TableofContents

PraiseTitlePageDedicationTheOligarchsProloguePARTONE

Chapter1-ShadowsandShortagesChapter2-AlexanderSmolenskyChapter3-YuriLuzhkovChapter4-AnatolyChubaisChapter5-MikhailKhodorkovskyChapter6-BorisBerezovskyChapter7-VladimirGusinskyPARTTWO

Chapter8-UnlockingtheTreasureChapter9-EasyMoneyChapter10-TheManWhoRebuiltMoscowChapter11-TheClubonSparrowHillsChapter12-TheEmbraceofWealthandPowerChapter13-SavingBorisYeltsinChapter14-TheBankers’WarChapter15-RoaroftheDragons

Chapter16-HardballandSilverBulletsEpilogueAfterwordtothe2003PaperbackEditionPostscriptNotesBibliographyAcknowledgementsIndexCopyrightPage

PraiseforTHEOLIGARCHS

“In terms of sheer drama, it’s an irresistible tale, andDavidHoffman’s newbook...milksitforallit’sworth...ManyfuturereaderswillfindthemselvesreturningtoHoffman’sbooktofindoutwhat,exactly,makesRussiatick.”

—Newsweek

“Hoffman brilliantly shows how seemingly halting and insignificant actsfinallyculminatedinchangesinawholesociety.”

—WashingtonPost

“Hoffman makes the tale of the men’s rise and fall a masterful blend ofadventureandserious,informedanalysis.”

—ForeignAffairs

“[Hoffman] offers one the most wide-ranging and sober of several recentdescriptions of the oligarchs during the painful past decade of change inRussia.”

—FinancialTimes

“Engaginglywritten...themostcomprehensiveandmostfascinatingaccountofthenewRussiatodate.”

—SanJoseMercuryNews

“ThissadstorycomestolifeinDavidHoffman’ssprawlingnewbook...forthoseinterestedinthefutureofthispuzzledandpuzzlingcountry,Hoffman’sbookcouldnothavecomeatabettertime.”

—WashingtonMonthly

“Hoffman’smasterly account of this period . . . dispels any doubts that [theoligarchs]didcalltheshots...WithouttheireffortstheRussianpeoplewouldstillbelanguishingunderahopelesslyineffectivecommandeconomy.Thatisone view. The other is that these men were self-serving opportunists whocarried out the biggest heist in history . . . It is the success of Hoffman’scompellingstorythatwecomeawayconvincedofbothversions.”

—TheLondonSundayTimes(Listedin100BestBooksoftheYear)

“Finally, a truly revelatory book about the men who remade Russia in the1990s . . . experts will be astounded by Hoffman’s great reporting, but anycurious readerwill be intrigued by the stories of thesemen’s extraordinarylives.”

—RobertG.Kaiser

“DavidHoffmanhasproducedamonumentalbook...TheOligarchsmaybethelastbookeverwrittenonthesubjectsinceitishardtoimagineanyoneelsetryingtoreplicateletaloneimproveuponthequalityofresearch,analysis,andprosecontainedinthisbook.”

—MichaelMcFaul

ToCarole

TheOligarchs

TenYearsLaterAnIntroductiontothe2011PaperbackEdition

IN MOSCOW, outside the Khamovnichesky courthouse on the morning ofDecember27,2010,ahundredorsopeoplegatheredonasnow-coveredknoll,dressedagainstthebittercoldinheavycoats,someofthemholdingupprotestsigns bearing a photograph of a man with short-cropped, graying hair andrimlesseyeglasses.“Togetherwiththepeople,foranewRussia!”declaredoneplacard.“Tofreedom!”saidalargecampaign-stylebutton.Insidethecourtroom,themaninthephotographwasstandinginsideaglass-

covered steel cabinet, with a lock and chain on the door. He was MikhailKhodorkovsky,oneofthemostambitiousofthefirstgenerationofoligarchswhorosetowealthandpowerafterthecollapseoftheSovietUnion.Thedaybefore,attheendofatwenty-two-monthtrial,JudgeViktorDanilkinhadfoundKhodorkovskyguiltyofembezzlement.Khodorkovskyhadalreadyspentmorethansevenyearsinprisonafteranearliertrialandconvictionoffraud.Now,as the judge, without looking up, read from the lengthy verdict, speakingrapidly and almost inaudibly, Khodorkovsky and his codefendant, PlatonLebedev,listenedfrominsidetheglassdetentionbox.Out on the street, Interior Ministry riot police seized anyone carrying a

protestsignontheknollanddraggedthemtoawaitingbus.Someofthesignscriticized Prime Minister Vladimir Putin, who had ruled Russia with anautocratic hand for a decade. Everyone who held up a sign was arrested.Severalofthosedetainedwereoldwomen.Whenoneparticularlyfrailwomanwasarrested, thecrowdstirred,chanting“Shame!”and“Freedom!”Someoftheprotesterswentrightuptotheofficersandshoutedintheirfaces.“Doyourchildren know what you’re doing here?” said one. “Aren’t you ashamed ofyourself?”demandedanother.Theriotpolicestoodbyimpassively.By1:00P.M.,about twentydemonstratorshadbeentakenaway.Thecrowd

thinned.VadimKlyuvgant, one ofKhodorkovsky’s lawyers, came out of the

courtroominablacksuitwithoutanovercoat.Hesaid that the judgehadnotyetpronouncedasentence,butthatwhathadalreadybeenreadaloudindicateditwouldbesevere.Alloftheprosecution’schargeshadstuck,exceptthoseforwhichthestatuteoflimitationshadexpired.Klyuvgantsuggestedthatthejudgewasunder“strongguidance”fromthepowers-that-be.Hedidnotsaypreciselywho.Headded,“Thisisadisgrace.”Twodayslater,onThursday,December31,Danilkindeliveredthesentence:

Khodorkovsky would have to serve another six years. Khodorkovsky’smother,Marina,bitterlyassailedthejudge,“Damnyouandyourdescendants!”Throughhislawyers,Khodorkovskyreleasedastatement:theverdictshowed,hesaid,that“youcannotcountonthecourtstoprotectyoufromgovernmentofficialsinRussia.”LeonidGozman,theheadofasmallprogressivepoliticalpartywithtiesto

theKremlin,said,“Thisisshocking.Itwasobviouslyapolitical,notajudicialdecision.”1Earlier,aU.S.diplomatwhowasmonitoringthetrialhadwritteninacable toWashington that the“motivation isclearlypolitical.”Byholdingatrial,thediplomatadded,theRussiangovernmentwas“applyingasuperficialrule-of-lawgloss to a cynical systemwherepolitical enemies are eliminatedwith impunity.” The cable was titled, “Rule of Law Lipstick on a PoliticalPig.”2Khodorkovsky was taken out of the glass box and returned to prison. It

seemedthatPutinhadsucceededinlockinghimupandthrowingawaythekey.But then something unusual happened. On February 14, an Internet news

portal based inMoscow,Gazeta.ru, and an online video channel,DozhdTV,carriedaninterviewwithDanilkin’sassistant,NataliaVasilyeva,whowasalsothecourtpress secretary.Shesaid that the judgehadstarted towritehisownverdict, but instead was forced to deliver a different one, given to him byhigherauthorities.“IknowforafacttheverdictwasbroughtfromtheMoscowCityCourt,”whichoverseesDanilkin’scourt,shesaid.“OfthisIamsure.”Thejudgewas“sortofabitashamedofthefactthatwhathewasreadingoutwasnothisown,andsohewasinarushtoberidofit.”Sheadded,“Icantellyouthattheentirejudicialcommunityunderstandsverywellthatthiscasehasbeenordered,thatthistrialhasbeenordered.”3ThewholespectacleofferedarevealingglimpseofthesystemPutincreated

toruleRussia.Onthesurface,alltheoutwardtrappingsofamarketdemocracycould be found: courts, laws, and trials; stock exchanges, companies, andprivate property; newspapers, television, radio, and Internet news outlets;

candidates,elections,andpoliticalparties;andevenafewgutsypeopletoholdupprotestsignsorwhispertruthsaboutthejudge.ButtherealpowerwasinthehandsofPutinandhiscronies.Theircontrolwasnotabsolute—itwasasoftauthoritarianism—butwhentheydecidedtogoaftersomeone,astheydidwithKhodorkovsky,theygottheirway.WhenTheOligarchs was written a decade ago, the architects of the new

Russia hoped that freedom and competition would drive politics andcapitalism.PresidentBorisYeltsin’sreformsgaverise toapeoplemorefreeandentrepreneurial thananyinRussianhistory.Millionswentabroadfor thefirst time, voted in elections, enjoyed a free press, and learned to rely onthemselves rather than the state. Anatoly Chubais, who transferred a vasttreasure of state-owned factories, mines, and oil fields to private hands,expressedconfidence that thenewowners,even thegreediest tycoons,wouldbemore effective than the old Soviet bosses, simply because theywould beforcedtocompeteinafreemarketthatwoulddeterminewinnersandlosers.ButYeltsinandhis teamdidnotcomplete the journey theybegan.Zealous

destroyers of the old, they stumbled when it came to erecting the newinstitutions that Russia desperately needed. Although Yeltsin instinctivelyunderstoodfreedom,hedidnotgrasptheimportanceofbuildingcivilsociety,the all-important web of connections between the rulers and the ruled. Evenmoretroublesome,Yeltsinfellshortinestablishingtheruleoflawtogovernthefreedomsheunleashed.Theresultwasawarpedprotocapitalisminwhichafewhustlersbecamebillionairesandmastersofthestate.Thiswastheageoftheoligarchs,andtheirstoryisattheheartofthisbook.WhenPutintookofficein2000,thecentralproblemhefacedwaswhattodo

with this inheritance.Therewasnogoingback to theSovietUnion.Butwhatwould follow the tumultuousYeltsin years?Putin came to the taskwith littleunderstandingofeitherMikhailGorbachev’sperestroika orYeltsin’s roaringnineties.Putin,aformerKGBagentandbackroomoperator,hadneverstoodfor a competitive election, andhedisdained the tycoons.Over thenext eightyears,hechoseapaththatwasautocraticandstatist.Hebroughttopowerlike-mindedmenwho,loosely,formedtheirownclan.Calledsiloviki,or themenofthesecurityservices,theysharedPutin’spenchantforcontrolandhopedtoenrichthemselvesintheprocess.Putin, in his first year in office, forced outVladimirGusinsky, themedia

magnate, and soon after,BorisBerezovsky, both prominent oligarchs of the1990s.Putinspokeofbrandishingaclubtomakethetycoonsheelandvowed

therewouldbenosuchthingasoligarchsasaclass.“ThisishowIseeit,”hesaid.“Thestateholdsaclub,which itusesonlyonce.Andtheblowconnectswith thehead.Wehavenotused theclubyet.Wehaveonlyshownit,and thegesturesufficedtogeteveryone’sattention.Ifwegetangry,however,wewilluse the club without hesitation.”4 Putin told the remaining oligarchs fromYeltsin’s day that they could keep their assets, but that he would brook nochallenge.Theyfellintoline.UnlikeYeltsininthefreewheelingnineties,Putinpreferred a system of state or crony capitalism in which the powers-that-bewouldchoosethewinnersandlosers.AfterKhodorkovsky’sarrest in2003,hisoil company,Yukos,wasdriven

intobankruptcyandstrippedofitsvaluableassetsbytheRussianauthorities.Awindfall—theprizedoilproductionsubsidiaries—went to thestate-ownedoilcompanyRosneft. In2006,Rosneftheldan initialpublicoffering inwhich itraisedmorethan$10billion,thelargestsuchshareauctioneverinRussia.Thechairman of Rosneft then was Igor Sechin, a deputy prime minister andlongtimePutincrony.Asthetransactionsuggests,thesilovikididnotbreaktheironbondbetweenwealthandpowerthathadbeenforgedunderYeltsinandtheoligarchs; rather, they took it over. Dmitri Trenin of the CarnegieMoscowCenter concluded, “Private and corporate interests are behind most ofMoscow’smajor policy decisions, asRussia is ruled by peoplewho largelyownit.”UnderPutin,hesaid,thegovernmenthadbeenturnedintoRussiaInc.,“withtopKremlinstaffersandseniorministerssittingontheboardsofvariousstate-owned corporations and taking an active interest in their progress andprofits.”5 While the first generation of oligarchs was arrogant and fairlyconspicuous,thenewbreedunderPutinwasquietandsecretive.6Putinpromisedtoendthelawlessnessofthepreviousdecade.Hedidfillin

importantgapsinlegislation,notablywithanewtaxcode.PutinalsobestowednewpowersandresourcesontheFederalSecurityService,knownastheFSB,thedomesticsuccessortotheKGB.However,revisinglawsonthebooksandaddingmorelawenforcementofficersdidnotseemtocreatemoreruleoflaw.In fact, by some measures the government bureaucracy expanded andcorruption becamemuchworse.TheKhodorkovsky casewas a signal to allthose inpower,notonly inMoscowbutdown through the regions, that theycould exercise their whims with impunity. A tragic example came in a caseinvolvingWilliamBrowder,who at one pointwas the largest private equityinvestorinRussia.Browder ’smethodwastobuysharesinacompany,digintoits books, then publicize whatever corruption and stealing he discovered,

hoping todrive thestockpricehigherandenrichhis fund.At first,BrowderthoughtPutinwouldcleanupcorruptionandbegoodforthecountry.ButthenBrowder, too,becamea target,perhapsbecausehisaggressive tacticsrubbedentrenchedbossesthewrongway.OnNovember13,2005,hewasstoppedattheMoscow airport after a business trip and refused reentry into Russia. Inearly 2007, a group of Interior Ministry officers raided the offices ofBrowder ’s fund, Hermitage, and its lawyer ’s offices. They seized corporatesealsandcharters, thenused them to finaglea$230million tax refund fromtheRussiangovernment,abreathtakinggambitbymenwhoweresupposedtobethepolice.WhenBrowdercomplainedloudlyaboutthecorruption,oneofhis Moscow lawyers, Sergei Magnitsky, thirty-seven, was arrested and heldwithout bail. Magnitsky became ill in prison, but his appeals for medicaltreatmentwereignored,andhediedinjailinlate2009.Thecasecastaharshlight on the culture of impunity; no one was ever arrested for Magnitsky’sdeath.“Russiaisbeingcriminalizedatanexponentialrate,”Browderlamented.“IwishIhadnotgonethere.”7In a cable sent on February 12, 2010, from theU.S. embassy inMoscow,

laterpublishedbyWikiLeaks,corruptioninRussiawasdescribedaspervasive,reachingfromcaféownerswhopaybribesforprotection, togovernorswhoextract bribes as a kind of tax system, to law enforcement agencies thatmaintain formal channels for payments. The cable quoted one personsuggesting that cash was sometimes carried into the Kremlin in suitcases.Another disagreed, arguing that thismethodwas unnecessary—“it would beeasier to open a secret account in Cyprus.”8 The group TransparencyInternational, in an annual index of corruption perceptions, rankedRussia at154outof178nations,onaparwithKenyaandTajikistan.9As in Yeltsin’s years, disputes were sometimes settled by hired assassins.

Anna Politkovskaya, a crusading reporter who had written trenchant piecesabout theunsolvedmurders andviolence inChechnya,wasgunneddownonOctober7,2006,intheelevatorofherMoscowapartmentblock.Putinvowedtofindthekillerandsaidthecrime“mustnotgounpunished.”Threemenwerecharged,butthenacquittedattrial.Noonewaspunishedintheend.Afteraseriesofapartmenthousebombings inMoscowandothercities in

1999, Putin successfully portrayed himself as a tough guy. People weredesperate for order and calm. Putin had enough support that he could havecreated a law enforcement and judicial system that was independent andrespected, but he did notwant to. Instead, he put the siloviki first. The secret

services were given expanded authority to carry out operations abroad—including assassinations—and to suppress political dissent at home. ThedirectoroftheFSBcalledthesesecuritymen“thenewnobility.”Foralltheirprivileges,however, in theyears that followed they facedsharpcriticismforfailingtopreventawaveof terroristattacks, includingtheNord-OstsiegeinOctober 2002. When Chechen terrorists seized a Moscow theater full ofcivilians,thesecurityservicespumpedadisablinggasintothebuilding.Allofthe terroristswerekilled in theensuingassault, but130of thehostagesalsodied,manybecausetheywerenotpromptlytreatedforexposuretogas.Then,inSeptember2004,atleast339peoplediedinaviolentstandoffwithmilitantsinaschoolinBeslan,Ingushetia,nearChechnya.Overhalfofthevictimswerechildren.Againquestionswereraised:wherewerethesiloviki?10PutinexploitedtheBeslanattacktoturnthescrewstighterinhiscontrolof

thepoliticalsystem.Inhisfirstterm,Kremlinaidesdescribedtheirapproachas“manageddemocracy,”inwhichtheinstitutionssuchaspoliticalpartieswereallowedtocarryon,albeitwithsharplylimitedautonomy.Intheseyears,Putintook control over all the major independent broadcast television networks,establishedunrivaleddominanceofbothhousesofparliament,andforcedtheoligarchstosubmit.ButintheweeksaftertheBeslanbloodshed,Putinchangedthe political structure permanently. He eliminated election of regionalgovernors,whowouldhenceforthbe appointedbyhimself.He also changedvoting for the State Duma, the lower house of parliament, so that the onlychoicewouldbepoliticalparties,notcandidatesfromindividualdistricts.Sucha party-only system is used elsewhere in theworld, but in Russia it had theimpactofwipingoutmanyof the remaining independent lawmakers, electedfrom districts. In the December 2003 parliamentary elections, two smallerprogressiveparties,YablokoandtheUnionofRightForces,failedtowinanyseatsasparties.Ofthefourpartiesthatdidwinseats,allweresupportiveoftheKremlin.In his second term, Putin imposed stillmore autocracy and centralization.

The powerful Central Election Commission was put under the control of alongtime associate of the president,VladimirChurov,who said upon takingoffice that his “first law” was that “Putin is always right.” The Kremlinoversaw how money was distributed to candidates in elections and put achokehold on the national television news so that opposition voices werepermitted only brief appearances, if any. The spicy political satire of the1990s,whichoftenskeweredYeltsinandhisteam,waslargelysilenced.11

Putin’sauthoritarianismwasnotabsolute;heoftenusedmanipulationratherthanoutright repression togethisway.Manyof the truly independentmediaoutlets—including newspapers, magazines, radio, and the Internet—werepermitted tocontinueworking, sometimespublishingandbroadcastinghard-hitting material about the government. The Internet was not blocked, soRussianscouldfreelyseeallkindsofopinionsthere,includingsomethatwereharshly critical of the regime. But the audience for the independent media,concentrated in Moscow and other big cities, was relatively small, and thejournalismhadlittlerealimpact.TheKremlinandthemajortelevisionoutletssimply ignored any nettlesome questions. For example, Russia’s financeminister,AlexeiKudrin,spokeoutinFebruary2011ataconferenceaboutthefailuretobuildaruleoflaw.“Ratherthanabidingbytherules,”hesaid,“weliveaswepleaseandrelyonwinksandnudges.Wehaveaveryweaksystemofgovernance.” This serious critique of the ruling powerswas ignored by theleadingtelevisionstations.12Without real political choices,manypeople inRussia simply checked out.

MashaLipman, editor ofPro etContra, a journal published by theMoscowCenteroftheCarnegieEndowmentforInternationalPeace,saidthatRussianshadbecomealienatedfrompoliticsandhadenteredakindof“noparticipationpact”withPutin:Theywouldn’tmeddleinpolitics,ifhewouldstayoutoftheirpersonallives.InSoviettimes,Lipmanrecalled,thestateintrudedeverywhere,butinRussiatodaypeopleenjoy“virtuallyunlimitedindividualfreedoms.”“People eagerly engage in their private affairs with little regard for the

politicalrealm,whichtheyhavewillinglyabandoned,”sheadded.Theresultisthat“thegovernmentenjoyseasydominanceoversociety.”13After the crash of 1998, when the government defaulted on its debts and

devalued theruble,Russiabenefitedenormouslyfromanextendedeconomicboom.Growthaveragedmorethan7percentperyearbetween1999and2008,making Russia’s one of the fastestgrowing economies in the world. (Russiaalsosufferedasharpdecline,an8percentdrop,inthecrisisof2008.)Bymostaccounts, the long run of high oil prices gave Russia a robust budget andfinancesintheseyears,butitpostponedmuch-neededreforms.Thecountryisstillheavilydependentonoil,gas,andothernaturalresourceexports.14Intheannualrankingoftheworld’sbillionaires,Forbesmagazinesaysthatthereare101of them inRussia, largely inoil, gas, coal,metals, andbanking.AndreiMelnichenko, who in 1991 was a currency trader working out of his dormroomatMoscowStateUniversity,isnowtheseventeenth-richestbillionairein

Russia,themagazinesays,with$8.6billion.15Just as Putinwas handpicked byYeltsin, so too did Putin choose his own

successoraspresident,DmitriMedvedev,anassociatefromSt.Petersburgwhowas elected according to the familiar pattern of “managed democracy”—theballoting was held, but the outcome was preordained. Putin became primeminister and by most accounts has continued to pull the levers of power,althoughtherelationshipbetweenthetworemainsopaqueandopentodebate.LiliaShevtsova,theastutepoliticalanalystinMoscow,saidthatwhilePutinisdominant in the tandem, Medvedev plays the important role of assuagingliberalsandtheWest.InSeptember2009,Medvedevpublishedalengthyessaytitled “Russia Forward” in which he described a list of Russia’s woes:overreliance on natural resource exports, decrepit infrastructure, corruption,and a weak civil society. Medvedev called for modernization anddiversification of the economy. Earlier, he also pledged to end the “legalnihilism” of recent years. But it appeared to be more talk than action. TheKhodorkovskytrialunfoldedonhiswatch.MedvedevhascoaxedRussianandforeign investors to contribute to a kind of high-tech center to be built atSkolkovo outside ofMoscow, but SiliconValleywas not built in a day, andMedvedev’sprojectseemsmoreasymbolthanarealforceforchange.Inearly2011,Medvedevremarkedthatanationcannot“beheldtogetherby

tightened screws.” Putin tried to hold Russia together for eight years withtightenedscrews,butthisishardlyaviablepathfortheyearsahead.Russiastilldesperatelyneeds tomodernize and to attract foreign capital, challenges thatwillbeimpossibletomeetwithoutalsobuildingtheruleoflaw.Itisbecomingever clearer that economic modernization cannot succeed without politicalmodernization too.Russiahasyet to fulfill thehopesofYeltsin’s reformers,who dreamed of a free market democracy driven by vibrant competition.Perhapsitmaytakegenerations.Certainly, theageoftheoligarchsdescribedin this book did not fully realize the dream, nor did the decade of Putinauthoritarianism.Butitremainsadreamworthpursuing,andfightingfor.

DavidE.HoffmanApril2011

NOTES

1CliffordJ.Levy,“RussiaExtendsPrisonSentenceofTycoonSixYears,”NewYorkTimes,December31,2010,p.A1.2“RuleofLawLipstickonaPoliticalPig,”cable09MOSCOW3144,December30,2009,releasedbyWikiLeaks,http://wikileaks.ch/index.html.3Khodorkovsky&LebedevCenter,“CourtAideRevealstheVerdictWasForcedontheJudge,”March2011,availableat:http://www.khodorkovskycenter.com/sites/khodorkovskycenter.com/files/March2011Newsletter.html(inRussian,seehttp://www.gazeta.ru/politics/2011/02/14_a_3524202.shtml).Also,onApril14,2011,aformercourtofficial,IgorKravchenko,saidinaninterviewwiththenewspaperNovayaGazetathatthejudgeinthecasehadacknowledgedthattheverdictwouldbedictatedtohimbysuperiors.4CharlesLambroschiniandPatrickdeSaint-Expeury,“VladimirPutin:RussiaHasChanged,”LeFigaro,astranslatedandpublishedinKommersant,October27,2000,p.2.5DmitriTrenin,“RussiaRedefinesItselfandItsRelationswiththeWest,”WashingtonQuarterly,Spring2007,pp.95–105.6InApril2011,PresidentDmitriMedvedevorderedgovernmentministerstoceaseservingonseventeencorporateboards,andSechinrelinquishedhispostatRosneft.Severalothersgaveuppostsatothercompaniesaswell.However,itwasnotclearwhetherthiswouldbeagenuinebreakwiththepastorjustacosmeticmove.7WilliamBrowder,“TheHermitageCase:OrganizedCrimeandLegalNihilismInsidetheRussianGovernment,”briefingdocumentintheauthor ’spossession;“WilliamBrowder,”astoldtoDianeBrady,BloombergBusinessweek,January10–16,2011.8“TheLuzhkovDilemma,”cable10MOSCOW317,February12,2010,releasedbyWikiLeaks,http://wikileaks.ch/index.html.9SeeTransparencyInternational,“CorruptionPerceptionsIndex2010Results,”http://www.transparency.org/policy_research/surveys_indices/cpi/2010/results.10AndreiSoldatovandIrinaBorogan,TheNewNobility:TheRestorationofRussia’sSecurityStateandtheEnduringLegacyoftheKGB(NewYork:PublicAffairs,2010),chaps.12and13.11NikolayPetrov,MariaLipman,andHenryE.Hale,OvermanagedDemocracyinRussia:GovernanceImplicationsofHybridRegimes(Washington,D.C.:CarnegieEndowmentforInternationalPeace,February

2010).12QuotedinaReutersdispatchbyDaryaKorsunskaya,“RussiaNeedsFairPollstoBackReforms:Kudrin,”February18,2011.13MashaLipman,“Putin’sNo-ParticipationPact,”MoscowTimes,April1,2011.14AndersÅslund,SergeiGuriev,andAndrewC.Kuchins,eds.,RussiaAftertheGlobalEconomicCrisis(Washington,D.C.:NewEconomicSchool,CenterforStrategicandInternationalStudies,PetersonInstituteforInternationalEconomics,June2010).15See“TheWorld’sBillionaires,”Forbes,March9,2011,availableat:http://www.forbes.com/wealth/billionaires.

Prologue

THEDEADOFWINTERfoundtheoldmantrappedinanotherbrooding,darkseasonofdiscontent.BorisYeltsin,theRussianpresident,hadbarelysetfootintheKremlinfortwomonthsafterbeinghospitalizedinDecember1997foranacute viral infection. In January he disappeared from view, far away fromMoscow, at awooded resort inValdai, near the borderwith Finland.Yeltsinwascapableofgreatspurtsofactivity,butnowhewasdormant.Ayearafterrecoveringfromheartsurgery,hisattentionspangrewshort,andheseemedtofadeinandoutofdiscussions.InFebruaryhewenttoItalyforastatevisit.Helookedpaleandstiff.AttheTomboftheUnknownSoldierinRome,hebrokeprotocolbyfailingtopaytributetotheItalianflag,despitefranticattemptsbyaidestostophiminfrontofit.HemadeabizarreblunderbyannouncingthattheUNsecretary-general,KofiAnnan,wouldvisitIraq.Annansaidhehadnosuch plans. At a press conference, Yeltsin needed help answering simplequestions.“IneversaidIwouldgotoIraq,”hereplied,befuddled.ToasmallgroupofRussia’swealthiestbusinessmen,Yeltsin’sbehaviorwas

deeply unsettling. Russia needed a strong political leader.With its presidentailing,thecountryseemedadrift.ThewindsoftheAsianfinancialcrisiswerealready blowing intoRussia, driving oil prices down and investors out. Thebusinessmenhadmuchtolose.Justtwoyearsearlier,thesetycoonshadrescuedYeltsinfromanotherofhis

dangerous winter hibernations. They offered Yeltsin their most talentedpolitical operatives, the enormous power of their television stations, and thefront pages of their newspapers for his faltering 1996 reelection campaign.Yeltsin roused himself from a stupor, threw himself into the fight, andwon.With theelectionvictory, the tycoonsand thepresident forgedabond—theirwealthwasgraftedtohispower.NeithertheynorYeltsincouldletgoofeachother.Astheirpowergrew,thetycoonsbecameknownassimplytheoligarchs,themenwhoownedandruledthenewRussia.Nowtheoligarchswererestless,astheirpresidentonceagaindriftedaway.

BorisBerezovskywas themostambitiousamong them.Hewasashortman,with arching eyebrows and a soft, hurried voice. He had made his fortuneexploitingthechaosofRussia’srapidtransformationfromSovietsocialismto

market capitalism. He was fifty-two years old and indefatigable. His latestgambitwas audacious—to replace the sittingRussian primeminister,ViktorChernomyrdin,with someoneelse,preferably someonewhowouldpayheedtotheoligarchs.Berezovskyknewitwasahugedecision: theprimeministerwasnext in lineofsuccession.Yeltsinwasfrequently ill.Atanymoment,hischoice for prime minister could become the next president of Russia.Berezovsky and the other tycoons began to talk seriously about creating a“corporate government.” They would become a shadow board of directors.With Yeltsin sick and distant, they would appoint ministers and they wouldinformallyrunthecountry.TheywereBigCapital,andthestatewasfeeble.ThetycoonsgatheredquietlyattheheadquartersofYukos,Russia’ssecond-

largest oil company, which was run by one of the oligarchs, MikhailKhodorkovsky. The shadow board of directors decided it was time forChernomyrdintogo,andtheydiscussedwhowouldreplacehim.BerezovskyalsometwithYeltsin’s chief of staff,ValentinYumashev, and the president’sinfluentialyoungerdaughter,TatyanaDyachenko.On Saturday, March 21, 1998, at his country house outside of Moscow,

Berezovskygavea long, taped interview to Itogi, a televisionnewsprogrampopularamongthepoliticalelite.TheprogramwascarriedonRussia’slargestandmostsuccessfulprivatetelevisionchannel,NTV,foundedbyanotheroftheoligarchs,VladimirGusinsky.Intheinterview,Berezovskydeclaredpointedlythatthecampaigntosucceed

Yeltsinwas already underway and that none of the leading candidateswere“electable.”Hespokevaguelyabout“immenseopportunitiestobringforwardnewpeople.”TheinterviewwasbroadcastonSundayevening.Thenextmorning,Yeltsin

firedChernomyrdin.This book is a chronicle of six men who helped lead Russia in one of thegrandest, most arduous experiments ever attempted: to transform a vastcountry, in the grip of failed socialism, into an economy of free marketcapitalism.Thestoryspansmore thanadecadeandahalf, fromthedawnofMikhail Gorbachev’s perestroika and glasnost reforms in 1985 to theaftermathofBorisYeltsin’sresignationonDecember31,1999.ThesesixmenbecameleadersofthenewRussia,architectsandapostlesofa

neworder.Bytheendofthe1990s,theyhadtastedenormouspoliticalpoweror sizable wealth or both. Although their stories are different, the threads

running through themare similar: theyamassedand lost fortunes, tookoverthe crown jewels of Russian industry, commanded private armies, playedkingmaker in elections, and ruled the country and its citadel of finance,Moscow.They bought up theRussianmassmedia, especially television, andtheyseizednotonlyfactoriesbutalsotheassetsofthestateitself,includingthebudget, the law enforcement system, and the Kremlin leadership. In theirswaggering domination of early Russian capitalism, they were secretive,deceptive,and,attimes,ruthlesslyviolent.The new age that gave rise to these sixmen began onSunday,March 10,

1985.KonstantinChernenko,theSovietgeneralsecretary,asickmanwhohadbeeninpoweronlythirteenmonths,died,andtheKremlinphysician,YevgenyChazov,telephonedGorbachev,theyoungestmemberoftherulingPolitburo.WithinhoursblacklimousineswerepullingintotheKremlinforthemeetingthatwouldputGorbachevinpowerandeventuallyleadtotheimplosionoftheSovietUnion.WhatGorbachevbeganwasrevolutionarychangethatsweptupeveryoneofthesixsubjectsofthisbook.Yet,at theoutset, theyweredistantfrom the center of power. They were obscure scientists and academics,bureaucrats and students. Certainly, on the day Gorbachev became generalsecretary,itwouldhavebeenimpossibletopinpointthemasstandard-bearersofthecomingrevolution.In a second-floor kitchen of a modest Moscow apartment made of

crumbling, prefabricated concrete slabs, a rangy, angry young man, aconstructioncrewboss, satgrousingabout life in“developedsocialism.”Hewas Alexander Smolensky, a thirty-year-old tough guy who drove a dumptruck.Hehadgrownupwithoutafather.Hewasanoutsider.Hissoulwasfilledwithresentmentathislot.At theMendeleev Institute forChemical Technology, a prestigious school

fortrainingchemicalengineers,MikhailKhodorkovsky,thentwenty-one,wasa year away from graduation. His boyish voice hid an inner drive andambition. Khodorkovsky was already interested in economics—he collectedtheduesfortheKomsomol,theYoungCommunistLeague,andwasopeningayouthcaféattheinstitute.At a bastion of Soviet applied science, the Institute of Control Sciences,

wheremathematiciansand theoristsdevisedways tocontrolballisticmissilesand atomic power plants, Boris Berezovsky, thirty-nine years old, was aspecialistintheoriesofhumandecisionmakingandheadedhisownlaboratory,wherehehadlatelybeendreamingofwinningaNobelPrize.

Outon thehighway to the international airport, a frustrated, skinnyyoungmanwasatthewheelofhiscar,whichhedrovebackandforthasanunofficialtaxi.VladimirGusinsky, thirty-three,wasdrifting through life.Gusinskywasangryat theworld.Hehadoncedreamedofacareer inthetheater,wherehehadtrainedasadirector,buthehadfailedtomakeittotheMoscowstage.AttheMoscowcitycouncil,YuriLuzhkovsatinaseaofmiddle-agedSoviet

bureaucratsandindustrialmanagers.Hedidnotstandoutamongthethousandmembersoftherubber-stampcitylegislature.Luzhkov,thenforty-eight,spokethelanguageofthemanagerialestablishment.Hewaschauffeuredaroundinablack,officialVolgacar.At a backwater engineering and economics institute inLeningrad, a lanky

redhead, Anatoly Chubais, thirty, displayed a certain stubborn, commandingpresence. The son of an orthodox Communist who taught in the militaryacademy,Chubaiswaslosinghisfaithinthesystem.Evenif theyhadgatheredinaroomonthedayofGorbachev’sascension,

thesesixmenwouldhardlyhaveknownwhattosaytooneanother.TheycamefromdifferentwalksofSovietlife,fromthenomenklaturaandsciences,fromtheshadyworldofstreethustlersandtheranksofSovietindustrialmanagers.But what distinguished them was an ability to change. Every one of themlearned to manipulate the old system while at the same time making anincredibleleapoutofitintothenewworld.Four of them, Smolensky, Khodorkovsky, Berezovsky, and Gusinsky,

became wealthy magnates over the next decade and a half, a coterie offinancierswhose fortunesweremade in the shadows of political power andwhoinformallyruledthecountryinYeltsin’stime.Twoofthem,LuzhkovandChubais,becamepowerfulpoliticalfigures.LuzhkovwastwiceelectedmayorofMoscow.The city harbored the largest concentrationof capital inRussia,and here Luzhkov built an empire of his own. Chubais was the longest-survivingeconomicreformerofthe1990sandarchitectofthelargesttransferinhistoryof state-ownedassets toprivatehands.More than anyother singleindividual,hewasthefatherofthewildlandgrabthatfollowed.Thesixmenandtheircountryhadlittlepreparationandevenlessexperience

from history for such a momentous transformation. Fromwhere, and fromwhom,didtheylearnhowtocarryitout?InSoviettimes,theyfoundthekeystolockedlibrariesandreadthe“restricted”booksonWesterneconomicsandfinance. They studied in Eastern Bloc countries such as Hungary andYugoslavia,whichwereexperimentingwithmorerelaxedkindsofsocialism,

andtheytraveledtotheWest.TheymarveledatthebrashheroesofHollywoodfilms,whichweresmuggledintoMoscowonpiratedvideocassettes.Later,theyweretutoredpersonallyat thekneesofglobaltycoonsandfinancierssuchasRupertMurdoch,GeorgeSoros,andmanyothers fromWallStreet,London,and private banking capitals from Geneva to Gibraltar. American andEuropeaninvestmentbankersandlawyersfloodedRussiaafter1992,helpingwrite Russia’s mass privatization program, drafting the all-important lawsgoverning companies, and setting up capital markets. International financialorganizations—theWorldBank,InternationalMonetaryFund,EuropeanBankforReconstructionandDevelopment,andothers—broughtWestern templatesandideastoRussia’snascentcapitalisminthe1990s.The new Russian tycoons also borrowed amply from a rich history of

plutocracyinEuropeandtheUnitedStates.AlthoughtheRussianfortuneswererelativelysmall—thetopfourRussiancommercialbanksin1995wouldhaverankedalittlehigherthanthirtiethinItaly—theynonethelessadoptedthestyleandmethodsof thegreat robberbarons, emulating their brazendeals, steelyself-confidence, daring gambits, and superrich fantasies. A resemblance toAmericancapitalistsoftheearlytwentiethcenturywasnotentirelyaccidental.TheodoreDreiser ’spowerfulnovelsTheFinancierandAnAmericanTragedyweretranslatedintoRussianandwidelyreadduringtheSovieterabecausetheyprovidedsuchtrenchantcommentaryontheundersideofAmericancapitalism.ManyofthetechniquesofthefirstRussianfinancierscanbefoundinthedealsmadebyFrankCowperwood,theheroofTheFinancier,whoexploitedbanks,the state, and investors,manipulated thewhole stockmarket and gobbled upcompanies.The1912novelwasbasedonthelifeofarealAmericanmagnate,CharlesT.Yerkes.But if they had Western models, these Russians were also unique. They

inheritedacountrywithapoliticalandeconomicculturerootedincenturiesofRussianobediencetoauthority,arbitrarilydefined,fromtsarstocommissars.They inherited a society inwhich the simplest human instincts of individualinitiative and entrepreneurship had been suppressed for seven decades,survivingonlyintheshadows.TheSovietmind-setlingeredandcouldnotbeerasedinthefirstyearsafterthearrivalofamarketeconomyonaliensoil.Russiawasalsouniquebecauseofacriticalchoicemadeimmediatelyafter

the Soviet Union collapsed. Yeltsin deployed a band of radical youngreformers, including Chubais, who, believing they had little time, set out towrecktheoldsystematanycost.Theychosetofreepricesandpropertyfirst

andtoinstallrulesandinstitutionsofamarketeconomyonlylater.Theresultwas thatRussiancapitalismwasborn intoanairlessspace,avacuumwithouteffectivelawsandastatesobadlyweakeneditcouldnotenforcelawsthatwereon thebooks.Timeandagain,questionsaroseabout thedealsmadeby thesesix men: Were they legal? Were they criminal? But the questions were noteasilyansweredbecausetheplayersmovedaboutinaworldlackingthelegalconstraintsor themoral compassofamatureWestern society. In theseearlyyears,Russiawasastatewithouttheruleoflaw.Lying,stealing,andcheatingwere part of daily business, and violence, brutality, and coercionwere oftentoolsofthetrade.Itisnottoexcusethecontractkillings,theblatantthefts,orgreedyambitionsofthosewholedtheRussiancapitalistrevolutiontosaythattheentireexperienceoccurredinafreefall,azoneoftheunknown.OneoftheRussian magnates ruefully told me in the summer of 2000 that his once-cherished hopes in Soviet times about the magic of free markets, privateproperty, and the rule of law had all turned out to be seriousoversimplifications.“It’stakenusmuchlongerthanwethought,”hesaid,“andtoomanypeoplewerekilled.”In theWestern experience, tycoons often feasted off both the government

andprivatecapital.TheRothschildswerebankerstoprinces;J.P.Morganwasa bridge between British lenders and American railroads. But Russia’s firsttycoonsdrewtheirearlysustenancealmostentirelyfromonesource:thestate.They keenly saw, and exploited, its many weaknesses. They seized on thecolossal imbalances inprices,property,and trade thatwere the legacyof theSoviet system—andmade fortunes from it.With several notable exceptions,theybuiltvery little thatwasnewon theground in theseearlyyears.Rather,their first lessons were how to make easy money, which came to them soeffortlesslythattheyseemedtograbitoutofthinair.Intheseearlyyearsofprotocapitalism,thesixmenportrayedinthisvolume

came to know each other well in business alliances, in friendship, and inhatred.Their troubled relationsbecameaneverendingpublicspectacle.Ataprivate club on a hill overlookingMoscow’s cityscape in September 1994,someofthemsignedasecretpactpromisingnottoattackeachother,apledgethey soon abandoned. They formed alliances and then destroyed them. Theybuilt empires and tried towreck those of their competitors. They all agreedaboutthefailureoftheoldsystem,buttheyheldquitedifferentvisionsofthenew.To understand how far the oligarchs came, it is necessary to beginwhere

they began, with the Soviet years of stagnation, the shortage economy andshadowmarkets.Allsixmenwereshapedbythiseraofdecayingsocialism,atimewhen each of them began to think—and act—toward a new order. Thefirstchapterofthisbookissetintheyearsofstagnation,aviewfromthestreetand from inside the dying system. The following six chapters probe moredeeply the road eachman followed in Gorbachev’s era of restructuring, orperestroika, and into the first years of the new Russia. The remaining ninechapters, in Part II of the book, examine the tumultuous 1990s through theoligarchs’ exploits and failures. It is the story of how a rapacious, unrulycapitalismwasbornontheashesofSovietcommunism.

PARTONE

Chapter1

ShadowsandShortages

INTHESUMMERHEAT,theglassfacadeofKurskyStationloomedabovethesweatycrowds.Thetrainstationhallwasamonumentalboxofglass,concrete,and space; it was stark, modern, even utopian, and the design spoke ofprogress. Such progress! Reflected in the glass facade, the travelers andtransients below were a bazaar of traders, strivers, hustlers, and survivors,trying tomake thebestof life in“developedsocialism” in theSovietUnion.Pies?Beer?Icecream?Livechicks?Itwasthere,spreadoutbefore theglasswallandjustbeyond,intheopenplatformbetweenthestationandtherowsofwaitingtrains.Fromhere,thelong-distanceraillinesstretchedtowardfar-offcitiesofthesouth,towardBaku,Tbilisi,andtheCrimea.Thecommutertrainsranoutof thecapital toward smallvillagesandcountrycottages, thedachas.Onasummerday,thecrowdssurgedoutofMoscowonthecommutertrains,theelektrichkas,tothevillagesofsummerretreat,tothecoolbirches.MostMoscowtrainstationswereseedyterminalsofdespair.Peopleslepton

thefloors,newspapersspreadoutunderthem;thewaitinghallswerezonesofmisery,reekingofdrunksandstalesmoke.ButKurskyStationhadbeenrebuiltin the 1970s, transformed into an architectural statement towering above themisery. It was a monument to a system that loved angular, concretecongratulationstoitself.TheywerespreadacrossthelandscapeoftheSovietUnion, celebrations of ideology, great exclamation points—to theachievementsofthepartyandthepeople!Butformostpeoplewhopassedbythem,thesesocialistmonumentswereno

longer even noticeable, nomore remarkable than a lamppost or a tree. Thearchitectural style remained—massive and imposing—but the meaning wasgone.The truthwas that thepeoplesurging inandoutofKurskyStationhadstopped paying attention to the stale propaganda and the hollowmodernismpresentedbytheSovietsystem.Achasmseparatedthemfromthestate.Theynolonger believed in a bright Communist future. They knew that even as the

system declared its greatness, it was stagnating, rotting fromwithin. Peoplespenthalftheirlivesinastruggletoovercomethemostbasicshortages,tolaytheirhandsonacutofmeatorapairofboots.Theysurvivedthankstoavast,unofficial second economy—a shadow economy—that somehow provided acushionagainsttheharshrealitiesoflife.Irina Makarova knew both the reality and the lie. A bright young

schoolteacher,withshoulder-lengthblackhairworn instylishcurls,her faceframed in aviator glasses, Irina made her way through the bustling crowdoutsideKurskyStation.Sheledherfour-year-olddaughterwithonehandandgrippedabulgingredrucksackwiththeother.Itwasahotdayinthesummerof 1985, and she did not bother to notice themodernistic facade ofKurskyStation.ShedidnotpayattentiontothedeclarationsofthePartyCongressorthelatestfive-yearplanortheabsurdtelevisionnewsbroadcastsaboutpeasantshappilypreparingfortheharvest.Itwasallsodistantfromreallife.Athome,in the kitchen, they had been talking often about the new general secretary,about this youngerman,MikhailGorbachev.But at thismoment she did notstoptoponderpoliticsorworryaboutthefuture;sheworriedaboutthewater.Irina clutched her young daughter ’s hand as they approached the small

bustling squareoutside the train station.She stiffly resisted thepull towardahulking, blue-gray vending machine, as big as a refrigerator, with thedisgustingjarthateveryonedrankfrom.Longago,themachinehadboastedarealdrinkingglassandaseparate, tinynook inwhichyoucouldrinse it,putyourkopeks in themachine,andwatch the sulphurouswaterpourdown.Butthen the glass had been stolen. Someone replaced it with a jar, an oldmayonnaisejar,withagrimystringtiedaboutitsneck.Theyalldrankfromthejar.Shedesperatelyhopedshecouldpassitwithoutbeingtuggedbyheryoungdaughter—whoalwayswantedadrink—towardthatjarwiththedirtystring.Inside, thetrainstationwascoolanddark.Shefoundthelinefor tickets to

Kupavna, a small village of summer cottages beyond the oppressivemetropolisofMoscow.Kupavnawastheirrefuge,butitwasnevereasytofleethe city. Itmeant struggling, shoving, pushing, and always hustling in smallways,grabbingwhatyoucouldwhenyoucould.Thelinefortheticketsontheelektrichka to Kupavna was the first hurdle. Children cried in the line,passengerspressedforward.Peoplepressedsoclose thatshecouldsmell thesoap—thatbrown,cakedsoap theyused foreverything—for the laundry, forthedishes.The ticketwindowswere imposingly tall.Yetnoonecould look inorout.

Eachwasclosedoffbyafaded,dirtydrawnblindthatfelldowntoatinyrabbithole–sizedslidingdoorat thebottom.Theauthoritiesdidnotwant theangrycrowds peering in, so they closed out the exhausted faces of the passengerswiththeimpenetrableblind.Throughtherabbithole,Irinasawthehands,butnot the face, of the clerk on the other side.Two tickets forKupavna, fifteenkopekseach.Thenbacktothedoors.Forallthevastnessofthestationhall,withitshigh

ceiling and wall of glass and huge main floor, when it came to people,everythingwasconstricted,asifahandwerereachingdownandchokingthemat the throat.Fourdoors stoodat theentrance to the tracksyet threeof themwereclosedand locked,sopeoplesurged,pushedandshovedtoget throughthe one door. Irina pushed out into the bright sunshine, toward the long,slinkinggreentrains.Then,justastheyturnedtowardthetrains,shesawit.Toiletpaper!A crowdwas pressing shoulder to shoulder. Instinct and years of survival

tookover. Irinahad longunderstood that tosurvive in this life,yougrabbedwhatyoucouldwhenyousawit.Shesawtheyweresellingtoiletpaperfromanopenboxanddidn’thesitate;sheboughttwentyrollsbecauseitwasthere.Shehadnofreehandtocarrythetoiletpaper.Ononeshouldershecarried

theheavyredrucksack,packedwithbooksandthingsforthedacha.Withherotherhand,sheclungtoherdaughter.Shedugintoherbagandfoundapieceofstring.Shelacedtherollsoftoiletpapertogetherand,withoutamoment’sthought,shewaswearingatoiletpapernecklace.Noonethoughtitunusual;itwaslife—sheboughtwhatcameherway.Whenshewantedtogooutandbuyachicken, she didn’t. She bought toilet paper, and next timewhen shewantedtoiletpaper,she’dprobablygetachicken.Theyboardedtheelektrichka.Thewoodenbenchseatswerethreeacross,the

wagonsjammedfull.Abicyclewasparkedintheaisle,dogsbarked,fruittreeswereboundinclothbags,heavysuitcasespiledonseats,childrendodgedandsquirmed.Itwasstifling.Thethickwindowsofthetrainwereclosedlikevaultsthat trapped inside the smells of herring wrapped in paper, cheese, andcigarettesmoke.Thetrainlurchedforward.Despite thepackedandstuffycars, theheavybag thatcutacrease intoher

fingers,andthetoiletpaperrollsaroundherneck,somethingwonderfulliftedherspiritswhenthetrainpulledout.TheburdenofMoscowslippedbackwardthrough the windows. It was true for all of them, the dachniki. They wereescaping, runningfromthesuffocating lives they led in thecity to theirown

privatereservesoffreshair.As the train picked up speed and the city slipped away, the whine of the

electric motors grew ever more shrill, then faded away. Hulking factories,fieldsofrustingcranes,andconcreteskeletonsofunfinishedbuildingspassedsolemnlybythewindow.Itwasaparadeofdecay.Irina was a survivor and strove to do her best in a world of gross

imperfection. She learnedEnglish and taught it at a special school, althoughshehadnevermetanyonewhospokenativeEnglish.Shehadalways,loyally,put on that artificial face, that mask, at the meetings of the Komsomol, theparty’s youth organization, even though she knew the whole exercise wasemptyandmeaningless.They imploredher tobea trueKomsomolmember.Topreachprinciplesof theKomsomolbuilder!Yetsheknewthesystemwascreaking.IrinawasthirtyyearsoldwhenGorbachevcametopower.SheandhergenerationhadcomeofageduringtheBrezhnevmalaiseofthe1970sandearly1980s.Thesewerecalled theyearsofstagnation, thegodyzastoya.Buttheywerealsocalledtheperiodofsenility—marazm.The senility of Soviet socialism thrust its failure in their face every day.

Often theydreamedofdrinkingacertain scarce teawithayellow label.Theleaveswerefinerandcut thinner,andwhentheybrewedit, theteawasarichreddish brown. The tea came in a yellow pack with an elephant on it.Supposedly it was from India. But there was a desperate shortage of thisyellow-packetedtea.ItwasimpossibletofindandnooneknewifitreallycamefromIndia.Butifyouspottedit,youwillinglystoodinlonglinesforit,atanytime.Thentherewasthecannedmeat.Thecanswerediscardedarmyrations,and

everyoneknewit.But freshmeatwasnowhere tobe found. In theprovinces,peoplewentforyearswithoutseeingfreshmeatinthestores.Thestatedumpedthe tinned-meat army rations on them. If they saw twenty cans, they boughtthem on the spot. They hoarded it; they hoarded everything, just in case.Cannedmeatonspaghettiwasameal to savor.Thereweren’tmanykindsofpasta,either;thethick,long,grayishkindtookforevertocook.Theydreamedoftheteawiththeelephant,thestewedmeatincans,andperhapsrealspaghetti.Sometimestheycouldobtainbetterpasta,likethefinertypesfromItaly.Theycouldn’tbuyit,buttheycould—withgreateffort—getit.Thiswasthestoryoftheirlife;althoughtheRussianlanguagehadaverb“tobuy,”theypreferredtosay“toget”or“totake.”Theywouldsay,“Itookahalfkiloofbutter.”Whatyou could “get” or “take” did not depend onmoney but on connections, on

luck,onfate.The Soviet state theoretically provided for almost everything—medical

care, schooling, transportation, work. In the hulking gray headquarters onMarx Prospekt in central Moscow, Gosplan, the mammoth state centralplanning agency, arranged how to allocate every ton of steel, deliver everybolt, utilize every last gear in the administrative-command economy.KhrushchevhadvowedthatCommunismwouldovertakecapitalismby1980.Yet in themid-1980s, Irina’s generation knew, felt, and tasted every day thehollownessofthatlong-agopromise.Sovietsocialismprovidedlessandless,and they struggled to survive with their own networks of friends andconnections.Theylivedwithacarnivalofwants,alwaysontheprowl.Thestatestoresneverthrewanythingaway.Theyjustsoldittopeople.Irina

hadseenitmanytimes:theywrappedupapackageofoutdatedcannedherringand stalebread, andonepacketof the teawith the elephant.And,maybe, thepasta,inafancyredcover.Thesepackageswerecalledzakazy,ororders,andevery school, every factory, every kindergarten, and every institute offeredthemtoworkers,perhapsonceamonth.Therewasnochoice:ifyouwantedtoenjoytheIndianteawiththeelephant,youhadtotakeeverythingthatwentwithit:thestalebread,theoldherring.Irina’s generation lived their lives in long, slow cycles of shortages. The

SovietUnionatthetimewasdevotingmassiveresourcestothearmsrace,butforitscitizensthereweretoiletpapernecklacesandoutdatedcansofherring.Every year, the shortages seemed to grow worse. At the beginning of the1980s, therewascheese,onekindofsausage,milk,margarine,sugar,bread,andthebasicnecessities.Evenso,backthen,Irinaandherfamilycomplainedto each other that there was nothing in the stores. Theywould say it aloud,“there’snothing,”andtheymeantthattheywantedabitofham,buttherewasno ham.Theywanted a beer but therewas no beer. Sadly, they didn’t reallyknow what was coming; they could not imagine that there would really benothing.Theshortagesrubbedtheiremotionsraw.Irinahadseenthefireinpeople’s

eyes when suddenly bags of flour appeared in a store. Soon five hundredpeople were waiting, writing their place in line—their number—on theirpalms. The white-smocked counter lady was patient with the first hundred.Then she started snarling.Shehated them.Peoplewould be begging.Please,givemetwokilosofflour!Oncecansofcondensedmilkappeared,hundredsofbluecans,painstakingly

arrangedinapatternonthecounter.Ayear later, therewasnosausage,onlycheese and condensed milk. Then after another year, no cheese, onlycondensedmilk.Thenthecondensedmilkwasgone!Therewasbreadandmaybesugar,butthentheflourwasgone.Theshelves

gotmorebarrenwitheachpassingyear, andoneday the shelves filledup—withcannedseaweedfromtheFarEast,carefullyarrangedindelicatepatterns,as the condensed milk had been. Although no one could eat it, the cannedseaweedsoondisappearedtoo.Thentherewastheapplejuice.Childrenalwaysthirstedforsomething,but

therewas only apple juice, very poor quality, and even that was not alwaysavailable.Itcameinthree-literjarswithuglylabelshaphazardlyslappedontheoutside.The juice tastedof ironbecauseof the lid.Astrongcanopenerwasneededtopryoffthelid,andveryoftentheglassneckofthejarshatteredintheprocess.Thejuicealwayshadtobefilteredthroughgauzetogettheglassoutofit.OnedayIrina’ssister-in-lawcalled,shoutedintothetelephone,“Getdressed

fast, Ira! Near the Sokol metro station, they have thrown out children’s furcoats!Hurry!”Shehadusedtheverb“tothrowout”butshemeantputonsale.Irina’s sister-in-lawwas875th in line, and sheput Irinadown for 876.Theyrushedtothespoteveryday,fordays,asthelinedwindled.Three,fourhoursadaytheystoodinline,everyday,notimeleftforanythingelse.Ittookalltheirenergy.Whentheirturncame,Irinaboughtseveralsmallfurcoatsandsewedtwoofthemtogethertomakeonecoatforherself.When jeans arrived in the 1970s, Irina remembered how her generation

went crazy.Clotheswere important because as poor as theywere, itwas theonly thing that differentiated them from each other. People would denythemselvesfoodtobuysomethingflashyorextravagant.Theyknewtheycouldnever afford tomove to another apartment, but they couldbuy something tostandoutinacrowd.Irina’smonthlysalaryasaschoolteacherwas110rubles,butshespent100rublesforapairofwinterboots.Itwasnotenough—shestillhad nowinter coat.When the bootswore out, she bought a coat but had noboots.When shehadabrown skirt, shehadnoblouse tomatch it;when shefinallyhadenoughforablouse,theskirtwaswornout.Peoplehadonepairofshoesforalloccasions.WithintheSovietUnion,consumershaddevelopedtastes.Theywerehungry

forgoods,influencedbywhattheycouldlearnandhearabouttheWest.ButtheSovietUniondidnotproducecontemporaryconsumergoodstosatisfythem,

andjeanswere thesymbolofall theylacked.TheSovietplannershadnot,atfirst, made allowances for jeans and only later supplied cheaply madeimitationsoftheWesternones.Butrealjeanscouldbehad,fromtravelersorscalpers,orinthespecialshopswheretheSovietelitespenttheirspecialhard-currency certificates. The younger generation—Irina and her friends—worejeanstothetheater,totheoffice,anywhere,formonthsatatime.Theyearsofmarazmturnedthemallintoavast,informalhumannetworkof

connections and friends that spread from family to family, from apartmentlandings to workplaces, from Moscow to the distant provinces, a chain ofsvyazi, or connections, that helped them survive when the system could notprovide.Thisnetworkwaspartofthevastsecondeconomy,ashadowsystemthat existed alongside the official world of five-year plans. The shadoweconomythrivedinindustry, inretail trade,inblackmarketsandeverywherethat peoplewere struggling tomake up for the failures of Soviet socialism.Irinaknewarelativewhowasontheadmissionscommitteeforaninstitute,amuchsought-afterschool.Peoplefoughttogetin,andherrelativetookfavorsfrom the applicants. “Wherewould I getmeat or sausage ormedicine?” shehadaskedIrinaonce.“HowwouldImanagewithoutmysvyazi?Iwouldbeahelplessnobody.”Ifyouneededtoseeadoctor,youwenttherewithagift inyour coat pocket, perhaps wrapped nicely in a treasured, brightly coloredplasticbag.Itwasn’tbribery,butanacceptedwayofsurvival.TogetIrinaintoa good hospitalwhen her daughterwas born, her sister-in-lawhad come upwith several crystal vases and a couple of necklaces made of semipreciousstonesfortheheaddoctor.The shadow economy nestled in the bosom of the official system. In the

drive to shape a “new man,” liberated somehow from greed and envy, theSoviet authorities had devoted enormous effort to wiping out the spirit ofentrepreneurship. The system sought to eliminate all private property andquash private economic activity beyond control of the state. The officialorthodoxywas strict and severe: peoplewent to jail for economic “crimes,”such as daring to buy and sell scarce goods or set up a small undergroundfactory. The whole atmosphere, reinforced by decades of propaganda andpenalties, created a cult of hatred toward thosewhomade their ownmoney.Theywerelabeledspeculatorsandcriminals.Evenso,thebasichumaninstinctforentrepreneurshipsurvivedinthishostileclimate.Thedesiretosurvive,tomakethebestof life, literallydrovetheshadoweconomy.ThewriterAndreiSinyavsky,whoservedsevenyearsinaprisoncampforpublishinghisfiction

abroad,recalledthatinSovietsocietyallsortsofoperationsran“ontheleft,”or beyond the realm of the state, for personal gain. Theft at a factory or acollective farm became a way of life; underground “production” thriveddespite the risks. Sinyavsky told a remarkable story about workers at aMoscow tram depot who, at their own risk and peril, revived an old tram,already consigned to the scrap heap, and put it back on track as their ownprivateenterprise.“Outwardly,itlookedlikeanyotherstatetram,”herecalled,“but inside, thedriver andconductorwereworkingnot for the state, and thepassengers’ kopeks were not going to the state treasury. This was a privateenterprise inside socialist city transport.Longafter thecrimewasuncoveredandthecriminalsimprisoned,peoplewerestillgleefullyrecallingthestoryofMoscow’sprivatetram.”1Years later, Lev Timofeyev, an economist who frequently wrote about

everyday life, recalledhow the shadoweconomy spread through theofficialone. “A shadowbeef filet is sold at a state-owned shop by ameat salesman,whomweknowpersonally,”he said. “Shadowwoodgrows in a state-ownedforest.Aphysicianrendersshadowservicetoshadowpatientsinastate-ownedhospital. Shadow goods are produced in the sphere of legal production.Shadow tradeshappen in theofficesofofficial enterprises—both sellers andbuyers of the shadow market occupy certain positions in the officialadministration. Even two soccer matches—a legal and a shadow one—takeplacesimultaneouslyattheverysamesoccerfield.”Thiswasareferencetoanofficialmatchthat,intheshadowworld,was“fixed”beforehandforabribe.2No one ever thought they could get along without their own private

networks, and decades before, a word had appeared in Russian, blat, whichcaptured the basic dynamic of the shadow economy. It was once a faintlynotoriouswordhavingdistant connections to thieves, but the expressionhadevolvedtorefersimplytousingfriendsandconnectionstogetsomething.Intheworld ofblat and svyazi, those who controlled the scarcity, those at thechokepointoftheshortage,likethebutcher,heldrealpowerinpeople’slives.Although officially the Soviet authorities did not approve, the truthwas thatblat grew up because the Soviet system had failed—had created so manyshortagesandwantsthatpeoplehadfoundanotherwaytosatisfythem.3Irinaandhergenerationwantedmore—muchmore—thanthesystemcould

provide. The Soviet Union felt like a prison cell sometimes, the wallsunyielding. The authorities strictly controlled travel abroad,monitoredmailfromoutside,andputoverseaspublicationsunderlockandkey.Theyevensaw

evil in copy machines, which were locked up. Igor Primakov, a computerscientist, recalled howhewould often cradle his shortwave radio on his lapand settle into his favorite easy chair, which could swivel in a 360-degreecircle. At night during the 1970s, when Western radio broadcasts werejammed,he slowly,methodically, rotated the chair, exactlyonedegree right,twodegreesleft,threedegreesright,untilhecouldpickuptheBBCorRadioLiberty.HelearnedEnglishfromtheradio.Anotherforcethatbrokedownthewalls of theSovietUnionwas theBeatles.AgainstSoviet state ideology andmythology, the Beatles left an indelible mark on the youth of Irina’sgeneration,whopainstakinglycopieddownthestanzasoftheirsongs,learningtheEnglishwordbyword.By the early 1980s, the system had begun toweaken, and theway of life

outside—includingtheoftenlavishcapitalist lifestylesportrayedinAmericanpop culture—increasingly seeped through. The most dramatic break was atechnological invention: the videocassette recorder.WhenVCRs began to besmuggledintotheSovietUnionduringtheearly1980s,therewasnostoppingthefloodtideofmovies,andwiththemoviescameaspellbindingglimpseofWesternprosperity.Themovieswereeasilycirculatedfromhandtohand,andnight after night, young people would stay up watching Western films,sometimesthreeinarowuntildawn.Theyobservedtheotherlifeclosely:theclothes, the manners, the talk, and the meaning of money and wealth. TheywereawedwhenaHollywoodfilmcharactercasuallyopenedtherefrigeratorinhisapartment:itwasalwaysfull!Primakov and hiswife,MashaVolkenstein, a sociologist, recalled forme

yearslaterhowtheyandtheirfriendslovedtoplayMonopoly,whichsomeonehadsmuggled in fromSpain.Forayear, theystayedup late into thenight inpursuit of Boardwalk and Park Place. It wasn’t so much the money as thefeeling of a Western casino, of freedom—it was Monte Carlo they weredreamingabout.4Theday-to-dayrealitywasasullenstruggletosurvive,anywaytheycould.

TheseeminglymonolithicfaceoftheSovietcentrallyplannedeconomywasinfact fullof cracks, and they spent their lives squeezingbetween thesecracks.When Irina’s train stopped at Kupavna, she and her daughter rushed off,walkingdowntheplatformandacrossthetracks,downapathandtowardthedacha.Kupavnawas a poor village, and the local store offeredonlymeagergoods: fat in a huge bowl covered with flies, brown soap, cotton fabric inrolls,andvodka—anendlesssupplyofvodka.Irinadidnotevenbothertolook

inside.Afterleavingherthingsatthedacha,shewalkedthroughasmallstandof birches to a forbiddingwall, a barrier of prefabricated concrete slabs sohighyoucouldn’tseeoverit.Andyouwerenotsupposedtogothroughit.Thewallwasthemonolithicfaceofthesystem.Beyond the wall lay a base for navy personnel, a military outpost. They

calleditthegorodok,littletown.Irinahadnoideawhattheydidthereanddidn’tcare.Shelookedforagapinthewall.Theholeswerepatchedoveralmostasquicklyaspeoplecouldfindthem.There—yes!—theslabshadseparated.Irinaslipped inside and made a beeline for a squat building near the main gate,MilitaryStore28.Officially, itwas just fornavalofficersand their families,butnoonenoticedasIrinatookaplaceinthelinewaitingforstuffedcabbages,sausage,andcheese.Shehadjustfoundanothercreviceinthecrazyworldoftheshortageeconomy.Onceagain,foronemoreday,shehadfoundawaytosurvive.5

Fromthetimehewasaboy,VitalyNaishulknewthatnumberscouldspeakthetruth. His father had been a mathematician who calculated orbits for Sovietspace satellites.Hismother alsowas amathematician, and sowas his sister.Naishulgraduated from themathematics facultyofMoscowStateUniversity.Theywereafamilyoftheintelligentsia.Hisfatherheldasensitive,top-secretpost,thedetailsofwhichhewascarefulnevertodiscussathome,yethealsolistenedtotheBBCandVoiceofAmericaontheradio.Naishulwantedtoworkasamathematician tooandkepthis faith innumbers.He felt that they spokelogically, even powerfully—one thing you couldn’t bend was the answer.Therewas truth inmathematics,and in theSoviet systemof the1970s ithadnot been ruined by ideology. Two plus two equaled four, and not even thesystemcouldchangethat.Orsoitseemed.Naishulwasassignedaresearcher ’sjobintheEconomicResearchInstitute

of theStatePlanningCommittee, orGosplan, a citadel of theSoviet system.Naishul did not see himself as a builder ofCommunism.Hewanted to be amathematician,andtookthejobgladly.Naishulsatintheveryheartofagreatbeast,onethatruledtheeconomiclife

ofanempire,allocating theresources foreverythingfromthe titaniumhullsoftheworld’slargestnuclearsubmarine,theTyphoon,whichwerebeingbuilt

intheNorthernFleetshipyards,tothesimplemanufactureofasundressfromcottonanddyesintheprovincialtextiletownofIvanovo.The empirewas fabulously rich in resources, brimmingwith natural gas,

oil, and vast quantities of timber, coal, and precious metals. It was alsoimpossiblylarge,coveringone-sixthoftheEarth’slandmass,stretchingeleventimezonesfromeast towestandstraddlingtwocontinents,EuropeandAsia.The monopoly on power over this gigantic country was held by theCommunistPartyinatop-downhierarchy,startingwiththePolitburo,thenthegeneralsecretary,theCentralCommittee,andhundredsofthousandsofpartyfunctionariesinrepublics,regions,cities,factories, theaters,offices,schools,andinstitutes.Thepartyhadaspecialpersonnelsystem,thenomenklatura,bywhichitkepttrackofthisnetworkofappointees,fromtheeliteinMoscowtoadistantfactorydirectororinfantryunit.AllroadsledbacktoMoscowandthecentral authorities. Not only did they command a globe-spanning militaryforce,notonlydidtheyseektocontrolliterature,art,theater,andculture,notonly did they dominate the sciences and seek to rule a far-flung empire ofsatellite nations, but also from the center, from the corridors and balancesheetsofGosplan,theytriedtocontroleveryimportanteconomicdecision.From his seat at Gosplan, Vitaly Naishul gradually began to see that

somethingwaswrong.Naishul’ssoftsmileandblack,wiryhairconcealedabitofrevolutionaryspirit.Hedidnotopenlydisplayhissuspicionsandemotions,forthatmighthavebeenrisky.Instead,hebegantosecretlywriteaboutwhathesaw,and the resultwasa remarkablebook insamizdat (or self-published) indog-eared,carbon-papercopies.ThebookwastitledAnotherLife,anditwasavisionarytract.TounderstandwhyNaishul’swork—writtenathiskitchentableintheearly

1980s—wassoimportant,itisnecessarytoreachbackintimetoamomentousbattleofideas.Let’stakeabrieftourofthisconflict,whichwasatthecenteroftheSovieteconomyanditscollapse,beforereturningtoNaishul.In the Industrial Revolution of the mid-eighteenth century in Britain,automationandfactoriestransformedrural,agriculturaleconomiesintourban,industrial ones. A new, more important economic actor was created, theindustrialist,whopushedasidetheearlydominanceoflandholders,merchants,and traders. Adam Smith, the Scottish economist and philosopher, was theprophet of this new age. In his great work, The Wealth of Nations, Smithexplained coherently how the central underlyingmotive in economic life is

self-interest. In his most famous passage, he wrote: “It is not from thebenevolenceofthebutcher,thebrewer,orthebaker,thatweexpectourdinner,butfromtheirregardtotheirowninterest.Weaddressourselves,nottotheirhumanity,buttotheirself-love,andnevertalktothemofourownnecessitiesbutoftheiradvantages.”Smithsaidtheindividual“isinthis,asinmanyothercases, led by an invisible hand to promote an endwhichwas no part of hisintention.”Thisobservationmarkedahugestepforward ineconomic thinking.Smith

madeself-interestrespectable.CentraltoSmith’sargumentwastheconceptoffree trade and competition. His ideas were later refined by other Europeanphilosophers, who peered into the inner workings of early industrialcapitalismandlaiddownasetofrulesaboutthewaytheworldworked.Theybelievedthatthebasicrelationshipbetweenemployerandworker,orbetweenland,capital,andlabor,neverchanges.Theystandinastateof“equilibrium.”Therecouldbechangesinthesupplyoflaborandcapital,forexample,butthatonlywouldonlybringanew“equilibrium”thatwasprofoundlystable.6A relentless German revolutionary who lived a quiet, isolated life in

London,KarlMarxmountedamightychallengetoclassicaleconomicsandthetheoryofstability.His long-timecolleague,FriedrichEngels, saidMarxwas“before all else a revolutionist,” because he saw the world not at rest inequilibrium but constantly changing. Marx believed that just as the newindustrialists, the capitalists of his age, were displacing the landed, rulingclasses, thecapitalistswouldalsopass.Thesystemdescribedby theclassicaleconomistswouldcometoaspectacularendwitharevoltoftheworkingclass.Marxsawcapitalismasjustapassingphase—althoughanecessaryone—andbelievedthatitwouldhaveto“ripen”fullybeforeitwouldeventuallyconsumeitself.7Marx and Engels gave full voice to their theory in The Communist

Manifesto,publishedin1848,inwhichtheydescribetheworldassplittinginto“twogreathostile camps,” thecapitalistsorbourgeoisieonone sideand theworkingclass, orproletariat, on theother.MarxandEngelsquite accuratelyobserved that capitalism had unleashed enormous productive powers in thehundred years since the beginning of the Industrial Revolution. But theydeclared thatcapitalistshad reducedeverything inhuman relations to“nakedself-interest.”Theysawthesmallshopsandmerchantsofanearlierageturnedinto the “great factory of the industrial capitalist,”whereworkers are “dailyand hourly enslaved by the machine” and by the capitalist himself. They

demanded the abolition of private property and predicted the demise of thebourgeoisieinarevoltbytheworkingclass.Marx’s ideology was enthroned in 1917, when Vladimir Lenin and the

Bolsheviks seized power inRussia. But Lenin and his revolutionary cohortsdidnotseizeacountrywitharipe,developedcapitalismofthekindthatMarxhadforeseen.Norwere theypropelled topowerbyanabusedworkingclass.Instead,Leninboth sparkedand leda revolt in a countrywhere industryandcapitalism were unevenly developed, the economy was predominatelyagricultural,andthepeopleweredisinclinedtoriseupagainsttheireconomicmasters.Lenin’s accomplishmentwas to organize a coupd’étatwhile givingtheappearanceof aworkers’ andpeasants’ revolt.Lenin shrewdlyplayedonthe peasants’ hunger for land, but the Bolshevik revolution later proved adisastrousturnforthepeasants.Lenincouldnotwaitforcapitalismto“ripen”asMarxhadpredictedandbelievedthattheRussianrevolutionwouldtouchoffaworldwidesocialistrevolt.Itdidnot,butintheyearsaftertherevolution,theBolsheviksputintopracticetheirideasofwhatMarxintended,erraticallyandviolently. Itwas the beginningof a seventy-four-year experiment to defy thelawsofcapitalismandsuppress thebasic instinctsofhumannature.Itwasanexperimentthat,howevergrimandultimatelydisastrous,touchedallofthosedescribedinthisbook,whoattemptedtoleadRussiaonadifferentpath.Theexperiment took twistsand turns.Thecivilwarwasmarkedbychaos,

anarchy, and a period of stringent economic measures known as WarCommunism.A relative easing began in 1921 underLenin’sNewEconomicPolicy,whichtoleratedsomemarketmechanismsinagricultureandtrade.Thisshort interlude was crushed by Joseph Stalin at the end of the 1920s. Stalinbegan to impose amassive command economyon the nation.He repeatedlytried to force prices downward, especially on grain and agricultural goods,with devastating results. Those who set their own prices, the privateentrepreneurs,wereaccusedofcriminal“speculation.”Stalinturnedviciouslyagainst the stubbornly independent peasants, forcing them onto collectivefarms. In 1929 he attempted a forced “revolution from above,” brutallycollectivizing agriculture and creating a vast legacy of human misery—famine,death,andshortages.OneofStalin’smost important toolswascentralplanning.TheBolsheviks

hadtriedtogetridofmoney,todestroyfreetrade,todictateprices—inshort,tobreakthebasiclawsofcapitalism.Butnowtheywentastepfurther,tryingtocoerce the behavior of the entire economy. Instead of leaving anything to

choice and competition, to a multitude of accidental and self-interestedtransactions, the state seized all the levers of the economicmachine throughcentral planning. It adopted five-year plans intended to dictate how theeconomywouldwork;thefirstwasapprovedin1928.Afterarelativelygoodyear,suddenlythetargetswereadjustedtoaccomplishthewholeplaninfouryears.LaterStalinsuggestedmaybethreeyears.Insteadoftheoriginalgoaltoproduce35million tonsof coal over theperiod, theplanwas revised to 75millionandthen95–105million.“Wearefiftyorahundredyearsbehindtheadvancedcountries,”Stalinsaidin1931.“Wemustmakegoodthisdistanceintenyears.Eitherwedoso,orweshallgounder.”8Any dissent was suppressed by fear, and central planning endured, along

with legends of superhuman productivity. In September 1935, a coal miner,AlexeiStakhanov,supposedlyachievedoutputfourteentimesgreater thanthetargetandwashailedbythepartyasahero;withthisexploittheStakhanovitemovementwasborn,anidealisticsymbolofthenewsocietyinthemaking.Stalin’s model heaved the Soviet Union into the industrial age,

accomplishing in slightly over a decade what in other countries had takenmore than a century. Gigantic factories were carved out of the wilderness;beyond theUralMountains, a colossal steelworkswasbuilt atMagnitogorskthat eventually churned out more steel than all of Canada. Stalin turned abackwardcountry intoamajor industrialpowerat enormoushumancost, asmillionswere sent to prison camps, including talentedmanagers, engineers,technicians, and planners. Everywhere therewere said to be spies,wreckers,and saboteurs. The burst of industrialization sucked labor from the villagesintothecities,leadingtomiseryandurbanovercrowding.TheStalinmodelofcentral planning, directed at heavy industry and militarization, helped theSoviet Union through World War II and later was expanded to support amassive Cold War military machine. Virtually all other components of theeconomyweresecondary,especiallyconsumers.By the 1970s, Brezhnev’s era, the Soviet Union had become a global

superpower, and yet the great economic leaps forward that Stalin hadaccomplished were no longer possible. The demands of a more complexeconomymadeitespeciallydifficulttosetplansfromabove.Twoattemptsatreform—onebyNikitaKhrushchevinthelate1950sandanotherunderAlexeiKosygin in themid-1960s—failed. The state kept its tight grip on property,prices, and trade; none of the attempts to breathe new life into the systemworked.Theoilpricespikesofthe1970sandearly1980shadcushionedthe

declinebyprovidingtheSovietUnionwithrevenuefromitsvastreserves.ButtheWestwasbeginning anew IndustrialRevolution inhigh technology.TheSovietUnionwasenteringthetwilightyearsofthesocialistexperiment.NowwereturntoNaishul,themathematiciansittingatGosplan,theheartofthecentralplanningmachine.Naishulcametoaprofoundconclusionintheearly1980sfromhisvantagepointinsideGosplan:thesystemwassick.Supposedly,he knew, the Communist Party set down goals and instructions, which werepasseddownthroughGosplanand then through thebranchesofgovernment,theministries,thefactories.Buttherealityhewitnessedwasfardifferent.Oneday,Naishul’sbosswenttotheKremlin,andwhenhecamebacktoGosplan,hetold an amazing story ofwhat he had just seen. The primeminister told theministerofmetallurgythattheSovietUnionhadtomanufactureanewkindofsteelinthinsheets.Thiswasanorderfromthetop,fromtheparty,writtenintothe party’s guidelines for the five-year plan.And theminister ofmetallurgysaid, without a pause, “No.” But then he added, “Unless you give us theresourcestobuildnewfactoriesandenterprises,wewillnotdoit!”Naishul’sbossjustshookhisheadwithamazement,forhethoughttheministerwouldbethrownout.Fired.Shot.Buthewasn’t.Nothinghappened.Thatwasaglimpseofhowthesystemreallyfunctioned,andthesystemwassick.Insidewhatwas formallyknownas theadministrative-commandeconomy,

there was a complex parade of input and output targets, goals and quotas,balancesandcontrols, thatmarchedupanddowntheladdersofauthority.Bythe 1970s, the promenade of planning, an elaborate blizzard of paper, wasnightmarishly complicated. Just the industrial supply and distribution planscreatedbyGosplan totaled seventyvolumesofnearly twelve thousandpagesanddealtwithoverthirtythousandcommodities.TheGosplanmathematicianstoiledovertheirmodels,butafterawhile,Naishulsawthathisbossestookhismathematical work and, to his horror, they just changed the answers to fitwhateveroutcometheywantedorneededthatday.Naishulhadasuddeninsight.Thesystemnolongerwasreallycommanded

from the top.Therewasnodictator! Instead thewholebureaucraticplanningsystemhadbecomeastrange,neverending,undisciplinedbazaar.Atthecoretherewerenofirmcommandsbutbargaining.Frombelow, factorydirectorsmade demands on the ministries and the ministries made demands on thecentralplanners;allthetuggingandpullingwentuptheladderandthencametumbling back down again in the form of a cascade of decisions that never

matchedtheinitialdemands.Ifthedecisionwastotakeawayfromonefactoryandgive toanother, the loserdidnotaccept thedecisionandbegan to lobbyothers for what it wanted, sometimes not up the ladder but sideways, fromotherfactories.Thekeyplayersinthesetransactionswereoftennotthecentralplannersatall,butthefactorymanagers,whogainedmoreandmorepowerasthe system weakened. Everyone, not just factories, was engaged in a wildcrisscrossing web of demands, permissions, secret hoards, trade-offs, andshortages,andtheplanningsystemcouldhardlykeepup,muchlesscontrolit.Naishul liked to tell of aCommunist Party boss in a faraway region.The

peopleinMoscowthoughthewasbusilybuildingsocialism.But,thebosstoldNaishul,“Mybusiness,thefirsthalfofmyday,istoexchangechickensfrommy region for eggs produced in another.” The growth of these side dealsmeant that Gosplan gradually controlled less and less. In the 1920s, centralplanninghadbeenborntograbtheleversofpowerovertheeconomyandjerkthem sharply; now the levers were jerked back and forth and there was noresult.Thesteeringwheelwasbeingturned,Naishullikedtosay,andnothingwashappening.Naishul concluded that, surprisingly, the system had been infected by

characteristics of the one great idea Marx and Lenin had sought to bury:capitalism.GosplanresemblednotsomuchthecathedralofMarx’shopesforautopian workers’ paradise, but rather a crude commodity exchange. Thecurrencyofthisexchangecouldbemanythings,includingtheverystuffofthestatemachine—suchasbureaucratic“approvals”orpermissions.Anythingofvalue in the hierarchy of Soviet life was traded: status, power, laws and theright to violate laws. Naishul discovered that even the official commandeconomy operated on the principles of the shadow economy—the officialworld was rife with blat and svyazi. To Naishul it looked far more like amarket thananyonewanted toadmit.Naishulconcluded thatSovietsocialismwasdegenerating,slowlyandagonizingly,becausethegreatimperativesoftheStalinyears,revolutionandwar,hadlongsincevanishedfromthesystem.9What’s more, Naishul saw that there was no accountability. Factory

managers took production goals seriously, but if they were producingsomethingshoddyorunnecessary,thesystemimposednopenaltyonthemandtheydidnotgooutofbusiness.As longas theirproductwas in theplan, thestatewouldprovidethemwithnewsubsidiesthenextyear.Naishulconcludedthatthevauntedtotalitarianstatewasactuallyquiteweak.This weakness was evident in the statistical cover-ups that so angered

Naishul. Virtually all statistical yearbooks, articles, and other materialprovidedforopenpublicationbytheauthoritieshadbeenscrubbedcleanandaltered to eliminate any negative information.10 Inmost ofWestern Europe,life expectancy had continued to grow, but in the Soviet Union, during theyears of stagnation, it leveled out, yet another sign that the system was introuble.Whatdidthebossesdo?Theymadethestatisticsonlifeexpectancytopsecret. Demographers were told to work on “theoretical models” and weredeniedaccesstorealdataaboutthepopulation.11Perhaps the most audacious stretch of all was a series of mathematical

calculationsaboutsupplyanddemandintheSovieteconomy—the“balances.”Inaclassicmarketsystem,supplyanddemandarebalancedoutbyfreeprices:anexcessofsupplydrivesthepricedown,andanexcessofdemanddrivesitup.But theSovietplanners tried tobreak thesebasic lawsanddictatesupply,demand, and price. They decided that ten thousand automobiles would bemanufactured, they decided how much iron, steel, and rubber had to be setaside to make them, and they set a final price for each car. The price wasabsurdly low, subsidized by the state without regard to the real costs ofbuilding the car. The result was that supply never could satisfy demand.Moreover, since individual initiative had been destroyed, laborers had noincentive todoagood job; thecarswereshoddyandoftenmissingparts theminutetheycameofftheassemblyline.Thepartswerestolen.Theresultwasshortage—“deficit”—anda ten-yearwait tobuy anewcar.Thebalanceshadbecomeimbalances,andtheywerecausingthewholesystemtowobblelikeatop.Like massive tectonic plates under the Earth, out-of-control forces were

grindingdeepinsidetheSovieteconomicsysteminthe1980s.Theimbalancesweresurreal.Energywascheapandwassquandered;atonofoilcostthesameas a single pack of sought-afterMarlboro cigarettes. The irony was that inGosplan, the system lumbered on. Naishul saw, with alarm, that the greatnational “balances,”which previously had been calculated once a year,werebeingrecalculatedmoreandmorefrequently—andfrantically.NaishulconcludedthattheSovietsystemwasinadeadlycrisis.Buthecould

notgooutonthestreetandshoutit,notintheearly1980s.Instead,heretreatedto his private space, the kitchen, with two friends from Gosplan. In 1981,usually once a week, they gathered in his kitchen to talk—very privately—aboutwhatwaswrong.Naishuldiscreetlybegan towritedownhis ideas.Hisfriendstoldhimtobecareful—hecouldgotojail.ButNaishuldidn’tstop.His

ideas, which were remarkable for the time, spilled into the pages of thesamizdatbook.“Ifnothingchanges,”hewrotetohisreadersinAnotherLife,“youandyour

childrenwillcontinuetoscurryaroundinshops,wearfadedclothesandtornshoes,waitinalineforanapartmentfortenyears,cursethebrokentelevisionorrefrigerator,liveandworkinadecayingdisorder.”Naishulthenwentontoargue for change so profound that he still didn’t dare utter it in public: hewantedtocreateamarketeconomywithprivateproperty.Hewantedtorewardself-interestandcompetition.Heofferedhisreadersafarsighteddescriptionofhowthevastpropertyof theSovietUnioncouldbedistributedtomillionsofpeople—privateproperty—butthosetwowordswereofficiallyunmentionablewhenNaishuldaredtowritethemdown.HepromisedabitofaparadisewouldcomeoutofprivatizationoftheSovietUnion’svastproperty.“Whatenterprisewould you like to own?” he asked in the text. “What shop? Food? Books?Clothes?Radiogoods?Supermarket?”Wageswoulddouble,hepromised;newshopsandcafeswouldbrightentheirlivesandtheywouldenjoyalifewithoutlines.Notonlythat,butthe“windowtoEurope”thatPetertheGreatenvisionedwouldreopenandtheycouldtraveltheworldandmeetforeigners.ThenNaishulshiftedhistone.Perhaps,hesuggested,thereaderwouldlike

to take a break from his description of “life in paradise” and go shopping.“Youenterafoodstoretodiscoverthatthereisstillnomilk,therehasbeennomeatforalongtimenow,thereisneveranybuckwheat.Thereisbread,butitisrunningout.”“Youwishedtobuyasummerdressforyourwife.Therearenoprettyones

forsale,”hewrote.“Why?”HisanswervividlydescribedhowtheSovietsystemhadbecomeatangled,

unworkablemess.Tofixthesundressshortage,hewrote,“thedirectoroftheclothesshopisworriedbytheabsenceofbeautifulsundressesandturnstothegarment factory.The director of the garment factory is horrified. ‘I left ourwomenwithoutsundresses?’Anorderisissuedimmediatelytosewsundressesofanewdesignmadeofbrightfabric.Thereisnofabrictobefound,sothedirectorphonesthetextileplant.Theplant,onlearningthatwomenareshortoffancy sundresses, instantly orders better-quality cotton [be cultivated] in thevast spaces of Central Asia, and an improved dye made at the vast USSRchemicalindustry.Whenthedirectorofachemicalfactorylearnsthatourdearwomen are naked, he starts producing new dyes, and for this he asks fordifferentoilproductsandequipment.”

Naishulnotedthattofixoneshortage,otherswerecreated.“Tobeginwith,the garment factory, by decorating a sundress with several extra stitches, isnowmaking less of other types of products . . . of parachutes, for example,which led to interruption in the supply to the air assault troops. At anotherfactory,fortextiles,thecareforwomenledtounderproductionofsometextilefilters,asaresult,somesmallbranchofindustrygotcloggedup.Thechemicalplant,carriedawaywith theproductionofreddyeforsundresses . . .didnotsendenoughoftheredpainttotheplasticindustry,soasmallplantmakingredalarmbuttonsbegantoproducethemingreeninstead....”Naishul’s secret manuscript was a glimpse into the tangled, atrophying

Sovieteconomicsystem.BythetimehefinishedwritingAnotherLifein1985,thetroublesofthesystemwereevengreaterthanhehadsuspected.Economicgrowthhadstalled;alcoholism, theft, andworker indifferencewere rampant;factoriesandenterprisesstumbledfromlosstoloss;pricesweresetarbitrarilyandremainedhopelesslyoutofwhackwithreality.Naishuldidnotknowitthen,butsoontherewouldbeanotherlife,anditwas

nota life inSovietsocialism.Theutopianexperimentwascomingtoanend.Asweshall see in thenext sixchapters, itwas theeconomyof shortageandshadows, thechaosofcentralplanning, and thedriving forceof self-interestthatgavebirthtothenewcapitalism—andtheoligarchsofRussia.

Chapter2

AlexanderSmolensky

INTHEECONOMYofchronicshortagethatgrippedtheSovietUnionintheearly1980s,goodbookswereapreciouscommodity,andbooksprohibitedbytheauthoritieswereevenmorevaluable.Althoughsomebookswerebannedassubversive,theBiblecontinuedtoexistintheofficiallyatheiststate.Itcouldbefound on private shelves, bought in shadowmarkets, obtained from foreigntravelers,tradedfromhandtohand,andexchangedforsomething.Aswastrueof everything else in short supply, the scarcity of Bibles gave them addedvalue.On the blackmarket, a Bible cost fifty rubles—nearly half amonth’saveragesalary.Theauthoritieshadgonetogreatlengthstoprohibitandinhibitthecopying

ofprintedmatter,especiallymaterialconsidereda threat toofficial ideology.Even retyping forbidden manuscripts such as Mikhail Bulgakov’s novelMasterandMargaritacouldbringtroublefromtheKGB.ApopularsonglyricofthetimereferredtotheEastGerman–manufacturedtypewriterknownastheErika,andhowitwasusedtomakecarboncopiesofsamizdattexts.“Erikacantypefourcopies,”wentthesong,“thisisall,butthisisenough.”1Usingacopymachineinanyofficeorinstituterequiredspecialpermission,

and most copiers were kept under lock and key. Alexander Smolensky hadneitherlock,key,norspecialpermission,buthehadwhatinsocialistlingowasknown as the “means of production”—a printing press, ink, and paper. Heworkedinastateprintingshop,andwhenthedaywasdone,hetookoverthepress and printedBibles.Hewas a rebellious youngman,with thin hair thecolorofwheatandablondmustache,whohadacertainintensestreetsmarts,theproductoflifeattheabsolutebottomofSovietsociety.ForSmolensky,theendofsocialismbeganwithprintingBibles.Smolenskyhadnohighereducationandfewprospectsforsuccessintheyearsofstagnation.Hewasanoutcast.Hismaternalgrandfatherhadbelongedtothe

Austrian Bund, a Jewwhowas amember of the Communist Party and fledfromtheNazistotheSovietUnionbeforeWorldWarII.HismothergrewupinMoscow,butthewarbroughtsufferingandmisfortunetothefamilybecauseof their Austrian origins. Pavel Smolensky, his father, was sent off to thePacificFleetwhenthewarbegan,andhismotherwasresettledtoastatefarmin Siberia with a young daughter. They returned to Moscow after the war,whereanotherdaughterwasborn,followedbyAlexanderonJuly6,1954.Hisparentsdivorcedwhenhewassmall.Smolensky’s youth was a painful one of “bread and water,” he recalled.

HardshipwascommonintheyearsafterWorldWarII,but itwasaggravatedforSmolenskybecausehismother,asanAustrianJew,wasbarredfrommanyjobsandwasnot admitted to an institute.Shecouldnotwork, and theywerepoor.His fatherplayedabsolutelyno role inhis life,he said, andhehadnomemoryofhim.SmolenskystudiedHindi languageforeightyears, inhopesoffindingabetterlife,but“Idiscoveredthatnobodyneededit.”HegrewupinMoscowwith his older sisters andhismother.A turningpoint camewhen itwas time for Smolensky, then sixteen, to apply for his first internal Sovietpassport, the key identification document for all citizens. Brimming withresentment,Smolenskycametotheplaceontheformfornationality.Hecouldenter either the nationality of his mother, who was born in Austria, or hisfather, who was Russian. Smolensky wrote “Austrian,” and the entry onlydeepened his woes. As a Jew, Smolensky’s career path was already limited;because he added Austrian, he was further stigmatized by the state as anoutsider,excludedby thesystemfromalmostanyupwardpath in life.“Afterthat, I received everything that was due to me,” Smolensky told me with abittersweethalfsmile.“Thestatelovesjokeslikethat.”2Itwasno joke.WhenSmolenskywasdrafted into thearmy,hisdocuments

included a long list of military districts in which he was prohibited fromserving, including the most sought-after cities, Moscow and Leningrad.SmolenskywassenttofarawayTbilisi,thebalmycapitalofSovietGeorgia,anorientalcitydistantfromMoscowintemperamentandstyle.ThereSmolenskycaught the attention of Eduard Krasnyansky, a twenty-six-year-old journalistwhowasservingoutadeferredstintinthemilitary.Krasnyanskyrecalledthatwhen he firstmet Smolensky, the youngman had eyes that sometimeswerecheery and at other times burned like a laser. Smolenskywas a frondyor, orrebel against the system. In the harsh world of Soviet army life, he couldtoleratenoslight,noinsult,andwasverymuchaloner.“Acatthatwalkedby

himself,”Krasnyansky recalled, paraphrasing aKipling poem. “Any kind ofinjustice, and we had many of them in our army, provoked him. He wouldnever allow himself to be humiliated. He wouldn’t allow the people aroundhim to be humiliated. In the army, the older soldiers could get what theywanted. Some did it by humiliating the younger and weaker. AlexanderPavlovichwouldn’tallowit.”Itwasacommonpracticefortheoldersoldiersto call the youngermen by themore familiar addressTy, or you, as if theywerechildren.ButSmolenskywouldn’tallowthissmallslightandinsistedtheyaddresshimwiththemoreformalVy.3Krasnyanskyknew thewaysofGeorgia,wherehehadgrownup.He took

Smolenskyunderhiswing.Theywerequitedifferent,Smolenskytheangrykidwho was so skinny his trousers were always sliding around his waist, andKrasnyansky the more knowledgeable and worldly older friend.When theyneededcash,theycameupwithanidea.Atthearmynewspaper,theyhadink,paper, and a press. They started printing cheap business cards, teachingthemselves how to set type. They sold one hundred cards for three rubles,undercutting the going rate of ten rubles. They sold most of them toKrasnyansky’sfriendsandfamilycontactsinTbilisi.“Wewerecheaper,better,faster!”Krasnyanskyrecalledyearslaterwithawidegrin.Theyweresoldier-businessmen, hustlers on the side. “Wedid all the typography,”Krasnyanskytoldme.“Asoldierhadtolivesomehow.”Downtohis lastdays in thearmy,Smolenskywasarebel.Whentheother

soldiersweresenthomeattheendoftheirterm,Smolenskywasnotgivenhisrelease papers, a slight from a commanding officer for all the troubleSmolenskyhadcausedhim.Oneday,KrasnyanskyandSmolenskywenttoseetheofficer,grabbedthepapersoffhisdesk,ranoutoftheoffice,climbedoverafence,andranaway,thereleasedocumentsinhand.Theygottotheairport,but Smolensky had no ticket. Krasnyansky knew someone at the airport andfixedaticketforhisfriendtoflybacktoMoscow.On his return to the capital after two years in the army, Smolensky’s

prospects hadn’t improved. The only thing he knew how to dowas set type.Krasnyansky tried to get him admitted to the Polygraphic Institute, butSmolenskyhadtwosistersandhismothertosupport,andinsteadofschool,hewent to work in a print shop. “I was an enemy of the people,” Smolenskyrecalled,“orrather,sonofenemiesofthepeople.Icouldn’tfindadecentjob.”His bitterness deepening further, Smolensky proved a good hustler in the

shadow economy. For three years after the army, heworked in the printing

shop and then became a shop steward at the publishing house of a Sovietindustrialministry.Hissalarywas110rublesamonth.4 Healsomoonlightedatabakery.Intheory,holdingasecondjobwasforbidden,butSmolenskygotalaborer he knew to fake a permission slip. Smolensky earned another sixtyrublesamonthandgavetentothelaborerforthecertificate.Smolensky wore his first pair of jeans for a year. Like many of his

generation,hespenthourscomplainingabouthismiseryintheprivacyofthekitchen.“Thesystemwasorganizedinsuchawaytomakeusthinkaboutfoodforhalfourlife,”hesaid,“andthesecondhalfwasdevotedtobuyingclothestocoveryourass.”Tosurvive,Smolenskymadegooduseofhispressatnight,printingBibles

indefianceof thesystem.Itwashiswayofstrikingback.SmolenskysaidhewasalsotryingtohelptheChurchbyprintingtheBible“freeofcharge.”TheRussian Orthodox Church, he insisted, “was an institution that could helpdestroy everything that existed, the system.” However, the church hierarchywasloyaltothestate,soitisnotclearwhySmolenskythoughthewasstrikingback.Amore plausible explanationwas profit. Smolensky found a crack in the

system:therewasademandforBiblesandhehadameanstoprintthem.AlexGoldfarb, a biologist who was a key link between foreign journalists anddissidentsatthetime,hadestablishedhisownchannelsforsmugglinginbooksthroughdiplomatsandjournalists.“TheBiblewasnotonlyathingofvalueinitself,butamajorcurrency,”hetoldme.“Itwasawaytosupportpeople.Ifyougot a shipment, you gave them to families of people in prison, to supportthem.” Smolensky may have easily reached the conclusion that fighting thesystemandmakingprohibitedprofitsonthesidewereoneandthesamething,Goldfarbexplained.“Businessactivitywasanactofpoliticaldissent,”hesaid.“In thosedays, thesystemofvalueswasdifferent.Peoplewhostoleprinter ’sink and printedBibleswere heroes; theywere the good guys. The bad guysweretheoneswhoinformedfortheKGB.”5SomeoneinformedonSmolensky,andtheKGBarrestedhimin1981.Itwas

the peak of the years of stagnation, and Smolensky was only twenty-sevenyears old.Hewas chargedwith “theft of state property,” accused of stealingsevenkilosofprinter ’sinkandcarryingout“individualcommercialactivity,”whichwasprohibited.ButSmolensky’scasewastreatedasaminoronebytheKGB.Herecalledthattheyalsotriedtoprovehestolethepaperbutcouldnot.“Sincetherewerenoanti-Sovietleaflets,theysaid,‘Okay,weshalltakepityon

you.’”Thecasewasturnedovertothelocalpolice.SmolenskywassentencedintheSokolnicheskyCourt inMoscowtotwoyearsonaprisonconstructionbrigadeinthetownofKalinin,outsideofMoscow.Hewasprohibited,bythecourtorder,fromholdinganypositionforthreeyearsinwhichhewouldhavea “material responsibility.” In other words, the anticapitalists did not wantSmolensky handling money. He had dared to engage in “individualcommercialactivity,”andin1981thatwasstillconsideredcriminal.6Smolensky’s rebellious instincts were reinforced by the arrest. “All those

procedures when the state thought they could tell me what was right andwrong,”hetoldmelater,hiseyesstillburningatthememory.“WhenitcreatedconditionssoIcouldn’tgetajobanywhere,Icouldn’tearnmoneyinanhonestway,Icouldn’tenteradecentinstitute.Theyactuallyblockedallthewaysforme!Icouldn’tgoabroad.Ijustwantedtogoasatourist,andtheysaid‘no,youcan’t.’”Smolenskysaidhewasbarredevenfromgoingtoanothercountryinthesocialistbloc.“AndIsaid,‘DoIhaveleprosy?’Andtheysaid,‘Youareadangerouselement.’”Smolensky found few open doors, but he was saved by the shortage

economy.TheSovietcentralplannerscouldneverkeepupwiththedemandforbuildingconstruction inMoscow,and therewasmore thanenoughwork.“Inconstruction, you could always earn money,” recalled Krasnyansky.Smolensky became a boss in a department of Remstroitrest, a state-ownedapartmentbuildingandrepairenterprise.Hehadadumptruckandastandardtwo-room,twenty-eight-square-meterapartment.Moscowinthoseyearswasburstingwithpeople,andthesystemhadfailed

toprovide themwithenoughhousing.Thewait foranewapartment lastedadecade or more. The state construction machine could not keep up withdemand.Living spacewas in severe shortage, like everything else.Althoughthestatehadestablishedtheminimumhousingspaceasninesquaremetersperperson,nearlyhalfthepopulationof9.5millionhadevenlessthanthat.7Theonly safety valvewas thewooded countryside—the villages of crudely builtdachasthatfilledtheforestsoutsidethemetropolis,whereMuscovitesescapedonwarmsummereveningsandwhereSmolenskywouldtastehisfirstprofits.Atthetime,constructionprojectssufferedfromshoddyworkandtookyears

tocomplete.Massive,uglyapartmentblockswereerectedaroundthecityoutofprefabricatedconcreteslabs.Therewerenoprivateconstructioncompanies.Factoryconstructionalso limpedalong,especially in those industriesoutsidethefavoredmilitary-industrialcomplex.InthelastyearsoftheSovietUnion,

asfactorymanagersgainedmoreandmoreautonomy,manyofthemsoughttoplan their own projects. Often the only way to build something within areasonableperiodof timewas tohire small constructionbrigades that couldworkquickly,usuallyintheshadows.Inthisworld,thekeyskillSmolenskylearnedinconstructionwashowtoget

hishandsonscarcerawmaterials.Ifheneedednailsorsandorcementblocks,hecouldnot justgobuy them.Theycouldnotbebought for anyamountofmoney.Theyhadtobeprocured,traded,orstolen—usuallyfromsomeotherprojectorsite.Smolenskywasgoodatgetting.Smolensky shared his generation’s disgust with the doddering Soviet

leadership. He was excited when a popular French rock group came toMoscowforaconcert.Smolenskymarveledattheirshinynewequipmentasitrolled out of the trucks and onto the stage. But Chernenko, the generalsecretary, then signed an article in a party newspaper saying that instead ofsubversive rock bands, the concerts should feature traditional Russianbalalaika,accordion,andsongsanddances,that“WesternculturecannotcometoourSovietfuture.”Smolenskygroaned.“OhGod,no!”hethought.“Itwassuchabore,alloveragain.”His fears were unfounded. Chernenko’s term was brief, and Gorbachev

came to power. Smolensky, a small-time construction boss and rebellioustolkatch, or hustler, was uneducated yet shrewd. When the system began tochange, he sensed it right away.He immediately saw something different inGorbachev.VisitingLeningradamonthafter takingoffice,Gorbachevspokewithoutwritten notes,whichwas unheard of for a Soviet leader.Gorbachevappeared with his wife, which was also extraordinary. He spoke freely.Smolenskywasmesmerized;herecalledGorbachevasthefirstSovietleaderheactuallyfoundappealing.Yet, as Smolensky discovered, change was agonizingly slow. The Soviet

Unionwasoneof thehardest-drinkingcountries in theworld.Vodka infusedlifeandalcoholismgrippedthepopulation,takingadevastatingtollonhealthandlifeexpectancy.Moreover,thesystemencouragedthediseasebyprovidingenormousvolumesofalcoholtothepopulationasawaytomakemoneyforthestate.Intheshortageeconomy,therewasalwaysanoceanofvodka.OneofGorbachev’s first moves was a campaign against excessive drinking.Smolenskysaidhewasorderedbylocalpartyofficialstotakethereinsoftheantialcoholdriveinhisconstructiongroup,perhapsbecausehewasknownasa clever hustlerwho got results. But Smolensky immediately realized that it

wasafutilecampaign.Everyweek,thepartydemandedthatSmolenskybringthem a report of how many drunks he had punished. How many? Well, herecalled later, for starters they could take all of the hundred constructionworkers in his outfit. Take them all—they worked in the open air, andSmolenskyknewtheystarteddrinkinginthemorningandcontinueduntiltheyleft in the evening. He could easily “punish” everyone working for him.Smolensky understood the scourge of alcoholism, and he knew how hisworkersburnedthemselvesoutonvodka.Theyevendrankcheapcologne.Theantialcohol campaignwas ill-fated, he thought, just another absurd facadeofthe system and its endless propaganda campaigns,which no one believed. Itwasridiculous:thestatetelevisionbroadcastsshowedweddingsofpeoplewithhappyfacesdrinkingjuice.Inreallife,heknew,everyonekeptdrinkingvodka.Despite his joy over Gorbachev’s ascension, the antialcohol campaign ledSmolenskytowonder:wouldtheirlifeeverchange?Ontheeconomicfront,Gorbachev’sfirsttwoyearswerenotpromising.Theyoungandenergeticgeneralsecretaryseemedtobegropingforawaytowardwhathe called“radical reform”of the socialist system,withoutbreaking thegrip of the Communist old guard. By his own later admission, Gorbachevwastedtime.8The summer of 1986 brought a bizarre backward step, the fight against

“unearned income.”The ideaseemed tobe tocrackdownoncorruption,butthe Politburo was unable to define “unearned income.” In fact, the entireshadoweconomypulsedwith it, thatvastnetworkofblatandsvyazi that hadkeptthecountryalive.Didyouget“unearnedincome”byusingyourcarforataxi? Selling your homegrown cucumbers and tomatoes?The campaignwaslaunchedwithvigorbutspunoutofcontrol.IntheVolgogradregion,privatetomato-growinghothousesweredestroyedat thebehestof thepoliceand themilitia. On the roads, police confiscated and destroyed the tomatoes. Thenewspaper Literaturnaya Gazeta published a long story about the affairheadlined,“TheCriminalTomato.”9LaterGorbachevtooktwofundamentalandfar-reachingstepsthatbeganto

unwind thesocialistexperiment.Tohelpalleviate theshortageeconomy,andpartlyasareactiontothemisguidedcampaignagainstunearnedincome,alawwasdrawnupin1986allowingSovietcitizenstocarryout“individuallaboractivity.”Theideawastofillthegapsinthecreaking,deficit-riddeneconomy

byallowingpeopletobecomeself-employedentrepreneurs.Alargenumberofprivate activities soon became possible, including handicrafts and consumerservices. A teacher could tutor students after school. Many teachers alreadyweredoingthis,butthenewlawmadetheirmoonlightinglegitimate;theynolonger had anything to fear.Moreover, the law said nothing about prices—individuals could charge what they wanted. The law was a first tiptoe awayfromstatecontrols.Still,therewerestrictlimits.Thenewentrepreneurscouldhireonlyfamilymembers; theycouldoperateonlywherethesocialistsectorhad failed, primarily in consumer shortages.The expense and difficulties ofstartingupwereimmense,andsomeactivitieswerestillforbidden, includingallkindsofprintingandprintingpresses.Gorbachev’snextstepwasevenmoreprofound.Inaspeechin1986,hehad

drawnattentiontothecooperatives,atypeofquasi-privatebusinessthathaditsroots in the New Economic Policy of the 1920s. In English, the word“cooperative”hasasocialistconnotation,butinfactthecooperatives,astheywere reinvented by Gorbachev, became the first private businesses in theSoviet Union. They marked a revolutionary departure from the decades ofanticapitalism.Gorbachev’s initialwordswerecautious,but their impactwasfar-reaching. The state began, gingerly, to allow these new autonomousbusinesses to take shape in 1987 in very narrow sections of the economy :recycling, baking, shoe repair, laundry services, and consumer goods.Although limited in scale, the cooperativemovement seized public attention.The ideaofprivateenterprisesopeningupamida seaof socialist stagnationwasaremarkablesight.OnestrikingexamplewastheappearanceofpaytoiletsincentralMoscow,operatedbyacooperative.Theywereclean,playedmusic,and offered rose-tinted toilet paper and new plumbing fixtures.Most peoplehad never seen such a facility, certainly not in their own homes. Otherenterprises soon followed, including youth discos and restaurants.When theformal Law onCooperativeswas adopted in 1988,many cooperativeswerealreadywellontheirwaytobecomingprivatebusinesses.Thethresholdofanewagehadbeencrossed.TheLawonCooperativescontainedahiddentimebombsettoexplodethe

dreamsoftheCommunists.Onelineinthetext,littlenoteduntillater,allowedtheformationoffinancialorcreditbusinessesascooperatives;inotherwords,banks.Smolenskywouldeventuallymakeafortunefromthissmallcrackthathadopenedindecayingsocialism.The cooperatives sprouted up surrounded bymany unknowns.Basic rules

simply did not exist. Previously, Soviet planners had mapped out economicactivityinthecorridorsofGosplan.Anenterprisesimplywastoldtomeetthegoals dictated to it from above. But the cooperatives were allowed tomaketheirowndecisionsandkeeptheirgains.AmostremarkableaspectoftheLawonCooperativeswasabrand-newdefinitionofpersonalfreedom.Thelawsaidany activity not specifically prohibited would be permitted—a completereversalofthedecadesofheavy-handeddictatesofthestate.10Oftenthecooperativessimplybroughtintotheopenwhatwasalreadygoing

onintheshadoweconomy.ViktorLoshak,asoft-spoken,thoughtfuljournalist,was the economics editor of Moscow News, a newspaper that became achampionofperestroika,andhebegantodevoteallhistimetochroniclingthegrowthofthenewcooperatives.HewroteaninfluentialseriesofarticlesfromArmenia, where underground workshops, which had always existed in theCaucasus, now came into the open. He visited one cooperative makinghandkerchiefs.“Whatmadethemhappymostofallwasthattheycouldsendtheirproducts

bymail,”herecalled.“Atfirst,Ididn’tunderstand.ButthenIrealizedthatwhenthey were inside the shadow economy, the most difficult thing was the pathfromtheirproductiontodistribution—becauseitwascriminal.Onanystageofthat route, the police could catch them.Andwhen they legalized themselves,theycouldsendtheirproductsopenlybymail.Alotofpeoplewerehappytotellothersaboutwhattheyhadbeendoingsecretlyalltheirlives.”11The original idea was that cooperatives, given the new freedoms, would

produce scarce goods such as the handkerchiefs or provide badly neededservices like car repairs. But this rather quaint vision of small workshopshumming with craftsmen was soon overtaken by more ambitious schemes.Somecooperatives foundways togetcheaporsubsidizedsupplies, fromthestateor shadowmarkets, and sold them for fast profits.Somewhat later theypioneered importing scarce goods like computers and exporting naturalresources for immensewindfall profits. Cooperatives charged higher pricesthan the old state stores, spawning resentment in a population that wasaccustomed to a patriarchal state which supposedly gave them everythingnearly for free and had regarded all private enterprise as immoral“speculation.”According to Anders Åslund, then a Swedish diplomat who served in

Moscow, “A few bold entrepreneurs skimmed themarket and did very wellindeedbecauseshortageswereimmense,competitionandtaxeswereminimal,

most regulations were unclear, and no one knew how long the feast wouldlast.”Asitturnedout,thefeastwasjustbeginning.In 1987 Smolenskywas summoned to the city party committee, thegorkom,whereafunctionarywhosupervisedhisconstructionunit,Remstroitrest,gavehim an order: “Urgently establish a cooperative!” Ever the rebellious one,Smolensky, then thirty-three, replied, “Whyme?Goyourself anddo it!”Butthegorkom threatened to firehimifhedidn’t followinstructions.Thiswasacampaignbytheparty,andthewordhadcomefromthetop:Smolenskymustobey!TheproblemwasthatSmolenskydidn’thaveacluewhatacooperativewas.

