#15 - JRL 9112 - JRL Home
Date: Wed, 6 Apr 2005
From: Sergei Roy <sergeiroy@yahoo.com>
Subject: Re: Chrystia Freeland

Dear David,

attached is my review of Chrystia Freeland's Sale of the Century. Although the book was published some years ago, the material is not just pertinent but highly topical in its bearing on Khodorkovsky, Nevzlin, Potanin, Gusinsky and other oligarchs currently some in, some out of trouble.

Best wishes,

Sergei Roy

editor, www.intelligent.ru

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Troika with Seat-belts
Lots of people have wondered in recent years, are still wondering, what went wrong with the “capitalist revolution” in Russia. Just about everything, that’s the answer to be deduced from Chrystia Freeland’s Sale of the Century. The Inside Story of the Second Russian Revolution (Little, Brown and Company. London, 2000).
By Sergei Roy

In Chrystia Freeland’s opinion, it is the individuals who carried out that revolution that are to blame. This answer is natural, given the work’s genre. It is not an academic study, heavy with tables and diagrams, of the political and economic tectonic shifts which have changed Russia beyond recognition during the 1990s. The book is in fact a collection of journalistic stories about the most powerful figures that shaped the capitalist revolution, primarily based on interviews with various individuals in that environment.

The picture that emerges is a bit like Goya’s portrayal of the Spanish Bourbons so ruthlessly penetrating as to be devastating. But not devastating enough to reveal the fact that for the individuals that carried out the “revolution,” as well as their cronies, members of their various clans, and their foreign advisers, everything went just right. Whatever the shortcomings of the current version of capitalism as compared to the model, western versions, and whatever the destruction and degradation the “revolution” has cost Russia, the “revolutionaries” (or, as they prefer to call themselves, liberal reformers) did very well for themselves. So well that at the end of the process the country’s entire assets (which previously belonged to the “whole people,” that is, were run by the Communist nomenklatura as a class for the ostensible benefit of the whole country) were divvied up between a tiny section of the society, with some 200 families appropriating the lion’s share of the national income.

Yegor Gaidar, the acting premier who administered shock therapy to Russia in 1992 by liberalizing prices and triggering off inflation that wiped out people’s life savings within a month, comes out as a pretty scary figure despite the author’s obvious sympathy with his struggle against the entrenched post-Soviet bureaucracy (the importance of which is blown out of all proportion by Freeland’s primary source on this score, former dissident Sergei Kovalyov, who, like a bad general, was still fighting his old wars while totally new warfare was going on all around him). Ms. Freeland states quite plainly that Gaidar, though versed in economic theory (of a certain kind), had no administrative talent to speak of, a lack which he made up for in fanaticism, in “Leninist zeal and ruthlessness,” traits that his colleagues, the liberal “Young Turk” reformers, fully shared; except that, unlike the bona fide, fanatical Leninists, they were clearly motivated by the most sordid reasons of personal gain, only slightly camouflaged with liberal reform verbiage.

The author omits to mention also that Gaidar, whose professional career was entirely in academia and journalism, had zero managerial experience (except for managing the family budget, perhaps) when he took up the job of top manager of the Russia Corp., bungling it quite inevitably.

Unfortunately, Ms. Freeland is so captivated by the “beautiful prose” of Gaidar’s book (a really gratuitous comment that merely shows what a fat lot she knows about Russian prose) that she repeats almost word for word his regrets that his shock therapy wasn’t shocking enough.

“I’m convinced [writes Ms. Freeland] that the central failure of Russia’s capitalist revolution was that it didn’t go far enough. Price liberalism was bold, but not bold enough… Balancing the budget was painful, but the government should have cut more deeply…” What is quite understandable as a politician’s self-justification and explanation of his failure, stands out as journalistic inanity in a book like Ms. Freeland’s, an irresponsible recipe for civil strife. Civil war, to be more precise. Thank God Russia had a cunning drunken slob, not a woolgathering journalist, for president in those years.

