Febuary 24, 1999    
This Date's Issues: 3067 • 3068 • 

Johnson's Russia List
#3068
24 February 1999
davidjohnson@erols.com

********

Part 2
The Russia You Never Met
By Matt Bivens (bivens@imedia.ru) and 
Jonas Bernstein (bernsteinj@hotmail.com)
[DJ: Currently with the Moscow Times. Footnotes
not reproduced here. Available from DJ.]


Loans-for-Shares: A Boring Label for a Historic Swindle

In 1995, Chubais and Yeltsin endorsed a plan put forward by Uneximbank's
Potanin. Banks would give the government "loans"; in return, they would
manage the state's stake in those strategic industries for a few years. 

This was not really about "loans" in return for "borrowing" an oil company,
but an underhanded way to sell off such companies. Loans-for-shares, as the
program was labeled, brought with it enough jargon and cloudiness to
obscure the issue and bore the public. Those who followed events more
closely, such as Gaidar's outspoken former finance minister Boris Fyodorov,
were contemptuous. "Yesterday [the oligarchs] shared television stations,
today they're splitting up companies among old friends."94

Chubais came to the rescue. Russia's financial giants would not simply sit
around the table and divide the oil companies among themselves; no, Chubais
promised, instead there would be competitive auctions open to the entire
world. "It once seemed control of Russian industry would fall into the laps
of its banks. Fortunately, things may turn out differently," intoned The
Economist. "Mr. Chubais has opened up bidding to anyone wanting to take
part."95

But a month before the first auction, Chubais reversed himself and let the
Economist down. The government announced that foreigners would be barred
from the bidding, and Chubais was silent. Later, he would justify that
ban.96 The first in what would be a historic series of "competitive
auctions" got under way 8 November 1995, when bidding opened on a 40
percent stake in Surgutneftegaz, an oil company with an alphabet soup name,
but a yearly oil output equal to France's Total.97 The auction had two
bidders, an obscure company called Svift and Surgutneftegaz. A third bidder
had been disqualified on a technicality. Surgutneftegaz won the bid,
pledging to shell out a mere $88 million. This was, as one financial
analyst put it, "as close to free as you can get when buying an oil
company."98 Vladimir Bogdanov, head of Surgutneftegaz, promised that the
government would get its money "even if we have to withhold wages and other
payments for two months."99

The next auction was even more blatantly collusive. On offer was 38 percent
of Norilsk Nickel, a metals combine located in Russia's Arctic North that
produces more than a quarter of all the world's nickel and more than a
third of all the cobalt. Norilsk Nickel earns an estimated $2 billion a
year from exports. This was one of a few engines that were dragging behind
themselves the entire Russian economy. Yet strangely, given what was at
stake, the government delegated its authority to decide Norilsk Nickel's
fate to Uneximbank, a private company. Uneximbank was deputized to accept
and evaluate bids for Norilsk, even though Uneximbank was itself offering a
bid. Not surprisingly, Uneximbank won. Its laughably small bid of $170.1
million was only $100,000 over the government's minimum bid. A competing
bid that was two times higher was judged unfit.100
And so it went:
• 51 percent of the enormous Sidanko oil company. Minimum bid: $125
million. Uneximbank organized the auction; an Uneximbank affiliate won with
a bid of $130 million. A rival bid was disqualified for arriving
twenty-four minutes late.101 One Western oil analyst at the time calculated
that Uneximbank had paid the equivalent of two cents a barrel for Sidanko's
reserves, when the going rate internationally for reserves was $4 or $5 a
barrel.102
• 5 percent of LUKoil, Russia's largest oil company. Minimum bid: $250
million. Bank Imperial, the pet bank of Chernomyrdin's Gazprom, organized
the auction. Bank Imperial and LUKoil jointly submitted the winning
bid$250.01 million, $10,000 over the minimum. Only weeks earlier, the
Atlantic Richfield Company had paid more than seven times that for a
comparable LUKoil stake.103
• 78 percent of Yukos, Russia's second-largest oil company. Bank Menatep,
the state's hand-picked organizer for the auction, won it with a bid of
$309.1 million, $9 million above the minimum, for control of 2 percent of
the world's known oil reserves. Menatep had rejected a rival bid from a
consortium composed of Alfa Bank, Inkombank, and Rossiisky Kredit on
various procedural grounds.104

A final auction was held in the waning days of 1995. Stolichny Savings Bank
and the previously unknown Oil Finance Company, reportedly a front for
financier Boris Berezovsky, together won 51 percent of Sibneft, Russia's
seventh-largest oil company. They paid $100.3 million, $300,000 over the
starting price. A rival bid was rejected for arriving twenty-four minutes
late, as had happened with the Sidanko sale.105