“Iwasa stateemployee,”he recalled.“Allofuswere stateemployees, and Ihadallkindsofplans,anddirectionsandinstructions,anditwaslikedroppingmeonthemoon.”KrasnyanskyrecalledlaterthatSmolenskyhadbeenchosenpreciselyforhisstreetsmartsandhustle,which thepartybosseshadnoticed.“Apparently,thepartybosseswerenotidiots.Theysawwhowascapableandwhowasnot.TheycouldhavecometomeahundredtimesandIwouldneverbeabletodoit.AndtheywentinsteadtoSmolensky.Theysawthathehadthatfire,thatheknewhowtoorganizepeople,takerisks.”Smolensky went to register as a cooperative at a small, barren office in

centralMoscowthathadbeensetup togivepermits to thenewbusinessmen.TherehewasmetbyYelenaBaturina,arecentuniversitygraduatewhowasincharge ofwhatwas called “public catering,” including bakeries, shoe repairshops, and hairdressers, among other things. Baturina was the assistant to ashort,bullheadedofficialwhohadbeenputinchargeofthecooperatives,YuriLuzhkov, a veteran chemical industry manager who had become a deputychairman of the Moscow city council. It was a chaotic time, and a motleycrowdofhustlersspilledoutintothehallways,strugglingtofillouttheproperformstostarttheirownbusiness.12Smolenskygothispaperwork inorder,buthefeltcompletelyoutofplace

andwasalittlefearfulofLuzhkov.Hehadtroublethinkingupanameforhisnewcooperative.InSoviettimes,stateconstructionenterprisesoftenjusthadanumber,such“SU-6.”Smolenskyscribbledontheapplicationthenameofhisproposedcooperative,Moskva.HecameintotheroomwhereLuzhkov,inshirtsleeves,wassittingatasimple,emptytableandsubmittedhisdocuments.Baturinascowled.“WealreadyhaveMoskva, takeawayyourdocuments!”

She had a firm, no-nonsense voice. Smolenskywondered briefly if thiswas

goingtobeliketheantialcoholcampaignandthoughttohimself,“Ohno,notall over again!” He paused and asked if he could name the cooperativeMoskva-2.“No!”shesaid.“We’vealreadygotMoskva-2.”Smolenskythenpleaded.“CanitbeMoskva-3?”“Okay,” Baturina relented. “Let it beMoskva-3.” Shewrote in the digit 3

nexttoSmolensky’shandwrittenMoskva.Onthatday,Smolenskylaterrecalled,“Communismwasoverforme.”

Moskva-3 was a private enterprise, set up in Pervomaisky District, one ofMoscow’s thirty-three administrative areas,where Smolensky hadworked atRemstroitrest.Buthehadpreciouslittleideawhathewassupposedtodoasaprivate entrepreneur. He had three thousand rubles saved up and wonderedwhetherhewassupposedtousehisownmoney.Hewonderedwherehewouldgetsuppliesandwhathewouldbuild.ThepartyhadorderedSmolenskytostartacooperative,butactuallydoingitcamedowntohisownindividualinitiative.Nooneelsehadaclue.Loshak,theMoscowNewsjournalist,recalledthattheveryfirstcooperatives

gatheredscrapmaterialsforresale.Theytriedtomakecrudekitchenfurnitureout of scrap lumber or flower boxes from used tires. Loshak said his firstmemoryofSmolenskywascollectingscrapmaterials.“Hehiredstudents,andthey dismantled houses that were to be demolished and sorted out the doorframes from the bricks. And they sold those things to people who werebuildingcountrycottages.”Smolensky soondecided tomakehis owngarages and small cottages, the

dachas in the countryside. They were in high demand as Muscovitesdesperatelysoughtrefugefromtheovercrowdedcity.Again,Smolenskysawagapandfilledit.Thestateconstructionenterpriseswouldneverbuilddachas;they couldn’t even keep upwith the demand for simple twenty-eight-square-meterapartmentsinthecity.ButtheimmediateproblemforSmolenskywasthesameonehehadfacedas

aconstructionbossworkingfor thestate.Inauniverseofchronicshortages,rawmaterialsweredifficulttocomeby.Therewerenowholesalerswhocouldsell himplanks andnails.The state theoretically controlledallmaterials, butthepracticewasdifferent.Thecompetitionforsupplieswasjustanotheraspectof the vast, disorganized bazaar of Soviet socialism. The first privateentrepreneurs had to rely on theirwits—onblat and svyazi, on theft, bribes,

andbargaining—togetsupplies.Alexander Panin, secretary of the city commission overseeing the

cooperatives, recalled that thecooperativesstartedoutdesperatefor themostbasic things. “Theyneeded a location towork from,” he said. “Theyneededsome stuff from which to sew things—cloth. Or if they wanted to makefurniture,theyneededtobuythewoodorwhatever—planks.Buttheproblemwasthestatedistributionsystemexisted.Youcouldn’tbuyatable,orwood,orplanks, because everything was distributed.” The commission headed byLuzhkov tried to help the new entrepreneurs by demanding that stateenterprisessupplybricksorcementtoacooperative.13It was not so simple. Smolensky recalled the bureaucrats in Moscow

providedlittlehelp.“Inthosetimes,itwasimpossibletobuyplanksandnailsinMoscow. Itwas just impossible.Not formoney,not foranything.”Moneycouldnot,byitself,purchasesomethinginshortage.ButSmolenskyknewhowtobeg,bargain,andhustleinthesocialistbazaar.Hewassoonsawingplanksatanoutdoorpavilionandbuildingsmallstructures—simpleone-andtwo-roomcottages,sheds,andgaragesinthecountryside.As an example of the new generation of cooperatives, Smolensky was

selectedoneday tobe a showcase for anAmerican televisionnews crew, inadvance of President Reagan’s summit meeting in Moscow. The film crewarrivedatanopenpavilionandwatchedasSmolensky’smenhauledlogstoasawandthentookthecutplanksaway,allofitbyhand.ThejournalistsquizzedSmolenskyaboutwhyitwassoprimitive.TheyhadnoideathatwhattheywerewatchingwasatriumphforSmolensky—hewasproudthatitexistedatall.WhenIsuggestedtoSmolenskyyearslaterthathisearlysuccesswasdueto

theimminentdeathoftheSovietstate,hebroughtmeupshort.“Wewerenotthinkingaboutthedeathofthestate,”hesaid.Rather,theywereworryingabouttheirownfate.IfGorbachevwerethrownout,wouldtheybejailedandshotasspeculators? Far from the death of the state, “we were thinking about ourdeath!”In themonths that followed, Smolensky’s cooperative became a booming

success.Thedachaswerepopular,andtheCommunistPartybossesagaintooknotice.TheypressedSmolenskytostartaspecialwaitinglistforpartychiefstoget dachas. Smolensky quickly complied ; they may well have had someleverageoverhislumbersupply.“Theystartedsortofputtingtheirnamesonthe list,”Smolensky saidofhisnew, elite customers,whowere also curiousabout Smolensky’s new business. Before long, the party would decide to

experimentwithprivatebusinessestoo.Thecooperativesbeganonthinice.ThebriefrelaxationoftheNewEconomicPolicy in the early 1920s had lasted only two years; could the new Sovietcooperatives last longer? “These first peoplewere justworkingwithin veryrigid limits,”Loshakrecalled.“Astepto the left,astep to theright,andtheyshoot.”Yetakindofdeep-seatedforcewasbeingreleasedfromthedepthsofthe system, a trembling of the Earth so profound that it would provide animmenseboosttowardlaunchingRussiaonitswaytoacapitalistfuture.Thatforcewasmoney.Intheshortageeconomy,whentherewasalmostnothingtobuy,when thedecisionsabout allocating scarcegoodsweremadearbitrarilywithouttheforcesofsupplyanddemand,moneyhadlittlesignificance.Butonasandysawmillsite,Smolensky,theangryyoungman,begantomakemoney.Heaccumulatedpilesandpilesofrubles—somuchthathehadnoplacetokeepitall.Hedistrustedthestatebanks,sohekepthismoneyincash.IntheearlyGorbachevyears,theSovietfinancialsystemwasstillrunbythe

state.At thecenterof thebankingsystemwasonegiant institution,Gosbank,whichcontrolledtheflowofmoneyandcredit.Smolenskywasaccumulatingcash,butheknewthatputtingitinthebankwouldleadtounpleasantquestions.Wherehadheearnedsomanyhundredsofthousandsofrubles?Whywasn’thepayingmoreintaxes?TheKGBwasjustwaitingforSmolenskytowalkintoGosbank.AsecondtieroffivenewSovietstatebankswasnotmuchbetter,butSmolensky was assigned, probably by the party, to use one of them,Promstroibank. He was required to use the bank for some transactions. Herecalledthateverytimehewantedtomakeasmallpaymentthroughthebank,he had to explain himself over and over to the bureaucrats. “My chiefaccountant was practically living there,” he recalled. “She was an elderlywoman,andshewouldgotherewithabagfullofchocolate,sausage,perfume.Thesystemwasthefollowing:youhadtovisitseveralcountersandputsealseverywhere.Youhad togivesomething toeachperson.Thatwas thesystem;otherwisenothingworked.”Moreover, the rigidSoviet financial systemmade it practically impossible

forSmolensky to use hismoney as hewanted to, such as paying a supplier,withoutseekingpermissionfromthestate.“Thestatebankwassostrongthatitcould destroy all the fruits ofmy laborwith just one signature,”Smolenskyrecalled. “I couldn’t paywages on time; I couldn’t settle for goods; I had tobring all kinds of documents ; I had to pay bribes; or maybe if not bribes,

‘gifts.’Iwasfedupandfeltitcouldnotlast.”Oneday in1988,Smolenskydecided tostarthisownbank,assomeother

cooperatives had recently done. He looked at the Law on Cooperatives,officiallyapprovedinMay,andfoundthesinglelinethatallowedcooperativesto open their own banks. He went out and filed the papers, he recalled, “inorder to stop the diktat of the state bank.” Smolenskywas again at the frontlinesofchange.Bytheendoftheyear,forty-onenewcommercialbankshadregisteredwithGosbank,andbytheendofthenextyear,thenumberhadrisento 225.14 Bank Stolichny, which would become the core of Smolensky’sbusiness for the next decade, was registered on February 14, 1989, eightmonthsbeforetheBerlinWallfell.Justashehadplungedintothecooperatives,Smolenskybeganhisquestto

becomeabankerintotalignorance.“ForseveralmonthsIhadabigdeskandallmy friendsmade jokes.On one side ofmy desk, Iwas chairman of thiscooperative,Moskva-3.AndontheothersideIwasdirectorofabank.”In 1989 the progressive newspaper, Moscow News, held the first ever

roundtable discussion with the nascent commercial bankers, who wereunknowntomostofthepublicanddeeplydistrusted.AleadingparticipantwasVladimirVinogradov,oneof the firstcommercialbankers,whowassmoothand well tailored. It was rumored at the time that Vinogradov had made somuchmoney so fast that he stashed it in his refrigerator. By contrast to theexperiencedVinogradov,Smolenskywasarough-hewnconstructionbosswhodid not appear very wealthy. His manner was blunt. He demanded that theauthorities leave the bankers alone. He was hardly the picture of a modernbanker.Alexander Bekker, then a journalist at Moscow News, remembered

SmolenskytellinghimthatStolichnyBankwasnumbersixty-fouronthestateregistration list of commercial banks. “I amworking for number sixty-four,and someday itwill beworking forme,” Smolensky boasted. “Iwill have acredithistoryandareputation.”15“Idon’tthinkhehadaveryclear-cutstrategyatthetime,”Bekkerrecalled.

“It was difficult to even know what a commercial bank should be.”Smolensky’soldarmyfriend,Krasnyansky,saidthekeyissuewasavoidingthestate. “The important thingwas to find freedom for hismoney, so he couldsend itwhere hewantedwithout explanation,”Krasnyansky said. “Only laterdidclientsappear,andhesawthat thebankcouldbringina lotmoremoneythansawingwoodatthecooperative.”

In theblossomingworldofbanking in thefinalyearsofSovietsocialism,muchofthesustenancecamefromthestateitselfintheformofcheapcredit.Many of the new banks were carved directly out of government ministries,industries, and special interests. The Ministry for Automobile ProductioncreatedAvtobank; theMinistry of Oil and Chemical Engineering created itsown Neftekhimbank; the state airline had Aeroflotbank. These banks anddozens of otherswere built to serve the state-owned industries behind them,and they could always count on a ready supply of subsidies. Big industries,regionalgovernments, and theCommunistPartyand itsmanyaffiliateswerethedrivingforceintheexplosionofthenewbankingsector,andtheirpoliticalcloutandmoneydwarfedthemoreindependentyoungcooperatives.Smolensky,whosemajorassetafewyearsearlierhadbeenhisdumptruck,

was still the outcast. His bank had no government ministry at its back.Comparedwiththeothers,whichhadpowerfulpatrons,thecooperativebankswere small. Smolenksky’s bank was not on the list of the twenty largestcommercial banks in the Soviet Union in 1990.16 Smolensky’s overridingprinciplewasthathewantednothingtodowiththestate,exceptthefreedomtodowhathewanted.Heinsistedthatnoneofhisemployeescomefromthestatebanks.HefoundyoungpeopletoworkforhimwhohadnopriormemoryofGosplanorGosbank.Smolenskywasmovingtoanewlevelofbusiness.Henolongerwantedto

sawlogs.HecloseddownMoskva-3,hiscooperative.Abankerwasborn.In the years after the American CivilWar, huge quantities of British capitalpouredintotheUnitedStates,chieflyasloanstotherailroads.England,whichhadgivenbirthtotheIndustrialRevolutionandinspiredthewisdomofAdamSmith,hadbecometheworld’sfinancialcenter,flushwithsurpluscapitalthathad to find a home. According to Ron Chernow, biographer of the greatmerchant banker J.P. Morgan, British investors were put off by the helter-skelter growth of theAmerican railroads, and they feared the swindlers andfast-talkerswhoranthem.Morganbecameatransatlanticintermediarybetweenthesourceofcapital inLondonand thosewhoneeded it in theUnitedStates.The London investors were often clueless and depended on Morgan’sknowledgeabouttherailroads.IntheUnitedStates,therailroadswereofteninsuch a chaotic state that their only hope of attracting capital was throughMorgan. As a journalist noted at the time,Morgan’s great power came notfromthemillionsofdollarsheowned,but fromthebillionshecommanded.

HewasoneofthegreatmiddlemenofAmericanhistory.TheloreofAmericantycoons is oftenwrapped up in their role asmasters over the railroads andsteeltrusts.ButthekeyfactorwastheAmericanhungerforcapital;thecapitalitself had first come from England, as a result of successful commercespawnedbytheIndustrialRevolution.17ConsiderthelandscapethatspreaditselfoutbeforeAlexanderSmolenskyin

1988.Therewereshortagesofsausageinthestatestoresandthegrimrealityof a system in decay. No distant bankers hankered to invest their capital.Smolenskyhadseen thewoundeddinosaursofSoviet industry,primitiveandailing, and he also knew that centuries of authoritarianism had sapped theRussianpopulation,whichwaspassiveandlethargicandwouldbedifficulttorevive.In1990Gorbachevhadtoyedwithaplantoturnthecountryintoamarket

economyinfivehundreddaysbutdiscardedit.Hiseconomicpolicyzigzaggedinconclusively back and forth. The chances for a huge infusion of privatecapital from abroad were not good. When one of the authors of the five-hundred-dayplan,GrigoryYavlinsky,wenttotheUnitedStatesseekingaid,hewassnubbedbyPresidentGeorgeH.W.Bush.TheWestwasnotyetreadytoriskmoney on the SovietUnion. The biggest source of capital—indeed, theonly real source of wealth—was the state itself. The state possessed asprawling network of oil fields, mines, factories, and pipelines. The state,throughGosbank,alsocontrolledthemoneysupplyandcredits,aswellasallforeigntrade.Iftherewasmoneytobemade,itwouldhavetocomefromthestate,eitherdirectly,aspropertyandsubsidies,or indirectly,bymanipulatingorexploitingthestate’scontroloverpricesandtrade.InthelateSovietperiod,tradingcompaniesrunbyyounghustlersandwell-

connected bureaucratsmade quick fortunes this way. They bought oil cheapinsidethecountry,paidbribestogetitacrosstheborder,solditatworldpricesforhardcurrency,boughtuppersonalcomputersfromabroad,paidbribestogetthecomputersbackinsidethecountry,andsoldthemforfantasticprofits,tobereinvestedinthenextlotofoil.Thestatecreatedtheconditionsforthishustle by keeping oil prices low, by making the computers scarce, and bycollectingthebribes.For Smolensky,whose gut instinctwas to distrust the state, the search for

early capital was fraught with difficulty and danger. He had no hope ofbecoming an intermediary between borrowers and lenders in the Anglo-Americantradition.TheSovietUnionandlaterRussiawere light-yearsaway

from the conditions that spawned the early American tycoons. Instead ofbecomingaMorganoraCarnegie,Smolenskytookwhattherewasbeforehim—thewild,unfettered,andwarpedRussianprotocapitalismoftheday.Bekker,whohad kept in touchwithSmolensky, toldme, “InRussia, there

were only two ways to get seed capital for a bank. One was to servicesuspicious accounts and have the principle that ‘I don’t care what kind ofmoneyisinmybank.It’snotmyresponsibilitytocheckthepassportofeverydepositor.’ Another way was to work closely with the authorities andgovernment officials and get budget accounts and profitable contracts.” ButSmolensky,herecalled,“didn’thaveanypoliticalcontacts.”In the year before the Soviet Union collapsed, more than half of all the

depositsincommercialbankswerefromthestate.18Theotherhalfcamefromthecooperativesandotherdisparateorganizationsandnascentbusinesses.ThisishowSmolenskybegan tobuildhisbank.Hedancedwith thosewhowoulddancewith him—BankStolichny ranwith the fast-moneymen, including theentrepreneurs who began the first cooperatives and the hustlers. They wereengaged almost entirely in high-stakes, quick-turnover deals that yieldedobsceneprofitsincash.Onemethodwasgenerallyknownasarbitrage,takingadvantageofthegapingpricedifferentialsthatexistedatthetimebetweentheheavilysubsidized,fixedpricesofthestate-runeconomyandthefree,higherprices of the market, both inside the country and abroad. Another lucrativebusiness was currency speculation, taking advantage of hyperinflation.Between the collapse of the Soviet Union in 1991 and the end of 1994, theruble exchange rate against the dollar dropped 95 percent. Smolensky andother bankers made enormous profits by essentially gambling on dailyfluctuationsintheruble-dollarexchangerate.WhenSmolenskywasat thepeakofhispower in1997, Iaskedhimabout

these early years, and he acknowledged thatmuch of his bank’smoneywaswrapped up in currency speculation.Unlike a traditionalWestern banker, hesimply did not make many loans. He remembered giving one loan to awatermelon farmerwhogrewhismelons inUzbekistanandbrought them toRussia for sale. He gave the melon grower a million rubles. Then ethnicclashesbrokeoutnearthefarmer ’slandinUzbekistan.Thewholedistrictwasclosed and he could not get the melons out to market. The authorities senttroops to the region. “Our guywas sitting on thosewatermelons, and Iwashaving a heart attack!” Smolensky recalled. The loanwas eventually repaid,Smolenskysaid,butlendingseemedtohimtobetoorisky.

“Youcouldn’tgive loans, inanormal sense,with suchhyperinflation,”hesaid.“Weengaged inmorespeculativeoperations, that’s true.Otherwiseyoucouldn’tsurvive.Therewasnorealindustrialproduction.So,whodoyougiveloansto?Theywouldgobankruptthenextday.”TheyoungRussianbankerswereintentonmakingakillingandatthesame

time were burying Soviet socialist ideology. The socialists had scornedfinancial manipulation as sheer greed. In the Soviet socialist economy,productionandindustrywereking;moneywasjustatoolforthelargergoalof fulfilling theplan, formeeting thequotas.However,whatSmolenskywasdoinghadnothingtodowiththeplan.Itwasfinanceforitsownsake,andthatwas a strange and utterly alien practice to the older Soviet generation,includingmany factorymanagers, bureaucrats, andKGBmen. They did notinheritthenewworldofcapitalismbecausetheycouldnotmakethisbasicleap.Thefleet-footedSmolenskyandtheboysonhiscurrencytradingfloordancedrightpasttheoldguard.In the last two years of the SovietUnion, currency transactionswere still

tightly controlled, theoretically. Smolensky’s currency speculators had to befast and invisible. By early 1990, Gosbank had only given two licenses tocommercial banks for limited hard currency transactions, and the banksreportedonlyafractionofthemtotheauthorities.19JoelHellman,aColumbiaUniversitydoctoralstudent,wasresearchinghis

thesis on the new Russian bankers in 1990 when he visited Smolensky.Hellman found that many of the bankers, as well as Gosbank officials,acknowledged that illegal hard currency transactions had blossomed wellbeyondthecontroloftheauthorities.Gosbank,whichhadoncecontrolledallmoneyandcredit,wasincreasinglylostinthenewenvironment.AccordingtoHellman,Gosbankfrequentlythreatenedtofinetherambunctiousbanks—anddid levya$14millionfineagainstSmolensky—orfreeze theiraccounts.Butthe attitude of commercial bankers was cavalier. Smolensky told Hellman,“Our bank has outpaced events.We do something and official permission isgrantedafterthefact.Itwouldbeimpossibleforustowaitforpermissionandthentoact.”20Hellman recalled that when he first met Smolensky, he was struck by the

newly remodeled, Western-style bank offices, with luxurious sofas.Smolensky’s vice presidents allworeArmani suits. Smolensky later toldmethat hedeliberately arranged it thatway, but theyoungvicepresidents neverbought thesuitsontheirown.Whenhewent toEurope,Smolenskyroutinely

bought two suits, two dress shirts, and two ties and carried them back toMoscowinhissuitcase,distributingthemtohisyoungvicepresidentssotheywouldlookWesternandprosperous.Smolensky’scapitalwassmall,andhisoperationssecret.Hedidnotpublish

periodic financial reports,and ifhehad, theycouldhardlyhavebeenhonest.One of Smolensky’s early assetswas a “manuscript” that he claimed he hadwritten about banking andwasworth 200million rubles. Smolensky said hesimplywrote down everything he had learned and set the huge value of thedocumenthimself.“ItwasjustthedescriptionofthesystemthatIhadcreated,”hesaid.“Howitworks.”Presto!Instantcapital.Smolenskyalsoparticipatedinawebofcross-ownershipwithsomeof the

otherearlybanks.Hisbankownedsharesinothers,andtheyownedsharesinhis,andeveryonegrosslypumpedup thevalue,asSmolenskyhaddonewiththe manuscript. It was a paper trick, one of many used by the youngcommercialbankerswhothrivedinaworldoffictionsandfacades.WhenHellman visited Smolensky in 1990, he noticed that the banker had

spreadoutonhisdeskbrochurespromoting thebigAmericanmutual funds,suchasMerrillLynchandFidelity.21Smolenskywaslookingforwaystoshipcash overseas. It was a small glimpse of what, at that time, was already atorrentofcapitalfleeingRussia.Slowlyatfirst,but laterwithmoreskill, thenewRussiancommercialbanksbuiltconnectionstotheinternationalfinancialsystemanddiscoveredhowtodiscreetlymovecash intooffshorezones.Thegoalwas toavoid therisksofkeepingmoneyinsidea turbulentandunstablecountry,andtododgeitsconfiscatorytaxratesorkeepthemoneyawayfrompartners, workers, or criminals. Smolensky, who was an outsider anyway,thoughtitwasaratherlogicalresponsetothethreatsthatalwayslurkedinsidethecountryforanyonewhohadmoney.“Therewererestrictions—now,Idon’trememberclearly,”SmolenskysaidlaterwhenIaskedifithadbeendifficulttotransferhismoneytoMerrillLynch.“Oractually,norestrictions.Anarchy.”Inits first published annual report, for 1992,Smolenskyboasted thatStolichnywas one of the first twenty Russian banks to be linked into the SWIFTinternational bank transfer system, and that Stolichny had thirty-fourcorrespondentbankrelationshipsabroad.“People were bringing money, but we didn’t know how to preserve it,”

Smolensky said. “Wewere looking for instruments to invest thismoney” inRussia,but“therewerenoinstruments.”Sotheysentthemoneyabroad.

Smolensky’sbankwasthemostclosedandsecretiveofthenewcommercialbanks, and he constantly attracted the attention of the suspicious KGB andGosbank, which was later turned into the Central Bank of Russia. Theauthorities, who looked askance at the young banker, were forever curiousaboutwhatwas going on inside thewalls of StolichnyBank, but Smolenskystubbornly refused to tell them or let them inspect his bank. For years, thesecurity services tried to show that criminals were among Smolensky’scustomers, but Smolensky was never arrested. Certainly, Smolensky’s bankwasahavenfortheeasymoneyoftheearly1990s.Alistofthemajorloansmade by the bank in 1996 showed that half of them were either tradingcompanies or oil and gas companies, both adventuresome businesses thatsurvived by speed, secrecy, and a healthy disrespect for national boundariesand authority.22 Among his colleagues, it was believed that Smolensky’sStolichnyBankhaddealingswithunsavorygangsanddirtymoneyinitsearlyyears.A leadingbanker toldme in1998, “Themain feature isbeingable tochange.Smolensky is notwhat hewas ten years ago.He is building a clear,openbank.Tenyearsago,itwasnot.Forsure,hehadcriminalelements—wealldid.But I amsurenogangster can reachSmolensky,or even talk tohimtoday.”23Smolensky spent years fighting one case. In 1992, the first year after the

Soviet collapse, the banking systemwas still immature and crude. From thesouthern Russian republics of Dagestan and Chechnya the Central Bankreceived, by fax, a series of wire transfer orders known as “avisos.” TheavisosorderedtheCentralBanktoimmediatelytransfermillionsofdollarstovariousMoscow commercial bank accounts. TheCentral Bank,which at thetimewas still using the creaking teletype, complied—and themoney flowedout, including about $30 million to Stolichny. Later, the Central Bankdiscovered that the avisos were faked, and it tried to recoup by taking themoney back from reserve accounts maintained by Smolensky’s bank in theCentral Bank. A criminal investigation was opened against Smolensky. Thewholeaffairwaslacedwithquestionsthatwereneveranswered—suchaswhytheCentralBankwouldgiveoutsomuchmoneyon thebasisofa fax in thefirstplace.Smolenskytoldmehesawthecaseasastrugglebetweenthenewcapitalists

and theoldguard,althoughitmayhavebeenamoremundanestruggleovercorruption and theft. Smolensky insisted he was wrongly targeted by thecriminalinvestigation,whichwasclosedin1999withoutcharges.“Itcostmea

lot of blood,” he recalled. After the case was closed, however, a Russiannewspaper, Sovershenno Sekretno, which often had sources in the securityservices, published what it described as details of the case, alleging thatSmolenskyandanothermanhadtaken$32millionthroughthefalseavisoandstashed $25 million in a company in Austria owned by Smolensky’s wife.Later, the newspaper said, Smolensky’s bank acknowledged a “mistaken”borrowingof$4millionandrepaidthatsum.24Throughout his career, Smolensky waged a bitter war with the state. The

Central Bank chairman, Viktor Gerashchenko, was his nemesis. Smolenskycomplained Gerashchenko “deluged commercial banks” with “1928-modelinstructions,” such as, “limit the issuing of cash.” Or, Smolensky fumed,another Central Bank official sent a message, “I authorize the payment ofwages.” Smolensky retorted, “Don’t my clients have the right to dispose oftheir ownmoney?” Bekker told me that “the state hated Smolensky and hisbankmore than any other.He didn’t bow to theKGB.He didn’t bow to thebureaucrats. He didn’t bow to the militia. Gerashchenko didn’t like thisindependentandfreewheelingbanker.”SmolenskyenjoyedunusualautonomyinthelateSovietperiodandthefirst

fewyearsof thenewRussia.He foughtbackagainst thegovernment,kickedouttheCentralBankauditors,andrefusedtoanswerquestionsabouthisbank,and yet he survived. What was the source of his impunity? The answer isunclear. As we shall see later, the most successful tycoons often enjoyedmysterious,high-levelprotection,thedetailsofwhichneverbecameknown.Ifhehad it,Smolensky still did not feel secure.Krasnyansky,Smolensky’s oldarmypal,whoeventuallycametoworkatStolichnyBank,recalledthatheandSmolenskyhadtheirmostcandidconversationsinthecar.SmolenskywasonhiswaytobecomingoneoftheleadingbankersinthenewRussia.Butoneday,in the car, he turned to Krasnyansky. “Edik,” he said, using an affectionatenickname,“weshouldn’tbeseducedbythis.Atanymoment,eveninourfreeRussia,theycanstillcomeandsquashyoulikeabug.”Still,Smolenskyhadcomealongway.In1992hisbankearned2.4billion

rubles on revenues of 6.1 billion. Not bad for a scrawny young man whostartedoutprintingBiblesatnight,foraconstructionbosswhowasorderedtoopenoneofthefirstcooperatives,foradachabuilderwhofilledagapintheshortageeconomy.

Chapter3

YuriLuzhkov

IFTHEREWASanightmareofthelateSovietyears,aplacethatcapturedallthe cumulative absurdity and folly of “developed socialism,” it was thereeking, rat-infested vegetable warehouses of Moscow. These twenty-threemammoth storehouses were monuments to the Bolsheviks’ peculiarlymisguided distrust (and cruel oppression) of the Russian peasantry. FromLenin’searlybattleswiththepeasantstoStalin’sforcedcollectivization,muchofSoviethistorywasawaragainstthecountrysidetofeedthecities.Althoughthe mass violence ended after Stalin, the giant machine of central planningrolledon,confiscatingtheoutputofthepeasantsyearafteryearandshippingitto thecities forstorageuntil itwasdistributed.Hugequantitiesofvegetablesand fruits—a year ’s supply—were brought from the farms into theMoscowwarehousesjustbecauseofthestate’smonumentaldistrustofthepeasants.Bytheearlydaysofperestroika, in themid-1980s, these“vegetablebases”

hadbecomeanorganizationalmonster.Thevegetableshad tobebrought in,sorted, stacked, packed, and preserved, sometimes for many months. Thetwenty-three warehouses, holding up to 1.5 million tons of fruits andvegetables,orenoughprovisionsforacityof10millionpeople,sufferedallthe symptomsof the shortage economyand all the underlyingdistortions ofcentralplanning.“Terminalfilth,stench,mold,rats,flies,cockroaches—therewasnothingsovilethatitdidnotfinditshomeinthesewarehouses,”recalledYuri Luzhkov, a seasoned Soviet industrial manager, after first visiting thewarehouses.Eventhenewerwarehouseswerestrippeddownandruinedbytheworkers,

Luzhkov observed, “brought to such a degree of negligence that you couldexplain it only by some crazy idea, that the employees were obsessed withintentionallydestroying everything, like an army retreating in the faceof anattackingfoe.Nothingshouldbeleftstandingfortheenemy.”Thechainof rotbegan faraway,on the farms.Strippedofany incentives,

the120,000growerswhoservedMoscowhadlongsincestoppedcaringaboutthequalityofthevegetablesandfruitstheyshipped.Theyreluctantlybroughttheirvegetablestoacollectionpoint, tobehauledawayinatruckcarryingabillofloadingthatreadsimply“Moscow.”Bythetimeitgottothecity,muchof the cargohadbegun to rot.Thepotatoeswere infestedwithbeetles. “Thewarehousesbecamedungeonswhosecontentsweredestroyed,notpreserved,”recalled Luzhkov. The rotting vegetables were then distributed to the statestores,where customers could only curse at black carrots, decaying greens,andmolderingpotatoes.Therewasawell-wornrefrainbythestoreclerksastheyhandedouttherottingvegetables:“Ifyoudon’tlikeit,don’teatit.”The vegetable bases, as they were known, were a triumph of collectivist

labor. Everyoneworked there, supposedly, for the “common good,” and yetthe realitywas thatnoonedid.Thevegetablebaseswere run likearmybootcamp:everyday twenty thousandMuscovitesweredrafted to re-sort, repack,and restack thespoiling, rottingproduce. Itwasmandatoryduty,dreaded forthe filth and the rats. The hundreds of thousands ofworkers forced into thesystemsimplystolewhattheycould.“The whole system was so deeply and pervasively corrupt that it made

absolutelynosensetobotherwithanyinvestigations,”Luzhkovsaid.Thiswasbecausethepolicewereinonthedeal.Financialcontrollersandinspectorsjustwrote off the losses, and party officials saw the mess as just anotheropportunity.Theystolethebestofwhattherewas.Thestealingwassocommonandpervasiveastodefydefinitionascriminal.

“Hereweareapproachingtheverycoreofsocialism,”Luzhkovobserved.“Toa certain degree, everybody was involved, and everybody participated—andunder socialism, this means nobody. That was the crucial point, the mostcorruptingeffectof the ‘developedsocialism.’Sinceeverybodybelieved thatthey did not create this evil, coming home with bags stuffed with stolenproductswasnotwrong.”1InDecember1985,GorbachevbroughtanewbosstoMoscow,therugged

Sverdlovskregionalpartychief,BorisYeltsin.SoonYeltsinbegantotakethecity by storm in a very unconventional way—standing in line with averagepeople, riding the trolley, poking into factories and stores unannounced,proddingthestale,atrophyingsocialistsystem.Thegrowingshortagesoffoodin the capitalwere a special concern toYeltsin.Hearing therewas veal at abutcher shop—exceedingly rare—he once went and stood in line for it. Heinsistedonakiloofvealandwastoldthestorehadnone.Yeltsinthenforced

himselfbehindthecounterand,throughasmallwindow,spiedthebackroom—wheretheywerehandingoutchunksofvealtospecialclients.2Yeltsin touched a populist nervewhen he publicly criticized the systemof

raspredelenie,inwhichthepartyeliteshadaccesstospecialstoresandqualitygoodsthatweredeniedtothegeneralpublic.Hebecameagenuinelywell-likedfigureamongMuscovites,butpopulistrhetoriccouldnotfixMoscow’sailingfooddistributionsystem.Oneafteranother,bureaucratsweregiventhejobofstraighteningoutthevegetablebases,andtheywereforcedoutinfailure.Inthesummer of 1987, as the food situation in Moscow worsened, the fruit andvegetablebaseswereonthevergeofcollapse.Yeltsin turned toLuzhkov,a stocky,bullet-headed industrialmanager,who

had been working as a senior-level administrator in the city government.LuzhkovwasoneoftwodeputiestothechairmanoftheMoscowcityexecutivecommittee, the managers who dealt with the day-to-day affairs of themetropolis. He was the city official who handed out licenses for the firstcooperatives.The bureaucrat who previously headed the vegetable bases had just had a

nervous breakdown. Yeltsin summoned Luzhkov. A mechanical engineer bytraining, Luzhkov did not want to take over the miserable vegetable bases,whichhelaterrecalledwouldbe“anabsolutelynowinsituation.”ButwhenhemetYeltsin,he softened.“Hedidn’t lookat all theway Iexpected,”Luzhkovsaid of Yeltsin. “He seemed tired, depressed.” Yeltsin told Luzhkov the jobwouldnotbeeasyandthenadded,“Ibegyou.”Luzhkovknewtheassignmentcouldbetheendofhiscareer.Buthesaidyes

toYeltsinandbeganhisownvoyage,aremarkableandtumultuousone,outofSovietsocialism.When he was a nineteen-year-old engineering student in Moscow, LuzhkovwasassignedtoatemporarystudentworkbrigadeinSiberiatohelpbringintheharvest.ItwasOctober1955.Theweatherwasgenerallywarmduringtheday,when theygatheredanddried thehay,but it turnedunexpectedlycoldatnight, often dropping below zero. The students got stranded; someone hadfailed toarrange their transportationback to school.For severalnights, theysleptinhay,shivering,manyofthembecomingill.Then,bychance,amemberof thePolitburoshowedupfromMoscow.He

was touring the harvest and made some perfunctory remarks, paying noattentiontothecomplaintsofthestudents.Theyaskedtogohome,sayingthey

hadnofood,nomedicine,nowater.Suddenly,outofthepackofstudents,LuzhkovrushedtowardthePolitburo

member. Before anyone could stop him, the pugnacious young Luzhkovpunched thepartymanon the shoulder. “Youmight go far in your career ifnobody stops you—but you will definitely be stopped!” Luzhkov bellowed,thenturnedandran.“Luzhkov simply hit him on the shoulder,” recalled his old friend,

AlexanderVladislavlev,whowasheadoftheworkbrigade.“Thatmanyelledasifhehadbeenstabbedwithaknife.”Theembarrassed,angryPolitburomandemandedtoknowwhowastheboss

of the brigade. Vladislavlev stepped forward. The party man signaled forVladislavlevtogetinhiscaranddrovehimtwentyminutesacrossthebarrenRussianplain.Arainstormhit,andhailpeltedthecarunderdarkthreateningclouds. Vladislavlev had no idea what was going to happen to him. Then,abruptly,thePolitburomantoldVladislavlevtogetoutofthecar,walkbackinthehail,shirtless,and“finishtheguy.”Vladislavlevdidn’taskhowto“finish”hisfriendLuzhkov.Hejusttrudged

backacrosstheopenfields,andwhenhereturnedtothecamp,herecalled,hedrank a bottle of vodka to keep himself from shivering to death. Soon thePolitburomancalled,“askingmewhatIhaddonetotheguy.Isaid,‘Ifinishedhim!’”Infact,hedidnothing.3ThetruculentLuzhkovofthatdaywastobecomealeaderofthenewRussia.

Luzhkov had suffered through a childhood of poverty. Born September 21,1936, he was the middle of three sons. His father was a carpenter and hismotheraboilerroomworker.Thefamilylivedonthefirstfloorofawoodenbarracknear thePaveletskyrailroadstationinMoscow.Thethreeboys, theirparents, and his father ’smother all shared one drafty roomwithout heat orrunningwater.Allthreesonssharedonecoatthattheirfatherhadbroughtbackfromthewar.Luzhkov’smemorieswereofconstanthungerduringtheyearsof World War II and after. “I can’t describe this,” he recalled. “We alwayswanted to . . . not even eat, but to devour no matter what. Kids around usswelledanddiedfromhunger.”Oncetheboysweresodesperatetheyate—andsalted—“white clay” they found along the railroad tracks and becamedreadfullysick.Luzhkov’smost vividmemories revolved around thedvor, the courtyard,

the center of his life as a youth. The courtyardwas a world apart from theoutside,“asmall, self-organizedcommunity inopposition to thecityand the

state.”Inthespacebetweenthebuildings,theysettherules,theethics,andthemorals. “There were intellectual courtyards, but there were sporty and eventhievish courtyards as well,” he recalled. “Ours was a hooligan courtyard,meaning that it provoked a special, risky mood—to get into a fight withsomebody, tomakeyourself visible, to show somepluck.”Luzhkov saidhismotherwassobusyworking—shetooktwo,thenthreejobs—thatshegavetheboys “total freedom to secretly indulge our passion for dangerous games.”Luzhkovwas left to the “risky, recklessmoodof the courtyard.”Theyoftendisassembledartilleryshellsfromthewarfrontthattheyfoundonrailwaycarsnearby.Theywouldtakeoutthegunpowder,makeafusewithatrailinthedirt,andsetoffasmallfirecrackerlikeexplosion.OnceLuzhkovhadanidea:Whynotsetoffthewholeshell?Hesetthefuseandran.Ahugeexplosionfollowed,shatteringwindows.Thepolicearrived,butthecourtyardhaditsrules.Noonegavehimaway.“Thecourtyardwasassilentas thegrave to theauthorities,”Luzhkovremembered.LaterLuzhkov enrolled at theGubkin Institute ofOil andGas, one of the

premier traininggrounds for the rapidly industrializingSovietUnion. In thehigh-ceilinged halls and laboratories of the institute, the Gubkin studentslearned mechanical engineering, oil and gas geology, mining and refiningfrom one hundred professors, including two prestigious academicians.Although the requisiteMarxist-Leninist training was present, the curriculumwasheavilyweighted toward technical training.Overall, the school played acritical role—turning out specialists—and each student was given a veryspecifictrainingoverfiveyearstofitintoagivenplaceinindustrywhentheyfinished.4Luzhkovgraduatedin1958.Heexpectedtogointotheoilindustrybutwas

assignedtoplastics.Heprotestedloudly,tonoavail.Nonetheless,Luzhkovdidwell.Plasticsandpetrochemicalscameintogreaterdemandinthe1960s,andhemoveduptheranks.In1974hewasappointeddirectorofadesignbureauinthe Ministry of the Chemical Industry, and later he became director ofKhimavtomatika,amakerofspecializedequipmentforchemicalfactorieswithtwentythousandworkers.Itwasthelargestsingleenterpriseintheministryandwasdividedbetweenscientificresearchandfactorywork.Itwashere,asatopSoviet industrial manager, that Luzhkov took his first, tentative steps awayfromsocialism,anditwasapainfuldeparture,searedintohismemory.In1980,attheendoftheBrezhnevperiod,Luzhkovproposedasomewhat

unorthodox idea, that the science half of his enterprise be put on a very

elementaryself-financingscheme.“Self-financing”wasawatchwordofearlierattempts to reform the centrally planned economy, and it oftenwent hand inglovewiththegrowingindependenceoffactorymanagers.Roughlyspeaking,itallowedfactoriestoretaintheirownearnings.Luzhkovsuggestedsellingtheresearch results at Khimavtomatika as a commodity; when they developed ascientific process, they could peddle it and keep the profits. Luzhkov’sproposalwenttothetopdecisionmakingbodyoftheministry,thecollegium,agroupofseniormanagerswhosataroundahorseshoe-shapedtablewhileanaudienceof150lessseniorworkerslookedon.Standingatapodium,Luzhkovoutlinedhisplans.Hisideawasimmediatelyanddramaticallyshotdownbyarepresentativeof theCommunistParty,whodeclared thatLuzhkovwanted toviolatethepreceptsofMarxandEngels.ThepartymanopenedupavolumeofMarxandreadaloud:sciencewastheproductofhumanthinkingandcouldnotbeevaluatedinmonetaryterms!LuzhkovwasviolatingMarx!Thatwastheendof the idea.Luzhkov’sministerhadnodesire tofight the

party.What had been a modest step away from socialism had turned into apolitical hot potato. Luzhkov’s idea was buried and forgotten. But he hadmarkedhimselfasamanwillingtoexperiment.5Atthebeginningofperestroika,Luzhkovwasfiftyyearsold,butnothingat

the timemarkedhimas a political leader.By the same age, bothGorbachevandYeltsin held high-ranking party posts.6 Luzhkov had joined the party in1968, but his preoccupation was Soviet industry and not ideology.Nevertheless, it was common that a top industrialmanager would be drawninto city affairs. In 1975 Luzhkov was chosen to serve on a local districtcouncil,andtwoyearslaterhebecameamemberoftherubber-stampMoscowcity council, knownas theMossovet. Its sizevaried,but theMossovet at thistimehadaboutathousandmembers.Theentirecitywasrunbytheparty,andtheMossovetwasanenormous,unwieldylegislature,afacadeofauthoritythatdecided very little. Luzhkov accepted a part-time post as head of the citycommissiononconsumerservices.ItwasanimportantchoicebecauseitwasherethattheseedsofchangewouldbeplantedinGorbachev’searlyyearsofperestroika.7In1986Luzhkovresignedfromhisindustrypostandmovedfull-timeinto

thecityadministrativesystem.YeltsinhadarrivedfromSverdlovskandbrokethenewstoLuzhkovpersonally;hehadbeenmadeoneofthedeputychairmenof the ispolkom, the city executive committee. His new duties includedsupervisingthebuddingcooperativesinMoscow.

Asalreadynoted, theoldpartystalwartsof the timeweresuspicious; theysawtheentrepreneursinthecooperativemovementasprofiteers,speculators,andsubversiveenemiesofsocialism.WhenLuzhkovsetupacommission tolicense the cooperatives inMoscow, thewhole experiment stood onwobblylegs.“Thiswasamission,averydangerousone,”Luzhkov toldme.Nooneknewifitcouldsurvivethedeadhandoftheoldsystem,whichhadstifledsomuchindividualinitiativeoverthedecades.Oneunlikelychampionofthecooperativeswasamanwhospokeinthedry,

measured tones of a bureaucrat, Alexander Panin, a Leningradmanagementspecialist who became Luzhkov’s right-hand man in dealing with thecooperatives. Panin was among legions of experts who, in between endlesscups of tea and idle hours in their institutes, were supposedly working toperfect socialist management techniques. Panin, who had been discreetlyreadingWestern management texts, concluded that the most important thingwas to unlock the brilliance and imagination of individuals. He took acourageous decision and wrote a letter to the Communist Party CentralCommitteeinMoscow.Hisideasflewinthefaceofdecadesofpartydoctrine.Hewas summoned to theCentralCommittee offices at Staraya Ploschad, orOldSquare,and thepartypeople listened, forawhile.Panin toldme that,bynecessity, he had to dress up his notion of individual initiativewith a lot ofrhetoric,insistingthatallowingindividualinitiativedidnotcontradictsocialistdogma. The party apparatchiks told Panin they could not help him, but theyurgedhim tokeepspreadinghisnotionsandapproach theCommunistYouthLeague,theKomsomol,whichhadalittlemoreleewayforfreethinkingaboutsuch things. Amazed by their reaction, Panin kept up his campaign. Hesuggested a modest experiment in individual initiative—allowing people tostart their own cooperatives, which would be very small private businesses,such as baking pies. Finally, the authorities agreed to let him try, and PaninbecameexecutivedirectorofLuzhkov’sMoscowcommitteeoncooperatives—tooverseebakingofthefirstpiesofcapitalism.8Luzhkov andPanin began in a room as large as a dance hall on the sixth

flooroftheMossovetbuildingincentralMoscow.Simplefoldingtableswerebroughtintoonesideoftheroom.Thestaffworkedbyday;thenLuzhkov,inshirtsleeves, came in the evenings, usually after 7:00 P.M., often holdingmeetings with the new entrepreneurs until well beyond midnight. The newbusinessmen thronged the halls with their proposals, their paperwork, theirquestions, and their substantialproblems,not the leastofwhichwerehow to

getsuppliesfromthestate-runeconomyandhowtogetaroomorgaragefortheirnewventure.“Bearded,shaggy,andlookingGod-knows-how,”Luzhkovlaterrecalledofhisimpressionsofthenewbusinessmen,“butallofthemwereenergetic, independent, and interested. One was offering to produce usefulgoodsoutofwastegarbage.Anotherfoundconsumerdemandataplacewherethe state structures had no field of activity at all. Ingenuity, inventiveness,creativity—wesawsomuchofitinourroom.”Luzhkov’s young, stern aidewasYelenaBaturina,whomhemarried after

his firstwife died of cancer in 1988.Baturina recalled how the peoplewhocame to the roomweresodifferent from thebureaucratswhoworked in theMossovetbuilding,andhowshockedthebureaucratswere tofind theraggedentrepreneurs in their halls. “We were constantly transferred from room toroom,”shetoldme,“becauseneighborscomplainedthatbearded,dirtypeopleweresittinginthecorridorsandactuallyspoiledtheimageofthebuilding!”9Viktor Loshak, theMoscow News journalist who had been watching the

dramaunfold,recalledthatLuzhkovhadtodefendthepioneeringcooperativebusinessmen against bureaucrats who wanted to crush them. One group ofbureaucrats were the fierce, large women who were official guardians ofpublichealthandsafety.Thebureaucratshadnoideathataneweconomywasbeingborninfrontoftheireyes;theyweresupposedtoupholdthedictatesofthe old system. “They resisted every microscopic step of the cooperativemovement,”Loshaktoldme.“Iwaswaitingforthefirstmeetingofthiscommission.Irememberthefirst

womanwhowasgoingtobeinprivatebusiness—shewasatheaterspecialistby profession. She had two or three children. Shewanted to bake cakes forpeopleforholidays,asabusiness.“AndLuzhkovsaid,‘Great!’Andtwoorthreeotherssaid‘Okay.’Thenthe

oppositesidestartedlookingforreasonswhytheycouldrefuseher.‘Whatisthesizeofyourapartment?’ theyasked.And it turnsout theapartment isbigenough.‘Doyouhaveamedicalcertificate?’Shehadacertificate.‘Willyoubeable togoontakingcareofyourchildren?’Andit turnedouthermotherwasinthesameblockofflatsandcouldhelp.“Then thisbitch fromthesanitaryepidemiological serviceasked, ‘Doyou

have secondary industrial ventilation in your apartment?’ And this womandidn’tevenknowwhatthatwomanwastakingabout.Nobodyknewwhatitwas,and I didn’t know what it was. And that woman from the sanitaryepidemiological service found some point number 3, article number 8, that

whenmakingcakesforsaletheremustbethatindustrialventilation.“Then Luzhkov said, ‘Go—you know where! I’m chairman of this

commissionand thiswomanwill startherbusiness!’”Luzhkovwon thevoteandmovedontothenextperson,whowantedtoopenabicyclerepairshop.10One evening in those early weeks, a party boss came and insisted that

Luzhkov move “this entire public out of here.” Luzhkov explained that thewholepointwastoletoffthesteamofpublicdiscontent.“Thewaveisrollingalready,”Luzhkovtoldthepartyman.“Ifwedon’tcope,wewillfindourselvesunderthiswave.”Atthesametime,Luzhkovprivatelyfearedhewasbeingsetupforfailure,thatthecooperativesweregoingtobecrushedandhewouldbeblamed. “The future cooperatorswere eager to start business, but theywerefearfulofthefutureandtheywantedtoreceivesomekindofsupportfromme.IcheeredthemupthewayIknewhow,butmyheartwasfilledwithanxietyandworry.”11Valery Saikin, chairman of the executive committee and Luzhkov’s boss,

toldLuzhkovthatthenascentprivatebusinessmenweresubversiveandfrettedthat they might come and demonstrate openly against the party chieftains.“Objectively,theyareagainstthestateeconomy.Againstsocialism,”hesaidtoLuzhkov.“Iwarnyou:iftheycometotheMossovet,youwillbetheonetogoandmeetthem!”“Withpleasure,”Luzhkovreplied.“Iwilltakemyfavoritecap,cometothe

balcony,andwillwavetothemlikeLenindidwhensayingfarewelltotroopsonthewaytothecivilwar.”Saikinwasnotamused.Later,recallingthosemonthsoffreneticactivity,Luzhkovsaidtheevenings

werenotjustbureaucraticworkbutofferedaglimpseofthemarketeconomy—peopleanxioustoworkforthemselves,notthestate.“Dealingwiththenewpeople formedanewworldoutlook,”he said.“Ibeganunderstanding thingsthatbeforeIusedtoguessonlyvaguely....”Butthingswereneverclear-cutatthebeginning.Thefirsttinystepstowarda

marketeconomywereconfused,inchoate,andshroudedinsuspicion.Werethenew businessmen taking bribes or paying bribes? Reaping windfall profits?Luzhkovheardtherumors.Theconfusionwaspartlyjustified;Paninnotedthatthepiesmadebythecooperativescostsevenoreightkopekseach,comparedwithfivekopeksinthestatestore.Tothepeopleonthestreet,thatseemedlikeprofiteering. Sometimes they were better, sometimes not. The cooperativesbegan the long march toward the market saddled with great suspicion in asocietythathadknownnothinglikeit.

The first cooperatives were dramatically different from the old stateestablishments.Thecooperativesactuallycaredabout theircustomers.“IntheSovietUnion, thecounterwas likeabarricade,withenemiesoneitherside,”Loshak recalled. “And suddenly they were not enemies. These people, the‘cooperators,’were interested in theirclients, inhaving thembuysomething.Whenthefirstcooperativerestaurantappeared,itdiffereddrasticallyfromalltheothers,fromstaterestaurants.”David Remnick, aWashington Post correspondent, described the amazing

scene at the first cooperative restaurant at 36KropotkinskayaStreet.He saidthemenuincludedsoup,sucklingpig,salad,andcoffee.“Soattentivewasthemanagementtogoodservicethatitsoonfiredonewaiterforbeing‘tactless.’The caféwas a sensation not only for thewell-to-do Soviets and foreignerswhocouldmanagethedualfeatsofgettinginthedoorandpayingthecheck,but also for ordinary people who heard about it in the press. There wererumors of fantastic profits being made and charges of ‘speculation.’ TheCommunistPartynewspaperPravdaassertedthatthenewsystemallowedsomepeople to make ‘significant sums that did not correspond to their expectedlabor.’”12In this environment, Luzhkov was a curator of the new experiment who

protected,nurtured, andmonitored the cooperatives as they tookhold. Inhisfirstfourmonths, thenumberofMoscowcooperativeszoomedfromfour tomorethanathousand.Luzhkovsponsoredanexhibitionoftheirworktomarkthe first hundred cooperatives and spread the idea. Yeltsin showed up toencouragehim.AphotographshowsLuzhkovadmiringtheexhibitstandofacooperator making his own musical instruments. Baturina recalled, “ThecooperativesworshipedLuzhkovbecause,outofalltheofficialpersonsatthattime,nooneriskedspeakingoutintheirfavor,intheirdefense.”ButLuzhkov,who in later years was famous for roaming city construction sites, rarelyvisitedthecooperatives.PaninsaidLuzhkovwasstillcautiousandsawhimselfasa“monitor”ofthenewbusinessmen.Neitherthepartybureaucratsnorthepublicwasreallypreparedforwhatwasbeingunleashed,herecalled.“Itwasatest,asusual,inthebeginning,”Panintoldme.“Youunderstand,ifwehadn’tmonitoredthem,theycouldhavepoisonedpeopleorusedbadrawmaterials.Andhadtheydonethat—wewouldhavehadalotofproblemsourselves.Thatwouldhavebeentheendofthecooperatives.”Asthecooperativemovementblossomed,LuzhkovandPaninbegantohave

their own private doubts. These ambitious new businessmen were rapidly

overtaking the early concept of baking pies. They were branching out intoworkwithSovietindustrialenterprises.Theywereexperimentingwithfinance.The Law on Cooperatives had opened the door to private banks, and a fewsmart young men had figured out a way to launder government subsidies,intendedfor factories, intocashfor themselves.Theywereobviouslybakingmoney, not pies. They were producing nothing useful for society, Luzhkovfeared. “After the cooperative movement grew in scale and it becameuncontrolled—then there was no stopping it,” Panin told me. “All barrierswereremoved.Theywereallowedtodoanything,andthenmassesofpeoplepouredintothemovementwithoutanycontrol.”Loshak,thejournalist,recalledthatLuzhkovwasoutwardlystillverymuch

partofthesystem.HeworeablackcoatwithablackfurcollarandafedoraofthekindlongfavoredbyCommunistPartyideologistSuslov.HewasdriveninanofficialblackVolgacar.Butinwardly,Luzhkovsensedthatthegroundwastrembling, even if he didn’t fully understand why. Loshak got a glimpse ofLuzhkov’schangingmind-setonenightinalong,soul-searchingconversationwithhim.“Wemetafterwork; itwas lateatnight,wesat together inhiscar.And we just drove around Moscow for a long time and talked. Ourconversation was about down-to-earth things, about cooperatives and thepeople who came to the cooperative movement, about Moscow. We werebeginningtounderstandsomethingnewinourlife.”Loshak added, “If somebody asks you who is the father of capitalism in

Russia, as a rule, there is always only one answer: It is Gorbachev. But inreality,oneofthefathersofcapitalismwasLuzhkov.”Yet, Loshak added, Luzhkov never could have uttered those words at the

time. Luzhkov did not imagine then that capitalism, markets, and privatepropertymightcometoRussia.Hewasa“bigboss,”aproductofthesystemitself,Loshakrecalled.“Butatthesametime,hewasarealperson,whichmadehim different from others. His eyes sparkled. I think that back then, heunderstoodthatsomehow,people’sinterestsmustfindawayout.”Inthesummerof1987,Luzhkovacceptedthesupposedlysuicidalmissionofmanaging the vegetablewarehouses.He felt doomed. “Nothing could save itfromimplosion,”herecalled. InMoscow,discontentwasgrowingoverfoodshortages. One night, at a gala concert, the popular stand-up comedianGennadyKhazanovdeclaredthatMoscow“isthecityofevergreentomatoes.”Itwas a play onwords from old hackneyed slogans about the SovietUnion

beingalandofevergreenforests.Whenhemadethecrackaboutthetomatoes,Luzhkov,whowasintheaudience,felttheperformerlookedrightathim—andthewholeaudiencelaughed.ForLuzhkov,itwasamomentofacutehumiliation,andrightaftertheshow

hestormedovertothetomatowarehouse.“Iwashorrified,”herecalled.“Iwaspacingamongthe‘evergreentomatoes,’squashedandrotting.Iknewwhytheywere like this.” In the next few months, Luzhkov, as with the cooperatives,begantosearchforafewlimitedmarketsolutionsinaseaofsocialistfolly.Everyday,thousandsofpeopleweredraftedfromtheirregularjobstowork

in the vegetable bases. The workers were drawn from schools, hospitals,laboratories, and institutes, which ordered them to go to the vegetabledungeons. The work was miserable, but they had no choice. “The chilled,humiliated, dirty librarians, engineers, and doctors were working under thesupervision of regularwarehouseworkers,who appeared in theirmink hatsand sheepskin jackets like nobility and evaluated their efforts in order toinformthedistrictpartycommittee,”Luzhkovrecalled.Inaradicalbreakwiththepast,Luzhkovdecidedtostoptheforcedmarchof

ordinaryMuscovitestothewarehouseseveryday.Hepromisedtosavemoneyby cutting back on waste and using the savings to pay his regular workersbettersalariesorhirepart-timers.Luzhkovrecalledthemomentwhenapartyofficial, standingat a largemeeting, somewhatdryly announced that the cityhadstoppeddraftingpeopletoworkinthevegetablebases.Itwasjustanotherline in the endlessly boring list of party “accomplishments.” Suddenly, theaudienceeruptedincheers,anoutpouringofenthusiasmunheardofinsuchasetting. The party man was stunned and embarrassed. He later telephonedLuzhkovanddemandedtoknowifatrickhadbeenplayedonhim.“Everything is true,” Luzhkov reported. No warehouse in Moscow had a

workerwhowasdrafted.Luzhkovfiguredthatstealinginthewarehouseswasdonebythreedifferent

groups.Roughlyone-thirdofthestealingwasdonebytheworkers,one-thirdby the truck driverswho delivered to the stores, and one-third in the stores.Luzhkovhadanidea.Iftheylostfewervegetablestospoilage,couldtheymakemoremoney and thenpaypeoplemore—andperhaps reduce the stealing? Itwasacapitalistthought.Luzhkovwenttoworkonit.Heaskedhisdeputiesfortheofficialspoilage

rate. The answer came back: 1 percent. “It was only then that I realized thepervasivecrueltyofthesystem,”herecalled.“Withallthemonstrouslossesof

upto30percentinthestorageprocess,thesystemhadthenervetodemandalossofonly1percent.Itwasalaughingmatter,amyth,acaricature—butthereit was.... The Soviet system formulated its laws on the premises of an idealpeoplelivingwithinanidealsocialandnaturalenvironment.Asaresult,itdidnotmatterhowgoodyouwereorhowwellyouworked—atthesametime,italsomeantthatnoonecouldmeettheestablishedquotas.”Luzhkov decided it was time for a change. He contracted a Moscow

biologist’s laboratory to give him realistic spoilage quotas for fruits andvegetables.Thenhegottheispolkom—thecityexecutivecommittee—to issueanordinance ratifying theseas thenewquotas.With thenewquotas inplace,Luzhkov told theworkers they could sell, for their own profit, half ofwhattheysavedfromspoilage.“Notathird,”Luzhkovintonedtotheworkers,“buthalf.”It worked. The spoilage was reduced, the quality of the produce was

improved,andtheworkerswerepaidmore.But the higher authorities did not like it. In a reactionary spasm,Luzhkov

was called before the committee of the people’s control, a party watchdogcommission. The committee accused Luzhkov of fiddling illegally with thespoilage rates. They accused Luzhkov of paying “huge bonuses” to acollective.Acrime!Butafteratensehearing,thecommitteebackeddown,andLuzhkovwasletoff.Luzhkov had survived the suicide mission, but he never won the kind of

popular approbation that Yeltsin enjoyed. The reason was that the vegetablebaseswent fromgrim to somewhat better, but theSovietUnionwas comingunraveledat thesametime.LuzhkovdespairedwhenYeltsin,whohadbeenasourceofsupport,wasdumpedasMoscowpartychiefinNovember1987.Thefollowingyear,heshookthehandofYeltsin,thenanoutcast,ataRedSquareholiday parade. They spoke for several hours, and Luzhkov expressed hopethattheywouldworktogetheragain.13The command system was growing weaker and getting tomatoes from

AzerbaijantoMoscowbecameevenmoredifficult,evenifthevegetablebaseswere functioning. Despite Luzhkov’s reforms, Moscow’s food shortagesworsened.ThenanotherkindofhurricaneapproachedandtookLuzhkovwithit.TheGorbachevyearsofperestroikasawMoscowseethingwithdissatisfaction,but the deepest source of discontent was rotten leadership more than rotten

vegetables.When he came to the city, Yeltsin touched a raw nerve with hispopulist campaigns against party privileges. The reaction went even deeperamongtheintelligentsia.Theyweresickandtiredofthegraybureaucratsandthepartyapparatchikstellingthemwhatlinesinascriptcouldbeperformedorwhat books could be read or what statistics about life expectancy could bepublishedinascientificjournal(i.e.,none).Gorbachev’spoliticalliberalizationunleashedatidalwaveofnewthinking,

andMoscowwasawashinpoliticalclubs,interestgroups,demonstrations,andferment.Whatisstrikingabouttheriseofthe“radical”democratsinMoscowishowrandomlyandevenaccidentallytheyallcametogetherinashortperiodof time.The fall of theBerlinWall inNovember 1989 had set the thinkers,artists,andprofessionalsinMoscowafire.VladimirBokser,apediatricianwhohadalsobeenanactivistforananimal

rights group, was one of the early democratic organizers. Bokser had theengaging manner of a friendly small-town doctor. But behind his calmdemeanor laya razor-sharpunderstandingofgrassrootsmoodsandpolitics.Hisprimary interestwaspolitical freedom.Hefelt the intelligentsiawas ripefor change. “Everyone came to understand that the leaders were not veryhonestpeople.Theylie,theypretend,”Bokserrecalled.“That’swhatendedupuniting everyone. In a very precise way, at the end of the 1970s and in thebeginningof the1980s,a feelingofshamestarted rising.”The intelligentsiarevolted against theCommunists, and they revolted first inMoscow.Boksertoldme,“Itwasarevolutionoftheintelligentsia,purelycultural.Therewasnootherrevolutionatthattime.Before1990,noneofushadeventhoughtaboutamarket to any degree. In fact, people feared that. Most importantly, peopledidn’twantthesebureaucratstositthereanymore,whodecidedeverythingforus, tolduswhat films towatch;whichbooksweought to read.Whenpeoplestarted watching what was happening outside the country, they wantedmoreopenness.Theywantednot only cultural openness but informationopenness.The first thing that happened was a revolution of openness, for an opensociety.”14One of the strongest voices came from a man with a very unremarkable

appearance—short and slightly hunched over, with a full head of salt-and-pepperhairandasmallmustache.GavriilPopov,aneconomistwhohadoncebeendeanoftheeconomicsdepartmentofMoscowStateUniversity,wastheneditor of a journal, Questions of Economics. Popov had doubts about thesystem in the late Brezhnev years, and as perestroika took off, he was a

prominentvoiceleadingsocietytowardsomethingnew.PopovwasacloseallyofYeltsin in the new elected parliament, theCongress of Peoples’Deputies,andhewasconstantlypushingGorbachevtopursuemoreradicalreforms.The Moscow radical democrats were a loose group of political clubs,

various associations for specific causes, human rights groups, and a host ofcurious and dissatisfied loners, many of them scientists. Under Popov, theycametogethertocreateacoalition,DemocraticRussia.Theydecidedtowageacampaign for theMarch4, 1990, elections to theMossovet,whichhadbeenreduced in size to 498 seats. This was a critical decision for the insurgentdemocrats—they decided to go local and make Moscow, not the nationalgovernment,anengineforrealchange.The democrats staged a noisy campaign: slogans blared from their

megaphonesinthesubwayunderpasses,soundtrucksroamedthestreets.Theyhad meetings in apartment houses, held two big street rallies, distributedthousands of mimeographed handbills, and put up posters in shops and thesubways.Theyweretheintellectualelite:amongtheircandidates,64.3percentcame fromcareers inhigher education, science, engineering, themedia, andarts.15They scored a stunningvictory, takingover theMoscowcity government.

They won 282 of the seats. On April 16, 1990, the newly empowereddemocratsassembledattheMossovetandchosePopovastheirchairman.TheinsurgentswereebullienttobecapturingMoscow.Theyhadshowntheycouldcompetewithallthoseselfimportantmenwhohadtoldthemwhattoreadandwhattothink.IlyaZaslavsky,achemicalengineerwhohadbeenelectedtothecouncil,declaredwithboundlesshope,“Wewillbeginanewlife.”16ButasPopovandtheothervictorsweresoontodiscover,apotentialdisaster

washurtlingtowardthem.Foodshortagesweremounting.Hoardingandpanicgrippedthecity;hundredsofthousandsofpeoplefloodedintoMoscowfromthe provinces looking for food. Lines sometimes blocked the big avenues.Eachwave of rumors spreadmore panic:meatwas running out! Breadwasalmost gone! Six weeks after taking office, Popov acknowledged that “thesituationinthecityisgettingcritical.Thereisarealdangerofthingsspinningout of control.Hundredsof thousandsof people are in the shops.”17 Bokserrecalled,“Everyonewasexpecting there tobea famine inMoscow.Maybe itwasexaggerated,buteveryoneexpected it.”AsecretCIAanalysisat the timereported themost probable outlook for the SovietUnionwas “deteriorationshortofanarchy,”andonethingthatcouldpushittowardtotalanarchywould

be “massive consumer unrest.” The CIA analysis said that any reactionaryputsch, or takeover, would certainly target the radical democrats, includingPopov.18Popov’sfirstmajordecisionwastoappointanewchairmanoftheispolkom,

thecityexecutivecommittee.Saikin,thepreviousboss,hadgoneonvacation.Theheadoftheispolkomwouldrunthecity,andifheranitbadly,theoutcrywouldcertainlywreckthereformers’chancesofholdingontopower.NoneofthosearoundPopovknewhowtomanagethesprawlingmetropolis.

HisinnercircleincludedBokserandVasilyShakhnovsky,aone-timeengineerwhoworkedonthermonuclearsynthesisattheKurchatovInstituteinMoscow.Shakhnovskyhadbeendrawnintotheblossomingworldofdebates,clubs,andelections in 1989, and he was elected to the Mossovet.19 Another aide wasMikhail Shneider, a physicist at the Institute of Geomagnetism and theIonospherewhohadhelpedorganizetheelectionswithBokser.Popovtoowasprimarilyathinker.Acommon,albeitrespectfuljibewasthatPopovneededtolieonthecouchandthinkforseveralhoursaday.20Atheorist,evenabitofaromanticist, Popov did not think about potholes and streetlamps. He had noideahowmanytonsofvegetableswereintheMoscowwarehouses.Hehadnoideahowtocopewiththecigaretteriotsorthefoodshortages.Popovfearedthattheradicaldemocratswouldbeoverwhelmedbytheirown

lack of experience in governing. Hewas haunted by the idea that thewholeexperiment could fail; everything might collapse and they would bediscredited,perhapsevenjailed.Itwasjusttooheavyatestfortheradicals,tomake them run the whole city at the beginning. They were not ready. Theyneededabridgetotheoldregime.Theyalsoneededsomethingfromalong,deeptraditioninRussianculture.

Theyneededarealkhozyain,arichterminRussianthatreferstotheleaderofa given social domain, a home, a village, an enterprise, or a country. Thekhozyain of a household, usually the oldest male, has responsibility for thewelfare of the group. A real khozyain takes care of those in his domain.Russianstendtojudgeleadersonwhethertheygivetheimpressionofbeingareal khozyain—sometimes in appearance or in action. And a person who atleastdisplaystalentsinthisdirection—whocanmanagetheaffairsoftheday—isakhozyaistvennik.21Popovwas in searchofonebecauseheclearlywasnot.PopovturnedtoYeltsin.The radicalsmet everymorning for breakfast in a large roombehind the

stageattheMossovetbuildingtotalkabouttheirplansfortheday.Popovtoyed

withtheideaofbringingbackSaikin,theoldpartyman,torunthecity,buttheradical democratswouldn’t hear of it.He had other candidates from the oldguard, but the radical democrats were dubious about them. Popov came tobreakfast one day and reported that Yeltsin had suggested a candidate tomanagethecity—Luzhkov.ButnoonepresentknewLuzhkov.“Andweasked,whoisthisman?”recalledoneofthedemocrats,Alexander

Osovtsov.The question hung in the air. Then someone recalled that the young

cooperators, who were mingling with the new democrats, spoke highly ofLuzhkov.ShneiderrecalledthathehadjustmetLuzhkov.Hisfirstimpressionwasvivid.“Sovietbureaucrat,”herecalled.“Styleofhisspeech,thechoiceofwords,vocabulary,appearance,thewayhetalkedtopeople—allofthatspokethathewasatrueSovietbureaucrat.JustthewayIhadimaginedabureaucrat,becauseIhadneverdealtwithbureaucratsbefore.”22Popov could not make up his mind. “Tomorrow, we have to make the

decision,”hetoldtheradicals.“Wemustdoittomorrow.”Bokserwenthomedistressed.Thephonerang.Itwasanoldacquaintance,a

womanwhowasnowapensioner.Bokser toldherhowPopovwaswaveringon this critical decision, butLuzhkovwas one of the finalists. Thewoman’svoicebrightened.“Thatwouldn’tbeYuriMikhailovich?”“YuriMikhailovich.Howdoyouknowhim?”“Wasn’thetheheadofKhimavtomatika?”ThiswastheenterpriseLuzhkov

headedinthelate1970sinMoscow.“Yes,”Bokserreplied,curiously.“Youknow,Iworkedtheretenyears,”shesaid.“Iknowhim.Ididn’tknow

himwell,butIheardthathealwaystreatedpeoplewell.”The next day, Bokserwent right to Popov and recommended Luzhkov. “I

heardthathetreatedpeoplewell,”hesaid.Luzhkovobservedthedemocratsedgily,wellaware thathewasconsideredamember of the old guard, one of the apparatchikswhom the insurgents hadvowedtothrowout.Herecalledthathewassimmeringwithangeratthewaythe dissidents had blamed everything on the previous regime. He was “soenraged”bythisthathedecidedtoquitcitygovernmentaltogether.ButthenhewenttotheMarbleHalloftheMossovettoseethenewpoliticiansforhimself.Theydidn’tlooklikebureaucrats; theyworeno ties.Luzhkov,whohadonce

been energizedby the cooperatives, took a similar liking to the rough-hewnnew democrats. They had none of the “blind obedience” of the previousgeneration,hethought.“You were dealing with intelligent, active, angry people, denouncing the

idiocy of the old system and promising to fix everything fast,” Luzhkovrecalled.“Thesepeoplegreatlyimpressedme.”Butheknew—betterthanthey—whatamesstheyhadinherited.ThesupplylinesthatheldtheSovietUniontogetherweresnapping,virtuallyeveryday.AsLuzhkovmulledthefuture,hisphone rang. It was Yeltsin, who had made his own comeback. OnMay 29,1990,YeltsinwaselectedchairmanoftheparliamentintheRussianRepublic,the largest Soviet republic, and was pressuring Gorbachev for still moreradicalreform.“ThisisYeltsin,”thefamiliarvoiceboomedtoLuzhkov.“Dropeverything

and get over here.” At Yeltsin’s urging, Popov chose Luzhkov to be cityadministratorandLuzhkovagreed.PopovtoldmeyearslaterthatLuzhkovhadseveral factors in his favor. He was never a top party boss. He had deftlymanaged the cooperatives, and Popov recalled that cooperative types hadsupported theradicaldemocrats in theirelectioncampaign.PopovalsoknewLuzhkovhadstoppedthedirty,miserableworkinthevegetablebases.23Bokserwenttoseetheradicaldemocratstoameliorateanyconcernsabout

the choice ofLuzhkov.The first reactionwas anger. “Betrayal!” the radicalsshoutedbackatBokser.“Wewantourowndemocrat!”ButtheangerpassedonthedayPopovformallyintroducedLuzhkovashis

choicebeforeameetingoftheMossovet.Luzhkovrecalledthat,atthemomentof the introduction, Popov regarded him coolly. Popov made a curtintroductionandthengaveLuzhkovtwelveminutestoexplainhimself.“Iwasshocked,”Luzhkovrecalled.Howcouldheaddressthecrisisgrippingthecityinjusttwelveminutes?ThemembersbombardedLuzhkovwithquestions.Onequestioncamefromaradicaldemocrat.“Tellus,whatisyourplatform?”Luzhkovwasasked.“Areyouademocrat

oraCommunist?”Luzhkovwasflustered.Somethingwelledup inhim,andheblurtedoutan

answer that resonatedforyears tocome.“IalwayswasandIamstandingononeplatform—thatofkhozyaistvennik,”hesaid.There was applause. The whole room broke into laughter. Luzhkov had

unexpectedlydisarmedtheradicalsandwonthemover.Shakhnovskyrecalledthat“thisanswerhadagreatinfluenceonthedemocraticpartoftheMossovet.

This was a very bright answer.” They voted for Luzhkov. Popov was thepoliticalleader,butLuzhkovthekhozyaistvennik.The year that followed broughtmore decline, as the Soviet Union careenedtowarditsfinalmonths.Yeltsin,Popov,andAnatolySobchakofLeningrad,allleadingdemocrats,walkedoutoftheSovietCommunistpartyinJuly1990andturned in their cards. Life in Moscow grew ever more bleak. In the earlyautumnof1990,assnowbegantofall,aterrifyingpanichit:thepotatoharvestwasrottinginthefields.Luzhkov looked to traditional commandmethods to cope with the chaos,

imposingsuchmeasuresas identitycardsforMuscovites tobuyfood.Astheshortages intensified, black markets sprang up outside the shops. Pricesskyrocketed for what little was available. Osovtsov recalled that Luzhkovdecidedtousethemilitiatoenforcerigidpricecontrols.ItwasatotallySovietresponse.Osovtsovspenthoursattempting topersuadeLuzhkov itwouldnotwork—indesperatetimes,thescarcegoodswouldgetwhateverblackmarketpricewassetforthem.“Inearlylostmyvoicetryingtoshowhimthesewerecompletelymeaninglessmeasures,”Osovtsovrecalled.Rationingbeganinthemajorcities,includingMoscowandLeningrad.24In the end therewas no famine, but shortages grew severe. In earlyApril

1991,visitingaMoscowfoodstore,mycolleagueMichaelDobbsran intoaman surveying themeat counter. “Therewasn’t anything here yesterday, andthereisn’tanythingheretoday,”themansaid,gazingatcounter,emptybutforsomeready-to-cookdinnersofsoggysausageandcongealedgravy.“Idoubtverymuchtherewillbeanythingheretomorrow.”25Thefollowingsummer,in1991,bothMoscowandSt.Petersburgunderwent

a major political restructuring. The rubber-stamp legislature and a smaller,powerful ispolkom—both totally controlled by the party—were restructuredinto amoremodernmayoralty. InMoscow, Popov ran formayor and tookLuzhkovascandidateforvicemayor.Popovhadnevershakenhisreputationas a thinker and theoretician, and Soviet journalists referred to him by anaffectionatenickname,“HedgehoginaFog,”afterapopularanimatedcartoonfilm.Popovseemedsensitivetothepoint.Inatelevisionappearanceduringthecampaign, he said, “Weneed to use the personnel available now in our owncountry—includingthestafffromtheoldCommunistapparat.Luzhkov,inmyview,compensatesforalotofmyshortcomings.”26

The voters gave the Popov-Luzhkov team a huge endorsement. Theywonwith 65.3 percent of the vote. Bokser observed a subtle change in Luzhkov.Before,Luzhkovhadbeenakhozyaistvennik,amanager,whilePopovplayedpolitics on the national stage with Yeltsin. But once elected as vice mayor,Boksersaid,itwasclearthatLuzhkovwastakingmoreandmorepowerintohishands.Aftertheelection“itwasasifhehadbecometheheirofPopov,andhewasn’ttheheirbeforetheelection.”At6:30A.M.MoscowtimeonAugust19,1991,agroupofdiscontentedhard-liners,includingtheheadoftheKGB,triedtotoppleGorbachev.Theyputhimunder house arrest at his dacha in the Crimea and called a general state ofemergency.TheKGBchief,VladimirKryuchkov, signed arrestwarrants forseventypeople,includingPopov,Bokser,andShneider.PopovwasinBishkek,Kirgizia,andwouldnotbebackuntilevening.Luzhkov,theactingmayor,gota telephone call at 8:00A.M. from the city party boss,Yuri Prokofyev,whosuggestedthatLuzhkovcometohim“forinstructions.”Luzhkov faced a choice—to go with the coup plotters or to join Yeltsin

against them.According toShakhnovsky,whowaswithLuzhkovat the time,Yeltsin called and asked Luzhkov to come to his dacha outside the city.ShakhnovskyrecalledthatLuzhkovwastheleaderofthecitythatday,andhadheannouncedsupportfortheputsch,thingsmighthaveturnedoutdifferently.Instead,hegotinacarandspedawaytowardYeltsin.HisnamewasaddedtothelistofthosetobearrestedbytheKGB.27Whenhearrivedatthedachathatmorning,YeltsingreetedhiminanoldT-

shirtandslippers.HepointedtosomeapplesonawindowsillandofferedonetoLuzhkov. “Moscow iswith you,”Luzhkov assured him. “Thanks,”Yeltsinsaid.HeurgedLuzhkovtoorganizepopularresistancetothecoup.Onthewaybacktothecity,Luzhkovaskedhisdrivertostopthecarandchangethelicenseplates.Theykeptasparesetinthetrunk.Justincase.28Shortly after noon, Yeltsin denounced the coup at a press conference. At

1:00P.M.Yeltsinclimbedontopoftank110oftheTamanDivisionandgavehis famousspeechprotesting thecoup.At4:30P.M.Luzhkov issuedhisowndenunciationofthecoupandcalledonMuscovitestojoininageneralstrike.“IrealizedthecoupplottersweregoingtofailwhenIsawthatLuzhkovwas

whollyagainstthem,”Bokserrecalledlater.“Why?BecausePopov,forthem,wasademocratandnotoneofthem.ButLuzhkovwasarealkhozyain.Hehad

given so many people apartments, such as the head of the communicationsbrigade, the pilot of the helicopters. All those people understood that inMoscow,therealkhozyainwasLuzhkov.”TherealheroesoftheAugustdayswereYeltsinandthetensofthousandsof

Muscoviteswhoturnedoutinthestreetstodefytheputsch.Luzhkovwasnotapublicfigureinthetensehoursofconfrontation.Buthedidplayarolebehindthescenes.Sincemostof thecentralnewspapersandtelevisionhadbeenshutdown,hekeptMoscow’s telephoneand radiochannelsopen,especiallyEchoofMoscow,theradiostationthathelpedantiputschforcesinthemostcriticalhours. The Mossovet had been among the founders of Echo of MoscowbecausePopov liked the idea of an independent radio station. Soon after thecoup began, the station sent a correspondent to remain at Luzhkov’s side.AlexeiVenediktov,thedirector,toldmethatthelinktoLuzhkovwascritical—it gave hope to all those who opposed the coup. There were reports thatLuzhkov was organizing a defense, deploying trucks and volunteers, andordering huge cement barriers to be set up. Luzhkov was on the air onlybrieflythreeorfourtimes,butjustknowingthatLuzhkovwasagainstthecoupwas important. “Luzhkov was a party member, an apparatchik,” Venediktovrecalled. “If such an active member of the Communist Party as Luzhkovrefusedtojoin,thatinspiredhope.”Fourtimesinthreedays,EchoofMoscowwasthrownofftheairbuteachtimefoundawaytogetbackon.29OsovtsovrecalledthatLuzhkovremainedcoolandpragmatic,makinglists

of things thathad tobedone todefeat thecoupplotters.“Theconversation,”Osovtsov recalled of a staffmeeting the first day in Luzhkov’s office, “wasmainly about the building blocks to be delivered to the White House andMossovetinordertocirclethebuildings;aboutcarswithfreshdrinkingwaterforthecrowds,aboutmobiletoilets,andnaturallyaboutfoodandothersimilarthings.Thepoliticalaspectofthemomentwasclear.”ButthenLuzhkovstoodupandwalkedtothewindow.Hisofficewasnowin

a high-rise building with windows that looked out to the White House, theMoscowRiver,andtheUkraineHotel.Asinglearmoredpersonnelcarrierwasstationedinfrontofthehotel,adistinctivegothictower,oneofthesevenStalinbuilt.Lookingout thewindow,Luzhkov spoke, as if to noone inparticular,althoughthestaffwassittingrightthereinhisoffice.“Betweenus,”hesaid,“Iwilltellyou.Acoupisacolossaladministrativeundertaking.”ReferringtotheCommunist Party veterans who had staged the revolt, he predicted, “TheseKomsomolmemberswillnevercopewithit—noway!”

Hewasright.Thecoupattemptcollapsed.LuzhkovcameoutofthefailedcoupwithawellspringofrespectinMoscow.Forthefirsttime,hewasseenasapolitician,notjustasanapparatchik.Asthecoup attempt fell apart, Luzhkov faced the crowds in the streets andsuccessfully persuaded themnot to goon a revengeful rampage through theCommunistPartyofficesatStarayaPloschad.WhenangrycrowdsthreatenedtotopplethestatueofinfamoussecretpolicechiefFelixDzerzhinsky,Luzhkovhad it taken down carefully by a crane, realizing that the eighty-five-tonmonument could wreck telephone cables and sewer lines underneath ifcarelesslyfelled.30The coup had a debilitating effect on Popov. The collapse of the Soviet

Union left him exhausted.When, after the coup, Yeltsin agreed to begin therapid market reforms in Russia that came to be known as “shock therapy,”Popovwasskeptical.HewasalsodisappointedthatYeltsinpassedoverhim.Popovalsofacedtroubleinthecity.Hecollidedalmostconstantlywiththe

Mossovet. There were strong suspicions that Popov was making his ownbusinessdealson theside.The foodsituation inMoscowandLeningradwasstill deteriorating. Popov had never shaken his fear that everything they haddonecouldfallapart,andhewouldbeblamed.InDecember1991, justas theunionfellapart,Popovtoldcloseassociates

hewanted toquit.Theyurgedhimnot to.ShakhnovskyandLuzhkovwent tosee Yeltsin. It was the day the Soviet flag came down and Gorbachevrelinquished the nuclear briefcase to Yeltsin. They asked Yeltsin to forestallPopov’sresignation.Hedid.InJanuary,Popovagaintoldawidergroupthathewouldresign,butatameetingofDemocraticRussia,hewasagainpersuadedtoremain.BokserrecalledthatPopovwasillandsufferedfromconstantbackpainasa

result of a mountain-climbing accident many years earlier. Popov was alsolosing interest inMoscow.He longed to joinYeltsinon thefederal level,butthere was no place for him, and he increasingly disagreed with the Gaidargovernment.Inthecity,itwasLuzhkov,notPopov,whoheldtheactualleversofpower.OnJune6,1992,Popovresigned, leavingLuzhkovtheleaderofachaotic,hungrymetropolisof9millionpeople.Andthekhozyainwasnotquiteready.

Chapter4

AnatolyChubais

IN THE VAST colonnaded Leningrad Public Library, with twenty-eightreading halls, 17 million books, 300,000 manuscripts, and 112,000 maps,NinaOdingknewthelocationofaspecialdrawerwhereforbiddenbookswerekept.Odingwas ayoungassistant in themammoth library in the late1970s,andwhennoonewaslooking,shewouldcurlupnexttothespecialdrawerandread the prohibited books. They were mostly Western books deemedsubversive by the Soviet state. Stored in the spetzkhran, a separate lockedroom, the books were brought out to the special drawer periodically, onrequest by foreign readers. For everyone else, access to the books requiredendless forms and permissions, and even then, the books would ofteninexplicablydisappear andbeunavailable. “Sorry,” theclerkwould say, “thebindingsarebeingrepaired.”1Whyweretheseparticularworkssecretedaway?Theregimedidnotsay.It

wasoneof thoseunfathomable absurdities of “developed socialism” that thesystemgave lovingcare tobooks itwantednoone to read.Thebookswereobviouslynot totally bannedbecause a great library like this one, opened in1814,couldnotacknowledgethattheydidnotexist.Rather, inthetwilightoftheBrezhnevyears,theregimesimplydecidedtohidethem,sortof.ThePublichka,asyoungscholarsfondlycalledthelibrary,wasaspacefor

freethinkingatatimewhenSovietthoughtcontrolstillinspiredanxiety.Inthehigh-ceilingedsociologyandeconomicsreadingroom—theycalledit“Sotz-Ek”—there were several bibliographers, young men who knew everythingfrom Tibetan language to the entire writings of Solzhenitsyn. They weresympathetic toward the interested reader, and once a bond of trust wasestablished, theywould talk freely about anything. In those days, the readerscalledPublichkathe“cemeteryofbrains,”notbecauseofthebooksbutallthesmartbibliographers,librarians,andreaderswhogatheredthere.Therewasaspiritofreadinganddebateintheair,especiallyinthesmokingloungeandthe

cafeteria,atinyplacewithjustafewtables.2Among thosewhogathered therewereKGBagents and informers,butno

one ever knew precisely the danger zone, the red line over which it wasprohibited to step. The regimewas old and sick, its fabled tentacles turningnumb,itsbrainaddled.Yettherewasalwaysacertainunpredictabilitythatkepteveryone from speaking out too loudly. Leningrad was known for anespeciallyalertKGBdivision.Oncearesearchercametothelibraryandaskedforforbiddenbooks.Hewastoldtheydidnotexist.Thenhecameback—withthe precise catalog numbers!He asked for them because he knew theywerethere, hidden away. The KGB began an investigation—where did he get thenumbers?NinaOdingwasanacuteobserverofthecrowdswhosurgedinandoutof

thelibrary.Ashortwomanwithamaneofcurlyauburnhairandmischievouseyesthatcouldburstwithenthusiasmordarkeninseriousness,shepossessedasplendidmemory of the varied readerswho came every day to the Sotz-Ek.She knew them by their faces and their ID numbers, which she easilymemorized.Amongthem,sheremembereda tall,handsomeyoungmanwithstrikingstrawberryblondhairwhowasalwayshangingout,readingbooksoneconomicsandpolitics.HisnamewasAnatolyChubais.For the curiousyoung academicsof the time,Chubais andhis generation,

fearoftheKGBwasnotanomnipresentdread,butitmeantacertaincautiouswayof talking to each other in public. It became secondnature.Everywherearoundthemwasevidencethatthesystemwasslowingdown,thattheeconomyand industrywere gradually becomingdysfunctional, that the leadershipwascorrupt and selfaggrandizing, but the young academics still spoke only inwhispersandcodedlanguage.Theirwordsabout“perfectionofthemechanismof production”were as gray as the stone face of theLeningradEngineeringEconomic Institute at 9Marat Street in the center of the city,whereChubaiswasanup-and-comingyoungprofessor.SometimeafterspottingChubaisatthelibrary,Odingwasassignedtoajob

athisinstitute.Itwasnotbychoice.Sheconsideredherselfafreethinker,notaCommunist Party member, and she believed that was why, after graduationfromtheuniversity,thepartybossessenthertoadrearyresearchinstituteforappliedeconomics.“Theeconomistsatthattimewerethesefunnypeople,”sherecalled years later. “It seemed tome I had fallen into somekind of horror.Theywere all so woodenheaded. And ideological! And I was a progressivehistorian.”

TheinstitutewasamonghundredswhereSovietspecialistsweresupposedlyworkingonthecolossalunsolvedproblemoftheBrezhnevera:howtomakesocialismworkbetter.Inthousandsofsmallcubicles,surroundedbyidenticalblondwood cabinets, thin curtains, and green plastic-hooded desk lamps, inclassrooms lined with chalkboards and half-empty cups of tea, Sovietresearchers strove to find a “scientific” answer that would repair the ailingsocialist machine. The researchers dutifully spent years examining thecreaking cogs of Soviet industry, if only to find out how to nudge themforwardorat leastarrest thedecay.Theysearchedfor“indicators,”orclues,that would show how to stimulate a 2 percent improvement in laborproductivity or 3 percent higher steel output. Every industry—machinebuilding,coalmining,agriculture,metallurgy,anddozensmore—haditsowngroup of institutes going through the same motions. The one all-encompassing, great indicator of market capitalism, free prices, was not apossibilityinSovietsocialism,sohundredsofthousandsofresearchersspenttediousyearslookingforother,inevitablyartificialmeasurementsofwhatwasrightorwrong,goodorbadineconomiclife.Manyoftheresearchersknew,or at least guessed, that their quest for the perfect “indicator” of socialistprogresswasfutile.Soon after her arrival at the institute, Oding was sent to the annual

mandatory autumn pilgrimage to harvest potatoes on a collective farm. TheentireinstitutewentofftotheeasternedgeoftheLeningradregion,aremote,depressedcorneroftheSovietempirewithrutteddirtroadspassableonlybytractor.Thecountrysideofferedawelcomebreakfromthegrindofseminarsandendlessdiscussionsaboutperfectingsocialismat the institute.They livedinoldwoodenbarracks.Byday,theybangedtogethercrudewoodencratesandyankedpotatoes from the ground, and by night they sang, drank, and talked.Theywereinvigoratedbythecleanair, thesorenessof tiredmusclesandthepain of sunburn, and by the influx of new friendships and the promise ofromance.Theyworkedinshiftsatthefarm.OdingquicklyrecognizedChubaisonthe

oppositeshift.Hewastall,withalong,handsomefaceandacomplexionthatquicklyreddenedwhenhegrewemotionalorangry.Hecameacrossasaveryseriousyoungman,dutiful,andanaturalleader.Hewascorrect,cautious,andsureofhimself.Back at the institute, he worked on the problem of “perfecting socialist

research and development.” Chubaiswas not an orthodox economist, Oding

later recalled, but he was no dissident, either. He was, if anything, alwaysdiligent and a favorite of the older professors. He had been admitted to theCommunistPartyataveryearlyage,whichwasunusual.Hewouldbrushoffthe flirtatious girls with a soft unyielding smile, and they would turn away,proclaimingloudly,“He’shopeless!”Butaroundfriendshewasengagingandgoodhumored.Likeeveryoneinthoseyears,ChubaiswasfondoftheBeatles.He liked jazz, but you’dnever findhim listening to theSexPistols orAliceCooper.Hewasaveryuprightyoungman.Atnight,therewaslittletoentertainthematthecollectivefarm;atractorwouldtakehourstogettothenearestcinema.Sotheytalkedintotheearlymorning.Hereintheglubinka,ordeepcountryside, theywerefreeof theKGB.OnanOctobereveningin1979,Chubaisandtwofriendsfromtheinstitutebegantoargueabout theirseeminglyendlesssearchforsocialist industrialperfection.Oneof thefriendswasGrigoryGlazkov,aquiet, thoughtfulspecialistontheproblems of industrial automation. The other was Yuri Yarmagaev, anemotionalmathematicianwhogeneratedideaslikethesparksfromawelder ’storch. Yarmagaev was an anti-Soviet radical, Glazkov a levelheaded analystwho critiqued every idea, and Chubais an establishment man. Chubais wastwenty-fouryearsold,his friendsboth justayearolder.3The longargumentthatnightwasthemomentthatchangedtheirlives.“Itwasaspecialyear,”Glazkovlaterremembered.“TheBrezhneverahada

certainlifecycle.Itwasveryvigorousinthelate1960s,whenBrezhnevtookpower.By1975, itwas the beginning of the end.Thiswas the turning pointwhenthesystembegantofallapart.Bytheendofthe1970s,itwascompletelyrotten.Therewascompletedisbelief,completedisappointment in theexistingSovietsystem.Anybodywithbrainswasverydisappointedandveryunhappywith thesystem.And in1979, I think thesystemmadeone lastattempt to fixitself.”The attempt came in an order from Brezhnev. The elusive search for

“indicators” of socialist progress had gone nowhere. The economy ofshortages grew worse. The factories made junk for consumers. So thescientificresearchersinalltheinstituteswereorderedtobeginanewquesttoimprove thequalityof the socialist industrialmachine.And theblueprint forthisnewsearchwascontainedinBrezhnev’sDecree695.Itwasahuge,thickbook of instructions. “It tried to be a system of measuring everything,”Glazkovrecalled.“Measuringeconomicsuccess.Industrialsuccess.Successin

productivity and quality and so on. And that was the end, actually. Thebeginningoftheveryendofthesystem.”Duringthenightatthekolkhoz,thethreefriendsarguedwhetherDecree695

wouldwork.Yarmagaevwas sure itwas doomed.He hadworked in a factory.He said

socialistindustrialperfectionwasutternonsense.“Everythingislies.Thereisno such thing as a socialist economy. Everyone is stealing. Everything isplundered.”WhenChubais argued that therewere “interests” in the socialisteconomy held by different groups, Yarmagaev shot back: “Let’s take thedirector of the factory. He has one interest. His interest is in getting moremoneyintohisownpocket.”Chubais self-confidently and ardently defended Decree 695. He had once

aspired to become a big factory director and he personally worked on theproblemsofmeasuringsocialistindustry.GlazkovrecalledChubaisasaverytoughdebater.TheChubaisapproachwasnottotakeanargumentwhole,buttotakeitapart,piecebypiece.“Look,”hesaid,accordingtoGlazkov,“ifwedothisandthat,andallthis,andthat,whyisitnotgoingtofly?”When I asked Chubais about the debate more than two decades later, he

remembered itclearly.4 “Iwas reallyasupporterof thedecree,”he recalled.WhenYarmagaev lambasted thedocument,Chubais felt his friendwasbeingtoo emotional. He, by contrast, knew what was in the huge document,appreciated itscomplexity, itsdepth,all theprofessionaleffort thathadgoneintowritingit.Hegrewexasperated.“Howcanhebesayingallthisisuselessandpurposeless?”herecalledthinkingofYarmagaev’stirade.Glazkov turned toChubais.He had trouble articulatingwhat hewanted to

say. He knew he could not win over the demanding Chubais with scientificarguments,becausehedidn’thaveany.“Ijusthadagutfeelingthatthisthingisimpossible,”herecalled.HetoldChubaisthatthewholeBrezhnevdecreewaslike a complexperpetualmotionmachine.They could debate all night aboutthevariousdetails,abouttheflywheels,gears,andpulleys.But,Glazkovsaid,thelargerissueisthatperpetualmotionisimpossible.Itwasafruitlessquest!Itjustwon’twork.ThenGlazkovcameuponasimpleranalogy.TheBrezhnevdecreewaslike

a huge, sophisticated aircraft, he said. Imagine the complex structure of thewings,thecockpit,thewholeinterlinkedsetofhardware.ItwasallhereintheblueprintofDecree695.Justoneproblemwiththisbeautifuldesign,Glazkovsaid.

Therewerenoengines.From that night, the three friends kept up their debate, and once they got

back to Leningrad they decided to do something about it. Speaking out tooloudly would be risky, probably useless. They decided to write an articletogether, trying to explain why all the searching for the “indicators” was afailure—why the perpetual motion machine could not really work. Chubaisarrangedtohavethearticlepublishedinanobscurejournal.They met in their kitchens or the dark, one-room communal flat where

Chubaislived.Onthelastnightbeforethedeadline,Glazkovwasstillhavingdifficultyputtingtheirideasdownonpaper.“Wesattheretillmorning,andbymorning he managed to finish it,” Chubais recalled. What they had put onpaperwasarevolutionaryidea,forthem.Theydeclaredthatthesearchforthefabled“indicators”ofsocialistindustrialprogresswasessentiallyuseless.Allthe struggle to measure factory output, labor, and production was in vain.Why?Noneofthehundredsofartificial“indicators”couldpossiblytakeintoaccount what was happening across a vast economy with millions ofdecisionmakers. Only one powerful, single tool could take into account allthosecomplexdecisions:pricessetbyafreemarket.Butatthetime,in1980,talk about free prices could bring trouble. Chubais and his friends hadstumbledon ahugely important realization, at least for themselves, butwhatcouldtheydowithit?

The Chubais family kitchen echoed with arguments about Soviet power,economics,war, and dissent.The debates left a deep impression onAnatoly,youngestof two sons.His father,Boris,wasaSovietArmy tankmanwhoseunit hadbeen surroundedon theLithuanianborder at theoutbreakofWorldWar II in 1941. Boris Chubais managed to break out of the blockade andsurvivedthewar,laterservingasacommissar—apoliticalindoctrinatorofthetroops.HewasanunshakablebelieverintheSovietsystem.“MyfatherisoneofthoseraremenwhosincerelybelievedinSovietpower, inits ideas, intheCommunistpower,inStalin,”Anatolyrecalled.5Hisolderbrother,Igor,wasborninBerlinin1947,andAnatolywasborn

June 16, 1955, in Belarus. The family moved constantly, almost two dozen

times,asBorisChubaistaughtatmilitaryschoolsthroughouttheSovietUnion.BorisChubais reared his sonswith amilitaryman’s sense of basic decency.Igor Chubais recalled that his father took seriously the ideals offered byCommunist propaganda. “I was formed on these ideas of honesty, justice,mutual help, solidarity, these kinds of things. But later on, I started tounderstand,theysayonething—anddoanother.”6Igor Chubais’s doubts about the Soviet systemwere sealed onAugust 21,

1968,whenSoviet troopsrolled intoCzechoslovakia tosuppressareformistmovement. “In August 1968,” he recalled, “it became clear to me that theauthoritieswerelying.Ididn’twanttobedeceived.AndIconcludedtomyself,theyarelying.”Igor, then twenty-one years old, was visiting a classmate on a summer

holidayinOdessaandorganizedaone-manprotest,carryingaCzechflag,infrontofastatueofLenin.“Iwasshouting,‘Getout,invaders!’andholdingoutthisflag,”herecalled.Nobodycame,nobodysawit,andIgorwasnotarrested.But the spark of dissent against the system had been ignited. Back home inLeningrad, he wrote a mildly provocative article for the university wallnewspaper (at that time one copy of a paperwas simply hung on awall foreveryone to read) about the invasion. Igor choose his words carefully. Thearticle created a stir. After the next class period, Igor saw all the studentsgatheredaroundthearticle,readingit.Thenhecamebackagainafteranotherclass. “Nowall newspaper. No paper! It had been taken away. So it actuallyhungforonlytwentyminutes.”Afewmonthslater,Igor ’sclassreceivedtheresultsoftheirLeninzachyot,a

test to see how well they knew Lenin and other Communist dogma. At aceremony to announce the results, the dean and the local party bosses werepresent.Theycalled theroll. Ivanov.“Passed.”Petrov.“Passed.”Sidorov.“Passed.”

Chubais.“No.”Asilence.WhensomestudentsprotestedthatIgorknewLeninaswellastheydid,thepartybosssaidthedecisionwasfinal.Igorrecalledthat“Ididn’twanttheLeninzachyotanyway”butwhenhesawthepartybossafewdayslater,heaskedwhyithadbeendenied.Thepartymananswered:“Youarenot only not going to get the credit, we are going to expel you from theuniversity.”Igor ’s rebellion reverberatedathome,where the intenseargumentsbegan.