Volumes have been written by professional economists (some of them years before the Freeland book) proving beyond a shadow of doubt that the Gaidar price liberalization was carried out (a) in the most stupid form imaginable and (b) in contravention of the then effective laws, that is, criminally. The wiping out of the people’s savings through government-engineered hyperinflation was nothing more nor less than expropriation, an act of outright banditry. Price liberalization, Gaidar fashion, meant simply that commodity producers were allowed to arbitrarily set their own prices in the absence of any mechanisms of fair competition, protection of consumers’ rights, or other known restraints. The government resolution on price liberalization, far from abolishing the old method of price-formation based on elementary calculation of costs, confirmed this survival from the socialist era, thus starting a cost inflation spiral.

When the author keeps closer to the ground, away from generalizations, her account of the “capitalist revolution” is often fascinating. Thus Ms. Freeland admires Anatoly Chubais’ administrative genius, calling him an “iron general of privatization” etc. Her own story, however, shows unequivocally that, for all his genius, Chubais failed at the self-imposed task of creating a class of effective owners of private property (if it ever was his primary goal). What he created instead, through his “voucher privatization,” is a class known as the comprador bourgeoisie the old “red directors” plus elements of various shades of criminality whose prime concern was not the “back-breakingly difficult job of changing the way factories were run” but taking control of those factories and, above all, of the “real money-spinner,” the mineral resources, and ripping them off for anything they were worth, then salting away the proceeds in foreign banks. Some people like to call the process a revolution or liberal reform; 99 percent of Russia’s population see it as downright thievery (the thieves themselves in unguarded or boastful moments make no bones about it).

The book’s centerpiece is, of course, the loans-for-shares scheme or rather scam, and that should have been the book’s title, “The Scam of the Century.” It was a ploy thought up by one of the future oligarchs, Vladimir Potanin, to privatize major state-owned enterprises worth billions of dollars, like Norilsk Nickel, under the guise of a loan program: A hand-picked bunch of Russian nouveaux riches would “loan” the state certain sums of money in exchange for shares in those enterprises, of which they would eventually gain absolute control.

The most absorbing feature of the whole shenanigans is, to an observer with a taste for scams as intellectual exercises, the fact that the money which the budding oligarchs were “lending” the state had been gained by ripping off that same state: in most cases, by privatizing financial flows through the so-called upolnomochennye “authorized” banks. Authorized, as it transpired, to play with government funds at the Exchange while the workers patiently waited for their wages for months on end.

Moreover (and this is something that Ms. Freeland didn’t dig deep enough to discover), there were scams within the big scam, with the state getting as “loans” money that was first borrowed from the state itself, through an intricate chain of money transfers, with the connivance of high-level bureaucrats. There were some really nice touches about the scams, like the state first lending the money to certain banks on no security at all and then borrowing that same money from the banks and putting up as security shares in grossly undervalued enterprises, with the all too apparent goal of leaving those shares in the hands of the swindlers that were intended to profit by the scam by taking hold of assets that had belonged to the state. Just another case of outright expropriation of the entire people’s property (for details see a two-volume study by Yuri Boldyrev, former head of the Accounting Chamber).

No wonder many observers, as Chrystia Freeland writes, refused to believe a “scheme so brazen, and so downright weird”; still, it was carried through, and Russia’s financial-industrial oligarchy was born, as a result of a patently criminal operation.

The way the scheme was implemented was just as underhand as the ploy itself. “We reached an agreement on who would take what,” the book quotes Leonid Nevzlin as saying (the same Leonid Nevzlin, a sidekick of the jailed tycoon Mikhail Khodorkovsky, who had run away to Israel when the going got tough). “We agreed not to get in each other’s way… In this respect, there was an element of insider dealing.”

Mr. Nevzlin is way too modest, of course: the whole scam was nothing but insider dealing, and the competitive bidding organized to camouflage the operation, with foreign bidders excluded, was nothing but a sham and a caricature, as the book shows in graphic detail.

