The Oligarchs (43 page)

One of the first things Luzhkov did on becoming Popov's successor was to fire Piyasheva and bury her liberal ideas. “He just got rid of the
whole department,” she recalled, “and he took everything into his hands.” Piyasheva saw—accurately—the side of Luzhkov's character and mentality that wanted to be a
khozyain
, the evocative Russian term for the leader of a given social domain, a home, a village, an enterprise, or a country. Luzhkov was a
khozyain
who wanted to extract a price from the city's businesses. Through leases, contracts, and rent obligations, every player in the Moscow economy would be captive to Luzhkov. “Their concept was directly opposite to mine,” Piyasheva told me. “When I was talking about fast privatization, Luzhkov would say it was impossible to give property to people just like that. Don't give anything for free! Everything should be managed. Luzhkov is the owner. He can close down any restaurant and any hotel—he can change an owner. He has the authority. He is the
khozyain
. And as the
khozyain
, he manages his household. If something dissatisfies him, he changes it. And he keeps full order. It is a feudal way of organizing things.”

After disposing of Piyasheva's radical ideas, Luzhkov's next move was to take on Chubais and block mass privatization in the capital. In the summer of 1993, Chubais, who was then trying to get his legislation through the recalcitrant Supreme Soviet, came to Luzhkov's office. They drank tea. In appearance, they were contrasting figures: Chubais, tall, with his gangly posture and youthful self-assuredness; Luzhkov, short, pugnacious, with a bald cannonball of a head and rugby-players' build. Both men had, once, accepted the Soviet system and then found their own path out of it; both were at the time supporters of Yeltsin, who was facing an increasingly tense revolt in parliament. Quietly, Luzhkov told Chubais that, although they had been allies in the past, he could not support mass privatization. There was no money in the country, so the factories would be sold for nothing, he complained. Besides, I think that Luzhkov may have had an unstated reason for opposing voucher privatization: he wanted to pick the new owners of property in Moscow, not leave it to the winners of a voucher auction, beyond his control. “Let's agree that privatization cannot be conducted this way—property cannot be sold that cheaply,” Luzhkov appealed to Chubais. “We will get a speculator instead of a
khozyain
.”

Chubais was not impressed. He wanted to break the grip of the
nomenklatura
on property, and Luzhkov symbolized that grip. They agreed on nothing, Luzhkov recalled.
¹³

Luzhkov supported Yeltsin during the events of October 3–4, 1993, when Yeltsin violently faced off against the rebellious parliament, shelling the White House where his nationalist and conservative critics were holed up, accompanied with armed hoodlums. The confrontation left 145 dead. Luzhkov sat in on Yeltsin's crisis meetings and cut off water, telephones, and electricity to the besieged White House during the confrontation. Just as Yeltsin used the events to write a new constitution giving him broad powers, Luzhkov too used the crisis to impose a new political structure on the city, which was confirmed by voters in the December elections. Instead of the unwieldy 498-member city council, Luzhkov, with Yeltsin's backing, created a new thirty-five-member city Duma, or legislature, which proved almost totally compliant in the years ahead.

After the October events, Luzhkov again appealed to Chubais to stop mass privatization. Chubais refused. Luzhkov declared war. “From now on, you are my ideological enemy and I am going to fight you and the methods you are instilling in the country with all possible means,” he said.
¹⁴
Privatization of large enterprises in Moscow then began to slow, and Luzhkov bent the city to his own will. He simply refused to follow the national privatization program. He went to Yeltsin on November 24, 1993, and argued that Chubais was selling off the country “for a song.”
¹⁵

Luzhkov was no stranger to the failures of the Soviet system and saw himself as an advocate of the market. But Luzhkov's understanding of the market, and of private property, was that it had to be managed by a
khozyain;
property was earned by hard work, not received for a token price. When it came to putting property into private hands, Luzhkov wanted to know the capabilities of his new owner first, while Chubais wanted to give away the property first and let the market sort out the effective owner later on. This went to the heart of their vastly different models of capitalism for Russia. Luzhkov said that “a man works with initiative not because he has property but exactly because he does not have property, yet has the right to earn it with productive labor.” Luzhkov scorned the new owners that Chubais created as “parasitic capital”—people who didn't know the first thing about factories and manufacturing but put their money in Swiss bank accounts or into “foreign villas, yachts, cars, and other pleasures.” In Luzhkov's world, these were never going to be good owners, they would never meet his definition of a
khozyain
. “Do you think
such people—whose wealth fell on their heads—could turn into effective owners, organizers of industrial production? Of course not,” Luzhkov said. “They felt they were ‘caliphs for an hour' and were trying to exploit this hour to the maximum, pressing everything possible out of their new property.”
¹⁶