Loans-for-Shares Revives the Communists:
The West Squirms to Exonerate Chubais

As auction after auction ended in scandal, with the losers threatening
lawsuits, Chubais defended the process. Just after the Norilsk Nickel sale,
Chubais told the press that he had informed Yeltsin of the "efficiency" of
loans-for-shares and that the president had declared himself
"satisfied."106 On the eve of the Yukos auction, Chubais lashed out at the
noisy trio of Inkombank, Alfa Bank, and Rossiisky Kredit, who were
protesting that Bank Menatep had been allowed to organize the auction and
participate in it. In a move worthy of Communist Party chief Gennady
Zyuganov, Chubais accused the trio of fronting for hidden foreign
investors.107

Finally, in mid-December, with the process nearly finished, Chubais
admitted that it had been a "mistake" to let banks organize the auctions
and also participate in them. He promised that this would never happen
again (another promise that would be broken). The mistake, he was quick to
add, had been of an "ethical," not a "legal," nature.108 He repeated this
tepid mea culpa in January 1996, adding, by way of exculpation: "We must
remember that Russia is a transition economy."109

Chubais never explained how Russia's status as a "transition economy"
justified the rigging of privatization auctions. Nor did he, or any other
top official, ever respond to sensational subsequent charges that the
loans-for-shares winners had paid for their stakes with taxpayers' money.
In October 1996, Yury Boldyrev, Yeltsin's former government inspector, told
the weekly Novaya Gazeta that his Accounts Chambera newly created
independent auditing office modeled after the U.S. General Accounting
Officehad discovered that the government had transferred to the accounts of
some of the winners state funds equal to amounts they would subsequently
bid. In other words, a few hand-picked men took over Russia's
state-developed oil fields for free, as part of a giant shell game in which
one arm of the government paid another arm.110

Chubais is viewed as the embodiment of liberal economic reform in Russia.
Clearly, a reevaluation of his role was in order. Yet USAID, which had
spent tens of millions of dollars helping sell the Russian people on his
privatization program, had nothing to say about loans-for-shares. World
Bank and IMF officials were also silent, as were the American media. A
notable exception was Harvard's Jeffrey Sachs, who called for reversing the
loans-for-shares auctions and the earlier privatization of Gazprom on
ethical grounds.111 Some, however, sought to protect Chubais's good name by
cutting him out of this unflattering picture. The Economist, for instance,
which had praised Chubais prior to the auctions for opening up bidding, did
not even mention his name in two subsequent articles on the scandal.112

As the December 1995 Duma elections approached, voters were infuriated, not
least by the loans-for-shares charade. Most understood that the winners of
the rigged auctions had won long-term control, not a temporary stake. (That
was indeed so: The banks would eventually sell their stakes, via front
companies, to themselves.)113 Not surprisingly, the Communists made a
comeback, racking up 22.31 percent of the national parliamentary vote.114
Yeltsin sacked Chubais, saying that he had "sold off big industry for next
to nothing" and that this had bolstered the Communists.115

The Wall Street Journal was more forgiving. In an editorial about the
dismissal, it cast Chubais as a scapegoat. It criticized loans-for-shares,
but claimed, without a shred of evidence, that much of what happened had
been "removed from Mr. Chubais's control."116 The Financial Times eulogized
Chubais as, of all things, a man "who relished roughing up Russia's vested
economic interests."117

The "Davos Bankers" Improve upon Democracy

At stake in loans-for-shares was not simply wealth, but political power.
These were strategic industries, engines of the Russian economy. Along with
the television stations and a growing number of other media, they now
belonged to that same new elite that had always owed its existence and
riches to the state. No one in this elite wanted to see Yeltsin lose a
presidential election. In January 1996, with the vote six months away, it
appeared that Yeltsin would do just that: The Communists were on a roll; a
war in Chechnya crawled on; millions of workers were owed months of back
pay. For the new elite, a Communist president would be bad; even more
dangerous would be a President Alexander Lebed or a President Grigory
Yavlinsky, both of whom were outspoken against corruption.

That month, Russia's leading financiers met at the annual international
economic conference in Davos, Switzerland. These were the new oligarchs,
most prominently LogoVAZ's Berezovsky, Uneximbank's Potanin, Menatep's
Khodorkovsky, and Most-Bank's Vladimir Gusinsky.118 These men knew what
they wanted: to preserve the status quo. They emerged from Davos with a
two-pronged strategy.

Prong one entailed money and favorable media coverage for Yeltsin's
campaign. At the bankers' request, the sacked Chubais was quietly brought
on as Yeltsin's campaign manager.119 Prong two was more sinister: It was a
plan to ditch the elections if they seemed to be going badly. This idea was
first floated in the infamous Letter of 13, published in late April 1996 in
nearly every major Russian newspaper and signed by the Davos bankers and
others. This open letter called on all politicians, but especially
Zyuganov, to seek a "political compromise" with Yeltsin before elections
could lead to "acute conflicts."120

Berezovsky, the Davos group's self-appointed spokesman, was credited with
having organized the letter. Berezovsky described an acceptable compromise
as one that would involve Yeltsin and Zyuganov forming a "coalition"
government, perhaps via the creation of an emergency "state council"in lieu
of elections. "The question is not whether to postpone elections,"
Berezovsky said. "The problem is finding a legal way to do it."121
Yeltsin's personal security chief Korzhakov backed this idea; in
Korzhakov's memoirs, he describes Chernomyrdin as also favoring
postponement.122 Zyuganov's people, meanwhile, were floating similar ideas
for a "state council." Details differed, but the overriding goal was the
same: to scrap democracy in favor of rule by the new nomenklatura, which in
turn would give the Communists a place at the feeding trough.

