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Johnson's Russia List


Febuary 23, 1999    
This Date's Issues: 3065  3066  


Johnson's Russia List
23 February 1999


Date: Fri, 19 Feb 1999 
From: (Matt Bivens) 
Subject: The Russia You Never Met

Jonas Bernstein and I wrote the following article in November 1997 for a
major American magazine. The magazine accepted it with enthusiastic
comments, and then after several months backed out and told us they
couldn't publish it. The stated reason was that the article had been
"scooped" by The Washington Post on Aug. 14 (when Georgetown's Peter
Reddaway wrote an op-ed article critical of Chubais, one that we cite
here). I don't know what the real objection to the article was; the editor
I dealt with this at this magazine was tightlipped, but he was also
obviously not happy at the outcome. (They also paid us in full -- which, as
a literary agent with International Creative Management told me, "means
they REALLY don't want to run it.")

It's a shame it took until 1999 to come out in Demokratizatsiya, since a
lot of what we pulled together more than a year ago was then somewhat
radical but today is the conventional wisdom. (For example, we note the
possibility of a coming default; we lay out the allegations that Berezovsky
has hijacked Aeroflot and is financing the Yeltsin family; we argue that
there is unlikely to be any economic growth until corruption is cleaned up;

Anyway, here it is below. I hope JRL readers like it.

Matt Bivens


Part 1
The Russia You Never Met
By Matt Bivens and Jonas Bernstein
[DJ: Currently with the Moscow Times. Footnotes
not reproduced here. Available from DJ.]

After staggering to reelection in summer 1996, President Boris Yeltsin
announced what had long been obvious: that he had a bad heart and needed
surgery. Then he disappeared from view, leaving his prime minister, Viktor
Chernomyrdin, and his chief of staff, Anatoly Chubais, to mind the Kremlin.
For the next few months, Russians would tune in the morning news to learn
if the president was still alive. Evenings they would tune in Chubais and
Chernomyrdin to hear about a national emergencyno one was paying their taxes.

Summer turned to autumn, but as Yeltsin's by-pass operation approached,
strange things began to happen. Chubais and Chernomyrdin suddenly announced
the creation of a new body, the Cheka, to help the government collect
taxes. In Lenin's day, the Cheka was the secret police forcethe forerunner
of the KGBthat, among other things, forcibly wrested food and money from
the peasantry and drove some of them into collective farms or concentration
camps. Chubais made no apologies, saying that he had chosen such a
historically weighted name to communicate the seriousness of the tax
emergency.1 Western governments nodded their collective heads in solemn
agreement. The International Monetary Fund and the World Bank both
confirmed that Russia was experiencing a tax collection emergency and
insisted that serious steps be taken.2

Never mind that the Russian government had been granting enormous tax
breaks to the politically connected, including billions to Chernomyrdin's
favorite, Gazprom, the natural gas monopoly,3 and around $1 billion to
Chubais's favorite, Uneximbank,4 never mind the horrendous corruption that
had been bleeding the treasury dry for years, or the nihilistic and
pointless (and expensive) destruction of Chechnya. None of this was
criticized, or even mentioned, by the same Western financial institutions
so upset by the tax shortfall. Chubais, a forty-two-year-old redhead who
speaks fluent English and is closely associated with Harvard University,
was the American government's number one ally in Russia. If Chubais said it
was so, then so it was: The problem was slack tax law enforcement, not
irresponsible government.

But Chubais soon made clear something that ordinary Russians had understood
from the start, for the name was not exactly a subtle thingthe Cheka was
not only about taxes. On a visit to St. Petersburg in October 1996, days
before Yeltsin's heart surgery, Chubais announced that the Cheka was not
"temporary," as it originally had been labeled (Lenin's Cheka was also at
first labeled "temporary"). Nor was its mandate only tax collection: the
Cheka, Chubais announced, would enforce better obedience to all laws and
decrees. Chubais went on to tell journalists cryptically that the Cheka was
part of a program of "consolidating power" because "the consolidation of
powerinstead of constant mutual intrigues, instead of public discussions,
instead of endless argumentsis exactly what the country needs."5

What was this about? The answer was clear: The regime was preparing for
Yeltsin's deatha quite possible outcome of this risky surgery for a
heavy-drinking sixty-five-year-old. Under the Russian constitution, new
presidential elections would have to be held three months after Yeltsin's
death; the winner in fall 1996 would have been General Alexander Lebed.
With his talk of ending "public discussions" and "endless arguments" (i.e.,
democratic debate) and "consolidating power" in his own hands, Chubais was
signaling the ruling elite's intention not to hold those elections. 

