You think you know a bit about Russian Politics? ha!

19 February 1999, Johnson's Russia List

By Matt Bivens

Jonas Bernstein and I wrote the following article in November 1997 for a major American magazine. The magazine accepted it with enthusiastic comments, and then after several months backed out and told us they couldn't publish it. The stated reason was that the article had been 'scooped' by The Washington Post on Aug. 14 (when Georgetown's Peter Reddaway wrote an op-ed article critical of Chubais, one that we cite here). I don't know what the real objection to the article was; the editor I dealt with this at this magazine was tightlipped, but he was also obviously not happy at the outcome. (They also paid us in full -- which, as a literary agent with International Creative Management told me, 'means they REALLY don't want to run it.')

It's a shame it took until 1999 to come out in Demokratizatsiya, since a lot of what we pulled together more than a year ago was then somewhat radical but today is the conventional wisdom. (For example, we note the possibility of a coming default; we lay out the allegations that Berezovsky has hijacked Aeroflot and is financing the Yeltsin family; we argue that there is unlikely to be any economic growth until corruption is cleaned up; etc.)

Anyway, here it is below. I hope JRL readers like it.

Matt Bivens

*******

By Matt Bivens and Jonas Bernstein

After staggering to reelection in summer 1996, President Boris Yeltsin announced what had long been obvious: that he had a bad heart and needed surgery. Then he disappeared from view, leaving his Prime Minister, Viktor Chernomyrdin, and his chief of staff, Anatoly Chubais, to mind the Kremlin. For the next few months, Russians would tune in the morning news to learn if the president was still alive. Evenings they would tune in Chubais and Chernomyrdin to hear about a national emergency no one was paying their taxes.

Summer turned to autumn, but as Yeltsin's by-pass operation approached, strange things began to happen. Chubais and Chernomyrdin suddenly announced the creation of a new body, the Cheka, to help the government collect taxes. In Lenin's day, the Cheka was the secret police force the forerunner of the KGB that, among other things, forcibly wrested food and money from the peasantry and drove some of them into collective farms or concentration camps. Chubais made no apologies, saying that he had chosen such a historically weighted name to communicate the seriousness of the tax emergency.1 Western governments nodded their collective heads in solemn agreement. The International Monetary Fund and the World Bank both confirmed that Russia was experiencing a tax collection emergency and insisted that serious steps be taken.2

Never mind that the Russian government had been granting enormous tax breaks to the politically connected, including billions to Chernomyrdin's favorite, Gazprom, the natural gas monopoly,3 and around $1 billion to Chubais's favorite, Uneximbank,4 never mind the horrendous corruption that had been bleeding the treasury dry for years, or the nihilistic and pointless (and expensive) destruction of Chechnya. None of this was criticized, or even mentioned, by the same Western financial institutions so upset by the tax shortfall. Chubais, a forty-two-year-old redhead who speaks fluent English and is closely associated with Harvard University, was the American government's number one ally in Russia. If Chubais said it was so, then so it was: The problem was slack tax law enforcement, not irresponsible government.

But Chubais soon made clear something that ordinary Russians had understood from the start, for the name was not exactly a subtle thing the Cheka was not only about taxes. On a visit to St. Petersburg in October 1996, days before Yeltsin's heart surgery, Chubais announced that the Cheka was not 'temporary,' as it originally had been labeled (Lenin's Cheka was also at first labeled 'temporary'). Nor was its mandate only tax collection: the Cheka, Chubais announced, would enforce better obedience to all laws and decrees. Chubais went on to tell journalists cryptically that the Cheka was part of a program of 'consolidating power' because 'the consolidation of power instead of constant mutual intrigues, instead of public discussions, instead of endless arguments is exactly what the country needs.'5

What was this about? The answer was clear: The regime was preparing for Yeltsin's death a quite possible outcome of this risky surgery for a heavy-drinking sixty-five-year-old. Under the Russian constitution, new presidential elections would have to be held three months after Yeltsin's death; the winner in fall 1996 would have been General Alexander Lebed. With his talk of ending 'public discussions' and 'endless arguments' (i.e., democratic debate) and 'consolidating power' in his own hands, Chubais was signaling the ruling elite's intention not to hold those elections.

'All is being prepared for the moment Yeltsin dies,' opined Sergei Markov, a Russian political analyst with the Carnegie Endowment for International Peace who is often cited in the Western media. 'The task is to thwart outsiders who might come to power through elections.'6

Chubais's remarks were widely reported in Russia. America's various Moscow correspondents were able to see or hear them in Russian, and even to read them in English the next morning in the English-language Moscow Times, which also offered the same interpretation from Markov. Surprisingly, few thought it news. Of major American newspapers, only the Christian Science Monitor reported Chubais's thinly veiled threat to rule by junta upon Yeltsin's death and even they put a strangely positive spin on it, as 'the latest example . . . of Chubais's use of non-democratic means to further economic reform.'7

The New York Times and the Washington Post did note the creation of the Cheka. But like other major American media, both characterized this as a positive development. Soon after the founding of the new Cheka, the Washington Post ran a 1,300-word profile of Chubais that approvingly described his efforts 'to impose an iron grip on this weakened post-Soviet state.'8 A month earlier, the New York Times had offered its own Chubais profile on the front page, under the headline: 'Rising Star in the Kremlin: An Ardent Pro-Capitalist.' 'Deep inside the Kremlin, Anatoly B. Chubais is plotting how to carry out the next stage of Russia's democratic revolution,' the article begins. It goes on to describe how 'the ardently pro-capitalist Mr. Chubais' was trying to turn Russia into 'a disciplined state.' Hence the need for a stern new Cheka, of which a clipped, neutral description is offered in the twenty-fourth paragraph.

The Times concedes that Chubais has critics, and cites one, Grigory Yavlinsky, leader of the liberal Yabloko party, who calls Chubais 'a Bolshevik . . . [who] believes the ends justify the means.' The article continues with what can be seen as the New York Times's rebuttal to Yavlinsky: 'Mr. Chubais now waves off such complaints with the annoyed air of a parent who is being challenged by a spoiled child.'9

Yeltsin survived his heart operation, and the Cheka faded away like a bad dream. But had Yeltsin died, Russia would have waked up to find itself under the rule of a junta a committee named for Lenin's death squads.