Both prongs of the strategy were pursued simultaneously. Yavlinsky was
marginalized in the media (a Yabloko study found that Yeltsin got 800 times
as much television news coverage as Yavlinsky.)123 Lebed, in turn, was
financed and beefed up by the bankers: Polls showed that a strong Lebed
showing would split Zyuganov's support. 

In May, Yeltsin said the elections would go forward: "Korzhakov is not
alone in thinking that a Zyuganov victory would start a civil war," he
said. "But I still believe in the wisdom of Russian voters. That is why the
election will take place according to the Constitution."124 Did that imply
the election would not take place if Yeltsin's faith were to falter?

Looking for White Hats and Black Hats:
"A Russian Bill Gates" and "a Kremlin Godfather"

In June, Chubais engineered Korzhakov's ouster, and Yeltsin went on to win.
The president reorganized his government. Chubais became his chief of
staff. At Chubais's request, Uneximbank's Potanin became deputy prime
minister in charge of economic policy. Within months, Lebed, who had been
given day-to-day charge of the presidential Security Council in the run-up
to the final vote, was sacked and LogoVAZ's Berezovsky joined the Security
Council.

Potanin, thirty-five, in particular intrigued the Western media. The Wall
Street Journal heralded him as "a Russian Bill Gates" who had built his
bank "into a financial power-house from modest beginnings."125 The
Financial Times, in an article describing the new government, saw hope in
the fact that Potanin, unlike his older colleagues in the cabinet, kept the
top button of his shirt undone.126 "Nobody doubts Mr. Potanin's
brilliance," gushed the Economist. "Everybody seems to agree, too, that Mr.
Potanin, who just stepped down as Uneximbank's chairman following his
appointment, is just the man needed to knock some vigour and direction into
Russia's economic management." The Economist went on to concede that, yes,
Potanin would use his offices to further favor Uneximbank à la the
loans-for-shares charades, but concluded, "If Mr. Potanin will take a job
in government, why look a gift horse in the mouth? The government will have
at least one minister who knows how the world works."127

In reality, Potanin was far from energetic in reform. Incredibly, he was
asked to reform the system of authorized banks that had been so profitable
for Uneximbank. His reform efforts involved drawing up a suggested shorter
list of banks, which of course included his.128 While Chubais and
Chernomyrdin were declaiming about the tax collection emergency, Potanin
was doing his bit to create it: Several days prior to joining the
government in August 1996, he won $1 billion in tax breaks and other
benefits for his newly obtained Norilsk Nickel.129

The West was less enamored of Boris Berezovsky, and not only because he had
publicly and explicitly advocated abandoning the elections. Berezovsky also
had bragged publicly about the Davos sit-down and claimed that he and six
other menincluding Uneximbank's Potanin and Menatep's
Khodorkovskycontrolled Russian politics and half of Russia's economy.130
Potanin has echoed that claim.131

A former math professor with his finger in every Russian pie, from oil to
the media to used cars to Aeroflot, Berezovsky first came to public
attention when he survived a 1994 car bomb that decapitated his
chauffeur.132 He gained Western notoriety in 1996 when Forbes magazine
described him as "the Godfather of the Kremlin" and suggested that he was
behind the high-profile murder of ORT television journalist Vladislav
Listiev.133 (Berezovsky's efforts to sue Forbes in Britain, where libel is
unusually easy to prove, have so far been rejected by courts).134

Berezovsky also controls state-owned ORT because he pays the salaries of
managersa practice that gives a totally new meaning to privatization.135
Meanwhile, no doubt with the collusion of top management, ORT advertising
revenues are skimmed off elsewhere. Berezovsky has reportedly done much the
same with state-owned Aeroflot, siphoning off nearly a third of its
estimated $400 million in annual revenues to a Swiss shell company.
Moskovsky Komsomolets reported in October 1997 that Berezovsky had bought
49 percent of Aeroflot and had engineered the appointment of Yeltsin's
son-in-law, Valery Okulov, as the general director. 
Moskovsky Komsomolets also published the comments of Igor Malkov, an ex-KGB
colonel, who described Berezovsky as the "chief cash disburser, sponsor,
and financial director of Yeltsin's tight-knit family."136 Korzhakov
agrees. Berezovsky funded the publication of Yeltsin's memoirs, The
Struggle for Russia, ghost-written by Valentin Yumashev. According to
Korzhakov, Yumashev used to come to the Kremlin once a month with royalties
from Berezovsky$16,000 in cash. "No one understood what this hippy
journalist was doing routinely visiting the president and then leaving his
office after three or five minutes," wrote Korzhakov. "Boris Nikolayevich
[Yeltsin] put the money into his safe; it was his private savings."137

