The Oligarchs

Yeltsin had lost fifty-seven pounds by the time he officially returned to the Kremlin on December 24. “Good morning,” he greeted the guard in a slow, breathless voice. “I’m in a good mood, in good health, ready for the fray.” But he spoke too soon. Yeltsin fell ill with pneumonia and his return was delayed nearly two months. Finally, he launched his second term in March, appointing Chubais first deputy prime minister and giving him broad authority over the economy, including the powerful portfolio of finance minister. Yeltsin then sent his influential daughter Tatyana Dyachenko to Nizhny Novgorod to persuade the young reformist governor there, Boris Nemtsov, to accept a post as deputy prime minister in Moscow, alongside Chubais.²

Nemtsov had caught Yeltsin’s attention years earlier when, as a young physicist, he led demonstrations against a nuclear power plant during perestroika. After Yeltsin appointed him governor of the region, which was heavily dependent on the defense industry, Nemtsov earned a reputation as an economic reformer. He quickly privatized small business and experimented with change on the hidebound Soviet-era collective farms. Tall and exuberant, with a perpetually youthful manner, Nemtsov was never afraid to speak his mind. He once told me that Russia desperately needed young people in leadership. “We need to get rid of the drunk old men at the top,” he said.³

Nemtsov took up Yeltsin’s offer to become a deputy prime minister in Moscow in March 1997. He and Chubais, dubbed the “young reformers,” heralded a new activism, a fresh start for Yeltsin’s second term. They were emboldened by signs the economy was perking up after so many years of decline. The sky-high interest rates on short-term government bonds, the superlucrative GKOs, had subsided to reasonable levels after the election. The gates to foreign capital were open, not only for the government but also for Russian companies. The spring brought a Russian stock market boom, which in turn gave rise to a young, prosperous, and lively new class of Moscow professionals in the brokerages and exchanges. Chubais was especially proud that hyperinflation had finally been quenched. “Let it be etched on my gravestone as one of the most impressive achievements of my life,” he said.⁴ But intractable problems remained; millions of people were still paid months late. In many parts of Russia outside of Moscow, real money had disappeared, and a medieval economy of barter had taken its place.

From the outset, Nemtsov declared that his goal was to vanquish “bandit capitalism.” Nemtsov often, and gleefully, declared, “I am for people’s capitalism.” In his first months in office, he tried to show what he had in mind. He ripped up an outrageous sweetheart deal giving huge rewards to the management of the natural gas monopoly, Gazprom, which was partially owned by the state, and demanded better terms. In a bit of showmanship, Nemtsov got Yeltsin to sign a decree ordering government bureaucrats to give up their cushy foreign-made limousines and drive Russian cars such as the Volga, a chunky sedan manufactured in Nizhny. Yeltsin, proud of his young protégé, gave up his Mercedes for a while and rode in a Zil limo used for Soviet Politburo members. But eventually he went back to the Mercedes. Nemtsov also pushed through a measure calling for high-ranking government officials to disclose their income, a novelty for a political elite nurtured on secret payoffs and offshore bank accounts. Nemtsov and Chubais promised to junk the system of “authorized banks” that the tycoons had exploited for easy money. They also promised to end wasted subsidies on housing and to reform the mammoth energy monopolies. Nemtsov’s showy, populist initiatives attracted wide attention, and his poll ratings zoomed upward. He was often mentioned as a possible successor to Yeltsin. However, the “young reformers,” Nemtsov and Chubais, took criticism from their own ranks that their agenda was shallow. Dmitri Vasiliev, the Chubais privatization deputy who became head of the federal securities commission, privately argued to Chubais that the second term was a golden opportunity to strengthen those vital institutions—rule of law and market regulation—that they had neglected at the outset of “shock therapy.” But Vasiliev’s voice went unheard.⁵

In April, Nemtsov met individually with the oligarchs. “I explained my intention . . . to establish new rules,” he said—from now on, the government would be open, transparent, and competitive. No more rigged auctions. There would be open tenders for everything, even provision of army rations. What’s more, he told the bankers that he and Chubais wanted to focus on creating a new middle class. The bankers replied enthusiastically that they would support him, especially in his desire to create open, above-board rules of the game. Nemtsov recalled the oligarchs’ lament that their previous wars—the kompromat and media combat, violence, theft, and deception—were a waste and they wanted to leave those days behind.⁶

It was all nice talk. In fact, Nemtsov was suggesting nothing less than dismantling the system of oligarchic capitalism that had taken shape under Chubais, Yeltsin, and the tycoons. The system had at its core a quick-profit, no-tomorrow ethos that was forged in perestroika with the explosion of cooperatives and banks, reached full strength in the frenzy of vouchers and easy money, and ripened into enormous property grabs in the loans for shares auctions. Nemtsov didn’t stand a chance against this system with words alone.

The model of oligarchic capitalism, centered in Moscow, spread quickly throughout Russia’s regions, as local barons copied what they learned from the tycoons. They grabbed control of factory complexes, glued themselves to regional governors, and sought fortunes with the same audacity that had rewarded the Moscow tycoons. Even in the capital, the ruling oligarchy extended beyond the seven to include dozens of other magnates who were less well known. For example, Vladimir Yevtushenkov, president of the conglomerate Systema and longtime friend of Yuri Luzhkov, was an influential tycoon in his own right who had assembled, with help from the city, a $1 billion group in mobile telephones, electronics, hotels, tourism, insurance, oil, and other properties.

While Nemtsov played for the television cameras, Chubais quietly underwent a fundamental rethinking of his own experience over the last few years. He reached a conclusion that had far-reaching consequences. Chubais decided that he had to break the incestuous relationship between wealth and power, a bond he had done so much to forge. Perhaps loans for shares had been necessary in 1995 to sell off the factories to younger managers, crimp the red directors, and raise money for the budget. That was worth it. Perhaps it had been necessary in 1996 to get Yeltsin reelected and destroy Zyuganov. That trade-off too was worth it. But in early 1997, Chubais was troubled by the merger of wealth and power. Chubais never denounced “bandit capitalism” because in fact it was his capitalism; more than anyone else, he had designed, nurtured, and protected it. In fact, he admired some of the tycoons, whom he considered modern capitalists. But he nonetheless decided the rules would have to change; he could no longer dish out the goodies as he had before.⁷

Chubais seethed in anger at Boris Berezovsky’s statements that the businessmen would run the country like a board of directors. When Chubais accepted this arrangement for the sake of the 1996 election, he certainly did not see it as permanent, as Berezovsky did.⁸ Chubais told me that before 1996 he was totally preoccupied with defeating the Communists. “There was nothing more important than this,” he said. “We could sacrifice a lot for this goal.” After Yeltsin was reelected, however, his outlook changed. He did not want to become a tool of Berezovsky, and he figured there was no better time to free himself than at the beginning of Yeltsin’s second term. “Yeltsin was president, but this was a different president,” he said. “This was Yeltsin elected anew, and if from the very beginning we didn’t start a new life with a different president, later on it would surely be impossible to do so.”⁹

Chubais had often demonstrated his preferred tactic for achieving change. He drove hard, then compromised, then came back again seeking to repair the earlier mistakes. For example, he made a huge bargain during mass privatization by allowing the red directors to keep control of their companies. Then he tried to compensate later by shifting property to the tycoons in loans for shares. Now he set about trying to fix the errors of loans for shares. One of the mistakes had been the rigged auctions. He decided the days of rigged auctions were over. Regardless of what had gone before, the market would now pick winners and losers. According to Yeltsin, Chubais declared it was time to show the oligarchs who was boss. “We need to sock them in the teeth for once in our lives!” Chubais said. “We won’t achieve anything if we don’t do this.”¹⁰

Chubais told Vladimir Gusinsky about his change of heart in late 1996 or early 1997. Gusinsky was preparing for the next big wave of privatization. At stake was an enormous telephone and communications company, which Gusinsky wanted badly. “You should keep in mind,” Chubais told him, “this will be an auction, and the person who wins will be the one who pays the most.” Chubais was unusually insistent. “Do you understand, Vladimir Alexandrovich?” Chubais asked Gusinsky.

