The Oligarchs

In the months before the final collapse, Yeltsin had begun to assemble a parallel regime that would take the radical economic measures Gorbachev had never made. Yeltsin passed over the older, well-known economists of the Gorbachev years and settled on thirty-two-year-old Yegor Gaidar, author of some of the best Soviet analyses of the economy in the party’s journal of ideology, Kommunist.¹ Yeltsin recalled that Gaidar led a team of “arrogant young upstarts” who were “independent thinkers raring to go.” Instinctive and intuitive, Yeltsin ruled by feeling rather than by policy; he liked the simple directness of Gaidar’s proposal for a “big bang,” a sudden jump to the free market modeled on Poland’s experience after the fall of the Berlin Wall. Yeltsin was infected with Gaidar’s enthusiasm for economic shock therapy. “I couldn’t force people to wait once again,” Yeltsin recalled, “to drag out the main events and processes for years. If our minds were made up, we had to get going!”² Yeltsin wanted to make sure he totally destroyed Soviet Communism. Pyotr Aven, who worked alongside Gaidar, remembered that “Yeltsin was interested only in power. He wanted a team that would be very aggressive in throwing out all the old bureaucrats. He also understood that, to us, Yeltsin was a god, and we would follow him.”³

In September-October 1991, Gaidar closeted himself with other young economists at dacha 15 to begin drawing up the details of Yeltsin’s radical economic reform. Everyone who had worked with Gaidar knew he was a gradualist by temperament, a cautious reformer, ever respectful of the existing powers. For years, he had insisted on trying to accomplish modest, realistic steps rather than risk a giant leap that would never stand a chance. Aven had suggested to Gaidar in Soviet times that they study Sweden, a Western social democracy, as a model, but Gaidar knocked down the idea as too radical ; he instead suggested Hungary, which was safely within the Soviet bloc. Gaidar had a very strong intellect; he was the best and brightest of his generation, yet he also had a tendency to ponder the data, to see different sides of an argument.

Among those Gaidar put on his team at the dacha was Anatoly Chubais, fresh from St. Petersburg and less well known than Gaidar at the time. Chubais too had been a gradualist in earlier years, but now he heartily embraced the need for radical change. While Gaidar had a slightly professorial, diffident air, Chubais was determined and self-assured. Of all those at the dacha, Chubais became the reformer who survived the longest, remaining in high-ranking posts throughout the 1990s. He was resolute and unyielding. It was his greatest asset, as well as a source of aggravation to those around him, that Chubais did not budge from a position once he had made up his mind. Gaidar was a trailblazing intellect but not a politician; Chubais was not an original thinker but a skilled, steely executor and political warrior. In the next few years, the two of them—Gaidar, short and stocky, a Pooh bear with a large, welcoming face, and Chubais, tall and lean, with a shock of sandy red hair and a complexion that flushed brightly whenever he became emotional—were transformed from obscure academics into the chief engineers of Yeltsin’s economic revolution. They set out to accomplish nothing less than wreck the old system—smash the entire complex of planning, thinking, and behavior inherited from Lenin, Stalin, and their successors.

They each scored a singular, huge accomplishment toward that goal and left an equally disturbing legacy. Gaidar’s most important contribution was to free prices from state control, crippling an oppressive tool of the centrally planned economy. But Gaidar’s legacy was a tidal wave of hyperinflation that washed over Russia once prices were free, and it was far more destructive and persistent than Gaidar had imagined possible. It eroded the life savings of the population, disenchanting them for years to come.

Chubais’s most important act was to break the state monopoly on property, putting the enormous industrial wealth of the country into private hands. The whole fate of the new Russia as a free market economy lay in whether these new, private owners would eventually prove more effective in running factories than the failed Communists. But Chubais did not pay heed, or care, to whom the riches of Russia were distributed, as long as they were private owners, free of the state. He figured that after several generations, the market would sort out the best from the worst. Surely, the worst would go broke by their own ineptitude and the best would enjoy the fruits of their labors. It was that simple: classical market theory. The reality would prove not so elegant.

Furthermore, both Chubais and Gaidar left a dangerous vacuum—the great breakthroughs toward free prices and private property were made without first building the key institutions of a market. In the chaotic dawn of Russia’s post-Soviet statehood, the economy was a wild, uncontrolled jungle without rules of the game and those who enforced them. In a mature market economy, competitors can pursue their disputes in forums with defined rules. They are like boxers in a ring. The contest is settled by the rules—either through the courts or in capital markets, where winners and losers are sorted out based on performance. But Russia did not have these forums, nor a strong state to create them, and this vacuum undermined the very aspirations and accomplishments of the revolution. How could Chubais possibly realize his dream of creating “effective owners” if there was no mechanism to reward the good and punish the bad? What good were free prices if no one was sure about their rights to property and profits? Gaidar regularly acknowledged that they were haunted by these unknowns. Was it better to unleash the boxers first or build the boxing ring for them to fight in? In the heady onrush of events in 1991 and 1992, Gaidar and Chubais decided: the boxers first; someone else, later, would take care of the rest. Chubais was certain that the players themselves would inevitably build the ring, once they saw it was necessary.

They were driven by urgency. They believed they could not put the revolution on hold for the years it would take to build up the institutions. But there was another, deeper reason—often unspoken but clearly evident—why Yeltsin, Chubais, and Gaidar did not immediately see the need for a stronger state. The Soviet state had been powerful and overweening; in their experience, authoritarianism had been a central, defining source of evil. They were thinking about destroying the old system, not recreating it.

As the autumn of 1991 set in, Gaidar and his brain trust feverishly prepared for Yeltsin’s major economic speech to the Russian parliament at the end of October. A sense of unreality filled the air as the Gaidar team set out on a mission unlike any in their lives; it was at once exhilarating, frightening, and unimaginable. Mikhail Berger, then the economics editor of the newspaper Izvestia, who was respected by the young reformers and witnessed the Gaidar team firsthand, recalled that dacha 15 was brimming with expectation. In their banter and debate, it was as if they were on another weekend retreat like the two seminars of 1986 and 1987 outside of St. Petersburg, except this time the stakes were enormous, and real. “The atmosphere was as if the young people went on a hike somewhere to the mountains or just out of town,” recalled Berger. “It was the atmosphere of a club, and a game. In fact, everybody felt as if it were not for real.”⁴

“Imagine, they sat discussing things and then someone might ask, ‘And who is going to be transportation minister?’ They started laughing. ‘Here we are, fresh from the institute, discussing who is going to be transportation minister!’ They treated it as some kind of game, not serious enough. They argued for a long time about who was going to be prime minister. None of them wanted to. Pure Kafka. Kids, sitting at the dacha, writing a program and trying to form a government. Of course, later it would change. But at that moment, it looked like a fairy tale about some kind of magic cave where they said ‘take as much treasure as you can carry on your back.’ It was a cave of power. They tried to take as much power as they were able to carry.”

But for all the revelry, the Gaidar crew brought to dacha 15 some profound shared assumptions, forged in Soviet times when they were little-known mathematicians, economists, and professors. They were saddled with the baggage of their past experience, and they were not quite prepared for the entirely different challenges of a new economic and political system.

