Moscow
Leaving Sheremetyevo Airport for the trip into Moscow, the visitor gains a first insight into the current Russian scene. The driver — if he was hired through one of the official airport tourism companies — points out bitterly the desirable spots close to the airport arrivals area where his unlicensed competitors illegally park. Their favored position, he snorts, is a result of their connections with “the mafia.” People bribe the police, he grumbles, so gypsy cab operations go on unimpeded. “Everything here is ‘under the roof,'” he says, using the slang for “protected by organized crime.” “It’s like a state within a state.”
Actually, Russia is in worse shape than that. It’s more like a state within a bank — or several banks. To put it bluntly, since the election of Boris Yeltsin in 1996, Russia has been run by a seemingly all-powerful oligarchy of bankers and financiers whose acquiescence in government decisions is increasingly necessary for the government to operate. When in mid-June the IMF demanded tough budget cuts as a prerequisite for making available to Russia another $ 670 million slice of a $ 9.2 billion IMF loan package, the young prime minister Sergei Kiriyenko didn’t call in top economists for advice. Instead, he summoned Russia’s financial oligarchs and met with them twice in three days. What did they suggest to help get the country out of its dire economic straits? One response to his inquiry: Set up a semi-permanent Council on Economic Cooperation consisting of themselves — the oligarchs — to advise the government of what they want it to do.
If such a council ever came into being, it would only institutionalize what almost all Russians and many foreigners now recognize as the country’s greatest source of weakness — even of potential national calamity — since Russia broke off the shackles of communism back in 1991. In effect, it would crown with legal standing the emergence of a small group of ultra-rich businessmen who pillaged the country during the privatization process and have used their economic power to manipulate both public opinion, through the media they own, and the entire political process. Andrei Piontkovsky, a columnist for the English-language daily Moscow Times, derided the proposed oligarchs’ council as “not even a parallel shadow government, but a type of Politburo of the Oligarchic Party of the Russian Federation.”
The first to apply the word “oligarchy” to the ultra-rich capitalists who have taken over Russia was Alexander Solzhenitsyn, in a speech to the Russian parliament in 1994. The Russian media sometimes speak of semibankirshchina, “rule of the seven bankers,” an unflattering allusion to the semiboyarshchina, the brutal rule of aristocratic officials and landowners during a period of national weakness in the 17th century.
These days, such analogies are commonplace. In early June, as the Russian stock market collapsed and interest rates rose to a stratospheric 150 percent, the IMF’s managing director Michel Camdessus warned of the “dangerous similarities” between the Russian government’s relationship to the oligarchy and the South Korean government’s relationship to the chaebols, largely family-controlled conglomerates whose crony-capitalist habits helped precipitate the collapse of the South Korean economy last year. Some Russian analysts actually thought the chaebol reference unfair to the Koreans. “Where are the industries and technologies created by [the Russian oligarchs],” asked one, “or the highways and scientific cities built by them?”
Where indeed? As the IMF prepared to negotiate the stringent conditions that Russia would have to meet to receive the next installment of its loan, few Russians or foreigners doing business there had any illusions about where the government’s vanishing funds had gone: Much has been ferreted away in foreign bank accounts, largely for the benefit of the notorious semibankirshchina. Literally billions of dollars lent to Russia from abroad or raised by the government in taxes for various infrastructure purposes have disappeared without a trace. In one of the most blatant cases of robbery of the public purse, of some 14 billion rubles ($ 2.3 billion) allocated by Moscow for the reconstruction of Chechnya, just over half was very sloppily accounted for and the rest had disappeared without a trace when Russia’s Chamber of Accounts conducted an audit. Of course, the oligarchs can hardly be held responsible for every act of thievery from the state. But the super-rich certainly set the pace. One of the Western European cities where Russian is most commonly heard these days is Zurich, headquarters of Swiss banking.
The new oligarchy came into being during the Wild West phase of Russian capitalism — the dying days of Gorbachev’s perestroika in the late 1980s and the first few years of Yeltsin’s privatization of the early ’90s. In this period, when private property had no clear legal standing, business regulations were in flux, and no one knew how to divide up the ram-shackle Soviet economy, energetic entrepreneurs flourished. Some of them formed small private companies, then teamed up with large state ventures undergoing privatization through a carelessly planned voucher scheme, under which state managers were able to transfer vast state assets into private hands without oversight or regulation. Other entrepreneurs persuaded several different companies to lend sums of money to create a new holding company that was powerful enough to gobble up smaller competitors and monopolize huge sections of the economy. Some have compared this to the reign of the robber barons in late 19th-century America — minus a trust-busting president and the safeguards of an already century-old democratic system.
