The Oligarchs

In feasting on easy money, Khodorkovsky tasted every delicious morsel. His bank, Menatep, generated handsome profits with ruble-dollar speculation, plunged into voucher trading, and was a leader in the superlucrative “authorized” banking for the federal and Moscow governments. But in the summer of 1995, one of the most rewarding easy money schemes, ruble-dollar speculation, finally dried up. The Russian Central Bank, struggling to bring inflation under control, imposed a new exchange rate “corridor,” a narrow range in which the ruble would be allowed to rise and fall against the dollar. The banks could no longer gamble on wild swings in the exchange rate. The Central Bank would use its reserves to enforce the limits. Chubais declared that the era of easy money was over. For banks that were speculating on the exchange rate, he said, “buying and selling dollars is an avenue that is now closed.”² Chubais hoped that getting control of the currency would finally dampen the raging hyperinflation that had begun in 1992 and lead to the first real stability in the economy since the beginning of shock therapy.

Soon it became evident that the days of easy money were not yet over. Other fast-money games abounded, and new ones were being invented. A short-term government bond, with a maximum term of three months, was paying amazingly high annual interest rates, sometimes climbing over 200 percent.³ The sizzling bond was easy money with the added benefit of low risk: it had Russian government guarantees. The new bonds were called GKOs, and they would eventually lead the Russian government to disaster. But in the early years they were incredibly profitable: just sit back and watch your money grow by leaps and bounds.

Despite this and other easy money temptations, Khodorkovsky did not want to live out his life as a banker; he longed to be a captain of industry. During mass privatization, Khodorkovsky snapped up many industrial firms, bidding with nothing more than a promise to make future investment. In September 1995, he created a financial-industrial conglomerate, Rosprom, to control his twenty-nine industrial companies in oil, metallurgy, chemicals, food processing, textiles, wood pulp, and paper.⁴ Still, Khodorkovsky was not satisfied with the grab bag assortment of factories he had assembled. When international consultants Arthur Andersen suggested that he model himself after Samsung, one of the Korean chaebol, or industrial conglomerates, Khodorkovsky immediately dismissed the idea, thinking it could not possibly work in Russia, and decided to pour his energy into “one branch” of industry. That branch was oil.⁵

Away from Moscow, on the other side of the Ural Mountains, in the broad basin of western Siberia, the Soviet Union had opened up huge new fields of oil and gas in the 1960s and 1970s. The deposits stretched across the West Siberian basin, which is drained by the Ob River, Russia’s third largest, as it wanders 3,650 kilometers from Altai in the south to the Kara Sea in the north, largely fed by spring thaws and melting snow. The river’s course is a road map to mammoth underground reserves of oil and gas, but unstable bogs and harsh weather conditions discouraged exploration until the 1970s. Then, in the late 1970s and 1980s, the giant fields were recklessly and wildly exploited in a frantic effort to prop up the failing Soviet economy with revenues from oil exports. At the time of the Soviet collapse, oil extraction in Russia was sliding downward, from a peak of 591 million tons in 1987 to 303 million tons in 1998.⁶

The Soviet oil industry was a vast archipelago of outdated, state-run “production associations,” oil enterprises based largely on the location of their fields. More than anyone else, Vagit Alekperov, an ethnic Azeri who was director of a production association in Kogalym, led the way in transforming post-Soviet Russia’s industry into modern Western-style companies. In 1991 and 1992, huge volumes of oil were being illicitly exported to take advantage of the large gap between domestic and export prices; a ton of oil sold for export would fetch $100 or more but could get only a fraction of that price on the domestic market. In this time of terrible flux and wholesale theft, Alekperov created his own Western-style oil company, Lukoil, out of three Siberian production associations, two refineries, and a trading company. Lukoil was Russia’s first vertically integrated oil company, handling everything from exploration and drilling to refining, distribution, and sales, very much like modern Western oil companies. Alekperov, who took the initiative at a time when the economy was in chaos, set an example that the Russian government under Yeltsin then followed for the rest of the industry. The idea was to reassemble the oil fields and refineries of the far-flung Soviet system into a dozen large private companies, building a new, market-oriented oil industry. By contrast, the natural gas behemoth Gazprom was left largely as it had been in Soviet times, as an inefficient and hidebound monopoly. On November 17, 1992, Yeltsin signed a decree establishing the first three vertically integrated oil companies, including Lukoil, and ordered the industry restructured.⁷

Khodorkovsky saw the prize he wanted, but it took him several years to reach it. Shrewd and calculating, he found an inside track. During the first year of the Yeltsin government, Khodorkovsky became an adviser to Vladimir Lopukhin, Gaidar’s minister of fuel and energy. The Gaidar cabinet was in office for less than a year, and the carving up of the oil industry had just begun, amid much uncertainty. When Khodorkovsky took the job with Lopukhin, he did not want to leave Menatep Bank, so Lopukhin created an informal position, with the rank of deputy minister, putting Khodorkovsky in charge of the energy ministry’s “investment fund.” What this really involved is not clear. However, it must have given Khodorkovsky an excellent source of intelligence about the oil industry. Nevzlin, Khodorkovsky’s long-time partner, told me that “the only plus I remember” from Khodorkovsky’s appointment “was that he managed to get acquainted” with the powerful Soviet-era directors of the production associations, known as the “oil generals.” At the time, few outsiders knew what was really going on in the oil production associations, and the oil generals were secretive, but Khodorkovsky got a glimpse of their closed world.⁸

What he found was that Alekperov had created his own empire in Lukoil. Another oil general, Vladimir Bogdanov, the strong-willed boss of the production association in Surgut, along the northern bank of the Ob River, created a similar kingdom of his own, Surgutneftegaz. Khodorkovsky was a Moscow financier, not an oil general, but had ambitions to stand shoulder to shoulder with Alekperov and Bogdanov. He set his sights on the new vertically integrated holding company that would eventually become Russia’s second largest oil giant. It was called Yukos, and the core was a production association, Yuganskneftegaz, on the southern bank of the Ob River. (A second production association, Samaraneftegaz, was also added to Yukos.) The boss of Yuganskneftegaz was Sergei Muravlenko, whose father was a legendary Siberian oilman. Muravlenko became just the kind of contact Khodorkovsky later needed for his takeover. Yuganskneftegaz had enormous potential; it was extracting 33 million tons of oil a year in 1993, nearly 15 percent of all western Siberia’s output. Yuganskneftegaz also had some of the largest reserves in Russia, including the biggest single undeveloped field, Priobskoye.⁹ Nonetheless, like most Russian enterprises, Yuganskneftegaz was not an ideal company—it had big tax debts and wage arrears, and it suffered losses by selling oil at Russia’s artificially low domestic prices.¹⁰