Just the fact that the Gaidar brain trust isolated itself at the dacha reflected the insular method they had adopted in the Soviet years. When Chubais first created his small cadre of freethinking economists in Leningrad, it was done in great secrecy to avoid attracting the attention of the KGB. The same mood prevailed when they retreated to a stairwell to debate Naishul’s radical ideas. The Soviet system had forced them to be conspirators; it crushed those who did not conform. Mikhail Dmitriev, the young economist who had been called on the carpet for the notes he took at the 1987 seminar, told me that Gaidar and Chubais had learned everything about politics under a regime that would immediately destroy any far-reaching new ideas. “By definition they were successful because they were conspirators, they were not open, they were mainly acting in a very narrow circle,” he said. “And all these habits couldn’t be changed quickly because by the end of the 1980s both Gaidar and Chubais were already in their mid-thirties, and people don’t change easily in this respect.”⁵

Another legacy of their past was their shared disdain for politics. In the 1980s, Gorbachev had unleashed freedom but lagged behind on economic change. They were determined to avoid Gorbachev’s quagmire of politics—endless plans that went nowhere, such as the five-hundred-day plan to turn the Soviet Union into a market economy, which was never adopted. Instead, they thought of themselves as technocrats, pure economists who would find the right thing to do and smash through the old barriers to getting it done. They believed, Soviet-style, that they only needed to please one man, the boss at the top, Boris Yeltsin.⁶ They also believed that the problem of the old system was too much political interference; certainly, a more purely economic approach would be more successful.⁷

Although their economic ideas were modern, capitalist, and radical, their political tactics were often arrogant and naive. They bypassed the parliament, which grew alienated, and Gaidar was especially poor at communicating with the public. The more determined and cunning Chubais turned out to be a sharper political operative, but both of them, along with Yeltsin, neglected from the outset to lay a grassroots base for their revolution. Gaidar later acknowledged it was a serious miscalculation that left them at sea and vulnerable. It might have been impossible to build such a popular base anyway, given the excruciating pain they were about to inflict on Russian society, but Gaidar told me they saw themselves as economic professionals, not politicians. “We had Yeltsin, who was an extremely efficient politician at the time, very popular and very active and a strong Russian politician,” he said.⁸ But Yeltsin was not enough, considering the enormity of their revolution.

Yet another fundamental belief among the Gaidar brain trust was that Russia, despite its backwardness and terrible history of autocracy, would be fertile soil for a market economic system. Russia, they believed, was not an exception to the basic rules of human behavior. Gaidar and Chubais were certain that if they created free choice, people would take advantage of it and respond to incentives. They hoped that all the collectivism, passivity, paternalism, and destruction of initiative and entrepreneurship that was a legacy of Russian and Soviet history would melt away as a beachhead of free markets, free trade, private property, and free prices was established. This assumption—that Western market economics could take root in Russia despite its peculiar cultural and historical experience—was one of the most fateful and daring of their time. It was a gamble. A decade later, the validity of this idea was still vigorously debated.

The Gaidar team also realized that no one would be building monuments to them for the transformation they intended to impose on their country. They often described themselves as kamikaze pilots, because they would certainly destroy themselves in trying to tear down so many entrenched interests. Not only would they battle old-school bureaucrats, party bosses, the military and security establishments ; they were setting out to destroy the mindset of millions of Russians who knew no other political or economic life other than what they had experienced during Soviet Communism. The kamikaze idea emboldened them because they had no careers, no promotions to worry about. But it also weakened them because it gave their opponents the idea that it would only be a matter of time until the reformers disappeared from the scene.

Gaidar and his brain trust knew that time was not on their side. The Soviet legacy was formidible: dozens of government ministries lorded over branches of industry; within them, the bureaucrats wanted to preserve their bastions of power. In the factories, the powerful “red directors” stood to lose their prominent status and sprawling empires. They all wanted to stop the radical reformers. The special interests insisted: why not restructure industry more slowly, factory by factory? Why not wait until a reliable legal and financial system was established ? Why not free prices later, after private property rights are guaranteed, and after the huge Soviet monopolies are dismembered?

But Gaidar and Chubais believed that gradualism was akin to death; it would strengthen the vested interests and doom any real chance at reform. Chubais said it was only an illusion that change could be done “gently, slowly, and painlessly, so that everybody should be happy.”⁹ Gaidar and Chubais had no intention to be gentle, slow, or painless. Later they would be criticized over and over again by those who said there was another way—if only they had taken more time, if only they had been more careful, if only they had rebuilt industry case by case, if only they had taken care to build institutions first. Many of these arguments were correct in a theoretical sense but were far removed from the real world that Gaidar and Chubais confronted. The reformers feared they did not have more time—to wait was to fail. I think their fears were not imagined. All around them were signs of utter collapse. At any minute, they could be history too.

In the final months of its existence, the Soviet Union slid into utter economic chaos. After the failed August coup, the country was rife with predictions of famine, catastrophe, and collapse. Grain deliveries to the state dropped by a factor of four. “People simply weren’t hauling it to the elevators,” Gaidar recalled. “Why should they? To get some piece of paper that, out of habit, everyone still calls money?” Both Gaidar and Chubais were haunted by what they saw on the streets of Moscow: the worst shortages ever. “Moscow in December 1991 is one of my most painful memories,” Gaidar said later. “Grim food lines, even without their usual squabbles and scenes. Pristinely empty stores. Women rushing about in search of some food, any food, for sale.... Expectations of disaster were in the air.”¹⁰

The chaos deepened as the Soviet state itself—the vast chain of commands and controls that stretched from Moscow to the most distant province—seemed to tear apart. The military and security organizations were in a “state of shock,” Gaidar recalled, while the republics went their separate ways. Yeltsin was a popular leader, but in the final months of the Soviet Union, he had “no levers of control.”¹¹

Gaidar was strongly influenced by the example of Poland, which had launched shock therapy on January 1, 1990, by freeing prices and trade. Poland’s “big bang” was led by a reform economist, Leszek Balcerowicz, and it bore immediate dividends; consumer shortages gave way to brimming street markets, and the initial burst of inflation was relatively short.¹² Poland’s shock therapy was in part the handiwork of the Harvard economist Jeffrey Sachs, who, along with a group of other Westerners, urged Russia to take the same route. The role of the Westerners—both individuals and governments—in Russia’s transformation later was hotly debated. But the most important actor was Yeltsin himself, who made the first big leap. According to Berger, Gaidar and his brain trust drafted a speech for Yeltsin in which they deliberately did not name a day when prices would be freed. They feared a specific date would lead to hoarding and panic, which they could hardly afford. Yeltsin sent back a draft in which he had scrawled that prices would be freed by year’s end. “Everybody was shocked, that was something that could not be announced beforehand,” Berger recalled. “They kind of persuaded Yeltsin to cross it out.” But when he gave the address on October 28, 1991, Yeltsin reinstated the remark. He declared plans for a “one-off unfreezing of prices in the current year.” That meant before January 1, 1992, just two months away. The Gaidar brain trust could do nothing more. “Yeltsin just pulled the lever,” Berger told me.

In this landmark speech, Yeltsin fully embraced shock therapy. “A large-scale reformist breakthrough is needed,” he declared, promising that “we shall finally begin, in reality and not just in words, to haul ourselves out of the quagmire that is sucking us in deeper and deeper.” Yeltsin endorsed the basic Gaidar plan for free prices, free trade, and mass privatization. He optimistically—even foolishly—promised that “people’s lives will gradually get better” by the next autumn.

