The Oligarchs (55 page)

Years later, a top executive at one of the three banks told me that “Khodorkovsky was buying Yukos with the money of Yukos. They didn't pay their taxes and decided to accumulate the money, and the deal was, later on they would decide what to do with the taxes. That's what made us so angry—no, I would say, mad. They stole the company.”

At some point, Pyotr Aven, president of Alfa Bank, went to see Chubais. They were old acquaintances. Aven had been present when Chubais first met Gaidar, and he had been a minister in Gaidar's government. Despite Aven's appeals, Chubais would not budge on the issue of using the GKOs for the deposit. The three bankers were out of luck. Chubais and Aven ruined their friendship over the Yukos auction. Chubais told me later that his chief concern at the time was getting cash for the budget. He added, “One can make claims that Khodorkovsky wasn't using the right money, that he was using Yukos' own money, and one can say he was using some of his deposits which the Ministry of Finance had placed with him, and that his sources had been formed in a wrong way. But my criteria was simple: besides all the political thoughts, I desperately needed money for the budget.”

Chubais got the money, but where did Khodorkovsky find it? The answer is unknown. Khodorkovsky by this time had a financial and political network that stretched across Russia and abroad. He was on good terms with Muravlenko, the president of Yukos, before the auction, and Muravlenko had helped Khodorkovsky lobby the government against foreign investors. But it is not clear whether Yukos had such cash—the movement of large amounts of money is often hidden in shell companies and not evident from official annual reports and audits. Khodorkovsky said he borrowed money from other tycoons. “Smolensky gave us money, Most Bank gave us money,” he said, adding that Menatep also borrowed from several defense factories which it had worked with in the past.
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“Yukos at that moment had wage debts, six months' wage arrears, they didn't have any money at all,” he claimed.

Kokh later hinted that Khodorkovsky had indeed exploited his connection
with Yukos to raise the cash to buy Yukos. He suggested Khodorkovsky pledged future oil deliveries for loans. The three other bankers “could not collect as much money as Yukos and Menatep could obtain, for instance, against oil futures,” Kokh wrote. “All sorts of things become possible when such an oil company joins forces with a large bank. This made people angry, and they started repeating angry mantras like ‘if we could only separate Yukos from Menatep' and the like. But strategic alliances are legal and play a positive role.”

On December 8, Khodorkovsky walked away with his prize. His Laguna front company paid $159 million, just $9 million over the starting price, for the block of 45 percent of Yukos shares. He won the investment tender for the 33 percent block of shares by offering just $125,000 more than the starting price of $150 million.

On the same day as the Yukos auction, Potanin snapped up another oil company, Sidanco, winning 51 percent of the shares for $130 million. The two oil generals, Alekperov and Bogdanov, also won loans-for-shares auctions for pieces of their companies, Lukoil and Surgutneftegaz respectively. The Surgut auction was an especially graphic example of how the Chubais ideals of openness and competition were ignored in practice. Outsiders were warned in advance by the the Surgut management not to make a bid, and the airport in Surgut was closed that day, so other bidders could not fly in to buy part of the company. They did not.
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The final oil prize of the year was claimed, at the last minute, by Berezovsky. In the summer of 1995, he abruptly parted ways with Kadannikov, the Avtovaz factory director who had been his partner in AVVA and in the Zhiguli deals. Kadannikov, facing a growing tide of debt and backlog of wages at the factory, unexpectedly demanded a huge repayment from Logovaz for an earlier shipment of thousands of cars. Berezovsky didn't flinch. He needed to raise $4 million overnight and he found it, selling off part of Logovaz and paying the factory on June 22, 1995. By this time, Berezovsky had already put himself into a higher orbit. He had taken on the Aeroflot accounts and taken over the ORT television channel, and now he was hankering for a piece of the oil industry sell-off.

Yuli Dubov, the author of
Bolshaya Paika,
the roman à clef about Berezovsky, told me once that Berezovsky only really functioned in a crisis environment. Berezovsky habitually waited until ten minutes after a deadline to even begin to think about how to act. “He is one of
those people who can exist calmly and comfortably only in extreme situations, in which not a single other person would feel comfortable,” Dubov told me. He described Berezovsky as among those who never rest, who change things by the sheer force of their energy, who “constantly have a nail in their chair.”
⁴¹
It was this Berezovsky who, in late summer and early autumn 1995, rushed into the loans for shares giveaway.

