The Oligarchs (77 page)

Like Khodorkovsky, Smolensky made good use of the crutch to avoid repaying his debts to foreigners, during the moratorium and afterward. The Russian depositors who entrusted him with their savings were also left out in the cold. After the crash, thousands of SBS-Agro depositors met regularly to vent their rage. They passed around leaflets that described how the bank's assets had been mysteriously spirited away, leaving just an empty shell. They shared their misery with each other. Lyudmila Isayeva, a trim, elderly woman with a very upright posture, came to one of the meetings in a neat gray blazer, her hair pulled back in a ballerina bun. She wore pink lipstick and carried a clutch of documents. A professional translator, Isayeva was a pensioner who had deposited $10,000 in SBS-Agro, money she had saved for years in hopes of buying a bigger apartment. She withdrew her money from the state bank after the hyperinflation of the early 1990s, which eroded her savings until they were worth “just bread, milk, and sausage.” In the boom of 1997, she went looking for a commercial bank to deposit her life savings. “One that was reliable,” she said, repeating the word over and over again. “Reliable.”

She pored over the magazines to see which commercial bank was the most reliable. “There were banks with A, A1, A2 ratings. B was less good. SBS-Agro was constantly in the A1 position,” she said. “It was constantly among the best of the commercial banks.” Her deposit in SBS-Agro paid monthly interest, which she collected at the local branch. She authorized the deposit to remain, month after month. “Eventually, since I came every month, the people working there started to know me. Finally, they convinced me to put my money in for one year. The one-year term ended in July 1998, and I prepared to take out my money. I wanted to finally pay for that apartment.”

It was early August when she asked for the withdrawal. “They said their cash registers didn't have that much money in them and to come back in five days.” They gave her the same excuse several times, each time providing a written promise to pay.

On Friday evening, August 14, she recalled seeing the television broadcasts of Yeltsin in Novgorod promising that the situation was “under control.” On Monday came the crash, and she never saw the $10,000 again. “I just wasn't lucky,” she recalled a year after the crash, standing in a crowd of the cheated depositors at a press conference.

Tatyana Kazantseva, fifty, an economist who worked at another bank, said she lost $20,000 in SBS-Agro. Her salary had been automatically deposited in the doomed bank. “I blame the government, but I also blame Smolensky,” she said after two years of failed attempts to recover her money. “We trusted him. We wanted to be like civilized people. We didn't put our money under the pillow. We trusted.” When I heard these sad stories, I was reminded that only two years earlier the $250 million Eurobond was arranged for Smolensky on the premise that he would be able to persuade Russians to trust their banks. In October 2000 Andrew Higgins of the
Wall Street Journal
asked Smolensky about the foreign creditors who lost more than $1 billion in SBS-Agro. Smolensky replied that they deserve only “dead donkey ears.”
⁸⁴

It was the year of dead donkey ears. Berezovsky stumbled in his aspiration to become a power broker, and his political gamesmanship stirred up a costly distraction just as an economic crisis was bearing down on Russia. From the early days, the oligarchs had manipulated political power to their ends, but this time it backfired. Chubais, whose stubborn determination had served him so well before, this time was blinded by it—he had worked so long to create a stable ruble
that he could not let go until it was too late. Chubais also suffered a costly lesson in how suddenly markets can render their own, harsh verdicts. Foreign investors, who had plied the Russians with easy money, found that they had been deceived. They had deceived themselves too by failing to look more closely at their borrowers. After the crash, the oligarchs were in various stages of agony, escape, and recovery, and the coming months would be among the most difficult in their young careers. They would never be together again, as they had been on the Sparrow Hills and during the Davos Pact. Their backs were to the wall, but their brand of wild capitalism endured. It did not perish with the roar of the dragons.

V
LADIMIR GUSINSKY'S dream machine was launched on November 22, 1998, at Cape Canaveral, just five years after he and two discouraged television journalists came up with an improbable plan to start their own channel from scratch. On the Florida coast, Gusinsky watched anxiously as a Delta II rocket launched into orbit his new 3,141-pound satellite, Bonum-1, which could broadcast dozens of television channels directly to homes across European Russia. As he gazed skyward, Gusinsky felt enormous pride: his satellite was the first ever built by an American firm for a customer in the former Soviet Union.
¹
After launch, the Hughes 376 high-powered satellite spread out its round, two-meter wide antenna and began an eleven-year flight, sending streams of digital news and entertainment down to the waiting trademark-green NTV-Plus receiver dishes below.

