This Date's Issues: 4466
Johnson's Russia List
20 August 2000
[Note from David Johnson:
1. AP: Vladimir Isachenkov, Endless Disasters Hitting Russia.
2. Reuters: Russian navy statement on likely fate of sub crew.
3. Jonas Bernstein: recent assessments of Vladimir Putin.
4. The Russia Journal: Andrei Piontkovsky, Kvashnin and the experts.
5. Interfax: AUTHORITIES PUT PRESSURE ON GAZPROM - NTV CHIEF.
6. The Russia Journal: Alexander Golts, Victim of ambition.
7. Moscow Times: Andrei Zolotov Jr., The Art of the Deal. (Interview with former Duma member and Communist millionaire
8. Forbes: Paul Klebnikov, The Rise of an Oligarch. (Excerpt from book about Boris
Endless Disasters Hitting Russia
August 20, 2000
By VLADIMIR ISACHENKOV
MOSCOW (AP) - The loss of a Russian nuclear submarine is just one more
catastrophe in a nation that has been transformed by years of decline and
stagnation from a superpower into a technological junkyard.
Disasters ranging from crashing airplanes to industrial accidents have become
commonplace in Russia, an increasingly poor country that can't afford to
purchase new equipment or maintain aging Soviet-era machinery. In industry
and the military, the problem has been compounded by carelessness, lack of
training and pilfering.
President Vladimir Putin describes the increasingly worn-out equipment as one
of the main obstacles to economic growth. ``Only 5 percent of our enterprises
are actively using modern technologies,'' Putin said at a recent meeting with
Emergency Situations Minister Sergei Shoigu has repeatedly warned that Russia
faces disaster as everything from airplanes to elevators go without the
maintenance vital to keep aging machinery running safely. In their annual
forecast released in January - one which drew quick comparisons to
Nostradamus' darkest prophecies - Shoigu's experts predicted that the country
could face a steady string of technological disasters starting from fires,
collapsing buildings and breaking pipelines and ending with leaks of
radiation and poisonous chemicals.
Experts have warned that if the current shortage of funds for new equipment
and maintenance goes on, most of Russia's industrial equipment could be
unusable by 2007. Companies struggling to stay afloat and workers desperate
to get any kind of pay continue to use aging equipment that should have been
junked years ago, experts say.
``This danger is augmented by the popular neglect of safety rules in the run
for profit,'' said Marina Ryklina, a spokeswoman for the Emergency Situations
Unlike in Soviet times, when discipline and fear of punishment were stronger,
safety rules are commonly ignored in modern Russia. A string of plane crashes
were blamed on overloading after pilots accepted bribes to take extra cargo,
weighing down their aircraft.
Natural gas explosions have become commonplace in apartment buildings because
of a lack of maintenance. In rural areas, people hack holes into oil
pipelines to siphon fuel, often causing fires or explosions.
Hundreds of people are electrocuted every year while trying to pilfer
communication wires, electric cable and train and plane parts for sell as
scrap metal. Large areas are left without electricity after power lines are
Compounding the problem, many Russians say, is a tendency to minimize or
dismiss danger - a trait that is sometimes boasted of as a national
Thousands of people drown in Russia every summer, mostly men who swim when
drunk. Drownings in Russia and other ex-Soviet republics are up to 500
percent higher than in Western nations, according to officials.
The Russian military is a glaring example of the breakdown, experts say. Even
though the Kursk was one of the most modern vessels in the navy, its safety
systems apparently failed to work.
``Not a single rescue system functioned on this top-of the-range submarine,
so what can be said about the older ones?'' said Alexander Golts, a military
analyst for the weekly magazine Itogi.
Insisting it is still a world power, the navy refuses to scrap hundreds of
rusting Soviet-era ships and submarines even though there is no money for
maintenance. Navy officials admit that 70 percent of their ships need major
repairs, and scores of vessels simply sank because their hulls rusted out.
``Why should we keep a huge and expensive nuclear fleet if we are short of
funds to send it to sea for even three days?'' the daily newspaper
Nezavisimaya Gazeta said Friday. ``We must live in accordance with our means
and not turn the seamen into kamikaze when they go on an exercise.''
Low military wages have contributed to a steady decline of skill and morale.
Officers, who earn the equivalent of $100 a month when they get paid, have to
moonlight as gypsy cab drivers or security guards to feed their families.
Theft is endemic in the military, with servicemen stripping ships and planes
of parts and metal to sell for food and other necessities.
Earlier this year, four Russian sailors and a retired officer were arrested
on charges of stealing radioactive fuel from a nuclear submarine. And an
officer on another nuclear submarine stripped the vessel of a filtration unit
that controlled the air supply. The crew would have suffocated if the theft
hadn't been discovered in time.
TEXT-Russian navy statement on likely fate of sub crew
MOSCOW, Aug 19 (Reuters) - The Russian navy sounded the death knell on
Saturday for the 118 crew of a nuclear-powered submarine lying crippled on
the floor of the Arctic Barents Sea.
Following are the main quotes from a television statement by the head of the
navy's general staff, Mikhail Motsak, on the accident which crippled the
Kursk on August 12. The translation is by Reuters.
``It is the gravest disaster that I, as a sailor, have known in the history
of the submarine fleet.
Most likely the whole of the front section of the submarine has been flooded
and the staff in those sections died in the first minutes of the accident.
My assessment of the situation in the stern: after the accident, and we have
said it on many occasions, we heard the tapping of submarine personnel
following the rules of communication with a sunken vessel.