Khodorkovsky was not the only one to spot an opportunity in Siberian oil. Foreign investors who came to the nascent Russian stock market avidly sought out shares in oil companies. It was said in the early 1990s that the cheapest place in the world to drill for oil and gas was on the Russian stock market. These stock market investors did not really care about sloppy management, overdue taxes, and crazy prices; in fact, most never even visited the companies in which they invested. They just bought the stocks and hoped to make a killing. The investors, many of them really just sophisticated gamblers, were lured by cheap assets, and that meant oil reserves in the ground, of which Yuganskneftegaz had plenty. The former production associations, which I will call the oil field extraction companies, did the real work of the industry, bringing the oil out of the ground. On the Russian stock market, it was possible to buy large blocks of shares in these oil field extraction companies. Yuganskneftegaz was one such alluring stock. It was the equivalent of a midsized international oil company such as Amoco.¹¹ The shares of Yuganskneftegaz started trading in the summer of 1994, and they were featured in research reports by Moscow’s small but growing legion of stock brokers.¹²

Even for gamblers, there were risks in buying shares in oil field extraction companies like Yuganskneftegaz. First, there was the theft. Russian oil industry managers, local politicians, criminal groups, and assorted sharks and financiers discovered ingenious ways to leach the wealth out of the extraction companies. Buying the stock did not guarantee that you would get the oil wealth. The managers, for example, could easily siphon off the profits into an offshore private “trading company” and leave you with the debts and wage arrears. A common technique was called “transfer pricing.” An extraction company sold oil to another company at an artificially low price, say, $2 a barrel. The second company then sold it for export abroad at a much higher price, say, $18 a barrel. The result was that the extraction company, with all the drills, wells, fields, and workers, lost money, while the second company made a handsome profit. The wealth was transferred from one company to the other, often in secret using shell companies and offshore havens.

The second risk was ownership. For the hungry investors who bought up stocks of the oil field extraction companies, there was the prospect that they, in turn, would be swallowed up by one of the new holding companies that the Russian government was creating in the early 1990s. These holding companies became corporate energy giants practically overnight and ranked among major international oil firms. The holding companies were fattened up by the state, which awarded them lucrative stakes in the oil field extraction companies. In general, the Russian government gave the holding company at least 51 percent of the voting shares in the extraction companies—enough to ensure the that holding companies got control. The government then planned to sell off its part of the holding companies after three years, reaping a nice chunk of cash.

The risk for investors in the extraction company was that, when the holding company took over, the new bosses could easily siphon off the oil wealth for themselves. The holding company could use transfer pricing, asset stripping, and other means to redirect the profits. The shareholders in the oil field extraction company would be robbed. They would have lots of stock certificates, but none of the profits. The situation was ripe for conflict. The holding companies, which had a majority of shares in the extraction companies, would naturally want to exercise their clout. The extraction companies had their own minority shareholders, who could be prickly and rebellious if they saw they were being ripped off.

The collision between oil field extraction company and holding company is exactly what happened at Yukos. A reclusive American investor, Kenneth Dart, heir to a foam cup fortune, bought tens of millions of dollars worth of stock in two extraction companies, Yuganskneftegaz and Samaraneftegaz, in those early years, figuring that, despite all the problems, they had cheap assets—oil in the ground. Dart’s purchase was secret at first, but later led to a bitter public fight with Khodorkovsky, master of the Yukos holding company.¹³

Yukos was created as a holding company in 1992, incorporating Yuganskneftegaz, Samaraneftegaz, and refineries. Yukos was offered for sale three years later, in 1995. Khodorkovsky recalled that he doubted whether the government, having created the oil holding companies, would ever sell them off. “I could never believe that the state would sell oil,” he said, insisting that he did not contemplate becoming an oil general in 1992, while he held the informal post in the fuel and energy ministry. Only in early 1995, Khodorkovsky said, did he begin to believe it was possible to buy Yukos.

Vladimir Potanin was a member of the Sparrow Hills club but a latecomer to the world of the young Russian tycoons. He arrived on the scene long after the others had suffered the hard knocks of the cooperatives and their nascent business ventures. During the tumultuous years of perestroika, when Mikhail Khodorkovsky was transforming worthless noncash into cash, when Boris Berezovsky was setting his sights on Avtovaz, and when Alexander Smolensky was building dachas, Potanin was a low-level bureaucrat in the Soviet Foreign Trade Ministry, where his father also worked. He started his first business in 1990, and he reaped his first fortune only after the Soviet Union vanished. Yet this pugnacious young man with thinning hair and a gravelly voice became ringleader of all the tycoons in 1995 in their greatest single property grab. He came on suddenly, out of nowhere, helping them and helping himself, enormously.

As a child, Potanin did not know lines and shortages. His family enjoyed access to special privileges, including well-stocked food stores and frequent travel abroad. When he was very young, Potanin lived in Yemen; later he spent four years in Turkey. When he was a teenager, his father was the Soviet trade representative in New Zealand. In Moscow, Potanin grew up in a tree-shaded neighborhood known as Matveevskoye, not far from where Stalin and later Brezhnev had their dachas. Alexei Mitrofanov, a childhood friend, recalled that they would often play in a nearby wood, hiding behind the trees and watching the Soviet bosses drive up to the dachas in their limousines.¹⁴ When I talked to Potanin’s teachers at School 58, I got the impression of an independent young man who was surrounded by elite trappings. His classmates were sons and daughters of Soviet diplomats and KGB agents who often spent months or years abroad. “When they came back from their summers abroad, they gave a report about the country in which they had lived,” the head teacher, Nina Yermakova, told me over tea and cookies as she brought out well-worn class scrapbooks. “We are talking about the broad horizon that these kids had,” she said, pointing to a photo of earnest young Potanin, who scored top marks for an essay on Tolstoy.¹⁵

Potanin was admitted to the Moscow State Institute of International Relations, a training ground for the cream of Soviet officialdom, especially future diplomats, trade officials, and KGB agents. He graduated in 1983. “The school taught us how to behave in the corridors of power,” Mitrofanov said. “How to build relationships with people in power, what to say and what not to say.” These were the young men and women whom the Soviet Union wanted to send abroad, the future grain merchants, spies, and arms traders. Although surrounded by the ever present ideology, a certain pragmatism was the order of the day. The future envoys had to know how to be clever in dealing with the capitalists they would meet. Oleg Churilov, a classmate of Potanin, told me “the emphasis was always on the practical issues” in their training, such as finance and currency, which Potanin studied in the International Economic Relations faculty.¹⁶ Potanin’s textbooks included titles such as International Currency-Financial Organization of Capitalist Countries, Currency-Credit Relations in World Trade, and Finances of the Capitalist States. Soviet socialism was troubled within, but for Potanin and his classmates, the important lessons were about the capitalists outside.

