March 11, 1999
Russias Ruling Robbers
Fortunately, there is good news in Russia that makes this a time of new opportunity. Despite the outrages and inequities of their robber baron capitalism, self-help and prosperity are growing in ways our macroeconomic charts have no way of describing. Moscow and St. Petersburg are boomtowns.
Governors and mayors are finding ingenious ways to raise money and provide services that are no longer coming from the central government. -- James Billington, New York Times, June 17, 1998
By Mark Ames
It may seem strange, but as recently as last summer, such Goebbels-like inverses on the truth were the Party Line when it came to Western reporting on Russia.
Heck, that quote could have come from any number of editorials and reports from any American paper of record, not to mention the influential English-language Russian daily, The Moscow Times.
More than half a year after Russia's financial collapse, you can't help read quotes and statements like the one above without wondering whether or not there was something either sinister -- or psychotic -- pervading the minds and intentions of the West's Russia-watchers and reporters.
One reason so few people knew how much danger Russia was in was because Western reporters insisted that the "gang of seven" which controlled Russia's wealth was an "oligarchy" or deserved the semi-respectful name "robber barons," when they were really just a group of pasty thugs.
Subconsciously, investors were comforted by the thought that these rough-edged capitalists were descended from the great, if morally ambiguous, historical line of Mellon, Carnegie, Rockefeller and Morgan, if not from ancient oligarchs: Caesar, Sallust and Plato.
But there's a big difference between a "robber baron" like Carnegie or Rockefeller, an "oligarch" like Plato's aristocratic contemporaries ... and, say, a slippery ex-con like SBS-Agro boss Alexander Smolensky who is forever denying that he orders contract murders, or the creepy Rasputin-like Boris Berezovsky who pulls Boris Yeltsin's strings while lavishing gifts on the president and his family.
The word "oligarch," which comes from the Greek word "oglio" meaning "few," was first used to describe small groups of reactionary Greek aristocrats who, in the early 5th century B.C., conspired to overthrow Athenian democracy, which they saw as mob rule, the rule of the commoner. What the original aristocrat-oligarchs objected to most in democracy was that it empowered the commoner who, they believed, lacked education and respect for culture and law.
In Russia, the inverse was true. There, "oligarchy" didn't mean overthrowing the rule of the mob, but rather, it meant a few mobsters ruling over everything -- the president, the aristocrats and commoner alike -- showing absolutely no respect for law and having less cultural sensibility than your average L.A. carjacker.
But if calling the Russian mob bosses "oligarchs" was a whitewash, then calling them "robber barons" was downright criminal.
The term "robber baron" was first coined by E.L. Godkin in 1867, who wrote about ruthless railroad magnates for The Nation. America's robber barons were, arguably, a necessary evil, the Supermen who drove America from its belated Industrial Revolution into the forefront of world economic powerhouses.
By simple association, any reader would be led to believe that Russian "robber barons" were similar to American ones. They were the necessary evil that would wrench Mother Russia out of the rusted inefficiency inflicted by Communist Party central planners.
But let's compare. John D. Rockefeller's Standard Oil built 1,012 miles of trunk oil pipelines between 1880 and 1882 alone. Andrew Carnegie, by consistently reinvesting profits, turned Carnegie Steel into the world leader in steel production by 1901. He also donated over $350 million to charities in his lifetime, including endowments for 2,800 libraries.
Russia's "robber barons," on the other hand, were famous for things like siphoning off state budget money intended for teachers' salaries so they could "buy" massive, resource-rich companies -- which they then stripped and leveraged into oblivion.
In fact, Russia was being controlled not by "robber barons" or "oligarchs," but rather by a posse of purse-snatching chumps. They were no more qualified to control Russia's wealth and build the foundations of civilized capitalism than, say, the Joe Pesci character from "Goodfellas."
Most folks probably wouldn't put a swindler in charge of their piggy banks, let alone the nation's finances. They wouldn't entrust a convicted embezzler to deliver grandmother's pension check, because they'd know he'd pocket the check. Yet that's exactly what happened in Russia.
Without bothering to examine the backgrounds of these thugs who were handed control of Russia's assets, Western journalists, financiers and the Clinton administration were all too willing to turn a blind eye and pretend that the so-called gang of seven were Russian reincarnations of Cornelius Vanderbilt. The results have been disastrous -- but, in hindsight, not at all surprising.