Chubais: We Build Democracy Through Dictatorship

The reelection campaign nearly killed Yeltsin, and he prepared for heart
surgery. Suddenly, it was Chubais pushing the desperate
Korzhakov-Berezovsky ideal of a junta. If others had spoken of
neutral-sounding "state councils," Chubais talked of a Cheka. If others had
justified themselves in public by citing the danger of potential civil
strife, Chubais defended his grab by arguing that Russia only needed more
discipline. Soon he was speaking favorably of the Soviet Communist Party's
talents at "cadre" management,138 and insisting that "to have a democracy
in society, there must be a dictatorship in the government."139

In autumn 1996, The New York Times reported that Chubais was "deep inside
the Kremlin," plotting his next move in "the democratic revolution."140 At
the same time, Chubais met deep inside the Kremlin with top Russian
newspaper editors. One of them complained to Chubais that the Kremlin was
interfering via Gazprom in editorial policy. According to Nezavisimaya
Gazeta editor Vitaly Tretyakov, Chubais responded: "You will do what the
owners [of your paper] tell you. And if you don't, bones will crack."141

Provincials from Nizhny Novgorod: 
Heralds of a New Progressive Era?

Following his successful by-pass operation, a reinvigorated Yeltsin
announced the sixth major anticorruption drive of his reign. In a speech
before parliament in March 1997, he accurately identified the worm at the
heart of Russia's reforms: "The state interferes in the economy where it
shouldn't," he declared, "while where it should, it does nothing."142

Yeltsin promised reform of the taxes that had driven so many entrepreneurs
underground where they were at the mercy of the mafia. He also pledged more
transparent governmentincluding an end to coddling of the banks and the
state-owned monopolies such as Gazprom, the power grid Unified Energy
Systems, and the railroadsand reshuffled his cabinet. Potanin was sacked.
Chernomyrdin stayed as prime minister, but Chubais was named first deputy
prime minister and finance minister, and tasked, again, with reviving the
economy. Then, almost as an afterthought, the president appointed Boris
Nemtsov, the thirty-seven-year-old governor of the Nizhny Novgorod region,
to serve alongside Chubais. 

Nemtsov's choice was good public relations, as evidenced by numerous
American newspaper reports that focused on his curly dark hair and youthful
energy. And Nemtsov was frank about the new Russia: "There are two models
of the market economy," he told the weekly Kapital. "The first is the
government-monopolistic, mafia-corrupt model. The second is democratic
capitalism. The first is being realized on a grand scale in Russia."143
Nemtsov declared that Yeltsin was in agreement and was determined to steer
the country from "bandit capitalism" to "people's capitalism." Overnight,
Nemtsov's analysis became an article of faith repeated throughout the
Western media. Yeltsin and his new team had finally gotten the mood music
right. But was Russia really entering its Progressive Era?

The era began with some key initiatives. One was a Yeltsin decree that
mandated open tenders for government contracts. As Chubais would later
admit, government contracts involving "tens of trillions of rubles"billions
of dollarshad previously been disbursed through bureaucratic procedures
"absolutely hidden from society." Although he had once shrugged at such
"mistakes," and split semantic hairs over whether to classify them as
"legal" or "ethical" in nature, Chubais now called the new decree an
"urgent" and "immediate" step in combating "one of the most serious
illnesses of our society and our statecorruption." 144 The decree's fine
print, however, left a lot of room for even mildly creative Russian
bureaucrats. Behind-closed-doors tenders could be used, for example, if
they were judged to be "the best method."145

In another initiative, Boris Nemtsov ordered bureaucrats to patriotically
trade in their beloved Mercedes, BMWs, and Audis for Russian-made cars. On
21 July, the nation's media attention was thus duly focused on an auction
where Nemtsov helped to move five used government cars off the lota slow
start, but one supposedly symbolic of greater things to come. That very
day, another auction took place. LUKoil, in a predictably opaque tender,
bought 5 percent of its own stock from the state. Analysts said LUKoil paid
less than a tenth of what the stake was worth.146