When his father stopped by the dacha, Gaidar mentioned that he might join the Yeltsin government. His father blanched, Gaidar recalled, “an expression of stark fear on his face.” Timur Gaidar knew the job was political suicide but urged his son to go ahead. The following week, Yeltsin formally appointed Gaidar a deputy prime minister to lead the revolution.¹³

Late one night, Gaidar took Chubais aside. Gaidar worried about money, prices, finance, and the looming prospects of panic buying, hunger, and a devastating winter. He would lead the first wave of radical reform, but he knew that if they made it to spring, there would be a second wave that would be far more difficult. The goal of the second wave was to profoundly change the underlying structure of the economy. It would involve carrying out the largest transfer of property to private hands ever attempted in modern times. Privatization was going badly in Poland and Hungary, and Gaidar needed someone who would see it to the end. He asked Chubais.

In earlier years, Chubais had paid little attention to privatization, which he found more of a dull organizational chore than an economics challenge. There wasn’t a single economics textbook he had seen about privatization, and few members of his team were interested in a field that had been nonexistent in Soviet times.¹⁴ One of the most basic tenets of Soviet Communism was the nationalization of all means of production except for individual labor; the very words “private property” came to the fore only in the final years of Gorbachev, and few of the young academicians really understood its implications. In the brief period in St. Petersburg city government, among those on the Chubais team, only Dmitri Vasiliev had worked on privatization, and he had focused on small businesses.

Once he was given the assignment of carrying out the grand transfer of property, however, Chubais characteristically turned it into an intense crusade. He championed private ownership as the equivalent of personal freedom. “We need to free the economy from the state,” he declared. “To free the country from socialism. To shake off the terrible chains of that gigantic, all-pervading, bureaucratic, ruinous, and ineffective state.”¹⁵

The first thing Chubais discovered was that someone else was already feasting at the table. Property was being grabbed, stolen, and gobbled up by the old guard, factory managers, and party elite, who were taking advantage of chaos in the country. Chubais called it “spontaneous privatization,” and it was out of control. As the reins of central authority were loosened in Gorbachev’s years, factory managers gained ever more power over their own domain and lined their own pockets. Using cooperatives and joint ventures, and later shell companies and offshore havens, they leeched the cash or raw materials out of state enterprises. Their overlords, bureaucrats in the government ministries, were also carving up the spoils for themselves. It was common for a state enterprise, such as a steel factory, to give birth to a small “pocket” bank, perhaps on the factory grounds. Then the bank would give birth to a trading company, which would take over the sale of the factory’s output—state property—and the profits would disappear into the offshore accounts of the director and his friends, perhaps using the pocket bank. There was nothing to stop it. In his landmark October speech, Yeltsin had noted that while the reformers debated privatization, “the party and state elite, meanwhile, were actively engaged in their own type of privatization. The extent of it, and the enterprise and hypocrisy, are simply amazing. Privatization in Russia has long been under way, but wildly, spontaneously, and not infrequently on a criminal basis.”

“In reality, it was theft of state property,” Chubais recalled, “but was not illegal because there was no legal basis for the transfer of property into private hands.”¹⁶ The result of spontaneous privatization was a spoils system that rewarded the factory managers and political bosses and left out everyone else. Chubais was offended at the rude, defiant way the old guard was going about it. The essence was that “if you are cheeky, daring, and resolute you will get everything,” he recalled. “If you are not very cheeky and not very daring, just sit quietly.”

In 1992, Chubais uncovered a good example of how spontaneous privatization worked. A group of party bigwigs set up a dummy corporation called Kolo Ltd. to take over Energia, a huge Soviet-era rocket engine and satellite manufacturer, a crown jewel of the military-industrial complex, at a fraction of its real value. The founders contributed their “intellectual property” (their ideas), which they arbitrarily valued at millions of rubles, and then tried to grab not only the massive rocket company but a military airfield as well. Chubais recalled that the thieves had created an “absolutely impregnable scheme,” and “the interesting thing about such deals is that we cannot untangle them.” When the rip-off was finally discovered, Chubais stopped it and fired one of his own deputies for approving it. But he was only beginning to think about how to halt the orgy of stealing already under way.¹⁷

When Chubais first got the privatization assignment from Gaidar in November 1991, Vasiliev wrote him a simple, three-page memo based on his St. Petersburg experience with the small businesses. Vasiliev told Chubais privatization of property should be “maximally wide,” or involving as much property as possible, and that the best way to carry it out was through competitive auctions, selling property for cash.¹⁸ In the months that followed, as small-scale privatization of bakeries and hair salons and other businesses was getting under way, Chubais embraced cash auctions, thinking it was the best example of a free market at work—open and competitive.

On April 4, 1992, Chubais and Gaidar flew to Nizhny Novgorod, 250 miles east of Moscow on the Volga River, to witness one of the first auctions, hoping to turn it into a political event. They faced growing resistance in Moscow and needed a symbolic boost. In Nizhny they were greeted by hundreds of demonstrators outside the former House of Literacy, many of whom were shop workers, fearful and envious of those who would buy their shops at cash auctions. Although Chubais and Gaidar believed that openly selling small enterprises to the highest bidder was the only fair and uncorrupted method, there was a chorus of demands that shops should be given to their workers, an emotional pull that ran strong after seven decades of socialism. The workers held placards, “Gaidar and Chubais! Find another city for your experiments.”

As they arrived at a back entrance of the hall, the two reformers were confronted by shouting, hissing, and screaming crowds. Chubais lost his cool and got into a shoving match with some of them as he and Gaidar tried to break through toward the door. “The whole situation got to us,” he recalled. “Gaidar and I understood that what we came here for had to be done at any cost.” Gaidar recalled that all the Russian elite was hoping the experiment would fail. “All of them were saying, ‘Auctions, what auctions? In Russia? Are you from another country? Do you not understand that it will not work?’” They had to demonstrate it would work, or they would be overrun by the vested interests.¹⁹

Fortunately, inside the hall, it did work. An auctioneer wearing a red bow tie and white silk shirt mopped his brow, slicked back his hair, and announced that Sewing Shop 38 on Yamskaya Street was up for grabs. The auctioneer, Arseny Labanov, called out the rising bids—100,000 rubles, then 500,000 and 2 million—and the store was sold for 3.6 million rubles, or about $36,000. The rest of the day brought the cash auctions of twenty-one cafés, hair salons, cheese shops, and other retail outlets, with the state reaping the proceeds. Chubais was in a fighting mood when he got inside the hall, but the elegance and simplicity of the auction calmed him. The auctioneer was “a real pro, an artist,” he recalled. “He had a natural gift for it.”

“It was quite a sight,” Chubais went on. “We had just emerged from the Soviet system. It was the early market period, the early democratic period, when the mere word ‘auction’ was taken as something anti-Soviet. And here we were watching the real procedure! With real live winners who were purchasing a bakery or a store.” Chubais recalled witnessing open auctions “based on competition, instead of doubtful tête-à-tête deals where bribes are discussed.” He and Gaidar sat together during the auction, Chubais marveling to himself how far they had come. “A mere five months ago we were writing all kinds of drafts. And now we were here, the official representatives of power, who succeeded in getting things done. It was a moment of happiness.”

Gaidar also had his moment when it all seemed to fall into place. The shortage economy had existed in the Soviet Union for as long as he could remember. In the final years of Soviet socialism, the shortage of goods had created an ominous monetary “overhang,” a huge surplus of rubles, since there was nothing to buy with them. A few days after price liberalization, Gaidar heard amazing news. Truck drivers were protesting. Not because of shortage, but the opposite—the stores would no longer accept any more cream! For Gaidar, it was a fleeting but wonderful sign—a reinforcing signal that shortages would end with free prices. Money and goods would come into rough balance. “For the person who lived in the realities of the end of 1991, when the shops were absolutely empty, and everybody knew nothing would appear there,” Gaidar told me, it was unimaginable “that there could be a situation when they would not accept any more cream because they did not want any more cream.”²⁰ In fact, the example was premature: it took many months for shortages to disappear, but they did.