How Could America Not Know This?

How could Russia be so close to an oligarchical dictatorship, and so frankly public about it, yet Americans not know of it? For an answer, one has to scroll back through the years of Russia's chaotic rebirth from the ashes of the Soviet Union both as it happened and as it was described by the White House and the American media.

Six years earlier, ordinary Soviet citizens were all but unanimous in their desire for political and economic freedoms. Many eyes then turned toward Amerika. The Russians have long had an affinity and respect for Americans. And paradoxically, the cold war brought us even closer: Just as the United States can take pride in the Marshall Plan that underwrote the restoration of much of Europe following World War II, or in the postwar revival of U.S. occupied Japan, so can we take pride in the work of the government-funded Voice of America (VOA) and Radio Liberty, which beamed international news into the Soviet Union. By speaking directly to the Russian people, VOA and the like won Americans enormous reserves of gratitude, not to mention moral authority reserves that still are not depleted.

Russians also knew of American asylum for one of their greatest writers, Alexander Solzhenitsyn, and of American support for another moral beacon, physicist Andrei Sakharov. Even today the Russians have a saying 'Eto tebe ne Amerika,' 'This isn't America for you,' a retort thrown back to people complaining of unfair treatment.

So as Russians eked out a limited, if stable, existence, they also imagined another life, described by VOA, by samizdat underground publications, and by friends of friends who had been abroad. Millions dreamed wistfully of a nation where they could own their own business, go to their grandparents' church, read a newspaper that contained real news, own a nice car and nice clothes, even save their wages and visit Paris.

But while some pressed for change for democracy and capitalist freedoms others followed a more worn path. Corruption has been a part of life in Russia ever since Peter the Great's favorite Prince Alexander Menshikov embezzled from government grain delivery contracts, took massive bribes, and parked 9 million rubles 'off-shore' in an Amsterdam bank (at a time when the average monthly salary was 18 rubles).10 Arguably, corruption grew worse under the commissars: The Soviet Communist Party funded the coup d'etat that brought it to power with bank robberies and never looked back.

'Bold' Reforms Wipe Out a Nation

Much like America in 1776, Russia in 1991 was a new country where democratic ideals had won the day and now needed to be consolidated. The country needed to replace its Brezhnev-era constitution, hold new elections, and eliminate, or dramatically downsize, the KGB. Yeltsin had an overwhelming mandate to do this. But as with most men of ambition, the last thing on his mind was sharing power or risking it. Instead, he appealed for more, calling on parliament to grant him emergency powers for one year. Parliament agreed.11

Yeltsin promised bold market reforms, most controversially a 'one-time changeover to market prices' from prices set by the state.12 This was a key element of the 'shock therapy' some economists most notably Andersslund of the Stockholm Institute and Jeffrey Sachs of Harvard, both of whom advised the Russian government at the timeprescribed.13 Shock therapy was orchestrated by neo-liberal economist Yegor Gaidar, then thirty-seven, who since has said he knew it would never work, but insists 'we couldn't just keep doing nothing.'14 Gaidar freed prices on 2 January 1992. He and Yeltsin had both reassured the public that prices would rise about threefold.15 By year's end they had skyrocketed twenty-fold and were still climbing.16 When 1992 began, 10,000 rubles would have bought a car; by year's end, 10,000 rubles might have bought a good pair of shoes. A stunned Russian public watched their life savings evaporate.

This was a disaster, but it was not unforeseen. The Gaidar game plan had been to check inflation by tightening the faucet on the amount of rubles in circulation. That was never much of a plan, mainly because Gaidar's team never had control of the faucet: The Soviet Union still existed in the form of rubles circulating across its length and breadth, issued by fifteen separate 'central banks,' each acting independently.17

Gaidar plowed ahead with a policy that hinged on the money supply when he knew beforehand that he didn't control it! He might as well have knowingly gotten behind the wheel of a car with no brakes and then planned on stopping, somehow, at the first traffic light.

Whatever its merits, shock therapy ? la Gaidar had an important side effect. Rampant inflation was the blow that smacked down Russian civil society just as it was showing faint signs of trying to rise, tottering, out of communism's sickbed. Slowly and tentatively, ordinary Russians had been taking an interest in how their country was run. They had been debating the future and demanding changes, so much so that David Remnick could write a book as hopeful as the Pulitzer Prize winning Lenin's Tomb. Then, suddenly, Gaidar snapped his fingers and they were financially wiped out, their savings gone, their buying power shrinking by the hour. Any energy left over went into moonlighting at second jobs driving gypsy cabs in the cities, for example and tending their own garden plots, either at dachas or in apartment window boxes. Life expectancies plummeted, particularly for men, thanks mostly to an increase in violent or stress-related deaths: suicides, murders, heart failures, and alcohol-related incidents.18

Spinning Government Connections into Gold

Not all prices were freed. At Yeltsin's insistence, energy prices were held fantastically low. As economist Andersslund has observed, in 1992 the price of a pack of Marlboro cigarettes on Moscow's streets (about $1) was the same as the state-dictated price for three tons of crude oil (or about one three-hundredth of world market prices).19 It takes little imagination to see how one might profit from this. Those with access to oil and other undervalued natural resources precious metals, lumber, natural gas immediately ran up fabulous fortunes by buying for domestic prices and selling abroad. Men who enjoyed such access would become Russia's leading tycoons, among them Mikhail Khodorkovsky, Boris Berezovsky, and Vladimir Potanin. Khodorkovsky, who founded Bank Menatep, was an adviser to Gaidar's fuel and energy minister, and before Gaidar he advised Yeltsin's easily forgotten first Russian prime minister, Ivan Silayev.20 Potanin, who today heads the powerful Uneximbank, was in 1991 head of a Soviet-era association of foreign economic traders that oversaw export of oils and precious metals.21 Another who quickly won lucrative oil export concessions was Dzhokhar Dudayev, the mafiaesque leader of the rebellious republic of Chechnya.22

Access to such resources was a direct function of access to officialdom. 'Maintaining low prices on natural resource soil, gas, wood, metals was advantageous to those who sold this merchandise on the foreign market, who had licenses, privileges, the right to sell,' wrote the free market economist Larisa Pyasheva, an early critic of the Gaidar-led reforms. 'All of these people passed through the government offices of the 'liberals,' receiving there those licenses, rights and privileges.'23 Other get-rich-quick opportunities abounded. Nearly all also depended on exploiting access to the government and sometimes, the president himself.