His friends suggest Potanin saw clearly the real world outside, but not the Soviet Union’s rot from within. His years at the institute were the final ones of the Brezhnev period, but in his crowd it was not certain, or even evident, that Soviet socialism was headed for a crack-up. “All of the students at that time did not think the period was a stagnation period,” Churilov recalled. “We did not think that the country was in a state of decline or that the economy was going through difficulty.”

After graduation, Potanin landed in the Foreign Trade Ministry, where his father had made a career. He was assigned to Soyuzpromexport, a Soviet state export company, first as an “engineer,” which was a clerk’s position, and later as an “expert,” which meant a senior clerk. Oleg Klimov, who was Potanin’s boss then, recalled the young man’s enthusiasm. But his task was dreary—selling fertilizer abroad: nitrogen, potash, and phosphate. Potanin was a Soviet phosphate fertilizer salesman-bureaucrat.¹⁷ The job provided one clue to Potanin’s future fortune, however: he traveled to the Far North, such as the Kola Peninsula, where the Soviet Union had a huge potash mine. In the same division of the Trade Ministry, there was also an ore section. In his visits to the North, and in the ore section, Potanin learned firsthand about a Soviet metals colossus that had been excavated out of the Arctic tundra, Norilsk Nickel. Founded in Stalin’s era of industrialization, Norilsk was originally hacked out of the ice by prison camp labor. Later it became a major producer of nickel for the war effort. At the time of the Soviet collapse, Norilsk produced 98 percent of Russia’s valuable platinum-group metals and 90 percent of its nickel.¹⁸

Potanin was just beginning to dabble in private business when the Soviet Union fell apart. Growing bored after seven years at the Trade Ministry, Potanin saw that many of his friends were going into business—the state trade monopoly was disintegrating and quick fortunes were awaiting those who could master private trade deals, exporting cheap domestic oil, timber, and minerals to markets abroad and importing consumer goods like computers. In March 1990, Potanin prodded twenty small trade organizations, most of them state-owned Soviet agencies hankering to make deals, to give him about $10,000 in start-up money for his new trading company, Interros. Soon thereafter, Potanin realized the trade organizations really needed a bank, and in 1992 he set up one for them. This is when Potanin got his biggest break. For a young man who had done nothing exceptional in the perestroika years, Potanin exploded out of the blocks. As the Soviet trade bloc in Eastern Europe collapsed, a Soviet state-run bank, the International Bank for Economic Cooperation, was in financial trouble. The Eastern European states that had loans from the bank could not repay them. In 1992 the bank’s management sent out letters quietly urging some of the bank’s customers within Russia to shift their money to Potanin’s bank. The suggestion was that this would save them from difficulties. How these letters came about is not clear, but it was one of those moments when Potanin most likely had a little help from the “magic hand” of power. Potanin appears to have effectively taken the deposits and assets away from the troubled state bank, while leaving behind the debts. Potanin inherited a $300 million windfall over a six-month period. He seems to have done nothing to earn the money other than offer a safe harbor. Almost overnight, Potanin’s bank had become a major Russian financial institution. By comparison, Menatep Bank, which had been started several years earlier, had assets of $835 million.¹⁹

In April 1993, Potanin, still on a roll, created the United Export-Import bank, known as Uneximbank, which also enjoyed explosive growth. Potanin’s license for Uneximbank was approved with unprecedented speed by the Russian government and Central Bank, with support from the reformist finance minister at the time, Boris Fyodorov. Potanin clearly had friends in high places. The early founders of Uneximbank included Potanin and his business partner Mikhail Prokhorov, who had been a foreign trade official in Soviet times and was also a son of the nomenklatura. Prokhorov also worked at the failed state bank from which Potanin got his $300 million. They put together about forty major Russian exporters and foreign trade organizations. One of them was Techmashimport, a state-owned oil and chemicals import-export firm. When I asked Gari Titarenko, vice president, how he had come to join Potanin’s bank, he recalled, “Potanin himself was always a very humble and smart boy. He was very respectful; during meetings he always paid a lot of attention to Techmashimport.” Why? “He wanted all our money to go through Uneximbank.”

Soon the smart boy demonstrated that his real talent was in the easy money scheme of “authorized” banking. Potanin once said Uneximbank was a “commercial bank with a state mentality,” and the state mentality meant the state’s cash flow. While the others were no slouches at milking the state, Potanin seemed to have a golden touch. In the summer of 1994, when he was invited to the club on Sparrow Hills, Potanin was rapidly burrowing into one of the richest lodes of the government, the State Customs Committee. The customs service was bulging with cash it had accumulated from import duties. Potanin somehow persuaded the customs service to put the cash in his bank, in return for creating a system to ease shipments by importers and exporters through customs—by paying duties in advance on their goods. If they sent Potanin money before their goods reached the border, Potanin could switch the money quickly to the customs service accounts to pay the duty. This wasn’t very difficult because the customs service accounts were in his own bank. Potanin provided the Customs service with computers too, so they could keep track of the incoming payments. It was convenient, especially for Potanin, since the crossroads of all the money was in Uneximbank. Potanin’s balance sheet swelled further as authorized bank for the Finance Ministry, the tax service, the arms control export agency, the City of Moscow and others. Potanin was also serving the accounts of Norilsk Nickel, which became a shareholder in Uneximbank. In 1994 Uneximbank began the year with $322 million in assets, and it ended the year with $2.1 billion.²⁰ Potanin was rocketing to the top of the banking charts and by December and had his eyes on Norilsk Nickel itself, a lucrative industrial prize. But how to get it?

“I have this idea,” Potanin told Jordan one day. The Russian government was desperate for cash to pay overdue wages and pensions. Potanin had the cash, although much of it was actually the government’s own deposits. Potanin suggested, to Jordan, making the government a deal: give it a loan and take some factories as collateral. “He needed someone to write it up,” Jordan told me. Jordan and Jennings, who had played a key role in launching voucher auctions and had made a small fortune as voucher speculators, were once again on the ground floor of Russia’s great sell-off. “Steven and I sat down and started thinking,” Jordan recalled. One late night in Jennings’s apartment, they sketched out the plan. In this early version, they proposed that banks loan money to the state and take the shares as collateral. If the government failed to pay back the loans, they could sell the shares for a very handsome commission. The plan called for a 30 percent fee, which was generous indeed. “Don’t forget our background,” Jordan said when we talked about it years later. “We were brokers!” They thought getting a fee for selling the shares would be the point of the whole scheme. “I always thought that I am going to do something and earn my fee,” Jordan said. “We never perceived it as a vehicle to take the companies for themselves,” he said of the tycoons. “At least I didn’t.”

