The Oligarchs (64 page)

Smolensky eschewed loans for shares, except to serve as a financier for Berezovsky. But Smolensky also reaped rich rewards for his role in the election. He had increasingly set his sights on becoming Russia's largest private commercial bank, and his prize came late in 1996. The formerly state-owned Agroprombank, one of Russia's largest banks with 1,254 branches, was failing due to poor management and the stagnation of Russian agriculture. A Central Bank official told me at the time that Agroprombank was within six to eight weeks of being closed. The government couldn't afford a bailout, nor could it close the bank, which had branches in the farm belt where the Communist
and Agrarian Parties dominated. So the state announced a competitive tender, but only two banks submitted bids. Smolensky walked away with the bank for $24 million, defeating Bank Imperial, which was backed by Gazprom. “I was 99 percent sure I would win,” Smolensky acknowledged. He pledged to provide $180 million in loans to farmers at low interest rates over the next five years. But the prize for Smolensky was the branch network—it would help him make a giant leap toward becoming the largest private retail bank in Russia. I was told by another banker that properly constructing a new bank branch in Moscow required about $2 million. Smolensky had just purchased 1,254 new branches for the equivalent of one for every $19,000 of his investment. The only bank with more branches would be Sberbank, the old state savings bank. Smolensky renamed his bank SBS-Agro.

The Davos Pact had another unexpected impact. It demonstrated that television commanded enormous political influence in the new Russia. The great pioneer was Gusinsky, who had tasted this power of television in 1994–1995 with NTV's critical coverage of the Chechen war. But the election had made it even more vivid: the television channels could create and destroy. Their next victim was General Lebed, whom Yeltsin appointed to head the Security Council. He had signed an important cease-fire deal with the Chechens in August but grew outspoken and insulting as Yeltsin's heart surgery loomed. Sensing a power vacuum in the Kremlin, Lebed was speaking about Yeltsin as if he were already gone. Having been built up as a serious candidate by ORT and NTV, Lebed was unceremoniously crushed by the same channels, which now broadcast unflattering stories about him. NTV aired videotape, some of it admittedly eighteen months old, showing an extreme nationalist and fascist group known as the Russian Legion marching in St. Petersburg and suggested that these were Lebed's forces. Lebed was fired by Yeltsin on October 17. Andrei Richter, who taught journalism at Moscow State University and headed a media law center there, said the television networks had served as the Kremlin's attack dogs. “There is a word,
Fas!
when you have a dog and you let it attack someone,” he said. “It means, ‘Go ahead, kill! Bite!'”
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Berezovsky had no qualms about this; political influence was his main benefit from ORT. But Gusinsky began to feel doubts that matured in later years into full-fledged regret. When I asked him to look back at the events of 1996, he said his support of Yeltsin was “a conscious decision—a wrong decision.”

“I think we were learning as a society,” he said, “and I was learning together with the rest. We were learning that no noble aims can be reached by dirty means. I am certain of this today.”

After the euphoria of the summer campaign, Chubais ended the year on a difficult note. Yeltsin admitted openly for the first time that he needed heart surgery, which was scheduled for November. Chubais desperately wanted to work outside of government but “to my biggest sorrow” was pressed into becoming Yeltsin's top aide in the Kremlin. “I was appointed head of the presidential administration, but there was no real president,” Chubais recalled. “Physically, there was no president.” No one knew if Yeltsin would survive the surgery. Instead of a fast start to Yeltsin's second term, Russia went into a long winter period of stagnation. The old man hibernated again.

Chubais began to think that maybe it was time to change the rules of the game.

