The Oligarchs

Using a copy machine in any office or institute required special permission, and most copiers were kept under lock and key. Alexander Smolensky had neither lock, key, nor special permission, but he had what in socialist lingo was known as the “means of production”—a printing press, ink, and paper. He worked in a state printing shop, and when the day was done, he took over the press and printed Bibles. He was a rebellious young man, with thin hair the color of wheat and a blond mustache, who had a certain intense street smarts, the product of life at the absolute bottom of Soviet society. For Smolensky, the end of socialism began with printing Bibles.

Smolensky had no higher education and few prospects for success in the years of stagnation. He was an outcast. His maternal grandfather had belonged to the Austrian Bund, a Jew who was a member of the Communist Party and fled from the Nazis to the Soviet Union before World War II. His mother grew up in Moscow, but the war brought suffering and misfortune to the family because of their Austrian origins. Pavel Smolensky, his father, was sent off to the Pacific Fleet when the war began, and his mother was resettled to a state farm in Siberia with a young daughter. They returned to Moscow after the war, where another daughter was born, followed by Alexander on July 6, 1954. His parents divorced when he was small.

Smolensky’s youth was a painful one of “bread and water,” he recalled. Hardship was common in the years after World War II, but it was aggravated for Smolensky because his mother, as an Austrian Jew, was barred from many jobs and was not admitted to an institute. She could not work, and they were poor. His father played absolutely no role in his life, he said, and he had no memory of him. Smolensky studied Hindi language for eight years, in hopes of finding a better life, but “I discovered that nobody needed it.” He grew up in Moscow with his older sisters and his mother. A turning point came when it was time for Smolensky, then sixteen, to apply for his first internal Soviet passport, the key identification document for all citizens. Brimming with resentment, Smolensky came to the place on the form for nationality. He could enter either the nationality of his mother, who was born in Austria, or his father, who was Russian. Smolensky wrote “Austrian,” and the entry only deepened his woes. As a Jew, Smolensky’s career path was already limited; because he added Austrian, he was further stigmatized by the state as an outsider, excluded by the system from almost any upward path in life. “After that, I received everything that was due to me,” Smolensky told me with a bittersweet half smile. “The state loves jokes like that.”²

It was no joke. When Smolensky was drafted into the army, his documents included a long list of military districts in which he was prohibited from serving, including the most sought-after cities, Moscow and Leningrad. Smolensky was sent to faraway Tbilisi, the balmy capital of Soviet Georgia, an oriental city distant from Moscow in temperament and style. There Smolensky caught the attention of Eduard Krasnyansky, a twenty-six-year-old journalist who was serving out a deferred stint in the military. Krasnyansky recalled that when he first met Smolensky, the young man had eyes that sometimes were cheery and at other times burned like a laser. Smolensky was a frondyor, or rebel against the system. In the harsh world of Soviet army life, he could tolerate no slight, no insult, and was very much a loner. “A cat that walked by himself,” Krasnyansky recalled, paraphrasing a Kipling poem. “Any kind of injustice, and we had many of them in our army, provoked him. He would never allow himself to be humiliated. He wouldn’t allow the people around him to be humiliated. In the army, the older soldiers could get what they wanted. Some did it by humiliating the younger and weaker. Alexander Pavlovich wouldn’t allow it.” It was a common practice for the older soldiers to call the younger men by the more familiar address Ty, or you, as if they were children. But Smolensky wouldn’t allow this small slight and insisted they address him with the more formal Vy.³

Krasnyansky knew the ways of Georgia, where he had grown up. He took Smolensky under his wing. They were quite different, Smolensky the angry kid who was so skinny his trousers were always sliding around his waist, and Krasnyansky the more knowledgeable and worldly older friend. When they needed cash, they came up with an idea. At the army newspaper, they had ink, paper, and a press. They started printing cheap business cards, teaching themselves how to set type. They sold one hundred cards for three rubles, undercutting the going rate of ten rubles. They sold most of them to Krasnyansky’s friends and family contacts in Tbilisi. “We were cheaper, better, faster!” Krasnyansky recalled years later with a wide grin. They were soldier-businessmen, hustlers on the side. “We did all the typography,” Krasnyansky told me. “A soldier had to live somehow.”

Down to his last days in the army, Smolensky was a rebel. When the other soldiers were sent home at the end of their term, Smolensky was not given his release papers, a slight from a commanding officer for all the trouble Smolensky had caused him. One day, Krasnyansky and Smolensky went to see the officer, grabbed the papers off his desk, ran out of the office, climbed over a fence, and ran away, the release documents in hand. They got to the airport, but Smolensky had no ticket. Krasnyansky knew someone at the airport and fixed a ticket for his friend to fly back to Moscow.

On his return to the capital after two years in the army, Smolensky’s prospects hadn’t improved. The only thing he knew how to do was set type. Krasnyansky tried to get him admitted to the Polygraphic Institute, but Smolensky had two sisters and his mother to support, and instead of school, he went to work in a print shop. “I was an enemy of the people,” Smolensky recalled, “or rather, son of enemies of the people. I couldn’t find a decent job.”