Once today’s oligarchs had emerged from obscurity and secured vast fortunes, they quickly co-opted key figures in Russian officialdom, including elected politicians, and thus could protect their wealth and power from challenge. Today, there is probably not a senior figure in Russia’s government who does not owe at least part of his financial standing or electoral success to members of the oligarchy. Late in 1996, after Yeltsin’s surprising victory in that year’s presidential race, possibly the richest and certainly the most prominent and feared of Russia’s oligarchs, Boris Berezovsky, crowed: “We hired Anatoly Chubais [Russia’s former privatization czar]. We paid an enormous amount for Boris Yeltsin’s election. Now we have the right to enjoy the fruits of our victory.”
Berezovsky declared a salary of $ 43,000 in 1997, but his personal assets are close to $ 2 billion. A generous man, he was named “Philanthropist of the Year” in 1996 for giving away $ 3 million. His rise was in some respects atypical. For many years Berezovsky was a respected mathematician attached to Russia’s Academy of Sciences. Then in 1989 he founded a private car dealership that quickly amassed millions. At the time, organized crime was notoriously active in Russian auto dealership; what with the perennial shortage of vehicles and the requirement that customers hand over the entire purchase price in cash (Russia still has virtually no consumer banking) months before delivery, opportunities for corruption were abundant. By 1996, Forbes magazine could assert that Berezovsky’s success was due to his gangland connections. The magnate promptly sued Forbes. But he could hardly explain away such highly suggestive facts as the attempt on his life in a professionally organized car-bomb attack that decapitated his chauffeur. Like the other oligarchs, he lives surrounded by a retinue of armed guards.
Eventually, as his empire grew, Berezovsky established the financial-industrial group LogoVAZ, which acquired huge holdings in the oil, media, and banking sectors. His political involvement also deepened, notably in early 1996, when he and the other oligarchs teamed up to pour money and organizational skills into Boris Yeltsin’s lagging presidential reelection campaign. Berezovsky was well equipped for the role of kingmaker. Insatiable for power, he had acquired part ownership of the influential ORT television channel, the respected daily Nezavisimaya Gazeta, and the satire magazine Ogonyok, a holdover from Soviet days. After the election, Berezovsky bragged of his role in reelecting Yeltsin and claimed that he and the other six oligarchs of the semibankirshchina now owned more than half the Russian economy. No one contested the assertion. “I think that if something is advantageous to capital, it goes without saying it’s advantageous to the nation,” gloated Berezovsky.
His reward from Yeltsin was swift: In 1996 he was named deputy chief of the Kremlin Security Council. Soon he showed almost Rasputin-like skill at advancing himself at the presidential court. He became financial adviser and friend to Yeltsin’s most politically savvy daughter, Tatyana Dyachenko, and to the presidential chief of staff, Valentin Yumashev. Inevitably, though, he overplayed his hand. In 1997, LogoVAZ lost out to a rival in a bid for 25 percent of Svyazinvest, the national communications conglomerate. It was the biggest auction of state property to that point, and Berezovsky’s star fell. His public posturing and complaining finally angered even Yeltsin, and he was pushed out of the Kremlin Security Council in November 1997. Nevertheless, he stayed afloat. His political connections included then prime minister Victor Chernomyrdin and, improbably, liberal economic reformer Yegor Gaidar. To add to Berezovsky’s reputation as a Machiavellian manipulator, he was rumored to have financed the successful run for governor of Krasnoyarsk of the gruff and tough Gen. Alexander Lebed in May 1998. Of Berezovsky, an American businessman in Moscow commented coldly, “He is a very sinister man.”
The seven original oligarchs — the others sometimes bitter rivals of Berezovsky, sometimes close collaborators — have all followed similar paths from obscurity, through skillful cross-ownership alliances, to control of enormous financial and industrial assets. In each of the other six cases, however, the key to success has been banking and the financing of a cash- strapped Russian government.
Vladimir Potanin, who beat out Berezovsky in the Svyazinvest auction, controls Russia’s largest bank, Oneximbank, through one of the country’s largest petroleum companies, Sidanco, and the Norilsk Nickel company, largest corporate supplier of nickel in the world. Potanin also controls the newspapers Izvestiya and Komsomolskaya Pravda. The other five of the original oligarchs are Mikhail Khodorkovsky, chairman of Bank Menatep; Vladimir Gusinsky, chairman of Most-Bank; Alexander Smolensky, chairman of SBS-Agro Bank; Mikhail Fridman, chairman of Alfa-Bank; and Vagit Alekperov, chairman of LUKoil. Those vying with Berezovsky in the field of media include Gusinsky, who controls the daily newspaper Segodnya and the slick newsweekly Itogi, and Alekperov, who shares control of Izvestiya with Potanin.
Also sometimes named now as full-fledged oligarchs are three other men: Rem Vyakhirev, chairman of Russia’s largest energy conglomerate, Gazprom; Vitaly Malkin of the Rossiiskii Kredit Bank; and Vladimir Bogdanov, chairman of the unpronounceable energy corporation Surgutneftegaz. The newest addition to the oligarchs’ club is none other than Anatoly Chubais. Repeatedly hired and fired from successive Yeltsin governments, Chubais made the best soft-landing of any former minister, heading up a new Russian commercial entity called the Unified Energy System.