In fact, Gusinsky and Berezovsky did not understand. They heard what Chubais said but did not take him seriously. In their view, the rules of the game could not be switched off like a light. They thought it was just rhetoric, like Nemtsov’s “bandit capitalism” slogans. Besides, everyone knew that it was not so simple. Was Chubais really changing the rules or just finding a new label for the same old game? One hint that nothing had changed came when Gusinsky was appointed as consultant to organize the telephone company sale, a role that in the past had been reserved for the prearranged winner. Gusinsky and Berezovsky simply assumed that the oligarchs would continue to carve up the country for themselves, with Chubais as their handmaiden.

In the spring of 1997, the capital market boom was in full swing. Russia had opened itself to the outside world, and a torrent of investment in stocks and bonds flooded into its nascent exchanges. Planeloads of investors were shuttled into town and given tours of Red Square, the Bolshoi Theater, and the Kremlin; they bought billions of dollars in Russian equity and debt. Dana F. McGinnis, a Texas fund manager, recalled the atmosphere of his early visits, which eventually led him to invest more than $200 million in Russia. “There was great optimism that there would be an end to the arms race and that some 250 million people would be brought into the capitalist fold,” McGinnis told my colleague Steven Mufson. “There was a buzz in the air. The country was evolving by the hour. You could feel it.”¹² By 1997, the reelection of Yeltsin seemed to have opened the spigots all the way. Russia was awash in speculative portfolio investment. Foreigners, who never visited the factories or refineries they were investing in or asked who ran them, plunked down billions of dollars for stocks and bonds. Foreign portfolio investment—the purchase of stocks and bonds—rose from $8.9 billion in 1996 to an incredible $45.6 billion in 1997, equaling 10 percent of the Russian economy.¹³ William Browder, who had come to Russia in the early days of privatization and discovered the Murmansk ship bargain as well as dozens of other undervalued companies, later set up his own fund, Hermitage, which became one of the best-performing funds in Russia in 1997, with a mammoth $1.2 billion in Russian equities under management. The savvy Browder, who was then thirty-three years old, was just one of many who rode the boom to new heights.

The allure of stocks was the “two-cent kilowatt.” A Moscow fund manager explained it to me this way: shares in a Russian electricity monopoly were selling at the equivalent of two cents per kilowatt per line, while a Brazilian electric company sold at fifty cents; in the United States it was five dollars. The two-cent kilowatt looked pretty cheap if you figured Russia would be stable and grow in the years ahead. “It was clear skies as far as the eye can see,” recalled James Fenkner, a bald, acerbic analyst for Troika Dialog, one of the largest brokerage firms in Moscow. Fenkner was a hardened, well-informed veteran of the crazy 1997 boom. “Toward the end, everyone was after everything,” he said. “All you had to do is say a Russian word, and if the Russian word had ‘share’ attached to it, you could sell it.”¹⁴ The Russian Trading System, an over-the-counter electronic stock market, soared nonstop for months. The index became the best performing emerging market in the world during 1997. The Moscow brokerages opened spacious new trading floors with flickering computer screens, frantic traders entwined in telephones, and a vocabulary of “blue chips” and “second-tier stocks” that glossed over the underlying problems. It had an aura of Western modernity, but underneath it was cutthroat.

In securities, dirty dealing was widespread, and practices that would land a broker in jail in the West went unregulated in Russia. Insider trading was common, as were techniques like “front-running,” when a local broker would exploit the rise in a stock price created by his own client’s large order, or “ramping,” which meant trying to run up a stock price by issuing glowing—and usually misleading—research reports. Brokers often made side deals for their own accounts while trading in the same stocks for clients, a conflict of interest that the investors never knew about.¹⁵ Russia had the markets but not the rule of law or the business culture of a mature market economy, which would deter cheating and theft. Dmitri Vasiliev, then the securities commission chairman, told me he spent most of 1997 trying to enact regulations to bring order to the unruly market. It was a nearly impossible task. Russia’s companies beckoned with cheap kilowatts, and in that summer of frenzied activity, Moscow became a gold rush town. It was easy to conclude that Russia had climbed out of the post-Soviet economic quagmire for the first time. Leonid Gozman, a political adviser to Chubais, marveled, “If this is not success, what is success?” Every stock deal, every loan offering had a shimmering story to go with it. I got a taste of this when Alexander Smolensky stepped out onto the stage of world finance.

Smolensky had come a long way from his days as a typesetter. His bank, SBS-Agro, was one of the largest commercial banks in Russia, with $5.2 billion in assets, forty-three thousand employees, and the most admired corporate art collection in the country. His plastic credit cards were used by members of parliament and his automatic teller machines were located inside the Kremlin. His conference room was hung with nineteenth-century Russian and German portraits and decorated with sculpted elephants, to which he had taken a liking. Smolensky never lost his earthy, streetwise manner, but he now was at the pinnacle of Russian business. He no longer needed to bring a few extra suits in his suitcase for his vice presidents. They could buy their own.¹⁶

In July 1997 Standard & Poors issued its first ratings of four Russian commercial banks, including Smolensky’s SBS-Agro, which soon became the first to tap into global capital.¹⁷ Smolensky floated a $250 million Eurobond at 10.25 percent, which was just 4.25 points over U.S. Treasury bonds.¹⁸ Xavier Jordan, a vice president of J.P. Morgan, lead managers for the loan, explained to me later the way he had pitched the Smolensky loan to investors. Russians had an enormous storehouse of savings under their mattresses, he said, perhaps 30–40 percent of the economy. They didn’t trust banks, which held only a tiny fraction of the country’s savings. Smolensky was building a retail banking empire that people could trust, he said. “If you assume Russia is going to converge into the real world,” he added, Smolensky would capture those mattress savings. “That’s a license to print money.”¹⁹ It was a wonderfully simple story: Smolensky, the onetime dump truck driver, builds the Russian equivalent of the Bank of America. Imagine: Smolensky, whose “risk” was just a shade greater than U.S. Treasury bills, could pull all those wads of dollar bills out from under the soggy mattresses! The story lasted about a year.

In the rush for black gold, Gusinsky was left out. He never got a chance to grab a Siberian oil company, and he never participated in loans for shares. Gusinsky often boasted that he did not dirty his hands in old Soviet factories.²⁰ Perhaps it was just as well because the failed theater director did not understand factories and refineries, conveyor belts and pipelines. Rather, after the Yeltsin election, Gusinsky hunted for his own black gold. He wanted to make big money, but not from mining nickel or hydrocarbons. Gusinsky sought wealth in the television airwaves, the silent digits of computer transmissions, the tiny pulses of electricity that carried phone conversations. He wanted to become Russia’s king of communications. His black gold shimmered with silicon chips, fiber-optic cables, satellite beams, and electronic pixels.

For Gusinsky, the key lesson of Russian business in the early 1990s was to think big. Nothing was impossible if you could imagine it vividly enough and then work like a dog. Finances and business plans, lawyers and accountants—these were mere details. His experience in founding NTV was a good example. When Yevgeny Kiselyov and Oleg Dobrodeyev came to him seeking money for a single program, Gusinsky expansively proposed building a whole channel. They did not hesitate over viewer demographics, broadcast signals, or licenses. They dreamed of a television channel, threw themselves into it, and now NTV was an impressive reality. The same boundless energy still motivated Gusinsky in the spring of 1997. His enormous ambition was his business plan.

At the core of Gusinsky’s dream was an incredibly optimistic vision of Russia. He believed in the birth of a new middle class. If it developed, the middle class would fuel demand for consumer goods, for washing machines and soft drinks, and the advertising would be carried by NTV. The middle class would also desire high-class movies and hard-hitting news and analysis that NTV offered. With more discretionary income, the middle class would go to restaurants, buy personal computers, and rent telephone lines. They would drive new cars, use mobile phones, and listen to the radio on their way to work. They would travel and hunger for information about the outside world. At every turn, Gusinsky would be there.