Anatolywasthenfourteenyearsold.“Athome,almosteveryday,activebattlesand disputes took place between my father and my brother—constantly and

nonstop,”AnatolyChubais recalled. “Very longdisputes, and I observed thatprocess.Although therewere twocompletelyoppositeapproaches, therewasonesubjectofconversation:thecountry,thehistory,thepresenttimesandthefuture.”The argumentswentwell beyondCzechoslovakia—they fought overphilosophy, economics, and the reasons for theSoviet economyof shortage.Theyoncehadafightoverwhytherewasnosausageinthestores.WhenBorisChubais’s friendswouldcomeover, Igorwoulddebate themtoo—itwas thatkindofhome.Thesoncouldspeakhismind,andBorisChubaistried,openly,topersuadeIgorhewaswrong.ThethrustandparryofdebateathomefascinatedyoungAnatolyandlefta

lasting impression on him. After listening to his father and older brother—both graduates and specialists in philosophy—he decided that he preferred amore concrete discipline, economics. The philosophy debates were tooabstract.Borismanagedto talk to thedeanandIgorwasnotexpelled.But theson’s

dissentcausedhisfatheragreatdealoftrouble.BorisChubaiswasteachingata military school of higher education. One day a general arrived fromMoscowto lectureabout the invasionofCzechoslovakia.Thegeneralwaxedeloquent about how Soviet troops were “restoring socialism inCzechoslovakia.” IgorChubais,whohad attended out of curiosity, could notcontainhimself.After the lecture hemarchedup to thegeneral anddeclaredbluntly,“Iknowanotherstory.Youaremistaken.Thingsaredifferent.”The remark triggered a very unpleasant investigation by the Leningrad

MilitaryDistrictheadquartersofoneofitsmostdeterminedCommunistPartyideologists,BorisChubais.Theturnofeventswasalarming,especiallytohiswife,Raisa. “Mymother reacted to it very nervously,” Igor recalled. “And Iunderstood, and everybody at home understood, that my father could bedismissed, and thenwewould be leftwithout anymeans of survival.”Yearslater,BorisChubaisconfessed tohiselder son thataKGBmanhadcome tohimaskingwhoIgor ’sfriendswere.But the commission investigating Boris Chubais found out what the son

already knew: hewas committed to the system. “They only saw that hewasquiteanorthodoxCommunist,”Igorlaterrecalled.“Andtherewasnothingtopunishhimfor.”The episode showedAnatolyChubais how the system reactedwhen itwas

challenged.Hesawhowthepartytriedtopunishhisfather,amanbornintheyear of the Bolshevik revolution, who wrote a doctoral dissertation entitled

“TheFullandFinalVictoryofSocialismintheUSSR”anddevotedeverydaytoadvancingtowardfullCommunism.Theevidencesuggeststhat,inhismostformativeyears,theunspokenlessonfortheyoungChubaiswasthatfornewideas tosprout, theyneededprotection.Newvoicesalsoneededtobebackedupbyanironwillbecausetheywerealwaysindangerofbeingsilenced.Anatoly Chubais loved the thrill of driving his own car. He drove fast anddeterminedly,alwayspushinghisreactionstotheedge.InLeningrad,hehadasmall yellow Zaporozhets, a rear-engine Soviet car made in Ukraine. “Hedroveatterrifyingspeed,”recalledOding,whowasoneofhisoldestfriends.“Hewouldcometoourhouselikethat.Thesoundofthecarwasstillwhistlinginhisears. Itwasas if itwasa flyingMercedes.He loved thatcar,awfully.”Another friend, Vladimir Korabelnikov, recalled that the car was dirty,“horrible,”butgaveChubaismorefreetimeeverydaybecausehedidnothavetowaitforabus.Chubaiswouldbeghisfriendstojoinhimcampingoutdoors,andhedrovetheZaporozhetstotheforestsoutsideofLeningrad,wheretheywenthikingandrafting.Whathelovedmorethananythingelsewaswhitewaterrafting.Theywouldbuild thesquareraftson thespot, lashing togethersomelogsandthensteeringthemawkwardlyintherushingwaterandjaggedrocks—itwassometimesdangerous,alwaysathrill.7Chubais could also be terribly stubborn about ideas. Many of his friends

recalledthatChubaisneededtobelieveinanideaatalltimes.Oncehegrippeda steering wheel, it would take enormous effort to pry his fingers off, topersuadehimtochangedirection.Hewasextraordinarilydetermined.Thatwasoneofthegreatstrengthsofhischaracter,butitcreatedblindspots.At the timeof thedebateon the farm,Anatolywasstillverycommitted to

improvingthesocialistsystem.In1983hedefendedhisthesisattheLeningradInstitute. Itwas entitled “ResearchandDevelopmentofMethodsofPlanning,Improvement, and Management in Specialized Scientific ResearchOrganizations.”8 Oding recalled she was going to skip the Chubaispresentationbecauseitseemedsopredictable,butshechangedhermindatthelastminute.Hedefendedthethemebrilliantly,evenemotionally,sherecalled.He was articulate and well-spoken, and self-assured. For months afterward,“therewereechoes”ofthatdefense.Privately, Chubais was beginning to shed his orthodoxy. Korabelnikov said

oneofhisclearestmemorieswasofChubais tellinghimthatherealizedthateconomics ruled all, and that the onlyway to change the Soviet systemwasthrougheconomics.OthersrecallthatChubaiseschewedRussianliterature.Hedidn’thavetime:hewasreadingpoliticaleconomy.After thedebateon the collective farm,Chubais,Glazkov, andYarmagaev

werecautious.Theyknew theycouldnotantagonize the systemoralarm theKGBor the party by shouting that the search for indicatorswas futile.Theyhad tomovecarefully,evensecretly.Therewerevery fewpeople theycouldreally share their ideas with. Yarmagaev knew another young researcher,Sergei Vasiliev, at the Leningrad Financial Economic Institute, which wassomewhatmoreprestigious than theirs.Oneevening, about the timeChubaishad defended his thesis, Glazkov invited Vasiliev to the Economics andEngineeringInstituteonMaratStreet.Itwasverylateintheevening,Vasilievtoldme,andthehallsoftheinstitute

were quiet. Brezhnev had died the year before and Soviet leader YuriAndropov,theone-timeKGBchief,wassignalingsomedesiretoendtheyearsofstagnation.Thesignalswerefaint—theyhadtobereadbetweenthelinesofturgid essays in the official press—and itwas not at all clear thatAndropovknew away out.But therewas a hint thatAndropov at least had a sense thesystemwasfailing.Glazkov confided toVasiliev that underChubais they had created a secret

teamat the institute. Itwas “semiunderground,”Vasiliev recalled.9 He asked,whatkindofteam?“Tochangethesystem,”Glazkovreplied.“Tochangetheeconomythrougheconomicreform.”Vasilievbecamethefourthmemberofthecadre,joiningGlazkov,Yarmagaev,andChubais,andhewasregardedastheintellectualpowerhouseinthoseearlyyears.Chubaisorganizedalow-keyseminaroneconomicreform.Adozenorso people came to the meetings and gradually broached some of theprogressiveideastheyhadbeenthinkingabout.Glazkov’srolewastofindtherightkindofpeopleand,verycarefully,invitethem,withoutraisingsuspicion.Yarmagaevwas,asalways,afountainofideasandenergywhoenjoyedasharpdebate.Vasilievwasthebrains,themosthighlyeducatedanderudite.Chubais became the curator; he organized the seminar, nurtured it, and

protected it.Hewasnot the leadingeconomistor thinker,buthemade spacefornewideasintheotherwisestultifyingpoliticalatmosphereofthetime.Hecouldgettherequiredpermissionsandavoidtrouble.Hewas,attwenty-eight,

an up-and-coming researcher, albeit from a second-tier institute.Among hisfriends, Chubais forced the team into a certain discipline. “Without him, itwould have just been talk in the kitchens,” Glazkov said. “Nothing else. Noseminar.Norealwork.Noarticle,whichthethreeofuswrote.”“Hehadagoodreputationintheinstitute,”Glazkovrecalled.“Therefore,he

hadagoodopportunitytoarrangetheseminars.Itwasn’taneasythingatthetime.” The idea of organizing a seminar, for example, to study progressivereforms in Hungary could easily have brought trouble from the KGB.“Everything was ideological,” Glazkov recalled. “The Communist Party iswatching, and that’s why you needed permission. It’s not easy. But Chubaiscouldget it.HewasaCommunistPartymember!Hecouldbetrusted!That’showwedidit.”“Weknewthatwewerenotfreethere,”Glazkovrecalled.“Weknewthatwe

hadbeenwatched,andthatwecouldn’tallowrevolutionarythingsthereatall.Theword‘market’wasadangerouswordatthetime.”AsperestroikadawnedwiththearrivalofGorbachevin1985,thetopicsat

the Leningrad seminars grew more ambitious. The participants began tobroach an altogether bold idea: introducing some aspects of the market toSovietsocialism.Foralongtime,theyintenselydebatedwhethertheeconomycould be saved by such reform concepts as self-financing or bydecentralization,whichmeantallowingfactorydirectorstomakemoreoftheirown decisions. Later, as the years went on, they concluded that the existingmachinewasprobablydoomedandwouldhave tobemassively restructured.Stilllater,theyspentmanydayscontemplatingtheprospectofa“transition”tosomenewkindofa system.Even thenotionofa“transition”wasa thrillingidea.TheywerenurturedbythebooksatthePublichka,buttheyhadothersources

ofinspirationaswell.Theyhadampleaccesstomoreradicaltextsinsamizdat,the dog-eared, self-typed, ormimeographedmanuscripts thatwere officiallyprohibitedbutwidelydistributedfromhandtohand.“Theywouldgiveyouaphotocopyandyoucouldreaditatnight,”Odingrecalled,“andinthemorningyouhadtogiveitback.Andtherewasnoguaranteethatthepersonwhogaveittoyouwouldn’ttellonyou.”Thencameasuddenboltofinspiration.Theywereprofoundlyinspiredbya

two-volume, 630-page book published in 1980 by a Hungarian economicsprofessor,JánosKornai.TheEconomicsofShortage,morethananyothertext,offeredaninsightintothefailingsofSovietsocialism.Hungaryhadbeenatthe

forefrontofmoremarket-orientedeconomicreformintheEasternBlocsince1968, and Kornai’s groundbreaking work was almost entirely based on hisobservationsaboutHungary.But for theyoung scholars aroundChubais, theworkopenedawindowasnootherSovietorWesternstudyhaddoneonwhytheeconomyofshortageexistedandhowit functioned.Kornaiexamined thebehaviorofbuyers,sellers,andproducersinanabsenceoffreeprices,aswellas the relationship between firms and the state under socialism and centralplanning.Kornai asked his readers to imagine the economic relationship between a

parentandchild.Hedescribedthisasfivestagesof“paternalism.”Inthefirststage,whichhecalled“grantsinkind—passiveacceptance,”theinfantcannotexpresshisneedsinwordsandreceivesallhisnourishmentandmaterialneedsfrom his parents. In the second, which he called “grants in kind—wishesactivelyexpressed,”thechildliveswiththefamilyandgetseverythingforfree,buttherecanbeacertainamountofpleadingandbargaining.Thethirdphasehecalled“financial allowance,” inwhich thechildhasgrownupandmovedaway fromhome, say to college, but still depends on a defined stipend.Thefourth phase, “self-supporting—assisted,”Kornai defined as the child grownupandworking fora livingbutbeingable to turn to theparents, ifneedbe.Andthelastwascalled“self-supporting—lefttohimself,”inwhichthechildisgrownandmustrelyentirelyonhimself.Kornaipointedoutthattheidealmarketeconomywasthelastphase:thestate

didnotbother tohelporhinder firmsand left themalone.Butheconcludedthat the real rootof the shortageeconomywas toomuchof the firstkindof“paternalism,” inwhich the state generously doled out subsidies to factoriesand enterprises, as a mother to a newborn. Kornai found that this led tounhealthydependence,whichhetermedthe“softbudgetconstraint,”meaningthat the firmsnever had to stop feeding; themore subsidies theywanted, themoretheygot.Thepointwasthatafactorywhichalwaysgotmoreregardlessofhowpoorlyitperformedwouldneverbecomeaccountableforitswork—itwouldjustgoonproducingshoddygoodsbecausetherewasneveranypenaltyfor doingotherwise.Kornai concluded that the “softening”of disciplinehadledtothemiseriesoftheshortageeconomy:theinsatiable,unfulfilleddemandsofconsumers,thehoarding,andtheendlesslines.10ThebookfirstarrivedinLeningradassmuggledphotocopiesandinstantly

“becameaBible,”Vasilievrecalled.“Wehadsomeideasinitially,butthebookwaskindofacatharsis.Itpushedourthinkingforward.Youmetapersonand

you said, ‘Haveyou readKornai?Yes?’And then itwas a startingpoint fordiscussion.”Chubais recalled that Kornai showed him why the shortage economy

persistedinsocialism.Kornaidemonstratedhowtheproducers—thefactories—always had first claim on subsidies and resources because they were fedthemconstantlybythepaternalisticstate.“Heshowedthattheverydistributionof resources happens in such a way that the producer always has a priorityover theconsumer,meaningthat theconsumer isalwaysdissatisfied, there isalwaysashortage.”But Kornai alone did not lead the Chubais team out of socialism; he just

helped them see it much more clearly. The other great inspiration of thoseyearscamefromtheAustrianeconomistFriedrichvonHayek,oneofthemosttrenchant early critics of socialism,whowas especially acute in his searingdenunciationofcentralplanning.AlthoughHayek’sbest-knownworkwasTheRoad to Serfdom, a 1944 treatise about the dangers to individual liberty ofsocialism and central planning, Chubais took to heart a lesser-knowneconomicstext.11ItwasanarticlethatHayekhadpublishedin1945,“TheUseofKnowledgeinSociety.”12ThearticlearticulatedclearlywhattheLeningradscholarshadbeengropingtowardsincethedebateatthecollectivefarm:thatfree prices were the single most powerful “indicator” to measure all themillionsofdecisionsinalarge,complexeconomy.Hayek used the example of a commodity, tin. In a freemarket, he said, if

there was a shortage of tin, all the producers and users would adjust byproducingmoretinorusinglessorfindingsubstitutes.Hayekpointedoutthatitwasvirtuallyimpossibleforacentralplannertomakethesedecisionsforsomany people, but that free prices could quickly and efficiently communicatethenewsituationtoproducersandconsumers.Aspricesrose,someproducerswouldmakemoretinorconsumersmightlookforadifferentmetal,andtheeffect would quickly cascade through the market economy, even if mostparticipantsdidnotpreciselyknowwhytheadjustmentwasbeingmade.Hayeksaidthefreelysetpricefortinislikeahigh-speednetworkofinformationthatworks splendidly to allocate resources—just what an army of Sovietresearchershadbeenhuntingforallthoseyears.Hayek declared that the price system was a “marvel” which could free

people from the “conscious control” of the central planners. At the timeChubaisreadthisessayinLeningrad,theSovietUnionwastheworld’slargestexample of “conscious control,”with rigid, fixed state prices set throughout

the economy. Hayek, who won the 1974 Nobel Prize in economics for hiswork, had taken a battering ram to the underpinnings of Soviet socialism.Amazingly, his wisdom was smuggled past the KGB on those dog-earedphotocopies, and it landed in the hands of an eager young generation ofknowledge-hungryLeningradacademics.Manyyearslater,ChubaisrecalledthethrillofreadingHayekandinstantly

gavehisownexampleofhowHayek’stheoryworkedinpracticeintheUnitedStates.“Oneperson is sellinghamburgerssomewhere inNewYork,”he toldme,“whileanotherpersonisgrazingcowssomewhereinArkansastoproducemeatthatwillbeusedtomakethosehamburgers.ButinorderforthatpersoninArkansastograzecows,thereneedstobeapriceformeat,whichtellshimthatheshouldgrazecows.”“And the value of price,” he said, “is absolutely universal, and absolutely

fundamental.”The theories Chubais and his teamwere debating at their institute onMaratStreetwerealsobeginningtodawnonothersintheSovietUnion.Evenbeforethe Gorbachev era, unorthodox thinking was fermenting in remote pockets.One was in Novosibirsk, Siberia, where an outspoken reformist economist,Abel Aganbegyan, had come up with a surprisingly candid and devastatingcritiqueoftheailingSovieteconomy.Aganbegyan,directoroftheInstituteofEconomicsandManagementoftheSiberianAcademyofSciences,wasjoinedbyacolleague,TatyanaZaslavskaya,asociologist.ZaslavskayahadpreparedalandmarkinternalstudychallengingtheentirestructureoftheSovieteconomy,whichwasdebatedata1983conferenceinNovosibirskandlatercontributedtomanyoftheideasinGorbachev’sperestroika.Chubais soon felt that he had to break out of the provincial world of the

Leningrad institute and make contact with others, especially in Moscow.AlthoughtherewereafewfreethinkersinLeningrad,heknewthattheremustbe dozens in the capital. Glazkov had taken a trip toMoscow and, throughfriends,broughttoChubaiswordofabright,youngeconomistthere.HewasYegor Gaidar, whoworked at the All-Union Institute for Systems Research,under the tutelage of a famous mathematical economist, Stanislav Shatalin.LikeChubais,Gaidarhadalsostruggledwiththegrandquestfor“indicators”andperfectionintheSovietindustrialmonster.13ButthedifferencewasthatGaidarwasinMoscow,atthecenteroftheaction,

whereasChubaiswasinaremoteprovincialinstitute.Gaidarwasachildofthe

Soviet elite, grandsonof a famousRedArmyofficer and author of belovedchildren’s stories, and son of a Pravda journalist.WhenAndropov began tolook for progressive ideas about economic reform, one of the youngresearchers whoworked on the early drafts wasGaidar. The atmosphere inShatalin’sgroupwasalsomoreopenthanChubaiscouldeveraffordtobeinLeningrad, where the KGB was always watching. “Here you didn’t have tocross your fingers behind your back when you talked,” Gaidar recalled ofMoscow’satmosphere.DespitemanyappealsfromGlazkov,Gaidarcouldnotfindthetimetocome

totheChubaisseminarsinLeningrad.“Hewastoobusytocometosometinyplace,theEngineeringEconomicInstitute,”Glazkovrecalled.“Hewasamongtheelite.Hedidn’tcare.”SoChubaiswent toMoscow and sought outGaidar. PyotrAven, son of a

leadingmathematician,wasworkingoneconometrics inGaidar ’sgroupandintroduced the two men. He recalled that at their first meeting, Gaidar andChubaisunderstoodthattheysharedthesameideasandfears.14 Gaidarwasbyall accounts the smartest economist of his generation. “We were betterpreparedthanChubais.Wewerefarahead,andbettereducated,”Avenrecalled.But Gaidar was a product of the Soviet era and could be excruciatinglycautiousaboutpushingthesystemtoohard.Chubaissharedthatcaution,yethehadthatsteely,whitewater-raftingdeterminationandanabsolutelyunshakableself-confidenceinwhateverhewasdoing.In the followingyears theywereall reminded,onceagain, that the system

wasnotyetreadyforradicalchange.Inearly1985,justasGorbachevcametopower, Gaidar ’s laboratory was given an assignment from the Politburo tostudy“improvingeconomicmechanismsat theenterpriselevel,”moreof thesame old nonsense from the past. But since the work was intended for thePolitburo,ChubaisandhisteamleapedatachancetocollaboratewithGaidaron the assignment. Working for the Politburo would give Chubais a bit ofprotectionfromtheKGB,andforthefirsttimehewasworkingonsomethingfor the upper echelon of power, something more than abstract, what-ifspeculation.“Westarted trying to thinkabout real things, insteadofall thatbullshitwe

wereengagedinduringourformaljobs,”Glazkovsaid.TheGaidar-Chubaisgroup produced a 120-page report, adapting some of the Hungarian andYugoslavreformsto theSovietsystem.Theycalledforabandoningplanningdictates and permitting some free market mechanisms.When Gaidar ’s boss

camebackoneday,hebroughtbadnews: theplanhadbeenrejected.“Whichmeant we were to give up our fruitless daydreaming” and come up withsomething“onamoremundanelevel,”Gaidarrecalled.ButwhenGaidarwenthome that day and turned on the television, he heard Gorbachev deliver aspeechusingsomeofthesametermstheyhadputintherejectedreport.Itwasa strange time; they had to constantly guess and read between the lines foropaquesignalsofchange.15ChubaishadapersonalbrushwiththeKGB.In1986heattemptedtoattenda

ten-month academic program abroad. Chubais recalled that it was in eitherFinlandorSweden.ItwouldhavebeenhisfirstextensiveexposuretotheWest,but hewas denied permission to exit the SovietUnion by theKGB.Chubaissaiditwassuggestedthathenotgotoacapitalistcountrybutratherstudyinasocialistcountry.16Hisbrother,Igor,saidthedenialcamebecauseChubaisisJewish on his mother ’s side. Chubais was deeply disappointed. It was apersonalreminderthattheauthoritiescouldcrushyou,iftheywantedto.Theyear1986wasacriticalturningpointforChubaisandGaidar.Chubais

helped make arrangements for Glazkov to work in Moscow for a year.GlazkovwasstationedattheCentralMathematicalInstitute,wherehefound,tohisamazement,thatresearcherswereopenlytoyingwithmathematicalmodelsof a market economy. At the end of August 1986, all the freethinkers inMoscow and Leningrad—about thirty economists—finally got together fordaysofdebateatarundownresorthotel,SnakeHill, intheforestsoutsideofLeningrad.“Itwasthebesttimeinourlives,”Glazkovrecalled.TheforestwassoisolatedtheyfeltfreetotalkwithouttheKGBlistening,andtheytrustedoneanother.GlazkovrecalledthatGaidarwastheshininglightofthegroup.Hewasthe

bestinformedandhadtheclearestvisionofwhatwashappening.“Anditwasclearthatthissystemwasnotgoingtosurvive.So,thequestionbecame,what’sgoingtohappenwhenthesystemcollapses?Whatarethescenarios?”Glazkovsaid that someof the participantswanted to debate the shapeof a theoreticalalternativeeconomyfor theSovietUnion,butGlazkovwasmorepragmatic;hewantedtofocusthedebateontheactualtransitiontoaneweconomy.“Iwasonlyreadytoraisethepoint,”herecalled,“butwasn’treadytobespecific.Wewerenotready.Iwasnotready.Nobodywasready!”Gaidarrecountedhowattheendofthedaytheymadecampfires,sang,and

toldjokes.Atthefinalseminar,hepresentedtwosatiricalskitsforeshadowing“the crisis to come.” The first was titled “The Crest of the Wave,” and it

portrayedwhateachof themwoulddotoreformtheeconomy.17Thesecondskitwas called “GoingUnder,” and it showed them all being sent to prison,stipulatingthelengthofeachsentenceandthesizeoftheirfoodrationpackets.In themonths that followed,Gorbachev’s era ofglasnost dawned. Taboos

werebeingbrokeneverywhere,Gaidarrecalled,causingevenmoreconfusion.“Thecensorsoverseeingscholarlyeconomicsjournalsandpublishinghousesweretearingtheirhairout,”hesaid.“Theynolongerknewwhatcouldbesaidandwhatcouldn’t.”Whentheprogressiveeconomiststriedtoorganizeanotherseminaroutside

Leningrad in 1987, under the auspices of Sergei Vasiliev’s institute, the oldguard struck back. Chubais said the agenda was officially approved by theparty regional committee, whichmeant that it was certain to be a dead end.Gaidar,Chubais,andthewholecrowdwenttotheresortbutfoundthemeetingssoboringandregressivethattheywalkedoutofthecoldconferencehallandgathered in one of the lodges. There, in jeans and sweaters, they began aparallelseminar,talkingmoreopenlyamongthemselves,astheyhadtheyearbefore. The group had grown somewhat since the previous year and nowincludedMikhailDmitriev,agraduatestudentinregionaleconomicstudiesatVasiliev’s institutewhowaswell versed inWestern economic theory.18 AlsoinvitedfromMoscowwasformerGosplanmathematicianVitalyNaishul,whohadwrittentheundergroundtextAnotherLifeandwasworkingwithGlazkovat the Central Mathematical Institute. By this time, Another Life, still intypescript samizdat, had been widely circulated among the progressiveeconomists.Thereadermayrecallthatinthefirstpartofthetext,Naishulhadmade a revolutionary argument that the property of the Soviet statemust beturnedintoprivateproperty,literallydistributedtothepeople.19Standingbefore a stairwell at the informal seminar,Naishulmade a rump

presentation of his radical ideas. Spread out before him on the stairs wereGaidar,Chubais,andmanyoftheothermostprogressivethinkersatthetime.Naishul explained to them his concept of mass privatization in which everySovietcitizenwouldbegivenacheckthatcouldbeusedtopurchaseabitoftheenormousholdingsoftheSovietstate.Thecheckwouldbeworth5,000rublesandtheresultwouldbeadaringleaptowardthemarket.20Naishul’s remarks were received with sharp criticism. Both Gaidar and

ChubaisdismissedNaishulastooradical.Theywerepragmaticandwantedtotry something that could actuallywork, not just get them in troublewith theKGB.Glazkovalso thought thatNaishulwas jumpingahead too fast. “Look,

there is a transition problem,” Glazkov recalled saying. “What you aresuggestingistootough.Thesystemwillbreak.Ifyouwanttogetdownfromatalltree,youhavetoclimb.Whatyouareofferingusistojump.Wewillbreakourlegsandourneck!”Gaidar ’s objections, he toldme later,were that private propertywould be

“politicallyimpossible”andthatitwasdangeroustointroduceitwhenmarketinstitutionsandpropertyrightswerenotwelldeveloped. Itwas like trying todivideup thestate’spropertyonaroulette table,Gaidarsaid.Thepopulationwould feel “cheated.” As an economist, Gaidar was at the cutting edge ofchange.HewasbeginningworkaseconomicseditorofKommunist, theonceorthodox Communist Party theoretical journal. Gaidar used the journal tobegin to break Soviet economic taboos, and he wrote about such onceforbiddensubjectsasinflation,unemployment,deficits,andmilitaryspending.ButGaidarfeltthatNaishulhadgonetoofar—itwasjustunrealistictobeginthinkingaboutprivateproperty.ChubaiswasalsocriticalofNaishul’sprivatizationplan.HesaidNaishulhad

adopted a “trivial” device—property checks for every person—to deal withwhat Chubais saw as a hugely complex transaction. “What was I criticizingNaishulfor?”Chubaistoldmelater.“Iwascriticizinghimbecausewhenyoutry to solve a problem of such gigantic, immeasurable, supernaturalcomplexity—astheproblemofprivatizationwas—insuchasimpleandstupidway as giving out 150million vouchers to each citizen and then just givinghim an opportunity to invest it wherever he wants, this is an extremelyprimitive technology, extremely primitive. The result would be giganticdisproportions.Millionsofpeoplewouldgetsomethingthat isuseless,whilesomeonewouldgetsomethingfantasticallyvaluable.Millionsofpeoplewouldbe extremely dissatisfied, and disappointed, and so on. The disproportionbetweenthecomplexityoftheproblemandthesimplicityofthewaytosolveitwasjustwaytoobig.”Eventhediscussionaboutprivatepropertycouldhavebroughttroubleatthe

time, Chubais recalled. “Of course there was fear,” he told me. “It wasabsolutelysecret.Wecouldn’ttellanyonefromtheoutsidethatthisdiscussionhad takenplace.Obviously, itwasn’tpartofanyofficialprogram.IfNaishulhad given that speech at the official conference, it would have undoubtedlymeantthatallpeoplewhoorganizedtheconferencewouldbefired,withoutasingle doubt. That is 100 percent sure. The subject of the presentation wasprivatization—privateproperty!Itwasfarbeyondthelineofwhatwasallowed

atthetime.”Somehow, word got back to the KGB that even the boring official

conferencehadincludedanti-Sovietstatements.Aninvestigationwaslaunched,andChubaisrecalledthegroupbeinghauledbeforetheKGB.“Weweresayingthat we hadn’t said anything of the kind, that we were simply studying thedecisionsofthepartyCongressandanalyzinghowtoimplementthembetter.”Dmitrievhadbeentakingnotesinanobscuretypeofshorthandthatwasnot

widely taught in the Soviet Union. He toldme that after the conference, therectorathisinstitutedemandedtoknowwhatwasinhisnotes.Dmitrievtypedup the minutes and in the process completely sanitized them, leaving outanything that was remotely controversial. He gave the rector the sanitizedversion.Satisfiedthattherewerenoanti-Sovietremarksattheconference,theKGBletitdrop.Theyneverfoundoutaboutthefarmoreradicalideasbeingdebatedonthestairwell.Chubaislivedmodestlyandseemedindifferenttowealth.Hisgreatluxurywaslistening tomusiconacassetteplayer inhisZaporozhets.He lived inaone-room communal apartment, extremely common in Leningrad, with a singlelargecorridorandsmallroomsofftothesideforeachfamily.“Hepracticallystudied in the corridors,” Oding remembered. “And there were a lot ofneighbors. Everyone used the soap. There were problems about who tooksomeone else’s soap in the bath. You can imagine, right?Who took whosefood? And he was almost never there—he was always at the library or theinstitute.”Chubaishadbeenwaitingpatientlyonthe“cityline”foramunicipalapartment,untilsomefriendspersuadedhimthathewouldnevergetaprivateapartment thatwayandshouldgooutandbuyone,even ifhehad toborrowfromfriends.“Hehadcertainlimits,whatonecoulddo,andwhatonemustnotdo,”Oding recalled. “Andhe couldn’t imagine that he could stepover thoselimits and cross the boundaries, and allow more for himself. His personaldemands were low. You live in a kommunalka, so you live there. It neverenteredintohisheadthathecouldtakeastepforward.”As Gorbachev’s era of glasnost and perestroika accelerated, Chubais

expanded his horizons. In 1988 he spent ten months studying in Hungary,whichhadcarriedout themost far-reachingeconomic reforms in theSovietbloc. There the market was not an alien concept, and a visitor would havefound the stores brimmingwith products. “It had a huge influence on him,”Odingrecalled.“HehadmadetheHungarianexperiencehisown.Hesawthat

within the framework of socialism, even within the Soviet Union, theHungarian experience could be used. He even saw the insufficiencies of theHungarianmodel.”AfterHungary,Chubaisseemedmorerelaxedandmorecuriousthanbefore.

At the urging of friends, hemade an attempt to become director of anotherinstitutebutwasdefeatedbymoreorthodoxpartymembers.HealsovisitedtheUnitedStates.“Hewasthisrathercorrectperson,whowasmaybejustonestepaheadof the others, but not a kilometer,”Oding recalled. “And suddenly, hestartedtoworkovernewinformation.ItseemstomethatAmericahadagreatinfluence on him. He never doubted himself after that. He didn’t have thosesocialistinclinationsanymore.Afterthat,hehadnomoresocialistillusionsatall.”“Hisvelocitychanged,”sheadded.“Therearepeoplewho,whenfacedwith

newinformation,becomeparalyzed.ButChubais’smentalprocessorleapedtosomefifthgeneration.Heworkeditalloverandranmoreandmorequickly.”AhintofhowfarChubaishadcomewasapaper thatheandSergeiVasilievdeliveredataconferenceinItalyinSeptember1989.TheyconcludedthattheSovieteconomywasbasicallydoomedwithoutmassivechange.Reform“turnsout to be impossible with the existing structure of the economy,” theydeclared.21In the spring and summer of 1990, radical democrats swept into the

Leningrad city council, just as theyhad inMoscow.Chubais self-confidentlydelivered a speech to them on “shock therapy” economic reform in Poland,and they installed him as chairman of a special committee on economicreform.22Chubaisgatheredaroundhimmanyofthefriendsandallieshehadmadein thepreviousdecade,andtheybeganthinkingabouthowtomakethecityamodelforreform.OneofthoseontheteamwasDmitriVasiliev,adiminutiveeconomistwith

thick glasses who talked in rapid-fire bursts. He had attended the famousNaishuldebateonthestairs.Vasiliev,whowasdeeplyinterestedintheideaofprivate business and property rights, came from a family that traced itsLeningrad roots back six generations.He recalled this as a heady time. TheChubaisteamwassuddenlythinkingbigandparcelingoutalltheexcitingnewspheresofpossiblereform,suchaslandandcurrencyregulation.Thebiggestideaofallwastopreparethecity—oratleastapartofit—tobecomea“freeeconomiczone,”sortofademonstrationprojectforradicaleconomicreforminsidetheSovietUnion.

Vasilievhadbeenresearchingthenewlyemergentcooperatives,andhewasgiven the task of privatizing small shops and businesses, which the othersconsideredlessexcitingworkthancurrencyorlandreform.Vasiliyevsaidthathe saw that “themarket economywaswinning, and itwaswinning fast. Forexample, two hairdressers—one state, and one private—you couldn’t evencomparethem.Theprivateonewasdoingmuchbetter.”OdingrecalledthatasChubaisandtheteamweredrawinguptheirplans,outonthestreetthecountrywas changing even faster—small kiosks and cooperatives were popping upeverywhere.Chubaiswasachampionofthefreeeconomiczone,butitwasovertakenby

events.TheSoviet empirewas inexorablydisintegratingbefore their eyes.Afreezoneinsideacollapsingcountrymadelesssensewitheverypassingday.Thenin1991theLeningradcouncilelectedanewmayor,AnatolySobchak,alaw professor who had been one of the most eloquent democrats of theGorbachevera.Sobchakdidnotsee theneedfor theChubaisexperiment.Hedemoted Chubais from head of the economic reform agency to simply an“adviser,” which effectively marked the end of the free economic zone.Characteristically,Chubaiskeptworkingonitlongaftertheothershadgivenup.“It lostall itsmeaning,”Odingrecalled,“becauseallofRussiabecomeafreeeconomiczone.”ThenGaidarcalledfromMoscowinthesummerof1991.BorisYeltsinhad

beenelectedpresidentofRussia thatsummer.Hewasputtingtogethera teamfor a truly radical attempt at economic reform inRussia, andGaidarwantedChubais to join them.ChubaisdrovehisyellowZaporozhets toMoscowandbeganworkingwith theGaidarbrain trust.OnNovember9, 1991,he calledDmitryVasilievinSt.Petersburg.Couldhewriteatwo-pageprogramformassprivatizationofallRussia?Andwriteitfast?

Chapter5

MikhailKhodorkovsky

MIKHAILKHODORKOVSKYwasachildofthelast-ditcheffortoftheSovietsystem to save itself. Desperate for a way out of stagnation, the Sovietleadership permitted a modest experiment in capitalism. It worked—andunleashedenormous,unexpectedforcesofchange.TheexperimentoccurredintheYoungCommunistLeague(orKomsomol),

the party’s youth organization. Khodorkovsky was the deputy chief ofKomsomolathisuniversity.Whenthedoorsswungopentonewopportunities,as they did repeatedly in the years of perestroika , Khodorkovsky rushedthrough, exploiting his connections with tireless determination and asurprisingly sophisticated understanding of loopholes and gaps in Sovietsocialism.Was thereahidden forcebehind thisunstoppableyoungmanwiththe black hair, mustache, and distinctively high, soft voice? The accounts Iheard from friends and colleagues suggested that there was not just oneCommunistPartybosswhoputhishandonKhodorkovsky’sshoulderandsaid,“Youwillbeourexperimentalcapitalist,son.”Rather,thereweremanypatronsin high places, including the KGB. They anointed him, and Khodorkovskyanointedhimself—withhardworkandagrittyfortitude.“Alltheventuresthatwere started at this time succeeded only if they were sponsored by or hadstrong connectionswith high-ranking people,”Khodorkovsky acknowledgedin1991.“Itwasn’t themoneybut thepatronage.Atthetime,youhadtohavepoliticalsponsorship.”1 In the end, however,Khodorkovsky far outpaced hisearlysponsors.HewasmoreambitiousandruthlessthantheCommunistPartyapparatchikswhowantedtodabbleincapitalism,andhewasmorecleverthantheKGBbossesinapositiontohelphim.Theyneverwentasfarashedidinthenewworld.Ataveryyoungage,Khodorkovskybecameoneofthefirsttitansofthenewentrepreneurial age, apioneering financier.Buthe couldnothave succeeded

were it not for larger events. The first and most important was thedisenchantment of youth with the painful shortcomings of Soviet socialism.ThisledtoaprofoundshiftinwhichtheCommunistPartydecidedtoletsomeyoungpeopledabbleincapitalism.Khodorkovskyseizedthemoment.The disillusionment of the younger generationwas brilliantly captured by

TimeMachine,alegendaryrockband.Apopularsong,whichoftenmethugeapplauseinconcerts,toldofashippilotedbyanexperiencedcaptainwhogetslostatseainastorm.ThesongtransparentlyhintedthatthisshipwastheSovietUnion.Intheend,afterashipwreck,thecaptainislostbutthepassengersmakeit to a new land. The song ends with, “Those of us who have survived fordifferentreasons,haveforgottenthecaptainofthatship.”The lyricswere a powerfulmetaphor for the profound cynicism, disdain,

and ambivalence that characterized the younger generation’s attitude towardtheSoviet leadership,theCommunistParty,andall theofficialstructuresandboringpropagandathatdominatedtheirlives.Theyyearnedtomakeittosomenewland.Theylongedfortheconsumergoods,suchasjeans,whichtheSovietsystemcouldnotgivethem,andrebelledbylisteningtorockmusic,whichtheSovietsystemrefusedtogivethem.Manyyoungpeoplemadetheirowntapesandcruderecords,whichbecametreasuredpossessions.Theyouthrebellionwasaslow-movingbutpowerfultideforchange,often

expressed in later years with satire and rock lyrics that fell just short ofconfrontationwiththesystem.AlexeiYurchak,manageroftheLeningradbandAviaintheearly1980swholaterbecameaprofessorofanthropologyat theUniversityofCalifornia–Berkeley,haschronicledthe“lastSovietgeneration,”youngpeopleborninthe1960sand1970s,andhowtheycynicallyadaptedtothe demands of public life in the Soviet era—the empty promises—whileprivately rejecting them. They worshiped rock bands like Time Machine,whichbecamepopularintheearly1970swithromanticandlyricalmusic,andAvia, a late-Sovietband thatwas sharplycynical and funny.Yurchak toldmethathisband’s lyricswereoftenawildcompositeofdifferentparty slogans,which sounded hilarious to young listeners. In one case, Avia mimicked afamous Stalinist era song, “Wake Up and Sing,” but with such a jumble ofSovietslogansthatitsoundedlike,“Stopthinkingaboutanything,justwakeupandsing!”Avia’sperformanceswerethemselvesamassivetheatricalsatireontheSovietsystemwithalargetroupeofperformers.Thegirlsweredressedinblack stockings, black skirts, and white shirts, saluting and marching andforming human pyramids very much in the fashion of the Soviet 1920s—

excepttheythrewinacrazy,unexpectedsexualtwist,suchasoneofthegirlsbendingover infrontof thepyramidwithherbottomto theaudience.Off totherightsideof thestage, therewasalwaysahugepodiumcoveredwithredvelvet.Betweensongs,amanclimbedatopitandshoutedslogansthatsoundedSovietbutwerereallymadeup,andnonsensical.“Forwardisnotbackward!”heshouted,“Hurray!”2The younger audiences got the point and loved it. The humor was

understatedenoughthatAviawouldnotbebannedbythesystemthatitmocked.But there was always the feeling that someone was watching. Another rockbandinLeningrad,Televizor,sanginthemid-1980s:

Okay,sotheyletusbreakdance,Okay,sowecanbehappysometimes.ButstillstandingbehindthecolumnIsthemaninthethintieWithcementinhiseyes.

The reference to the man with cement in his eyes was unmistakable—theparty and its agents were watching and were in control. Ever since theBolshevik revolution, the Communist Party leadership strove to keep thenatural restiveness of youth in check. The primary mechanism was theKomsomol,anorganizationubiquitousthroughoutthesevendecadesofSoviethistory.“Wheneveragroupofteensoryoungadultsgathered,”wroteStevenL.Solnick,aprofessoratColumbiaUniversitywhodocumentedthedemiseofthe Komsomol, “on factory floors and on battlefields, in barracks and indormitories,duringwartimeandduringharvests,atconstructionsitesandonstreet corners—a Komsomol organizer loomed.”3 In a society in which thestatetoleratednoothervoicesbutthoseoftheparty,therewaslittleroomforyouth tofind themselves inprivateassociations.TheKomsomolattempted tomonopolizethelivesofyouthbetweentheagesoffourteenandtwenty-eight,althoughtheleaderswereoftenolder.For millions of youth, the main reason to join Komsomol was a cynical

pragmatism:without it, ayoungpersonmight fail toget intoauniversityorget a good job. But by the late Brezhnev period, Komsomol had come tosymbolizethesamebleak,tiredslogansasthoseoftheparty.TheKomsomolleaderswerewidelyviewedasladder-climbingcareerists,asapparatchikswithacertainobsequiouscharacter.Gorbachev,whohadoncebeenaKomsomolactivist,openedthefloodgates

tootherorganizationsandothervoices.Heunleashedasurgeinwhatbecameknownasneformalny, or the informals: nonofficial associations, clubs, rockbands,andothergroupsthattookshapeoutsidethepartyandwithoutofficialpermission or regulation. During Gorbachev’s era, an entire youthundergroundblossomed.4Theyouthmovementwasanopenrebellionagainstthe cultural orthodoxy of the past, and much of it was centered around apassionforrockmusic.Inthe1960sand1970s,Sovietauthoritieshadtriedtosuppressrock,shuttingitoffradioandtelevision.Butthemusicspreadanyway—on tapes recorded from Western broadcasts, on thin homemade plasticrecords, and through performances of thousands of unofficial bands thatplayedinhiddencellarsor,defyingtheauthorities,instudentandfactoryclubs.Blackmarket trade thrived in recordalbums.Theregimefinallygave inandstoppedattemptstosuppressrockinthe1980s.Asthedoorsforfreethinkingopenedupelsewhere,theKomsomolbeganto

witherandsufferedadrasticdeclineinmembership.InGorbachev’sfirstthreeyears, Komsomol membership fell by 4 million to 38 million in 1988. Inearlieryears, theproblemofsustainingKomsomolmembershiphadbeensoacutethatfigureswerefalsified.Buteventhatcouldnotmasktherealcrisisofthe Komsomol in the mid-1980s. Membership dues—the lifeblood of theorganization—weredryingup.ViktorMironenko,electedfirstsecretaryoftheKomsomolin1986,lateracknowledgedthathecouldnotconvincehisoldestsontojoin.5The Komsomol had to find a way to survive. Its leaders turned to the

capitalist ferment on the street. By 1987, the cooperative movement wasgathering steam, forming the first small businesses. The Komsomol chiefs,alongwiththeireldersintheCommunistParty,decidedtograbapieceoftheaction.Theyopenedadoor—andyoungKhodorkovskybreezedrightthrough.In the years before Gorbachev, one of the most popular ways to try and

remedytheillsof theSovieteconomywas“self-financing,”orkhozraschyot,the idea that a factory could retain its own earnings. When Luzhkov hadproposeditin1980,hewasrebuffed,butlaterinthedecadetheconcepttookhold,especiallyasfactorydirectorsgotmorecontrolover theirownaffairs.The Komsomol too began to apply self-financing to its myriad of localorganizations, allowing them, for example, to decide for themselves how touseincomefromdues,aswellasproceedsearnedfromtheKomsomol’smanytourism agencies and publishing houses.Givenmore fiscal autonomy,manylocal Komsomol groups simply went into business for themselves. The

Komsomol became aCommunist Party business school. Cafes, discos, bars,travel bureaus, printing houses, and other small enterprises sprang up, oftenwithloansorsubsidiesfromKomsomolbudgets.Thesenewenterpriseswereallowed to keep their own profits. Entrepreneurial zeal flourished. TheKomsomolplunge intobusinessmarkedanabruptchangeof ideology, fromdecaying socialism to crude capitalism. But it also was a defining momentwhich suggested that the Communist Party, at the very highest levels, hadsenseddangerandrouseditselfforacontrolledexperimentinmakingprofits.Olga Kryshtanovskaya, a sociologist who became one of Russia’s mostperceptiveanalystsofthenewbusinesselite,toldmeyearslaterthatthepartyhierarchy initially had doubts whether the youth experiment would work. Itwas, she said, “just a test.”But then the test succeeded—beyond theirwildestimagination.6The experiment beganwith a bear of a youngman,KonstantinZatulin. In

1986Zatulin,apostgraduatestudentatMoscowStateUniversity,wasappointedan aide to Mironenko, the first secretary of the Komsomol. Zatulin was aspecialist in industrialmanagement andhad studied earlier failed attempts toreformSovietsocialism,suchas theKosyginreformsof the1960s.Hisfirstjobwas todraft a letter to thePolitburo, suggesting newbusiness directionsfor the Komsomol. The two-page letter took Zatulin six months to writebecauseofenormous resistance,debate, andconfusion inside theKomsomolapparatus.Somanybusinessconceptswerealien to theoldguard that itwasextraordinarilydifficulttoputthemonpaperinawaythatwouldwinapproval.Zatulinrecalledthathefoughtwithonehigh-levelbureaucratforweeksoverthe idea of establishing a company with shareholders who would be paiddividends.Thebureaucratcouldnotgrasptheconceptofsomeonebeingpaidwhowasnotactuallyworkingonthefactoryfloor.Zatulinpersisted.7Herealizedtheimportanceofhisassignment.Nothinglessthanthesurvival

oftheKomsomolwasatstake.AmongtheideasinZatulin’sletterwasthattheKomsomol take over the Soviet toy industry and that it finally abandon thedecades-long practice of sending Komsomol youth out on gruelingconstruction “work brigades.” Both ideas were eventually approved. Butperhapsthemostfar-reachingideathatZatulinproposedwasinscience.Inthe1960s, a youth organization called Fakel (Torch) had taken root inNovosibirsk, a center of Soviet scientific research in Siberia. The youngpeoplehadfoundawaytoearnmoneybyhelping technology-starvedSovietindustry solvepractical researchproblems, for additionalpay.Theywere so

effective that the party leadership became alarmed—and abruptly abolishedFakel.Zatulinproposedrevivingthemodel.Hesuggestedcreatingaseriesof“CentersforScientific-TechnicalCreativityofYouth,”which,intheory,woulduseyoungscientiststohelpSovietindustrysolvetechnicalproblems.Theideawasapproved,ironically,bythelionoftheSovietoldguard,YegorLigachev,whohadoftenexpressedstrongviewsaboutbanningrockmusic.Ligachevhadnoideathathehadjustapprovedaspringboardtocapitalism.

Khodorkovsky watched Komsomol membership rolls decline firsthand. Hewas deputy chief of the Komsomol at the Mendeleev Institute of ChemicalTechnology, one of Russia’s oldest industrial schools, situated atMiusskayaSquare in Moscow. Khodorkovsky graduated in June 1986, a year afterGorbachevtookpower.Hehadachemistrydegreeandhadalsoservedontheinstitute’seconomicsdebatingteam.The technical sciences were a breeding ground for many new capitalists

becausetheirstudiesincludedonlyaminimalamountofideologyandfocusedon practical questions of what worked and what did not. AlexanderKhachaturov,wholaterbecamedeanofeconomicsattheMendeleevInstitute,toldmethatthechemistsandscientistslearnedtosharpentheiranalyticalskillsanddidnotspendmuchtimeonMarxandEngels.“Theyenteredthenewlifewithease,”herecalledoftheperestroikayears.“Theyknewwhatkhozraschyotwas,whatprofitsandprofitabilitywere.”Theyalsohadanacuteunderstandingof the country’s political and economic failings. “Many felt that the countrycouldnotcontinueendlesslywastingitsresources,”hetoldme.“Theysensedthat theregimecouldnotcontinuefora long time . . .witha leadershipwhocouldnotputtwowordstogether.”8In theKomsomol,Khodorkovskycollecteddues,a thankless taskata time

whenmemberswerefleeing.“Weoftenhadtocontributeourownmoneyintoit,”Khodorkovskytoldme.9“Ifsomeonedidn’tpaytheKomsomoldues,thenthedeputywasreprimanded.”Hetookafewfingersandrappedthebackofhisneck in a gesture of reprimand. Khodorkovsky recalled that he disliked thedues-collecting work and took the first chance that came along to dosomething else. He opened a youth café—one of the budding Komsomolbusinesses. “It didn’t work out that well,” he recalled. The café was in thewrongplace. Itwas located inside the institute,butstudents fledeachday fortheirdormitories—leavingthecaféempty.“Thatwasmyfirstexperience,not

quitehappy,”Khodorkovskyrecalled.ButtheKomsomolbeckonedwithother,morelucrativepossibilities.Oneof these ideaswas toprovecrucial toKhodorkovsky’ssuccess. Itwas

Zatulin’sproposalforyoungscientiststomakemoneybyprovidingadvicetofactories and industry on technical issues. Factory managers had somediscretionary funds to use as they liked. They often spent their money oncontractswithinstituteslikeMendeleevforresearchandtechnicalprojects.Tosnare someof themoney fromsuchprojects,Khodorkovsky startedwhathecalled theFoundationofYouth Initiative, a “youthclub” thatwas in realityanascentbusinessundertheprotectiveumbrellaoftheKomsomol.Khodorkovsky and his new venture soon reached a crossroads. Itwas the

summerof1987,justayearaftergraduation.Unexpectedly,hewasforcedtomakeachoice.HissuperiorstoldhimeitherhecouldclimbtheladderintheKomsomol,adecentcareer,orhewouldhave to leave the institute togooffand continuewhat they called his “self-financing tricks.”The termwas a bitderogatory, since the more seasoned apparatchiks figured the capitalistexperimentswerejusttemporary.TheydemandedtoknowwhatKhodorkovskywoulddecide:stickwiththemandremainadedicatedKomsomolfunctionary,orgooffonhis“self-financingtricks”?“So,”Khodorkovskyrecalled,“ina tremblingvoice, Isaid:‘self-financing

tricks.’AttheinstitutetheylookedatmeasifIwascrazy.”“Many years later,” he added, “I talked with people and asked them, why

didn’tyoustartdoingthesamething?Whydidn’tyougointoit?BecauseanyheadofaninstitutehadmorepossibilitiesthanIhad,byanorderofmagnitude.Theyexplainedthattheyhadallgonethroughtheperiod—theKosyginthaw—when the same self-financing systemwas allowed. And then, at best, peoplewereunabletosucceedintheircareerand,atworst,foundthemselvesinjail.Theywereallsurethatwouldbethecasethistime,andthatiswhytheydidnotgointoit.AndI”—Khodorkovskyletoutabig,broadlaughatthememory—“Ididnotrememberthis!Iwastooyoung!AndIwentforit.”OneofKhodorkovsky’sfirsttargetsforhisbusinesswasaprestigiousSovietresearchfacility.TheInstituteofHighTemperaturesspreadoutoverseventy-fiveacresonthenorthernedgeofMoscow,avastcomplexoflaboratoriesforthe study of high-temperature physics, rocket propulsion, and lasers. ThisprominentinstituteplayedaroleinthespaceraceandtheColdWararmsrace,especiallythefinal,futilequestforlaserweapons.Itwasalsoanincubatorfor

anothermorepromisingwaveofthefuture:capitalism.Foundedinthe1960s, theInstituteofHighTemperaturesgrewrapidlyand

bythe1980shadfourthousandworkers.TheleaderwasAlexanderSheindlin,anacademician(thehighestrankforaSovietscholar)andoneofthecountry’sforemost experts in high-temperature physics. Sheindlin, a polite, easygoingman with large blue eyes, enjoyed not only stature at home but prestigiousoverseascontacts,whichbroughthimvaluableresources.“Ourinstitutewasarichinstitute,”herecalled.One day, Khodorkovsky and one of his young associates arrived at the

polished, laminated conference table at Sheindlin’s office.10 Sheindlin calledthemrebyata,anaffectionatetermforyoungfellows.“Theywereveryyoung,Ilikedthemalot.Ilikedtoseelittlesparksintheireyes,”Sheindlinrecalled.Theyoungmenwerelookingforscientificprojectsthattheycouldcarryoutforhisinstitute.Theymaynothaveusedthewords“self-financingtricks,”butthatwaswhattheywereinterestedin.“Theywereenergeticpeople,”Sheindlinrecalled. “They were well-known Komsomol workers—they were refined,cleanpeople,notpettythieves.”“Theyofferedmenothing,”herecalled.“Theyweregoodguys.Theysaid,

‘giveusalittlebitofmoney.Wewill lookforsomethinginteresting.Butwewill work honestly.’ There: honestly, they said.” Sheindlin told me thatKhodorkovskywanted some “start-up capital,” andSheindlin quickly drew acomparison with the American industrialist David Packard, who started hisbusinessinagarage.Moreover,hesaidthebrightyoungfellowshadtoldhimtheyhadalreadyreceivedsomehelpfromtheStateCommitteeonScienceandTechnology,aninfluentialgovernmentagencythatoversawscientificresearch—acallingcardSheindlinquicklyrecognized.“Well,maybeIforgetnow,”Sheindlinrecalled,“but itseemstomeIgave

them 170,000 rubles.” Thiswas an enormous amount ofmoney at the time.“Wemade an agreement,” Sheindlin said, “that they had to do some kind ofscientificresearch.”Sheindlin toldmehenever reallyexpected them todoanyscientificwork

forhisinstitute.Perhapshegavethemthemoneybecauseheexpectedsimplytoearnaprofitfromfinancialdealings,orperhapsKhodorkovsky’sfriendsinhighplaceshadpressedSheindlinintomakingthepayment.Therealreasonissimplynotknown.WhenIaskedSheindlin,heacknowledged,“Iknewthatnokindof sciencewasgoing tocome from this. Iknew that. I fullyunderstoodthatthey,realistically,coulddonothingformyinstitute.”11

Forthenexttwoyears,Sheindlindidnothearawordfromthebrightyoungfellows.But he figured theywere busywith hismoney. “To this day I don’tknow the details,” Sheindlin toldme. “They used thismoney to increase themoney—many,many times.And theknowledgeofworkingwithmoneywasnot simple. All the laws that existed in the country! To work with lots ofmoney,youhadtoknowhowtomaneuver.”This was Khodorkovsky’s secret: he knew. The episode at Sheindlin’s

institute was just one small window on a hugely important discovery thatKhodorkovskyhadmadeabouttheSovietfinancialsystem.Hediscoveredhowto exploit the way money was controlled and used—and turn it into moremoney.Andhewasabletodoitbecausethesystemlethimexperiment.TheSovietfinancialsystemwasalegacyoftheStalinyears.Inthecommand

economy,moneyandfinancewerenotthemajorfactorsindecisionsmadebyfactoriesandenterprises.Rather,factoriesstrovetomeetoutputtargetssetbycentralplanners,andtheyreceivedsubsidiestodoso.Intheshortageeconomy,moneyalonecouldnotalwaysbuymoresuppliesorleadtomoreoutput.Whatmatteredwasbargainingforscarcesuppliesandmeetingtheoutputquotas.TheSovietsystemhadtwokindsofmoney.Onewassimplecash.Thiswas

realmoneythatcameinbanknotesandcoins.Inthecommandeconomy,strictrules governed how enterprises and factories could use their cash, ornalichnye, which was used chiefly for wages. It was scarce, but a factorymanager who could get some extra cash might also use it for somethingadditionalheneeded,suchasatruckorbuildingashed.TheSoviet systemalso had another kind of funds, known as non-cash, or

beznalichnye.Thiswasnotbanknotesorcoins,butakindofvirtualmoneythatwaswidelydistributedasgovernmentsubsidiestofactories.Thebeznalichnye,ornoncash,existedonlyasanaccountingunit.Afactorywouldbetransferredsubsidiesinbeznalichnye,whichitwouldrecordonitsbooksandmightusetopayanotherenterprise—butitwasnotsomethingyoucouldputinyourwallet.The key dilemma for a factory manager was that the system was rigid:

mixingthetwokindsofmoneywasprohibited.Thefactorymanagerwasnotallowedtotakethebeznalichnyeandturnitintorealcash.Bothkindsofmoneywere controlled by Gosbank, the official state bank, and by the centralplanners.However,factorymanagersalmostalwaysneededmorecashthantheycould

get out of the system. The supply of cash was tight, but the supply ofbeznalichnyewasveryplentiful—maybebecausetherewasnotmuchuseforit.

Theresultwasanimbalanceinthevalueofthetwokindsofmoney.Cashwasmuchmore valuable and sought after. By some estimates, a cash ruble wasworthtentimesanoncashruble.Thisimbalancewasaninvitationtohugeprofits.Someonewhofiguredout

how to turn thebeznalichnye into cashwouldmake a fortune.The planners’greatest nightmarewas that someonewould do this and pump the relativelyworthlessstatesubsidiesintorealcashrubles.Khodorkovsky figured it out. Starting in 1987, he began to churn the

relatively useless beznalichnye into sought-after cash and, even better, intoevenmorevaluablehardcurrency.Thefullstory,evenadecadelater,isabitof a mystery, and I discovered that many of those who participated inKhodorkovsky’smoneymachinewere reluctant to talk about it.The processobviouslywastrialanderror,butforKhodorkovskyitwasfarmorelucrativethantheyouthcafé.ThecrackinthesystemstartedwiththeKomsomol,whichwaslookingfora

waytostayafloatandwrangledaspecialprivilegeforitsbusinesses,includingthe cafés and discos. On December 28, 1987, the central committee of theKomsomolgaveitslocalorganizationsanewsetoffinancialrules,allowingthem to raise and spend money as they pleased and set up their own bankaccounts.Thiswasinkeepingwiththespiritofself-financing.Oneoftheruleswas extremely significant: Komsomol organizations could, in certain cases,mixthenalichnyeandbeznalichnye. (It ispossible that thenewrulecameoutafterthepracticehadalreadybegunthatyear.)Theyouthgroupscoulddowhatno factory director dared: turn the useless noncash into cash and pay morepeople with it or build a nice dacha in the woods outside ofMoscow. Thisopened up newhorizons formakingmoney—andmaking it virtually out ofnothing.Allthatwasneededwastherightpermits,andperhapspayoffsfortheproperauthorities,andsuddenlyasmallprivilegeturnedintosomethingveryvaluableindeed:crankingthestatesubsidiesintocash.12Atapproximately thesame time,Zatulin’s ideaof studentsdoingwork for

factoriesbecamearealitywiththeopeningofanewkindofbusinessknownasCentersforScientific-TechnicalCreativityofYouth,orNTTMsbytheRussianacronym.Khodorkovsky in1987 transformedhisyouthclub intoanNTTM,whichoperated,broadly,undertheauspicesoftheKomsomol.TheNTTMwassupposed toperformscientific and technical research.But the real core—theattraction that brought the young researchers toKhodorkovsky’s door—wasmoney.

Khodorkovskyworkedfromasmall, shabbyoffice,set justslightlybelowstreetlevelon1stTverskaya-YamskayaStreetincentralMoscow.Atthetime,aKomsomol activist was supposed to look like a good party man and dressnicely. But Khodorkovsky did not fit the party mold.13 He was alwaysuncomfortable in suits and tiesandmorecommonlyappeared in jeansandasweater;hehadworkedjobssometimesasafreightloaderandcarpenter,andrecalled that his childhood ambitionwas to become director of a big Sovietfactory.His father,whoworkedat ahigh-precisionmachine toolsplant,wasJewish,whichmeantKhodorkovskywasprobablybarredfromeverobtainingahigh-levelpartyposition,eventhoughheheldajuniorpostintheKomsomolatMendeleev.AftertheMendeleevInstitute,hestudiedatthelawinstituteforafew years, telling friends that it was necessary to be able to understand andexploitdecreesissuedbythegovernment.TheyouthsciencecentersweresprinkledthroughoutMoscow’sthirty-three

districts. Khodorkovsky found a home in the Frunze District, a prestigiouscentralarea,becausehehadagoodconnectionthere.14Whatkindofbusinessdidtheyouthsciencecentercarryout?Thekeywas

churning noncash into cash. Spread across the Soviet Union was a vastarchipelagoofresearchinstitutes—many,butnotallofthempartoftheColdWarmilitarymachine—whichhadalotofextranoncash.Khodorkovsky,usingtheprivilegesofaKomsomolman,couldsetupwhatwerecalled“temporarycreative collectives.”Thesewere simplyagroupofworkers, often the sameworkers who were already inside the institute or enterprise or sometimes atruly temporary group from outside. The key advantage was that the“temporary creative collective” could legally be paid in cash. ThenKhodorkovsky, again because of his Komsomol affiliation, could draw upcontracts for the collective to perform some kind of research project, writesoftware, or build something for the institute. Sometimes it was just a proforma arrangement to work on a project on which they already labored,sometimesitwasanewproject.Theimportantpointwasthemoneymachine:Khodorkovskycouldtakethenoncashfromtheinstituteandturnitintocashtopay the “temporary creative collective.” This was not just peanuts, but realmoneychurningfromidlestatesubsidiesintohardcash.Khodorkovsky probably received special permission at the bank—special

patronagewas importantatevery turn—to transfer thenon-cash intocash. Inreality,thecashhegotwasspreadaround:totheworkers,totheinstituteanditsdirector,toKhodorkovsky’ssciencecenter,andapercentagerebatedtothe

Komsomol.Thetightlyregimentedcontrolofcashhadjustsprungaleak,butitwasnotsomewild-eyedradicalwhohadbreachedit.Rather,itwasazealouschildoftheSovietsystem.An early recruit to Khodorkovsky’s youth science center was Leonid

Nevzlin,acomputerprogrammer.Nevzlintoldmethathespottedanewspaperadvertisement forKhodorkovsky’s sciencecenterandwent to investigate.Hearrived there in November 1987, when the operation was just a few smallrooms—being hastily repaired—and a dozen people. Nevzlin, with hairbrushedacrosshisforeheadandlargegreeneyesthatgavehimrock-stargoodlooks,wasworkinginastategeologicalresearchinstitute,drawingtheusualmeager state salary. However, he had written a computer program to helpenterprises keep track of accounting and deliveries. After he signed up forKhodorkovsky’s science center,Nevzlinbegan to “sell” the software—whichhealreadyhadcreated—overandoveragaintovariousinstitutesandfactories.He was using Khodorkovsky’s process to churn the relatively worthlessnoncashheldbythefactoriesandinstitutesintocold,hardcash.ThealluringalchemyofKhodorkovsky’ssystemwasthathesharedthecash

with the participants such asNevzlin—many timesmoremoney than any ofthem had earned before in their official jobs. After a few months of this,Nevzlinrecalled,hefeltwealthy.15DozensofhungryyoungresearchersbeganshowingupatKhodorkovsky’sdoor.The directors of enterprises and institutes who used Khodorkovsky’s

services were also grateful—Khodorkovsky had amagic channel that couldgivethemaddedcashtoo,sincetheyusuallygotasliceoftheproceeds.Forthefactory bosses, the risks were minimal because Khodorkovsky came with asealofapprovalfromthesystemitself.Kryshtanovskaya,thesociologistwhostudiedtheRussianelite,toldmethat

the industrial directors who cooperated with Khodorkovsky knew “that theywereworkingwith theauthorities, that itwasn’t conartists.” In this case, thetransaction was a breeze, a simple bank transfer, which would have beendifficultorimpossibleifnotforKhodorkovsky’sgoodconnections.“Thereisaninstitute.Theinstitutehasanaccountatthebank,”Kryshtanovskayatoldme.“ThereisanNTTM.Ithasanaccountatthebank.Somoneyfrombanknumberoneistransferredtobanknumbertwo.AndtheNTTM,theytakemoneyfromthatbank.”Sheadded,“Theprocessofprivatizationhadbegun—thefirstkindofprivatizationwasthatofmoneyitself.”Kryshtanovskaya recalled that the possibilities multiplied as the bright

youngfellowscameupwithnewself-financingtricks.“Theystartedtothink,‘How can we get money?’ That is, you had to convince the director of theenterprisethathehadtodosomekindofwork.Andtheseteamswerecreatedaround people like Khodorkovsky and others who were very young andcynical,whoofferedtothedirectors,‘Wewillbringyouthisgroundbreakingresearch!’Or‘we’llputsomekindofbusinessplaninplace!’Theyusedasortofintellectualpreemptivestrike.Theyfoisteditonpeople.Andveryoftentheywouldtakethatso-called‘research’andsell it tomanyenterprisesforprofit.Andpracticallyallofthembecameveryrichpeople.”Khodorkovsky was making money from thin air. No manufacturing was

involved; no widgets rolled off assembly lines. Andrei Gorodetsky, whoworkedwithKhodorkovskyintheearlydaysandlaterheadedthetradingdeskat a Russian bank, told me that the science centers often did not pay theinstitutes or factories for use of the equipment, laboratories, or spacewheretheworkwasdone.“Inreality,theseNTTMweremakingmoneywhileusingstateproperty.But the stategenerally closed its eyes to this.”He added, “Allthese centers did not really produce anything. They were middlemen. Wesimplyworkedasmiddlemen.Therewasnobusiness—purchaseandsaledidnotexist.”16By1990therewereforty-sevenyouthsciencecentersinMoscow.Thesame

techniques were being applied to other Komsomol activities—rock concertsandbeautycontestswereafavoritewaytochurnnoncashintocash.Anygroupofpeople couldbe turned intoa “temporarycreativecollective”andused tofunneltheuselessnoncashintorealmoney.Khodorkovskywentfartherandfasterthanmanyothers,constantlyhustling

to think up new avenues for making easymoney. But he needed help. “Themoneydidn’tdothetrick,”Khodorkovskyoncesaid.“Oldfriendshipsdidthetrick.”17 Khodorkovsky’s hunting ground was the upper echelons of Sovietindustry and science. In 1994Khodorkovsky told an interviewer, “I inventedseveral financial methods that were broadly used and that in the best daysallowed me to conduct up to five hundred contracts for scientific researchsimultaneously.Fivethousandpeoplewereworkingthere.”18Later I askedKhodorkovskywhat had been his big breakthrough, because

clearly he had zoomed ahead of his generation. I had spoken to dozens ofpeople who worked with Khodorkovsky, but the kernel of his success wasalways elusive. Khodorkovsky was a workaholic, they said. He was well-connected.Hehustled,hesharedhisrewards,hewasneverflashy.

Many of those who came to the youth science center recalled thatKhodorkovskymultipliedtheirincomefordoingthesameworkasbefore.ButKhodorkovsky’sownaccountrevealedamoneymakingmachinethatwasmoreambitious and audacious than I had imagined.He toldme he had turned thenoncashnotonlyintorublecashbutalsointohardcurrency—intodollars.“Aseparatebreakthroughforus, incomparisonwithall theotherNTTMs,

wasthat,alltheotherssaid,whatdoweneedthisbeznalichnyefor?Andtheywere trying to increase the share of cash.And to do a littlework, trying tomaximizetheshareofcash,throughmanythings,andgetthemintheformofwages.Ourrealbreakthroughwasthat,wesaid,okay,allthecashwillbegiventotheworkinglaborcollectives.Andwecollectthebeznalichnye.”WhatdidKhodorkovskydowithit?“Weweresavingthebeznalichnye,”he

told me. “People just didn’t care about the beznalichnye , they were notinterested,becausenothingcouldbedonewithit.”ThereaderisremindedthatKhodorkovskywasalreadyaworldapartfrommanyotheryoungmenofhisgeneration. At twenty-four years of age, he possessed a bulging supply ofSovietgovernmentnoncashrubles.“Iwassavingit,”hesaid.“Iknewforsurethatwewouldbeabletocomeupwithsomething.Wesaved,accumulatedalotofit.”Sincethebeznalichnyewasavirtualmoneythatexistedonledgersonly,Khodorkovskymusthavehadpermission tokeepit inanaccountorperhapsgotcontrolofsomeoneelse’saccount.Itwasnotthekindofmoneythatcouldbekeptinashoebox.In the next stage, Khodorkovsky went on, he found some enterprises that

wouldexchange thenoncash forvaluable foreignhardcurrency.Thesewereexportcompanies—primarilyintimber—thathadplentyofhardcurrency.“WewenttotheFarEast,andweboughtalotfromtimberpeople,”Khodorkovskysaid. “It took us a year to save the money and get this idea.” AlthoughKhodorkovsky left itunsaid, theprocesswasobviously immensely lucrative:hewas trading relativelyworthlessnoncash forveryvaluablehardcurrency.Since the Soviet Union had rigid exchange rates and restrictions on hardcurrency,Khodorkovskywasprobablyofferingthetimbercompaniesahugelyadvantageousratethatallowedthemtogetmorefortheirhardcurrencythaniftheyhadtotradeitattheofficialrate.ThefactthatKhodorkovskywasdealinginhardcurrencywasaclue thathismoneymachinewasaccelerating tonewlevelsandthathehadpatronsinhighplaces.Allalongthechain,Khodorkovskyhadprotectionfromabove.Eventhough

hedecidednottobecomeaKomsomolcareerist,theKomsomolwascriticalto

his early gains. Moreover, the Komsomol affiliation functioned as anumbrella,offeringKhodorkovskylegitimacyandaccessatatimewhenmanyyoung, hustling businessmen feared that at any minute the KGBwould takethemaway.Thecooperativeswerejustbeginning,andtheyfacedmanyofthesameuncertainties,withoutthebenefitofKomsomolprotection.AnothersourceofKhodorkovsky’ssupportwastheimprimaturoftheState

CommitteeonScienceandTechnology,whichwas,intheory,cosponsoroftheyouth science centers. This powerful agency was a conduit between theCommunist Party and the state scientific research institutes, and it hadenormous influence over Soviet science and how scientists worked. Justmentioning that he had support from the State Committee opened doors forKhodorkovsky. “I could always refer to it,” he told me. Several earlieraccountsbyjournalistssuggestedthatKhodorkovskyreceivedmoneyfromtheState Committee. Khodorkovsky told me that he did not, saying that theofficialstherehadmadepromisesbutweretoohighupintheSovietsystemtoworryaboutsomeyoungrebyataplayingcapitalistgames.ButKhodorkovskyacknowledged that on one occasion he got valuable protection from thecommittee.“Ourlawenforcementagenciesatthattimedidnotquiteunderstandwhat perestroika was,” Khodorkovsky recalled. Under Soviet law,entrepreneurship was criminal, and the law had not been repealed, even asentrepreneurshipwasgraduallybeingspawnedbythesystem.Thelawwasnotwidely enforced but could be a pretext for harassment. “Themilitia came tous,”Khodorkovsky recalled, “and started inquiring howwe got our profit.”KhodorkovskysaidheappealedtothechairmanoftheStateCommittee.“Itoldhimindetailwhatwedidandwhatweweredoing,andhecalledsomemilitiabossandaskedhimtoleavetheNTTMalone.”Thatkepttheauthoritiesoffhisbackfor twoyears,herecalled.Thosewere the twomost importantyearsofhisfledglingmoneymachine.KhodorkovskytoldPeterSlevin,thenareporterfortheMiamiHerald, that

at one time he had enthusiastically embraced all the old Communist Partyideology; he “totally believed that capitalism was decaying, that Lenin wasrightandthat thefuture layinCommunism.”But thenKhodorkovskysaidhewent through a “total rethink” and emerged a full-blooded capitalist. ThisrethinkinghappenedintheyearswhenKhodorkovskywasdiscoveringhowtoturntherelativelyuselessbeznalichnyeintorealmoney.Itcompletelychangedhisviews,he said. “Thepeoplewhohadknownmebefore thechangedidn’trecognizemeafter.”Headded,withabitofhyperbole,“IftheoldMikhailhad

metthenewone,hewouldhaveshothim.”19Whilemostoftheworldwasaskinginthelate1980swhetherGorbachev’s

glasnostandperestroika reformswere irreversible, at the street level changewasunfoldingwith incredible swiftness.Within a fewmonths of starting thesciencecenter,Khodorkovskydecidedtotransformityetagain,thistimeintoacooperative, the quasiindependent businesses that could set their own prices.The cooperatives were already emerging as the next wave, and they wereanother step removed from his original Komsomol sponsors.Moreover, asSmolensky had discovered, a small provision in the law on cooperativespermittedthemtostarttheirownbanks.But first Khodorkovsky had to register the cooperative with the city

authorities.HevisitedtheMossovetbuilding,wherelicensesforcooperativeswerebeinggivenoutbythestolidLuzhkov,whorejectedhisfirstapplication.Thecooperativesweregenerally,untilthattime,engagedinconcreteactivitiessuch as construction, pie baking, or car repairs. They were not engaged inamorphous“scientific-technical”work.Luzhkovhaddoubtsaboutthescheme,according to Panin, Luzhkov’s staff assistant on the cooperative licensingcommission.LuzhkovhadspenthisentirecareerinthechemicalindustryandknewtheSovietsystemfromtheinsideout.ButthatexperienceonlyaddedtohisworryaboutKhodorkovsky.Luzhkovrecognizedthatbehindthescientificresearch,Khodorkovskywaschurningnoncashintocash.“Luzhkovsenseditverywell,likenooneelse,becausehehadbeendirectorofanenterprise,andhesaidthesetwosystems,non-cashandcashsystems,mustnotbecombined,”Paninrecalled.20Khodorkovskywaspersistent,however,anddespiteLuzhkov’smisgivings,

he received permission to start a cooperative in a few months. How heovercameLuzhkov’sdoubtsisnotknown.ButKhodorkovskyclearlywasnotone to be intimidated by roadblocks. He just jumped—orwas liftedwith aninvisiblehand—rightover them.Hehadgonevery far, very fast in eighteenmonths,fromgraduationinthesummerof1986torunningtheyouthsciencecenter and its financial network in late 1987 and establishing a cooperativeafter that.Hispacedidnotslowdown—hehadawheelbarrowfullofmoneyandneededtodosomethingwithit.The“self-financingtricks”wereworking,buttheywerenotenough.Whenhewasinvitedtogoabroadonabusinesstripin1988,IgorPrimakov,a

scientistlivinginMoscow,ponderedwhattobringbackfromtheWest:shirts?jeans?Primakov,aspecialistinusingcomputerstopredictearthquakes,finallydecidedtobringbackapersonalcomputer,whichheknewcouldberesoldinMoscowatahugeprofit.Byscrimpingandsavinguphistravelallowance,hemanaged tobuyanAmstrad286desktopcomputer forabout$3,000 in Italy.Oncehome,Primakovsoldthecomputerfor70,000rubles.“Itwasmysalaryforforty-eightyears!”herecalled.WhydidPrimakov’scomputerbringsuchahighprice?TheSovietUnion

wascaughtinatimewarp.Theeconomystagnatedinthelate1970sandearly1980s,preciselyat themomentwhentheWestwasgoing throughthesiliconchiprevolution.WhilepersonalcomputersblossomedintheWest,theybarelyexistedinsidetheSovietUnion.Thedemandforthemwasenormous.Primakov sold the computer through a cooperative to an institute. Once

again,noncashwasturnedintocash.Theinstitutehadanabundanceofnoncashto purchase the computerwith, and the cooperative acted as themiddleman,turning thenon-cash intoreal rubles topayPrimakov.Herecallednervouslygoingtothestatesavingsbanktocollecthispayment.Thebankofficeclosedforanhourjusttocountoutthe70,000rubles,whichhetookhomeinabag.“WhenIdiditonce,”Primakovtoldme,“Ihadnoplantogobackthereandbuy twoor three computers,make the sameprofitable deal again and again.But I know now that dozens of people made these deals, one or two yearsbefore me.When they did it once, they understood there was a window ofopportunity,thatyoucanbuyone,two,theneight.”21Khodorkovskywas always on the lookout for newopportunity, and, flush

with money-machine profits, he plunged into trade in personal computers,spendinghishardcurrencytobuythemabroad,importingthem,sellingthemforbeznalichnye,andchangingthenon-cashbackintocashorhardcurrencyagain.“Westartedcirculatingmoneyveryfast,especiallywhenthecomputersstarted,”Khodorkovsky recalled. The financial chain had grown longer, anddelaysorinterruptionscouldbreakit.Therewereconstantuncertaintiesaboutgetting the computers into the country and changing the money. ButKhodorkovskywascalm.Accordingtoayoungmanwhoworkedwithhimonthecomputers,“Khodorkovskycouldthink,morethantalk.Hecouldlistentoideas.”22 Khodorkovsky was a closed, almost secretive person about hisbusinessbutattentivetothewindsofcapitalismswirlingaroundhim.Hereadeverydecreeandannouncementcarefully,lookingforloopholes,andheknewabout the unwritten loopholes too. “It is possible to find loopholes in every

law, and Iwill use themwithout an instant of hesitation,” he once boasted.23Personal computers were one of the most profitable means of arbitrage—takingadvantageoftheenormousdifferencesinpricesinsidetheSovietUnionand outside it. Khodorkovsky had added a new dimension to his moneymachine. He was now trading in not only cash but goods—in this casecomputersthatwereasgoodasgold.Khodorkovskyrecalledthatatsomepointhismoney-and-trademachinewas

growingsofastthatitsfinancesbegantofray.Hewasstretchedthinbecauseofthe long chain of conversion and transfers, from noncash to cash to hardcurrency to computers andback again. “Weneeded someonewho could sellthe hard currency, pay them the rubles, get the currency, again buy thecomputers.Asyou see, the cyclewasquite long.”24 The cycle also includedothercommodities thatcouldbeprofitably traded.At the time,arbitragewassucha simpleway tomakemoney that amultitudeof commodity exchangesopened theirdoors inMoscow.YuliaLatynina,ahard-digging journalistandnovelist who delighted in exposing skullduggery in Russian finance andindustry, recalled that Khodorkovsky’s early years were characterized byrumorsofallkindsofdealsforscarcegoods.TheyincludedimportingfakeNapoleon brandy and bogus Swiss vodka bottled in Poland, as well asstonewashed jeans, whichwere in huge demand, and laundering CommunistPartymoney.Ofallthemyths,Latyninarecalled,Khodorkovskyandhisteamwouldlateradmitonlytotheworkoftheirsciencecenterandthecomputers.But,Latyninarecalled,shehadbeentoldbyNevzlinthattheyalsobroughtinthe fake cognac: “‘Okay,’Khodorkovsky’s deputyLeonidNevzlinwaves hishand.‘Wefinancedthecognac.Noone,ultimately,waspoisonedbyit.’”25Khodorkovsky’snextmovewasintobanking.Atthetime,theall-pervasive

Gosbank,themainbankoftheSovietcentrallyplannedeconomy,hadsplitofffive new specialist banks, known as the spetsbanks, for agriculture, industryandconstruction,foreigntrade,retailsavings,andthefifth,Zhiltsotsbank,forfinancingsocialneeds,suchashousing.KhodorkovskyshoweduponedayatZhiltsotsbank,whichwas in his district, and asked for a loan. “I heard suchthings could happen!” he laughed years later, recalling the audacity of therequest. The bank didn’t throw him out. Bank officials explained that theycouldonlygive a loan to a state enterpriseoperatingunder theofficial stateplan,andKhodorkovskywasnotastateenterpriseandwasnotundertheplan.Theyalsotoldhimthatifhewasabanktheycouldgivehimacredit—but,atthatmoment,hewasnotabankeither.At the time, theveryfirstcommercial

banks were being permitted, many of them taking advantage of the Law onCooperatives.It was another of those breakthrough moments when Khodorkovsky was

anointed or anointed himself. The management of Zhiltsotsbank agreeablyhelped Khodorkovsky set up his own commercial bank and then made himloanstofinancethecomputerdeals.26Zhiltsotsbanksignedonasfoundersofthenewbank,butKhodorkovsky recalled theydidnotcontributeanycapital.Hesaidthebank’soriginalcapitalincluded2.5millionrublesfromthesciencecenter ’sprofits.Khodorkovsky’sbankwentthroughseveralnamechangesandwas formally registered as Bank Menatep at the end of 1988.27 “We weremeetingpracticallynoobstaclesfromthestatestructures,”hecommented.“Arareoccurrenceofcircumstances.”28Rareindeed,butnotforafavoritesonofthesystem.Two years after first visiting the Institute of High Temperatures,

Khodorkovsky called on Sheindlin at home. Sheindlin told me thatKhodorkovskyinformedhimthathehadcomeintoalotofmoneyandwantedtocreateabank.ButKhodorkovskywasworriedaboutstatusandconnections—he needed some high-level sponsors. “They were young kids,” Sheindlinrecalled. “I took them inwarmly.Wedrankgoodwineandvodka together. Ilistened and I said, ‘You are great, kids! Tellme, and anyway I can help, Iwill.’”Sheindlin agreed to sit on the board of the new Bank Menatep. At the

infrequentmeetings, he recalled, “We sat together and drank tea for two orthreehours,andspokeaboutthesituationinthecountry.So,thatwasforthem,forthekids,veryimportant.”The “kids” were no longer kids. They were beginning to set up offshoreaccountsandmovehardcurrencyinandoutoftheSovietUnion,wheretheoldundergroundeconomywasrapidlybecomingtheprimaryeconomy.Althoughprivatepropertyhadnotyetappeared,Khodorkovskywasat the forefrontofthe rapidly emerging world of banking and finance, at the cutting edge ofproto-capitalism. JoelHellman, aColumbiaUniversity graduate studentwhocametoMoscowtoresearchadoctorateonthenewRussianbanks,foundthatMenatepwaslow-keyandinscrutable,comparedwithsomeoftheotherflashynew commercial banks that blossomed in 1989. “No one spoke English, noone hadWestern suits,” Hellman recalled of Menatep. “They didn’t rush to

fancy offices. They kept it low-key.”29 But Khodorkovsky was undeniablyamong the leaders of his generation. When Gorbachev invited a group ofpoliticians,scholars,andjournalists(theword“businessmen”wasnotused)totheKremlintotalkaboutreformin1990,Khodorkovskywasamongthem.30Asthe“kids”werefeelingtheirwaytoriches,theyalsosenseddanger.What

ifthewholeexperimentcollapsed?Wouldtheyhaveanyalliestodefendthem?Nevzlin, who had become a partner and confidant of Khodorkovsky, wasextroverted,whereasKhodorkovskywas reclusive.Nevzlinhadan idea: theyneeded to explain themselves because on the street, and in the public mind,thereweremany doubts about their business.Whatwas a commercial bank?WhatwasMenatep?Rumorsswirledthat itwasafrontfortheKomsomolorthe Communist Party or the KGB; the same rumors dogged almost all theyoungcommercialbanksatthattime.31Nevzlin proposed that they explain themselves in a small book, an

explanatorytract.KhodorkovskywentalongbecauseNevzlinurgedhimtodoso.Theyhadbecomeclosepartners.Nevzlinrecalledthattheywerelivinginacountry house outside of Moscow, he on the first floor and Khodorkovskyupstairs.In1991,thelastyearoftheSovietUnion,theydictatedtheirthoughtsintoataperecorderandthenpublishedCheloveksRublyom(Manwitharuble),mimicking a famous Soviet play about Lenin,Man with a Gun. The bookjacketfeatureddollarsandrubles.TheircompanyMenatep-Informprintedfiftythousandcopies.32The book was fifty thousand shouts at the system. Khodorkovsky and

Nevzlinscreamed,Getrich!Likeus!Theentiretreatisehasthetoneofbrazenteenagers taunting theirparents. It hasonlyone idea:getting rich isnot evil.Theexuberantwritingisquiteacontrasttothelow-keyKhodorkovsky,ashybankerinjeansandflannelshirts.Ithinkthebookwasacrudeattemptbythepairatpublicrelations.Thebookissofilledwithexhortationsandclichésthatit isalmostunreadable.“Ourcompass isprofit,” theywrote.“Our idol ishisfinancial majesty the capital.” Their goal: “to become billionaires.” Theyasked, “What is a good leader? It seems to us that it must first of all besomeonewhobringsprofit.”TheyinvokedHenryFordasoneoftheirheroes.“Amanwhocanturnaninvesteddollarintoabillionisagenius.”In their rambling discourse, punctuated by headings such as “Menatep: A

Way toBeingWealthy,”Khodorkovsky andNevzlin celebrated greed,whichmayexplainwhytheyfeltcompelledtowriteit:theyfearedenvy,jealousy,andmisunderstanding. Their fears were not unfounded. Suspicion of capitalism,

wealth,andproperty,afeatureofSovietpropaganda,wasadeeplyheldbeliefinRussian culture, one thatwould linger, especially in the older generation,for years after the demise of Soviet Communism. The “kids” did not knowwhatwascomingandsoughttojustifytheirextravagantnewstatus.“Ourselvesforourselves,”theydeclaredoftheirphilosophy.“Beingwealthyisanormofbeing.”Theyebullientlyrecalledalavishbusinesspresentationtheyhadmadeat theMoscowCommercialClub,a favoritewateringholeof thenewlyrich,with fireworks, food, drink, and entertainment for four hundred guests.“Glasseswerefilledwithtwentybrandsofcognac,whiskey,champagne,gin,allkindsofwines, liqueurs,morethanfiftykindsofdrinksforall tastes.Wedid not begrudge the expense of arranging the party.” They described theirlavishhospitalityas“thehighest formofethics.”But thepointofdescribingtheir glittering partywas not somuch to brag as to defend and justify. “We,Menatep, can afford not to fear the results of our own work, can afford toshowoffwhatwehave earned,” they insisted.WhereasLenin’s formulawasequalityinpoverty,“weareadvocatesofequalityintherighttoberich.”CharlesRyan, aHarvard graduatewho came to theSovietUnion in its finalyeartoworkfortheEuropeanBankforReconstructionandDevelopment,gotoffatrainonedayinSt.Petersburg,wherehehadbeensenttogiveadvicetosome young reformers, including Anatoly Chubais. Ryan recalled walkingacrossthesquarelookingforabus,thinkingthathewasanxioustoquitbeinganadviserandparticipateinthe“huntandkill”oftheemergingcapitalism.Hespottedamanwearingasandwichboardadvertisement,twostrings,andasignthatread:“BuySharesofBankMenatep.”“Isaytomyself,thisisfunny,Igottaseethisone!”recalledRyan,whohad

spent some time onWall Street before coming toSt. Petersburg and knew afew things about shares. “A bank? So, the guy is standing there. He’s got agreasyhandfulof these littlescrapsofpaper that sayMenatepBankshares. Iboughtacouple.Iwhippedoutacoupleofthosetwenty-fiverublenoteswithLenin’sfaceonthemandIboughtmyselfalittlefistful.Igotinataxi,andIamcracking up at the idea that you can just buy these bearer notes, you know,sharesonthestreet.Iamthinking,thishasgottobeapyramidscheme.“I get to the hotel and click on the television. You know, back then the

television ads inRussia, therewas no picture. Just a line of the name of thecompanyandaphonenumber.”“Surprise: there’sa face!And it’sMikhailKhodorkovsky.And therehe is,

wavingafistatthetelevisionandsaying,‘MynameisMikhailKhodorkovskyandIamurgingyoutoguaranteeyourfutureandbuysharesinBankMenatep!It’sacommercialbank.’”Ryanwasamazed.“ItwascouchedintheusualsortofSovietlanguage,butthebottomlinewas,buythesedamnthingsandyou’regoingtogetrich.Whichwasweird,andinteresting,I thought.It’s interestingthattheyareappealingtopeople’sdesiretomakemoney.”ThesignificanceoftheMenatepshares,oneofthefirstsuchstockofferings,

was that once againKhodorkovskywas at the head of the pack, relentlesslylooking for new avenues and directions in which to expand. Despite hispenchant for secretiveness, Khodorkovsky decided that he wanted to makeMenatepintoahouseholdnameandturnedtoVladislavSurkov,awiry,chain-smokingyoungmanwhomhefirstmetattheyouthsciencecenter.Surkovhadmadehisfirstmoneybyusingastatepresstoprintreproductionsofafamouspainting, which he then sold for a huge profit on the street outside an artexhibition where the original was hanging. “I liked Khodorkovsky at firstglance,”Surkovrecalled,“becausehe immediately tookasheetofpaperandstarted drawing circles and arrows, and he said that in several years we’regoingtohaveanempire.”33“Iknewthatmanypeople,themajorityofpeople,wereveryskepticalabout

Khodorkovsky’s ideas,” he added. “Everybody thought that the Communistsjustgaveyoungpeopleachancetoplayforabouttwoorthreeyears,andthattheywouldnevergiveusachancetogofurther.”ButSurkovsaidhebelievedinKhodorkovsky’sdreamofanempire,howeverdistant itmayhaveseemedfromtheshabbybeginningsintheyouthsciencecenter.“IwantedtobelikeaherointhemoviePrettyWoman.Iwantedtobeabigbusinessmanwho’ssittinginabighotel,supervisingbigevents.”SurkovbecameKhodorkovsky’smarketingman.Hehiredsomejournalists

he knew, and together they sat down for a brainstorming session, thinkingabouthowtocreateanadvertisingcampaign. Insteadof long,boringSoviet-style television appearances, Surkov came up with snappy, attention-gettingads.Hethoughtupafoursecondflashonthetelevisionscreenthatsaidsimply,“Bank Menatep,” and he got the bank’s name posted in a corner of thetelevision screen during the weather broadcast onVremya, the main nightlynews broadcast, which was rigidly controlled by the party. “Peopleremembered it,” he recalled of the weather advertisement, “but we had tocoordinate it with the party central committee.” Surkov also cajoled famousRussianactorsintoappearinginMenateptelevisionspots,encouragingthemto

give testimonials using any words that came to mind, and he negotiatedappearances by Khodorkovsky on popular television talk shows, includingMoment Istiny and Tema, a popular program that often broke Soviet-erataboos.Althoughtheywereadvertisinginpublic,Menatepwasnotreallyinterested

in the public. The bank was a largely closed financial nerve center forKhodorkovsky’stradingandcurrencyoperations.Thepointoftheadvertisingand shares campaigns was political insurance against a crackdown by theauthorities.IftheCommunistPartyhadstartedthewholeexperiment,itcouldalso shut it down.Therewere dark clouds of retreat in 1990, asGorbachevhesitated with glasnost and perestroika. “We wanted many thousands ofshareholders in our companybecausewe expected that the authoritieswouldsay at any time, ‘Enough!’ When they came to our bank to disperse it, wewanted them to encounter the resistance of many shareholders,” Surkovrecalled.Within the bank, Khodorkovsky was creating a money machine that wouldtower above the firstmodest transactionswithbeznalichnye.He realized thatthe really large sums to be found in Russia were not in the private sector,whichwasstillinitsinfancy.KhodorkovskyandNevzlindecidedtogoforthebigmoney—tomilkthestate,thelargestsourceofcapital,moredirectlythanbefore.Theybeganroamingtheincreasinglychaoticcorridorsofpower.TheSoviet Union was already coming unglued, and a new power center hademerged with Yeltsin at the head of a separate Russian government.Khodorkovsky became an adviser to Yeltsin’s prime minister, Ivan Silayev.Whathedidinthispostisnotknownprecisely,butitmusthavegivenhimanidealvantagepointforidentifyingnewsourcesofcash.Meanwhile, the Soviet government was cranking out huge amounts of

creditstoenterprisesinavainefforttokeepthemfromfallingapart.Menatepbecameanauthorizedbank,oneofthechosencommercialbanksthatservedasan intermediary to transfer government money to enterprises. The rate ofreturnforworkingwiththegovernmentmoneywas,onthefaceofit,notverylucrative, Khodorkovsky told me. But Khodorkovsky could parlay the statecredits—whichcamepracticallyfree,likewaterfromatap—intogoodprofits.He took the state credits, used them for his ownpurposes, andpaid the statebackmuch later. Itwas free capital.Khodorkovsky toldme that in 1990 and1991, the computers and hard currency earnings began to play a secondary

role in his bottom line. “The main thing was credits” from the state, herecalled.“Basically,wetookmoneyfromthestate,gaveittostateenterprises,and then tookmoney fromstate enterprises and returned it to the state.”Theturnover was tremendously profitable in part because neither the stateenterprises nor the low-paid bureaucrats fully understood the time value ofmoney;Khodorkovskycouldearnhisprofitsbyholdingtheircashandusingit.LatyninawrotethatKhodorkovskywasalsoveryskillfulatmanipulatingthebureaucrats. “He was one of the first to understand the advantages ofinvestments in government officials,” she wrote. “Receptions for high-levelguests at thebank’scountrycottagesonRublevskoyeHighway . . .wouldbereturned in income a thousandfold.” 34 In other words, Khodorkovsky andNevzlin realized the value of connections—that a bureaucrat, properlyentertained,couldsignoverabigaccounttotheirbank,andtheycouldmakemillionsofdollarsjustplayingwiththemoneyofthestate.Khodorkovsky’s machine was moving into overdrive. His network of

connectionsbegantostretchfarabroadtosuchconfidentialoffshorebankinghavensasSwitzerlandandGibraltar, aswell as theUnitedStates.TheSovietgovernment maintained tight restrictions on hard currency, but the youngcommercialbanks, includingMenatep,begantoroutinelyignorethem.35ThegraduallycollapsingSovietstatehadnowaytokeeptrackofthefleet-footedeasy money boys. Khodorkovsky’s early offshore network extended toGeneva,andaprivateinvestmentbankknownasRiggsValmet.ThefirmhadofficesinGibraltar,Cyprus,theIsleofManandotherfinancialcentersknowntocatertowealthyindividualsandcompaniesseekingwaystoavoidtaxesandmovemoneyoffshore.AftertheBerlinWallfellin1989,RiggsNationalBankofWashingtonhadpurchaseda51percentstakeinValmetaspartofaplantoexpand into Eastern Europe and Russia.36 Khodorkovsky was not yet thirtyyears old—and only a few years earlier had tried unsuccessfully to open ayouthcaféinMoscow—whenhefirstbecameaclientoftheexclusiveGenevainvestment bank. At the lavish party Khodorkovsky threw in 1991 at theMoscow Commercial Club, where a jazz band played softly and MercedesBenzes and BMWs filled every available parking space outside, arepresentativeofRiggsValmettoldareporterthatKhodorkovskyhadalreadybeenaclientfor twoyears.“Theyare themostsophisticatedinMoscow,”hesaidofKhodorkovsky’steam.Also,PlatonLebedev,whowasthenMenatep’sfinancialdirector,calledRiggs“ourteachers”andadded,“TheirSwissbranchisoursecondhome.”37

Five days after theAugust 1991 coup attempt against Gorbachev, NikolaiKruchina,theCommunistPartytreasurer,threwhimselfoutofawindow.Sixweeks later, his predecessor, Georgi Pavlov, fell to his death the sameway.Theytookwith themoneof thegreatsecretsof theSovietdenouement:whathappened to the billions of dollars held by the party?Themissing cash andgoldof theCommunisthierarchybecameanenduringandunsolvedmystery,one that even a decade later could arouse the most intense arguments andspeculation amongMoscow bankers and politicians.No one knows for surehow much money was involved or where it went, but the speculation oftenpointed to the “kids” of the Komsomol, the most successful of whom wasMikhail Khodorkovsky. Was it possible that this bright young fellow, whofound his first wealth as the system scrambled to rescue itself, became theCommunistParty’sliferaftaswell,helpingthepartybossesorKGBtransferriches safely away to foreignbank accounts?Khodorkovsky alreadyhad theskills,thenetwork,andtheforeigncontacts.Khodorkovskyhasdeniedarole insavingtheparty’smoney.Buthemade

anambiguousstatementaboutitintheearly1990s.“Abankislikeawaiter,”he said. “Itsbusiness is to cater to the clients independentlyof their politicalbeliefsoraffiliationwiththisorthatcamp.Itsjobistotakeorgivemoneytosomeone,registeringthedeal.Soitisnotcleartome,whatisthefaultofthosebanks that kept the Communist Party money on their accounts? Had I beenofferedtokeeptheminmybank,Iwouldalsohaveconsidereditasanhonor.Then all of a sudden the Communist Party was declared a criminalorganization, and the banks servicing it became if not criminals then somekindofaccomplices.Itshouldnotbethisway.”38YegorGaidar,whowasYeltsin’sfirstprimeminister, toldmethattheonly

peopleinRussiawhocouldreallyhelpfindtheCommunistPartymoneyweretheKGB—andtheyhadprobablytakenthemoneyout.Gaidarturnedinsteadtotheinternationalprivatedetectivefirm,KrollAssociates,tohelpfindthepartymoney.39Gaidarauthorizedafeeof$900,000forthreemonths.ByMay1992,the probe had produced a lot of paperwork, but theRussian security servicewasnotcooperating,andGaidarconcludedtheinvestigatorswerecomingupwithnothinguseful.Hestoppedthesearch.At the same time, Fritz Ermarth, a top CIA official, heard about the

investigationfromaretiredCIAcolleague.TheretiredcolleaguetoldErmarththat the new Russian government wanted to find “the vast sums essentiallystolenby theKGBonbehalfof itself and theCPSUanddepositedabroad in

bank accounts and front companies.” Ermarth said his former colleaguewanted to know if the U.S. intelligence community could help the Russianreformersgetthemoneyback?40ErmarthsaidthatU.S.intelligencecouldhelpfindthemoney.Butshouldit?

Ahigh-levelWhiteHousegroupwasconvenedtodecide.Buttheanswercameback:no.Ermarthsaidtherationalewas“capitalflightiscapitalflight.Wecanno more help Russia retrieve such money than we can help Brazil orArgentina.”Thecasewasclosed,andthemoneyneverfound.

Chapter6

BorisBerezovsky

ON LANGUID summer days, Leonid Boguslavsky took his small skiff,poweredbyacrankymotor,andzoomedoutovertheshimmeringflatsurfaceof the lakeoutsideofMoscow.When themotorbrokedown,as itoftendid,Boguslavsky spent weeks searching for spare parts. Then he devoted hourstaking it apart and then reassembling it, tenderly coaxing it back to life. Acomputer specialist, Boguslavskywas curious about how thingsworked. Hehadafeelforthemotor.Heknewwhenitcouldrunandwhenitwouldnot.Onasummerweekendin1974,Boguslavskyplannedanoutingwithadozen

acquaintances,includingoneofhisclosestfriends,BorisBerezovsky.BothheandBerezovskywereyoungresearchersattheInstituteofControlSciences,aprestigiousthinktankforappliedmathematics,automation,andtheemergingcomputer sciences. Boguslavsky, then twenty-three years old, was reserved,while his friendBerezovsky, five years older,was irrepressible.Berezovskyhad a full head of black,wiry hair and longish sideburns.He spoke rapidlybecausehethoughtrapidly.Sunday?Sure.Thelakesidepartywasset.On Saturday, the motor died. Boguslavsky knew it was impossible to get

spare parts before Sunday,maybe not for days orweeks.WhenBerezovskyandtheothersarrivedonSunday,hetoldthemthebadnews.Hesuggestedtheyplay football and forget about the boat. The others agreed, but Berezovskyrefusedtobelievethemotorwasdead.“Leonid,”heimplored,“let’strytofixit.”“Boris,” he replied, “there is no way to fix it. What do you know about

engines?”“Iknownothingaboutengines,butwehavetotry!Wehavebeendreaming

aboutwaterskiing,itwillbeagreatthingifwecanfixit!”Berezovskysaid,hisspeechpickingupspeedasitdidwhenhegotexcited.“Okay,” Boguslavsky relented, confronted with his older friend’s

considerablepowersofpersuasion.“Ibetyou—it’sjustimpossible.Iknowthis

engine.Somethinghashappened,andwejustcan’tfixit.”While their friends went to the beach and lit a bonfire, Boguslavsky and

Berezovskyheadedofftothedocktotrytorepairthemotor.Boguslavskydidthework,whileBerezovskytalkedandtalkedandtalked.Boguslavskythoughtto himself: Berezovsky can’t even use a screwdriver, but he sure can talk!Threehourslater,theyhadtakenapartandreassembledthemotor.Itwasstilldead.Theyhadmissedmostof theparty,yetBerezovskyinsistedtheyhad tokeeptrying.“Wetriedthisandthat,”Boguslavskyrecalled.Berezovskywouldnotgiveup.Thesunwasgoingdown,theirfriendsweretired,andBerezovskyfinally acknowledged that Boguslavsky had been right all along, the motorcouldnotbefixed.Berezovskywaslikethat.Healwaysraisedthebartothehighestnotchand

went for it.Hewas always inmotion, always racing toward the goal, neverknowing or fearing obstacles. Even if no one else believed it was possible,Berezovskyhadtotry,andhewouldonlyabandonhisquestattheveryend,attheverylastminute,ifitbecameabsolutelyandunassailablyclearthatthegoalcouldnotbereached.Therewasoneotherreasonhemightgiveup,andthatwasthatBerezovsky’s

mindwasrestless,hisemotionseverchanging,andhesometimeslostinterestinwhathehadstarted.Butas longashewantedsomething,hedidnot relax,notforaminute.“Hehasthisattitude,”Boguslavskyrecalledmanyyearslater,when both of them had become successful businessmen, “never stopattacking.”1

Moscowisaflatcityofbroadboulevards,crisscrossedbyalazyriveranditstributaries, strewn with a hodgepodge of buildings, from elegant stoneprerevolutionary apartment houses to ugly concrete prefab high-rises andSoviet-era utopianmonstrosities.A few gentle hills rise on this flat plain ofdiversity, and one of them lifts Profsoyuznaya Street as it extends outwardfromthecenterofthecity.Perchedonaslopeat65ProfsoyuznayaStreetistheInstitute ofControl Sciences, a sleek box of an office building fronted by apond.Itisanislandofseemingcalmisolatedfromthemetropolis.Huddledintheir tiny closetlike offices or drinking tea in the high-ceilinged classroomswithpicturewindowsoverlookingthecity,thescientistsandresearchershereformed the brain center of Soviet technology. Founded in 1939, the institutehadoriginallybeenanoutgrowthofStalin’sdriveforrapidindustrialization.AfterWorldWar II, a whole new family of mechanical beasts had arrived,

requiring ever more sophisticated controls such as intercontinental ballisticmissilesandatomicpowerstationsandjetfighterplanes.Thescientistswrotethe algorithms that guided these rockets and jet planes. They toyedwith theflowofgiantoilrefineriesandsearchedendlesslyfortheperfectautomationfor a thousand assembly lines. On their chalkboards were scratchedmathematicalformulasforcontrollinganythingthatmoved,fromtheorbitofa supersecret satellite to a scheme for sorting themail.As the SovietUnionforeverstruggledtokeepupwithWesterntechnology,theinstitutebecameanelite and prestigious scientific center encompassing everything fromcybernetics to pneumatics to the study of decisionmaking. One of the mostfamousaccomplishmentswasthealgorithmofprofessorMarkAizerman,whofiguredouthow tokeepa tank’sgun lockedona targetwhile the tank itselfwasinjerkymotion.Buttheinstitutewasmorethanchalkboards,theorems,andassemblylines.It

wasafreethinkingcauldronofintellectualferment,aclubfornonstopdebatesaboutliterature,theater,philosophy,perestroika,glasnost,autoparts,sausage,theshortageeconomy,andwhateverelsecouldbechewedover.Sciencewastheirpurposebutlifewastheirdiet.Mostofthescientistswrotetheirpapersathome on the kitchen table and spent their days at the institute in thesediscussions.VladimirGrodsky,whoworkedintheinstituteatthetime,recalleditwasverymuchlikethemythicalInstituteofResearchintoMagicalProcessesdescribedinthefamous1966Russiannovel,MondayBeginsonSaturday,bythe brothersArkady andBoris Strugatsky. “Itwas a science fiction novel inwhichalltheintellectualelite,alotofreallyintelligentandtalentedpeople,gottogetherinoneparticularplace.”2In the halls of the Institute of Control Sciences strolled gifted

mathematiciansandtheorists,whoworkedwiththeirformulasandenjoyedtheluxury of time to think. Theywere grateful for a small place to scratch outtheir ideas,adecent salary,a seminarwhere theycouldbrainstorm,acupoftea,andtheintellectualroomtothrive.Buttheydidnotmaketheirownspace;itwasprovidedtothembyothers,whofoundthemoneyandthemeans.Berezovsky was one of those who found the means. He streaked through

these halls like a comet.Hewas a compressed ball of energy. Constantly inmotion, he was burning with plans, ambitions, ideas, and, most of all,connections tomake themhappen.Hewas also restless, always racingdownthelonghallways,alwayscallingonthephonefromhalfwayacrossMoscow.His colleagues liked to say he was distributed over time: he was always in

severalplacesatonce.Somehow,withaninsistent,gentlecharm,andafierceunderlyingdesire,Berezovskygotwhathewanted.Berezovsky was the only child of a Jewish construction engineer and a

pediatricnurse.HisfatherhadcometoMoscowinthe1930sfromtheSiberiancityofTomsk.Berezovsky’sfatherworkedhisentirelifebuildingfactoriesinbricksand stone.Berezovskywasanonlychild,born January23,1946, justafterthewar,andenjoyedwhathecalleda“veryhappySovietchildhood.”Heattended a forestry institute before coming to the prestigious Institute ofControl Sciences as a young researcher January 23, 1969.3 As a Jew,Berezovsky faced hurdles. There were tacit, unspoken limits on how manyJews could hold senior posts, defend dissertations, enjoy the status of alaboratory chief, or win a prestigious prize. Everything required five timesgreatereffortforaJew;anti-SemitismwasaSovietstatepolicy.“Forme,therewas no political future,” Berezovsky told me. “I wasn’t a member of thepolitical elite. I am a Jew. Thereweremassive limitations. I understood thatperfectlywell.”4Yet the InstituteofControlSciencesbecameoneof the safeharbors for Jews. Many Jews had been inclined toward science to avoidserving the Soviet regime directly and to find professional satisfaction. ThebestandbrightestJewishscientistsgatheredattheinstitute.“Itwasasurprisingplace,”recalledAlexanderOslon,whocameto theinstitute in the1970sasapart-time student. “Surprising in the quantity of unusual people—by theirenergy, their intellect, their originality. There was an extremely richintellectual life at the institute, both scientific and humanitarian. It was aphenomenon.InthesphereofSovietlife,thesewerethebrightestpeoplewhohadcometogether.Itwas,toameaningfuldegree,aJewishinstitute.”5In the world of late Soviet socialism, a scientist could hardly dream of

accumulating great property and wealth. But status in one’s field, evenworldwiderecognitionandfame,wasextraordinarilyimportantandcouldleadtomaterialgains.Berezovskylaboredatappliedmathematics,but,byhisownaccount, he was not a brilliant scientist. What he was talented at—whateveryone remembers from his two decades at the institute—was a flair formaking things happen in a world of lassitude and false pretenses. Althoughimpulsive in his desires, Berezovsky thrived on inventing tactics to achievethem.Hehadananalyticalmind,alongwithenormousenergyandwillpower.The years at the institute were a precursor for all that was to come, forBerezovsky’stransformationintooneofthemostwealthyandinfluentialmeninRussia. In the halls of the Institute ofControl Sciences, the comet burned

brightly.Aizerman,thefamousprofessorattheinstitutewhohadsolvedthetankgun

problemandalsopioneeredresearchinimagingandpneumatics,believedthata scientist should break into a new direction every five years. He began tochampionscientificstudyofdecisionmaking.Attheinstitute,thebasicresearchunit was a laboratory, which was not a room filled with test tubes but agrouping of researchers around a theory or an idea. Berezovsky eventuallyheaded his own laboratory devoted to the theory of decisionmaking, usingappliedmathematics to study theprocessesofhowchoicesaremade.6 In theSovietsystem,certainscientificresearch,especiallymathematics,couldbeonestep removed from the ever present heavy-handed ideology. For example,mathematiciansworkedforyearsonmodelsofamarketeconomy—thiswaspermitted because they were models— while surrounded by the obviousfailures of Soviet socialism. The market models were useful to themathematicians because they learned about Western methods and read theWesternliterature,buttheycouldnotapplywhattheylearnedtowhattheysawonthestreet.Likewise,thestudyofdecisionmakingwasanabstractpursuitthatmay have had little influence on decaying Soviet socialism. Mark Levin, aprofessor of economics who did graduate work at the institute and knewBerezovsky in the early days, recalled that Aizerman was a visionary whodidn’tcarepreciselywherethefieldwouldleadhim.“Wearepioneers,”wasAizerman’soutlook,Levintoldme.“Ourtaskisanewfrontier.Andwecan’tallow ourselves to work out the details. Others will do that. Our task is tocreatevariousdirections.Toworkoutwhatwecan.Andthengoforward.Andletotherpeopletakecareofthedetails.”7WhatwasremarkableaboutBerezovskywasnotsomuchthescienceasthe

method. “He was a generator of ideas,” recalled Grodsky, who worked inBerezovsky’s laboratory at the time and later became a leading Russianspecialistonpublicopinionandpolls.“Heexpressedeverythingthatappearedinhishead.Halfofitcouldbenonsense,buttheotherhalfwasgenius.”Oslonrecalled Berezovsky, for all his determination, was not a very goodadministrator, and his laboratory often failed at simple paperwork orhousekeepingtasks.“Theywereburningallthetime,”hetoldme.“Theywerealways in the midst of creative surges.” Berezovsky was too busy to bebotheredwithmundanetasks.“Hewassoactivethatyoucouldn’tcatchhim,”Oslonrecalled.“Hewasinoneplaceoneminute,andinanotherthenext.Hehad a million phone calls. A million places where he was late to arrive.

Anothermillionplaceswherehepromisedtoarrivebutneverwent.”Iftherewasamethodtohismadness,Berezovskywasconstantlymarshaling

whatever resources his incessant networking could unlock. “It was purebusiness,” Grodsky told me. “The possibility of organizing seminars,conducting seminars, organizing trips abroad, receiving delegations fromotheruniversities,travelingthere,makingspeechesthere—noteverybodyhadthat.Borisknewhowtobuildrelationswithpeople.Hecouldbasicallyfindacommonlanguagewithanyone.”The hustling and networking was not confined to academic pursuits. The

headofalaboratorywasexpectedtobeaproviderforhispeople,ahunterandforager for his extended family. Even though they were the elite of Sovietscience, the traditions of blat and svyazi were alive and well. Berezovsky’sdayswere filledwith the hassles of not only organizing a seminar but alsofindingan apartment for a colleague.He tookcareofhis researchers, andaplaceinhislaboratorywasacovetedprivilege.For many who aspired to succeed in the Soviet industrial and scientific

system,ahigheracademicdegreewasessential.“Adissertationwascurrency,”Grodskyrecalled.“Whatmatteredwaswhetheryouwereadoctorofscienceor a candidate of science, amember of the party or not amember. Itwas acompletely different social hierarchy.And that iswhy, often times, graduatestudiesandscientificdegreesservedasakindofcurrencyofexchange.‘Itakeyou asmy graduate student, and you allowme to buy aZhiguli carwithouthavingtostandinline.’Itwasafunnyexchange,butitdidtakeplace.Thisishowtheserelationswerebuilt.”8Berezovsky’s recollections of his years at the institute support the

suggestion made by many that science was not at the center of his days. “Iworkedatsciencewithpleasure,”hetoldme.“ButIfeltthatthiswasn’t‘mine.’That is, Iwroteahundredarticlesand threemonographs. Ididsomething inmyfield,somethingmeaningful,Ithink.ButImanageditwithgreatdifficulty.I had to keep myself within very strict limits. Because I didn’t have anysupertalents,right?Inmathematics.AndIsimplyhadtocontrolmyselfallthetime. And—how can I put this?—I will tell you a funny thing. It’s hard tobelievenowbecauseIamseentodayasapersonwhoisinmanyplacesatthesame time. But three years of my life—three years of my life—I dedicatedmyselftoprovingonetheorem.Dayandnight.BecauseeverythingIdo,Idotoan absolutelymaximum degree. If I amworking on something, I will workonlyveryseriously,eighteenortwentyhoursaday.Iprovedthattheoremand

defendedmydissertation.AndwhenIdefendedit,whentheyconfirmedmeasacandidateofscience,oneofmyfriendsshowedmethattherewasamistakeinmyproof.Ispenttwomoreyearsdedicatedtofixingthatmistake.”Berezovsky took in talented, unemployed mathematicians, just to feel the

satisfaction that theywere working near him. “There were a few prominentmathematicianswhomBoris simplywatched out for,” recalledOslon. “To alargeextenttheyhadnorelationshiptothepracticalactivityofthelaboratory.They worked on high, pure mathematics. He simply created a few tranquilplacesforthemsotheycouldworknormally.Oneofthemhadnowork,justoddjobs—forexample,heclearedsnowfromrooftops.Boryatookhimon.“That was, for Boris, a kind of a weakness. A sort of special sympathy.

