The Oligarchs, page 25
In earlier years, Chubais had paid little attention to privatization, which he found more of a dull organizational chore than an economics challenge. There wasn’t a single economics textbook he had seen about privatization, and few members of his team were interested in a field that had been nonexistent in Soviet times.14 One of the most basic tenets of Soviet Communism was the nationalization of all means of production except for individual labor; the very words “private property” came to the fore only in the final years of Gorbachev, and few of the young academicians really understood its implications. In the brief period in St. Petersburg city government, among those on the Chubais team, only Dmitri Vasiliev had worked on privatization, and he had focused on small businesses.
Once he was given the assignment of carrying out the grand transfer of property, however, Chubais characteristically turned it into an intense crusade. He championed private ownership as the equivalent of personal freedom. “We need to free the economy from the state,” he declared. “To free the country from socialism. To shake off the terrible chains of that gigantic, all-pervading, bureaucratic, ruinous, and ineffective state.”15
The first thing Chubais discovered was that someone else was already feasting at the table. Property was being grabbed, stolen, and gobbled up by the old guard, factory managers, and party elite, who were taking advantage of chaos in the country. Chubais called it “spontaneous privatization,” and it was out of control. As the reins of central authority were loosened in Gorbachev’s years, factory managers gained ever more power over their own domain and lined their own pockets. Using cooperatives and joint ventures, and later shell companies and offshore havens, they leeched the cash or raw materials out of state enterprises. Their overlords, bureaucrats in the government ministries, were also carving up the spoils for themselves. It was common for a state enterprise, such as a steel factory, to give birth to a small “pocket” bank, perhaps on the factory grounds. Then the bank would give birth to a trading company, which would take over the sale of the factory’s output—state property—and the profits would disappear into the offshore accounts of the director and his friends, perhaps using the pocket bank. There was nothing to stop it. In his landmark October speech, Yeltsin had noted that while the reformers debated privatization, “the party and state elite, meanwhile, were actively engaged in their own type of privatization. The extent of it, and the enterprise and hypocrisy, are simply amazing. Privatization in Russia has long been under way, but wildly, spontaneously, and not infrequently on a criminal basis.”
“In reality, it was theft of state property,” Chubais recalled, “but was not illegal because there was no legal basis for the transfer of property into private hands.”16 The result of spontaneous privatization was a spoils system that rewarded the factory managers and political bosses and left out everyone else. Chubais was offended at the rude, defiant way the old guard was going about it. The essence was that “if you are cheeky, daring, and resolute you will get everything,” he recalled. “If you are not very cheeky and not very daring, just sit quietly.”
Chubais had caught wind of something. Theft, insider dealing, and hidden money flows characterized the entire first decade of Russian capitalism, but in that early period it seemed to be the particular skill of the old guard, the party, and managerial elite. Later, many others would learn the benefits of being daring and cheeky.
In 1992, Chubais uncovered a good example of how spontaneous privatization worked. A group of party bigwigs set up a dummy corporation called Kolo Ltd. to take over Energia, a huge Soviet-era rocket engine and satellite manufacturer, a crown jewel of the military-industrial complex, at a fraction of its real value. The founders contributed their “intellectual property” (their ideas), which they arbitrarily valued at millions of rubles, and then tried to grab not only the massive rocket company but a military airfield as well. Chubais recalled that the thieves had created an “absolutely impregnable scheme,” and “the interesting thing about such deals is that we cannot untangle them.” When the rip-off was finally discovered, Chubais stopped it and fired one of his own deputies for approving it. But he was only beginning to think about how to halt the orgy of stealing already under way.17
When Chubais first got the privatization assignment from Gaidar in November 1991, Vasiliev wrote him a simple, three-page memo based on his St. Petersburg experience with the small businesses. Vasiliev told Chubais privatization of property should be “maximally wide,” or involving as much property as possible, and that the best way to carry it out was through competitive auctions, selling property for cash.18 In the months that followed, as small-scale privatization of bakeries and hair salons and other businesses was getting under way, Chubais embraced cash auctions, thinking it was the best example of a free market at work—open and competitive.
