Russia's oligarchy tumbles downward Nation's tycoons lose their power in wake of ruble's decline


MOSCOW -- Because of its towering, glimmering-green headquarters here, Russia's sprawling and powerful natural gas monopoly came to be known to admirers and critics alike as the Emerald City.

And its boss, Rem Vyakhirev, was the Wizard.

Vyakhirev himself said he liked the image. Gazprom, as the company is more formally known, became a domain unto itself in post-Soviet Russia, a Land of Oz that made the mighty tremble and left plain folks in awe. It dictated to the government and vaulted Vyakhirev, a grandfatherly lover of fishing and Russian folk songs who once wanted nothing more than to run away to sea, into the ranks of the tycoons who sat at the heart of Russia's peculiar capitalism.

In the seven years since the end of the Soviet Union, fewer than a dozen men amassed enormous wealth, strung together far-flung empires, bought the Russian press outright, and came to wield tremendous power. They rose through connections, patronage, charm, intimidation and an adroit use of other people's money. They maneuvered the Kremlin into handing out vast portions of the Russian economy, through privatization.

They were called the oligarchs.

Yet it came tumbling down, because there was something about Oz that all the wizards seem to have forgotten.

Last spring a young man named Sergei V. Kiriyenko was anointed as prime minister just when it appeared that the Russian economy was in trouble. His role, it now seems evident, was to play the fall guy, taking the unpopular but necessary steps to save everyone's investment. But he did something else: He was Toto, pulling the curtains aside and showing the world that the whole thing was a fraud.

On Aug. 17, Russia defaulted on its pyramid of debt, and took the banks that had feasted on the debt down with it. The Russian economy is following.

Most of the oligarchs managed to stash personal fortunes abroad during the avalanche, but the financial structures they built are paralyzed and broke. Kiriyenko was swept aside, but so was their grip on power.

Vyakhirev was left with more than his comrades, because Gazprom is a real company that sells a real product. The others -- men like Vladimir Potanin, Alexander P. Smolensky and the manipulative Boris A. Berezovsky -- have little to show for their gilded decade but an acquired taste for fine Cognac, expensive cars and vacations on the Cote d'Azur.

'Puppet show has ended'

Something else has collapsed, too, says Lilia Shevtsova, an analyst with the Carnegie Moscow Center. That is the myth of the oligarchs, a myth that they themselves, through their press holdings, actively encouraged.

"But the oligarchs were not oligarchs in fact," Shevtsova said. "They were favorites. It was all court politics."

They were not like America's Vanderbilts or Rockefellers or Carnegies. They were as ruthless, but built nothing. Their success depended on the extent to which they could rely on the government to fuel their wealth. When the government's finances went south, theirs quickly followed.

"This kind of puppet show has ended," said Shevtsova.

The idea of the oligarchs began to attract attention in late 1995, when a group of bankers got together with Anatoly Chubais, in charge of Russia's privatization program, and devised what was called the loans-for-shares plan. In exchange for loans from the banks, the government would deposit, in trust, shares in publicly owned companies. When the government didn't pay back the loans, as everyone knew it wouldn't, the banks took the shares for a fraction of their worth.

Potanin himself temporarily left Oneximbank, one of the participating banks, and took a post in the economics ministry, where he oversaw the government's inability to redeem the shares.

But by this time they were already wealthy and adept at playing the inside game. The men who came to be known as the oligarchs had perfected the gift of grab several years earlier.

Several rose to prominence strictly through dealings in finance. Vladimir Gusinsky, a one-time theater director, produced a cultural program for the 1986 Goodwill Games and in 1989 put his experience to use setting up Most Bank. Smolensky started off in 1987 with a "cooperative" that bought construction materials at subsidized state prices and sold them at vastly higher market prices. With his profits he established Stolichny Bank. In 1996 the government asked him to take over a surviving Soviet-era agricultural bank, and the result was SBS-Agro, the second-largest bank in Russia.