Maybehisdesiretohelpmathematicianswassomesubliminalthing....Healsowanted tobeamathematician.Hehadan inclination todopuremathematics.Maybe he dreamed of doing ‘high’ mathematics. On the other hand, thestrengthofhischaracterwasthathewasalwaysaverypracticalperson.”9Berezovsky’s interests would blossom and then suddenly fade. He

sometimes could not sustain interest in his own projects. Once, Grodskyrecalled,politicalfeverswept theinstituteas theybegantoholdelectionsforaninternalcouncil.Berezovsky“alsobecameenthusiasticandstartedplaying.And then he suddenly lost interest. He said, ‘Come on guys, quit this.Whocares?Thisisallrubbish.Wewon’tbedoingthis!’”YetBerezovskywasconstantlyclimbinghisownladdertohigherstatus.His

charm,sincerity,cunning,andenergywerevaluableassets.Oslonsaid,“Thereare different levels of status: candidate of science, doctor of science, seniorlecturer, professor; then there are awards, Lenin Komsomol Award, StateAward,LeninAward.Apersonwhoismotivatedtoclimbupthisladdermustpossess themall.Likeakingwhopossessesacrownanda throne, thesearesymbols.Youhadtospendalotof timefor thosesymbols,butonceyougotthemyoucouldstartthinkingaboutthenextstep.”Levinsaidthateventheprocessofearningadoctoratewasmorealobbying

campaign than a scholarly quest. “In those years, it was less of a scientificprocess andmore a political process.And it has to be said that the politicalprocess—Berezovskydidthatbrilliantly.”10Berezovskyturnedhisattentiontowinningprestigiousprizes;hesetoutfor

thefirst level, theLeninKomsomolprize,andwonit.Thenhesetout towinthe farmore difficult State Prize, whichwas awarded by a jury. Towin theprize,hehadtoactivelyhustleforit;theartofconvincingwasasimportantas

thescienceitself.BoguslavskytoldmethatBerezovskythrewhisenergyintoseekingthehonor,“buildingrelationswithpeople,gettingreferences,gettingall kinds of very important documentation to support the case.” But, herecalled, Berezovsky failed to win the prize. “There was much morecompetition.”Berezovsky was undeterred. He told Boguslavsky that he had already

decidedonthenextstep:theNobelPrize.“HisrealgoalwastheNobelPrize,”Boguslavskyrecalled.“Heputthebar

at that level, and hewas really thinking how to approach this as a goal, thissummit.Hespentahellofalotoftime,anddidagoodjob,recruitingyoung,talented kids from the university, building his scientific team, building hismuscles,brainstorming.Hewasn’tarealscientistintermsofdoingparticularwork, likeusing techniquesandmethods.Hewasn’tgoodat that.Buthewasquitecreativewithcertain ideas,using talentedkids for the routinework.Hewasgoodatdecidingwhatsubject toattackandhowtogetacertainsolutionthat could be applicable for the Nobel Prize. It was not a joke. It was anabsolutelyrealthought.”“You know what stopped him?” Boguslavsky recalled. “Perestroika. It

openedupanotheropportunity.Ifperestroikahadnotbroughtthecommercialside,hewouldhavebeengoingaftertheNobelPrizeuntilhedied.”11

Berezovsky’s path to wealth began with a simple want—a car. In the early1980s,apersonalcarinMoscowwasararepossession.Boguslavskyhadanold,batteredredZhiguli.Berezovskycovetedthatcar.TheZhigulimodelwasamodifiedcompactFiat. Ithadbeenmanufactured

since 1970 at a colossal assembly line in theVolgaRiver town ofTogliatti,named after the Italian Communist leader. The Volga automobile factory,knownasAvtovaz,wasanentireFiatassemblyline,importedfromItaly.Fromhis work at the institute, Berezovsky had connections with Avtovaz andproposedadealtoBoguslavsky.HewouldsendtheoldredZhigulitoTogliattiand get it completely renovated—an almost unimaginable dream, since autoparts were extremely scarce. Berezovsky’s deal was this: if he arranged therenovation,theywouldsharethecar.“Isaidokay,fine,”Boguslavskytoldme.“Ididn’tlikethisshittycar,which

brokedowneveryday,becauseitwastooold.Itwouldbelikeanewcar.AndIremember,Iaskedhim,whowilldeliverthecarfromMoscowtoTogliatti?”Berezovsky,whohadjustreceivedhisdriver ’slicense,repliedthathewould

just drive the 634 miles to the auto factory. Boguslavsky was incredulous.“How can you? Two days ago you just got a license! How can you drivethere?” Boguslavsky insisted that before taking the car, Berezovsky wouldhave to demonstrate that he really knew how to drive. They set up a test.Boguslavskyparkedthecaronaramp,settingthehandbrake.HechallengedBerezovskytogetin,startthecar,anddriveitforwardwithoutrollingback.Berezovsky flunked—the car rolled backward. But then he turned on his

charm. “He is very pushywhen he wants to get to the target,” Boguslavskyrecalled.“Hesaid, ‘Leonid,don’tworry.Everythingwillbe just fine!LetmedrivetoTogliatti!”AndBoguslavskyrelented.When the car came back, good as new, Boguslavsky didn’t ask any

questions.Theysharedthecar;oneweekBoguslavskydroveit,thenextweek,Berezovsky. Soon Boguslavsky noticed: Each week, he drove five hundredkilometers andBerezovsky drove three thousand kilometers.The cometwasunstoppable.“IcannottellyouhowhappyIwas,”Berezovskyrecalled.12

AsSovietsocialismdegenerated, theauthoritiesplacedgreat faith in the ideathat scientific research could rescue it. The central planners and partyideologues nurtured hope that science—empirical data, mathematicalformulas,thebestminds—couldcurethelong,sloweconomicstagnation.TheInstitute ofControlScienceswas tightly interlockedwithSoviet factories, asevery researcherendeavored to“prove” thathis sciencehad reapedpracticalrewardsintheeconomy.ThereisaRussianwordthatdescribedthiscomplexrelationship, vnedrenie , literally introduction or inculcation. It meant thateverythinginsciencemustbeshowntobeusefulandpractical.“Alltheories,allformulas,allexperimentsultimatelyhadtohavesomekind

of vnedrenie,” Oslon told me. “Any kind of technical discipline, includingapplied mathematics, mechanics, physics—all of this had to be ‘inculcated.’What did inculcation mean? Every dissertation consisted of some practicalpart, inwhich themethodsofapplicationweredescribed.How thescientists’theoryisappliedinpractice:forafactory,foraninstitute,foratransportationsystem.” The scientist sent the results to the factory, which then provided adocument,knownasanakt,tocertifythattheresearchhadindeedbeenuseful.“Moreover,thatitisnotsimplyuseful,butthatithadaneconomiceffect.So,

therewouldbeanotewhereitwaswrittenthat,‘Asaresultofinculcationofthedevelopmentofapplicantforthedegreeofcandidateoftechnicalsciences,Mr.Ivanov,asavingsof10,000rubleswasobtained.’Signature,seal.Thatis

whyallthescientist-organizers,whohadgraduatestudents,collaboratorsandco-researchers, strove toward establishing connections with practicalorganizations.”Theaktwouldbefollowedbycontractsforongoingresearch,whichinturnbecameasourceofrevenuefortheinstitute.Berezovsky’s laboratory earned its vnedrenie from the Avtovaz plant in

Togliatti.TheplantwasoneofthelargestindustrialundertakingsintheSovietUnion. It churned out hundreds of thousands of the little Zhigulis andaccountedforover1percentoftheentireeconomy.Oslonrecalledtheinstitutewould typically have a plan: “Laboratory of Berezovsky. Client: the factoryAvtovaz.Theme:developmentofthesystemofdesigningofautomobiles.”Thelaboratorywrotereports,theinstitutesentthemtothefactory,thefactorypaidtheinstituteandsometimestheresearchers.But in the late Soviet years, everyone knew that vnedrenie had become a

shellgame,partofthebusinessofjockeyingforresourcesinsideaneconomyofscarcity.Noamountofscientificresearchwasgoingtosavethedinosaurofdeveloped socialism, but the subsidies for research kept coming and theresearcherskeptinsistingtheywereactuallymakingindustrybetter.“Wehadafoolish system,” said Grodsky. “There existed a whole bunch of methods,calculationsofhowthisformulahadinfluencedtheprocessofproducingcars,whatever. It was very funny. It was kind of a game, and everybody wasplaying.”Headded,“BoriswasageniusinthesensethathewasoneofthefirstpeopleattheinstitutewhoestablishedveryprofitablecontactsbetweenhislabandAvtovaz.Itwasmoneythatpeoplecouldliveandworkon.”13ButBerezovskyhad far greater visions than small-time favors and pocket

change.HeknewthattheboxylittleZhigulicarswerethedreamofEveryman.Avtovaztohimwasmorethanafactory.Itwasagoldmine.“I understoodone important thing,”Berezovsky toldme. “At that time, an

enormousnumberofpeoplewantedtobuycars.Itdidn’tmatteriftheylackedanapartment.Itdidn’tmatteriftheylackedclothes.Butifonlytherewouldbeacar!”Berezovskypaused.Hewassittinginthenineteenth-centurymansionhehad

transformedintoabusinessclubwearingapressedwhitebusinessshirtandanelegant maroon silk tie, sipping from a glass of red wine. He savored thememory,as if ithad rushedback tohimagain throughall theyears,ofhowdesperatelypeoplewantedacaroftheirown,adreamthathetoohadshared.“Possessed,”he toldme, pausing again. “I remembermyself.My first car

appearedwhenIwasfortyyearsold.Halfacar.Oneweekmine,theotherweek

his.Andwedidn’targueaboutitonce.Notonce.”The Volga automobile factory was built in the spirit of the triumph ofsocialism. In 1967 young Komsomol construction brigades from threehundredcitiesand townsconvergedonabarren sitenear theVolgaRiver toerectwhatwouldbecome the largestautomobile factory in theSovietUnion.Theybeganexcavatingnot just amammoth factorybut awhole factorycity,includingblocksofapartmentstohouse150,000futureautoworkers.Forthreeand a half years, every day, forty-five thousand workers, two hundredbulldozers,fivehundredconstructioncranes,onehundredexcavators,andtwothousand dump trucks labored to erect the new industrial metropolis.14 Theplant itselfwasagiganticbuilding,fourteenkilometersaroundtheperimeterwith twenty-one entrances. On April 19, 1970, the first car rolled off theassembly line, theVAZ2101,amodifiedFiat124witha tiny1.2 literengineand trademark squared-off nose and round headlamps. It was called theZhiguli,namedaftertherollinghillsonthewestbankoftheVolgaRiver.Justthree years later, themillionth Zhiguliwas produced, and by 1974 the plantreachedfullproductiononthreemassiveassemblylines,eachwithacapacityof220,000carsayear.Thescaleofthefactorywasimmense,butsowasthedemandforcars,just

oneofmanyconsumergoodsthathadfallenintoshortage.15Inthelate1970sandearly1980s,thefactorybegantorunafoulofthelargermalfunctioningofcentral planning. Shortages of parts and badworkmanship plagued the littleZhiguli.Bytheyearsofperestroika in the late1980s, thefactorywasrottingfromwithin.Soonthevulturescametopickoverthecarcass.Thecentralplannerscreatedacardistributionsystemthathadnorelationto

the market. Prices didn’t really matter; color was irrelevant, a guaranteeuseless.The ideaofkicking the tiresandslamming thedoorswas ludicrous.Thedistributionwasbasedonparty,privilege,andconnections:carsweresentto various groups, such as unions or enterprises or Komsomol, based onsvyazi,andthegroupsdecidedwhowouldgettheprizedvehicles.AtissuewasnotwhetheryoucouldbuyaZhigulibutwhetheryoucouldgetoneafter tenyearsofwaitingonthelist,andwhether,ifyougotone,youwouldkeepitorresellitimmediatelyatahugeprofit.Tomakemattersworse,thesimpleZhiguliwasnotabreadbox,althoughit

lookedlikeone.Itwasamoderatelycomplexpieceofmachinerythatneeded

maintenance and spare parts, and they too slipped into the shadow economy.Likethecars,sparepartsweredistributedbytheplannersandnotthemarket.Soon, asmillions of Zhigulis began to wear out brake pads and foul sparkplugs,asfenderswerecrunchedandheadlampsshattered,sparepartsbecameavaluablesecondcurrency.Theyweretradable,portable,andalwaysindemand.Astheshortagesgrew,sodidthevalueoftheparts.Itwasaclassicexampleofthesocialisteconomiccrack-upinslowmotion.AZhiguliownerremovedthewindshieldwiperbladesfromhiscareverytimeitwasparkedsotheywouldnotbestolen.Theshortagesgrewmoreandmoresevereinthe1980s;atonepointtherewerespecialgangswithgiantsuctioncupdevices.Theywouldspotaclean,uncrackedwindshield,and,whennoonewaslooking,stickthesuctioncups on it, pop it out, and steal it in a flash. Adding to the despair of carowners, the networkof service stationswere also chronically short of spareparts,andanykindofseriousrepairdemandednotonlyamechanicbutspareparts.The1,033servicecenterscouldhardlycope,andduring theperiodofGorbachev’s reforms, the black hole of auto spare parts became a gapingabyss.Avtovaz was suffering not only because of the overall crisis of Soviet

socialism.Thefactorywasbeingdestroyedfromwithinbytheft.Crudelawsofsupplyanddemandexistedintheblackmarkets.Ifsomethingwasinshortage,andwasbadlyneeded,thedemandwasmetbystealing.Ifcarsandsparepartswerecurrency,thenAvtovazwasanenormoustreasurechest.Thefactorywastheoreticallyownedandrunbythestate,butasstatecontrolweakened,othersbegan to rob the treasure.So strongwas theblackmarket demand for sparepartsthatwholecontainersofthemwerebrazenlystolenoffthefactoryfloorbycriminals,causing theassembly line togrind toahalt.Ascriminalsgrewevenmoredaring, they stoodon theassembly lineandchosewhich finishedcars they would take. Moreover, the factory depended on a network ofsuppliers that was growing weaker as the Soviet Union itself was spinningapart.Carsrightofftheassemblylineweretradedtosuppliersfordesperatelyneeded parts, which were being stolen anyway. The fences around Avtovazbecame famous as a twenty-four-hour blackmarket in parts andwhole cars.Avtovaz,acompanywith4billionrublesinsalesand$670millionayearinhard-currencyearningsfromexports,avastwarehouseofwindshieldwipersand carburetors that were extremely valuable, a phalanx of assembly linesproducingmodestbutdesperately sought automobiles,wasbeing turned intoan extremely lucrative bazaar. The managers of the factory knew that their

plant was being dismembered, and they joined in the festival of theft.Everythingwasforthetaking.Berezovsky was losing his interest in science. His restless mind waswandering.“IhavealwaysdoneonlywhatIloved,”hetoldmeyearslater.“Ihave never ‘gone towork.’Right? I do only thatwhich I love.”Berezovskyalso claimed that he had an acute sensitivity to the change going on aroundhim.“Youmustlookattheworldthroughtheeyesofachild,”hesaid.Hesawin 1988 that the Soviet Union was undergoing a profound transformation.Gorbachev had flung open the doors of opportunity; the cooperatives werespringingtolife; thefirstbankswereopening.Thelongsocialistexperimentin collectivismwas ending, and the advantagewould fall to individualswhoseized themoment, who could think for themselves. Berezovsky envisionedhimselfamongthem.“Speakingbluntly, the tragedyfor themajorityofpeoplewas thestatehad

taken care of them, and the state had cast them aside,” Berezovsky recalled.“That is, overnight the state ceased to care about them, right? Millions ofpeople ended up without social protection, couldn’t go to the health clinic.People thought that someone was supposed to take care of them. The state,right? I didn’t think thatway.Maybemore quickly than others, I understoodthatthiswasthebeginningofanewera.”Berezovskyleapedintothebusinessworld.Byhisaccount,hisfirstdealwas

software. “We simply used the knowledge that I had gained professionally,fromtheinstitute,andtheworkwehaddoneattheinstitute,andstartedtosellthatwork.”BerezovskywasnoWillyLoman,goingdoortodoorpeddlinghiswares. He worked at a state institute and sold the software to the StateCommitteeonScienceandTechnology,thepowerfulgovernmentagencythatwas a conduit between the Communist Party and the Soviet scientificestablishment. Berezovsky said he “absolutely vulgarly lobbied our project”withtheagency.“Weconvincedthemthatitwasagoodproduct,andwesoldtensofthousandsofcopiesofthissoftware.Andthosewerethefirstmillionsofrublesthatweearned,andamillionrublesatthattimewasawholelot.”16Berezovskywasa relentlesscharmer.His friendBoguslavsky recalled that

Berezovsky—the compressed ball of energy—could also display a certainstudiedpatiencewhen it suitedhisneeds.He thoughtnothingofwaitingonadoorsteptopersonallybuttonholesomeoneforafavor.“Therewerenotafewoccasions when Boris needed something from me,” Boguslavsky recalled,

“andinthemorningIwouldbewalkingdownstairs,andIwouldseeBorisatthe entrance, just waiting for me. He was waiting because he wanted to fixsomethingwithme,andmyphonewasbusyorturnedoff,andhewantedtodoitrightthen—sohewouldjustsitandwaitattheentrance.”Thesamescene—Berezovskywaiting patiently in aKremlin anteroom,waiting in a televisionstudioouter lobby, looking for a favoror adeal—would reappearover andoverintheyearstocome.The intrepid Berezovsky used the same patience and resolve to good

advantage with one of the executives at Avtovaz, Vladimir Tikhonov, whooften came to Moscow on business trips. According to Boguslavsky, whenTikhonovarrivedinMoscowformeetings,Berezovsky,forwhomnotaskwastoo humble, would volunteer to be his chauffeur. Tikhonov often met inMoscowwithItalianautoindustrychiefsandspecialistswhohaddesignedtheTogliattiplant.AstheywereshuttledaroundMoscow,theirdriver,Berezovsky,absorbedeveryword.“Boriswasnevershy,”Boguslavskyrecalled,“ifheneededsomething.”

In January1989Gorbachev’s economic reformswere still amatter of greatuncertainty in the West. At the end of the previous year, a secret nationalintelligenceestimatepreparedbytheCIAandotherU.S.intelligenceagenciesopened with a declaration that “Gorbachev’s efforts at reviving the Sovieteconomywillproduceno substantial improvementover thenext fiveyears.”There is “some chance that Gorbachev’s economic programs may notsurvive.”17In theend,Gorbachev survived inofficeonly threemoreyears.But1989

turnedouttobearemarkablepoliticalturningpointtowardtheendoftheColdWar.TheSovietUnionpulleditslasttroopsoutofAfghanistan;theCommunistParty began to lose itsmonopoly on power; theBerlinWall fell; and in thespring, theCongressofPeople’sDeputiesbecame the first popularly electedlegislature in Soviet history.Despite pessimism aboutGorbachev’s future inthe U.S. intelligence community, the economic revolution he had unleashedwasunfoldingonthestreetsandinthecooperatives.Oneverysmallglimpseof itcouldbeseeninacaféonMoscow’sLeninskyProspekt,where thefirstrootsofBerezovsky’scapitalistempireweresunkintotheearth.The café was called Adriatica, and in January 1989 Berezovsky,

Boguslavsky, and Pyotr Aven, a mathematician-economist who had workedwithGaidarinMoscow,aswellassomeotherfriends,gatheredtheretostarta

business.Theydidn’thaveaclearidea.Theywerejustbeingcarriedalongbythe times; everyone around them was going into business, and they werealreadyalittlebitlate.Boguslavskysaidtheideawastosetupalegal“shell,”intowhicheachofthemcouldbringtheirowndeals.Theyrentedasmallroomandputupachalkboardonwhichtheywroteideasforthefledglingbusiness.Adetailed account of those years was written by Yuli Dubov, who became adeputytoBerezovsky.Hehascalledthebookanovel—hechangedthenamesoftheparticipantsandaddedsomeunrelatedeventstospiceupthestory—buthehasalsosaid,“IpaintedwhatIsaw.”ManypeopleIspokewithwhoknewBerezovsky in those years described the book,Bolshaya Paika, as the mostpreciseaccountoftheperiod,althoughitissometimesoverlygenerousinitsportrayalofBerezovsky.18Dubovlistedtheideasthatthenovicebusinessmenwroteontheboard:

Weneedourownbank.At leastweneed toorganizenormalconditionshere!Wespenddayshere,

andthereisnothingtoguzzle!Isuggestwegetseriouslyinvolvedinmedicine.Weneednormalphones.AndatleastoneXeroxmachine.

Whatwouldthebusinessdo?Insomecases,theythrewinexistingindividualprojects, such a computer networking contract that Boguslavsky had inCzechoslovakia.Itbroughtinearlycash.Whilehisfriendswerecastingabout,Berezovsky had a vision.Hewanted to start a big business, nothing like thesmallcooperativesthendottingMoscowstreetcorners.Hedecidedtoformajoint venture with a foreign partner, which would be more solid than acooperativeandcouldbeusefulingettingmoneyoutofthecountry.AventoldmethatBerezovskyalwayshadthelargestambitionsofanyonein thegroup.“Berezovsky always wanted to have a billion dollars,” he said. “He alwayswouldtakehigherrisks.”FromhisdaysasadriverforTikhonov,andfromhisexpandingcontactsat

the factory, Berezovsky learned of an Italian company, Logosystem SpA, asystems integrator based in Turin and a Fiat supplier. The specialists fromLogosystem frequently flew to the Soviet Union to fix the assembly line atAvtovaz. When Western businessmen came to the Soviet Union, they wereoften bewildered by an array of problems and inconveniences. Berezovskyknew he could smooth out their troubles. Berezovsky offered to become anintermediary for the Italians, giving them a base inMoscow for their work

with Avtovaz. They agreed. In May 1989, Berezovsky founded Logovaz—borrowinghalfthenamefromtheItalianLogosystemandhalffromAvtovaz.ForBerezovsky,thesprawlingAvtovazplantinTogliattiwasfertileground

for his human networking talents. “When he got to Avtovaz, he started tosearch,” Aven told me. “What did the executives need? They neededconnectionsinMoscow,andtheydidn’thavethem.TheywantedtogoabroadwithanAcademyofSciencesdelegation,andhecouldhelpthem.”HisfirstmajorbreakcamewithAlexanderZibarev,whowasthenadeputy

general director of the factory in charge of spare parts.Berezovskymade aclassic connection: he brought Zibarev to the institute to work on adissertation, which was essential for any up-and-coming Soviet industrialmanager. In 1987 Zibarev received a candidate of science degree from theinstitute based on his thesis, “Perfecting the Centralized Mechanism of theDistribution of Spare Parts forAutomobiles,” usingAvtovaz as an example.Zibarev laterdefendedhisdoctoraldissertation too.Berezovsky toldme thathetooka“veryactivepartintheworkonthatdissertation.”Zibarev “wanted to be respected,” Berezovsky recalled. “And to defend a

candidate’sdissertation, thatmeansrespect.”Berezovskyinsisted thatZibarevwrote thedissertationhimself, although“hediscussedverymany thingswithme.”Inturn,ZibarevhelpedBerezovsky,bringinghimtotheexecutivesuitesof

Avtovaz, where Berezovsky met Vladimir Kadannikov, the head of theenterprise.Kadannikovwasconsideredpartofanewgenerationofperestroikaindustrialmanagersandhadbecomedirectorin1986.Berezovskywantedthefactorytoserveasoneofthefounders,aswellasaclient,ofhisnewcompany,Logovaz.According toBoguslavsky, thepowerfulKadannikovat firstdidn’tsee thepoint—whydidheneedan intermediarywith theItalians?Butfinally,Boguslavsky said,Kadannikov agreed to giveBerezovskymoney just to gethim out of his hair. “Initially, hewas very skeptical,” recalledBoguslavsky,who became deputy director of Logovaz. Later Kadannikov became moreenthusiastic.Dubov, the author, told me that Berezovsky came across to the Avtovaz

executives as someone who could think big, as they did. “He simplyunderstood that,ofcourse,youcould firstcreateacooperative,a smallone,andthencometoAvtovazandsay,‘Ihaveasmallcooperative,let’swork.’ButyoucouldalsocometoAvtovazandsay,‘Let’screateanenterprisetogether.’What sensedid itmake to come toAvtovazwithanother cooperative?Some

fiftycooperativeswouldhavealreadybeenthere,andhewouldhavebeenthefifty-first. But hewas the only one to come and say, ‘Let’swork together.’”Both Zibarev and Kadannikov eventually became part of Logovaz whilekeepingtheirpositionsatthefactory.Kadannikovprovedkeyinmakingdealsthatwereprofitable forLogovazat theexpenseofhisown factory,Avtovaz.Butthisawkwardpositionwasnotunusualforthetimes—mosttopexecutiveswerescramblingforapieceoftheactionontheside.In his novel, Dubov described the first meeting with Kadannikov as a

seminalmoment.Thedirector“didn’tretaininhismemoryanydetailsofthemeeting and failed to feel anything important about it. But he should have.Precisely at that moment a small knot was tied, and a tiny thread began tostretch.Andthisthreadwastodevelopintoanet,sometimesvisible,sometimesnot,butaverysolidone,thatwouldlaterseizethefateofthecountry,thatofthe factory, and the fateofmanypeople, including thedirectorhimself.Andvery likely some of these people, having amore fine intuition, would haveflinchedatthatminuteandlookedattheirwatches.Becausethefirstbrickwaslaid in the foundationof the financialempire.”Thatempire, in real life,wascalledLogovaz.With the Logovaz structure in place, Berezovsky began to build an

automobileempire.“In the first stage,”Berezovsky toldme,“everything thatLogovazdid,Itriedtodomyself.Thatis,Iwantedtoseehowitworked.”Forexample, Berezovsky planned to sell secondhand imported cars. He went toGermany, bought aMercedes, and drove it back toMoscow, where the carcouldberesoldatafantasticprofit.19Hemadethe trip toGermanyandbacktentimes.20Thefuturetycoondiscoveredthatbusinessrequiredgutsandrisktaking.But

he retained his early impulsiveness. Without much advance planning, hedecided to import a fleet of 846 small Fiats. Berezovsky recalled that hepersuadedAvtovaztogivehimaloanof$5milliontobuytheFiats.Howhegottheloanisnotclear,butBerezovskyhadconnectionswiththecompany’stop brass, including Kadannikov. What sounds like a simple transaction—importingforeigncars—wasnotatallsimpleinSoviettimes.Berezovskysaidhe brought in the cars “absolutely officially, put them through customs, andorganized their transportation” from Europe to Moscow. “Brought them toMoscow,soldthem,andweatthattimeearnedmoreorless$3million.Atthattime,thiswascolossalmoney.ThatwasthefirstrealbusinessthatIhaddoneexceptforsoftware.”

Boguslavsky said the Fiat deal originatedwithBerezovsky’s joint venturepartner,Logosystem,inTurin.“Itreallywasahellofajob;itwassorisky!”Boguslavsky recalled. “And this was one story that shows Berezovsky’smentality.Basically,otherpeoplewouldprobablyspendmonthsjustcheckingeverything, trying to understand if they would fail or not.” But Berezovsky“jumped on the opportunity immediately.” Boguslavsky recalled that “a realcrisis” ensued becauseLogovazwas not prepared to receive the cars,whichwere obsolete by Western standards and had been parked in a lot inScandinavia for a year. Boguslavsky’smemorywas that Logovaz got a baddeal with the Fiats and earned no profit, only “three million dollars ofexperienceratherthanthreemilliondollarsofcash.”Dubovdescribed a farmore colorful account of theFiat deal inBolshaya

Paika,althoughitmaybeslightlyexaggerated.ThecarswereapproachingtheRussianborder,hewrote,whensomeonenoticedagovernmentrulethatsuchcars could not be imported for retail sale; they could only be imported for“internaluse”byanauthorizedimporter,ofwhichtherewereonlyoneortwo—and Logovazwas not among them. TheBerezovsky character inDubov’saccountwasinItaly,andwhentheLogovazofficecalledfromMoscowtotellhimofthesnafu,hereplied,“Staycool,guys.”Thenextday,theBerezovskycharacter discovered a state enterprise next door to the institute that wasauthorizedtoimportcars,andhecalledthedirector.“It was Friday,” Dubovwrote, “and so for two days and two nights, they

winedanddinedthedirectorandtwoofhisdeputies,calledupgirlsforthemfromtheMetropolHotel,gavethemgifts,andbySundayeveningtheysigneddocuments”allowingthecarstobeimported.Boguslavsky said the deal for the Fiats whetted their appetite for the real

gold mine: becoming a nationwide dealer for the sought-after Zhigulis. ToBerezovskythecarswereasymbolofpotentialriches.Hedidnothavegoodconnectionsinotherindustries,buthehadbuiltthemintheautofactory.“Forhim, thecarbusinesswasalwaysassociatedwithbigbusiness,”Boguslavskyrecalled.Once the pride of young Komsomol construction workers with a glint ofsocialist idealism in their eyes, the factorywas literally coming apart at theseamsinthelastyearoftheSovietUnion.Themanagersbegantoformtheirowncompanies, takingadvantageof their connections.Theybought the carscheaply off the assembly line or the rail cars and resold them for quick

superprofits,oftenoutoflotselsewhereinTogliatti.Theywerenothingmorethan middlemen, and the trade was so lucrative that they found themselvesjockeyingwithcriminalgangsfortherighttoclaimthecarsstillcomingoffthe assembly line every day. The old system of distribution by svyazi wasfalling apart and the new system was chaotic, violent, and exceedinglylucrative. “InTogliatti, they started growing likemushrooms,” recalledYuriTselikov,amidlevelAvtovazexecutive,referringtothemiddlemenandawaveofcrimeandviolencethatsweptthroughthefactorycityinthosedays.“Carsweregiventothem,andtheystartedtostufftheirpockets.”21The factory was a state enterprise that had been built by the state and

receivedstatesubsidies.TheZhiguliscameoutofthegatewithartificiallylow,subsidized state prices. Then they were sold at a huge markup. The traderswereeffectivelysuckingthevalueoutofAvtovaz,buttheyweredoingitwiththepermissionofthemanagersinside.Insomecases,theywerethemanagers.Valery Ivanov, a tall, dark-haired, harried, and courageous journalist for alocalweekly newspaper, theTogliatti Review, documented themanyways inwhich the factorybegan to fall apart in the1990s.The result ofhisprobingarticleswasaspateofangrythreats.HerecalledthatthemushroomingprivatefirmsarrangedadealwithAvtovazmanagement.Theywouldtakeabatchofcars—one hundred or two hundred—on “consignment,” meaning that theycouldtakethecarsnowforasmallsumandpaytherestbacklater,ornotatall.“Itwasatheftscheme,crudelyput,”Ivanovrecalled.Thebureaucratswhoworkedinthefactorytookbribestogreasethewayforthedeals,whichweremeasured in a special code: the height in centimeters of a stack of dollars.“Andsotheywouldsay,forthatcontract,well,fivecentimetersofdollars.”22ThuggeryandthefteruptedatAvtovazinotherwaysaswell.Whencriminal

groups stood on the assembly line and claimed the cars as they rolled off,anyonewhointerferedwouldsuffer;violencespread.AnatolyIvanov,aunionleader and an electronic technician at the factory, toldme howhe spoke outonce in a newspaper interview against a scheme,whichwaswidely used, offalseexportsofZhigulicars.Sincemarkets inEasternEuropeweregrowingmore competitive,Avtovaz often shipped cars there and sold them at a loss.Theofficialexplanationwas thatAvtovazwas cuttingprices in an attempt toholdontoitsshareofthemarket.ButIvanovandmanyotherssuspectedthattheschemewasdesignedtosuckthelifebloodoutofthefactory.Hebelievedthat the cars were not really exported. The documents were taken over theborderandstamped,buttheactualcarswereresoldonthedomesticmarketata

hugemarkup.Ivanovasked,“Ifthefactoryhasnomoney,whyarewesendingthesecarsouttoexport,anexportwherethecarsdon’tevenarrive?”Aweekaftertheseremarkswerepublished,Ivanovwasleavingforworkbeforedawn.Ahiredkiller lurked at the entrance tohis apartment.Thegunman fired andwoundedIvanovintheleg.IvanovlaterwaselectedtotheRussianparliamentfromTogliatti.23Dubov,inBolshayaPaika,offeredagraphicdescriptionofthechaosatthe

factory.HewrotethatthepolicenolongerneededtocultivatesourcestolearnabouttheRussiancriminalworld.“Itwasenoughtospendjustoneweekatthefactory.Withouthiding,representativesofallcriminalgroupswanderedaboutthefactory.”“The carsweredistributed among themat the assembly line,” hewent on.

“Anagreementhadbeenmadenottocarryoutrazborki (violentshowdowns)on the factory premises; that is why everybody behaved quietly, closelyobserving their competitors’ actions. Meanwhile, outside the factory,explosions and shots rang out. The big automobile war invaded half thecountry.”“Thechronicleofactionswashorrifying.InMoscow. . .arealbattletook

place, with no fewer than fifty people involved. Result: six people killed,unknownnumber ofwounded, three cars burned, and a police car blownupfromagrenadelauncher....Aseriesofexplosionsin‘pocketbanks’thatwereprovidingservices to thisor thatcriminalgroup.Peopledisappearing.Raidson saunas and restaurants where the leaders of the criminal world werecelebratingautomobiledeals.Itsmelledofbloodandgunpowder.”24Thesupplierswerealsocaught in thewebofviolenceandcoercion. “The

directorofonetirefactory,whodidn’tsensethesituationrightaway,wasputon thewindow sill and askedwhether he knewonwhat floor his officewaslocated,andhowlongwasthedistancetothepavement.Thedirectorflinchedand immediately signed approval for a shipment of train carswith tires, notevenaskinghowandwhentheywouldbepaidfor.”Asthefactorysankintothemireoflawlessness,themethodsusedtodrain

value out of the enterprise multiplied. One of the most common was thereexport scheme. Ivanovandothershavesuggested thatBerezovskywaspartofthisscheme.Berezovskyinsistedtomethatit“wasneverdone”byLogovaz.But itwas one of themost commonmethods ofmaking a fortune from thefactoryintheyearsBerezovskywasassociatedwithAvtovaz.Berezovskydescribedformehisownambitiousplan.Hestruckadealwith

AvtovazandKadannikovthatwouldmultiplyhiscapitalmanytimesoverandlaunch him on the path to becoming one ofRussia’s richestmen. Instead ofsmall consignments of one hundred or two hundred cars, BerezovskypersuadedthefactorytogiveLogovazahugefleetofcarsonconsignment—tens of thousands. Ivanov put the first batch at thirty-five thousand Zhigulis.Berezovskytoldmethetermswere10percentdownandtheremaindertobepaidtwoandahalfyearslater.ThehiddentrickinthedealwasthatBerezovskywasgoingtorepayAvtovaz

in rubles—andhyperinflationwas just around the corner.Thehyperinflationmeant that hewouldpayback for the cars in rubles thatwereworth far lessthantheyhadbeenwhenheboughtthecars.For example, in January 1993, thewholesale price of a basicZhiguli, the

model VAZ 2104, was 1.9 million rubles, or about $3,321.25 The Logovazretail price for this car, also in January 1993, was $4,590, or amarkup of$1,269percar.26Overthenexttwoandahalfyearsofinflation,therublewentfrom 527 to the dollar, when Berezovsky made the deal, to 4,726 to thedollar.27Thedealmeant thatBerezovskywasgetting thecarsforasongandpayingforthemincurrencythatwasrapidlyturningtotoiletpaper.(Anotherwaytolookatthedealwasthis:afterthedownpayment,heagreedtopaytherubleequivalentof$2,989laterforeachcar,but infact,after twoandahalfyears of inflation, hewould pay back only the ruble equivalent of $360 foreachcar.)Heknewwhathewasdoing.Ifhetookaconsignmentofthirty-fivethousandcarsandmade,conservatively,$3,000oneach—betweenthemarkupandthecurrencymargin—thatwasa$105milliondeal.“Of course, we would return the money as late as we could, because the

valueof themoneywas falling,”Berezovsky toldme.“Weunderstood thatapowerfulprocessofinflationwasgoingon.Thedevaluationoftheruble.TheeconomistsatAvtovazdidn’tunderstandthis.”“We were considering things that those on the other side were not

considering,”Berezovskysaid.Whilechaosreignedoutsidethefactorygatesand criminals lurked on the assembly line, Berezovsky described Logovaz,which created a network of dealerships, as above the fray. The smallergangsterswho took thecarson“consignment”didn’tpay the factorybackatall.“We were the first in Russia to create a market, a real market for cars,”

Berezovskyclaimed.“Before,itexistedonlylikethis:thegovernmentpriceisthis, and the ‘black price’ is this.Andwe created a realmarket.Any person

couldcomeofficiallytoastoreandbuyacar.Thatisamarket,isn’tit?”Yearslater,Kadannikovwasasked ifheregrettedgiving thecars toBerezovsky.“Icannotregretit,”hereplied.“Itwascleartomewhyweweregivingthemtheautomobilesforsale,becausebeforeitwasnotsaleswehad,but‘distribution.’Theneverythingcollapsed.Ourgroundscankeepnomorethantenthousandautomobiles,whichisthreedays’work.Weneededtofindaplaceforothersinorder to keep the plant in production. Logovaz came to us with a dealernetwork.” In fact, Kadannikov was almost giving away the cars, allowingAvtovaztobefurtherdrainedofitslifeblood.But even as he became the largest Zhiguli dealer, Berezovsky was still

restless. Inaphilosophicalmood,hehadoncequoted thegreatphysicistandhumanrightsadvocateAndreiSakharovassaying“themeaningofall life isexpansion.” Berezovsky was looking for expansion. Dubov observed inBolshaya Paika that the “wild outburst of uncontrolled business” at Avtovazwas“a serious threat. Itwasobvious that it couldn’t continue thisway.But itwasalsoobvious that the factory’s leadership, stuckunder thevariousbandit‘roofs,’wasunabletoundertakeanyconstructiveaction.”Thefactoryitselfwasavaluableprize.In1991theWallStreetfirmofBear

Stearns was commissioned to do a study of Avtovaz for potential foreigninvestors.Itsreportsaidnothingaboutgangstersat thegatesbutunderscoredtheassets:afactorythreetimesthesizeoftheaverageU.S.automobileplant,with four assembly lines, capacity to produce 740,000 cars a year, and acountryofpeoplewhowerehungry,absolutelydesperate tofulfill thedreamofowningacar.IntheSovietUniontherewasonecarforevery22.8people,comparedwithone for every1.7 in theUnitedStates.28Therewas a fortunewaitingtobehad.AccordingtoDubov,Berezovsky“decidedtostakehisall.”“Totakethefactoryforhimself.”29

Chapter7

VladimirGusinsky

THEDAWNOFperestroikafoundVladimirGusinskyatadeadend.Aneasilyinsulted youngmanwith outsized emotions,Gusinsky had trained as a stagedirector but failed to find a place in theworld ofMoscow theater.Hewas aJew, and he believed that anti-Semitismwas the unspoken reasonwhy doorsslammedinhisface.JewishdirectorshadmadeitintheSoviettheater,butnotGusinsky.Hehaddabbledinstagingpublicconcertsandculturalevents,andheevenhelpedproduce theentertainment for theGoodwillGames in1986.ButthosedayshadturnedsourwhenhegotintroublewithMoscow’sCommunistPartycommitteeforaharmlessprank.Hetoldthemtogotohell.In the mid-1980s, Gusinsky was going nowhere. He drove his car as an

unofficialtaxi,carryingpassengerstoandfromthenewinternationalairport,earningcashtosupporthiswifeandyoungson,andhopingtorestarthislife.Late one evening, Gusinsky, who was skinny and wore a leather jacket,

steppedoutofhiscartosmokeacigarette.Bychance,hehadstoppednearanelectricstreetcardepot.Heglancedatabacklotwheretheykeptthebigelectrictransformers.“IturnedaroundandsuddenlyIsawaveinofgold,”herecalled.“Whatwas

it? A huge wooden reel, twometers tall, wound with copper cable—coppercable that was used for the transformer of the streetcar. It was long, purecopper.AndIrealized,hereitis,thegoldmine!”Thegoldminewascopperbracelets,whichhadbecomeacrazeatthetime.

Theyhadafaintlyorientalappeal,andpeopleworethemtofendoffillnessesor evil spirits.Gusinsky tookone look at thewooden spool of copperwire,officiallystateproperty,andfinagledthreereelsfornexttonothing.Hefoundan idle state factorywith ametal-stampingmachineon the edgeofMoscow.Forsomecashontheside,hearrangedforhigh-qualitymetal-stampingmoldstobe fashionedat a closedmilitary factory.Soon the six stampingmachineswereworkingovertime.

Gusinskystartedacooperativeandquicklybecamekingofcopperbraceletsin the Soviet Union. The simple bracelets carried an imprint of two tinydragons andwere imprintedwith theword “Metal,” the name ofGusinsky’sfledglingbusiness.Thestampingmachinesworkedaround theclock in threeshifts, eachmachine capable of six strikes perminute. Soon the cooperativewasstampingout51,840braceletsaday.Thebraceletscosthimthreekopekstomakeandhesoldthemforfiverublesapiece.Inasingleday,hisrevenueswere 259,200 rubles,more than five hundred times themonthly salary of adoctor of science at a leading institute. “In those days,” he recalled, “it wasgiganticprofit.”Gusinskyhadmadehisfirstfortuneandrestartedhislife.1

HewasbornOctober2,1952,anonlychild,intooneofthemillionsofSovietfamilies that had known the pain of repression. Gusinsky’s maternalgrandfather was shot during Stalin’s purges. His grandmother had spent tenyears in the gulag and afterWorldWar II was ordered to live at least onehundred kilometers from the center of Moscow as part of the sentence.Gusinsky’smotherandhersisterhadnonethelessenteredMoscowundetectedand livedwith friends.Hismother evenattended theGubkin Institute forOilandGaswithoutbeingcaught.Gusinsky’sfather,Alexander,wasasimplemanwithoutanyhighereducation.HehadservedintheRedArmyduringthewarandworkedatafactorymakingcustomcuttingtools.Gusinskyandhisparentslivedinoneroom,aneighteen-square-meterflatin

aworking-classneighborhood.Asaboy,heoftenfeltresentmentwellingupinhim.“IwasayoungsterandIknewalreadythattheword‘Yid’wasaninsult,”Gusinsky toldme.“Just likeall theboys, Iwasveryafraidof fightingat thebeginning.IusedtothinkthatforsureifIhitmyadversaryhardandhurthim,he would certainly hit me back and I would be hurt even more—so I wasscared.Andthenitsohappenedthatsomeguysabitolderthanmedrovemeinto a corner in the courtyard and started pestering and insultingme.And Irememberthisstrangefeeling,asuddencompletesenseoffreedom:itdidnotmatter tomewhat theyweregoing todo tome.”That time,Gusinskystruckback,thinkinghemustfightback“whileIstillcan.”“I was never scared to fight, one street against another, courtyard versus

courtyard,”herecalled.Once,agroupofoldermenweredrinkingvodkaandplaying dominoes after work in the courtyard. Gusinsky was ten or elevenyearsold,andashecamehomeafterschoolonawarmafternoon, theoldermenchided,“HerecomesthelittleYid.”Gusinskyeruptedwithrage.Heseized

anironpipeandflailedatthetormentors,whoranfromhim,frightenedthathehadgonemad.“Iwas in tearsandIwaschasingthemwithapipearoundthewholecourtyard,”Gusinskyrecalled.“Iwasintearsfromfuryandinsult,notfromfear.”Gusinskygrewup“on thestreet,”ashe laterput it.“Iamaproductof the

street.Iwasborninthestreetandlearnedtodefendmyselfinthestreet.”After studying mathematics in high school, he felt the sting of prejudice

again when he tried to enroll in the theoretical physics department at theMoscow Physics-Engineering Institute. It was a prestigious school thatprepared specialists for the Soviet military-industrial complex. Jews wereunwanted. “I really knew mathematics and physics well. I was absolutelyconfident. Everybody was telling me: they don’t take Jews there.” Gusinskysaidheignoredtheiradvice.Heapplied—andwasrejected.Hewasoffended,andangry.GusinskyenrolledinsteadattheGubkinInstituteofOilandGasbecausehis

motherhadstudiedthere.Gusinskywasabadstudentattheschoolthatstudentsfondly called Kerosinka. “I was not interested,” he acknowledged. “I tookoffenseateveryone,almostagainstthewholeworld.”Gusinskydidnotfinishhis studies at Gubkin. By his own account he dabbled in the black market,workingasafartzovschik—daringyoungtraderswhodealtinimportedjeansandaudiocassettesandchangedmoneyforforeigntourists.Gusinskyrecalledthathecouldn’tgetthehangofbeingaso-calledspeculator.“Iboughtseveralpairsof jeans, then I tried to sell themand it turnedout I sold themcheaperthanIboughtthem,”hetoldmeruefully.Gusinskyoftenjokedthathewasnotcut out to be a street trader.However, in later years, he showed a knack forentrepreneurshipthatfarovershadowedhislackofskillsasajeanstrader.Having failed his classes at the institute, Gusinsky went into the army in

1973,wherehewas trained as a junior sergeant in the chemical intelligencetroops.Theseunitswouldenterthebattlezoneafterachemicalorbiologicalweaponsattack.ButGusinsky’sstrongestmemoryofthearmywasthathehadtostandhisground.“Ihadperfectrelationswitheverybodyinthearmyexceptforcomplete idiotsand scoundrels,”he recalled. “Ionly lost several teeth inthearmy,sonothinghorriblewasgoingon—theseweretheusualfistfights;ithappens.Intwoyearsinthearmy,Ilearnedonlyonething,theabilitytofightformyself.”After the military, he was adrift back inMoscow. A friend urged him to

enroll in another prestigious school, the State Institute for the Study of

Theatrical Arts. Gusinsky replied that he had not read Stanislavsky orShakespeare orMolière.Butwith twomonths before the entrance exams, hedecided to try.He spentnightsporingoverbooks.His friend reassuredhim,“Piece of cake—you’ll make it,” but Gusinsky feared that Jews were notwelcome at the institute; the theater, like film, was under strict CommunistPartycontrol.Theoralexamsweregivenbyarenowneddirector,BorisRavenskikh,chief

stagedirectorofMoscow’sMalyTheater.Atthetimeoftheexams,Gusinsky,still thin as a rail and angry at the world, came before Ravenskikh for therequired interview.BehindGusinskywasValeryBelyakovich, anotherdramastudent.RavenskikhaskedGusinsky,“Whyareyougoingtostudystagedirecting?”“Iwanttounderstandlife,”hereplied.“Alotinthislifesurprisesme.”“Whatsurprisesyoumost?”Ravenskikhasked.“Lack of communication between people,” Gusinsky responded. “People

havelosttheabilitytounderstandeachother.”2Ravenskikhimmediatelytookaninterestintheintenseyoungman,whowas

theonlyoneintheclasswithnodramaexperience.“Hebelievedverymuchinthe idea that a stage director is a person with life experience,” Gusinskyrecalled.“Hewasselectingpeoplebyintuition.Andhetoldme,‘I’lltakeyou.’”ButGusinskyagain felt touchedbyanti-Semitism.Ravenskikhwaswarned

byapartyofficial:“Whatareyoudoing?Outoffifteenpeoplefor thisyear,youaretakingthreeJews!”AccordingtoGusinsky,Ravenskikhdidnotliketobepressured.Ravenskikhstubbornlyinsistedthatheremainintheclass.Attheinstitute,Gusinskywasalwaysbrimmingwithjokesandrunningina

dozendirections.Despiteshortageseverywhere,Gusinskyfoundscarcewhitepaint tospruceup the theaterat the institute.Hefoundapairofspeakersandwiredupasoundsystem.Heputhishandsona taperecorderwhenhisclassneededone.Hebrought scarceorbannedLPs tohis friends. “Hegavemearecord of Krokus, it was Polish!” Belyakovich recalled. “It was banned—averyexpensivegift,becauseitwasimpossibletogetevenaPolishLP.IhadnootherLPs.”Atthelunchhourattheinstitute,Gusinskyoftentookfivefriends,packedthemintohistinycar—hewastheonlyonewithacar—andtheydashedawayfromthecampusforabreak.Gusinsky “was always taking us to theaters; he had connections

everywhere,” Belyakovich remembered. “In those days it was hard to gettickets; it was always difficult.” It was practically impossible to get into

Moscow’s famous Lenkom Theater, but Gusinsky managed to do it for apreviewofYunonaandAvos, a hugelypopular rockmusical that blazednewtrails in the theater at the time because it lacked ideology.Gusinsky told hisclassmatestoshowupattheLenkomat10:30A.M.andinstructedthemtowaitforhimoutsideuntilhegave thesignal:“And thenIwhistle,andyoufollowme!”SoonGusinskyhadtheminsideforarehearsalrightbehindthedirector.The

first part ofGusinsky’s last namemeans goose inRussian, and thatwas hisnickname.“Hewasswimminglikethisallthetime,”Belyakovichsaid,“andwewouldaskhim,‘Gus,canyougetusticketsforthis?’Andhewouldsay,‘Wait,’he had a lot of acquaintances. He was different because of hiscommunicativenessandnetworks.Butbringingtwelvepeopleinwasverytopclass!Heintroducedusasstagedirectors,claimingthatwehadtobethere.”His teacher, Ravenskikh, left an impression on Gusinsky. Ravenskikh

refused to be pushed around andwas willing to experiment even within theregimented,ideologicalrealmofSoviettheater.RavenskikhoncewasorderedtostageBrezhnev’ssugaryghost-writtenwarmemoir,MalayaZemlya,at theKremlinPalaceofCongresses.ThebookdescribesBrezhnev’sroleina1943battleinwhichtheEighteenthArmycapturedandheldapieceofland,MalayaZemlya,on theBlackSea for225days.The roleof thebattlewasplayedupafter Brezhnev came to power, but Brezhnev had done nothing out of theordinary.Ravenskikhwenttothesceneofthebattletoponderhisassignment.He did not want to do it, but refusing would be risky. He then returned toMoscowanddeclaredthathecouldnotdotheplayandwouldnot:Brezhnev’srolehadbeenoverstated.UnderRavenskikh’s tutelageat the institute,studentspushedtheboundaries

ofwhatwaspermissible.Theycouldbreathemorefreelyattheinstitutethanonthe formal stage. Gusinsky and his class read and staged a part of NicholaiErdman’splayTheSuicide, a black comedy about anordinarySoviet citizenwhoisdrivenbydespairtoattemptsuicidebutisfinallytoocowardlytocarryitout.Theplayhadbeenbannedin1932andwasneverofficiallystagedintheSovietUnion.Forgraduation,studentswererequiredtostageaplayinarealtheater,notat

the institute. Moscow was the center of theatrical life, yet it was nearlyimpossible forstudents tostage theirdiplomaplays in thecapital,and itwasquitecommontolookforastageintheprovinces.Forhisdiplomawork,theequivalent of his graduate thesis, Gusinsky went to Tula, a hardscrabble

industrialtownsouthofMoscow.AttheTulaStateDramaticTheaterduringthe1979–1980 winter season, the ever enthusiastic, ever thin, ever emotionalGusinsky staged Tartuffe, by Jean-Baptist Molière, the seventeenth-centuryFrenchplaywright.Theshowwasbilledasacomedy,anexperimentalone-actplaybystudents.Importantly,itborrowedfragmentsfromaworkonMolièreby the twentieth-century Russian writer and playwright Mikhail Bulgakov,which Bulgakov wrote in the second half of 1929.3 As Gusinsky was wellaware,Bulgakovhadfocusedontherelationshipbetweentheartistandpower,between Molière and Louis XIV. The tense relationship between artist anddictatorwasonethatBulgakovknewwellthroughhisowngreatheartacheandpain in theearlyStalinyears.HisplayaboutMolièrewasrehearsedfor fouryears—butbannedafteronlysevenperformances.By1979Bulgakovwasnolongertotallyprohibitedbutwasstillinformally

proscribed. Gusinsky’s performance in Tula gained a popular following inpart because it also was slightly beyond what was usually permitted by theauthorities. The audience entered the theater to guitar music or a band.Alexander Minkin, a lively, bearded drama critic who later became a well-knownMoscowjournalist,hadstudiedat thetheaterinstituteat thesametimeasGusinsky.Minkin concentrated on theory and criticism,whileGusinsky’straining was practical as a stage director. Minkin told me that Gusinskyimploredhim tocome toTula to see thepremiere—to takeanelektrichka, acommutertrain,fourhourstoTula!—butherefused.“Ithoughtinadvancethatitwasgoing to behorrible, itwasgoing to be rubbish,”Minkin recalled. “Ididn’tthinkhewasagooddirector.”Moreover,headded,“Moliereisalwaysveryboring.Heisaclassic,butaboringone.ThatiswhyIbelievedneitherinGusinskynorinthefactthathecouldstageMoliere.”4ButMinkinchangedhismindandwenttoTula,andGusinsky’sproduction

turnedouttobeapopularhit.“Ilaughedsomuch,mystomachached,”Minkinrecalled. “It was done with such taste, with such humor!” According to theMoscowNews, the house was full every night, and Tula youth talked aboutnothingotherthanTartuffe.5Gusinskywastheheartandsoulofhiscompany,workingwiththemlateatnight,drivingthemhomeinhiscar,bringingthemgiftsofsausagefromMoscow.GusinskyhadbeenluckyinTula;theauthoritiesallowedhimtostageaplay

that was slightly off-key to the trained ear of the Soviet propagandist.Moreover, Gusinsky had added sonnets from Shakespeare, including astronglyantiauthoritariansonnetattheclose.

“ItwasnotagainstSovietpower,itwasaboutarebellionofaman,anartist,againstanypower,”Gusinskyremembered.“Anditwasnotanti-Soviet;itwasjustthattheyareallcrazy,allourfuckingSovietpower,allthoseCommunists—theybelievethatanythinggoingbeyondcertainboundariesisaimedagainstthem.”GusinskytookhisplaytoKiev,whereitwascloseddownbythepartycity committee for being anti-Soviet after a few performances. The partybosses wrote a complaint to the Central Committee in Moscow. “It wasprobably then that I learned that I could notmarch in formation,”Gusinskyrecalled,referringtotherigidconformitydemandedbytheparty.Gusinsky“stubbornlywantedtostagethenextplayinMoscow,”Minkintold

me.“Yearafteryear,hewentandbowedfromthewaisttoeverybody—totheCultureMinistryoftheUSSR,totheCultureMinistryoftheRussianRepublic,totheCulturalDepartmentofMoscow.Hewenteverywhere,includingallthetheaters.Heaskedthemtogivehimastage.Heaskedheaddirectors,theatricalleaders—nothing.Andeveryweekhehoped,becausesomeonehadpromisedhim something. And he waited, waited, and waited. And another six monthspassed, andnothing again.He started anew, andhewasgiven somepromiseanew, and hewaited again.But thatwas horrible.Hewasn’t doing anything!Therewasenergyinhimlikeanatomicbomb,buttherewasnowayout.”TheMoscowtheaterworldwascrowdedandcompetitive,anditwouldhave

been painstakingly difficult for Gusinsky to break into it under anycircumstances.Hehadgoodconnections,havingstudiedunderRavenskikhandthe renowned Yuri Lyubimov, director of the Taganka Theater. But he stillcould not break down the barriers and get a play to the stage in Moscow.Gusinskybelievedthereasonwasanti-Semitism,andperhapshislackoftalent.“I am a Jew. It was prohibited. Plus, in fact, I was not a very talented stagedirector.”Through the early 1980s, Gusinsky searched in vain for a place in the

theater.Hisquestwasalongandfrustratingone.“Manytimeshetoldme,‘Thisismy lastattempt,’”Minkinremembered.“‘If theydeceivemeoncemore, ifthey don’t let me stage a play, I will go into business. I won’t take it anylonger.’”He found work organizing public events such as concerts and sports. As

stage director for Ted Turner ’sGoodwillGames in 1986, he organized theopeningandclosingceremony,settingupperformancesattheKremlinPalaceofCongressesfortheforeignparticipants.HeenjoyedgoodconnectionswiththeKomsomolandtheKGB.ButwhenIaskedhimaboutityearslater,hesaid

itwasdreary.“Iwassimplyearningmoney,”hesaid.Minkinwasmoreblunt.“Thatwasshit,”herecalledoftheeventsGusinsky

organized. “For a theaterdirector tobe involved in thatwashorrible. Is thisreal work for a director—to stage how girls walk and throw those stupidsticks? No, that’s impossible.” Minkin recalled that Gusinsky was stilldreamingofabreakintothetheateratthebeginningofperestroika,hopingthatchanges in the politicalmoodmight leave him an opening. But one day hisorganizingofpublicevents tooka turnfor theworsebecauseofastretchofblackribbon.In theearlydaysofperestroika,GusinskyorganizedaDayof theTheater,

sponsored by the Komsomol city committee. On the broad main avenue inMoscowthenknownasKalininskyProspekt,Gusinskysetupastringofsmalloutdoor cafés with special themes: one for writers, one for artists, one formusicians. “Allwaswell because thiswas a day of culture, and I took veryearnestly everything that Gorbachev was saying—here, it started, freedomcame.”Butonethinghadnotchanged:thepartytightlycontrolledpublicspace,especially open squares and buildings. Kalininsky Prospekt was a specialstreet,theroutethatpartyleadersandotherstooktotheKremlin.Someoftheartists who were helping Gusinsky decided to change the way KalininskyProspektlooked,andtheylacedthetreeswithblackribbon.Itwasaharmlessgesture,butsomelow-levelKGBmentookoffense.Gorbachevmightseeitashis limousine sped toward the Kremlin! They hauled Gusinsky before theKomsomolcitycommitteeandaccusedhimofanti-Sovietactivity.Ashehadmany timesbefore,Gusinskygothisbackup.He lashedout.HearguedwiththeKomsomolchiefsastheydemandedhechangethis,changethat,hewtothepartyline.AndtheyinsistedthatheapologizetoeveryoneintheGorkom,thecityCommunistPartycommittee.Gusinsky erupted. He shouted that they were fools, that their parents had

been fools, that theywould die fools.He slammed the door andwalked out.TheDayoftheTheaterwastobeheldintwodays.Theycanceledsomeoftheevents and flooded the restwith uniformed and plainclothes securitymen, atacticdesignedtothrowawetblanketonanypublicevent.ThelocalKGBmenwantedto lockupthis impertinentyoungman,Gusinsky,andthrowawaythekey, but Gusinsky told me years later they did not succeed. They “wereprevented from eating me up, let’s put it this way,” he recalled. “I was notstaginganymoremassperformances;thiswasthelastone.Buttheywerenotgiventhechancetofinishmeoff.”

TheepisodeprovedavaluablelessonforGusinsky.Herealizedthathehadto work on maintaining good relations with people in power, even if hedespised them.At the time, hewas quietly protected by a high-ranking partyofficial,YuriVoronov,whowasdeputyheadoftheCultureDepartmentoftheCentral Committee. There was another episode too. According to a closefriend,Gusinsky in thisperiodwasalsocaught tradinghardcurrency,whichwas forbidden. No charges were ever brought against Gusinsky, the friendsaid,butasaresultofthebrushwiththeauthorities,GusinskyestablishedclosetieswithsomeKGBofficers.GusinskycametotheattentionofFilippBobkov,adeputyKGBdirectorwhoheadedthenotoriousFifthMainDirectorate,whichwaged war on dissidents. Bobkov, whose job included keeping tabs on theintelligentsia, may have found Gusinsky a valuable source of informationaboutwhatwashappeninginthetheater.Manyyearslater,Bobkovbecamepartof Gusinsky’s corporate high command. Gusinsky was learning how tocultivatefriendsinhighplaces.6

Theworld of the early cooperatives inMoscowwaswild andunpredictable.ThewholeideaofentrepreneurshiphadbeenlabeledcriminalinSoviettimes,andthefirstbusinessmenwereoftenregardedwithdeepsuspicion,ashustlersattheedgeofsociety,aragtagbunchofexperimentersandgamblers.In1988and1989,Gusinskyfitinamongthemperfectly—hehadtheimaginationandtheguts.Hisalmostinstantsuccesswiththecopperbraceletsshowedhimhowto make money fast, and his experience with the black ribbon scandal hadpointed toward another essential ingredient of success: connections. TheCommunistPartywasstillall-pervasive;authorityandpowerweresomethingthat had to be bought. To make money, Gusinsky realized, he neededconnections. An aspiring businessman could not simply close his door andkeep to himself; he needed to succor bureaucrats and politicians, to havefriendsintheKGBandthepolice.Gusinskywasanearlyandavidstudentofthe nexus betweenwealth and power.He practiced cultivating politicians andsecuritymen,harboringthemandexploitingthem.At first, thedrawofpower, theabsolutebeautyofmakingmoneybyyour

own ingenuity and someone else’s permission slip or signature, wasappallingly simple. After the bracelets bonanza, Gusinsky opened a newcooperative that made cheap figurines, copies of famous Russian artworksfrommolded plaster. They were covered with a microthin layer of copper,usingspecialchemicalbaths.Aswiththebracelets,thecostswereminimal,the

profitsfantastic,andthecopieswerebeautiful—aslongasyoudidnotnoticethe plaster core. Hood ornaments for foreign-made cars were very populartoo; hemade amintwith imitation Jaguar hood ornaments. But to duplicateRussian art he needed protection. He wanted to formally export the fakefigurines, which would mean handling hard currency, and that was anotherreasonheneededprotection.Moreover,Gusinsky’scooperativewasofficiallyregisteredaspartoftheSovietCulturalFoundation,ofwhichRaisaGorbachevwas a boardmember. This government foundationwas prohibited by Sovietlawfromengagingincommercialactivities;ifheflauntedthelaw,therecouldbe trouble. Again Gusinsky found a way out by using his connections. HeturnedtoVoronov,theCentralCommitteemanwhohadprotectedhimduringtheblackribbonscandal,andmanagedtogeta letterofpermissionfromtheSoviet prime minister, Nicholai Ryzhkov, allowing him to export his fakefigurinesforhardcurrency.ItisnotclearpreciselywhythepartymanhelpedGusinsky. But for Gusinsky, it was a fantastic mix: plaster, permission, andhardcurrency.Gusinskytoldmeitwashisfirstbigpoliticalsuccess,anditledtomore.“I realized then there arewaysofworkingwith the authorities,”Gusinsky

said. At some lower levels, it was as simple as bribes. But Voronov andbureaucrats in the Central Committee were above this petty corruption,Gusinskyrealized.Hediscoveredthatathigherlevels,thetrickwastoestablishgoodrelationswithofficials.Finally,helearnedsomewhatlaterthatitwasalsopossible to influence theveryhighestofficials,but theapproach, thedelicatedance,must be handledwith great care. The keywas to offer something theofficialneededtoadvancehiscareer.Thenbribesweren’tevennecessary,noteven a good personal relationship,Gusinsky discovered. The officialwouldalmostalwayshelp,outofself-interest.“Soitwasalwaysimportantformetounderstand,whatdoesthisbossneed?”Themost importantbossGusinskywouldbefriendin theseyearswasYuri

Luzhkov, the stout, strong-willed bureaucrat who had been put in charge ofMoscow’schaoticvegetablebasesandalsolicensedthecooperatives.Gusinskyand Luzhkov had their quarrels and differences, but their paths wereintertwinedformorethanadecade.Inthelate1980s,Gusinskyrecalled,Luzhkovwouldmeetwellintotheearly

morning hours with the young entrepreneurs of the cooperatives. Luzhkovlistenedpatiently to their problems. Itwas foolish to go toLuzhkov’s officebefore midnight because that’s when he began working with the new

businessmen,oftennot finishingbeforedawn.ForGusinsky, itwasamazing:the average person inMoscowmightwait on line for aweek to see a localbureaucrat, but here was a man who was deputy head of the Moscow cityexecutivecommitteewhowouldseeeverysinglecooperativebusinessmaninhiswaitingroombeforegoinghome.Luzhkov was a widower in those years, and late one evening he invited

Gusinsky to his home. “A lonely man, he was not old then, but perfectlylonely,” Gusinsky recalled. “He said, ‘What shall we have, let’s have tea.’ Isaid,‘Let’sdrinktea.’Now,whathavewegotfortea?Outofhisrefrigeratorhetookapieceofstale,molderingryebread.ThisIrememberdistinctly.Hehadnothingathomebecausehedidn’t live there.Hewould sometimes sleepthere,butveryoftenhesimplyspentthenightathisoffice.Strangeperson.Myrelationswithhimthengrewverywarm.”In 1988 Gusinsky opened a cooperative, named Infeks, as a consulting

companytohelpWesterninvestorsfathomthecomplexityofdoingbusinessintheSovietUnion.Hewasstillaskinnyyoungmanwearingoutsizedeyeglassesand a big smile. For a fee, Gusinsky served as a fixer and provided legaladvice and crude marketing data. He was working out of a cramped,windowlessofficeonthefaroutskirtsofMoscow,hardlyafinancialkingpin,buthewasincreasinglyamanwithconnectionswhoknewhiswayaroundthecorridorsofpower.Gusinsky’s horizons were rapidly expanding beyond Moscow. In 1988 a

group ofAmerican businesspeople came toMoscow looking for investmentopportunities,amongthemMargeryKrausofAPCO,aconsultingfirmownedbyArnold&Porter,thenWashington’slargestlawfirm.KrausandGusinskyquickly found that they understood each other and on December 13, 1988,announcedplansforajointventurepartnershiptobringbusinessprospectstoMoscow.WhenWesternclientscametothecapital,Gusinskywouldhelpthemnavigatetheoftenobscureworldofthebureaucracy.7KraustookGusinskytodinner one evening in Washington. She needed some cash afterward andwalked with Gusinsky to an automatic teller machine to get the money.Gusinskywaswide-eyed.He had never seen such a thing. ThemachinewaspartofanelectronicbankingnetworkcalledMOST,whichwaswrittenontheATM.GusinskyadoptedthenameforhisnewjointventureandeventuallyforhisMoscowbank. InRussian, theword “most”means bridge.Gusinsky saidthenewbusinesswouldbehisbridgetotheoutside.HetoldKraus,“Forusitwillbeahardcurrencymachine.”

BorisKhait,thenGusinsky’sdeputy,recalledthatAPCOaskedthemtocarryout a studyof the foodmarket because amidsizeAmerican fruitwholesalerwanted to know about the demand for fresh fruit. Gusinsky carried out amarket “survey” by sending out students to question foreigners in the city,who,itwasthought,wouldpayinhardcurrency.Theywereaskedwhatkindsof fruit they wanted to buy inMoscow. Khait was puzzled to learn that thegreatest demand was for something called “kiwi.” Khait had been deputydirectorofamedical technologyinstituteandconsideredhimselfarelativelywelleducatedman.Buthehadneverheardofakiwi.8GusinskytookLuzhkovtotheUnitedStatesonatourarrangedbyKraus,his

partner inWashington.Luzhkov,who still had crude ideas about economics,wantedtostartahuge,centralizedfoodmanufacturingbusinessinMoscow.HeaskedGusinskyaboutcreating“animmenseenterprisethatwouldmanufactureeverything”thecityneeded.Gusinskywasskeptical;atthistime,Luzhkovwasstill“aSovietbureaucratwithnoideaabouthowthemarketworked—thatthemainpointistoalloweverybodytoproduceeverything,andthentherewillbeno problem of food supply.” Luzhkov still thought in terms of massive,centralized, state-run factories, and he persisted. “Do you know anybody inAmerica?”heaskedGusinsky.The tourwasaneye-openingexperience forbothof them,Kraus recalled.

NoonewasinterestedinLuzhkov’splanforagiantcentralizedfoodfactoryinMoscow,butGusinsky andLuzhkov found themselves flyingonprivate jets.They were featured guests of corporate giants PhillipMorris and ConAgraFoods.TheyalsovisitedLehmanBrothersonWallStreet.Krausrecalledoneremarkable afternoon when, after meeting ConAgra officials in Omaha,Nebraska, the two Russians toured a local supermarket. Luzhkov asked aconstantstreamofquestionsandinsistedonseeingthebackofthestorewherethemeatwascut.“Luzhkovwasjustblownaway,”Krausrecalledofthegoods-laden store they inspected. Another time, Kraus was driving them to anappointment and pulled in to a Kentucky Fried Chicken drive-in for lunch.When their order came down a chute and through the car window, the twoRussians were amazed. They had never seen such a thing. Gusinsky andLuzhkov were a funny pair, two men not widely known outside the Sovietcapital,ahustlingcooperativepioneerandaMoscowadministratorexploringsuperprosperousAmericalikevirtualtimetravelersinastrangeland.InNewYorkCity, theywere shown an overstuffed candy store. They insisted that adrivertakethemtoadozenmorestorestosatisfythemselvesthatthefirstone

wasnot justsetupfor theirvisit.Soon theyrealized there reallywasoneoneverycorner.LuzhkovlosthisluggageandKrausboughthimnewclothes.Hetraveledwithtwopairofsocks,whichhewashedinthehotelroom.Gusinskyabsorbed the lessons well and one night was sitting in Kraus’s kitchen,pondering his future. “He drewon a napkin his vision for a conglomerate,”Krausrecalled.“Hewantedtotalkabouteverything!”BackinMoscow,Gusinsky’sfaithinpoliticalconnectionsprovedcriticalto

his next big leap, into construction and real estate. Earlier, in his Metalcooperative, he had built small, stand-alone shell-shaped garages out ofcorrugated metal, which sprang up around the dreary apartment blocks ofMoscow.Inthecooperativedays,itwasenoughtomakethingspeoplewantedand sell them. But now Gusinsky wanted to repair and reconstruct oldbuildings.Moscowwaslitteredwithlongforgotten,dilapidatedstructures,andthe lethargic state construction firms did notwant to botherwith small jobs.Gusinsky realized thathecouldmakea small fortuneby fixingupbuildingsand selling them on Moscow’s increasingly high-priced real estate market,where rents for good offices and luxury apartments were approachingNewYorkandTokyolevels,pushedupbyburgeoningdemandamongthenewrich.But first Gusinsky had to get a bargain on the old buildings. He needed

Luzhkov.Asacityofficial,Luzhkovcould,withastrokeofthepen,parceloutcitybuildings.ButGusinskyknewthatLuzhkovhadtobenefitinsomewayasaresult. This was not a matter of crude bribery. What Luzhkov needed wascareer-enhancing results. Mikhail Leontiev, a journalist who knew bothLuzhkov and Gusinsky at the time and later worked for Gusinsky, told me,“Luzhkovisaworkaholic.Helikestohavearesult.Gusinskyisveryenergetictoo.Theycomplementedeachotherverywell.”Luzhkov desperately wanted to expand Moscow’s overburdened housing

supply.GusinskyandLuzhkovstruckadeal:LuzhkovwouldgiveGusinskytherightstoanoldbuilding,absolutelyfree.Gusinskywouldthenreconstructthebuildingandgivehalforeven75percentofitbacktothecity.ForGusinsky,itwas still enormously profitable to sell the remaining part, and for Luzhkov,whocontrolledthebuildingpermissionslipsbuthadnootherresourcesathisdisposal, itwas an effortlessway to gain valuable, freshly repaired housingand office space for the city. Later, the scheme became the backbone ofLuzhkov’s method for rapidly increasing residential housing in Moscow;hundreds of thousands of square meters of housing space were built bycontractorswithsimilardeals.

Moscowintheearly1990swasjustbeginningtoblossomintothemoney-soaked, anything-goes Russian boom town that it later became, wherecorruptionwas rife and therewere no clear boundaries between private andpublic interests. To get something done in the city, you needed money andinfluence,gutsandbribery,andthewholeenvironmentwasoneofsecrecyanddeception.Even thesmallestcitydepartmentblithelydemandedsomekindofbribe or payoff, and big projects were always accompanied by heftycorruption.ThiswastheworldinwhichGusinskymadehisearlyfortune.Yuri Schekochikhin, a crusading investigative journalist and democratic

reformpolitician,wrotedespairinglythatcriminalstructureswerecomingtopowerinthecity,takingadvantageofthetriumphofthereformersin1990and1991. In a lengthy article published in June 1992 in the newspaperLiteraturnayaGazeta,whichheentitledsimply“Fear,”Scheckochikhinsaidhissources were so fearful that they insisted on answering questions aboutMoscowcorruptiononhastilyscribbledbitsofpaper,whichtheythenburned.Thecriminal structures “havealreadydividedamong themselves the spheresofinfluenceinMoscow,”hewrote.“TheyhavealreadysoldouttoeachotherMoscow’stastymorsels.”“WhogovernsMoscowtoday?”heasked.“Thosewhotookintotheirhands

Moscow’s assets—its land, its buildings, andwhole districts.” Schekochikhinsaidtherealpowerinthecitywasreservednotforsmallbusinessmenwhogotstarted after Communism collapsed nor the “real criminal businesses” thattookadvantageof“chaosinthecountry,”butratherashadowy“thirdgroup”close to thecitygovernment.HenotedhowLuzhkovhadgivenabuilding toGusinsky’s company, Most. “I have information that Most has bought upvirtuallyfornothingoveronehundredbuildingsinMoscowalreadyandthereisnolawthatcanpreventitfromdoingthis,”hewrote,sayingthatitwasnottheelectedleaderswhowererunningthecitybut the tycoonsclosetopower.Thesewerethe“realmastersofMoscow.”9Gusinsky was getting into big money, far more than he had ever known

before.Tensofmillionsofdollarswere running throughhishands.His lifewasabluroflongnightsandweekendswithneveradayoff.Danger lurkedwheremoney accumulated.When he first started stamping

out bracelets, Gusinsky came face-to-face with small-time gangsters. ThecriminalgangsthathadexistedbelowthesurfaceofSovietlife—andundertheheel of Soviet authority—became brazen during perestroika, just as thecooperatives blossomed. The bandits would be at the door as soon as they

smelledmoney.Atfirst,Gusinskysimplypuffedupandtriedtoscarethemoffwith the same volcanic anger he had once summoned up as a boy on thecourtyard. “You would take something heavy in your hand and scare themaway,”herecalled.Butsoonhewashiringhisownsecurityforcetokeepoutthegangsterswhodemandedmoneyforprotection.Gusinskyknewhelivedinalawlessvacuumanditwasnouseturningtothepolice.Hehadtomakehisown rules, since hewas probably operating outside the Soviet-era laws thatmadeentrepreneurshipacrime.“Wehadtwooptions,”hesaid,“toeitherpaythe bandits or to keep the security service on the payroll.” Later, as hisbusinessesgrew,especiallyashebuiltanempireinconstructionandbanking,Gusinskykept thebanditsatbaywithhisownthousand-mansecurityservice.Bobkov, the former high-ranking KGB general who had been in charge ofpersecuting dissidents, became a key member of Gusinsky’s corporate highcommand.BobkovwasdescribedbyGusinskyasananalyst,buthewasreallyconcernedwithallaspectsofGusinsky’ssecurity.InGusinsky’sempire,asinothers, private in-house security services oversawmany different aspects ofdefendingthecompany,frombodyguardsto“analysis”ofcompetitorstolinkswiththestatesecurityorgans.Gusinskywasapioneerincreatingtheseprivateservices,whichdrewfromeliteSovietmilitaryunitsandtheKGB.Foryears,Gusinsky brushed off criticism of his security operation, saying it wasnecessarytokeepoutthecriminalsandguardhisconstructionsitesandbankbranches. “Bandits, bandits, bandits!”hemoanedwhen I askedhimabout thedangers he felt.When criticized for Bobkov’s presence in his organization,Gusinskydeclaredthathewould“hiretheDevilhimselfifhecouldprovideuswithsecurity.”10Gusinsky’sfinancialcenter,MostBank,whichbeganas littlemore thanan

accounting department, expanded with the patronage of Luzhkov. The banksnared the city’s main accounts in the early 1990s, a privileged status thatallowedGusinsky toplaywithmunicipal deposits, earninghandsomeprofitsforhimselfwhilehepaidasmallpercentagebacktothecity.Gusinskysetuphisofficesinthesamehigh-risebuildingwhereLuzhkovadministeredthecity,next door to the Russian White House. Gusinsky’s own automatic tellermachineswerestationed in thehallways,and theelite inMoscowwereusinghisMostBankcreditcards.Ashefamouslyputitatthetime,itwaspossibletomakemoneyfromthinair.Whatdidittaketosurvive?Ashelookedoutfromhishigh-riseofficeatthe

sprawling city below him, Gusinsky pondered his success. You had to have

somekindofinnerdrive,somekindofinnerfuelthatforcedpeoplelikehimtowant tobefirst. Itwasaverysmallgroupofpeople,willingtotakerisks,desperatetosucceed.InthedaysofGorbachev’sperestroikaandglasnostreforms,andlaterduringthe radical change of the earlyYeltsin years, journalists became beacons ofhopeforRussiansociety.EspeciallyaftertheSovietcollapse,journalistswereadmiredandrespected.“Theywererulersoftheminds,”OlegDobrodeyev,aprominenttelevisioneditorandexecutive,recalledinaninterviewmanyyearslater.11“InthefirstSupremeSovietofRussia,one-tenthofitsmemberswerejournalists. Their popularity and their authority in those years after August1991wasfantastic!”Itwasnotunusualforjournaliststoparticipateopenlyinpolitics.Dobrodeyevrememberedthatthejournalistsbecametheeyesandearsoftheintelligentsia,thebannercarriersforreformanddemocracy;sometimeshewaseveninvitedtoparticipateinclosedgovernmentmeetings.“Peoplewhowere the base of reforms—the engineering and technical intelligentsia,doctors, teachers, thosewhosincerelywantedchanges—lookedto journalistsastheirbrightestrepresentatives,andspokesmenoftheiraspirations.”In contrast to the gray, obedient Soviet-era press, brash new publications

sprangup,suchasthenewspaperKommersant,whichbecamethebibleoftheearlycooperativemovement.Theeditor,VladimirYakovlev,recruitedyoungreporterswhowereopen-mindedaboutawholenewlanguageofcommerce,capitalism,andmoney,avocabularythatsimplydidnotexistinthestaidworldofSovietjournalism.OneofthisgenerationwasMikhailLeontiev,whowasafriendoftheearlycooperativebusinessmen.HegothisstartwiththefirstissueofKommersantin1989.Leontievlatermovedontoanotherprominentreformpaper, Nezavisimaya Gazeta, which had been created by the democraticreformers who triumphed in Moscow city politics. The name meant“independentnewspaper.”Theofficewasspreadoutonanold factory floor,and itattractedmanyof themost talented journalistsof thedaywith the ideathatitwouldremaintrulyindependent.But Leontiev felt dissatisfied. The salaries at the newspaper, while larger

thanothers,werestillrelativelypaltry.Andastimewentby,thepaper ’searlyromanticismwasdulledsomewhatbyimmutablelawsofmarketeconomics:anewspaperthatlostmoneyinevitablyfacedcommercialpressures.“Wehadtobuy newsprint at market prices,” Leontiev told me. “There was very littleadvertising,naturally.Andthemainsourceofmoneywassponsors.”Leontiev

began to quarrel with Vitaly Tretyakov, the editor ofNezavisimaya Gazeta,sayingthat“itwasunfairtodragmoneyfromsponsorsandconsiderourselvesindependent.”Leontievadded,“ItwasmainlyIwhofoundsponsors.Notallofthemwerehonestpeople,andwehadtotakeitintoaccount.Wemadethemfeelhappyforgivingusthemoney.Thiswasthesystem.”12SoonLeontievandotherjournalistswerethinkingofleavingNezavisimaya

Gazeta and creating their own paper. Their idealism was tempered by therealitythattheyneededtofindanowner,ratherthanbegforperiodicinjectionsof cash from publicity hungry sponsors. They knew that a Moscow bankerwouldhavehisowndesiresanddemands,butitseemedfarmorecomfortabletohaveasingle,knowninvestorthantoconstantlysearchfor,andpanderto,outside sponsors. Leontiev met Gusinsky in the cooperative movement andintroducedGusinskytohiscircleoffriends.HequitNezavisimayaGazetaandbegantopressGusinskytobankrollanewpaper.“Youcouldbecomeamediamagnateyourself,”Leontiev toldGusinsky, and they talkedabout theprojectformonths,startingin1992,thefirstyearofpost-SovietRussia.Leontiev recalled thatGusinskywasentrancedwith the idea fromthestart.

“He is averyambitiousperson. I think that Ihit thebull’s-eye.Hemayhavethoughtaboutitbefore.Idon’tclaimIgavehimthisidea,butIwaspressingonhimtomakethedecision.Theideawastocreateaprofessionalpaper.Atthattime,bankershadagreatdealofverycheapmoney.Itdidn’tcostanything.Itwas impossible to find a liquid use for it. At that time, everybody began tosupportdifferentpapers.”Sergei Zverev, a bearded, sandy-haired, hardened political operative who

workedforGusinskythroughmuchof the1990s, recalled thatGusinskyhadbeen upset by newspapers criticizing his business activities in the city.13Gusinskysoongraspedthathecouldprotectanddefendhimselfandhispublicimage.Leontievagreed.“Volodyacaredabout this imageverymuch,” and itwouldbeenhancedasthepublisherofareputablepaper.Gusinsky told me he listened to Leontiev’s proposal from a different

perspective.The truthwas that he hardly understood the ideals and romanticnotions of journalists like Leontiev and Dobrodeyev, people who saw theirmission as leading society. “I did not perceivemassmedia asmassmedia. Icould not even understandwhat itwas,”Gusinsky toldme.Rather,Gusinskywassearchingforatoolforinfluenceandpower.Hehadplayedthegame,likeall the businessmen of his generation, by paying bribes when necessary,deploying his security servicewhen called for, and flattering top politicians

with his plans and ambitions. But Gusinsky said the pettiness of theinfluencepeddlinggamesometimeslefthimfeelingempty;briberywasadeadendbecauseultimately anyonewith enoughmoney couldpay a larger bribe.Theincreasinglycostlyandintensecompetitiontobuyinfluenceseemedtobeoutrunningitself.Bribery“ishumiliatingforme,”Gusinskytoldme.“ItmeansthateitherIam

doing something that I cannot spell out in public—that I’m a rascal—or thatmoneyisbeingextortedfrommebyforce.Inwhichcase,itmeansIamafraid,that’swhyIbuyhim.”“Igavebribes,nosecret.ToliveinRussia,toliveintheSovietUnion,and

not togivebribes isabsurd.ButIwas tryingtodoitasseldomaspossible.”Gusinskywondered,insteadofendlesslycompetingtobuyinfluence,wasthereawaytoexertgreater,moresystematicpower?Andthenitdawnedonhim.“Anewspaper!”“WhenIstartedthenewspaper,Iwillsayitdirectlyasitwas:itwasnothing

but an instrument of influence,” Gusinsky said. “One hundred percent—influenceoverofficialsandoversociety.Iwascreatingthenewspaperexactlyfor thisaim.”Headded,“Ifanofficial turnedbad, Iwouldattackhimwithanewspaperand tell the truth thathedemandedmoney,extorted it,oracceptedconditionsdishonestly.”Leontievhadno illusions.Gusinsky, he realized,was “trying todevelop a

system of promoting himself, of self-defense through the press.” GusinskyhiredprofessionallobbyistssuchasZverev.“ThemainaimforRussianpublicrelations was not about creating an opinion about a firm in society,” saidLeontiev. “The society plays a secondary role here. Themain thing is thosewhomakedecisions: the power structures, theKremlin, and the cabinet.Theaimwastogetthisorthatsignature.”WhenGusinsky’snewspaperSevodnyaappearedinFebruary1993,itwasa

respected liberal organ that soon attractedmany ofMoscow’smost talentedjournalists. It was born out of an inchoate and incompatible mix of thejournalists’idealsandGusinsky’sdesireforpowerandinfluence.“Ifanybodytells you that we clearly understood what we were doing, it was not so,”recalled Zverev. Originally, Gusinsky and two partners, one of whom wasSmolensky, invested$6million.But thepartnersdroppedout; theycouldnottake the heatwhen the newspaper came under fire orwent on the offensive.Gusinsky acknowledged that it was often a difficult choice for him too,because therewere somany peoplewho could bewounded by a newspaper

article.Despite the torrent of complaints and competing pressures, “I stayedon,deciding:letmetry.”Sevodnya had a small circulation, forty thousand copies, was entirely in

Moscow,andranlittleadvertising,butitearnedanicheamongMoscow’selite.Gusinsky ran the newspaper as a hobby. One day, Leontiev asked him toappoint a manager, since no one seemed to be running the paper. Gusinskydidn’t want to bother wasting a good manager on the newspaper. In otherbusinesses,Gusinsky explained, a goodmanager could earn $100million ayear. “If I ask him toworkwith the paper, hewill only be able to cover itslosses,whichare$6million.Forme,it isbetterifheearnsthe$100millionandIgive$6milliontoyou,andkeep$94million!”DespiteGusinsky’sambivalenceaboutthenewspaper,itwastheseedofwhat

wouldbecomehisgrandestproject.WhenSevodnyabeganpublishing,agroupof disgruntled journalists at the state-run Ostankino television station tooknotice.Untilthen,noonehadassociatedGusinskywiththenewsmedia.Buthisnewpaperwassmart,progressive,andprivatelyowned.Itwasasignpost.Theyfollowedit.On television,YevgenyKiselyovwas a voice of authority.He spoke slowly,thoughtfully, and deliberately, with resonant, deep tones. His handsome,rugged,square-jawedfacewasalmostalwayssetinanexpressionofsobriety.He had a healthy shock of brown hair and a prominent mustache. But whatmadeKiselyovsopowerfulasatelevisionpersonalitywasavoicethatneverhurriedandoftenpausedforeffect.Kiselyov had once been a Persian translator with the Soviet Army in

Afghanistan and later taught Persian at the KGB academy. He was unhappythereand jumpedatachance tostarta journalismcareeratRadioMoscow’sPersian-language service. Later hemoved to television, and in the first daysafterthecollapseoftheSovietUnioninJanuary1992,hewentontheairatthestate-runOstankino channelwith a newweekly analytical program, Itogi, orsumming up, which quickly became a success, driven by Kiselyov’sauthoritativepersonalstyle.14But as 1992 wore on and Yeltsin came under increasing fire from

parliament,KiselyovnoticedthattheKremlinwashankeringtoimposemorecontrolonOstankinotobolsterYeltsin’sposition.IgorMalashenko,whohadonce worked for Gorbachev’s press service and later became director ofOstankino,abruptlyresigned,complainingaboutgrowingpoliticalpressures.

Throughaseriesofominouspersonnelshifts,Kiselyovfeltachillthroughthehallways—andfearedthatsoonhewouldbeaskedtotakedirectordersfromYeltsin’s henchmen. “I sensed that the clouds were becoming darker anddarker,”herecalled.15KiselyovknewthatGusinskyhadinvestedbigmoneyinadailynewspaper

and wondered whether he would consider bankrolling a television show.Kiselyov talked over the situation with Dobrodeyev, who was producer ofItogi,andsuggestedtheyapproachGusinskytogether.Kiselyovtelephonedanoldfriend,Zverev,whohadbegunworkingforGusinsky’scompanies.Zverevwas immediately enthusiastic. The call fromKiselyov came in the

morning,andameetingwasarrangedto takeplacelater in theday.KiselyovandDobrodeyevtooktheelevatortotheofficesofGusinsky’scompanies,theMost Group, on the twenty-first floor of the high-rise building whereLuzhkov’sofficeswere also located.Dobrodeyev recalled that theofficesoftheMostGrouplooked“extremelyserious.”In Zverev’s office, Kiselyov presented his idea. He wanted to find an

independent financier for his program Itogi. They would leave state-runOstankino.Theywanted journalistic freedomand theywanted tomakemoremoneyaswell.“Journalistswerelivingalmostinpoverty,includingmyself,”Kiselyov recalled. “We wanted to go independent because we wanted toproducewhatwe reallywanted toproduce.Wewanted toattractnew,young,talentedpeople,offer themgoodmoney for the job, andearn something forourselves.”Surprisingly, Zverev jumped out of his chair and hustled down to

Gusinsky’soffice.He returneda fewminutes laterand invited theastonishedKiselyovandDobrodeyevtoseeGusinsky—immediately.TheywalkeddownthehallwaytoGusinsky’soffice,which,althoughithada

fabulousview,wasfurnishedratherdarkly.Gusinskywasnolongertheskinnyboy who slipped his friends into the Lenkom theater. He had put on someweight,andheworeaviatorstyleglassesandarumpledwhiteshirtandtie.Buthis face retained an extraordinary ability to reflect his boundless, ever-changingemotions.Hiseyebrowsroseandfell,andhissentencesburstoutassoonasa thoughtoccurred tohim.WhenKiselyovwalked in,Gusinskywasenormously excited. He had never met Kiselyov before but admired thenewsman greatly. Gusinsky was little known in public, but Kiselyov was ahouseholdname,theRussianWalterCronkite.“Imagine!”Gusinskyrecalled.“Kiselyovintheflesh,atmyoffice.Howcan

this be? This is Kiselyov himself. As if we were sitting here andMargaretThatcherwalkedthroughthedoor.GodAlmighty!It’slikethis!”KiselyovandDobrodeyev laidout theirplan, askingGusinsky ifhe could

financetheproductionofItogi.ButGusinsky’sbrainwasalreadyinoverdrive.Yes, he said immediately, he would finance their show, but why stop there?“This is a small project,” he said. “I think the big project is to start anindependent televisioncompany,broadcasting twenty-fourhoursaday; that’swhatIamreallythinkingof.”The guestswere speechless.No such independent television existed in the

new Russia, only state television inherited from the Soviet Union. KiselyovremindedGusinskythatachannelwouldrequireafrequencytobroadcaston—and theyhadnone.ButGusinskywaswayaheadof them.Hequicklypointedout the sorry state of Channel 4, a government station that was a dumpinggroundforunwantedprogrammingbythetwomainstatechannels,Ostankinoand Russian Television, which had Channel 1 and Channel 2, respectively.Channel 4was a disaster; noonewatched it or cared about it, andGusinskywas already plotting to lobby the Kremlin for a decree signed by PresidentBorisYeltsingivinghimChannel4.Withinafewhours,Kiselyov,Dobrodeyev,andGusinskyweresurrounded

by lawyersand financialexperts,and theyweredeep intoplanning theirnewproject. Such were the times that dreams were unlimited and enthusiasmcontagious. “Gusinsky was a very dynamic person; he moved very rapidlyacross his huge office,” Dobrodeyev recalled. “The whole situation was inkeepingwiththetimesinRussia,whenthingsappearedoutofnothing,andithappenedvery,veryrapidly.Grandioseprojectsappeared.Banksappeared.Atelevisioncompanyappeared.Thenegotiationsweren’tlong.Wearegoingtocreatetelevision.Moneywasn’taproblem.Otherresources,connections—nota problem! Back then, the will, the desire, the drive solved absolutelyeverything.”Dobrodeyevrecalledthathehadnoideawhetherthenewtelevisionchannel

couldsucceedcommercially.“I thinkmostpeoplehadgreatdoubtsabout thecommercial side of thematter,” he said. “Itwas amatter of status. The bestyearsofverymanynewspapers,reallygoodnewspapers,ofvarioustelevisionprograms,werepreciselythoseyearswhentheownerstreatedthemasiftheywere standing next to amasterpiece. It was like, ‘And I have a newspaper. Ihaveagoodnewspaper.’”GusinskyapproachedMalashenkoaboutbeingmanagerofthenewchannel.

Malashenko recalled thatGusinsky treated his newspaper as just a hobby. “Itwasastatussymbol....SoveryquicklyI realized that forhimaTVcompanywould be another—how to say it—architectural detail, an ornament on hisfaçade.” Nonetheless, Malashenko agreed to become the new boss of theGusinskychannel.Malashenkohadhisownreasons:hewashumiliatedwhenhe resigned from Ostankino. He wanted to get back at his tormentors bystartingarivalindependentchannel.“Iwantedrevenge,”heremembered.16Gusinskyalsohadascore tosettle.Hehadanongoingpersonal feudwith

Mikhail Poltoranin, the press minister in Yeltsin’s government, whomGusinskyregardedasananti-Semite.PoltoraninhadinsultedGusinskyatsomepoint in recent years, and “I had a strong desire to have a fight with him,”Gusinskyrecalled.“Ievendrovetohisofficetwiceespeciallytorunintohimandpunchhiminthenose.”Startingatelevisionstationoutsidethecontrolofthestatewassweetrevenge,Gusinskyfelt,butthatwasnotall.“Ijustwantedtobenumberone,”he recalledofhisearlyenthusiasmfor television.“I think Istarted it because I had to be the first, because no one else had his owntelevisionchannel,andIwouldhaveone.”Gusinskywasalsothinkingaboutmoney.IntheUnitedStates,someonehad

mentionedtohimthataminuteofadvertisingontelevisionsoldformillionsofdollars.“Iseizedthemeaning,”herecalled.“Hereit is, thegoldmine,yetagain.Iunderstoodthatitwas100percentpossibletomakemoney.”The first yearwas exhilarating.Malashenko hastily drew up a planwhich

predicted they would need $30 million for the first fifteen months, andGusinsky found themoneywith other investors, including Smolensky. Theyboughtcameras,equipment,andofficespace,andtheykeptawaryeyeonthenews.Russiawasheadingintoamammothpoliticalcrisis,aface-offbetweenYeltsinandhard-linersinparliament.Theywerenotyetontheair,butbuildinga new, private channelwas exciting. “Itwas a great time,”Kiselyov recalledlater.“Weweredoingsomethingforourselves,wehadcompletefreedom,wetraveledalot,andwefeltthatweweredoingsomethingsignificant,probablythemostsignificantprojectofourlives.”WhenKiselyovandDobrodeyevleftOstankino,theytookdozensofthebesttelevisionpeoplewiththemtothenew,privatechannel,includingannouncersTatyanaMitkovaandMikhailOsokin.TheGusinskyhighcommandcouldnotdecidewhattocallthenewchannel.

Malashenko suggestedNTV forNovoeTelevidenie, orNewTelevision.Theotherswinced.Itsoundedawful,theythought.Thensomeonesaid,howaboutNezavisimoe Televidenie, or Independent Television. No, that didn’t work

either.According toMalashenko, they decided to call itNTV and leave it atthat. There was no official name, but Malashenko thought up a slogan. InSoviettimes,hehadspentyearsstudyingtheUnitedStatesandwasfondofanoldStrategicAirCommandslogan:“PeaceIsOurProfession.”HeadaptedittoNTV:“NewsIsOurProfession.”NTV went on the air October 10, 1993, a week after the confrontation

betweenYeltsinandparliamentturnedviolent.Atfirst,thenascentstationhadonlyanhouradayofprogrammingonaweakSt.Petersburgchannel.InthemidstofYeltsin’swarwithparliament,whichwasunfoldingvirtually acrossthestreetfromGusinsky’sofficesinthemayor ’sbuilding,Malashenkosatinhiscar,abatteredoldMoskvich,andusedhismobiletelephonetotryandmakeappointments inCannes,where the televisionfilmandminiseriesmarketwasopening.AstelevisionsscreensflickeredaroundtheglobewiththescenesoftanksbombardingtheWhiteHouse,Malashenkowastryingtoshoutover thedin, persuading people that a new television station inRussiawanted to buytheir films. He then flew to Cannes and frantically tried to buy moreprogramming. “Peopledidn’twant to sell,”he recalled. “Itwas incredible tobelieve that a guy would come from Moscow, where parliament is beingshelled,tobuymovies.”For sixmonths,Zverev lobbied foradecree from theKremlin thatwould

giveNTVthecherishedChannel4airtime.ZverevarguedthatanindependentchannelwouldbeavaluablesourceofsupportforYeltsin,buthewaslobbyingfor an idea that no one could grasp. “Nobody understoodwhat independent,private television would be like,” Zverev recalled of his difficult andexhaustingefforttowinthepresidentialdecree.Someonewasblockingit,andZverev could not figure outwho.Once, by chance, he tookKiselyov to seeYeltsin’s tennis coach,ShamilTarpischev, amemberof thepresident’s innercircle,whohadanofficeintheKremlin.Zverevdiscoveredthesourceofhistroubles:TarpischevwasblockingthedecreebecausehewantedChannel4tobeasportschannel.ZverevpersuadedhimthatNTVwouldbroadcastsports,and his resistance ended.17 Yeltsin signed the decree in December, and inJanuary,NTVwentontheairsixhoursaday,startingat6P.M.Malashenkowasstillharried:hehadmanagedtobuyonlytwoweeks’worth

of programming.As tapes arrived inRussia, theywere immediately dubbedandthrownontheair.Itwaschaos,buttheywerehavingthetimeoftheirlives.Thehighestaspirationsof thenew televisionpioneerswas toexistbeyond

thegripof thestate, toproducewhat theycalled“normal” television.Oneof

them had suggested half-jokingly that NTV should stand for “NormalnoyeTelevidenie.” Gusinsky loved movies, especially those from the West, anddreamed simply of a television channel broadcasting movies and newsbulletins.Gusinsky had started his newspaper with the idea of broadening his

influence.Laterhewouldrelentlesslyusehis televisionchannelasapoliticaltool as well, and it would lead to endless troubles. But at the outset, theparticipantstoldme,theyhadnotfullyunderstoodtherisks.Theyhadnotevendreamed, back then, of turning their channel against Yeltsin, a friend andguarantorofthefreepress,whoseownsignatureonthedecreehadgiventhemtherighttobroadcast.Gusinsky was now more than just a Moscow businessman who had

connections.WithNTVtelevisionandthenewspaperSevodnya,hehadbecomeapillarofthenewRussia.Hisrivalshadalreadybegunplottinghowtotearhimdown.