"All is being prepared for the moment Yeltsin dies," opined Sergei Markov,
a Russian political analyst with the Carnegie Endowment for International
Peace who is often cited in the Western media. "The task is to thwart
outsiders who might come to power through elections."6

Chubais's remarks were widely reported in Russia. America's various Moscow
correspondents were able to see or hear them in Russian, and even to read
them in English the next morning in the English-language Moscow Times,
which also offered the same interpretation from Markov. Surprisingly, few
thought it news. Of major American newspapers, only the Christian Science
Monitor reported Chubais's thinly veiled threat to rule by junta upon
Yeltsin's deathand even they put a strangely positive spin on it, as "the
latest example . . . of Chubais's use of nondemocratic means to further
economic reform."7

The New York Times and the Washington Post did note the creation of the
Cheka. But like other major American media, both characterized this as a
positive development. Soon after the founding of the new Cheka, the
Washington Post ran a 1,300-word profile of Chubais that approvingly
described his efforts "to impose an iron grip on this weakened post-Soviet
state."8 A month earlier, the New York Times had offered its own Chubais
profile on the front page, under the headline: "Rising Star in the Kremlin:
An Ardent Pro-Capitalist." "Deep inside the Kremlin, Anatoly B. Chubais is
plotting how to carry out the next stage of Russia's democratic
revolution," the article begins. It goes on to describe how "the ardently
pro-capitalist Mr. Chubais" was trying to turn Russia into "a disciplined
state." Hence the need for a stern new Cheka, of which a clipped, neutral
description is offered in the twenty-fourth paragraph.

The Times concedes that Chubais has critics, and cites one, Grigory
Yavlinsky, leader of the liberal Yabloko party, who calls Chubais "a
Bolshevik . . . [who] believes the ends justify the means." The article
continues with what can be seen as the New York Times's rebuttal to
Yavlinsky: "Mr. Chubais now waves off such complaints with the annoyed air
of a parent who is being challenged by a spoiled child."9

Yeltsin survived his heart operation, and the Cheka faded away like a bad
dream. But had Yeltsin died, Russia would have waked up to find itself
under the rule of a juntaa committee named for Lenin's death squads.

How Could America Not Know This?

How could Russia be so close to an oligarchical dictatorship, and so
frankly public about it, yet Americans not know of it? For an answer, one
has to scroll back through the years of Russia's chaotic rebirth from the
ashes of the Soviet Unionboth as it happened and as it was described by the
White House and the American media. 

Six years earlier, ordinary Soviet citizens were all but unanimous in their
desire for political and economic freedoms. Many eyes then turned toward
Amerika. The Russians have long had an affinity and respect for Americans.
And paradoxically, the cold war brought us even closer: Just as the United
States can take pride in the Marshall Plan that underwrote the restoration
of much of Europe following World War II, or in the postwar revival of
U.S.occupied Japan, so can we take pride in the work of the
government-funded Voice of America (VOA) and Radio Liberty, which beamed
international news into the Soviet Union. By speaking directly to the
Russian people, VOA and the like won Americans enormous reserves of
gratitude, not to mention moral authorityreserves that still are not

Russians also knew of American asylum for one of their greatest writers,
Alexander Solzhenitsyn, and of American support for another moral beacon,
physicist Andrei Sakharov. Even today the Russians have a sayingEto tebe ne
Amerika, "This isn't America for you"a retort thrown back to people
complaining of unfair treatment.

So as Russians eked out a limited, if stable, existence, they also imagined
another life, described by VOA, by samizdat underground publications, and
by friends of friends who had been abroad. Millions dreamed wistfully of a
nation where they could own their own business, go to their grandparents'
church, read a newspaper that contained real news, own a nice car and nice
clothes, even save their wages and visit Paris. 

But while some pressed for changefor democracy and capitalist
freedomsothers followed a more worn path. Corruption has been a part of
life in Russia ever since Peter the Great's favorite Prince Alexander
Menshikov embezzled from government grain delivery contracts, took massive
bribes, and parked 9 million rubles "off-shore" in an Amsterdam bank (at a
time when the average monthly salary was 18 rubles).10 Arguably, corruption
grew worse under the commissars: The Soviet Communist Party funded the coup
d'etat that brought it to power with bank robberies and never looked back. 

"Bold" Reforms Wipe Out a Nation

Much like America in 1776, Russia in 1991 was a new country where
democratic ideals had won the dayand now needed to be consolidated. The
country needed to replace its Brezhnev-era constitution, hold new
elections, and eliminate, or dramatically downsize, the KGB. Yeltsin had an
overwhelming mandate to do this. But as with most men of ambition, the last
thing on his mind was sharing poweror risking it. Instead, he appealed for
more, calling on parliament to grant him emergency powers for one year.
Parliament agreed.11

Yeltsin promised bold market reforms, most controversially a "one-time
changeover to market prices" from prices set by the state.12 This was a key
element of the "shock therapy" some economistsmost notably Anders Åslund of
the Stockholm Institute and Jeffrey Sachs of Harvard, both of whom advised
the Russian government at the timeprescribed.13 Shock therapy was
orchestrated by neoliberal economist Yegor Gaidar, then thirty-seven, who
since has said he knew it would never work, but insists "we couldn't just
keep doing nothing."14 Gaidar freed prices on 2 January 1992. He and
Yeltsin had both reassured the public that prices would rise about
threefold.15 By year's end they had skyrocketed twentyfold and were still
climbing.16 When 1992 began, 10,000 rubles would have bought a car; by
year's end, 10,000 rubles might have bought a good pair of shoes. A stunned
Russian public watched their life savings evaporate. 

