The Oligarchs

Zlatkis was skeptical about Berezovsky raising the money from shares to build his dream factory. The Russian financial markets were still inchoate, a grab bag of small commodity exchanges, without controls, selling vouchers and a handful of company shares in between tons of steel pipe. They were growing faster than the rules, the government, or the laws could keep up. Zlatkis was being thrust onto the frontier of wild capitalism, the kind without institutions or rules. Berezovsky was proposing to create a new, private financial instrument, with certain unique features that would make it behave like real money. He implored Zlatkis to approve it. The new security would be a huge precedent, a leap into the unknown. It was so new, Zlatkis concluded, that there were no laws governing it.

Berezovsky would not give up. “He was sure that he would be able to collect $2 billion in Russia,” Zlatkis recalled. Berezovsky wanted to sell shares. At the mention of the word, Zlatkis recalled a snowy night back in December 1991 when she had just taken the job in the Finance Ministry. The Soviet Union was collapsing and Yeltsin was coming to power at the beginning of shock therapy. Zlatkis was heading home from her office at 11:00 P.M. on a winter night; the streets were dark and the sidewalks icy. As Zlatkis shivered, her driver took the wheel of the unheated, aging Zaporozhets and rounded a dark corner near Red Square. Zlatkis saw a familiar sight: in the cold, a long line of people, just standing and waiting, under a single lamp. She told the driver to stop. She got out to see what might be at the end of the line. She saw mostly elderly women, bundled against the cold.

She heard them talking about “shares.” They were standing in line to buy a piece of paper that promised huge returns in a year. The shares were issued by Bank Menatep. “We have been here for several days, standing in line to buy shares,” Zlatkis was told by the first woman she met. “They are selling shares. They are going to pay a big interest on them. We are investing a thousand rubles. And they promise that in a year, they are going to pay ten thousand rubles.” The women were waiting for easy money.

The great inflation of the early 1990s did not subside in Russia as it had in Poland. Every month in 1992 and 1993, the ruble’s value fell as the Central Bank recklessly pumped billions in fresh credits into the system. A full year after Gaidar had set prices free, consumer inflation in Russia was still galloping ahead at 25 percent a month.⁴ By the end of 1994, consumer prices were 2,000 percent higher than they had been in December 1990.⁵ Viktor Gerashchenko, chairman of the Russian Central Bank, thought in Soviet fashion that pumping more money into the economy would save it. Instead, he was wrecking it.

That is precisely what happened in Russia. Hyperinflation destabilized the economy and wiped out the savings of a population. It was cruel and unusual punishment. A scientist, whose salary in Soviet times may have been two hundred rubles a month, who may have saved five thousand rubles over a career, saw the value of his entire life savings shrink to a loaf of bread. But for the most cunning and daring businessmen, the wave of inflation was an incredible opportunity. It heralded an age of fantastically easy money, of fortunes spun out of thin air. The lure was especially strong for those who already had connections, such as the cooperative businessmen, nascent bankers, Komsomol activists and ex-KGB agents, and those who had guts, including intrepid university students who had never known the Soviet system.

Russia was a broken country that needed to attract investment, build confidence in its currency, and establish the basic institutions of the market. The wave of easy money was enormously destructive to all these goals. It taught all the wrong lessons, and the damage lingered throughout the 1990s. The mind-set of these years was that it was far more profitable to wheel and deal with finance, to leverage money, and to exploit the distortions of inflation than to build a business brick by brick. The profits were astounding for Russia, but so were the costs—easy money put off the hard work until later.

In the Soviet system, money played a secondary role in the economy. In the years after the revolution, a few Bolsheviks even fantasized that money would disappear altogether in the workers’ paradise. Soviet industry was geared first and foremost toward meeting production targets and plans, and money was not generally critical to success or failure. If the goods from a factory were shoddy or unneeded, the factory still got subsidies. A whole panoply of notions about money and its relation to private ownership—profit, loss, debt, interest, shares and dividends—did not exist. Moreover, for consumers as well as factories, goods in the shortage economy existed beyond the reach of money; the key factor was access or privilege, not cash.

But when shock therapy began, the first results did little to establish faith in the currency. The initial surge of inflation heightened mistrust of the ruble. In 1992–1994, the Russian people showed they were indeed rational actors in response to economic change: they got rid of their rubles as fast as possible. The dollar became king. Primitive barter trade took hold, as refrigerators were traded for pickles and coal for flour, and nothing for rubles. Those who had the means sent their money abroad, creating a river of “capital flight” out of Russia that continued for years. But most ordinary people just looked for somewhere else to put their money—perhaps in dollars under the mattress.

Just as hyperinflation began to roll through the economy, just as people began to think about getting rid of their rubles as fast as possible, Chubais opened the door for an alternative place for their money—the voucher and voucher mutual funds. The voucher funds soon evolved into all manner of get-rich-quick temptations and climaxed in 1994 in a wave of popular but destructive financial pyramid schemes. If the voucher was a legal financial instrument, given to everyone as a gift by the state, it was not such a big leap to imagine that other pieces of investment paper could be legal too and satisfy the hunger for quick rewards in a time of runaway inflation. Gaidar feared at the outset that the vouchers would lead to massive speculation—the gambling kind. He was absolutely right. The voucher funds soon began to play on people’s expectations for easy money, sprinkling their names with the words “diamonds” and “oil” and offering annual returns over 500 percent.