Gaidar persuaded Yeltsin to sign a decree liberalizing all kinds of trade in early 1992. Street trade was an illicit, criminal offense in Soviet times. Just after Yeltsin approved the document, Gaidar was driving through Lubyanka Square, past the famous children’s department store Detsky Mir, when he spotted a long line twisting around the block. At first, he thought it was just another symptom of shortages—“probably something just appeared on the shelves.” But he was amazed to look closer: the line was not desperate shoppers. It was desperate sellers. “Clutching a few packs of cigarettes, a couple of cans of food, or a bottle of vodka, wool stockings, mittens, or a child’s sweater, people with the ‘Decree on free trade’ newspaper clipping pinned to their coats were offering various little items for sale.”²¹ The scene was a first, tangible sign of their gamble that Russia was not exceptional—give people incentives, and the market will come.

“We need millions of owners, not hundreds of millionaires,” Yeltsin declared in a speech to the Congress of People’s Deputies on April 7, 1992, coining a populist slogan for mass privatization. He won applause with the line, but the truth was that privatization was heading in exactly the opposite direction, toward creating just a few hundred millionaires. In a speech to the Congress of People’s Deputies in April, Chubais acknowledged the mounting criticism that “auctions are only for the rich.” Privately, he and Vasiliev were having second thoughts about the auctions. They realized that cash auctions were not suitable for the colossal task of privatizing all of Russian industry. They worried that the angry shop workers in Nizhny Novgorod had a good point: what if all the property was bought up in auctions by a tiny percentage of the population? The rest of the country would be left behind, and that could spark a political time bomb of envy and resentment. “Gradually, we came to understand that society simply cannot absorb the idea of selling property for money,” Vasiliev recalled. “It would lead to people thinking that everything was bought by bandits and those who had stolen money.”²²

In a series of concessions and tactical maneuvers, Chubais put privatization on a new track in the next year and kept it from being derailed. Despite fierce opposition, he was able to keep privatization moving ahead, and there was much still to be done: privatization of 5,603 large enterprises with a combined workforce of 15 million. Chubais earned his reputation in this period as a feared manager and fearless infighter. His stubbornness paid off, but so did another personal characteristic—he would sometimes compromise and cut corners in pursuit of his larger goal.

In a clever organizational move, he created a new agency, the State Property Committee, within Russia’s hidebound bureaucracy. At first, committee members worked in bare, unheated offices in the grubby high-rise towers along Novy Arbat, the grim socialist-realist avenue of utopian architecture in the center of Moscow. Later, they moved to a drafty ministry building near Red Square. In the early months, they churned out ideas and documents day and night. “We had no heat, no Xerox, no fax, no food,” recalled Jonathan Hay, one of the Americans who came to help. “The first time I came there, I saw just Dmitri Vasiliev and thirty people sitting in a huge hall, just this small man in big glasses, and they were all around him, in a heated discussion, talking about small-scale privatization.” By his own account, Chubais was overwhelmed, with heaps of papers on his desk, phone calls streaming in, and crowds of people in the reception area demanding his attention. But Chubais enjoyed what Berger called a clean slate—he started from scratch and could build privatization from the ground up.

To a far greater extent than other reformers, Chubais attracted Westerners to help with privatization. The international financial organizations saw the young reformers as the best hope of Russia and provided money for technical assistance. Lawyers, economists, public relations people, investment bankers, and government officials—they all trouped through the shabby offices of the State Property Committee.²³

By the time he got organized, Chubais faced a virtual tug-of-war. The industrial property in theory belonged to the state, but in practice different groups laid claim to the treasure. Managers felt they knew the factory best; workers felt entitled since they had put so many years on the assembly line; the local governor and politicians saw the juicy plums and wanted the right to distribute them. These were “stakeholders” whose demands would have to be dealt with. The likelihood of meeting all their demands was zero. Meanwhile, a fourth group, the party nomenklatura, was already helping itself. “There hasn’t been a fair privatization in the history of mankind; this has to be accepted,” Berger recalled of the choices facing Chubais. “Chubais had one main goal: to destroy the monopoly of the state on property. At any cost.”

Chubais believed that outsiders—the new generation of private owners, perhaps even foreign investors—who had never had a stake in the factory would be the best ones to eventually restructure it. At least theoretically, he thought, they were the ones who would become the most “effective owners.” Cold-eyed outsiders would be more inclined to strip away the inefficient equipment and the excessive spending on kindergartens and resorts that were part of every socialist enterprise and retool it with new investment and a view toward longer-term profit.

But Chubais could not afford to ignore the insiders: the workers and managers. They were powerful stakeholders, and in his original speech, Yeltsin promised to split the state property with the workers. The idea was immensely popular because of the legacy of socialism and the ideology of a workers’ paradise. Larisa Piyasheva, a privatization expert working for the Moscow city government, had campaigned to turn everything over to the workers all at once. Chubais was vehemently against it, seeing that the workers, in reality, had little control over a business. When it came to key decisions of ownership, the workers were under the thumb of the all-powerful managers. Both workers and managers were insiders, and insiders would be the least likely to break with the socialist past.

At first, Chubais did not want to resolve this conflict in the Supreme Soviet, a parliament largely elected in Soviet times and dominated by old-style former party officials and the so-called red directors, the Soviet-era factory managers. But he could not delay forever; he needed a legal basis for privatization. In March 1992 Chubais proposed a privatization law. He offered to give workers and managers—the insiders—40 percent of the shares of an enterprise, with the rest to be sold off to outsiders. But the overture to the insiders was not enough. In the first months of shock therapy, factory production plunged and the red directors struck back in the Supreme Soviet, where they had a strong advocate in Arkady Volsky, an imposing former Communist Party apparatchik and adviser to several Soviet leaders. Volsky had built up a lobby of the old-guard economic elite. The red directors also had a sympathetic ear in Ruslan Khasbulatov, the chairman of the Supreme Soviet. Although originally chosen by Yeltsin, Khasbulatov was increasingly outspoken against the youthful Gaidar government, and within two years he would be leading an open rebellion against Yeltsin.

The general notion of privatization was still popular, but the insider-dominated parliament wanted more than Chubais offered. They came up with a second plan, known as Option 2, which turned over 51 percent of each enterprise to the insiders, with the rest to be sold off to outsiders or held by the state. Chubais was dead set against this, fearing that the insiders would preserve the status quo. If the whole idea was to forge a new generation of effective owners, how could they be created out of the same old, tired Soviet factory managers?

But in the end, faced with certain defeat, Chubais gave in to the factory bosses. “We understood there would be no privatization if the directors didn’t support it,” Chubais recalled later.²⁴ The bosses were still strong, and the government weak. To defeat the insiders would have required more willpower than Chubais or Yeltsin could summon, more than the system could stand. “We would have had to put all the directors and all the bosses in jail,” Chubais later recalled. “Or at least half of them, in the hope if you put half in jail, the other half will shut up.” Neither Chubais nor Yeltsin were ready for that.²⁵

On June 11, 1992, the Supreme Soviet approved the privatization law.²⁶ It was the last time parliament approved privatization; after that, opposition intensified, and Chubais relied solely on Yeltsin’s decrees. This was a seminal moment for Chubais. For all his steely self-confidence and determination, he decided to make a crucial trade. He gave up one of his most cherished ideas at the time, the importance of outside owners, to achieve his larger goal of transferring the property out of the hands of the state. The deal was a precursor of what was to become a trademark Chubais method, one that led to a corrosive weakening of his own principles later on.