This was a disaster, but it was not unforeseen. The Gaidar game plan had
been to check inflation by tightening the faucet on the amount of rubles in
circulation. That was never much of a plan, mainly because Gaidar's team
never had control of the faucet: The Soviet Union still existed in the form
of rubles circulating across its length and breadth, issued by fifteen
separate "central banks," each acting independently.17

Gaidar plowed ahead with a policy that hinged on the money supplywhen he
knew beforehand that he didn't control it! He might as well have knowingly
gotten behind the wheel of a car with no brakes and then planned on
stopping, somehow, at the first traffic light. 
Whatever its merits, shock therapy à la Gaidar had an important side
effect. Rampant inflation was the blow that smacked down Russian civil
society just as it was showing faint signs of trying to rise, tottering,
out of communism's sickbed. Slowly and tentatively, ordinary Russians had
been taking an interest in how their country was run. They had been
debating the future and demanding changes, so much so that David Remnick
could write a book as hopeful as the Pulitzer Prize winning Lenin's Tomb.
Then, suddenly, Gaidar snapped his fingers and they were financially wiped
out, their savings gone, their buying power shrinking by the hour. Any
energy left over went into moonlighting at second jobsdriving gypsy cabs in
the cities, for exampleand tending their own garden plots, either at dachas
or in apartment window boxes. Life expectancies plummeted, particularly for
men, thanks mostly to an increase in violent or stress-related deaths:
suicides, murders, heart failures, and alcohol-related incidents.18

Spinning Government Connections into Gold

Not all prices were freed. At Yeltsin's insistence, energy prices were held
fantastically low. As economist Åslund has observed, in 1992 the price of a
pack of Marlboro cigarettes on Moscow's streets (about $1) was the same as
the state-dictated price for three tons of crude oil (or about one
three-hundredth of world market prices).19 It takes little imagination to
see how one might profit from this. Those with access to oil and other
undervalued natural resourcesprecious metals, lumber, natural
gasimmediately ran up fabulous fortunes by buying for domestic prices and
selling abroad. Men who enjoyed such access would become Russia's leading
tycoons, among them Mikhail Khodorkovsky, Boris Berezovsky, and Vladimir
Potanin. Khodorkovsky, who founded Bank Menatep, was an adviser to Gaidar's
fuel and energy minister, and before Gaidar he advised Yeltsin's easily
forgotten first Russian prime minister, Ivan Silayev.20 Potanin, who today
heads the powerful Uneximbank, was in 1991 head of a Soviet-era association
of foreign economic traders that oversaw export of oils and precious
metals.21 Another who quickly won lucrative oil export concessions was
Dzhokhar Dudayev, the mafiaesque leader of the rebellious republic of

Access to such resources was a direct function of access to officialdom.
"Maintaining low prices on natural resourcesoil, gas, wood, metalswas
advantageous to those who sold this merchandise on the foreign market, who
had licenses, privileges, the right to sell," wrote the free market
economist Larisa Pyasheva, an early critic of the Gaidar-led reforms. "All
of these people passed through the government offices of the 'liberals,'
receiving there those licenses, rights and privileges."23 Other
get-rich-quick opportunities abounded. Nearly all also depended on
exploiting access to the governmentand sometimes, the president himself. 

An only slightly more creative way to spin hay into gold was by wrangling a
presidentially decreed break from paying taxes or tariffs on imports and
exports. Yeltsin gave such decrees left and right. One recipient was the
Orthodox Church;24 another was the National Sports Fund, a corrupt, quasi
sports ministry; another was a fund purportedly to help disabled Afghan War
veterans that was plagued by murderous infighting.25 Yet another was a
Moscow sports center headed by Otari Kvantrashvili, described in the
Russian press as the godfather of the Moscow mafia.26

Few of these organizations lived up to their noble-sounding names. For
instance, the National Sports Fundthe domain of two of Yeltsin's friends,
tennis coach Shamil Tarpishchev and security chief Alexander Korzhakovwas
encouraging athletic excellence by importing duty-free booze and
cigarettes. (At the time the tariff on imported beer was 300 percent; on
foreign vodka, 500 percent.) Izvestia's economics editor, citing the
Russian Economics Ministry, reported that the exemptions on vodka alone
were costing the government $200 million a month in 1995.27

When they had made their money, Russia's new elite needed a place to keep
it. Since the Gorbachev era, banks had been easy to open and register, and
largely unregulated. Many financial structures calling themselves "banks"
were actually investment houses, places to hold the money of a select few.
Soon these men were offering their "banking" services to the government
itself. In 1992, Gaidar had quietly chosen a handful of "authorized banks"
to handle federal budget money. Oceans of cashfarm subsidies, energy
subsidies, survival payments to the communities of Russia's ailing Far
Northwashed through the vaults of these anointed few.28