His bitterness deepening further, Smolensky proved a good hustler in the shadow economy. For three years after the army, he worked in the printing shop and then became a shop steward at the publishing house of a Soviet industrial ministry. His salary was 110 rubles a month.⁴ He also moonlighted at a bakery. In theory, holding a second job was forbidden, but Smolensky got a laborer he knew to fake a permission slip. Smolensky earned another sixty rubles a month and gave ten to the laborer for the certificate.

To survive, Smolensky made good use of his press at night, printing Bibles in defiance of the system. It was his way of striking back. Smolensky said he was also trying to help the Church by printing the Bible “free of charge.” The Russian Orthodox Church, he insisted, “was an institution that could help destroy everything that existed, the system.” However, the church hierarchy was loyal to the state, so it is not clear why Smolensky thought he was striking back.

A more plausible explanation was profit. Smolensky found a crack in the system: there was a demand for Bibles and he had a means to print them. Alex Goldfarb, a biologist who was a key link between foreign journalists and dissidents at the time, had established his own channels for smuggling in books through diplomats and journalists. “The Bible was not only a thing of value in itself, but a major currency,” he told me. “It was a way to support people. If you got a shipment, you gave them to families of people in prison, to support them.” Smolensky may have easily reached the conclusion that fighting the system and making prohibited profits on the side were one and the same thing, Goldfarb explained. “Business activity was an act of political dissent,” he said. “In those days, the system of values was different. People who stole printer’s ink and printed Bibles were heroes; they were the good guys. The bad guys were the ones who informed for the KGB.”⁵

Someone informed on Smolensky, and the KGB arrested him in 1981. It was the peak of the years of stagnation, and Smolensky was only twenty-seven years old. He was charged with “theft of state property,” accused of stealing seven kilos of printer’s ink and carrying out “individual commercial activity,” which was prohibited. But Smolensky’s case was treated as a minor one by the KGB. He recalled that they also tried to prove he stole the paper but could not. “Since there were no anti-Soviet leaflets, they said, ‘Okay, we shall take pity on you.’” The case was turned over to the local police. Smolensky was sentenced in the Sokolnichesky Court in Moscow to two years on a prison construction brigade in the town of Kalinin, outside of Moscow. He was prohibited, by the court order, from holding any position for three years in which he would have a “material responsibility.” In other words, the anticapitalists did not want Smolensky handling money. He had dared to engage in “individual commercial activity,” and in 1981 that was still considered criminal.⁶

Smolensky’s rebellious instincts were reinforced by the arrest. “All those procedures when the state thought they could tell me what was right and wrong,” he told me later, his eyes still burning at the memory. “When it created conditions so I couldn’t get a job anywhere, I couldn’t earn money in an honest way, I couldn’t enter a decent institute. They actually blocked all the ways for me! I couldn’t go abroad. I just wanted to go as a tourist, and they said ‘no, you can’t.’” Smolensky said he was barred even from going to another country in the socialist bloc. “And I said, ‘Do I have leprosy?’ And they said, ‘You are a dangerous element.’”

Smolensky found few open doors, but he was saved by the shortage economy. The Soviet central planners could never keep up with the demand for building construction in Moscow, and there was more than enough work. “In construction, you could always earn money,” recalled Krasnyansky. Smolensky became a boss in a department of Remstroitrest, a state-owned apartment building and repair enterprise. He had a dump truck and a standard two-room, twenty-eight-square-meter apartment.

Moscow in those years was bursting with people, and the system had failed to provide them with enough housing. The wait for a new apartment lasted a decade or more. The state construction machine could not keep up with demand. Living space was in severe shortage, like everything else. Although the state had established the minimum housing space as nine square meters per person, nearly half the population of 9.5 million had even less than that.⁷ The only safety valve was the wooded countryside—the villages of crudely built dachas that filled the forests outside the metropolis, where Muscovites escaped on warm summer evenings and where Smolensky would taste his first profits.

At the time, construction projects suffered from shoddy work and took years to complete. Massive, ugly apartment blocks were erected around the city out of prefabricated concrete slabs. There were no private construction companies. Factory construction also limped along, especially in those industries outside the favored military-industrial complex. In the last years of the Soviet Union, as factory managers gained more and more autonomy, many of them sought to plan their own projects. Often the only way to build something within a reasonable period of time was to hire small construction brigades that could work quickly, usually in the shadows.

Smolensky shared his generation’s disgust with the doddering Soviet leadership. He was excited when a popular French rock group came to Moscow for a concert. Smolensky marveled at their shiny new equipment as it rolled out of the trucks and onto the stage. But Chernenko, the general secretary, then signed an article in a party newspaper saying that instead of subversive rock bands, the concerts should feature traditional Russian balalaika, accordion, and songs and dances, that “Western culture cannot come to our Soviet future.” Smolensky groaned. “Oh God, no!” he thought. “It was such a bore, all over again.”

