The Oligarchs (65 page)

Chubais told Vladimir Gusinsky about his change of heart in late 1996 or early 1997. Gusinsky was preparing for the next big wave of privatization. At stake was an enormous telephone and communications company, which Gusinsky wanted badly. “You should keep in mind,” Chubais told him, “this will be an auction, and the person who wins will be the one who pays the most.” Chubais was unusually insistent. “Do you understand, Vladimir Alexandrovich?” Chubais asked Gusinsky.

“Of course, of course,” Gusinsky said, according to Chubais. “I clearly understand that.”
¹¹

In fact, Gusinsky and Berezovsky did not understand. They heard what Chubais said but did not take him seriously. In their view, the rules of the game could not be switched off like a light. They thought it was just rhetoric, like Nemtsov's “bandit capitalism” slogans. Besides, everyone knew that it was not so simple. Was Chubais really changing the rules or just finding a new label for the same old game? One hint that nothing had changed came when Gusinsky was appointed as consultant to organize the telephone company sale, a role that in the past had been reserved for the prearranged winner. Gusinsky
and Berezovsky simply assumed that the oligarchs would continue to carve up the country for themselves, with Chubais as their handmaiden.

Soon they were all headed for disaster. Although the tycoons told Nemtsov they were fed up with the dirty little wars of Russian capitalism, they were plunging straight into the most vicious, destructive feud of the decade.

 

In the spring of 1997, the capital market boom was in full swing. Russia had opened itself to the outside world, and a torrent of investment in stocks and bonds flooded into its nascent exchanges. Planeloads of investors were shuttled into town and given tours of Red Square, the Bolshoi Theater, and the Kremlin; they bought billions of dollars in Russian equity and debt. Dana F. McGinnis, a Texas fund manager, recalled the atmosphere of his early visits, which eventually led him to invest more than $200 million in Russia. “There was great optimism that there would be an end to the arms race and that some 250 million people would be brought into the capitalist fold,” McGinnis told my colleague Steven Mufson. “There was a buzz in the air. The country was evolving by the hour. You could feel it.”
¹²
By 1997, the reelection of Yeltsin seemed to have opened the spigots all the way. Russia was awash in speculative portfolio investment. Foreigners, who never visited the factories or refineries they were investing in or asked who ran them, plunked down billions of dollars for stocks and bonds. Foreign portfolio investment—the purchase of stocks and bonds—rose from $8.9 billion in 1996 to an incredible $45.6 billion in 1997, equaling 10 percent of the Russian economy.
¹³
William Browder, who had come to Russia in the early days of privatization and discovered the Murmansk ship bargain as well as dozens of other undervalued companies, later set up his own fund, Hermitage, which became one of the best-performing funds in Russia in 1997, with a mammoth $1.2 billion in Russian equities under management. The savvy Browder, who was then thirty-three years old, was just one of many who rode the boom to new heights.

The allure of stocks was the “two-cent kilowatt.” A Moscow fund manager explained it to me this way: shares in a Russian electricity monopoly were selling at the equivalent of two cents per kilowatt per line, while a Brazilian electric company sold at fifty cents; in the
United States it was five dollars. The two-cent kilowatt looked pretty cheap if you figured Russia would be stable and grow in the years ahead. “It was clear skies as far as the eye can see,” recalled James Fenkner, a bald, acerbic analyst for Troika Dialog, one of the largest brokerage firms in Moscow. Fenkner was a hardened, well-informed veteran of the crazy 1997 boom. “Toward the end, everyone was after everything,” he said. “All you had to do is say a Russian word, and if the Russian word had ‘share' attached to it, you could sell it.”
¹⁴
The Russian Trading System, an over-the-counter electronic stock market, soared nonstop for months. The index became the best performing emerging market in the world during 1997. The Moscow brokerages opened spacious new trading floors with flickering computer screens, frantic traders entwined in telephones, and a vocabulary of “blue chips” and “second-tier stocks” that glossed over the underlying problems. It had an aura of Western modernity, but underneath it was cutthroat.