T
HE WINTER MELTED into a spring season of promise in early 1997, and once again Boris Yeltsin rose from adversity. After risky heart surgery in which his rib cage was opened and five arteries were replaced, Yeltsin spent months recovering away from the Kremlin. Anatoly Chubais, chief of the presidential administration, was effectively the acting president, surmising what Yeltsin might do but with no way to ask, no one at the other end of the phone. His critics mocked him as “regent,” a civil servant behind the throne, which is exactly what he was. The throne was empty. “It is monstrously difficult to run the president's administration in his absence, a very unpleasant occupation,” Chubais confessed.
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Yeltsin had lost fifty-seven pounds by the time he officially returned to the Kremlin on December 24. “Good morning,” he greeted the guard in a slow, breathless voice. “I'm in a good mood, in good health, ready for the fray.” But he spoke too soon. Yeltsin fell ill with pneumonia and his return was delayed nearly two months. Finally, he launched his second term in March, appointing Chubais first deputy prime minister and giving him broad authority over the economy, including the powerful portfolio of finance minister. Yeltsin then sent
his influential daughter Tatyana Dyachenko to Nizhny Novgorod to persuade the young reformist governor there, Boris Nemtsov, to accept a post as deputy prime minister in Moscow, alongside Chubais.
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Nemtsov had caught Yeltsin's attention years earlier when, as a young physicist, he led demonstrations against a nuclear power plant during
perestroika.
After Yeltsin appointed him governor of the region, which was heavily dependent on the defense industry, Nemtsov earned a reputation as an economic reformer. He quickly privatized small business and experimented with change on the hidebound Soviet-era collective farms. Tall and exuberant, with a perpetually youthful manner, Nemtsov was never afraid to speak his mind. He once told me that Russia desperately needed young people in leadership. “We need to get rid of the drunk old men at the top,” he said.
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Nemtsov took up Yeltsin's offer to become a deputy prime minister in Moscow in March 1997. He and Chubais, dubbed the “young reformers,” heralded a new activism, a fresh start for Yeltsin's second term. They were emboldened by signs the economy was perking up after so many years of decline. The sky-high interest rates on short-term government bonds, the superlucrative GKOs, had subsided to reasonable levels after the election. The gates to foreign capital were open, not only for the government but also for Russian companies. The spring brought a Russian stock market boom, which in turn gave rise to a young, prosperous, and lively new class of Moscow professionals in the brokerages and exchanges. Chubais was especially proud that hyperinflation had finally been quenched. “Let it be etched on my gravestone as one of the most impressive achievements of my life,” he said.
⁴
But intractable problems remained; millions of people were still paid months late. In many parts of Russia outside of Moscow, real money had disappeared, and a medieval economy of barter had taken its place.

From the outset, Nemtsov declared that his goal was to vanquish “bandit capitalism.” Nemtsov often, and gleefully, declared, “I am for people's capitalism.” In his first months in office, he tried to show what he had in mind. He ripped up an outrageous sweetheart deal giving huge rewards to the management of the natural gas monopoly, Gazprom, which was partially owned by the state, and demanded better terms. In a bit of showmanship, Nemtsov got Yeltsin to sign a decree ordering government bureaucrats to give up their cushy foreign-made limousines and drive Russian cars such as the Volga, a
chunky sedan manufactured in Nizhny. Yeltsin, proud of his young protégé, gave up his Mercedes for a while and rode in a Zil limo used for Soviet Politburo members. But eventually he went back to the Mercedes. Nemtsov also pushed through a measure calling for high-ranking government officials to disclose their income, a novelty for a political elite nurtured on secret payoffs and offshore bank accounts. Nemtsov and Chubais promised to junk the system of “authorized banks” that the tycoons had exploited for easy money. They also promised to end wasted subsidies on housing and to reform the mammoth energy monopolies. Nemtsov's showy, populist initiatives attracted wide attention, and his poll ratings zoomed upward. He was often mentioned as a possible successor to Yeltsin. However, the “young reformers,” Nemtsov and Chubais, took criticism from their own ranks that their agenda was shallow. Dmitri Vasiliev, the Chubais privatization deputy who became head of the federal securities commission, privately argued to Chubais that the second term was a golden opportunity to strengthen those vital institutions—rule of law and market regulation—that they had neglected at the outset of “shock therapy.” But Vasiliev's voice went unheard.
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In April, Nemtsov met individually with the oligarchs. “I explained my intention . . . to establish new rules,” he said—from now on, the government would be open, transparent, and competitive. No more rigged auctions. There would be open tenders for everything, even provision of army rations. What's more, he told the bankers that he and Chubais wanted to focus on creating a new middle class. The bankers replied enthusiastically that they would support him, especially in his desire to create open, above-board rules of the game. Nemtsov recalled the oligarchs' lament that their previous wars—the
kompromat
and media combat, violence, theft, and deception—were a waste and they wanted to leave those days behind.
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It was all nice talk. In fact, Nemtsov was suggesting nothing less than dismantling the system of oligarchic capitalism that had taken shape under Chubais, Yeltsin, and the tycoons. The system had at its core a quick-profit, no-tomorrow ethos that was forged in
perestroika
with the explosion of cooperatives and banks, reached full strength in the frenzy of vouchers and easy money, and ripened into enormous property grabs in the loans for shares auctions. Nemtsov didn't stand a chance against this system with words alone.

