#9 - JRL 7179
The Piratization of Russia: An Interview with Marshall Goldman
May 12, 2003
Washington Profile News Agency
www.washprofile.org

Marshall I. Goldman is Kathryn Wasserman Davis Professor of Russian Economics (Emeritus) at Wellesley College. An expert on the Russian economy and the economics of high technology, he is also Associate Director of the Davis Center for Russian and Eurasian Studies at Harvard University. Marshall Goldman's most recent book is The Piratization of Russia: Russian Reform Goes Awry.

Why did you decide to write this book?

Because I wanted to know how the whole thing happened - such an incredible transfer of wealth. I wanted to know who did it, and how these oligarchs became so rich so quickly. There are 17 now on Forbes' list of richest people in the world. In 1985 - zero. And I wanted to know - could it have been done in a different way, particularly in way that was not as egregious, not as blatant. One of the chapters in the book looks at other alternatives, particularly Poland. Poland has corruption, but not from the privatization process. So I wanted to learn more, and I was curious about the oligarchs in particular, so I have two chapters going into their backgrounds, like a little "who's who" of who these people are and their origins. I was also interested in the links with the Tsarist era - after all, most of the people who look at this begin in the Communist period. But I wanted to see if there were any continuities with business, the way it was done in the 19th century. It's a very dramatic story, but it also has an intellectual interest.

Were there any continuities to the 19th century?

As it turns out, there were many continuities. You needed a patron in the 19th century. If you did not have someone protecting you, you were through, and this is the case today - not only in Moscow, but also in the provinces.

Are there any historical parallels around the world to what has happened in Russia?

In the Czech Republic, there was also great disappointment with the reforms. But Russia is unique in that it has so much wealth. It might have been easier for the Russians if it were a poorer country. You could say maybe that's why things went so well in Poland, there wasn't much to steal. There was a lot to steal in Russia, and the general attitude was, "Well I better get in there before he does, because I am more deserving." To some extent, that did complicate the problem. Also, nobody had to endure Communism for 70 years, and the longer you did, the more difficult it would be to re-enter. So Russia is unique, but not completely. In this book I also look at the reforms in Poland and the Czech Republic - I don't spend much time on China, and I think you can argue that they could have learned a lot from China. I've asked Gorbachev - we've become quite friendly even though I was very critical of him in some of my earlier books - I've asked him about that, and he said that the Politburo would have never allowed him to copy what happened in China, but I think there could have been lesson learned there. Gorbachev began in 1985, the Chinese have had their reforms since 1979, and some good things could have been learned. They did not do privatization, the held back - that's one of my criticisms in the book, and I go after the Western advisors too, particularly Andrei Schleifer. The argument was that it had to be quick, otherwise they would have stripped the assets - well, they stripped the assets anyway, and in the case of Poland they didn't strip assets and they waited five years - not necessarily internationally - and by then, it went much smoother, and they had a design that made much more sense.

So who benefited the most from privatization?

It certainly wasn't the Russian people. Again, it's very interesting to compare Poland and Russia. In Poland, some of the shares from the companies were put aside in a fund with the idea that as the reforms succeeded, the profits would go not just to the directors or the workers or stockholders, but to the public. The Polish public generally did a little better. In the case of Russia, the average citizen got a 10,00 ruble voucher - that was an insult. After 70 years of Communism, this is your share, for all that suffering - ten thousand lousy rubles. The nomenklatura who was in there benefited. Last night I gave a lecture. And there was a Trotskyite there who said, "so the nomenklatura was in control in the Soviet period, and now they're in control in the Russian times," but it's not quiet like that. There are a few oligarchs - I made a few charts, it's not a complete roster, you can see the big oligarchs - only two of them are from the nomenklatura - Potanin was working in the Ministry of Trade, but he was not in the upper echelons. So you've got two people - Viakherov and Chernomyrdin - who took their ministry and privatized it. But the other guys - and this is the most interesting part of the book - were basically neer-do-wells, they were on fringes on society, Jews in part, and to the extent that they were doing anything in the pre-Gorbachev days, they were engaged in black market operations, currency speculation, some - Smolinsky - were accused of economic crimes. These were guys who were basically energetic, so they tried to make a place for themselves for doing illicit things, but suddenly 1987 comes on, and suddenly what they're doing is legal. That causes great confusion among the police. In the Yeltsin era, these guys' talent was they were able to find goods that were in short supply - that's what they had been doing in the Soviet days. And so they were able to accumulate a lot of rubles very quickly, and in almost all the cases these people ended up with a lot of cash, and there were people who wanted to borrow money, so they began to lend. And there were two kinds of money, there was the nalichnye and beznalichnye. So they were able to make it liquid and in effect set up banks, and you did not much money to be formally established as a bank - 75,000 dollars or less - and so they created banks, and once they did that, they were in a position to buy vouchers, and take over and buy these companies. If you go down the list and look at the subsidiaries, there's always a bank that acts like an ATM machine for themselves. There was no competition, there was no regulation. The question I kept asking - how did they do it so quickly? - and of course that's part of it, and also fro the loans-for-shares program, which doesn't come until 1995. They could buy favors and get patrons - it's very interesting to see who these people are, people who were on the fringes of society.