The voucher had opened a door, and beyond it was a wonderland of unregulated securities, surrogate money, and wild finance, a period that was a perfect illustration of what happens when the market has no rules. A population that for seven decades had been lectured about the ills of bourgeois capitalism was suddenly told, “Get rich quick!” They were not just invited but exhorted to get rich. The exhortations were carried by ads in the newspapers and on television, followed by an army of people to help make the dreams come true. Voucher traders became brokers, speculators, and in some cases thieves. Yevgeny Myslovsky, a veteran Soviet-era prosecutor who later investigated many of the dubious financial schemes of the early 1990s, chronicled a typical rip-off by one voucher fund, Astron. The director collected a thousand vouchers from 254 people between December 1992 and March 1993. He then sold them for 5 million rubles, of which he spent 1 million on himself and paid out some of the remaining money to lure more investors. But he invested in nothing—it was strictly a trick.⁷

Psychologically, Russians were totally unprepared to resist the new temptations of wealth. They knew practically nothing about real money or investment; many had never seen a personal check or stock certificate. Alexander Oslon, a leading pollster, described the first post-Soviet years as similar to a man released from prison. When the prisoner first gets out, he is overwhelmed by the blinding light, the fresh air, the euphoric freedom, and the sense of being weak-kneed and naive in a strange new world. The Russian people went through the same transformation. “They emancipated themselves from censorship; they freed themselves from the pressure of the authorities; they emancipated themselves from economic monotony,” Oslon explained.⁸ “Their initiatives and their desires, which were always imprisoned, were set free.” But they didn’t know how to handle it.

“In that time, elements of a new language appeared,” Oslon recalled. “Words like ‘business,’ ‘limited,’ ‘joint stock company,’ ‘funds market,’ ‘dollar exchange rate.’” The new language was followed by alluring, stark, and unrealistic ideas of how the market economy would function. “At the beginning of the period was a fairy-tale concept of capitalism, ‘a field of miracles,’” Oslon told me. He remembered that millions of people were captivated by a television advertisement for one investment fund in which a father and son are sitting, fishing. The son says, “Papa, we are sitting here, and the money is coming!” The message: you can sit and do nothing, and money springs up on its own accord. This yearning for a miracle, for dreams to come true, was fertile ground for the man with big ideas, Berezovsky.

Berezovsky’s brainchild was the All-Russian Automobile Alliance, known by its Russian acronym, AVVA. The alliance was an ingenious scheme that would both tap into public anxiety about high inflation and exploit the pent-up desire of millions of people to own their own car. Berezovsky was general director of the alliance, and the handsome certificates he would sell to the public were signed on the reverse by Kadannikov, director of the huge Avtovaz factory in Togliatti, who became the new chairman of AVVA.

One day after the December 13, 1993, election, in which Yeltsin won approval of the new Russian constitution and a new parliament, the securities went on sale in the vast exhibition hall on Manezh Square next to the Kremlin.⁹ The certificates were printed in Switzerland on paper fine enough for any national currency, with special protection against counterfeiting. Each one was engraved with a portrait of a famous prerevolutionary Russian industrialist, such as Savva Mamontov, a patron of the arts and literature, iron magnate, and the largest shareholder of the Moscow-Yaroslavl-Archangelsk railroad. The certificates were specially flown to Moscow from Zurich in heavy wooden crates and stored under tight security.

But the back of the certificate held a clue that not everything was as it seemed. The certificate was not a share of stock in the legal or traditional sense. Rather, it was a new kind of security, a hybrid called a “bearer certificate.” The bearer certificate gave the person who held it only one right: to exchange it for one genuine share of AVVA. However, trading in the bearer certificate was very difficult, and all the shares not claimed (meaning most of them) would be controlled by AVVA itself. In other words, AVVA was selling papers that said “One Share” on the front but said they were not a share on the back. The certificate holder had no voting rights. Real control rested with the founders of AVVA, a series of companies and banks close to Berezovsky and Kadannikov.¹⁰

Berezovsky added a special twist to discourage people from trading in their certificates. With much hype, AVVA promised to give away 100,000 Avtovaz cars and big discounts on car purchases in a lottery for those who held the certificates. Berezovsky personally announced the first lottery on February 18, 1994, saying 6,500 cars were being offered—every tenth car for free, and the others with 25 percent and 50 percent discounts.¹¹ But the rules of the lottery were that only people who did not trade in their certificates could participate. In the end, the car giveaway lotteries were held just three times. The gambit worked: most people did not trade in their certificates and just stashed them in a drawer. This was good for Berezovsky because it meant he could keep the money and keep control of AVVA too.

In public, Berezovsky’s ambition was sky-high. The “people’s car” project, he announced, would build a new factory in Togliatti to manufacture 300,000 cars a year. The project was estimated to cost between $1.5 billion and $3 billion, although Berezovsky initially hoped to raise about $300 million from selling the AVVA certificates and the rest from a foreign investor, who was portrayed as just around the corner. Kadannikov frequently and prominently suggested the possibility of a joint venture with General Motors. A team of industrial and factory specialists at AVVA worked out dozens of different scenarios for the envisioned factory and visited auto parts suppliers all over Russia.¹² Zlatkis recalled that Berezovsky “was planning to become a Ford,” a pillar of the Russian auto industry. “It was his favorite topic to talk about. I’m convinced he was planning to build it.” President Yeltsin signed a decree in late December 1993 awarding AVVA substantial tax breaks over the next three years.

Berezovsky’s public declarations about the “people’s car,” however, were not the whole story. As early as 1994, Berezovsky was also planning, with Kadannikov, to buy a sizable chunk—perhaps all—of the Avtovaz factory, which was being privatized.¹³ Berezovsky shrewdly realized that Avtovaz was an industrial crown jewel of Russia but would be sold cheaply in the privatization giveaway. So he and Kaddanikov essentially created a scheme to raise the necessary money from people on the street, and they used it to buy shares in Avtovaz.