One such lucky winner was Mikhail Khodorkovsky's Bank Menatep. Established
in 1988, Menatep, under Gaidar, was tapped to handle funding for a host of
federal programs, including supplying the military with food, funneling
cash for the Chernobyl cleanup, and later, rebuilding war-torn Chechnya.29
("Rebuilding" Chechnya has been spectacularly lucrative: According to the
Accounts Chamber, a Russian government auditing body, $4.4 billion sent off
to Grozny disappeared in the vaults of commercial banks such as Menatep.)30

Another winner was Uneximbank, founded by Potanin in 1993. As might be
expected, given Potanin's pull with the government, the central bank,
Finance Ministry, and Foreign Trade Ministry, expedited Uneximbank's
licenses, and the bank quickly received authorization to sell government
Treasury bills and conduct operations with gold and other precious
metals.31Uneximbank was anointed to handle the budgets of the Finance and
Foreign Trade Ministries and the State Customs Committee.32 According to
the newspaper Moskovsky Komsomolets revenues that Uneximbank skimmed from
government programs in 1997 came to more than $1 billion.33

This national model of authorized banks was mimicked at the local level,
with the mayors of Moscow and St. Petersburg tapping their own insider
banks. Most- Bank, for example, achieved national fame while handling
Moscow's municipal accounts. The banks tended to be slow in delivering the
money, which because of inflation was of no small significance. Sometimes
they kept a hefty cut of government transactions. Sometimes they
collapsedas in St. Petersburg, where local Astrobank went under with a
healthy chunk of the city budget.34

Soon, a handful of financial organizationsusually centered around a single
mancame to dominate Russian political and economic life. Most-Bank,
Gazprom, Menatep, Uneximbank, Alfa Bank, LogoVAZ, Stolichny Savings Bankall
of these powerhouses burst onto the national scene just four or five years
ago. While ordinary Russians bent ever lower over their potato gardens
(Russians now grow at home a stunning 87 percent of all the potatoes they
consume and 67 percent of all vegetables, according to the newspaper
Argumenty i Fakty),35 the new elite grew bolder about flaunting its wealth
and startlingly open about how they earned it.

"To become a millionaire in our country it is not at all necessary to have
a good head or specialized knowledge," Pyotr Aven, founder of Alfa Bank,
told Moskovskiye Novosti in July 1994. "Often it is enough to have active
support in the government, the parliament, local power structures and law
enforcement agencies. One fine day your insignificant bank is authorized,
for instance, to conduct operations with budgetary funds. Or quotas are
generously allotted . . . for the export of oil, timber and gas. In other
words, you are appointed a millionaire."36 Aven could speak with authority.
He had been Gaidar's foreign trade minister, a position he apparently used
to advantage. His Alfa group won lucrative state contracts to export oil,
import Cuban sugar, and service some of the accounts of the State Customs

Menatep's Khodorkovsky, the former adviser to top government ministers,
once frankly stated in an interview that politics was Russia's "most
profitable business."37 According to an Izvestia profile of Menatep, the
bank is structured to mirror the state hierarchy: its top managers were
hired for their contacts with top government officials, middle managers for
contacts with middle-level bureaucrats, and so on.38 Potanin, another
former government official, once described Uneximbank as "a private bank
with a state mentality"39another admission of where the big opportunities

Behind the Castle Walls

These beneficiaries of nomenklatura capitalism resided, figuratively
speaking, behind the castle walls, while Russia's small entrepreneurs were
stuck with Hobbes's state of nature. The top bankers were protected from
rampant organized crime by private security forces made up of ex-KGB
personnel. Their business headquarters were fortresslike structures in
central Moscow; their residences were heavily guarded, palatial homes on
the capital's outskirts. They commuted back and forth in convoys of
Mercedes and Jeep Cherokees, which raced down the central lanes of Moscow's
main thoroughfares, once reserved for the Communist Party elite, flashing
blue roof lights warning the masses to clear the way.

The average merchant working out of a kiosk or a market stall had no
protection from the tide of bureaucratic corruption and freelance
extortion. A January 1994 study by Yeltsin's own analytical service found
that all small traders in Russia were paying hefty protection payments.40
This state of affairs, as Larisa Pyasheva noted, was the result of choices
made by Russia's new leaders.

"It was not so hard, in the end, for the state to impose orderor, more
accurately, not to allow disorder," Pyasheva wrote. "If, of course, the
state had been genuinely liberal. Because a liberal state is a state strong
and decisive in defending the legal rights of its citizens. Liberalism and
disorder are antonyms. But tell me, did anyone in the Gaidar or post-Gaidar
governments lift a finger to 
provide freedom for the market from bandits and bribe-takers?"41

"Everyone Will Have Equal Opportunity"

In 1992, Russians were frightened by the inflation Gaidar had unleashed.
Their consolation was the argument that it would soon be over (actually it
took years), and that privatizationthe second half of the reform planwas on
the way. 
Under a program designed by Anatoly Chubais, then thirty-five, with the
help of Western advisers, small businesses and shops would be sold at local
auctions. Larger industries would be turned into corporations whose shares
would be given to workers and management, and also sold to the impoverished
general public, which would be issued special chitsprivatization
vouchersfor use in buying them. When Yeltsin introduced the voucher program
in August 1992, he said the goal would be to create "millions of owners
rather than a handful of millionaires" and promised, "Everyone will have
equal opportunity in this undertaking."42

