The Oligarchs, page 53
“We all spoke about this topic,” Berezovsky acknowledged of the plotting to dump Chernomyrdin. “All the oligarchs when we would meet, Yumashev, Tatyana, Khodorkovsky—there was a club, and there was a conversation. About what? That Chernomyrdin had exhausted his potential.”18
The group, Berezovsky claimed in a newspaper interview, was “more consolidated” than it had been before the 1996 election. Chubais and Potanin were absolutely excluded, however. Uneximbank was “beyond the pale” because of the bankers’ war, and Chubais “should know his place—I hate to be that vulgar.”19
The evidence suggests that Berezovsky and his allies in the Kremlin—chiefly Dyachenko and Yumashev—hatched the idea of dumping Chernomyrdin in February or March 1998. Berezovsky told me that although he did not speak to Yeltsin about it directly, “the question” of dumping Chernomyrdin “was debated for several months.” Gusinsky recalled that the tycoons discussed it at a boardroom meeting at Khodorkovsky’s oil company, Yukos.
One day in late February, Sergei Karaganov got a call to come to the Kremlin. The dapper, bald Karaganov was deputy director of the Institute of Europe, one of dozens of think tanks in the Russian Academy of Science. Karaganov was also chairman of a prestigious foreign policy council. Always tailored in elegant suits and bright ties, Karaganov had written the 1996 letter to Yeltsin warning of grave consequences if Yeltsin canceled the elections. Yeltsin read the letter and did not cancel the election. Karaganov was someone whom Yeltsin had listened to in the past.
Now Karaganov slipped into the Kremlin. In Yumashev’s small Kremlin study, Karaganov also found Dyachenko and some of the oligarchs. They presented Karaganov with a plan. He would go to Yeltsin and urge him to dump the prime minister. They already had several possible candidates to replace Chernomyrdin. It was unspoken but immediately clear to Karaganov that this was no ordinary political maneuver.
The next day, Karaganov, brooding, returned to the Kremlin. He had lunch privately with Yumashev and Dyachenko. They offered him a high-level job in the Kremlin. But Karaganov was dubious. The plan to replace Chernomyrdin was an audacious power play by the tycoons. Karaganov nearly choked when he heard the words “corporate government.” He then gave Yeltsin’s daughter and his chief of staff a severe, angry soliloquy. Were the oligarchs out of their minds? Were they crazy? Were they trying to take over Russia? Perhaps, Karaganov said, he would simply tell Yeltsin that it was time to retire. Wasn’t that really the implication?
“No!” Dyachenko insisted; this was going too far. Karaganov left the Kremlin and never heard about the plan again.20 But the effort to dump Chernomyrdin accelerated.
In his memoirs, Yeltsin claimed that sacking Chernomyrdin was all his idea, that he was looking for a “someone younger and stronger” and had been searching for “three months” before he actually dismissed Chernomyrdin. Yeltsin’s style was to be the power balancer, always scrambling and reassembling his court. But it is not known exactly how he came to the decision. It is possible Berezovsky succeeded in manipulating Yeltsin from behind the scenes. But it is also possible that Yeltsin had decided to move, and Berezovsky was trying to exploit the opening to his own ends.
The first specific action Yeltsin took, by his own account, was on Saturday, March 21, just two days before he fired Chernomyrdin. Yeltsin met the prime minister at his Gorky 9 residence outside Moscow. They talked about wage arrears, and Yeltsin told Chernomyrdin he was unhappy with his work. Chernomyrdin “looked at me with the doomed expression of an old, experienced apparatchik who understood everything,” Yeltsin wrote. That evening, Saturday, Yeltsin summoned Yumashev and his press secretary, Sergei Yastrzhembsky, and told them to prepare a decree for Chernomyrdin’s firing. Yeltsin recalled that Yumashev asked him to postpone the announcement until Monday, saying it would be a work day, and more businesslike. Yeltsin was reluctant but agreed to wait.
