencies in the economy and social sphere in the middle of 1994” for the “unfavorable investment climate.”
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The people's car would have to remain the people's dream. But the people certainly would not get their money back. Berezovsky's scheme had been structured so carefully that, in the end, neither he nor the buyers of his certificates had a list of who held the papers. That was the idea—no list, no refunds, no problems. The certificates were worthless unless the bearer could find the right place and time to exchange them for a genuine share of AVVA. At the 1995 annual meeting, and at every subsequent meeting, it was also decided not to pay dividends. In fact, in the following six years, AVVA never once paid dividends, despite the millions of tiny coupons it had distributed attached to the certificates. The dividends were as much an illusion as the “people's car.” The promised 100,000-car lottery was stopped after three offerings and 14,000 cars.

The promises that AVVA made to the people who gave their money were broken, repeatedly. The real winners were Berezovsky and Kadannikov.
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In 1996, when asked what happened to the people's money and to AVVA, Berezovsky replied, “It has lived up to every promise it gave. We collected about $50 million, then we made this money work, and at least it did not melt down.... We succeeded in preserving the money, we did not spend it on our needs, on entertainment and pleasure.”
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Instead, they spent it on buying their own car factory.