That was not entirely true. To paraphrase a certain fictional pig, some
people's opportunity was to be more equal than others'. Soon Chubais would
be as hated as Gaidar. Through vouchers, the government sold off the lemons
of Russian industry, including thousands of enterprises that needed to be
shut down. Real wealthfrom television stations to oil companieswas held
back. It would later be divided up among the new elite. Or, if real wealth
did go on the block, the auction would be rigged. Izvestia, a newspaper
then squarely behind Chubais, nevertheless concluded in July 1994 that
nearly three-fourths of all shares sold at voucher auctions went to people
selected in advance.43

As the voucher program closed in 1994, more than 17,000 large and mid-sized
enterprises had been privatized, and among shareholders were 41 million
Russian citizens44a statistic that has become obligatory in all newspaper
articles heralding the success of Russia's market transition. Defenders of
privatization say that all Russians will ultimately be winners, as these
now-private enterprises will be restructured. But aside from some scant
evidence that enterprises are dumping old management for new, there are few
signs that restructuring is under way as a trend.45 Even if it is, it will
surely take years, probably decades. Why should the nation wait and bear
the cost, while a small elite profits today?

The West has ignored this explosive political subtext and embraced
privatization as its own. From the start of his political career, Chubais
was the recipient of massive U.S. aid and technical advice.46 "If we hadn't
been there to provide funding for Chubais, could we have won the battle for
privatization? Probably not," Richard Morningstar, coordinator of U.S.
assistance to the former Soviet Union, said in Prague recently. Morningstar
noted that America does not have the money to revive the Russian economy on
our own, "but you can provide targeted assistance to help Chubais."47

Through vouchers, Chubais achieved the status of a "demigod," as one World
Bank official put it.48 In 1995, the International Monetary Fund (IMF) made
a $10 billion loan to Russia conditional on Chubais running Russian
economic policy that year.49 When the re-elected Yeltsin again tapped
Chubais as economics tsar in 1996, the Clinton administration all but wept
publicly for joy. A top U.S. Treasury official, Lawrence Summers, gushed of
Russia's new "economic dream team."50

One statistic much ballyhooed by Chubais's fans is the creation of 41
million "property owners," as boosters describe voucher-created
shareholdersa phrase no doubt chosen to conjure the image of a nation of
shopkeepers. This is a meaningless statistic: Theoretically all 41 million
could hold shares in one hopelessly bankrupt brick factory somewhere above
the Arctic Circle. (And millions more, in fact, ended up investing both
their vouchers and their money in unregulated pyramid schemes.) The truth,
of course, is somewhere between the Arctic Circle and the government happy
talk in Washington and Moscow. It will remain difficult to evaluate until
information becomes available that breaks down how shares are distributed
among the population. Such information about wealth is exceedingly rare in
Russia. But one authoritative study, commissioned by the Russian central
bank and carried out by the Academy of Sciences in fall 1996, has
demonstrated how few winners have been produced by economic reform. The
study found that Russians held $140 billion in personal savings, of which
3.3 percent belonged to the poorer 71 percent of the population and 72.5
percent to the richest 5 percent. More than half of all Russian savings
were held by just 2 percent of the population. That same study found that
nearly half of all personal savings is kept in cash, much of it in U.S.
dollars. It is not being invested into the economynot in industry, not even
in banking and financial structures. This, as the academy's Iosif Diskin
wrote, represents a vote of no-confidence in Russia's "state-financial
institutions, and in the state as a whole." 51

Our Home Is Gazprom

Among the choice plums kept off of the voucher auction block were Russia's
biggest money makers: oil, precious metals, natural gas, gold, and
diamonds. The classic example is Gazprom, the Russian natural gas monopoly
once headed by Prime Minister Chernomyrdin. Gazprom's wealth is staggering:
The standard estimate put forward by Gazprom managers and by Western
experts is from $250 billion to $950 billion.52

If Gazprom had been privatized in accordance with the stated goals of the
voucher programusing equal opportunity to create millions of owners and not
just a few millionairesRussia might today be an entirely different place.
The government could have divided Gazprom among the nation's 148 million
people, one Gazprom share per voucher. Assume that the stock value indeed
reflects the company value (which is the way it is supposed to work in the
textbooks, even if real life is less predictable), and each voucher would
have been worth somewhere between $1,700 and $6,400. For a family of three,
that would have been $5,100 to $19,200 in stock, to say nothing of
dividends.53 Creating that sort of wealth for 148 million people (and not
just 41 million) would indeed have been something to brag about.54 Imagine
if roughly the same approach had been rolled out through the other crown
jewels of Russian industry the massive oil companies such as LUKOIL and
Yukos, the metals giants such as Norilsk Nickel, the telephone giants such
as Svyazinvest, the diamond mines and the gold mines, all of which were
protected from voucher privatization. Assuming a truly liquid trade in
shares on a vibrant stock market, the world would no longer have been
looking at Russians with pity, but with envy. Russia would have created
overnight a middle class whose consumer appetites would have fueled an
economic revival.