In January 1997, Gusinsky left his post at Most Bank and devoted himself full-time to building a communications empire under the new conglomerate name, Media-Most. Sergei Parkhomenko, one of the most respected newspaper journalists of the day, and Masha Lipman, an exceptional editor who once worked in our bureau at the Washington Post, designed and built from scratch a glossy, informative newsmagazine, Itogi, which Gusinsky launched in 1996.²¹ Alexei Venediktov and other radio journalists who had started the popular Echo of Moscow radio station sold it to Gusinsky in 1994, and it thrived. A slick television magazine, Seven Days, rocketed to a half million weekly circulation. Gusinsky spent long hours with media giant Rupert Murdoch, whom he greatly respected, and embarked on a major new venture, NTV-Plus, to blanket Russia with pay satellite television. “There was this terrible enthusiasm, when there was an expectation of the booming economy, that it’s going to expand very, very quickly,” Igor Malashenko recalled of the plans for NTV-Plus. Gusinsky financed the first stage of NTV-Plus with the capital from the sale of 30 percent of NTV to Gazprom.²² Gusinsky said marketing studies showed he had a potential audience of 10 million subscribers for NTV-Plus. To fulfill his dreams, Gusinsky planned to launch a new, expensive satellite. He also needed good programming. He only had to imagine and to build, and the viewers would come. It might eventually cost billions, but Gusinsky never put finance first. They would find the money.

Another vision of electronic black gold that Gusinky harbored was telephones and communications. In the mid-1990s, Russia had only nineteen telephone lines for one hundred people, compared to fifty-eight for the United States and forty-nine for Great Britain. Once modernized and privatized, the telephone networks could be a source of colossal profits. Like oil reserves, the phone lines represented a concrete, tangible asset: add up the number of subscribers and multiply by the payments, throw in new equipment and a growing middle class, and you get a machine that prints money. Gusinsky saw telephones as a communications business that dovetailed with his knack for television. However, in Gusinsky’s circle, there were doubts about this. Malashenko told me he worried Gusinsky was going too far. Whatever the future of telecommunications, the existing telephone enterprises were creaky old Soviet outfits of the kind Gusinsky had so far avoided.

To privatize the phone system, the Russian government created a new holding company, Svyazinvest. The word svyaz in Russian means a link, connection, or communication. The philosophy was the same as with oil: the state created a holding company out of thin air, gave it control over valuable state-owned enterprises, wrapped it in a pretty bow, and sold it off. The new holding company was given controlling stakes in Russia’s eighty-eight regional telephone companies, with 22 million phone lines. The promise of Svyazinvest was large, but so were the problems. The owner would have to get control over dozens of independent telephone companies and a maddening patchwork of tariffs, old technology, and political cross-currents. It might take years, as well as serious investment by a company with real experience in telephones, to straighten out Svyazinvest. Moreover, the phone system had a silent watchdog. The military and security services viewed the telephone lines as their sphere of influence. When the Soviet KGB was broken up, several divisions—the Eighth Division, which dealt with ciphering, and the Sixteenth Division, which dealt with deciphering and electronic surveillance—were turned into a new stand-alone security service, the Federal Agency for Government Communications and Information, directly under the Russian president.²³ The military also had a strong interest in the telephone system, on which it relied for its communications.

The Russian government failed to sell 25 percent of Svyazinvest in 1995. The Italian state-owned telephone company, Stet, had offered $640 million for the stake plus a promise to invest $754 million over two years. But the deal fell apart. The publicly stated reason was that the Italians made certain last-minute financial demands, but the real reason was objections from the military and security services to a foreigner buying up Russia’s telephone lines.²⁴

After the 1996 elections, Gusinsky set his sights on winning Svyazinvest. He went to Alfred Kokh, the blunt-spoken director of the federal property agency, who was a Chubais man. Gusinsky wanted to organize another attempt to privatize Svyazinvest. He suggested making Svyazinvest a stronger company by combining it with Rostelecom, the Russian long-distance provider. Then, Gusinsky told Kokh, he would try to persuade the generals and security agencies to approve the sale. Gusinsky told me that Kokh let him go ahead because Kokh thought the military would never agree to the deal. Naturally, Gusinsky also knew that if he organized the privatization—as the presale “consultant”—he could expect to have the inside track on winning the company. Those were the rules of the game the oligarchs had already established. Vladimir Potanin had organized Norilsk and won; Mikhail Khodorkovsky had organized Yukos and won. Why couldn’t he?

Gusinsky contributed only a small portion of the finances behind the deal. He brought in a foreign strategic investor, the Spanish telephone giant Telefonica SA, the investment bank Credit Suisse First Boston, and Mikhail Friedman’s Alfa Group. One of the big private investors in Gusinsky’s group was Benny Steinmetz, an Israeli financier and diamond tycoon. Gusinsky’s role was to lead the political charge for the deal—to be the influential point man for a consortium of investors. If they won the Svyazinvest auction, the actual day-to-day work of running the company would be in the hands of Telefonica.

Gusinsky’s real worry was not the military but the other oligarchs. He constantly fretted about Potanin. In the early months of his preparations, Gusinsky pressed Chubais to keep Potanin’s fast-growing bank, Uneximbank, out of the bidding for the phone company while Potanin was first deputy prime minister. Chubais agreed and went to Potanin, asking him to remove himself from the competition. Potanin consented, but he revoked the pledge as soon as he quit the government on March 17. He wanted to play, and he said the promise to stay out was good only as long as he was a government official.²⁵

Gusinsky nervously watched Potanin’s money. He believed he could compete against rational outside investors for Svyazinvest because they would take a cold-eyed look at the company based on its assets and the potential value of the telephone lines. But he feared it was hopeless to compete against someone like Potanin, who commanded so much cash he could practically throw it at the deal. He knew Potanin’s bank held an enormous deposit, more than $1 billion, from the federal customs service. Gusinsky also believed that Potanin had obtained, through a leak, Gusinsky’s complete documentation about the Svyazinvest deal. That documentation would give Potanin a big advantage.

Gusinsky’s anxiety about Potanin was well founded. In addition to sitting atop a mountain of cash, he had access to even more money through Boris Jordan, the hyperactive young financier and broker who scored big in vouchers and later helped conceive loans for shares. Jordan recruited superfinancier and philanthropist George Soros into Potanin’s deal for buying Svyazinvest.²⁸ Potanin did not meet Soros until much later; the Svyazinvest deal was the result of Jordan’s hustle. “I sold him on the business deal,” Jordan recalled of Soros. “But I know what sold him on Russia—it was Nemtsov.”²⁹

Soros was deeply ambivalent about investing in Russia. As a rule, he did not like to invest in countries where he was a philanthropist. His contributions to Russia were substantial. Among other things, he singlehandedly helped publish new, honest history textbooks for Russian schoolchildren, provided stipends for scholars and scientists, and rescued the “thick journals,” a rich tradition of Russian literary magazines such as Novy Mir whose circulation had plummeted. Soros also displayed an acute understanding of the importance and difficulties of building civil society in the post-Soviet world. Soros shunned Berezovsky’s solicitation for Sibneft in 1995, fearing the political risks. But two years later he was ready to sink real investment into Russia. When I met Soros for breakfast in Moscow at the Metropol Hotel one morning in June 1997, I was fascinated to hear his analysis of the Russian economy; Soros had earned billions making the right calls at the right time. Russia, he said, “moved from the excesses of the Soviet system to the excesses of laissez-faire capitalism, or, more appropriately here, robber capitalism.” The oligarchs? “They are pretty crude and pretty rapacious.”