The author also goes into considerable detail about the oligarchs’ previous careers; not quite ennobling reading matter, it must be said. Say, anyone who ever saw the media tycoon Vladimir Gusinsky (now under investigation in Israel for money-laundering) as a stalwart proponent of civic virtues and democratic freedoms should certainly read the relevant chapters and prepare themselves for some shocking eye-openers.

Basically, Chrystia Freeland’s book is about the oligarchs and how they organized themselves not only as a financial-industrial but also the dominant political force that played a decisive role in the 1996 presidential election; how they divided the spoils after the election; how they and the political establishment coalesced, becoming “Siamese twins,” as the author puts it; how they fell out among themselves over various chunks of the economy too succulent to lie about unclaimed; how their greed and lack of vision led to the August 1998 crash. In short, this book is about the Russian version of crony capitalism ( “bandit capitalism,” more like it) and how it came to grief just like its Asian brethren, only with worse consequences for the innocent bystanders, the people of Russia.

This primary focus on what went on within Moscow’s Garden Ring explains some of the obvious gaps in Chrystia Freeland’s narrative. The author mostly tells us what the oligarchs and their political associates told her in those interviews; and they clearly didn’t tell her all there was to tell. Although the word krysha (criminal protection) is mentioned, the fact that huge chunks of the Russian economy (the figures vary wildly, from 40 to 80 percent) were grabbed by organized crime, is not. The history of privatization at the regional level and of the role of corrupt administrators and criminal kingpins in it is yet to be written, the piles of corpses left in the process by the roadside are yet to be explained.

These lacunae could later be filled in, though. More irksome is Ms. Freeland’s continual tendency to substitute sloppy journalistic clichés for careful study of her facts. To her, Putin is still a “former KGB agent who had spent most of his career in East Germany.” Putin spent slightly more than four years there, and quite a few people both in Russia and elsewhere believe that his stature is a bit more than that of a former KGB agent.

Grigory Yavlinsky is consistently described as “Russia’s leading independent democratic politician.” Well, any half-educated Russian could have told Ms. Freeland which oligarch sustained Grigory Yavlinsky’s “independence” at any given time. Actually, Mr. Yavlinsky makes no secret of it himself he openly complains that life has become awfully difficult for the party and for himself since the jailing of Mr. Khodorkovsky. As for Yavlinsky’s democratic credentials, elections after elections have shown that a mere fraction of Russia’s population, certified democrats included, accept them.

Often Ms. Freeland goes on in such a slapdash manner that one’s eyebrows keep climbing higher and higher: Kiev lies south of Scandinavia, not north, as the author believes; Krasnoyarsk is no more of a “frontier city” than Moscow; there is no such Russian word as shturmirovka, it should be shturmovshchina. One could fill pages with similar nonsense.

Ms. Freeland is at her most unreadable when she slips into quasi-historiosophical discourse about the Russians’ messianic tendencies as the root cause of all of Russia’s misfortunes, clean forgetting, among other things, that all messianic ideologies that have allegedly motivated Russians Byzantine Orthodox Christianity, Marxism, and now market economy and liberal democracy are distinctly European, imported products. That should help to see where the real root causes lie. Besides, to talk of “messianic tendencies” of a people whose primary concern is physical survival is plain ludicrous. Mere eyewash, in fact.

In conclusion, Ms. Freeland misquotes at length Nikolai Gogol’s comparison of Russia to a troika rushing headlong in an unknown destination, expressing the hope that this time round the driver will give the passengers of the troika “a chance to buckle their seat-belts.” A troika with seat-belts sounds to me like an A-bomb with handles. And why not? It would be easier to carry.

So tighten your armchair belts when you come to passages like this and if you really want to learn something worthwhile of Russian bandit capitalism of the 1990s, try to get your hands on some reading matter with a less touristy flavor.