His fears were unfounded. Chernenko’s term was brief, and Gorbachev came to power. Smolensky, a small-time construction boss and rebellious tolkatch, or hustler, was uneducated yet shrewd. When the system began to change, he sensed it right away. He immediately saw something different in Gorbachev. Visiting Leningrad a month after taking office, Gorbachev spoke without written notes, which was unheard of for a Soviet leader. Gorbachev appeared with his wife, which was also extraordinary. He spoke freely. Smolensky was mesmerized ; he recalled Gorbachev as the first Soviet leader he actually found appealing.

Yet, as Smolensky discovered, change was agonizingly slow. The Soviet Union was one of the hardest-drinking countries in the world. Vodka infused life and alcoholism gripped the population, taking a devastating toll on health and life expectancy. Moreover, the system encouraged the disease by providing enormous volumes of alcohol to the population as a way to make money for the state. In the shortage economy, there was always an ocean of vodka. One of Gorbachev’s first moves was a campaign against excessive drinking. Smolensky said he was ordered by local party officials to take the reins of the antialcohol drive in his construction group, perhaps because he was known as a clever hustler who got results. But Smolensky immediately realized that it was a futile campaign. Every week, the party demanded that Smolensky bring them a report of how many drunks he had punished. How many? Well, he recalled later, for starters they could take all of the hundred construction workers in his outfit. Take them all—they worked in the open air, and Smolensky knew they started drinking in the morning and continued until they left in the evening. He could easily “punish” everyone working for him. Smolensky understood the scourge of alcoholism, and he knew how his workers burned themselves out on vodka. They even drank cheap cologne. The antialcohol campaign was ill-fated, he thought, just another absurd facade of the system and its endless propaganda campaigns, which no one believed. It was ridiculous: the state television broadcasts showed weddings of people with happy faces drinking juice. In real life, he knew, everyone kept drinking vodka. Despite his joy over Gorbachev’s ascension, the antialcohol campaign led Smolensky to wonder: would their life ever change?

The summer of 1986 brought a bizarre backward step, the fight against “unearned income.” The idea seemed to be to crack down on corruption, but the Politburo was unable to define “unearned income.” In fact, the entire shadow economy pulsed with it, that vast network of blat and svyazi that had kept the country alive. Did you get “unearned income” by using your car for a taxi? Selling your homegrown cucumbers and tomatoes? The campaign was launched with vigor but spun out of control. In the Volgograd region, private tomato-growing hothouses were destroyed at the behest of the police and the militia. On the roads, police confiscated and destroyed the tomatoes. The newspaper Literaturnaya Gazeta published a long story about the affair headlined, “The Criminal Tomato.”⁹

Later Gorbachev took two fundamental and far-reaching steps that began to unwind the socialist experiment. To help alleviate the shortage economy, and partly as a reaction to the misguided campaign against unearned income, a law was drawn up in 1986 allowing Soviet citizens to carry out “individual labor activity.” The idea was to fill the gaps in the creaking, deficit-ridden economy by allowing people to become self-employed entrepreneurs. A large number of private activities soon became possible, including handicrafts and consumer services. A teacher could tutor students after school. Many teachers already were doing this, but the new law made their moonlighting legitimate; they no longer had anything to fear. Moreover, the law said nothing about prices—individuals could charge what they wanted. The law was a first tiptoe away from state controls. Still, there were strict limits. The new entrepreneurs could hire only family members; they could operate only where the socialist sector had failed, primarily in consumer shortages. The expense and difficulties of starting up were immense, and some activities were still forbidden, including all kinds of printing and printing presses.

Gorbachev’s next step was even more profound. In a speech in 1986, he had drawn attention to the cooperatives, a type of quasi-private business that had its roots in the New Economic Policy of the 1920s. In English, the word “cooperative” has a socialist connotation, but in fact the cooperatives, as they were reinvented by Gorbachev, became the first private businesses in the Soviet Union. They marked a revolutionary departure from the decades of anticapitalism. Gorbachev’s initial words were cautious, but their impact was far-reaching. The state began, gingerly, to allow these new autonomous businesses to take shape in 1987 in very narrow sections of the economy : recycling, baking, shoe repair, laundry services, and consumer goods. Although limited in scale, the cooperative movement seized public attention. The idea of private enterprises opening up amid a sea of socialist stagnation was a remarkable sight. One striking example was the appearance of pay toilets in central Moscow, operated by a cooperative. They were clean, played music, and offered rose-tinted toilet paper and new plumbing fixtures. Most people had never seen such a facility, certainly not in their own homes. Other enterprises soon followed, including youth discos and restaurants. When the formal Law on Cooperatives was adopted in 1988, many cooperatives were already well on their way to becoming private businesses. The threshold of a new age had been crossed.