On April 4, 1992, Chubais and Gaidar flew to Nizhny Novgorod, 250 miles east of Moscow on the Volga River, to witness one of the first auctions, hoping to turn it into a political event. They faced growing resistance in Moscow and needed a symbolic boost. In Nizhny they were greeted by hundreds of demonstrators outside the former House of Literacy, many of whom were shop workers, fearful and envious of those who would buy their shops at cash auctions. Although Chubais and Gaidar believed that openly selling small enterprises to the highest bidder was the only fair and uncorrupted method, there was a chorus of demands that shops should be given to their workers, an emotional pull that ran strong after seven decades of socialism. The workers held placards, “Gaidar and Chubais! Find another city for your experiments.”
“Democrats!” spat out an middle-aged grocery clerk. “Speculators, the lot of them!”
As they arrived at a back entrance of the hall, the two reformers were confronted by shouting, hissing, and screaming crowds. Chubais lost his cool and got into a shoving match with some of them as he and Gaidar tried to break through toward the door. “The whole situation got to us,” he recalled. “Gaidar and I understood that what we came here for had to be done at any cost.” Gaidar recalled that all the Russian elite was hoping the experiment would fail. “All of them were saying, ‘Auctions, what auctions? In Russia? Are you from another country? Do you not understand that it will not work?’” They had to demonstrate it would work, or they would be overrun by the vested interests.19
Fortunately, inside the hall, it did work. An auctioneer wearing a red bow tie and white silk shirt mopped his brow, slicked back his hair, and announced that Sewing Shop 38 on Yamskaya Street was up for grabs. The auctioneer, Arseny Labanov, called out the rising bids—100,000 rubles, then 500,000 and 2 million—and the store was sold for 3.6 million rubles, or about $36,000. The rest of the day brought the cash auctions of twenty-one cafés, hair salons, cheese shops, and other retail outlets, with the state reaping the proceeds. Chubais was in a fighting mood when he got inside the hall, but the elegance and simplicity of the auction calmed him. The auctioneer was “a real pro, an artist,” he recalled. “He had a natural gift for it.”
“It was quite a sight,” Chubais went on. “We had just emerged from the Soviet system. It was the early market period, the early democratic period, when the mere word ‘auction’ was taken as something anti-Soviet. And here we were watching the real procedure! With real live winners who were purchasing a bakery or a store.” Chubais recalled witnessing open auctions “based on competition, instead of doubtful tête-à-tête deals where bribes are discussed.” He and Gaidar sat together during the auction, Chubais marveling to himself how far they had come. “A mere five months ago we were writing all kinds of drafts. And now we were here, the official representatives of power, who succeeded in getting things done. It was a moment of happiness.”
Gaidar also had his moment when it all seemed to fall into place. The shortage economy had existed in the Soviet Union for as long as he could remember. In the final years of Soviet socialism, the shortage of goods had created an ominous monetary “overhang,” a huge surplus of rubles, since there was nothing to buy with them. A few days after price liberalization, Gaidar heard amazing news. Truck drivers were protesting. Not because of shortage, but the opposite—the stores would no longer accept any more cream! For Gaidar, it was a fleeting but wonderful sign—a reinforcing signal that shortages would end with free prices. Money and goods would come into rough balance. “For the person who lived in the realities of the end of 1991, when the shops were absolutely empty, and everybody knew nothing would appear there,” Gaidar told me, it was unimaginable “that there could be a situation when they would not accept any more cream because they did not want any more cream.”20 In fact, the example was premature: it took many months for shortages to disappear, but they did.