Still, at this point, Chubais was single-minded. “Every enterprise ripped out of the state and transferred to the hands of a private owner was a way of destroying Communism in Russia,” he told me. “This is how we understood the situation, without any exaggeration. And every extra day we worked, we could privatize another ten, twenty, or thirty enterprises. And at that stage, it didn’t matter at all to whom these enterprises went, who was getting the property. It was absolutely unimportant whether that person was ready for it.”

In Another Life, his visionary samizdat text in the early 1980s, Vitaly Naishul had described the key role the nomenklatura and factory managers played in the Soviet industrial empire. They were the “guiding nucleus” of its success, he acknowledged, and could not be ignored, even in a shift to the market. But Naishul speculated, with remarkable prescience, that it was possible to redistribute—very widely—the entire property of the Soviet state, so it would not just wind up in the hands of the directors and the elite. He proposed that every person in the country would be given five thousand “special personal investment rubles” which they could then invest in factories, stores, and enterprises, possibly chosen from a list published in the newspaper. Naishul’s underground manuscript described mass privatization with a dreamy romanticism, trying to popularize the idea of creating millions of shareholders, the equivalent of a class of stock hounds watching their dividends. “Your enterprise will function, sell and buy,” he wrote. “You and other owners will get the profit and split it among yourselves, and mind the enterprise like your personal belonging.” Naishul was years ahead of his time.

Chubais and Gaidar had once poured scorn on Naishul’s privatization plan, saying his ideas were too complex, entirely unworkable, and too radical. But in the summer of 1992, the environment had changed dramatically, and Chubais found a new enthusiasm for Naishul’s vision. Mass privatization was a political weapon that Chubais could use to blunt the land grab by the nomenklatura and the factory directors. Moreover, he could create at least the impression that millions of people had become property owners—he could coopt the angry shop workers they had seen in Nizhny Novgorod, putting a share of stock in their hands instead of a placard.

Inspired by the popularity of a privatization scheme being used in Czechoslovakia at the time, the Chubais team decided to give away property to the whole country—all at once—in 148 million checks, or vouchers, which could then be traded at auctions for shares of companies. ²⁷ Critics later called them “worthless candy wrappers,” and Chubais never lived down his absurd promise that a voucher would be worth enough to buy two Volga automobiles.²⁸ In fact, the vouchers themselves were less an economic tool than a political gambit by Chubais to make all people feel they were getting a piece of the pie. The Chubais agenda was simply to win popular support for privatization and thereby make it irreversible.

The vouchers were handsomely printed in a rich brown to look like currency, with an etching of the Russian White House by the Moscow River, which then housed parliament. They were called “privatization checks” because Yeltsin hated the word “voucher.” At cabinet meetings, Yeltsin forbade officials from using “voucher” because he thought the English word was vulgar, but it stuck nonetheless. Each voucher had a face value of ten thousand rubles and could be picked up at the local bank for twenty-five rubles, or about ten cents. They could be traded for an employee’s shares of his company, deposited in mutual funds, or simply sold or exchanged. “The share is a real right to property . . . a sort of ticket to a free economy for every one of us,” Yeltsin promised when he announced the voucher scheme on August 19, 1992, a year after the failed coup against Gorbachev. From October until the following January, 144 million vouchers, or almost 98 percent of the total, were picked up.

The voucher was a forced redistribution of property, designed to forever end state control and halt spontaneous privatization by the elite. Chubais was boldly creating a new group of stakeholders: the general population. The voucher scheme “signifies the death of the command economy and the political system that was built on the basis of total state property ownership,” Chubais told reporters.²⁹ Later he recalled that “the beginning of mass privatization—privatization based on the ‘rules’—meant the end of stealing state property by the high and mighty.”³⁰

However, the voucher was just an interim step in the redistribution of property, a way station en route to a new class of owners. How long it would take to reach the goal, who those owners would be, and whether they would be “effective owners” was still uncertain. Private companies would be created out of the voucher auctions, and those companies would issue shares that would be bought and sold freely. That was a goal in and of itself, Vasiliev told me. But what came next? He said it was obvious that “the effective owner would appear only after the property was redistributed, after some serious period of time.”³¹

As the opposition rallied in the Supreme Soviet, Chubais began a political counteroffensive for the voucher phase of mass privatization. Paul Bograd, a political consultant then working for Sawyer-Miller, a Boston firm, came to Moscow in August to help Chubais engineer a public relations and advertising campaign for the vouchers. Bograd immediately got a taste of what he was up against. He suggested a television advertisement for vouchers featuring Chubais. An older, Soviet-era bureaucrat told Bograd that advertising by the state was always anonymous. Chubais couldn’t do it personally!

On the day the commercial was filmed, Bograd’s heart sank: Chubais was sitting behind a desk with a flag behind him, looking like a stale Soviet apparatchik. “I said, try it a different way, maybe without your coat on? Or maybe standing, or leaning on your desk?” recalled Bograd, who wanted to put a little flair into Chubais. “People have had years of watching Soviet officials sitting behind their desk with their jacket on, flag and all! They have been completely discredited.”

“Okay,” Chubais said, “I will stand.” He stood. “But I am not taking my jacket off!” Chubais felt that he had to talk to people in their own language, and that meant talking to millions who were shaped by the Soviet mind-set.³³ He was also sensitive about appearing too Western. He got ready to start his speech. Then he looked back at Bograd, smiled, and unbuttoned the jacket.

As a political gambit, the vouchers galvanized the population and became the single most important symbol of the reform years. Although experts suggested the voucher be denominated in abstract “points” rather than money, Chubais insisted they must have a monetary face value, since the whole point was to make vouchers look like a gift to the public.³⁴ “They seized the nation’s imagination,” recalled Leonid Rozhetskin, a Wall Street lawyer and Russian émigré who arrived in Moscow in 1992 to begin working with Chubais and Vasiliev. “It was at the time an absolute public relations boon to the reforms. Every newscaster, every channel was asking people on the street five or six times a day, ‘What are you going to do with your voucher?’ And for a period of time, the voucher may have been the most liquid form of security in the world. It could be bought and sold at every street corner kiosk and metro station from Vladivostok to St. Petersburg.”³⁵

The vouchers were traded by the bushel at Moscow’s nascent commodity exchanges. On the largest floor, the Russian Raw Materials and Commodity Exchange, a scruffy bus station–like hall in central Moscow that traded commodities in the morning and vouchers in the afternoon, volume reached 60,000 to 100,000 vouchers a day, or about $1 million. At the end of the process, the volume reached $10 million. Traders hauling shopping bags and suitcases stuffed with vouchers often roamed the hall.

In the twenty months of the voucher program, the price gyrated widely, reaching a high of $20 and a low of $4, largely depending on the wild shifts in Russian politics. In metro stations, people lined the walls with signs pinned to their coats: “I will buy vouchers.” Or, written on the flip side: “I will sell vouchers.” The vouchers were freely tradable, and many millions were immediately exchanged for a bottle of vodka or sold for a song. Brokers began scouring the country for vouchers, which they stuffed in suitcases and took on overnight trains to Moscow for trading and speculating, since the street price often varied from place to place.

