#16 | Special Issue, September 4, 1997  smlogo.gif

Feature Story

In This Issue
Feature Story


Baldfellas:  the eXile's guide to Russia's Hot Autumn

by Jose Alinez

It is now September, 1997, and there is almost nothing left to steal in Russia. Most of the good stuff, like metals magnate Norilsk Nickel, oil companies like SibNeft and Sidanko and Yukos, and shares in the Russian telephone company, Svyazinvest, have been snatched up in shady, intrigue-filled semi-legal state auctions that most of you who are visiting Russia for the first time have heard very little about. Now, with Moscow's 850th birthday acting as a starting gun, it's time for the last vicious round-and we all get to watch.

This holiday was a meaningless and obscure historical landmark until Mayor Yuri Luzhkov, in search of a way to advertise himself and attract investment to his city, pulled the number 850 out of his hat and deemed it worthy of creating a massive spectacle. Luzhkov is trying to show the world a new Moscow-one that looks better, is more comfortable, offers better services and better food and entertainment, and is optimistic, dynamic and free of the past. Luzhkov wants clubs and restaurants and casinos to replace Lenin's tomb as the primary tourist attractions in Russia. His purpose in throwing this huge party was to show the world a new Russia-the new Russia he wants you to see, that is.

This special 850th jubilee edition of the eXile is meant to be used by new visitors to the city as a simple guide to political and economic reality in modern Russia. Our idea is to show you who and what is behind all of this new construction and new wealth-who controls it, what political conditions brought it about, and who will oversee its inevitable expansion. Luzhkov is right, this is a new Russia. Its post-Soviet gestation period is over. It is now a newborn corporate monster with a handful of venal and mostly balding men at the helm. They've arrived at the top after a long journey along a road paved with cutthroat politics, blackmail, murder and ungodly riches. These men are ready now to stop stealing and start the more difficult job of protecting what they've stolen. To do that, they need help from the West-in the form of investors. In one form or another, that means you.

So who are these guys, your hosts to Moscow's 850th birthday party? Read on. Here's who they are, where they came from, and what side they're likely to be on in the battle for the last slice of the pie:

1. The Setting

A little over a year ago, Russia's political future was uncertain. Polls showed in the winter of 1995-1996 that Boris Yeltsin was likely to lose to communist leader Gennady Zyuganov in the June presidential elections. Suddenly, a whole range of people who had become wealthy since the collapse of communism were in danger of losing everything. Action needed to be taken.

The wealthiest of Russia's new rich, many of them presidents of banks and large corporations, decided to take a chance. Up until then, they had represented themselves in public as independent persons-businessmen unrelated to one another, with separate interests. Now, with Yeltsin and the economic legal code he'd ushered in in trouble, they came out in public for the first time as a group, all but admitting in the process that they were a united political force with common interests. In May of 1996, a so-called "Group of Seven" bankers and industrialists, led by LogoVaz (the distribution company for the Russian automaker AvtoVaz) chairman Boris Berezovsky, held a press conference to announce that they were throwing their financial weight behind Yeltsin's re-election campaign. Suddenly the levers of economic power, which controlled the press, were placed squarely under the control of Yeltsin's campaign team. From then on, election coverage was openly slanted against the communists and the President, through superior resources and propaganda, cruised to an easy re-election.

The Tree of the Bald

The Group of Seven asked a price for their compliance in Yeltsin's reelection effort. For some of them, it was positions in government. For others, it was an advantageous position in auctions of state enterprises. Whatever the individual price, the collective result was that the Group of Seven became, less than a year after the election, a de facto corporate oligarchy ruling Russia under a passive and ailing dictatorial President. The master architect behind the creation of this mysterious new form of government was one man-a government official outside the group named Anatoly Chubais.

2. Anatoly Chubais

Prior to 1996, Anatoly Chubais was best known as the designer of the new Russian economy. An economist from St. Petersburg, the English-speaking Chubais had acted as a point man between the Russian government and the Western aid community in the effort to build a capitalist economy in Russia after communism collapsed in 1991. Chubais rode hundreds of millions of dollars in Western aid money, which became his de facto political base, in a steep rise up the ladder of government, working first as privatization chief, then as deputy prime minister in charge of the economy.

By 1995, Chubais had become the bogey man for nearly every oppositionist political group in Russia. His economic policies had on the one hand resulted in the creation of millions of property owners; on the other hand, they had left millions without salaries as non-subsidized Russian industry failed and factories stalled. At the end of 1995, a new affront to the ordinary Russian was organized by Chubais; the loans-for-shares auctions, in which state enterprises were auctioned off to private companies at rock-bottom prices. Many of the auctions were fixed: banks that were put in charge of holding the tenders inevitably won the tenders themselves.