Luzhkov still believed in some aspects of the old system, including state subsidies, and he was not allergic to state ownership of industry, whereas Chubais sought to raze the command economy to the ground. Years later, Luzhkov continued to pump subsidies into the ailing Zil truck factory to keep it alive, but over time this approach did not work. Luzhkov abhorred the suddenness and seeming haste of shock therapy; it offended his sense of order. “Chubais is a radical,” Luzhkov said. “He thinks in extremes. One moment, he opens the lid of the coffin, the next he is hammering the last nail into it. In his life everything is like this—the last blow on something or someone. I prefer to move by steps and not by revolutionary, radical leaps and bounds.”
¹⁷

Most importantly, although he did not talk about it openly, Luzhkov did not want to lose control of the money. As he built his empire, every storefront and every factory was a potential source of revenue. And if the property was to be doled out by the murky, ad hoc decisions of city hall bureaucrats, rather than in open auctions, the possibilities for corruption were greater.

The confrontation with Chubais gathered steam in the spring. At a press conference on February 11, 1994, Luzhkov vowed not to allow the national privatization program to be carried out in Moscow and blasted Chubais, saying that he had privatized Russia “the way a drunkard sells off all his possessions in the street in order to buy booze.” The “drunkard” phrase stung. Chubais replied that Moscow had the worst privatization record in Russia, with only 2 percent of the large businesses privatized. Chubais fumed: “This is bureaucratic lawlessness that is a violation of the rights of the simple person.” Privatization, Chubais added, takes “from the hands of the high-level bureaucrat the property that he truly does not want to let go of, the property that was the foundation of his power for decades.” On March 23, 1994, Chubais announced that he would order fifty factories in Moscow auctioned off despite Luzhkov's objections.
¹⁸
Then on April 1, Luzhkov struck back, suspending the registration of enterprises as joint stock companies, a critical prelude to privatization. Chubais accused the mayor of breaking the law. He appealed to the general
prosecutor, demanding that Luzhkov be charged with criminal negligence. Luzhkov refused to budge. Prime Minister Chernomyrdin ordered Luzhkov to fall in line with the national program, and Luzhkov still refused. The quarrel was settled on June 10, 1994, when Yeltsin announced that Luzhkov had won. Yeltsin said at a news conference that efforts to reconcile the two had failed, so he ordered the government “to leave Moscow alone.”
¹⁹
The move was widely seen as expressing Yeltsin's gratitude for Luzhkov's support during the battle with parliament the previous October. A bitter Chubais washed his hands of the capital. “In Moscow we see so many breaches of the law, so many breaches of the constitution, so much corruption that I can have nothing to do with it,” he said.
²⁰

The decision was a critical victory for Luzhkov on the path toward building his own municipal empire. Taking control of the city's property—storefronts, office buildings, factories, parking lots, hotels, theaters, schools, and more—gave Luzhkov an important source of revenues and power.

In the days of hyperinflation, cash lost its value rapidly, so Luzhkov found other currency with which to make deals. He leveraged, bartered, and traded his real estate for the things he needed for the city. These informal trade-offs were not necessarily wrong or illegal. The idea had been tested in Luzhkov's early dealings with Gusinsky, in which the city gave away buildings in exchange for renovation and a return “gift” of half the real estate. The trade-off gambit became standard procedure. For example, in the mid-1990s, Inkombank had grown to be Russia's third largest bank, and its largest commercial bank. The president, Vladimir Vinogradov, wanted to set up his corporate headquarters in a rundown prerevolutionary building near the Kremlin. The city simply gave the building to Inkombank in exchange for a promise to restore it and a long-term lease. Two years later, when I visited, the headquarters building gleamed with an elegant, turn-ofthe-century look. Luzhkov came to the ribbon cutting. A small fifteenth-century church in the square, just in front of the bank, was also restored, at a cost of several million dollars, by Inkombank. Vinogradov, who had been among the early leaders of the cooperative movement, became a Luzhkov backer and donated twenty-four restored icons from the seventeenth and eighteenth centuries to the cathedral project. Luzhkov bestowed Vinogradov with a city award. Vinogradov contributed to Luzhkov's pet project to build apartments
for Russians living in Sevastopol. The bank won city accounts and financed city projects, such as demolishing the unsightly five-story Khrushchev-era apartment blocks.
²¹