For a few more days, Jordan and Jennings hammered out their plan and wrote up a white paper for Potanin. They put no names on it. Jennings claimed there was a “certain logic” to the scheme from the Russian government’s point of view, since it would bring badly needed cash to the budget to pay pensions and teachers. Moreover, the young Russian stock market had gone through its first major decline in late 1994. Share prices were way down. Under the Jordan-Jennings plan, the government could hope to fetch a higher price for the factories later on, when presumably share prices would again be higher. Also, it was possible that top managers from the private sector would be brought in to improve the performance of the factories. But Jennings told me he insisted that the deals must be completely transparent and open to international competition. If not, he said, “it will be a disaster.” Jordan gave the white paper to Potanin. “This is how you do it,” he said.²¹

But what happened next did not follow Jordan’s script. Potanin took their paper but “destroyed the concept,” Jordan said. In the end, the process was not open to foreigners, was not transparent, and turned out to be rigged. It also had one profound consequence that they did not foresee: the white paper was the beginning of a merger between the Russian tycoons and the government. The tycoons found their political patron, an answer to their search on the Sparrow Hills. He was Boris Yeltsin, and they were about to graft their wealth to his power.

In the 1990s, no other civil servant, no other reformer, oil general, red director, or politician had quite the same survival skills as Chubais. He exhibited extraordinary determination under fire, and he believed the ends justified the means. But Chubais was a survivor for another reason as well. He would push, drive, and force his way forward, but then he usually spotted the moment for a compromise. This was the secret to his success in mass privatization. The famous compromise with the Supreme Soviet, allowing insiders to control the newly privatized companies, served the larger goal of getting property out of the hands of the state.

Chubais was quite certain of those ideals in the early years of mass privatization, when he and Yeltsin championed a populist slogan: “We do not need hundreds of millionaires, but millions of property owners.” Chubais was a crusader out to break the grip of the old nomenklatura and halt the wild, “spontaneous” privatization by the factory directors. He was dead certain that the way forward lay in the magic of the market. It was the market that would choose winners and losers; it was the market that would determine who would become an “effective” owner of the new property taken from the state. The market was the boxing ring that would sift out those who deserved to survive, by dint of their ingenuity, and those who should go broke. For Chubais and the reformers, the lesson of Soviet socialism had been that no single politician or bureaucrat, acting arbitrarily, can be as effective at making decisions as the collective wisdom of the marketplace. Chubais and his generation of reformers believed the overly politicized decisions of the Communist Party had proven totally ineffective. The way out lay in rigorous market competition, and to be competitive the market had to be open. This is why Chubais was so enamored of the small business auctions he and Gaidar had witnessed in Nizhny Novgorod: it was pure, elementary competition.

On March 30, 1995, Potanin appeared before the Russian cabinet. Down both sides of a long, horseshoe-shaped table, cabinet members sat shoulder to shoulder, small bottles of mineral water, note pads, and sharpened pencils neatly arrayed before them. The prime minister sat at one end, his voice amplified by a microphone, while aides and visitors were seated in an open section of the room at the opposite end. Potanin had prepared carefully for the meeting. He outlined an early version of his loans for shares plan, drawn from the Jordan-Jennings white paper. In a session that lasted four hours, Potanin, joined by Khodorkovsky and Smolensky, told the ministers that a consortium of commercial banks was prepared to loan the government 9.1 trillion rubles, or $1.8 billion, in exchange for collateral in shares of some of Russia’s largest enterprises. This was no small change. The budget called for raising 8.7 trillion rubles from privatization during the year, but so far the State Property Committee had taken in a paltry 143 billion rubles.²² Wages and pensions were going unpaid across the land. The bankers were offering the government a plan to reap the whole year’s privatization revenue in one fell swoop.

Among the forty-four companies that the bankers wanted, it was no accident that both Norilsk Nickel and Yukos were on the list: Potanin had put them there. Just the day before, Potanin had been carefully going over the details of his plan with Kokh, the blunt-spoken privatization chief. Potanin already had the support of deputy prime minister Soskovyets, whose realm included heavy industry and who was part of the reactionary group around Korzhakov, Yeltsin’s security chief and leader of the so-called party of war. But the question remained, What about Chubais, the other deputy prime minister?

The young reformers on the Chubais team were privately disgusted by the obvious corruption in the loans for shares scheme. Dmitry Vasiliev was Chubais’s original deputy at the State Property Committee and in 1995 was chief of the Russian federal securities commission. He told me that Jordan came to him one day with an early draft of the loans for shares white paper. “I said I think this scheme is corrupt,” Vasiliev recalled. “What actually happened was even worse than we ever expected.”²³

Everything about loans for shares was the opposite of what the reformers had once stood for. It reeked of picking winners and losers arbitrarily instead of letting the market decide. It meant that the new owners were being selected, once again, by politicians, not by market competition and not by the testing of strength in the “boxing ring.” And the loans for shares deals were carried out not in the open but largely in secret, by offshore shell companies and hidden accounts. Even the auctions were corrupt: the auctioneer himself, in most cases, turned out to be the winning bidder. The auctions were rigged, and Chubais let it happen.

If Chubais had any doubts, they were fleeting. On the day of Potanin’s presentation to the cabinet, Chubais recalled, “I understood immediately that I was going to support this idea at any cost.”²⁴ Sergei Belyaev, another Chubais recruit from St. Petersburg, told me that Chubais’s only concern was whether the banks were really serious about coming up with so much money. Chubais wasn’t questioning the plan, just whether the tycoons would pay. “He saw a certain danger here that the banks would deceive us,” Belyaev told me. “They would take the packets of shares and won’t give any money.”²⁵

But evidently Chubais swallowed those doubts quickly because in the autumn of 1995, another threat loomed—loss of the whole privatization drive. The political atmosphere had turned gloomy. Yeltsin suffered two heart ailments during the year, the Chechen war was dragging on, and Yeltsin seemed to have lost his way as a champion of the democratic movement. The polls showed that every week the Communist Party was coming closer to a victory in the December elections for the lower house of parliament, the State Duma. The Russian Communists were led by Gennady Zyuganov, a one-time Soviet party propagandist. Zyuganov liked to present himself to Westerners as a modern social democrat, but at home he was an ideologue who sounded harsher themes of nationalism. Zyuganov’s positions on the economy were hazy; he talked about renationalizing some banks but also declared his support for “mixed” forms of property ownership. When Zyuganov said he would reverse privatization, Chubais took the threat seriously.