Back in the real world, Gazprom was privatized secretly, with the company
managers getting a huge cut. Today the government owns 40 percent, Gazprom
management owns 35 percent, and ownership of the remaining 25 percent is,
as the Moscow Times recently put it, "unclear."55 For three years after
Gazprom was privatized, there was more consternation in Russia than debate.
But in May 1995, former finance minister Boris Fyodorov, writing in
Izvestia, attacked Gazprom's privatization as "the biggest robbery of the
century, perhaps of human history." Fyodorov asked why the natural gas
monopoly stock had been divided among top management insiders, with each
getting from 1 to 5 percent of the company, or "a potential . . . minimum
of from $1.2 billion to $10 billion each." "It's nice that we have people
who can compete in wealth with the sheiks and the Rockefellers," Fyodorov
wrote. "But why should [ordinary Russians] be satisfied with a share of the
national wealth equal to one [privatization] voucher?"56

There were other salvos, including allegations that Prime Minister
Chernomyrdin was one of those new Russians rivaling the sheiks and the
Rockefellers. Current and former high-ranking Russian officials soon were
lining up to offer allegations that Chernomyrdin was now one of the "ten
richest men in Russia," thanks to his secret Gazprom stock, and that
Chernomyrdin's son was also a Gazprom shareholder, both of them via the
"dummy" front companies sprinkled throughout the list of Gazprom

Amid these allegations, the New York Times offered a muddled, page-one
profile of Chernomyrdin. The article noted accusations that Chernomyrdin
"owned stock" in Gazprom (without ever explaining how he might have gotten
it) and reported that his son was building a three-story dacha on the
Gazprom compound. It then quickly moved to exonerate Chernomyrdin: "While
few challenge Mr. Chernomyrdin's personal integrity, many here cite him as
an example of a chummy relationship that makes the government blind or
indifferent to official corruption, even when officials themselves are
honest."58 (This would appear to mean that "official corruption" exists in
Russia, but that neither Chernomyrdin nor "the government" is involved.
Both, however, are guilty of a "chummy relationship," although with whom
and for what purpose is not specified.)

Chernomyrdin has long been coy about his Gazprom ties. In fall 1995, when
the prime minister was being questioned by parliament, one deputy asked him
how many shares he owned in Gazprom. Chernomyrdin paused, then said with a
smile, "Next question." Eventually, however, Chernomyrdin did respond. In
July 1995, he summoned a reporter from Komsomlskaya Pravdaa national
newspaper by then partly owned by Gazpromto his office for an interview.

Eventually, and apologetically, Komsomolskaya's interviewer asked
Chernomyrdin to comment on reports that he owns 5 percent of Gazprom and
that his brothernot his sonis building a palatial, three-story dacha.
Somehow not noticing that convenient mistake, Chernomyrdin launched into
the sad tale of how both his brothers had died in recent years, then
stated: "When I read vile comments about dachas, I feel as though the
authors know of my grief and simply want to rub salt in the wounds."

Chernomyrdin continued with his famously tortured grammar: "As to [Gazprom]
shares, those who say that, it seems, don't have the brains to understand
what a gigantic sum of money that is, and can it belong to one person. In
general I don't have any Gazprom stock, although in my time they suggested
I become a shareholder." 

They? Who are "they"? Why did "they" suggest such a thing? Why did you
decline? Sadly for history, interviewer Gamov quickly changed the subject,
asking Chernomyrdin if he is a "sentimental" person, asking how he keeps in
shapeperhaps his wife feeds him a particular way?asking him to "comment"
about the family photos of his wife and grandchildren on his desk.59

First as fuel and energy minister and then as prime minister, Chernomyrdin
for years protected the oil and gas industry from paying taxes. His valiant
efforts in that regard earned his political party, "Our Home is Russia,"
(Nazh dom Rossiya) the derisive nickname "Our Home is Gazprom" (Nazh dom
Gazprom). Åslund notes that while the oil and gas sector is now properly
taxed, it was not so as late as 1995when a reasonable tax burden would have
contributed up to $30 billion in revenues that year, more than half of all
projected revenues in the 1995 Russian budget. With that money, the
government could have given each of its 30 million pensioners $1,000. Each
Russian student, from first grade up, could have been given a laptop
computer. Chechnya could have been destroyed and rebuilt, twice. 

Two years ago when the allegations against Chernomyrdin were hot news, Vice
President Al Gore was praising Chernomyrdin for his "resolute vision."
"Friends have a right to be proud of their friends," Gore said then.61
Until Chernomyrdin was fired in March 1998, Gore continued to trumpet his
personal relationship with the prime minister, which mirrored Clinton's
relationship with Yeltsin. In some of the most bizarre expenditures ever
seen, meanwhile, the U.S. government has steered foreign aid to Gazprom,
one of the world's richest corporations. In a deal brokered at a meeting of
the Gore-Chernomyrdin Commission, the U.S. Agency for International
Development (USAID) gave $2.3 million to buy pipeline valves for Gazprom. A
few weeks later, Gazprom bought two $50 million French jets for its

"The Presidential Orchestra Played and We Danced"

Privatization's greatest success was perhaps a program under which every
family has the option to privatize the Soviet-built apartment in which it
lives. Today this represents the only major wealth many can boast of. The
elderly in particular have been quick to liquidate this, their only asset,
and move in with friends or family. 