The cooperatives sprouted up surrounded by many unknowns. Basic rules simply did not exist. Previously, Soviet planners had mapped out economic activity in the corridors of Gosplan. An enterprise simply was told to meet the goals dictated to it from above. But the cooperatives were allowed to make their own decisions and keep their gains. A most remarkable aspect of the Law on Cooperatives was a brand-new definition of personal freedom. The law said any activity not specifically prohibited would be permitted—a complete reversal of the decades of heavy-handed dictates of the state.¹⁰

Often the cooperatives simply brought into the open what was already going on in the shadow economy. Viktor Loshak, a soft-spoken, thoughtful journalist, was the economics editor of Moscow News, a newspaper that became a champion of perestroika, and he began to devote all his time to chronicling the growth of the new cooperatives. He wrote an influential series of articles from Armenia, where underground workshops, which had always existed in the Caucasus, now came into the open. He visited one cooperative making handkerchiefs.

“What made them happy most of all was that they could send their products by mail,” he recalled. “At first, I didn’t understand. But then I realized that when they were inside the shadow economy, the most difficult thing was the path from their production to distribution—because it was criminal. On any stage of that route, the police could catch them. And when they legalized themselves, they could send their products openly by mail. A lot of people were happy to tell others about what they had been doing secretly all their lives.”¹¹

The original idea was that cooperatives, given the new freedoms, would produce scarce goods such as the handkerchiefs or provide badly needed services like car repairs. But this rather quaint vision of small workshops humming with craftsmen was soon overtaken by more ambitious schemes. Some cooperatives found ways to get cheap or subsidized supplies, from the state or shadow markets, and sold them for fast profits. Somewhat later they pioneered importing scarce goods like computers and exporting natural resources for immense windfall profits. Cooperatives charged higher prices than the old state stores, spawning resentment in a population that was accustomed to a patriarchal state which supposedly gave them everything nearly for free and had regarded all private enterprise as immoral “speculation.”

In 1987 Smolensky was summoned to the city party committee, the gorkom, where a functionary who supervised his construction unit, Remstroitrest, gave him an order: “Urgently establish a cooperative!” Ever the rebellious one, Smolensky, then thirty-three, replied, “Why me? Go yourself and do it!” But the gorkom threatened to fire him if he didn’t follow instructions. This was a campaign by the party, and the word had come from the top: Smolensky must obey!

The problem was that Smolensky didn’t have a clue what a cooperative was. “I was a state employee,” he recalled. “All of us were state employees, and I had all kinds of plans, and directions and instructions, and it was like dropping me on the moon.” Krasnyansky recalled later that Smolensky had been chosen precisely for his street smarts and hustle, which the party bosses had noticed. “Apparently, the party bosses were not idiots. They saw who was capable and who was not. They could have come to me a hundred times and I would never be able to do it. And they went instead to Smolensky. They saw that he had that fire, that he knew how to organize people, take risks.”

Smolensky went to register as a cooperative at a small, barren office in central Moscow that had been set up to give permits to the new businessmen. There he was met by Yelena Baturina, a recent university graduate who was in charge of what was called “public catering,” including bakeries, shoe repair shops, and hairdressers, among other things. Baturina was the assistant to a short, bullheaded official who had been put in charge of the cooperatives, Yuri Luzhkov, a veteran chemical industry manager who had become a deputy chairman of the Moscow city council. It was a chaotic time, and a motley crowd of hustlers spilled out into the hallways, struggling to fill out the proper forms to start their own business.¹²

Smolensky got his paperwork in order, but he felt completely out of place and was a little fearful of Luzhkov. He had trouble thinking up a name for his new cooperative. In Soviet times, state construction enterprises often just had a number, such “SU-6.” Smolensky scribbled on the application the name of his proposed cooperative, Moskva. He came into the room where Luzhkov, in shirt sleeves, was sitting at a simple, empty table and submitted his documents.

Moskva-3 was a private enterprise, set up in Pervomaisky District, one of Moscow’s thirty-three administrative areas, where Smolensky had worked at Remstroitrest. But he had precious little idea what he was supposed to do as a private entrepreneur. He had three thousand rubles saved up and wondered whether he was supposed to use his own money. He wondered where he would get supplies and what he would build. The party had ordered Smolensky to start a cooperative, but actually doing it came down to his own individual initiative. No one else had a clue.

Loshak, the Moscow News journalist, recalled that the very first cooperatives gathered scrap materials for resale. They tried to make crude kitchen furniture out of scrap lumber or flower boxes from used tires. Loshak said his first memory of Smolensky was collecting scrap materials. “He hired students, and they dismantled houses that were to be demolished and sorted out the door frames from the bricks. And they sold those things to people who were building country cottages.”

Smolensky soon decided to make his own garages and small cottages, the dachas in the countryside. They were in high demand as Muscovites desperately sought refuge from the overcrowded city. Again, Smolensky saw a gap and filled it. The state construction enterprises would never build dachas; they couldn’t even keep up with the demand for simple twenty-eight-square-meter apartments in the city.

But the immediate problem for Smolensky was the same one he had faced as a construction boss working for the state. In a universe of chronic shortages, raw materials were difficult to come by. There were no wholesalers who could sell him planks and nails. The state theoretically controlled all materials, but the practice was different. The competition for supplies was just another aspect of the vast, disorganized bazaar of Soviet socialism. The first private entrepreneurs had to rely on their wits—on blat and svyazi, on theft, bribes, and bargaining—to get supplies.