Chubais, who became extraordinarily unpopular among Russian voters in these years, felt increasingly isolated in his post as deputy prime minister. He was marginalized under Chernomyrdin; there was a “complete blockage” of his goals by the other deputy, Oleg Soskovyets. Chubais told me he felt Chernomyrdin had 50 percent of the government in his hands, Soskovyets had 40 percent, and he had only 10 percent. “Privatization was practically stopped,” Chubais recalled. The Russian reformers had envisioned a second phase of privatization, after vouchers, in which state-owned factories, refineries, and mines would be sold for cash to the highest bidders. Chubais saw the failure to get this phase of privatization off the ground as a major setback, not only for the budget but for his larger hopes of creating a new class of private owners. At the time, he recalled, “There was no consolidation, no political force standing behind private property.”²⁶

Jordan and Jennings traveled constantly around Russia, poking their noses into aging factories and debating how to best sell off shipyards and mines. They always stopped in the office of the factory director. They kept track of what they half jokingly called the “Lenin index,” a tally of how many pictures of Lenin they saw still hanging in the general directors’ offices. One might assume, with the collapse of the Soviet Union, that the “Lenin index” would decline. But in fact, they discovered, it did not. One reason was that in mass privatization, Chubais had compromised by giving insiders, the Soviet factory directors, a chance to keep control of their factories. The pictures of Lenin remained in place. The “red directors” still ruled Russian industry. This, coupled with public discontent, was what made Zyuganov a powerful figure and worried Chubais.

Then Potanin made a potent argument to Chubais. He suggested that loans for shares would correct the earlier compromise, which had prolonged the reign of the red directors. Potanin especially wanted to torpedo Andrei Filatov, a giant of a man who was the red director of Norilsk Nickel. His legendary influence reached all the way from the tundra to the Kremlin. “During the loans for shares auctions, it was not possible to declare this at the time because it was politically unacceptable,” Potanin admitted later. “But the real reason was to bring normal management to sizable companies and to break the red directors’ lobby. It was the most important thing.”²⁷ What Potanin did not say, was that the “normal management” he had in mind was to be the inexperienced financiers like himself and Khodorkovsky. Could they manage better than the old factory bosses? Chubais knew that the factory directors, siphoning off the profits into their own pockets, were poison for the market, but there was no way to know whether Khodorkovsky, Potanin, or Berezovsky would be any better, or why. Nonetheless, he saw the tycoons as the epitome of modern Russia and the factory directors as crusty symbols of past failures. Paul Bograd, the political consultant who had grown close to the Chubais team, recalled that Chubais believed the young tycoons would bring “some semblance of competent corporate management, as opposed to doing nothing and allowing these places to be looted. Which, given the state of management then, was likely to happen.”²⁸

Khodorkovsky recalled that in early 1995 “a situation arose when it became clear to everyone that big industry remained in the hands of the red directors, and if nothing happened, then they would bring the Communists back to power.”²⁹ Chubais had many motives, but this one was at the core: to defeat Zyuganov and the Communists—forever. If Zyuganov did well in the December elections, it was already clear that he would become the leading challenger to Yeltsin in the 1996 election. Chubais knew that Yeltsin was weak physically and could see from polls that he was weak politically. He feared a Zyuganov victory would lead Russia backward. Chubais never advertised it publicly—he attempted to keep the goal obscure so as not to alarm the opposition—but loans for shares should really have been called “tycoons for Yeltsin.” Chubais was willing to hand over the property without competition, without openness, and, as it turned out, for a bargain price, but in a way that would keep the businessmen at Yeltsin’s side in the 1996 reelection campaign.

I personally had my doubts at the time about whether Chubais was this farsighted, and it was hard to even imagine Yeltsin running for president again. But in retrospect, I was wrong about Chubais and Yeltsin. Loans for shares was the first phase in Yeltsin’s reelection campaign. It was the weld between the tycoons and the Kremlin, the embrace of wealth and power. Chubais later acknowledged the trade-off. “The fact that these would be the forces supporting their own private property, that they would defend their private property, and that in the political process they would be, by definition, against Communists and pro-reform—that was 100 percent sure,” Chubais told me. “And that is what happened.”

Gaidar, who remained a confidant of Chubais, although he was not in government at the time, acknowledged, “It was not the most pleasant choice. I would rather not be in a position to make this choice. But I really think that if Yeltsin, Chernomyrdin, and Chubais had not gone to this loans for shares scheme, which radically changed the composition of forces in the economic elite, I think that Zyuganov’s chances of winning the elections would have been substantially better, and maybe he would have been unbeatable.”³⁰

On August 30, 1995, Yeltsin signed a decree putting loans for shares in motion. But the plan was already changing in ways that made it even more appealing to the tycoons who were lobbying for it. When Jennings originally wrote the white paper, he had insisted on international competition—foreign oil companies would be welcome to compete for Russia’s riches. However, the door was slammed shut on foreigners in the autumn, in part thanks to the efforts of Khodorkovsky and one of his deputies, Konstantin Kagalovsky, a shrewd former Russian representative to the International Monetary Fund and World Bank. Kagalovsky, who had been among those helping Gaidar at the dacha in 1991, waged a campaign to exclude foreigners from the Yukos auction by making the rules ambiguous enough to create doubts among investors about whether they could legally keep the properties if they won. Scaring away foreign investors had a larger purpose as well—the tycoons were not so rich that they could outbid foreign oil companies in an open competition. Khodorkovsky did not want to have to face British Petroleum in a bidding war for Yukos. By slamming the door on foreigners, he was making sure that the price of the properties would be as low as possible.

Chubais also had a cunning plan to ensure the loyalty of the tycoons. He created a dual key system, in which the first key for each factory would be given out before the 1996 presidential election, but the second key—the one that allowed the businessmen to lock up and keep their property—would be distributed only after the 1996 election. Thus the magnates would have an interest in seeing Yeltsin reelected because if Zyuganov came to power, they could kiss their factories and oil fields good-bye.

As it was hammered out in September 1995, the loans for shares plan called for the State Property Committee to hold auctions in which the banks could bid for state shares in the enterprises by offering low-interest loans to the government. The shares were to be held as collateral. Until the loans were repaid, the banks were allowed, indeed encouraged, to take the factories under control and to manage them. Then, if the government later defaulted on the loans, as everyone expected, the banks could sell the shares in a second phase, paying back the loans but keeping 30 percent of the proceeds as a commission. The sell-off was set for September 1996, but the elections were held earlier, in June and July.³¹

In a key procedural twist that enormously helped the tycoons rig the auctions, they were allowed to bid on their choice property while also being the auctioneer. For example, Menatep Bank was the official “organizer” of the auction for Yukos as well as the chief suitor. This was a glaring conflict of interest, but increasingly it was the businessmen who dictated the terms to the government and not the other way around. They picked the companies they wanted, they picked the terms, and they picked the outcome. In the next few years, this became the kernel of how the businessmen dealt with the state. Joel Hellman, an economist for the European Bank for Reconstruction and Development, later termed it “state capture,” meaning that businessmen and vested interests turned around and “captured” the government. ³² This was not an abstract idea in the Russia of the 1990s. It was the credo of Berezovsky: big capital should talk and politicians listen.