For the reformers, the public reaction to vouchers reaffirmed their basic assumption: Russians would respond to market incentives, and they would adopt the new ideas of shares and property ownership. Chubais later boasted, “You can ask a babushka in the Smolensk region what dividends are, and I think she will reasonably explain to you what they are. You would agree, that a year or a year and a half ago, the same babushka might have told the questioner to pack it.”³⁶ Some enterprising businessmen were soon setting up voucher mutual funds. Chubais and Vasiliev were euphoric. “There was a feeling, this is our victory!” Chubais recalled. The hope was that investment funds would collect vouchers from the population, invest them in companies, demand good management and profits, and distribute dividends to the investors. Chubais predicted the investment funds would be ideal for “people who just want to make a reliable investment and receive a return on it.” Chubais recalled how strange and sudden it all was. Even in frozen Yakutia, in the far northeastern corner of Siberia, thousands of miles from Moscow, there was a voucher mutual fund! When first told about voucher funds, an official there was puzzled. “It took me six months to run around the tundra trying to distribute the vouchers.” Then he asked Chubais, “Now, should I run back to collect them?”³⁷

The early euphoria faded when Chubais realized that he had liberated an unpredictable, voracious monster. Over the coming months, dozens and then hundreds of voucher funds sprung up, with loud and insistent advertising. Many of the voucher funds were just covert attempts by companies to buy up their own shares. But others were independent and aggressive; the largest Moscow fund, First Voucher, collected 4 million vouchers.³⁸ Soon the funds got out of control. They were completely unregulated, and Chubais failed to anticipate how fast they would proliferate. In the end, about six hundred voucher funds collected 45 million vouchers. The market that had started without institutions had become a jungle. Unscrupulous funds promised outrageous dividends, took vouchers, and never returned anything to investors, just selling the vouchers and stealing the proceeds. The managers of one fund, Neftalmazinvest, which had promised to invest in oil and diamonds, made off with about 900,000 vouchers. In the end, ninety-nine of the voucher funds disappeared without a trace.³⁹ People felt deceived, and they were.⁴⁰ It was just the beginning.

The voucher program was launched in October 1992 under enormous pressure. The Congress of People’s Deputies, the broader legislature that met twice yearly, was set to reconvene on December 1, 1992. A new avalanche of criticism was certain, and Chubais did not yet have a single actual sale of a factory to show for it. He was desperate to complete a showcase sale before the congress began and urgently sought help from Western investment bankers.

One of them was Hans-Joerg Rudloff, president of Credit Suisse First Boston, who was a visionary financier. Rudloff had taken his firm into huge gambles as Communism collapsed, making deals with the struggling new states of Eastern Europe. He was accustomed to being wooed by prime ministers and to making fateful decisions about their ability to borrow on world markets. Rudloff, son of a German leather manufacturer who had memories of rebuilding the family factory after World War II, had sharply conflicting feelings about the chaos he saw in post-Soviet Russia. Rudloff clearly understood the lingering legacy of Soviet Communism. He knew the absolute power that the Communist Party had once held over the country, the fear that it had sometimes instilled, and the vacuum that was created when it disappeared. Who would seize the enormous inventory of factories, mines, shops, and warehouses that were up for grabs? Rudloff had grave doubts that it could be done rationally, but he was also drawn by the prospect of making a fortune.⁴¹ His first encounter with the young Russian reformers, in early 1992, had gone badly; they seemed arrogant and turned down his offer of help. He left thinking they were hopelessly naive and vowed not to come back. But come back he did, believing that “we can’t miss the biggest emerging market in history.”

Through an acquaintance, Rudloff recruited a young finance specialist, Boris Jordan, who came from a family of fiercely anti-Communist Russian émigrés in New York. Jordan, a pink-cheeked, baby-faced young man, then twenty-five years old, was an incredible hustler, whose grandfather fought against the Bolsheviks with the White Army. Jordan longed for a chance to go to Russia. He grew up speaking Russian at home and passed the Foreign Service examination, but the State Department said he would never be sent to Russia as a diplomat. At the time, he was making airplane finance deals in Latin America. “I loved the deal-making environment,” Jordan recalled. “But wouldn’t it be better to do it somewhere I actually speak the language?”⁴²

Jordan was paired with Steven Jennings, a tall, square-jawed New Zealander, then thirty-two, who was as calm as Jordan was excitable. Jennings, a policy wonk who made his mark in New Zealand’s 1980s privatization, had been working on a World Bank project to restructure Hungary’s banking system when Rudloff recruited him for Russia. “When I walked into the office the first time, Steven had books everywhere,” Jordan told me, recalling their first meeting in London. “He wrote books about privatization, and he loved the stuff. I wasn’t interested in it. I was interested in how to make money.”

Once they moved to Moscow, Jordan and Jennings were familiar faces in the cold, empty offices of the State Property Committee. They brought the needy Russian staff office supplies, coffee, and ideas. “We had a lot of lazy, arrogant investment bankers come and offer to work for money,” recalled a Westerner who witnessed the early months. But Jordan and Jennings seemed different: they were always hanging around. Credit Suisse First Boston became a support branch of the privatization agency. The Westerner remembered of Jordan and Jennings: “They were six foot three, in your face, and ready to go.”

The pair went to Chubais and made a deal: they would help advise on the first auctions for free, which was Rudloff’s idea. “Don’t take any money from anybody,” Rudloff told his young charges. “If we are going to risk this thing, which has a 20 percent chance of success, we might as well not take any money. So they can’t accuse us of profiting off a failed program.” Rudloff recalled, “We said we can’t miss the biggest emerging market in history, but we can’t go in saying we are going to make money. We will see what comes out of it in two or three years. I told them, don’t worry about profits.”⁴³

Their goal was to organize the first sale of a factory, the venerable Bolshevik Biscuit Company in Moscow. Founded in 1855 by a Swiss baker and later nationalized by the Soviets, the factory was well known for its elaborate cakes and cookies. Jordan and Jennings spent a month working around the clock trying to indoctrinate and cajole the management and workers. Over endless cups of tea and cookies, Jordan explained the basic concepts such as equity and the meaning of outside ownership. In this first sale, management and workers kept 51 percent of the company and the remaining 49 percent was offered to the public for vouchers. Jordan and Jennings set up an exhibition hall on the Moscow River for the big event, expecting thousands. They were not trampled, but hundreds came on the first day, offering their vouchers in a bid for shares. In a back room, Jennings and Jordan watched apprehensively as a computer tallied the auction. They could not believe what they saw. Jennings had earlier worked on a sale of an almost identical cookie company in Eastern Europe, which was sold to Pepsi for about $80 million.

What Jordan and Jennings had seen was the dawn of Russia’s transformation. Not only was the enormous stock of factories, mines, and smelters about to be sold, but judging by any comparison around the rest of the world, it was to be sold dirt cheap. Chubais didn’t care; to him, the important fact was the process of redistribution. But soon the smell of money lured all kinds of investors—mega-moneyed foreigners, sharks, vultures, and gamblers—to the scene.