An only slightly more creative way to spin hay into gold was by wrangling a presidentially decreed break from paying taxes or tariffs on imports and exports. Yeltsin gave such decrees left and right. One recipient was the Orthodox Church;24 another was the National Sports Fund, a corrupt, quasi sports ministry; another was a fund purportedly to help disabled Afghan War veterans that was plagued by murderous infighting.25 Yet another was a Moscow sports center headed by Otari Kvantrashvili, described in the Russian press as the godfather of the Moscow mafia.26

Few of these organizations lived up to their noble-sounding names. For instance, the National Sports Fund the domain of two of Yeltsin's friends, tennis coach Shamil Tarpishchev and security chief Alexander Korzhakov was encouraging athletic excellence by importing duty-free booze and cigarettes. (At the time the tariff on imported beer was 300 percent; on foreign vodka, 500 percent.) Izvestia's economics editor, citing the Russian Economics Ministry, reported that the exemptions on vodka alone were costing the government $200 million a month in 1995.27

When they had made their money, Russia's new elite needed a place to keep it. Since the Gorbachev era, banks had been easy to open and register, and largely unregulated. Many financial structures calling themselves 'banks' were actually investment houses, places to hold the money of a select few. Soon these men were offering their 'banking' services to the government itself. In 1992, Gaidar had quietly chosen a handful of 'authorized banks' to handle federal budget money. Oceans of cash farm subsidies, energy subsidies, survival payments to the communities of Russia's ailing Far North was led through the vaults of these anointed few.28

One such lucky winner was Mikhail Khodorkovsky's Bank Menatep. Established in 1988, Menatep, under Gaidar, was tapped to handle funding for a host of federal programs, including supplying the military with food, funneling cash for the Chernobyl cleanup, and later, rebuilding war-torn Chechnya.29 ('Rebuilding' Chechnya has been spectacularly lucrative: According to the Accounts Chamber, a Russian government auditing body, $4.4 billion sent off to Grozny disappeared in the vaults of commercial banks such as Menatep.)30

Another winner was Uneximbank, founded by Potanin in 1993. As might be expected, given Potanin's pull with the government, the central bank, Finance Ministry, and Foreign Trade Ministry, expedited Uneximbank's licenses, and the bank quickly received authorization to sell government Treasury bills and conduct operations with gold and other precious metals.31Uneximbank was anointed to handle the budgets of the Finance and Foreign Trade Ministries and the State Customs Committee.32 According to the newspaper Moskovsky Komsomolets revenues that Uneximbank skimmed from government programs in 1997 came to more than $1 billion.33

This national model of authorized banks was mimicked at the local level, with the mayors of Moscow and St. Petersburg tapping their own insider banks. Most- Bank, for example, achieved national fame while handling Moscow's municipal accounts. The banks tended to be slow in delivering the money, which because of inflation was of no small significance. Sometimes they kept a hefty cut of government transactions. Sometimes they collapsed as in St. Petersburg, where local Astrobank went under with a healthy chunk of the city budget.34

Soon, a handful of financial organizations usually centered around a single man came to dominate Russian political and economic life. Most-Bank, Gazprom, Menatep, Uneximbank, Alfa Bank, LogoVAZ, Stolichny Savings Bank all of these powerhouses burst onto the national scene just four or five years ago. While ordinary Russians bent ever lower over their potato gardens (Russians now grow at home a stunning 87 percent of all the potatoes they consume and 67 percent of all vegetables, according to the newspaper Argumenty i Fakty),35 the new elite grew bolder about flaunting its wealth and startlingly open about how they earned it.

'To become a millionaire in our country it is not at all necessary to have a good head or specialized knowledge,' Pyotr Aven, founder of Alfa Bank, told Moskovskiye Novosti in July 1994. 'Often it is enough to have active support in the government, the parliament, local power structures and law enforcement agencies. One fine day your insignificant bank is authorized, for instance, to conduct operations with budgetary funds. Or quotas are generously allotted . . . for the export of oil, timber and gas. In other words, you are appointed a millionaire.'36 Aven could speak with authority. He had been Gaidar's foreign trade minister, a position he apparently used to advantage. His Alfa group won lucrative state contracts to export oil, import Cuban sugar, and service some of the accounts of the State Customs Committee.

Menatep's Khodorkovsky, the former adviser to top government ministers, once frankly stated in an interview that politics was Russia's 'most profitable business.'37 According to an Izvestia profile of Menatep, the bank is structured to mirror the state hierarchy: its top managers were hired for their contacts with top government officials, middle managers for contacts with middle-level bureaucrats, and so on.38 Potanin, another former government official, once described Uneximbank as 'a private bank with a state mentality'39another admission of where the big opportunities were.

Behind the Castle Walls

These beneficiaries of nomenklatura capitalism resided, figuratively speaking, behind the castle walls, while Russia's small entrepreneurs were stuck with Hobbes's state of nature. The top bankers were protected from rampant organized crime by private security forces made up of ex-KGB personnel. Their business headquarters were fortress like structures in central Moscow; their residences were heavily guarded, palatial homes on the capital's outskirts. They commuted back and forth in convoys of Mercedes and Jeep Cherokees, which raced down the central lanes of Moscow's main thoroughfares, once reserved for the Communist Party elite, flashing blue roof lights warning the masses to clear the way.

The average merchant working out of a kiosk or a market stall had no protection from the tide of bureaucratic corruption and freelance extortion. A January 1994 study by Yeltsin's own analytical service found that all small traders in Russia were paying hefty protection payments.40 This state of affairs, as Larisa Pyasheva noted, was the result of choices made by Russia's new leaders.

'It was not so hard, in the end, for the state to impose order or, more accurately, not to allow disorder,' Pyasheva wrote. 'If, of course, the state had been genuinely liberal. Because a liberal state is a state strong and decisive in defending the legal rights of its citizens. Liberalism and disorder are antonyms. But tell me, did anyone in the Gaidar or post-Gaidar governments lift a finger to provide freedom for the market from bandits and bribe-takers?'41

'Everyone Will Have Equal Opportunity'

In 1992, Russians were frightened by the inflation Gaidar had unleashed. Their consolation was the argument that it would soon be over (actually it took years), and that privatization the second half of the reform plan was on the way.