There was always this hitch. Take the "baron" out of "robber baron" and all you've got is ... a robber. Robber barons monopolize and build. Robbers just rob. And if a robber was given control over an entire nation, he wouldn't stop robbing ... until ... the country went broke.
Yet, until the Russian crack-up in August 1998, the U.S. press was filled with praise for the "shock therapy" economic medicine prescribed by young post-communist "reformers," the likes of Anatoly Chubais.
In 1996, when Communist Party chief Gennady Zyuganov appeared headed toward election over an ailing Yeltsin, the West cheered as Chubais enlisted seven of the newly enriched "robber barons" to illegally pump an estimated $140 million into Yeltsin's corpse-like campaign. That was a mere 46 times the legal spending limit of $3 million.
The "robber barons" also made sure that the enfeebled president got rave press notices from a national media that the gang held a major interest in. One gang-connected ad executive even lined up pop stars to cavort on stage with Yeltsin and give the campaign a P.R. image of vitality.
Thrilled with Yeltsin's victory as a reaffirmation of democracy, the Western press offered few warnings of what was in store as the "gang of seven" collected their spoils and consolidated their power.
One exception was Forbes which published a scathing examination of the gang's self-proclaimed leader, Boris Berezovsky, now 53. In December 1996, Forbes entitled its article "Godfather of the Kremlin?" and pulled no punches in labeling Berezovsky "a powerful gangland boss."
"Russia is a bubbling cauldron of criminal organizations -- Sicily on a giant scale," the business magazine observed.
For the investigation, Forbes reporters traveled to the Volga River town of Togliatti, about 700 miles east of Moscow, the home of Avtovaz, Russia's biggest auto manufacturer, producer of the Lada. There, in 1989, Berezovsky, a mathematician by training, founded Logvaz, his auto dealership, the flagship of his business empire.
According to Moscow police reports, Berezovsky started his dealership in close collaboration with Chechen criminal gangs who gave him protection -- or a "roof" in Russian slang.
Berezovsky's company quickly became Russia's largest Avtovaz seller, accounting for more than 10 percent of sales by 1993.
One of the secrets of Berezovsky's success, Forbes reported, was that gangsters ensured that cars going to unprotected dealers arrived with windows smashed, wiring pulled out or tires slashed.
Forbes reported that the gangster-dealers ripped off Avtovaz in another way: by delaying payments to the manufacturer while forcing customers to pay up front. That allowed the dealers to make extra profits by using the money for currency speculation.
Back at the plant, Avtovaz's executives didn't press for payments for two reasons: either they were in on the scams themselves or they feared "a bullet in the head," Forbes reported. "It's as if Lucky Luciano were chairman of the board of Chrysler," complained one American businessman who supplied parts to Avtovaz.
When the Russian Solntsevo gang tried to muscle in on the Chechens' auto-dealer turf in Moscow, one police detective said Berezovsky told the Russian gang, "I already have a roof. Talk to the Chechens."
That "conversation" turned into a gun battle outside one of Berezovsky's showrooms. Six Chechens and four Russians died.
Soon afterwards, a bomb detonated next to Berezovsky's Mercedes 600, decapitating his driver and leaving him with burns to his face and hands. Another bomb hit the headquarters of his Obedinenyi Bank.
Forbes also linked Berezovsky to the notorious murder of Vladislav Listiev, a popular TV personality who tried to clean up ORT, a giant TV station that Berezovsky partly owned. Listiev told friends that Berezovsky was supposed to transfer $100 million in cash to a mafia-connected executive who was being bought out. When Berezovsky delayed turning over the money, Listiev died. [Forbes, Dec. 30, 1996]
Berezovsky fumed over the Forbes story, calling it a "regrettable example of the Western mass media falling victim to a disinformation campaign which is being carried out purposefully by communist circles with the aim of discrediting the administration of President Yeltsin." [The Moscow Times, Dec. 20, 1996]
The savvy financier filed suit against Forbes in London where the magazine distributes only 2,000 copies but where libel laws are tougher than in the United States or Russia.