In fact, the brief delay allowed Berezovsky to waltz on stage. On Saturday, just as Yeltsin was telling aides of his plan to fire Chernomyrdin, Berezovsky taped an interview at his spacious country dacha for Yevgeny Kiselyov’s television program, Itogi. His back was still hurting from the snowmobile accident and he was in discomfort during the taping, perched on a chair, packed all around with pillows. He also posed for the cameras with the snowmobile on which he suffered the accident. In the interview, Berezovsky foreshadowed the changes to come. He said he was focused on preparing for the elections in the year 2000, on ensuring “continuity of power.” Then, with the selfassurance of a real power broker, he criticized virtually all the leading candidates in the polls to succeed Yeltsin, crisply rattling off his verdict on each one—“electable” or “not electable.” It was the performance of a confident kingmaker. Berezovsky said he doubted whether the stodgy Chernomyrdin could be elected, and since there wasn’t an obvious favorite, he hinted that there would be time for “new people.” But he did not say who.21
On Sunday evening, Yeltsin told his aide, Yumashev, that his choice for prime minister was Sergei Kiriyenko, the thirty-five-year-old minister of fuel and energy. Kiriyenko was the banker from Nizhny Novgorod who in 1996 had said he wanted to cross the “raging river” to complete economic reforms with Yeltsin. Kiriyenko was progressive, earnest, and independent-minded, with short hair and wire-rim glasses that gave him a youthful, studious look. A protégé of Boris Nemtsov, Kiriyenko headed a bank and oil company in Nizhny, but he had limited experience in government and had served in Moscow less than a year.
Yeltsin arrived at the Kremlin on Monday, March 23, very early, to tape a television address about Chernomyrdin’s dismissal. In the tape, however, Yeltsin did not mention Kiriyenko’s name. He said that “for the time being, before the appointment of a new prime minister, I will myself perform his duties.” He added, “In the near future I will nominate a candidate for this post.” When he made the tape, Yeltsin clearly did not know who he was going to pick. I think a furious lobbying campaign was still under way that morning.
Kiriyenko said Yumashev called him at home late Sunday and asked him to be at the Kremlin early the next morning. Kiriyenko had no idea why he had been summoned to the Kremlin. He guessed that he had been called to a policy meeting about European Union trade policy. It was his daughter’s birthday, and he promised her he would be home early. When the president offered him the job, Kiriyenko was stunned. It was a “total surprise.” The Kremlin had to acknowledge that, contrary to what the president had said in his taped address, he could not serve as the acting prime minister. Kiriyenko got the job.
Kiriyenko was definitely not Berezovsky’s cup of tea. Berezovsky later said the choice of Kiriyenko was “unpleasant” for him. Chubais could not conceal his glee that he had outfoxed Berezovsky. “Some oligarchs,” he said, “woke up this morning in a cold sweat.”22 What happened? It is clear that Berezovsky and the other oligarchs started the process of replacing Chernomyrdin, but Berezovsky lost control of it. Kiriyenko zoomed in with the backing of Chubais, Yumashev, Dyachenko, and some of the other oligarchs. Perhaps Berezovsky mistakenly thought he had more time to manipulate Yeltsin. Or perhaps Yeltsin himself decided to bypass the wily oligarch. Who outfoxed whom? It was typical of Berezovsky and even more characteristic of Yeltsin that the answer is not clear. But the outcome was the same: Chernomyrdin was sacked.
Yeltsin said he wanted Chernomyrdin to prepare a presidential campaign—a lame excuse given that he had just removed Chernomyrdin from a high-profile position. The hapless Chernomyrdin went through the motions of starting the campaign, including a meeting with the “board of directors” of oligarchs at Berezovsky’s Logovaz Club a few days later. Berezovsky said at the time he saw a different Chernomyrdin, with “tremendous potential.” That was nonsense—Chernomyrdin’s political future was actually quite bleak; his pro-Kremlin political party, Our Home Is Russia, was broke. Still, as became apparent later in the year, Berezovsky had not yet given up on him.
What everyone missed was that Yeltsin had just decapitated the government at the absolutely worst time. On March 27, Berezovsky met with a group of journalists over breakfast at the elegant Metropol Hotel in Moscow. His back still aching from the snowmobile injury, Berezovsky stood, immaculately tailored as always, as we listened to his soft, rapid-paced patter over croissants and orange juice. Berezovsky clearly felt that Kiriyenko was a political weakling and that Yeltsin was not in good shape. “I think it is bad because the president’s health, his condition does not allow him to engage in active political work every day, which is undoubtedly necessary.” He added, “It will take time to gain experience and strength, and who will fill the vacuum? I have no answer to this question.”