Dubov’s novel contains some remarkably precise details about the AVVA scheme that are supported by other evidence. Berezovsky deliberately created the hybrid security so he could sell as many certificates as possible while bypassing laws that required shares to be registered in someone’s name. “We won’t be selling shares, we’ll be selling securities,” the Berezovsky character says in Dubov’s book. “Did you get that? The law doesn’t say a word about that sort of paper!” When the operation was over, “the only shareholders will be us, ourselves, and we,” he added. “And we will be making all the decisions. And meanwhile, the rest of the people will be sitting with their wrap papers. And it will be even better if they keep their papers to themselves, for good.”¹⁴

He then lured two of Zlatkis’s deputies to come to AVVA and made her a tempting offer. Zlatkis said her salary at the time was the equivalent of $30 a month. Berezovsky offered her a job at $15,000 a month. “I couldn’t even imagine such a salary could exist,” she told me. “Had I believed in all those things, in all those projects, I would have taken the offer. And for a long time I had doubts.” But Zlatkis told me she ultimately turned Berezovsky down because she thought AVVA’s financial plan would never work—they could never collect the kind of money Berezovsky dreamed of.

At first, Berezovsky’s plan looked like a winner. Outside the Manezh exhibition hall, right next to the Kremlin, long lines formed to buy the certificates; AVVA also accepted vouchers in payment. “Let’s go!” implored the AVVA television advertising. The AVVA certificates soon became some of the most traded papers in the Moscow commodity exchanges. The venture reaped about $50 million between December 1993 and mid-1994. All together, 2.6 million people gave their money and vouchers for a piece of paper that did not even have their name written on it. Then Lyonya Golubkov took to the airwaves, and Berezovsky’s automobile alliance ran out of gas.

Golubkov was the name of a character in a television commercial. He was slightly pudgy, with unkempt, greasy black hair and a dull metal tooth. Unassuming and disheveled yet brimming with enthusiasm, Golubkov became the prophet of the easy money age. Supposedly he had once been a tractor driver, but his life changed overnight when he bought shares in a company called MMM and struck it rich. He bought a pair of boots for his wife, then a fur coat, and finally splurged on a trip to San Francisco to watch Russia play in the World Cup. Golubkov’s fictional adventures were the centerpiece of a phenomenally successful television advertising campaign that took Russia by storm in the spring of 1994. Golubkov sold dreams, and the weary Russian people bought them, spending billions of rubles to purchase certificates in MMM promising instant wealth at 3,000 percent interest a year. Golubkov played on Russian television screens night after night for months—2,666 ads aired on Russian television in March, April, and May alone—in spots that always featured the same sprightly music, a simple white backdrop, and a slapstick style and usually ended with the ubiquitous MMM logo.¹⁵

Behind the curtains of MMM was a reclusive former mathematician, Sergei Mavrodi, who traded in jeans, records, and other goods in the Soviet days and later started a cooperative in the perestroika years, selling computers. Mavrodi was a quiet figure; when his apartment was later searched, police found it relatively modest, filled with butterfly collections and a stuffed bat on the wall. In 1993, when vouchers appeared, Mavrodi moved into the world of securities, and his voucher investment fund, MMM-Invest, became one of the largest and loudest in Russia. “MMM Invest turns your vouchers into gold!” promised the television commercials.¹⁶ However, Mavrodi was to make a far greater contribution to Russian capitalism than just speculating in vouchers. He showed an entire country how to make money out of thin air.

On June 11 and June 16, 1993, Mavrodi officially registered the MMM joint stock company, with 991,000 authorized shares at a nominal price of a thousand rubles each. In the following months, Mavrodi then spun a web of associated companies—named after jewels, such as Diamond and Sapphire—which would trade in hybrid securities, the same “bearer certificates” that Berezovsky had used in setting up AVVA. Although the government had approved the issuance of 991,000 MMM shares, Mavrodi really sold millions of these bearer certificates, each of which was not actually a share but a claim on a bit of a share.

At least Berezovsky promoted his partnership with a famous industrialist, Kadannikov. Berezovsky had a tangible, if unrealistic, goal of building a factory, with the promise of dividends sometime in the future. By contrast, Mavrodi produced nothing but the lure of quick riches. In one memorable advertisement, Golubkov and his older brother Ivan are in San Francisco for the soccer match. Ivan sits in the stands, his head in his hands. He moans despairingly: I worked my whole life and got nothing! And Lyonya, this little brat, did nothing, and he’s rich.

Mavrodi’s company opened branch offices where investors could buy the certificates. In a few weeks, or even days, a purchaser could trade in the certificates for cash at the MMM central office at 26 Varshavskoye Shosse in Moscow. The redemption price was set by Mavrodi, who was making a market in his own securities and sent the price higher and higher. The securities soared from 1,600 rubles, or the equivalent of a dollar at the prevailing exchange rate, in February to 105,600 rubles, or $50, in late July 1994. It was a classic pyramid scheme, in which money from the new investors was used to pay off earlier investors.

Mavrodi was imitating a famous American con artist, Charles Ponzi, a dapper rogue who in 1920 collected an estimated $15 million in eight months by persuading tens of thousands of Bostonians that he had unlocked the secret to easy wealth. Ponzi claimed to have found a way to profit by speculating in international postal reply coupons, a form of prepaid return postage for use in foreign correspondence. After he had paid off his first round of investors—he had paid 50 percent interest in ninety days—new money was rolling in. He was simply reshuffling the money from new investors to old ones, which came to be known as a Ponzi scheme. Ponzi snared forty thousand investors before the scheme crashed.¹⁷

In Mavrodi’s case, the visible payout was a key part of the marketing trick. Myslovsky, the prosecutor who later investigated the scheme, pinpointed the central deception of Mavrodi: he alone controlled the market in MMM certificates. The company created wild demand for the certificates but “kept silent about the fact that it had a right to stop buying the papers any minute or drastically cut down the quotes,” Myslovsky said. For those who got the huge payouts, the game was lucrative, but there was always a big risk that the music would stop suddenly and everyone holding the certificates would be cheated.