Moreover, the analysis of the tapping allows us to conclude that the crew in
the compartments in the stern were telling us that water was filtering into
their sections and they wanted us to provide air supply...
as water slowly filled the compartments in the stern the pressure inside
built up, inevitably reducing the life expectancy of the crew and affecting
It is possible that the pressure inside the compartments is now very high.
There are pockets of air but in fact we have crossed the critical survival
threshold which we set for the crew according to our guidelines.
We've been crossing this threshold yesterday, today and maybe tomorrow. That
is how I see the situation.
Moreover, I want to say that the absence of any signals from the submarine
leads us to conclude that the critical point has been reached.
Hard as it is to say this, we will most likely have to say that our worst
expectations have come true. I think that the essence of the second stage of
the operation we are conducting...is to retrieve them, dead or alive, to be
able at least to give them their due on land.''
From: "Jonas Bernstein" <email@example.com>
Subject: recent assessments of Vladimir Putin
Date: Sat, 19 Aug 2000
In light of the Kursk tragedy, I think it's worth taking another look at
several noted Russia watchers' recent assessments of Vladimir Putin. For
example, in the wake of his roundtable with the tycoons, Nikoil's Eric Kraus
proclaimed (somewhat prematurely, I thought) that the "Autumn of the
Oligarch" had arrived, and called Putin a "decisive and energetic president"
who is "clearly accelerating" the "gradual evolution of the Russian economic
model" (see the JRL, #4436, 3 August 2000). Except, apparently, when he's
on vacation. Then there is Peter J. Lavelle, head of research at IFC
Metropol, who in a Aug. 16 Moscow Times essay deemed Putin a "fox" who is
"here for the long haul" in the battle against the "hedgehogs" - meaning the
oligarchs - who, unlike Putin, are unconcerned with the "national interest."
Finally, there is John Lloyd, who declared that not only are Russian
liberals wrong in their skepticism and fear of Putin, but that Putin is
actually their "best hope." Putin, he wrote, is simply "seeking to create an
efficient state." Except, apparently, when it comes to efficiently informing
the public about matters of vital national concern.
While it always tempting to attach some deep significance to changes in
Russia's political leadership, it seems to me that the Kursk incident
suggests that Putin and the other energetic young St. Petersburg reformers
in his entourage (like Ilya Klebanov), far from being motivated by some
higher ideal - the "national interest," "creating an efficient state," etc.
- behave very much like the bureaucrats and politicians who ran Russia
before them, both during the Yeltsin period and before 1991. In the sense
that they will reflexively resort to the Big Lie to save what is nearest and
dearest to them - their power, privileges, and perks; in short, their own
political asses - and that they tend to regard the public with little more
than contempt. None of this is surprising: Russia's political culture is
characterized more by continuity than change, because its rulers, despite
outward appearances, are still essentially appointed.
What is surprising is how readily some Western observers are willing to
forget the past - from Chernobyl to Pavlov's monetary "reform" to Black
Tuesday to Chechnya I to loans-for-shares to the $538,000 in the Xerox box
to Aug. 17, 1998 to last year's apartment building bombings and
parliamentary election campaign to Chechnya II - in their rush to greet the
arrival of the latest batch of self-appointed leaders as the dawning of a
The Russia Journal
August 19-25, 2000
SEASON OF DISCONTENT: Kvashnin and the experts
By Andrei Piontkovsky
The public conflict between the Russian defense minister and the head of
the General Staff is unprecedented and reflects the serious crisis in the
political management of the armed forces. The very fact that such a crisis
has occurred is a strong argument in favor of civilian management of the
However, it is interesting that the Russian civilian strategic community,
from the ultra-patriotic newspaper Zavtra to the Yabloko liberals, almost
unanimously supports Marshal Igor Sergeyev's point of view. They are doing
so less with reasoned arguments than emotional ones, coming down on General
Anatoly Kvashnin with political and personal insults including strategic
capitulation, careerism and treachery.
It seems to me this biased position can partly be explained by the fact
that the vast majority of civilian experts in the field of security have
spent their entire careers working on problems of nuclear strategy and
strategic stability. It is more prestigious and simpler. Paradoxical as it
may seem, it is conceptually easier to model a nuclear war scenario than to
model the actions of a tank regiment. Of course they got into personal
contact with the "missile generals" and, with or without intending to,
consciously or unconsciously, they became members of a sort of corporate clan.
Kvashnin's opponents are essentially accusing him of three things (see for
example Sergei Rogov's article, "Strategic Capitulation" in Nezavisimaya
Gazeta on July 26).
Firstly, they accuse him of attacking Russia's status as a great power,
which may be harmed as a result of cuts to nuclear forces proposed by
Kvashnin. The number of nuclear weapons carriers itself holds as much
significance and status as the number of phallic symbols surrounding the
hut of a tribal leader. The effectiveness of a strategic weapons system is
defined by its functional capabilities. Most of all, this means that they
have deterrence potential towards an adversary, which implies second-strike
ability to inflict unacceptable damage on him.
Here we come to Kvashnin's opponents' second, more concrete affirmation
that his plan "undermines Russia's ability to maintain a nuclear balance
and allows the Pentagon to plan a pre-emptive counterforce strike, thus
avoiding a nuclear missile retribution." But this assertion distorts the
position of Kvashnin and his supporters. They are not at all turning their
backs on the concept of mutual deterrence. They simply and rightly feel
that the Russian deterrence potential can be provided by a smaller number
of warheads than currently, not necessarily the same as the Americans have.