Gusinsky's dream was that a carpet of NTV-Plus receivers would spread across the Russian landscape, linking millions of viewers with his satellite. But the dream was inexorably linked with the fate of the Russian economy. Gusinsky gambled that a new middle class would take hold, including millions of families who would want—and could afford—to pay $299 for the satellite dish to receive around-the-clock movies, sports, news, children's programming, and other channels
that he hoped to offer them someday. Both technically and financially, Gusinsky's expansion goals were extraordinarily ambitious. The satellite was controlled from a new ground station Gusinsky built outside Moscow. He planned a sprawling new production facility for NTV. He was making three hundred hours a year of television soap operas. Just five years after starting NTV, he already thought of himself as one of Europe's largest media companies. He was trying to cover three different levels of television in Russia all at once: by satellite, direct to people's homes, with NTV-Plus; by traditional terrestrial signal, from a broadcasting tower, with his flagship NTV channel; and with TNT, the fledgling affiliate network that was beginning to snake across Russia's regions.

But the August 17, 1998, ruble crash came at the worst possible moment for Gusinsky. The first shock wave of devaluation prompted the nascent middle class to reduce all discretionary spending—for restaurants, for electronics, and for entertainment. For Gusinsky, the result was like a slow-motion car wreck; the disaster took some time to sink in, but it was inevitable. NTV-Plus had reached 180,000 subscribers at the end of 1998, but a year later it had only 109,000. The original plan had been for half a million or more. Even worse, many of Gusinsky's current subscribers could not afford to pay their bills. Then the television advertising market collapsed in late 1998 in a way that was particularly painful for Gusinsky. The devaluation made imported products suddenly more expensive, and imports were the mainstay of his advertising—commercials pushing American toothpaste and Japanese electronics. After August 17, NTV advertising revenues fell by two-thirds.
²

Gusinsky scaled back. He scrubbed plans for the expanded NTV studios, gave up his dream to build movie theaters, and abandoned hope of floating the company's stock on Wall Street, the most important part of his expansion strategy. “The crisis came and everything died,” he told me a few years later. Gusinsky was a victim of bad timing, outsized dreams, and a sudden reversal in the fortunes of his longed-for middle class. He was a product of his own impulsive expansion in the early years. His philosophy had been, Build it and they will come. The whole satellite business had been based on European and Asian models in which the first five years were investment intensive. Profits came later, in the seventh or eighth year. Gusinsky had not yet made it to the profit years. Now, like a tide, the money flows changed direction; Gusinsky's costs were high and his revenues dwindled. He
would have to pay off the expensive satellite, for which he still owed $123.7 million to the Export-Import Bank of the United States, without the expected profits. “What is a business, particularly one you have built?” Gusinsky asked me, rhetorically, looking back on his plight. “It is like a bicycle racer who races very fast. He leans forward and pedals so fast . . . because if he doesn't keep pedaling, he'll fall down and break his head and hands. You have to run fast if you want to be first.”

Gusinsky fell. The economic crisis was like a patch of gravel that caused his bike to skid out from under him. The satellite turned out to be a financial albatross. Igor Malashenko, the NTV president, asserted later that it was Gusinsky's single biggest business mistake. He and others close to Gusinsky saw the satellite as a symbol of Gusinsky's early style—to dream the impossible dream and hope it would come true. In this case, the economy tumbled and the dream was no longer viable. Gusinsky didn't shift his vision fast enough.