Amazingly, both Chubais and Kokh maintained a public facade at the outset of the loans for shares auctions that all was going normally. Kokh told reporters that the auctioneer was “largely a technical function and does not give any additional advantage” to the bidders. Chubais was even more brazen. “As you may know,” he told journalists on September 25, “we don’t predetermine the buyer.” The procedures for the auctions “will be free and competitive.” This was sheer nonsense. The reality was that Chubais and Kokh handpicked the winners: Potanin, Khodorkovsky, and Berezovsky won their prizes in quick succession. Just as the tycoons demanded, foreign bidders were excluded, again with the support of Chubais and Kokh. “Russian capital cannot yet compete with foreign capital,” said Kokh, parroting the Khodorkovsky line.

On September 25, Yeltsin approved a list of forty-four companies that were going to be offered for the loans, but two weeks later it was narrowed down to twenty-nine. In the final version published October 17, 1995, there were only sixteen enterprises. Four more were not auctioned due to lack of bids. Of the dozen loans for shares auctions that took place between November 3 and December 28, 1995, the overwhelming majority went to the banks that acted as organizers of the auction, their secret shell companies, or affiliates of the enterprises themselves. The deals were rigged.³³

On November 17, Potanin seized his prize, a 38 percent stake in the metals giant Norilsk Nickel. The initial offering price had been $170 million, and Potanin won by offering just $100,000 more. This was a mere pittance for a company that reported 1995 revenues of $3.3 billion and profits of $1.2 billion. Although the truth of the company’s financial condition was murky, it was clear Norilsk had enormous potential, borne out in the next few years when the company generated billions of dollars in profits. There were four bids that day, three of them from Potanin and his affiliates. The fourth came from another Moscow bank, Rossiisky Kredit, through a front company, Kont. This bid was for $355 million, far more than Potanin had offered. But Kokh “smelled a rat,” and he disqualified the bid on the narrow technical grounds that the bidders did not possess a reliable bank guarantee for the capital they were offering, while the capital of the other bidders, all Potanin affiliates, “seemed credible.”³⁴ One reason why Potanin’s capital was so “credible” is that the government was filling up his bank with its own money. An Interior Ministry investigator, whose probe into the Norilsk case was later closed without charges, ferreted out one interesting footnote to Potanin’s victory: one of his front companies, Reola, lacked the same bank guarantees, but Kokh didn’t seem to take notice.³⁵

Khodorkovsky’s prize, Yukos, came with somewhat more difficulty and drama but demonstrated anew Chubais’s determination to remain on the path he had chosen. It also showed that Khodorkovsky could be ruthless. At stake in the December 8 auction was 45 percent of the shares of Yukos in a loans for shares deal, as well as another 33 percent in an investment tender. The starting price was a $150 million loan for the shares, and $150 million for the investment tender, with the winner required to promise another $200 million investment in the company. Khodorkovsky’s bank, Menatep, was organizing the auction. Khodorkovsky was bidding through one of his front companies, Laguna.

However, another group of three banks was preparing a serious bid for Yukos. This troika of prominent tycoons was made up of Vladimir Vinogradov of Inkombank, Mikhail Friedman’s Alfa Bank, and Valery Malkin’s Rossiisky Kredit, which had lost out weeks earlier on Norilsk. The three bankers objected immediately to Menatep’s demand that all the deposits for the auction be put in Menatep, and this time Kokh listened. He agreed that all the money would instead be deposited at the Central Bank.

However, the three bankers didn’t really have enough money. They needed a $350 million deposit and sent out feelers to foreign investors, but without much luck. One of the investors they approached was California billionaire oilman Martin S. Davis. What the three bankers did not know is that Khodorkovsky was playing hardball. Khodorkovsky dispatched one of his top lieutenants to the United States to deliver a blunt message to Davis that the laws in Russia on foreign investment in loans for shares were at best vague (as Khodorkovsky had earlier ensured they would be) and at worst could cost him everything if tested in court. The Russian told Davis that if he invested in the rival consortium bidding for Yukos, he would lose all his money. “You put at risk $300 million,” the Russian said. Davis decided not to invest, although Khodorkovsky’s rivals never knew of the secret mission. ³⁶ When I asked Khodorkovsky about it, he brushed it aside. “They spoke about it,” he said of his rivals, “but I didn’t believe that a foreigner would give money. Because on my side I was trying to raise foreign capital also—nothing!”

Instead of cash, the three bankers offered the equivalent of $370.2 million in short-term government bonds, the high-flying GKOs, and said they would put $82 million in cash into the Central Bank. But Kokh rejected the GKOs, as did Chubais. Only cash would do. They were saying, in effect, the Russian government would not accept its own bonds as a deposit for the auction. This meant that the three bankers were out of the running. “We had cash,” one of Khodorkovsky’s vice presidents later told me. “We were quite sure our competition did not have cash.”

Even without knowing about the secret mission to discourage their investor, the three bankers were furious at Khodorkovsky. They knew Menatep was organizing the auction and bidding at the same time, which was bad enough. But they also suspected Menatep was able to cough up the cash thanks to its close ties to the state and to Yukos itself. They knew that Khodorkovsky had mammoth loans and deposits from the Finance Ministry; the federal government was Khodorkovsky’s largest single client. In a rare public attack on a fellow tycoon, the three bankers demanded that the Yukos auction be postponed and fired off a fusillade of complaints at Khodorkovsky. They even threatened to dump all their GKOs and disrupt the government securities market.³⁷ But Chubais was determined not to be derailed. “Nothing doing,” he insisted. Chubais later suggested the three banks were making so much noise because they were just angling for a deal with Khodorkovsky for a piece of the action.³⁸

At some point, Pyotr Aven, president of Alfa Bank, went to see Chubais. They were old acquaintances. Aven had been present when Chubais first met Gaidar, and he had been a minister in Gaidar’s government. Despite Aven’s appeals, Chubais would not budge on the issue of using the GKOs for the deposit. The three bankers were out of luck. Chubais and Aven ruined their friendship over the Yukos auction. Chubais told me later that his chief concern at the time was getting cash for the budget. He added, “One can make claims that Khodorkovsky wasn’t using the right money, that he was using Yukos’ own money, and one can say he was using some of his deposits which the Ministry of Finance had placed with him, and that his sources had been formed in a wrong way. But my criteria was simple: besides all the political thoughts, I desperately needed money for the budget.”