While the price soared, Mavrodi was secretive about how he was able to generate such handsome returns, and it appeared that millions of people did not want to know the truth. They lined up—sometimes by the hundreds—to buy the certificates. The government too was passive and mystified. Zlatkis told a journalist at the time that the returns were amazing, but she saw nothing illegal. “They must be working really hard with their securities and the money every day to manage it,” she said.¹⁸ Another time, she declared, “There will always be a financial product offered to the market. We cannot ban this process.”¹⁹

What Mavrodi had really mastered was marketing. His television advertising was created by Bakhyt Kilibayev, a thirty-six-year-old Kazakh film director who touched the raw nerves of post-Soviet Russia. The advertisements were brief and rather crudely produced but poignant in message; they offered a powerful antidote to the prevailing cynicism, pessimism, and worry about daily life. The advertising also dealt head-on with ignorance and naïveté about finance and securities. In one of the initial spots, an elderly man is seen buying an MMM certificate for the first time. “Indeed, a strange piece of paper,” acknowledges the cheerful announcer, as the old man peers through his broken eyeglasses at the document. Later, eyeglasses repaired, he collects his cash. In another spot, newlyweds Igor and Julia, both students, quarrel over their meager budget. “Not a simple solution, but a decision is taken,” intones the announcer as they slap their cash on the counter at MMM. When they return three weeks later to collect, Julia’s eyes light up and they embrace. “It’s better than a stipend!” exults Igor. In another commercial, a lonely single woman, Marina Sergeyevna, believes in no one, says the announcer. But then she collects her cash at MMM and declares, “They did not fool me!” She later gets a boyfriend on the strength of her winnings. “Here, we don’t fool people,” declares the announcer. The message was clear: MMM paper is strange but worth real money. It is better than government stipends, and we won’t fool you as Prime Minister Pavlov did.

The announcer then intones, “That’s true, Lyonya, we’re partners. MMM.” Lyonya’s explanation was completely false—there was no factory—but it contained a kernel of Mavrodi’s philosophy, which was to get everyone to “chip in.” Another spot showed the family at the kitchen table as Lyonya’s wife, Rita, cheerfully draws a diagram on a piece of paper to explain MMM—a large square—and then arrows pointing inward. “Like a huge pool!” exclaims Ivan. “And it is always full.” Everyone chips in! It was the essence of a pyramid scam.

Once Mavrodi and Berezovsky began, others followed and Russia turned into a bazaar of easy money temptations. One widespread scheme, Russky Dom Selenga, carried as its motto: “Every grain of sand of your deposit, we turn into a pearl.”²¹ On a typical day of advertising in the popular Moskovsky Komsomolets newspaper, the First Financial Construction Company offered “up to 1,600 percent in rubles.” Another, ALD Trust, promised investors 500 percent on rubles, or 60 percent annual return on dollars. In a Moscow weekly free newspaper, Extra-M, the Mosimportbank offered 30,000 percent interest on five-year ruble deposits, although it was later pointed out the sum was a math trick taking advantage of the difference between simple and compound interest.²²

The proliferation of easy money traps and lures crept into every corner of life. Soon shares of pyramid schemes were being traded in the Finance Ministry cafeteria, the very institution that was supposed to be policing them. In the cafeteria, employees could buy certificates for “Tibet,” AVVA or MMM. No one could dampen the frenzy; the ministry workers were caught up in Lyonya’s dreams. Zlatkis said, “As soon as I emerged from my office, someone would catch me in the corridor, I mean some ministry official or employee, and would start asking me: ‘Bella, tell me honestly, what do you think, if I sell my apartment and invest all the money in Tibet, will I be later able to buy an apartment for my daughter?’ I began to explain that you will lose your apartment. But the woman said, ‘You don’t want to help us!’” Zlatkis only slowly—too slowly—began to realize the frenzy had become an epidemic. Even the esteemed halls of the Russian Constitutional Court were not immune; court justices bought paper in an outrageous pyramid called Vlastilina. The mastermind was Valentina Solovyova, a one-time barbershop cashier who created her pyramid without any advertising at all, just word of mouth. She promised returns of 100 percent a month, a Zhiguli car for half the market price in the same period, or a Mercedes at one-third the price over three months. A river of cash began arriving at her offices. She used the cash to reward the first depositors in order to attract more. Yevgeny Kovrov, who later investigated the case and headed a government commission to represent the victims, told me that Solovyova’s word-of-mouth approach was as evocative and phenomenally successful as Mavrodi’s massive advertising. “The rumor about this firm spread all over Russia,” he recalled. The first car giveaway ignited a burst of enthusiasm. One person told a friend, and the friend came running. Vlastilina seemed to be especially attractive to the elite—pop star Alla Pugachova reportedly lost $1.7 million. Solovyova set a minimum deposit of 50 million rubles, and still people came. “People got that money together from entire factories,” Kovrov recalled, “and transported it there in bags. And, judging by the accounts of witnesses, they would sleep in front of her offices, making campfires.”²³ Solovyova was convicted in 1999 and sentenced to seven years in prison for taking the ruble equivalent of $130 million from 16,500 victims, although no one knows where the money went and the investors got nothing back.

In July 1994, the Russian authorities began to raise questions about MMM. “Lyonya is getting on my nerves,” Yeltsin grumbled. The State Antimonopoly Committee asked television stations to stop broadcasting MMM commercials, to no avail. Then the tax inspectorate said one of Mavrodi’s subsidiaries, Invest-Consulting, owed 49.9 billion rubles in taxes, payable immediately. Prime Minister Chernomyrdin weighed in, saying, “We must warn those like Lyonya Golubkov and Marina Sergeyevna, the opportunities for easy money in the market will soon disappear.” But the voice of Chernomyrdin, who had presided over a growing backlog of wage arrears in the real economy, was faint in comparison with the wonderland of riches offered by MMM. On July 27, Mavrodi fired back in a newspaper advertisement: “So, the authorities do not like Lyonya Golubkov and Marina Sergeyevna. But do Lyonya Golubkov and Marina Sergeyevna like the authorities? No one’s asked about that. Yet.”