Gaidar, the “kamikaze” reformer who thought he would only last a few months, was ousted under pressure from the Congress of People’s Deputies in December 1992, after less than a year in office, just as Chubais was selling off Bolshevik Biscuit. To appease the industrial lobby, Yeltsin replaced Gaidar with the stolid Viktor Chernomyrdin, the one-time Soviet natural gas minister who transformed his monopoly into Gazprom, Russia’s largest company. For the young reformers, the appointment seemed ominous. Chernomyrdin’s first words stunned them: “I am in favor of reforms, of a real market,” he said, “but not of a bazaar.”⁴⁵

Even worse, Gaidar’s nightmare scenario, hyperinflation—when prices zoom upward—was fast becoming a reality. The inflation was fueled by massive subsidized credits that the Russian Central Bank was pumping into the economy, at the behest of the “red directors,” the Soviet-era factory bosses, and their patrons in the Supreme Soviet. The parliament had installed Viktor Gerashchenko as chairman of the Central Bank in the summer, and the former Soviet banker cheerfully opened the sluice gates to new credits. The Central Bank was giving out credits to factories at 10 or 25 percent a year while inflation was raging at 25 percent a month.⁴⁶ The flood of credits did little to revitalize industry but had a perverse effect on the economy, triggering inflation that became political poison as people saw their money evaporate. Berger recalled trying to persuade Gaidar to show some sympathy for people who suffered. Gaidar insisted that from an economics point of view, the ruble savings were just figures on paper; in fact, they had long ago been used up by the Soviet Union on the arms race. The money was just a “line on people’s accounts.”

Gaidar’s departure left Chubais vulnerable and worried about the deepening opposition to reform. Chubais had briefly pondered quitting with Gaidar but agreed to stay on to finish the job he had begun.⁴⁸ The Supreme Soviet was considering a bill that would totally stymie privatization. Yeltsin had warned in December that reform was in “serious danger,” and the danger seemed to only grow deeper as Yeltsin squared off against his Communist and nationalist critics in parliament. Those critics were led by Khasbulatov and Yeltsin’s vice president, Alexander Rutskoi, the Afghan war veteran and former general who derided the young Gaidar government as “little boys in pink shorts.” Yeltsin called for a referendum on reforms, and Chubais poured himself into making it a success. By the winter of 1992, Chubais had launched the privatization of small shops but had not yet sold off the factories. The process was not yet irreversible; “it can be strangled in the cradle yet,” he said.⁴⁹

Tensions between Yeltsin and the parliament ran high. Vladimir Shumeiko, then first deputy prime minister, showed Chubais a gun that he was carrying around with him. “He said he got it recently and if Khasbulatov tried to arrest him, he would shoot and he would definitely kill five or ten people,” Chubais recalled. “And while on the one hand it was nonsense, on the other hand I think it was the truth; he would have really shot and killed about five people. The situation was rather hot.”⁵⁰

The referendum on Yeltsin’s reforms was set for April 25, 1993, and became a turning point. The voters were asked four questions: (1) do you support Yeltsin, (2 ) do you support Yeltsin’s economic policy, (3) do you want early elections for president, and (4) do you want early elections for parliament? The whole idea of a referendum was risky: had Yeltsin lost, it would have been a defeat for all he stood for. The Yeltsin team campaigned with a snappy string of answers to the referendum questions: “Da, Da, Nyet, Da” (yes, yes, no, and yes). Chubais portrayed the referendum as a case of the people against the politicians. “Our main support is the people,” he insisted at a press conference four days before the vote. “The people who have become stockholders at their own enterprises, the people who have swapped their privatization vouchers for stocks of enterprises, the people who have won contests to buy shops or restaurants.”

Chubais was sure that if they lost the referendum, his privatization struggle would be in vain. In the weeks before the vote, he had fought tooth-and-nail against bills and resolutions in the Supreme Soviet that would bottle up privatization. At one point, without telling Yeltsin or Chernomyrdin, he secretly wrote up an order to abruptly cancel the whole privatization program and took it in his pocket to parliament, where, if necessary, he was ready to blow up his entire project and let the blame fall on Khasbulatov. He never carried out the stunt, but no tactics were off-limits for Chubais. When Communists in Chelyabinsk, in the Urals, tried to start a regional revolt against privatization, Chubais immediately flew there and publicly challenged them. What the public did not see was a four-hour long harangue against the Chelyabinsk governor back in Moscow. Chubais threatened to block the governor at every turn. “I will simply strangle you,” Chubais threatened him.⁵¹

Chubais never let it be told, but he had deployed a secret weapon to help Yeltsin win the April referendum. Chubais privately met with George Soros, the Hungarian-born superfinancier and philanthropist, who was in Moscow to launch a program to help scientists. Soros agreed to bankroll the pro-Yeltsin referendum campaign, the first but not the last time he would come to the rescue of the reformers. A Chubais representative, a Westerner, went to Switzerland and made the financial arrangements for a $1 million transfer from Soros to offshore accounts that Chubais could draw on for the campaign. The money helped the Yeltsin forces buy advertising to drown out the voices of the opposition.⁵²

Chubais was no longer on speaking terms with Khasbulatov. In the halls of parliament, “they talked openly about prison cells being readied for us.” Chubais told me that on April 24, the night before the vote, “I was sitting in my ministers’ office, destroying documents, because I understood if Yeltsin were to lose the election, Khasbulatov would not pity his opponents.”

As it turned out, Yeltsin won the referendum, with 58 percent expressing confidence in him and 52 percent approving of economic reform. The threats to privatization eased. The referendum provided Yeltsin some political breathing space before his confrontation with parliament turned violent in October. By then, however, much of Russian industry was already on its way to being sold. There was no turning back.

“If the problem is only that the rich will buy up the property,” Chubais mused at one point, “I am sure that is the way it must be.”⁵³ The privatization slogan had been to create millions of shareholders, and indeed the voucher plan had touched millions. But in the next step, the ownership of Russia’s property was reshuffled once again, this time into fewer hands, including a few millionaires. These were men who had daring and smarts, who had come to the same realization that struck Jordan and Jennings on the day Bolshevik Biscuit was privatized—that Russia held incredible treasure and Chubais was practically giving away the keys to anyone who was farsighted enough to take them.

William Browder was one of them. He was the grandson of Earl Browder, leader of the American Communist Party (1932–1945). Bill Browder yearned to see the Russia of his family roots, and after Stanford Business School and a stint working privatization in Poland, he joined the Eastern Europe team of Salomon Brothers in London to specialize in Russia. Browder, who has a wry but incisive sense of humor and a sharp eye for finance, found it lonely work: no one believed there was any business in Russia. The boss threw some expense account sheets at him and told him to go to Russia and see what he could find.

Browder snared an assignment to advise the trawler fleet in the northern port city of Murmansk on privatization. The manager of the fleet told him there were one hundred ships, and each cost $20 million new. But management was entitled to buy its 51 percent of the company for the equivalent of just $2.5 million. Browder took out a sheet of blank white paper and did some quick calculations. His scratch-pad math practically screamed off the page: huge assets were for sale, cheap. “I thought to myself at that moment,” Browder recalled, “I cannot make a lot of money as an investment banker in Russia, but I can make a lot of money as an investor in Russia.” Browder went back and started to sketch out the value of other companies, especially in the oil industry. “Sure enough, the same thing in oil!”⁵⁴

Browder eventually built up the largest private investment fund in Russia. But in these early days, the picture of riches in Russia was hazy, the prospects dim. Companies had no open financial data, managers were distrustful, marketing or business plans did not exist. The risks were imponderably large. Back in London, Browder at first met with skepticism and disbelief. “I was running around Salomon Brothers trying to find someone who would listen that this was going to be the most unbelievable investment opportunity there ever was,” he told me. Eventually, he got permission to invest $25 million, a tiny sum for one of the world’s largest investment houses, but a large commitment for Russia at the time. Browder bought as many vouchers as he could, and then bought shares in little-known companies.