Alexander Panin, secretary of the city commission overseeing the cooperatives, recalled that the cooperatives started out desperate for the most basic things. “They needed a location to work from,” he said. “They needed some stuff from which to sew things—cloth. Or if they wanted to make furniture, they needed to buy the wood or whatever— planks. But the problem was the state distribution system existed. You couldn’t buy a table, or wood, or planks, because everything was distributed.” The commission headed by Luzhkov tried to help the new entrepreneurs by demanding that state enterprises supply bricks or cement to a cooperative.¹³

It was not so simple. Smolensky recalled the bureaucrats in Moscow provided little help. “In those times, it was impossible to buy planks and nails in Moscow. It was just impossible. Not for money, not for anything.” Money could not, by itself, purchase something in shortage. But Smolensky knew how to beg, bargain, and hustle in the socialist bazaar. He was soon sawing planks at an outdoor pavilion and building small structures—simple one- and two-room cottages, sheds, and garages in the countryside.

As an example of the new generation of cooperatives, Smolensky was selected one day to be a showcase for an American television news crew, in advance of President Reagan’s summit meeting in Moscow. The film crew arrived at an open pavilion and watched as Smolensky’s men hauled logs to a saw and then took the cut planks away, all of it by hand. The journalists quizzed Smolensky about why it was so primitive. They had no idea that what they were watching was a triumph for Smolensky—he was proud that it existed at all.

When I suggested to Smolensky years later that his early success was due to the imminent death of the Soviet state, he brought me up short. “We were not thinking about the death of the state,” he said. Rather, they were worrying about their own fate. If Gorbachev were thrown out, would they be jailed and shot as speculators? Far from the death of the state, “we were thinking about our death!”

In the months that followed, Smolensky’s cooperative became a booming success. The dachas were popular, and the Communist Party bosses again took notice. They pressed Smolensky to start a special waiting list for party chiefs to get dachas. Smolensky quickly complied ; they may well have had some leverage over his lumber supply. “They started sort of putting their names on the list,” Smolensky said of his new, elite customers, who were also curious about Smolensky’s new business. Before long, the party would decide to experiment with private businesses too.

The cooperatives began on thin ice. The brief relaxation of the New Economic Policy in the early 1920s had lasted only two years; could the new Soviet cooperatives last longer? “These first people were just working within very rigid limits,” Loshak recalled. “A step to the left, a step to the right, and they shoot.” Yet a kind of deep-seated force was being released from the depths of the system, a trembling of the Earth so profound that it would provide an immense boost toward launching Russia on its way to a capitalist future. That force was money. In the shortage economy, when there was almost nothing to buy, when the decisions about allocating scarce goods were made arbitrarily without the forces of supply and demand, money had little significance. But on a sandy sawmill site, Smolensky, the angry young man, began to make money. He accumulated piles and piles of rubles—so much that he had no place to keep it all. He distrusted the state banks, so he kept his money in cash.

In the early Gorbachev years, the Soviet financial system was still run by the state. At the center of the banking system was one giant institution, Gosbank, which controlled the flow of money and credit. Smolensky was accumulating cash, but he knew that putting it in the bank would lead to unpleasant questions. Where had he earned so many hundreds of thousands of rubles? Why wasn’t he paying more in taxes? The KGB was just waiting for Smolensky to walk into Gosbank. A second tier of five new Soviet state banks was not much better, but Smolensky was assigned, probably by the party, to use one of them, Promstroibank. He was required to use the bank for some transactions. He recalled that every time he wanted to make a small payment through the bank, he had to explain himself over and over to the bureaucrats. “My chief accountant was practically living there,” he recalled. “She was an elderly woman, and she would go there with a bag full of chocolate, sausage, perfume. The system was the following: you had to visit several counters and put seals everywhere. You had to give something to each person. That was the system; otherwise nothing worked.”

Moreover, the rigid Soviet financial system made it practically impossible for Smolensky to use his money as he wanted to, such as paying a supplier, without seeking permission from the state. “The state bank was so strong that it could destroy all the fruits of my labor with just one signature,” Smolensky recalled. “I couldn’t pay wages on time; I couldn’t settle for goods; I had to bring all kinds of documents ; I had to pay bribes; or maybe if not bribes, ‘gifts.’ I was fed up and felt it could not last.”

One day in 1988, Smolensky decided to start his own bank, as some other cooperatives had recently done. He looked at the Law on Cooperatives, officially approved in May, and found the single line that allowed cooperatives to open their own banks. He went out and filed the papers, he recalled, “in order to stop the diktat of the state bank.” Smolensky was again at the front lines of change. By the end of the year, forty-one new commercial banks had registered with Gosbank, and by the end of the next year, the number had risen to 225.¹⁴ Bank Stolichny, which would become the core of Smolensky’s business for the next decade, was registered on February 14, 1989, eight months before the Berlin Wall fell.