Under a program designed by Anatoly Chubais, then thirty-five, with the help of Western advisers, small businesses and shops would be sold at local auctions. Larger industries would be turned into corporations whose shares would be given to workers and management, and also sold to the impoverished general public, which would be issued special chits privatization vouchers for use in buying them. When Yeltsin introduced the voucher program in August 1992, he said the goal would be to create 'millions of owners rather than a handful of millionaires' and promised, 'Everyone will have equal opportunity in this undertaking.'42

That was not entirely true. To paraphrase a certain fictional pig, some people's opportunity was to be more equal than others'. Soon Chubais would be as hated as Gaidar. Through vouchers, the government sold off the lemons of Russian industry, including thousands of enterprises that needed to be shut down. Real wealth from television stations to oil companies was held back. It would later be divided up among the new elite. Or, if real wealth did go on the block, the auction would be rigged. Izvestia, a newspaper then squarely behind Chubais, nevertheless concluded in July 1994 that nearly three-fourths of all shares sold at voucher auctions went to people selected in advance.43

As the voucher program closed in 1994, more than 17,000 large and mid-sized enterprises had been privatized, and among shareholders were 41 million Russian citizens44a statistic that has become obligatory in all newspaper articles heralding the success of Russia's market transition. Defenders of privatization say that all Russians will ultimately be winners, as these now-private enterprises will be restructured. But aside from some scant evidence that enterprises are dumping old management for new, there are few signs that restructuring is under way as a trend.45 Even if it is, it will surely take years, probably decades. Why should the nation wait and bear the cost, while a small elite profits today?

The West has ignored this explosive political subtext and embraced privatization as its own. From the start of his political career, Chubais was the recipient of massive U.S. aid and technical advice.46 'If we hadn't been there to provide funding for Chubais, could we have won the battle for privatization? Probably not,' Richard Morningstar, coordinator of U.S. assistance to the former Soviet Union, said in Prague recently. Morningstar noted that America does not have the money to revive the Russian economy on our own, 'but you can provide targeted assistance to help Chubais.'47

Through vouchers, Chubais achieved the status of a 'demigod,' as one World Bank official put it.48 In 1995, the International Monetary Fund (IMF) made a $10 billion loan to Russia conditional on Chubais running Russian economic policy that year.49 When the re-elected Yeltsin again tapped Chubais as economics tsar in 1996, the Clinton administration all but wept publicly for joy. A top U.S. Treasury official, Lawrence Summers, gushed of Russia's new 'economic dream team.'50

One statistic much ballyhooed by Chubais's fans is the creation of 41 million 'property owners,' as boosters describe voucher-created shareholders a phrase no doubt chosen to conjure the image of a nation of shopkeepers. This is a meaningless statistic: Theoretically all 41 million could hold shares in one hopelessly bankrupt brick factory somewhere above the Arctic Circle. (And millions more, in fact, ended up investing both their vouchers and their money in unregulated pyramid schemes.) The truth, of course, is somewhere between the Arctic Circle and the government happy talk in Washington and Moscow. It will remain difficult to evaluate until information becomes available that breaks down how shares are distributed among the population. Such information about wealth is exceedingly rare in Russia. But one authoritative study, commissioned by the Russian central bank and carried out by the Academy of Sciences in fall 1996, has demonstrated how few winners have been produced by economic reform. The study found that Russians held $140 billion in personal savings, of which 3.3 percent belonged to the poorer 71 percent of the population and 72.5 percent to the richest 5 percent. More than half of all Russian savings were held by just 2 percent of the population. That same study found that nearly half of all personal savings is kept in cash, much of it in U.S. dollars. It is not being invested into the economy not in industry, not even in banking and financial structures. This, as the academy's Iosif Diskin wrote, represents a vote of no-confidence in Russia's 'state-financial institutions, and in the state as a whole.' 51

Our Home Is Gazprom

Among the choice plums kept off of the voucher auction block were Russia's biggest money makers: oil, precious metals, natural gas, gold, and diamonds. The classic example is Gazprom, the Russian natural gas monopoly once headed by Prime Minister Chernomyrdin. Gazprom's wealth is staggering: The standard estimate put forward by Gazprom managers and by Western experts is from $250 billion to $950 billion.52

If Gazprom had been privatized in accordance with the stated goals of the voucher program using equal opportunity to create millions of owners and not just a few millionaires Russia might today be an entirely different place. The government could have divided Gazprom among the nation's 148 million people, one Gazprom share per voucher. Assume that the stock value indeed reflects the company value (which is the way it is supposed to work in the textbooks, even if real life is less predictable), and each voucher would have been worth somewhere between $1,700 and $6,400. For a family of three, that would have been $5,100 to $19,200 in stock, to say nothing of dividends.53 Creating that sort of wealth for 148 million people (and not just 41 million) would indeed have been something to brag about.54 Imagine if roughly the same approach had been rolled out through the other crown jewels of Russian industry the massive oil companies such as LUKOIL and Yukos, the metals giants such as Norilsk Nickel, the telephone giants such as Svyazinvest, the diamond mines and the gold mines, all of which were protected from voucher privatization. Assuming a truly liquid trade in shares on a vibrant stock market, the world would no longer have been looking at Russians with pity, but with envy. Russia would have created overnight a middle class whose consumer appetites would have fueled an economic revival.