The next day, the pyramid collapsed. The MMM certificates had been trading at over 100,000 rubles, but at 11:00 A.M., Mavrodi announced that the new price—which he alone set—was only 1,000 rubles. Thousands of angry shareholders blocked the Varshavskoye Shosse, the wide boulevard where MMM was located, and riot police were called out to control the crowds. Mavrodi issued a reassuring statement that investors need not worry, the share price would climb back up to 125,000 in a few months. He urged everyone to hold onto their papers. “We, unlike the state, have never deceived you,” Mavrodi declared. “And never will.” Many people were still prepared to believe Mavrodi. “The papers are saying MMM are charlatans, but I trust them over President Boris Yeltsin and his government any day,” a pensioner, Maria Vasilievna, told a reporter. “What has the government ever done for us, except trick us with their money reforms?”²⁴ Days later, Mavrodi began to issue a new security, MMM “tickets,” which were emblazoned with Mavrodi’s portrait. Hundreds of investors returned, hoping that the bubble had not really burst. They too were fooled. Mavrodi had been authorized to sell 991,000 shares, but in the end he deceived between 5 and 10 million people. He was later arrested for tax evasion in a high-profile police raid and was held two months. But he was released after he won an off-year election to parliament and thus received immunity from prosecution. He disappeared and was never prosecuted for the pyramid scheme; six years later Russian authorities said he was still being sought.²⁵

The collapse of MMM threw into sharp relief the near total passivity of the state. Yeltsin and his reformers had let capitalism run untethered, and it had gone berserk. “The government had absolutely nothing to do with it, gave no guarantees, and will not interfere at all,” Yeltsin said after the crash of MMM. Zlatkis was overwhelmed and complained in June that proliferating pyramids were “out of control” and “coming down on our heads like an avalanche.”²⁶ Zlatkis told me the government didn’t really have a clue what was going on; in the ministry, some of her aides even asked if she wanted help in getting one of Vlastilina’s cars at half price. “No one understood anything, not even in one of the divisions of my department,” she recalled. Myslovsky recalled that he saw huge files on the cases, but the general prosecutor was ordered by someone in power at the time not to proceed. “The main slogan at the time was ‘get rich,’” he recalled. “The legislative base was very unclear. These companies were conducting very aggressive advertising, they had a lot of money, and the state reaction was weak, toothless.”²⁷ Vyacheslav Mavrodi, Sergei’s brother and partner in MMM, later told a television interviewer, “If the law enforcement bodies thought I was a swindler, why did they let me do it?”²⁸ Zlatkis recalled, “I had a feeling of helplessness all the time. I knew perfectly well how it was going to end, and I couldn’t do anything about it.”

Dmitri Vasiliev, the Chubais deputy, saw the episode in much darker terms. The reformers had neglected to build the institutions of a market, and as a result chaos was spreading. Vasiliev believed the Finance Ministry had “totally failed” to control the pyramids and was unable to regulate the financial markets. The derivatives used by Mavrodi were no more than “lottery tickets,” he told reporters the week after the collapse, “these scraps of paper are not securities.” Vasiliev warned that without stronger government regulation, “scandals will snowball.” As early as 1992, the reformers had discussed whether to build an independent securities commission, but no one had been interested. Now the wreckage of unbridled capitalism was strewn across the landscape. In the autumn of 1994, Chernomyrdin agreed to set up a securities commission, with Vasiliev as its chairman, to regulate the market. Mavrodi, Vasiliev later recalled, was “the mother of our commission.”

The collapse of Mavrodi’s pyramid destroyed confidence in Berezovsky’s automobile alliance, but the real damage had begun earlier, in the spring of 1994. Mavrodi was a better huckster than Berezovsky. Promising instant returns, Mavrodi siphoned off the easy money, as did the other high-yielding schemes, and sales of the AVVA certificates fell off. Still, Berezovsky had done quite handsomely in the year of the pyramids; according to financial records that were made public later, AVVA had collected 25.3 billion rubles from selling its certificates in 1994, or about $15 million. Kadannikov and Berezovsky later put the total raised at $50 million, although that appears to include interest and profits from reinvestments. In effect, AVVA used the cash it gathered and immediately recycled it, speculating in privatization vouchers, high-yielding bank certificates, and other quick-money schemes, doubling and tripling the winnings. Easy money was easy.

Although the public may have believed during 1994 that it was seeing the birth of a “people’s car,” in fact Berezovsky put the money elsewhere: in buying up partial control of the Avtovaz factory. Financial reports show that AVVA spent 6.1 billion rubles, or about $3.1 million, to buy a third of Russia’s largest car factory, an astoundingly tiny payment for such a huge industrial asset. Berezovsky used two separate methods. First, AVVA used vouchers to buy shares in the factory. Second, AVVA was the winner of an August 8, 1994, investment tender for Avtovaz. The tenders were supposed to be competitions in which the winner made sizable investments in the future in the enterprise, but one official told me later that AVVA was the only bidder.²⁹ At some point, Avtovaz then issued new stock, and a further chunk was given to AVVA. After all this, AVVA owned 34 percent of the factory. On July 23, just seven months after AVVA had been launched at the exhibition hall in Moscow, Berezovsky was placed on the elevenmember board of Avtovaz. The people’s money had helped put him there. It was the perfect plot: he collected money from the public and used it to bootstrap himself and Kadannikov into private ownership of the factory. According to Yuri Zektser, who later became general director of AVVA, inside the company it was absolutely clear by the late summer of 1994 that the Berezovsky scheme had not collected enough money to build an auto factory. Moreover, negotiations with General Motors were bogging down because it feared the political risks of investing in Russia. (Also, there were signs of a war looming in Chechnya, and Russia went through a one-day currency panic in October.) Kadannikov hinted at the difficulties on November 2, 1994, in a newspaper interview, suggesting that General Motors had proposed a tiny project to make twenty thousand cars a year, which “doesn’t suit us.” However, he reassured people that “the anticipated absence of the foreign participation won’t disturb the realization of the AVVA project.”³⁰