In Russia, Berezovsky's money assured him friends in high places, especially in the presidents office. In 1994, he reportedly financed a printing of Yeltsin's memoirs that guaranteed Yeltsin royalties of $16,000 a month. [Cox News Service, Sept. 4, 1998]
Also in 1994, Berezovsky secretly signed over to Yeltsin a 26 percent interest in ORT, Russias largest TV station, the one that Forbes had identified as mob-connected. Word of that deal surfaced four years later with a disclosure from Yeltsins former bodyguard, Alexander Korzhakov, a claim that Berezovsky confirmed. [Moscow Times and Interfax Russian News, Nov. 20, 1998]
To burnish his image internationally, Berezovsky hired a top U.S. P.R. firm, Edelman Associates, with his account managed by Ronald Reagan's image-molder, Michael Deaver. Despite the Russian crisis in August 1998, Deaver and company seemed to be making some headway. On Sept. 7, 1998, The New York Times pronounced Berezovsky "a capitalist in the bloodless image of Commodore Vanderbilt."
Since the Russian economic collapse, however, much more has come to light about the gang's sordid past and its savage present. One column in the Sunday Times of London asked "where has all the moolah in Russia gone?"
The answer included Berezovsky buying a $70 million chateau (formerly owned by Joseph Mobutu) on the French Riviera, a favorite spot for many of the Russian nouveau riche.
"Thirty-five percent of the Riviera's 3,000 luxury boats for charter are taken up by Russians paying $50,000 to $150,000 a week. Everything is paid in cash. ... The next Russian dictator should send an elite paratroop division to attack the Riviera and retrieve some of the country's wealth." [Sunday Times, Aug. 30, 1998]
The south of France, of course, was only one of the offshore receptacles for Russia's fortunes. Credit Suisse First Boston, which itself over-invested in Russia, estimated that Russian banks and businesses had spirited some $66 billion out of the country from 1994 to 1997. [NYT, Sept. 27, 1998]
Berezovsky was certainly not alone. Another of the "oligarchs" who bought expensive play things abroad was the balding, mid-40ish Alexander Smolensky.
But Smolensky preferred the High Life in the mountains of Austria to the glittering beaches of the Cote d'Azur. Cruising Vienna's imperial roads in a Rolls Royce, living in Tony Montana-like mansions, he marked himself as the trailblazer in vulgar New Russian chic.
Smolensky is still head of the once-giant SBS-Agro bank, even after a scandal involving the disappearance of $100 million from Central Bank re-capitalization funds last August.
Smolensky, more than anyone, was responsible for wiping out the fabled "emerging middle class" in Russia, since SBS-Agro had the nation's second-largest deposit base.
But who is Smolensky, and how did he gain so much power?
Smolensky was one of several "oligarchs" profiled last October by the Russian investigative magazine, Sovershenno Sekretno ["Top Secret" in Russian]. The popular monthly found that Smolensky's higher education consisted of furtively purchasing a diploma from an obscure institute in the town of Dzhambul in what is now Kazakhstan.
After a stint in the Red Army in the mid-70s, he got a job in a printing factory, where he worked his way up to the position of foreman for a publisher affiliated with the Ministry for the Construction Materials Industry. Confidential reports from his superiors characterized Smolensky as "having a tendency towards swindling."
Right they were. In 1981, the future oligarch was sentenced by the Sokolniki District Court in Moscow to two years in prison for embezzling. Smolensky's touching version of his life's history had him persecuted by the KGB for publishing Bibles "free of charge." [WP, Oct. 17, 1997]
Immediately after getting out of jail, he went to work in a construction firm. Then, in the mid-1980s, with perestroika permitting the start of private companies, he became head of Moscow-3, a construction cooperative. The firm sawed logs, made planks and built small dachas near Moscow. The firm was successful largely because it could "get" supplies when its competitors couldn't.
In an interview with The Washington Post, Smolensky stated that "in those times, to buy planks and nails in Moscow was impossible. It was just impossible. Not for money, not for anything. You could only 'get' something." He refused to say how he would "get" his supplies.
In 1989, with the profits from Moscow-3 and the help of then-Moscow Mayor Gavriil Popov, Smolensky founded his Stolichny Savings Bank. The first few years were pretty dicey as Smolensky kept coming under suspicion for embezzlement.