Chubais got the money, but where did Khodorkovsky find it? The answer is unknown. Khodorkovsky by this time had a financial and political network that stretched across Russia and abroad. He was on good terms with Muravlenko, the president of Yukos, before the auction, and Muravlenko had helped Khodorkovsky lobby the government against foreign investors. But it is not clear whether Yukos had such cash—the movement of large amounts of money is often hidden in shell companies and not evident from official annual reports and audits. Khodorkovsky said he borrowed money from other tycoons. “Smolensky gave us money, Most Bank gave us money,” he said, adding that Menatep also borrowed from several defense factories which it had worked with in the past.³⁹ “Yukos at that moment had wage debts, six months’ wage arrears, they didn’t have any money at all,” he claimed.

Kokh later hinted that Khodorkovsky had indeed exploited his connection with Yukos to raise the cash to buy Yukos. He suggested Khodorkovsky pledged future oil deliveries for loans. The three other bankers “could not collect as much money as Yukos and Menatep could obtain, for instance, against oil futures,” Kokh wrote. “All sorts of things become possible when such an oil company joins forces with a large bank. This made people angry, and they started repeating angry mantras like ‘if we could only separate Yukos from Menatep’ and the like. But strategic alliances are legal and play a positive role.”

On the same day as the Yukos auction, Potanin snapped up another oil company, Sidanco, winning 51 percent of the shares for $130 million. The two oil generals, Alekperov and Bogdanov, also won loans-for-shares auctions for pieces of their companies, Lukoil and Surgutneftegaz respectively. The Surgut auction was an especially graphic example of how the Chubais ideals of openness and competition were ignored in practice. Outsiders were warned in advance by the the Surgut management not to make a bid, and the airport in Surgut was closed that day, so other bidders could not fly in to buy part of the company. They did not.⁴⁰

The final oil prize of the year was claimed, at the last minute, by Berezovsky. In the summer of 1995, he abruptly parted ways with Kadannikov, the Avtovaz factory director who had been his partner in AVVA and in the Zhiguli deals. Kadannikov, facing a growing tide of debt and backlog of wages at the factory, unexpectedly demanded a huge repayment from Logovaz for an earlier shipment of thousands of cars. Berezovsky didn’t flinch. He needed to raise $4 million overnight and he found it, selling off part of Logovaz and paying the factory on June 22, 1995. By this time, Berezovsky had already put himself into a higher orbit. He had taken on the Aeroflot accounts and taken over the ORT television channel, and now he was hankering for a piece of the oil industry sell-off.

Yuli Dubov, the author of Bolshaya Paika, the roman à clef about Berezovsky, told me once that Berezovsky only really functioned in a crisis environment. Berezovsky habitually waited until ten minutes after a deadline to even begin to think about how to act. “He is one of those people who can exist calmly and comfortably only in extreme situations, in which not a single other person would feel comfortable,” Dubov told me. He described Berezovsky as among those who never rest, who change things by the sheer force of their energy, who “constantly have a nail in their chair.”⁴¹ It was this Berezovsky who, in late summer and early autumn 1995, rushed into the loans for shares giveaway.

He lobbied the Kremlin to hastily slice off a new vertically integrated oil company, Sibneft, which included Russia’s largest, most modern refinery in Omsk, and a Siberian production association, Noyabrskneftegaz. Korzhakov recalled that Berezovsky’s pitch was that he needed oil revenues to support the television channel. Korzhakov said, “I am not very good at economics” and gave his approval. He and a top Yeltsin aide called a regional governor and the minister of energy to “put in a word for Berezovsky,” Korzhakov said.⁴² If he did not know much about economics, Korzhakov was clearly drunk on power. “Berezovsky needed my okay, for if I had been told he was founding an oil company without my knowledge, I would have instantly made short work of him,” Korzhakov later said.⁴³ Yeltsin signed the decree creating Sibneft on September 29, 1995, making it Russia’s sixth-largest oil company. With Kokh’s help (he drafted a key document for Berezovsky in the middle of the night to meet the next day’s deadline), the controlling block of shares in Sibneft was hastily thrown into the loans for shares auctions. It was scheduled for December 28, 1995, to be the last. The starting price was $100 million.

Like the other tycoons, however, Berezovsky didn’t have that kind of money, nor did he have much time. He had met the superfinancier George Soros, who was already spending hundreds of millions of dollars on philanthropy inside Russia, supporting civil society and helping Russian scientists, writers, and teachers through the difficult early years after the Soviet collapse. Alex Goldfarb, the biologist who had once been a link between dissidents and foreign correspondents, was close to Soros and also knew Berezovsky. Desperate to raise money, Berezovsky visited Japan, Germany, and New York, looking for loans to help him buy Sibneft. But he ran into a wall of refusal. Goldfarb, who attended Berezovsky’s presentation to Wall Street money men, recalled, “Investors were afraid it could all fall apart. At that time, Berezovsky was no one.”

After Berezovsky left New York, Goldfarb helped him pass along a thick file of documents about Sibneft, some of them crudely sketched and typed, to the Soros financial team in New York. Berezovsky later told me he had been seeking $50 million from foreigners for the purchase of Sibneft.⁴⁴ He had asked Soros for $10 million to $15 million.⁴⁵ Goldfarb told me that word came back in a few days from New York: no thanks. Soros was not even willing to put in a million because he felt “the risk was too great,” Berezovsky said. Berezovsky recalled that Soros told him “I cannot give you even one dollar” because he was worried that Zyuganov, the Communist Party leader, would be elected president and then renationalize private property. Berezovsky eventually found the money for Sibneft with help from Smolensky.⁴⁶ On the day of the auction, Berezovsky won with a bid just $300,000 over the starting price of $100 million. A few years later, the company had a market capitalization over $1 billion.

Throughout 1995 there were hints of what the tycoons were up to, but never a full picture. Perhaps a full picture was impossible, since the always secretive magnates were never a cohesive group. Their overlapping alliances and frequent conflicts subdivided and recombined them into several amorphous groups. The clans of Russian capitalism were just beginning to coalesce in 1994–1995, laying the groundwork for what would later become a full-fledged system of rival tribes—powerful and well-financed groups of politicians, factory directors, moneymen, journalists, and corporate secret agents.