What Kadannikov didn’t say was that months earlier Berezovsky and he had used the people’s money to buy Avtovaz shares, and there wasn’t going to be a “people’s car” any time soon. Then, in mid-January 1995, Kadannikov publicly acknowledged a delay, saying the project would be scaled down; in mid-February, he said it was impossible to start building the factory and that AVVA had raised only $50 million out of a planned $300 million. The final acknowledgment that the project was dead came in a May newspaper announcement that AVVA had held its annual meeting on April 7, 1995. The announcement blamed “negative tendencies in the economy and social sphere in the middle of 1994” for the “unfavorable investment climate.”³¹

The people’s car would have to remain the people’s dream. But the people certainly would not get their money back. Berezovsky’s scheme had been structured so carefully that, in the end, neither he nor the buyers of his certificates had a list of who held the papers. That was the idea—no list, no refunds, no problems. The certificates were worthless unless the bearer could find the right place and time to exchange them for a genuine share of AVVA. At the 1995 annual meeting, and at every subsequent meeting, it was also decided not to pay dividends. In fact, in the following six years, AVVA never once paid dividends, despite the millions of tiny coupons it had distributed attached to the certificates. The dividends were as much an illusion as the “people’s car.” The promised 100,000-car lottery was stopped after three offerings and 14,000 cars.

The promises that AVVA made to the people who gave their money were broken, repeatedly. The real winners were Berezovsky and Kadannikov. ³² In 1996, when asked what happened to the people’s money and to AVVA, Berezovsky replied, “It has lived up to every promise it gave. We collected about $50 million, then we made this money work, and at least it did not melt down.... We succeeded in preserving the money, we did not spend it on our needs, on entertainment and pleasure.”³³ Instead, they spent it on buying their own car factory.

Andrei Melnichenko was one of them. He progressed nicely through the best schools—he was a champion of the Olympiads, Soviet-era academic contests—and enrolled in physics at the prestigious Moscow State University. Tall and a bit awkward, with a soft complexion and straight hair parted down the middle, Melnichenko, often dressed in jeans and T-shirts, had the innocent looks of a teenager but the wits and cunning of a financier. In the final years of the Soviet Union, from his dormitory room in the dark labyrinth of the university building, Melnichenko became a youthful trailblazer in the era of easy money.

In his second year, 1991, as the Soviet system disintegrated, the school turned into an informal commodity exchange. The hallways and courtyard buzzed with people selling a ton of copper or oil, usually stored in a state-run factory or warehouse. But everything was traded for cash, and the traders needed a secure, swift, and mobile source of currency. Melnichenko became their man—the premier moneychanger of the Moscow university traders, helping them switch from dollars to rubles and back again, often within hours. Melnichenko and two friends worked out of their dorm room, where they kept a single paper notebook to record the transactions and a large wooden box to store the money. “The university dorm no longer looked like a place where students lived, studied, and did homework, but it resembled a stock exchange,” Melnichenko recalled. “All over the place there were announcements, people buying and selling things. There was a big turnover of commodities and goods—automobiles, trucks, sugar, metals—whatever you wanted.” For three years, Melnichenko paid little attention to his studies but devoted all his energy to hustling rubles and dollars. At first, the day brought in as little as $100 profit, perhaps $2,000 on a very good day. But within a year, the business exploded, and the three students were handling $100,000 a day.

The great inflation of 1992–1994 was like an escalator. Every day, relentlessly, the ruble’s value declined against the dollar. Melnichenko and his friends discovered how to use the escalator to make a fortune. The trick was to take rubles, change them into dollars for a short period, and then pay back the same amount of rubles, which were now worth less, and pocket the profit. The rubles could be borrowed for 10–13 percent a year, but inflation was eroding their value at 25 percent a month. Money fell into their hands out of thin air. All they needed was the guts—and sometimes it required steel nerves—to be a trader. Melnichenko told me that trainloads of commodities were being bought and sold at the university. Because buyer and seller often did not trust each other, they arranged for a deposit in cash. Melnichenko collected these deposits too, and his capital soared. He didn’t even have a safe for storing the cash, but the dorm room had a heavy door, which he locked very carefully. The boys in jeans and T-shirts started to think about life after graduation.

Melnichenko and his friends followed their clients when they moved off campus to nascent city commodity exchanges. Melnichenko opened a tiny office in a shabby two-room apartment and put a two-line advertisement in Moskovsky Komsomolets, a popular broadsheet newspaper: “We buy currency. We sell currency.” The phones never stopped ringing. Customers arrived in the first room with bags of cash, and the deals were closed in the second room, where Melnichenko installed a money-counting machine and a real safe. The boys started to get rich. “We all rented very nice apartments, bought ourselves cars, and lived decently,” Melnichenko remembered.

When the laws changed and they needed a formal license in 1992, Melnichenko found a minuscule one-room bank, Premier Bank, and struck a deal with the owner. He would function under the protection of their license, paying a fee while expanding his money exchange points in the city. For a brief time, he also traded in vouchers and in cigarettes, which were in such demand that cartons of them or whole truckloads could be substituted for currency. When I met Melnichenko years later, I asked him if he recalled having any hobbies or pastimes in those years. He could remember none: just hours and hours on the phone, checking rates, changing money.