Nonetheless, Soros was greatly encouraged by the appointment of Nemtsov. The young reformer persuaded Soros that the time had come to invest in Russia. “I can see the path by which robber capitalism can turn into legitimate capitalism,” Soros said.³⁰ Although I didn’t know it at the time, a few days after our breakfast, Soros personally extended a helping hand to the cash-strapped Russian government. Chubais and Nemtsov had pledged to pay off government workers’ back wages by July 1, but they were short of funds. Kokh called Jordan, saying the government was desperate. Jordan then called Soros in New York—but his office said he was in Moscow at the Metropol. Jordan went to the hotel and talked Soros into making a quick personal loan of several hundred million dollars between June 25 and July 3, until Russia received the proceeds of a Eurobond issue.³¹ Another secret I didn’t discover at the breakfast was that Soros was also making a large investment with one of the robber barons he denounced, putting $980 million into Potanin’s bid for Svyazinvest. The stock market boom made every investment seem like a sure thing. Soros later disclosed that his total investment in Russia was $2.5 billion, making him by far the largest Western portfolio investor in Russia at the time.³² He too was chasing black gold.

Potanin’s investment consortium for Svyazinvest was, typically, an offshore web of shell companies. The chain of transactions flowed from a company called Bidco, based in Cyprus, through another company, Investco, in the British Virgin Islands, which was a front for another company, Svyaz Finance Ltd.; then to another company, IFCI (Cyprus) Ltd., based in Cyprus. It also included Mustcom Ltd. in Cyprus. Russia’s economy may have been on an upswing, but when it came to big money, investors still wanted to remain in the relative safety of offshore havens.³³

Potanin claimed that Svyazinvest was a “strategic investment,” but his preparations spoke otherwise. Potanin was a speculator. He was putting in only about $200 million of his own cash. Jordan contributed another $200 million from Renaissance. The rest was raised from outside investors, including Soros. Ultimately, Potanin was gambling on quickly reselling the company to someone else who might pay twice as much for it. “It was getting something for nothing,” one of Potanin’s investors told me later. “If he spent $1.5 billion, he could sell it a year later for $5 billion.” The premise was not outrageous in the superheated boom of that summer.³⁴

Potanin, like Gusinsky, staked everything on his own sway as an oligarch. According to documents that he gave to investors, Potanin’s game plan was a gutsy one, built entirely on his own clout. After winning the first 25 percent of Svyazinvest, he promised he would elbow into the management suite and assume control over sale of the next 24 percent, which was going to be offered within nine months. Potanin told his investors that he could appoint managers, get the company’s books, and sell off the next chunk of Svyazinvest to a strategic investor.³⁵ The unspoken calculation was that this would fatten up the price of his own stake. It all depended on Potanin’s ability to move quickly into the company. “We never thought we would buy that second stake,” Jordan told me. “It was always in the plans to sell that second stake to a strategic investor, which would have boosted the value of our stake.” He added, “Let’s be honest, George Soros is no long-term investor. He never held anything longer than a week! He’s a trader. George Soros was going to trade that baby out to a strategic investor right after the next deal.” Potanin surely would have liked to do the same. Potanin promised to hold the shares for two years, but I think he would have gladly sold them sooner.

Gusinsky also longed to make a killing on Svyazinvest. Only days before the auction, a friend of mine recalled, Gusinsky was openly talking about the billion dollars he was going to make on the deal. Gusinsky differed from Potanin in that he had already brought in Telefonica, an experienced phone company that intended to actually build telecommunications in Russia, whereas Potanin was playing for casino profits.

In a real competition, the winner isn’t chosen before the race begins. But in the crude culture of Russian capitalism in the 1990s, the winner was usually chosen in advance by the participants. The Svyazinvest auction was set for July 25. The Kremlin was jittery about deepening tensions among the oligarchs. Yeltsin sent Yumashev, his chief of staff, who had replaced Chubais, to suggest to the tycoons that they solve the issue “peacefully, without the news wars and without planting bombs under the government.” Amazingly, Yeltsin’s own man did not suggest a fair competition. Rather, as “a last resort,” the two sides should divide up the spoils fifty-fifty, among themselves. This was a remarkable glimpse of how oligarchic capitalism had entrenched itself in 1997—the president himself wanted the boys to share the loot, quietly. They refused.³⁶

Russian law required a minimum of two bidders for an auction to be legal, but many auctions were rigged anyway. The winner was agreed upon beforehand, and the second bidder was a dummy corporation. The trick had been used often in loans for shares. Frequently a serious second bidder would deliberately walk away, for a price. Gusinsky recalled that at one point Potanin came to his office and proposed to pay him several hundred million dollars to stay out of the auction. Potanin proposed that after he won, he would hire Gusinsky to run the company for him. “We will hire you because you are the only man who understands it,” Potanin said, according to Gusinsky.³⁷

But Gusinsky repeatedly refused to cooperate with Potanin. All he wanted was to get Potanin out. This was his deal! Both sides hardened as the deadline drew closer. Neither would walk away. They were getting locked in with foreign investors. Gusinsky warned Potanin: “If you participate, then everything that I know about your loans for shares auctions and all about your deals and relations will be made public after this!” It was an angry threat, typical of many that brought Gusinsky his share of enemies.

They also agreed to bring Berezovsky, then deputy secretary of the Kremlin Security Council, to the meeting with Chubais. Berezovsky had, in theory, given up his business interests while serving in government, but he was active in promoting the oligarchy and his own ambitions, both political and financial. At one point in June, Berezovsky tried, unsuccessfully, to recruit Soros into a bid to make Berezovsky chairman of the natural gas monopoly Gazprom. Berezovsky flew Soros to Sochi, the Black Sea resort, to see Chernomyrdin, the former chairman of Gazprom, and later Berezovsky lunched with Soros at the Logovaz Club. Soros recalled that Berezovsky grew terribly angry when Soros informed Nemtsov, a harsh critic of Gazprom, about Berezovsky’s maneuvering to take over the company. Nemtsov vowed, “Over my dead body.”³⁹ The deal never happened.

Berezovsky had become the coach of Team Tycoon and was constantly scrutinizing and guiding his players. “Berezovsky has to be number one everywhere,” Gusinsky told me later. “He has to be the best man at every wedding, the grave digger at every funeral. If something happens somewhere without Berezovsky, he is full of anxiety.” Berezovsky had no formal participation in Gusinsky’s deal but had asked Gusinsky whether, in the event he won Svyazinvest, he could become a partner. “We’ll discuss it later,” Gusinsky said.

On July 23, 1997, the tycoons—Gusinsky, Potanin, and Berezovsky—secretly flew out of Moscow on Gusinsky’s private business jet to Nice, and then on to Saint-Tropez. They took a boat to a seaside estate where Chubais was vacationing at the home of a friend. The mood was relaxed as they sat in a pleasant garden for six hours, replaying their arguments for Chubais. “They came with the same question,” Chubais recalled. Was he serious about the new rules of the game? According to Chubais, the tycoons proposed a deal. They would carve up the forthcoming privatization riches among themselves. In this plan, Gusinsky would win Svyazinvest in a rigged auction, since he had made all the preparations. Then the next big company to come up would go to Potanin—Unified Energy Systems, the mighty nationwide electric power grid and generating company. Chubais remembered that they had all the details ready: the shares, the volumes, the conditions. “We came to an agreement,” they said, turning to Chubais. “And do you agree?”

Chubais recalled that the tycoons objected to the $1.2 billion starting price, set by the government, for Svyazinvest. “We will never jump over a rope set up by you,” Chubais quoted one of them as saying. “I said, ‘Dear Friends, what you call jumping over a rope is called competition and that’s how it takes place everywhere, and that’s how it is going to take place here. If you don’t pay, you won’t get it. The one who pays a ruble more will get it.’”⁴⁰

What really angered Chubais was the way that Berezovsky and the others tried to force him to accept their cunning insider deals. At the memory of Berezovsky’s statement to the Financial Times about the group of seven controlling half the Russian economy, Chubais flushed with anger. Who did they think they were? “What do you mean, giving this auction to Gusinsky and Berezovsky, and the next one to Potanin?” he asked. Later, he told me, he was thinking to himself, “This means that I was hired by them. They hired me and they are telling me that this goes here and that goes there.” Chubais dug in his heels. No way! He would not be their puppet.