Still another trumpeted measure was a Kremlin decree requiring top
government officials to declare their incomes and assets. The prime
minister duly reported his 1996 income as $8,000 and valued his assets,
including real estate, at $46,000.147 (Nemtsov, the Kremlin's new broom,
seemed little different: For an autobiography rushed into print upon his
appointment, The Provincial, Nemtsov was advanced $90,000 from a publishing
company owned by Sergei Lisovsky, an advertising mogul with links to
Chubais, Berezovsky, and reportedly, organized crime. Only 25,000 copies
were published and retailed for well under a dollar.)148
Kommersant Weekly described how officials could easily circumvent such
declarations. "You sit here on information which can, for instance, either
damage or help someone in a competitive struggle," an anonymous government
official told the magazine. "Information about planned Russian governmental
decisions can instantly cause the fluctuation of prices on the world market
for an entire series of commodities or the quotations of shares in certain
companies. You can have a numbered account in Austria or Liechtenstein and
never even travel abroad. Your share from speculative operations initiated
by information which you have provided will be regularly transferred to
that account."149

Such general accounts were tolerated. But when newspapers named namesas did
Izvestia, by reprinting a report in Le Monde that Chernomyrdin's net worth
was $5 billionthe stakes were much higher. Chernomyrdin was reportedly
enraged by the IzvestiaLe Monde report, so much so that a war for control
of Izvestia was launched. The ultimate winner was Uneximbank.150

Chubais and Nemtsov did force Gazprom to pay higher taxes and its tax
arrears and placed a key Nemtsov ally at the head of the Unified Energy
Systems (UES) power grid. Such isolated incidents were hailed as a
fundamental assault on the oligarchic "bandit capitalism" that everyone,
from Solzhenitsyn to financier George Soros, suddenly agreed had Russia in
its grip. Few in the West noted that Chubais and Nemtsov were steering the
pain of reform to their political rivals, such as Chernomyrdin, while
protecting their ownfor example, Uneximbank, which was emerging as a
Chubais ally. What was developing behind the Western headlinesbut not the
Russianappeared to be little more than a gang fight. 

In July, for example, various national publications cited a leaked letter
from the Central Bank to Chernomyrdin that described a complicated scheme:
an Uneximbank affiliate was accused of embezzling $237 million from a
government transaction involving the sale of MiG-29 fighters to India. The
Central Bank also charged that a second bank, also closely linked to
Uneximbank, had made off with $275 million intended for the Moscow oblast
government. A criminal investigation was launched. Uneximbank's people
responded with denialsand cryptic allegations of their own about
questionable deals involving banks close to Chernomyrdin. The matter was
dropped. One political clan had attacked another; both had then blinked.
And the missing $512 millionequal to about half of what the government then
owed public-sector employees in back pay? Its whereabouts remained unknown;
hardly anyone cared.151

One of the few who did care was Leonid Krutakov, an investigative
journalist who tried to find out what had happened to the missing money. He
was able to determine that a third bank had been involved in
misappropriating the MiG funds, but when he went to the bank's official
address, he found only a telephone switching box. When Krutakov informed
the Central Bank of his findings, it revoked the phantom bank's license.152

If the MiG scandal received desultory coverage in America, at least it was
mentioned. Nothing was said of a front-page report in Kommersant Daily that
Russia's gold reserves were being sold off more than twice as rapidly as
the government had plannedbecause the officials involved were taking a
commission on all sales. Kommersant, citing the Accounts Chamber, reported
that the extra revenue raised was used for things such as buying fancy
dishes for the Kremlin.153

Most by now know that the Russian media are also being snapped up by the
oligarchs. The young reformers have not opposed this trend. In September,
Bank Menatep managed to have one of its own people, Leonid Nevzlin,
appointed as the deputy director of Itar-Tass, Russia's state news agency.
Asked by Kommersant Daily if he intended "to lobby the interests of
Menatep," Nevzlin replied, "In the accepted sense of the word, yes. But
only in the business arena."154 This hardly suggested that the state was
about to get serious about breaking up the oligarchy. So much for the
Progressive Era. 

Svyazinvest: A '"Relatively" Fair Deal

Infighting among the oligarchs went public in summer 1997. If once they had
bragged about deciding Russia's fate cordially at a sit-down in Davos, now
they hated each other. The chief reason was Svyazinvest, Russia's telephone
company and largest-ever privatization. Everybody wanted it; Chubais's ally
Potanin got it. Slighted were financiers Vladimir Gusinsky of Most-Bank and
Berezovskyeach of whom controlled a national television station. Overnight,
the country was treated to an unprecedented public falling out. The
situation got so ugly that Yeltsin stepped in. Chubais's lieutenant for
privatization, Alfred Kokh, resigned; two days later, Yeltsin, citing the
Svyazinvest hullabaloo, complained of coziness between Kokh and Uneximbank.
Subsequent investigations by Novaya Gazeta and the Financial Times revealed
that Kokh had received $100,000 for a book deal from a Swiss company tied
to Uneximbank. That hefty advance was for an academic monograph on
privatization that Kokh had not yet written.155
Ignoring contrary evidence, the Western media have portrayed Svyazinvest as
a successful assault on the corrupt oligarchic system. 