Not everyone worked as hard. Potanin, a former junior bureaucrat in the Soviet Ministry of Foreign Trade, set up a bank to handle overseas trade in 1992 and found himself blessed with a torrent of business. Mikhail Khodorkovsky established his Menatep Bank in 1988 with money from the Komsomol, or Young Communist League.

Unconventional methods

None of these banks acted the way banks do elsewhere. With the exception of SBS-Agro, they were indifferent to depositors. None made loans available for mortgages. What they all did was speculate in government debt and snap up companies being privatized through insider auctions.

The Russian government embarked on a system of issuing credits to various enterprises, but did so through the commercial banks. It would be unfair to say the banks took a fee. Typically, they might pay 30 percent interest on the credits, but collect 150 percent from the enterprises. The profits were enormous.

When the government issued vouchers to every citizen that were to be redeemable for shares in newly privatized firms, all the business was funneled through the favored banks.

Throughout this era, rather than establish its own treasury, the Russian government simply deposited its funds in commercial banks.

It meant a vast amount of money to work with. It all came from the government.

"It was like a drug to them," said Sergei Kolmakov, of the Polity Foundation here.

Others among the oligarchs continued to emphasize commerce as well as finance. Berezovsky began building his fortune in the 1980s by establishing himself as a middleman in Russian car sales. With good contacts among the manufacturers, he bought cars for practically nothing and sold them on the open market. It was lucrative -- but there had to have been more. Forbes magazine has listed Berezovsky as one of the richest men in the world.

"I remain unconvinced you become a multi-billionaire by selling cars in Russia," said Michael McFaul, a Hoover fellow at Stanford University who has studied the rise of the oligarchs. "It doesn't add up."

Berezovsky, the target of a car bomb in 1994, has cultivated President Boris N. Yeltsin's influential daughter, Tatyana Dyachenko. In 1995 he was unexpectedly named director of the ORT television network shortly after Vladislav Listyev, a popular announcer who was trying to fight corruption in the sale of advertising, was slain.

Forbes said Listyev had been caught in a dispute with Berezovsky. Berezovsky sued the magazine for libel in England, but a court there ruled that it did not have proper jurisdiction.

Berezovsky also controls Aeroflot, though the government still owns a 50 percent stake in the national airline. He installed Dyachenko's husband -- Yeltsin's son-in-law -- as chairman. The newspaper Obshaya Gazeta reported that all of Aeroflot's foreign earnings are funneled though a company in Switzerland that Berezovsky set up, and that payments by foreign airlines for transiting Russian airspace go to the same company.

'Drain' on economy

In late 1995, Potanin, Berezovsky and others set out on the loans-for-shares project. Oil companies, nickel companies, as much as half the Russian economy, was parceled out in deals that no one even pretended were open or fair. The bargain-basement sell-off has become the symbol of the oligarchs, although, as McFaul points out, none of the companies is particularly profitable, and none of the oligarchs has any interest in learning the principles of good management to make them so.

What the new owners have been able to do is help themselves to the resources of their acquisitions. In their brazenness they hark back to the last century, when the American financial manipulator Jay Gould looted one railroad after another, leaving companies like the Erie so wrecked that it never recovered.

"So far it's all been pillage," said McFaul. "They were a parasitic, nonproductive drain on the economy."

They were also riding high. Boastful and arrogant, they controlled most of the flow of money in the country. No one dared cross them.

Following Gusinsky's lead, they acquired vast press and television holdings, which they used to powerful effect in support of Yeltsin in the 1996 elections -- a payback, it was generally believed, for the loans-for-shares. (Some have even speculated that Chubais gave his approval to the scheme after calculating that it was what would be needed to ensure Yeltsin's re-election.)

The media played a large role, as well, in promoting the image of the oligarchs in the first place. To the extent that they could be portrayed as influential, they became influential.

In a country like Russia, it was easy for people to believe there were power brokers acting behind the scenes. It may have been inflated well beyond any connection to reality.