PARTTWO

Chapter8

UnlockingtheTreasure

THE REVOLUTIONARIES were young men in their thirties, selfconfident,hopeful, untested in power, and confronted with a task far beyond theirimagination or practical experience. For years, as assistant professors andlittle-known specialists, theyhadbeendreaming aboutmarginal, incrementalchangestothestagnantSovietsystem.Theyhadsatisfiedthemselvesstudyingthe slightly more progressive examples of economic experimentation insocialist Hungary and the Latin American transformations. Now, as theygatheredinagovernmentguesthouse,dacha15, inArchangelskoe,avillagewest ofMoscow, theywere facing an entirely newworld. The SovietUnionwasinitsdeaththroes.Theywerebeingcallednottosaveitbuttoburyit.AfterthefailedAugust1991coupattempt,MikhailGorbachevremainedin

office four months longer in a vain attempt to keep the Soviet Union fromdisintegrating.ThefinalblowcameinearlyDecember,whenBorisYeltsinandthe leaders of Ukraine and Belarus, meeting at Belavezhskaya Pushcha, ahunting resort outside Brest, declared their own union, defying Gorbachev.TheSovietflagwasloweredfromtheKremlinthreeweekslater,onDecember25,1991,justafterGorbachevannouncedhisresignation.In the months before the final collapse, Yeltsin had begun to assemble a

parallelregimethatwouldtaketheradicaleconomicmeasuresGorbachevhadnever made. Yeltsin passed over the older, well-known economists of theGorbachev years and settled on thirty-two-year-oldYegorGaidar, author ofsome of the best Soviet analyses of the economy in the party’s journal ofideology,Kommunist.1 Yeltsin recalled that Gaidar led a team of “arrogantyoungupstarts”whowere“independentthinkersraringtogo.”Instinctiveandintuitive, Yeltsin ruled by feeling rather than by policy; he liked the simpledirectness ofGaidar ’s proposal for a “big bang,” a sudden jump to the freemarket modeled on Poland’s experience after the fall of the Berlin Wall.YeltsinwasinfectedwithGaidar ’senthusiasmforeconomicshocktherapy.“I

couldn’t force people towait once again,”Yeltsin recalled, “to drag out themaineventsandprocessesforyears.Ifourmindsweremadeup,wehadtogetgoing!”2YeltsinwantedtomakesurehetotallydestroyedSovietCommunism.Pyotr Aven, who worked alongside Gaidar, remembered that “Yeltsin wasinterestedonly inpower.Hewanteda team thatwouldbeveryaggressive inthrowingoutalltheoldbureaucrats.Healsounderstoodthat,tous,Yeltsinwasagod,andwewouldfollowhim.”3In September-October 1991, Gaidar closeted himself with other young

economists at dacha 15 to begin drawing up the details of Yeltsin’s radicaleconomic reform. Everyone who had worked with Gaidar knew he was agradualistbytemperament,acautiousreformer,everrespectfuloftheexistingpowers. For years, he had insisted on trying to accomplishmodest, realisticsteps rather than risk agiant leap thatwouldnever standa chance.Avenhadsuggested toGaidar inSoviet times that theystudySweden,aWesternsocialdemocracy,asamodel,butGaidarknockeddowntheideaastooradical;heinstead suggested Hungary, which was safely within the Soviet bloc. Gaidarhadaverystrongintellect;hewasthebestandbrightestofhisgeneration,yethealsohadatendencytoponderthedata,toseedifferentsidesofanargument.AmongthoseGaidarputonhisteamatthedachawasAnatolyChubais,fresh

fromSt.PetersburgandlesswellknownthanGaidaratthetime.Chubaistoohadbeenagradualist inearlieryears,butnowheheartilyembracedtheneedfor radical change. While Gaidar had a slightly professorial, diffident air,Chubaiswas determined and self-assured.Of all those at the dacha, Chubaisbecame the reformer who survived the longest, remaining in high-rankingpoststhroughoutthe1990s.Hewasresoluteandunyielding.Itwashisgreatestasset,aswellasasourceofaggravationtothosearoundhim,thatChubaisdidnot budge from a position once he had made up his mind. Gaidar was atrailblazing intellectbutnot apolitician;Chubaiswasnot anoriginal thinkerbut a skilled, steely executor andpoliticalwarrior. In thenext fewyears, thetwoofthem—Gaidar,shortandstocky,aPoohbearwithalarge,welcomingface, and Chubais, tall and lean, with a shock of sandy red hair and acomplexion that flushed brightly whenever he became emotional—weretransformed from obscure academics into the chief engineers of Yeltsin’seconomicrevolution.Theysetout toaccomplishnothing less thanwreck theold system—smash the entire complex of planning, thinking, and behaviorinheritedfromLenin,Stalin,andtheirsuccessors.Theyeachscoredasingular,hugeaccomplishmenttowardthatgoalandleft

anequallydisturbinglegacy.Gaidar ’smostimportantcontributionwastofreepricesfromstatecontrol,cripplinganoppressivetoolofthecentrallyplannedeconomy.ButGaidar ’s legacywasa tidalwaveofhyperinflationthatwashedover Russia once prices were free, and it was far more destructive andpersistentthanGaidarhadimaginedpossible.Iterodedthelifesavingsofthepopulation,disenchantingthemforyearstocome.Chubais’smostimportantactwastobreakthestatemonopolyonproperty,

putting theenormous industrialwealthof thecountry intoprivatehands.Thewhole fateof thenewRussiaas a freemarket economy lay inwhether thesenew, private owners would eventually prove more effective in runningfactoriesthanthefailedCommunists.ButChubaisdidnotpayheed,orcare,towhom the riches of Russia were distributed, as long as they were privateowners,freeofthestate.Hefiguredthatafterseveralgenerations,themarketwouldsortout thebest from theworst.Surely, theworstwouldgobrokebytheirownineptitudeandthebestwouldenjoythefruitsoftheirlabors.Itwasthatsimple:classicalmarkettheory.Therealitywouldprovenotsoelegant.Furthermore,bothChubaisandGaidarleftadangerousvacuum—thegreat

breakthroughstowardfreepricesandprivatepropertyweremadewithoutfirstbuildingthekeyinstitutionsofamarket.InthechaoticdawnofRussia’spost-Sovietstatehood,theeconomywasawild,uncontrolledjunglewithoutrulesofthe game and those who enforced them. In a mature market economy,competitorscanpursue theirdisputes in forumswithdefined rules.Theyarelike boxers in a ring. The contest is settled by the rules—either through thecourtsorincapitalmarkets,wherewinnersandlosersaresortedoutbasedonperformance.ButRussiadidnothavetheseforums,norastrongstatetocreatethem,and thisvacuumundermined theveryaspirationsandaccomplishmentsof the revolution.HowcouldChubaispossibly realizehisdreamof creating“effectiveowners”iftherewasnomechanismtorewardthegoodandpunishthebad?Whatgoodwerefreepricesifnoonewassureabout theirrights toproperty andprofits?Gaidar regularly acknowledged that theywere hauntedbytheseunknowns.Wasitbettertounleashtheboxersfirstorbuildtheboxingring for them to fight in? In the heady onrush of events in 1991 and 1992,GaidarandChubaisdecided: theboxersfirst;someoneelse, later,wouldtakecare of the rest. Chubais was certain that the players themselves wouldinevitablybuildthering,oncetheysawitwasnecessary.They were driven by urgency. They believed they could not put the

revolutiononholdfortheyearsitwouldtaketobuilduptheinstitutions.But

there was another, deeper reason—often unspoken but clearly evident—whyYeltsin,Chubais,andGaidardidnot immediatelysee theneed forastrongerstate.TheSovietstatehadbeenpowerfulandoverweening;intheirexperience,authoritarianism had been a central, defining source of evil. They werethinkingaboutdestroyingtheoldsystem,notrecreatingit.Astheautumnof1991setin,Gaidarandhisbraintrustfeverishlyprepared

forYeltsin’smajor economic speech to theRussian parliament at the endofOctober. A sense of unreality filled the air as the Gaidar team set out on amissionunlikeanyintheir lives; itwasatonceexhilarating,frightening,andunimaginable. Mikhail Berger, then the economics editor of the newspaperIzvestia,whowasrespectedbytheyoungreformersandwitnessedtheGaidarteamfirsthand,recalledthatdacha15wasbrimmingwithexpectation.Intheirbanteranddebate,itwasasiftheywereonanotherweekendretreatlikethetwoseminars of 1986 and 1987 outside of St. Petersburg, except this time thestakeswereenormous,andreal.“Theatmospherewasasiftheyoungpeoplewent on a hike somewhere to the mountains or just out of town,” recalledBerger.“Itwastheatmosphereofaclub,andagame.Infact,everybodyfeltasifitwerenotforreal.”4“Imagine,theysatdiscussingthingsandthensomeonemightask,‘Andwho

isgoing tobe transportationminister?’They started laughing. ‘Hereweare,freshfromtheinstitute,discussingwhoisgoingtobetransportationminister!’Theytreateditassomekindofgame,notseriousenough.Theyarguedforalongtimeaboutwhowasgoingtobeprimeminister.Noneofthemwantedto.PureKafka.Kids,sittingatthedacha,writingaprogramandtryingtoformagovernment.Of course, later itwould change.But at thatmoment, it lookedlikeafairytaleaboutsomekindofmagiccavewheretheysaid‘takeasmuchtreasureasyoucancarryonyourback.’Itwasacaveofpower.Theytriedtotakeasmuchpowerastheywereabletocarry.”Butforalltherevelry,theGaidarcrewbroughttodacha15someprofound

shared assumptions, forged in Soviet times when they were little-knownmathematicians, economists, and professors. They were saddled with thebaggage of their past experience, and they were not quite prepared for theentirelydifferentchallengesofaneweconomicandpoliticalsystem.JustthefactthattheGaidarbraintrustisolateditselfatthedachareflectedthe

insular method they had adopted in the Soviet years. When Chubais firstcreatedhissmallcadreoffreethinkingeconomistsinLeningrad,itwasdoneingreat secrecy to avoid attracting the attention of the KGB. The same mood

prevailedwhen they retreated toa stairwell todebateNaishul’s radical ideas.TheSovietsystemhadforcedthemtobeconspirators;itcrushedthosewhodidnotconform.MikhailDmitriev,theyoungeconomistwhohadbeencalledonthecarpet for thenoteshe tookat the1987seminar, toldme thatGaidarandChubais had learned everything about politics under a regime that wouldimmediately destroy any far-reaching new ideas. “By definition they weresuccessful because they were conspirators, they were not open, they weremainlyactinginaverynarrowcircle,”hesaid.“Andallthesehabitscouldn’tbechangedquicklybecausebytheendofthe1980sbothGaidarandChubaiswere already in their mid-thirties, and people don’t change easily in thisrespect.”5Another legacy of their past was their shared disdain for politics. In the

1980s, Gorbachev had unleashed freedom but lagged behind on economicchange.Theywere determined to avoidGorbachev’s quagmire of politics—endlessplansthatwentnowhere,suchasthefive-hundred-dayplantoturntheSovietUnion intoamarketeconomy,whichwasneveradopted. Instead, theythought of themselves as technocrats, pure economists who would find theright thing todoandsmash through theoldbarriers togetting itdone.Theybelieved,Soviet-style,thattheyonlyneededtopleaseoneman,thebossatthetop,BorisYeltsin.6Theyalsobelievedthattheproblemoftheoldsystemwastoomuchpolitical interference; certainly, amorepurely economic approachwouldbemoresuccessful.7Although their economic ideas were modern, capitalist, and radical, their

political tacticswereoftenarrogantandnaive.Theybypassedtheparliament,whichgrewalienated,andGaidarwasespeciallypooratcommunicatingwiththe public. The more determined and cunning Chubais turned out to be asharper political operative, but both of them, along with Yeltsin, neglectedfrom the outset to lay a grassroots base for their revolution. Gaidar lateracknowledged it was a serious miscalculation that left them at sea andvulnerable.Itmighthavebeenimpossibletobuildsuchapopularbaseanyway,given theexcruciatingpain theywereabout to inflictonRussian society,butGaidartoldmetheysawthemselvesaseconomicprofessionals,notpoliticians.“We hadYeltsin,whowas an extremely efficient politician at the time, verypopularandveryactiveandastrongRussianpolitician,”hesaid.8ButYeltsinwasnotenough,consideringtheenormityoftheirrevolution.YetanotherfundamentalbeliefamongtheGaidarbraintrustwasthatRussia,

despiteitsbackwardnessandterriblehistoryofautocracy,wouldbefertilesoil

foramarketeconomicsystem.Russia,theybelieved,wasnotanexceptiontothebasicrulesofhumanbehavior.GaidarandChubaiswerecertainthatiftheycreated free choice, people would take advantage of it and respond toincentives. They hoped that all the collectivism, passivity, paternalism, anddestructionofinitiativeandentrepreneurshipthatwasalegacyofRussianandSoviet history wouldmelt away as a beachhead of freemarkets, free trade,private property, and free prices was established. This assumption—thatWestern market economics could take root in Russia despite its peculiarculturalandhistoricalexperience—wasoneofthemostfatefulanddaringoftheir time. Itwas a gamble.A decade later, the validity of this ideawas stillvigorouslydebated.TheGaidarteamalsorealizedthatnoonewouldbebuildingmonumentsto

them for the transformation they intended to impose on their country. Theyoften described themselves as kamikaze pilots, because theywould certainlydestroy themselves in trying to tear down somany entrenched interests.Notonlywould theybattle old-school bureaucrats, party bosses, themilitary andsecurity establishments ; they were setting out to destroy the mindset ofmillionsofRussianswhoknewnootherpoliticaloreconomiclifeotherthanwhat they had experienced during Soviet Communism. The kamikaze ideaemboldenedthembecausetheyhadnocareers,nopromotionstoworryabout.Butitalsoweakenedthembecauseitgavetheiropponentstheideathatitwouldonlybeamatteroftimeuntilthereformersdisappearedfromthescene.Gaidarandhisbrain trustknewthat timewasnotontheirside.TheSoviet

legacywasformidible:dozensofgovernmentministrieslordedoverbranchesof industry;within them, thebureaucratswanted topreserve theirbastionsofpower. In the factories, the powerful “red directors” stood to lose theirprominent status and sprawling empires. They allwanted to stop the radicalreformers. The special interests insisted: why not restructure industry moreslowly, factory by factory?Why notwait until a reliable legal and financialsystemwasestablished?Whynotfreepriceslater,afterprivatepropertyrightsareguaranteed,andafterthehugeSovietmonopoliesaredismembered?ButGaidarandChubaisbelievedthatgradualismwasakintodeath;itwould

strengthen the vested interests and doom any real chance at reform.Chubaissaid it was only an illusion that change could be done “gently, slowly, andpainlessly, so that everybody shouldbehappy.”9Gaidar andChubais had nointentiontobegentle,slow,orpainless.Latertheywouldbecriticizedoverandoveragainby thosewhosaid therewasanotherway—ifonly theyhad taken

moretime,ifonlytheyhadbeenmorecareful,ifonlytheyhadrebuiltindustrycase by case, if only they had taken care to build institutions first.Many oftheseargumentswerecorrectinatheoreticalsensebutwerefarremovedfromtherealworldthatGaidarandChubaisconfronted.Thereformersfearedtheydid not have more time—to wait was to fail. I think their fears were notimagined.All around themwere signs of utter collapse.At anyminute, theycouldbehistorytoo.Inthefinalmonthsofitsexistence,theSovietUnionslidintouttereconomic

chaos.After the failedAugust coup, the countrywas rifewithpredictionsoffamine, catastrophe, and collapse.Grain deliveries to the state dropped by afactor of four. “People simply weren’t hauling it to the elevators,” Gaidarrecalled. “Why should they? To get some piece of paper that, out of habit,everyonestill callsmoney?”BothGaidarandChubaiswerehauntedbywhatthey saw on the streets of Moscow: the worst shortages ever. “Moscow inDecember 1991 is one of my most painful memories,” Gaidar said later.“Grim food lines, even without their usual squabbles and scenes. Pristinelyempty stores.Women rushing about in search of some food, any food, forsale....Expectationsofdisasterwereintheair.”10Thechaosdeepenedas theSoviet state itself—thevastchainofcommands

andcontrolsthatstretchedfromMoscowtothemostdistantprovince—seemedto tear apart. The military and security organizations were in a “state ofshock,”Gaidar recalled,while the republicswent their separateways.Yeltsinwasapopularleader,butinthefinalmonthsoftheSovietUnion,hehad“noleversofcontrol.”11Gaidar was strongly influenced by the example of Poland, which had

launched shock therapy on January 1, 1990, by freeing prices and trade.Poland’s“bigbang”wasledbyareformeconomist,LeszekBalcerowicz,anditboreimmediatedividends;consumershortagesgavewaytobrimmingstreetmarkets,andtheinitialburstofinflationwasrelativelyshort.12Poland’sshocktherapy was in part the handiwork of the Harvard economist Jeffrey Sachs,who, alongwithagroupofotherWesterners,urgedRussia to take the sameroute. The role of the Westerners—both individuals and governments—inRussia’s transformation laterwashotlydebated.But themost importantactorwasYeltsinhimself,whomadethefirstbigleap.AccordingtoBerger,Gaidarandhisbrain trustdraftedaspeechforYeltsin inwhich theydeliberatelydidnotnameadaywhenpriceswouldbefreed.Theyfearedaspecificdatewouldleadtohoardingandpanic,whichtheycouldhardlyafford.Yeltsinsentbacka

draft in which he had scrawled that prices would be freed by year ’s end.“Everybody was shocked, that was something that could not be announcedbeforehand,”Bergerrecalled.“TheykindofpersuadedYeltsintocrossitout.”But when he gave the address on October 28, 1991, Yeltsin reinstated theremark.Hedeclaredplans for a “one-offunfreezingofprices in thecurrentyear.”ThatmeantbeforeJanuary1,1992, just twomonthsaway.TheGaidarbraintrustcoulddonothingmore.“Yeltsinjustpulledthelever,”Bergertoldme.In this landmark speech, Yeltsin fully embraced shock therapy. “A large-

scalereformistbreakthroughisneeded,”hedeclared,promisingthat“weshallfinally begin, in reality and not just in words, to haul ourselves out of thequagmirethat issuckingus indeeperanddeeper.”YeltsinendorsedthebasicGaidar plan for free prices, free trade, and mass privatization. Heoptimistically—even foolishly—promised that “people’s lives will graduallygetbetter”bythenextautumn.Whenhisfatherstoppedbythedacha,Gaidarmentionedthathemight join

theYeltsingovernment.Hisfatherblanched,Gaidarrecalled,“anexpressionofstark fear on his face.”TimurGaidar knew the jobwas political suicide buturged his son to go ahead. The followingweek, Yeltsin formally appointedGaidaradeputyprimeministertoleadtherevolution.13Late one night, Gaidar took Chubais aside. Gaidar worried about money,

prices, finance, and the looming prospects of panic buying, hunger, and adevastatingwinter.Hewouldleadthefirstwaveofradicalreform,butheknewthatiftheymadeittospring,therewouldbeasecondwavethatwouldbefarmore difficult. The goal of the second wave was to profoundly change theunderlyingstructureoftheeconomy.Itwouldinvolvecarryingoutthelargesttransfer of property to private hands ever attempted in modern times.Privatization was going badly in Poland and Hungary, and Gaidar neededsomeonewhowouldseeittotheend.HeaskedChubais.“Yegor,” Chubais replied, with a deep sigh. “Do you understand that

regardless of what the result will be, I will be hated for the rest ofmy lifebecauseIwasthepersonwhosoldoffRussia?”Gaidarrepliedthattheywouldall“havetodrinkfromthatpoisonedchalice.”In earlier years, Chubais had paid little attention to privatization, which hefoundmoreofadullorganizationalchorethananeconomicschallenge.Therewasn’t a single economics textbookhehad seenaboutprivatization, and few

members of his teamwere interested in a field that had been nonexistent inSoviet times.14 One of themost basic tenets of Soviet Communismwas thenationalizationofallmeansofproductionexceptforindividuallabor;theverywords “private property” came to the fore only in the final years ofGorbachev, and few of the young academicians really understood itsimplications. In the brief period in St. Petersburg city government, amongthoseontheChubaisteam,onlyDmitriVasilievhadworkedonprivatization,andhehadfocusedonsmallbusinesses.Once he was given the assignment of carrying out the grand transfer of

property,however,Chubaischaracteristicallyturneditintoanintensecrusade.Hechampionedprivateownershipastheequivalentofpersonalfreedom.“Weneed to free the economy from the state,” he declared. “To free the countryfromsocialism.Toshakeofftheterriblechainsofthatgigantic,all-pervading,bureaucratic,ruinous,andineffectivestate.”15The first thing Chubais discovered was that someone else was already

feastingatthetable.Propertywasbeinggrabbed,stolen,andgobbledupbytheold guard, factorymanagers, and party elite, whowere taking advantage ofchaosinthecountry.Chubaiscalledit“spontaneousprivatization,”anditwasoutofcontrol.AsthereinsofcentralauthoritywereloosenedinGorbachev’syears,factorymanagersgainedevermorepowerovertheirowndomainandlinedtheirownpockets.Usingcooperativesandjointventures,andlatershellcompaniesandoffshorehavens,theyleechedthecashorrawmaterialsoutofstate enterprises. Their overlords, bureaucrats in the government ministries,were also carving up the spoils for themselves. It was common for a stateenterprise, such as a steel factory, to give birth to a small “pocket” bank,perhapson the factorygrounds.Then thebankwouldgivebirth to a tradingcompany, which would take over the sale of the factory’s output—stateproperty—and the profits would disappear into the offshore accounts of thedirectorandhisfriends,perhapsusingthepocketbank.Therewasnothingtostop it. In his landmark October speech, Yeltsin had noted that while thereformers debated privatization, “the party and state elite, meanwhile, wereactively engaged in their own type of privatization. The extent of it, and theenterpriseandhypocrisy,aresimplyamazing.PrivatizationinRussiahaslongbeenunderway,butwildly,spontaneously,andnotinfrequentlyonacriminalbasis.”“In reality, it was theft of state property,” Chubais recalled, “but was not

illegalbecausetherewasnolegalbasisforthetransferofpropertyintoprivate

hands.”16 The result of spontaneous privatization was a spoils system thatrewardedthefactorymanagersandpoliticalbossesandleftouteveryoneelse.Chubaiswasoffendedattherude,defiantwaytheoldguardwasgoingaboutit.The essence was that “if you are cheeky, daring, and resolute you will geteverything,”herecalled.“Ifyouarenotverycheekyandnotverydaring,justsitquietly.”Chubais had caughtwind of something.Theft, insider dealing, and hidden

moneyflowscharacterizedtheentirefirstdecadeofRussiancapitalism,butinthatearlyperioditseemedtobetheparticularskilloftheoldguard,theparty,and managerial elite. Later, many others would learn the benefits of beingdaringandcheeky.In 1992, Chubais uncovered a good example of how spontaneous

privatizationworked.Agroupofpartybigwigs setupadummycorporationcalled Kolo Ltd. to take over Energia, a huge Soviet-era rocket engine andsatellitemanufacturer, a crown jewel of themilitary-industrial complex, at afractionofitsrealvalue.Thefounderscontributedtheir“intellectualproperty”(theirideas),whichtheyarbitrarilyvaluedatmillionsofrubles,andthentriedto grab not only themassive rocket companybut amilitary airfield aswell.Chubais recalled that the thieves had created an “absolutely impregnablescheme,”and“theinterestingthingaboutsuchdealsisthatwecannotuntanglethem.”When the rip-offwas finallydiscovered,Chubais stopped it and firedoneofhisowndeputiesforapprovingit.Buthewasonlybeginningtothinkabouthowtohalttheorgyofstealingalreadyunderway.17When Chubais first got the privatization assignment from Gaidar in

November1991,Vasilievwrotehimasimple,three-pagememobasedonhisSt. Petersburg experience with the small businesses. Vasiliev told Chubaisprivatizationofproperty shouldbe“maximallywide,”or involvingasmuchproperty as possible, and that the best way to carry it out was throughcompetitiveauctions,sellingpropertyforcash.18Inthemonthsthatfollowed,as small-scale privatization of bakeries and hair salons and other businesseswas getting underway, Chubais embraced cash auctions, thinking it was thebestexampleofafreemarketatwork—openandcompetitive.OnApril4,1992,ChubaisandGaidarflewtoNizhnyNovgorod,250miles

eastofMoscowontheVolgaRiver,towitnessoneofthefirstauctions,hopingtoturnitintoapoliticalevent.TheyfacedgrowingresistanceinMoscowandneeded a symbolic boost. In Nizhny they were greeted by hundreds ofdemonstratorsoutsidetheformerHouseofLiteracy,manyofwhomwereshop

workers, fearful and envious of those who would buy their shops at cashauctions. Although Chubais and Gaidar believed that openly selling smallenterprises to the highest bidder was the only fair and uncorruptedmethod,therewasachorusofdemandsthatshopsshouldbegiventotheirworkers,anemotionalpull that ranstrongaftersevendecadesofsocialism.Theworkersheldplacards,“GaidarandChubais!Findanothercityforyourexperiments.”“Democrats!”spatoutanmiddle-agedgroceryclerk.“Speculators,thelotof

them!”As they arrived at a back entrance of the hall, the two reformers were

confrontedbyshouting,hissing,andscreamingcrowds.Chubaislosthiscooland got into a shovingmatch with some of them as he and Gaidar tried tobreak through toward thedoor. “Thewhole situationgot to us,” he recalled.“Gaidar and I understood thatwhatwe came here for had to be done at anycost.” Gaidar recalled that all the Russian elite was hoping the experimentwouldfail.“Allofthemweresaying,‘Auctions,whatauctions?InRussia?Areyou from another country? Do you not understand that it will not work?’”They had to demonstrate it would work, or they would be overrun by thevestedinterests.19Fortunately,insidethehall,itdidwork.Anauctioneerwearingaredbowtie

andwhitesilkshirtmoppedhisbrow,slickedbackhishair,andannouncedthatSewingShop38onYamskayaStreetwasupforgrabs.Theauctioneer,ArsenyLabanov, called out the rising bids—100,000 rubles, then 500,000 and 2million—andthestorewassoldfor3.6millionrubles,orabout$36,000.Therest of the day brought the cash auctions of twenty-one cafés, hair salons,cheese shops, and other retail outlets, with the state reaping the proceeds.Chubaiswasinafightingmoodwhenhegot insidethehall,but theeleganceandsimplicityof theauctioncalmedhim.Theauctioneerwas“arealpro,anartist,”herecalled.“Hehadanaturalgiftforit.”“It was quite a sight,” Chubais went on. “We had just emerged from the

Soviet system. It was the early market period, the early democratic period,whenthemereword‘auction’wastakenassomethinganti-Soviet.Andherewewerewatchingtherealprocedure!Withreallivewinnerswhowerepurchasinga bakery or a store.” Chubais recalled witnessing open auctions “based oncompetition, insteadofdoubtful tête-à-têtedealswherebribesarediscussed.”HeandGaidarsat togetherduring theauction,Chubaismarveling tohimselfhowfartheyhadcome.“Amerefivemonthsagowewerewritingallkindsofdrafts. And now we were here, the official representatives of power, who

succeededingettingthingsdone.Itwasamomentofhappiness.”Gaidar also had his moment when it all seemed to fall into place. The

shortage economy had existed in the Soviet Union for as long as he couldremember. In the final years of Soviet socialism, the shortage of goods hadcreatedanominousmonetary“overhang,”ahugesurplusofrubles,sincetherewas nothing to buywith them. A few days after price liberalization, Gaidarheardamazingnews.Truckdriverswereprotesting.Notbecauseofshortage,but the opposite—the stores would no longer accept any more cream! ForGaidar, it was a fleeting but wonderful sign—a reinforcing signal thatshortages would end with free prices. Money and goods would come intoroughbalance.“For thepersonwholived in therealitiesof theendof1991,when the shops were absolutely empty, and everybody knew nothing wouldappear there,” Gaidar told me, it was unimaginable “that there could be asituation when they would not accept anymore cream because they did notwant anymore cream.”20 In fact, the example was premature: it took manymonthsforshortagestodisappear,buttheydid.GaidarpersuadedYeltsin tosignadecree liberalizingallkindsof trade in

early 1992. Street tradewas an illicit, criminal offense in Soviet times. Justafter Yeltsin approved the document, Gaidar was driving through LubyankaSquare, past the famous children’s department store Detsky Mir, when hespotted a long line twisting around the block.At first, he thought itwas justanother symptom of shortages—“probably something just appeared on theshelves.” But he was amazed to look closer: the line was not desperateshoppers. It was desperate sellers. “Clutching a few packs of cigarettes, acouple of cans of food, or a bottle of vodka, wool stockings, mittens, or achild’s sweater, people with the ‘Decree on free trade’ newspaper clippingpinnedto theircoatswereofferingvarious little itemsforsale.”21Thescenewasafirst,tangiblesignoftheirgamblethatRussiawasnotexceptional—givepeopleincentives,andthemarketwillcome.“Weneedmillionsofowners,nothundredsofmillionaires,”YeltsindeclaredinaspeechtotheCongressofPeople’sDeputiesonApril7,1992,coiningapopulistsloganformassprivatization.Hewonapplausewiththeline,butthetruth was that privatization was heading in exactly the opposite direction,towardcreatingjustafewhundredmillionaires.InaspeechtotheCongressofPeople’sDeputiesinApril,Chubaisacknowledgedthemountingcriticismthat

“auctionsareonlyfortherich.”Privately,heandVasilievwerehavingsecondthoughtsabouttheauctions.Theyrealizedthatcashauctionswerenotsuitablefor thecolossal taskofprivatizingallofRussianindustry.TheyworriedthattheangryshopworkersinNizhnyNovgorodhadagoodpoint:whatifallthepropertywasboughtupinauctionsbyatinypercentageofthepopulation?Therestof thecountrywouldbeleftbehind,andthatcouldsparkapolitical timebombofenvyandresentment.“Gradually,wecametounderstandthatsocietysimply cannot absorb the idea of selling property for money,” Vasilievrecalled. “It would lead to people thinking that everything was bought bybanditsandthosewhohadstolenmoney.”22Inaseriesofconcessionsandtacticalmaneuvers,Chubaisputprivatization

onanewtrackinthenextyearandkeptitfrombeingderailed.Despitefierceopposition, he was able to keep privatization moving ahead, and there wasmuchstilltobedone:privatizationof5,603largeenterpriseswithacombinedworkforce of 15 million. Chubais earned his reputation in this period as afearedmanager and fearless infighter.His stubbornness paid off, but so didanother personal characteristic—he would sometimes compromise and cutcornersinpursuitofhislargergoal.Inacleverorganizationalmove,hecreatedanewagency,theStateProperty

Committee, within Russia’s hidebound bureaucracy. At first, committeemembers worked in bare, unheated offices in the grubby high-rise towersalongNovyArbat, thegrimsocialist-realistavenueofutopianarchitectureinthecenterofMoscow.Later,theymovedtoadraftyministrybuildingnearRedSquare. In the earlymonths, they churned out ideas and documents day andnight.“Wehadnoheat,noXerox,nofax,nofood,”recalledJonathanHay,oneof theAmericanswho came to help. “The first time I came there, I saw justDmitriVasilievandthirtypeoplesittinginahugehall, just thissmallmaninbigglasses,andtheywereallaroundhim,inaheateddiscussion,talkingaboutsmall-scale privatization.” By his own account, Chubais was overwhelmed,with heaps of papers on his desk, phone calls streaming in, and crowds ofpeopleinthereceptionareademandinghisattention.ButChubaisenjoyedwhatBerger called a clean slate—he started from scratch and could buildprivatizationfromthegroundup.Toafargreaterextentthanotherreformers,ChubaisattractedWesternersto

help with privatization. The international financial organizations saw theyoungreformersasthebesthopeofRussiaandprovidedmoneyfortechnicalassistance.Lawyers, economists, public relationspeople, investmentbankers,

andgovernmentofficials—theyall trouped through theshabbyofficesof theStatePropertyCommittee.23By the time he got organized, Chubais faced a virtual tug-of-war. The

industrial property in theory belonged to the state, but in practice differentgroups laid claim to the treasure.Managers felt they knew the factory best;workersfeltentitledsincetheyhadputsomanyyearsontheassemblyline;thelocal governor and politicians saw the juicy plums and wanted the right todistribute them.Thesewere“stakeholders”whosedemandswouldhave tobedealtwith.Thelikelihoodofmeetingalltheirdemandswaszero.Meanwhile,afourthgroup,thepartynomenklatura,wasalreadyhelpingitself.“Therehasn’tbeen a fair privatization in the history ofmankind; this has to be accepted,”BergerrecalledofthechoicesfacingChubais.“Chubaishadonemaingoal:todestroythemonopolyofthestateonproperty.Atanycost.”Chubais believed that outsiders—the new generation of private owners,

perhaps even foreign investors—who had never had a stake in the factorywould be the best ones to eventually restructure it. At least theoretically, hethought, theywere theoneswhowouldbecome themost “effectiveowners.”Cold-eyed outsiders would be more inclined to strip away the inefficientequipmentand theexcessivespendingonkindergartensand resorts thatwerepartofeverysocialistenterpriseandretoolitwithnewinvestmentandaviewtowardlonger-termprofit.But Chubais could not afford to ignore the insiders: the workers and

managers. They were powerful stakeholders, and in his original speech,Yeltsin promised to split the state property with the workers. The idea wasimmenselypopularbecauseof the legacyofsocialismand the ideologyofaworkers’ paradise. Larisa Piyasheva, a privatization expert working for theMoscow city government, had campaigned to turn everything over to theworkersallatonce.Chubaiswasvehementlyagainstit,seeingthattheworkers,inreality,hadlittlecontroloverabusiness.Whenitcametokeydecisionsofownership, theworkerswere under the thumbof the all-powerfulmanagers.Both workers and managers were insiders, and insiders would be the leastlikelytobreakwiththesocialistpast.Atfirst,ChubaisdidnotwanttoresolvethisconflictintheSupremeSoviet,

aparliamentlargelyelectedinSoviettimesanddominatedbyold-styleformerpartyofficialsandtheso-calledreddirectors,theSoviet-erafactorymanagers.But he could not delay forever; he needed a legal basis for privatization. InMarch1992Chubaisproposedaprivatizationlaw.Heofferedtogiveworkers

andmanagers—the insiders—40 percent of the shares of an enterprise,withthe rest to be sold off to outsiders. But the overture to the insiders was notenough.In thefirstmonthsofshocktherapy,factoryproductionplungedandthe reddirectorsstruckback in theSupremeSoviet,where theyhadastrongadvocateinArkadyVolsky,animposingformerCommunistPartyapparatchikandadviser toseveralSoviet leaders.Volskyhadbuiltupa lobbyof theold-guardeconomicelite.Thereddirectorsalsohadasympatheticear inRuslanKhasbulatov,thechairmanoftheSupremeSoviet.Althoughoriginallychosenby Yeltsin, Khasbulatov was increasingly outspoken against the youthfulGaidar government, and within two years he would be leading an openrebellionagainstYeltsin.The general notion of privatization was still popular, but the insider-

dominatedparliamentwantedmorethanChubaisoffered.Theycameupwithasecond plan, known as Option 2, which turned over 51 percent of eachenterprisetotheinsiders,withtheresttobesoldofftooutsidersorheldbythestate.Chubaiswasdeadsetagainstthis,fearingthattheinsiderswouldpreservethe status quo. If thewhole ideawas to forge a new generation of effectiveowners, how could they be created out of the same old, tired Soviet factorymanagers?But in the end, faced with certain defeat, Chubais gave in to the factory

bosses.“Weunderstoodtherewouldbenoprivatizationifthedirectorsdidn’tsupport it,” Chubais recalled later.24 The bosses were still strong, and thegovernmentweak.TodefeattheinsiderswouldhaverequiredmorewillpowerthanChubaisorYeltsincouldsummon,morethanthesystemcouldstand.“Wewouldhavehadtoputallthedirectorsandallthebossesinjail,”Chubaislaterrecalled.“Oratleasthalfofthem,inthehopeifyouputhalfinjail,theotherhalfwillshutup.”NeitherChubaisnorYeltsinwerereadyforthat.25

On June 11, 1992, theSupremeSoviet approved the privatization law.26 Itwas the last time parliament approved privatization; after that, oppositionintensified,andChubaisreliedsolelyonYeltsin’sdecrees.Thiswasaseminalmoment forChubais.Forallhis steelyself-confidenceanddetermination,hedecidedtomakeacrucialtrade.Hegaveuponeofhismostcherishedideasatthe time, the importance of outside owners, to achieve his larger goal oftransferringthepropertyoutofthehandsofthestate.Thedealwasaprecursorof what was to become a trademark Chubais method, one that led to acorrosiveweakeningofhisownprincipleslateron.Still,atthispoint,Chubaiswassingle-minded.“Everyenterpriserippedout

of the state and transferred to the hands of a private owner was a way ofdestroyingCommunism inRussia,” he toldme. “This is howweunderstoodthe situation,without any exaggeration.And every extra dayweworked,wecould privatize another ten, twenty, or thirty enterprises.And at that stage, itdidn’t matter at all to whom these enterprises went, who was getting theproperty.Itwasabsolutelyunimportantwhetherthatpersonwasreadyforit.”InAnotherLife,hisvisionarysamizdat textintheearly1980s,VitalyNaishulhaddescribed thekey role thenomenklatura and factorymanagersplayed intheSovietindustrialempire.Theywerethe“guidingnucleus”ofitssuccess,heacknowledged, and could not be ignored, even in a shift to the market. ButNaishul speculated, with remarkable prescience, that it was possible toredistribute—verywidely—theentirepropertyoftheSovietstate,soitwouldnot justwindup in thehandsof thedirectors and the elite.Heproposed thatevery person in the countrywould be given five thousand “special personalinvestment rubles” which they could then invest in factories, stores, andenterprises,possiblychosenfromalistpublishedinthenewspaper.Naishul’sunderground manuscript described mass privatization with a dreamyromanticism, trying to popularize the idea of creating millions ofshareholders, the equivalent of a class of stock hounds watching theirdividends. “Your enterprisewill function, sell and buy,” hewrote. “You andother ownerswill get the profit and split it amongyourselves, andmind theenterpriselikeyourpersonalbelonging.”Naishulwasyearsaheadofhistime.ChubaisandGaidarhadoncepouredscornonNaishul’sprivatizationplan,

sayinghisideasweretoocomplex,entirelyunworkable,andtooradical.Butinthesummerof1992,theenvironmenthadchangeddramatically,andChubaisfoundanewenthusiasmforNaishul’svision.MassprivatizationwasapoliticalweaponthatChubaiscouldusetobluntthelandgrabbythenomenklaturaandthe factory directors.Moreover, he could create at least the impression thatmillions of people had become property owners—he could coopt the angryshopworkers theyhadseen inNizhnyNovgorod,puttingashareofstock intheirhandsinsteadofaplacard.Inspired by the popularity of a privatization scheme being used in

Czechoslovakiaatthetime,theChubaisteamdecidedtogiveawaypropertytothewhole country—all at once—in 148million checks, or vouchers, whichcouldthenbetradedatauctionsforsharesofcompanies.27Criticslatercalledthem “worthless candywrappers,” andChubais never lived down his absurd

promise that a voucher would be worth enough to buy two Volgaautomobiles.28 In fact, the vouchers themselves were less an economic toolthanapoliticalgambitbyChubaistomakeallpeoplefeeltheyweregettingapieceof thepie.TheChubais agendawas simply towinpopular support forprivatizationandtherebymakeitirreversible.The vouchers were handsomely printed in a rich brown to look like

currency,withanetchingof theRussianWhiteHouseby theMoscowRiver,whichthenhousedparliament.Theywerecalled“privatizationchecks”becauseYeltsinhatedtheword“voucher.”Atcabinetmeetings,Yeltsinforbadeofficialsfromusing“voucher”becausehethoughttheEnglishwordwasvulgar,butitstuck nonetheless.Eachvoucher had a face value of ten thousand rubles andcouldbepickedupatthelocalbankfortwenty-fiverubles,orabouttencents.Theycouldbe traded foranemployee’s sharesofhiscompany,deposited inmutual funds, or simply sold or exchanged. “The share is a real right toproperty . . . a sortof ticket toa freeeconomyforeveryoneofus,”YeltsinpromisedwhenheannouncedthevoucherschemeonAugust19,1992,ayearafter the failed coup against Gorbachev. From October until the followingJanuary,144millionvouchers,oralmost98percentofthetotal,werepickedup.The voucherwas a forced redistribution of property, designed to forever

end state control andhalt spontaneousprivatizationby the elite.Chubaiswasboldly creating a new group of stakeholders: the general population. Thevoucherscheme“signifiesthedeathofthecommandeconomyandthepoliticalsystemthatwasbuilton thebasisof totalstatepropertyownership,”Chubaistoldreporters.29Laterherecalledthat“thebeginningofmassprivatization—privatizationbasedonthe‘rules’—meanttheendofstealingstatepropertybythehighandmighty.”30However, the voucher was just an interim step in the redistribution of

property,awaystationenroutetoanewclassofowners.Howlongitwouldtaketoreachthegoal,whothoseownerswouldbe,andwhethertheywouldbe“effectiveowners”wasstilluncertain.Privatecompanieswouldbecreatedoutofthevoucherauctions,andthosecompanieswouldissuesharesthatwouldbeboughtandsoldfreely.Thatwasagoalinandofitself,Vasilievtoldme.Butwhatcamenext?Hesaiditwasobviousthat“theeffectiveownerwouldappearonlyafterthepropertywasredistributed,aftersomeseriousperiodoftime.”31As theopposition rallied in theSupremeSoviet,Chubaisbeganapolitical

counteroffensivefor thevoucherphaseofmassprivatization.PaulBograd,a

political consultant thenworking for Sawyer-Miller, aBoston firm, came toMoscowinAugusttohelpChubaisengineerapublicrelationsandadvertisingcampaignforthevouchers.Bogradimmediatelygotatasteofwhathewasupagainst. He suggested a television advertisement for vouchers featuringChubais.An older, Soviet-era bureaucrat toldBograd that advertising by thestatewasalwaysanonymous.Chubaiscouldn’tdoitpersonally!“Chubaislistened,”Bogradrecalled.“Hesaid,Iwilltakeresponsibilityfor

this.Failure,goodorbad,someonehastoownit.”32On the day the commercialwas filmed,Bograd’s heart sank:Chubaiswas

sitting behind a desk with a flag behind him, looking like a stale Sovietapparatchik. “I said, try it a differentway,maybewithout your coat on?Ormaybestanding,orleaningonyourdesk?”recalledBograd,whowantedtoputalittleflairintoChubais.“PeoplehavehadyearsofwatchingSovietofficialssitting behind their desk with their jacket on, flag and all! They have beencompletelydiscredited.”“Okay,” Chubais said, “I will stand.” He stood. “But I am not taking my

jacketoff!”Chubaisfeltthathehadtotalktopeopleintheirownlanguage,andthatmeant talking tomillionswhowere shapedby theSovietmind-set.33 Hewas also sensitive about appearing too Western. He got ready to start hisspeech.ThenhelookedbackatBograd,smiled,andunbuttonedthejacket.As a political gambit, the vouchers galvanized the population and became

the single most important symbol of the reform years. Although expertssuggestedthevoucherbedenominatedinabstract“points”ratherthanmoney,Chubais insisted theymusthaveamonetaryfacevalue,since thewholepointwastomakevoucherslooklikeagifttothepublic.34 “Theyseizedthenation’simagination,” recalled Leonid Rozhetskin, aWall Street lawyer and Russianémigréwho arrived inMoscow in1992 to beginworkingwithChubais andVasiliev.“Itwasat the timeanabsolutepublic relationsboon to the reforms.Every newscaster, every channelwas asking people on the street five or sixtimesaday,‘Whatareyougoingtodowithyourvoucher?’Andforaperiodof time, the vouchermay have been themost liquid form of security in theworld. It could be bought and sold at every street corner kiosk and metrostationfromVladivostoktoSt.Petersburg.”35The vouchers were traded by the bushel atMoscow’s nascent commodity

exchanges. On the largest floor, the Russian RawMaterials and CommodityExchange, a scruffy bus station–like hall in central Moscow that tradedcommodities in themorning and vouchers in the afternoon, volume reached

60,000 to 100,000 vouchers a day, or about $1 million. At the end of theprocess,thevolumereached$10million.Tradershaulingshoppingbagsandsuitcasesstuffedwithvouchersoftenroamedthehall.In the twenty months of the voucher program, the price gyrated widely,

reachingahighof$20andalowof$4,largelydependingonthewildshiftsinRussianpolitics.Inmetrostations,peoplelinedthewallswithsignspinnedtotheir coats: “I will buy vouchers.” Or, written on the flip side: “I will sellvouchers.” The vouchers were freely tradable, and many millions wereimmediately exchanged for a bottle of vodka or sold for a song. Brokersbeganscouring thecountry forvouchers,which theystuffed in suitcasesandtook on overnight trains to Moscow for trading and speculating, since thestreetpriceoftenvariedfromplacetoplace.For the reformers, the public reaction to vouchers reaffirmed their basic

assumption: Russians would respond to market incentives, and they wouldadopt thenewideasofsharesandpropertyownership.Chubais laterboasted,“You can ask a babushka in the Smolensk region what dividends are, and Ithinkshewillreasonablyexplaintoyouwhattheyare.Youwouldagree,thatayear or a year and a half ago, the same babushka might have told thequestionertopackit.”36Someenterprisingbusinessmenweresoonsettingupvoucher mutual funds. Chubais and Vasiliev were euphoric. “There was afeeling, this is our victory!”Chubais recalled.The hopewas that investmentfundswouldcollectvouchersfromthepopulation, invest themincompanies,demand good management and profits, and distribute dividends to theinvestors.Chubaispredicted the investment fundswouldbe ideal for“peoplewho just want to make a reliable investment and receive a return on it.”Chubaisrecalledhowstrangeandsuddenitallwas.EveninfrozenYakutia,inthefarnortheasterncornerofSiberia,thousandsofmilesfromMoscow,therewasavouchermutual fund!When first toldaboutvoucher funds, anofficialtherewaspuzzled.“It tookmesixmonths to runaround the tundra trying todistribute thevouchers.”ThenheaskedChubais, “Now, should I runback tocollectthem?”37The early euphoria faded when Chubais realized that he had liberated an

unpredictable, voraciousmonster.Over the comingmonths, dozens and thenhundreds of voucher funds sprung up, with loud and insistent advertising.Manyofthevoucherfundswerejustcovertattemptsbycompaniestobuyuptheir own shares. But others were independent and aggressive; the largestMoscow fund,FirstVoucher, collected 4million vouchers.38 Soon the funds

gotout of control.Theywere completelyunregulated, andChubais failed toanticipate how fast they would proliferate. In the end, about six hundredvoucher funds collected 45 million vouchers. The market that had startedwithout institutions had become a jungle. Unscrupulous funds promisedoutrageousdividends,tookvouchers,andneverreturnedanythingtoinvestors,justsellingthevouchersandstealingtheproceeds.Themanagersofonefund,Neftalmazinvest,whichhadpromisedtoinvestinoilanddiamonds,madeoffwith about 900,000 vouchers. In the end, ninety-nine of the voucher fundsdisappearedwithoutatrace.39Peoplefeltdeceived,andtheywere.40Itwasjustthebeginning.The voucher program was launched in October 1992 under enormouspressure.TheCongressofPeople’sDeputies,thebroaderlegislaturethatmettwiceyearly,wassettoreconveneonDecember1,1992.Anewavalancheofcriticismwas certain, andChubais did not yet have a single actual sale of afactorytoshowforit.HewasdesperatetocompleteashowcasesalebeforethecongressbeganandurgentlysoughthelpfromWesterninvestmentbankers.One of them was Hans-Joerg Rudloff, president of Credit Suisse First

Boston,whowasavisionary financier.Rudloffhad takenhis firm intohugegambles as Communism collapsed, making deals with the struggling newstates of Eastern Europe. He was accustomed to being wooed by primeministers and to making fateful decisions about their ability to borrow onworld markets. Rudloff, son of a German leather manufacturer who hadmemories of rebuilding the family factory afterWorldWar II, had sharplyconflicting feelings about the chaos he saw in post-Soviet Russia. Rudloffclearly understood the lingering legacy ofSovietCommunism.Heknew theabsolutepower that theCommunistPartyhadonceheldover thecountry, thefear that it had sometimes instilled, and the vacuum thatwas createdwhen itdisappeared. Who would seize the enormous inventory of factories, mines,shops,andwarehousesthatwereupforgrabs?Rudloffhadgravedoubtsthatitcouldbedonerationally,buthewasalsodrawnby theprospectofmakingafortune.41HisfirstencounterwiththeyoungRussianreformers,inearly1992,hadgonebadly; theyseemedarrogantand turneddownhisofferofhelp.Heleftthinkingtheywerehopelesslynaiveandvowednottocomeback.Butcomeback he did, believing that “we can’t miss the biggest emerging market inhistory.”

Through an acquaintance, Rudloff recruited a young finance specialist,Boris Jordan, who came from a family of fiercely anti-Communist Russianémigrés in New York. Jordan, a pink-cheeked, baby-faced young man, thentwenty-five years old, was an incredible hustler, whose grandfather foughtagainsttheBolshevikswiththeWhiteArmy.Jordanlongedforachancetogoto Russia. He grew up speaking Russian at home and passed the ForeignServiceexamination,but theStateDepartmentsaidhewouldneverbesent toRussiaasadiplomat.Atthetime,hewasmakingairplanefinancedealsinLatinAmerica. “I loved the deal-making environment,” Jordan recalled. “Butwouldn’titbebettertodoitsomewhereIactuallyspeakthelanguage?”42Rudloff hired Jordan and sent him toMoscow. “I smell change,” he told

Jordan.“Gothereandfindout.”JordanwaspairedwithStevenJennings,atall,square-jawedNewZealander,

then thirty-two,whowasas calmas Jordanwasexcitable. Jennings, apolicywonk who made his mark in New Zealand’s 1980s privatization, had beenworking on aWorld Bank project to restructure Hungary’s banking systemwhenRudloffrecruitedhimforRussia.“WhenIwalkedintotheofficethefirsttime, Steven had books everywhere,” Jordan told me, recalling their firstmeeting in London. “He wrote books about privatization, and he loved thestuff.Iwasn’tinterestedinit.Iwasinterestedinhowtomakemoney.”Yet Jordan’s first impressions of Moscow on his exploratory trips were

discouraging.Therewerenomarketsyet.“Steven,”he toldJennings,“unlessthiscountrycreatesmarketsIamnotgoingtohaveanythingtodohere.”OncetheymovedtoMoscow,JordanandJenningswerefamiliarfacesinthe

cold,emptyofficesof theStatePropertyCommittee.Theybrought theneedyRussianstaffofficesupplies,coffee,andideas.“Wehadalotoflazy,arrogantinvestmentbankerscomeandoffertoworkformoney,”recalledaWesternerwho witnessed the early months. But Jordan and Jennings seemed different:theywerealwayshangingaround.CreditSuisseFirstBostonbecameasupportbranchoftheprivatizationagency.TheWesternerrememberedofJordanandJennings:“Theyweresixfootthree,inyourface,andreadytogo.”The pairwent toChubais andmade a deal: theywould help advise on the

firstauctionsforfree,whichwasRudloff’sidea.“Don’ttakeanymoneyfromanybody,”Rudlofftoldhisyoungcharges.“Ifwearegoingtoriskthisthing,which has a 20 percent chance of success, we might as well not take anymoney. So they can’t accuse us of profiting off a failed program.” Rudloffrecalled,“Wesaidwecan’tmiss thebiggestemergingmarket inhistory,but

wecan’tgoinsayingwearegoingtomakemoney.Wewillseewhatcomesoutofitintwoorthreeyears.Itoldthem,don’tworryaboutprofits.”43Chubais took themon. Jenningswas amazedwhen he got toMoscow and

sawthatallofRussiawasabouttobesoldoffbya“tinygroupofpeoplewiththese tiny shredsof legislation.” Itwas “like the first stepwalkingupMountEverest,that’swhatitfeltlike.”44Their goal was to organize the first sale of a factory, the venerable

BolshevikBiscuitCompanyinMoscow.Foundedin1855byaSwissbakerandlaternationalizedbytheSoviets,thefactorywaswellknownforitselaboratecakes and cookies. Jordan and Jennings spent a month working around theclock trying to indoctrinate and cajole the management and workers. Overendless cupsof tea andcookies, Jordanexplained thebasic concepts suchasequityandthemeaningofoutsideownership.Inthisfirstsale,managementandworkers kept 51 percent of the company and the remaining 49 percent wasoffered to the public for vouchers. Jordan and Jennings set up an exhibitionhallon theMoscowRiver for thebigevent, expecting thousands.Theywerenottrampled,buthundredscameonthefirstday,offeringtheirvouchersinabidforshares.Inabackroom,JenningsandJordanwatchedapprehensivelyasacomputertalliedtheauction.Theycouldnotbelievewhattheysaw.JenningshadearlierworkedonasaleofanalmostidenticalcookiecompanyinEasternEurope,whichwassoldtoPepsiforabout$80million.BolshevikBiscuithadjustsoldfor$654,000.Jordanrecalled,“We lookedateachotherandsaid, ‘Weareon thewrong

sideofthisdeal.Weshouldn’tberepresentingthegovernment.Weshouldbebuyingthestuff!’”“Wequit!”theysaidtoeachother.What Jordan and Jennings had seen was the dawn of Russia’s

transformation. Not only was the enormous stock of factories, mines, andsmeltersabouttobesold,butjudgingbyanycomparisonaroundtherestoftheworld,itwastobesolddirtcheap.Chubaisdidn’tcare;tohim,theimportantfactwas theprocessof redistribution.But soon thesmellofmoney luredallkindsofinvestors—mega-moneyedforeigners,sharks,vultures,andgamblers—tothescene.Gaidar, the “kamikaze” reformer who thought he would only last a fewmonths,wasoustedunderpressurefromtheCongressofPeople’sDeputiesin

December1992,afterlessthanayearinoffice,justasChubaiswassellingoffBolshevik Biscuit. To appease the industrial lobby, Yeltsin replaced GaidarwiththestolidViktorChernomyrdin,theone-timeSovietnaturalgasministerwhotransformedhismonopolyintoGazprom,Russia’slargestcompany.Fortheyoungreformers, theappointmentseemedominous.Chernomyrdin’sfirstwordsstunnedthem:“Iaminfavorofreforms,ofarealmarket,”hesaid,“butnotofabazaar.”45Even worse, Gaidar ’s nightmare scenario, hyperinflation—when prices

zoom upward—was fast becoming a reality. The inflation was fueled bymassivesubsidizedcreditsthattheRussianCentralBankwaspumpingintotheeconomy, at the behest of the “red directors,” the Soviet-era factory bosses,and their patrons in theSupremeSoviet.Theparliamenthad installedViktorGerashchenkoaschairmanoftheCentralBankinthesummer,andtheformerSoviet banker cheerfully opened the sluice gates to new credits. TheCentralBank was giving out credits to factories at 10 or 25 percent a year whileinflationwasragingat25percentamonth.46Thefloodofcreditsdidlittletorevitalize industry but had a perverse effect on the economy, triggeringinflation that became political poison as people saw their money evaporate.BergerrecalledtryingtopersuadeGaidartoshowsomesympathyforpeoplewhosuffered.Gaidarinsistedthatfromaneconomicspointofview,therublesavingswerejustfiguresonpaper;infact,theyhadlongagobeenusedupbythe SovietUnion on the arms race. Themoneywas just a “line on people’saccounts.”“Yegor,”Bergerinsisted,“weneedtoatleastpromisepeoplethatinfiveor

sevenyears,youwillpaythemback.Notyou,butothers,itdoesnotmatter.”Gaidarrefusedtomakethepledge,sayinghecouldnotdeceivepeople.“Don’t deceive, but use a little populism!” Berger implored Gaidar, with

growingexasperation.“Say,‘Yes,wewillreturnitlater,theredbanditsstoleitall.’”“No,”Gaidarrepliedsomberly,“Iknowwewon’tbeabletoreturnitlater.I

cannotdeceivethepeople.”“PROMISEIT!”Bergershouted.“Oryouwon’tbeabletowork.”“No,”Gaidarsaid.“Wehavenorighttodoit.”47Gaidar ’sdepartureleftChubaisvulnerableandworriedaboutthedeepening

opposition to reform.Chubais hadbriefly ponderedquittingwithGaidar butagreed to stayon to finish the jobhehadbegun.48TheSupremeSovietwasconsideringabillthatwouldtotallystymieprivatization.Yeltsinhadwarnedin

Decemberthatreformwasin“seriousdanger,”andthedangerseemedtoonlygrow deeper as Yeltsin squared off against his Communist and nationalistcriticsinparliament.ThosecriticswereledbyKhasbulatovandYeltsin’svicepresident,AlexanderRutskoi,theAfghanwarveteranandformergeneralwhoderided the youngGaidar government as “little boys in pink shorts.”Yeltsincalledforareferendumonreforms,andChubaispouredhimselfintomakingitasuccess.Bythewinterof1992,Chubaishadlaunchedtheprivatizationofsmall shops but had not yet sold off the factories. The process was not yetirreversible;“itcanbestrangledinthecradleyet,”hesaid.49TensionsbetweenYeltsinandtheparliamentranhigh.VladimirShumeiko,

then first deputyprimeminister, showedChubais agun that hewas carryingaroundwithhim.“HesaidhegotitrecentlyandifKhasbulatovtriedtoarresthim,hewouldshootandhewoulddefinitelykillfiveortenpeople,”Chubaisrecalled.“Andwhileontheonehanditwasnonsense,ontheotherhandIthinkitwas the truth; hewould have really shot and killed about five people.Thesituationwasratherhot.”50The referendum on Yeltsin’s reforms was set for April 25, 1993, and

became a turning point. The voters were asked four questions: (1) do yousupportYeltsin,(2)doyousupportYeltsin’seconomicpolicy,(3)doyouwantearly elections for president, and (4) do you want early elections forparliament? The whole idea of a referendum was risky: had Yeltsin lost, itwould have been a defeat for all he stood for.TheYeltsin team campaignedwith a snappy string of answers to the referendumquestions: “Da,Da,Nyet,Da”(yes,yes,no,andyes).Chubaisportrayedthereferendumasacaseofthepeopleagainstthepoliticians.“Ourmainsupportisthepeople,”heinsistedatapress conference four days before the vote. “The people who have becomestockholders at their own enterprises, the people who have swapped theirprivatization vouchers for stocks of enterprises, the people who have wonconteststobuyshopsorrestaurants.”Chubaiswassurethatiftheylostthereferendum,hisprivatizationstruggle

would be in vain. In theweeks before the vote, he had fought tooth-and-nailagainst bills and resolutions in the Supreme Soviet that would bottle upprivatization. At one point, without telling Yeltsin or Chernomyrdin, hesecretlywroteupanordertoabruptlycancelthewholeprivatizationprogramand took it in his pocket to parliament,where, if necessary, hewas ready toblow up his entire project and let the blame fall on Khasbulatov. He nevercarried out the stunt, but no tactics were off-limits for Chubais. When

CommunistsinChelyabinsk,intheUrals,triedtostartaregionalrevoltagainstprivatization, Chubais immediately flew there and publicly challenged them.What the public did not see was a four-hour long harangue against theChelyabinsk governor back in Moscow. Chubais threatened to block thegovernorateveryturn.“Iwillsimplystrangleyou,”Chubaisthreatenedhim.51Chubais never let it be told, but he had deployed a secretweapon to help

Yeltsinwin theApril referendum.Chubais privatelymetwithGeorgeSoros,theHungarian-bornsuperfinancierandphilanthropist,whowasinMoscowtolaunchaprogramtohelpscientists.Sorosagreed tobankroll thepro-Yeltsinreferendum campaign, the first but not the last time he would come to therescue of the reformers. A Chubais representative, a Westerner, went toSwitzerland and made the financial arrangements for a $1 million transferfromSorostooffshoreaccountsthatChubaiscoulddrawonforthecampaign.ThemoneyhelpedtheYeltsinforcesbuyadvertisingtodrownout thevoicesoftheopposition.52ChubaiswasnolongeronspeakingtermswithKhasbulatov.Inthehallsof

parliament, “they talked openly about prison cells being readied for us.”ChubaistoldmethatonApril24,thenightbeforethevote,“Iwassittinginmyministers’office,destroyingdocuments,becauseIunderstoodifYeltsinweretolosetheelection,Khasbulatovwouldnotpityhisopponents.”As it turned out, Yeltsin won the referendum, with 58 percent expressing

confidenceinhimand52percentapprovingofeconomicreform.Thethreatsto privatization eased. The referendum provided Yeltsin some politicalbreathing space before his confrontation with parliament turned violent inOctober.Bythen,however,muchofRussianindustrywasalreadyonitswaytobeingsold.Therewasnoturningback.“Iftheproblemisonlythattherichwillbuyuptheproperty,”Chubaismusedatonepoint,“Iamsurethatisthewayitmustbe.”53Theprivatizationsloganhadbeentocreatemillionsofshareholders,andindeedthevoucherplanhadtouchedmillions.Butinthenextstep,theownershipofRussia’spropertywasreshuffledonceagain,thistimeintofewerhands,includingafewmillionaires.These were men who had daring and smarts, who had come to the samerealization that struck Jordanand Jenningson thedayBolshevikBiscuitwasprivatized—that Russia held incredible treasure and Chubais was practicallygivingawaythekeystoanyonewhowasfarsightedenoughtotakethem.

WilliamBrowderwasoneof them.HewasthegrandsonofEarlBrowder,leaderoftheAmericanCommunistParty(1932–1945).BillBrowderyearnedtoseetheRussiaofhisfamilyroots,andafterStanfordBusinessSchoolandastint working privatization in Poland, he joined the Eastern Europe team ofSalomonBrothersinLondontospecializeinRussia.Browder,whohasawrybutincisivesenseofhumorandasharpeyeforfinance,founditlonelywork:no one believed there was any business in Russia. The boss threw someexpense account sheets at him and told him to go toRussia and seewhat hecouldfind.Browdersnaredanassignmenttoadvisethetrawlerfleetinthenorthernport

city ofMurmansk on privatization. Themanager of the fleet told him therewereonehundredships,andeachcost$20millionnew.Butmanagementwasentitled to buy its 51 percent of the company for the equivalent of just $2.5million.Browder took out a sheet of blankwhite paper and did some quickcalculations. His scratch-pad math practically screamed off the page: hugeassets were for sale, cheap. “I thought to myself at that moment,” Browderrecalled,“IcannotmakealotofmoneyasaninvestmentbankerinRussia,butIcanmake a lot ofmoney as an investor inRussia.”Browderwent back andstartedtosketchoutthevalueofothercompanies,especiallyintheoilindustry.“Sureenough,thesamethinginoil!”54Browder eventually built up the largest private investment fund in Russia.

Butintheseearlydays,thepictureofrichesinRussiawashazy,theprospectsdim. Companies had no open financial data, managers were distrustful,marketingorbusinessplansdidnotexist.Theriskswereimponderablylarge.Back in London, Browder at first met with skepticism and disbelief. “I wasrunning around SalomonBrothers trying to find someonewhowould listenthat thiswas going to be themost unbelievable investment opportunity thereeverwas,”he toldme.Eventually,hegotpermission to invest$25million,atiny sum for one of the world’s largest investment houses, but a largecommitment forRussiaat the time.Browderboughtasmanyvouchersashecould,andthenboughtsharesinlittle-knowncompanies.Browder had an advantage. He knew an oil trader in Moscow who had

rudimentary information about the companies that were being privatized,especially inoil. “At the time, just knowing thenamesof the companies androughly what the production and reserves were was huge, valuableinformation,” Browder recalled. He had the facts on a spreadsheet but wascarefulnottoshowittoanyone.Hehadthefirstcrackatthebestinvestments,

sinceeveryoneelsewasinthedark.Atthetime,noteveryonecouldseethroughthefogofdespairthatblanketed

the Russian economy. There were almost daily stories of factories failing,workers without wages, idled assembly lines, and industrial misery. Whowanted to buy an old Soviet factory with no competitive markets, agingequipment,noseriousaccounting,andthousandsofdependentworkers?Itwasnotapretty sight.Rutskoi, the rebelliousYeltsinvicepresident,declared thatthereformershad“turnedRussiaintoaneconomicdump.”Indeed, the big money was not in property, but in finance. Currency

speculation,tradingingoldandpreciousmetals,arbitrageinoil—thesewerethenewgushersofthefirstpost-Sovietyears.Smolensky,devotinghimselftohisbankingbusiness,wasdistinctlyuninterested inRussian factories.Hewasmaking a mint running dollar-ruble speculation, changing money back andforth every day and gambling on tomorrow’s exchange rate. Gusinsky wascementinghisalliancewithLuzhkov,makingmoneyfromrealestateandusingthecitygovernmentdepositsinhisbank.ButsomeRussianshadaclueofwhat lurkedbehindthedoorChubaiswas

opening. Khodorkovsky bought up a huge quantity of vouchers. His BankMenatep was a major player in the voucher market, even thoughKhodorkovsky knew Russian industry was in deep distress. “Idealism,”Khodorkovskyrecalledofhisdecisiontobuyvouchers.“SincemychildhoodIwantedtobedirectorofaplant.Myparentsworkedataplanttheirwholelives.IwassureandIamstillsurethatthemostimportantthingisindustry.”Butlikemanyothers,Khodorkovskywasshootinginthedark.Hecouldnotfigureoutwhich factories were potentially lucrative, so he bought many. Using hisconnections, he was able to pick up many factories in so-called investmenttenders,inwhichthewinnerpromisedtomakeinvestmentslateronbutrarelydid.ThejournalistYuliaLatyninasaidKhodorkovskyturnedMenatepintothefirstRussian investmentbank,with fiercedetermination.“Nootherbankdugup industry with such rage and omnivorousness,” she recalled.55Khodorkovsky purchased large blocks of shares in timber, titanium, pipe,coppersmelting,andotherindustries,morethanonehundredcompaniesinall.KhodorkovskytoldmethathehiredAndersenConsultingtosurveythecrazy-quilt industryhehadassembled,and themanagementconsultants toldhimhehad gathered up the equivalent of a South Korean conglomerate. Theydescribed for Khodorkovsky how it could work, like Samsung. Thecomparison did not appeal to him. “When it was done,” Khodorkovsky

recalled, “I said, this cannot work.” He would soon decide to go after therichestsingletreasure,oil.Behind the shuttered factorygates,amammoth fire salewasgettingunder

way.Judgingbythenumberofvouchersandtheirstreetprice,thetotalvalueof Russian industrywas under $12 billion. In other words, the equity of allRussian factories, including oil, gas, some transportation, and most ofmanufacturing,wasworth less than that ofKelloggorAnheuser-Busch. In aprivatization carried out with special restrictions against foreigners andoutsiders, Gazprom came out of the voucher auction with a value of under$228 million, or about one-thousandth of the value put on it by foreigninvestment banks. The market value of Zil, the famous truck and limousinemakerwith100,000workers,was$16million.ThemarketvalueofthegiantGorkyAutomobileWorks,knownasGAZ,whichmanufacturestheVolgacar,was $27million. Indeed, the auto factorywas so lucrative that themanagersused state credits to buy up 1.8million vouchers through dummy firms andthen tried tograb thefactoryfor themselves,but theywerestoppedwhen theschemewasuncovered.ThemarketvalueoftwohouseholdnamesinRussianmanufacturing,Uralmash andPermMotors,were $4million and$6millionrespectively. Whereas American firms typically have market values of$100,000 per employee, Russian firms obtained voucher auction values ofbetween$100and$500perworker,ortwohundredtimesless.56JordanwasscouringRussiaforvouchers,whichheboughteverydayfrom

asmallcircleofRussianbrokersandthensoldtoforeigninvestorsatagiantmarkup.Eventhoughhehadspottedtheludicrouslylowfactoryvalues,Jordannever invested in factories, instead working frenetically as a middlemanspeculatinginvouchers,forwhichtherewasoftenasuddendemandbeforeabigauction.Jordanhadtroublefindingasafeplacetostorethemountainsofvouchers and eventually settled on a vaultlike room in the tall high-risebuilding across from the RussianWhite House. This distinctive building inSoviet timeshadhousedtheSocialistbloceconomicassociation, theCouncilonMutualEconomicAssistance.ItwasthesamebuildingwhereLuzhkovandGusinsky had set up their offices. Every night, after buying up vouchers,brokerswouldtaketheriskofdeliveringthemtotheundergroundroom,andJordanwouldgo there to inspect thepaperwork.Withhundredsof thousandsof vouchers, the process was a logistical nightmare. One evening Jordannoticed the clerks slicing up condoms with scissors and then using them tobundlethevouchers.Theyhadnorubberbands.

For a few sweaty hours during the violent October 1993 confrontationbetween Yeltsin and hard-liners at the Russian parliament, Jordan and theChubaisstaffsufferedaterriblescare—theyfearedtherebelliousnationalistsandhard-liners,ledbyRutskoiandKhasbulatov,mightstormtheroomwherethe vouchers were stored, just across the street. Tens ofmillions of dollarsworth of vouchers were lying there—the guts of the whole privatizationprogram!—andinonemomenttheycouldhavegoneupinsmoke.Buttheanti-Yeltsinforcesat theWhiteHouseneverdiscoveredit.Thevouchervaultwassafe.57At the beginning of 1994 came a dawning realization in the West that

Russian industry was going to be a new Klondike. Yeltsin won a newconstitution that gave him broad powers and a new legislature. The oldSupremeSovietwashistory.Jordanrecalledthathehadtried,invain,inMarch1993,beforeYeltsinwon the referendum, to interest foreign investors in thevouchers.“IwouldgooutandtellpeopleaboutRussia,andnoonewouldletmeintotheiroffice,”herecalled.“Nobodycared.AllaroundtheworldIwentforthreeweeks.AndinNovember,Iwentonanotherroadshow.Thenpeoplestarted to open their doors tome. And inMarch 1994, every person in theworldwantedtoknowwhoIwas.”Between December 1993 and June 1994, when the voucher phase ended,

JordanandJenningshad traded16,346,070vouchers—more than10percentof the total. Foreign investorswere hungry forRussian stocks, even thoughthey often knewnothing about the companies theywere buying. Even an oilmajorlikeLukoilhadbarelyonepageoffinancialdatatosharewithinvestors.AturningpointcameinMay1994with thepublicationofanarticle in the

Economist titled“SaleoftheCentury,”whichlaidoutthestarkmath:Russianassetswerevery,verycheapcomparedwithsimilarpropertyelsewhereintheworld.Thearticlenoted that shares inBolshevikBiscuitwere tradingat$53each, or three times the price at the 1992 privatization. Still, Bolshevik’smarket value per tonof outputwas $9,while aPolish biscuitmaker,Wedel,wasvaluedbyitsstockmarketthenat$850aton.58Right after the Economist article appeared, Browder recalled a flood of

interestinRussiaamonghiscolleaguesinLondon,whoearlierwouldnotgivehimthetimeofday.“Iwassittingonthetradingfloorandallofasuddenallthemanagingdirectorsarearoundmydesk.‘Bill,’theysaid,‘Interestingstuffyouaredoingthere.CanyougetussomeLukoil?’”Despite two years of political crisis, Chubais had delivered on his core

promisetoputstatepropertyintoprivatehands.Aboutfourteenthousandfirmswent through voucher auctions in twentymonths, and thousandsmore smallshops and businesses were privatized; all told, about 70 percent of theeconomywasputintoanewprivatesector.WouldthenewownersprovemoreeffectivethantheSovietmasters?Atthe

end of the period of mass privatization, in mid-1994, there were plenty ofdanger signs. Rozhetskin traveled the back roads of Russia, looking atfactories, and many of the owners he encountered were not interested inbuilding the businesses they had purchased cheaply. Instead, they were juststrippingtheassetsandsuckingoutthecashflow.Thewholeideaofcorporatemanagement skills, boardroom discipline, and effective ownership seemeddistant,theconceptsinchoate.ButChubaiswas not concernedwith that.The lessons ofmanagement and

ownershipwouldcomelater.Iftheownerswerebad,theywouldfail.“That’sall there is to it,” he said. “And if the second owner is bad also, hewill gobroke.Ifheisgood,hewon’t.”59In late1994,Chubaiswasebullientabout thefutureof thepropertyhehad

freed from the state. “Everything thatwe’ve done already has convincedmethatourcountryisonthedoorstepofaninvestmentboom,”hesaid.“Andthesearenotmyfantasies.”One day after mass privatization was complete, Rudloff found himself

sittingacrossthetablefromChubais.Everthegruffskeptic,RudlofflookedatChubaisandaskedhimpoint-blank,“WhathaveyoureallydoneforRussia?”Chubais,whohadsteelynervesandanunshakablesenseofmission,replied,

“Ihaveprivatizedpower.IfinishedofftheCommunistsystem.”Rudloff was speechless, because what Chubais said was both breathtaking

andtrue.

Chapter9

EasyMoney

BORIS BEREZOVSKY, full of plans, came to the Russian FinanceMinistryseveral times in1993.Hewanted to seeBellaZlatkis, a careerbureaucrat, astockywomanofLatviandescent,with short, blackhair and an authoritativetone.Intheearly1990s,Zlatkishadbeenappointedtoheadanewdepartmentin the ministry. It was called the Department of Securities and FinancialMarkets,althoughnoonereallyknewmuchaboutsecuritiesandthefinancialmarketswerejustbeginningtotakeshape.Berezovskywas a fountain of ideas, she recalled, and ever so insistent. In

hersmalloffice,ZlatkislistenedasBerezovskydescribedhislatestdream.Hewanted to construct a new auto factory, to create a “people’s car” like theVolkswagen. Berezovsky’s company, Logovaz, was already Russia’s leadingcar dealer, taking thousands of Zhiguli cars from the Avtovaz factory inTogliattiandpayingforthemmuchlater,indeflatedrubles.NowBerezovskywasproposing togo further.He toldZlatkisheneeded to raise$2billion tobuildafactorytomanufacturethepeople’scar.ImaginehowRussianswouldflock to the showrooms!Acarwas thedreamof theRussianEveryman,andBerezovskyhadafinancialplantomatchhisimagination.The privatization voucher had blazed a trail through the consciousness of

the Russian people. On the streets, vouchers were ubiquitous; the exchangeshummed with voucher trading. The public was learning fast about shares,piecesofpaperwitharealvalue.Voucherfunds,promisinglucrativereturns,spreadlikewildfire,beckoningnewinvestors.A thought occurred to Berezovsky: if the state could issue securities—the

vouchers—thenwhycouldn’the?Thepeoplewouldfinancethe“people’scar.”Theywouldbuyshares.TheAvtovaz factory inTogliattiwas troubled, overrun by petty criminals

and robbed blind by its managers. But the director, Vladimir Kadannikov,stood behind Berezovsky’s dream. The sandy-haired Kadannikov, who had

takenthehelmofAvtovazin1986atthebeginningofperestroika,wasoneofthe country’s most prominent industrial generals, and he lent an air ofauthoritytoBerezovsky’sscheme.KadannikovrecalledhowVolkswagen—theGerman people’s car—had also gotten started with small individualinvestments before World War II.1 “What’s good for Avtovaz is good forRussia,” Kaddanikov had boasted, borrowing a famous slogan of Americancapitalism.2 The boast came, oddly, as Kadannikov’s own manufacturingkingdomwasbeingdismemberedandwascollapsingundertheweightoftheft,violence,andhyperinflation.Zlatkiswas skeptical about Berezovsky raising themoney from shares to

build his dream factory.TheRussian financialmarketswere still inchoate, agrab bag of small commodity exchanges,without controls, selling vouchersand a handful of company shares in between tons of steel pipe. They weregrowing faster than the rules, the government, or the laws could keep up.Zlatkiswasbeingthrustontothefrontierofwildcapitalism, thekindwithoutinstitutions or rules. Berezovsky was proposing to create a new, privatefinancial instrument, with certain unique features that wouldmake it behavelikerealmoney.HeimploredZlatkistoapproveit.Thenewsecuritywouldbeahugeprecedent, a leap into theunknown. Itwas sonew,Zlatkis concluded,thattherewerenolawsgoverningit.“I saw the flaws of the investment project,” Zlatkis later told me. “They

needed$2billion to establishwhat theywanted.But the financialmarket cangive just so much. They could collect $100 million; they couldn’t possiblyhavecollectedmore.Butwiththatmoney,theycouldn’tbuildanything.Maybea garment factory, but not anything in auto manufacturing that would beinteresting.”Berezovskywouldnotgiveup.“Hewassurethathewouldbeabletocollect

$2billioninRussia,”Zlatkisrecalled.Berezovskywantedtosellshares.Atthementionof theword,Zlatkis recalleda snowynightback inDecember1991whenshehadjusttakenthejobintheFinanceMinistry.TheSovietUnionwascollapsingandYeltsinwascomingtopoweratthebeginningofshocktherapy.Zlatkiswasheadinghomefromherofficeat11:00P.M.onawinternight;thestreetsweredarkandthesidewalksicy.AsZlatkisshivered,herdrivertookthewheeloftheunheated,agingZaporozhetsandroundedadarkcornernearRedSquare. Zlatkis saw a familiar sight: in the cold, a long line of people, juststandingandwaiting,underasinglelamp.Shetoldthedrivertostop.Shegotouttoseewhatmightbeattheendoftheline.Shesawmostlyelderlywomen,

bundledagainstthecold.Sheheardthemtalkingabout“shares.”Theywerestandinginlinetobuya

pieceofpaperthatpromisedhugereturnsinayear.TheshareswereissuedbyBankMenatep. “Wehave been here for several days, standing in line to buyshares,”Zlatkiswastoldbythefirstwomanshemet.“Theyaresellingshares.They are going to pay a big interest on them.We are investing a thousandrubles. And they promise that in a year, they are going to pay ten thousandrubles.”Thewomenwerewaitingforeasymoney.Zlatkis did not dare mention that she was chief of a Finance Ministry

departmentforsecurities.Butshecouldnotremainquiet.Shetriedtopersuadethewomenthatitwasallamistake,arip-off.Theywouldneverseethemoneyagain.Herdrivertuggedathercoat,sayingitwasuselesstopersuadethemallby herself. But Zlatkis persisted, despite the cold air and the hostile looks.Sadly, theywerebeingdeceived.Theshareswerenot legal.Theywouldlosethemoney.Couldn’ttheysee?Thewomenhuddledcloser,closingtheircircleagainstherentreaties.They

toldZlatkis toget lost.Theywouldnot listen toher.Theyglancedanxiouslyover their shoulders as she begged them to realize that the shares wereworthless.“Theywereveryangry,”Zlatkisremembered.“Theyjustdrovemeaway.Icouldn’tdoanything.Iwastalkingtopeoplewhowereabsolutelynotreadytohearme,tounderstandme.”3Soonthesceneinthesnowwouldcomebacktohaunther—andthem.

The great inflation of the early 1990s did not subside inRussia as it had inPoland.Everymonth in 1992 and 1993, the ruble’s value fell as theCentralBank recklesslypumpedbillions in fresh credits into the system.A full yearafter Gaidar had set prices free, consumer inflation in Russia was stillgallopingaheadat25percentamonth.4Bytheendof1994,consumerpriceswere 2,000 percent higher than they had been in December 1990.5 ViktorGerashchenko, chairman of the Russian Central Bank, thought in Sovietfashionthatpumpingmoremoneyintotheeconomywouldsaveit.Instead,hewaswreckingit.Gaidarwasnotcompletelyblindtothedamagetotheeconomy,eventhough

hehadtroubledisplayingsympathyfor thepopulation.“Hyperinflation is themost terriblemonetarycatastropheof all,”he recalledyears later. “It occurswhenthepublichaslostallfaithinitsownnationalcurrencyandrushestogetridofit,buyingupwhatevercomestohand.”6That is preciselywhat happened in Russia. Hyperinflation destabilized the

economyandwipedout thesavingsofapopulation.Itwascruelandunusualpunishment. A scientist, whose salary in Soviet times may have been twohundred rubles a month, who may have saved five thousand rubles over acareer,sawthevalueofhisentirelifesavingsshrinktoaloafofbread.Butforthe most cunning and daring businessmen, the wave of inflation was anincredible opportunity. It heralded an age of fantastically easy money, offortunes spun out of thin air. The lure was especially strong for those whoalready had connections, such as the cooperative businessmen, nascentbankers, Komsomol activists and ex-KGB agents, and those who had guts,includingintrepiduniversitystudentswhohadneverknowntheSovietsystem.Russia was a broken country that needed to attract investment, build

confidence in its currency, and establish the basic institutions of themarket.The wave of easy money was enormously destructive to all these goals. Ittaughtall thewrong lessons, and thedamage lingered throughout the1990s.Themind-setof theseyearswas that itwas farmoreprofitable towheelanddealwithfinance,toleveragemoney,andtoexploitthedistortionsofinflationthantobuildabusinessbrickbybrick.TheprofitswereastoundingforRussia,butsowerethecosts—easymoneyputoffthehardworkuntillater.IntheSovietsystem,moneyplayedasecondaryroleintheeconomy.Inthe

yearsaftertherevolution,afewBolsheviksevenfantasizedthatmoneywoulddisappearaltogetherintheworkers’paradise.Sovietindustrywasgearedfirstandforemosttowardmeetingproductiontargetsandplans,andmoneywasnotgenerally critical to success or failure. If the goods from a factory wereshoddyorunneeded,thefactorystillgotsubsidies.Awholepanoplyofnotionsaboutmoneyanditsrelationtoprivateownership—profit,loss,debt,interest,shares and dividends—did not exist. Moreover, for consumers as well asfactories,goodsintheshortageeconomyexistedbeyondthereachofmoney;thekeyfactorwasaccessorprivilege,notcash.When it came tomoney,Russiansharbored adeepand abidingdistrust of

their rulers. Soviet leaders had periodically confiscated people’s savings tosoakup the so-calledmonetaryoverhang, theexcess rubles that accumulatedbecausetherewasnothingtobuy.Thelastconfiscationwasstillfreshinpublic

memory,inflictedbyPrimeMinisterValentinPavlov,whosuddenlywithdrewfiftyandonehundredrublebanknotesfromcirculationin1991.When Yeltsin launched shock therapy by freeing most prices, his central

goal was to ensure that money and prices, and not the dictates of centralplanning,wouldplaytheleadingroleinthecomplexdramaofeconomiclife.FortheYeltsinrevolutiontowork,ithadtoimpartaprofoundnewmeaningtothe definition of money, to infuse the ruble with value and bury the Sovietlegacy. In theory, money and prices would become the chief indicators ofsuccessorfailure,separatinggoodfrombad.Butwhenshocktherapybegan,thefirstresultsdidlittletoestablishfaithin

thecurrency.Theinitialsurgeofinflationheightenedmistrustoftheruble.In1992–1994, the Russian people showed they were indeed rational actors inresponse toeconomicchange: theygotridof their rublesasfastaspossible.Thedollarbecameking.Primitivebartertradetookhold,asrefrigeratorsweretradedforpicklesandcoal for flour,andnothingfor rubles.Thosewhohadthemeanssent theirmoneyabroad,creatingariverof“capital flight”outofRussia that continued for years. But most ordinary people just looked forsomewhereelsetoputtheirmoney—perhapsindollarsunderthemattress.Just as hyperinflation began to roll through the economy, just as people

began to think about getting rid of their rubles as fast as possible, Chubaisopened the door for an alternative place for their money—the voucher andvouchermutualfunds.Thevoucherfundssoonevolvedintoallmannerofget-rich-quick temptations and climaxed in 1994 in a wave of popular butdestructive financial pyramid schemes. If the voucher was a legal financialinstrument,giventoeveryoneasagiftbythestate,itwasnotsuchabigleaptoimaginethatotherpiecesofinvestmentpapercouldbelegaltooandsatisfythehungerforquickrewardsinatimeofrunawayinflation.Gaidarfearedattheoutsetthatthevoucherswouldleadtomassivespeculation—thegamblingkind.Hewas absolutely right. The voucher funds soon began to play on people’sexpectations for easy money, sprinkling their names with the words“diamonds”and“oil”andofferingannualreturnsover500percent.The voucher had opened a door, and beyond it was a wonderland of

unregulatedsecurities,surrogatemoney,andwildfinance,aperiodthatwasaperfectillustrationofwhathappenswhenthemarkethasnorules.Apopulationthatforsevendecadeshadbeenlecturedabouttheillsofbourgeoiscapitalismwassuddenlytold,“Getrichquick!”Theywerenotjustinvitedbutexhortedtoget rich. The exhortations were carried by ads in the newspapers and on

television,followedbyanarmyofpeopletohelpmakethedreamscometrue.Voucher traders became brokers, speculators, and in some cases thieves.Yevgeny Myslovsky, a veteran Soviet-era prosecutor who later investigatedmanyofthedubiousfinancialschemesoftheearly1990s,chronicledatypicalrip-off by one voucher fund, Astron. The director collected a thousandvouchersfrom254peoplebetweenDecember1992andMarch1993.Hethensoldthemfor5millionrubles,ofwhichhespent1milliononhimselfandpaidout someof the remainingmoney to luremore investors.Buthe invested innothing—itwasstrictlyatrick.7Psychologically, Russians were totally unprepared to resist the new

temptations of wealth. They knew practically nothing about real money orinvestment; many had never seen a personal check or stock certificate.Alexander Oslon, a leading pollster, described the first post-Soviet years assimilartoamanreleasedfromprison.Whentheprisonerfirstgetsout,heisoverwhelmedbytheblindinglight,thefreshair,theeuphoricfreedom,andthesense of being weak-kneed and naive in a strange new world. The Russianpeoplewent through thesame transformation.“Theyemancipated themselvesfrom censorship; they freed themselves from the pressure of the authorities;they emancipated themselves from economic monotony,” Oslon explained.8“Their initiatives and their desires,whichwere always imprisoned,were setfree.”Buttheydidn’tknowhowtohandleit.“Inthattime,elementsofanewlanguageappeared,”Oslonrecalled.“Words

like ‘business,’ ‘limited,’ ‘joint stock company,’ ‘funds market,’ ‘dollarexchange rate.’” The new language was followed by alluring, stark, andunrealistic ideas of how the market economy would function. “At thebeginning of the period was a fairy-tale concept of capitalism, ‘a field ofmiracles,’” Oslon told me. He remembered that millions of people werecaptivated by a television advertisement for one investment fund in which afatherandsonaresitting,fishing.Thesonsays,“Papa,wearesittinghere,andthemoneyiscoming!”Themessage:youcansitanddonothing,andmoneyspringsuponitsownaccord.Thisyearningforamiracle,fordreamstocometrue,wasfertilegroundforthemanwithbigideas,Berezovsky.Berezovsky’sbrainchildwas theAll-RussianAutomobileAlliance,knownbyitsRussianacronym,AVVA.Thealliancewasaningeniousschemethatwouldbothtapintopublicanxietyabouthighinflationandexploitthepent-updesire

ofmillionsofpeopletoowntheirowncar.Berezovskywasgeneraldirectorofthealliance,andthehandsomecertificateshewouldselltothepublicweresignedonthereversebyKadannikov,directorofthehugeAvtovazfactoryinTogliatti,whobecamethenewchairmanofAVVA.One day after the December 13, 1993, election, in which Yeltsin won

approvalof thenewRussianconstitutionandanewparliament, thesecuritieswentonsaleinthevastexhibitionhallonManezhSquarenexttotheKremlin.9The certificates were printed in Switzerland on paper fine enough for anynationalcurrency,withspecialprotectionagainstcounterfeiting.Eachonewasengravedwith a portrait of a famous prerevolutionary Russian industrialist,suchasSavvaMamontov,apatronoftheartsandliterature,ironmagnate,andthe largest shareholder of theMoscow-Yaroslavl-Archangelsk railroad. Thecertificates were specially flown to Moscow from Zurich in heavy woodencratesandstoredundertightsecurity.The certificates said quite clearly on the front side: “One Share.” The

nominalfacevaluewastenthousandrubles,andeachcertificatecarriedeightperforated coupons attached to the bottom, labeled “Check to ReceiveDividends.” Berezovsky promised that the first dividends would be paid in1995,eventhoughthenewautofactorywouldnotgointooperationforafewyears.But the back of the certificate held a clue that not everything was as it

seemed. The certificate was not a share of stock in the legal or traditionalsense. Rather, it was a new kind of security, a hybrid called a “bearercertificate.”Thebearercertificategavethepersonwhohelditonlyoneright:toexchangeitforonegenuineshareofAVVA.However,tradinginthebearercertificatewasverydifficult,andallthesharesnotclaimed(meaningmostofthem)wouldbecontrolledbyAVVAitself. Inotherwords,AVVAwassellingpapersthatsaid“OneShare”onthefrontbutsaidtheywerenotashareontheback.Thecertificateholderhadnovotingrights.RealcontrolrestedwiththefoundersofAVVA,aseriesofcompaniesandbanksclosetoBerezovskyandKadannikov.10Berezovskyaddedaspecialtwisttodiscouragepeoplefromtradingintheir

certificates.Withmuchhype,AVVApromised togiveaway100,000Avtovazcars and big discounts on car purchases in a lottery for thosewho held thecertificates.BerezovskypersonallyannouncedthefirstlotteryonFebruary18,1994,saying6,500carswerebeingoffered—everytenthcarforfree,andtheotherswith25percentand50percentdiscounts.11But therulesof the lottery

werethatonlypeoplewhodidnottradeintheircertificatescouldparticipate.Inthe end, the car giveaway lotteries were held just three times. The gambitworked:mostpeopledidnottradeintheircertificatesandjuststashedtheminadrawer.Thiswasgood forBerezovskybecause itmeanthecouldkeep themoneyandkeepcontrolofAVVAtoo.Therewasanothertrick.TheAVVApaperswerenotimprintedwiththename

of the bearer, as required by law for a real share of stock. This made thepapers, like privatization vouchers, easier to trade on the street. Butconsequently there would never be a proper list of those who bought thembecause there were no names. Thus it would be extremely difficult to paydividends,aspromised.Inpublic,Berezovsky’sambitionwassky-high.The“people’scar”project,

heannounced,wouldbuildanewfactoryinTogliattitomanufacture300,000cars a year. The project was estimated to cost between $1.5 billion and $3billion,althoughBerezovskyinitiallyhopedtoraiseabout$300millionfromselling theAVVA certificates and the rest from a foreign investor, whowasportrayed as just around the corner.Kadannikov frequently and prominentlysuggested the possibility of a joint venturewith GeneralMotors. A team ofindustrial and factory specialists at AVVA worked out dozens of differentscenarios for the envisioned factory andvisited autoparts suppliers all overRussia.12ZlatkisrecalledthatBerezovsky“wasplanningtobecomeaFord,”apillaroftheRussianautoindustry.“Itwashisfavoritetopictotalkabout.I’mconvincedhewasplanningtobuildit.”PresidentYeltsinsignedadecreeinlateDecember 1993 awarding AVVA substantial tax breaks over the next threeyears.Berezovsky’s public declarations about the “people’s car,” however, were

not the whole story. As early as 1994, Berezovsky was also planning, withKadannikov, to buy a sizable chunk—perhaps all—of the Avtovaz factory,whichwasbeingprivatized.13BerezovskyshrewdlyrealizedthatAvtovazwasan industrial crown jewel of Russia but would be sold cheaply in theprivatizationgiveaway.SoheandKaddanikovessentiallycreatedaschemetoraise thenecessarymoney frompeopleon the street, and theyused it tobuysharesinAvtovaz.YuliDubov,authorofthethinlydisguisednovelaboutBerezovsky,Bolshaya

Paika,wrotethatthetakeoverhadtobeplottedinsecret,“sothatthepeopleinthe factory wouldn’t understand” the real intention, “and so that the poorRussian people, intended to be themain source of the operation’s financing,

wouldheadforthecashcollectionpoints.”Dubov’s novel contains some remarkably precise details about the AVVA

schemethataresupportedbyotherevidence.Berezovskydeliberatelycreatedthe hybrid security so he could sell as many certificates as possible whilebypassinglawsthatrequiredshares toberegisteredinsomeone’sname.“Wewon’tbesellingshares,we’llbesellingsecurities,”theBerezovskycharactersaysinDubov’sbook.“Didyougetthat?Thelawdoesn’tsayawordaboutthatsortofpaper!”Whentheoperationwasover,“theonlyshareholderswillbeus,ourselves,andwe,”headded.“Andwewillbemakingall thedecisions.Andmeanwhile,therestofthepeoplewillbesittingwiththeirwrappapers.Anditwillbeevenbetteriftheykeeptheirpaperstothemselves,forgood.”14AttheFinanceMinistry,theresponsibilityforregistrationofanewsecurity

fell to Zlatkis. Berezovsky lobbied her for permission to sell the AVVAcertificates.Zlatkisknewthatthenewsecuritywasnotcoveredbyexistinglaw.“Thelawyers,whosawthatissuance,saiditwaslegal,”Zlatkistoldme.“ItwasinaccordwithRussian legislationat that time.”The lawdidn’t evenmentionthesenewtypesofsecurities,knownasbearercertificates.Berezovskydroverightthroughthegap.He then lured two of Zlatkis’s deputies to come toAVVA andmade her a

temptingoffer.Zlatkissaidhersalaryat thetimewastheequivalentof$30amonth. Berezovsky offered her a job at $15,000 a month. “I couldn’t evenimagine such a salary could exist,” she toldme. “Had I believed in all thosethings,inallthoseprojects,Iwouldhavetakentheoffer.AndforalongtimeIhad doubts.” But Zlatkis told me she ultimately turned Berezovsky downbecause she thought AVVA’s financial plan would never work—they couldnevercollectthekindofmoneyBerezovskydreamedof.At first, Berezovsky’s plan looked like a winner. Outside the Manezh

exhibition hall, right next to the Kremlin, long lines formed to buy thecertificates;AVVAalsoacceptedvouchersinpayment.“Let’sgo!”imploredtheAVVAtelevisionadvertising.TheAVVAcertificatessoonbecamesomeofthemosttradedpapersintheMoscowcommodityexchanges.Theventurereapedabout $50million betweenDecember 1993 andmid-1994. All together, 2.6millionpeoplegavetheirmoneyandvouchersforapieceofpaperthatdidnoteven have their name written on it. Then Lyonya Golubkov took to theairwaves,andBerezovsky’sautomobileallianceranoutofgas.Golubkov was the name of a character in a television commercial. He was

slightly pudgy, with unkempt, greasy black hair and a dull metal tooth.Unassuminganddisheveledyetbrimmingwithenthusiasm,Golubkovbecamethe prophet of the easy money age. Supposedly he had once been a tractordriver, but his life changed overnight when he bought shares in a companycalledMMMandstruckitrich.Heboughtapairofbootsforhiswife,thenafurcoat,andfinallysplurgedonatriptoSanFranciscotowatchRussiaplayinthe World Cup. Golubkov’s fictional adventures were the centerpiece of aphenomenally successful televisionadvertisingcampaign that tookRussiabystorm in the spring of 1994.Golubkov sold dreams, and thewearyRussianpeople bought them, spending billions of rubles to purchase certificates inMMM promising instant wealth at 3,000 percent interest a year. GolubkovplayedonRussian televisionscreensnightafternight formonths—2,666adsaired on Russian television in March, April, and May alone—in spots thatalways featured the same sprightly music, a simple white backdrop, and aslapstickstyleandusuallyendedwiththeubiquitousMMMlogo.15BehindthecurtainsofMMMwasareclusiveformermathematician,Sergei

Mavrodi,whotradedinjeans,records,andothergoodsintheSovietdaysandlaterstartedacooperativeintheperestroikayears,sellingcomputers.Mavrodiwas a quiet figure; when his apartment was later searched, police found itrelativelymodest,filledwithbutterflycollectionsandastuffedbatonthewall.In1993,whenvouchersappeared,Mavrodimovedintotheworldofsecurities,andhisvoucherinvestmentfund,MMM-Invest,becameoneofthelargestandloudestinRussia.“MMMInvestturnsyourvouchersintogold!”promisedthetelevision commercials.16 However, Mavrodi was to make a far greatercontribution to Russian capitalism than just speculating in vouchers. Heshowedanentirecountryhowtomakemoneyoutofthinair.OnJune11andJune16,1993,MavrodiofficiallyregisteredtheMMMjoint

stock company, with 991,000 authorized shares at a nominal price of athousand rubles each. In the followingmonths,Mavrodi then spun aweb ofassociatedcompanies—namedafter jewels, suchasDiamondandSapphire—which would trade in hybrid securities, the same “bearer certificates” thatBerezovsky had used in setting up AVVA. Although the government hadapprovedtheissuanceof991,000MMMshares,Mavrodireallysoldmillionsofthesebearercertificates,eachofwhichwasnotactuallyasharebutaclaimonabitofashare.At least Berezovsky promoted his partnershipwith a famous industrialist,

Kadannikov. Berezovsky had a tangible, if unrealistic, goal of building a

factory, with the promise of dividends sometime in the future. By contrast,Mavrodi produced nothing but the lure of quick riches. In one memorableadvertisement,GolubkovandhisolderbrotherIvanare inSanFranciscoforthe soccer match. Ivan sits in the stands, his head in his hands. He moansdespairingly:Iworkedmywholelifeandgotnothing!AndLyonya,thislittlebrat,didnothing,andhe’srich.Mavrodi’s company opened branch officeswhere investors could buy the

certificates. In a few weeks, or even days, a purchaser could trade in thecertificatesforcashat theMMMcentralofficeat26VarshavskoyeShosse inMoscow.TheredemptionpricewassetbyMavrodi,whowasmakingamarketinhisownsecuritiesandsentthepricehigherandhigher.Thesecuritiessoaredfrom1,600rubles,ortheequivalentofadollarattheprevailingexchangerate,in February to 105,600 rubles, or $50, in late July 1994. It was a classicpyramidscheme,inwhichmoneyfromthenewinvestorswasusedtopayoffearlierinvestors.Mavrodi was imitating a famous American con artist, Charles Ponzi, a

dapperroguewhoin1920collectedanestimated$15millionineightmonthsbypersuadingtensofthousandsofBostoniansthathehadunlockedthesecrettoeasywealth.Ponziclaimedtohavefoundawaytoprofitbyspeculatingininternationalpostalreplycoupons,aformofprepaidreturnpostageforuseinforeigncorrespondence.Afterhehadpaidoffhisfirstroundofinvestors—hehadpaid50percentinterestinninetydays—newmoneywasrollingin.Hewassimplyreshufflingthemoneyfromnewinvestorstooldones,whichcametobeknownasaPonzischeme.Ponzisnaredfortythousandinvestorsbeforetheschemecrashed.17InMavrodi’scase,thevisiblepayoutwasakeypartofthemarketingtrick.

Myslovsky, the prosecutorwho later investigated the scheme, pinpointed thecentral deception of Mavrodi: he alone controlled the market in MMMcertificates. The company createdwild demand for the certificates but “keptsilentaboutthefactthatithadarighttostopbuyingthepapersanyminuteordrasticallycutdownthequotes,”Myslovskysaid.Forthosewhogotthehugepayouts,thegamewaslucrative,buttherewasalwaysabigriskthatthemusicwouldstopsuddenlyandeveryoneholdingthecertificateswouldbecheated.While the price soared,Mavrodi was secretive about how he was able to

generatesuchhandsomereturns,anditappearedthatmillionsofpeopledidnotwanttoknowthetruth.Theylinedup—sometimesbythehundreds—tobuythecertificates. The government too was passive and mystified. Zlatkis told a

journalistatthetimethatthereturnswereamazing,butshesawnothingillegal.“Theymustbeworkingreallyhardwiththeirsecuritiesandthemoneyeverydaytomanageit,”shesaid.18Anothertime,shedeclared,“Therewillalwaysbeafinancialproductofferedtothemarket.Wecannotbanthisprocess.”19WhatMavrodihadreallymasteredwasmarketing.Histelevisionadvertising

was created by Bakhyt Kilibayev, a thirty-six-year-old Kazakh film directorwho touched the raw nerves of post-SovietRussia. The advertisementswerebrief and rather crudely produced but poignant in message; they offered apowerful antidote to the prevailing cynicism, pessimism, and worry aboutdailylife.Theadvertisingalsodealthead-onwithignoranceandnaïvetéaboutfinanceandsecurities.Inoneoftheinitialspots,anelderlymanisseenbuyingan MMM certificate for the first time. “Indeed, a strange piece of paper,”acknowledgesthecheerfulannouncer,astheoldmanpeersthroughhisbrokeneyeglassesatthedocument.Later,eyeglassesrepaired,hecollectshiscash.Inanother spot, newlyweds Igor and Julia, both students, quarrel over theirmeager budget. “Not a simple solution, but a decision is taken,” intones theannouncer as they slap their cashon the counter atMMM.When they returnthreeweekslatertocollect,Julia’seyeslightupandtheyembrace.“It’sbetterthan a stipend!” exults Igor. In another commercial, a lonely singlewoman,Marina Sergeyevna, believes in no one, says the announcer. But then shecollectshercashatMMManddeclares,“Theydidnotfoolme!”Shelatergetsa boyfriend on the strength of her winnings. “Here, we don’t fool people,”declares the announcer. The message was clear: MMM paper is strange butworthrealmoney.Itisbetterthangovernmentstipends,andwewon’tfoolyouasPrimeMinisterPavlovdid.But the most powerful television huckster was Golubkov himself, the

erstwhile constructionworkernow living thehigh life.20 In one of the earlyadvertisements,heisshowndressedinanill-fittingsuit,holdingapointer,andmotioningtowardachart,plottingtheeverrisingpathofthefamily’sfortuneandacquisitions:boots,furcoat,furniture,andacarnextmonth.Atthetopofthechart:ahouse.“House in Paris?” inquires his wife, Rita, sitting in her housecoat in an

overstuffedchairandmunchingchocolates.“Why not?” says the announcer, as Golubkov looks up dreamily at the

ceiling.In yet another spot, Lyonya and his older brother, Ivan,who is a tattooed

coalminer,argueatakitchentable,abottleofvodkaandpickledcucumbers

between them.Ivandeclares thatLyonya isa freeloader,akhaliavschik.“Youblockhead!”Ivandeclares.“Don’tyourememberwhatourparents taughtus?Toworkhonestly.Andhereyouarerunningaroundandmakingafussbuyingstocks.You’reakhaliavschik!”Lyonya answers slowly. “You’re wrong, brother. I’m not a khaliavschik,

brother.Iearnmoneyhonestly,withmyexcavator.AndIbuysharesthatbringprofittome.Youwantedtobuildafactory.Youcan’tbuilditonyourown.Butifweallchipin,wecanbuildonethatwillbringprofittousandfeedus.I’mnotakhaliavschik,I’mapartner.”The announcer then intones, “That’s true,Lyonya,we’re partners.MMM.”

Lyonya’s explanation was completely false—there was no factory—but itcontained a kernel of Mavrodi’s philosophy, which was to get everyone to“chipin.”AnotherspotshowedthefamilyatthekitchentableasLyonya’swife,Rita,cheerfullydrawsadiagramonapieceofpapertoexplainMMM—alargesquare—andthenarrowspointinginward.“Likeahugepool!”exclaimsIvan.“And it is always full.” Everyone chips in! It was the essence of a pyramidscam.Theadvertisingwassosuccessfulonlybecausetherealeconomywassucha

mess. As hyperinflation destroyed savings, as factories closed down andworkers went unpaid for months or even years at a time, the Lyonya saga,broadcast day after day, beckoned viewers to new heights of optimism andprosperity.Itwasnocontest—thesorryRussianpeoplecouldhardlyresistthefantasyofferedbyMavrodi,andtheRussianstatewastooweaktodoanythingaboutit.OnceMavrodi and Berezovsky began, others followed and Russia turned

into a bazaar of easy money temptations. One widespread scheme, RusskyDomSelenga,carriedas itsmotto:“Everygrainofsandofyourdeposit,weturnintoapearl.”21OnatypicaldayofadvertisinginthepopularMoskovskyKomsomolets newspaper, the First Financial Construction Company offered“upto1,600percentinrubles.”Another,ALDTrust,promisedinvestors500percentonrubles,or60percentannualreturnondollars.InaMoscowweeklyfreenewspaper,Extra-M, theMosimportbankoffered30,000percent intereston five-year ruble deposits, although itwas later pointed out the sumwas amath trick taking advantage of the difference between simple and compoundinterest.22Theproliferationofeasymoneytrapsandlurescreptintoeverycornerof

life. Soon shares of pyramid schemes were being traded in the Finance

Ministrycafeteria,theveryinstitutionthatwassupposedtobepolicingthem.Inthecafeteria,employeescouldbuycertificatesfor“Tibet,”AVVAorMMM.Noonecoulddampenthefrenzy;theministryworkerswerecaughtupinLyonya’sdreams.Zlatkissaid,“AssoonasIemergedfrommyoffice,someonewouldcatch me in the corridor, I mean some ministry official or employee, andwouldstartaskingme:‘Bella,tellmehonestly,whatdoyouthink,ifIsellmyapartment and invest all the money in Tibet, will I be later able to buy anapartment for my daughter?’ I began to explain that you will lose yourapartment. But the woman said, ‘You don’t want to help us!’” Zlatkis onlyslowly—too slowly—began to realize the frenzy had become an epidemic.EventheesteemedhallsoftheRussianConstitutionalCourtwerenotimmune;court justices bought paper in an outrageous pyramid called Vlastilina. Themastermind was Valentina Solovyova, a one-time barbershop cashier whocreated her pyramidwithout any advertising at all, just word ofmouth. Shepromised returns of 100 percent amonth, a Zhiguli car for half themarketprice in the same period, or a Mercedes at one-third the price over threemonths. A river of cash began arriving at her offices. She used the cash torewardthefirstdepositorsinordertoattractmore.YevgenyKovrov,wholaterinvestigated the case and headed a government commission to represent thevictims, toldme thatSolovyova’sword-of-mouth approachwas as evocativeand phenomenally successful asMavrodi’smassive advertising. “The rumorabout this firm spread all over Russia,” he recalled. The first car giveawayignited a burst of enthusiasm.Oneperson told a friend, and the friend camerunning.Vlastilinaseemedtobeespeciallyattractivetotheelite—popstarAllaPugachovareportedlylost$1.7million.Solovyovasetaminimumdepositof50millionrubles,andstillpeoplecame.“Peoplegotthatmoneytogetherfromentire factories,” Kovrov recalled, “and transported it there in bags. And,judgingbytheaccountsofwitnesses,theywouldsleepinfrontofheroffices,makingcampfires.”23Solovyovawasconvictedin1999andsentencedtosevenyears inprison for taking the ruble equivalentof$130million from16,500victims,althoughnooneknowswhere themoneywentand the investorsgotnothingback.Zlatkisrecalledthatthefrenzyfinallyseepedintoherownhome.Oneday

her husband asked her about the pyramids. “He couldn’t understand whyeverybodyarounduswasgettingrich,andhewasnot.”In July 1994, the Russian authorities began to raise questions about MMM.

“Lyonyaisgettingonmynerves,”Yeltsingrumbled.TheStateAntimonopolyCommitteeaskedtelevisionstationstostopbroadcastingMMMcommercials,to no avail. Then the tax inspectorate said one of Mavrodi’s subsidiaries,Invest-Consulting, owed 49.9 billion rubles in taxes, payable immediately.PrimeMinisterChernomyrdinweighed in, saying, “Wemustwarn those likeLyonyaGolubkovandMarinaSergeyevna,theopportunitiesforeasymoneyinthe market will soon disappear.” But the voice of Chernomyrdin, who hadpresided over a growing backlog ofwage arrears in the real economy,wasfaintincomparisonwiththewonderlandofrichesofferedbyMMM.OnJuly27,Mavrodi firedback inanewspaperadvertisement:“So, theauthoritiesdonot likeLyonyaGolubkovandMarinaSergeyevna.ButdoLyonyaGolubkovandMarinaSergeyevnaliketheauthorities?Noone’saskedaboutthat.Yet.”Thenextday,thepyramidcollapsed.TheMMMcertificateshadbeentrading

at over 100,000 rubles, but at 11:00A.M.,Mavrodi announced that the newprice—which he alone set—was only 1,000 rubles. Thousands of angryshareholders blocked the Varshavskoye Shosse, the wide boulevard whereMMM was located, and riot police were called out to control the crowds.Mavrodiissuedareassuringstatementthatinvestorsneednotworry,thesharepricewouldclimbbackupto125,000inafewmonths.Heurgedeveryonetohold onto their papers. “We, unlike the state, have never deceived you,”Mavrodi declared. “And never will.” Many people were still prepared tobelieveMavrodi.“ThepapersaresayingMMMarecharlatans,butItrustthemoverPresidentBorisYeltsinandhisgovernmentanyday,”apensioner,MariaVasilievna,toldareporter.“Whathasthegovernmenteverdoneforus,excepttrick uswith theirmoney reforms?”24 Days later,Mavrodi began to issue anewsecurity,MMM“tickets,”whichwereemblazonedwithMavrodi’sportrait.Hundreds of investors returned, hoping that the bubble had not really burst.Theytoowerefooled.Mavrodihadbeenauthorizedtosell991,000shares,butintheendhedeceivedbetween5and10millionpeople.Hewaslaterarrestedfortaxevasioninahigh-profilepoliceraidandwasheldtwomonths.Buthewasreleasedafterhewonanoff-yearelectiontoparliamentandthusreceivedimmunityfromprosecution.Hedisappearedandwasneverprosecutedforthepyramid scheme; six years later Russian authorities said he was still beingsought.25ThecollapseofMMMthrewintosharprelieftheneartotalpassivityofthe

state. Yeltsin and his reformers had let capitalism run untethered, and it hadgoneberserk.“Thegovernmenthadabsolutelynothingtodowithit,gaveno

guarantees,andwillnotinterfereatall,”YeltsinsaidafterthecrashofMMM.ZlatkiswasoverwhelmedandcomplainedinJunethatproliferatingpyramidswere“outofcontrol”and“comingdownonourheads likeanavalanche.”26Zlatkistoldmethegovernmentdidn’treallyhaveacluewhatwasgoingon;intheministry,someofheraidesevenaskedifshewantedhelpingettingoneofVlastilina’scarsathalfprice.“Nooneunderstoodanything,noteveninoneofthedivisionsofmydepartment,”sherecalled.Myslovskyrecalledthathesawhugefilesonthecases,butthegeneralprosecutorwasorderedbysomeoneinpoweratthetimenottoproceed.“Themainsloganatthetimewas‘getrich,’”he recalled. “The legislative base was very unclear. These companies wereconductingveryaggressiveadvertising,theyhadalotofmoney,andthestatereaction was weak, toothless.”27 Vyacheslav Mavrodi, Sergei’s brother andpartner inMMM, later told a television interviewer, “If the law enforcementbodiesthoughtIwasaswindler,whydidtheyletmedoit?”28Zlatkisrecalled,“Ihadafeelingofhelplessnessall thetime.Iknewperfectlywellhowitwasgoingtoend,andIcouldn’tdoanythingaboutit.”DmitriVasiliev, theChubaisdeputy,sawtheepisodeinmuchdarkerterms.

The reformers had neglected to build the institutions of a market, and as aresultchaoswasspreading.VasilievbelievedtheFinanceMinistryhad“totallyfailed” to control the pyramids and was unable to regulate the financialmarkets.ThederivativesusedbyMavrodiwerenomorethan“lotterytickets,”he told reporters theweek after the collapse, “these scraps of paper are notsecurities.” Vasiliev warned that without stronger government regulation,“scandals will snowball.” As early as 1992, the reformers had discussedwhether to build an independent securities commission, but noonehadbeeninterested. Now the wreckage of unbridled capitalismwas strewn across thelandscape.Intheautumnof1994,Chernomyrdinagreedtosetupasecuritiescommission, withVasiliev as its chairman, to regulate themarket.Mavrodi,Vasilievlaterrecalled,was“themotherofourcommission.”AfterMavrodiranintotrouble,histoplieutenantsfromMMMcametosee

Zlatkis,demandingapprovalofahugenewshareissue,knowingfullwelltheproposal would be rejected. It was a trick—if the share issue was denied,Mavrodiwould try to shiftblame forhis troubles to thegovernment.Zlatkissawthroughtheruseandstalled,sayingthatthepaperswerenotinorder.Sheaskedoneofthevisitors,“Areyoualawyeroraneconomist?”He replied threateningly: “Neither. I am an athlete. Target shooting ismy

line.”