The apocalyptic scenarios of pre-emptive strikes by the Pentagon bear no
relation to reality. Even the experts who formulated them know the United
States well and understand that contemporary American society considers a
single nuclear warhead falling on an American megapolis to be unacceptable
damage. No geopolitical goals exist or can ever exist for which a U.S.
president would risk a nuclear confrontation with Russia.
And finally, the third group of arguments is connected to the thesis of the
Russian Federation's dependence on nuclear weapons as a means of preventing
not only a nuclear strike but also aggression from adversaries who have
more powerful conventional forces than our country. It is true that the
Russian Federation's new military doctrine is pervaded with the idea that
Russia would use nuclear force first to repel a conventional attack. On
closer analysis, this idea seems extremely shaky. From the West, the threat
of attack is deterred at a much lower level. The failure of the military
phase of the Kosovo operation, NATO countries' lack of readiness to deploy
ground forces showed once again that for these countries, "unacceptable
damage" amounts to losing a few tens of soldiers.
The nature of the threats from the south is such that they simply cannot be
deterred by nuclear weapons. And finally, it is time to understand that
China will not "be a match for us in 10-15 years, and may even overtake us
in nuclear strength" as Sergei Rogov said, but that China has already
overtaken us on all the intermediate steps of nuclear escalation. It has
overtaken us because in nuclear strategy, it is not just the number of
warheads that counts, but how prepared a society and political leadership
are to suffer several millions of victims. To bank on nuclear weapons in a
potential conflict with China is illusory and irresponsible.
As far as the political responsibility and depth of strategic thinking of
certain missile generals is concerned, it is enough to recall the threat by
the head of the Strategic Missile Forces to deploy medium-range missiles
targeted at European cities. The threat happened to come just as Putin is
trying to convince European leaders of the value of the joint European
anti-missile nuclear defense system proposed by Russia.
AUTHORITIES PUT PRESSURE ON GAZPROM - NTV CHIEF
MOSCOW. Aug 18 (Interfax) - The tremendous pressure the Russian
authorities have brought to bear on the Gazprom management has resulted
in the failure of talks on the settlement of Media-MOST holding's debts
to that company, NTV director general Yevgeny Kiselyov said in an
interview published in Kommersant newspaper on Friday.
The talks centered on the repayment of a $211 million debt,
Kiselyov said. Under a previous arrangement Gazprom was to pay the debt
and take over Media-MOST's stake in NTV, he said. That is a usual kind
of deal between two commercial companies, but the authorities have
interfered and made the Gazprom managers go back on it, Kiselyov said.
He effectively refuted reports that talks are underway on selling NTV.
"To buy, or, in plain words, to take NTV away from its owners is
the wild dream of our adversaries," Kiselyov said. The details of the
talks on selling NTV are not worth a cent, he said. "I guess political
technologists such as Gleb Pavlovsky have a hand in this. This campaign
of psychological pressure on Media-MOST managers has been thoroughly
planned and is well-paid," Kiselyov said. He added that he is not faint-
Meanwhile, the talks on the sale of Media-MOST holding and NTV have
entered a final stage, Kommersant reports. Vladimir Gusinsky, the
holding's CEO, is now engaged in talks with his legal advisers in London
on the sale of his controlling interest in Media-MOST.
Alfred Kokh, director general of Gazprom-media company, is involved
in the talks because Media-MOST owes Gazprom $486 million, $211 million
of which must be paid now, Kommersant reports. Kokh visited London
recently to discuss the technical details of selling Media-MOST's shares
with Gusinsky's legal advisers, it reports.
Following a meeting with Kokh, British lawyers submitted to
Gusinsky a plan for a deal that was to be signed on August 27,
Kommersant said. Gusinsky is reported to have asked that the deadline be
put off for at least a week.
The Russia Journal
August 19-25, 2000
Victim of ambition
By ALEXANDER GOLTS
Every time Russian leaders announce yet another ambitious plan, Russians
cross their fingers. Some mysterious rule in our country makes it certain
that the announcement is always followed by some sort of trouble.
Without any connection to the actual cause of the catastrophe: an exploding
torpedo or a collision with another vessel or a World War II mine, the
Kursk tragedy has become the logical conclusion of the last couple of weeks
of talk about the "rebirth of Russia's naval power."
Much was said on this topic by Supreme Commander Vladimir Putin when he
visited the Baltic Fleet, and Naval Commander Adm. Vladimir Kuroyedov even
wrote an essay on new naval doctrine.
The Kursk events force one to consider where the boundary lies between real
necessities in the security field and empty ambitions. This atomic
submarine, one of the newest in the Russian fleet, belongs to the class of
multi-target attack submarines. It does not have intercontinental ballistic
missiles on board and is not a deterrent.
Its two dozen winged Granite missiles are designed to destroy American
aircraft carrier groups and American submarines nothing more.
In just the same way, the heavy atomic cruiser Petr Veliky, the pride of
the fleet, is intended solely for destroying large naval groups (it has
also been taking part in the rescue operation). When an admiral was asked
why Russia needs this "aircraft carrier Terminator" now, he replied that
this ship (costing no less than $1.5 billion) can be used as a school for
completing naval officer training. The same logic can be applied to
multi-target attack submarines such as the Kursk.
At some point the government decided to finish building these ships because
it would have been more expensive to scrap them. But Cold War weaponry has
become more and more of an independent factor in Russian security policy.
If the Kremlin has military hardware intended for use against the American
fleet, then it can only be used on a confrontational basis.