Kiriyenko had no political base in Moscow, no clout in parliament, and he was doomed from the first day. His plight was aggravated by a five-week wait for confirmation in the Duma, the lower house of parliament. He was confirmed on the third and last ballot, having lost the first two votes.23 Berezovsky spent most of April plotting against the Kremlin and trying to undermine Kiriyenko in his newspaper and on television, perhaps hoping Kiriyenko’s nomination would fail. Yegor Gaidar told me at the time that Berezovsky was hungry for power, but his reach may have exceeded his grasp. “For Berezovsky, the essence of his business is politics, and intrigue, and that’s the game he plays. He thinks he has the right to rule this country,” complained Gaidar, no friend of the tycoon. “He has spoken openly. The government is too weak to rule, he says. Someone has to do it. They [the oligarchs] are strong and clever men, so they can do it, so they say. But I think he has overestimated himself.”
“Berezovsky’s biggest mistake was that he talked too much about his importance,” Gaidar continued. “If and when you have a lot of influence, the best thing to do is keep quiet.”
In mid-April, Yeltsin had his fill of Berezovsky’s intrigues. He called Berezovsky and sternly demanded that the tycoon stop trying to undermine Kiriyenko in the parliament.24 In a ceremony for Russian cosmonauts, Yeltsin said aloud what he had been thinking: if Berezovsky didn’t stop the scheming he would send the tycoon on a long business trip outside of Russia—forever. It was an extraordinary moment, and the newspaper Kommersant Daily, which broke the story, said that Yumashev and Yastrzhembsky attempted afterward to hush up Yeltsin’s outburst. It leaked anyway.25 Two weeks later, Berezovsky got another appointment, as executive secretary of the Commonwealth of Independent States, the loose and largely ineffective organization of former Soviet republics except for the Baltics. The position was based in Minsk but gave Berezovsky the most important thing: a fresh power base and access to the Kremlin.
One of the most acid critics of the tycoons in this period was Andrei Piontkovski, a one-time mathematician and nuclear weapons strategist who wrote an entertaining newspaper commentary about the influence of the oligarchy. He told me that the maneuverings of Berezovsky in the spring had been extraordinarily costly and senseless. The oligarchs “have been destroying themselves before our eyes,” he said. “I think there are no victors, only losers.”26 Piontkovsky was more correct than he realized.
The ruble was funny money. Russians did not trust their own currency, or the banks or government. They kept their money under a mattress—usually in dollars. Russia had an estimated $30 billion to $40 billion in American banknotes in circulation, the largest sum in any country outside the United States itself. Russians clung to their dollars because, both before and after the breakup of the Soviet Union, attempts to fiddle with the ruble had always led to chaos, and Gaidar’s hyperinflation eroded any remaining public trust.27
So it was with some trepidation that the Russian government and Central Bank decided to make another ruble fix. On January 1, 1998, the Russian ruble was redenominated, which meant cutting three zeros off the end of the currency. What was six thousand rubles to the dollar became six, a strictly cosmetic change that was designed to wipe away the memory of hyperinflation and symbolize normalcy. Billions of new banknotes were printed months in advance. Fearing another panic, the government and Central Bank spent months preparing the population with advertising and soothing reassurances. “New zeros will never again appear on our banknotes,” Yeltsin promised.
Nothing happened. The redenomination passed quietly, without panic. Another threshold was crossed on the road to normalcy, or so it seemed. The ghosts of past inflation had receded. Chubais proudly declared that Russia had tamed the ruble. “We have a stable currency which, incidentally, has the same exchange rate as the French franc,” he boasted.28 Chubais told Yeltsin in February that he wanted to leave the government; he had been desperate to leave for a long time. Yeltsin asked Chubais, “What’s with the economy?” Chubais recalled telling Yeltsin that he felt comfortable leaving the government because nothing bad would happen to the economy in the year ahead.
“The economy should grow this year. Nothing of any scale, positive or negative, will happen,” Chubais said.
