Tycoons Take the Reins in Russia

Tycoons Take the Reins in Russia
Shift Shows Union of Money, Power Endures in Post-Soviet Era

By David Hoffman
Washington Post Foreign Service
Friday, August 28, 1998

MOSCOW, Aug. 27—Viktor Chernomyrdin walked down the long carpeted corridor of the Russian White House. As he approached the doors leading into the office of the prime minister, to which he had just been reappointed, a short man with a wisp of black hair awaited him.

Chernomyrdin paused. The short man crossed the threshold first. Then Chernomyrdin followed him.

The scene on Monday, described by a government official, was a telling moment in the evolution of post-Soviet Russia. The short man was Boris Berezovsky, a wealthy financier, relentless wheeler-dealer and vigorous exponent of the might of Russia's brash young capitalists.

More than anyone else, Berezovsky brought Chernomyrdin back to power, and his appearance at the door was further confirmation that Russia remains a state dominated by a coterie of financial and industrial tycoons who wield as much influence, and sometimes more, than the politicians.

Their latest coup, in effect recruiting Russia's prime minister, has nonetheless come at a moment of high crisis. The currency and equity markets are in free-fall, the ruble is sliding, and the banks are under siege. But the return of Chernomyrdin was a sign that, despite all Russia's troubles, and perhaps because of them, the marriage of money and power endures.

The tycoons moved to install Chernomyrdin over the weekend because they feared the government was going to let their banks fail, and auction them off, perhaps to Western investors. Ousted prime minister Sergei Kiriyenko had a plan to push some weaker banks into bankruptcy.

The financiers have been seriously strained by the devaluation of the ruble and the government's decision to repay only a fraction of their holdings in treasury bills. Their early hopes for Chernomyrdin were immediately fulfilled: Instead of allowing bankruptcy, the Central Bank pumped 4 billion rubles into the banking system to keep some of them afloat.

But Chernomyrdin has not stemmed the currency crisis gripping the country, and that spells more instability and worries for the financiers. In the past, some of the moguls have profited from chaos and uncertainty, through currency speculation or buying up distressed industrial plants.

Those barons with oil and gas can still profit as exporters for hard currency. But for many of them, the specter of popular unrest and financial market meltdown now unfolding here is a bad dream that could dash their grand hopes for expansion and Western capital. It is even possible that Chernomyrdin's new government will turn against them, adopting anti-market policies or imposing more state controls.

As the financial crisis has steadily worsened in recent weeks, the moguls have plunged into the center of Kremlin politics, as they have at several other critical moments in the last three years. Berezovsky has been the most active. He got Yeltsin to fire Kiriyenko and bring back Chernomyrdin by working through two allies -- Yeltsin's daughter, Tatyana Dyachenko, and his chief of staff, Valentin Yumashev, both of whom are close to the financier.

Although Berezovsky and the tycoons allied with him have not always been able to move Yeltsin, they have wielded extraordinary influence ever since they financed his come-from-behind campaign for reelection as president two years ago. Russians have given the tycoons a nickname, the semibankirshchina, or rule of the seven bankers. It is a play on words from the rubric given to a group of seven boyars, or noblemen, who ran Russia in the 17th century during a brief period between the czars.

The Moscow tycoons use their banks as the financial core of their enterprises, but their interests have broadened beyond banking. Vladimir Gusinsky, 45, has aspired to be Russia's media and entertainment king. Mikhail Khodorkovsky, 35, aimed to be one of the world's biggest oil magnates. Alexander Smolensky, 44, once wanted to be Russia's leading retail banker but has run into difficulties.

All are men who made their fortunes in a nascent state without a developed rule of law, without a real middle class, without a mature civil society. Like the great European and American magnates, the Russians thrived under the wing of the state, and at its expense. They made fortunes because the government was weak -- and ripe for the picking.

"If we rank all the fields of man's activity by profitability, politics will be the most lucrative business," Khodorkovsky told an interviewer last year. "When we see a critical situation in the government, we draw lots in order to pick out a person from our milieu for work in power."

Some have roots in the old Soviet elite. Vladimir Potanin, 37, was the son of a Soviet trade attache who lived abroad as a youth. He worked for seven years in the Soviet Foreign Trade Ministry; when the Soviet Union fell apart, he assembled many of the enterprises under the ministry into Uneximbank, which became the cornerstone of his empire. Khodorkovsky was a leader of the Young Communist Youth League, the Komsomol, which in the late Soviet years became a kind of business school for the ambitious.