In 1989 the progressive newspaper, Moscow News, held the first ever roundtable discussion with the nascent commercial bankers, who were unknown to most of the public and deeply distrusted. A leading participant was Vladimir Vinogradov, one of the first commercial bankers, who was smooth and well tailored. It was rumored at the time that Vinogradov had made so much money so fast that he stashed it in his refrigerator. By contrast to the experienced Vinogradov, Smolensky was a rough-hewn construction boss who did not appear very wealthy. His manner was blunt. He demanded that the authorities leave the bankers alone. He was hardly the picture of a modern banker.

“I don’t think he had a very clear-cut strategy at the time,” Bekker recalled. “It was difficult to even know what a commercial bank should be.” Smolensky’s old army friend, Krasnyansky, said the key issue was avoiding the state. “The important thing was to find freedom for his money, so he could send it where he wanted without explanation,” Krasnyansky said. “Only later did clients appear, and he saw that the bank could bring in a lot more money than sawing wood at the cooperative.”

In the blossoming world of banking in the final years of Soviet socialism, much of the sustenance came from the state itself in the form of cheap credit. Many of the new banks were carved directly out of government ministries, industries, and special interests. The Ministry for Automobile Production created Avtobank; the Ministry of Oil and Chemical Engineering created its own Neftekhimbank; the state airline had Aeroflotbank. These banks and dozens of others were built to serve the state-owned industries behind them, and they could always count on a ready supply of subsidies. Big industries, regional governments, and the Communist Party and its many affiliates were the driving force in the explosion of the new banking sector, and their political clout and money dwarfed the more independent young cooperatives.

Smolensky, whose major asset a few years earlier had been his dump truck, was still the outcast. His bank had no government ministry at its back. Compared with the others, which had powerful patrons, the cooperative banks were small. Smolenksky’s bank was not on the list of the twenty largest commercial banks in the Soviet Union in 1990.¹⁶ Smolensky’s overriding principle was that he wanted nothing to do with the state, except the freedom to do what he wanted. He insisted that none of his employees come from the state banks. He found young people to work for him who had no prior memory of Gosplan or Gosbank.

In the years after the American Civil War, huge quantities of British capital poured into the United States, chiefly as loans to the railroads. England, which had given birth to the Industrial Revolution and inspired the wisdom of Adam Smith, had become the world’s financial center, flush with surplus capital that had to find a home. According to Ron Chernow, biographer of the great merchant banker J.P. Morgan, British investors were put off by the helter-skelter growth of the American railroads, and they feared the swindlers and fast-talkers who ran them. Morgan became a transatlantic intermediary between the source of capital in London and those who needed it in the United States. The London investors were often clueless and depended on Morgan’s knowledge about the railroads. In the United States, the railroads were often in such a chaotic state that their only hope of attracting capital was through Morgan. As a journalist noted at the time, Morgan’s great power came not from the millions of dollars he owned, but from the billions he commanded. He was one of the great middlemen of American history. The lore of American tycoons is often wrapped up in their role as masters over the railroads and steel trusts. But the key factor was the American hunger for capital; the capital itself had first come from England, as a result of successful commerce spawned by the Industrial Revolution.¹⁷

Consider the landscape that spread itself out before Alexander Smolensky in 1988. There were shortages of sausage in the state stores and the grim reality of a system in decay. No distant bankers hankered to invest their capital. Smolensky had seen the wounded dinosaurs of Soviet industry, primitive and ailing, and he also knew that centuries of authoritarianism had sapped the Russian population, which was passive and lethargic and would be difficult to revive.

In 1990 Gorbachev had toyed with a plan to turn the country into a market economy in five hundred days but discarded it. His economic policy zigzagged inconclusively back and forth. The chances for a huge infusion of private capital from abroad were not good. When one of the authors of the five-hundred-day plan, Grigory Yavlinsky, went to the United States seeking aid, he was snubbed by President George H. W. Bush. The West was not yet ready to risk money on the Soviet Union. The biggest source of capital—indeed, the only real source of wealth—was the state itself. The state possessed a sprawling network of oil fields, mines, factories, and pipelines. The state, through Gosbank, also controlled the money supply and credits, as well as all foreign trade. If there was money to be made, it would have to come from the state, either directly, as property and subsidies, or indirectly, by manipulating or exploiting the state’s control over prices and trade.

In the late Soviet period, trading companies run by young hustlers and well-connected bureaucrats made quick fortunes this way. They bought oil cheap inside the country, paid bribes to get it across the border, sold it at world prices for hard currency, bought up personal computers from abroad, paid bribes to get the computers back inside the country, and sold them for fantastic profits, to be reinvested in the next lot of oil. The state created the conditions for this hustle by keeping oil prices low, by making the computers scarce, and by collecting the bribes.

For Smolensky, whose gut instinct was to distrust the state, the search for early capital was fraught with difficulty and danger. He had no hope of becoming an intermediary between borrowers and lenders in the Anglo-American tradition. The Soviet Union and later Russia were light-years away from the conditions that spawned the early American tycoons. Instead of becoming a Morgan or a Carnegie, Smolensky took what there was before him—the wild, unfettered, and warped Russian protocapitalism of the day.