The talk turned sour. Gusinsky again blurted out that if Potanin was in the race, he would make a stink. “I promise that I will stir a scandal,” he warned Chubais. He reminded Chubais that in recent months the “young reformers” had been treated warmly in Gusinsky’s mass media. “We were saying that these men are making Russia good. We never wrote badly about them. We were always supporting them. This was editorial policy,” Gusinsky said. But it could change overnight.

Chubais walked the angry tycoons down to the waiting boat. Chubais could see trouble brewing. He knew what the big guns were capable of, because a year earlier, during the campaign, he had commanded those same guns. The television channels which had destroyed Korzhakov would now be aimed at him. His image would be smeared, his phones tapped, his movements followed, and the nasty kompromat flung in his face every day.

The flight back to Moscow was somber. The tycoons felt a sense of impending doom. The gambit to strike a deal with Chubais had failed. Now what? Gusinsky recalled that Potanin actively tried to find a compromise. Starting on the plane and continuing in three more meetings, Potanin suggested that they agree in advance on the price and the terms of a deal, according to Gusinsky. Potanin claimed he did not discuss the specific price. Chubais said he later discovered they had.

The first meeting was at Berezovsky’s Logovaz Club. “Massive pressure was put on Potanin to step out of that auction,” recalled Jordan, who was present and stood to reap big commissions in the deal.⁴¹ “Potanin almost succumbed to the pressure, but I said, ‘Vladimir, it’s too late. I have brought in a consortium of Western investors, including George Soros, and they are not going to tolerate you stepping out now because of some political deal.’” Jordan recalled Berezovsky complained, “Potanin is breaking with us. He’s breaking with the way we have run this country for a year and a half. And Potanin is going to destroy this place because of the way he is behaving. These are the rules of the game, and Potanin said no.” Another meeting followed at Gusinsky’s office. Still no resolution: Gusinsky wanted to win and Potanin refused to walk away.

The night before the auction, Potanin’s plans suffered a setback. One of his investors, Kenneth Dart, the reclusive foam cup magnate who had also invested in Russian oil companies, withdrew his $300 million investment from the Potanin consortium. Jordan covered the gap, drawing funds from his own firm as well as Deutsche Morgan Grenfell. The deal was hot, and word on the street was that dozens of investors were lined up to put in even more money if Jordan needed them.

On the day of the auction, July 25, at about 3:00 P.M., Potanin and Gusinsky met alone in Gusinsky’s office in the high-rise tower. Personally and politically, both oligarchs had staked their all—their reputations—on the deal. In this climactic final face-off, Gusinsky was the more emotional. He had never gotten a single brick or nail from the state, and now it was his turn. According to Gusinsky, Potanin said he was prepared to lose and named a figure he intended to bid.

Right after Potanin left, Gusinsky recalled, all his partners converged on his office. “Potanin named the figure, but I think he is lying,” Gusinsky told them. He added, “I think we must pay more.” Gusinsky and Friedman were prepared to add another $100 million each of their own money to their bid, Gusinsky said, but with little time before the auction, they suddenly ran into a brick wall. For bureaucratic reasons, they could not get their partner, Telefonica, to approve a higher bid. The Spanish telephone company required board approval, and it would take time. Gusinsky was trapped.

Both Potanin and Gusinsky were also caught up in suspicion and doubt. They worried about leaks and spies. Did Potanin know that Gusinsky could not go higher because of Telefonica? Did Gusinsky know Potanin had lost Dart’s $300 million? Did Gusinsky interpret the rumors about the Dart money pulling out as a ploy to lure him into making a lower bid? One of Gusinsky’s major investors had his briefcase stolen just before the auction—had the other side grabbed the documents?

In the final hours, the Potanin side pondered the amount of their bid. As planned, the Soros organization and Jordan came to an agreement on the figure. At the sleek, glass-walled office building of Renaissance Capital, overlooking the Moscow River, managing director Leonid Rozhetskin spread twenty letters out on his desk. The letters were identical except for one number—the offering price for the Potanin-Soros bid. The purpose of the multiple letters was to avoid leaks right up to the last minute. Rozhetskin said he had studied the price Telefonica had paid for Latin American phone systems: $2,000 and even $3,000 a line. After a few phone calls, he picked up the letter with $1.87 billion written on it, which was the equivalent of $850 a line. He felt there was a good chance they would lose, given Telefonica’s experience in Latin America.⁴² But, he consoled himself—this was Russia; Telefonica was in a different market, out of the bounds of its own experience. He put the letter in a standard letter-sized envelope and slipped it into his suit pocket. He summoned a driver and headed to the Federal Property Fund building.

There he saw that Mikhail Friedman had brought Gusinsky’s bid to the auction in a large, sealed envelope, inside of which were nested two other envelopes. The Gusinsky team had arranged a press conference and reception nearby to celebrate their anticipated victory. Zverev, the Gusinsky lobbyist, told me he had written a press release announcing that Gusinsky had won and would work together with Potanin. It was never issued.⁴³

When the bids were opened at 5:00 P.M. for 25 percent plus one share of Svyazinvest, Gusinsky offered $1.71 billion to Potanin’s $1.87 billion. Potanin had triumphed. Jordan was at home, wearing casual clothes and packing for a vacation, when Rozhetskin called him with the news. “I thought we had lost,” Jordan recalled. “They had a strategic buyer, and I thought they were going to bid more than $2 billion.” He called Potanin with the news they had won. “He thought it was a joke.” Jordan threw on a suit and raced to his office.

With the loss, Gusinsky suffered a severe blow to his prestige, not to mention his dreams of becoming Russia’s communications titan. For several days, urgent meetings were held at the White House and the Kremlin in an effort to avert all-out war among the oligarchs. The whole campaign team was thrown into the crisis: Dyachenko, Malashenko, Chernomyrdin, Chubais, and the other oligarchs. At stake was their insular, powerful club, their system, their whole experience.

“The solution was simple,” Chubais recalled. “When I returned from vacation, we spent four or five nights in meetings. We were working day and night. Their main idea was to cancel the results of the auction and return the property, and then all would be in order.” But, he added, “it was impossible.” Chubais believed the new rules had worked: the Svyazinvest sale had brought in more money than any other sell-off in modern Russian history. Privately, Chubais was thrilled that the market had worked and that the highest bidder had won. Despite the threat of a war among the tycoons, he was not going to reverse the results now.

Perhaps they could not see it at the time, but the tight-knit oligarchy was breaking down and breaking up. Blinded by greed and wounded pride, they failed to listen to each other. Gusinsky and Berezovsky could not imagine that Chubais, once their ally, was serious about changing the rules of the game. Chubais underestimated how profoundly Gusinsky and Berezovsky refused to honor his new rules. Chubais calculated that—just as in Yeltsin’s reelection campaign—they would have no choice but to go along in the end. He was wrong; the two offended tycoons went ballistic. They were infuriated that the winner was Potanin, who already had done quite well in loans for shares and was grabbing government cash faster than anyone. Malashenko later recalled that Chubais “started to pump resources into Potanin, you know, to make him the tallest guy of all. And it’s like basketball, you cannot play basketball when there is a guy who is three meters tall. And from my point of view, that’s what Chubais and Kokh were doing to create this monster out of Potanin.”