The collapse ofMavrodi’s pyramid destroyed confidence inBerezovsky’sautomobile alliance, but the real damage had begun earlier, in the spring of1994. Mavrodi was a better huckster than Berezovsky. Promising instantreturns,Mavrodisiphonedoff theeasymoney,asdidtheotherhigh-yieldingschemes,andsalesoftheAVVAcertificatesfelloff.Still,Berezovskyhaddonequitehandsomely in theyearof thepyramids;according to financial recordsthat were made public later, AVVA had collected 25.3 billion rubles fromselling its certificates in 1994, or about $15 million. Kadannikov andBerezovsky later put the total raised at $50million, although that appears toincludeinterestandprofitsfromreinvestments.Ineffect,AVVAusedthecashitgathered and immediately recycled it, speculating in privatization vouchers,high-yieldingbankcertificates,andotherquick-moneyschemes,doublingandtriplingthewinnings.Easymoneywaseasy.Although thepublicmayhavebelievedduring1994 that itwas seeing the

birth of a “people’s car,” in fact Berezovsky put the money elsewhere: inbuyinguppartial control of theAvtovaz factory.Financial reports show thatAVVAspent6.1billionrubles,orabout$3.1million,tobuyathirdofRussia’slargest car factory, an astoundingly tiny payment for such a huge industrialasset. Berezovsky used two separate methods. First, AVVA used vouchers tobuysharesinthefactory.Second,AVVAwasthewinnerofanAugust8,1994,investmenttenderforAvtovaz.Thetendersweresupposedtobecompetitionsinwhichthewinnermadesizableinvestmentsinthefutureintheenterprise,butone official told me later that AVVA was the only bidder.29 At some point,Avtovazthenissuednewstock,andafurtherchunkwasgiventoAVVA.Afterallthis,AVVAowned34percentofthefactory.OnJuly23,justsevenmonthsafterAVVAhad been launched at the exhibition hall inMoscow,Berezovskywasplacedon theelevenmemberboardofAvtovaz.Thepeople’smoneyhadhelped put him there. It was the perfect plot: he collected money from thepublicandusedittobootstraphimselfandKadannikovintoprivateownershipofthefactory.AccordingtoYuriZektser,wholaterbecamegeneraldirectorofAVVA,insidethecompanyitwasabsolutelyclearbythelatesummerof1994that theBerezovskyschemehadnotcollectedenoughmoneytobuildanautofactory. Moreover, negotiations with General Motors were bogging downbecause it feared the political risks of investing inRussia. (Also, thereweresigns of a war looming in Chechnya, and Russia went through a one-daycurrencypanicinOctober.)KadannikovhintedatthedifficultiesonNovember2, 1994, in a newspaper interview, suggesting that General Motors had

proposeda tinyproject tomake twenty thousandcars ayear,which“doesn’tsuit us.” However, he reassured people that “the anticipated absence of theforeignparticipationwon’tdisturbtherealizationoftheAVVAproject.”30WhatKadannikovdidn’tsaywasthatmonthsearlierBerezovskyandhehad

usedthepeople’smoneytobuyAvtovazshares,andtherewasn’tgoingtobea“people’s car” any time soon. Then, in mid-January 1995, Kadannikovpublicly acknowledged a delay, saying the projectwould be scaled down; inmid-February,he said itwas impossible to startbuilding the factoryand thatAVVAhad raisedonly$50millionout of a planned$300million.The finalacknowledgment that the project was dead came in a May newspaperannouncement thatAVVAhad held its annualmeeting onApril 7, 1995.Theannouncementblamed“negativetendenciesintheeconomyandsocialsphereinthemiddleof1994”forthe“unfavorableinvestmentclimate.”31Thepeople’scarwouldhave to remain thepeople’sdream.But thepeople

certainly would not get their money back. Berezovsky’s scheme had beenstructured so carefully that, in the end, neither he nor the buyers of hiscertificates had a list ofwho held the papers. Thatwas the idea—no list, norefunds,noproblems.ThecertificateswereworthlessunlessthebearercouldfindtherightplaceandtimetoexchangethemforagenuineshareofAVVA.Atthe1995annualmeeting,andateverysubsequentmeeting,itwasalsodecidednottopaydividends.Infact,inthefollowingsixyears,AVVAneveroncepaiddividends,despitethemillionsoftinycouponsithaddistributedattachedtothecertificates.Thedividendswereasmuchanillusionasthe“people’scar.”Thepromised 100,000-car lottery was stopped after three offerings and 14,000cars.The promises that AVVAmade to the peoplewho gave theirmoneywere

broken, repeatedly.TherealwinnerswereBerezovskyandKadannikov.32 In1996, when asked what happened to the people’s money and to AVVA,Berezovsky replied, “It has lived up to every promise it gave.We collectedabout$50million,thenwemadethismoneywork,andatleastitdidnotmeltdown....We succeeded in preserving themoney, we did not spend it on ourneeds,onentertainmentandpleasure.”33 Instead, theyspent itonbuying theirowncarfactory.

ThesagaoftheAll-RussianAutomobileAllianceoffersaglimpseoftheeasymoneyyearsbutdoesnot tell thewholestory.Easymoneycouldbepluckedfrom the hands of bureaucrats, found on the rudimentary commodityexchanges,orreapedbystreetwiseyouthsinseedycurrencyexchangebooths.Easy money was an era, a culture, an experience—and for some withexceptionalgutsandsavvy,adefiningmoment.AndreiMelnichenkowasoneofthem.Heprogressednicelythroughthebest

schools—hewasachampionof theOlympiads,Soviet-eraacademiccontests—andenrolledinphysicsattheprestigiousMoscowStateUniversity.Tallanda bit awkward, with a soft complexion and straight hair parted down themiddle, Melnichenko, often dressed in jeans and T-shirts, had the innocentlooksofateenagerbutthewitsandcunningofafinancier.Inthefinalyearsofthe Soviet Union, from his dormitory room in the dark labyrinth of theuniversity building,Melnichenko became a youthful trailblazer in the era ofeasymoney.In his second year, 1991, as the Soviet system disintegrated, the school

turned into an informal commodity exchange. The hallways and courtyardbuzzedwithpeoplesellingatonofcopperoroil,usuallystoredinastate-runfactory or warehouse. But everything was traded for cash, and the tradersneeded a secure, swift, andmobile source of currency.Melnichenkobecametheir man—the premier moneychanger of the Moscow university traders,helpingthemswitchfromdollarstorublesandbackagain,oftenwithinhours.Melnichenkoandtwofriendsworkedoutoftheirdormroom,wheretheykeptasinglepapernotebooktorecordthetransactionsandalargewoodenboxtostore themoney. “The university dormno longer looked like a placewherestudentslived,studied,anddidhomework,butitresembledastockexchange,”Melnichenko recalled. “Allover theplace therewereannouncements,peoplebuyingandsellingthings.Therewasabigturnoverofcommoditiesandgoods—automobiles,trucks,sugar,metals—whateveryouwanted.”Forthreeyears,Melnichenko paid little attention to his studies but devoted all his energy tohustlingrublesanddollars.Atfirst,thedaybroughtinaslittleas$100profit,perhaps$2,000onaverygoodday.Butwithinayear,thebusinessexploded,andthethreestudentswerehandling$100,000aday.The great inflation of 1992–1994 was like an escalator. Every day,

relentlessly,theruble’svaluedeclinedagainstthedollar.Melnichenkoandhisfriendsdiscoveredhowtousetheescalatortomakeafortune.Thetrickwastotakerubles,changethemintodollarsforashortperiod,andthenpaybackthe

sameamountofrubles,whichwerenowworthless,andpockettheprofit.Therublescouldbeborrowedfor10–13percentayear,butinflationwaserodingtheirvalueat25percentamonth.Moneyfell into theirhandsoutof thinair.Alltheyneededwastheguts—andsometimesitrequiredsteelnerves—tobeatrader.Melnichenkotoldmethattrainloadsofcommoditieswerebeingboughtand sold at the university. Because buyer and seller often did not trust eachother,theyarrangedforadepositincash.Melnichenkocollectedthesedepositstoo,andhiscapitalsoared.Hedidn’tevenhaveasafeforstoringthecash,butthedormroomhadaheavydoor,whichhelockedverycarefully.TheboysinjeansandT-shirtsstartedtothinkaboutlifeaftergraduation.Melnichenko and his friends followed their clients when they moved off

campus to nascent city commodity exchanges. Melnichenko opened a tinyoffice in a shabby two-room apartment and put a two-line advertisement inMoskovskyKomsomolets,apopularbroadsheetnewspaper:“Webuycurrency.Wesellcurrency.”Thephonesneverstoppedringing.Customersarrivedinthefirst roomwithbagsof cash, and thedealswereclosed in the second room,whereMelnichenko installedamoney-countingmachineanda real safe.Theboysstartedtogetrich.“Weallrentedveryniceapartments,boughtourselvescars,andliveddecently,”Melnichenkoremembered.When the laws changed and they needed a formal license in 1992,

Melnichenko foundaminusculeone-roombank,PremierBank, and struckadealwith theowner.Hewould functionunder theprotectionof their license,payingafeewhileexpandinghismoneyexchangepointsinthecity.Forabrieftime,healsotradedinvouchersandincigarettes,whichwereinsuchdemandthat cartons of them or whole truckloads could be substituted for currency.When ImetMelnichenko years later, I asked him if he recalled having anyhobbiesorpastimes in thoseyears.Hecould remembernone: justhoursandhoursonthephone,checkingrates,changingmoney.Melnichenko’smostimportantcommoditywasinformation.Heandhisteam

startedeachdaycountingtheircashandthendecidingwhatdirectiontheruble-dollarexchangeratewouldprobablytake.Theycalledcompetitorstoseewhatrates they were offering. There were no computer networks, no exchangefloors or flashing tickers, only the telephone. Then clients began calling; afactoryneeded to change $100,000 in earnings from a shipment of titaniuminto rubles—fast. For several years in the early 1990s, all such deals weremadeincash,whichwasaboontoMelnichenko.Astherategyratedduringtheday, theyworked swiftly, constantly telephoning, countingbanknotes, buying

andselling.“Fromdawn tilldusk,”Melnichenkosaid.“Andoftenatnightaswell,because therewerenight flights,peoplecominghere fromtheregions,and they needed to catch a flight back home.” They soon reached severalhundredthousanddollarsadayintradesandhardlyeversufferedaloss.Themechanismwasasgoodasaprintingpress:itcrankedoutprofitsallthetime.No messy factories to bother with, no aging equipment to replace, notroublesome socialist legacy or red directors to worry about. “To lose wasquite difficult,” he recalled. Melnichenko, who was thirteen years old whenGorbachevlaunchedperestroika,startedwearingatie.Melnichenkohadsetupacurrencyexchange inMoscow,UnitedCurrency

House. On October 11, 1994, known later as “Black Tuesday,” the rubleexchange rateplungedfrom3,081perdollar to3,926.Melnichenko toldmethatonedaybeforethecrash,“weforesawthatitcouldhappenthenextday.Webought a lot at the exchange.” Then when the ruble took a nosedive,Melnichenkomoved in for thekill.“Wesoldatmaximum,”he recalled.“Onthatdaywemademorethan$10million.”Melnichenko’ssecretwasnothisalone.Ruble-dollarspeculationbecamea

mainstayoftheeasymoneyeraintheearly1990s.34 Theincentiveswerestark:industry was flat on its back and would require massive amounts of capitalinvestment,butcurrencyspeculationinvolvedlowoverhead,highprofits,andno property.Who could resist? “Goodmoneywas earned on speculation. Itwas easymoney, easy capital,” recalledAlexander Smolensky,who in thosedays was running ruble-dollar operations with cash from Moscow retailclients.Smolenskycollected rublesandchanged themtodollars,andback torubles again. “You give money in the morning and collect earnings in theevening,”hesaid.“Itrequiredwhoeverwasthefastest.Wespentwholedaysinthe bank—itwas like a race, like amachine thatwas printingmoney. Everyday, it broughtmore andmoremoney.Themost important thingwasnot tomake a mistake. God took mercy. Converting, trading, earning, converting,trading,earning—itwaslikethateveryday.”35Theprofitsfromcurrencyspeculationwerenottheonlywaytomakeeasy

money. The combination of a weak government and high inflation spawnedother schemes to score a quick fortune, especially for those with politicalconnections,includingtheearlycooperativebusinessmen,veteransofthepartyandKomsomol,andtheirpatronsintheformerKGB.Thesewerethecreamoftheeliteand,theirpipelineforeasymoneycamedirectlyfromthegovernment.In the early 1990s, Russia had no central treasury and came to rely on

“authorized” commercial banks for deposits and disbursement of the state’smoney.Thesystemwascorruptfromtheoutsetbutlingeredonforyears.Thebankscozieduptounderpaidbureaucratstosnarethelucrativebusiness,withbriberyandcoercion.Thebureaucratslookedtheotherwayashugesumswere“deposited”withthefinanciers.Thebankersthendidnotdisbursethemoneyastheyweresupposedto,butusedit insteadfor theirownpurposes.Theyoftenrepaidthemoneytothestatemuchlater,ornotatall.Thefleet-footedbankersexploited a simple premise: money has value over time. The corruptgovernmentofficialswillinglyignoredthisconcept,allowingthefinancierstofeastonthestate’sriches.The authorized bank system is another example of how the easy money

years distorted the formative years ofRussian capitalism.Whywould bankswant to get involved in the risky business of lending to troubled Russianfactoriesorwobblynewbusinessesiftheycouldsimplyfeedatthetroughofthe Russian state? They were spoiled by free money from the government,which postponed the day when they—and all the others in the easy moneygeneration—wouldhave to learnhowto invest in therealeconomyandearnprofitsthehardway.Theimpactofeasymoneylingeredthroughthe1990s.SergeiYegorov,the

chairmanoftheAssociationofRussianBanks,offeredarevealinglookatthedistortions in early 1997.He reported that of $21 billion in banking creditsissuedin1996,only1.2percentwerelong-termloanstobusinesses,while90percentwere disbursed for short-term transactions on government debt, andthe rest went to import-export operations. In other words, the commercialbankswerebarelymakinganyloansatallintherealeconomy.Theywerelittlemorethancasinos,thrivingoneasymoney.36Onestudyfoundthatfrom1994to1996,halfofthebanks’profitsweregeneratedfromeasymoney.Almostnoonegotbigloans,andthelongesttermforaloanwasoneyear.37Smolensky,Khodorkovsky,Gusinsky,andBerezovskyallcapitalizedinthe

early1990sonthesystemof“authorized”banks.Gusinsky,withsupportfromLuzhkov,dominated theburgeoningMoscowmunicipal accounts for severalyears. Smolensky serviced accounts for the Kremlin administration, amongothers.Berezovskyusedthesametacticstogarnerthecashflowofthenationalairline,Aeroflot.Khodorkovskyhadonceboastedthathisbank,Menatep,couldsurviveunder

anyregime,andaformervicepresidentofMenateptoldmewhy:thebankwasstructured to parallel the government. Khodorkovsky and his lieutenants all

had direct lobbying links to key ministers, and their deputies to the deputyministers. The bank thrived on a web of government lending programs,ranging from defense spending to food purchases; the Russian FinanceMinistrywasoneofitsmajorclientsandloansforthestatemadeupmorethanhalf of Menatep’s lending activity in 1995.38 The former Menatep vicepresident tried his hand at Western-style investment banking but laterconcluded, in frustration, that itwas futilewhen the bank earnedmillions ofdollarsinprofitfordoingnothingasan“authorized”bank.“Therewasjustnopoint” in the painstaking work of investment banking, he said, “when youcould go have abanya sessionwith your buddy at the FinanceMinistry andtheywouldputin$600million.”“TheMinistryofFinancewouldputthatmoneyondepositinMenatepBank

and then instruct them to disburse it to the regions.WhatMenatepwould dowastakethat$600million,notpaytheministryanything,andtheywoulddelaythe startofpayment to the regions.When thepeoplecame toget themoney,theywould just delay it for threeweeks.Then theywould issuenot cashbutpromissorynotes—Menateppromissorynotes—insteadofcash!”39Duringtheinterval, Menatep put the money into high-yielding investments, reapingmillionsofdollarsineasyprofitsforwhichtheyhaddoneabsolutelynothingexceptwillfully ignore thegovernment’s instructions.Noonewascaught,noonewaspunished.“The thingwas that the crazymoneywas beingmadeon special relations

with the government,”VladimirVinogradov, the founder of Inkombank andoneoftheleadingcommercialbankersofthe1990s,toldmeyearslaterafterhisfinancialempirehadcollapsed.“Forexample,moneywas takenfromthegovernmenttofinancesomeprograms.Thoseprogramswerenotfinancedorwere financed just one-tenth of what had to be paid. And the money wasinvested into vouchers, and they were changed for shares.”40 Presto! Easymoneywasturnedintoprivateproperty.Intheearly1990s,oneoftheWesternerswhogotaringsideseatintheage

of easy money was Victor Huaco, a one-time Citibank expert on the LatinAmerican debt crisis, who ran his own ruble-dollar currency business inMoscow.HelaterhelpedlargeWesterninvestorsnavigatethemurkyworldofRussian banking and investments. Huaco, an immaculately dressed financierwho sawmany parallels between the Russian chaos and the Latin economicupheavalsof the1980s, toldme thatoneof theenduringmysterieswaswhoreallypickedthewinnersandlosersintheageofeasymoney.Huacosaidhe

alwayssensedthattherewasa“magichand”behindeverydeal,thatpoliticiansandbureaucratshelpedtheirfriendsdrainthelifebloodofthestateitself.The“magic hand” was another sign of what would become the single mostdestructive phenomenon of the first decade of Russian capitalism, thecorruptionofpowerbywealth.TheseedswereplantedinSoviettimes,intheshortage economy and the traditions of blat and svyazi. But the trendacceleratedintheyearsofeasymoney,whentheRussianstatewassoweakandsobereftofrulesandinstitutionsthatitwasblownawaybytheforcesofwildcapitalism that it had unleashed. Later a coterie of financiers became sopowerfulthattheynearlytookoverthestateitself.Huacotoldmethatthe“magichand”ofpowerwasoftenhiddenfromview.

The pyramid schemes had stolen from people with great fanfare, and thecurrencytraderswerein theopen,but theauthorizedbanksworkedinsecret.Thewinnersgotspecialinsiderinformation,whichtheyusedtostrikeitrich.Accordingto the journalistYuliaLatynina,adeputyministeroffinanceonceannouncedthatbondsfromastatebankwouldnotbepaid.Thepriceplunged.Khodorkovsky then bought them up. Several days later, the deputy ministerannouncedthat,infact,theywouldbepaid.Thepricesurged.41“Forme,thequestionalwayswas,wheredidthismagichandcomefrom?”

Huacoasked.“Themagichandcamewithmoney,andthesepeopleutilizedthemoneytomaketentimesmorebyhavingaccesstoinformationordeals.Whenthemagic hand picked them, it did not only give themmoney, it gave theminformation.They knew certain things and placed their bets accordingly.” Inonecase,HuacohelpedaRussiangovernmentagencyborrowmoneyfromaWestern lender. The loanwas guaranteed byRussia, transferred toMoscow,anddepositedinaRussianbank.Awhilelater,thegovernmentagencythatwassupposedtogettheproceedsfromtheloancomplainedaboutneverreceivingit.Huacotrackeditdown.“TheRussianbankhadjustchurneditintotheirowninvestments,”hesaid.Themagichandwasatworkagain.42Periodically, thegovernmentwouldannouncewithgreatsolemnity that the

days of easymoneywere over. Alexander Livshitz, an economic adviser toYeltsin, declared after the MMM disaster, “The time of easy money ispassing.”43Hecouldnothavebeenmorewrong.The age of easymoney, the roaring 1990s, masked a dark side of the newRussia. The oxygen of freedom was exhilarating, yet many took it as an

invitationforbrazenabuse.Therewasfreedomtoskirtthelaw,cheatthestate,steal from the population, and get away with it. Coal miners, pensioners,teachers, andnurseswentwithout paybecause the “authorized”bankers—thetycoons—whoweresupposedtodistributetheirpayonbehalfofthestateusedthemoneyinsteadtomakeaquickwindfall.RussiaofferedthespectacleofaneliteinMoscowthathadbecomestrongerthanthestate,protectedbytheirownprivate armies, strong-arming the government into relinquishing its riches,threateningandcoercinganyonewhostoodintheirway.BorisYeltsinandtheliberalreformersaroundhimhadspenttheirbestyears

destroyingthesymbolsofSovietpower,andtheydidnotwanttorevivethebigstate;itwasadangerstillfreshintheirmemory.Inadecisionthatwouldhaveprofound consequences for the early years ofRussian capitalism, the liberalreformerschoosetoprovidemaximumfreedomfirstandruleslater.Intothisvacuum rushed chaotic forces of evil—the cheaters and charlatans, thehooligans, criminal gangs, corrupt politicians, bureaucrats, natural resourcebarons,Mafiakingpins,ambitioustycoons,andformerKGBbosses.Sadly,intheenfeebledconditionofthenewRussianstate,whichcouldbarelymusterapauper ’s salary for militiamen and bureaucrats, money bought power. Theveryessenceof thestate—authority toset therulesof thegame—wassimplyprivatizedbythenewcapitalism.Thesequencewasunmistakable:thewaveofmoneycame first, startingwith earlyopportunities to sell oil andcomputersfor superprofits. The easy money was followed later by privatization ofgigantic factories and natural resource treasures. Money and propertyinvariably brought competition and conflict. And conflict needed a place tosettle its disputes, but since the rules were still not drawn—the laws notenforced, the courts not effective—the new money and property interestscreated their own rules outside the law, using bribery and corruption, usingviolenceandcoercion,allofwhichcouldbeeasilypurchased.Thecyclewascomplete:moneyruled.In the excitement of the easy money years, a profound fact was often

overlooked:fromthetsarstotheSovietCommunistParty,Russiasimplyneverhada traditionof the ruleof law.Russianshave spent centuries appealing toindividuals—aconcretepersonwithwhims,atsar,apartyboss—ratherthantoanabstractlawthathasnopersonality,thatexistsaboveindividualdiscretion.WhenSovietpowerwasdemolished,alidwaslifted;theweightofarbitrary

CommunistPartyruleceased toexistovernight.Thiswasamomentofgreatdangerthatnoonefullyunderstood.Noonethoughttoputanythinginplaceof

theheavylid.Russiawassuddenlythrustintoavoid.44 Slowly,newlawswerewrittenandanewconstitutionwasadoptedontheheelsoftheviolentshellingof parliament in 1993. But the utterly painful reality of the 1990s was thatRussiaremainedinavacuum,afreefall,aplaceofarbitrarypower,individualwhims, and private score settling. It extended from a simple street corner,wherea trafficpolicemanspenthisday takingpettybribes, toghastly shoot-outsbetweengangsofthugs,tothehighestechelonsoftheRussianstateitself,where money, that mighty symbol of onrushing capitalism, was a potent,causticforce.The astonishing corruption of post-Soviet Russia was hardly new; the

cultureandpracticewerecenturiesold.BriberyflourishedinthetimeofPetertheGreat,whohangedaSiberiangovernor,Gagarin,forcorruptionandthreeyears laterhangedNesterov, themanwhoexposedthegovernor,forbribery.Throughout the entire reignof theRomanovdynasty, corruption remainedasourceofincomeforbothpettygovernmentemployeesandhighofficials.InSoviettimes,thedefinitionschanged:theauthoritiespersecutedandprosecutedthe perceived enemies of socialism, including those with entrepreneurialinstincts. But old-fashioned corruption remained below the surface, in theshadoweconomy;itwasfrequentlytheonlypossiblewaytocarryoutmarkettransactionsinaplannedeconomy.A powerful legacy of the Soviet era—the hostile ideology toward

entrepreneurshipandcapitalism—persistedinthenewRussia.Thecopsonthebeat during Russia’s first taste of wild capitalism were the same onesinculcatedwiththeSovietnotionsthatallbusinessmenwerecriminalsforthemere fact of doing business. They were the same ones who grew up on aSovietlegalcodethatcriminalizedallkindsofmarkettransactions.Theselawenforcementofficialsneverabsorbedtheradicallynewideathattheirjobwastoprotectbusiness.OnceIaskedaRussianpoliceacademyinstructoraboutastringofunsolvedmurdersofbankers.Hegrewindignantandbeganshoutingatme, pushing his chair away from the table, standing, and glowering. “If abanker gets killed, it’s because he did not have a strong enough securityservice!”hedeclared.Hedidnotseeprotectingabankeraspolicework.Inmanyoppressiveregimes,thereisapowerfullinkbetweenaweakstate,

corruption,andauthoritarianism.Ifthelawsareunenforceableornonexistent,thenjustaboutanyonecanbefoundatfault.Thisgreatlyenhancesthepowerofselectiveprosecution:therulerscandecidearbitrarilywhowillbecaughtandpunished.HerewasthecoreofRussia’stroublesinthe1990s.Thearchaictax

laws,forexample,wereimpossibletoobey.Asmallbusinessmanoncetoldmethat thetotalofficial taxbillonhisbusinesswas110percentof theprofits,arefrain that I heard time and time again. The laws made almost everybusinessmanandtaxpayeralawbreaker—andthusapotentialcriminalandthusawillingsupplicanttopowerand,finally,abriber.AlexanderGurov,theheadofanInteriorMinistrytraininginstitute,oncecandidlyacknowledgedthatthismentality had become embedded in the Russian people. “Of one hundredpeoplestoppedbythetrafficpolice,”hesaid,“95percentwereofferingbribesevenbeforethepolicemanopenedhismouth.”45

Chapter10

TheManWhoRebuiltMoscow

THE CATHEDRAL was as grand as the military victory it commemorated.AfterRussia’sarmyturnedbackNapoleonin1812,TsarAlexanderIorderedtheconstructionofamammothtempletomarkthetriumph.TheCathedralofChrist theSaviorwasstarted in1839andcompleted forty-fouryears later,acolossalthirty-storystructureof40millionbricks,withwallsmorethanthreemeters thick, sheathed on the outside with slabs of marble and granite andcrownedwithagiganticcupola,coveredincopperweighing176tons.Atthesummitstoodacrossthreestorieshigh.Themaincupolawassurroundedbyfourbelfriesinwhichhungfourteenbellswithacombinedweightofsixty-fivetons.Twelvedoorssculptedinbronzeledtotheinteriorofthegrandcathedral,whichwasbothareligiousshrineandawarmemorial.“Tsarscameandwent,oldgenerationsdiedoffandnewonespopulatedtheearth,Russiathrewherselfintothechaosofwarsandconquests,sufferedrecurringwavesoffamineandepidemic,andyetnothinginterruptedtheefforttocompletethisextraordinarystructure,”onehistorianwrote.The finished temple, consecratedonMay26,1883,wasasignaturestructureofMoscow.In 1931 Joseph Stalin ordered the magnificent cathedral blown up. After

fourmonthsofscavengingtheedificeforeveryscrapofgold,pryingoffthemarble and copper and weakening the bricks with small dynamite blasts,workerstoppledthestructureinaseriesofexplosionsonthecoldmorningofDecember 5, leaving behind a tall, smokingmound of rubble. “A terrifyingsilencereignedinthisplace,”awitnessnoted.1Stalinwantedtobuildanevenlarger “palace of soviets,” a high-rise taller than the Empire StateBuilding,with a gargantuan statue of Lenin on top.Architectural competitions for thenewskyscraperwentonforyears,buttheprojectwasabandonedafterStalin’sdeath. InNikitaKhrushchev’s time,a large,heatedoutdoorpublicswimmingpoolwasbuiltonthesite.Thecathedralwasofficiallywipedfromthehistorybooks,butnotfrommemory.

In1989,whenMikhailGorbachevpermittedmoreopennessaboutthepast,VladimirMokrousovconstructedasmallplaster-and-cardboardmodelof thecathedral, working from an old photograph of the original cathedral that afriendhadgivenhim.Likeallwhodareddefyofficial ideology,Mokrousovwas cautious and indirect, at first. A prolific sculptorwith a lined forehead,gray eyes, long, gray hair, and shaggy beard, Mokrousov worked out of adrafty,agingtwo-floorstudioinMoscowwithcreakyfloorboards.Hecreatedamock-upoftheoriginalcathedral,workingquietly.Hehadtohidethemodelbecause the Union of Artists still had a charter prohibiting members fromworkingonreligioussubjects.Thecathedralwasatleastofficiallyaforbiddentopic,andMokrousovdidnotwanttotaketheriskofattractingtheattentionoftheKGB.In1989acompetitionwasannouncedforaWorldWarIIwarmemorialin

Moscow.Theentriesweredisplayedat theManezhexhibitionhallnext to theKremlin, andMokrousov, in a flash of rebelliousness, decided to submit hismodelcathedralto“correctthemistake”thatStalinhadmade.2Itwasjustoneof fourhundredentries—manyof thembearing thehammer and sickle—butMokrousov’sparticularmodelcauseda stir. Itwasondisplay for twoweeksandthensuddenlydisappeared.MokrousovsaidtheKGBseizeditandputitinavault.ButtheKGBwastoolate.Mokrousov’smodelsparkedinterestintheideaof resurrecting the church. In addition to anewspaper article about it, asmallgrassrootsmovementwasborn, themembersgatheringperiodically inMokrousov’sstudio.TheycalledthemselvestheObschina,aRussianwordthatmeans a local religious or ethnic community. In the next few years, theObschina activists stood on street corners across the country seekingsignaturesandsmallcontributionsforrestorationofthegrandcathedral.Theirdreamwasstrictlyastreet-levelaffair; theRussianOrthodoxChurchand theRussian state paid them little heed.3 On December 5, 1990, to mark theanniversaryofthedestructionofthecathedral,astonewaslaidnearthespot,and the following March, a two-meter-high plaster cross, sculpted byMokrousov,waserected;peoplegatheredaround it andprayed.Theywereamixture of nationalists and religious believers at first, but later, after theAugust1991coup,theywerejoinedbysomeofRussia’sdemocrats,whosawthe cathedral’s rebuilding as a symbolic spike through the heart ofCommunism. In 1991, on the sixtieth anniversary of the cathedral’sdestruction, BorisYeltsin declared that “this unprecedented act of vandalismwas committed not by foreign invaders but by people blinded by false ideas

andmotivatedbyhatredtowardeverythinggoodandsaintly.”4Yeltsin appointed Yuri Luzhkov mayor of Moscow after Gavriil Popov

unexpectedly resigned on June 6, 1992. Luzhkov inherited a confused andworriedcitizenry facinggrimshortagesanddeepuncertainty.He recognizedthatheneeded to inspirehope,buthewasnotacharismaticfigure.Hewasapragmatic man, a Soviet-era administrator and engineer with a limitedunderstandingofpolitics.Certainlyhehadnoideawhatkindofpoliticswouldinspirepeopleinthebrand-newstatethatwasunfolding.VasilyShakhnovsky,whowasa senioraide tobothPopovandLuzhkovduring this time, toldmethat Luzhkov took office suddenly, unexpectedly, without a grand plan orstrategy.Shakhnovskyrecalled,“Hefoundhimselfinaverydifficultsituationbecause he didn’t have a ready, thought-out program.” Shakhnovsky saidLuzhkovfollowedhisinstincts.5“Themostimportantthingnowistosurvivethismoment,”Luzhkovtolda

Moscowgovernmentmeetingat thetimehetookoffice, launchingamassiveand ambitious construction plan for the city,which he hopedwould providejobs—and take theedgeoffpopulardiscontent, fueledbyunemploymentanddespair.On the streets, the Obschina was collecting contributions with growing

vigor, themembers standing in subway stations and posting notices on lightpoles seeking support. The Obschina won official government recognition,allowing it to register as a legal group and open a bank account. Activistspresented tens of thousands of signatures to the authorities, petitioning forreconstructionofthecathedral.Asmallbankwasevenstarted in thenameofreconstruction of the church. But no matter how hard the grassrootscampaigners tried, they were amateurs, and the chances of their dreambecoming a reality remained slim. They raised only paltry sums from theirpublic solicitations.Mokrousov’swife,Valentina,whohad become treasureroftheObschina,begantowonderiftheywouldeversucceed;memberswereasking why nothing was happening. “There was very little money, but weneededtodosomething,atleaststartsomething,”shesaid.6Luzhkovtooknotice.Hisparentshadtoldhimthestoryofthecathedral,he

recalled, and he had seen photographs of it and heard legends of greatcraftsmenwhoworked on the original structure.7 According toMokrousov,Luzhkov personally signed an order turning over to the Obschina the 6.7hectaresoflandonwhichthecathedralhadoncestood,sothattheycouldbuildasmallchapel.Atthetime,thechapelseemedlikeamodestbutpracticalgoal.

The Mokrousovs then discovered that the land was occupied by a Chechenused-cardealer.Inadaringgambit,Valentinawenttothedealeranddemandedpaymentforuseoftheland.Toheruttersurprise,heimmediatelypaidher3.5million rubles, the equivalent of several thousand dollars, in cash.With thismoney, theObschinaerecteda fenceandcommissionedsomeblueprints,buttheir dreamwas still elusive.Yeltsinput reconstructionof the cathedral on alistofbigprojectstobebuiltinthenewRussia—someday.In1994aleaderoftheRussianOrthodoxChurchpatriarchatetookValentina

aside.“Sooneverythingwillbefineforyou,”hetoldher.“Soonthecathedralwillbegintobebuilt.”“Andwho,canIask,isgoingtodoit?”sheinquired.“YuriMikhailovichistakingthisjobuponhimself.Heisserious.Luzhkovis

notYeltsin.Ifhesayshewilldoit,hewill.”On February 23, 1994, theMoscow architecture council approved a new,

enlarged plan to reconstruct the cathedral. It was far more ambitious thananythingMokrousovhadeverdreamedof—afull-fledgedreconstruction,notjustamodelorasmallchapel.Mokrousov’s grassroots campaignwas overtaken by a farmore powerful

force:Luzhkov.Mokrousovandhiswifewereprivately somewhatbitter thattheirownhardwork,painstakingyearsofstandingonstreetcornersseekingsignaturesanddonations,hadbeenabruptlytossedaside.Theyresignedfromthe Obschina, which was soon abolished by a formal notification from thepatriarchate,andthelandforthecathedralwastakenbackbythecity.Luzhkovtookover the financial sideof rebuilding thecathedral too. InSeptember,anofficialMoscowcityfundforreconstructionofthecathedralwasannounced,andonJanuary7,1995, thecornerstonewaslaid.Luzhkovsaidhewantedtocomplete the new cathedral’s shell in time for the commemoration ofMoscow’s850thanniversary in1997.Yeltsingranteda federal taxbreak forcontributionstotheeffort.Whatoccurred in thenextyearwasnothingshortof remarkableforacity

where, in Soviet times, ambitious building projects had often languished,unfinished, for many years, a city struggling with unmet needs in housing,healthcare, schooling, and roads.Luzhkovsent intobattleanarmyof2,500constructionworkerswho labored around the clock, pouring amountain ofconcrete to meet blueprints that were fresh off the drawing boards. Theworkerswereforcedtopauseseveraltimes,waitingforthedesignerstofinishtheplans.Thepouredconcretewaswarmedwithelectricheaters inwinter to

keepitfromfreezing.Luzhkovagreedtoamethodofconstructionthatwoulduse 10 million bricks instead of 40 million. Twice or three times a week,Luzhkovarrivedonthesite,promisingtheworkersanendlesssupplyofkvas,thesweetRussiansoftdrinkmadefromfermentedbread.A forest of construction cranes rose by the Moscow River, as well as a

chorusofdoubts.Woulditnotbebetter,criticsasked,torebuildonehundredsmallerchurches,whichwerealsodestroyedby theCommunists,or tennewhospitals?Wasn’t the symbolism of the cathedral a throwback to the age ofRussianimperialism?Whysuchabrazen,mammothstructureatatimeofsomany other troubles and desperate needs? Luzhkov did not heed thesecomplaints.Hebuilt.On the outside, the cathedral, 335 feet high, resembled the original, but

inside, in addition to the chapels, it was a modern headquarters for thepatriarchate, with garages, elevators, conference rooms, video systems,modern ventilation, and cafes. In place of the swimming pool built over theoriginalbuildingsite,agiganticgray,granitecoveredbasestretchedforacityblock,housingtheChurchoftheTransfigurationandamuseumofthehistoryofthecathedral.Thesouthernsideheldamassivetwelve-hundred-seatHallofChurch Councils, five refectories, and a kitchen capable of feeding fifteenhundredpeople.8Luzhkovdevotedattentiontoeverydetail.Byoneaccount,itwascalculated

that less gold could be used to gild the cathedral’s domes—just twenty kilosinsteadoftheoriginal312.6kilos—bysprayingafinelayerofgoldenlacquerthat includedonlymicroscopic particles of gold between a layer of titaniumnitrate,asabase,andagraphiteoverlay.Luzhkov,wanting tocheckwhetherthis would look real, supposedly went to the patriarch of Moscow and allRussia,AlexyII,withtwosamples,onethecheaperversionandonerealgoldleaf. Without disclosing which sample was real, he asked the patriarch tochoose which one looked better. The patriarch choose the cheaper variant,whichwasused.9Afteryearsof lassitudeandshortages,anddespitecriticismandeconomic

chaos all around him, Luzhkov’s reconstruction of the cathedral made apowerful, symbolic statement at the dawn of the new Russia. The structureitselfwasanimposingcastlebytheMoscowRiver,withafairy-talelookthatshimmeredfromadistance.Asareligiousshrineandarchitecturalmonument,thecathedralwasunquestionablyapotentsymbol.ButIthinkithadabroadermessageaswell.Thereconstructionwasanantidotetoalltheuncertaintyand

doubtofthosefirsttumultuousyearsofchange.Luzhkov’smessagewas,Itcanbedone.But how? Six years after it was begun, the project, originally estimated

between$150millionand$300million,hadcost$700million.LuzhkovandYeltsinofferedonlyvagueexplanationsabouthowthecathedralwasfinanced,but the riddlewaspartly answeredon January6, 1996,whena largemarbleplaque was erected outside the lower cathedral. In gold leaf, the plaquedeclared: “Thesewere the first to contribute selflessly,” and then listedwell-knownandlesser-knownbastionsoffinanceandindustry.AmongthefirstonthelistwasAlexanderSmolensky’sStolichnyBankofSavings,whichdonatedfifty-three kilos of gold for the cupolas of the cathedral. The natural gasmonopoly Gazprom donated 10 billion rubles for marble to clad the walls.Inkombank gave $1.5 million and two dozen icons. The Moscow InterbankCurrency Exchange donated $1 million. In the next four years, the lists ofdonors grew, and new tabletswere erected.The donors included the biggestMoscow utilities and city-affiliated businesses, such as the telephone andelectric companies, prominent banks, restaurants, retailers, food traders, oilexporters, a famous chocolate company, and dozens of other factories andfirms,powerhousesofthenewcapitalismandthenewMoscow.Thedonorswerenotentirelyaltruistic.Thetruthwasthattheircontributions

were as much a tribute to Luzhkov as to the cathedral. Luzhkov created apoliticalmachineinwhichpowerandproperty—hisownformidableruleandhis control over Moscow’s enormous resources—were leveraged intorebuildingthecity.InLuzhkov’srealm,thelawsofthemarketandthelawofthe landwerenotnearly as strong as thehandof themayor.WhenLuzhkovmadedemands,businessesleapedtoattention;withoutLuzhkov’ssupport,theycouldnot survive.The financiers, traders, industrialists, and restaurateurs allpaidup, andwere rewarded in return.As soonasSmolenskycontributed thegold ingots, the patriarchate deposited its accounts in Stolichny Bank ofSavings.MikhailOgorodnikov,spokesmanforthecity’scathedralrebuildingfund, explained: “Luzhkovwasable tounderstandandcombine thiswish foreconomicfreedomwitheconomicdiktat.Eightypercentofthemoneyforthecathedralwasdonatedbybanksandcorporations.Howis itpossible tomakethemworkforthecity?Luzhkovgotthemtounderstand:ifyoudonothingforthecity,youwillnotfinditcomfortablehere,youwillnotsurvivewithoutthesupportofthecity.”UnlikeotherswhotriedtocoaxRussia’snewrichtogivemoney, Luzhkov was more direct. Ogorodnikov described Luzhkov’s

approach thisway:“You live in thiscity.Youaremakingmoney in thiscity.Paythecityitsdue.Otherwise,youwillnotbehere.”10What Luzhkov reconstructed was not just the cathedral that Stalin

demolished, not just a gleaming symbol of post-Soviet Russian renaissance.ThecathedralwasalsoaconcretedemonstrationofanewmodelofcapitalismthatLuzhkovmuscledontotheRussianstageinthe1990s,amodelthatmixedpublic and private interests, blended power and money, spawned corruptionand massive new public works, all with one central figure, Luzhkov, at thehelm.The Luzhkov model—Moscow Inc.—was not what the reformers had in

mind. Anatoly Chubais and Yegor Gaidar were dreaming of building aWestern-stylemodelofcapitalism,withunderlyingprinciplesofcompetitionand openness and a separation of business and the state, and theywanted toleaveit tothemarket tochoosethewinnersandlosers.Bycontrast,Luzhkovintended to choose the winners and losers himself. Instead of a Westernapproach,hismodelwasmoreintheinscrutabletraditionsoftheEast,centeredonthewhimsofapotentateratherthanprofitandloss.Luzhkov’smodelwascalled, by some, “state capitalism” because the city itself became a majorparticipant inbusiness.Luzhkovdidnotobject to the label“statecapitalism.”Criticsalsocalledit“cronycapitalism”becauseitbenefitedLuzhkov’spals.InMoscow,Luzhkovhadtheinstinctsofapopulist,theorganizingskillsof

amachinepolitician,and theambitionsofabuilder.HeborrowedfrombothChicago’sMayorRichardDaleyandNewYork’smasterbuilderRobertMoses.He did not see building—and grand architecture—as an end in itself, but assomething that a politician does for people.Hewas not a towering designerwho looked down from great monuments, but a street-level pol whounderstoodthepoweroflookingupatthem.Luzhkov’sempirehadaseamyside—corruptionandhisownheavy-handed

style—but he was immensely popular, especially in the years of freneticbuilding in the mid-1990s. Muscovites twice elected him mayor by largemargins, 89.6 percent in 1996 and 70 percent in 1999. He had no seriouscompetition in 1996, but in 1999 was challenged by a well-known, liberalformerprimeminister,SergeiKiriyenko.Nonetheless,Kiriyenko’scampaignflopped. Muscovites seemed to approve an implicit trade-off Luzhkovrepresented: he would take from the new rich and give to the city. GalinaStarovoitova, a progressivemember of parliament from St. Petersburgwhowasmurderedin1998, toldmeoncethatLuzhkovwonpopularapprobation,

ratherthanscorn,forsqueezingmoneyoutofbanksandbusinesses.“Alotofordinarypeople think thesenew rich, thesenewRussians, should share theirwealth with the city,” she said, “and this is a way to cut, a little bit, theirsuperprofits.”TheriseofLuzhkov’sempireinMoscowwasnotinconsequentialforallof

Russia.Itappearedintheearly,inchoateyearsasthecountrywasgropingoutofthedarknessofSovietsocialism,whenitwasnotclearhowtobuildmarketsinacountrythathadnoexperiencewithcapitalismsinceearlyinthecentury.Soonitbecameevidentthatnotjustonebutseveralpathscouldbetakenontheroad toamarketeconomy.Onewas theChubais-Gaidar liberalism, inwhichmarket forces ruled. A second was rapacious, winner-take-all, oligarchiccapitalism,whichwill bemore fully detailed in the next chapters. The thirdtypewasLuzhkov’sboss-ruledcitymachine.ThesedifferingapproachesdidnotmeanthatLuzhkovandChubaispolitely

debatedeachotherinfrontofachalkboardinaneconomicsclassroom.Itwasreal-timetrialanderror,azigzagofthrustandretreat.Luzhkov,whorosetopowersomewhatbychancewithPopov’sdeparture,wasnotthetypetowastetime with theory. He was a doer, shaped by the old Soviet-era managerialexperiencebutalsoanimatedwithacontemporaryalacrity,seizingonhisgoodfortune to lead the most prosperous metropolis in the country. In the end,Luzhkov put into practice an enormous, functioning example of what hethoughtthenewRussiashouldbe.Larisa Piyasheva had her own vision of capitalist Moscow. An ultraliberaleconomist,PiyashevahadbeenrecruitedbyPopovinNovember1991tocarryout rapid privatization of business and industry. Previously, the city hadpracticallygivenawayapartments to their current inhabitants.Thenext stagewas to privatize small businesses. Piyasheva wanted to give all the stores,cafeterias, restaurants, beauty salons, auto repair garages, and shoe repairshops ofMoscow to theworkers, and all at once. It was called “avalanche”privatization,asimple,bold,andfar-reachingidea.Piyashevasawitasentirelyfree market, and also very populist. “An enterprise would be given to theemployeesforfree,”Piyashevatoldmeofherplan.“Theybecametheowners.My idea was that property should be given away. It used to be state-ownedproperty; now it would become private property.” Like the other liberals,Piyasheva figured that eventually the good owners and the bad would beweededoutbymarketforces,butshedidnotwanttowastetimesortingitoutat

thebeginning.Inher“avalanche”idea,aweekwasallthatwouldbeneededtoapprovetheprivatizationofanyenterprise.Presto:thehairdresserswouldownthe salon, themechanicswould own the garage. “Some become rich, otherslose,”shesaid.“Butthisstageofcompetitionisnotunderstatecontrol.”11Piyasheva’s ideaneverhadachance,however.OnereasonwasthatPopov,

whohadbroughtherintothecitygovernment,wasgrowingweakpolitically,constantly quarreling with the Mossovet, the city council. Piyasheva’sprivatizationplanwasannouncedinNovember1991,butbarelyamonthlater,onDecember19,Popovmadehisfirstattempttoresign,sayinghefeltreformswerebeing frustratedby the city council.12Hewas out of office sixmonthslater.OneofthefirstthingsLuzhkovdidonbecomingPopov’ssuccessorwasto

fire Piyasheva and bury her liberal ideas. “He just got rid of the wholedepartment,”sherecalled,“andhetookeverythingintohishands.”Piyashevasaw—accurately—thesideofLuzhkov’scharacterandmentalitythatwantedtobe a khozyain, the evocative Russian term for the leader of a given socialdomain,ahome,avillage,anenterprise,oracountry.Luzhkovwasakhozyainwho wanted to extract a price from the city’s businesses. Through leases,contracts,andrentobligations,everyplayerintheMoscoweconomywouldbecaptivetoLuzhkov.“Theirconceptwasdirectlyoppositetomine,”Piyashevatoldme. “When Iwas talking about fast privatization, Luzhkovwould say itwas impossible togiveproperty topeople just like that.Don’tgiveanythingforfree!Everythingshouldbemanaged.Luzhkovis theowner.Hecanclosedown any restaurant and any hotel—he can change an owner. He has theauthority.Heisthekhozyain.Andasthekhozyain,hemanageshishousehold.Ifsomethingdissatisfieshim,hechangesit.Andhekeepsfullorder.Itisafeudalwayoforganizingthings.”After disposing ofPiyasheva’s radical ideas,Luzhkov’s nextmovewas to

takeonChubaisandblockmassprivatizationinthecapital.Inthesummerof1993, Chubais, who was then trying to get his legislation through therecalcitrant Supreme Soviet, came to Luzhkov’s office. They drank tea. Inappearance, they were contrasting figures: Chubais, tall, with his ganglypostureandyouthfulself-assuredness;Luzhkov,short,pugnacious,withabaldcannonballofaheadandrugby-players’build.Bothmenhad,once,acceptedtheSovietsystemandthenfoundtheirownpathoutofit;bothwereatthetimesupporters of Yeltsin, who was facing an increasingly tense revolt inparliament.Quietly,LuzhkovtoldChubaisthat,althoughtheyhadbeenalliesin

thepast,hecouldnotsupportmassprivatization.Therewasnomoneyin thecountry,sothefactorieswouldbesoldfornothing,hecomplained.Besides,Ithink that Luzhkov may have had an unstated reason for opposing voucherprivatization: hewanted to pick the newowners of property inMoscow, notleaveit to thewinnersofavoucherauction,beyondhiscontrol.“Let’sagreethatprivatizationcannotbeconducted thisway—propertycannotbesold thatcheaply,”LuzhkovappealedtoChubais.“Wewillgetaspeculatorinsteadofakhozyain.”Chubaiswasnotimpressed.Hewantedtobreakthegripofthenomenklatura

on property, and Luzhkov symbolized that grip. They agreed on nothing,Luzhkovrecalled.13Luzhkov supportedYeltsin during the events ofOctober 3–4, 1993,when

Yeltsinviolentlyfacedoffagainsttherebelliousparliament,shellingtheWhiteHouse where his nationalist and conservative critics were holed up,accompaniedwitharmedhoodlums.Theconfrontationleft145dead.LuzhkovsatinonYeltsin’scrisismeetingsandcutoffwater,telephones,andelectricitytothebesiegedWhiteHouseduringtheconfrontation.JustasYeltsinusedtheeventstowriteanewconstitutiongivinghimbroadpowers,Luzhkovtoousedthecrisistoimposeanewpoliticalstructureonthecity,whichwasconfirmedbyvotersintheDecemberelections.Insteadoftheunwieldy498-membercitycouncil, Luzhkov, with Yeltsin’s backing, created a new thirty-five-membercityDuma,or legislature,whichprovedalmost totallycompliant in theyearsahead.After theOctoberevents,Luzhkovagainappealed toChubais tostopmass

privatization.Chubaisrefused.Luzhkovdeclaredwar.“Fromnowon,youaremy ideological enemyand I amgoing to fightyouand themethodsyouareinstilling in the countrywith all possiblemeans,” he said.14 Privatization oflargeenterprisesinMoscowthenbegantoslow,andLuzhkovbentthecitytohisownwill.Hesimplyrefusedtofollowthenationalprivatizationprogram.HewenttoYeltsinonNovember24,1993,andarguedthatChubaiswassellingoffthecountry“forasong.”15Luzhkov was no stranger to the failures of the Soviet system and saw

himself as an advocate of the market. But Luzhkov’s understanding of themarket,andofprivateproperty,wasthatithadtobemanagedbyakhozyain;property was earned by hard work, not received for a token price.When itcame to putting property into private hands, Luzhkov wanted to know thecapabilities of his new owner first, while Chubais wanted to give away the

propertyfirstandletthemarketsortouttheeffectiveownerlateron.ThiswenttotheheartoftheirvastlydifferentmodelsofcapitalismforRussia.Luzhkovsaidthat“amanworkswithinitiativenotbecausehehaspropertybutexactlybecausehedoesnothaveproperty,yethastherighttoearnitwithproductivelabor.” Luzhkov scorned the new owners that Chubais created as “parasiticcapital”—people who didn’t know the first thing about factories andmanufacturing but put their money in Swiss bank accounts or into “foreignvillas,yachts,cars,andotherpleasures.”InLuzhkov’sworld,thesewerenevergoingtobegoodowners,theywouldnevermeethisdefinitionofakhozyain.“Doyouthinksuchpeople—whosewealthfellontheirheads—couldturnintoeffective owners, organizers of industrial production? Of course not,”Luzhkov said. “They felt theywere ‘caliphs for an hour ’ andwere trying toexploit this hour to themaximum, pressing everything possible out of theirnewproperty.”16Luzhkov still believed in some aspects of the old system, including state

subsidies, and he was not allergic to state ownership of industry, whereasChubais sought to raze the command economy to the ground. Years later,LuzhkovcontinuedtopumpsubsidiesintotheailingZiltruckfactorytokeepitalive, but over time this approach did not work. Luzhkov abhorred thesuddennessandseeminghasteofshocktherapy;itoffendedhissenseoforder.“Chubaisisaradical,”Luzhkovsaid.“Hethinksinextremes.Onemoment,heopensthelidofthecoffin,thenextheishammeringthelastnailintoit.Inhislifeeverythingislikethis—thelastblowonsomethingorsomeone.Iprefertomovebystepsandnotbyrevolutionary,radicalleapsandbounds.”17Mostimportantly,althoughhedidnottalkaboutitopenly,Luzhkovdidnot

wanttolosecontrolofthemoney.Ashebuilthisempire,everystorefrontandeveryfactorywasapotentialsourceofrevenue.Andifthepropertywastobedoledoutbythemurky,adhocdecisionsofcityhallbureaucrats,ratherthaninopenauctions,thepossibilitiesforcorruptionweregreater.The confrontation with Chubais gathered steam in the spring. At a press

conference on February 11, 1994, Luzhkov vowed not to allow the nationalprivatizationprogramtobecarriedoutinMoscowandblastedChubais,sayingthathehadprivatizedRussia“thewayadrunkardsellsoffallhispossessionsin the street in order to buy booze.” The “drunkard” phrase stung. ChubaisrepliedthatMoscowhadtheworstprivatizationrecordinRussia,withonly2percent of the large businesses privatized. Chubais fumed: “This isbureaucraticlawlessnessthatisaviolationoftherightsofthesimpleperson.”

Privatization, Chubais added, takes “from the hands of the high-levelbureaucrat theproperty thathe trulydoesnotwant to letgoof, thepropertythat was the foundation of his power for decades.” On March 23, 1994,Chubais announced that hewould order fifty factories inMoscow auctionedoff despite Luzhkov’s objections.18 Then on April 1, Luzhkov struck back,suspending the registrationofenterprisesas joint stockcompanies, acriticalprelude to privatization.Chubais accused themayor of breaking the law.Heappealed to thegeneralprosecutor,demanding thatLuzhkovbechargedwithcriminalnegligence.Luzhkovrefusedtobudge.PrimeMinisterChernomyrdinorderedLuzhkov to fall in linewith thenationalprogram,andLuzhkovstillrefused.ThequarrelwassettledonJune10,1994,whenYeltsinannouncedthatLuzhkovhadwon.Yeltsinsaidatanewsconferencethateffortstoreconcilethetwohadfailed,soheorderedthegovernment“toleaveMoscowalone.”19ThemovewaswidelyseenasexpressingYeltsin’sgratitudeforLuzhkov’ssupportduringthebattlewithparliamentthepreviousOctober.AbitterChubaiswashedhishandsof thecapital.“InMoscowweseesomanybreachesof the law,somanybreachesoftheconstitution,somuchcorruptionthatIcanhavenothingtodowithit,”hesaid.20ThedecisionwasacriticalvictoryforLuzhkovonthepathtowardbuilding

hisownmunicipalempire.Takingcontrolofthecity’sproperty—storefronts,officebuildings,factories,parkinglots,hotels,theaters,schools,andmore—gaveLuzhkovanimportantsourceofrevenuesandpower.Inthedaysofhyperinflation,cashlost itsvaluerapidly,soLuzhkovfound

other currencywithwhich tomakedeals.He leveraged, bartered, and tradedhisrealestateforthethingsheneededforthecity.Theseinformaltrade-offswerenotnecessarilywrongorillegal.TheideahadbeentestedinLuzhkov’searly dealings with Gusinsky, in which the city gave away buildings inexchangeforrenovationandareturn“gift”ofhalf therealestate.Thetrade-off gambit became standard procedure. For example, in the mid-1990s,Inkombank had grown to be Russia’s third largest bank, and its largestcommercial bank. The president,VladimirVinogradov,wanted to set up hiscorporate headquarters in a rundown prerevolutionary building near theKremlin.The city simply gave the building to Inkombank in exchange for apromisetorestoreitandalong-termlease.Twoyearslater,whenIvisited,theheadquarters building gleamed with an elegant, turn-ofthe-century look.Luzhkov came to the ribbon cutting. A small fifteenth-century church in thesquare,justinfrontofthebank,wasalsorestored,atacostofseveralmillion

dollars,byInkombank.Vinogradov,whohadbeenamongtheearlyleadersofthecooperativemovement,becameaLuzhkovbackeranddonatedtwenty-fourrestored icons from the seventeenth and eighteenth centuries to the cathedralproject. Luzhkov bestowed Vinogradov with a city award. VinogradovcontributedtoLuzhkov’spetprojecttobuildapartmentsforRussianslivinginSevastopol. The bank won city accounts and financed city projects, such asdemolishingtheunsightlyfive-storyKhrushchev-eraapartmentblocks.21This cozy relationship was reenacted over and over, especially with

VladimirGusinsky,whobecamethemostprominentofthebankersalliedwithLuzhkov.LuzhkovdescribedGusinskyasabusiness“partner”inthisperiod.22Gusinskylocatedhisheadquartersinthemayor ’shigh-rise;cityworkerswerepaid from Gusinsky’s Most Bank and withdrew cash from automatic tellermachines placed in the lobby of a building housing city offices. In 1994Gusinsky’s bank held a significant portion of the city’s revenues, includingdeposits of the departments of municipal housing, licensing, education,architecture, finance, international relations, traffic police, and city militia,amongothers.23Luzhkov’scitygovernmentleasedoutpropertyforanominalsum,butthen

thecitybossesmadeunwrittendemandsnotinthelease:toplanttrees,rebuilda hospital, pave a highway, set up a kindergarten.The side dealsweremoreimportant than cash. In 1994 Luzhkovwas anxious to clean up an old toxicdump,whichhecalledanulceronthecity.Wasteshadbeenaccumulatingtherefor decades and the dump was described by one specialist as an ocean ofcontamination.Luzhkovturnedtoaprivatizeddumptruckcompany,MoscowMechanizedConstructionNumber 5,which agreed to take on the hazardoustask of removing the poisonous eyesore.The company removed 2.6millioncubicyardsofsoilandreplaceditwithcleansandandearth,workingaroundthe clock for two years. But the company, which primarily worked on cityhousing construction sites, also needed Luzhkov’s help. It had bought a $10millionfleetofnewdumptrucksfromVolvobutstillowed$3million,whichit could not pay. Luzhkov came to the rescue, arranging a loan at 4 percentinterest fromaMoscowbank,whenmarket interest rateswere farhigher, sothe firm could settle the debt. When the toxic waste dump was cleaned up,Luzhkov held a ceremony to mark the accomplishment and handed someworkerskeystonewZhigulicarsandnewapartmentsasprizes.24Mikhail Moskvin-Tarkhanov, a member of the city Duma who had been

among theMoscowreformdemocrats in theearly1990sand laterbecamea

Luzhkovloyalist,saidthemayoressentiallyinventedhisownsubstitutefortheSoviet command economy. Moskvin-Tarkhanov described it as “softadministration and strong economic regulation.” He explained: “That is, wehave a soft administrative systemwhenwe can first saywhat wewant, thenpropose, then force, and finally punish.”25 Pavel Bunich, an adviser toLuzhkovwho hadworkedwith him in the Soviet years on the idea of self-financingforfactories,madenosecretofthefactthatLuzhkovhadfiguredouthowtosqueezeMoscow’snewbusinessmen.“Luzhkovknowshowto‘sweat’sponsors,buthealsoknowshowtothankthem.Allbankersandentrepreneursknow:money in themorning, and in the evening they can get privileges onrent, city orders, credits, or loans.”26 Bunich added: “Luzhkov has certainlevers that make it possible for him to thank sponsors. If you are abusinessman,itwouldcertainlybebettertohaveanofficeinthecenterneartheKremlin.Luzhkovcandoit foryou.Luzhkovcanestablishrentfromzero—skywards.”27AlexeiKara-Murza,aliberalphilosopherandpoliticianinMoscow,toldme

once,“TheproblemdoesnotlieinthefactthatLuzhkovissounique,butthatMoscow is so unique in Russia.” The city floated on rivers of capital thatsimplydidnotexistanywhereelseinRussia.In1997,fiveyearsafterLuzhkovbecame mayor, the city reaped 25 to 30 percent of the taxes of the wholecountry but had only 6 percent of the population. Of Russia’s twenty-fivehundredbanks,seventeenhundredofthemwereinMoscow;ofthetoptwenty-five banks, all but one were in the capital, and they held 80 percent of thedeposits. Eighty percent of nationwide television advertising originated inMoscow. Muscovites were twice as likely as city dwellers on the whole inRussia to travel abroad, andmore than twice as likely toowna telephone, apersonalcomputer,amicrowave,oracreditcard.MoscowwasthecitadelofRussian capital, and the rush of riches became so strong that even St.Petersburg, Russia’s second-largest city, seemed a sleepy backwater bycomparison.28GaidarlatercalledattentiontojustoneofthemanywaysLuzhkovexploited

Moscow’suniqueposition.Russianlawrequiredcompaniestopaytaxeswheretheywereofficiallyregistered.Thefar-flungnationalmonopolynetworksallregistered in Moscow. Rostelecom was in charge of telephones over all ofRussia, but it paid taxes toMoscow. Unified Energy Systems, the electricitymonopoly,generatedpoweranddistributeditoverallRussia,butitpaidtaxesto Moscow. The same was true of Gazprom, the mammoth natural gas

monopoly,andTransneft,theoilpipelinecompany,bothofwhichspannednotonlyRussiabutpartsofEurope.Theytoopaid taxes inMoscow.29“Moscowhappens to sit next to a fountain spouting gold,”Gaidar declared. It’s a citywith“moneytoburn.”30WhenIaskedLuzhkovaboutthis,hetookissuewiththeclaimandinsisted

thatthebigcompaniesbroughtnomorethan12–15percentofthecitybudget.LuzhkovsaidtheMoscowmiraclewasnottheresultofitsstatusasthecapital,but theway hemanaged it. Hewas a pragmatic khozyain with the riches heinherited.Hepaid thedoctorsand teacherson time,andpensioners rodecitytransportforfree.“Wesaythatwearegoingtobuild3millionsquaremetersof housing, and we do,” Luzhkov insisted. “We say that 5 million squaremeters of roads will be repaired, and we do the repairing.” And the bestevidence, Luzhkov recalled, was that business flooded the capital. If he hadbeenabadkhozyain,businesswouldhavefled.31

Wearing his trademark leather cap, Luzhkov jaunted about the city onSaturdays,touringconstructionsites,trailingjournalists,aides,andpetitioners,demanding explanations, poking into blueprints, and dressing down hislieutenants.Luzhkov’svisitsneverprovokedsoaringrhetoric,justastaccatoofshort, sparse, blunt sentences, not unlike the bricks andmortar around him.Luzhkovwasnot aphilosopherking;he spoke the languageof construction,engineering,andchemistry.Hethoughtintermsofgoalsset,approached,andachieved, and, if not achieved, he angrily demanded to know why. Heresembled,more thananyRussianpoliticianof theage, thevisionaryRobertMoses, who built the great complex of parks, beaches, apartment houses,bridges,parkways,androadsofmodernNewYorkCity.LikeMosesstrollingthroughCentralParkorConeyIsland,Luzhkovroamedhisdomain,dreamingof publicworks large and small.Hemeddled in everything from the largestcoveredstadiuminEuropetothetinydetailsofafast-foodmenu.Intheseyears,Moscowwasacityof8.6millionpeople,althoughbysome

estimatestherewereanothermillionormoreunofficialresidentsorvisitorsatanymoment.Thecity,spreadoutover1,091squarekilometers,sufferedfromaging and decrepit infrastructure. The most dramatic examples came verysuddenly on a coldwinter daywhen themassive underground heating pipesmelted the frozen ground above, and grotesque chasms opened up—swallowingcarsandpeople.Everywhere, the citywashurting fromyearsof

neglect: roadswith enormous potholes, chipped and slippery steps, invisibletraffic lights, trees choking from pollution, streets groaning with autogridlock, and always those smelly, dark, forbidding entrances to residentialapartmentblocks.ButinLuzhkov’sday,thecitybecamecleaner,andmorefunctional,thanat

anytimeinmemory.Luzhkovopenednewsubwaystations,pavedruttedroads,created outdoor markets, built playgrounds, installed public fountains, and,mostimportantly,alleviatedthepent-updemandforhousing.Hebuiltbetween3.0and3.4millionsquaremetersofnewapartmentspaceeachyear.Hesoldapartmentstotherichandusedtheproceedstopayforfreshhousingfortensofthousandsoffamilieswhohadbeenonmunicipalwaitinglistsforyears.Tohiscredit,whenevertherewasacityemergency,abridgecollapsed,orsomeotherdisastererupted,Luzhkovshowedupandtookcharge.But at some pointLuzhkov hungered formore.VladimirYevtushenkov, a

one-timeplasticsengineerwhowasaclosefriendofLuzhkovandbecameoneofRussia’srichestmen,toldmethatLuzhkovgrewrestlessandhankeredforsomethingmorecreativethanbuildingapartmentblocksandpavingroads.“Hewanted to try thingsofa largerscale,”Yevtushenkovsaid.32Luzhkov’swife,YelenaBaturina,recalledthathesawconstructionasanideology,abeaconthatcould inspire people, keep them from losing faith. Luzhkov “understood themostimportantthing,”shesaid,“thatatsuchdestructivetimes,itwasimportantto findan idea thatwouldunitepeople. InMoscow,buildingbecamean ideathat united Muscovites.”33 On Luzhkov’s birthday one year, his wife waswonderingwhattogivehim.Shespottedanexcavatorbytheroadside.ShehadtheshovelfilledwithrosesanddeliveredittoLuzhkov.TheperfectpresentforTheBuilder.34WhenIinterviewedLuzhkov,afteralongwait,Iwantedtoknow:whatwas

hisgreatvisionorinspirationasabuilder?IhadlongassumedthatLuzhkov’sambitionwasdefinedandexpressedbyconstruction—thenewcitysquares,theparks and highways, the towering new apartment buildings that were histrademark.ButhisanswerwaslessvisionarythanIhadexpected.Luzhkovtoldme his real “ideology” was not so much construction for its own sake butmakingthecitymorelivable.Thiswasastreet-level,populistperspective,notquite the soaringmotive that I had once assumed. “In 1995 I couldn’t speakabout itbecause life inMoscowwassorevolting,”hesaid.“MoscowwassodirtythatifIhadspokenaboutcomfort,Iwouldhavebeentold,youaremad,youarecrazy.NowIsayitfearlesslyandopenlyandfrequently:wemustmake

our city more comfortable.” Luzhkov’s definition of comfort was broad,embracing symbols of “spirituality,” such as the cathedral, as well as moremundaneaffairsliketheRingRoad.35The Ring Road was a Luzhkov project that virtually reshaped the city. A

beltwayencirclingMoscow,the109-kilometerroadwasknowninSoviettimesasadangerous, rock-strewn,potholedmess.Over fiveyears, at acostof18billionrubles,Luzhkovrebuilttheentirerouteintoaeight-lanesuperhighway,complete with on-ramps, rest stops, pedestrian overpasses, gas stations, andradarspeedtraps.LuzhkovalsodreamedofturningMoscowintoayear-roundsports capital. Once a week, Luzhkov played soccer with his staff at theLuzhnikistadiumalongtheMoscowRiver,andhealsoplayedtennistherewithhiswife. Soon, tall construction cranes hoisted into place a 10,000-ton steelring supporting a 140-foot-high, 12-acre sliding roof of glass-reinforcedplastic, making it Europe’s largest domed stadium. The $230 millionrenovationincludedreplacementoftheseats.Luzhkov’swife,YelenaBaturina,wonacontracttoreplaceoldwoodenbenchesinthe85,000-seatstadiumwithnewplasticseatsthatmetEuropeanstandardsformatchestobeheldthere.36One of the great pieces of unfinished business of the Soviet era was

Poklonnaya Gora, or the Bowing Hill, a historic site that derived its namefrom an old tradition in which travelers coming to Moscow bowed to thecapital.Itwasalsosaidthatbytraditionsoldiersdepartedforwarfromthehill,andtoittheyreturnedvictorious.Fromhere,FieldMarshallMikhailKutuzovyieldedMoscowtoNapoleonin1812,vowingnottoloseRussia.AfterWorldWarII,asporadiceffortwasmadetobuildawarmemorialonthehill,andinthe1980sthechosendesignwasacentralmonumentofredgranite,castintheshapeofamassivecurlingbanner toppedwithastar.Duringperestroika, thedesignbecameboggeddownindebateandprotests,andwhenLuzhkovbecamemayor, it was unfinished, although a spacious war museum behind themonumentwaspartlycomplete.Luzhkov retooled theprojectand, inacrashconstructioneffort, finished it in1995, in time for celebrationof the fiftiethanniversary of the victory over Germany. Luzhkov constructed a RussianOrthodoxchapel,asynagogue,andamosqueonthegroundsof thepark.Hewaswidelyknownforencouragingreligioustoleranceandrevival,exceptforChechens,whosufferedonthestreetsofhiscity.Nearthepark,LuzhkovbeganconstructionofagiantinternationalbusinessandtradecenterwithapedestrianbridgespanningtheMoscowRiver.When Yeltsin was worried in 1993 about demonstrations outside the

Kremlinwalls inManezhSquare, Luzhkov threwup fences around the spot,which kept all the demonstrators away. The fences were ostensibly for aconstruction project. But only later did Luzhkov actually come up with theproject—to build an underground shopping mall. The mall would be threestoriesdeep,with23,408squaremetersofretailspace.Typically,Luzhkovsetstiff deadlines anddemanded round-the-clockconstructionbut thendisruptedthe plans with his own personal whims. According to one engineer, threemonthsbefore theopening,Luzhkovordereddrywallceilings tobereplacedwith brass strips.Mistakes by the architect resulted in part of themall beingunrentable. In the early years, themall was a commercial disaster: the rentsweresohighthatitwasmostlyvacant.TheManezhturnedintoa$110millionwhiteelephant.37Luzhkov preferred, and imposed, a kitschy, baroque aesthetic on his

Moscowmonuments andbuildings.Sometimes itwas nomore than an extrafrill,suchasfunctionlessturretsatopamodernglassfacadeofficebuildingtospiceitup.38Othertimes,itwasmoreprofound,especiallywhentheaestheticdecisionwas left toLuzhkov’s friendandprolificsculptorZurabTsereteli,aGeorgian-born artistwhose impact on the cityscape rivaled that ofLuzhkov.The gregarious Tsereteli had a penchant for Sovietmonumentalism, but hisstylewassentimentalandsugary.Tsereteli,presidentoftheRussianAcademyofArt,receivedalargeportionofmunicipalartcommissionsintheLuzhkovyears, andhis flamboyantwork left an indelible impression.For theManezhshopping mall, Tsereteli designed a simulated voyage through Russiancenturies, set inmarble, chrome, and brass.Outside, he arranged a fountaindecoratedwith bronzes of animals fromRussian fairy tales.At theMoscowZoo,Tseretelidesignedacavelikefantasyentrancewithawaterfallandclock.Instead of the Soviet red granite banner on Poklonnaya Gora, Tseretelidesigned a 141.8-meter-high obelisk that supported a 24-ton likeness of theGreekgoddessNika,accompaniedbytwotrumpetingangels.Criticscalledita“grasshopperonastick.”Myownimpressionisthatthesculpturewaspeculiar,but the park itself, with a broad promenade, forest, and a small hill forsledding,wasacitydwellers’delight,anexampleofhowLuzhkovunderstoodthat a population packed into tiny apartments needed functional, pleasantoutdoorspaces. In theafternoonandevening, fromearlyspring through lateautumn,theparkwasoftenfull,despitetheartisticoddities.The mayor patiently tolerated criticism of Tsereteli’s style. Writer

Alexander Solzhenitsyn fumed that “Moscow is being recklessly disfigured”

and dismissedTsereteli’sworks as “massive and third-ratememorials.”Onegrim,bulkyTseretelisculptureaboutgenocide,titledTragedyofthePeoples—amonumentshowingalineofstarved,nakedfigurescollapsingintoaclusteroftombstones—wasoriginallyplacedattheopeningofPoklonnayaHill.Aftercomplaintsthatitwastoodepressing,mobilecranescameonedayandhauleditawaytoaspotbehindthemuseum.Tseretelisparkedhisgreatestoutcrywitha165-foot-high,$15millionstatue

ofPetertheGreaterectedontheMoscowRiver,notfarfromthecathedral,in1997.Theveryideaofthesculptureisabsurd:PetertheGreat,founderoftheRussiannavy,movedtheRussiancapitaltoSt.PetersburgtoescapeMoscow’sdarkintrigues.Butwhatreallytriggeredprotestswastheactualsculptureitself,whichdepictsanawkwardtsarastrideagalleon,holdingagoldenmap,aslittlemetallicflagsflutterinthebreeze.Criticssaidtheproportionswerewrong;thestatuelookedlikeabigtoysoldier.Despiteprotests,LuzhkovbackedTsereteli,and themonument remained.AvisitorcruisingdowntheMoscowRiver inatourboatwouldsee,inshortorder,GorkyParkandamodelofthediscardedSovietspaceshuttle;Tsereteli’sPetertheGreat;andtheCathedralofChristtheSavior. At times Moscow could seem like a very strange post-SovietDisneyland.But itwas also true thatTsereteli played a serious role in thepainstaking,

complex job of duplicating the original paintings inside the cathedral. Heoversaw 360 painters working intensely over an eight-month period—often200 of them at any one time were on the scaffolding—using computer-enhancedimagestovisualizedepthanddimensionfromoldphotographs.39Ofallthebuildings,parks,andmonuments,thecathedralbecameLuzhkov’s

mostfamouscontributiontothecityskyline.Ogorodnikovrecalledthestoriedhistory of the original structure—Tsar Alexander I blessed it, three moreRussianemperorstookforty-fouryearstoerectit.“AndLuzhkovdiditinfiveyears,” he said. “It was important for his career. He built a monument tohimself.”IremembermyownfirstimpressionsofMoscowinthewinterof1990:adarkandclosetedcityslumberingunderagrayfog.Thebarrenhigh-riseapartmentblocks were forbidding towers in the night, their entrances threatening andfoul-smelling. Grimy store windows featured faded cardboard cutouts ofnonexistent groceries. Moscow was described once as a “dysfunctional

dystopiathatsomehowkeptonbarelyfunctioning.”40ButtheMoscowIcameto know in the Luzhkov years fairly crackled with light and an energetic ifsuperficial brashness. It became a city of extremes, of generous and garishgestures,ofwealthgainedandspentobscenely,ofcasinos,discos,restaurants,electronics,gastronomes,mobilephones,billboards,boutiques,andanascentmiddleclass.Arealestateboomsentprimeofficerents to levelshigher thanthe most prestigious buildings in New York and Tokyo. More than 150casinos, nearly half of them unlicensed, opened in the mid-1990s. At theCherry Casino on the New Arbat, my Washington Post colleague LeeHockstaderfoundhundredsofRussiansthrongingtotheblackjackandroulettetablesonweekendnights,buttheslotmachineswerepracticallyignored.Themanagerwasquicktoexplain.“Youcan’tshowofftoaslotmachine,”hesaid.“Thesepeopledon’tjustcometogamble.Theycometoshowofftheirmoney,flashitaround.Andaslotmachinedoesn’tcareifyouhaveabigrollof$100billsinyourpocket.”41A rich youngMuscovite spent hundreds of thousands of dollars to plaster

billboards all over townwith a close-up image of his exquisitewife and aninscription, “I love you.” Forweeks, the billboardswere amystery.No onecouldfigureoutwhohadputthemuporwhy.Whenthestorywasfinallytold,many people deemed it a shining and chivalrous act—not ostentatious in theleast.42HockstaderrecalledthatLuzhkovandeightycloseassociatesdroppedbytheswankyMaxim’srestaurantafewweeksafteritopenedin1995.“Therewerespit-andpolishwaiters,Tiffanylamps,BelleEpoquepaintings,softmusic,terrific wine, sublime food—and a check that ran more than $20,000,” hereported.“Themayor ’spartypaidcash.Indollars,ofcourse.”The new luxury and excess in these boom years often lay awkwardly

juxtaposed against the reality that poverty was still widespread, even inLuzhkov’scity.Onlya thin layerof theelite and thenewly richcould reallyafford the sleek cocktail dresses, jewels, and furs displayed in Moscow’sboutiquewindows.Emotions were often rubbed raw in the contrasts between freshly minted

wealth and aching poverty.WhenYeltsinwas preparing for heart surgery inOctober 1996, I decided to try and find outwhat itwas like for an averageRussianwhoneededthesameheartoperation.InthecourtyardoftheBakulevCardiovascular Surgery Institute, I found Nina Dyomina, a lonely figuredabbing tears fromher eyeswith a soiled handkerchief. “Money,money foreverything,” she cried softly. “The only word you hear is ‘money!’” In a

hospitalward,herhusband,ViktorDyomin, then fifty-eightyearsold, lay inneedofheartsurgery.Althoughtheoperationwastheoreticallyfree,Dyomina,who had come from a provincial town, neededmoney to pay formedicinesand care, and even then she might have to wait years for her husband’soperation.Theformulawassimple:nomoney,nosurgery.Thosewhocouldpay for private care got it. Those without money, forced to depend on theaging Moscow city health care system, could wait forever. Despite all themoneylavishedonthecathedralandtheManezhshoppingmall,thenumberofhospital beds in Moscow did not grow in the 1990s, and two health caresystemsexisted:oneforthehavesandanotherforthehave-nots.Formanyofthemost unfortunate city dwellers, the homeless, Luzhkov offered the boot.Police rounded themupfromrailwaystationsandvegetablemarketsandputthem on trains, forcibly deporting them to villages or makeshift camps farbeyondthecitylimits.Norwasitpleasanttobedark-skinnedinLuzhkov’scity.Those with darker complexions who were thought to be from the NorthCaucasus—especially fromChechnya—wereoftenunceremoniously roundeduponcitystreetsaftertheChechenwarbegan.LuzhkovregardedMoscowasafortressandhefoughtforyearstokeepthe

gates closed to outsiders. Defying the courts, he enforced a Soviet-eraresidencepermit,knownasapropiska, foreveryone living in thecity. In theSovietera,peopleweretoldwheretoworkandlivebytheCommunistParty.The1993Russianconstitutionattempted tobury this legacy. Itpromised thatallRussians“shallhavetherighttofreedomofmovementandtochoosetheirplace of stay and their residence.” But the constitution was only paper; inpractice, Luzhkov was stronger. The old Soviet procedures were kept alive.Luzhkovfearedawaveofimmigrantsthatwouldovertaxthecityandcompetefor its resources. The propiska stood, although it was later called a fee forresidency. Obtaining one in the mid-1990s required a payment of about$7,000,farbeyondthemeansofmostpeoplelivingintheprovinces.43Despite the gaps between wealth and poverty in post-Soviet Moscow,

Luzhkovwasnotjustamayorfortherich.Hewasattentivetotheneedsofthepensioners, themiddle class, and thepoor andwaspopular among them.Hewas farmore public than any other politician of the time, plunging into thecoldMoscowRiverforaswim,fitasafiddle,orsingingasongonstageatalocaltheater.Luzhkov tried to ease tensions brought on by unemployment and the

humiliationmanyfeltastheoldveritiesoftheSovietsystemdisappeared.He

becamethechampionofagrimy,sweatyarmyof traderswhocarriedgoodsontheirbacks,intoRussiafromoverseasandbackandforthbetweenMoscowandtheprovinces.Knownasshuttletradersorchelnoki,aftertheRussianwordfortheshuttleinaweavingloom,whichrapidlycarriesthreadbackandforth,theynumberedamillionormore in themid-1990s,haulingsuitcases,duffelbags, boxes, and crates for endless hours on planes, buses, trains, and cars,oftenunderexhaustingandmiserableconditions—includingfrequentdemandsfrom militiamen for bribes—just to earn small profit margins. Luzhkovprovided a king-sized crossroads for shuttle traders at Moscow’s Luzhnikistadium. Outside the arena, under a statue of Lenin, spread over dozens ofacres, he established a bazaar that rivaledMiddle Eastern souks. Every day,thousands of people came to buy and sell, many arriving at dawn afterovernight bus rides from the provinces and departing again before sunset,carryingtheirgoodshomeforpeddlingonadistantstreetcorner.Theshuttletraderswereoftenteachers,nurses,andmilitaryofficers,moonlightingtoekeout a living. When the buses pulled out from Luzhniki, they left behindmountainsofemptyboxes,remnantsoftheshoesandvideomachinesthatthetradershadunpackedinordertosqueezemoreintoeachnookandcrannyofthe bus. Themarket itself was a chaotic sea of bargain hunters, gawking atleathercoatsandwolfingdownsausagesandpotatoes.Thegoods—importedcoats,rugs,watches,shoes,hairdyes,sweaters,tapes,andmore—werehoistedonricketymetalframesreachinghighintothetrees.“Thiskindofbusiness,”Luzhkovdeclared,“hasbecomeawayofsurvival formillionsofRussians.”Themarketsalsobecamehavensforcriminalgangs thatextractedprotectionmoneyfromthemerchants.AsMoscow’smayor,Luzhkovwasamicromanagerwhenitsuitedhim.On

holidays,heoftenwoulddictatethekindofsignsandlightsstorefrontscoulddisplay.HeoncesignedadecreebanishingcertainEnglishwordsandinsistingthat Russianwords be used instead, to be chosen from a list provided by—Luzhkov.Thus“minimarket”became“gastronom.”Thosewhodareddefythemayorweresubjecttofinesupto$700.44Luzhkov fussed over the smallest details. He personally selected the

caricatureofanineteenth-centuryRussiancossackofficerasthemascotforanewchainof fast-food restaurants in the city,RusskoyeBistro.He chose thesmartorangeuniforms,theborschtandtea,andscrutinizedeveryitemonthemenu, including such Russian traditional foods as hot pirozhok pies and thedrink kvas. “Everything we sell was tasted by the mayor himself,” boasted

VladimirPivovarov,thedeputygeneraldirector.TherestaurantswerepartoftheMoscowcitycommercialempire,oftendescribedas“statecapitalism,”inwhich the city was the direct owner of the business. By 1997Moscow Inc.includedfifteenhundredbusinesses,mostlyformerSovietenterprises,andthecitywasapartnerwithoutside investors inanother threehundred firms.Thebusinesses included hotels, construction outfits, bakeries, publishing houses,banking, aviation and communications firms, beauty salons, an oil refinery,and a pair of venerable, troubled auto factories. Luzhkovwas in position togive city businesses a huge advantage over competitors. In the case ofRusskoye Bistro, the city contributed choice spots for the restaurants, cheaputilities, and bank loans at low interest rates. The system captured perfectlyLuzhkov’svisionofthekhozyain,butithardlyfittheChubaisnotionofanewgenerationofprivateownerscompetinginthemarketplace.ArkadyMurashev,aformerMoscowpolicechiefwholedaliberaloppositioncampaignforcitycouncil, infuriated the powerful mayor once when he said Luzhkov hadbecome “the biggest entrepreneur in the city, having taken control ofeverything.”ButLuzhkov’sbrandof statecapitalism failedwhen it came toa farmore

ambitiouscommercialventure,rescuingthemoribundZiltruckfactory.OnceacrownjewelofSovietindustry,Zilbuiltthefour-tonbulletprooflimousinesenjoyed byCommunist Party leaders. The factory fell on hard times after itwas privatized. The first private owners used some questionable financialschemes tonearlywreck thecompany.Thecity tookacontrolling stake inabailout inlate1996.Afactorythatoncechurnedout200,000vehiclesayearwasmakingonly17,000 that year and sinking into loss anddebt. “ComradeZilites, I think that you steal!” Luzhkov thundered to the assembledmanagement of Zil one day, after the city assumed responsibility for thefalteringplant.Luzhkov,withtypicalbrusqueness,declaredlater:“Theysaytome,youarecrazy.Thefactoryhasalreadydied.Nothingofthesort.Givemehalfayear,andZilwillbestandingquiteseriouslyonitsfeet.”45Hewaswrong. Luzhkov funneled enough cash into the factory to keep it

afloat, in part by guaranteeing a loan from commercial banks. He forcedmunicipal departments to order Zil trucks. But the trucks Zil made wereuncompetitiveontheopenmarket—afarmorepopularmodelwasmadebytherivalGaz factory inNizhnyNovgorod—andZilwas, in trueSoviet fashion,cranking out a product for which there was no market. Four years afterLuzhkov’spromisetoputZilbackonitsfeet,thecompanywasstillrunningin

thered,withnoendinsight.Luzhkovfaredjustaspoorlywith theotherbigMoscowautofactory,Moskvich,forthesamereasons.Statecapitalismsimplycouldnotsubstituteforarealmarket.ThedarksideofLuzhkov’sempirewasendemic,uncontrolledcorruption,

fueledby thepassionsof thenewmoney that floodedMoscow.Thecitywasrifewithprotectionrackets—virtuallyeverybusinesshadtoemployakrysha,orroof,forprotectionintheearly1990s—andseverallargeorganizedcrimegangs thrived. Bribery, kickbacks, and secret overseas bank accounts werecommon, and disputeswere settledwith car bombs and contractmurders. Inthisrespect,Moscowwasnotunique,butamoreconcentratedexampleofthecorruption sickness that befell all Russia.When the government itselfwas amajorbreedinggroundforcorruption,whencitybossesandfederalministerswere routinely on the take, the law enforcement authorities alone could nothavecleanedupthemess.Theywerejustasmuchapartofthecorruptnetworkas theministersandbureaucrats.The issuewasmuchmoreprofound:Russiahadnotbecomeastatewiththeruleoflaw,anditsrulerswereoftenindifferentto,andsometimescomplicitin,thechaos.Luzhkovtoldmehestruggledwith thecrimewave inMoscow,buthe laid

blameforitonthewayRussia’seconomywasbuiltintheearly1990s,whenthe “shadow economy” turned into big business. “Representatives of thecriminalworldpenetratedbothbusinessandlawenforcementbodies,”hesaid,“and they imported their rules.” He insisted that the level of corruption inMoscowwaslowerthaninothercities.46But itwas impossible to do business inLuzhkov’sMoscowwithout being

harassedforbribesbyinspectors,police,andbureaucrats.Togetastreet-levelview, one day I visited a typical bakery and candy store nearMoscow StateUniversity, Bread Store 185. In the back of the store, I listened to VeraTrusova, a pleasant woman in a boldly striped sweater who was once anengineer,describethetrialsenduredbysmallbusinessesinLuzhkov’scity.Shecuppedherhandsinabeggingsignofhelplessnessassherecountedhowthelatestcityinspector,whowascheckingpricestickers,imposedfinesonherthatwereequal toamonth’spay.Thepettycorruption—demandsforbribesweremade by anyone with a badge—were wrecking her business. “If she comesrightnow,Iamstillgoingtobowdownbeforeher,”Trusovasaidofthelatestinspector.“AndIamgoingtosay,‘Yes,howmuch?’”Trusovawrotealettertofellowsmallbusinessowners,inwhichsherecalledhowateamofinspectorswas“drivingbythestore,andalampwasnotburninginthewindow.Afine.

They approach the store, and there’s a cigarette butt lying on the ground.Afine.Thesalespersonwasnotwearingacap.Afine.Andtheyfounddustonthelampinthestorageroom,afine.Theywroteoutapileoffinesandwalkedoutofthestore,happy!”AmoreominousshadowwascastoverLuzhkov’sempireonagraySunday

afternoon,November3,1996.Atabout5:00P.M.,anAmericanbusinessman,PaulTatum, left theRadisson-Slavyanskaya,a430-roomhotelhehadhelpedconvert intooneof the firstWestern-stylehotels in the city.Tatum, a flashy,eccentric forty-one-year-old Oklahoman who was among the early wave ofenthusiasts about the rise of capitalism in Moscow, walked with twobodyguards toward the Kievskaya Metro stop, just beyond the hotel. As hedescendeddownthewornstonestepsofanunderpass,alonegunmanopenedfire from the parapet around the stairway. Twenty shots rang out, eleven ofthem hitting Tatum, who died shortly after being shot. The killer escaped,leaving behind the murder weapon, a Kalashnikov free of fingerprints andwrappedinaplasticbag.At the time, Tatumwas locked in a nasty business dispute over the hotel.

Tatum’s company owned 40 percent, theMinneapolis-based Radisson Hotelchainowned10percent,andLuzhkov’scityheldtheother50percent.Tatum’sfight pitted him against UmarDzhabrailov, an ethnic Chechen, a slightmanwith shoulder-length hair, always impeccably tailored,who swooped up anddown the main hallway of the hotel surrounded by a flying wedge ofbodyguards.Dzhabrailovwas the city representative of the joint venture thatwasrunningthehotel,aswellasotherproperties.Tatumhadbeensharplyandopenly critical ofDzhabrailov—saying hewas part of theChechenmafia inMoscow—and their arguments spilled into the newspapers and television.Tatum said he was being pushed out of the hotel venture; Dzhabrailov saidTatumfailedtopayhisdebts.TatumarrivedatthehotelonedayinJune1994and was blocked by armed guards. He held a news conference in the hotelparking lot to denounce his Russian partners. A week and a half later,accompaniedbyadozenbodyguardsandwearingabulletproofvest,hebulliedhiswaybackintothehotel.47DzhabrailovdeniedanyroleinTatum’skilling,butquestionshauntedhim.

Less than a month after the assassination, the United States revokedDzhabrailov’s visa after a journalist forUSAToday reported to the embassythat his life had been threatened by Dzhabrailov during an interview aboutTatum’smurder.48

Luzhkovremainedsilentaboutthemurderforalongtime.Inexplicably,hekept Dzhabrailov in place and later promoted him to manage the Manezhshopping mall. Still later, Dzhabrailov campaigned for president of Russia,plasteringcentralMoscowwithhissmilingfaceonbillboards.49Luzhkovlatertoldareporter,“IftheAmericansidehassoundevidenceofhisinvolvementinthis horrible murder and terrorist act, I am ready to draw the most radicalconclusions—Imeantostopallcontactwithhim,businessorpersonal.Ifnot,we will take the decision on whom to deal with on our own, without anypressure or instructions from America.”50 Luzhkov said in response to myquestion about Tatum: “Therewas no decisive reaction to thismurder fromyoursideeither.AndIhaveaslittletodowiththismurderasyoudo.”51Tatum’skillerwasneverfoundbyMoscow’shomicidedetectives.Thatwas

not unusual: in the city that year they found the killer and the person whoordered the killing in only three of 152 murders believed to be contractkillings.52NordidtheMoscownewspapersandcentraltelevisionstationsraisetheissueatthetime.Luzhkov was almost never criticized by the press, in part because he

providedafinanciallifelinetomanynewspapersandtelevisionstationsintheform of subsidized rents. One journalist told me that his entire apartmentbuilding,occupiedbythenewspaper ’sreporters,wasgiventothemcheaplybyLuzhkov. They believed he could take it away, and theywere careful not tooffendhim.Luzhkovwasaking inhisownrealm,andhereveled in thefactthatnoonecouldchallengehim.“Forlongyears,YuriMikhailovichlivedinanenvironment, in an atmosphereofbeing everybody’s favorite,”his friendYevtushenkov toldme. “Hewas a sacred cowwhom nobody dared criticizemuch.”53WhenLuzhkovwasoffendedbyanarticleorabroadcast,heregularlysued

for slander in the city courts—which he also subsidized—and won almosteverycase.ButthisinsularcocoonlaterprovedcostlytoLuzhkov.In a speech that was reprinted inMoscow News, an independent weekly

newspaper, Yegor Gaidar said, “The economic life in Moscow is terriblybureaucratizedandfullofregulations,whichresultsinwidespreadcorruption.Everybody who has to deal with theMoscowmunicipal structures knows itperfectly well. And, regrettably, the process here is growing bigger, notsmaller.”54 LuzhkovfiledsuitagainstGaidar,sayingthecity’sreputationhadbeen hurt.Gaidar took the case seriously.His lawyers provided evidence ofbribetakinginthecity,but,afteraninitialvictoryinthelowercourt,Luzhkov

wononappeal.Thejudgegavenoreason.55YettheobvioustruthofGaidar ’sclaim was illustrated once again in November 2000, when police arrestedVladimirKochetkov,whowasheadofamunicipalhousingandconstructionauthority,afterhetriedtoextracta$827bribeforsigningacontractforstreetlights. They found that Kochetkov had a $700,000 Swiss bank account, andtheydiscovered$67,000inaplasticbagbehindaradiatorinhishouse.56

The first years of the newRussiawere a perplexing time for Luzhkov as apoliticalleader.Thecountrydeclareditselfademocracyandmarketeconomy,butthelaws,traditions,andmind-setoftheearliereralingered.Therewasnohandbook for this twilight zone between the Soviet experience and the newcapitalism. One of the most difficult questions was the relationship betweenpublicandprivateinterests.Theoldsystemwasruledbyarbitrarypartydiktat,andprivate business interests did not exist orwere banished to the shadows.Then, practically overnight, the party was gone and replaced with a newelectoral-based democracy.The newpolitical leaders, among themLuzhkov,were just as suddenly faced with a plethora of hungry new private businessinterests. These business interests, no longer relegated to the shadows,werepowerful.Inthepassagefromtheoldworldtothenewone,thelinesbetweenpublic interest and private gain were blurred. The private interests helpedthemselves to the public treasure, and the new leaders of Russia—includingLuzhkov—letthematit.Themixtureofpublic interestandprivatebusinesswas foreshadowed ina

briefcontroversyinvolvingLuzhkov’sroleinacompanycalledOrgkomitet,which had somehow secured the monopoly privilege to sell city-ownedhousing to private owners. In 1991Luzhkov, then vicemayor under Popov,becameheadofOrgkomitet.Asacityofficial,hetransferredtherightstotwovaluablebuildingstoOrgkomitet,whichwasanapparentconflictofinterest.57Afterpresscriticismandpressurefromaprosecutor,Luzhkovresignedfromthe company on April 22, 1992. One of Luzhkov’s assistants told me thatOrgkomitetwasoneamongmanyshady,quasi-privatecompaniesthatbegantofeed off the city in the 1990s, and Luzhkov got involved by “accident.”Luzhkovlatersaid,“Orgkomitetwascreatedalongwithahugenumberofnewmarketstructuresatatimeofpervasiveuncertainty.Assoonaswesawwhatitwas,weimmediatelyliquidatedit.”58ButOrgkomitetwas an early precursor ofLuzhkov’s basic system,which

combinedpublicandprivateinterests.Thisapproachcameintofullviewinthe1990swiththebirthofacorporategiantheadedbyLuzhkov’sclosepersonalfriend,Yevtushenkov,theone-timeplasticsengineer,aquietandcautiousmanwith wire-rim glasses and a very low-key style that belied his influentialpositionatLuzhkov’sside.Yevtushenkov’spathtowealthbeganatasmallbackwaterof themunicipal

bureaucracy,theMoscowCityCommitteeonScienceandTechnology.Itwasamarginal department, and Yevtushenkov, the director, found that his budgetsubsidies had dried up. In 1993, the year after Luzhkov became mayor,Yevtushenkov went commercial. He simply transformed his small citydepartmentintoaprivatecompany.Theoriginalidea,hesaid,wastogenerateprofit for the committee to substitute for lost state subsidies. “I wasexperimenting, as everyone was,” Yevtushenkov explained. His experimentsbecame very profitable indeed, leading to the creation of a sprawlingconglomeratewithholdingsintelephones,electronics,insurance,tourism,andotherbusinesses.ThecompanywascalledSystema.YevtushenkovtoldmethathewasafriendoftheLuzhkovfamilybutinsisted

that he did not use his friendship to speak with Luzhkov about businessventures.59 Another Luzhkov assistant said that Yevtushenkov was closer toLuzhkov than anyone else except Luzhkov’s wife, Yelena Baturina.Yevtushenkov had been best man at their wedding. Luzhkov’s wife waspresident of a plastics company, Inteko,whichLuzhkovhaddescribed as hischiefsourceoffamilyincome.AtonepointYevtushenkovsoldhis24percentinterestinanotherplasticsfactory,Almeko,toBaturina’sfirm,whichsheranwithherbrotherViktor.60ThesourceofearlycapitalfortheSystemaconglomerateisnotknown.One

version came from Yevgeny Novitsky, president of Systema, who said theconglomerategrewoutofagroupof import-exportcompaniesmakingeasymoneyintheearly1990ssellingRussianoilabroadandimportingcomputers.“We took loans, purchased oil, sold this oil to the West. Then we boughtcomputer goods, televisions, computers, food products, sold them in themarkethere,andonaccountofthis,alargeprofitmarketdeveloped.In1993itwas possible to make 100 percent in one operation. Buy something for adollar, sell it for two.”Thestorysounded typicalof thequick-riches talesoftheera,butitdidnotaccountfortheadvantagethatYevtushenkovenjoyedasapalofthemayor.Thatadvantagecameintheearlydaysofprivatization.Accordingtoitsown

reports,Systema’sassetsmultipliedalmostsixfoldbetween1994and1996,tomorethan$1billion.OneofthemostrevealingacquisitionswastheMoscowtelephone monopoly, the fifth-largest phone system in the world, with 4millionlines.Itwasanotoriouslycreakynetwork,andoneexchange,231,hadbeen inservicesince1930.61But itwasstillapotentially lucrativecompany,since the demandwas strong formore and better phones. If telephone ratescould be raised—and that was a decision Luzhkov would have to take—thephonecompanycouldbeprofitable.“Quitebychance,”Yevtushenkovrecalled,“I found myself in a field that began to develop very fast—telecommunications.”When Luzhkov’s government decided to privatize 33 percent of the

telephonecompany in1995,Yevtushenkovwent for it.He justcreateda newversionofhisoldcitygovernmentcommittee.Thenamewasslightlychanged,however, fromMoscowCityonScienceandTechnologytoMoscowCityonScience andTechnology andCompany.The “andCompany”was agroupoffirmsmostlycontrolledorownedbySystema.Hisnewfirmwasdeclaredthewinnerof theMoscowCityPropertyFundinvestment tenderfor theMoscowphonecompanyonApril21,1995.Thepricewas$136million,ofwhich$100million could be provided in equipment; the price was a fraction of thecompany’smarketcapitalizationatthetimeof$2billion.62When the privatization results were announced, the winner was identified

onlyas the“MoscowCommitteeonScienceandTechnologyandCompany.”TheSystemaconglomerate,therealforcebehindthedeal,wasnotmentioned.Theprivatizationwasaninsiderdeal.Itwasexactlythekindofcheapsell-offthatLuzhkovwaspubliclydenouncing inhis fightwithChubais,buthisowncitywas engaged in the same practice, benefiting his friendYevtushenkov.63When I asked theMoscowproperty committee fordetailsof the tender, all Ireceivedwasafaxlistingtheconditionsbeforethetender,andasecondpage,ashort listof investment tenderwinners for theweek.Noprices,no terms,nodetails.64Systemawasaveryprivate,almosthiddencompany.Inthemid-1990s,when

Yevtushenkovwasexpanding,Systemawasnotwell-knownandreceived lessattention than the financial and industrial empires of Gusinsky, Smolensky,Berezovsky,andKhodorkovsky.EventhesmartfinancialanalystsinMoscowseemed confused about Systema.As late as 1998, stock brokerswho issuedresearch bulletins to foreign investors about the telephone company oftenfailed to note that the “MoscowCommittee on Science and Technology and

Company” was linked to Systema. Nor was it clear who really owned theSystema conglomerate. The company issued no detailed reports on itsownershipandonlyskimpyfinancialdocuments.Novitskytoldmetheparentcompanywas100percentownedbyanotherfirm,Systemainvest,whichinturnis40percentownedbyaLuxembourginvestmentcompany,andtheremainderin the hands of individuals, including Yevtushenkov. Luzhkov denied thatSystemawas“asparepocketforthemayor.”65As Moscow boomed, Yevtushenkov’s conglomerate became ever more

deeplywoven into the fabricof thecity’s financial flows.TheMoscowBankfor Reconstruction and Development, part of Systema, became one ofMoscow’s“authorized”banks,withthelucrativeprivilegeofdistributingcitymoney,suchasthesubsidiestoZil.Systema’sinsurancecompanyinsuredtheMoscow subway. Systema-Neft operated a chain of Moscow gas stations.Systema-Gals was a major real estate developer in the center of Moscow.Systema Telecommunications had interests in two Moscow cellular phonecompanies,oneofwhichbecameamarketleader.SystemaalsoownedDetskiMir, thefamous,sprawlingchildren’sstore, theIntourist travelagency,andagroup of electronics factories.Yevtushenkovworemany different hats all atonce:Luzhkov’sfriendandadviser,thebossofSystema,andotherpostssuchas chairman of the council of the Moscow Stock Exchange. He movedeffortlesslybackandforthbetweenpublicinterestandprivatebusiness.Alexei Ulyukaev, a reformist member of the city council and the deputy

directorofGaidar ’sinstitute,describedthisastypicaloftheLuzhkovmethod.“IntheMoscownetwork,it’simportanttohavetwolegs—oneinbusiness,theotherintheadministration,”hetoldme.Luzhkovcreatedasysteminwhichitwasnotunusualforacitydepartmenttobelinkedtoaprivatebusiness.“Ontheonehand, theymanagebudgetmoney,”Ulyukaevsaid,“but then theyare,onthe other hand, making money. And third, the city oversees it all. They aresupply,demand, andadministration.”Ulyukaevcalled it “commercialization”ofthegovernment.“Virtuallyeverystructureofthecityhasitsownoff-budgetfund,”hesaid,usedforcollectingprofitsfromitsbusinesses.Theprofitswereoftenhidden. In aprospectuswritten foroverseas investors in1997, the cityadmittedthatallof itsoff-budgetfundsamountedtoafifthof theentire$9.9billion in revenues,andmanyexperts said theactualamountwas fargreater.Ulyukaevsaidthedetailsremainedundisclosedtothecitycouncilaswell.66Whatwould be considered conflict of interest in aWestern economywas

standard procedure in Moscow. When the city borrowed $500 million on

globalcapitalmarketsin1997,itdecidedtomakeloansfromtheproceedstoencourage investment. Yevtushenkov had a seat on the twenty-four-membercouncil thatdecidedon the loans.Whogot themoney?Systemadid—at leastthreeloans:$16.5millionforadowntownrealestateproject,$16.5millionfora factorymaking television sets, and $15million for a plantmaking digitaltelephoneexchanges.Yevtushenkov toldmehewasn’tpresentwhen the loanswerediscussed,butacityofficialsaidhewaspresentandsatsilently.TheriseofSystemaisnotjustastoryaboutwealthoraboutLuzhkov’sblatantmixtureofpowerandmoney.AtthetimeSystemabegantotakeshape,thenewRussianeconomywasbecomingatribal,clannishsystem.Itwasgivingbirthtoconglomerates (politely called financial-industrial groups) that were in factsmallempiresinthemaking,oftenalliedwithapoliticalleader.Luzhkov,theboss of a sprawling, increasingly prosperous metropolis, needed his ownalliance with a financial-industrial group. In the early years, it had beenGusinsky,andlateritbecameSystemaandYevtushenkov.Luzhkov began to think about new horizons. Reporters were already

badgeringhimaboutwhetherhewouldrunforpresident.Yeltsin,thenslidingintosickness,wouldnotbepresidentforever.“IamtiredofrepeatingthatIdonot intend to run,”Luzhkovreplied in1995.“This isnotmycupof tea.”Hethenadded,“ButevenifIdecidedtorunforpresident,isitacrime,anillegalact?”67Infact,YevtushenkovandLuzhkov,whovacationedtogetherandspenthours

onweekends in long discussions, began to speculate privately about what itwouldtakeforLuzhkovtorunforpresident,afterYeltsin.Intheend,LuzhkovsupportedtheRussianpresidentduringthe1996elections,butthediscussionswent on long after that. Yevtushenkov believed that Luzhkov had one verypowerfulargument:hecouldchangethecountryinthesamewayhehadrebuiltMoscow.YevtushenkovfeltthatLuzhkovhadachancetomakehistory.Itwas a daring thought, but therewas one problem thatwould only show

itself later:Luzhkovwasnot ready.Hewasatheartakhozyain, amanager, aSovietmanwhohad adapted to the neweconomy.Hewas still a creature ofMoscow’suniquesituation,andhisexperienceinpoliticswasforgedwithintheprotectedcocoonofMoscow.Thebustlingcity-statewasaworldapart fromtherestofRussia.

Chapter11

TheClubonSparrowHills

INALLOFMOSCOW,fewvantagepointsareasspectacularasSparrowHills,aforested,slopingriseperchedabovetheMoscowRiverwhereitmakesalazyturn toward the Kremlin. On summer afternoons, the woods offer a coolrefuge from the city. Riverboats and barges ply the waterway. The hill iscommanded by the imposing thirty-five-story tower of the Moscow StateUniversity building.A broad promenade at the top of the hill overlooks theriverandoffersapanoramicoverviewofthecityhorizon,fromtheLuzhnikistadiumintheforegroundtotheneedle-likeOstankinotelevisiontowerinthedistance.Downeachsideof thehill fromtheuniversity runsKosyginStreet,one of Moscow’s most placid, tree-lined boulevards. This is a prestigiousneighborhood, home to the university, the Institute ofChemical Physics, andMosfilm,oncetheheartoftheSovietmovieindustry.SparrowHillsisalsothefictional point at which Woland, the devil, alights on his steed and fliesheavenward in the final scenes of Mikhail Bulgakov’s classic novel, TheMasterandMargarita.1It was on the crest of the hill that a few wealthy Russian businessmen

gatheredataprivatevillaoverlookingtheriverinSeptember1994.Theyweremostlyyoung,andtheirfortuneswereevenyounger.MikhailKhodorkovsky,then thirty, had only seven years earlier tried to start his youth café at theMendeleevInstitute.AlexanderSmolensky,thenthirty-nine,hadbeenbuildingdachas from logs seven years earlier. Boris Berezovsky, at forty-seven theoldest in thegroup,had foundedLogovaz inacafébarely fiveyearsearlier.They were joined by several others: Vladimir Vinogradov, thirty-nine, apioneer among the early cooperative businessmenwho became president ofInkombank, one of the biggest of the new commercial banks; VladimirPotanin,thirty-two,asonofthenomenklaturawhosebankwasexpandingveryrapidly; and Mikhail Friedman, thirty, who made his first money in acooperative—washing windows—but was now also head of a fast-growing

bank.Twootherswerequiteprominentat thetimebutlaterfadedfromview:OlegBoiko,thirty,afinancierwhohadsupportedYegorGaidar ’spartyintheearly years, and Alexander Yefanov, thirty-eight, president of Mikrodin, acompanythatinvestedinheavyindustrybutwaslaterabsorbedintoPotanin’sempire.Asagroup,theseonetimehustlersandjeanstraderswereblossomingastycoons.They came to the club at the urging of Vasily Shakhnovsky, then thirty-

seven, one ofYuri Luzhkov’s top aides. Shakhnovsky,who had steely gray-blueeyesthatcrinkledattheedges,receding,wiryhair,andabrownishbeardspeckled with gray, was one of their generation. Only five years earlier,ShakhnovskyhadbeendrawnintothefermentofthedemocracymovementinMoscowcitypolitics.HeworkedforGavriilPopovandthenLuzhkov,holdingatoppositiononthemayor ’sstaff.Fromhisperchatcityhall,ShakhnovskysawthatRussianpoliticalandbusinesslifewasincreasinglychaotic.Theyearsof upheaval—the August 1991 coup attempt, the 1992 Yeltsin economicrevolution, the October 1993 violent confrontation with parliament—leftbusinessmen without established rules of the game. It was a time when theyoung financiers and industrialists knew quite well how to get what theywantedfrompoliticiansorbureaucrats,buttheyhadonlyafaintnotionoftheircollectivepower.Theycouldbribe theirway to an exportpermitbuthadnoidea how to change export policy. Shakhnovsky called the group bolshoikapital,orbigcapital,buttheywereadrift,withoutavoice.Thebusinessmensaid they wanted a “normal country,” with normal laws and a normalgovernmentandanormaleconomy,buttheydidn’thaveone,noraclueabouthow to get there.Most of themhad beenworking so intensely on their ownbusinesses,theyhadnotlookedatthebigpicture.Moreover, Shakhnovsky saw that the young tycoons dealt with the

government in one crudeway: bribery and coercion. Itwas an all-ornothingenvironment, and everybusinessman faced a stark choice, aswasoften said:“annihilateorbeannihilated.”Therewere no rules. “If onewas playing soccer and anotherwas playing

rugby, there was no game; it led to a fistfight without rules,” Shakhnovskyrecalled. Increasingly, Shakhnovsky saw that the businessmen settled theirscores on the street. “At that time in particular, there were no rules at all.”Worriedaboutthedisorder,Shakhnovskydecidedonhisowntodosomethingaboutit.“Bribescannotbegivenforever,”hesaid.“Soonerorlater,thereisanendtoeverything.”