Bekker, who had kept in touch with Smolensky, told me, “In Russia, there were only two ways to get seed capital for a bank. One was to service suspicious accounts and have the principle that ‘I don’t care what kind of money is in my bank. It’s not my responsibility to check the passport of every depositor.’ Another way was to work closely with the authorities and government officials and get budget accounts and profitable contracts.” But Smolensky, he recalled, “didn’t have any political contacts.”

In the year before the Soviet Union collapsed, more than half of all the deposits in commercial banks were from the state.¹⁸ The other half came from the cooperatives and other disparate organizations and nascent businesses. This is how Smolensky began to build his bank. He danced with those who would dance with him—Bank Stolichny ran with the fast-money men, including the entrepreneurs who began the first cooperatives and the hustlers. They were engaged almost entirely in high-stakes, quick-turnover deals that yielded obscene profits in cash. One method was generally known as arbitrage, taking advantage of the gaping price differentials that existed at the time between the heavily subsidized, fixed prices of the state-run economy and the free, higher prices of the market, both inside the country and abroad. Another lucrative business was currency speculation, taking advantage of hyperinflation. Between the collapse of the Soviet Union in 1991 and the end of 1994, the ruble exchange rate against the dollar dropped 95 percent. Smolensky and other bankers made enormous profits by essentially gambling on daily fluctuations in the ruble-dollar exchange rate.

When Smolensky was at the peak of his power in 1997, I asked him about these early years, and he acknowledged that much of his bank’s money was wrapped up in currency speculation. Unlike a traditional Western banker, he simply did not make many loans. He remembered giving one loan to a watermelon farmer who grew his melons in Uzbekistan and brought them to Russia for sale. He gave the melon grower a million rubles. Then ethnic clashes broke out near the farmer’s land in Uzbekistan. The whole district was closed and he could not get the melons out to market. The authorities sent troops to the region. “Our guy was sitting on those watermelons, and I was having a heart attack!” Smolensky recalled. The loan was eventually repaid, Smolensky said, but lending seemed to him to be too risky.

The young Russian bankers were intent on making a killing and at the same time were burying Soviet socialist ideology. The socialists had scorned financial manipulation as sheer greed. In the Soviet socialist economy, production and industry were king; money was just a tool for the larger goal of fulfilling the plan, for meeting the quotas. However, what Smolensky was doing had nothing to do with the plan. It was finance for its own sake, and that was a strange and utterly alien practice to the older Soviet generation, including many factory managers, bureaucrats, and KGB men. They did not inherit the new world of capitalism because they could not make this basic leap. The fleet-footed Smolensky and the boys on his currency trading floor danced right past the old guard.

In the last two years of the Soviet Union, currency transactions were still tightly controlled, theoretically. Smolensky’s currency speculators had to be fast and invisible. By early 1990, Gosbank had only given two licenses to commercial banks for limited hard currency transactions, and the banks reported only a fraction of them to the authorities.¹⁹

Joel Hellman, a Columbia University doctoral student, was researching his thesis on the new Russian bankers in 1990 when he visited Smolensky. Hellman found that many of the bankers, as well as Gosbank officials, acknowledged that illegal hard currency transactions had blossomed well beyond the control of the authorities. Gosbank, which had once controlled all money and credit, was increasingly lost in the new environment. According to Hellman, Gosbank frequently threatened to fine the rambunctious banks—and did levy a $14 million fine against Smolensky—or freeze their accounts. But the attitude of commercial bankers was cavalier. Smolensky told Hellman, “Our bank has outpaced events. We do something and official permission is granted after the fact. It would be impossible for us to wait for permission and then to act.”²⁰

Hellman recalled that when he first met Smolensky, he was struck by the newly remodeled, Western-style bank offices, with luxurious sofas. Smolensky’s vice presidents all wore Armani suits. Smolensky later told me that he deliberately arranged it that way, but the young vice presidents never bought the suits on their own. When he went to Europe, Smolensky routinely bought two suits, two dress shirts, and two ties and carried them back to Moscow in his suitcase, distributing them to his young vice presidents so they would look Western and prosperous.

Smolensky’s capital was small, and his operations secret. He did not publish periodic financial reports, and if he had, they could hardly have been honest. One of Smolensky’s early assets was a “manuscript” that he claimed he had written about banking and was worth 200 million rubles. Smolensky said he simply wrote down everything he had learned and set the huge value of the document himself. “It was just the description of the system that I had created,” he said. “How it works.”

Smolensky also participated in a web of cross-ownership with some of the other early banks. His bank owned shares in others, and they owned shares in his, and everyone grossly pumped up the value, as Smolensky had done with the manuscript. It was a paper trick, one of many used by the young commercial bankers who thrived in a world of fictions and facades.