Lumbering out of the fog of confusion and chaos in the first years, a new capitalist leviathan was visible, but its true nature was hard to discern. Just two weeks before Potanin’s cabinet appearance in March to pitch loans for shares, one member of the Sparrow Hills club, Oleg Boiko, spoke publicly about some aspects of the tycoons’ private discussions. Boiko described creation of a “big eight” of financial-industrial giants who were contemplating a greater role in politics. Boiko named companies, not people: Logovaz (Berezovsky), Menatep (Khodorkovsky), Stolichny Bank (Smolensky), Alfa Bank (Friedman), Mikrodin (Yefanov), and several others associated with Gazprom. Boiko, however, did not include the fast-rising Potanin or Vinogradov. Without mentioning their weekly meetings on the Sparrow Hills, Boiko accurately described the early political mood among the tycoons—that they lacked a clear-cut political patron, and they were nervous about further upheavals. They wanted normalcy. But Boiko’s comments, which stirred much talk about the “Magnificent Eight,” failed to point to the loans for shares grab just around the corner. Boiko did not participate in loans for shares and later slipped from prominence.⁴⁷

The most prescient of those who discovered the rising clan structure of Russian capitalism in 1995 was Olga Kryshtanovskaya. Usually wearing her hair pulled back in a bun and evincing a patient, tutoring manner, Kryshtanovskaya often resembled a very proper schoolteacher. But in fact she was a laser-smart sociologist. She made a specialty out of studying the Russian elite, and she was perfectly positioned to see the leviathan coming out of the fog. In the early 1990s, she carried out her research by going from person to person, trying to understand the business practices, finances, and mores of the “new millionaires.” Kryshtanovskaya and her band of student researchers conducted long interviews with dozens of businessmen. They were invited by some into luxurious marble palaces and by others to meet on a park bench. She found one future industrialist, Kakha Benzukidze, living in a one-room apartment and sleeping on a cot. Kryshtanovskaya painstakingly traced how they had made their first money and how they had made it grow. She compiled lists of the wealthiest businessmen and lists of the biggest banks, and then she made cross-checks and diagrams, trying to piece together companies and empires. Then she carried out still more interviews to find out how they worked. Kryshtanovskaya spotted the emerging clan structure and wrote a penetrating piece about it, brilliantly summarizing the history of the late 1980s and early 1990s. The essay appeared in Izvestia in January 1996 under the headline, “The Financial Oligarchy in Russia.” It was a turning point that brought the tycoons’ actions into focus. More than just wealth, they were amassing political clout. Kryshtanovskaya pioneered the idea that the tycoons were becoming an oligarchy—a small group men who possessed both wealth and power. She spotted the rise of Potanin’s Uneximbank, the power of Khodorkovsky’s Menatep, and the significance of Gusinsky in Luzhkov’s realm, although Berezovsky did not appear on her list.

Much of what the outside world knew about Russia in the early 1990s was focused on Yeltsin and his power struggles, which dominated the headlines. But two diplomats stationed in Moscow, both veterans of the Soviet period, also spotted the rise of the clans in the summer and autumn of 1995. Glenn Waller, a shrewd Australian diplomat who had spent nearly a decade in the former Soviet Union and Russia, wrote a lengthy and perceptive cable in May on Russia’s “financial-industrial elite” that captured virtually all the key players of the Sparrow Hills club. Moreover, Waller nailed down the marriage of wealth and power, the merger of financial and political interests, which was at the core of how Potanin, Khodorkovsky, and Berezovsky were functioning at the time. He warned that although privatization had given the new tycoons fabulous wealth, they should not be regarded as resembling Western titans of capitalism. “The relationship between business and government in Russia remains very close,” he wrote, “indeed incestuous. Even the ‘new’ business elite grew out of the Soviet system—most (if not all) of the private financial groups made their first capital through their privileged access to party and Komsomol funds or through political contacts (in Russian: blat) in government ministries. Today, they continue to rely on government favors.... Big business in Russia continues to coalesce around powerful political leaders.”⁴⁸

A hard-nosed skeptic, American diplomat Thomas E. Graham was back in Moscow for his second tour of duty in the summer of 1995. Graham was trying to explain to himself—and to policymakers in Washington—how Russian capitalism was morphing into rival clans and warring financial-industrial groups. What Graham saw did not neatly fit into the Washington idea of brave reformers led by Yeltsin and Chubais fighting off the Communists.

One day, the word came back from Washington: please don’t use the word “clan” anymore. The State Department bureaucrats didn’t like it; “they said ‘clan’ has an anthropological meaning; you can’t apply it to Russian politics,” Graham recalled. So he fixed the language in his cables to read “elite groups often referred to in Russia as clans,” and in the summer of 1995 he began to dig deeper. In the autumn, he asked for permission from Washington to publish an article in Russia spelling out his unvarnished views on what was happening. Graham told me he did not expect approval because a diplomat was supposed to be discreet; it was not very often that a political counselor was permitted to publish strong views of his own in the country where he was serving. Public statements were for presidents and secretaries of state. But the approval came and Graham wrote, without the usual diplomatic niceties, about what he saw happening around him. The essay was published on November 23, 1995, in the newspaper Nezavisimaya Gazeta, which had recently started receiving financial backing from Berezovsky. Graham declared that “a new regime has emerged in Russia” characterized by a stable, but vigorous, contest between rival clans. The essay, which filled an entire page of the newspaper, was the talk of Moscow for days. Graham argued that the real balance of power in Russia was not Boris Yeltsin against parliament, not reform against revanche, but the noisy pushing and shoving of the clans. And he used the word “clan” without hesitation. Graham outlined five major clans, including Chernomyrdin’s energy lobby, Luzhkov’s Moscow group, the Korzhakov “party of war,” and Chubais together with the tycoons; he told me years later that he erred by including the hapless Agrarian Party as fifth. But in retrospect, the essay precisely captured the emerging structure, mechanics, and methods of financial and political tribes.

The publication triggered an angry reaction by both governments. The Russians lodged an official protest with the U.S. embassy, mortified not by Graham’s conclusions but by his public candor. Back at the State Department, Graham’s essay hit like a thunderclap because of the unspoken message that the Clinton focus on Yeltsin and the young reformers was misguided, that other power brokers were rising, and that they were not necessarily committed to Western-style democracy. It was not the message the U.S. government wanted to hear. Graham told me he braced himself for trouble in Moscow after the dustup over his article, fearing that Russian sources would stop talking to him.

Meanwhile, the political mood in the country was grim. In the parliamentary elections, the Communists won the largest single bloc of seats in the next Duma. Their leader, Zyuganov, was well positioned to run for president the next summer. In January, the Chechen war spilled over into neighboring Dagestan in a terrible, bloody battle between Russian troops and a small band of Chechen separatists holed up in a border village, Pervomaiskoye. Inside the Kremlin, Yeltsin was in the grip of the reactionary Korzhakov and his “party of war.” Then on January 16, Yeltsin abruptly fired Chubais from his post as deputy prime minister. Chubais had weathered more than four years in the cockpit of privatization and economic reform, but he had become a hated symbol of all the tumult and pain Russians had endured. “He sold off big industry for next to nothing,” Yeltsin told reporters. “We cannot forgive this.”