Back in the real world, Gazprom was privatized secretly, with the company managers getting a huge cut. Today the government owns 40 percent, Gazprom management owns 35 percent, and ownership of the remaining 25 percent is, as the Moscow Times recently put it, 'unclear.'55 For three years after Gazprom was privatized, there was more consternation in Russia than debate. But in May 1995, former finance minister Boris Fyodorov, writing in Izvestia, attacked Gazprom's privatization as 'the biggest robbery of the century, perhaps of human history.' Fyodorov asked why the natural gas monopoly stock had been divided among top management insiders, with each getting from 1 to 5 percent of the company, or 'a potential . . . minimum of from $1.2 billion to $10 billion each.' 'It's nice that we have people who can compete in wealth with the sheiks and the Rockefellers,' Fyodorov wrote. 'But why should [ordinary Russians] be satisfied with a share of the national wealth equal to one [privatization] voucher?'56

There were other salvos, including allegations that Prime Minister Chernomyrdin was one of those new Russians rivaling the sheiks and the Rockefellers. Current and former high-ranking Russian officials soon were lining up to offer allegations that Chernomyrdin was now one of the 'ten richest men in Russia,' thanks to his secret Gazprom stock, and that Chernomyrdin's son was also a Gazprom shareholder, both of them via the 'dummy' front companies sprinkled throughout the list of Gazprom shareholders.57

Amid these allegations, the New York Times offered a muddled, page-one profile of Chernomyrdin. The article noted accusations that Chernomyrdin 'owned stock' in Gazprom (without ever explaining how he might have gotten it) and reported that his son was building a three-story dacha on the Gazprom compound. It then quickly moved to exonerate Chernomyrdin: 'While few challenge Mr. Chernomyrdin's personal integrity, many here cite him as an example of a chummy relationship that makes the government blind or indifferent to official corruption, even when officials themselves are honest.'58 (This would appear to mean that 'official corruption' exists in Russia, but that neither Chernomyrdin nor 'the government' is involved. Both, however, are guilty of a 'chummy relationship,' although with whom and for what purpose is not specified.)

Chernomyrdin has long been coy about his Gazprom ties. In fall 1995, when the prime minister was being questioned by parliament, one deputy asked him how many shares he owned in Gazprom. Chernomyrdin paused, then said with a smile, 'Next question.' Eventually, however, Chernomyrdin did respond. In July 1995, he summoned a reporter from Komsomlskaya Pravda a national newspaper by then partly owned by Gazprom to his office for an interview.

Eventually, and apologetically, Komsomolskaya's interviewer asked Chernomyrdin to comment on reports that he owns 5 percent of Gazprom and that his brother not his son is building a palatial, three-story dacha. Somehow not noticing that convenient mistake, Chernomyrdin launched into the sad tale of how both his brothers had died in recent years, then stated: 'When I read vile comments about dachas, I feel as though the authors know of my grief and simply want to rub salt in the wounds.'

Chernomyrdin continued with his famously tortured grammar: 'As to [Gazprom] shares, those who say that, it seems, don't have the brains to understand what a gigantic sum of money that is, and can it belong to one person. In general I don't have any Gazprom stock, although in my time they suggested I become a shareholder.'

They? Who are 'they'? Why did 'they' suggest such a thing? Why did you decline? Sadly for history, interviewer Gamov quickly changed the subject, asking Chernomyrdin if he is a 'sentimental' person, asking how he keeps in shape perhaps his wife feeds him a particular way, asking him to 'comment' about the family photos of his wife and grandchildren on his desk.59

First as fuel and energy minister and then as prime minister, Chernomyrdin for years protected the oil and gas industry from paying taxes. His valiant efforts in that regard earned his political party, 'Our Home is Russia,' (Nazh dom Rossiya) the derisive nickname 'Our Home is Gazprom' (Nazh dom Gazprom). Andersslund notes that while the oil and gas sector is now properly taxed, it was not so as late as 1995when a reasonable tax burden would have contributed up to $30 billion in revenues that year, more than half of all projected revenues in the 1995 Russian budget. With that money, the government could have given each of its 30 million pensioners $1,000. Each Russian student, from first grade up, could have been given a laptop computer. Chechnya could have been destroyed and rebuilt, twice.

Two years ago when the allegations against Chernomyrdin were hot news, Vice President Al Gore was praising Chernomyrdin for his 'resolute vision.' 'Friends have a right to be proud of their friends,' Gore said then.61 Until Chernomyrdin was fired in March 1998, Gore continued to trumpet his personal relationship with the prime minister, which mirrored Clinton's relationship with Yeltsin. In some of the most bizarre expenditures ever seen, meanwhile, the U.S. government has steered foreign aid to Gazprom, one of the world's richest corporations. In a deal brokered at a meeting of the Gore-Chernomyrdin Commission, the U.S. Agency for International Development (USAID) gave $2.3 million to buy pipeline valves for Gazprom. A few weeks later, Gazprom bought two $50 million French jets for its executives.62

'The Presidential Orchestra Played and We Danced'

Privatization's greatest success was perhaps a program under which every family has the option to privatize the Soviet-built apartment in which it lives. Today this represents the only major wealth many can boast of. The elderly in particular have been quick to liquidate this, their only asset, and move in with friends or family.

Housing privatization had a different meaning for the new elite. Soon after taking office, Yeltsin ordered an apartment building on Moscow's Ulitsa Osennaya commandeered and renovated. The new apartments, which had been built at state expense, were doled out as gifts. Other than the Yeltsins, those who quickly moved in included Korzhakov, Gaidar, Chernomyrdin, Moscow Mayor Yury Luzhkov, Defense Minister Pavel Grachev, Interior Minister Viktor Yerin, Deputy Prime Minister Oleg Soskovets, presidential tennis partner Shamil Tarpishchev, the ghost author of Yeltsin's memoirs Valentin Yumashev, Korzhakov's lieutenant (and future chief of the FSB, the KGB's successor agency) Mikhail Barsukov, and many others.63

Korzhakov, Yeltsin's personal security chief until he was sacked in 1996, describes in his memoirs how the elite pleaded for flats: As soon as our allies learned that the Presidential Building was ready for habitation, supplicants began to come see me.64 . . . Soon at a government meeting Gaidar came up to me and began to ask in a pitiful voice: 'Alexander Vasilievich, couldn't you speak with Boris Nikolayevich [Yeltsin] and convince him? Because I live in a ground floor apartment, I'm in such danger.'65 . . . Moscow Mayor Yury Luzhkov and [deputy mayor] Vladimir Resin [next] became our neighbors. Yeltsin invited them. At first they both delicately refused, then moved in.66 . . . Boris Nikolayevich then organized a collective housewarming party at the House of Receptions on the Leninsky Hills. It was jolly. Everyone arrived with their families. We dined wonderfully. The Presidential Orchestra played and we danced. We congratulated each other on our lucky and cost-free acquisitions. Yegor Gaidar, who so passionately preached the idea of the market, was also ecstatic about the free distribution of apartments.67

Korzhakov's memoirs came out in the late summer of 1997 and have been selling rapidly from street-corner tables throughout Russia. Western journalists, however, have downplayed or debunked the book.68 They correctly argue that Korzhakov is corrupt and anti-Yeltsin. Russians know this as well, yet few would argue that Korzhakov's portrait of Kremlin life is false.