Melnichenko’s most important commodity was information. He and his team started each day counting their cash and then deciding what direction the ruble-dollar exchange rate would probably take. They called competitors to see what rates they were offering. There were no computer networks, no exchange floors or flashing tickers, only the telephone. Then clients began calling; a factory needed to change $100,000 in earnings from a shipment of titanium into rubles—fast. For several years in the early 1990s, all such deals were made in cash, which was a boon to Melnichenko. As the rate gyrated during the day, they worked swiftly, constantly telephoning, counting banknotes, buying and selling. “From dawn till dusk,” Melnichenko said. “And often at night as well, because there were night flights, people coming here from the regions, and they needed to catch a flight back home.” They soon reached several hundred thousand dollars a day in trades and hardly ever suffered a loss. The mechanism was as good as a printing press: it cranked out profits all the time. No messy factories to bother with, no aging equipment to replace, no troublesome socialist legacy or red directors to worry about. “To lose was quite difficult,” he recalled. Melnichenko, who was thirteen years old when Gorbachev launched perestroika, started wearing a tie.

Melnichenko’s secret was not his alone. Ruble-dollar speculation became a mainstay of the easy money era in the early 1990s.³⁴ The incentives were stark: industry was flat on its back and would require massive amounts of capital investment, but currency speculation involved low overhead, high profits, and no property. Who could resist? “Good money was earned on speculation. It was easy money, easy capital,” recalled Alexander Smolensky, who in those days was running ruble-dollar operations with cash from Moscow retail clients. Smolensky collected rubles and changed them to dollars, and back to rubles again. “You give money in the morning and collect earnings in the evening,” he said. “It required whoever was the fastest. We spent whole days in the bank—it was like a race, like a machine that was printing money. Every day, it brought more and more money. The most important thing was not to make a mistake. God took mercy. Converting, trading, earning, converting, trading, earning—it was like that every day.”³⁵

In the early 1990s, Russia had no central treasury and came to rely on “authorized” commercial banks for deposits and disbursement of the state’s money. The system was corrupt from the outset but lingered on for years. The banks cozied up to underpaid bureaucrats to snare the lucrative business, with bribery and coercion. The bureaucrats looked the other way as huge sums were “deposited” with the financiers. The bankers then did not disburse the money as they were supposed to, but used it instead for their own purposes. They often repaid the money to the state much later, or not at all. The fleet-footed bankers exploited a simple premise: money has value over time. The corrupt government officials willingly ignored this concept, allowing the financiers to feast on the state’s riches.

The authorized bank system is another example of how the easy money years distorted the formative years of Russian capitalism. Why would banks want to get involved in the risky business of lending to troubled Russian factories or wobbly new businesses if they could simply feed at the trough of the Russian state? They were spoiled by free money from the government, which postponed the day when they—and all the others in the easy money generation—would have to learn how to invest in the real economy and earn profits the hard way.

The impact of easy money lingered through the 1990s. Sergei Yegorov, the chairman of the Association of Russian Banks, offered a revealing look at the distortions in early 1997. He reported that of $21 billion in banking credits issued in 1996, only 1.2 percent were long-term loans to businesses, while 90 percent were disbursed for short-term transactions on government debt, and the rest went to import-export operations. In other words, the commercial banks were barely making any loans at all in the real economy. They were little more than casinos, thriving on easy money.³⁶ One study found that from 1994 to 1996, half of the banks’ profits were generated from easy money. Almost no one got big loans, and the longest term for a loan was one year.³⁷

Khodorkovsky had once boasted that his bank, Menatep, could survive under any regime, and a former vice president of Menatep told me why: the bank was structured to parallel the government. Khodorkovsky and his lieutenants all had direct lobbying links to key ministers, and their deputies to the deputy ministers. The bank thrived on a web of government lending programs, ranging from defense spending to food purchases; the Russian Finance Ministry was one of its major clients and loans for the state made up more than half of Menatep’s lending activity in 1995.³⁸ The former Menatep vice president tried his hand at Western-style investment banking but later concluded, in frustration, that it was futile when the bank earned millions of dollars in profit for doing nothing as an “authorized” bank. “There was just no point” in the painstaking work of investment banking, he said, “when you could go have a banya session with your buddy at the Finance Ministry and they would put in $600 million.”

“The Ministry of Finance would put that money on deposit in Menatep Bank and then instruct them to disburse it to the regions. What Menatep would do was take that $600 million, not pay the ministry anything, and they would delay the start of payment to the regions. When the people came to get the money, they would just delay it for three weeks. Then they would issue not cash but promissory notes—Menatep promissory notes—instead of cash!”³⁹ During the interval, Menatep put the money into high-yielding investments, reaping millions of dollars in easy profits for which they had done absolutely nothing except willfully ignore the government’s instructions. No one was caught, no one was punished.

“The thing was that the crazy money was being made on special relations with the government,” Vladimir Vinogradov, the founder of Inkombank and one of the leading commercial bankers of the 1990s, told me years later after his financial empire had collapsed. “For example, money was taken from the government to finance some programs. Those programs were not financed or were financed just one-tenth of what had to be paid. And the money was invested into vouchers, and they were changed for shares.”⁴⁰ Presto! Easy money was turned into private property.

In the early 1990s, one of the Westerners who got a ringside seat in the age of easy money was Victor Huaco, a one-time Citibank expert on the Latin American debt crisis, who ran his own ruble-dollar currency business in Moscow. He later helped large Western investors navigate the murky world of Russian banking and investments. Huaco, an immaculately dressed financier who saw many parallels between the Russian chaos and the Latin economic upheavals of the 1980s, told me that one of the enduring mysteries was who really picked the winners and losers in the age of easy money. Huaco said he always sensed that there was a “magic hand” behind every deal, that politicians and bureaucrats helped their friends drain the lifeblood of the state itself. The “magic hand” was another sign of what would become the single most destructive phenomenon of the first decade of Russian capitalism, the corruption of power by wealth. The seeds were planted in Soviet times, in the shortage economy and the traditions of blat and svyazi. But the trend accelerated in the years of easy money, when the Russian state was so weak and so bereft of rules and institutions that it was blown away by the forces of wild capitalism that it had unleashed. Later a coterie of financiers became so powerful that they nearly took over the state itself.