He lobbied the Kremlin to hastily slice off a new vertically integrated oil company, Sibneft, which included Russia's largest, most modern refinery in Omsk, and a Siberian production association, Noyabrskneftegaz. Korzhakov recalled that Berezovsky's pitch was that he needed oil revenues to support the television channel. Korzhakov said, “I am not very good at economics” and gave his approval. He and a top Yeltsin aide called a regional governor and the minister of energy to “put in a word for Berezovsky,” Korzhakov said.
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If he did not know much about economics, Korzhakov was clearly drunk on power. “Berezovsky needed my okay, for if I had been told he was founding an oil company without my knowledge, I would have instantly made short work of him,” Korzhakov later said.
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Yeltsin signed the decree creating Sibneft on September 29, 1995, making it Russia's sixth-largest oil company. With Kokh's help (he drafted a key document for Berezovsky in the middle of the night to meet the next day's deadline), the controlling block of shares in Sibneft was hastily thrown into the loans for shares auctions. It was scheduled for December 28, 1995, to be the last. The starting price was $100 million.

Like the other tycoons, however, Berezovsky didn't have that kind of money, nor did he have much time. He had met the superfinancier George Soros, who was already spending hundreds of millions of dollars on philanthropy inside Russia, supporting civil society and helping Russian scientists, writers, and teachers through the difficult early years after the Soviet collapse. Alex Goldfarb, the biologist who had once been a link between dissidents and foreign correspondents, was close to Soros and also knew Berezovsky. Desperate to raise money, Berezovsky visited Japan, Germany, and New York, looking for loans to help him buy Sibneft. But he ran into a wall of refusal. Goldfarb, who attended Berezovsky's presentation to Wall Street money men, recalled, “Investors were afraid it could all fall apart. At that time, Berezovsky was no one.”

After Berezovsky left New York, Goldfarb helped him pass along a thick file of documents about Sibneft, some of them crudely sketched and typed, to the Soros financial team in New York. Berezovsky later told me he had been seeking $50 million from foreigners for the purchase of Sibneft.
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He had asked Soros for $10 million to $15 million.
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Goldfarb told me that word came back in a few days from New York: no thanks. Soros was not even willing to put in a million because he felt “the risk was too great,” Berezovsky said. Berezovsky recalled that Soros told him “I cannot give you even one dollar” because he was worried that Zyuganov, the Communist Party leader, would be elected president and then renationalize private property. Berezovsky eventually found the money for Sibneft with help from Smolensky.
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On the day of the auction, Berezovsky won with a bid just $300,000 over the starting price of $100 million. A few years later, the company had a market capitalization over $1 billion.

 

Throughout 1995 there were hints of what the tycoons were up to, but never a full picture. Perhaps a full picture was impossible, since the always secretive magnates were never a cohesive group. Their overlapping alliances and frequent conflicts subdivided and recombined them into several amorphous groups. The clans of Russian capitalism were just beginning to coalesce in 1994–1995, laying the groundwork for what would later become a full-fledged system of rival tribes—powerful and well-financed groups of politicians, factory directors, moneymen, journalists, and corporate secret agents.

Lumbering out of the fog of confusion and chaos in the first years, a new capitalist leviathan was visible, but its true nature was hard to discern. Just two weeks before Potanin's cabinet appearance in March to pitch loans for shares, one member of the Sparrow Hills club, Oleg Boiko, spoke publicly about some aspects of the tycoons' private discussions. Boiko described creation of a “big eight” of financial-industrial giants who were contemplating a greater role in politics. Boiko named companies, not people: Logovaz (Berezovsky), Menatep (Khodorkovsky), Stolichny Bank (Smolensky), Alfa Bank (Friedman), Mikrodin (Yefanov), and several others associated with Gazprom. Boiko, however, did not include the fast-rising Potanin or Vinogradov. Without mentioning their weekly meetings on the Sparrow Hills, Boiko accurately described the early political mood among the
tycoons—that they lacked a clear-cut political patron, and they were nervous about further upheavals. They wanted normalcy. But Boiko's comments, which stirred much talk about the “Magnificent Eight,” failed to point to the loans for shares grab just around the corner. Boiko did not participate in loans for shares and later slipped from prominence.
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The most prescient of those who discovered the rising clan structure of Russian capitalism in 1995 was Olga Kryshtanovskaya. Usually wearing her hair pulled back in a bun and evincing a patient, tutoring manner, Kryshtanovskaya often resembled a very proper schoolteacher. But in fact she was a laser-smart sociologist. She made a specialty out of studying the Russian elite, and she was perfectly positioned to see the leviathan coming out of the fog. In the early 1990s, she carried out her research by going from person to person, trying to understand the business practices, finances, and mores of the “new millionaires.” Kryshtanovskaya and her band of student researchers conducted long interviews with dozens of businessmen. They were invited by some into luxurious marble palaces and by others to meet on a park bench. She found one future industrialist, Kakha Benzukidze, living in a one-room apartment and sleeping on a cot. Kryshtanovskaya painstakingly traced how they had made their first money and how they had made it grow. She compiled lists of the wealthiest businessmen and lists of the biggest banks, and then she made cross-checks and diagrams, trying to piece together companies and empires. Then she carried out still more interviews to find out how they worked. Kryshtanovskaya spotted the emerging clan structure and wrote a penetrating piece about it, brilliantly summarizing the history of the late 1980s and early 1990s. The essay appeared in
Izvestia
in January 1996 under the headline, “The Financial Oligarchy in Russia.” It was a turning point that brought the tycoons' actions into focus. More than just wealth, they were amassing political clout. Kryshtanovskaya pioneered the idea that the tycoons were becoming an oligarchy—a small group men who possessed both wealth and power. She spotted the rise of Potanin's Uneximbank, the power of Khodorkovsky's Menatep, and the significance of Gusinsky in Luzhkov's realm, although Berezovsky did not appear on her list.