Others took a different route. Berezovsky, at 52 the oldest of the group, was once an obscure mathematics expert who devised a management system for the huge state-owned auto company. He became a car distributor, making millions selling the Zhiguli, the Soviet car for everyman, a homely copy of a Fiat. Gusinsky had tried his hand as a theater director but began to realize the possibilities of a market economy selling office supplies, and later reconstructing office space in Moscow, the expanding capital. Smolensky, was a true outsider who made his first money building sawed-log dachas in the Moscow countryside.

For all of them, the Gorbachev period of liberalization, starting in the late 1980s, paved the way for riches later on. In particular, in 1987, the Soviet financial system was liberalized, and most of the would-be tycoons started up their own banks.

When the new Russian economy was born in early 1992, the young tycoons profited handsomely by speculating against the ruble-dollar exchange rate -- often using the government's money. Since Russia had no formal treasury, its deposits were made with "authorized" banks, including those owned by the oligarchs.

The link between power and finance grew tighter in 1995, when Yeltsin approved a project called "loans for shares," which involved a swap: The bankers loaned money to the cash-strapped government in exchange for shares in some of Russia's lucrative enterprises. If the government failed to pay back the loans, the bankers could sell off the companies, and they did -- to themselves. Many of the auctions were rigged from the inside.

Potanin was one of the biggest winners. His bank, Uneximbank, got Norilsk Nickel, one of the world's largest producers of nickel, cobalt and platinum group metals. He also won an oil company, Sidanko, and the Novolipetsky Metallurgical Co. Khodorkovsky snared Yukos, Russia's second-biggest oil company. Berezovsky got Sibneft, another large oil company. Separately, over the next two years, the moguls also gained control over most of Russia's mass media.

In the run-up to the 1996 election, the tycoons contributed millions of dollars to Yeltsin's reelection campaign, spurred on by Berezovsky, who later boasted that the seven members of the club controlled half of Russia's economy. It was an overstatement but reflected their hubris.

After the election, according to several sources, the tycoons met and decided to insert one of their own into government. They debated who -- and choose Potanin, who became deputy prime minister. One reason they choose Potanin was that he is not Jewish, and most of the rest of them are, and feared a backlash against the Jewish bankers.

Not all Russia's oligarchs were part of this cozy club. Gazprom, the natural gas monopoly, has become a state within a state, and Chernomyrdin, once boss of Gazprom, unabashedly represented its interests as prime minister. Lukoil, the oil company, was another powerhouse. In the regions, mini-oligarchies also thrived.

At a news conference last January, there was one shining moment when everything seemed to be going well for the tycoons. With Chernomyrdin's blessing, they announced the merger of Khodorkovsky's Yukos and Berezovsky's Sibneft into what would be a new oil major.

But declining world oil prices later contributed to the undoing of the deal, and world markets began to lose faith in Russia. Many of the bankers needed Western capital, but, despite their repeated trips to New York and London, Russia's deteriorating financial condition made it impossible to borrow.

Berezovsky had from the outset argued that government should heed the call of the barons. But Yeltsin got so tired of Berezovsky's maneuvering that he threatened to banish him from the country. Yeltsin's choice of Kiriyenko, a progressive young banker, to replace Chernomyrdin as prime minister last March -- a move that disregarded Berezovsky's choices -- did little to salve the wounds. Kiriyenko distanced himself from the tycoons, and, at the outset, would not even meet them.

After the Russian markets were severely jolted in May, the Russian business magnates grew more restive. They met with Yeltsin and appealed for quick action to stem the country's worsening economic problems. Later, they announced their willingness to form a special advisory council to Kiriyenko, but the idea fell flat.

As Russia's finances worsened, the oligarchs also sunk into trouble. Several of them had pledged Russian stocks and bonds as collateral for hard-currency loans from Western creditors. When the value of the Russian assets fell, they could not meet the payments. In mid-August, two major banks reportedly defaulted. Moreover, according to MFK Renaissance, an investment house here, a number of large commercial loans to Western creditors fall due this autumn, including Yukos, with a $100 million obligation, and Smolensky's bank, SBS-Agro, with a $113 million debt.

Still other banks had taken out so-called "forward" contracts on the ruble-dollar exchange rate, based on the assumption the ruble would hold at 6.2 to the dollar. It did not, and they stood to lose millions of dollars.

Moreover, the credit ratings of all the tycoons were blackened by the Russian financial meltdown. They were shut off from Western capital.

To save themselves from bankruptcy, the bankers pressed the government to include a 90-day moratorium on payment of their debts in the decision on Aug. 17 to devalue the ruble. Still, a week after the devaluation, the government and Central Bank were planning to force some banks to go under. According to a highly placed source, Kiriyenko wanted to auction off some of the bankrupt banks to new Western partners.

This brought a furious reaction from the tycoons, headed by Berezovsky.

Within days, Kiriyenko was fired and Berezovsky was escorting Chernomyrdin back into his office.