The Kursk submarine was taking part in a large-scale training exercise with
the North Fleet in which the scenarios involved a clash between two large
naval groups. And the exercises were to be followed by a squadron of
Russian ships travelling to the Mediterranean, where their main task was to
fly the flag. One can only guess at the political thinking tied up in such
The only logical explanation is that the squadron was to show NATO
countries, especially the United States, Moscow's intention of protecting
Slobodan Milosevic's regime in Serbia. These are the methods the president
is using to overcome the Russian military's sense of inadequacy following
the NATO operation in Yugoslavia.
One has to add that he has partially succeeded: The Kursk incident has seen
Russian admirals behaving as if they were back in Soviet times. Contact
with the submarine was lost Saturday, Aug. 12, but it took two days for
naval commanders to admit that it had disappeared. They even refused to
issue a list of those on board. The naval command was openly issuing
pessimistic statements on the vessel's fate, at the same time refusing
assistance offered by the U.S. and U.K. navies.
The accident involving the North Fleet's best submarine shows very clearly
that the Russian naval strategy has no clear and real goals. Instead of
concentrating meager resources and even more meager funds on maintaining
powerful warships, and trying to keep up the image of a naval superpower,
Russia might do better to concentrate on more concrete goals. Starting with
building frigates capable of establishing control over territorial waters.
The one problem with this is that real goals have nothing in common with
aspirations to being a naval superpower. But carrying them out would also
result in fewer victims.
(Alexander Golts is a columnist for the weekly Itogi. He wrote this piece
for The Russia Journal.)
August 19, 2000
The Art of the Deal
By Andrei Zolotov Jr.
Communist millionaire Vladimir Semago, 53, was a reporter's best friend
during his two terms in the State Duma. No longer a Duma deputy and no longer
a Communist f Semago was kicked out of the party earlier this year over his
criticism of it f he has set up a lobbyist organization to counteract the
dishonest influence peddling he complains of in parliament. The urbane and
unabashedly talkative businessman had an opinion about everybody when he met
with Andrei Zolotov Jr. at his posh Moscow Commercial Club. Semago says he is
worth about $10 million, which is "not here," i.e. in foreign accounts. While
he prefers not to speak about how he made his money in the late 1980s, he
insists that, unlike many other deputies, his wealth did not grow during his
term in the Duma.
What do you do now?
I am president of the Gubernsky Bank f a new bank that emerged on the wave of
the destruction of the Russian banking system. Besides this, I was approached
to head an insurance company that was in bad shape some time ago. Perhaps a
person of my rank, of my position in the business community, can turn this
company around. I may look a little overconfident, but I think that it is
your connections that decide everything.
In addition to [these activities], we have created a Russian-French Trade
Committee to replace the defunct Russian-French Chamber of Commerce. Given
our steady connections in government, parliament and in the regions, this
committee was conceived as a strong lobbyism structure. We have personal ties
to many leaders. All this together allows us to work seriously in a way, I
think, no one has in Russia yet.
In Russia everything was "pushed through" on the basis of closed-door deals f
often criminal ones. Take, for example, the tragic fate of Andrei Klimentyev,
who ended up in prison as a result of f I dare say f a criminal deal between
[then-Nizhny Novgorod governor Boris] Nemtsov and [then-Finance Minister
Boris] Fyodorov. Abusing their positions, the two men agreed on a government
loan and then liquidated the loan when almost half of it was paid, accusing
Klimentyev of everything. As a result, he got his six years [in prison] while
Boris Yefimovich Nemtsov is the leader of the Union of Right Forces and
Fyodorov sits on the board of some 15 companies.
[Editorial note: Andrei Klimentyev, a former adviser to Nemtsov, was
convicted in 1997 for misappropriating a $30 million federal loan to Nizhny
Novgorod. He maintains his innocence and blames Nemtsov of diverting the loan
and accepting $800,000 in bribes. Nemtsov has denied the charges.]
Nobody needs lobbyism in Russia, because lobbyism in Russia means picking up
money quietly f under the counter, in private, by money transfers abroad
through offshore companies. Everybody considers us to be swindlers because
for 10 years we have actively declared on the European and world markets that
we are swindlers. We have declared it shamelessly, saying: You see, I am a
swindler and you are a swindler. What a wonderful corrupt connection we have!
Everything is decided on the basis of commission. In the beginning, it was
cheap. In [former Prime Minister Yegor] Gaidar's government, a signature on a
letter cost a thousand dollars. When [former Prime Minister Sergei] Kiriyenko
was in power and the IMF loan was stolen f as the Italian press reported f
some $2.7 billion of the $4.8 billion loan ended up in Australia, and our
prime minister went there after he was fired.
Why do I want to take part in the lobbying business? I have at least some
reputation as a person who is responsible for his words and his actions. I
came to parliament as a naive country boy who wanted to change something, and
I was shocked by the wild lobbyism there. The mechanism of lobbying in the
Duma is primitive: You simply buy votes.
How does it work?
You go to some deputy and you tell him, "Ivan Petrovich, we've got a problem
and it's got to be solved." One way to solve the problem is to draft a bill.
This is the way it happened for the laws on production sharing, fishing,
advertising, natural resources f 20 percent to 25 percent of our laws are
Take, for example, the bill on advertising alcohol the Duma will be
considering. It already has special lobbyists who are working for it. Of
course, they [the deputies] will deny it, saying only that they selflessly
love the vodka producers, that they cannot live without this love, that it's
their sexual orientation f to love vodka producers. Gennady Kulik, who is one
of the most professional lobbyists in the State Duma, will never give it up.
So f getting back to the way it works f you come with an order and the
question arises: How much does it cost? You calculate the projected dividends
to be gained from the law and say what you are willing to pay.