At the time, the oligarchs were given a popular moniker, the
semibankirshchina
, or rule of the seven bankers. It was a play on words from the label given to a group of seven boyars who ran Russia in the seventeenth century during a brief period between tsars. The
semibankirshchina
ruled even when Yeltsin was in the Kremlin.

The model of oligarchic capitalism, centered in Moscow, spread quickly throughout Russia's regions, as local barons copied what they learned from the tycoons. They grabbed control of factory complexes, glued themselves to regional governors, and sought fortunes with the same audacity that had rewarded the Moscow tycoons. Even in the capital, the ruling oligarchy extended beyond the seven to include dozens of other magnates who were less well known. For example, Vladimir Yevtushenkov, president of the conglomerate Systema and longtime friend of Yuri Luzhkov, was an influential tycoon in his own right who had assembled, with help from the city, a $1 billion group in mobile telephones, electronics, hotels, tourism, insurance, oil, and other properties.

While Nemtsov played for the television cameras, Chubais quietly underwent a fundamental rethinking of his own experience over the last few years. He reached a conclusion that had far-reaching consequences. Chubais decided that he had to break the incestuous relationship between wealth and power, a bond he had done so much to forge. Perhaps loans for shares had been necessary in 1995 to sell off the factories to younger managers, crimp the red directors, and raise money for the budget. That was worth it. Perhaps it had been necessary in 1996 to get Yeltsin reelected and destroy Zyuganov. That trade-off too was worth it. But in early 1997, Chubais was troubled by the merger of wealth and power. Chubais never denounced “bandit capitalism” because in fact it was
his
capitalism; more than anyone else, he had designed, nurtured, and protected it. In fact, he admired some of the tycoons, whom he considered modern capitalists. But he nonetheless decided the rules would have to change; he could no longer dish out the goodies as he had before.
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Chubais seethed in anger at Boris Berezovsky's statements that the businessmen would run the country like a board of directors. When Chubais accepted this arrangement for the sake of the 1996 election, he certainly did not see it as permanent, as Berezovsky did.
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Chubais told me that before 1996 he was totally preoccupied with defeating the Communists. “There was nothing more important than this,” he said. “We could sacrifice a lot for this goal.” After Yeltsin was
reelected, however, his outlook changed. He did not want to become a tool of Berezovsky, and he figured there was no better time to free himself than at the beginning of Yeltsin's second term. “Yeltsin was president, but this was a different president,” he said. “This was Yeltsin elected anew, and if from the very beginning we didn't start a new life with a different president, later on it would surely be impossible to do so.”
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Chubais had often demonstrated his preferred tactic for achieving change. He drove hard, then compromised, then came back again seeking to repair the earlier mistakes. For example, he made a huge bargain during mass privatization by allowing the red directors to keep control of their companies. Then he tried to compensate later by shifting property to the tycoons in loans for shares. Now he set about trying to fix the errors of loans for shares. One of the mistakes had been the rigged auctions. He decided the days of rigged auctions were over. Regardless of what had gone before, the market would now pick winners and losers. According to Yeltsin, Chubais declared it was time to show the oligarchs who was boss. “We need to sock them in the teeth for once in our lives!” Chubais said. “We won't achieve anything if we don't do this.”
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