A year ago the banker oligarchs had a falling out over further privatizations, and a vicious game of insider politics ensued. By then the store had been all but cleaned out, anyway.

Vyakhirev's ascension was along a different path, but he ended up much as the others did. He built his career at Gazprom, a good friend of Viktor S. Chernomyrdin, who left the company in late 1992 and served for the next five years as prime minister.

For decades under the Soviet government the country's energy producers had taken second place to its industrial complex in power and in Moscow's regard. But in the 1990s Gazprom came into its own, selling gas abroad for dollars and German marks that no longer had to be turned over to the center.

Gazprom's obligation was to pay taxes, but the company kept three sets of books, according to Andrei Piontkovsky, who has written extensively about the oligarchs. The government run by Chernomyrdin never cared to see the profits and thus saw little of the taxes. In effect, Gazprom did what the banks did, using public money to snag its own empire of media and other holdings.

Where the others had links to Chubais or the Yeltsin family, Vyakhirev had Chernomyrdin. He liked, as well, to cultivate an altogether different image from that of Berezovsky or Potanin.

Vyakhirev was just a simple Russian man, with a good wife and a loving family. When he had to travel to Italy on business, he ate only eggs so as not to have to put up with foreign food. He disdained the idea of receiving a government dacha. Instead he built his own brick mansion, using his own money -- or, at least, money under his control.

Late last spring, Kiriyenko's short-lived government tried to put the squeeze on Gazprom, eliciting squeals of protest not only from the gas company but from the obedient press and even Communist members of the parliament. Who wasn't bedazzled by the Emerald City? The prime minister backed down, but the oligarchs had already decided to get rid of him.

By mid-August there was no question that Russia was tumbling into crisis. It was, not coincidentally, related to two of the oligarchs' specialties -- vast public debt and widespread corporate tax evasion. In a functioning democracy, the Kremlin would have been able to make a decision in the context of established political institutions acting in public and, most important, reliable information.

But it had none of those. "That's when you begin to rely on your courtiers," said Shevtsova. "To the whispers in your ear."

After the collapse

The Kremlin was weak and in the dark. Berezovsky, who was flourishing as the Yeltsin family confidante, "had managed to push out anyone who had a brain over there," said McFaul.

Yeltsin fired Kiriyenko and an exultant Berezovsky backed the return of Chernomyrdin. But the collapse was bigger and faster than anyone expected. The other oligarchs dropped from sight; McFaul is not alone in believing they were busy moving assets abroad, even after the Central Bank froze accounts. Their legendary influence never showed. The parliament balked, and Chernomyrdin was gone.

"If there is any blessing in this tremendous tragedy, that might be one -- these guys have been destroyed," said McFaul.

Kolmakov predicts that there will soon be a battle for control of ORT, the television network. The government still has the controlling share, and if Prime Minister Yevgeny M. Primakov can force Berezovsky out, Kolmakov said, that will be the end of his career in the oligarchy. Russia's new era

Russia's new era

Gazprom and the big petroleum company, Lukoil, have in some ways found themselves back where they were in Soviet times, under a government that wants to prop up industry at their expense. The Central Bank plans to enforce a rule that's been ignored since 1992, requiring exporters to exchange half or more of their hard-currency income for rubles -- a Soviet-style step that would strike a direct blow at both companies.

If there's any part of the oligarchy still in a position to resist change, it would be Vyakhirev and Vagit Alekperov, chairman of Lukoil. But with Chernomyrdin gone -- and humiliated by his repeated rejection by parliament last month -- there's no one in the government looking out for them. At the same time, the fall in commodities prices worldwide has given them less money and less room to maneuver.

Russia, in any case, has entered into a new era. The equations are different. Yeltsin is on the margin and no one can continue to treat the Russian state like a cash cow. There's not enough cash and there's too much bitterness. The Emerald City doesn't glisten the way it once did. For seven years Russia followed the yellow brick road, and it led to ruin.

Pub Date: 10/05/98

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