The Svyazinvest auction was held on a languid Friday afternoon in Moscow, when traffic on the outbound highways was heavy with city dwellers fleeing for their cool country dachas. The summer news lull had set in. Over the weekend, when most people were hardly paying attention to television, and even as Gusinsky was madly trying to reverse the result of the auction, Berezovsky began firing off his big gun, the cannon of all cannons, Russia’s most powerful television channel, ORT. His agent was Sergei Dorenko, a husky-voiced, handsome anchorman with a killer instinct for drama and propaganda. Dorenko had chiseled features, an extremely serious, even solemn look, and a deep, penetrating voice. He met Berezovsky after the 1994 bombing attack on Berezovsky’s car, and he later became Berezovsky’s most effective weapon on television. No subtle analysis, no cryptic between-the-lines hints were used in Dorenko’s presentation. Perhaps because his manner was so brazen yet so self-assured, Dorenko cast a certain spell over viewers, especially those without a detailed knowledge of what he was talking about, and there were tens of millions of them. Dorenko did his attack-dog pieces not on the regular news but on a special prime-time “analytical” show called the Sergei Dorenko Program, which he anchored. The elite sniffed at Dorenko: How cheap! How crude! How opinionated! Kiselyov, while not universally admired, was the darling of the elite, but Dorenko was the master of the masses.

On Saturday, July 26, the day after the Svyazinvest auction, the history of Russian capitalism turned another corner. Up until this day, the oligarchs and reformers had been allies, working together against outside forces, such as Gennady Zyuganov or the “party of war.” But when Dorenko’s television show went on the air that summer Saturday evening, the club of tycoons and reformers began to fall apart. The oligarchs and reformers began to fight one another in what became known as the bankers’ war. The destruction of the club left the Russian political and economic elite virtually paralyzed.

The first salvo was fired by Dorenko, agent of Berezovsky. His target was Potanin. Near the end of his Saturday show, Dorenko charged that Potanin used murky shell companies in the auction for Svyazinvest; the “profits are going to be siphoned off to an offshore zone.” The investors in Potanin’s deal, Dorenko intoned, were “pure speculators,” in the unseemly Soviet sense of petty black marketeers, “people with a scandalous, tarnished-to-doubtful reputation,” who “did not spend a single minute of their life dealing with communications.” He attacked Jordan and Soros, saying the philanthropist was “one of the most famous speculators on the planet,” and declared that Kokh, their patron, “writes the auction terms for his friends.” Dorenko brought Nemtsov into the program too, saying he was “as active as a roach on the wall.” Two days later, in an interview on Gusinsky’s radio station, Echo of Moscow, Dorenko expanded on the metaphor. “Haven’t you ever seen,” he said, “that when you spray a cockroach with a special irritant it starts running around like mad?” Dorenko was asked whether there was a conspiracy between the government and Potanin. “I did not say conspiracy, but the whole thing smacks of it,” he replied.⁴⁴

Dorenko had lit the match, and it did not take long to ignite a fullscale media conflagration, just as Gusinsky and Berezovsky had promised. On the first day newspapers were published after the auction, Monday, July 28, Gusinsky’s broadsheet, Sevodnya, rendered a verdict in the headline: “The Money Stank.” The article said Potanin and Kokh had become too friendly and that Potanin’s money was of questionable origin. The young reformers were immediately thrown on the defensive, and the feisty Nemtsov wheeled out his favorite slogans to blast the losing oligarchs, Gusinsky and Berezovsky. “They don’t need honest rules and democratic capitalism,” he said. “They want bandit capitalism!” Nemtsov had never really defined his “bandit capitalism,” and Sevodnya fired back with the obvious question: Who had been the father of it? Perhaps it was Chubais or Yeltsin? “It now transpires,” the newspaper deadpanned, “that the guarantor of Russian democracy has presided over a sustained effort to build ‘gangster capitalism.’”⁴⁵ The point was, If Russia had become a gangster state, weren’t they all responsible?

Kokh, the privatization chief, resigned on August 13, announcing he wanted to go into private business. The initial Kremlin reaction was cordial; Yeltsin thanked Kokh for his services. Up to this point, Gusinsky had said nothing in public, as he tried to get Chubais to reverse the deal. But by mid-August it was evident Chubais would not budge. Gusinsky then attacked. In an August 14 interview on Echo of Moscow radio, Gusinsky said of Potanin’s winning bid, “There is money, and there is money. As far as I am concerned, money has a smell.” He recalled the discussion with Chubais about new rules of the game. “Honest rules of the game,” he added, “presuppose that the seller and the buyer should not be in collusion.” Gusinsky hinted that the government had been in cahoots with Potanin, but he was cautious. (The truth was that Gusinsky had expected that the government would be in cahoots with him, but he had lost.) The next day, Yeltsin unexpectedly weighed in, noting that both Svyazinvest and Norilsk Nickel auctions had been won by Potanin.⁴⁶ “The entire scandal,” Yeltsin said, “is connected with the fact that certain banks are apparently closer to the soul of Alfred Kokh than others.”

Kokh’s role now came under closer scrutiny. Although no one paid much attention at the time, Kokh had earlier reported on his financial disclosure form that he had received a $100,000 advance to write a book about privatization. Alexander Minkin, the muckraking journalist who was close to Gusinsky since their theater days, wrote an article in the newspaper Novaya Gazeta, questioning why Kokh was given such a large advance from what he described as a tiny company, Servina Trading, in Geneva. Minkin, using a Swiss reporter to make some checks, reported that the company had only a tiny room and two or three workers. He quoted a Servina official as saying they had not yet seen the manuscript. “Servina paid Kokh a hundred thousand dollars for hope only,” Minkin said. “It’s obvious that a tiny company cannot make such luxurious gestures. It was not Servina that paid. It was someone else paying through it. It is also clear that Kokh sold not the book, but something totally different.”⁴⁷ Minkin was just getting warmed up.

Every day, the battle brought new headlines and new charges. The war consumed the “young reformers” and the tycoons. On Saturday morning, September 13, I grabbed a few newspapers and went to watch my sons play soccer. But once on the field, I stood riveted, not on the game but on Nezavisimaya Gazeta, the Berezovsky newspaper. The paper published a remarkable front-page ad hominem tirade against Chubais under the headline “Anatoly Chubais Seeks Control over Russia.” What was interesting was that the attack was not the usual sleazy kompromat of secret documents or embarrassing wiretaps, but a thinking man’s screed against Chubais. The byline was Ulyan Kerzonov, most likely a pen name for Berezovsky. The commentary was acid. Chubais, already a hated figure in Russian public opinion, was portrayed as darkly scheming and power hungry, “a cynical zealot,” for whom “the ends justifies the means,” whose mentality “resembles that of Lenin,” a “ferocious pragmatist who has placed his faith solely in revolutionary expediency.” The author complimented Chubais for creating, during the election campaign, “a closed-circuit oligarchic system, later nicknamed ‘the seven banks.’” But now, the author said, Chubais was wrecking the group of seven bankers in order to build up Potanin alone as a “privately owned supermonopoly.” The essay had all the markings of an angry personal letter from Berezovsky, furious that Chubais had ruined his cozy club of oligarchs, his bolshoi kapital operating system. “The ‘seven banks’ system could have become a normal market,” the author said, “but Chubais decided otherwise.”

The article was the talk of Moscow and reverberated the following evening on Kiselyov’s widely watched Sunday television show, Itogi. “We haven’t heard or read something like that for quite a long time,” Kiselyov marveled. He was cautious and recalled later that he was distracted by negotiations for the release of a kidnapped NTV correspondent in Chechnya.⁴⁸ Dobrodeyev told me he felt trepidation and dismay when the bankers’ war broke onto the airwaves. “I had doubts, and very big doubts,” he said. It was one thing to use journalists and television for a fight against Zyuganov and the Communists, a cause that was “clear, explicable, and absolutely comprehensible to everyone.” But Svyazinvest was an obscure commercial dispute. Should journalists risk their reputations on a war between avaricious business interests? “It was a shameful situation for the mass media as a whole,” he recalled.