Communists and nationalists screamed bloody murder, and Chubais was summarily axed by Yeltsin in a pre-election concession. However, Chubais was not out of the game; Yeltsin hired him as his campaign manager. Without a doubt, Chubais had a role in organizing the Group of Seven as a united front. And it was almost certainly Chubais, who returned to government after the election, who played Santa Claus to the Group of Seven after they'd done their work to keep Yeltsin in the Kremlin.

Chubais today is again Deputy Prime Minister. He effectively runs the country. In the summer of 1996, Chubais pushed through a law under which no Presidential decree is legal until Chubais signs it. Although he is technically subordinate to Prime Minister Viktor Chernomyrdin, he has emerged victorious in numerous scuffles with his boss, most recently in a re-auction of Norilsk Nickel, in which Chernomyrdin's decision to cancel the auction was overturned and a Chubais protege won the tender.

In order to get back into government after his dismissal, Chubais needed to deliver for Yeltsin in 1996. He did so, largely by organizing the nation's economic power behind the re-election. The Group of Seven, on the other hand, relied heavily on Chubais to muscle through the state-sponsored gifts of federal enterprises that made them the wealthy men they are today. In short, Chubais and his industrialists needed each other. But now that their mutual adversaries are declawed, they have turned against one another, creating a mighty power struggle. The final power play in Russia is thus defined along pro-Chubais and anti-Chubais lines. The chief ally to Chubais is Vladimir Potanin, the head of Oneximbank:

3. Vladimir Potanin

One of Yeltsin's first moves after the election last year was to name Vladimir Potanin, erstwhile head of Oneximbank, one of Russia's most powerful banks, the new deputy prime minister in charge of the economy. He lasted about five months before he was dismissed; he then returned to Oneximbank to become Russia's most powerful financier.

Through Potanin, Chubais has sought to create a vast socio-economic empire. Under Chubais's direction, Potanin managed to acquire Norilsk Nickel, a company which controls 30% of the world's nickel reserves and is worth billions, for a mere $70 million. Potanin has also given Chubais a huge media empire to bolster him politically, with acquisitions like Komsomolskaya Pravda and Izvestia. In a heavily-contested auction this summer, Oneximbank won a $1.8 billion tender for a 25.1% stake in Svyazinvest. Auction losers like Berezovsky and Most-Bank chief Vladimir Gusinsky (another Group of Seven member) cried foul after that auction, but Gusinsky, at least, quickly retracted. The fact that Chubais had pronounced the auction fair and succeeded in making it stick sent a message to other financiers that Chubais still had tremendous influence over the distribution of resources.

Potanin, who is now united with Western-run Renaissance capital, made a breakthrough move when he brought on George Soros as a partner in his Svyazinvezst bid-a signal that he was ready to branch out and become a player on the international scene. His next moves, apart from making bids on the few remaining state enterprises on the table, will likely be the development of his assets using Western capital and, eventually, acquisitions abroad. His fortunes here in Russia will be limitless if Chubais continues to hold off his enemies and maintain government power.

His main obstacle to success will be Chubais's new sworn enemy, Berezovsky.

4. Boris Berezovsky

Boris Berezovsky began as the prototypical "New Russian" businessman.

According to numerous news reports, he made his fortune off a very simple scam: he bought Lada cars from AvtoVaz for their "export" price (Vaz, a state enterprise, was attempting to carve out a market abroad by price dumping its standard Lada model) and then sold those same cars in Russia at usual domestic prices. LogoVaz early on became a kind of Heart of Darkness for government inspectors: according to Forbes magazine, officials who went to LogoVaz to investigate reports of financial misdoings either never returned or simply went to work for Berezovsky.

Berezovsky went on to purchase large stakes in Aeroflot and ORT, the state television network (he is the largest minority shareholder). He also won a bid for the oil company SibNeft and will attempt, through the upcoming bid for RosNeft, to become Russia's oil king.

Berezovsky, who like Potanin was named to a key government position last year (he is Deputy Secretary to the Security Council), has a reputation of being a very unsubtle operator. When he lost the Svyazinvest auction to Potanin, ORT came on the next day and, in defiance to even the appearance of objectivity, aired a 29-minute diatribe against Potanin during a news show. When Deputy Prime Minister Boris Nemtsov said that Berezovsky should be out of government, Berezovsky, a Jew, reminded Nemtsov that he (Nemtsov) was Jewish and would never be President. Unlike Chubais, who is simply detested by most ordinary people, Berezovsky is feared. Izvestia reporter Leonid Krutakov told the eXile not long ago that Berezovsky and the heads of Alfa-Bank were the only people in Russia he was really afraid to write about, because they were "true bandits."