Browder had an advantage. He knew an oil trader in Moscow who had rudimentary information about the companies that were being privatized, especially in oil. “At the time, just knowing the names of the companies and roughly what the production and reserves were was huge, valuable information,” Browder recalled. He had the facts on a spreadsheet but was careful not to show it to anyone. He had the first crack at the best investments, since everyone else was in the dark.

At the time, not everyone could see through the fog of despair that blanketed the Russian economy. There were almost daily stories of factories failing, workers without wages, idled assembly lines, and industrial misery. Who wanted to buy an old Soviet factory with no competitive markets, aging equipment, no serious accounting, and thousands of dependent workers? It was not a pretty sight. Rutskoi, the rebellious Yeltsin vice president, declared that the reformers had “turned Russia into an economic dump.”

Indeed, the big money was not in property, but in finance. Currency speculation, trading in gold and precious metals, arbitrage in oil—these were the new gushers of the first post-Soviet years. Smolensky, devoting himself to his banking business, was distinctly uninterested in Russian factories. He was making a mint running dollar-ruble speculation, changing money back and forth every day and gambling on tomorrow’s exchange rate. Gusinsky was cementing his alliance with Luzhkov, making money from real estate and using the city government deposits in his bank.

But some Russians had a clue of what lurked behind the door Chubais was opening. Khodorkovsky bought up a huge quantity of vouchers. His Bank Menatep was a major player in the voucher market, even though Khodorkovsky knew Russian industry was in deep distress. “Idealism,” Khodorkovsky recalled of his decision to buy vouchers. “Since my childhood I wanted to be director of a plant. My parents worked at a plant their whole lives. I was sure and I am still sure that the most important thing is industry.” But like many others, Khodorkovsky was shooting in the dark. He could not figure out which factories were potentially lucrative, so he bought many. Using his connections, he was able to pick up many factories in so-called investment tenders, in which the winner promised to make investments later on but rarely did. The journalist Yulia Latynina said Khodorkovsky turned Menatep into the first Russian investment bank, with fierce determination. “No other bank dug up industry with such rage and omnivorousness,” she recalled.⁵⁵ Khodorkovsky purchased large blocks of shares in timber, titanium, pipe, copper smelting, and other industries, more than one hundred companies in all. Khodorkovsky told me that he hired Andersen Consulting to survey the crazy-quilt industry he had assembled, and the management consultants told him he had gathered up the equivalent of a South Korean conglomerate. They described for Khodorkovsky how it could work, like Samsung. The comparison did not appeal to him. “When it was done,” Khodorkovsky recalled, “I said, this cannot work.” He would soon decide to go after the richest single treasure, oil.

Behind the shuttered factory gates, a mammoth fire sale was getting under way. Judging by the number of vouchers and their street price, the total value of Russian industry was under $12 billion. In other words, the equity of all Russian factories, including oil, gas, some transportation, and most of manufacturing, was worth less than that of Kellogg or Anheuser-Busch. In a privatization carried out with special restrictions against foreigners and outsiders, Gazprom came out of the voucher auction with a value of under $228 million, or about one-thousandth of the value put on it by foreign investment banks. The market value of Zil, the famous truck and limousine maker with 100,000 workers, was $16 million. The market value of the giant Gorky Automobile Works, known as GAZ, which manufactures the Volga car, was $27 million. Indeed, the auto factory was so lucrative that the managers used state credits to buy up 1.8 million vouchers through dummy firms and then tried to grab the factory for themselves, but they were stopped when the scheme was uncovered. The market value of two household names in Russian manufacturing, Uralmash and Perm Motors, were $4 million and $6 million respectively. Whereas American firms typically have market values of $100,000 per employee, Russian firms obtained voucher auction values of between $100 and $500 per worker, or two hundred times less.⁵⁶

Jordan was scouring Russia for vouchers, which he bought every day from a small circle of Russian brokers and then sold to foreign investors at a giant markup. Even though he had spotted the ludicrously low factory values, Jordan never invested in factories, instead working frenetically as a middleman speculating in vouchers, for which there was often a sudden demand before a big auction. Jordan had trouble finding a safe place to store the mountains of vouchers and eventually settled on a vaultlike room in the tall high-rise building across from the Russian White House. This distinctive building in Soviet times had housed the Socialist bloc economic association, the Council on Mutual Economic Assistance. It was the same building where Luzhkov and Gusinsky had set up their offices. Every night, after buying up vouchers, brokers would take the risk of delivering them to the underground room, and Jordan would go there to inspect the paperwork. With hundreds of thousands of vouchers, the process was a logistical nightmare. One evening Jordan noticed the clerks slicing up condoms with scissors and then using them to bundle the vouchers. They had no rubber bands.

For a few sweaty hours during the violent October 1993 confrontation between Yeltsin and hard-liners at the Russian parliament, Jordan and the Chubais staff suffered a terrible scare—they feared the rebellious nationalists and hard-liners, led by Rutskoi and Khasbulatov, might storm the room where the vouchers were stored, just across the street. Tens of millions of dollars worth of vouchers were lying there—the guts of the whole privatization program!—and in one moment they could have gone up in smoke. But the anti-Yeltsin forces at the White House never discovered it. The voucher vault was safe.⁵⁷

At the beginning of 1994 came a dawning realization in the West that Russian industry was going to be a new Klondike. Yeltsin won a new constitution that gave him broad powers and a new legislature. The old Supreme Soviet was history. Jordan recalled that he had tried, in vain, in March 1993, before Yeltsin won the referendum, to interest foreign investors in the vouchers. “I would go out and tell people about Russia, and no one would let me into their office,” he recalled. “Nobody cared. All around the world I went for three weeks. And in November, I went on another roadshow. Then people started to open their doors to me. And in March 1994, every person in the world wanted to know who I was.”

Between December 1993 and June 1994, when the voucher phase ended, Jordan and Jennings had traded 16,346,070 vouchers—more than 10 percent of the total. Foreign investors were hungry for Russian stocks, even though they often knew nothing about the companies they were buying. Even an oil major like Lukoil had barely one page of financial data to share with investors.

A turning point came in May 1994 with the publication of an article in the Economist titled “Sale of the Century,” which laid out the stark math: Russian assets were very, very cheap compared with similar property elsewhere in the world. The article noted that shares in Bolshevik Biscuit were trading at $53 each, or three times the price at the 1992 privatization. Still, Bolshevik’s market value per ton of output was $9, while a Polish biscuit maker, Wedel, was valued by its stock market then at $850 a ton.⁵⁸

Right after the Economist article appeared, Browder recalled a flood of interest in Russia among his colleagues in London, who earlier would not give him the time of day. “I was sitting on the trading floor and all of a sudden all the managing directors are around my desk. ‘Bill,’ they said, ‘Interesting stuff you are doing there. Can you get us some Lukoil?’”

Despite two years of political crisis, Chubais had delivered on his core promise to put state property into private hands. About fourteen thousand firms went through voucher auctions in twenty months, and thousands more small shops and businesses were privatized; all told, about 70 percent of the economy was put into a new private sector.

Would the new owners prove more effective than the Soviet masters? At the end of the period of mass privatization, in mid-1994, there were plenty of danger signs. Rozhetskin traveled the back roads of Russia, looking at factories, and many of the owners he encountered were not interested in building the businesses they had purchased cheaply. Instead, they were just stripping the assets and sucking out the cash flow. The whole idea of corporate management skills, boardroom discipline, and effective ownership seemed distant, the concepts inchoate.