Housing privatization had a different meaning for the new elite. Soon after
taking office, Yeltsin ordered an apartment building on Moscow's Ulitsa
Osennaya commandeered and renovated. The new apartments, which had been
built at state expense, were doled out as gifts. Other than the Yeltsins,
those who quickly moved in included Korzhakov, Gaidar, Chernomyrdin, Moscow
Mayor Yury Luzhkov, Defense Minister Pavel Grachev, Interior Minister
Viktor Yerin, Deputy Prime Minister Oleg Soskovets, presidential tennis
partner Shamil Tarpishchev, the ghost author of Yeltsin's memoirs Valentin
Yumashev, Korzhakov's lieutenant (and future chief of the FSB, the KGB's
successor agency) Mikhail Barsukov, and many others.63

Korzhakov, Yeltsin's personal security chief until he was sacked in 1996,
describes in his memoirs how the elite pleaded for flats:
As soon as our allies learned that the Presidential Building was ready for
habitation, supplicants began to come see me.64 . . . Soon at a government
meeting Gaidar came up to me and began to ask in a pitiful voice:
"Alexander Vasilievich, couldn't you speak with Boris Nikolayevich
[Yeltsin] and convince him? Because I live in a ground floor apartment, I'm
in such danger."65 . . . Moscow Mayor Yury Luzhkov and [deputy mayor]
Vladimir Resin [next] became our neighbors. Yeltsin invited them. At first
they both delicately refused, then moved in.66 . . . Boris Nikolayevich
then organized a collective housewarming party at the House of Receptions
on the Leninsky Hills. It was jolly. Everyone arrived with their families.
We dined wonderfully. The Presidential Orchestra played and we danced. We
congratulated each other on our lucky and cost-free acquisitions. Yegor
Gaidar, who so passionately preached the idea of the market, was also
ecstatic about the free distribution of apartments.67

Korzhakov's memoirs came out in the late summer of 1997 and have been
selling rapidly from street-corner tables throughout Russia. Western
journalists, however, have downplayed or debunked the book.68 They
correctly argue that Korzhakov is corrupt and anti-Yeltsin. Russians know
this as well, yet few would argue that Korzhakov's portrait of Kremlin life
is false. 

Anti-Corruption and the Russian Salvation Tour

One of Yeltsin's first public anti-corruption drives came in March 1992,
only two months after Gaidar had unleashed inflation. Yeltsin appointed
Yury Boldyrev, a young crusader from St. Petersburg, to the new post of
chief government inspector. Boldyrev documented the illegal sale of tens of
millions of dollars worth of military hardware by Russian army brass still
based in Eastern Europe, the so-called Western Forces;69 he asked Yeltsin
to fire some top generals. He also asked for permission to investigate
corruption in the administration of Moscow Mayor Luzhkov. Yeltsin refused,
fired Boldyrev, and liquidated the inspector's office.70 According to
Boldyrev, Yeltsin explained his refusal in part by saying, "We support

This would become the standard government response to corruption. In
public, Yeltsin would champion "the struggle against the cancerous tumor of
corruption in the upper echelons of power."72 In fact, corruption
flourished under his protection, even encouragement. At times this would
become clear; then the government would trot out Chubais, the darling of
the West, to break up the gaming in the style of Casablanca's Captain Louis

Consider the furor over the National Sports Fund and its duty-free alcohol
and cigarette trade. The World Bank and the IMF were not happy when the
fund's tax breaks came to lightwhy, after all, should Western governments
make loans to Russia, if Tarpishchev, Korzhakov, and company were siphoning
millions from the budget? So began a sleight of hand aimed at the
Westerners: In March 1995, Yeltsin signed a new decree repealing the
duty-free status; but four months later, in July, Chubais himself quietly
approved a government decree that paid Tarpishchev's sports fund
compensation for any revenue lost.73 Then in September, Chubais went public
with a demand ("I'm shocked, shocked I say!") that the already canceled
privileges, be, um, canceled again. By 1 October, "Either the [tax and
tariff] exemptions go, or I go!" Chubais thundered. By most accounts, they
were extended repeatedly until the beginning of 1996.74 

Another case was the disabled Afghanistan veterans fund. In 1994, after the
fund's chairman was murdered, the government canceled its exemptions and
ordered it to pay retroactively the duties it had avoided. But Yeltsin then
signed decrees that forgave all penalties and paid the fund $8
millionagain, compensation for its lost status.75 

Meanwhile, Yeltsin's subordinates followed his shining example. In 1992,
the Kremlin's Palace of Congresses was rented out to Shoko Asahara, head of
Japan's Aum Shinryko cult. Cult members dressed in tinsel-covered leotards
pranced around through clouds of dry ice in a musical Asahara had written
for the occasion.76 This was Aum's "Russian Salvation Tour." Aum cult
members met with Vice President Alexander Rutskoi and parliamentary Speaker
Ruslan Khasbulatov and quickly found an ally in Oleg Lobov, chairman of the
Security Council and a top confidante of Yeltsin.77 Investigators of Aum's
1995 sarin nerve gas attack on the Tokyo subway, which killed 12 and
injured 5,500, say the sarin was of Russian origin.78 They also say Aum
recruitsapparently including one who would later expertly gun down a top
Tokyo police official79had weapons training in 1994 with the KGB's elite
Alpha Group,80 then headed by Korzhakov. 