He was profoundly mistaken. It was the first of many errors in a troubled year for Chubais, who failed to see that Russia would suffer greatly from the changing winds of the global economy. He was in the raft with the tycoons as they blithely floated down the river. Russia was soon caught in the grip of two mighty dragons—writhing serpents of modern economics that tore the country apart. The first dragon was an explosion of debt. The second was a failure to recognize that the time had come for devaluation of the ruble. The dragons were creeping up together on Russia in the early spring. Many people saw the threat, but very few were certain that they would strike or when. Russia was in “crisis” so often that its leaders were paralyzed by crisis fatigue, numb to more alarmist warnings, and in this case the government contributed to the problem by reassuring everyone for too long that there would be no catastrophe. When it finally did hit—when the dragons attacked—it was too late to escape.
If you could have flown over Russia in early 1998 and viewed the economy in terms of topography, starkly different worlds would have appeared below. Spanning a landmass as large as the United States and Canada together, Russia had an economy that comprised several different realms. The timeless rural landscape remained rudimentary, isolated, and agrarian. Provincial urban Russia was a tableau of chaos and uncertainty. Industry functioned inefficiently; gargantuan factories churned out steel and automobiles but were forever plagued by losses. Workers, factories, and the government were all caught in a complex web of barter. Cash had almost disappeared from the economy. Large enterprises did 73 percent of their business in barter and paid only 8 percent of their taxes in cash. The swaps and trade-offs were a horribly distorting factor in everyday life, prompting two American scholars to conclude that Russia was becoming a “virtual economy” in which every important facet, such as prices, wages, and profits, were deceptive.29
Finally, if you flew over Moscow, you would have seen a world apart. Moscow was a throbbing boomtown before August 1998. The Moscow financial scene was cluttered with banks and exchanges, tycoons and stockbrokers, and trappings of wealth and power. Moscow was its own sort of virtual economy, awash in easy money. It was ruled by the oligarchs and their political patrons. Their battles and whims echoed loudly in the Moscow media, which they largely owned. It was here, in this Moscow boomtown, that the crisis of 1998 unfolded.
The trouble began with the chronically undisciplined Russian government. The country’s public finances were a black hole. Simply put, Russia spent more money than it had, every day. Special-interest lobbies such as agriculture, the military-industrial complex, the banks, and the huge Soviet-era factories hauled away truckloads of subsidies, with hearty encouragement from the Communist-dominated parliament. At the same time, tax collection was abysmal.30 When the government ran out of money, it simply stopped paying people. Russia was living beyond its means.
In the inflationary years of 1993 and 1994, one way to cover the deficit was to print more money, but that fueled hyperinflation. Chubais stopped that in 1995. Another way to cover the deficit was to obtain loans from the International Monetary Fund, which pledged a three-year, $10 billion loan starting in 1996 before Yeltsin’s reelection. 31 Beginning in 1993, Russia found still another inflation-free way to finance the deficits—it borrowed the money on capital markets. At home, the borrowing was through the high-flying, short-term bonds known as GKOs. The acronym stood for the Russian words gosudarstvenniye kratkosrochniye obligatzii, or short-term government obligations. The GKO came to symbolize all that was crazy about the stock and bond market boom. The bonds were denominated in rubles and usually had a three- or six-month term. When they were first floated in May 1993, the market was small. At the end of 1994, only $3 billion in GKOs were outstanding. But at the end of the election year of 1996 the total zoomed to $42.7 billion. In 1997, the year of the “young reformers,” the outstanding GKO debt went to $64.7 billion, and in mid-1998 it reached $70 billion. When risks seemed to be on the rise in Russia, especially before the 1996 election, the yields on GKOs soared, which meant the government had to pay even more to borrow even more. But the high yields also had a silver lining—the bonds were a wonderful source of easy money for Russian banks and anyone else who could get their hands on them. The GKOs sucked up capital that should have gone to productive investments. Victor Huaco, the financier at Orion Capital Advisors Ltd. in Moscow, told me that a Russian company with $200 million would obviously rather put it in GKOs than invest in new equipment. “I can invest in new equipment and over a ten-year period get a return per year of 20 percent,” he said. “Or, I can invest in GKOs, and in six months get 100 percent.” The choice was easy money, once again.
Originally designed as a way for the government to raise money, the GKOs wound up costing money. The bonds took on a life of their own—they became an unsustainable pyramid scheme in which new investors were desperately needed to pay off the old ones, not unlike the MMM scam. In 1994, three-fourths of the proceeds from GKOs went to the Finance Ministry to help cover the deficit, but by 1997, a full 91 percent of the proceeds were being used just to pay back earlier GKOs, with only 9 percent going to the budget.32