What kind of sums are these?
Quite big. With the law on natural resources, the law on production sharing f
millions of dollars. The person who organizes it gets most of the money. Then
he talks with the [faction] leaders and with the committees. Once the
committee has recommended the bill, you work with the technical people in the
Duma Council, who lobby to get the bill on the agenda. If the law has failed,
then you have to pay the Duma Council again so that it puts it back on the
agenda. That's how it happened with the law on production sharing f it went
back on the agenda four days in a row. My friend [former Duma Speaker
Gennady] Seleznyov [was responsible for this]. He is as much of a man as I am
a Chinese emperor.
Did Seleznyov take money himself?
I have no proof of it. But let's suggest that he make public all his
correspondence for the past four years. I assure you we will find three or
four major projects that have been funded with real big money. If there is to
be a real investigation, I am sure that all the top brass of the State Duma
would have to resign, including Yabloko.
Do Yabloko members take money too?
Of course. They are divided. There are "clean" ones who are interested in
politics only, and there are those who are raking in the dough [through
Another time bribery was necessary f at least in the old Duma f was when the
LDPR faction was left out of the process. Then [party leader] Vladimir
Volfovich Zhirinovsky got up and righteously smashed the lobbyists who were
pushing through a bill against the interests of the state. The bill failed
and Vladimir Volfovich retired to his office and waited. I like Vladimir
Volfovich f he is a wonderful, smart, honest man who found his plot in the
forest and didn't allow anyone in. If the country allowed it f why not? Today
his situation is complicated because his faction is weaker.
Furthermore, I am sure that the seats on the party lists f in Unity,
Fatherland and the Communist Party too f were the subject of trading. If you
go for deputy speaker, that costs between $1 millon and $5 million.
You said in an interview with Novaya Gazeta that a vote against presidential
impeachment cost $5,000.
Yes, that was the rate. I know that for sure because that is what I was
Did you take it?
No, I'm not that kind of man and everybody knows it.
Who offered the money?
The deputies are no longer in the Duma, but they are alive and I don't want
their lives to get complicated. But if it comes to a serious investigation, I
am ready to testify against them.
Are there other methods of this so-called lobbying, other than creating a
"pyramid" of deputies to vote for a bill?
There are many methods f starting an investigation, stopping an
investigation. There are cases when a nosy parliamentary commission is set up
to investigate f as was the case with Norilsk Nickel. This investigation
snowballed and everyone thought that's it f [Vladimir] Potanin is going to
have a heart attack. And then it was over.
[Editorial note: In July, federal prosecutors declared that Potanin's
Uneximbank rigged the 1997 privatization auction to buy Norilsk Nickel and
ordered him to pay $140 million in compensation or face charges. However,
since then the charges have not been pursued, causing some to speculate that
Potanin may have reached a deal with the Kremlin.]
Other than Kulik, who are the biggest lobbyists?
Georgy Boos. Kolya Kharitonov f he was running around the Duma pushing
through the resolution on the National Sports Fund, the dirtiest organization
possible. Svetlana Orlova from the Primorsky region f she's a wolf. The whole
budget committee is a committee of lobbyists. Most of them know the value of
Did the presidential administration also buy votes?
Before early 1999 f yes. Now f I think not.
September 4, 2000
The Rise of an Oligarch
Russian President Vladimir Putin is trying to free himself from the grip of
crony capitalist Boris Berezovsky. But if anyone is counting Berezovsky out,
they'd do well to remember how this tough tycoon made his first fortune.
The Rise Of An Oligarch
By Paul Klebnikov
Boris Berezovsky occupies a special place in Russian history. As we detailed
in an article in 1996 (now the subject of a pending libel suit against FORBES
by Berezovsky), this once-obscure car dealer privatized vast stretches of
Russian industry. He organized the secret financing of the Yeltsin election
campaign in 1996 and three years later helped select Vladimir Putin as
Yeltsin's heir. Putin has now declared war on the "oligarchs." Will
Berezovsky withstand this threat to his fortune and his liberty? In this
excerpt from Godfather of the Kremlin (Harcourt, September 2000), a FORBES
senior editor shows how the tycoon survived previous assaults on his empire.
NOT LONG AFTER COMMUNISM FELL AND BORIS YELTSIN took power, an American
entrepreneur named Page Thompson went to Russia in search of deals. Thompson
was a former treasurer of Atlantic Richfield, the oil company now part of BP.
With a taste for adventure, he had begun a second career selling auto parts
to the former Soviet Union. Success came quickly. In 1994 he landed a $4
million contract to sell Goodyear tires to Avtovaz, the giant auto factory
that accounted for half the Russian market for passenger cars.
In the course of the negotiations, Thompson asked Avtovaz for a letter of
credit from a Western bank guaranteeing its payment. He was told that French
bank Crédit Lyonnais would provide it. Crédit Lyonnais would later come close
to collapse in a famous fraud and embezzlement scandal, but at the time it
seemed a strong and respectable bank. Its guarantee was good enough for
Then the deal turned strange. Thompson was told that he had to pick up the
letter of credit from an outfit called Forus Services S.A. in the town of
Lausanne, Switzerland. He arrived at the Forus office to find two Russian men
"They did business in an absolutely empty office, a beautiful office, but it
didn't have anything in it, except furniture--just empty desks and empty
chairs," he recalls. "There were three or four rooms, a bottle of Jack
Daniels and no people except these two guys and a secretary who didn't speak
any language I understood."