With ORT and the influential Nezavisimaya Gazeta under his control, Berezovsky is the only person left who has both the financial and social clout to mount a serious public challenge to Chubais's political power.

There are, however, other players on the scene who might help tilt the balance one way or another. Chief among these is Gusinsky.

5. Vladimir Gusinsky

Gusinsky is possibly the most remarkable of Russia's oligarchs in that he has successfully managed to hedge his bets throughout, keeping his alliances fluid and temporary. His stated goal is to become media king of Russia, a "Russian Rupert Murdoch," as he put it, and he has even spoken of building filmmaking and movie theater empires. His Most-Bank group is already a powerful player in Russian media, controlling NTV, the newspaper Segodnya, and Itogi magazine. He once also provided political cover to Moskovsky Komsomolets editor Pavel Gusev, allowing him to build Russia's most irreverent and independent publishing voice; he split with Gusev earlier this year in an ugly public spat. Gusinsky has earned a reputation as one of the most devious traders in compromising information around; he provided Moskovsky Komsomolets with a taped phone conversation in which Chubais planned to suppress a criminal investigation, and later leaked information that Chubais had avoided taxes. Curiously, during this same period, NTV, Segodnya, and Itogi were openly supporting Chubais initiatives and providing pro-Chubais coverage in most news stories. It was Gusinsky who smoothed Chubais's return to government by giving the go-ahead for NTV to give Chubais's side of the story during a muddled "coup attempt" by presidential bodyguard Alexander Korzhakov during the elections, a coup attempt which was actually an attempt by Korzhakov to catch Chubais and his cronies in the act of embezzling millions of dollars of campaign funds.

Gusinsky attempted to move out of media this year to make a play for Svyazinvest, and when he lost, he threatened to sue Potanin, sending a message to Chubais that he could no longer take NTV for granted. He has, as said, since retracted, however, and his position in the inevitable Chubais-Berezovsky showdown is now unclear. His immediate plans will be to position himself to take over Mosfilm.

6. The others

The rest of the Group of Seven consists of Mikhail Freedman and Pyotr Avin of Alfa-bank, Alexander Smolensky of Stolichniy Bank, and Mikhail Khodorkovsky of Bank Menatep. Where they stand in the upcoming battle is anybody's guess. Smolensky reportedly paid a bribe to Chubais for delivering AgPromBank to him in a state auction, but since the services were paid for already, his loyalties could change. Menatep won Yukos with Chubais's help during loans-for-shares, and Menatep publications (which include Playboy, The Moscow Times and Cosmopolitan) have so fair remained out of the fray in the war of compromising information (kompromat in Russian) which has been played out in the press this year. Alfa-Bank recently won a big stake in a big oil company, Tyumen oil, and Chubais-linked privatization officials didn't object despite the obvious rigging of the auction (rules were drawn up under which only companies owning certain technology could participate, and only Alfa-bank had that technology).

7. Whats Next

Theoretically, the infighting over power and property could continue indefinitely. As they did before the elections, the oligarchical powers have since proved that they are more than willing to unite to protect each other rather than risk ceding any of the influence they currently hold as a group. They did so when Potanin and Chernomyrdin came together to oust an unpopular newspaper editor in Igor Golombiyevsky of Izvestia earlier this year; Golombiyevsky had show an inclination to publish damaging material at his own initiative, a quality unacceptable to both parties. However, Potanin and Berezovsky have made such strides in the last year that the Group of Seven is now weighted on two sides, and the conflict is becoming increasingly vicious and public.

New privatization chief Maxim Boiko, who was picked by Yeltsin ostensibly to end the favoritism that Oneximbank received from previous privatization chief Alfred Kokh, is hardly the panacea that Berezovsky was looking for: Boiko comes from the same Chubais-led St. Petersburg "young reformers" mafia as Kokh, and has worked closely with Chubais from the beginning. Boiko has also promised to make 1998 the biggest firesale yet of Russian assets. But with most of the jewels in the Russian crown already pawned off, the vultures will be fighting over a lot of skin and bone. And when that happens, the vultures start to see each other not as part of a flock, but as competitors for an ever-dwindling supply of meat.

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