Anti-Corruption and the Russian Salvation Tour

One of Yeltsin's first public anti-corruption drives came in March 1992, only two months after Gaidar had unleashed inflation. Yeltsin appointed Yury Boldyrev, a young crusader from St. Petersburg, to the new post of chief government inspector. Boldyrev documented the illegal sale of tens of millions of dollars worth of military hardware by Russian army brass still based in Eastern Europe, the so-called Western Forces;69 he asked Yeltsin to fire some top generals. He also asked for permission to investigate corruption in the administration of Moscow Mayor Luzhkov. Yeltsin refused, fired Boldyrev, and liquidated the inspector's office.70 According to Boldyrev, Yeltsin explained his refusal in part by saying, 'We support Luzhkov.'71

This would become the standard government response to corruption. In public, Yeltsin would champion 'the struggle against the cancerous tumor of corruption in the upper echelons of power.'72 In fact, corruption flourished under his protection, even encouragement. At times this would become clear; then the government would trot out Chubais, the darling of the West, to break up the gaming in the style of Casablanca's Captain Louis Renault.

Consider the furor over the National Sports Fund and its duty-free alcohol and cigarette trade. The World Bank and the IMF were not happy when the fund's tax breaks came to light why, after all, should Western governments make loans to Russia, if Tarpishchev, Korzhakov, and company were siphoning millions from the budget? So began a sleight of hand aimed at the Westerners: In March 1995, Yeltsin signed a new decree repealing the duty-free status; but four months later, in July, Chubais himself quietly approved a government decree that paid Tarpishchev's sports fund compensation for any revenue lost.73 Then in September, Chubais went public with a demand ('I'm shocked, shocked I say!') that the already canceled privileges, be, um, canceled again. By 1 October, 'Either the [tax and tariff] exemptions go, or I go!' Chubais thundered. By most accounts, they were extended repeatedly until the beginning of 1996.74

Another case was the disabled Afghanistan veterans fund. In 1994, after the fund's chairman was murdered, the government canceled its exemptions and ordered it to pay retroactively the duties it had avoided. But Yeltsin then signed decrees that forgave all penalties and paid the fund $8 million again, compensation for its lost status.75

Meanwhile, Yeltsin's subordinates followed his shining example. In 1992, the Kremlin's Palace of Congresses was rented out to Shoko Asahara, head of Japan's Aum Shinryko cult. Cult members dressed in tinsel-covered leotards pranced around through clouds of dry ice in a musical Asahara had written for the occasion.76 This was Aum's 'Russian Salvation Tour.' Aum cult members met with Vice President Alexander Rutskoi and parliamentary Speaker Ruslan Khasbulatov and quickly found an ally in Oleg Lobov, chairman of the Security Council and a top confidante of Yeltsin.77 Investigators of Aum's 1995 sarin nerve gas attack on the Tokyo subway, which killed 12 and injured 5,500, say the sarin was of Russian origin.78 They also say Aum recruits apparently including one who would later expertly gun down a top Tokyo police official79had weapons training in 1994 with the KGB's elite Alpha Group,80 then headed by Korzhakov.

Lobov has been accused of accepting a suitcase containing $79,000 from Aum, in return for sarin-producing technology. A Russian criminal case remains open.81 (Yeltsin's response to the charges that Lobov helped Aum was immediately to promote him to be his envoy to Chechnya.)82 Aum also obtained some military hardware and technology to produce its own Kalashnikov assault rifles.83 Investigators say Aum was aiming higher: cult leaders prowling around Russia literally kept a shopping list in a notebook that included MiG-29 fighter jets, Proton rocket launchers, and nuclear warheads. That same notebook listed pathetically trivial gifts for government officials: 'To Lobov and others, Polaroid camera, Cross ballpen, and Walkman.'84

'Corruption is not a new topic,' noted prominent Moscow lawyer and Literaturnaya Gazeta political columnist Arkady Vaksberg, writing in August 1993.

The fact that it is penetrating more and more into all levels of the government has been written about for quite some time. The official indifference with which these alarming signals are greeted can be partially explained by the fact that those responsible for fighting corruption have themselves been infected with the sickness. . . . To this date there is no known corruption case against any bureaucrat occupying an even slightly prominent government post.85

As Yeltsin's conflict with Khasbulatov's parliament worsened, both sides began to make intriguing corruption allegations. But Andrei Malgin, the editor of the weekly news magazine Stolitsa, found Americans to be surprisingly hostile to the idea of examining the Kremlin's corruption. In September 1993, he wrote: I recently published an article in the Moscow Times in which I expressed an opinion that I thought was indisputable: The mutual accusations of corruption coming from the executive and legislative branches discredit both, and diminish the authority of the government as a whole. The populace has long lost the ability to distinguish who is right, who is guilty, and has just become convinced that all those in power are thieves.

Not everyone agreed with me. Several foreigners working here in Moscow even called me and asked with irritation how I could equate the Yeltsin and Khasbulatov teams. And on the very next day after my article appeared it was liberally quoted in the New York Times as a very exotic view of the corruption charges.86

Murky Oligarchy on Channel 1

Only one television station could be seen across all of the Soviet Union. Predictably, it was Channel 1. The company that ran Channel 1 used to be called Ostankino. But after investigators uncovered massive corruption,87 Yeltsin issued a decree liquidating Ostankino and transferring its property and privileges to a new company, ORT. End of investigation. 'This is like a thieving store manager setting his store on fire to cover up the tracks,' said Igor Yakovenko, head of the Duma's media subcommittee and a member of the Yabloko Party.88 The Moscow Times complained in an editorial about a switcheroo carried out 'by a stroke of the president's pen, with no pretext of conforming to the laws on privatization. . . . The secrecy surrounding the deal strongly suggests that one inefficient and corrupt system in which billions of rubles in revenues flooded into private pockets is about to be exchanged for another.'89