The letter of credit had not arrived yet, Thompson was told. Come back in two
days. When he finally got it, the letter contained the names of Crédit
Lyonnais, Avtovaz and Thompson's company, but there was no mention of Forus
"It made quite an impression on me," Thompson says. "When I was treasurer of
Atlantic Richfield and we wanted to borrow money, I'd pick up the phone and
I'd call Chase and I'd say, 'We're interested in borrowing a couple of
hundred million dollars' and they'd say 'We're interested in lending it to
you, and we'll come out and talk about it.' I didn't have to call Joe, Mike
and Moe at, you know, the Wilshire Financial Co. or something to do my
borrowing for me at Chase."
Thompson concluded that this strange, unpopulated office was "a company that
someone powerful at Avtovaz had set up to run these financing transactions,
charge Avtovaz a fee, and then split the fee among the owners. I never knew
who the people were."
In fact, Forus Services had been established on Feb. 13, 1992 by car dealer
Boris Berezovsky, Avtovaz finance chief Nikolai Glushkov and the big Swiss
commodities trader André & Cie. Officially Forus was a financial company
trading currencies and organizing lines of credit and other financial matters
for Russian companies abroad. It remained, however, an insiders' club. And
the insiders' ownership was difficult to trace. Forus in Lausanne was owned
by Forus Holding (Luxembourg), which in turn was owned at least partly by a
Lausanne shell company named Anros S.A. In other words Berezovsky and his
partners were insulated by at least two front companies.
Forus was just one of a number of companies owned (directly or indirectly) by
Berezovsky in Russia, Cyprus, Switzerland, Luxembourg, Ireland and the
Caribbean to take control of the hard-currency revenues of several of
Russia's biggest industrial companies. These finance companies earned
millions of dollars through unusually high fees, high-interest loans and
simply making money off the float (the working capital they handled for their
clients). It was a sophisticated financial network, ideal for getting money
out of Russia, facilitating financial flows around the world, minimizing
taxes and avoiding scrutiny. Today, several of those companies (including
Forus) are the focus of a number of criminal investigations in Russia and
Switzerland, in which the investigators suspect embezzlement, fraud, tax
evasion and money laundering.
In 1994 the cash cow of Berezovsky's growing empire was the state-owned
automaker, Avtovaz. Berezovsky's company, called Logovaz, was the automaker's
largest dealer, selling 45,000 Avtovaz cars annually, nearly 10% of its
Amid the disintegrating Russian economy, the auto industry remained
remarkably healthy, producing one domestically made product Russians were
still eager to buy. The demand for Avtovaz's vehicles--a sedan known in the
West as the Lada and an off-roader called the Niva--consistently outstripped
the supply. Blessed with low raw-material costs and cheap labor (the average
worker received $250 a month, usually paid several months late), Avtovaz
should have been enormously profitable. In fact, it was bleeding cash and
piling on debt.
The problem lay in the corruption of the distribution network. Hundreds of
small companies had been created to trade Ladas and spare parts; they were
independent, but they were linked to various members of Avtovaz's management.
When I asked Avtovaz President Alexei Nikolaev in the summer of 1996 about
his company's dealership network, he explained that he was selling his cars
at a loss:
"On average, we get $3,500 [per car]," he said. "In reality, this car has a
much higher production cost--approximately 30% higher [ $4,600]."
Since most dealers sold their Ladas for $7,000 or more, they were making 50%
gross margins, ten times what a dealer would get in the U.S. And that assumes
the dealers paid for the goods, which they often didn't. By 1995 Berezovsky's
Logovaz and other dealers owed the automaker $1.2 billion, one-third of its
"You can't just go over and become a dealer in Ladas," recalls Page Thompson,
who was selling tires and lubricants to several big Avtovaz dealers. "If the
other people who deal in Ladas allow you to become one, you're going to pay
for the privilege. Some guy's going to show up and tell you that you have a
Dealers who tried to purchase cars from Avtovaz without going through the
established channels were unlikely to get any cars or, if they did, they
would often receive their vehicles with windshields smashed, wiring pulled
out and tires slashed. Or, they would get shot.
Thompson cites the example of one of his clients, a big Avtovaz distributor
in Moscow called Lada Strong. "He had his cars stored in two lots, and he had
to pay one criminal gang tribute for Lot A and another criminal gang tribute
for Lot B," Thompson says. "Through some gaffe, one of his employees moved 50
cars from Lot A to Lot B, whereupon the guys who were collecting a tariff
from Lot A kidnapped him and held him hostage in a cellar until the
dealership came up with $50,000 for the insult."
Another of Thompson's clients was a dealership run by a young Russian
businessman outside of Avtovaz's gates in the city of Togliatti.
"He was a huge dealer in Ladas and parts and all sorts of hard-to-get stuff.
To visit his lair, you came in and there was a whole bunch of tough-looking
guys lying around watching Woody Woodpecker cartoons on TV and bristling with
firearms. Everywhere he went, there was a car with four armed guys in back of
Thompson began doing business with this man, selling him secondhand American
cars for shipment to Russia. Thompson says this man boasted to him about how
he defrauded and robbed everyone, and how someone inside Avtovaz fed him cars
that should have gone somewhere else.
The whole Avtovaz system was corrupt, Thompson says. If a dealer wanted to
get a shipment of spare parts, for instance, he had to bribe the manager
responsible for spare parts sales. "I knew the guy who used to take the
money," says Thompson.