Gaidar persuaded Yeltsin to sign a decree liberalizing all kinds of trade in early 1992. Street trade was an illicit, criminal offense in Soviet times. Just after Yeltsin approved the document, Gaidar was driving through Lubyanka Square, past the famous children’s department store Detsky Mir, when he spotted a long line twisting around the block. At first, he thought it was just another symptom of shortages—“probably something just appeared on the shelves.” But he was amazed to look closer: the line was not desperate shoppers. It was desperate sellers. “Clutching a few packs of cigarettes, a couple of cans of food, or a bottle of vodka, wool stockings, mittens, or a child’s sweater, people with the ‘Decree on free trade’ newspaper clipping pinned to their coats were offering various little items for sale.”21 The scene was a first, tangible sign of their gamble that Russia was not exceptional—give people incentives, and the market will come.
“We need millions of owners, not hundreds of millionaires,” Yeltsin declared in a speech to the Congress of People’s Deputies on April 7, 1992, coining a populist slogan for mass privatization. He won applause with the line, but the truth was that privatization was heading in exactly the opposite direction, toward creating just a few hundred millionaires. In a speech to the Congress of People’s Deputies in April, Chubais acknowledged the mounting criticism that “auctions are only for the rich.” Privately, he and Vasiliev were having second thoughts about the auctions. They realized that cash auctions were not suitable for the colossal task of privatizing all of Russian industry. They worried that the angry shop workers in Nizhny Novgorod had a good point: what if all the property was bought up in auctions by a tiny percentage of the population? The rest of the country would be left behind, and that could spark a political time bomb of envy and resentment. “Gradually, we came to understand that society simply cannot absorb the idea of selling property for money,” Vasiliev recalled. “It would lead to people thinking that everything was bought by bandits and those who had stolen money.”22
In a series of concessions and tactical maneuvers, Chubais put privatization on a new track in the next year and kept it from being derailed. Despite fierce opposition, he was able to keep privatization moving ahead, and there was much still to be done: privatization of 5,603 large enterprises with a combined workforce of 15 million. Chubais earned his reputation in this period as a feared manager and fearless infighter. His stubbornness paid off, but so did another personal characteristic—he would sometimes compromise and cut corners in pursuit of his larger goal.
In a clever organizational move, he created a new agency, the State Property Committee, within Russia’s hidebound bureaucracy. At first, committee members worked in bare, unheated offices in the grubby high-rise towers along Novy Arbat, the grim socialist-realist avenue of utopian architecture in the center of Moscow. Later, they moved to a drafty ministry building near Red Square. In the early months, they churned out ideas and documents day and night. “We had no heat, no Xerox, no fax, no food,” recalled Jonathan Hay, one of the Americans who came to help. “The first time I came there, I saw just Dmitri Vasiliev and thirty people sitting in a huge hall, just this small man in big glasses, and they were all around him, in a heated discussion, talking about small-scale privatization.” By his own account, Chubais was overwhelmed, with heaps of papers on his desk, phone calls streaming in, and crowds of people in the reception area demanding his attention. But Chubais enjoyed what Berger called a clean slate—he started from scratch and could build privatization from the ground up.
To a far greater extent than other reformers, Chubais attracted Westerners to help with privatization. The international financial organizations saw the young reformers as the best hope of Russia and provided money for technical assistance. Lawyers, economists, public relations people, investment bankers, and government officials—they all trouped through the shabby offices of the State Property Committee.23
By the time he got organized, Chubais faced a virtual tug-of-war. The industrial property in theory belonged to the state, but in practice different groups laid claim to the treasure. Managers felt they knew the factory best; workers felt entitled since they had put so many years on the assembly line; the local governor and politicians saw the juicy plums and wanted the right to distribute them. These were “stakeholders” whose demands would have to be dealt with. The likelihood of meeting all their demands was zero. Meanwhile, a fourth group, the party nomenklatura, was already helping itself. “There hasn’t been a fair privatization in the history of mankind; this has to be accepted,” Berger recalled of the choices facing Chubais. “Chubais had one main goal: to destroy the monopoly of the state on property. At any cost.”