This cozy relationship was reenacted over and over, especially with Vladimir Gusinsky, who became the most prominent of the bankers allied with Luzhkov. Luzhkov described Gusinsky as a business “partner” in this period.
²²
Gusinsky located his headquarters in the mayor's high-rise; city workers were paid from Gusinsky's Most Bank and withdrew cash from automatic teller machines placed in the lobby of a building housing city offices. In 1994 Gusinsky's bank held a significant portion of the city's revenues, including deposits of the departments of municipal housing, licensing, education, architecture, finance, international relations, traffic police, and city militia, among others.
²³

Luzhkov's city government leased out property for a nominal sum, but then the city bosses made unwritten demands not in the lease: to plant trees, rebuild a hospital, pave a highway, set up a kindergarten. The side deals were more important than cash. In 1994 Luzhkov was anxious to clean up an old toxic dump, which he called an ulcer on the city. Wastes had been accumulating there for decades and the dump was described by one specialist as an ocean of contamination. Luzhkov turned to a privatized dump truck company, Moscow Mechanized Construction Number 5, which agreed to take on the hazardous task of removing the poisonous eyesore. The company removed 2.6 million cubic yards of soil and replaced it with clean sand and earth, working around the clock for two years. But the company, which primarily worked on city housing construction sites, also needed Luzhkov's help. It had bought a $10 million fleet of new dump trucks from Volvo but still owed $3 million, which it could not pay. Luzhkov came to the rescue, arranging a loan at 4 percent interest from a Moscow bank, when market interest rates were far higher, so the firm could settle the debt. When the toxic waste dump was cleaned up, Luzhkov held a ceremony to mark the accomplishment and handed some workers keys to new Zhiguli cars and new apartments as prizes.
²⁴

Mikhail Moskvin-Tarkhanov, a member of the city Duma who had been among the Moscow reform democrats in the early 1990s and later became a Luzhkov loyalist, said the mayor essentially invented his own substitute for the Soviet command economy. Moskvin-Tarkhanov
described it as “soft administration and strong economic regulation.” He explained: “That is, we have a soft administrative system when we can first say what we want, then propose, then force, and finally punish.”
²⁵
Pavel Bunich, an adviser to Luzhkov who had worked with him in the Soviet years on the idea of self-financing for factories, made no secret of the fact that Luzhkov had figured out how to squeeze Moscow's new businessmen. “Luzhkov knows how to ‘sweat' sponsors, but he also knows how to thank them. All bankers and entrepreneurs know: money in the morning, and in the evening they can get privileges on rent, city orders, credits, or loans.”
²⁶
Bunich added: “Luzhkov has certain levers that make it possible for him to thank sponsors. If you are a businessman, it would certainly be better to have an office in the center near the Kremlin. Luzhkov can do it for you. Luzhkov can establish rent from zero—skywards.”
²⁷

Alexei Kara-Murza, a liberal philosopher and politician in Moscow, told me once, “The problem does not lie in the fact that Luzhkov is so unique, but that Moscow is so unique in Russia.” The city floated on rivers of capital that simply did not exist anywhere else in Russia. In 1997, five years after Luzhkov became mayor, the city reaped 25 to 30 percent of the taxes of the whole country but had only 6 percent of the population. Of Russia's twenty-five hundred banks, seventeen hundred of them were in Moscow; of the top twenty-five banks, all but one were in the capital, and they held 80 percent of the deposits. Eighty percent of nationwide television advertising originated in Moscow. Muscovites were twice as likely as city dwellers on the whole in Russia to travel abroad, and more than twice as likely to own a telephone, a personal computer, a microwave, or a credit card. Moscow was the citadel of Russian capital, and the rush of riches became so strong that even St. Petersburg, Russia's second-largest city, seemed a sleepy backwater by comparison.
²⁸