The state was to hold 51 percent of ORT, and the other 49 percent was to be divided up among some of Russia's mightiest and murkiest commercial structures: Gazprom, Stolichny Bank, Alfa Bank, Bank Menatep, LogoVAZ, and others. Chubais himself was also on the board of directors. Many of the men sitting around the ORT table were already working in tandem with government officials to build personal fortunes at state expense. They were also rapidly taking over the nation's media. This was starting to look suspiciously like an oligarchy. One of the first people to say as much was Alexander Solzhenitsyn. 'We have oligarchy, not democracy,' he said in a speech soon after his arrival from twenty years of exile in Vermont.90 Later, in Le Monde, Solzhenitsyn wrote, 'Former members of the communist elite, along with Russia's new rich, who amassed instant fortunes through banditry, have formed an exclusive . . . oligarchy of 150 to 200 people who run the country.'91

On his return to Russia, Solzhenitsyn was given a twice-monthly show on ORT. After he used it to deliver those criticisms and others against the war in Chechnya and against privatization, the show was unceremoniously yanked.92 Solzhenitsyn faded angrily from public view; today he describes Russian politics as not worth his time.93 The loss, again, of Solzhenitsyn's voice was truly sad, for by late 1995 privatization ? la Chubais was about to enter a final and dirty stage one that would prove that the rigged voucher auctions and the corrupt privatizations of Gazprom and ORT were not flukes. The crown jewels of Russian industry tens of billions of dollars worth of oil companies, metals companies, and energy and telecommunications mammoths had been kept out of the voucher program. Now they would be divided.

Loans-for-Shares: A Boring Label for a Historic Swindle

In 1995, Chubais and Yeltsin endorsed a plan put forward by Uneximbank's Potanin. Banks would give the government 'loans'; in return, they would manage the state's stake in those strategic industries for a few years.

This was not really about 'loans' in return for 'borrowing' an oil company, but an underhanded way to sell off such companies. Loans-for-shares, as the program was labeled, brought with it enough jargon and cloudiness to obscure the issue and bore the public. Those who followed events more closely, such as Gaidar's outspoken former finance minister Boris Fyodorov, were contemptuous. 'Yesterday [the oligarchs] shared television stations, today they're splitting up companies among old friends.'94

Chubais came to the rescue. Russia's financial giants would not simply sit around the table and divide the oil companies among themselves; no, Chubais promised, instead there would be competitive auctions open to the entire world. 'It once seemed control of Russian industry would fall into the laps of its banks. Fortunately, things may turn out differently,' intoned The Economist. 'Mr. Chubais has opened up bidding to anyone wanting to take part.'95

But a month before the first auction, Chubais reversed himself and let the Economist down. The government announced that foreigners would be barred from the bidding, and Chubais was silent. Later, he would justify that ban.96 The first in what would be a historic series of 'competitive auctions' got under way 8 November 1995, when bidding opened on a 40 percent stake in Surgutneftegaz, an oil company with an alphabet soup name, but a yearly oil output equal to France's Total.97 The auction had two bidders, an obscure company called Svift and Surgutneftegaz. A third bidder had been disqualified on a technicality. Surgutneftegaz won the bid, pledging to shell out a mere $88 million. This was, as one financial analyst put it, 'as close to free as you can get when buying an oil company.'98 Vladimir Bogdanov, head of Surgutneftegaz, promised that the government would get its money 'even if we have to withhold wages and other payments for two months.'99

The next auction was even more blatantly collusive. On offer was 38 percent of Norilsk Nickel, a metals combine located in Russia's Arctic North that produces more than a quarter of all the world's nickel and more than a third of all the cobalt. Norilsk Nickel earns an estimated $2 billion a year from exports. This was one of a few engines that were dragging behind themselves the entire Russian economy. Yet strangely, given what was at stake, the government delegated its authority to decide Norilsk Nickel's fate to Uneximbank, a private company. Uneximbank was deputized to accept and evaluate bids for Norilsk, even though Uneximbank was itself offering a bid. Not surprisingly, Uneximbank won. Its laughably small bid of $170.1 million was only $100,000 over the government's minimum bid. A competing bid that was two times higher was judged unfit.100 And so it went:

1) 51 percent of the enormous Sidanko oil company. Minimum bid: $125 million. Uneximbank organized the auction; an Uneximbank affiliate won with a bid of $130 million. A rival bid was disqualified for arriving twenty-four minutes late.101 One Western oil analyst at the time calculated that Uneximbank had paid the equivalent of two cents a barrel for Sidanko's reserves, when the going rate internationally for reserves was $4 or $5 a barrel.102 ?

2) 5 percent of LUKoil, Russia's largest oil company. Minimum bid: $250 million. Bank Imperial, the pet bank of Chernomyrdin's Gazprom, organized the auction. Bank Imperial and LUKoil jointly submitted the winning bid$250.01 million, $10,000 over the minimum. Only weeks earlier, the Atlantic Richfield Company had paid more than seven times that for a comparable LUKoil stake.103 ?

3) 78 percent of Yukos, Russia's second-largest oil company. Bank Menatep, the state's hand-picked organizer for the auction, won it with a bid of $309.1 million, $9 million above the minimum, for control of 2 percent of the world's known oil reserves. Menatep had rejected a rival bid from a consortium composed of Alfa Bank, Inkombank, and Rossiisky Kredit on various procedural grounds.104

A final auction was held in the waning days of 1995. Stolichny Savings Bank and the previously unknown Oil Finance Company, reportedly a front for financier Boris Berezovsky, together won 51 percent of Sibneft, Russia's seventh-largest oil company. They paid $100.3 million, $300,000 over the starting price. A rival bid was rejected for arriving twenty-four minutes late, as had happened with the Sidanko sale.105

Loans-for-Shares Revives the Communists: The West Squirms to Exonerate Chubais

As auction after auction ended in scandal, with the losers threatening lawsuits, Chubais defended the process. Just after the Norilsk Nickel sale, Chubais told the press that he had informed Yeltsin of the 'efficiency' of loans-for-shares and that the president had declared himself 'satisfied.'106 On the eve of the Yukos auction, Chubais lashed out at the noisy trio of Inkombank, Alfa Bank, and Rossiisky Kredit, who were protesting that Bank Menatep had been allowed to organize the auction and participate in it. In a move worthy of Communist Party chief Gennady Zyuganov, Chubais accused the trio of fronting for hidden foreign investors.107