Yeltsin was furious at the growing discord, and he was also confused. He had given rise to the “young reformers” and the tycoons, and now they were at each other’s throats. The vicious mudslinging every day in the newspapers “irritated me tremendously,” Yeltsin recalled.⁴⁹ He summoned the oligarchs to the Kremlin on the Monday after the article appeared in Nezavisimaya Gazeta. Gusinsky, Potanin, Friedman, Khodorkovsky, Vinogradov, and Smolensky came, as did Yumashev, but Berezovsky, deputy secretary of the security council and theoretically a civil servant, was absent, as was Chubais. Smolensky told me that Chubais was “divorced from the banks, and it’s hurting. . . . We shall have a hard life without him. Everybody feels it. We have been together a long time.”⁵⁰

It was the first time since the meeting after Davos that Yeltsin had seen the oligarchs as a group. Vinogradov recalled that Yeltsin appeared self-assured and was clear of voice. “I urged them, and they agreed, that banks cannot be, as it were, above the authorities,” Yeltsin told reporters after the two-hour meeting. Yeltsin said the oligarchs agreed to stop attacking Chubais and Nemtsov, and “we achieved mutual understanding.” Inside the meeting, Yeltsin also said that some bidders felt Kokh leaked information to one side during the Svyazinvest auction. Potanin came steeled for criticism: on the spot, in front of Yeltsin, he volunteered to give up his lucrative Customs Committee accounts and transfer the money to the Central Bank.⁵¹

Looking back, Yeltsin said he felt estranged from the tycoons. “Despite their assurances, I sensed that these men had not really become my allies. Potanin seemed to stick out from all the others. I couldn’t rid myself of the hunch that he had his own agenda.” Yeltsin said that behind their smiles and agreements, the tycoons left him cold. “It was as if I were dealing with a people of a different race,” he said, “people made not of steel but of some kind of cosmic metal. Not a single side considered itself guilty. There was no area for compromise. There were no concrete concessions.”

Indeed, Yeltsin at this critical moment was baffled. He remains confused in recalling the role of the oligarchs in his memoir. He vigorously defends how property was sold off cheaply to the oligarchs, welcomes approvingly their support for him in the 1996 campaign, and notes their interest in political stability, so their companies would grow. He insists they were not underworld figures. Yet, at the same time, Yeltsin decries the fact that the tycoons tried to influence the government and “tried to run the country behind the backs of the politicians.” Yeltsin describes this as a “new and dangerous challenge.” He calls the businessmen “new and illegitimate centers of power.” He writes, ominously: “Our greatest threat came from the people with big money, who gobbled each other up and thus toppled the political edifice we had built with such difficulty.” Yeltsin obviously both liked and disliked his oligarchs, the children of his capitalist revolution.⁵²

Soros, who said he thought investing in the Svyazinvest deal was helping establish legitimate capitalism, found himself snared in the sleazy bankers’ war. Alex Goldfarb, who had been the intermediary between Soros and Berezovsky earlier, told me that Soros expressed worry about the uproar. “Soros said it will all end very badly,” Goldfarb told me. Goldfarb went to see Berezovsky in the middle of the bankers’ war to appeal for a truce. He urged Berezovsky to stop the combat. “I said it will destroy everything,” Goldfarb recalled. “Everyone was so ecstatic when they got rid of the party of war. They got the good side of Yeltsin, the reformist side, and then a few months later this ugly thing comes out.”

Soros later recalled that he personally tried to dissuade Berezovsky from the onslaught, telling Berezovsky that he could be rich enough with the companies he already owned. “He told me I did not understand,” Soros recalled. “It was not a question of how rich he was, but how he measured up against Chubais and against the other oligarchs. They had made a deal, and they must stick to it. He must destroy or be destroyed himself.” Soros concluded that there was no way Berezovsky could be transformed from robber baron to legitimate capitalist.⁵³

Jordan, who had brought Soros into the deal, suddenly found that his multiple-entry visa to Russia was yanked, just before he left Moscow for London in early October. Dorenko, sticking in the knife ever so smoothly, announced on his television show that Jordan, a U.S. citizen, was in possession of Russian government secrets, perhaps secret contracts about weapons sales. Jordan, he said, must “say ‘God Bless America’ every time his eyes fall on any sort of classified information.” There was no secret who was behind the decision to pull Jordan’s visa; it was Berezovsky. He said a few days later, “The case with Jordan is a matter of a U.S. citizen getting access to exclusive information about our financial and defense secrets.”⁵⁴ Jordan’s firm responded that the real issue was using the visa in a war of business competitors. Nemtsov stepped in and got Jordan a new visa.

In early October, London’s Financial Times reported that the tiny company which paid Kokh’s $100,000 book advance had ties to Potanin’s Uneximbank: the link that Gusinsky had suspected. An official of Potanin’s Swiss affiliate, Banque Unexim (Suisse), had previously been a director at Servina Trading and commissioned the book. The Moscow city prosecutor announced a criminal investigation into the book advance, saying it seemed to be unusually large given the potential subject. Potanin acknowledged that he and Kokh were friends but insisted it “does not affect the work.” Chrystia Freeland, the Financial Times correspondent in Moscow who broke the story, later wrote that even more incriminating kompromat was waiting in the wings—the offended oligarchs obtained a shaky, handheld video of Kokh and Potanin on holiday at the Côte d’Azur one month after the Svyazinvest sale.⁵⁵ Kokh later told me he didn’t see anything wrong vacationing with Potanin so soon after the Svyazinvest deal. “But what’s wrong if I want to spend some time with my friends in France?” he asked curtly. He admitted, however, resentment over the investigation by the prosecutor. “I was nearly put in jail,” he complained. ⁵⁶ Chubais came to Kokh’s defense again, saying Kokh had indeed written a book. “I have known Kokh for ten years and know that he is a man of integrity,” Chubais told reporters. “Lavishly paid lies are reprinted from one newspaper owned by a banker to a newspaper owned by another, from a TV channel owned by one of them to a TV channel owned by another.” Gusinsky had another view. He believed that Chubais was clean, but Kokh had taken money from Potanin and Chubais was trying to protect his friend.

Chubais decided it was time to strike back. With Nemtsov, he went to Yeltsin at his out-of-town retreat, Gorky 9, on November 4 and demanded that Yeltsin fire Berezovsky from the Security Council. Chubais argued that the war would subside if Berezovsky were dismissed. Yeltsin looked at Chubais and recalled that only a year before Chubais had asked him to appoint Berezovsky to the same post. Yeltsin later wrote in his memoir that he resented all the attention Berezovsky got as the supposed kingmaker, the power behind the throne of the Yeltsin years. “I never liked Boris Berezovsky and I still don’t like him,” Yeltsin wrote. He complained that Berezovsky always overstated his influence. “There weren’t any mechanisms through which Berezovsky might have exercised influence over me, the president.” Yeltsin did not address the book royalties that others said Berezovsky brought to the president’s family.

Nor was it Berezovsky’s style to whisper directly into Yeltsin’s ear. Berezovsky operated through intermediaries and agents, through layers and indirection, including his friends in Yeltsin’s inner circle.⁵⁷ For example, Yumashev invited Berezovsky to the Kremlin the day before he was sacked to show Berezovsky the presidential decree, Berezovsky said. Yumashev had advised Yeltsin against firing Berezovsky.

In late October, Chubais mentioned to a group of reporters traveling with him to London, at the end of an interview, that he and several of his deputies were writing a “monograph” about privatization. Chubais said 95 percent of the honorarium from the book would be given to charity, but he did not mention specifically how much they were being paid or by whom. Chubais said the book was originally designed to celebrate the fifth anniversary of the beginning of mass privatization. The interview was published on the front page of Kommersant Daily, the influential newspaper, on October 28 under the headline “Chubais Is Not a Reader; Chubais a Writer.” The story hardly caused a ripple, but it set in motion a chain of events that would boomerang against Chubais.