I asked Alain Mayor, the Russia point man for Berezovsky's Lausanne partner
André & Cie., about the rampant corruption at Avtovaz. "I think that is the
case with a lot of Russian companies, not just Avtovaz," he said. "It's a
question of mentality: Collective property is property that belongs to
André & Cie. had witnessed this corruption firsthand. In 1993-94 André tried
to arrange a $100 million credit for Avtovaz from the Italian foreign trade
bank. The money was supposed to be paid back over seven years with the sale
of Ladas in foreign markets like Africa. "It didn't work out," notes
Christian Maret, head of André's Moscow office. "Because each manager of
Avtovaz had his own pet distribution network."
Berezovsky's particular scheme was called re-export. Avtovaz export contracts
typically stipulated an even lower price for Ladas than domestic dealership
contracts, and granted an even longer grace period for dealerships to pay
back the auto factory (up to one year). Berezovsky actually sold his cars in
Russia--the cars remained in the country, but their documentation showed them
to be exported and then imported back into Russia. Their "export" status
allowed him to receive foreign currency. While the auto factory was paid by
its dealers with constantly depreciating rubles or even worse quality IOUs,
Berezovsky received dollars for the cars he sold.
I asked Alain Mayor why the auto factory was selling its cars to Berezovsky
on such detrimental terms. "Listen, Monsieur, 90% of cars in Russia are sold
in the same manner," he answered. "There is not much of a difference in favor
of Logovaz. There are very different conditions existing as a result of
personal relations between people, people who were friends with the managers
Berezovsky, the largest Avtovaz dealer, had the best "personal relationship"
imaginable, since the Avtovaz chairman, its head of finance and its head of
aftersale service each owned a substantial portion of Logovaz stock. In other
words, Avtovaz was selling its cars at a loss to Berezovsky's dealership,
Logovaz, and engaging Logovaz to handle its finances at the same time that
the top executives at the auto factory benefited personally from the
relationship as Logovaz shareholders.
While Avtovaz dealers like Berezovsky were becoming immensely wealthy, the
automaker slid steadily into bankruptcy. The company was so short of cash
that it could not pay its taxes, electricity bills or workers' salaries. Page
Thompson continued trying to do business with Avtovaz; he did a few
successful deals, lost money on others and finally decided to stop.
"I lost a couple partners," he says. "One of my Avtovaz partners in Bishkek,
Kirghizstan, was assassinated in his office. My partner in Togliatti was
certainly a major criminal. I've just decided that it ain't a game worth
playing over there."
When I asked Avtovaz President Alexei Nikolaev about the problem of gangsters
controlling his dealer network, he admitted that the car company did have a
problem. In fact, Avtovaz had become arguably the most gangster-ridden major
industrial company in Russia.
In 1994 Radik Yakutian, head of the investigative department of the Samara
Region prosecutor's office, was assassinated while looking into organized
crime at Avtovaz. In 1997 the Ministry of Internal Affairs (MVD) carried out
"Operation Cyclone," a combined-forces assault on organized crime at Avtovaz.
The raid, involving 3,000 operatives from the MVD, the prosecutor's office
and the tax police, all converging simultaneously to block the giant
factory's exits and seize its computer files, was the largest anticrime
operation of the Yeltsin era. The raid unearthed evidence that gangsters
connected to Avtovaz had carried out no fewer than 65 murders of company
managers, dealers and business rivals. Dozens of people were arrested.
Criminal cases were opened.
In February 1999 the office that was in charge of compiling and pursuing the
investigation of Avtovaz--the MVD headquarters in the provincial capital of
Samara--was destroyed by a huge fire. The Avtovaz documentation was
destroyed; at least 50 investigators and other MVD staffers perished in the
blaze. The MVD headquarters in Moscow quickly concluded that the fire was not
the result of arson, but it still opened a criminal case against Avtovaz
management on tax evasion charges several days later.
It was in this lawless environment that Berezovsky was building his empire. A
47-year-old (in 1993) mathematics Ph.D. who had spent most of his
professional life designing computer software, Berezovsky was hardly the type
expected to succeed in the world of gangsters. Yet he would not be able to
survive in this business unless he could protect his gains from the thugs.
With the Russian government in disarray the most effective "security service"
available to businessmen was the Mob. According to several top Russian law
enforcement officials, Berezovsky had built his dealership, Logovaz, under
the protection of the Chechen Commune, one of the most feared organized crime
groups in Russia. The Chechens were Berezovsky's "roof" in the auto market.
Meanwhile his rivals in the auto market, beholden to other organized crime
groups, were jealous of his success and his inside deal with Avtovaz top
management. Thus, alone among the big businessmen who would come to be known
as "the oligarchs," Berezovsky found himself personally involved in a turf
war between Moscow's predominant gangster families.
One of the first attacks occurred on the afternoon of July 19, 1993 when a
gang led by a man named Igor Ovchinnikov descended on a Logovaz showroom at
the Kazakhstan Cinema on 105 Lenin Prospekt. The gangsters pulled up in three
cars and started shooting--first at the windows, then at the people inside.
The Logovaz men shot back. Within moments, three men lay dead (including
Ovchinnikov) and six were wounded.
Several days later, when I asked General Vladimir Rushailo, head of the
Moscow RUOP (the organized crime squad of the police) about the incident, he
explained: "The cause of the shoot-out was that [Logovaz] had its own
security service and another gang arrived and wanted to collect money from
them as well. The result was entirely predictable."
Later, when I asked Berezovsky about the incident, he said he remembered the
shoot-out, but didn't know what it was about. He went on to say:
"Today we are witnessing a redistribution of property on a scale
unprecedented in history. No one is satisfied: neither those who became
millionaires overnight--they complain they didn't earn enough millions--nor
those who received nothing and are naturally discontented."