Much of what the outside world knew about Russia in the early 1990s was focused on Yeltsin and his power struggles, which dominated the headlines. But two diplomats stationed in Moscow, both
veterans of the Soviet period, also spotted the rise of the clans in the summer and autumn of 1995. Glenn Waller, a shrewd Australian diplomat who had spent nearly a decade in the former Soviet Union and Russia, wrote a lengthy and perceptive cable in May on Russia's “financial-industrial elite” that captured virtually all the key players of the Sparrow Hills club. Moreover, Waller nailed down the marriage of wealth and power, the merger of financial and political interests, which was at the core of how Potanin, Khodorkovsky, and Berezovsky were functioning at the time. He warned that although privatization had given the new tycoons fabulous wealth, they should not be regarded as resembling Western titans of capitalism. “The relationship between business and government in Russia remains very close,” he wrote, “indeed incestuous. Even the ‘new' business elite grew out of the Soviet system—most (if not all) of the private financial groups made their first capital through their privileged access to party and Komsomol funds or through political contacts (in Russian:
blat)
in government ministries. Today, they continue to rely on government favors.... Big business in Russia continues to coalesce around powerful political leaders.”
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A hard-nosed skeptic, American diplomat Thomas E. Graham was back in Moscow for his second tour of duty in the summer of 1995. Graham was trying to explain to himself—and to policymakers in Washington—how Russian capitalism was morphing into rival clans and warring financial-industrial groups. What Graham saw did not neatly fit into the Washington idea of brave reformers led by Yeltsin and Chubais fighting off the Communists.

One day, the word came back from Washington: please don't use the word “clan” anymore. The State Department bureaucrats didn't like it; “they said ‘clan' has an anthropological meaning; you can't apply it to Russian politics,” Graham recalled. So he fixed the language in his cables to read “elite groups often referred to in Russia as clans,” and in the summer of 1995 he began to dig deeper. In the autumn, he asked for permission from Washington to publish an article in Russia spelling out his unvarnished views on what was happening. Graham told me he did not expect approval because a diplomat was supposed to be discreet; it was not very often that a political counselor was permitted to publish strong views of his own in the country where he was serving. Public statements were for presidents and secretaries of state. But the approval came and Graham wrote,
without the usual diplomatic niceties, about what he saw happening around him. The essay was published on November 23, 1995, in the newspaper
Nezavisimaya Gazeta
, which had recently started receiving financial backing from Berezovsky. Graham declared that “a new regime has emerged in Russia” characterized by a stable, but vigorous, contest between rival clans. The essay, which filled an entire page of the newspaper, was the talk of Moscow for days. Graham argued that the real balance of power in Russia was not Boris Yeltsin against parliament, not reform against revanche, but the noisy pushing and shoving of the clans. And he used the word “clan” without hesitation. Graham outlined five major clans, including Chernomyrdin's energy lobby, Luzhkov's Moscow group, the Korzhakov “party of war,” and Chubais together with the tycoons; he told me years later that he erred by including the hapless Agrarian Party as fifth. But in retrospect, the essay precisely captured the emerging structure, mechanics, and methods of financial and political tribes.