The main justification cited was that the state, for once, had sold an
asset for a healthy chunk of moneythe winner of 25 percent of Svyazinvest
paid $1.87 billion, well above the starting priceand that among the
participants were foreigners, including Soros, who put up much of the money
for Uneximbank. Neither the amount paid (which was arguably low),156 nor
the difference between that amount and the starting price, nor the presence
of foreigners, proved that the privatization of Svyazinvest was "open" or
"fair." So some in the Western press fudged it. The Moscow Times called the
Svyazinvest auction "relatively open";157 the Washington Post called it
"relatively fair."158 

Soros has conceded that describing the Svyazinvest tender as fair "would be
an overstatement." He added that "the looting of state assets" under
privatization was "frankly, quite repulsive."159 (Uneximbank's Potanin, who
was Soros's partner in the Svyazinvest consortium, conceded that
loans-for-shares auctions were rigged, but he was more blasé. "It is a part
of our history," he said, shrugging, in an interview with Business Week.)160

Some argued that Svyazinvest showed that Chubais, who had crowned the Davos
bankers kings, hoped to destroy the oligarchy and to replace it with an
oligarchy of one, Uneximbank. "And this is already a step away from
'oligarchic freedom' and toward dictatorship," the weekly Obshchaya Gazeta
wrote.161 If that was Chubais's goal, he failed spectacularly. In November,
he and Nemtsov pushed Berezovsky out of the government. Days later,
allegations surfaced that Chubais and four of his reform lieutenantsall of
them men who had been supported by Chubais's USAID-funded patronagehad
accepted $90,000 each in bribes disguised as a book advance from Uneximbank. 

This was far from the first such revelation: In early 1997, for example,
Izvestia revealed that a think-tank Chubais created had accepted a $3
million interest-free loan from Stolichny Bank for the putative purpose of
"building civil society."162 The money was then put in an investment fund
headed by a close Chubais associate.163 Chubais responded to critics by
airily claiming in a letter to Izvestia that "an interest-free loan . . .
is absolutely normal . . . in both Russia and any other democratic
country."164 The Western media let this pass unchallenged; and at about
this same time, Potanin's Uneximbank took over and muzzled Izvestia. 

But Chubais did not get away so easily from the book scandal: Yeltsin,
prodded on by Berezovsky, fired three key Chubais lieutenants and stripped
Chubais of the finance ministry. Soon after, however, came the cruelest cut
of all: Chubais lost the support of the New York Times. America's newspaper
of record, complaining that Chubais had "disgraced" himself, called for his
dismissal. Explaining their past support of the privatization chief, the
Times wrote, "Chubais has often served a larger interest with his
manipulations."165 In other words, the ends justified the means when
Chubais allowed the oligarchs to hijack the country. American news media
were willing to forgive Chubais for robbing millions of people of billions
of dollars, as long as the people involved were lowly Russians and "larger
interests" were being served; but when he was caught lining his own
pockets, they were furious: Venality is unbecoming in revolutionaries.

Suicide as Redemption

But a few months later, when Boris Yeltsin suddenly roused himself and
fired his entire governmentChubais, Chernomyrdin, everyonethe American
media were once again at Chubais's side. The Los Angeles Times, without a
shred of evidence, reported that Chubais, "like a suicide bomber," had
engineered his own firing as a way of taking out the corrupt Chernomyrdin
with him.166 Both the Los Angeles Times and the Washington Post described
Chubais in separate eulogies as "a lightning rod" for anger over the
stalled Russian economy. "Chubais was a lightning rod for complaints about
the economy," wrote the Washington Post. "He oversaw Russia's privatization
program, but was blamed for the poverty of millions of Russians. He also
clashed with some major businessmen over his efforts to reduce their
influence in government and their throttlehold over the auction of
state-owned enterprises. In a valedictory to reporters today, Chubais took
pride in the changes in Russia's economy."167

Nowhere did either the Washington Post or the Los Angeles Times mention the
enormous rigged privatizations that Chubais oversaw, from Gazprom to
Norilsk Nickel, to Svyazinvest, which together constitute the theft of
billions of dollars from Russia; nowhere did either paper mention the
other, pettier allegations of corruption, such as book advances and
interest-free loans. There is no mention that Chubais was the number-one
recipient of USAID assistance, for example, or that he reportedly
encouraged the muzzling of the Russian press, or that he never once spoke
out against the war in Chechnya. Instead, readers are told that Chubais is
a lightning rodan object that sacrifices itself to protect the greater
goodwho oversaw privatization "but" was blamed for Russia's widespread
poverty; a "reformer" who fought major businessmen to break their
"throttlehold over the auction of state-owned enterprises"; a man who "in a
valedictory(!?)" took pride in the changes he had wrought.

And once again, reports of Chubais's demise were premature. Soon Chubais
was back in governmentappointed the head of Unified Energy Systems, the
national electric power grid, one of the few companies in Russia that comes
close to rivaling Gazprom in size and clout. 