In 1993, the Finance Ministry opened an investigation into the disappearance of $25 million from a Stolichny account. The money had allegedly been transferred to a Vienna bank.
Austrian police joined in the investigation. At that time, the Austrian press began to loudly accuse Smolensky, who lived part-time in Vienna, of being connected to a Russian mafia kingpin, one Lenni Makintosh.
Smolensky denied to Russian and Austrian authorities that he belonged to the Russian mafia. "I cannot steal; I cannot murder," he insisted. "I don't know how; I don't want to do that."
Not trusting Smolensky's assurances, Austrian authorities began a public campaign to prosecute or deport him. But after high-level intervention from the heads of the Russian Foreign Ministry and Interior Ministry, the case was dropped. It turned out that Smolensky had extended a loan to the Interior Ministry through his Stolichny bank.
In 1993, Smolensky got another break when Yeltsin sent tanks to crush his political enemies in the parliament. "All the audits stopped," Smolensky later recalled. He was free to continue his novel banking practices that ignored investment loans in favor of lucrative currency speculation.
"We engaged in speculation," Smolensky acknowledged in the Post interview. "There was no real industrial production. Who to give loans to? They would go bankrupt the next day."
The distance between banking and organized crime -- if there was any -- was closing fast. Competing crime syndicates eliminated each other's money men in Russia's versions of drive-by crack wars. In four years in the mid-1990s, 79 bankers were killed and 36 were wounded. Smolensky surrounded himself with a small army of gunmen.
In 1995, Stolichny Bank looked like it was going under financially. Depositors were pulling out. Sberbank and Vneshtorgbank, Russia's two-largest state banks, cut off credits. Smolensky's own bodyguards reportedly worried that he was on the verge of getting iced by up-and-coming bandits who smelled prey.
But the ex-con was saved in the nick of time by Anatoly Chubais. As chairman of Yeltsin's 1996 campaign, Chubais approached Smolensky, Berezovsky and five other "robber barons" to save the president and thwart a Communist come-back.
In exchange for an obscene commitment of what U.S. pols might call "soft money," Chubais honored Yeltsin's saviors by christening them the "oligarchy." After Yeltsin's re-election, the "oligarchs" landed key government posts and effective control over the privatization of the Russian economy.
As his share of the spoils, Smolensky got an inside track on a privatization auction that gained him the nation's agro-industrial bank network, Agroprombank, the second largest in Russia. Smolensky merged his new baby with tiny Stolichny and formed SBS-Agro.
Coincidentally, right around the time of the Agroprombank auction, which Chubais oversaw, Chubais, that idealistic "reformer," got a $3 million "interest-free loan" from Stolichny bank.
So, how does this grotesque Horatio Alger tale end? After the 1998 crisis, the Central Bank issued $100 million in credits to save SBS-Agro. But that money vanished without a trace.
Today, SBS-Agro owes $2 billion to Westerners and is fending off payment demands from 250,000 individual depositors.
On Feb. 18, Smolensky changed his bank's name from SBS-Agro to Soyuz, but remained its chairman. Not surprisingly, Smolensky's bank is still distributing state agricultural funds and offering almost worthless "agrobonds" to pay clients. [The Moscow Times, Feb. 19, 1999]
If you think of Smolensky as a Carnegie or an Athenian aristocrat -- that is, a robber baron or oligarch -- then it's hard to imagine him being responsible for so much destruction.
But when you look at the real Smolensky -- no higher education, ex-con jailed for embezzlement, relentless schmoozer with mafia dons and government fixers, whizzing around Central Europe in a Rolls and fighting to keep from getting deported -- and then you imagine that this Smolensky was suddenly, overnight, promoted into the role of Russia's chief private banker ... well, it's hard to imagine things turning out any differently than they did.
Mikhail Khodorkovsky, in his mid-30s but also balding, is another one of Yeltsin's inspiring "oligarchs." He heads the mega-oil company, Yukos, making him roughly analogous to John D. Rockefeller as per the Western media "robber baron" spin.
But unlike Rockefellers enduring oil companies, Khodorkovsky's empire has all but crumbled just three years after he "acquired" it. His Menatep bank, which "financed" the oil empire, no longer exists. It was wiped out last August after the devaluation and debt defaults. He also is losing control of Yukos to creditors. His company had borrowed hundreds of millions of dollars in loans from Western banks.