Huaco told me that the “magic hand” of power was often hidden from view. The pyramid schemes had stolen from people with great fanfare, and the currency traders were in the open, but the authorized banks worked in secret. The winners got special insider information, which they used to strike it rich. According to the journalist Yulia Latynina, a deputy minister of finance once announced that bonds from a state bank would not be paid. The price plunged. Khodorkovsky then bought them up. Several days later, the deputy minister announced that, in fact, they would be paid. The price surged.⁴¹

“For me, the question always was, where did this magic hand come from?” Huaco asked. “The magic hand came with money, and these people utilized the money to make ten times more by having access to information or deals. When the magic hand picked them, it did not only give them money, it gave them information. They knew certain things and placed their bets accordingly.” In one case, Huaco helped a Russian government agency borrow money from a Western lender. The loan was guaranteed by Russia, transferred to Moscow, and deposited in a Russian bank. A while later, the government agency that was supposed to get the proceeds from the loan complained about never receiving it. Huaco tracked it down. “The Russian bank had just churned it into their own investments,” he said. The magic hand was at work again.⁴²

The age of easy money, the roaring 1990s, masked a dark side of the new Russia. The oxygen of freedom was exhilarating, yet many took it as an invitation for brazen abuse. There was freedom to skirt the law, cheat the state, steal from the population, and get away with it. Coal miners, pensioners, teachers, and nurses went without pay because the “authorized” bankers—the tycoons—who were supposed to distribute their pay on behalf of the state used the money instead to make a quick windfall. Russia offered the spectacle of an elite in Moscow that had become stronger than the state, protected by their own private armies, strong-arming the government into relinquishing its riches, threatening and coercing anyone who stood in their way.

Boris Yeltsin and the liberal reformers around him had spent their best years destroying the symbols of Soviet power, and they did not want to revive the big state; it was a danger still fresh in their memory. In a decision that would have profound consequences for the early years of Russian capitalism, the liberal reformers choose to provide maximum freedom first and rules later. Into this vacuum rushed chaotic forces of evil—the cheaters and charlatans, the hooligans, criminal gangs, corrupt politicians, bureaucrats, natural resource barons, Mafia kingpins, ambitious tycoons, and former KGB bosses. Sadly, in the enfeebled condition of the new Russian state, which could barely muster a pauper’s salary for militiamen and bureaucrats, money bought power. The very essence of the state—authority to set the rules of the game—was simply privatized by the new capitalism. The sequence was unmistakable: the wave of money came first, starting with early opportunities to sell oil and computers for superprofits. The easy money was followed later by privatization of gigantic factories and natural resource treasures. Money and property invariably brought competition and conflict. And conflict needed a place to settle its disputes, but since the rules were still not drawn—the laws not enforced, the courts not effective—the new money and property interests created their own rules outside the law, using bribery and corruption, using violence and coercion, all of which could be easily purchased. The cycle was complete: money ruled.

When Soviet power was demolished, a lid was lifted; the weight of arbitrary Communist Party rule ceased to exist overnight. This was a moment of great danger that no one fully understood. No one thought to put anything in place of the heavy lid. Russia was suddenly thrust into a void.⁴⁴ Slowly, new laws were written and a new constitution was adopted on the heels of the violent shelling of parliament in 1993. But the utterly painful reality of the 1990s was that Russia remained in a vacuum, a free fall, a place of arbitrary power, individual whims, and private score settling. It extended from a simple street corner, where a traffic policeman spent his day taking petty bribes, to ghastly shoot-outs between gangs of thugs, to the highest echelons of the Russian state itself, where money, that mighty symbol of onrushing capitalism, was a potent, caustic force.

The astonishing corruption of post-Soviet Russia was hardly new; the culture and practice were centuries old. Bribery flourished in the time of Peter the Great, who hanged a Siberian governor, Gagarin, for corruption and three years later hanged Nesterov, the man who exposed the governor, for bribery. Throughout the entire reign of the Romanov dynasty, corruption remained a source of income for both petty government employees and high officials. In Soviet times, the definitions changed: the authorities persecuted and prosecuted the perceived enemies of socialism, including those with entrepreneurial instincts. But old-fashioned corruption remained below the surface, in the shadow economy; it was frequently the only possible way to carry out market transactions in a planned economy.

A powerful legacy of the Soviet era—the hostile ideology toward entrepreneurship and capitalism—persisted in the new Russia. The cops on the beat during Russia’s first taste of wild capitalism were the same ones inculcated with the Soviet notions that all businessmen were criminals for the mere fact of doing business. They were the same ones who grew up on a Soviet legal code that criminalized all kinds of market transactions. These law enforcement officials never absorbed the radically new idea that their job was to protect business. Once I asked a Russian police academy instructor about a string of unsolved murders of bankers. He grew indignant and began shouting at me, pushing his chair away from the table, standing, and glowering. “If a banker gets killed, it’s because he did not have a strong enough security service!” he declared. He did not see protecting a banker as police work.

In many oppressive regimes, there is a powerful link between a weak state, corruption, and authoritarianism. If the laws are unenforceable or nonexistent, then just about anyone can be found at fault. This greatly enhances the power of selective prosecution: the rulers can decide arbitrarily who will be caught and punished. Here was the core of Russia’s troubles in the 1990s. The archaic tax laws, for example, were impossible to obey. A small businessman once told me that the total official tax bill on his business was 110 percent of the profits, a refrain that I heard time and time again. The laws made almost every businessman and taxpayer a lawbreaker—and thus a potential criminal and thus a willing supplicant to power and, finally, a briber. Alexander Gurov, the head of an Interior Ministry training institute, once candidly acknowledged that this mentality had become embedded in the Russian people. “Of one hundred people stopped by the traffic police,” he said, “95 percent were offering bribes even before the policeman opened his mouth.”⁴⁵