In securities, dirty dealing was widespread, and practices that would land a broker in jail in the West went unregulated in Russia. Insider trading was common, as were techniques like “front-running,” when a local broker would exploit the rise in a stock price created by his own client's large order, or “ramping,” which meant trying to run up a stock price by issuing glowing—and usually misleading—research reports. Brokers often made side deals for their own accounts while trading in the same stocks for clients, a conflict of interest that the investors never knew about.
¹⁵
Russia had the markets but not the rule of law or the business culture of a mature market economy, which would deter cheating and theft. Dmitri Vasiliev, then the securities commission chairman, told me he spent most of 1997 trying to enact regulations to bring order to the unruly market. It was a nearly impossible task. Russia's companies beckoned with cheap kilowatts, and in that summer of frenzied activity, Moscow became a gold rush town. It was easy to conclude that Russia had climbed out of the post-Soviet economic quagmire for the first time. Leonid Gozman, a political adviser to Chubais, marveled, “If this is not success, what is success?” Every stock deal, every loan offering had a shimmering story to go with it. I got a taste of this when Alexander Smolensky stepped out onto the stage of world finance.

Smolensky had come a long way from his days as a typesetter. His bank, SBS-Agro, was one of the largest commercial banks in Russia,
with $5.2 billion in assets, forty-three thousand employees, and the most admired corporate art collection in the country. His plastic credit cards were used by members of parliament and his automatic teller machines were located inside the Kremlin. His conference room was hung with nineteenth-century Russian and German portraits and decorated with sculpted elephants, to which he had taken a liking. Smolensky never lost his earthy, streetwise manner, but he now was at the pinnacle of Russian business. He no longer needed to bring a few extra suits in his suitcase for his vice presidents. They could buy their own.
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In July 1997 Standard & Poors issued its first ratings of four Russian commercial banks, including Smolensky's SBS-Agro, which soon became the first to tap into global capital.
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Smolensky floated a $250 million Eurobond at 10.25 percent, which was just 4.25 points over U.S. Treasury bonds.
¹⁸
Xavier Jordan, a vice president of J.P. Morgan, lead managers for the loan, explained to me later the way he had pitched the Smolensky loan to investors. Russians had an enormous storehouse of savings under their mattresses, he said, perhaps 30–40 percent of the economy. They didn't trust banks, which held only a tiny fraction of the country's savings. Smolensky was building a retail banking empire that people could trust, he said. “If you assume Russia is going to converge into the real world,” he added, Smolensky would capture those mattress savings. “That's a license to print money.”
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It was a wonderfully simple story: Smolensky, the onetime dump truck driver, builds the Russian equivalent of the Bank of America. Imagine: Smolensky, whose “risk” was just a shade greater than U.S. Treasury bills, could pull all those wads of dollar bills out from under the soggy mattresses! The story lasted about a year.

 

In the rush for black gold, Gusinsky was left out. He never got a chance to grab a Siberian oil company, and he never participated in loans for shares. Gusinsky often boasted that he did not dirty his hands in old Soviet factories.
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Perhaps it was just as well because the failed theater director did not understand factories and refineries, conveyor belts and pipelines. Rather, after the Yeltsin election, Gusinsky hunted for his own black gold. He wanted to make big money, but not from mining nickel or hydrocarbons. Gusinsky sought wealth in the television airwaves, the silent digits of computer transmissions, the
tiny pulses of electricity that carried phone conversations. He wanted to become Russia's king of communications. His black gold shimmered with silicon chips, fiber-optic cables, satellite beams, and electronic pixels.

For Gusinsky, the key lesson of Russian business in the early 1990s was to think big. Nothing was impossible if you could imagine it vividly enough and then work like a dog. Finances and business plans, lawyers and accountants—these were mere details. His experience in founding NTV was a good example. When Yevgeny Kiselyov and Oleg Dobrodeyev came to him seeking money for a single program, Gusinsky expansively proposed building a whole channel. They did not hesitate over viewer demographics, broadcast signals, or licenses. They dreamed of a television channel, threw themselves into it, and now NTV was an impressive reality. The same boundless energy still motivated Gusinsky in the spring of 1997. His enormous ambition
was
his business plan.