To the predictable Western applause and cries of "a young reformer,"
meanwhile, Yeltsin put forward a new prime minister, a thirty-five-year-old
provincial technocrat, Sergei Kiriyenko. Despite his youth, Kiriyenko had
already run a commercial bank, an oil company, and a Russian ministry. But
was Kiriyenko really a change from Chubais, Chernomyrdin, Potanin and
others? A Washington Post profile argued yes, painting Kiriyenko as
emblematic of "a new breed of Russian"young hustlers who "knew how to find
a ton of cheap oil, for example, and sell it abroad for breathtaking
profits."168 Of course, the trick is having the government connections to
do so, as Kiriyenko himself made plain in a monograph he wrote on Russian
banking while a student. His conclusion calls to mind those of fellow
successful Communist Youth League members such as Potanin and Khodorkovsky:
"The most important task of commercial banks is lobbying at all levels of
power."169 Another key to success, Kiriyenko noted in his paper, is the
ability to hide accounts offshore from the government.

Yes, It's Better Than Communism.
But How Much Better?

Russia six years after the collapse of the Soviet Union is perhaps freer
than at any time in its history. People can travel abroad, read, and say
and believe what they wish. It is widely accepted now that politicians earn
their legitimacy through elections.
There have also been economic successes. There was officially 0.4 percent
economic growth for the first time in 1997. The stock market boomed in
1997, then crashed along with Asian markets in August 1998. (And, as a few
analysts warned, a Latin Americanstyle debt defaultor an Indonesialike
currency collapsehas happened.)170

Whatever the growth statistics, wage arrears remain enormous for teachers,
doctors, soldiers, and other public sector workers, while the state has
failed dismally at tax collection. Delayed salaries force improvisation:
the average Russian now grows a whopping 38 percent of all the food he
eats, according to Argumenty i Fakty.171 While the masses tend their
gardens, twelve to fifteen corporations control more than 50 percent of the
economy, according to Uneximbank's Potanin.172 And while no one can deny
the emergence of a middle class, mostly in St. Petersburg and Moscow, the
small business sector remains stunted by confiscatory tax policies and lack
of legal protection. Small business constitutes 7 percent of GDP, according
to the government, while in Western countries it accounts for at least 40
percent. 

Whether official statistics accurately reflect Russia's quasi-legal
"shadow" economy is hotly debated. Whatever the case, this sector is far
from being a pillar of middle-class stability. In October 1997, a survey of
1,000 high school students by the authoritative VTsIOM polling agency found
students today more interested in pursuing careers as contract killers or
prostitutes than as teachers or engineers.173 And this is how the twentieth
century will likely close on the average Russian: Hoeing his garden and
wondering how to keep his children out of crime.

Meanwhile, key democratic institutionsparliament, the presshave been
emasculated, bought out by large financial-industrial conglomerates
connected to officialdom.174 The media, which enjoyed a brief euphoric
freedom following the August 1991 coup, today are used as a weapon in
inter-clan battlesso much so that one NTV Television press reviewer late
last year quipped that the national newspapers should be stamped "For
official use only" (not that his station is above the fray). 

And given the criminalization of the economy and the unchecked power of
organized crime, maintaining the independence of Russia's judiciary is, as
Anatoly Chubais admitted in January 1998, "even harder than it was in the
Soviet period."175

Parliament rose from the ashes of the 1993 showdown as two houses, the Duma
and the Federation Council. While the Duma's powers are insignificant, the
upper house is made up of elected governors and top legislators from the
regionsimagine if U.S. Senators were also the governors of their statesand
could someday rival the Kremlin for control of Russia. (Berezovsky is one
who believes that could happen. He has set about forming a political
movement in the regions. "I am certain that in 1998, regional elites 
will dictate the new center of power," he said in a speech recently.)176

The regional governors, however, rule their fiefdoms in much the way
Yeltsin rules the country, through control of a huge bureaucracy, the local
press, and close ties to "semi-state and commercial structures, even the
criminal world," as one Moscow journalist wroteapprovingly.177

In this, Russia resembles the corporatist states of pre-reform Latin
Americasuch as Mexico, where the PRI ruled unchallenged for nearly ninety
years, with regular elections and other trappings of democracy. It also has
traits, not surprisingly, of feudal Russia. So, while Yeltsin (who refers
to himself often as Boris I) warned the Davos bankers last fall that he
will not allow them to dictate to the state (c'est moi), he also promised
to meet them for regular economic "strategic planning" meetings.
Simultaneously, Yeltsin was making overtures to the easily co-opted
Communist Party, while ignoring those of consistent principles, like
Alexander Solzhenitsyn, veteran human rights activist Sergei Kovalyov, and
Yabloko leader Grigory Yavlinsky.

America's Role in the Crib Death of Russian Democracy

The United States continues to provide moral and financial cover for
Yeltsin's new order. In an article published in 1996 in Demokratizatsiya,
George Washington University professor Janine Wedel demonstrated how USAID
has steered money toward supporting Chubais's political career and quoted
top USAID officials frankly admitting as much.