Lobov has been accused of accepting a suitcase containing $79,000 from Aum,
in return for sarin-producing technology. A Russian criminal case remains
open.81 (Yeltsin's response to the charges that Lobov helped Aum was
immediately to promote him to be his envoy to Chechnya.)82 Aum also
obtained some military hardware and technology to produce its own
Kalashnikov assault rifles.83 Investigators say Aum was aiming higher: cult
leaders prowling around Russia literally kept a shopping list in a notebook
that included MiG-29 fighter jets, Proton rocket launchers, and nuclear
warheads. That same notebook listed pathetically trivial gifts for
government officials: "To Lobov and others, Polaroid camera, Cross ballpen,
and Walkman."84

"Corruption is not a new topic," noted prominent Moscow lawyer and
Literaturnaya Gazeta political columnist Arkady Vaksberg, writing in August
The fact that it is penetrating more and more into all levels of the
government has been written about for quite some time. The official
indifference with which these alarming signals are greeted can be partially
explained by the fact that those responsible for fighting corruption have
themselves been infected with the sickness. . . . To this date there is no
known corruption case against any bureaucrat occupying an even slightly
prominent government post.85

As Yeltsin's conflict with Khasbulatov's parliament worsened, both sides
began to make intriguing corruption allegations. But Andrei Malgin, the
editor of the weekly news magazine Stolitsa, found Americans to be
surprisingly hostile to the idea of examining the Kremlin's corruption. In
September 1993, he wrote:
I recently published an article in the Moscow Times in which I expressed an
opinion that I thought was indisputable: The mutual accusations of
corruption coming from the executive and legislative branches discredit
both, and diminish the authority of the government as a whole. The populace
has long lost the ability to distinguish who is right, who is guilty, and
has just become convinced that all those in power are thieves.

Not everyone agreed with me. Several foreigners working here in Moscow even
called me and asked with irritation how I could equate the Yeltsin and
Khasbulatov teams. And on the very next day after my article appeared it
was liberally quoted in the New York Times as a very exotic view of the
corruption charges.86 

Murky Oligarchy on Channel 1

Only one television station could be seen across all of the Soviet Union.
Predictably, it was Channel 1. The company that ran Channel 1 used to be
called Ostankino. But after investigators uncovered massive corruption,87
Yeltsin issued a decree liquidating Ostankino and transferring its property
and privileges to a new company, ORT. End of investigation. "This is like a
thieving store manager setting his store on fire to cover up the tracks,"
said Igor Yakovenko, head of the Duma's media subcommittee and a member of
the Yabloko Party.88 The Moscow Times complained in an editorial about a
switcheroo carried out "by a stroke of the president's pen, with no pretext
of conforming to the laws on privatization. . . . The secrecy surrounding
the deal strongly suggests that one inefficient and corrupt systemin which
billions of rubles in revenues flooded into private pocketsis about to be
exchanged for another."89

The state was to hold 51 percent of ORT, and the other 49 percent was to be
divided up among some of Russia's mightiestand murkiestcommercial
structures: Gazprom, Stolichny Bank, Alfa Bank, Bank Menatep, LogoVAZ, and
others. Chubais himself was also on the board of directors. Many of the men
sitting around the ORT table were already working in tandem with government
officials to build personal fortunes at state expense. They were also
rapidly taking over the nation's media. This was starting to look
suspiciously like an oligarchy. One of the first people to say as much was
Alexander Solzhenitsyn. "We have oligarchy, not democracy," he said in a
speech soon after his arrival from twenty years of exile in Vermont.90
Later, in Le Monde, Solzhenitsyn wrote, "Former members of the communist
elite, along with Russia's new rich, who amassed instant fortunes through
banditry, have formed an exclusive . . . oligarchy of 150 to 200 people who
run the country."91

On his return to Russia, Solzhenitsyn was given a twice-monthly show on
ORT. After he used it to deliver those criticisms and others against the
war in Chechnya and against privatization, the show was unceremoniously
yanked.92 Solzhenitsyn faded angrily from public view; today he describes
Russian politics as not worth his time.93 The loss, again, of
Solzhenitsyn's voice was truly sad, for by late 1995 privatization à la
Chubais was about to enter a final and dirty stageone that would prove that
the rigged voucher auctions and the corrupt privatizations of Gazprom and
ORT were not flukes. The crown jewels of Russian industrytens of billions
of dollars worth of oil companies, metals companies, and energy and
telecommunications mammothshad been kept out of the voucher program. Now
they would be divided.

[continued in Part 2]



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