“My partners said to me that I was a fool for trying to build an empire,” Gusinsky said. They wanted Gusinsky to set aside his profits as a cushion rather than plow them back into the business. Gusinsky told them the satellite was the best way to deliver television in a country with decrepit infrastructure. He told me he invested $1.2 billion in retained earnings and loans into NTV-Plus. But he didn't count on the ruble crash. “The mistake was, we thought Russia was stable enough to invest in the business, and growth.”
³

Gusinsky wasn't alone in his troubles after the crash. Berezovsky, still anxious to play the role of wheeler-dealer, was threatened with arrest and political exile by an openly hostile prime minister, Yevgeny Primakov. Khodorkovsky, failing to pay off his loans, waged a dirty campaign to get rid of his Western creditors and minority shareholders. Smolensky's bank closed and he slipped out of public view. Luzhkov weathered the economic crisis, and for a while he was considered a potential successor to Yeltsin. But his political aspirations were quickly, and crudely, destroyed. The happy days were over.

For the oligarchs, events took a particularly ominous turn in late autumn. The Russian people were resentful and confused by the economic collapse, and a search for scapegoats began. There were plenty of potential targets. A poll taken in Moscow two weeks after the crash showed that Viktor Chernomyrdin, Boris Yeltsin, and Sergei Kiriyenko were the first three names mentioned when people were asked, Who is to blame? Then came the oligarchs, bankers, and financiers, followed by parliament, the reformers, and the Central Bank.
⁴

But the most ominous threats came from an outspoken Communist extremist in parliament, Albert Makashov, a crude, vengeful man who had been jailed in 1993 for his part in an armed attempt to storm the Ostankino television station during Yeltsin's violent confrontation with parliament. As far back as 1996, the tycoons had feared an anti-Semitic backlash; now Makashov tried to ignite it. On November 11, he attacked Berezovsky. “Don't behave as a Yid,” he said, using a slur for Jew. “Give this country, this nation . . . a billion or two of your green money and this nation will calm down.” Communist leader Gennady Zyuganov refused to denounce Makashov in public, saying that it was enough that Makashov had received an internal party reprimand. Then Zyuganov joined the attacks on the Jewish bankers, reviving anti-Semitic rhetoric of the Soviet era. “Our people are not blind,” Zyuganov said. “They cannot turn a blind eye to the aggressive, destructive role of Zionist capital in ruining Russia's economy and plundering her property owned by all. There is a growing understanding among the people that the origin of all the current troubles is the criminal course of an antipeople, supranational oligarchy that seized power.”
⁵

After a while it became evident that Makashov and Zyuganov were out of touch. Their attempt to incite hatred seemed menacing in the aftermath of the ruble collapse, but within a few months it disappeared, and the public did not take up their battle cry against the Jewish bankers. Anti-Semitism remained a latent force in some parts of Russian society, and the oligarchs were unpopular in many quarters, but the spark did not ignite. Perhaps anti-Semitism was fading since it no longer had the official backing of the state; or perhaps the urge to survive in hard times was stronger than the urge to hate.

What hurt the oligarchs was not public opinion but internecine battles with outside investors, with each other, and with the Kremlin. In the two and a half years after the ruble crash, the oligarchs fought costly, self-destructive conflicts motivated by a raw hunger for power and greed. This chapter is the story of four of those conflicts. It does not mark the end of the oligarchs, but it does mark the sunset of the roaring 1990s and the Yeltsin epoch in which they played such a prominent role.

 

Hard times meant hardball, and Mikhail Khodorkovsky was a master of the game. When he first won Yukos, Khodorkovsky sent three hundred of his best security men to Siberia to physically take over the
company's wells and refineries, according to a former Menatep official. Oil towns like Nefteyugansk were notoriously filled with gangsters who sucked money out of the industry. Khodorkovsky paid special attention to the accountants and financial controllers at his new properties. “He personally went to every single financial controller and head accountant in all the daughter companies and said, ‘This is who you work for now, don't screw around,'” the former Menatep official told me. The rules of this game were winner take all.
⁶

After the crash, Khodorkovsky took a scorched earth approach to his Western creditors and minority shareholders. He wanted to shake them from his tail and reclaim ownership of all, or at least most, of Yukos. When the ninety-day moratorium had expired, Menatep defaulted on the $236 million loan from Daiwa of Japan, West Merchant of Germany, and Standard Chartered of London, for which Menatep had pledged about 30 percent of the shares in Yukos as collateral.
⁷