By now, it should be easy to guess where those loans went. Here's a hint: they probably didn't wind up invested in Russian oil infrastructure.
So where did this oil magnate get his start? Did he rise up through the ranks of the great Soviet oil industry? Maybe he worked in related chemicals or the energy sector? Well, no.
Here's a wild guess: he made his first bucks using his connections as a Komsomol [Communist Youth League] leader to sell Russian girls to rich Westerners? Bingo!
Back in 1989, Khodorkovsky created a joint venture with one Richard Hughes to ship Russian models to New York. In the August 1998 issue of New York magazine, Hughes explained that their first client was a Miss USSR, 17-year-old Yulia Sukhanovaya.
"Every time we tried to get an exit visa for Sukhanovaya, we ran up against resistance from the authorities," Hughes was quoted as saying. "In the end, with the help of Khodorkovsky, we got the permission, but he and I had to personally escort the girl onto the airplane." Khodorkovsky reportedly had close ties to the KGB.
According to the article in Sovershenno Sekretno, recent lawsuits filed in New York by young Russian models against wealthy gentlemen who owed them for "services" also traced back to Khodorkovsky. In one case, 27-year-old Inna Misane sued her former lover for allegedly using her sexually for almost a year without paying. She won $495,753, the magazine reported.
Khodorkovsky, the entrepreneurial Communist Youth League leader, moved into the big time through his founding of Bank Menatep, which by the mid-1990s had become notorious for corruption. "For at least part of this decade, it was illegal for any U.S. bank to do business with Menatep," reported Jim Ledbetter in The Village Voice. "A 1995 CIA report identified Menatep as one of the world's most corrupt banks, with close links to organized crime." [VV, Sept. 7, 1998]
That same year, 1995, Khodorkovsky acquired Yukos, Russia's second largest oil company. He snapped it up at a privatization auction for the bargain price of $168 million. Within three years, Yukos had gobbled up other energy companies and saw its value estimated at $3 billion. Forbes pegged Khodorkovsky's personal wealth at $2.2 billion.
The Russian newspaper Novaya Gazeta detailed how Yukos obtained funds that it used to acquire weaker oil companies. Focusing on just one region, Volgograd, the newspaper described how tens of millions of dollars earmarked for local school, bridge and infrastructure projects were diverted into Yukos's accounts in a complex arrangement involving meaningless IOUs, shell companies, and kickbacks to local officials. [Novaya Gazeta, Feb. 1, 1999]
Like other oligarchs, Khodorkovsky understood, too, that a friendly press could make everything so much easier. In 1996, his Bank Menatep bought a 10-percent stake in Independent Media, the publisher of The Moscow Times and St. Petersburg Times, influential papers especially with American correspondents.
Another of the young Russian robber barons was Vladimir Potanin, now in his late 30's and dubbed the "baby billionaire" by the media. Potanin's empire boasted Norilsk Nickel, which controls one-third of the world's nickel, and Sidanko, one of Russia's largest oil companies, as well as Uneximbank, which he founded in 1993.
Potanin's smooth style made him a favorite of Western reporters who wrote P.R. fluff about him as "the good robber baron." He did have the advantage of lacking an overtly criminal past. He also was a graduate of the elite Moscow Foreign Relations Institute and spoke French and English.
When Potanin visited the United States in early 1998 -- less than six months before the economic crash -- The Washington Post's Fred Hiatt hailed Potanin as a visionary "seeking to show that not all [Russian] 'robber barons' as they are commonly known in America, are the same." Hiatt said Potanin had "metamorphosed from low-ranking Soviet bureaucrat into one of the world's most influential businessmen," someone who could lead Russia to the next stage of modern development. [WP, March 9, 1998]
But how did this short, well-groomed "baby billionaire" become "one of the world's most influential businessmen?" Did he do it like the American robber barons, through years of ruthless acquisitions, investments, restructuring, strategizing? Not really.
It's common knowledge that Norilsk Nickel's privatization auction in 1995 was brazenly rigged. The mineral giant's value was estimated then at $1.1 billion. Potanin snatched it for $170 million.