What is the oligarchs' nature?

The only scientist is Peter Aven, and Berezovsky was in operations research and studied at Harvard. His contacts with Avtovaz was due to his research connections, although he had not been in black market activities. Smolinksy was arrested, Gusinsky was driving a taxi, Fridman was washing windows, Khodorkovksy created a co-op, Potanin was working in the foreign trade organizations and privatized it.

Russia has been compared to South Korea, which also has oligarchic structures? Can Russia's economy do what the South Koreans did.

The Koreans created these chaebols, big family enterprises - there is a similarity, because these were big holding companies, but the big difference here is that most of the wealth comes from value-added manufacturing; in Russia, with the possible exception of Gusinsky, most of these people just took assets that belonged to the state in the form of raw materials. In my mind, I accord more respect to people who create something. The South Koreans are creating, manufacturing, expanding, and in Russia that's not the case. One of the things I look at in the book is - Can Russia move into manufacturing? I'm not optimistic about the prospect, and it has a lot to do with the fact that they're dependent on raw materials.

Is oil Russia's curse?

Only Norway has managed to develop oil and not be corrupted by it - it's very hard. The more prices of oil rise, the more dollars come into the country, they can pay off their debts, but this also pushes up the value of the ruble - this makes imports more attractive and drives out domestic manufacturing. It's very interesting to see what's happening with someone like Khodorkovsky - now that they're hiring Western managers, they're putting money back into the country rather than taking it out, because there's more profit to be made.

Does Russian business have the ability to make the country a superpower.

Lukoil bought Getty oil. It's possible. They're looking for good managers now, no longer just relatives. Gazprom is beginning to bring in managers, not just grandkids etc. Where s the second-largest Russian producer of oil headquartered - Jacksonville, FL. Both Lukopil and Yukos now have foreigners on their board of directors. And I asked those people if they are independent, and they seemed to believe they are, or at least on the way. If they can make decisions as independent good managers means they can create competition. Khodorkovsky has always wanted to keep foreigners out, but now he's bringing in Western managers, and they're well-trained, and they can compete with best. That's not true with every industry, but it's happening more and more. It's like a fashion statement, you have to have a Western-trained MBAs to be your chief financial officers. I am a cynic, but this is a first step.

What is the future of the oligarchs?

Khodorkovsky is now the cover boy - I want transparency etc - he has the most sordid record of any other oligarchs - he has cheated more people than any other oligarch, and that's a pretty impressive accomplishment. I don't think he can change completely, but he is trying, and part of the reason is that he ahs so much money that he wants rules and regulations. In the US, the equivalent is - you buy a house in a fancy district, and you wanted to increase the zoning laws so that no one else can come in. He now wants to establish laws and have the laws observed. In doing so he becomes a model of good behavior. But there's another aspect - they don't want the children to go through what they went through, so these guys are sending their children to private school in Switzerland and England. If you look at the list and see whose children are going where, my impression is that they're going abroad 80% of the time. So they go to school in the US - I called Tatiana, a student of mine and I asked to come into my office on Thursday and she said "Thank you, but I have to see my broker." So in the future, they will probably be more subtle, more civilized, and less cut-throat. I also talk in the book about the effort to introduce corporate governance codes. And initially these groups were ridiculed, but not the case anymore.