Shakhnovskyrecruitedthebusinessmentojoinanexclusive,secretcluboftheirown. InShaknovsky’smind, theclubwas tobeaprotectedplacewheretheycouldbefreetotalk,argue,andhopefullycoalescearoundtheircommoninterests. Shakhnovsky told me he did not want to create a salon of dealmaking.Hewantedhisgueststothinkbroadly:howbolshoikapitalcouldmakeanimpactonthenewlyemergentRussiandemocracyandeconomy.Hewantedthemtocomeupwithideasabouthowtolobbythegovernmentinacivilizedway—how to create good public relations for themselves—as was done ineverynormalcountry.Theclub took shape,butnot in thewayShakhnovskyhadenvisioned.The

businessmenwere far too concernedwith their ownproblems to see the bigpicture. Two years later, in 1996, they finally came together as a single,powerfulgroup,whentheyfelttheirwealthandpropertywerethreatened.Butatthebeginning,theyhadpressingparochialworries.Theywantedprotection—from each other. The first order of business at the club was to create“civilizedrulesofthegamewitheachother,”Shakhnovskysaid.Theydraftedacharter.Theessencewasthattheywouldnotattackeachother.Theypledgednot to bribe the law enforcement authorities to go after each other, or usenewspapersand television to smeareachother.At the time,allof themwerebuildingup theirownprivate corporatearmiesand intelligenceagencies fordoing just that. Many of them had hired ex-KGB chiefs for the task. Onepurpose of these well-paid, well-equipped spies was to dig up dirt andcompromisingmaterials, known as kompromat , to use against rivals or thegovernment.Kompromatcouldbepurchased,easily,fromtheofficialsecurityservices and agencies, including theones that hadbeenpart of theKGBandstillhadaccesstoitsmountainsoffiles.Or,ifnotbought,kompromatcouldbemanufactured—using forged documents—and it would be just as effective.Moreover,itwasnotdifficulttospread.Todeployawarofkompromatagainstenemies, a banker did not need to own a newspaper or television station orradiostation.Itwasenoughtopayarelativelysmallsum,evenafewhundreddollars, to a desperate journalist. Not all journalists were corrupt, but somewere,andtheywouldpublishorbroadcastjustaboutanythingformoney.In their charter the tycoons agreed: no kompromat against each other.

“Maybeabitutopian,abitofachildishidea,butatthatearlystage,theyagreedtoit,andhadsomesuccessinsomehowchannelingtheprocess,”Shakhnovskytoldmelater.2It was the nature of their informal, exclusive club that no one quite

rememberedyears laterwhether thecharterwaswrittenororal,andwhethertheyhad signed itornot.LeonidNevzlin,whowasKhodorkovsky’spartner,recalledthatitwasanoralagreement.“Itwasdiscussed,butnotputonpaper,”he toldme.Khodorkovskycouldnot rememberattending themeetingsatall.Vinogradovsaid,“Idon’trememberwhetherweactuallyputoursignaturesonit.”Smolenskysaid,“Therewasnodocument,therewasanoralagreement.Weagreednottobiteeachother,nottoresorttothemassmediainordertosettleourrelations,nottouselawenforcementtosettleourcommercialproblems.”3Shakhnovskytoldmethedocumentwaswrittendown,draftedandredrafted;

thelanguagewaskeptverygeneral.“Itwasbeingcorrected,somewouldsignit,somewouldaddcorrections,”herecalled.“Therewasadocumentallright,butsincethiswasaveryamorphouscreation,itcannotbesaidthatallaccepteditandallbegantofollowit.Itwassigned.”“Ithinktheminutetheywalkedoutofthegatesofthebuilding,”Vinogradov

recalled, “they immediately broke the agreement.” He was right, and thefollowingyearsbroughteveryoneofthemintofierceconflictwitheachother.They broke their promises and used the law enforcement agencies and themassmediatoattackeachother.YetShakhnovskyhadindeedstartedsomething.Themembersoftheclubon

Sparrow Hills multiplied their millions, and their quiet little club laterblossomed into much more than the debating society envisioned byShakhnovsky.Itwasthebeginningofadaringattempt,farmoreaudaciousthanShakhnovskycouldhaveimaginedatfirst,totakeoverthecountry.The club on Sparrow Hills met regularly, every other week, at the villaoverlookingtheriver.Nestledamongthetrees,thevillawassetbackfromthestreet by a long driveway, completely shielded from view by an imposingstone wall. It was a perfect hideaway, behind a guarded gate, part of asprawlingnetworkofcity-ownedbuildings.Thebusinessmenarrivedat7:00P.M.fordrinksand thendinedarounda table.They talked late into thenight,until the city horizon stretched out before them in a twinkling sea of lights.They met for the first time in September 1994 and for the last time in theautumnof1995,buttheclubreviveditself,inotherplacesandothertimes,foranothertwoyearsafterthat.Fromthefirstmeetings,thebusinessmenwerefrustratedintheirsearchfor

a political patron. Yeltsin’s Kremlin was split by competing factions.Chernomyrdin, the jowly, inarticulateprimeminister,was theepitomeof the

oldSovietfactorydirectors,hardlyapromisingcandidate.NoneoftheyoungeconomicreformerssuchasGaidarandChubaiswereprominent,experienced,orpowerfulenough to lead theambitiousnewelite.TheviewfromSparrowHills,asoneparticipantlaterrecalled,was“completelydisillusioned.”4One evening Shakhnovsky invited Luzhkov to meet them. According to

Shakhnovsky, the club was pondering whether Luzhkov could be theirstandard-bearer. “These peoplewere prepared to put their stake on him,” hesaid,“andwerereadytoperceivehimasamanwhowouldmovetheirinterestsforwardamongpoliticalcircles.”But theeffort failed. In thefirstmeeting, itwasevidenttheysimplydidnotspeakthesamelanguage.Luzhkov,thenfifty-eight, had traveled part of the way toward the market economy, but he wassuspiciousoftheyoungbusinessmen,whoseemedtorepresentthespeculative,gamblingsideofwhathecalled“parasitic”capitalism.Heretainedtheinstinctsof his training as a Soviet-eramanager; hewas a khozyain. By contrast, theyoungbanker-industrialists,mostofthemtwodecadesyoungerthanLuzhkov,werecynicalandambitious.They,unlikeLuzhkov,hadneverrunafactory,buttheyknewmorethanhedidabouthowtogambleontheruble-dollarexchangerate and move their winnings offshore. At least two of the young tycoons,Smolensky and Khodorkovsky, long ago, during perestroika, applied toLuzhkov for a license for their cooperatives. They may have shared somecommonideasbackthen,butnolonger.Smolensky recalled that Luzhkov immediately alienated the tycoons by

bringing along two of his lieutenants, Vladimir Resin and Boris Nikolsky.SmolenskysawLuzhkov’smenascutfromthesameclothasthemayor,old-school guys out of sync with the fleet-footed financiers. “Nonliquid stuff,”Smolensky scoffed at the memory. Smolensky remembered that one of theyoungbusinessmensaidtoLuzhkov,“YuriMikhailovich,youwantustoinvestinMoscow?You are digging a hole inManezhSquare” (the excavation hadjust begun). “We think this is not a valid project.” In other words, it was amoneyloser.Luzhkovstubbornlyreplied,“Idug,andwillkeepondigging!Andyouare

nottogiveorderstome,andIwon’ttakeyouradviceonthat.”“Fine,”thebusinessmansaid.“It’syourdecision,YuriMikhailovich.”The young bankers felt themselves to be newly minted Masters of the

Universe. They did not want to be bossed around. Luzhkov, however, couldhaveitnootherway.Hewastheboss.Hewoulddecidewheretodig,evenifhehadstarteddiggingfornoreasonatallexcepttostopaprotestrally.Hisentire

mind-setwasthatofdigging,andhismodelofcapitalismrevolvedaroundhisowncentralrole.“Luzhkovarrivedtothismeetingas,aboveall,akhozyainwhoconsidered

himself much wiser and more farsighted than the people sitting around thetable,” Shakhnovsky recalled. “And he was not talking with these people aspartners.No.Thiswasaconversationlookingverymuchdown,verymuchso.Hewaslecturingthemsome,hewasgivingthemadvicesome,butitwasnotaconversation.”Berezovsky was appalled at what Luzhkov told the tycoons. Berezovsky

believedBigCapitalshouldtell thegovernmentwhattodo,andnottheotherway around. “We just scattered away from him,” Smolensky recalled ofLuzhkovafterthatmeeting.“WeweretheMoscowbankers,andhejustlostus.”AlthoughShakhnovskywantedtokeeptheclub’sattentiononthebigpicture,

hewasundonebyBerezovsky,whosoonbrought to theclub just thekindofdeal making that Shakhnovsky hoped to avoid. Berezovsky remained thecompressed ball of energy his friends had described in earlier years. In theautumn of 1994, he launched himself into a new orbit of dreams and plans.While other members of the club were still debating who in politics couldbecomethepatronofBigCapital,Berezovskywasalreadyoutrecruiting.Hedidn’tstartsmall:BerezovskywantedBorisYeltsin.TheautobusinessprovedlucrativeanddangerousforBerezovsky.Bythetimetheclubbegantomeetin1994,LogovazwasnotjustRussia’slargestZhigulidealerbutwasalsosellingMercedes,Honda,Chevrolet,Chrysler,andVolvovehiclesandwasplanningtofeatureDaewoocarsaswell.Toweringbillboardswith theLogovazwhite and blue symbolwere erected on themajor arteriesleading intoMoscow.ALogovazreportdescribing thecompany’smarketingstrategyboastedthatalthoughin1993onlysevenoutoftenpeopleknewwhatLogovazwas,by1994,tenoutoftenknewthecompany’sreputationinthecarbusiness.Logovazspent$1.2millionforadvertisingandpublicrelationsintheyear that ended in mid-1994. The firm’s big attentiongetter was Moscow’sannual August auto show. Berezovsky also sponsored an annual $100,000Triumphcharityartsprize.5Butthecardealershipshadadarkunderside—thebusinesswasamagnetfor

criminal gangs. Moscow became a playground for rival underworld mobs,whosawthecardealershipsasaprize.Atonepointinlate1993Berezovsky

fledMoscow for Israel, where he received citizenship. 6 He apparently hadbeen targeted by the gangs. In Moscow, two warring mobs, one led byChechens,whowereknownfor their ferocity,and theotherby theSolntsevogang, a Slavic mob named after a district in southwestern Moscow, werecompeting for control of the auto dealerships. In September 1993,Berezovksy’s Logovaz car parks were attacked three times, and hisshowroomsbombedwithgrenades.7OnNovokuznetskayaStreet,anoldMoscowavenuewithacreakytramline,

Berezovsky’s command center was the Logovaz Club, a restored earlynineteenth-century Smirnov family mansion. From the outside, the LogovazClub isanunmarked, low-lyinggraybuilding.But inside it isanoldworld–stylesalon,lavishlygildedandornatelydecorated.TheroomIremembermostwas the spacious anteroom where I waited before appointments withBerezovsky:softyellowwalls,aredrosepaintedontheceilingarch,tinklingglassesatthebar,abattalionofredwinebottles,blondwoodchairsarrangedin frontof small roundParisian-café tables, an illuminatedaquariumagainstonewall,andalwaysacrowdofpeopleshiftingintheirchairs,waitingtoseeBerezovsky.Hewouldcomebreezingthrough,handsinhissuitpockets,strideuptoyou,andbegyourpardon.Hewasrunninglate—alwaysrunninglate.Hewould be back, he promised, and he usually was. Meanwhile, the anteroomstirred,cellulartelephoneshummed,buzzed,andscreeched,andthesoftcolorswerebrokenbythelatestnewsbulletinsfromajarring,oversized,wide-screentelevisionmountedononewall.At5:00P.M.onJune7,1994,Berezovskywalkedout thedoorofhisclub

andclimbedintothebackseatofhisMercedes600sedan,behindthedriver.Inthe front, next to the driver, sat his bodyguard. At the peak of rush hour,Berezovsky’s Mercedes wheeled out of the courtyard and onto the street,passing a parkedOpel.A remotely controlled bomb, concealed in theOpel,exploded with enormous power, ripping apart the front of Berezovsky’sMercedes,sendingthousandsofsmall,deadlymetalpelletsflyingthroughtheair. Berezovsky’s driver was decapitated, his bodyguard lost an eye, sevenpedestrians waiting for the tramwere injured, and windows in a building ablock awaywere shattered. Climbing out of the bloody, smokingwreckage,Berezovskywasburnedandbadlyshaken.Logovazissuedanangrystatementthat“thistragedyshowsbeyondadoubtthatthereareforcesinsocietythatareactively trying, by barbarically criminal means, to keep civilizedentrepreneurshipfromdevelopinginourcountry.”Nonameswerenamed.

Itwasafearsometime:policesaidfifty-twobombshadgoneoffinthecitybyJuneof thatyear,comparedwithsixty-one forallof1993.Thebombsetfor Berezovsky was the most powerful of them all. Vladimir Kadannikov,Berezovsky’spartneranddirectorofAvtovaz,offereda$1millionrewardforinformationleadingto identificationof the“initiatorsandperpetratorsof theterroristact”againstBerezovsky.Theywereneverfound.Berezovsky toldme that fourdaysafter thebombing, still inbandages,he

attendedareceptionheldbyYeltsintomarkaRussianholiday.“Yeltsinsawmeand he was surprised and asked what happened. I told him.” According toBerezovsky, Yeltsin motioned to his security ministers. “Do you see whathappenedtohim?”hesaidofBerezovsky.“Iamgivingyouonemonthtofindoutwhodidit.”8Theyneverdidfindout.BerezovskyflewtoSwitzerlandformedicalattention.WhenhereturnedtoMoscow,hewasburningwithambition.Hewantedto

bemorethanRussia’sbiggestcardealer.LeonidBoguslavsky,hisfriendfromearlyyears at the institute, recalled thatBerezovskywas thinking as early as1992 about television, especially powerful Channel 1, with a broadcastingsignal that reached almost every household in the formerSovietUnion.TheSovietauthoritieshadinvestedinexpensivesatellites tomakesureChannel1blanketednearly200millionpeople.TheLogovazbusinesswas“justatool,”the Logovaz clubhouse was “just a tool,” Berezovsky told his friendBoguslavsky.“ThemostimportanttoolwillbeChannel1.”9Channel1andtherelatedtransmissionandproductionfacilities—including

the1,771-footbroadcastingtowerinMoscow,Europe’stalleststructure—wereonce supported by the state, but the government no longer shelled out thelavishsubsidiesof theSovietyears.Moreover,Channel1,orOstankinoas itwas also known, was riddled with theft.While the government continued toprovide enough support to keep the powerful signal on the air, advertisingmoney was diverted by individual production companies, very little of itfindingitswaybacktothechannelasawhole.Thesituationwassimilartotheassembly line in Togliatti, where cars rolled off practically for free, andmiddlemen sold them for a small fortune. In television, the state kept the“factory”goingbysubsidizing thebroadcastingsignal,butothers reaped thecashfromadvertising.WhileChannel1claimed it ranonlynineteenminutesofadvertisingadayinmid-1993,astudyofprogrammingfounditbroadcastonehundredminutesaday.Thus,evenatthelowestrates,therevenueflowwas60 to75billion rublesayear,butagovernmentaudit foundonlyabout11.2

billionrublesactuallyreachedthestation.10IgorMalashenko,whoresignedinearly1993afterabriefstintasdirector

ofOstankino,toldme:“Commercially,itwasanabsolutedisaster.Itstartedinaverysimpleway:youknow,whenadvertisingwasintroduced,nobodyknewhow to sell it. And managers of Ostankino were just these old-time Sovietbureaucrats.Suddenlytheyfoundthattheydidn’thavemoneytobuyprogramsbecause state financing virtually stopped. And then imagine, some youngproducer would come to them and say, ‘Okay, I will provide you withprograms.Ijustneedtobarterwithyou.Idon’tneedanymoneyfromyou.Justgivemeacertainamountofadvertisingtime.Iwillsellitmyself,it’smyrisk.’These idiots were absolutely happy—but economically they destroyedOstankino.”11SergeiLisovsky,aconcertpromoterandentertainmentmogulwhobecame

one of Russia’s leading advertising tycoons, toldme that in the early yearsChannel 1 merely sold off the errant blank spots between programs—thethirty-second or sometimes five-minute holes that were the result of sloppyscheduling.Later, as big advertisingmoney flowed in toRussia, the variousproducersandprogramsbeganfreelancing,sellingtheirownadvertising.Toadvertisers, especially Western consumer goods companies like Proctor &Gamble,thiswasbedlam.Iftheyboughttime,theyhadnoideawhatwasbeingshownandnoguaranteethatitwouldbefilm,sports,orsoapopera.Moreover, the state continued to underwrite the costs of broadcasting the

signal—electricity, satellites, and all the other expenses of Channel 1—although there was lessmoney than in the old days. The carcass of a state-ownedtelevisionnetworkremained,while the lifeblood,advertisingrevenue,disappearedintothehandsoftheindependentproducers.Berezovsky knew where the money lay. He had his own inside line to

Channel 1 through a company called Reklama Holding. The word reklamameans advertising in Russian, and Reklama Holding was formed to try andmonopolize the advertising time on Channel 1. Berezovsky’s advertisingagency, Logovaz Press, had been among the founders of ReklamaHolding.Lisovsky was the power behind Reklama Holding. The plan was that thecompanywouldbean intermediary, selling timeonChannel1 toadvertisersand then buying it in wholesale blocks from the channel, cutting out othermiddlemen and gainingmore control. Lisovsky and Berezovsky, as well asothersinvolvedinReklamaHolding,weremakingthemselvesthemiddlemen,while turning over a slice of their profits to Channel 1.12 Berezovsky’s ad

agency,LogovazPress,earned$1millioninprofit in1993–1994,accordingtotheannualreport.13OnereasonfortheprofitswasthatLogovazPresswasenjoyingan80percentdiscountonadvertisingtime.Onceagain,Berezovskywasgettingsomethingpracticallyforfree—theairtime—andresellingitforasmallfortune.Meanwhile, the television audience was burgeoning. After decades of dry

programming, Russian viewers were entranced with films and soap operasfrom theWest. Programs like theMexican serialThe Rich AlsoCry and theAmerican-made Santa Barbara drew enormous audiences. For advertisers,Channel 1 could deliver tens ofmillions of potential consumers who had apent-up demand forWestern goods like toothpaste and breakfast cereal. ThecostofadvertisinginRussiaperviewerwasridiculouslycheapcomparedwiththeWest.Itcostabout$1toreachathousandviewersinRussia,comparedtoabout $15 per thousand viewers in theUnited States.14 Channel 1 hadmuchbroader reach in 1994 than Gusinsky’s smaller, private NTV, althoughGusinsky’s channelwas attracting attentionwithpopularmovies and talentednews broadcasters. Channel 1 bridged the vast distances of Russia throughtranspondersandsatelliteserectedandsupportedbythestate.IntheearlymeetingsoftheclubonSparrowHills,Berezovskylaunchedan

ideathatcatapultedhimfromacardealertoakingmakerfortheremainderofthedecade.Hewantedthepoliticalinfluence,aswellastheprofits,thatwouldcome fromcommandinga televisionchannel.He told theotherbusinessmenhewasputtingtogetheraplantoprivatizeChannel1.Wasitabusinessdealora political deal? “Both,” Berezovsky declared. By cutting out all the otherthievingmiddlemen,Berezovskycouldmakeafortune.Bydictatingthenewscoverage,Berezovskycouldbecomeapowerbroker.15Simultaneously, he was working his way into Yeltsin’s inner circle. The

restlessBerezovsky could demonstrate an unexpected humility, and patience,whenitservedhisends.HehadwaitedatthedoorforhisfriendBoguslavskyonthoselong-agomornings;hehadpatientlyplayedchauffeur to theItaliansto learn more about their business with Avtovaz. Now he was applying thesame tactics with the Kremlin and Yeltsin’s family. He patiently infiltratedYeltsin’sinnercircle.Berezovsky had been introduced to the Kremlin crowd by Valentin

Yumashev, a fresh-faced young journalist who had ghost-written Yeltsin’smemoirs.YumashevhadbeenclosetoYeltsinsincethedaysofperestroika,andhewasaneditoratthepopularweeklymagazine,Ogonyok,whichBerezovsky

began to support financially.HowdidBerezovsky firstmeetYumashev?Theintermediary was Pyotr Aven, whose father was a mathematician atBerezovsky’sinstitute.AvenhadworkedalongsideGaidarduringperestroika,wasforeigntradeministerinGaidar ’sgovernment,andhadbeenpresentatthecaféwhenLogovazwasformed.16A key witness to these events is Alexander Korzhakov, Yeltsin’s beefy

longtime bodyguard, who stood loyally at Yeltsin’s side in the 1980s whenYeltsin was cast out of the Communist Party. Korzhakov, who had beenassignedtoprotectYeltsinbytheKGB’sNinthDirectorate,remainedYeltsin’sfriend and sidekick. They drank together and traveled togetherwhenYeltsinwas out of favor. Korzhakov was rewarded when Yeltsin came to power.Korzhakov built himself a small army in the early 1990s as head of theKremlin’spresidentialsecurityservice.Bysomeaccounts,Korzhakov’sarmycontainedseveralthousandmen,includingthecrackAlphaantiterroristtroops.Korzhakov’s recollections are valuable because he had a firsthand view ofevents,buttheyarecoloredbyhisbitternessatbeingfiredbyYeltsinin1996andhisdeepsuspicionsofthenewcapitalists,chieflyBerezovsky,whohelpedgethimfired.Korzhakovcomesacrossasareactionarywhosawnoneedfordemocracy or capitalism, a one-time factotumwho rose beyond his abilitiesbuthadafrontrowseatatthetimeBerezovskyarrivedintheKremlin.17Korzhakov said it was Yumashev who first brought Berezovsky into the

Yeltsin inner circle, just afterYumashev finishedwritingupYeltsin’s secondmemoir,publishedinRussianasNotesofthePresident.Itwaslate1993,afterthe violent October clash with parliament. Yumashev had penned the bookquickly, but the Kremlin did not have a good idea how to get it published.“NowIunderstandthatifwehadorganizedanopentender,therewouldhavebeen a line of publishers,” Korzhakov recalled. “But Valentin presented thewhole business of publishing the book as a feat, a courageous act, implyingthat only Boris Abramovich Berezovsky was capable of such an act.”Yumashev invitedBerezovsky to theKremlin and introduced him toYeltsin.Berezovsky supposedly arranged for a million copies of the book to bepublished in Finland. The publisher was Ogonyok. Berezovsky brought theroyaltiestotheYeltsinfamily,Korzhakovrecalled.HeclaimedaLondonbankaccount was opened to accept Yeltsin’s royalties.18 “That is how thisbusinessmanfoundhimselfinYeltsin’sgrace,”Korzhakovsaid.19Berezovsky was soon invited to join the Presidential Club, an exclusive

MoscowsportsenclaveYeltsinhadsetupforhisclosestcronies.Butinsteadof

playingtennisthere,Berezovskysetaboutlobbyingforthetelevisionchannelwith a clever line that played to Yeltsin’s political instincts. The Russianpresidentwasunderattackfromallsides.ThenewchannelwouldbeYeltsin’sinstrument, Berezovsky promised; it would be the “president’s channel.”BerezovskywasaidedinhislobbyingeffortsbyYumashev,whohadYeltsin’strust.20 The charm offensive worked, and on November 29, 1994, Yeltsinsigned a decree, number 2133, which effectively privatized the enormoustelevision channel without an auction as required by law. The new owners’founding capitalwas $2.2million.21 The name of the new organizationwasRussianPublicTelevision—ORTintheRussianacronym.Theideaof“public”television,whichwouldnotbestatetelevision,wasanovelty,andnooneknewpreciselywhat itwould become. The government retained 51 percent of thesharesofORT,but the restweredividedamongagroupofwealthybankersand a smatteringof industrialists.AnORToversight boardwas createdwithYeltsinaschairman,butKorzhakovlatersaiditnevermet.Berezovskywasthedriving force behind the new channel; the state was sure to be an absenteelandlord.22BerezovskydrewhispartnersfromtheSparrowHillsclubofbusinessmen.

The new shareholders included Berezovsky, Khodorkovsky, Friedman,Smolensky,andafewothers.KhodorkovskyrecalledthatBerezovskysimplytelephonedhimtoaskifhewouldtake5percent.“Ifullytrusthim;hecreatedhis own deal, which successfully developed,” Khodorkovsky said.23Berezovskylaterconsolidatedmostofthesharesinhisownhands.Berezovskysaidthatwhenhebegantotakeoverthetelevisionchannel,costs

wererunningat$250millionayearwhileadvertisingrevenueswereonly$40million.24Hesaidalargeamountofadvertisingrevenueswerebeingsiphonedoffbytheindependentproducers.Heslashedspendingandcameupwithaplantorecapturetheadvertisingmarket.ThenewownerswerepreparingtotakecontrolinApril.Thechannel’snew

executivedirectorwastobeapopulartelevisionpersonality,VladislavListyev.With his handlebarmustache and probing, brazen style, Listyev, thirty-eight,was perhaps the best-known television star of his generation.His broadcastshadbrokenpublic tabooson topics suchas sexandmoney in the lateSovietyears,andhisFieldofMiracles,asortofWheelofFortunegameshow,wasahit.Listyevwasnotonlyanon-airhost; likeother independentproducers,heowned an advertising agency, Inter-Vid, which had been a participant inReklamaHolding.

Berezovskydecidedtheonlywaytoregaincontroloveradvertisingwastostop everything and start over. He proposed a three-month moratorium onadvertisingon thenewchannel. “Thiswasmypersonal idea,”he said. “Thiscausedwild surprise.” Berezovsky said Listyevwas originally against it buteventuallyagreed.OnFebruary20,1995,Listyevannouncedamoratoriumonadvertisingon

Channel1,ariskymovedesignedtogivethenewchanneltimetocutoutthecancer of corruption and theft. Malashenko later told me that Listyev andBerezovsky had no choice if they were taking control of Channel 1. “YoucouldnotreformOstankino,”Malashenkosaid.“Theonlythingyoucandoisyou start a new entity, transfer the license, and take anything you need fromOstankino,andjustdestroythispieceofshitentirely.Anditwasdone.”Millionsofdollarswereatstake.Listyev’sannouncementmeant lossesfor

thosewhohadalreadybookedtimeorwantedtoselltimeinthesemonthsonthestation,includingtheindependentproducers.Atleastintheory,thosewhowouldsufferlossesalsoincludedLisovsky,Berezovsky,andListyevhimself.Lisovsky, the advertisingmogul, tried to get Berezovsky to negotiate a newcontract.Berezovskyrefusedanddemandedamoratoriumonalladvertising.“We calculated how much we were going to lose” without commercials,Berezovskyrecalled,“buthowmuchmoreweweregoingtogainlater,”oncethey controlled the advertising.Themoratoriumwas a boldmove—and onethatpotentiallycouldcreatemanyenemies.OnMarch1,1995, amonthbeforehewas to takeover a revampedORT,

Listyevwasgunneddownbytwounknownassailantsintheentrancewayofhisapartment. The murder shocked the country. Yeltsin came to the Ostankinostationanddenouncedthe“cowardlyandevilmurderofaverytalentedworldtelevision journalist.”Yeltsinsacked theMoscowprosecutorandpolicechiefandblamedLuzhkov,whomheaccusedof“turningablindeyetothemafiosi”in the city.25 It was a gesture meant to underscore the Kremlin’s distrust ofLuzhkov,which,asweshallsee,wasdeepening.No one was ever accused of the Listyev murder, and the investigation

eventually ran cold. The case was entangled in speculation and intrigue; thetruth seems to have long vanished.26 YevgenyKiselyov, the prominentNTVjournalistwho had leftChannel 1 towork forGusinsky, toldme he did notaccept the theory that Listyev was killed because of the conflict overadvertising. “I am quite convinced he had nothing to do with advertising,”Kiselyov said. “All the financial matters, concerning advertising—to stop

advertising—theyweren’thisdecision.Otherpeoplewereresponsible.Hewasjustinchargeofprogramming....Hewasacreativeperson.”Others also agreed that the moratorium, which lasted four months, was

decidedbyBerezovsky,notListyev.AsLisovskysaidtome,“EveryoneknewperfectlywellthatfromthemomentORTwascreated,itwasBorisBerezovskywho managed all the issues concerned with advertising. Solely Berezovsky.BecauseBerezovskysaidfromtheverystartthatmoneyistobediscussedonlywithhim,andonlyhewillmakethedecision.”AnothertelevisionfigurewhowasclosetoBerezovskyatthetimetoldme,

“Everyone knows that Berezovsky controlled all the finances. Lisovsky andListyevcametoseehimaboutmoney.”Althoughthissourcesaidnoonereallyknows who killed Listyev, he believes the assassins were shadowy securityservices,ortheirhiredguns,seekingtopreventthechannelfrombeingpassedtoBerezovsky.27Later, in taking over the channel, Berezovsky set up a new monopoly

advertisingsystem.Inthisarrangement, thechannelsoldblocksofairtimetoLisovsky’sagency,PremierSV,whichwasthesoleagencyresellingthetimetoadvertisers.Berezovskysaidthemoratoriumhadworked,andthecontractwithLisovsky was on favorable terms. “We dictated the conditions,” he said.28Berezovsky also controlled the news decisions at ORT, and the Logovazwaiting roomwas often full of television officials coming to him for theirinstructions.“Wepreventedtheruinofthemainnationalchannel.Weblockedtherivers

oftheft,”Berezovskysaid.29Hemadeasimilarclaimaboutthewayhehandledthe assembly line in Togliatti. There Berezovsky became a big player whodisplacedallthesmall-scaleoperators.Hehadcreateda“civilizedcarmarket,”ashelikedtosay.Likewise,intelevision,hetookovertheadvertisingmarket.He took control of the money—blocking out all the small-scale rip-offs.“Berezovsky, it’s another one of his traits,” Lisovsky recalled. “When hecomestoaplace,hecontrolsallfinancialflowshimself.Thatishisstrictrule.”Berezovsky had reached his goal, taking over Channel 1, but the way he

wentaboutitinjectedasournoteintotheclubonSparrowHills.Shakhnovskyrecalledthebusinessmen“weresupposedtocommunicatethereandworkoutsomecommonapproaches,whilebusinessshouldhaveremainedoutside.”“What destroyed it? If we look back, it was Berezovsky’s position that

destroyedthisidea.Whenconcretebusinesswasintroducedtothisclub’swork,itactuallyruinedit.”

Inthesummerandearlyautumnof1994,VladimirGusinskywasdoingwell.Hisnewtelevisionstation,NTV,wasbristlingwiththebesttalentandhadbeengivencovetedadditionaltimeonChannel4forbroadcasting.HisalliancewithLuzhkov was in full swing, and it was helping them both. He had thrivingbusinesses in construction andbanking, aswell as an expandingnewsmediaempire that included the newspaper Sevodnya and a radio station, Echo ofMoscow.Whenapublicrelationscompany,VoxPopuli,cameupwithalistofRussia’s wealthiest and most influential bankers that summer, Gusinsky wasranked first among the richest and second among the most powerful. Bycontrast, Berezovsky was seventeenth among the wealthiest and thirteenthamongthemostpowerful.30Yet Gusinsky was not invited to Sparrow Hills, and it was no accident.

Shakhnovsky told me as he met the businessmen that summer, trying toorganize theclub,Gusinskywasblacklistedby theothers.“Everybodyspokeagainst it because Gusinsky had a conflict with practically every one of theparticipants,”Shakhnovskyrecalled.Inthemonthsthatfollowed,Gusinskysailedintoastorm.Thedarkclouds

weretheresultofacombinationoffactorsthatsuddenlycametogetherlikeahurricane, an unpredictablemix of highwinds and choppy seas.One reasonfor the storm was the frenetic energy of Berezovsky, who was ruthlesslyexpanding—and colliding with Gusinsky. Another was Yeltsin. Foreverguardinghisownpoliticalsupremacy,plaguedbyparanoiaandweakenedbyillness,YeltsinwasespeciallynervousaboutLuzhkov’sgrowingpopularityinMoscow. With the fears about Luzhkov came paranoia about Gusinsky.Moreover, theKremlinwasstumbling intoadirty littlewar inChechnya, thehorrors of which were magnified many times—and for the first time—byGusinsky’stelevisionstation,NTV.Berezovsky was indefatigable. He liked to say that in Russia, the first

treasure to be privatized would be profit, then property, and finally debt.Berezovskymeant that the first thinghewanted to take inacompanywas itscash flow, and only later would he be interested in owning it, and perhapsnever. Itwas inpursuitofsuchcashflowthatheranheadlongintoGusinskyoveralucrativebusinessdeal.Atthetime,Gusinsky’sMostBankandAvtovazBank,whichwasunderBerezovsky’scontrol,werecompetingfortherighttohandle hundreds of millions of dollars in overseas ticket sales from theRussiannationalairline,Aeroflot.Atthetime,Aeroflotoftenranshortoffuel,

and pilots went unpaid for months. Aging planes—beached dinosaurs withdroopywings,punched-outwindscreens,doorsopenforlornlytothewinds—could be seen on tarmacs scattered across the country, missing engines andparts thatwerescavenged tokeepotherplanes in theair.Thedecrepit,huge,erratically scheduled airline was another vivid example of post-Soviet theft.Thegovernmentpaid for the fuelandsalaries, sometimes,but thecash fromticket sales, especially tickets bought with hard currency overseas, justdisappeared.Justastheautofactoryandtelevisionstationgaverisetocorruptmiddlemen,sotooAeroflotspawnedtheft.Thecashfromticketsales,insteadof flowingback to the airline,wasbeing siphonedoff tohundredsof secretforeignbankaccounts.NikolaiGlushkov,oneofBerezovsky’spartners, laterclaimedthatAeroflotwasatreasuryfortheRussiansecretservicesabroad.31Sergei Zverev, who was a lobbyist for Gusinsky then, told me that Most

Bank planned to take over the Aeroflot accounts, which they were surecontainedhidden treasure. “Weknew that ifwecouldcommand the financialflowsintherightway,wewouldbeabletofindadditionaltensofmillionsofdollars insidethecompany,orevenhundredsofmillions,”herecalled.32ButBerezovsky had the same idea. Ownership of shares inAeroflot was not anissue—thecompanyhadbeenprivatizedbutthemajorityoftheblockofsharesremained state-owned. The trick was to get control of the huge cash flow,whichGlushkovestimatedatbetween$80millionto$220millionatanyonemoment.In the corridors of the Kremlin and at the exclusive Yeltsin sports club,

Berezovsky spread tantalizingly poisonous gossip about his rival, Gusinsky.AccordingtoKorzhakov,Berezovsky“wouldregularlyreportwhatandwhereGusinsky said about the president, how he cursed him,what name he calledhim, how hewanted to deceive him.”Berezovsky came to theKremlinwithreal or imagined bits of intelligence, whatKorzhakov called “new ominousdetails.” For example, according to Korzhakov, Berezovsky claimed“Gusinskywassitting inabunkerwithLuzhkovanddrinking.AndmakingatoasttoYuriMikhailovichasthepresident.”BerezovskythensupposedlytoldKorzhakovthatGusinskysentalittlepackageeveryThursdaytotheMoscowgovernment,withaspecificsumofcashforeachperson,fromfivehundredtoseveral thousand dollars, depending on how useful they have been. It isimpossible toknowwho ismorecreative in this tale:avengefulKorzhakov,who later turned against Berezovsky, or Berezovsky himself, devilishlycompetitive, who was trying to discredit Gusinsky and Luzhkov

simultaneously.Korzhakov claimed that Berezovsky turned toYeltsin’s younger daughter,

Tatyana Dyachenko, when Korzhakov would no longer carry Berezovsky’stales to Yeltsin. Why Korzhakov stopped being the courier is not clear.Korzhakov claims Berezovsky lavished gifts on the president’s daughter,includingaRussian-madeNivajeepandaChevroletBlazer,whichDyachenkolaterdenied.Gusinsky knew that Berezovskywas feeding the growing hostility toward

him.Buthetoldmeinretrospect,“Let’snotdemonizeBerezovsky.Everybodysays,Berezovskyarrangedit.ButitwasnotBerezovsky—Yeltsindidit.WhatdoesBerezovskyhavetodowithit?Certainly,Berezovskywasstirringthingsup,sincehewantedtogetthis,todothat.Yes,thisistrue.ButiftherewerenoBerezovsky,therewouldbesomeSidorov—so,what’sthedifference?”WhenIpressedGusinsky,however,heacknowledgedtheconflictwithBerezovskywasreal.“Ofcourse,ahundredpercent,awarwason,morethanthis,averytoughconfrontationaboutAeroflotandmany things.BerezovskywasveryenviousthattherewasNTV.”33Thewarbetweenthemwasjustthefirstinwhatbecamealmost constant internecine combat among the tycoons and their variousfinancialempiresintheyearsahead.Yeltsin’sinnercirclewashardeningintheautumnof1994aroundahawkish

groupknown informallybycritics as “thepartyofwar,”withKorzhakov inthe center. Theywere directly responsible for the onset of the Chechenwarand,twoyearslater,cameveryclosetopersuadingYeltsintocancelelections.Korzhakovbecamesopowerful that, atonepoint,he attempted todictateoilexportpolicytoChernomyrdin.34 The“partyofwar”dominatedtheKremlinjust as Yeltsin’s grip was weakening. On August 31, Yeltsin was in Berlinattending a ceremonymarking the withdrawal of troops fromGermany. Heappeareddrunk,grabbed thebatonof aband leader, and tried toconduct theorchestra, a bit of unbecoming clownishness seen around the world ontelevision.SomeofYeltsin’smoreliberalaideswrotehimalettercomplainingabouthisbehavior,andtheyweresidelined.WhenYeltsinflewbackfromtheUnitedStatesonSeptember30,hefailedtogetofftheplaneinIrelandtoseethe waiting prime minister. Many assumed he was drunk. Deputy PrimeMinisterOlegSoskovyets, another in the “partyofwar”whoeventuallymetthe Irish prime minister, was quoted by Tass as saying: “Boris Yeltsin ishealthy.”Thiswasalie.KorzhakovlateradmittedYeltsinhadsufferedaheartattackontheplane.35

InMoscow,fast-pacedcriseskepttheKremlinreeling.OnOctober11cametheunexpected“BlackTuesday,”whentherublelost27percentofitsvalue.OnOctober 17, Dmitri Kholodov, an investigative reporter for the mass-circulation daily Moskovsky Komsomolets who was probing militarycorruption,waskilled inabombblast.Many journalistsandpoliticianswereoutragedatthebrazenmurderoftheyoungreporter.Yeltsin, isolated and ill, was told that his enemies were everywhere.

Korzhakov claims Berezovsky brought him kompromat about Gusinsky.Berezovskyhadlitafuse,anditwasburninginsidetheKremlin.HewasusingKorzhakovandYeltsinforhisowngoals,tocrusharival.OnedayataKremlinlunchwithKorzhakov,Yeltsinasked,“Whycan’tyou

deal with what’s-his-name, with Gusinsky?” According to Korzhakov’saccount,YeltsinthencomplainedaboutGusinsky’scarcuttingoffhiswifeandfamilyonthehighwayintotown.“HowmanytimesdidithappenwhenTanyaandNainaweredrivingsomewhereandtheroadwasblockedtomakewayforGusinsky?HisNTVhasgottenoutofcontrol;itbehavesimprudently.Iorderyou,dealwithhim!”Korzhakov claims he protested that they had no legal grounds. “Find

something,”Yeltsinsteamed,accordingtoKorzhakov’srecollection.“Followhimaroundeverywhere,givehimnopeace.Makethegroundburnunderhisfeet!”Thegroundsoonbegantoburn.Oneofthefirstsignscameonthemorning

ofNovember19,1994,withanarticle inRossiiskayaGazeta,apro-Kremlinstate-owned newspaper. The articlewas headlined, “The Snow Is Falling.” Itquotedunnamedsourceswithdarkhints that a shadowyMoscow financier—Gusinsky—waspreparingtomakeLuzhkovpresident.ThearticlereflectedthedepthsoftheKremlin’sparanoiaabouttheMoscowmayorandGusinsky,whowas blamed for the October ruble crash and depicted as a diabolicalpowerbroker,buyingupthemassmedia.TheMostempire,thearticlesaid,“isplanningtoforceitswaytopower.”36Gusinskyreadthearticleknowingthatitwasathreat.“Thefirstpoliticalhunthadbegun,”herecalled.Hewastheprey.Gusinsky’stroublesalsohadtheiroriginsintheChechnyamisadventurethat

Yeltsin,Korzhakov, and the “party ofwar”were soon to embark upon. TheChechen republic, in southern Russia, was increasingly coming under thecontrol of separatist leaderDzhokharDudayev, and theMoscow authorities,isolated and blind, were sliding toward war. The first stage came in mid-November,whenRussianintelligenceservicessecretlyarrangedanassaultby

forty-seven tank crews, under the cover of an attack by an “opposition” toDudayev.The“opposition”werereallyuntrainedRussiantroops,recruitedjustdays before from Moscow’s Interior Ministry forces, the Kantemirov andTamanTankDivisions.Theyouthful soldierswere not even toldwhere theyweregoingorwhy.ThetankoffensivewasbegunonNovember26,butastheyrolledintothecapital,Grozny,thepoorlypreparedtroopswereslaughteredbya fusillade of rocket-propelled grenades fired by the Dudayev forces. Thewhole covert operation turned into a bloody debacle forwhich theKremlinwas slow to admit responsibility. Twenty-one soldiers were captured byDudayev’s forces and shown on television. The head of the Kantemirovdivision, General Boris Polyakov, resigned, saying the assault had beenarrangedbehindhisback.37Whatmadethesetensedaysevenmoredangerousfor Gusinsky was the sudden, amplified power of television. Polyakov’sresignationhadbeenbroadcastonNTV,whichinfuriatedtheKremlin.“Whentheseguysdecidedtostartthewar,theystartedtothinkaboutmediacoverage,and it made them extremely nervous,” Malashenko recalled. They werenervousbecausetherewasonechannel,NTV,thattheycouldnotcontrol.OnedayinNovember, justbeforethetankdebacle,Malashenko, thenpresidentofNTV, met a top official from the security services while waiting for anappointment in the Kremlin. The man was intimately involved in the tankassault.HewasanoldfriendofMalashenko.“Igor!”heimploredMalashenko.“CanyouforgetaboutChechnyaforjusttwoweeks?Intwoweeks,we’llfinishthewholeoperationandIpersonallywillgoonNTVand tellyou thewholestory.”Malashenkowasstunned.Washecrazy?“Doyousincerelybelieveyoucan wind up this problem in two weeks?” Malashenko refused to stop thecoverage.JustasthetankdebaclewasunfoldinginGrozny,Gusinskywassummoned

to theKremlin byKorzhakov’s deputy,GeorgiRogozin. “He started a soul-searching discourse about how one should be in love with the authorities,”Gusinskytoldme,“andwhatoneistodo.”38OnthemorningofDecember2,black-maskedmenwearingfatigueswithout

any insignia and carrying automatic rifles pulled up to Gusinsky’s homeoutsideMoscowandtriedtostartafightwithhissecuritydetail.Themaskedmen left, but they returned to tailGusinskyon thehighwayasGusinskywasdrivenfromhiscountryhousetothecenterofthecity.Theyfollowedhimallthewaytohisoffices in thehigh-risebuildingonNovyArbat.Thehigh-risealsohousedofficesofLuzhkov’scitygovernment.Gusinskyhadnoideawho

thearmed,maskedmenwere,butinfacttheyhadbeensentbyKorzhakov,wholater chortled, “The bankers’ security guards were nervous, and Gusinskyhimself was scared to death.” When Gusinsky reached the high-rise, hescurried inside and up to his twenty-firstfloor offices, while Korzhakov’sgoonsbegantogrufflyinterrogateGusinsky’ssecurityguardsintheparkinglot.Up in thewindowed tower,Gusinsky beganmadly calling for help. Thegoonsleft,andat5:30,anothergroupofmasked,armedmenarrivedincrispfatigues with weapons. They bore no markings, no insignia, just menacingmasksandguns.They roughedupGusinsky’s securityguards in theparkinglotandforcedseveralofthemtolieinthesnowforseveralhours.Anagitated,panicked Gusinsky then called a friend, Yevgeny Savostyanov, head of theMoscow branch of another federal security service.39 Savostyanov was aliberal,abeardedacademicwhoparticipatedinthepro-democracymovementduring perestroika and had been close toGavriil Popov. Savostyanov sent ateamofagentstothehigh-risetower.Korzhakov’s Kremlin goons were suddenly nose-to-nose with

Savostyanov’sMoscowagents, and a fight brokeout.Korzhakov claims thatSavostyanov’smenwereslightlydrunk.Shotswerefired,oneofwhichgrazedthe leather jacket of one of Korzhakov’smen. Another bullet hit a car. Justwhenthesituationwasabouttoexplode,oneofSavostyanov’smenrecognizedone of Korzhakov’s, with whom he used to work. The Savostyanov teamrealized they were up against the elite presidential security service andretreated.Korzhakov recalled that when he heard about the episode, he went

immediately to Yeltsin, who signed a decree firing Savostyanov. ThenKorzhakovsentasmallunitofrapid-reactiontroopstoGusinsky’sparkinglot.TheyblockedtheentrancestothebuildingandbegancheckingallthecarsinGusinsky’sfleet.“ThedriverofGusinsky’sarmoredMercedeslockedhimselfinsidethecar,”Korzhakovrecalled.“Whenhewasaskedtogetout,herefused.Thenagrenadewasputontopofthecar.Heimmediatelyjumpedout.”ItwastypicalofKorzhakov’sswaggeringstyle.Heclaimedthegrenadedidn’tevenhaveafuse.Meanwhile, Gusinsky summonedMoscow’s press corps to the scene. The

Korzhakovgoonswerecapturedbytwodozentelevisionnewscrews,withtheGusinskymenstillfacedowninthesnow.Theepisodewasknownlongafteras“facesinthesnow.”Thereasonsfortheconfrontationremaineduncleartotheoutside world that night. Certainly, the Kremlin’s anger at Gusinsky over

coverageofChechnyawasoneplausiblereasonfortheassault,butitwasnotevident precisely who had sent the goons. After the confrontation in theparkinglot,Gusinskyrealizedwhohewasupagainst,andhewasfurious.Gusinsky later reflected on the events: “If back then these morons at the

Kremlinwere smarter, theywould have calledme and said, ‘Volod,we begyou,pleasegiveusyoursupporthere.’Iprobablywouldhavetriedto.Buttheydecidedtointimidateme.AndI’manidiot,aramfromchildhood.Ifyouaregoingtothreatenme,getlost!”40On December 5, Gusinsky was again invited to see Korzhakov’s deputy,

Rogozin. He decided to disarm all his bodyguards, so there would be noquestionaboutshootingbackifanotherconfrontationerupted.Healsodecidedtosendhiswife,Lena,andhisyoungsontoLondon.AshewasheadedfortheKremlin,Gusinsky got a call from his security chief that three blueVolvos,unmarked,were trailing hiswife on theway to the airport. “There aremenwithmachinegunssittinginside,”thesecuritymansaid.“Gotit,”Gusinskyreplied,curtly.At the table with Rogozin, Gusinsky broached the idea of a compromise.

Whatwouldittake?“Chechnya,Kukly,” said theKorzhakovdeputy, suggesting thatGusinsky’s

televisionstationneededtofall intoline.HewasreferringtoKukly,abrand-new television satire program, based on puppets, which often made fun ofYeltsinandhismen.“Iamnotgoingtodiscussit,”Gusinskycuthimoff.Hewouldnotgiveup

thestation.Rogozin replied, “Somethingneeds tobedone; the emotional temperature

needstobelowered.”“Areyoulettingmywifeflyouttoday,byanychance?”Gusinskyasked.“Judgingbyyourbehavior,”Rogozinrepliedcagily.Gusinskyhadasuddenflashback.Hewasinthecourtyardasasmallboy.He

waspickingup thepipe inhishands tosmash themanwhohadcalledhimaYid.He lookedRogozin in the eyes. “I told him that Iwould personally killhim,ifanythinghappenedtomywifeandchild,”Gusinskyrecalled.“Thiswasan unpleasant incident for me. I told him, ‘I don’t need any security. I willpersonallystrikeyoudead,I’llstrikeyoudeadmyself.’Probablythisiswrong,uncivilized,butIhadnochoice.Hadsomethinghappenedtomywifeandchildatthatpoint,Iwouldhavekilledhiminhisofficewithsomethingheavy,anashtray,anything.”

Gusinsky’swife flewoutof thecountry.But thepressureonGusinskydidnot letup.Korzhakovboasted inanewspaper interviewa fewdays later that“huntinggeeseisanoldhobbyofmine.”TheRussianwordforgoose—gus—isaplayonGusinsky’sname,andafavoritenicknameforGusinsky.In mid-December, Kiselyov got a telephone call from the Kremlin. The

warningwas blunt. “You are in great danger,” saidViktor Ilyushin,Yeltsin’schiefofstaff,whohaddialedKiselyovdirectly,noteventhroughasecretary.KiselyovwenttotheKremlintomeetIlyushinforaformalinterview,inwhichIlyushin said nothing. But after the interview, Ilyushin took the televisionanchor aside, and said, “You have big problems, guys.” Just a year before,YeltsinhadsignedthedecreegivingNTVtheexpandedairtimeonChannel4.NowYeltsin’swife,Naina,couldhardlywatch thechannel, Ilyushinreported.“Whydidyoudothatterriblestory?”Ilyushindemandedtoknow.“Whatterriblestory?”Kiselyovasked.Ilyushin said theYeltsin familywas distraught over anNTV feature about

howYeltsinwasdeeplyunpopulareveninthevillagewherehewasborn.Thestoryreflectedasad truth:Yeltsin’spublicapproval ratingsweresliding intosingledigitsbecauseofthestrainsofreformandtheshadowofwar.41Gusinskytoowasfeelingmoreandmorepressure.“Theysummonedmeto

theKremlinandtheytoldme,ifyoucontinueshowingChechnya,wewillstripyou ofNTV and kill you,”Gusinsky recalled. “It felt scary. But I could notagree to it, of course. I grew up on the street, didn’t I? I don’t like to bethreatened.Iamdeeplyscared,ofcourseIam,butIcannotshowtoanybodythatIamafraid,canI?Isaid,fuckoff—allofyou.”If his tormentors thought they had defeated Gusinsky, they were wrong.

They saved him. The beginning of the Chechen war in December 1994changedGusinsky’s life forever. It forged a new, popular, private televisionchannel,NTV,whichsoonposedaseriouschallengetoYeltsin’sauthority.NTVnot only brought home the horrors of thewar but became a sort of

alternative power center, telling the stories that the government would notadmit.Nightafternight,NTVbroadcastinawaythattelevisioninRussiahadneverdonebefore.WhenaRussianhelicopterwasdowned,NTVshowedthebodies, but government officials said nothing. When Russians were takenprisonerinmid-December,NTVshowedthem;thegovernmentsaidtherewereno prisoners. When Yeltsin said the bombing of the presidential palace inGroznyhadstopped,NTVshowedthebombsstillfalling.Kiselyov told me that in 1994, even before the war began, “We were

permanently in Chechnya from late spring, throughout the summer, into thefall.”Morethananyothertelevisionchannel,NTVwaspreparedwhenthewarbrokeout,andbroadcastfootageofthetroopconcentrations,themobilefieldhospitals, and the war itself. Gusinsky recalled, “Thanks to our honesty incovering thatwar,we became theNTV company.Wewere honest.Wewereshowingwhatwehad toshow.Itwasexactlyat thatpoint that I realizedwhatpublicservicewas.Exactlyatthatpoint.”Fearing arrest, Gusinsky left Russia on December 18 and remained in

Londonforsixmonths.Thepressure,thethreateningphonecalls,andthevowstoshutdownNTVcontinuedintothespringasthewarturnedintoaquagmireforYeltsin.Kiselyovtoldmethatafterallthetumultheandhiscolleagueshadbeenthroughinrecentyears,whentheChechenwarbegan,theyknewexactlywhat todo.Theydidnotdebatehow to cover thewar—theywent anddid it.“We had a good understanding that informationwas a powerful tool in ourhands, to fight back,” he said. The reporting was impassioned, at timessickeninginitsunblinkingtreatmentofthewar ’sghastly,bloodyvictims.Mycolleague Lee Hockstader, who covered the war at great risk and withenormouspersonal intensity,wroteofNTV:“Mangled limbs,agonizeddeaththroes,evisceratedcorpses,allofitwasfairgamefortheeveningnews.Thetoneofsomeofthecoveragebecameovertlyantiwar.”OlegDobrodeyev,whohad founded the channel with Gusinsky and Kiselyov, led the day-to-daycoverage.Hisrulewasthatifcorrespondentssawit,theyairedit.“Iremembermyself sitting and watching all those reports, making decision about whatwould and would not be put on the air,” Dobrodeyev told me. “I broadcasteverything,” he said, because the footage spoke for itself—powerfully. Thepathos of war on television, which Americans had discovered a generationearlier inVietnam,provedgripping toRussianviewers,whohadnever seenanythinglikeit.42NTVenjoyedasurgeofpublictrust.Televisionbecamethechiefsourceofinformationaboutthewar;newspapersandmagazineswerefarbehind.VsevolodVilchek,alongtimepublicopinionspecialistforChannel1andlaterforNTV,reportedthatwhenpeoplewereaskedattheoutbreakofthewar if they were following events, 80 percent said yes. The audience fortelevisionwasexpanding,buttheshareofthenewviewersthatwenttoChannel1was tiny, justa fewpercent.Thesecondchannel,RTR,didbetter,butNTVgot an astounding 70 percent of the new audience.43 NTV doubled its totalviewersandatthepeakofthewarNTVaudienceinMoscowwas48percent—nearlyhalfofallthetelevisionsturnedonatthattime.44 Thoseearlymonthsof

theChechenwartransformedNTVintoRussia’smostprofessionaltelevisionchannel,andpeoplenoticed.SodidYeltsin.On July 8, 1995,NTV aired another segment of its regularweekly satire

program,Kukly,whichfeaturedlife-sizedpuppetsandwaswrittenbyawickedhumorist,ViktorShenderovich.Kukly hadbeen launched just as theChechenwar was getting under way, and it unexpectedly became another thorn inYeltsin’s side.The show that eveningdepictedgovernment leaders as trampswhocouldnotsubsistonthegovernment’sminimumwage.Yeltsinwasshownwandering through a passenger train, begging for change, dragging hissecuritychief,Korzhakov,alongasababy.Yeltsinhadathickskinafteryearsinpolitics,butGusinskybelievedKuklyprovokedhimintofitsofrage.Afterthe trainepisode, thegeneralprosecutor launchedacriminal investigationofKukly,whichbroughttheshowevenmoreattention.Nothingevercameoftheprobe, but Gusinsky realized the penetrating influence of his televisionchannel. “Yeltsin had quiet hatred reserved for me,” Gusinsky said. YeltsinoncecalledLuzhkovpersonallyandimploredhimtoaskGusinskytostopthepuppetshow.“Theyhumiliateme!”Yeltsinbegged.Buttheshowwenton.The Kremlin attack on Gusinsky had one major consequence: it drove a

wedgebetweenGusinskyandLuzhkov.TheMoscowmayor felt thepressurefrom theKremlin andwanted to keephis headdown.Gusinsky’sMostBankdepended on the “authorized” accounts of the city, but those accounts wereshifted to the new Bank of Moscow. Gusinsky’s relationship with Luzhkovcooled.Atsomepointthetwomen,whohadbeensoclosetoeachothersincetheir days in the cooperative movement, stopped talking to each other.GusinskyalsolosttheAeroflotbusinesstoBerezovsky,adecisiontakenintheKremlinaspunishmentforhisoppositiontothewar.“Itwasaverydifficult timefor thewholegroup,”Malashenkorecalledof

Gusinsky’steam,“becausepeopleinthebankwereofcourseextremelyupset.For them, itwas the death of their business.But I told them, listen guys,wedon’thavemuchchoice.WearenotgoingtosacrificeNTV.”Gusinsky had reached a crossroads. He decided that his future lay not in

banking and not in construction, but in media, as a mogul. A one-minuteadvertisement on NTV cost about $10,000. It was a tremendously valuableenterprise,both forbusinessand forpolitics.Hehadbuilt it up fromalmostnothing.Gusinskywasproudofthis:hisassetswerenot“ready-made”Soviet-era enterprises like Berezovsky’s Avtovaz or Ostankino. Gusinsky was an

entrepreneur, perhaps because he had to be—he built from zero. He had noreservationsaboutlobbyingthegovernment,ashehaddonetowinthelicenseforNTV,butthestationitselfwascreatedbyhim.ItwasnotaSovietleftover.Itwashistickettothefuture.TheviewfromtheclubonSparrowHillswasdifferent.Theothertycoons

were just beginning to look over a thick book from the State PropertyCommittee.Itwasalistofready-madeSoviet-erafactoriesandotherindustrialassets that would soon be theirs for the asking. They didn’t want to startsomething from scratch, as Gusinsky had, when there were such lucrativepropertiesjustwaitingtobeplucked—thebestminesandoilrefineriesinallofRussia.

Chapter12

TheEmbraceofWealthandPower

CHARLESRYAN,whodelighted inbuyinga fistfulofMenatepBankshareson a street corner in 1991, became an adviser to the privatization teamworking with Anatoly Chubais. One of his first acquaintances was AlfredKokh,asharp-tongued,bullheadedyoungman,deputyheadof theLeningradprivatizationoffice in thoseearlydays.Laterbothof themcame toMoscow.Ryan cofoundedUnited FinancialGroup, an investment bank. In 1995Kokhwas appointed acting director of the State PropertyCommittee, in charge ofcontinuingthesell-offofindustrybegunbyAnatolyChubais,whobecameoneoftwodeputyprimeministers.It was a difficult time for the Chubais team; the privatization of state

property had stalled, Boris Yeltsin was weak, and the Communists weregainingstrength inpolls for theDecember1995parliamentaryelections.OnSaturdays,Kokhwasofteninhisoffice,andthedoorwasopen.RyanlikedtowanderinandshootthebreezeonthesequietafternoonswithKokh,whowasknown forhis earthy languageand short temper.Oneday in late summerof1995, as they were talking, Kokh asked Ryan casually, “What do you thinkaboutUneximbankandMenatep?”Ryandiscovered thatKokhwasworkingonaprivatizationdeal thatwould

changeRussiancapitalismandpolitics forever.Onhisdeskwasa scheme inwhichRussiawouldgiveawayitsindustrialcrownjewels—themostlucrativeoil companies and richestmetalmines—to a coterie of tycoons, all of themfrom the Sparrow Hills club. Vladimir Potanin of Uneximbank was first inline, followed by Mikhail Khodorkovsky of Menatep. From the beginning,Kokhhadhandpickedthewinners,Ryanrecalled.Accordingtotheplan,sharesin thefactorieswere tobegiven to the tycoonsforsafekeeping, inexchangefor a loan to the government. Everyone knew the deficit-ridden governmentwouldnotrepaytheloan.Thenthetycoonswouldselltheshares,asrepaymentoftheloans.Buttherewasatwist.Thetycoonswouldprobablyselltheshares

to themselves, very cheaply, through hidden offshore companies. That way,they would get the valuable assets for next to nothing. It looked to Ryansuspiciouslylikeabackdoorgiveaway,aloantothegovernmentinexchangeforcolossaloilandmineralriches.Theschemewascalled“loansforshares,”andRyantoldKokh:“Thisloansforsharesthingreallystinks.”“Whatdoyoumean?”Kokhasked.“YouknowAlfred, thefunnythingis thatyouaregoingtogethosed.You

are going to be the scapegoat for all this. You are the one signing all theorders.”“That’s not true,” protested Kokh. “Everything I have done has been

approvedbyAnatoly.”“Alfred,you’resuchajoker.Infouryears,Chubaisisgoingtohavesome

greatjob,andyou’regoingtobethesucker.”KokhgrewfuriousandshoutedatRyan,“Fuckyou!”Ryanlaterrecalled,“I

told himwhere he could stick it. And this loans for shares thingwas prettymuchtheendofmyfriendshipwiththoseguys.”1

In feastingoneasymoney,Khodorkovsky tastedeverydeliciousmorsel.Hisbank, 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 thesummer of 1995, one of the most rewarding easy money schemes, ruble-dollar speculation, finally dried up.TheRussianCentralBank, struggling tobring inflation under control, imposed a new exchange rate “corridor,” anarrowrangeinwhichtherublewouldbeallowedtoriseandfallagainstthedollar.Thebankscouldnolongergambleonwildswingsintheexchangerate.TheCentralBankwoulduseitsreservestoenforcethelimits.Chubaisdeclaredthat the era of easymoneywasover.For banks thatwere speculatingon theexchange rate, he said, “buying and selling dollars is an avenue that is nowclosed.”2 Chubais hoped that getting control of the currency would finallydampentheraginghyperinflationthathadbegunin1992andleadtothefirstrealstabilityintheeconomysincethebeginningofshocktherapy.Soonitbecameevidentthatthedaysofeasymoneywerenotyetover.Other

fast-moneygamesabounded,andnewoneswerebeinginvented.Ashort-termgovernment bond, with a maximum term of three months, was payingamazinglyhighannual interest rates, sometimesclimbingover200percent.3

Thesizzlingbondwaseasymoneywith theaddedbenefitof lowrisk: ithadRussiangovernmentguarantees.ThenewbondswerecalledGKOs,and theywould eventually lead the Russian government to disaster. But in the earlyyearstheywereincrediblyprofitable:justsitbackandwatchyourmoneygrowbyleapsandbounds.Despitethisandothereasymoneytemptations,Khodorkovskydidnotwant

to liveouthis lifeasabanker;he longed tobeacaptainof industry.Duringmassprivatization,Khodorkovskysnappedupmanyindustrial firms,biddingwith nothing more than a promise to make future investment. In September1995,hecreatedafinancial-industrialconglomerate,Rosprom,tocontrolhistwenty-nine industrial companies in oil, metallurgy, chemicals, foodprocessing, textiles, wood pulp, and paper.4 Still, Khodorkovsky was notsatisfied with the grab bag assortment of factories he had assembled.Wheninternational consultants Arthur Andersen suggested that he model himselfafter Samsung, one of the Korean chaebol, or industrial conglomerates,Khodorkovskyimmediatelydismissedtheidea, thinkingitcouldnotpossiblyworkinRussia,anddecidedtopourhisenergyinto“onebranch”ofindustry.Thatbranchwasoil.5AwayfromMoscow,on theothersideof theUralMountains, in thebroad

basinofwesternSiberia, theSovietUnionhadopeneduphugenewfieldsofoil and gas in the 1960s and 1970s. The deposits stretched across theWestSiberianbasin,which isdrainedby theObRiver,Russia’s third largest, as itwanders3,650kilometersfromAltaiinthesouthtotheKaraSeainthenorth,largely fed by spring thaws andmelting snow. The river ’s course is a roadmaptomammothundergroundreservesofoilandgas,butunstablebogsandharshweatherconditionsdiscouragedexplorationuntilthe1970s.Then,inthelate1970sand1980s,thegiantfieldswererecklesslyandwildlyexploitedinafrantic effort to prop up the failing Soviet economywith revenues from oilexports.AtthetimeoftheSovietcollapse,oilextractioninRussiawasslidingdownward, from a peak of 591million tons in 1987 to 303million tons in1998.6The Soviet oil industry was a vast archipelago of outdated, state-run

“productionassociations,”oilenterprisesbasedlargelyonthelocationoftheirfields. More than anyone else, Vagit Alekperov, an ethnic Azeri who wasdirectorofaproductionassociationinKogalym,ledthewayintransformingpost-Soviet Russia’s industry intomodernWestern-style companies. In 1991and1992,hugevolumesofoilwerebeingillicitlyexportedtotakeadvantage

of the large gap between domestic and export prices; a ton of oil sold forexportwouldfetch$100ormorebutcouldgetonlyafractionofthatpriceonthe domestic market. In this time of terrible flux and wholesale theft,Alekperov created his ownWestern-style oil company, Lukoil, out of threeSiberian production associations, two refineries, and a trading company.Lukoil was Russia’s first vertically integrated oil company, handlingeverything from exploration and drilling to refining, distribution, and sales,very much like modern Western oil companies. Alekperov, who took theinitiative at a timewhen the economywas in chaos, set an example that theRussian government underYeltsin then followed for the rest of the industry.Theideawastoreassembletheoilfieldsandrefineriesofthefar-flungSovietsystemintoadozenlargeprivatecompanies,buildinganew,market-orientedoilindustry.Bycontrast,thenaturalgasbehemothGazpromwasleftlargelyasit had been in Soviet times, as an inefficient and hidebound monopoly. OnNovember 17, 1992, Yeltsin signed a decree establishing the first threeverticallyintegratedoilcompanies,includingLukoil,andorderedtheindustryrestructured.7Khodorkovsky saw the prize he wanted, but it took him several years to

reachit.Shrewdandcalculating,hefoundaninsidetrack.Duringthefirstyearof the Yeltsin government, Khodorkovsky became an adviser to VladimirLopukhin, Gaidar ’s minister of fuel and energy. The Gaidar cabinet was inofficeforlessthanayear,andthecarvingupoftheoilindustryhadjustbegun,amidmuchuncertainty.WhenKhodorkovsky took the jobwithLopukhin, hedidnotwanttoleaveMenatepBank,soLopukhincreatedaninformalposition,with the rank of deputy minister, putting Khodorkovsky in charge of theenergy ministry’s “investment fund.”What this really involved is not clear.However,itmusthavegivenKhodorkovskyanexcellentsourceofintelligenceabouttheoilindustry.Nevzlin,Khodorkovsky’slong-timepartner,toldmethat“the only plus I remember” fromKhodorkovsky’s appointment “was that hemanaged to get acquainted” with the powerful Soviet-era directors of theproductionassociations,knownasthe“oilgenerals.”Atthetime,fewoutsidersknewwhatwasreallygoingonintheoilproductionassociations,andtheoilgenerals were secretive, but Khodorkovsky got a glimpse of their closedworld.8What he foundwas thatAlekperov had created his own empire inLukoil.

Another oil general, Vladimir Bogdanov, the strong-willed boss of theproduction association in Surgut, along the northern bank of the Ob River,

created a similar kingdomof his own,Surgutneftegaz.Khodorkovskywas aMoscowfinancier,notanoilgeneral,buthadambitions to standshoulder toshoulderwithAlekperovandBogdanov.Hesethissightsonthenewverticallyintegrated holding company that would eventually become Russia’s secondlargest oil giant. It was called Yukos, and the core was a productionassociation,Yuganskneftegaz,onthesouthernbankoftheObRiver.(Asecondproduction association,Samaraneftegaz,was also added toYukos.)Thebossof Yuganskneftegaz was Sergei Muravlenko, whose father was a legendarySiberian oilman.Muravlenko became just the kind of contactKhodorkovskylaterneededforhistakeover.Yuganskneftegazhadenormouspotential;itwasextracting 33 million tons of oil a year in 1993, nearly 15 percent of allwestern Siberia’s output. Yuganskneftegaz also had some of the largestreserves in Russia, including the biggest single undeveloped field,Priobskoye.9Nonetheless,likemostRussianenterprises,Yuganskneftegazwasnotan idealcompany—ithadbig taxdebtsandwagearrears,and it sufferedlossesbysellingoilatRussia’sartificiallylowdomesticprices.10Khodorkovskywasnot theonlyonetospotanopportunity inSiberianoil.

ForeigninvestorswhocametothenascentRussianstockmarketavidlysoughtout shares in oil companies. Itwas said in the early 1990s that the cheapestplace in theworld to drill for oil and gaswas on theRussian stockmarket.These stockmarket investors did not really care about sloppymanagement,overduetaxes,andcrazyprices;infact,mostneverevenvisitedthecompaniesinwhichtheyinvested.Theyjustboughtthestocksandhopedtomakeakilling.Theinvestors,manyofthemreallyjustsophisticatedgamblers,wereluredbycheap assets, and that meant oil reserves in the ground, of whichYuganskneftegazhadplenty.Theformerproductionassociations,whichIwillcall the oil field extraction companies, did the real work of the industry,bringingtheoiloutoftheground.OntheRussianstockmarket,itwaspossibleto buy large blocks of shares in these oil field extraction companies.Yuganskneftegaz was one such alluring stock. It was the equivalent of amidsized international oil company such as Amoco.11 The shares ofYuganskneftegazstartedtradinginthesummerof1994,andtheywerefeaturedinresearchreportsbyMoscow’ssmallbutgrowinglegionofstockbrokers.12Evenforgamblers,therewererisksinbuyingsharesinoilfieldextraction

companieslikeYuganskneftegaz.First,therewasthetheft.Russianoilindustrymanagers, local politicians, criminal groups, and assorted sharks andfinanciersdiscoveredingeniouswaystoleachthewealthoutoftheextraction

companies. Buying the stock did not guarantee that you would get the oilwealth.Themanagers,forexample,couldeasilysiphonofftheprofitsintoanoffshore private “trading company” and leave you with the debts and wagearrears. A common technique was called “transfer pricing.” An extractioncompany sold oil to another company at an artificially low price, say, $2 abarrel.The secondcompany thensold it forexportabroadat amuchhigherprice,say,$18abarrel.Theresultwasthattheextractioncompany,withallthedrills,wells,fields,andworkers,lostmoney,whilethesecondcompanymadeahandsomeprofit.Thewealthwastransferredfromonecompanytotheother,ofteninsecretusingshellcompaniesandoffshorehavens.The second riskwas ownership. For the hungry investorswho bought up

stocksoftheoilfieldextractioncompanies,therewastheprospectthatthey,inturn, would be swallowed up by one of the new holding companies that theRussiangovernmentwascreatingintheearly1990s.Theseholdingcompaniesbecame corporate energy giants practically overnight and ranked amongmajorinternationaloilfirms.Theholdingcompanieswerefattenedupbythestate,whichawardedthemlucrativestakesintheoilfieldextractioncompanies.In general, the Russian government gave the holding company at least 51percentofthevotingsharesintheextractioncompanies—enoughtoensurethethatholdingcompaniesgotcontrol.Thegovernmentthenplannedtoselloffitspartoftheholdingcompaniesafterthreeyears,reapinganicechunkofcash.Theriskforinvestorsintheextractioncompanywasthat,whentheholding

companytookover,thenewbossescouldeasilysiphonofftheoilwealthforthemselves.Theholdingcompanycoulduse transferpricing,asset stripping,and other means to redirect the profits. The shareholders in the oil fieldextraction company would be robbed. They would have lots of stockcertificates, but none of the profits. The situationwas ripe for conflict. Theholding companies, which had a majority of shares in the extractioncompanies, would naturally want to exercise their clout. The extractioncompanies had their own minority shareholders, who could be prickly andrebelliousiftheysawtheywerebeingrippedoff.Thecollisionbetweenoilfieldextractioncompanyandholdingcompanyis

exactlywhathappenedatYukos.AreclusiveAmericaninvestor,KennethDart,heirtoafoamcupfortune,boughttensofmillionsofdollarsworthofstockintwoextractioncompanies,YuganskneftegazandSamaraneftegaz,inthoseearlyyears,figuringthat,despitealltheproblems,theyhadcheapassets—oilintheground.Dart’spurchasewassecretatfirst,butlaterledtoabitterpublicfight

withKhodorkovsky,masteroftheYukosholdingcompany.13Yukos was created as a holding company in 1992, incorporating

Yuganskneftegaz,Samaraneftegaz,andrefineries.Yukoswasofferedforsalethreeyearslater,in1995.Khodorkovskyrecalledthathedoubtedwhetherthegovernment,havingcreated theoilholdingcompanies,wouldeversell themoff.“Icouldneverbelievethatthestatewouldselloil,”hesaid,insistingthathe did not contemplate becoming an oil general in 1992, while he held theinformal post in the fuel and energy ministry. Only in early 1995,Khodorkovskysaid,didhebegintobelieveitwaspossibletobuyYukos.Why?SomethingPotaninhadcookedupcalled“loansforshares.”

VladimirPotaninwasamemberoftheSparrowHillsclubbutalatecomertotheworldoftheyoungRussiantycoons.Hearrivedonthescenelongaftertheothers had suffered the hard knocks of the cooperatives and their nascentbusiness ventures.During the tumultuous years ofperestroika, whenMikhailKhodorkovsky was transforming worthless noncash into cash, when BorisBerezovskywassettinghissightsonAvtovaz,andwhenAlexanderSmolenskywasbuildingdachas,Potaninwasalow-levelbureaucratintheSovietForeignTradeMinistry,wherehis fatheralsoworked.Hestartedhis firstbusiness in1990,andhereapedhisfirstfortuneonlyaftertheSovietUnionvanished.Yetthis pugnacious youngmanwith thinning hair and a gravelly voice becameringleaderofallthetycoonsin1995intheirgreatestsinglepropertygrab.Hecame 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, includingwell-stocked food stores and frequenttravelabroad.Whenhewasveryyoung,PotaninlivedinYemen;laterhespentfouryearsinTurkey.Whenhewasateenager,hisfatherwastheSoviettraderepresentative inNewZealand. InMoscow,Potaningrewup ina tree-shadedneighborhood known asMatveevskoye, not far fromwhere Stalin and laterBrezhnevhadtheirdachas.AlexeiMitrofanov,achildhoodfriend,recalledthattheywouldoftenplayinanearbywood,hidingbehindthetreesandwatchingtheSovietbossesdriveuptothedachasintheirlimousines.14WhenItalkedtoPotanin’steachersatSchool58,Igottheimpressionofanindependentyoungman who was surrounded by elite trappings. His classmates were sons anddaughters of Soviet diplomats and KGB agents who often spent months or

yearsabroad.“Whentheycamebackfromtheirsummersabroad,theygaveareport about the country in which they had lived,” the head teacher, NinaYermakova,toldmeoverteaandcookiesasshebroughtoutwell-wornclassscrapbooks.“Wearetalkingaboutthebroadhorizonthatthesekidshad,”shesaid,pointingtoaphotoofearnestyoungPotanin,whoscoredtopmarksforanessayonTolstoy.15PotaninwasadmittedtotheMoscowStateInstituteofInternationalRelations,

a training ground for the cream of Soviet officialdom, especially futurediplomats,tradeofficials,andKGBagents.Hegraduatedin1983.“Theschooltaughtushowtobehaveinthecorridorsofpower,”Mitrofanovsaid.“Howtobuild relationships with people in power, what to say and what not to say.”TheseweretheyoungmenandwomenwhomtheSovietUnionwantedtosendabroad, the future grain merchants, spies, and arms traders. Althoughsurroundedbytheeverpresent ideology,acertainpragmatismwastheorderoftheday.Thefutureenvoyshadtoknowhowtobecleverindealingwiththecapitalists they wouldmeet. Oleg Churilov, a classmate of Potanin, told me“the emphasis was always on the practical issues” in their training, such asfinance and currency, which Potanin studied in the International EconomicRelations faculty.16 Potanin’s textbooks included titles such as InternationalCurrency-Financial Organization of Capitalist Countries, Currency-CreditRelations in World Trade, and Finances of the Capitalist States. Sovietsocialism was troubled within, but for Potanin and his classmates, theimportantlessonswereaboutthecapitalistsoutside.His friends suggestPotanin sawclearly the realworldoutside,butnot the

SovietUnion’srotfromwithin.HisyearsattheinstitutewerethefinalonesoftheBrezhnevperiod,butinhiscrowditwasnotcertain,orevenevident,thatSovietsocialismwasheadedforacrack-up.“Allofthestudentsatthattimedidnot thinktheperiodwasastagnationperiod,”Churilovrecalled.“Wedidnotthinkthatthecountrywasinastateofdeclineorthattheeconomywasgoingthroughdifficulty.”After graduation,Potanin landed in theForeignTradeMinistry,wherehis

fatherhadmadeacareer.HewasassignedtoSoyuzpromexport,aSovietstateexportcompany,firstasan“engineer,”whichwasaclerk’sposition,andlaterasan“expert,”whichmeantaseniorclerk.OlegKlimov,whowasPotanin’sboss then, recalled the young man’s enthusiasm. But his task was dreary—sellingfertilizerabroad:nitrogen,potash,andphosphate.PotaninwasaSovietphosphate fertilizer salesman-bureaucrat.17 The job provided one clue to

Potanin’s future fortune, however: he traveled to the Far North, such as theKolaPeninsula,where theSovietUnionhadahugepotashmine. In thesamedivisionoftheTradeMinistry,therewasalsoanoresection.InhisvisitstotheNorth,andin theoresection,PotaninlearnedfirsthandaboutaSovietmetalscolossus that had been excavated out of the Arctic tundra, Norilsk Nickel.FoundedinStalin’seraofindustrialization,Norilskwasoriginallyhackedoutoftheicebyprisoncamplabor.Lateritbecameamajorproducerofnickelforthewareffort.AtthetimeoftheSovietcollapse,Norilskproduced98percentofRussia’svaluableplatinum-groupmetalsand90percentofitsnickel.18Potanin was just beginning to dabble in private business when the Soviet

Union fell apart. Growing bored after seven years at the Trade Ministry,Potaninsawthatmanyofhisfriendsweregoingintobusiness—thestatetrademonopoly was disintegrating and quick fortunes were awaiting those whocould master private trade deals, exporting cheap domestic oil, timber, andmineralstomarketsabroadandimportingconsumergoodslikecomputers.InMarch1990,Potaninproddedtwentysmalltradeorganizations,mostofthemstate-owned Soviet agencies hankering to make deals, to give him about$10,000 in start-up money for his new trading company, Interros. Soonthereafter,Potaninrealizedthetradeorganizationsreallyneededabank,andin1992hesetuponeforthem.ThisiswhenPotaningothisbiggestbreak.Forayoungmanwhohaddonenothingexceptionalintheperestroikayears,Potaninexploded out of the blocks. As the Soviet trade bloc in Eastern Europecollapsed, a Soviet state-run bank, the International Bank for EconomicCooperation, was in financial trouble. The Eastern European states that hadloansfromthebankcouldnotrepaythem.In1992thebank’smanagementsentout lettersquietlyurgingsomeof thebank’scustomerswithinRussia toshifttheirmoney toPotanin’sbank.Thesuggestionwas that thiswouldsave themfromdifficulties.Howthese letterscameabout isnotclear,but itwasoneofthose moments when Potanin most likely had a little help from the “magichand” of power. Potanin appears to have effectively taken the deposits andassets away from the troubled state bank, while leaving behind the debts.Potanininheriteda$300millionwindfalloverasix-monthperiod.Heseemstohavedonenothingtoearnthemoneyotherthanofferasafeharbor.Almostovernight,Potanin’sbankhadbecomeamajorRussianfinancialinstitution.Bycomparison,MenatepBank,whichhadbeenstartedseveralyearsearlier,hadassetsof$835million.19In April 1993, Potanin, still on a roll, created the United Export-Import

bank,knownasUneximbank,whichalsoenjoyedexplosivegrowth.Potanin’slicense for Uneximbank was approved with unprecedented speed by theRussiangovernmentandCentralBank,withsupportfromthereformistfinanceminister at the time, Boris Fyodorov. Potanin clearly had friends in highplaces.Theearly foundersofUneximbank includedPotaninandhisbusinesspartnerMikhail Prokhorov, who had been a foreign trade official in Soviettimesandwasalsoasonof thenomenklatura.Prokhorovalsoworkedat thefailedstatebankfromwhichPotaningothis$300million.Theyputtogetherabout fortymajorRussianexportersand foreign tradeorganizations.Oneofthem was Techmashimport, a state-owned oil and chemicals import-exportfirm.When I askedGariTitarenko,vicepresident,howhehadcome to joinPotanin’s bank, he recalled, “Potanin himselfwas always a very humble andsmart boy.Hewas very respectful; duringmeetings he always paid a lot ofattentiontoTechmashimport.”Why?“HewantedallourmoneytogothroughUneximbank.”Soonthesmartboydemonstratedthathisrealtalentwasintheeasymoney

scheme of “authorized” banking. Potanin once said Uneximbank was a“commercial bank with a state mentality,” and the state mentality meant thestate’s cash flow. While the others were no slouches at milking the state,Potaninseemedtohaveagoldentouch.Inthesummerof1994,whenhewasinvitedtotheclubonSparrowHills,Potaninwasrapidlyburrowingintooneof the richest lodes of the government, the State Customs Committee. Thecustomsservicewasbulgingwithcashithadaccumulatedfromimportduties.Potaninsomehowpersuadedthecustomsservicetoputthecashinhisbank,inreturn for creating a system to ease shipments by importers and exportersthrough customs—by paying duties in advance on their goods. If they sentPotaninmoneybeforetheirgoodsreachedtheborder,Potanincouldswitchthemoney quickly to the customs service accounts to pay the duty. This wasn’tvery difficult because the customs service accounts were in his own bank.PotaninprovidedtheCustomsservicewithcomputerstoo,sotheycouldkeeptrack of the incoming payments. It was convenient, especially for Potanin,since the crossroadsof all themoneywas inUneximbank.Potanin’s balancesheet swelled further as authorized bank for the Finance Ministry, the taxservice, the arms control export agency, the City of Moscow and others.Potanin was also serving the accounts of Norilsk Nickel, which became ashareholder inUneximbank. In 1994Uneximbank began the yearwith $322million in assets, and it ended the year with $2.1 billion.20 Potanin was

rocketingtothetopofthebankingchartsandbyDecemberandhadhiseyesonNorilskNickelitself,alucrativeindustrialprize.Buthowtogetit?Potaninwent toBorisJordan, thewhizkidwhohadshoutedfor joy in the

firstvoucherauctionwhenherealizedhowcheaplyBolshevikBiscuithadbeensold. Jordan was setting up his own firm, Renaissance Capital, with partnerSteven Jennings in early 1995.They leftCredit SuisseFirstBoston tomaketheirownfortunesasstockbrokersintheRussianmarket.“Ihavethisidea,”PotanintoldJordanoneday.TheRussiangovernmentwas

desperate forcash topayoverduewagesandpensions.Potaninhad thecash,although much of it was actually the government’s own deposits. Potaninsuggested, to Jordan,making the government a deal: give it a loan and takesomefactoriesascollateral.“Heneededsomeonetowriteitup,”Jordantoldme. Jordan and Jennings, who had played a key role in launching voucherauctionsandhadmadeasmallfortuneasvoucherspeculators,wereonceagainon the ground floor of Russia’s great sell-off. “Steven and I sat down andstartedthinking,”Jordanrecalled.OnelatenightinJennings’sapartment,theysketched out the plan. In this early version, they proposed that banks loanmoneytothestateandtakethesharesascollateral.Ifthegovernmentfailedtopaybacktheloans,theycouldsellthesharesforaveryhandsomecommission.Theplancalledfora30percentfee,whichwasgenerousindeed.“Don’tforgetour background,” Jordan saidwhenwe talked about it years later. “Wewerebrokers!”Theythoughtgettingafeeforsellingtheshareswouldbethepointof thewholescheme.“Ialways thought that Iamgoing todosomethingandearn my fee,” Jordan said. “We never perceived it as a vehicle to take thecompaniesforthemselves,”hesaidofthetycoons.“AtleastIdidn’t.”Potaninhadanotheridea.For a few more days, Jordan and Jennings hammered out their plan and

wroteupawhitepaperforPotanin.Theyputnonamesonit.Jenningsclaimedtherewasa“certainlogic”totheschemefromtheRussiangovernment’spointofview,sinceitwouldbringbadlyneededcashtothebudgettopaypensionsandteachers.Moreover,theyoungRussianstockmarkethadgonethroughitsfirst major decline in late 1994. Share prices were way down. Under theJordan-Jenningsplan, thegovernmentcouldhope to fetchahigherprice forthe factories later on,when presumably share priceswould again be higher.Also, it was possible that top managers from the private sector would bebroughtintoimprovetheperformanceofthefactories.ButJenningstoldmehe insisted that the deals must be completely transparent and open to

internationalcompetition.Ifnot,hesaid,“itwillbeadisaster.”JordangavethewhitepapertoPotanin.“Thisishowyoudoit,”hesaid.21Butwhat happened next did not follow Jordan’s script. Potanin took their

paperbut“destroyedtheconcept,”Jordansaid.Intheend,theprocesswasnotopentoforeigners,wasnottransparent,andturnedouttoberigged.Italsohadoneprofoundconsequence that theydidnot foresee: thewhitepaperwas thebeginningofamergerbetweentheRussiantycoonsandthegovernment.Thetycoonsfoundtheirpoliticalpatron,ananswertotheirsearchontheSparrowHills.HewasBorisYeltsin, and theywere about to graft theirwealth to hispower.In the 1990s, no other civil servant, no other reformer, oil general, reddirector, or politician had quite the same survival skills as Chubais. Heexhibited extraordinary determination under fire, and he believed the endsjustifiedthemeans.ButChubaiswasasurvivorforanotherreasonaswell.Hewouldpush,drive,andforcehiswayforward,butthenheusuallyspottedthemoment for a compromise. This was the secret to his success in massprivatization. The famous compromise with the Supreme Soviet, allowinginsiders tocontrol thenewlyprivatizedcompanies,served the largergoalofgettingpropertyoutofthehandsofthestate.NowChubais,oneof the twodeputyprimeministers,wason thevergeof

another remarkabledemonstrationof his ironwill.Hewasgoing toharnessthepowerofthetycoonstothatoftheailingRussianpresidentandtrytosavethemboth.Onceagain,hewaswillingtopayaprice,foritmeantsubvertinghisownidealsinpursuitofthelargergoal.Hediditwithoutevidenthesitation.Chubais was quite certain of those ideals in the early years of mass

privatization,whenheandYeltsinchampionedapopulistslogan:“Wedonotneedhundredsofmillionaires,butmillionsofpropertyowners.”Chubaiswasa crusader out to break the grip of the old nomenklatura and halt the wild,“spontaneous”privatizationbythefactorydirectors.Hewasdeadcertain thatthewayforward lay in themagicof themarket. Itwas themarket thatwouldchoosewinnersandlosers;itwasthemarketthatwoulddeterminewhowouldbecome an “effective” owner of the new property taken from the state. Themarketwastheboxingringthatwouldsiftoutthosewhodeservedtosurvive,bydintoftheiringenuity,andthosewhoshouldgobroke.ForChubaisandthereformers,thelessonofSovietsocialismhadbeenthatnosinglepoliticianorbureaucrat, acting arbitrarily, can be as effective atmaking decisions as the

collectivewisdomofthemarketplace.Chubaisandhisgenerationofreformersbelieved theoverlypoliticizeddecisionsof theCommunistPartyhadproventotallyineffective.Thewayoutlayinrigorousmarketcompetition,andtobecompetitivethemarkethadtobeopen.ThisiswhyChubaiswassoenamoredof the small business auctions he and Gaidar had witnessed in NizhnyNovgorod:itwaspure,elementarycompetition.OnMarch 30, 1995, Potanin appeared before the Russian cabinet. Down

bothsidesofalong,horseshoe-shapedtable,cabinetmemberssatshouldertoshoulder, small bottles of mineral water, note pads, and sharpened pencilsneatly arrayed before them. The prime minister sat at one end, his voiceamplified by amicrophone,while aides and visitorswere seated in an opensectionoftheroomattheoppositeend.Potaninhadpreparedcarefullyforthemeeting.Heoutlinedanearlyversionofhisloansforsharesplan,drawnfromthe Jordan-Jenningswhitepaper. In a session that lasted fourhours,Potanin,joinedbyKhodorkovskyandSmolensky,toldtheministersthataconsortiumofcommercialbankswaspreparedtoloanthegovernment9.1trillionrubles,or$1.8billion,inexchangeforcollateralinsharesofsomeofRussia’slargestenterprises. This was no small change. The budget called for raising 8.7trillionrublesfromprivatizationduringtheyear,butsofartheStatePropertyCommitteehadtakeninapaltry143billionrubles.22Wagesandpensionsweregoing unpaid across the land. The bankers were offering the government aplantoreapthewholeyear ’sprivatizationrevenueinonefellswoop.Amongtheforty-fourcompaniesthatthebankerswanted,itwasnoaccident

thatbothNorilskNickelandYukoswereonthelist:Potaninhadputthemthere.Just the daybefore,Potanin hadbeen carefully goingover the details of hisplanwithKokh, theblunt-spokenprivatization chief.Potanin alreadyhad thesupport of deputy prime minister Soskovyets, whose realm included heavyindustry and who was part of the reactionary group around Korzhakov,Yeltsin’s security chief and leader of the so-called party of war. But thequestionremained,WhataboutChubais,theotherdeputyprimeminister?Theyoungreformerson theChubais teamwereprivatelydisgustedby the

obvious corruption in the loans for shares scheme. Dmitry Vasiliev wasChubais’s original deputy at the State Property Committee and in 1995waschief of the Russian federal securities commission. He told me that Jordancametohimonedaywithanearlydraftoftheloansforshareswhitepaper.“IsaidIthinkthisschemeiscorrupt,”Vasilievrecalled.“Whatactuallyhappenedwasevenworsethanweeverexpected.”23

Everything about loans for shareswas the opposite ofwhat the reformershadoncestoodfor.Itreekedofpickingwinnersandlosersarbitrarilyinsteadoflettingthemarketdecide.Itmeantthatthenewownerswerebeingselected,onceagain,bypoliticians,notbymarketcompetitionandnotbythetestingofstrengthinthe“boxingring.”Andtheloansforsharesdealswerecarriedoutnot in theopenbut largelyinsecret,byoffshoreshellcompaniesandhiddenaccounts.Eventheauctionswerecorrupt:theauctioneerhimself,inmostcases,turnedouttobethewinningbidder.Theauctionswererigged,andChubaisletithappen.If Chubais had any doubts, they were fleeting. On the day of Potanin’s

presentationtothecabinet,Chubaisrecalled,“IunderstoodimmediatelythatIwasgoingtosupportthisideaatanycost.”24 SergeiBelyaev,anotherChubaisrecruitfromSt.Petersburg, toldmethatChubais’sonlyconcernwaswhetherthebankswerereallyseriousaboutcomingupwithsomuchmoney.Chubaiswasn’t questioning the plan, just whether the tycoons would pay. “He saw acertaindangerherethatthebankswoulddeceiveus,”Belyaevtoldme.“Theywouldtakethepacketsofsharesandwon’tgiveanymoney.”25ButevidentlyChubaisswallowedthosedoubtsquicklybecauseintheautumn

of 1995, another threat loomed—loss of the whole privatization drive. Thepolitical atmosphere had turned gloomy. Yeltsin suffered two heart ailmentsduringtheyear,theChechenwarwasdraggingon,andYeltsinseemedtohavelosthiswayasachampionofthedemocraticmovement.Thepollsshowedthatevery week the Communist Party was coming closer to a victory in theDecember elections for the lower house of parliament, the StateDuma. TheRussianCommunistswereledbyGennadyZyuganov,aone-timeSovietpartypropagandist. Zyuganov liked to present himself toWesterners as amodernsocialdemocrat,butathomehewasanideologuewhosoundedharsherthemesof nationalism. Zyuganov’s positions on the economy were hazy; he talkedabout renationalizing some banks but also declared his support for “mixed”forms of property ownership. When Zyuganov said he would reverseprivatization,Chubaistookthethreatseriously.Chubais, who became extraordinarily unpopular amongRussian voters in

theseyears,feltincreasinglyisolatedinhispostasdeputyprimeminister.Hewasmarginalized underChernomyrdin; therewas a “complete blockage” ofhis goals by the other deputy, Oleg Soskovyets. Chubais told me he feltChernomyrdinhad50percentofthegovernmentinhishands,Soskovyetshad40percent,andhehadonly10percent.“Privatizationwaspracticallystopped,”

Chubais recalled. The Russian reformers had envisioned a second phase ofprivatization, after vouchers, in which state-owned factories, refineries, andmineswouldbesoldforcashtothehighestbidders.Chubaissawthefailuretogetthisphaseofprivatizationoffthegroundasamajorsetback,notonlyforthebudgetbutforhislargerhopesofcreatinganewclassofprivateowners.At the time, he recalled, “There was no consolidation, no political forcestandingbehindprivateproperty.”26JordanandJennings traveledconstantlyaroundRussia,poking theirnoses

into aging factories and debating how to best sell off shipyards and mines.Theyalways stopped in theofficeof the factorydirector.Theykept trackofwhattheyhalfjokinglycalledthe“Leninindex,”atallyofhowmanypicturesof Lenin they saw still hanging in the general directors’ offices. Onemightassume,with the collapse of the SovietUnion, that the “Lenin index”woulddecline.But in fact, they discovered, it did not.One reasonwas that inmassprivatization,Chubaishadcompromisedbygivinginsiders,theSovietfactorydirectors, a chance to keep control of their factories. The pictures of Leninremained in place. The “red directors” still ruled Russian industry. This,coupledwith public discontent,waswhatmade Zyuganov a powerful figureandworriedChubais.ThenPotaninmade apotent argument toChubais.He suggested that loans

for shares would correct the earlier compromise, which had prolonged thereignofthereddirectors.PotaninespeciallywantedtotorpedoAndreiFilatov,a giant of amanwhowas the red director ofNorilskNickel.His legendaryinfluencereachedallthewayfromthetundratotheKremlin.“Duringtheloansforsharesauctions,itwasnotpossibletodeclarethisatthetimebecauseitwaspolitically unacceptable,” Potanin admitted later. “But the real reasonwas tobringnormalmanagementtosizablecompaniesandtobreakthereddirectors’lobby.Itwasthemostimportantthing.”27WhatPotanindidnotsay,wasthatthe“normalmanagement”hehadinmindwastobetheinexperiencedfinancierslikehimselfandKhodorkovsky.Couldtheymanagebetterthantheoldfactorybosses?Chubaisknewthatthefactorydirectors,siphoningofftheprofitsintotheirownpockets,werepoisonforthemarket,buttherewasnowaytoknowwhetherKhodorkovsky,Potanin,orBerezovskywouldbeanybetter,orwhy.Nonetheless, he saw the tycoons as the epitome of modern Russia and thefactorydirectorsascrustysymbolsofpastfailures.PaulBograd,thepoliticalconsultant who had grown close to the Chubais team, recalled that Chubaisbelieved the young tycoons would bring “some semblance of competent

corporatemanagement,asopposedtodoingnothingandallowingtheseplacesto be looted. Which, given the state of management then, was likely tohappen.”28Khodorkovskyrecalledthatinearly1995“asituationarosewhenitbecame

cleartoeveryonethatbigindustryremainedinthehandsofthereddirectors,and if nothing happened, then they would bring the Communists back topower.”29Chubais hadmanymotives, but this onewas at the core: to defeatZyuganov and the Communists—forever. If Zyuganov did well in theDecember elections, it was already clear that he would become the leadingchallengertoYeltsininthe1996election.ChubaisknewthatYeltsinwasweakphysicallyandcouldseefrompolls thathewasweakpolitically.HefearedaZyuganov victory would lead Russia backward. Chubais never advertised itpublicly—he attempted to keep the goal obscure so as not to alarm theopposition—butloansforsharesshouldreallyhavebeencalled“tycoonsforYeltsin.”Chubaiswaswilling tohandover thepropertywithout competition,withoutopenness,and,as it turnedout, forabargainprice,but inaway thatwouldkeepthebusinessmenatYeltsin’ssideinthe1996reelectioncampaign.I personally had my doubts at the time about whether Chubais was this

farsighted,anditwashardtoevenimagineYeltsinrunningforpresidentagain.Butinretrospect,IwaswrongaboutChubaisandYeltsin.Loansforshareswasthe first phase in Yeltsin’s reelection campaign. It was the weld between thetycoons and the Kremlin, the embrace of wealth and power. Chubais lateracknowledgedthetrade-off.“Thefactthatthesewouldbetheforcessupportingtheirownprivateproperty, that theywoulddefend theirprivateproperty,andthat in thepoliticalprocess theywouldbe,bydefinition,againstCommunistsand pro-reform—that was 100 percent sure,” Chubais told me. “And that iswhathappened.”Gaidar, who remained a confidant of Chubais, although he was not in

governmentatthetime,acknowledged,“Itwasnotthemostpleasantchoice.Iwouldrathernotbeinapositiontomakethischoice.ButIreallythinkthatifYeltsin, Chernomyrdin, and Chubais had not gone to this loans for sharesscheme,which radically changed the composition of forces in the economicelite,IthinkthatZyuganov’schancesofwinningtheelectionswouldhavebeensubstantiallybetter,andmaybehewouldhavebeenunbeatable.”30Jordanexplained,“Youhave to remember thateveryyearuntilYeltsingot

reelected, everyone in this country, including me, was worried that theCommunistsweregoingtocomeback.Idon’tbelievetheywerethinkingmuch

furtherthan,theCommunistriskmustbetakenoutofthegame.Andthat’swhattheywerethinkingabout—theyweren’tthinkingabouttheeconomy!”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 evenmoreappealingtothetycoonswhowerelobbyingforit.WhenJenningsoriginallywrote thewhite paper, he had insisted on international competition—foreignoilcompanieswouldbewelcometocompeteforRussia’sriches.However,thedoor was slammed shut on foreigners in the autumn, in part thanks to theefforts of Khodorkovsky and one of his deputies, Konstantin Kagalovsky, ashrewdformerRussianrepresentativetotheInternationalMonetaryFundandWorld Bank. Kagalovsky, who had been among those helping Gaidar at thedacha in 1991, waged a campaign to exclude foreigners from the Yukosauction by making the rules ambiguous enough to create doubts amonginvestors about whether they could legally keep the properties if they won.Scaring away foreign investors had a larger purpose as well—the tycoonswere not so rich that they could outbid foreign oil companies in an opencompetition.KhodorkovskydidnotwanttohavetofaceBritishPetroleuminabiddingwarforYukos.Byslammingthedooronforeigners,hewasmakingsurethatthepriceofthepropertieswouldbeaslowaspossible.Chubais also had a cunning plan to ensure the loyalty of the tycoons. He

created a dual key system, inwhich the first key for each factorywould begivenout before the 1996presidential election, but the secondkey—theonethat allowed the businessmen to lock up and keep their property—would bedistributed only after the 1996 election. Thus the magnates would have aninterest in seeingYeltsin reelectedbecause ifZyuganov came topower, theycouldkisstheirfactoriesandoilfieldsgood-bye.AsitwashammeredoutinSeptember1995,theloansforsharesplancalled

fortheStatePropertyCommitteetoholdauctionsinwhichthebankscouldbidfor state shares in the enterprises by offering low-interest loans to thegovernment. The shares were to be held as collateral. Until the loans wererepaid,thebankswereallowed,indeedencouraged,totakethefactoriesundercontrol and tomanage them. Then, if the government later defaulted on theloans,aseveryoneexpected,thebankscouldsellthesharesinasecondphase,payingbacktheloansbutkeeping30percentoftheproceedsasacommission.Thesell-offwassetforSeptember1996,buttheelectionswereheldearlier,inJuneandJuly.31In a key procedural twist that enormously helped the tycoons rig the

auctions, theywereallowed tobidon their choicepropertywhilealsobeingtheauctioneer.Forexample,MenatepBankwastheofficial“organizer”oftheauction forYukos aswell as the chief suitor. Thiswas a glaring conflict ofinterest,butincreasinglyitwasthebusinessmenwhodictatedthetermstothegovernment and not the other way around. They picked the companies theywanted, they picked the terms, and they picked the outcome. In the next fewyears,thisbecamethekernelofhowthebusinessmendealtwiththestate.JoelHellman, an economist for the European Bank for Reconstruction andDevelopment, later termed it “state capture,” meaning that businessmen andvestedintereststurnedaroundand“captured”thegovernment.32ThiswasnotanabstractideaintheRussiaofthe1990s.ItwasthecredoofBerezovsky:bigcapitalshouldtalkandpoliticianslisten.Amazingly,bothChubaisandKokhmaintainedapublicfacadeattheoutset

of the loans for shares auctions that all was going normally. Kokh toldreporters that the auctioneer was “largely a technical function and does notgiveanyadditionaladvantage”tothebidders.Chubaiswasevenmorebrazen.“As you may know,” he told journalists on September 25, “we don’tpredetermine the buyer.” The procedures for the auctions “will be free andcompetitive.”Thiswassheernonsense.TherealitywasthatChubaisandKokhhandpicked the winners: Potanin, Khodorkovsky, and Berezovsky won theirprizesinquicksuccession.Justasthetycoonsdemanded,foreignbidderswereexcluded,againwiththesupportofChubaisandKokh.“Russiancapitalcannotyet compete with foreign capital,” said Kokh, parroting the Khodorkovskyline.OnSeptember25,Yeltsinapprovedalistofforty-fourcompaniesthatwere

goingtobeofferedfortheloans,buttwoweekslateritwasnarroweddowntotwenty-nine.InthefinalversionpublishedOctober17,1995,therewereonlysixteenenterprises.Fourmorewerenotauctioneddueto lackofbids.Of thedozen loans for shares auctions that took place between November 3 andDecember28,1995,theoverwhelmingmajoritywenttothebanksthatactedasorganizers of the auction, their secret shell companies, or affiliates of theenterprisesthemselves.Thedealswererigged.33OnNovember17,Potaninseizedhisprize,a38percentstakeinthemetals

giant Norilsk Nickel. The initial offering price had been $170 million, andPotaninwonbyoffering just$100,000more.Thiswasamerepittanceforacompany that reported 1995 revenues of $3.3 billion and profits of $1.2billion.Althoughthetruthofthecompany’sfinancialconditionwasmurky,it

was clear Norilsk had enormous potential, borne out in the next few yearswhen the company generated billions of dollars in profits. Therewere fourbids thatday, threeof them fromPotanin andhis affiliates.The fourth camefromanotherMoscowbank,RossiiskyKredit,throughafrontcompany,Kont.Thisbidwasfor$355million, farmore thanPotaninhadoffered.ButKokh“smelled a rat,” andhe disqualified the bid on the narrow technical groundsthat thebiddersdidnotpossessa reliablebankguarantee for thecapital theywere offering, while the capital of the other bidders, all Potanin affiliates,“seemed credible.”34 One reasonwhy Potanin’s capital was so “credible” isthat thegovernmentwas fillinguphis bankwith its ownmoney.An InteriorMinistry investigator, whose probe into the Norilsk case was later closedwithoutcharges,ferretedoutoneinterestingfootnotetoPotanin’svictory:oneof his front companies, Reola, lacked the same bank guarantees, but Kokhdidn’tseemtotakenotice.35Khodorkovsky’s prize, Yukos, came with somewhat more difficulty and

dramabutdemonstratedanewChubais’sdeterminationtoremainonthepathhehadchosen.ItalsoshowedthatKhodorkovskycouldberuthless.AtstakeintheDecember 8 auction was 45 percent of the shares of Yukos in a loans forsharesdeal,aswellasanother33percentinaninvestmenttender.Thestartingprice was a $150 million loan for the shares, and $150 million for theinvestment tender,with thewinner required topromiseanother$200millioninvestment in the company. Khodorkovsky’s bank,Menatep, was organizingthe auction.Khodorkovskywasbidding throughoneofhis front companies,Laguna.However, another group of three banks was preparing a serious bid for

Yukos.ThistroikaofprominenttycoonswasmadeupofVladimirVinogradovofInkombank,MikhailFriedman’sAlfaBank,andValeryMalkin’sRossiiskyKredit,whichhadlostoutweeksearlieronNorilsk.ThethreebankersobjectedimmediatelytoMenatep’sdemandthatallthedepositsfortheauctionbeputinMenatep, and this time Kokh listened. He agreed that all the money wouldinsteadbedepositedattheCentralBank.However,thethreebankersdidn’treallyhaveenoughmoney.Theyneededa

$350 million deposit and sent out feelers to foreign investors, but withoutmuch luck. One of the investors they approached was California billionaireoilman Martin S. Davis. What the three bankers did not know is thatKhodorkovskywasplayinghardball.KhodorkovskydispatchedoneofhistoplieutenantstotheUnitedStatestodeliverabluntmessagetoDavisthatthelaws

in Russia on foreign investment in loans for shares were at best vague (asKhodorkovskyhadearlierensuredtheywouldbe)andatworstcouldcosthimeverything if tested incourt.TheRussian toldDavis that ifhe invested in therivalconsortiumbiddingforYukos,hewouldloseallhismoney.“Youputatrisk $300 million,” the Russian said. Davis decided not to invest, althoughKhodorkovsky’s rivals never knew of the secret mission. 36 When I askedKhodorkovskyaboutit,hebrusheditaside.“Theyspokeaboutit,”hesaidofhisrivals,“butIdidn’tbelievethataforeignerwouldgivemoney.BecauseonmysideIwastryingtoraiseforeigncapitalalso—nothing!”Insteadofcash,thethreebankersofferedtheequivalentof$370.2millionin

short-termgovernmentbonds,thehigh-flyingGKOs,andsaidtheywouldput$82millionincashintotheCentralBank.ButKokhrejectedtheGKOs,asdidChubais. Only cash would do. They were saying, in effect, the Russiangovernmentwouldnotacceptitsownbondsasadepositfortheauction.Thismeant that the threebankerswereout of the running. “Wehad cash,”oneofKhodorkovsky’s vice presidents later told me. “We were quite sure ourcompetitiondidnothavecash.”Evenwithoutknowingaboutthesecretmissiontodiscouragetheirinvestor,

the three bankers were furious at Khodorkovsky. They knew Menatep wasorganizing theauctionandbiddingat the same time,whichwasbadenough.But they also suspectedMenatepwas able to cough up the cash thanks to itsclose ties to the state and toYukos itself.Theyknew thatKhodorkovskyhadmammoth loans and deposits from the Finance Ministry; the federalgovernmentwasKhodorkovsky’s largest singleclient. Ina rarepublicattackon a fellow tycoon, the three bankers demanded that the Yukos auction bepostponedandfiredoffafusilladeofcomplaintsatKhodorkovsky.Theyeventhreatened to dump all their GKOs and disrupt the government securitiesmarket.37ButChubaiswasdeterminednottobederailed.“Nothingdoing,”heinsisted.Chubais later suggested the threebanksweremakingsomuchnoisebecausetheywerejustanglingforadealwithKhodorkovskyforapieceoftheaction.38Years later, a top executive at one of the three banks told me that

“KhodorkovskywasbuyingYukoswiththemoneyofYukos.Theydidn’tpaytheirtaxesanddecidedtoaccumulatethemoney,andthedealwas,laterontheywoulddecidewhat todowith the taxes.That’swhatmadeussoangry—no,Iwouldsay,mad.Theystolethecompany.”At some point, Pyotr Aven, president of Alfa Bank, went to see Chubais.