It was Potanin’s Oneximbank that came up with the cash-for-shares scheme the oligarchs used to grab so much of the national wealth for themselves. In 1995, the Yeltsin government, desperate to meet its enormous payroll and cover other expenses, agreed to give huge chunks of state-owned industries and other assets, in the form of shares, to financial-industrial groups that would lend it cash. Behind the scenes, in advance of what were officially public competitions with sealed bids, the oligarchs would agree among themselves which of them would make the winning bid, allowing the rest to submit low bids and walk away. That ended with the bitterly contested Svyazinvest deal. The government, embarrassed by financial scandals, had come under increasing pressure from inside and outside the country to conduct a fair bidding process for state assets being privatized. And Potanin, breaking ranks with the other oligarchs, went along. His secret tender for Svyazinvest turned out to be the highest offer. Berezovsky was enraged.
If Russia’s banking system were in any sense orderly and regulated, the domination of the banking industry by a handful of super-powerful entities might be worrisome, but it wouldn’t necessarily be disastrous. Some 50 very big banks, however, have been authorized to act as financial agents and payroll conduits for major government departments, as well as for local and regional authorities of the Russian Federation. Many of them are in the habit of speculating wildly with the public funds under their control. Data provided by the FBI to the Center for Strategic and International Studies in Washington, D.C., and confirmed by Russian law-enforcement sources for a 1997 report showed that half of the country’s 256 largest banks were linked to organized crime through extortion schemes and money laundering. In effect, under the leadership of the oligarchs, Russian entrepreneurs have turned into plunderers of the national wealth. Some American business observers believe that this development is not entirely harmful. Sighed one, a Moscow resident: “Nobody likes vultures, but they serve a useful purpose in the food chain. They are inevitable.”
Be that as it may, one of the consequences of the oligarchs’ activities has been a decline in freedom of the press. Several Russian reporters eagerly joined in the boost-Yeltsin effort of Berezovsky and others during the crucial 1996 election because they feared that press freedom would vanish altogether if his principal challenger, the Communist Gennady Zyuganov, won. Now many sense that they made a Faustian bargain. Though the Russian media are not centrally controlled, as they were under the Communists, all major media outlets depend on the financial support of the oligarchs, and this has stifled the once-vigorous reporting of the post-Communist press. It is possible to find out what is happening in Russia by reading half a dozen or more papers every day, but no single one of them can be relied on for consistent, independent coverage of the news.
How long will the oligarchs rule? For that matter, how long will Russia’s infant democracy survive? “Russia,” commented financier George Soros last year, “is like a canoe in which seven men are fighting over a hoard of gold. They are too absorbed by this to recognize that they are heading towards a waterfall.”
That approaching catastrophe is a total implosion of the Russian economy, with political consequences that are entirely unforeseeable but almost certainly unpleasant for the rest of the world. It has been estimated that the federal government of Russia last year actually took in only half of the tax payments owed it. As of May 1, the energy giant Gazprom alone owed the government over $ 800 million, according to Benyamin Sokolov, chief of the Russian equivalent of the U.S. General Accounting Office. About one-third of the national budget goes to paying off a foreign debt that keeps mounting. As to living standards, some 31 million people live below the official poverty line of 432 rubles a month (about $ 72). Many Russians avoid starvation only by eating the potatoes and cabbages they grow on tiny private plots.
Since the fall of the Soviet Union, Russia’s workers and professionals have endured years of unpaid wages and seriously declining health standards. Some economists believe the country’s gross domestic product has shrunk by over 40 percent. If the people have not yet risen up against the Yeltsin regime, it is partly because they are not yet convinced there is a serious alternative to it. They may also cling to a vestige of hope that somehow, underneath all the present hardship and turmoil, Russia is actually inching its way toward membership in the developed world, where economies are at least somewhat predictable and living standards tend to rise year after year.
It is intriguing that, amid the economic gloom in Russia, the man who first called the post-Communist oligarchy by its name — only to be dismissed by intellectuals at home and in the West as a pessimist and out of touch — is once again receiving some attention. In his new book, Russia in the Abyss, Solzhenitsyn writes: “Criminal is the government that throws the national patrimony up for grabs and its citizens into the teeth of beasts of prey in the absence of laws.” Four years ago, when the great Nobel Laureate returned to his homeland after two decades’ involuntary exile, hoping to see his long-abused nation resume a normal existence, he was almost alone in his dark view of things. Today, far more Russians would agree.
David Aikman, a senior fellow at the Ethics and Public Policy Center in Washington, D.C., is a veteran foreign correspondent.