Still, you'd think that a clever "baby billionaire" who earned Western press praise would have set up a complex, clever rigging of that auction? Again, not really.
Here's how it worked: In order for an auction to be valid, there had to be at least one competing bid. Then-privatization minister, our old friend Anatoly Chubais, appointed Potanin's Uneximbank to oversee the auction.
Potanin simply disqualified everyone else's valid bids, no matter how much higher than his own. One bidder, Rossisky Kredit, offered $355 million, but that bid was tossed out.
Only one unknown company, named Reola, was allowed to compete. Its bid came in $1 million below Unexim's. Potanin was the winner!
Afterwards, Potanin conceded that the auction process was a travesty. "The prices were cheap," he admitted. But then he added hopefully, "we can stop discussing this. It was bad. But it did solve the problem of having more efficient owners." [NYT, Sept. 27, 1998]
Well, its obvious why Potanin would not want too close an examination. When Sovershenno Sekretno investigated the Norilsk Nickel case last year, its reporters went to Alabushevo, a miserable little village outside of Moscow, where the legal founder of Reola, a fellow named Rashid Ismatulin, resided.
The reporters found Ismatulin not at home. "He's probably out drinking somewhere," his embittered old mother said. Not exactly a mysterious tycoon capable of ponying up almost $170 million, Rashid Ismatulin turned out to be a village drunkard. He had sold his passport for $10 to a thief named Evgeny Merkulov.
After Yeltsin's re-election in 1996, Potanin was named first deputy prime minister for economic reform. For his part, Chubais received a sizable book advance from a publishing company controlled by Potanin's Uneximbank. [NYT, Sept. 27, 1998]
In the harsh months since the August 1998 crash, foreigners concluded that Norilsk Nickel was a classic strip-the-assets, hide-the-profits and screw-the-shareholders company. Also, the auction was so shabbily rigged that many think it is a likely candidate for re-nationalization.
The baby billionaire's Uneximbank was another casualty. His media holdings, including the daily newspaper Izvestia, once the Soviet official paper, are in deep trouble, too. As is Sidanko, his oil company. Creditors have stripped it of assets.
With Russia's economy in shambles and Yeltsins health failing, the "robber barons" now find themselves confronting a less-friendly Russian government.
In late 1998, they pressed Yeltsin to appoint their ally, Victor Chernomyrdin, as prime minister. But the Communist-dominated parliament twice rebuffed Yeltsin's nominee.
As a compromise, Yeltsin named Yevgeny Primakov, a former foreign minister and KGB chief. Primakov has shown little sympathy for the battered barons.
"Primakov has never had much time for the business elite and is precisely the sort of independent-minded person they didn't want to see head the new government," remarked former deputy prime minister Boris Nemtsov, who himself was closely identified first with Berezovsky and later with Potanin.
In fall 1998, Primakov summoned the "oligarchs" to the government's White House and chastised them for continuing a capital flight that was costing Russia $2 billion a month. The cash seemed to be ending up in accounts in Switzerland and other secretive offshore locations. [Institutional Investor, Nov. 1998]
Berezovsky's troubles also have mounted. His allies at Aeroflot are alleged to have engineered the theft of $250 million in foreign revenues funneled into a Swiss bank account owned by Berezovsky. Unlike his heyday, Berezovsky could not pull the necessary strings to protect the deal. [NYT, Feb. 13, 1999]
So there you have it, a sordid portrait of the lowlifes who stripped and bankrupted Russia. Besides forcing millions into starvation, the economic rape has made this nuclear-armed nation far more unstable and prone to extremist solutions.
This catastrophe might not have happened but for a little P.R. from the journalism world. By dignifying common mobsters with words like "robber barons" and "oligarchs," American reporters made a lot of people feel a lot more comfortable than they should have.
That such a ridiculous collection of balding goons like these -- at times comical, at times scary -- should have left their nation bankrupt three years after having been handed its wealth on a silver platter is no surprise at all. In fact, after reading stories like these, the banking collapse is no longer shocking, just depressing.
These guys weren't interested in building anything. Like all purse-snatchers, they wanted to strip, rip and split while the gittin' was good. And boy was it good.
Mark Ames is editor of The eXile, a bi-weekly newspaper based in Moscow. Its Internet site is www.exile.ru
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