Finally, in mid-December, with the process nearly finished, Chubais admitted that it had been a 'mistake' to let banks organize the auctions and also participate in them. He promised that this would never happen again (another promise that would be broken). The mistake, he was quick to add, had been of an 'ethical,' not a 'legal,' nature.108 He repeated this tepid mea culpa in January 1996, adding, by way of exculpation: 'We must remember that Russia is a transition economy.'109

Chubais never explained how Russia's status as a 'transition economy' justified the rigging of privatization auctions. Nor did he, or any other top official, ever respond to sensational subsequent charges that the loans-for-shares winners had paid for their stakes with taxpayers' money. In October 1996, Yury Boldyrev, Yeltsin's former government inspector, told the weekly Novaya Gazeta that his Accounts Chambera newly created independent auditing office modeled after the U.S. General Accounting Office had discovered that the government had transferred to the accounts of some of the winners state funds equal to amounts they would subsequently bid. In other words, a few hand-picked men took over Russia's state-developed oil fields for free, as part of a giant shell game in which one arm of the government paid another arm.110

Chubais is viewed as the embodiment of liberal economic reform in Russia. Clearly, a reevaluation of his role was in order. Yet USAID, which had spent tens of millions of dollars helping sell the Russian people on his privatization program, had nothing to say about loans-for-shares. World Bank and IMF officials were also silent, as were the American media. A notable exception was Harvard's Jeffrey Sachs, who called for reversing the loans-for-shares auctions and the earlier privatization of Gazprom on ethical grounds.111 Some, however, sought to protect Chubais's good name by cutting him out of this unflattering picture. The Economist, for instance, which had praised Chubais prior to the auctions for opening up bidding, did not even mention his name in two subsequent articles on the scandal.112

As the December 1995 Duma elections approached, voters were infuriated, not least by the loans-for-shares charade. Most understood that the winners of the rigged auctions had won long-term control, not a temporary stake. (That was indeed so: The banks would eventually sell their stakes, via front companies, to themselves.)113 Not surprisingly, the Communists made a comeback, racking up 22.31 percent of the national parliamentary vote.114 Yeltsin sacked Chubais, saying that he had 'sold off big industry for next to nothing' and that this had bolstered the Communists.115

The Wall Street Journal was more forgiving. In an editorial about the dismissal, it cast Chubais as a scapegoat. It criticized loans-for-shares, but claimed, without a shred of evidence, that much of what happened had been 'removed from Mr. Chubais's control.'116 The Financial Times eulogized Chubais as, of all things, a man 'who relished roughing up Russia's vested economic interests.'117

The 'Davos Bankers' Improve upon Democracy

At stake in loans-for-shares was not simply wealth, but political power. These were strategic industries, engines of the Russian economy. Along with the television stations and a growing number of other media, they now belonged to that same new elite that had always owed its existence and riches to the state. No one in this elite wanted to see Yeltsin lose a presidential election. In January 1996, with the vote six months away, it appeared that Yeltsin would do just that: The Communists were on a roll; a war in Chechnya crawled on; millions of workers were owed months of back pay. For the new elite, a Communist president would be bad; even more dangerous would be a President Alexander Lebed or a President Grigory Yavlinsky, both of whom were outspoken against corruption.

That month, Russia's leading financiers met at the annual international economic conference in Davos, Switzerland. These were the new oligarchs, most prominently LogoVAZ's Berezovsky, Uneximbank's Potanin, Menatep's Khodorkovsky, and Most-Bank's Vladimir Gusinsky.118 These men knew what they wanted: to preserve the status quo. They emerged from Davos with a two-pronged strategy.

Prong one entailed money and favorable media coverage for Yeltsin's campaign. At the bankers' request, the sacked Chubais was quietly brought on as Yeltsin's campaign manager.119 Prong two was more sinister: It was a plan to ditch the elections if they seemed to be going badly. This idea was first floated in the infamous Letter of 13, published in late April 1996 in nearly every major Russian newspaper and signed by the Davos bankers and others. This open letter called on all politicians, but especially Zyuganov, to seek a 'political compromise' with Yeltsin before elections could lead to 'acute conflicts.'120

Berezovsky, the Davos group's self-appointed spokesman, was credited with having organized the letter. Berezovsky described an acceptable compromise as one that would involve Yeltsin and Zyuganov forming a 'coalition' government, perhaps via the creation of an emergency 'state council 'in lieu of elections. 'The question is not whether to postpone elections,' Berezovsky said. 'The problem is finding a legal way to do it.'121 Yeltsin's personal security chief Korzhakov backed this idea; in Korzhakov's memoirs, he describes Chernomyrdin as also favoring postponement.122 Zyuganov's people, meanwhile, were floating similar ideas for a 'state council.' Details differed, but the overriding goal was the same: to scrap democracy in favor of rule by the new nomenklatura, which in turn would give the Communists a place at the feeding trough.

Both prongs of the strategy were pursued simultaneously. Yavlinsky was marginalized in the media (a Yabloko study found that Yeltsin got 800 times as much television news coverage as Yavlinsky.)123 Lebed, in turn, was financed and beefed up by the bankers: Polls showed that a strong Lebed showing would split Zyuganov's support.

In May, Yeltsin said the elections would go forward: 'Korzhakov is not alone in thinking that a Zyuganov victory would start a civil war,' he said. 'But I still believe in the wisdom of Russian voters. That is why the election will take place according to the Constitution.'124 Did that imply the election would not take place if Yeltsin's faith were to falter?

Looking for White Hats and Black Hats: 'A Russian Bill Gates' and 'a Kremlin Godfather'

In June, Chubais engineered Korzhakov's ouster, and Yeltsin went on to win. The president reorganized his government. Chubais became his chief of staff. At Chubais's request, Uneximbank's Potanin became deputy prime minister in charge of economic policy. Within months, Lebed, who had been given day-to-day charge of the presidential Security Council in the run-up to the final vote, was sacked and LogoVAZ's Berezovsky joined the Security Council.

Potanin, thirty-five, in particular intrigued the Western media. The Wall Street Journal heralded him as 'a Russian Bill Gates' who had built his bank 'into a financial power-house from modest beginnings.'125 The Financial Times, in an article describing the new government, saw hop

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