At the core of Gusinsky's dream was an incredibly optimistic vision of Russia. He believed in the birth of a new middle class. If it developed, the middle class would fuel demand for consumer goods, for washing machines and soft drinks, and the advertising would be carried by NTV. The middle class would also desire high-class movies and hard-hitting news and analysis that NTV offered. With more discretionary income, the middle class would go to restaurants, buy personal computers, and rent telephone lines. They would drive new cars, use mobile phones, and listen to the radio on their way to work. They would travel and hunger for information about the outside world. At every turn, Gusinsky would be there.

In January 1997, Gusinsky left his post at Most Bank and devoted himself full-time to building a communications empire under the new conglomerate name, Media-Most. Sergei Parkhomenko, one of the most respected newspaper journalists of the day, and Masha Lipman, an exceptional editor who once worked in our bureau at the
Washington Post
, designed and built from scratch a glossy, informative newsmagazine,
Itogi
, which Gusinsky launched in 1996.
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Alexei Venediktov and other radio journalists who had started the popular Echo of Moscow radio station sold it to Gusinsky in 1994, and it thrived. A slick television magazine,
Seven Days
, rocketed to a half million weekly circulation. Gusinsky spent long hours with media giant Rupert Murdoch, whom he greatly respected, and embarked on a major new venture,
NTV-Plus, to blanket Russia with pay satellite television. “There was this terrible enthusiasm, when there was an expectation of the booming economy, that it's going to expand very, very quickly,” Igor Malashenko recalled of the plans for NTV-Plus. Gusinsky financed the first stage of NTV-Plus with the capital from the sale of 30 percent of NTV to Gazprom.
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Gusinsky said marketing studies showed he had a potential audience of 10 million subscribers for NTV-Plus. To fulfill his dreams, Gusinsky planned to launch a new, expensive satellite. He also needed good programming. He only had to imagine and to build, and the viewers would come. It might eventually cost billions, but Gusinsky never put finance first. They would find the money.

Another vision of electronic black gold that Gusinky harbored was telephones and communications. In the mid-1990s, Russia had only nineteen telephone lines for one hundred people, compared to fifty-eight for the United States and forty-nine for Great Britain. Once modernized and privatized, the telephone networks could be a source of colossal profits. Like oil reserves, the phone lines represented a concrete, tangible asset: add up the number of subscribers and multiply by the payments, throw in new equipment and a growing middle class, and you get a machine that prints money. Gusinsky saw telephones as a communications business that dovetailed with his knack for television. However, in Gusinsky's circle, there were doubts about this. Malashenko told me he worried Gusinsky was going too far. Whatever the future of telecommunications, the existing telephone enterprises were creaky old Soviet outfits of the kind Gusinsky had so far avoided.

To privatize the phone system, the Russian government created a new holding company, Svyazinvest. The word
svyaz
in Russian means a link, connection, or communication. The philosophy was the same as with oil: the state created a holding company out of thin air, gave it control over valuable state-owned enterprises, wrapped it in a pretty bow, and sold it off. The new holding company was given controlling stakes in Russia's eighty-eight regional telephone companies, with 22 million phone lines. The promise of Svyazinvest was large, but so were the problems. The owner would have to get control over dozens of independent telephone companies and a maddening patchwork of tariffs, old technology, and political cross-currents. It might take years, as well as serious investment by a company with real experience in telephones, to straighten out Svyazinvest. Moreover, the phone system had a silent watchdog. The military and security services
viewed the telephone lines as their sphere of influence. When the Soviet KGB was broken up, several divisions—the Eighth Division, which dealt with ciphering, and the Sixteenth Division, which dealt with deciphering and electronic surveillance—were turned into a new stand-alone security service, the Federal Agency for Government Communications and Information, directly under the Russian president.
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The military also had a strong interest in the telephone system, on which it relied for its communications.