Wedel argued that USAID's privatization push undercut Russian democracy
because it emphasized using Kremlin decrees to circumvent parliament and
other institutions. Alexander Minkin, Russia's most famous investigative
reporter, goes further. In a nationally televised interview on 15 November
1997, he alleged that it was well known that the U.S. government offered
Russian journalists money in return for glowing articles about
privatization. Minkin offered no evidence. But because the U.S. government
has openly backed one political clan and a few specific policies, charges
such as Minkin's are accepted as simply logical. (After all, the other
clans buy their own media, too).178 Should America be involved in
undercutting democracy to advance a few policies, or more precisely, a few
economists? Are we so enamored of vouchers and loans-for-shares that we
prefer them to our highest principles?

Sadly, there is another dynamic at work here, an element of disdain for the
Russians as a people. Westerners in Russia regale each other with (quite
true) tales of Russian rudeness and business ignorance. Russians themselves
play into this, claiming to be a people genetically damaged by alcoholism
and Stalinismthe latter of which drove off or killed the intellectual cream
of the nation. Many among both Russians and Westerners have sympathy for
the idea that, following centuries of oppression, the Russians "aren't
ready" to be trusted with complete democracy. Perhaps, then, it is better
to let Chubais and his Harvard-trained whiz kids manipulate mattersalways,
of course, "in the larger interest." 

In reality, Russians are perfectly capable of determining their own
interests. They have always voted pragmaticallywhether expressing their
anger via a vile nationalist such as Vladimir Zhirinovsky in a protest vote
to the meaningless Duma, or holding their noses and dropping a ballot for
Yeltsin, again. Their failure comes not at elections, but between them,
when political and civic activity is negligible. Some sociologists argue
that this is healthythat Russians are simply enjoying, for the first time
in their history, the opportunity to ignore politics and the state. The
danger is that by the time interest in the political direction of the
country reawakens, it may have already been irrevocably decided.

The international financial institutions have also unwaveringly
underwritten whatever the Kremlin has seen fit to do. What is one to make
of the IMF and World Bank activity in Russia? The IMF sternly withholds
cash when tax revenues droop; they then applaud the announced solution of a
new enforcement organ, named after Lenin's death squads. Yet they have
never withheld money to protest corruption, or loans-for-shares, or the war
in Chechnya. The IMF's $10.2 billion loan, released in 1995, in essence
financed the war in Chechnya; arguably it prolonged the war. Certainly the
Chechens see it that way.179 

IMF Managing Director Michel Camdessus acknowledged that the loans financed
the war, although he denied that the funds were prolonging it. The
Washington Post reported his words from Moscow: "'Are we financing
Chechnya?' he said. "We are contributing to the overall financing of Russia
today. . . . [As for] those who tell me, 'You are financing Chechnya,' in
some ways, yes, as we finance Russia."180 In 1997, it came to light that
some of a $500 million World Bank loan to assist in downsizing Russia's
unprofitable coal industry had gone missing. The bank's response? It gave
Russia an $800 million loan for vague "social adjustment" purposes, and
then another $500 million for the coal industry.181

"I do not believe in compensation from abroad for local incompetence and
corruption," the liberal former finance minister Boris Fyodorov once
complained of such loans. "There are too many people in senior positions in
the Russian government who think it patriotic to take as many loans as
possible, and then quietly obtain debt forgiveness and reduction."182

Thanks to the outcry from some Washington scholars and Congress, the IMF
and the World Bank have recently announced that they will now consider
corruption when making loans. That would seem to mean Russia: Transparency
International, the Berlin-based monitoring group, ranked Russia as the
fourth-most-corrupt country in the world (after Nigeria, Bolivia, and
Colombia),183 while the British consultancy Control Risks Group ranked
Russia the world's worst.184 Yet while the IMF suspended a $220 million
loan to Kenya last August over high-level corruption, the fund has never
publicly called Russia to task over this issue.185 The World Bank plans to
greatly increase its lending to Russia over the next few years.

Do Not Give Up on Russia. Tell the Truth.

During the Soviet era, the United States spoke directly to the Russian
people. "That is why Americans had an unlimited credit of trust in Russia
in the early 1990s: Americans had not confused the government with the
people. But then, suddenly, America seemed to recognize only the
government," wrote Yabloko leader Grigory Yavlinsky in the New York Times
Magazine. 

Addressing the Americans, Yavlinsky wrote: "You are expanding NATO because
100,000 people were killed in Chechnya, because we have an unpredictable
leadership, because there are enormous failures in economic reform. You
should say so openly. I know that an enormous investment of time and money
has been spent by the [U.S.] government, by the private sector, by
foundations and universities in promoting the myth that Russia has achieved
democracy. It would take great courage to admit that the taxpayers' money
was wasted. But it is always better to be honest. . . . Do not give up on
Russia. Tell the truth to us and to yourselves."186 

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