Then he added with a professorial flourish: "Therefore I do not think that
the extent of crime exceeds the scale of the transformation process."
Igor Ovchinnikov, the man who had attacked the Kazakhstan Cinema, was a minor
player in the mob war. He was subservient to a crime boss--a man nicknamed
Cyclops--who in turn was subject to a higher-level gangster organization.
The shoot-out at the Kazakhstan Cinema was just the beginning. In September
1993, on at least two occasions, Logovaz dealership lots in Moscow were
attacked by men with grenades. Several vehicles were damaged, but no people
were hurt. Russian newspapers quoted frustrated police detectives as saying
that Logovaz was refusing to cooperate with the investigation. One detective
was quoted as saying that the attacks were "a continuation of the war between
organized crime groups over the auto market."
Little is known about the measures Berezovsky took to rid himself of the
gangster threat. The Russian government was of little help in protecting
businesses from the orgy of violence. It was fatally corrupt.
The same month as the gangster attack on the Logovaz showroom at the cinema,
President Yeltsin accepted the resignation of his minister of security (head
of the former KGB), Viktor Barannikov. Barannikov had been one of the main
patrons of a shadowy commodities trader named Boris Birstein and his
Toronto-and Zurich-based company, Seabeco. Birstein was lavish with his
rewards to his government patrons. In early 1993 he invited the wives of
Barannikov and the first deputy chief of the MVD on a three-day shopping trip
to Switzerland. The two ladies bought $300,000 worth of furs, perfumes,
scarves and watches (all paid for by Seabeco) and carried their loot back to
Russia in suitcases. They had 20 pieces of excess luggage and were fined
$2,000 by the airline, but this bill, too, was paid by Seabeco. When the
scandal came to light, Barannikov and the first deputy chief of the MVD were
fired, but never prosecuted.
In Lausanne Berezovsky's business partner, André & Cie., was alarmed at the
gangster war raging in Moscow in 1993-94. When André & Cie. became
Berezovsky's strategic partner it had not reckoned on a wave of bombings and
assassinations. But Alain Mayor managed to soothe the nerves of his André
"It was something that was happening in Russia; it wasn't something that was
happening in Switzerland," he explained. "We established the facts and ... my
superiors at the company accepted the facts. That was all. At that time there
were very strong rivalries in the automotive milieu in Moscow, that's for
sure. People used very violent methods. It wasn't very reassuring. In fact,
it was painful, disagreeable to see."
André & Cie. decided to stick by its Russian partner. In the winter of
1993-94, while the mob war was raging in Moscow, Berezovsky spent much of his
time abroad. He went to Lausanne to put the finishing touches on his offshore
financial network with André & Cie. When he returned to Moscow, he was
targeted almost immediately. The door of his apartment was booby-trapped with
a grenade. Fortunately it failed to explode.
In the late afternoon of June 7, 1994 Berezovsky walked out of the new
Logovaz headquarters in central Moscow and got into the back seat of his
Mercedes. His bodyguard sat in front, next to the chauffeur. As the car
pulled out, the neighborhood was shaken by a massive explosion. Someone had
parked an Opel filled with explosives on the narrow street and detonated the
car bomb by remote control as soon as Berezovsky's car passed by. Berezovsky
saw his driver decapitated by the blast. The bodyguard was severely
wounded--he would lose an eye. Half-a-dozen passersby were injured.
Berezovsky stumbled out of the car, his clothes smoldering. His burns were
severe, requiring months of treatment in a Swiss clinic.
A few days later the offices of Berezovsky's Obedinenny Bank were also
bombed. Berezovsky blamed his competitors in the auto industry for the
violence. Nine months later, when he was under suspicion for the murder of
Russia's most successful TV producer, Berezovsky made a private videotaped
explanation to Yeltsin and put forward a different version, pointing the
finger at his chief rival in the media market, Vladimir Gusinsky.
Like so many other gangster killings, the Logovaz bombing was never solved.
Commenting on another outbreak of mob violence outside the gates of Logovaz a
year earlier, RUOP's chief, General Rushailo, told me: "Many believe that
businessmen get killed simply because they are businessmen. Not so.
Investigations of cases involving contract killings have shown that the
victims were involved in some sort of unclear relationship, to put it
diplomatically, with the very people who either ordered or carried out the
hits against them. No one kills the law-abiding citizens--those who do not
violate the law, who pay their taxes."
In March 1994 a Berezovsky investment fund called Avva had placed money with
an institution called Mostorg Bank, buying two 500-million-ruble short-term
promissory notes. Mostorg Bank was controlled by a famous mobster called
Sergei Timofeev (alias: Sylvester, since he vaguely resembled Sylvester
Stallone). Sylvester himself was allied with a powerful organization called
the Solntsevo Brotherhood. Sylvester's bank did not pay back the obligation
on time, having transferred the money abroad.
After the Logovaz car bombing had propelled Berezovsky onto the front pages
of the newspapers and forced even President Yeltsin to speak out about the
"criminal filth" ruining Russia, Mostorg Bank finally paid Logovaz back (with
The mob war continued. In the early evening of Sept. 13 1993 there was a
powerful explosion just off Tverskaya Street, Moscow's most elegant shopping
district. Police found a Mercedes S-600 sedan that had been destroyed by a
remote-controlled bomb attached to the underside of the car. A charred corpse
was pulled from the wreckage. It was Sylvester.
Berezovsky, who by then had returned to Moscow from Switzerland, was briefly
considered a suspect. But Sylvester had many enemies, and the case was never
solved. With Sylvester's death, the gangster assaults on Logovaz ceased.
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