Chubais believed that outsiders—the new generation of private owners, perhaps even foreign investors—who had never had a stake in the factory would be the best ones to eventually restructure it. At least theoretically, he thought, they were the ones who would become the most “effective owners.” Cold-eyed outsiders would be more inclined to strip away the inefficient equipment and the excessive spending on kindergartens and resorts that were part of every socialist enterprise and retool it with new investment and a view toward longer-term profit.
But Chubais could not afford to ignore the insiders: the workers and managers. They were powerful stakeholders, and in his original speech, Yeltsin promised to split the state property with the workers. The idea was immensely popular because of the legacy of socialism and the ideology of a workers’ paradise. Larisa Piyasheva, a privatization expert working for the Moscow city government, had campaigned to turn everything over to the workers all at once. Chubais was vehemently against it, seeing that the workers, in reality, had little control over a business. When it came to key decisions of ownership, the workers were under the thumb of the all-powerful managers. Both workers and managers were insiders, and insiders would be the least likely to break with the socialist past.
At first, Chubais did not want to resolve this conflict in the Supreme Soviet, a parliament largely elected in Soviet times and dominated by old-style former party officials and the so-called red directors, the Soviet-era factory managers. But he could not delay forever; he needed a legal basis for privatization. In March 1992 Chubais proposed a privatization law. He offered to give workers and managers—the insiders—40 percent of the shares of an enterprise, with the rest to be sold off to outsiders. But the overture to the insiders was not enough. In the first months of shock therapy, factory production plunged and the red directors struck back in the Supreme Soviet, where they had a strong advocate in Arkady Volsky, an imposing former Communist Party apparatchik and adviser to several Soviet leaders. Volsky had built up a lobby of the old-guard economic elite. The red directors also had a sympathetic ear in Ruslan Khasbulatov, the chairman of the Supreme Soviet. Although originally chosen by Yeltsin, Khasbulatov was increasingly outspoken against the youthful Gaidar government, and within two years he would be leading an open rebellion against Yeltsin.
The general notion of privatization was still popular, but the insider-dominated parliament wanted more than Chubais offered. They came up with a second plan, known as Option 2, which turned over 51 percent of each enterprise to the insiders, with the rest to be sold off to outsiders or held by the state. Chubais was dead set against this, fearing that the insiders would preserve the status quo. If the whole idea was to forge a new generation of effective owners, how could they be created out of the same old, tired Soviet factory managers?
But in the end, faced with certain defeat, Chubais gave in to the factory bosses. “We understood there would be no privatization if the directors didn’t support it,” Chubais recalled later.24 The bosses were still strong, and the government weak. To defeat the insiders would have required more willpower than Chubais or Yeltsin could summon, more than the system could stand. “We would have had to put all the directors and all the bosses in jail,” Chubais later recalled. “Or at least half of them, in the hope if you put half in jail, the other half will shut up.” Neither Chubais nor Yeltsin were ready for that.25
On June 11, 1992, the Supreme Soviet approved the privatization law.26 It was the last time parliament approved privatization; after that, opposition intensified, and Chubais relied solely on Yeltsin’s decrees. This was a seminal moment for Chubais. For all his steely self-confidence and determination, he decided to make a crucial trade. He gave up one of his most cherished ideas at the time, the importance of outside owners, to achieve his larger goal of transferring the property out of the hands of the state. The deal was a precursor of what was to become a trademark Chubais method, one that led to a corrosive weakening of his own principles later on.
Still, at this point, Chubais was single-minded. “Every enterprise ripped out of the state and transferred to the hands of a private owner was a way of destroying Communism in Russia,” he told me. “This is how we understood the situation, without any exaggeration. And every extra day we worked, we could privatize another ten, twenty, or thirty enterprises. And at that stage, it didn’t matter at all to whom these enterprises went, who was getting the property. It was absolutely unimportant whether that person was ready for it.”