When Hellman visited Smolensky in 1990, he noticed that the banker had spread out on his desk brochures promoting the big American mutual funds, such as Merrill Lynch and Fidelity.²¹ Smolensky was looking for ways to ship cash overseas. It was a small glimpse of what, at that time, was already a torrent of capital fleeing Russia. Slowly at first, but later with more skill, the new Russian commercial banks built connections to the international financial system and discovered how to discreetly move cash into offshore zones. The goal was to avoid the risks of keeping money inside a turbulent and unstable country, and to dodge its confiscatory tax rates or keep the money away from partners, workers, or criminals. Smolensky, who was an outsider anyway, thought it was a rather logical response to the threats that always lurked inside the country for anyone who had money. “There were restrictions—now, I don’t remember clearly,” Smolensky said later when I asked if it had been difficult to transfer his money to Merrill Lynch. “Or actually, no restrictions. Anarchy.” In its first published annual report, for 1992, Smolensky boasted that Stolichny was one of the first twenty Russian banks to be linked into the SWIFT international bank transfer system, and that Stolichny had thirty-four correspondent bank relationships abroad.

Smolensky’s bank was the most closed and secretive of the new commercial banks, and he constantly attracted the attention of the suspicious KGB and Gosbank, which was later turned into the Central Bank of Russia. The authorities, who looked askance at the young banker, were forever curious about what was going on inside the walls of Stolichny Bank, but Smolensky stubbornly refused to tell them or let them inspect his bank. For years, the security services tried to show that criminals were among Smolensky’s customers, but Smolensky was never arrested. Certainly, Smolensky’s bank was a haven for the easy money of the early 1990s. A list of the major loans made by the bank in 1996 showed that half of them were either trading companies or oil and gas companies, both adventuresome businesses that survived by speed, secrecy, and a healthy disrespect for national boundaries and authority.²² Among his colleagues, it was believed that Smolensky’s Stolichny Bank had dealings with unsavory gangs and dirty money in its early years. A leading banker told me in 1998, “The main feature is being able to change. Smolensky is not what he was ten years ago. He is building a clear, open bank. Ten years ago, it was not. For sure, he had criminal elements—we all did. But I am sure no gangster can reach Smolensky, or even talk to him today.”²³

Smolensky spent years fighting one case. In 1992, the first year after the Soviet collapse, the banking system was still immature and crude. From the southern Russian republics of Dagestan and Chechnya the Central Bank received, by fax, a series of wire transfer orders known as “avisos.” The avisos ordered the Central Bank to immediately transfer millions of dollars to various Moscow commercial bank accounts. The Central Bank, which at the time was still using the creaking teletype, complied—and the money flowed out, including about $30 million to Stolichny. Later, the Central Bank discovered that the avisos were faked, and it tried to recoup by taking the money back from reserve accounts maintained by Smolensky’s bank in the Central Bank. A criminal investigation was opened against Smolensky. The whole affair was laced with questions that were never answered—such as why the Central Bank would give out so much money on the basis of a fax in the first place.

Smolensky told me he saw the case as a struggle between the new capitalists and the old guard, although it may have been a more mundane struggle over corruption and theft. Smolensky insisted he was wrongly targeted by the criminal investigation, which was closed in 1999 without charges. “It cost me a lot of blood,” he recalled. After the case was closed, however, a Russian newspaper, Sovershenno Sekretno, which often had sources in the security services, published what it described as details of the case, alleging that Smolensky and another man had taken $32 million through the false aviso and stashed $25 million in a company in Austria owned by Smolensky’s wife. Later, the newspaper said, Smolensky’s bank acknowledged a “mistaken” borrowing of $4 million and repaid that sum.²⁴

Throughout his career, Smolensky waged a bitter war with the state. The Central Bank chairman, Viktor Gerashchenko, was his nemesis. Smolensky complained Gerashchenko “deluged commercial banks” with “1928-model instructions,” such as, “limit the issuing of cash.” Or, Smolensky fumed, another Central Bank official sent a message, “I authorize the payment of wages.” Smolensky retorted, “Don’t my clients have the right to dispose of their own money?” Bekker told me that “the state hated Smolensky and his bank more than any other. He didn’t bow to the KGB. He didn’t bow to the bureaucrats. He didn’t bow to the militia. Gerashchenko didn’t like this independent and freewheeling banker.”

Smolensky enjoyed unusual autonomy in the late Soviet period and the first few years of the new Russia. He fought back against the government, kicked out the Central Bank auditors, and refused to answer questions about his bank, and yet he survived. What was the source of his impunity? The answer is unclear. As we shall see later, the most successful tycoons often enjoyed mysterious, high-level protection, the details of which never became known. If he had it, Smolensky still did not feel secure. Krasnyansky, Smolensky’s old army pal, who eventually came to work at Stolichny Bank, recalled that he and Smolensky had their most candid conversations in the car. Smolensky was on his way to becoming one of the leading bankers in the new Russia. But one day, in the car, he turned to Krasnyansky. “Edik,” he said, using an affectionate nickname, “we shouldn’t be seduced by this. At any moment, even in our free Russia, they can still come and squash you like a bug.”