Sergei Lisovsky, the advertising magnate who had worked on the 1996 campaign, recalled being invited to a strategy session by the Berezovsky-Gusinsky camp to plan a counterattack on Chubais. The attack was to be based on new documents that the Berezovsky team had obtained about the Chubais monograph. The documents showed that Chubais and four members of his team received $90,000 each, or $450,000 altogether, for the book. The information could blow up into a scandal because it would reinforce the impression, created by the Kokh disclosures, that the young reformers were lining their own pockets. The amounts were relatively small compared to the gargantuan profits and payoffs in the years of easy money, but the symbolism was awful.

Lisovsky said there was a “detailed scenario” for the attack on Chubais, including “who was to start first, who was to pick it up.” Lisovsky said he refused to participate. “You are committing suicide,” he warned the Gusinsky-Berezovsky camp. “If you kill Chubais, you will eliminate yourself in several years’ time, because in the long run, Chubais will never sink you, never jail you—he has created you as Russian capitalists. And anyone else in his place will treat you very cruelly.”⁵⁸

The plotters decided to make the material public through Minkin, the investigative journalist close to Gusinsky who earlier questioned the $100,000 book fee paid to Kokh. I knew Minkin from a few years earlier when he had told me a harrowing story of how he was attacked by pipe-wielding goons in the middle of the night for a story he had written. In the perestroika years, Minkin was known for some really penetrating stories about the Soviet Union. But there was another kind of investigative reporting that involved simply taking handouts of compromising materials from commercial interests or security services—the kompromat—and publicizing it. The use of kompromat was a sleazy business; it might be true, it might be forged, it might be half true, but it was always distributed to tarnish someone’s reputation at the behest of a foe.

In this case, Minkin told me that the information about Chubais was given to him outright. He would not say who his source was, but he had no qualms disclosing the materials because he shared the same “principles.” And, he said, he knew that Berezovsky and Gusinsky were behind it. The same documents were already on the desk of Anatoly Kulikov, the interior minister, Yeltsin recalled in his memoir. Minkin immediately went public in an interview on Gusinsky’s radio station, Echo of Moscow, on November 12. Not by chance, Minkin’s appearance on the radio station was covered by Berezovsky and Gusinsky’s television stations. The fees for the book were “exorbitant,” Minkin reported. “This is a veiled form of a bribe” and “a method of money laundering,” he said.

Where had the money come from? Minkin said the publisher of the monograph was Sevodnya Press, which had been affiliated with the newspaper Komsomolskaya Pravda (and was not part of the newspaper Sevodnya). Sevodnya Press had been purchased that year by Potanin’s Uneximbank, but it was not owned by Potanin until after the Chubais team had made the contracts to publish the book. Minkin correctly reported that money for the book had come from the fund that Chubais set up during the 1996 campaign, when he had received the $5 million from the tycoons. However, this accurate suggestion by Minkin, that Chubais was somehow laundering the campaign money, was totally overlooked in the ensuing uproar. The word “bribe” stuck out. So did the tenuous link to Potanin. Chubais and his team kept quiet about the true source of the money because they did not want to reopen the far more sensitive issue of the “black cash” and how Yeltsin’s 1996 campaign was financed. A source close to Chubais told me that the book was actually a hastily conceived cover story for the planned transfer of the leftover 1996 campaign money to the team.

Minkin’s words on the radio touched off a new storm. Chubais was defiant at first, insisting, “I do not see any crime against humanity here” and repeating that 95 percent of the money was being given to a “charity,” which he described, puzzlingly, as a fund to protect private property rights headed by Yegor Gaidar. The promise to give the money to “charity” was rather vague, and Gaidar was furious that Chubais had roped him into the scandal when he had nothing to do with it. Two days after Minkin went public, Chubais said “the fee is high . . . and we must admit this.” Chubais wrote Yeltsin a letter saying that although the book was real, he “considered himself guilty.” Yeltsin immediately fired Alexander Kazakov, a Chubais ally, from his post in the Kremlin and then sacked Maxim Boiko, another Chubais protégé who headed the privatization agency, and Pyotr Mostovoi, head of the federal bankruptcy agency. All were Chubais men in the government and coauthors of the book. The fifth coauthor was Kokh. Finally, Chubais was relieved of his Finance Ministry portfolio, a major setback, although Yeltsin said he refused to give up on Chubais altogether and kept him in the government. “The book scandal was the banana peel on which the whole team of young reformers slipped,” said Yeltsin. Chubais later sued Minkin for slander but lost.

The bankers’ war was extraordinarily destructive for everyone. The young reformers and the tycoons squandered most of the year in their struggle. Chubais and Nemtsov never got back on track. Their reform agenda died. The irony was that outwardly Russia seemed to be on the comeback trail. “The year 1997 is one of missed opportunities,” Vasiliev lamented. Arkady Yevstafiev, the Chubais aide, said the oligarchs were to blame. “They wanted to rule the country because they were greedy and wanted everything for themselves. There is a proverb: The appetite comes in the eating. And their appetite became huge. Berezovsky didn’t need Chubais for one simple reason: he didn’t give him an opportunity to grab everything in this hands. Chubais stood in his way.”

“We lost 1995–1996—we can excuse that,” said Steven Jennings, the investment banker who was Jordan’s partner. “But we had a year of no change in 1997. That was when they should have gone for the jugular.” Instead of aggressive reforms, the credibility of Chubais and Nemtsov was besmirched, their attention diverted, their energy sapped. If anything, the events served to etch oligarchic capitalism more deeply into the public consciousness—and demonstrated how powerful the tycoons and their television weapons had become.

Potanin also suffered. After he won the Svyazinvest auction, his plan for taking over the company and making a quick fortune fell apart. The government never let him in the door. The second stake was not sold off, and the value of the $1.87 billion investment collapsed. Soros later called Svyazinvest the worst investment he ever made. From a business standpoint, Gusinsky was lucky he lost, but he made lasting enemies in 1997. Kokh never forgot the wounds Gusinsky inflicted on him and later sought revenge. The rancor of Svyazinvest came back to haunt Gusinsky when he was in desperate trouble three years later. Gusinsky, who had doubts about the 1996 fling with Yeltsin, told me that he was also unsettled by the Svyazinvest debacle. “Exactly then, I realized that the further away I distance myself from the authorities,” he recalled, “the safer my business is going to be and the more honestly I can look in the eyes of my children.”

Even worse than the soiled reputations and bruised egos, the bankers’ war crippled Russia’s economic and political leadership. Chubias complained, “The major players on my team are being investigated. Enormous numbers of telephone calls are bugged. My closest relatives are being investigated.... My son is constantly being followed. And much else is happening nonstop. What has yet to be done? I haven’t been shot at.”⁵⁹ Casting worried glances over their shoulders every day, the Russian reformers were unprepared to look ahead at a critical time, a period when even the most experienced seaman would have had difficulty navigating the ship. A financial crisis broke out in East Asia while they were fighting over Svyazinvest. When Russia’s economy began to slow in the autumn, Chubais and the reformers were so wrapped up in the Svyazinvest deal that they completely failed to see that Russia was vulnerable—and exposed—to nasty global trends.

The Russian Trading System index began the year at 213, and it reached a peak of 571 on October 6. In the midst of the good times, there was a sudden drop in temperature: the world’s stock markets crashed on October 27. Russian markets went down with them, but the event was not seen as a catastrophe. Chubais was sanguine, even upbeat, about the year ahead: “This is the beginning of a turn,” the beginning of a “long, ever more steep and powerful trajectory of growth, which will be clear and obvious . . . to every person’s family. They will judge by his wages, his income, his ability to buy a modern car and have a proper vacation in summer.”⁶⁰

When I saw Chubais on December 2, he was still wounded and angry about the bankers’ war. He said he was paying attention to East Asian financial statistics but predicted that the Asian crisis would be a small setback for Russia, perhaps a six-month postponement of economic recovery.⁶¹ “Nothing can happen to the ruble,” he insisted. Later in that month, Chubais said, “Today we really have every reason to say that the most dangerous point is behind us, that it occurred early in December.”⁶²