Theywere old acquaintances.AvenhadbeenpresentwhenChubais firstmetGaidar, and he had been aminister inGaidar ’s government. DespiteAven’sappeals, Chubais would not budge on the issue of using the GKOs for thedeposit. The three bankers were out of luck. Chubais and Aven ruined theirfriendshipovertheYukosauction.Chubaistoldmelaterthathischiefconcernat the timewasgettingcashfor thebudget.Headded,“OnecanmakeclaimsthatKhodorkovskywasn’tusingtherightmoney,thathewasusingYukos’ownmoney,andonecansayhewasusingsomeofhisdepositswhichtheMinistryof Finance had placed with him, and that his sources had been formed in awrong way. But my criteria was simple: besides all the political thoughts, Idesperatelyneededmoneyforthebudget.”Chubaisgotthemoney,butwheredidKhodorkovskyfindit?Theansweris

unknown.KhodorkovskybythistimehadafinancialandpoliticalnetworkthatstretchedacrossRussiaandabroad.HewasongoodtermswithMuravlenko,the president of Yukos, before the auction, and Muravlenko had helpedKhodorkovsky lobby the government against foreign investors. But it is notclearwhetherYukoshadsuchcash—themovementoflargeamountsofmoneyisoftenhiddeninshellcompaniesandnotevidentfromofficialannualreportsand audits. Khodorkovsky said he borrowed money from other tycoons.“Smolenskygaveusmoney,MostBankgaveusmoney,”hesaid,addingthatMenatep also borrowed from several defense factorieswhich it hadworkedwith in the past.39 “Yukos at thatmoment hadwage debts, sixmonths’wagearrears,theydidn’thaveanymoneyatall,”heclaimed.Kokh later hinted that Khodorkovsky had indeed exploited his connection

with Yukos to raise the cash to buy Yukos. He suggested Khodorkovskypledged future oil deliveries for loans. The three other bankers “could notcollect as much money as Yukos and Menatep could obtain, for instance,against oil futures,”Kokhwrote. “All sorts of things becomepossiblewhensuchanoilcompanyjoinsforceswithalargebank.Thismadepeopleangry,andtheystartedrepeatingangrymantraslike‘ifwecouldonlyseparateYukosfromMenatep’andthelike.Butstrategicalliancesarelegalandplayapositiverole.”On December 8, Khodorkovsky walked away with his prize. His Laguna

frontcompanypaid$159million, just$9millionover thestartingprice, fortheblockof45percentofYukosshares.Hewontheinvestmenttenderforthe33percent block of shares by offering just $125,000more than the startingpriceof$150million.

On the same day as the Yukos auction, Potanin snapped up another oilcompany,Sidanco,winning51percentofthesharesfor$130million.Thetwooilgenerals,AlekperovandBogdanov,alsowonloans-for-sharesauctionsforpiecesoftheircompanies,LukoilandSurgutneftegazrespectively.TheSurgutauction was an especially graphic example of how the Chubais ideals ofopennessandcompetitionwereignoredinpractice.Outsiderswerewarnedinadvanceby the theSurgutmanagement not tomake a bid, and the airport inSurgutwasclosedthatday,sootherbidderscouldnotflyintobuypartofthecompany.Theydidnot.40The final oil prize of the year was claimed, at the last minute, by

Berezovsky.Inthesummerof1995,heabruptlypartedwayswithKadannikov,the Avtovaz factory director who had been his partner in AVVA and in theZhigulideals.Kadannikov,facingagrowingtideofdebtandbacklogofwagesatthefactory,unexpectedlydemandedahugerepaymentfromLogovazforanearliershipmentofthousandsofcars.Berezovskydidn’tflinch.Heneededtoraise $4million overnight and he found it, selling off part of Logovaz andpayingthefactoryonJune22,1995.Bythistime,Berezovskyhadalreadyputhimself intoahigherorbit.Hehad takenon theAeroflot accounts and takenovertheORTtelevisionchannel,andnowhewashankeringforapieceoftheoilindustrysell-off.Yuli Dubov, the author of Bolshaya Paika, the roman à clef about

Berezovsky, toldme once thatBerezovsky only really functioned in a crisisenvironment.Berezovskyhabituallywaiteduntiltenminutesafteradeadlinetoevenbegintothinkabouthowtoact.“Heisoneofthosepeoplewhocanexistcalmlyandcomfortablyonlyinextremesituations,inwhichnotasingleotherpersonwouldfeelcomfortable,”Dubovtoldme.HedescribedBerezovskyasamong thosewho never rest,who change things by the sheer force of theirenergy,who “constantly have a nail in their chair.”41 Itwas thisBerezovskywho,inlatesummerandearlyautumn1995,rushedintotheloansforsharesgiveaway.He lobbied theKremlin to hastily slice off a new vertically integrated oil

company, Sibneft, which included Russia’s largest,mostmodern refinery inOmsk, and a Siberian production association, Noyabrskneftegaz. KorzhakovrecalledthatBerezovsky’spitchwasthatheneededoilrevenuestosupportthetelevision channel.Korzhakov said, “I am not very good at economics” andgavehisapproval.HeandatopYeltsinaidecalledaregionalgovernorandtheministerofenergyto“putinawordforBerezovsky,”Korzhakovsaid.42Ifhe

didnotknowmuchabouteconomics,Korzhakovwasclearlydrunkonpower.“Berezovskyneededmyokay, for if I hadbeen told hewas founding an oilcompanywithoutmyknowledge, Iwouldhave instantlymade shortworkofhim,” Korzhakov later said.43 Yeltsin signed the decree creating Sibneft onSeptember 29, 1995, making it Russia’s sixth-largest oil company. WithKokh’shelp (hedraftedakeydocument forBerezovsky in themiddleof thenight to meet the next day’s deadline), the controlling block of shares inSibneftwashastilythrownintotheloansforsharesauctions.ItwasscheduledforDecember28,1995,tobethelast.Thestartingpricewas$100million.Liketheothertycoons,however,Berezovskydidn’thavethatkindofmoney,

nordidhehavemuchtime.HehadmetthesuperfinancierGeorgeSoros,whowasalreadyspendinghundredsofmillionsofdollarsonphilanthropy insideRussia, supporting civil society and helping Russian scientists, writers, andteachers through the difficult early years after the Soviet collapse. AlexGoldfarb, the biologist who had once been a link between dissidents andforeign correspondents, was close to Soros and also knew Berezovsky.Desperatetoraisemoney,BerezovskyvisitedJapan,Germany,andNewYork,looking for loans tohelphimbuySibneft.Buthe ran into awall of refusal.Goldfarb,whoattendedBerezovsky’spresentationtoWallStreetmoneymen,recalled,“Investorswereafraiditcouldallfallapart.Atthattime,Berezovskywasnoone.”AfterBerezovsky leftNewYork,Goldfarb helped him pass along a thick

fileofdocumentsaboutSibneft,someofthemcrudelysketchedandtyped,totheSorosfinancial teaminNewYork.Berezovsky later toldmehehadbeenseeking $50million from foreigners for the purchase of Sibneft.44 He hadasked Soros for $10 million to $15 million.45 Goldfarb told me that wordcame back in a few days from New York: no thanks. Soros was not evenwillingtoputinamillionbecausehefelt“theriskwastoogreat,”Berezovskysaid. Berezovsky recalled that Soros told him “I cannot give you even onedollar” because hewasworried that Zyuganov, theCommunist Party leader,wouldbeelectedpresidentandthenrenationalizeprivateproperty.Berezovskyeventually found themoney forSibneftwithhelp fromSmolensky.46On thedayoftheauction,Berezovskywonwithabidjust$300,000overthestartingprice of $100 million. A few years later, the company had a marketcapitalizationover$1billion.

Throughout1995therewerehintsofwhatthetycoonswereupto,butneverafullpicture.Perhapsa fullpicturewas impossible, since thealwayssecretivemagnates were never a cohesive group. Their overlapping alliances andfrequent conflicts subdivided and recombined them into several amorphousgroups. The clans of Russian capitalism were just beginning to coalesce in1994–1995, laying the groundwork for what would later become a full-fledged system of rival tribes—powerful and well-financed groups ofpoliticians, factory directors, moneymen, journalists, and corporate secretagents.Lumberingoutof the fogofconfusionandchaos in the firstyears,anew

capitalistleviathanwasvisible,butitstruenaturewashardtodiscern.JusttwoweeksbeforePotanin’scabinetappearanceinMarchtopitchloansforshares,one member of the Sparrow Hills club, Oleg Boiko, spoke publicly aboutsomeaspectsofthetycoons’privatediscussions.Boikodescribedcreationofa“big eight” of financial-industrial giants who were contemplating a greaterrole inpolitics.Boikonamedcompanies,notpeople:Logovaz(Berezovsky),Menatep (Khodorkovsky), Stolichny Bank (Smolensky), Alfa Bank(Friedman),Mikrodin(Yefanov),andseveralothersassociatedwithGazprom.Boiko,however,didnotincludethefast-risingPotaninorVinogradov.Withoutmentioning their weekly meetings on the Sparrow Hills, Boiko accuratelydescribed the early political mood among the tycoons—that they lacked aclear-cutpoliticalpatron,andtheywerenervousaboutfurtherupheavals.Theywanted normalcy. But Boiko’s comments, which stirredmuch talk about the“MagnificentEight,”failedtopointtotheloansforsharesgrabjustaroundthecorner. Boiko did not participate in loans for shares and later slipped fromprominence.47The most prescient of those who discovered the rising clan structure of

Russian capitalism in 1995wasOlgaKryshtanovskaya.Usuallywearing herhair pulled back in a bun and evincing a patient, tutoring manner,Kryshtanovskayaoftenresembledaveryproperschoolteacher.Butinfactshewasalaser-smartsociologist.ShemadeaspecialtyoutofstudyingtheRussianelite,andshewasperfectlypositioned tosee the leviathancomingoutof thefog.Intheearly1990s,shecarriedoutherresearchbygoingfrompersontoperson,tryingtounderstandthebusinesspractices,finances,andmoresofthe“new millionaires.” Kryshtanovskaya and her band of student researchersconductedlonginterviewswithdozensofbusinessmen.Theywereinvitedbysomeintoluxuriousmarblepalacesandbyotherstomeetonaparkbench.She

found one future industrialist, Kakha Benzukidze, living in a one-roomapartment and sleeping on a cot. Kryshtanovskaya painstakingly traced howtheyhadmadetheirfirstmoneyandhowtheyhadmadeitgrow.Shecompiledlistsofthewealthiestbusinessmenandlistsofthebiggestbanks,andthenshemade cross-checks and diagrams, trying to piece together companies andempires. Then she carried out still more interviews to find out how theyworked. Kryshtanovskaya spotted the emerging clan structure and wrote apenetratingpieceaboutit,brilliantlysummarizingthehistoryofthelate1980sand early 1990s. The essay appeared in Izvestia in January 1996 under theheadline, “The Financial Oligarchy in Russia.” It was a turning point thatbrought the tycoons’ actions into focus. More than just wealth, they wereamassingpoliticalclout.Kryshtanovskayapioneeredthe idea that the tycoonswerebecominganoligarchy—asmallgroupmenwhopossessedbothwealthand power. She spotted the rise of Potanin’s Uneximbank, the power ofKhodorkovsky’s Menatep, and the significance of Gusinsky in Luzhkov’srealm,althoughBerezovskydidnotappearonherlist.Muchofwhat theoutsideworldknewaboutRussia in theearly1990swas

focusedonYeltsinandhispowerstruggles,whichdominatedtheheadlines.Buttwo diplomats stationed inMoscow, both veterans of the Soviet period, alsospottedtheriseoftheclansinthesummerandautumnof1995.GlennWaller,a shrewd Australian diplomat who had spent nearly a decade in the formerSoviet Union and Russia, wrote a lengthy and perceptive cable in May onRussia’s“financial-industrialelite”thatcapturedvirtuallyallthekeyplayersoftheSparrowHillsclub.Moreover,Wallernaileddownthemarriageofwealthandpower,themergeroffinancialandpoliticalinterests,whichwasatthecoreofhowPotanin,Khodorkovsky,andBerezovskywerefunctioningatthetime.He warned that although privatization had given the new tycoons fabulouswealth,theyshouldnotberegardedasresemblingWesterntitansofcapitalism.“The relationship between business and government in Russia remains veryclose,”hewrote,“indeedincestuous.Eventhe‘new’businesselitegrewoutoftheSovietsystem—most(ifnotall)oftheprivatefinancialgroupsmadetheirfirstcapital through theirprivilegedaccess topartyandKomsomol fundsorthroughpoliticalcontacts (inRussian:blat) ingovernmentministries.Today,theycontinuetorelyongovernmentfavors....BigbusinessinRussiacontinuestocoalescearoundpowerfulpoliticalleaders.”48Ahard-nosed skeptic,AmericandiplomatThomasE.Grahamwasback 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—howRussian capitalism was morphing into rival clans and warring financial-industrialgroups.WhatGrahamsawdidnotneatlyfitintotheWashingtonideaofbravereformersledbyYeltsinandChubaisfightingofftheCommunists.Oneday, thewordcamebackfromWashington:pleasedon’tuse theword

“clan” anymore. The State Department bureaucrats didn’t like it; “they said‘clan’hasananthropologicalmeaning;youcan’tapplyittoRussianpolitics,”Grahamrecalled.Sohefixedthelanguageinhiscablestoread“elitegroupsoftenreferredtoinRussiaasclans,”andinthesummerof1995hebegantodigdeeper.Intheautumn,heaskedforpermissionfromWashingtontopublishanarticleinRussiaspellingouthisunvarnishedviewsonwhatwashappening.Grahamtoldmehedidnotexpectapprovalbecauseadiplomatwassupposedtobediscreet;itwasnotveryoftenthatapoliticalcounselorwaspermittedtopublishstrongviewsofhisown in thecountrywherehewasserving.Publicstatementswereforpresidentsandsecretariesofstate.ButtheapprovalcameandGrahamwrote,without the usual diplomatic niceties, aboutwhat he sawhappeningaroundhim.TheessaywaspublishedonNovember23,1995,inthenewspaperNezavisimayaGazeta,whichhadrecentlystartedreceivingfinancialbackingfromBerezovsky.Grahamdeclaredthat“anewregimehasemergedinRussia”characterizedbyastable,butvigorous,contestbetweenrivalclans.The essay, which filled an entire page of the newspaper, was the talk ofMoscowfordays.GrahamarguedthattherealbalanceofpowerinRussiawasnotBorisYeltsinagainstparliament,notreformagainstrevanche,butthenoisypushing and shoving of the clans. And he used the word “clan” withouthesitation. Graham outlined five major clans, including Chernomyrdin’senergy lobby,Luzhkov’sMoscowgroup, theKorzhakov“partyofwar,” andChubais together with the tycoons; he told me years later that he erred byincluding the hapless Agrarian Party as fifth. But in retrospect, the essaypreciselycapturedtheemergingstructure,mechanics,andmethodsoffinancialandpoliticaltribes.The publication triggered an angry reaction by both governments. The

Russians lodged an official protest with the U.S. embassy, mortified not byGraham’sconclusionsbutbyhispubliccandor.BackattheStateDepartment,Graham’sessayhitlikeathunderclapbecauseoftheunspokenmessagethattheClinton focus onYeltsin and the young reformerswasmisguided, that otherpower brokerswere rising, and that theywere not necessarily committed toWestern-styledemocracy. Itwasnot themessage theU.S.governmentwanted

to hear.Graham toldme he braced himself for trouble inMoscow after thedustupoverhisarticle,fearingthatRussiansourceswouldstoptalkingtohim.Instead, theoppositehappened.The tycoonsdidnot flinch from the image

Grahamhaddescribed.VitalyTretyakov,editorofNezavisimayaGazeta,whohadpublishedthearticle,gaveacopyofittoBerezovsky,wholikeditsomuchheinvitedGrahamforachatattheLogovazClub.49

At theendofDecember1995, themagnatesofRussiahad reacheda turningpoint.Potanin,Khodorkovsky,andBerezovskyhadpocketedtheirfirstkeystoindustry, as the loans for shares auctions came to an end. Gusinsky hadreturned toMoscow over the summer.50 Gusinskywas expanding hismediaempire.Meanwhile,thepoliticalmoodinthecountrywasgrim.Intheparliamentary

elections, the Communists won the largest single bloc of seats in the nextDuma. Their leader, Zyuganov,waswell positioned to run for president thenext summer. In January, the Chechen war spilled over into neighboringDagestaninaterrible,bloodybattlebetweenRussiantroopsandasmallbandofChechenseparatistsholedupinabordervillage,Pervomaiskoye.InsidetheKremlin,Yeltsinwasin thegripof thereactionaryKorzhakovandhis“partyofwar.”ThenonJanuary16,YeltsinabruptlyfiredChubaisfromhispostasdeputy prime minister. Chubais had weathered more than four years in thecockpit of privatization and economic reform, but he had become a hatedsymbol of all the tumult and pain Russians had endured. “He sold off bigindustryfornexttonothing,”Yeltsintoldreporters.“Wecannotforgivethis.”ButChubaiswouldsoonbebackbecausetheembraceofwealthandpower

had just begun.The tycoonshad taken their shareofproperty,but soon theywould be called on to return the favor. They would be asked to help theirtroubledpatron,BorisYeltsin,andonceagainhelpthemselves.

BORISBEREZOVKSY

VLADIMIRGUSINSKY

ANATOLYCHUBAIS

ALEXANDERSMOLENSKY

MIKHAILKHODORKOVSKY

YURILUZHKOV

THESHORTAGEECONOMY:ASTOREINNIZHNYNOVGOROD,1991.

THE CATHEDRAL OF CHRIST THE SAVIOUR, REFLECTED IN THEMOSCOWRIVER.

CHUBAISINTRODUCESTHEPRIVATIZATIONVOUCHERIN1992.

THEPRIVATIZATIONVOUCHER

BUYINGANDSELLINGMMMSHARESINMOSCOW,1994

THECERTIFICATEFORTHEALL-RUSSIANAUTOMOBILEALLIANCE

YELTSINONTHECAMPAIGNTRAILIN1996.

PRESIDENT YELTSIN MEETS WITH THE FEUDING OLIGARCHS ONSEPTEMBER 15, 1997, DURING THE BANKERS’ WAR. VALENTINYUMASHEV IS TO YELTSIN’S RIGHT. THE OLIGARCHS ARE, FROMLEFT TO RIGHT: MIKHAIL KHODORKOVSKY, VLADIMIR GUSINSKY,ALEXANDER SMOLEN- SKY, VLADIMIR POTANIN, VLADIMIRVINOGRADOV,ANDMIKHAILFRIEDMAN.

DEMONSTRATORS GATHERED OUTSIDE NTV IN APRIL, 2001 TOPROTEST THE TAKE-OVER OF GUSINSKY’S INDEPENDENTTELEVISIONCHANNEL.

PRESIDENTVLADIMIRPUTIN

AWOMANBEGSFORMONEYINAMOSCOWUNDERPASSADECADEAFTER THE SOVIET COLLAPSE. FOR MANY, THE CHANGE FROMCOMMUNISMTOCAPITALISMMEANTIMPOVERISHMENT.ACOUPLEINREDSQUAREATARALLYFORYELTSINATTHEENDOFTHE 1996 CAMPAIGN. THE YOUNGER GENERATIONS FOUND ITEASIERTOADAPTTOTHECHANGESOFTHE1990s.

Chapter13

SavingBorisYeltsin

INDAVOS, a tiny Swiss Alpine ski resort, Gennady Zyuganov, the RussianCommunist leader, stopped in the lobby of the Sun Star Park Hotel to giveanotherautograph.MikhailBerger, theeconomicseditorofIzvestia,watchedwith a sense of alarm as a swarm of Western business executives hoveredaroundZyuganov,hangingonhiseverywordandpumpinghishand,theireyesexpectantly surveying the possible next president ofRussia. Zyuganov, freshfromhis triumph in theDecemberparliamentaryelections,purredpleasantlytohisWesternsuitors.Hegaveabouttwentyinterviewsadaytothepress.Herubbed shoulders with the world’s financial and political elite at the annualconferenceoftheWorldEconomicForuminthefirstweekofFebruary1996.Amid the tinkling of champagne glasses, the unceasing corridor chatter, andthecrushofastandingroomonlypressconference,Zyuganovstoletheshowin Davos, presenting himself as a kinder, gentler Communist who wouldrespectdemocracyandsomekindsofprivateproperty.LeadingtheearlypollsinthecampaignfortheRussianpresidency,Zyuganovcalledhimself“themostpeaceful man on the planet” and insisted he would not undertake wholesalerenationalization.“Weunderstandthatifwestarttakingfactoriesback,there’sgoing to be shooting fromMurmansk toVladivostok,” he declared. Berger,whohadbeenclosetothereformerssincetheearlydays,reportedfromDavosthatZyuganov—abeefy,muscularmanwithahighforeheadandthinning,palehair—wasthecenterofattentionamongWesternmoneymen.“TheimpressionwasthattheWestwasalreadypreparedtorecognizehimasthenextpresident,”Bergerreported.1TheZyuganovappearanceinDavosledtoaquietdramathatwastochange

Russia’s course once again. Anatoly Chubais, Boris Berezovsky, VladimirGusinsky, Mikhail Khodorkovsky, and Yuri Luzhkov all attended theconferenceandwatchedZyuganov’sappearancewithvaryingdegreesofalarmand anxiety. They knew him better than the corporatemavenswho crowded

aroundhiminthehotellobby.LedbyBerezovsky,theydecidedonthespottotryandsaveBorisYeltsin.OustedbyYeltsinandunsureofhisownfuture,Chubaiscutalonelyfigure

at Davos in 1996. It was the fifth time he had been invited to the WorldEconomic Forum, and he personally knewmany of the captains ofWesternindustry.TheyhadonceregardedhimasthegreatesthopeforRussianreform.But now Chubais was out of office, and Zyuganov was on the rise. Theadulation for Zyuganov stunned Chubais. He told me that in Davos, “I sawmanyofmygoodfriends,presidentsofmajorAmericancompanies,Europeancompanies, who were simply dancing around Zyuganov, trying to catch hiseye,peeringathim.Theseweretheworld’smostpowerfulbusinessmen,withworld-famousnames,whowiththeirentireappearancedemonstratedthattheywereseekingsupportofthefuturepresidentofRussia,becauseitwascleartoeveryone that Zyuganovwas going to be the future president ofRussia, andnowtheyneededtobuildarelationshipwithhim.So,thisshookmeup!”2ChubaiscalledbacktoMoscowandspoketoArkadyYevstafiev,thendeputy

directorofORTtelevision,whohadbeenhispressspokesmanandadviserinthe early days of privatization. Chubais asked for copies of the RussianCommunist Party platform and otherZyuganov statements,whichYevstafievquicklyfaxedtoDavos.3OntheclosingdayinDavos,Chubaiscalledapressconference inwhichhedenouncedZyuganov for “a classicCommunist lie,”presenting himself as a moderate to theWesterners while saying somethingquitedifferent athome. “Thereare twoZyuganovs,one for foreignandonefor domestic consumption,” Chubais said, reading from a Communist Partytext that called for nationalization of energy and banking and reversal ofprivatization. If theCommunists return to power, Chubais insisted, “the firstmovewillbetoforbidthefreepress.”ThenZyuganovwill“putinprisonallhis political enemies.” Hewarned darkly, “My judgment is that this kind ofpolicywillinevitablyleadtobigbloodshedinRussia.”4GusinskywasalsoalarmedbyZyuganov’sappearance inDavos.Gusinsky

recalled that earlier, in Moscow, he held long discussions with Zyuganov,urging him to become a social democrat, as other former Communists haddoneinEasternEurope,sayingthatifZyuganovwouldcasthimselfsimplyasachampionofthedowntrodden,hewouldenjoyalongpoliticalcareer.“StopbeingaCommunist,putthelabelaway,don’tscreamaboutprivateproperty,”GusinskyurgedZyuganov.“Thisisnormal,soturnnormal!”5ButinDavos,GusinskyrealizedZyuganovwouldnotchange.“Iwaspresent

atthemeetingbetweenZyuganovandSwissbankers.Itwasveryimportantforme toseehowhewasgoing tobehave.Andwhen I saw thathewas lookingintotheireyesandlyingtothem,thathewassayingexactlywhattheywantedtohear, a typical Soviet Communist KGB trick, I knew it! They will close usdown.Theminutehewins,he’llshutusdown.Iwasfrightened.”Zyuganov’ssilkywordstotheWesternbusinessmenalsogaveBerezovskya

start.“Zyuganovwasadangertous,andtoRussia,”hetoldmelaterthatyear.6Thecompressedballofenergywentintoaction.Fornearlyayear,Berezovskyhadbeen at oddswithGusinsky, but inDavos he picked up the phone in hishotel roomandcalledhim.Theyquicklyagreed tomeet.Bothsetaside theirdifferences,whichwentbacktothe1994fightoverAeroflotandthefacesinthe snow episode. “We didn’t waste time finding a common language,”Berezovsky recalled. “We both understood that the threat of a return toCommunism required a joint counter-attack.”7 Gusinsky recalled later thatBerezovskycametohimandsaid,“Ithinkitistimeforatruce.Thecountryisat a crossroads, to the left or to the right. These are not the elections, butalmostacivilwar—withoutshotsbeingfired.”“Icompletelyagreedwithhim,”Gusinsky toldme.“Ibelieve that if ithad

not been for Berezovsky at that time, Yeltsin would not be the president ofRussia,andmostlikelyhistorywouldhavebeendifferent.”BerezovskyalsogotawarninginDavosfromthefinancierGeorgeSoros,

whofearedZyuganovwoulddefeatYeltsin.SorosrecalledtellingBerezovskythat if the Communist leader were elected, the tycoon would “hang from alamppost.”8Berezovsky’srecollectionoftheconversationwasthatSorostoldhimZyuganovwasasurewinnerandBerezovskyshouldleavethecountrytosavehimself.Berezovskywouldhavenoneofit.“George,Ithinkthatwewillmanageto

defeat Zyuganov,” Berezovsky confidently told Soros. Then “I had theimpressionthathelookedatmeasifIweremad.”“Boris,”Sorosreplied,“youarewrong.”9Berezovsky next talked to Chubais, alone. Berezovsky suggested that

Chubais bring together a group of tycoons to back Yeltsin. Then he andGusinsky attended the Chubais press conference with Berger, the journalist,sitting between them, and they loved every word of Chubais’s attack onZyuganov.10 Berezovsky then went to Mikhail Khodorkovsky, VladimirVinogradov,whowasalsoinDavos,andeventoLuzhkov,seekingsupportforan alliance to saveYeltsin. Their alliance became known as theDavos Pact.

AlthoughLuzhkovdidnotformallyjointhebusinessmen,hedecidedtothrowhisweightbehindYeltsin,settingasidethestrainsof1994–1995.BerezovskyandGusinskywerewealthymen,butthe“DavosPact”wasnot

only about wealth. The two tycoons now controlled two of the three majortelevision channels inRussia. They could sway public opinion, and that, forYeltsin,wasthemostvaluablecurrencyofall.Back in Moscow, Berezovsky hurled himself into the new project. WithGusinsky, Khodorkovsky, and Vinogradov already on board, he recruitedAlexander Smolensky, Vladimir Potanin, and Mikhail Friedman, the AlfaGroup chief, accompanied byPyotrAven, his politically astute partner. This“group of seven” (Berezovsky, Gusinsky, Khodorkovsky, Potanin,Vinogradov, Smolensky, and Friedman-Aven) made up the core of thefinancial-politicaloligarchy.MosthadbeenattheclubonSparrowHills,mosthadparticipatedinloansforshares.NowtheysetabouttryingtosaveYeltsin.The oligarchs agreed that Chubais, the steely, resolute architect of mass

privatizationandloansforshares,wasthelogicalchoicetomanageYeltsin’sreelectioncampaign.ThedeterminationChubaishadshownoverthelastfouryearswasjustwhatthegroupofsevenmagnateswerelookingfor.Lessthansix months after they had benefited so handsomely at the loans for sharesauctions,andstillawaitingthe“secondkey”to their industrial treasures, theysimplyhiredChubais,whohadbeenoutofgovernmentsinceYeltsinfiredhiminJanuary.Thetycoonspaidhimahandsomesalaryforhisservices.Chubaiscreatedaprivatefund,theCenterforProtectionofPrivateProperty,

andtoldthetycoonsheneeded$5milliontodothejob.“Yougive$5milliontome,notformebutformetocreateastructuretowhichIwillattractthebestpeople,” Chubais said he told the tycoons. “Within five days, the credit wasextendedandreceived.”Chubaisdescribedthemoneyasano-interestloan.Heset up the fund and then invested the money in the superprofitable bonds,known as GKOs, which were paying ever higher annual yields at the timebecause of uncertainty over Yeltsin’s future. The GKO yields in May-June1996 topped100percent.Chubais saidhepaidstaff salariesoutof theGKOprofits.Hisownsalarywas$50,000amonth.Chubaissaidhepaidtaxesona$300,000incomethatyear.11ThemoneythatwenttoChubaishintedatthemuchlargerroletheoligarchs

would later play in financingYeltsin’s campaign. It was also a sign of howChubaiswasdrawing closer to thebusinessmen.Hehadbecome their agent.

“Wedidn’thaveanydoubtsabouthisdecency,”Berezovskyrecalled.“Plushisbrains,strength,andorganizationalabilities.”Chubaiswasalsoimpressedbythe tycoons and their willingness to unite behind Yeltsin. “The fact that bigcapital turnedtoYeltsin,”Chubais toldme,“hadaveryserious impactonallthebusinesselite,directorsofenterprises,governors,andministers.Thishadaveryseriousimpactonallofthepoliticaleliteofthecountry,apsychologicalimpact.”12But beforeChubais and the oligarchs could helpYeltsin defeat Zyuganov,

they had to saveYeltsin fromhimself. The oldmanwas brooding about histroubles andmisfortunes.Winterwas always the cruelest season forYeltsin,bringingnew illnessand isolation.Hehad sufferedaheart attack inOctoberandhadbeenallbutinvisibleduringtheautumn1995parliamentarycampaign.For the first time in his life, he felt politically isolated, and his poll ratingswerealmostzero.“At that timemywhole lifeseemedunderassault,”Yeltsinwroteofthedarkwinterdays,“batteredaboutbyallsortsofstormsandstrife.I stayedonmyfeetbutwasalmostknockedoverby thegustsandblows.... Itseemed as if allwere lost.”13Yeltsin’s deteriorating health remained largelyhidden from view. Yeltsin acknowledged in his memoir that the Kremlindoctorswrotealetterexpressingconcernabout“thecatastrophicstate”ofhisheart, although the letter was shown to him much later. They warned thatfrequent travel and stress were “a real threat to the health and life of thepresident.”His political life was also draining away. On January 11, a team of top

Yeltsin advisers, led by the Kremlin political strategist Georgy Satarov, satdown together to plan for the campaign. The election would be held in sixmonths,andtheoutlookwasasgrimasithadeverbeen.Yeltsinstoodat3–4percentinthepolls,whileZyuganovwasleadingthepackwith20percent.“Atthe meeting there was total pessimism, a total absence of hope,” oneparticipant, IgorMintusov, recalled later.14 “Of ten people who spoke, ninesaid it was senseless, a lost cause.” Nonetheless, the Satarov group pushedahead,lookingforastrategythatcouldsaveYeltsin.Reacting to theDecember setback in the parliamentary voting,Yeltsin had

firedthreepeoplewhowerecloselyassociatedwiththeearlydemocracyandreformmovements:Chubais,ForeignMinisterAndreiKozyrev,andhischiefof staff, Sergei Filatov. Chubais was replaced with Vladimir Kadannikov,Berezovsky’s one-time partner from Avtovaz and AVVA. Kozyrev wasreplaced by Yevgeny Primakov, then head of foreign intelligence and a

representativeoftheoldSovietnomenklatura,whowasnofriendoftheWest.The new look of Yeltsin’s team was nationalist and regressive, and theoligarchsworriedthatAlexanderKorzhakov’sclanwasgaininggroundintheKremlin.Despite his standing at the bottom of polls, Yeltsin decided to run for

reelection.Hesaidhismotivewas tostop theCommunists fromreturning topower.Yeltsin appointedDeputy PrimeMinisterOleg Soskovets to head thecampaign.Soskovetswasput inchargeofcollecting the1millionsignaturesnecessary to put Yeltsin’s name on the ballot. What should have been arelatively easy organizational problem turned into a disaster. Soskovets, aproduct of the Soviet era, was woefully unprepared for running a realcampaign. He ordered the Russian railroad ministry workers to be coercedinto signing pledges forYeltsin. Yeltsin said he heard that railroadworkerswere being forced to sign up when they got paid. “They were sent to twowindows,onetogettheirpaypacket,andtheothertosupportPresidentYeltsin.I asked that the story be checked out, and it turned out to be true.” ArkadyYevstafiev, the Chubais lieutenant, told me that he and Yeltsin’s daughterTatyana Dyachenko (who would play a large role in the campaign in thecoming months) went to the Ministry of Railways and took samples of thesignatures gathered there. Yevstafiev then had the samples checked. In fourdayshegot a response. “Fifty percent of themwere fake,” he said.15 Yeltsinsaid of Soskovets, “My campaign manager had ‘forgotten’ that we werealready living in another country and not the old Soviet Union, wherepoliticianscouldbuyvoterssocrudely.”16When Yeltsin finally made his announcement speech on February 15 in

Yekaterinburg,where he hadoncebeenCommunistParty boss, a number ofhis closest advisers stood in thewings and cried. Some of them feared theywerewitnessingYeltsin’slasthurrah.MostmajorpollsputYeltsininfourthorfifth place in the presidential race. It was a frigid, damp day and Yeltsin’snormally booming baritone was reduced to an unhealthy rasp. “We werestanding behind the curtains, and several of the president’s aides—their eyeswelledupwithtears,”recalledMintusov.“Herewasthiselderlypresidentwithhis hoarse voicewhowas showing this tremendous determination. Itwas anemotionalmoment.”“Atkeypointsinhislife,Yeltsinwakesup,”BerezovskytoldmeofYeltsin’s

revival in thespringof1996.Yeltsinshruggedoff illhealth,depression,anddrink.He literally climbed out of his hibernation, a great political animal if

thereeverwasone.“Hewasbornwithasenseofpower,”Gusinskymarveled.“Youhave twohands, two feet, andahead, and sodo I,butYeltsinwasalsobornwith a sense of power.”Yeltsin rousedhimself for the sakeof keepingthispower,butheneededhelp.“We realized that the first problem was to get information to Yeltsin,”

Berezovskysaid.“Wehadtobreakdownthewallsthathadbeenbuiltaroundhim.Weagreedtostopfightingamongourselves,andtotryandconnectwiththepresident’s teamand tell them.”17Berezovskywent toViktor Ilyushin, anoldSverdlovskhandintheKremlin,alow-profile,silver-haired,quietYeltsinmanwhohadwarnedYevgenyKiselyovabouttheYeltsinfamily’sunhappinesswithNTV.IlyushinarrangedameetingwithYeltsin,Chubais,andtheoligarchs.Intheintensifyingromancebetweenwealthandpower,betweenthetycoons

andtheirpatron,themeetingwasaturningpoint.Yeltsinknewmostofthoseatthetable,but,isolatedinhishospitalbedandprotectedbyKorzhakov,hehadnotseentheminalongwhile.Herecalledthatheatfirstregardedthem“rathercautiously,”feelingthat“theyhadnowheretogo,thattheyhadtosupportme,andIthoughtthattheconversationwouldprobablybeaboutthefundingofmycampaign.”18Buttheoligarchshadadifferentplan.Beforethemeeting, theyagreedthat

someonewould try to deliver the raw truth toYeltsin that hewas no longerpopular,apainfulrealizationthat,accordingtoIlyushin,thepresidenthadnotabsorbed. “Weagreed thatweweregoing to tell the truth toYeltsin, that hispopularity was 3 percent,” Gusinsky said, “because his KGBmen . . . weretellinghimstoriesthatitwasnotlessthan98percent.”Smolensky recalled that Chubais arrived carrying a briefcase. Despite the

elegantKremlinlunch,Chubaisploppedhisbriefcaseonthetableandtookoutsomepapers.Chubais,fearlessinthefaceofpower,abruptlyfiredoffthebadnews. “Boris Nikolayevich, the situation is not simple. Your rating is 5percent!”ChubaisshowedsomeofthepaperstoYeltsin.Thepresidentglancedatthem

andtossedthemaside.“Thisisallrubbish,”Yeltsinsaid.“Yeltsin grew tense and red,” Gusinsky recalled. Speaking very slowly,

Yeltsin said, “AnatolyBorisovich,wehave to figureoutwhoprepared thoseratings.Ithinkthisisnottrue.”Yeltsinemphasizedthelastwords,nottrue.Chubais then turned scarlet. There was a long pause. Gusinsky spoke up.

“BorisNikolayevich,everythingthatyourpeoplesaytoyou,yourcircle,isalllies.”

“He turns to me, he gazes,” Gusinsky recalled. Gusinsky felt that Yeltsinstrongly disliked him, that he was only allowed to set foot in the KremlinbecauseYeltsinnowneededhimandthebankerstoholdontopower—suchacynicalman,Yeltsin.“Andhowdoyouknowwhatmymenare tellingme?”Yeltsin inquiredof

Gusinsky,againspeakingslowly.“BorisNikolayevich,”Gusinskyreplied,“becauseyouactfoolishly.That’s

why.Iseeit—youactfoolishlybecausetheygiveyouthissortofinformation.”Anotherlongpause,asGusinskyrememberedit.BothSmolensky,whowas

seatednext toYeltsin,andGusinsky,whowasacross fromhim, rememberedthat Yeltsin was figuratively looking around for a heavy plate to throw atGusinsky.“Somehowwemovedon,”Gusinskyadded.“Keepinmind,”hetoldYeltsin

sympathetically, “if the Communists come back to power, you will be heldpersonallyresponsible.Allofusarehereforthisreason:topreventthemfromcomingback.”Yeltsin’srecollectionwasthatthebusinessmenalsoexpressedtheirownfear

ofZyuganov.“TheCommunistswillhangus fromthe lampposts,”hequotesthemsayingasagroup.“Ifwedon’tturnthissituationarounddrastically,inamonthitwillbetoolate.”Throughoutthemeal,Yeltsinlargelyremainedsilent.Thebankerssuggested

YeltsinputChubaisinchargeofhiscampaign.Yeltsin,whohadonlyrecentlyfired Chubais, later said this suggestion “amazed me most,” although heacknowledged his own growing dissatisfaction with Soskovets. The bankersleft and shook hands with Yeltsin, not really knowing if they had gottenthroughtohimornot.Before the meeting, Berezovsky had quietly approached Yeltsin’s wife,

Naina. He had asked her to help arrange a ten-minute tête-à-tête with thepresident after the lunch. Berezovsky reminded Yeltsin of his request as theother tycoonswere leaving, andYeltsin gave him an approving look.Whentheywerealone,Berezovskyrecalled,hetoldYeltsinthattroublewasbrewing.He told Yeltsin that Korzhakov wanted to call off the elections becauseYeltsin’s standingwas so low. “BorisNikolayevich, you cannot use force tosolvetheproblem,”Berezovskysaid.“Ifwefollowthisroutewemaygetintoacivilwar.”YeltsinlookeddownatBerezovsky.“Isthisallyouhavetosay?”“Yes,”saidBerezovsky.

“I leftwith a heavy feeling,”Berezovsky recalled. “Everybody felt that hefailedtounderstand,thathedidnotunderstand.”“Theverynextday,”Berezovskyrecalled,“hegavetheordertoreorganize

theheadquarters.”Inamethodfamiliartoall,Yeltsinmaintainedhispowerbybalancingcompetinggroups.Hewasthearbiter, thegreatcircusmaster,whokepthislionsandtigersjumpingthroughhoopswithalongwhip.Yeltsindidnot immediately closedown theSoskovets campaignoperationbut created arival,acampaigncouncilchairedbyhimselfandattachedtoitanall-importantnew analytical center headed by Chubais. The analytical center became asecondcampaignheadquarters;themoneycamefromtheoligarchs.The key figure at the analytical center was Yeltsin’s youngest daughter,

TatyanaDyachenko,whosteppedintopoliticsforthefirsttimeasherfather ’seyesandearsinthecampaignorganization.Shewasashortwoman,shy,withherfather ’seyesandloosebangsoverherforehead.Dyachenkohadstudiedtobe a systems programmer and worked at a defense-related bureau on spacetrajectories.Shewasnotapublicfigure,andlittlewasknownaboutheratthetime.Shehadnoexperienceinpolitics,butshecouldspeaktoherfatherinawaynooneelsedared.TheoligarchssawherasadetouraroundKorzhakovtogetinformationtoYeltsin.“She had a lot of the features of her father,” Berezovsky recalled. “She

workedtwentyhoursaday.”Shewasstubborn,likethepresident,hesaid,butshewouldlisten.Yeltsinrecalledthatbeforeshejoinedthecampaignhefeared“Iwasgoing tobreakdown”under thestress,but sheofferedhimaglintofoptimism. Valentin Yumashev, who was Yeltsin’s ghostwriter and hadintroducedBerezovskytotheKremlininnercircle,joinedDyachenkoonmanypolitical missions. Chubais quickly realized the value of Dyachenko’spresence,especiallyinbypassingKorzhakov.SoonDyachenkoandYumashevwere traveling all over Moscow, recruiting advertising men and politicalconsultantstocometoYeltsin’srescue.OnMarch4,Dyachenko andYumashev came to see IgorMalashenko, the

presidentofNTV,andappealed tohim to takeononeof themost importantjobs in the campaign—media and public relations. It was an extraordinarygesture to a leader of the Gusinsky camp. Malashenko, who has the short-cropped hair of a drill sergeant aswell as finely honed political skills, toldthemhebelievedYeltsinhad“anenormoushiddensupportbecausethenationisbasicallynon-Communist.”And,hesaid,“theonlythingheneedsisarealelectioncampaign:tomakenewseveryday,tomakestoriesthatlookgoodon

television.”MalashenkoregaledthemwithReagancampaigntechniqueshehadheardabout,suchasvisitingaflagfactory.ButMalashenko worried that Korzhakov and his pals did not want to go

aheadwitharealcampaign.Malashenkowas“notfullofjoy”aboutworkingfortheKremlin,Gusinskysaid.Therewereobviousdrawbacks.OnewasthatYeltsin’s political standingwas so low thatMalashenkomight not be able toturn it around.And therewas the everworrisome threat ofKorzhakov,whohadmasterminded the faces in thesnowattackonGusinsky in1994.Finally,there was the biggest risk of all—the move could compromise NTV’scherishedreputationforindependence,earnedduringtheChechenwar.“Igor, I begyou to take the job at theKremlin,”Gusinsky recalled telling

Malashenko.“Thisisateamdecision.Thisisateamgame.WearedefendingourselvesfromtheCommunists.”“Youlaymebare,”Malashenkoprotested,accordingtoGusinsky.“Yes,”Gusinskysaid,“Ilayyoubare.ButIamexposingmyselftoo,believe

itornot.Iamnotconcealingthatthisisourteamdecision.WemustpreventtheCommunistsfromcomingtopower.”MalashenkosoonthereaftermetwithYeltsin.Hewasblunt.“Listen,”hetold

Yeltsin, “you cannot just use the media as a propaganda tool of the Soviettimes. It doesn’twork; you need to get elected.Youneed towork a lot.Youshouldgoalloverthecountry,makenews,makespeeches,meetpeople,andsoon.”MalashenkoadvisedYeltsin: runamodern,Western-stylecampaign inacountrythathadneverreallyknownone.“Onaviscerallevel,”Malashenkotoldme,“hegotit.”Touchingasensitivesubject,MalashenkoremindedYeltsinthathewasone

ofGusinsky’s partners.He askedYeltsin to stand by him in case of anotherattack from Korzhakov. According to Malashenko, Yeltsin understood andagreed.GusinskylaterattributedYeltsin’sacquiescencetohissenseofpower—Yeltsin knew he neededMalashenko, regardless ofwhat had gone before.“Forthesakeofthissenseofpower,”Gusinskysaid,“Yeltsinwaspreparedtolovehisenemies,betrayfriends—itwasallthesametohim.Thegoalwastoholdontopower.”Chubais recruited the best and brightest political operatives from the

financial clans. “From each of them, I took their strongest people,”Chubaissaid. Among them were Shakhnovsky, Luzhkov’s senior aide, who hadorganized theSparrowHills club, andSergeiZverev, anotherGusinskymanwhowasasuperlobbyist.OthersincludedYevstafiev,theChubaisaidewhohad

recently beenworking atBerezovsky’s television channel;AlexanderOslon,theleadingcommercialpollster;VyacheslavNikonov,aformermemberofthelower house of parliament; and Satarov,whowasYeltsin’s political adviser.Manyothersworkedas freelancerson the side, suchasSergeiLisovsky, theentertainmentandadvertisingmagnate.TheteamwasjustgettingorganizedinMarchwhenthecampaignnearlywentoffacliff.Theartandscienceofpublicopinionpollingwasstillcrudein1996.Insteadof telephone surveys, pollsters relied on an armyof foot soldierswhowentdoortodoorwithclipboardsandquestionnaires,oftenhavingdoorsslammedintheirface.Butitwaspossible,withenoughpluckandcare,tobuildapictureof theelectorate.Oslon’spollscharted thispicture.Months-longbacklogs inpayingwagesspreadacrossthecountry,feedingdiscontent.TheChechenwarwas deeply unpopular. The January battle in Pervomaiskoye was especiallyhumiliating for Yeltsin. He had demonstrated before television cameras—bymoving his head back and forth like a sharpshooter through a scope—howthirty-eightcrackRussiansniperswerewatchingeverymoveoftherebelsandpredictedtheywouldbedefeatedinasingleday.Instead,theyescaped.Yeltsinlookedtotallydisconnectedfromthebloodyrealityofthewar.Oslontoldmebackthen,“Chechnyaisthefundamentalquestion.There’snothingleftforhimtodobutendthewarinChechnya.”YetanotherfactorwasYeltsin’sisolation“behindtheKremlinwalls,”Oslonsaid.Russiansfelttheyhadlosttouchwiththeir leader, a one-time streetcar populist who had inexplicably become adistantcaricatureofhimself.19Yet thepollsalsoshowed thatYeltsinhadastoreofpopularsupport, ifhe

couldunlockit.Forallhismistakes,Yeltsin’sratingswentupasvotersbeganto think aboutwhere the countrywas going next, rather than about the past.Insteadofcapitalizingonhisstrength,Yeltsincameclosetodiscardingit.WhatBerezovskyhad toldYeltsinwas true:Korzhakovwashoping tocall

off the election rather than risk defeat. In late February, Soskovets secretlyhiredagroupofAmericanpoliticalconsultantstoanalyzethetrendsinpublicopinion. On February 27 Soskovets told one of the consultants, RichardDresner, that “one of your tasks is to advise us, amonth from the election,about whether we should call it off if you determine that we’re going tolose.”20 Korzhakov tried to persuade Yeltsin to abandon the elections. “It issenseless to struggle when you have a 3 percent approval rating, Boris

Nikolayevich,” Korzhakov said, according to Yeltsin’s account. “If we losetimewithalltheseelectoralgames,thenwhat?”Korzhakov later offered his own explanation, saying, “It was clear tome

whomweweregoingtoelect:eitherZyuganovorasickpresident.ThatiswhyIwassuggestingtopostponetheelectionsbytwoyears.”21DyachenkolaterrecalledthatKorzhakovwantedto“preservehisinfluence”

onYeltsinandsurroundedhimwith“atightcircleofhismen.”Soon“Papagotencircled by peoplewhowere all saying as one:why dowe need thismostdifficult campaign?You shall stayon for twomoreyears . . . . laterwewillhold the elections calmly. All the democratic values will be preserved.”22Korzhakov knew what others did not: Yeltsin was seriously ill. But the fullweightoftheideatopostponetheelectionscannotbeplacedonKorzhakov’sshouldersalone.Atsomepoint,itbecameYeltsin’sidea.Hepushedforwardaplan, in violation of the constitution, to dissolve the State Duma, the lowerhouseofparliament,ban theCommunistParty,andpostpone theelections.“Ihadtotakearadicalstep,”Yeltsinsaidinhismemoir,withoutreallyexplainingwhy. “After the ban, the Communist Party would be finished forever inRussia,” he recalled thinking at the time. But Yeltsin would undoubtedly befinishedtoo,andhisaccountleavesmanyquestionsunansweredaboutwhyhewentsofarwithsucha riskyscheme.“Idon’tknowwhosecrazy idea itwasexactly,”Berezovskyrecalled,“butKorzhakovandthegangwereveryactivelytryingtobringittolife.”23OnMarch15, aFriday, theStateDumavoted250 to98 for anonbinding

resolution to repeal the1991agreementatBelovezhskayaPushcha.Thiswastheagreement,afterthefailedcoup,betweenYeltsinandtheleadersofUkraineandBelarus.MeetingatahuntingresortoutsideBrest,theydeclaredtheirownunion, defying Gorbachev and triggering the end of the Soviet Union threeweekslater.TheDumavotewasapoliticalstatement,abitofgrandstandingbythenewlyelectedCommunistsandnationalists.ButtoKorzhakovandhispartyofwar,thevotewasaperfectpretexttotriggerdissolutionoftheDuma.Overthenexttwodays,ahiddendramaofextraordinarysignificanceunfoldedintheKremlin. Itwas so secret thatmost journalists, includingmyself, had only avagueclue,untillongafteritwasover,whathadhappened.Ishouldhavepaidmore attention to Yeltsin’s reaction to the vote on Saturday. Yeltsin said theDumahadcalled intodoubt itsown legitimacy,aswell as“thepossibilityofholdingpresidentialelections.”Ididn’trealizeitatthetime,butYeltsinmeanteveryword.

EarlyonSaturdaymorning,YeltsinsummonedAnatolyKulikov,theinteriorminister, to the Kremlin. The barrel-chested Kulikov, inscrutable behindglasses with thick, tinted lenses, was an architect of the Chechen war andpresidedoverafar-flungnationalpoliceforce,riddledwithcorruption.WhenhegottoYeltsin’soffice,hesawtheRussianpresident“excitedandagitated,”herecalled.AssoonasKulikovsatdown,Yeltsin toldhimhehaddecidedtodissolve the Duma, ban the Communists, and put off the election. “I’m notgoing to tolerate it any more,” Yeltsin said. “I need two years.” KulikovrecalledthatYeltsinkeptrepeating,“Ineedtwoyears.”Yeltsinsaidthedecreewouldbesentoutintheafternoon.24Kulikov, while promising to follow orders, asked for time to consider

Yeltsin’splan.HesaidhewouldcomebacktoYeltsinat5:00P.M.Hethenhada cognac with Korzhakov and Soskovets, at Korzhakov’s invitation, andrealized,as theyspoke“passionately,” that theywerearchitectsof the idea toput off the elections.WhenKulikov called around to thegeneral prosecutor,Yuri Skuratov, and the chairman of the Constitutional Court, VladimirTumanov, he discoveredYeltsin had told each of them, untruthfully, that theotheronesapprovedofhisplan.KulikoventeredYeltsin’sstudyagainat5:00P.M. and found the Russian president “morose, his face sallow.” Kulikovexpressedgravedoubtsabouttheplan,warningYeltsinthatifhewentaheaditcould lead to a “social explosion” inRussia, “andwedidnothave forces tomanage the situation.”ForYeltsin, thismusthavebeenanominouswarning,that thearmyand interior troopswouldnot supporthim.Yeltsin,undeterred,orderedaidestopreparethedecrees.KulikovwenttotheKremlinofficewheretheyweredraftingthedocuments.HewalkeduptoawindowoverlookingRedSquare, which at about 6:00 P.M. was full of people strolling on thecobblestones.“Don’tyoudarepreparethisdecree,”Kulikovimploredtheaides.“Seethese

peoplewalking around? Tomorrow, after the decree is signed, fireswill beburning here.And I don’t know atwhat other places inMoscow, howmanyaround thecountry.Wedon’thaveforces tokeep thesituationundercontrol.Thisisthepathtocivilwar.”KulikovwassummonedbacktoYeltsin’sstudyonSundaymorningat6:00

A.M. He found Yeltsin even more somber, and tormented. To Kulikov’ssurprise, Yeltsin had also summoned the heads of the Moscow city andregionalinteriortroops,whowouldhavetohandleanyriots.OneofthemtoldYeltsin that sixteen thousand troops were ready but another ten thousand to

twelvethousandwereneeded.KulikovnoticedYeltsinhadadecreeonhisdeskfiringhim.Unbowed,heprotestedonceagainthatYeltsinwouldigniteacivilwar if he went ahead with his plan. Kulikov said the army might not standbehindYeltsin; the prosecutor and chairman of theConstitutionalCourt alsoopposed the plan. ThenKulikov asked a question. Yeltsin wanted to ban theCommunistParty.“Doesanyoneknowwheretheirheadquartersislocated?”YeltsinlookedatthetwoMoscowinteriorchiefs.Heaskedthefirstone,then

thesecondone,“Doyouknowwhere?”“No,”theyadmitted.“I know where,” said Mikhail Barsukov, head of the Federal Security

ServiceandacronyofKorzhakov.Barsukovshuffledthroughsomepapers.“1Okhotny Ryad,” he announced. “The State Duma.” Kulikov thought it wasBarsukov’swayofbreakingthetension,ajoke.Alongpause.“Noonelookedup;allsatsilent,”Kulikovrecalled.“Thiswas

averydifficultperiod.”HeexpectedtobefiredbyYeltsinatanyminute.Butafter a long silence,Yeltsin said, “Right, certainly, theymust be dispersed. Ineed twomore years.”Yeltsin also said, “Of course the only obstacle is theconstitution.”Hethengaveasignal,ahint,ofuncertainty,Kulikovnoticed.Hesaidhewouldconsultwithothers,includingLuzhkov.Thatmorning at home,Yeltsin had also heard protests fromhis daughter,

Dyachenko. “I told him that no one was going to understand him, that thismeantlosingeverythingthathadbeenachievedwithsomucheffort.Buthewasnottakingmywordsseriously,”sherecalled.25Berezovsky and Gusinsky had also picked up word of the plan through

Kremlin leaks. “Whenwe learnedwhat was being prepared, we felt that themomenthadarrivedwhenwemusttrytopreventthesituationthroughthemassmedia,”Berezovskysaid,“tomakeitpublicinordertoopposeit.”OnSunday,therewerestillhours togobefore theeveningbroadcasts. Ilyushin,Yeltsin’sloyal aide, had started leaking word of the dramatic plan to call off theelectionstoGusinsky’sNTVtelevisionchannel.“Weweregettinginformationvirtually live,”Malashenko recalled. “Ilyushin was a very secretive guy, so,youknow,toleaktheinformation,itwouldmeanthesituationwasdisastrous,justdisastrous.Andhewasleakinginformationtous.”SergeiKaraganov,deputydirectorof theInstituteofEurope,alsoplayeda

small role. Karaganov was one of the leading foreign policy analysts inMoscow.HeservedonthePresident’sCouncil,anearlydefunctadvisorypanelto Yeltsin. The president paid heed when Karaganov wrote him a personal

letter,warningthattheWestwouldnotunderstandifhecalledofftheelection.Yeltsinwouldbeisolatedandcutofffromtheworld.26Finally, Dyachenko saw her father was “in the mood to take the final

decision—adangerousone,Ifear.”Shecalledtheonemanwhowasfearlessinthe face ofYeltsin’s immense power—Chubais, head of the analytical centerandagentof the tycoons.ShemetChubais at theKremlin, tookhim into thepresident’sreceptionroom,anddemandedameetingwithPapa.WhileChubaiswaitedoutside,shewentinandbeseechedherfathertolistentoChubais.“Papasaidhedidnotwanttolistentoanyone.Buthedidnotsaythathehadtakenthefinaldecision.Ineverkneeledinfrontofanybody,buthereIwasreadytofalltomykneesandbeg.Perhapshesensedit,”sherecalled.YeltsinagreedtoseeChubais,whoenteredtheroom,andDyachenkoleft.Latersherecalledhearingshoutingthroughthedoor.YeltsinrecalledthatChubaiswasred-faced.“BorisNikolayevich,”Chubaisbegan,“this isnot1993,”whenYeltsinhad

facedoffagainstaviolent,rebelliousparliament.“Thedifferencebetweenthatmoment and now is that now, the one who goes beyond the constitutionalboundarieswillfailfirst.Itdoesn’tmatterthattheCommunistsweretheonestogooutofboundsbackin1993.It’sacrazyideatogetridoftheCommunistsin this way. The Communist ideology is in people’s heads. A presidentialdecree can’t put new heads on people. When we build a normal, strong,wealthy country, only thenwillweput an end toCommunism.The electionscannotbepostponed.”Yeltsin recalled theyspokeforanhour.“Ipracticallyshouted,somethingI

rarelydo,”hesaid.“Andfinally,IreversedadecisionIhadalmostmade.”27Chubais later recalled that at the end of the very heated argument,Yeltsin

finallyadmitteditwaswrongtopostponetheelections.HeturnedtoChubaisandsaid,“Andyou,Chubais,mademanymistakesinprivatization.”28Atabout5:00P.M.onSunday,abombthreatwasostensiblymadeagainstthe

Duma. The building was evacuated and surrounded by interior troops. ThiswasthefirstcueintheplantodissolvetheDumabyforce.Butjustastheyhadcome,thetroopsleft.Theordercame:Pullbacktothebarracks.Yeltsindidnotpull the trigger.He later attributed his decision to the arguments ofChubaisandhisdaughter.Nowhehadtofightforreelectionandfor that,hisfriends,theoligarchs,werestillathisside.Butitwouldalsomeanthat,asMalashenkohadwarnedhim,hewouldhavetoworkforit.

Yeltsinhadtobreakoutofthe“KremlinWall”syndrome.Hehadtopersuadevotersthathewasnotadistanttsar.AtriptoKrasnodarinsouthernRussia,setupbytheSoskovetscampaigngroup,was,typically,apublicrelationsdisaster.Yeltsin barely got close to any voters and was surrounded by cordons ofsecuritymenandlocalchinnovniki,thebureaucrats.Although Yeltsin did not know it, Shakhnovsky, now working for the

Chubaisanalyticalcenter,hadsecretlysentphotographerstoKrasnodar.TheycapturedthesightofYeltsin,milesawayfromthevoters.Shakhnovskytoldmehe compared the photos with earlier pictures shot in 1991, showing Yeltsinplunging intowelcoming crowds.WhenMalashenko showedYeltsin the twosetsofphotographs, thepresidentgotthemessage.“Ialmostyelpedinpain,”Yeltsinsaid.“Itmadeastrong impressiononme. Ithadonlybeenfiveyearsago.IrememberedhowIfeltbackthenwhenImetpeopleandeverythingfellintoplace.”29Yeltsinrealizedheneededtowagea“real”campaignandgetcloser to the

voters.ThefirstthinghedidwasremoveSoskovetsfromthecampaignandputChubais incontrol.Shakhnovsky tookover theschedulingandYeltsinhit theroad,visitingtwodozencities infourmonths.Inascenethatbecamepartofthecampaignlore,Yeltsin,energizedbyapplausefromyoungpeopleatarockconcertinRostov-on-Don,playfullydancedonstage.Yeltsin tried to edge aside Grigory Yavlinsky, the centrist leader of the

Yablokoparty,whowasalsorunning.30Yavlinskyrefusedtoleavetherace,butYeltsinseizedprideofplaceastheonlyrealdemocraticandreformalternativetoZyuganov.Yeltsin’spollratingsbegantoclimbintotheteensinMarch,andbylateAprilhewascomingclosetoaneck-and-neckracewithZyuganov,whohadcrisscrossedthecountrywithadroning,gloomystumpspeech.OnApril2Yeltsin announced he was ordering the withdrawal of Russian troops fromChechnya, and soon he signed an agreement in the Kremlin with Chechenresistance leaderZelimkhanYandarbiev.Yeltsinalsomadeaquickvisit toanairfieldnearGrozny.Althoughhisactionsdidnotstopthefighting,theygaveYeltsinapublicrelationsboost.ThetycoonsinjectedastrangetwisttothecampaignonApril27inanopen

letter published in Russian newspapers. The letter, expressing alarm about aschism inRussian society, appealed to themilitary, businessmen, politicians,and opinion makers “to pool their efforts in searching for a political

compromise,”althoughYeltsinandZyuganovwerenotspecificallymentioned.Theletter,writtenincautiousandevenobfuscatoryterms,waslargelycriticaloftheCommunistsandinretrospectappearstobeatacticalwarningfromthetycoons to Zyuganov not to rip Russian society apart, even as they wererippinghimapart.TheimplicitmessagetoZyuganovwastokeepthingscalmor else. The letter was signed by thirteen financiers and industrialists,Berezovsky first, including the rest of the group of seven, who werecommitted Yeltsin backers. “It was a kind of warning to Zyuganov andKorzhakov,”Smolenskysaid.“Wetriedtogetacrossthemessagethatweshallslapanyone’shandsiftheytrytobreakthedemocracy.”Inotherwords,thisisourelection,don’tmesswithit.Yeltsin’spoliticaloperativeshadZyuganovintheirsights,butfirsttheyhad

to sellYeltsin himself, and thatwas extraordinarily difficult. PaulBograd, apoliticalconsultant,preparedadetailed lookat thepolls,whichhesubmittedonApril25toChubais.Drawingoneighteenmonthsofdata,Bogradfoundthevoters in a foulmood. “Sixty-five percent of all voterswant to vote againstPresident Yeltsin,” he reported. “Sixty-five percent of voters do not want tovoteforZyuganov.”Headded,“Thewinnerwillbethecandidatewhomvotersdo not vote against.”31 Put simply, this political math meant that Yeltsin’scampaignhad tomakehim the lesserof twoevilsbydiscreditingZyuganov.Theyhad tocreateablack-and-whitechoice,whichwasnotsimplegiven thestrong negative feelings about Yeltsin. Oslon, the Yeltsin campaign pollster,toldmethatanaddeddangerzoneforYeltsinwashishealth—ifpeoplesawhewasfrail,hissupportwouldcrumble.The kinder, gentler campaign for Yeltsin was born in a brainstorming

session at Video International, one of the two major television advertisingfirmsinMoscowatthetime.TheleaderoftheteamwasMikhailMargelov,astrapping,worldly,ambitiousyoungmanwhocamefromafamilyofmilitaryand intelligence officers. Margelov taught Arabic language at the KGB’sHigherSchool,atrainingacademyforspies,andlaterworkedfortheofficialnewsagencyTass.But in the1990sheplunged into thecapitalistpursuitsofadvertising and public relations. Video International made a pitch to theChubais team on how to sell Boris Yeltsin to the skeptical Russian public.Margelov recalled,“Ourstartingpointwas,Yeltsin ispresident.He is rulingthecountry.Hehasmadeverymanymistakes.Peoplewholovedhimin1989–1990 do not love him now.”32 The result was a nationwide televisionadvertisingblitz inwhichYeltsindidnot appear, except in thevery last spot.

Instead, elderly people, veterans, and working-class voters offered soft andfuzzytestimonialsfortheRussianleader.Mostofthesubjectsintheadswerecloser to the profile ofCommunist supporters but said theywere voting forYeltsin.The themeof the spotswas“ChoosewithYourHeart,”anattempt toopen the door to votes for Yeltsin while sidestepping economics, crime,ideology, and thorny issues that might remind voters of why they dislikedYeltsin. Margelov recalled that he made one commercial showing a sailorpromisingtovoteforYeltsin,despitethefacthehadnotbeenpaidinmonths.Butthecommercialwasdiscardedatthelastminute—noonewouldbelieveit.Yeltsin was above the fray in his advertising, cast as the guarantor of

stability, a father figure. “Maybe it sounds even idiotic to the Westernmentality,”Margelovsaidofthe“ChoosewithYourHeart”campaignslogan,“but for the Russian mentality it sounds quite natural.” Dyachenko broughtMargelov a box ofYeltsin family photos.He selected some of the best, andthey became the centerpiece of the final commercial in the set: Yeltsinnarratinghisownfamilyhistory.Againstsentimentalmusicinthebackground,Yeltsin’svoicereminiscedabouthismother ’shotcakes,andthephotosshowedhimasayoungman,trim,withathickpompadourofblackhair—anathlete,arebel, a father and grandfather. Finally, an older, puffy Yeltsin, seated in abeigechairandwearinganopen-neckedwhiteshirt,camebefore thecameraandofferedsympathyforthepainhiscountrymenhadfeltinrecentyears.“Notapersoninthecountryhashaditeasy,”hesaid.Theclosingsloganwas,“WeTrust,WeBelieve,WeHope.”Alexei Levinson, a specialist in Western-style “focus groups,” using test

groups to evaluate products or ads, told me such powerful televisionadvertising appeared in Russia for the first time during the 1996 campaign.“FormanyRussians,advertising isanew thing,only twoor threeyearsold.There’s hardly a kid who—like you in America—knew advertising fromchildhood.Andforadultsitisstillsomethingtheyarenotaccustomedto.“Thosewhowere least likely to vote forYeltsinwere over fifty, but they

were also themost affected by commercials,” he said. “Theywere themostvulnerabletothecommercials.Theyalsohatedthemthemost.Itwasn’tsimple.The trick in the commercials was that the people in themwere 100 percentZyuganov-typevoters.Youlookatapersontalkingaboutthehardshipsoflife,notnecessarily linked toCommunist rule,andallofasuddenhesays, ‘Let’svoteforYeltsin.’Itmadeamishmashoftheirbrains.”33InMoscow,whichhadoneofthemostproreformelectoratesinthecountry,

Luzhkovwas a powerful engine for Yeltsin’s reelection campaign. Luzhkovappearedonthousandsofbillboardsaroundthecity,shakingYeltsin’shandinendorsement.Hestoodshoulder toshoulderwithYeltsinata finalconcert inRed Square before the vote, leading the cheers. Yeltsin’s natural base wasamong young people, and Lisovsky, who had begun his career stagingconcerts in Soviet times, approached MTV about an appearance by Yeltsinsimilar to theonePresidentClintonmade in1992.Back then,MTVstagedahighly successful youth get-out-the-vote campaign called “Choose or Lose.”Clinton’s appearance on MTV was rewarded by a strong showing amongyoung voters. But this time MTV was nervous about Yeltsin’s apparentweaknessandrefusedtocooperate,givingLisovskythreevideocassettesoftheClinton appearance and telling him they wanted nothing to do with Yeltsin.Lisovskymodeled“VoteorLose,”Yeltsin’syouthcampaign,ontheMTVidea,including dozens of concerts across the country that spring. But the YeltsincampaignconcludeditwasnotenoughtorecastYeltsininsoftfocus.ItwasnotenoughforYeltsintodanceonstage.TheyhadtodestroyZyuganov.

The front page of the newspaper held a startling photograph. Rations ofsausagewerecurledonnewspapersandsetoutonthefloor.Everyonewhosawthe picture instantly recognized the scene from the past—the scramble for apieceofsausage,thelines,theshortages,theSovietlife.Itwasthesixthissueof a newspaper with a circulation of 10 million—more than twice that ofRussia’s best-selling weekly Argumenty i Fakty—that materialized inmailboxesandatpublicgatheringplacesacrossRussiainApril,May,andJune1996. In bold letters across the top, the newspaper was calledNe Dai Bog!(Godforbid!),anditwasoneofthemostsuccessfultoolsinYeltsin’snegativecampaignagainstZyuganov.NeDaiBog!wasanunrelenting,cleverlywrittencrusade against Communism, and it was especially aimed at the provincesoutside ofMoscow,whereZyuganovwas running stronger thanYeltsin, andwherethetransitiontothemarketeconomyhadbeenthemostdifficult.Everyissueofthepapercarriedbitingarticles,lavishcolorphotos,andillustrationstodrivehomethemessagethatZyuganovwouldtakethecountrybackward.Inthe sixth issue, the frontpagecarrieda faked transcriptof a supposed secretCommunistPartymeeting.“Weblurteditout!”readtheheadline.“Wewillnotbe able to give the people anything thatwe promised.” In an earlier edition,featuringachildren’sessaycontest,onechildwrote:“Russiaismyhome,my

fortress.ButifCommunistscometopower—mycoffin.”ThenewspaperwassecretlycreatedandpublishedbyYeltsin’scampaign.It

was among the many different “black” propaganda ploys—disinformation,dirtytricks,paidnewspaperarticles,unsignedadvertising,falsifieddocuments—used to carry out the attack on Zyuganov. In another example, a millionsmallposterswereprintedshowingaglowering,threateningZyuganovandthewords:“Buyfood—Itcouldbeyour lastchance!”Theposterswereadhesivebacked and difficult to remove. Theywere stuck on food storewindows allacrossRussia,ablatantscaretactic.TheYeltsincampaignneveradmittedtheywerebehindit,buttheywere.The campaign also mixed the technology of black propaganda with the

reach and credibility of the mainstream news media. Journalists told mycolleague Lee Hockstader that the Yeltsin campaign lavished hundreds ofthousandsofdollarsonthemforfavorablecoverage,mostlytodrivehometheanti-Communist attack on Zyuganov. The payoffs ranged from thousands ofdollars a month for a top reporter to just a hundred dollars to a freelancejournalist. The bribes and payoffs were especially welcome at strugglingnewspapersandmediaoutlets,wheresalarieswerelow.Even without the dirty tricks and bribes, Yeltsin reaped a huge wave of

support amongRussian journalists in the campaign against Zyuganov.Manyhonest and reputable reporters threw themselves into the task of defeatingZyuganov out of genuine fear about the return of Communism. Theycompletely shared Berezovsky’s views, expressed to me right after theelection.“It’snotanelectionasnormal,”Berezovskysaid.“It’snotanelectionof the kind you have in the United States. It’s not Republicans versusDemocrats.Itwasasituationwherewehadtochoosebetweentwosystems.”Berezovsky and Gusinsky devoted their powerful television channels to

reelecting Yeltsin, and the third channel, RTR, was state-owned and easilymanipulated by the Kremlin. The result was blanket coverage favorable toYeltsin.InthefiveweeksbeforetheJune16first-roundvote,Yeltsinreceivedthreetimesmoreairtimeonprime-timenewsprogramsthanhisrival.34Thepro-Yeltsinbiascamenotonlybecausetheoligarchsorderedit,butalso

becausejournalistswillinglyjoinedtheminthecrusade.Yeltsinwentsofarinhis memoirs as to claim that Malashenko “created a firm vertical chain ofcommand for work with the television reporters and journalists.” In reality,this did not happen because it wasn’t necessary—the journalists willinglyenteredtheKremlincorral.

Among the television channels, ORT was sympathetic to Yeltsin, asBerezovsky had promised it would be. But Gusinsky’s NTV, born in thecrucibleoftheChechenwarthepreviousyear,earnedareputationforstandinguptotheKremlin.Now,inadifferentsituation,NTVshiftedandwentovertoYeltsin’sside.Dobrodeyev,whowithKiselyovandGusinskyhadfoundedthechannel, recalled later that he backedYeltsin instinctively,without hesitation,becauseofhismemoriesoftheSovietyears.“Forpeopleofmygeneration,itwasamatterofprinciple,”hesaid.KiselyovhadalsobeeninDavosandsharedtheanxietyofthetycoonswhen

he saw Western businessmen rubbing elbows with Zyuganov. The election“wasn’t a choice of supportingGeorge Bush or Al Gore. It was a differentchoice, inapoliticizedsocietyin transition,withaneconomiccrisis thatwasnotyetover,andwithalltheproblemsincludingChechnyathatwehad.”Inthemonthsbeforetheelection,Kiselyovfoundthat“rank-and-filecorrespondents,producers, reporters, news readers, all of them were enthusiastically andwholeheartedly supporting Yeltsin, with all the drawbacks, with all theunderstanding of his illness, his drinking habits, of his personalitydeteriorating,allofusunderstoodthat—wethoughthewasabetterchoicethanZyuganov.”Afterthefact,Gusinskyconcludedthathehadmadeafundamentalmistake

incooperatingsocloselywithYeltsinin1996becausetheKremlingottheideathat thenewsmedia—includinghis cherishedNTV—couldbe treated like anobedientpuppy.The flirtationwithpower tookan immense tollonGusinskylateron.Butatthetime,itseemedtherightthingtodo.“Thefactis,westirredhysteria and scared ourselves,” Gusinsky recalled. “We had no politicalexperience.Andwealldecidedthatwehadamissiontopreventthearrivalofthe Communists. And journalists decided that if the Communists came, thatwould be the end. Theywere defending themselves, you see. Theywere notelecting Yeltsin; they were defending themselves and their right to do theirjob.”“Thepeoplewhoworkedforthemassmedia,90percentweredemocrats.It

wasnotpaidfor!”Berezovskyinsisted.“Itwastheirownopinions.”In thisatmosphere, thenewsmediabecamea toolof theYeltsincampaign.

Even theworstof the“black”propagandamade it into themainstreampress.Anexamplecame justdaysbefore thefirst roundof theelection.OnJune8,NezavisimayaGazeta, Berezovsky’s newspaper, published a lengthy, alarmistarticleasserting that theCommunistswouldnotacceptdefeatpeacefully.The

article was a fabrication from the “black” side of the Yeltsin campaign. Itclaimed to reveal top-secret intelligence reports that Zyuganov was “losingcontrol.” It claimed that radicals inside thepartywerepreparing, through anelaborateeight-stepplan,toseizepoweraftertheelection,sincetheycouldnolongerwin it throughdemocracy.Thewholedocumentwas intended to raisefears about Zyuganov, and publication inNezavisimayaGazeta was just thefirststep.Nextitbecamepresidentialammunition.YeltsingaveapreelectioninterviewtoKiselyov.Theinterview,broadcaston

June 9,was taped earlier in a spacious, imperial-style room in theKremlin,withYeltsininadarkgraysuit,hishairbrilliantwhite,sittingclosetoaroundtable in a pink-upholstered, gilded chair. “Boris Nicholayevich,” Kiselyovaskedinhisslow,trademarkvoice,“tellmeplease,thereisonlyoneweekleftto the elections. Do you have fears that there can be some unexpectedunpleasantness, provocations, attempts to do something to disrupt theelections?”Yeltsin replied that he just happened to read an article about that in the

newspaper.“Whenanenemy,orarivaltobeprecise,losesconfidence—andheislosingconfidencenow...youmustexpectthathewillattempttostirupthesituation,” he said. The message was that Zyuganov equals instability. ThefabricatedmemowasnowtransformedbyYeltsinintosomethingreal.In the final weeks of the campaign, the oligarchs also lent a hand to

AlexanderLebed,thegruff,deep-voiced,charismaticformergeneralwhowasalsorunningforpresident.TheLebedgambitwasintendedtohelpYeltsinbyfurther erodingZyuganov’s support.Berezovsky’s television channel aired afive-minutevideoportrayingLebedasabornleader,“oneofus,”likeYeltsin.Berezovsky told me he also held long talks with Lebed, who “reflects theproblems and doubts” of ordinary Russians. Vinogradov said his bank,Inkombank,tookituponitselftofinanceLebed’scampaignbutcoordinateditwith the Chubais headquarters. “Lebed did everything we told him to,”Vinogradov said. Vinogradov estimated he spent $10 million to supportLebed’scampaign.35TheYeltsincampaignhadanofficialbudgetof$3millionundercampaign

rules. But it spent many millions—perhaps $100 million or more—for the“black” propaganda, for the printing of Ne Dai Bog!, for the “Buy Food”posters, for payoffs to journalists, for personalized letters sent through themail toeveryveteranofWorldWar II,and formanyotherhiddencampaignactivities. The campaign headquarters was awash in cash. A friend of mine

stumbledontoayouthcampaignworkers’conferenceat theHotelOrlyonok,nearSparrowHills.Duringthethree-dayaffair,youthleaderswerecalledonebyonetoaseparatesuiteusedbythechairman.Theretheywereeachhandedasackofcash.Who paid for it all? Every journalist has a moment when his cumulative

experience becomes a blindfold—mine came on the issue of the campaignfinancing. After years of watching American politics, where businessmenalwaysmake hefty contributions to candidates, it seemedperfectly natural tome to assume that the Russian tycoons bankrolled Yeltsin’s campaign. Myimpressions were reinforced by the details I already knew of the tycoons’interest-freeloantoChubais.Butthedeep,dark,dirtysecretofthe1996Yeltsincampaignwasdifferent.

AsIshouldhaveknown,thetycoonsdidn’tpay,theygotpaid.TheydeliveredtoYeltsintheirbestbrainsandtheirairwaves,andtheybankrolledChubais.Butwhenitcametobigmoney,tothetensofmillionsofdollarsneededtostageYeltsin’sreelectioncampaign,theflowofmoneywasnotfromtheoligarchstoYeltsin,butfromthestatetotheoligarchs.They did not use government money directly. Rather, with help from the

campaignheadquarters, theycreatedahidden scheme inwhich theyobtainedgovernmentbondscheaply.Thebondsweredeliberately sold to the tycoons’banks at a deep discount. Then the banks could resell the bonds at amarketprice, raising quick cash, which they were then supposed to spend forcampaignactivities.Howmuch theyactuallyspent forYeltsinandhowmuchtheypocketedwill neverbeknown.Thedetailswere so secret that even fiveyearsafterthefact,manypeoplestillrefusedtotalkaboutit,butIamconfidentthat the scheme existed. A top campaign official told me that the oligarchscouldnotsparetensofmillionsofdollarsatthetime.Instead,theylaunderedcashbybuyingandresellingthegovernment’sownbonds.Preciselyhowtheygot thebonds isamystery.Anothersourcewhodirectlyparticipatedsaid:“Itgoeswithoutsayingthatnoonewasgivingawaymoneyfornothing.That isall I want to say on this subject. Do you understand? Your information iscorrect.” The most likely source of the river of laundered money was thegovernment’sdollar-denominatedbondsknownasMinFins,becausetheywereissuedbytheMinistryofFinance.InMay1996,theMinistryofFinanceissuedthe sixth in a series of MinFin bonds, $1.75 billion worth of financialcertificates. Financial specialists toldme itwould not havebeendifficult forthegovernmenttoparceloutsomethebondstofavoredbanks.36Thescheme

had a certain elegancebecause the tycoonswere not suckingmoneydirectlyfromthebudget.Rather,theywerefinaglinganassetcheaply—thegovernmentbonds—and selling them dearly. It was just like their past deals, importingcomputers, exporting oil, and speculating on the ruble-dollar exchange rate.TheYeltsin reelection campaignwas financedwith easymoney. Satarov, theYeltsinaide,latersaidinanNTVdocumentaryabouttheelection,“Letusnotbenaive,letusunderstandthatblackcashisturnedoverinourelectionsallthetime,byeverybody.”37Vinogradov,whohadbeenatDavosandattendedthemeetingwithYeltsinin

March, nonetheless was something of an outsider among the tycoons. Herefused to participate in theORT consortium and did notwin any loans forsharesauctions.HeclaimedthathealsogotleftoutwhentheMinFinlootwasdistributed. “When the registerwaswritten, whowas to get what atMinFin,they didn’twrite anything next to our bank,” he said.Vinogradov said $100millionwas spent from the scheme onYeltsin’s campaign and $200millionstolen, although precise figures are hard to find. “This was a very largebusiness,blackbusiness,”hesaid.“Aftertheelectiontherewereinformallistsofwhostolehowmuch.ItwaswrittentherehowmuchSmolenskystole,howmuch Khodorkovsky stole, how much Berezovsky got. He got the largestshare.”38Chubaisoversawthecampaign’streasury,othercampaignworkerstoldme.

WhenIaskedhimaboutit,heimmediatelyrecalledhappilydiscoveringastackofNeDaiBog!newspapersathome,yearslater,readingthemoveragainwithgreat pleasure. “But it wasn’t for free,” he said. “It cost money, seriousmoney.”WhenIpressedhimwherethemoneycamefrom,Chubaisdodgedthequestion. “Whether there had been some financial schemes, giving them anopportunity to receive certain privileges, orwhether there had been no suchschemes,Iamnotreadytoanswer,”hesaid.“Iamnotreadytoeitherconfirmordenyit.”Konstantin Kagalovsky, a well-informed political operative who helped

KhodorkovskywintheloansforsharesauctionforYukos,wroteanewspaperarticle several years later expressing chagrin at the financing of Yeltsin’sreelectioncampaign.KagalovskysaidnooneinRussiabelievedtheoligarchsusedtheirownmoneytofinancetheYeltsincampaign.Rather,theywereusedfor their “technical” abilities—a reference, I think, to the scheme forreprocessing the bonds. Then Kagalovsky added, “Such a mechanism forfinancing the elections is called ‘corruption in defense of democracy.’”

Chubais,hesaid,“candeservedlybeconsideredthefounderofthissystemof‘corruptionindefenseofdemocracy.’”HeaddedthatitbecamethenormunderYeltsin in the following years. “Once you try it, you like it,” Kagalovskywrote.39ItisanoversimplificationtosaythatYeltsinwontheelectionbecauseofNe

DaiBog!orbecauseoftheoverwhelmingsupportofjournalistsorsecretdealsbybankers.Noamountofcampaigndirtytricks,advertising,andairtimecanchange the fact that Yeltsin won the election because of a profound choiceRussianvotersfaced.Foralltheirflaws,YeltsinandZyuganovrepresentedtwoopposingvisionsofRussia’sfuture.Zyuganovdidnotreallyunderstand,norwant to take, thepathofmarket capitalism,whichwas still fragile inRussia.Yeltsinwasbarelycapableofbuildingthatcapitalism,buthewascommittedtothenotionofit.Russianvoterswereonlyfouryearsawayfromthememoryofemptystoreshelves.Myowntravelsatthetimesuggestedthatthebestwaytounderstand why Yeltsin won was to ask voters whether, and how, they hadadapted to the new life of the 1990s, especially the economy. Millions ofpensionersandelderlyhadnotadapted—andvotedforZyuganov.Butmillionsofyoungerpeoplehadadapted,andIthinktherewasjustbarelyacriticalmassof themby June16, 1996.Onedayduring the campaign, in theVolgaRivercity of Nizhny Novgorod, I interviewed a bright young banker, SergeiKiriyenko, who was then thirty-four years old. He told me, “We are in themiddleofragingriverrapids.Wecangoback.Orwecanstubbornlygoahead.In the worst case, if we go back, we will lose everything we have alreadygained.”Yeltsin,headded,“isgoingtotheothershore,whereIwanttogo.”Togettotheothershore,Yeltsinalsoneededtheoligarchs—heneededtheir

March “wake-up call,” their media bullhorns, their talented staff, and theirmoney-laundering abilities. They helped amplify his message, discreditZyuganov, and bring off a victory. The oligarchs saved Yeltsin to savethemselves,andheallowedthemtodoit.BothalsobelievedtheyweresavingRussiancapitalism,andtheywere.Yeltsinwon35.28percentofthefirst-roundvote, to 32.03 for Zyuganov, 14.52 percent for Lebed, and 7.34 percent forYavlinsky. The results forced Yeltsin and Zyuganov into a second-roundrunoff.Yeltsin firedhisunpopulardefenseminister andgaveanewKremlinpost toLebed inorder toattractmorevoters tohis side.Thecampaign staffbeganplanningforavigorousfinalassaultthatincludedaheavyscheduleforYeltsin. Then Yeltsin’s roller-coaster ride of 1996 took another terrifyingnosedive.

Fourdaysafterthevote,twocampaignofficialslefttheRussianWhiteHouseat about 5:20P.M.The first towalk outwasLisovsky, the entertainment andadvertisingmogul,whowascarryingaXeroxboxwrappedinwhitetwine.Hewas stopped at guardhouse 2, a small structure throughwhich visitors enterandexitthefencedcompound.TheguardsaskedLisovskyifhehadapassforthebox.Hedidnot.Theyaskedtoseethebox.At that moment, a final, climactic confrontation between Chubais and

Korzhakovbegan.Formonths,eversinceYeltsinhaddecidedtogoaheadwiththeelections,Korzhakovhadbeengrowingincreasinglyrestive.InearlyMay,KorzhakovadmittedtoareporterfortheObserverofLondonthathewantedtocall off the elections, andYeltsinquicklyput him inhis place.40Yeltsin saidKorzhakovwouldsticktohisdutiesasabodyguard,andthecampaignwouldgoon.KorzhakovknewtheChubaisteamwascarryingbigmoneyaroundingym

bagsandsuitcases; in fact,hispresidentialguardswerealsoferrying aroundcash,“drivingmoneyaroundthewholecountryinsuitcases.”41TheargumentwithChubaiswas, infact,aboutmorethancampaignmoney.Korzhakovsaidhe sawhimself as a championof “Russia and the state,” andhis rivals as “acampofthosewhowantedtosellandrobthisRussia.”TheChubaisgroupsawtheopposite:Korzhakovasapower-crazedreactionarywhodidnotunderstanddemocracyorcapitalism.Korzhakovseta trapfor theChubaisgroup.Thedetailsof thetrapremain

partlyobscure,buttheexistenceofatrapisnotindispute.Korzhakovandoneof his deputies, Valery Streletsky, later boasted they had engineered the net.StreletskyhasclaimedhebuggedtheroomwhereChubaisaideskeptthecashin the RussianWhite House and lay in wait for someone to come for it.42Lisovsky toldme thatKorzhakov’s teamhad been planning the trap for twomonths.43YeltsinsaidinhismemoiritwasKorzhakov’s“finalcounterstrike.”Thechiefofthepresidentialbodyguards“hadbeenspoilingforascandal,andnowhehadfoundone.”Theboxcontained$500,000 inneatlywrappedU.S.dollars.Minutes after

Lisovskywasarrested,Yevstafiev, theChubaisaide,walkedoutof theWhiteHouse and into the same guardhouse. “I saw people standing with Sergei[Lisovsky]withguns,”herecalled.YevstafievaddedthatheheardsomeonetellLisovsky to take the box, that Lisovsky was bending over and Yevstafiev

warnedhimnottotouchit.Yevstafievwasalsodetained.Bothmenweretakento closed rooms, their mobile telephones were taken away, and Streletsky’smenbegantointerrogatethem.WhenbothYevstafievandLisovskydisappeared,thecampaignheadquarters

started lookingfor them.Yevstafievhad leftwordwithhisoffice thathewasgoing to theWhiteHouse andwould be back in an hour.When he failed toreturn, they grew worried. They found him under armed guard—byKorzhakov’smen. “Themenwithgunshad theorder to shoot if necessary,”Yevstafiev recalled. They offered to give him an injection for “high bloodpressure,”whichhefirmlyrefused,suspectingitwassomethingelse.Aboutanhour later,a thirdman,BorisLavrov,acommercialbanker,was

foundintheroomwiththesafebytheKorzhakovguardsandwasquestionedalso. He had another $38,850 in his briefcase. He told interrogators thatLisovskyhadcometotheroomwithYevstafiev,andthatLisovskytooktheboxwiththe$500,000andsignedareceiptforit.44The tycoons and campaign staff were already gathering for a previously

scheduled meeting at Berezovsky’s Logovaz Club that evening. But as theypulled up to the building on Novokuznetskaya Street, they were under awatchfuleye.Korzhakovhadputthebuildingunderconspicuoussurveillancefromunmarkedcarsandrooftops.Zverev,theGusinskylobbyist,recalledthatthe campaign constantly worried about Korzhakov. “We had the impressionsomething was going to happen,” he said.45 Still, Chubais wasn’t sureKorzhakov would go so far as to arrest his campaign staff. “Until the lastmoment,Icouldn’tbelievethatYevstafievwasarrested,”herecalledlater.“Itseemedabsolutelyimpossibletome.”Onceagain,Chubaisexhibitednervesofsteel.FromBerezovsky’selegantly

appointedmansion,hepickedupthephone.Itwasnowlateintheevening.HecouldnotreachKorzhakov,andYeltsinwasasleepandcouldnotbeawakened.Hisangerrisingbytheminute,ChubaisfinallyreachedBarsukov,theheadofthe Federal Security Service. Barsukov was a weak figure who had beenoverpromotedbyhispal,Korzhakov.“I told him I would destroy him,” Chubais said. “I promised him that. I

woulddestroyhimifasinglehairfellfromYevstafiev’shead.”Unexpectedly,Barsukov quickly backpedaled. “Hewas saying, ‘It was no big deal, we areholding him temporarily, another thirtyminutes, then everything will be allright.Justdon’tworry.’”46Kiselyov,theNTVfounderandanchor,gotacallathomeandwastoldby

Malashenkotorushtothetelevisionstudioand“bepreparedtostayontheairthroughoutthenight.”MalashenkowasbothKiselyov’scolleagueaspresidentof NTV and Yeltsin’s campaign media boss. NTV went on the air aftermidnight with news of the arrest, portraying it as a trap set by Korzhakov.Kiselyovappeared, announcingan“emergency”newsbulletin, and remindedviewersthatKorzhakovhadadmittedinMayhewantedtocallofftheelections.“Itlookslikethecountryisonthebrinkofapoliticalcatastrophe,”Kiselyovsaid.“Iwouldliketowishyouagoodnight,butIcannot.”47The final countdown had begun: one group or the otherwas going to be

sacked in the morning. Kiselyov then went to the Logovaz Club, where hefound anxiety rising. Gusinsky, Berezovsky, Chubais, Zverev, Yumashev,Dyachenko,andtheliberalgovernorofNizhnyNovgorod,BorisNemtsov,allmilled about.Zverev said, “Iwent away to destroy somedocuments becausetherecouldbesomearreststhatnight.”“Everyone understood,” Kiselyov said, “that tomorrow morning,

KorzhakovwouldgotoYeltsinandsay,‘Look,BorisNikolayevich,theseguyswhomyoutrustsomucharecrooks.Theyarestealingmoney, incash, fromunderyournose.TheyarejustbringingitinemptyXeroxboxesfromtheverybuildingwherethegovernmentsits,andyouhavetodecide,finally,whoyoutrust.”48Thatwas,infact,exactlytheKorzhakovplan.“Everybodywasvery frightened,”Kiselyov recalled. “It’s not as if people

weretrembling—noonesaiditopenly,nooneconfessed—butIhadafeelingthatsomeofthepeoplegatheredintheLogovazmansionwereafraidtoleave.They were thinking, I could be arrested.” Kiselyov said that Dyachenko’spresencethroughthenightgavethemconfidencethattheyweresafe,insidetheLogovazClub at least. “Korzhakovwould not dare” storm the buildingwithDyachenkoinside,heassumed.But even as they waited anxiously in the Logovaz Club, Gusinsky and

Berezovsky had in their hands a weapon more powerful than Korzhakov’spresidential guards. Their television station broadcasts in the middle of thenighthadelectrifiedthepoliticaleliteinMoscowandunderscoredhowclosethe oligarchs had bound themselves to Chubais and Yeltsin. The campaignstaff,thebusinessmen,andthebroadcasterswereallonthesameteam.At 1:00 A.M., after Chubais reached him by phone, Lebed tried to call

KorzhakovandBarsukovona special top-secretKremlinphone system,S-1and S-2. No answer. Lebed then deployed his cannon-sized voice and vividvocabularyonbehalfof theChubais team in a televised statement. “Attempts

arebeingmadetowreckthesecondround;thatismyfirstimpression,”Lebedsaid. “Anymutinywill be crushed and crushedwith extreme severity. Thosewho want to throw the country into the abyss of bloody chaos deserve nomercyatall.”LisovskyandYevstafievwerereleasedabout3:00A.M.,aftertenhours of interrogation. Their captors were unnerved by the televisionbroadcasts.Chubaislatertoldmethattelevisionprovedtobethekeyelementinthewholeaffair.The racewas on to get toYeltsin, but he slept through the night, hearing

about the confrontationonly in themorning fromhisdaughter.Bleary-eyed,theChubais team gathered at an office in the towerwhereGusinsky had hiscorporateheadquarters.JustoutsidewastheparkinglotwhereKorzhakovhadforcedGusinsky’smen to lie facedown in the snow. Itwasdecided that onlyChubaiscouldpersuadeYeltsintosavethem,justasChubaishadtalkedYeltsinoutofcancelingtheelectiontwomonthsearlier.ChubaishadreachedYeltsininthemorningonaphonewithadirectlinetotheKremlin.“WhenItalkedtohimonthephone,hesaidnothingterriblehadhappened,”

Chubaisremembered,“thatpeoplehadtriedtostealmoney,buteverythingwasinordernow.‘Wewon’tallowanyonetostealmoney.Don’tworry.Everythingis all right.’ I told him that no, it wasn’t all right, that the situation wasabsolutelycatastrophic,andIabsolutelyhadtomeetwithhim.Hereallydidn’tlikethat.Nevertheless,hesetupatime.”Edgy and exhausted, the Chubais team felt the outcome was wildly

unpredictable.Quitepossibly,theywerelosingouttoKorzhakov.Theywouldbe fired from the campaign, arrested, and jailed. But they were cheered upwhenYumashevmadeasurprisingguessaboutwhatYeltsinwoulddo.“BorisNikolayevichisgoingtofireKorzhakov,”hepredicted.“Idon’tknowwhy,butIhaveknownYeltsinfora longtime.”Theotherswerestartled.“Manyofusweresotiredthatwewerenotquiteawareofwhatwashappeningaroundus,”Kiselyovrecalled,butYumashev’sstatementmadeanimpressiononeveryone.Zverev told me, “Yumashev whispered, ‘He’s going to fire them.’We wereshocked.Noonebelievedhimbecauseweweresurethatweweregoingtobefired.”Chubais went to see Chernomyrdin, who had cautiously kept his distance

fromthewarringcamps.Chubaiscameoutwithallgunsblazing.Thiswasado-or-diesituation,hescreamedattheRussianprimeminister.Chernomyrdinkept veryquiet. “I simply told him that the timehad come to sayhisword,”Chubaisrecalled.“Hehadkeptquietforfiveyears,andnowitwas,eithersay

everythinginanhour,oryouwillbedestroyedtonight.Therewasnomiddlegroundleft,nomiddlewhatsoever.Youhavetwohours.Ifafterthisyoudon’tgotothepresident,anddon’tsayitiseither‘meorthem,’youareapieceofshit.Youdon’texistanylonger.”ChubaisnextbumpedintoChernomyrdinafewhourslaterintheanteroom

ofYeltsin’soffice.ChernomyrdinlookedatChubaisandreported,“I’vesaiditalltohim.”When he entered Yeltsin’s office, Chubais felt weak-kneed. “I felt that I

wouldn’tbeable toconvincehim,andthat thesituationwasalmosthopeless;therewere no chances.”He fearedYeltsinwould brush off the conflict as asmallmisunderstanding,ashehadearlierintheday.Itisnotknownwhathappenedinthemeeting,buttheresultwasthatYeltsin

decidedtofireKorzhakov,Barsukov,andSoskovets,theentire“partyofwar.”Yeltsinwentbeforethetelevisioncamerastomaketheannouncement.“AllthetimeIambeingreproachedforBarsukov,Korzhakov,andSoskovets,”Yeltsinsaidinasombermonotone.“Doesthepresidentworkforthem?Theybegantotaketoomuchonthemselvesandgivetoolittle.”“Itwasastunningepisode,”Kiselyovrecalled.Aftermakinghisstatement,

thegray-facedYeltsinlookedattheassembledjournalistsandbeamedbroadly.“Sowhat?Whyareyou staying?Youshouldbe rushing to the telephones toannouncethebreakingnews!”KiselyovsawaflashofthespunkyoldYeltsin.Chubais,triumphant,immediatelycalledanewsconferenceattheRadisson-

Slavyanskaya Hotel. He denounced the arrests the night before at theWhiteHouse as an attempt to wreck the campaign. When asked about the box ofmoney,Chubais threwup a smoke screen. “I am firmly convinced,” he said,“that the so-called box of money is one of the traditional elements in atraditional KGB, Soviet-style provocation, of which we have very greatexperience in our country.” Chubais suggested the money had been planted.“We arewell aware of how foreign currency,money, used to be planted onRussiandissidentsandnotjustonthem,andrecentlywesawasimilarsituationwhendrugswereplanted.It is,unfortunately,ademonstrationof themethodsthat have become almost commonplace again for Barsukov andKorzhakov,and I am sure this provocation, this falsification, will soon be completelydispelled officially by the bodies of law and order.” Chubais was not askedfurtheraboutthemoney.49InaninterviewwithChubaisthateveningonNTV,Kiselyovdidnotonceinquireabouttheboxofmoney.Fivedayslater,disasterstruckYeltsinagain.

At Video International, preparing for an intense second-round campaign,Mikhail Margelov recalled that the company’s president, Mikhail Lesin,returned from a meeting of the campaign headquarters with bad news. “Itseems that we will have to work during the second round in a difficultsituation,”hesaid.“Whatdoyoumean?”Margelovinquired.“Wewillworkwiththeabsenceoftheclient,”Lesinsaid.“Canweaskmorequestions?”Margelovsaid.“No.”Yeltsin’s busy travel schedulewas canceled. His aides said he had a cold.

“Thepresidentisingoodform,”saidhispresssecretary,SergeiMedvedev.OnJune26,Yeltsinhadcomehomeatabout5:00P.M.Whilerestingbriefly

inanarmchair,hesufferedamajorheartattack.Hisdoctorwasnearbyandhewas treated immediately. Yeltsin recalled in his memoir how the Kremlindoctors had been trailing him throughout the campaign, warning of theconsequencesofhisintensiveactivity.Nowthestressandstrainhadcaughtupwith him. “The pain sliced through me, an enormous crushing pain,” herecalled.The heart attack posed an extremely delicate problem for the campaign.

Oslon’spollsshowedthatifthepublicknewYeltsinwasinillhealth,hewouldlose support.Thepolls showedYeltsin’spoll ratingwas slippingone-half toonepercentagepointeachday.ThecampaignstaffhadpreparedahugefinaleofYeltsinappearancesacrossthecountry,andalltheeventswouldhavetobecanceled.“We also had to try to prevent any leaks about my illness and hold back

informationfromeveryone,”Yeltsinrecalled.OntheweekendbeforetheJuly3vote,Yeltsintapedapreelectionaddresstothecountry.AcameracrewcametoBarvikha,thepresidentialresthomejustoutsideMoscow.Thenthetapewasbrought back toVideo International for editing.One of the cameramen toldMargelovtobepreparedforashock.Theoldmanwasinverybadshape.“It was quite obvious that it was very difficult for Yeltsin to speak,”

Margelovsaidofthetape,whichhesawinitsrawform.“Hewassweatingallthe time. It was difficult even to pronounce words. Sometimes he couldn’tfinishthesentence.Sometimesitwasdifficultforhimtoevenbreathe.”The video specialists then carried out an amazing reconstruction. Using

digitalediting technology, theysplicedandretouched theentireshortspeech.

“It was serious work to make it look nice,” Margelov told me. “Not manypeople could see that something was wrong.” The precarious health of thepresidentwas covered up on the eve of the vote.My own impression of thetape,thenightIsawitontelevision,wasthatYeltsinseemedwooden,andthetapewasjerky.Buttomillionsofpeople,thatwashardlyacluethathehadjustsufferedamajorheartattack.“Wewere absolutely surewewere doing the right thing,”Margelov said.

“No,therewerenomoralquestionsduringthesecondround:arewedeceivingsomebodyornot?Because I think thegoalwasquiteobvious.NotoneofuswantedtheCommunistsback.”Thenthetycoonsdeliveredtheirfinalelectiongift toYeltsin: they broadcast the doctored tape and didn’t say aword aboutYeltsin’sheart attack.Malashenkowaspresentwhen thevideotapewasmade.“What could I do?”Malashenko said. “Hewasvery sick at themoment.Theonly thing I did to protect my conscience, I didn’t tell anything to mycolleagues.Thesinwasfullyonme.Journalistswereneveraware”ofit.“AndIjusthadtodomyjobasamemberoftheelectioncampaign.Andmypositionwas very simple. Imade the statement publiclymore than once that I preferYeltsin’scorpsetoZyuganov.Unfortunately.Thatwasmychoice.”ThedeceptioncontinuedonElectionDay.Yeltsincasthisballotatapolling

placeinBarvikha.KremlinvideocamerasshowedYeltsinstandingandatonepointflashinghisfamiliarwrysmile.Butthevideotapewasedited—todeletethetwowhite-coateddoctorsstandingnearby.Thatwouldhavebeenacluethatsomethingwasamiss,ariskthatYeltsinandhiscampaigndidnotwanttotake.OnJuly3,Yeltsinwaselectedwith53.82percentofthevoteto40.31percentforZyuganov,and4.83percent“againstall.”TheDavosPactsucceeded,andChubais was euphoric. In a press conference on July 5, Chubais comparedYeltsin toPeter theGreat,Russia’s foremostwesternizer, andannounced thatRussia’s post-Communist path was irrevocable. “Irrevocable. Russiandemocracyis irrevocable;privateownershipinRussiais irrevocable;marketreformsintheRussianstateareirrevocable.”Berezovskywas also feeling expansive. Just after the election, hemade a

single comment that came to crystallize the power and reach of theRussianoligarchy.Inapostelectioninterview,BerezovskytoldtheFinancialTimesthatthe seven tycoons controlled about 50 percent of the Russian economy.Berezovskyoverstatedtheireconomicprowess,buthewasmorethancorrectabout their political influence. They had arrived at the definition of an

oligarchy—theywererichandpowerfulkingmakers.Thesevenmetaftertheelectiontodecidewhichofthemshouldgointothe

government. Chubais said they could appoint one of their own as a deputyprimeminister underChernomyrdin.The embrace ofwealth and powerwasnowcomplete,anditwastimetosortouttheloot.Inearlieryears,whenthemogulsgatheredtotalkormakedeals,whenthey

dinedinthevillaonSparrowHills,orwhentheyenteredtheKremlintowarnYeltsin,theywerelargelyhiddenfrompublicview.Butintheautumnof1996,itwasno longerpossible to conceal their ambitionand theirpresence in thehighest councils of the state. They worried, among themselves, about abacklash. Five of them had parents, either one or both, who were Jewish:Gusinsky, Berezovsky, Friedman, Smolensky, and Khodorkovsky. GusinskywaselectedpresidentoftheRussianJewishCongressinJanuary1996andwasmaking business deals in Israel. Individually, some of them had brushed upagainstanti-Semitisminearlieryears,butnow,asagroup,theybegantofretaboutthepossibilityofapublicreactiontothe“Jewishbankers.”Thespitefulwords were already on the lips of some nationalists and reactionaries.Berezovsky told me at the time, “Of course anti-Semitism exists today inRussia.Anditexiststodaynotonlyinclosedform,asitexistedintheSovietUnion, but in open form aswell.” The earthy Smolensky said the oligarchsknewtheyfannedresentmentandenvy,recallingapopularsaying,“Ifthereisnowaterinyourfaucet,itistheJewswhohavedrunkit.”Partlyoutoffearofstirringupmorepublicemotions,thegroupsettledon

PotaninastheirmaningovernmentbecausehewasnotJewish.Soon,however,Berezovskywent intogovernmentaswell.OnOctober29,hewasappointeddeputysecretaryoftheKremlinSecurityCouncilandgivenresponsibilityforworkingout a settlement inChechnya.Theappointmentwas followedby thedisclosureinIzvestia thatBerezovskyheldanIsraelipassport.UnderRussianlaw, he could not hold dual citizenship andwork in a sensitive governmentpost, and the news triggered howls of protest from nationalists andCommunists in parliament. Berezovsky responded to the disclosure withclumsyexplanations.He saidhehadonlyvisited Israel twice, once for threedays and once for six days, and the last time was in 1994. He feignedignoranceofwhetherhehadformallybeengivenIsraelicitizenship.“Istartedtheformalities;Ididnotbringtheprocesstotheend,”hesaidinatelevisioninterviewwithKiselyov.“Whenthequestionaroseofmycitizenship,thehitchwas that Ididnotknowwhat the situationactuallywas.”50 In fact, hewas an

Israelicitizen,andhehadhiscitizenshipannulledtotaketheSecurityCouncilpost.The Davos Pact solidified Berezovsky’s convictions that wealth should

dictate topower. Inhisview, the tycoonswere thebest andbrightestof theirgeneration.Justastheyhadmadefortunesinthenewsystemthroughskillandforesight, he said, they also proved brilliant political kingmakers in theelection. The people who served in government should listen carefully.“Strongcapital—strongcountry,”Berezovskydeclared.“Frommy point of view, in general, power and capital are inseparable,”

Berezovsky toldme inDecember.Thenhepaused.Berezovsky, inabusinesssuitandcrispwhiteshirtandtie,wasspeakinginasmallhideawayofficeattheLogovazClub.Herethoughtwhathehadjustsaidandofferedamodification.“I think that two types of power are possible,” he said. “Either a power ofideologyor a power of capital. Ideology is nowdead.”Thenewpowerwascapital. “I think that if something is advantageous to capital, it goeswithoutsaying that it is advantageous to the nation.” In other words, the oligarchswouldshowRussiatheway.Berezovsky swiveled in his chair slightly, and an aide brought a cellular

telephone for a quick conversation. He resumed the interview in aphilosophicalmoodthatreflectedthethrilloftheelectionvictory,asensethathehaddoneeverythingright,afeelingofenormoussatisfactionattheriseofthe oligarchs. He had lived through a revolutionary time, Berezovskyreflected; Russia was passing through a stormy, violent upheaval in whichpublic property was passing into private hands. All revolutions wereunavoidablypainful,filledwithjealousyandenvy.Evenamongthetycoons,hesaid,thosewhowonthegreatestprizeswerestillgreedyformore,andthosewholostoutwerenothappy.Societytoowasdeeplydivided,headmitted,andthepoorwereembittered.“IknowthatintheUnitedStatesandWesternEurope,very rich people are also not really liked,”Berezovsky said. “And I can tellyouthatintoday’sRussia,thisfeelingofdislikefortherichisahundredtimesgreater than in theWest. But I’m certain, this is a matter of time. And I’mcertainthatintime,societywilltoalargerextentunderstandthatthericharenotthosetowhomsuddenly,unexpectedly,wealthfellontheirheads,butthatthericharethosewho,firstofall—thereareexceptions—butthericharethosewhofirstofallaremorecapable,moretalented,andmorehardworkingthanothers.”Berezovskywascorrectthatthetycoonsweretalentedandhardworking.But

itwasalsotruethatmanyofthemdidhavesuddenwealthfallontheirheads.Berezovsky might also have added that they were the most ruthless andrelentlessoftheirgeneration.HisownempirewasstillexpandingandincludedtheLogovazcardealerships;Sibneft,theoilcompany;Aeroflot,wherehewasprofiting from the cash flow of overseas ticket sales; ORT, the televisionchannel; Transaero, an upstart Russian airline; and a number of mediaproperties,includingNezavisimayaGazeta.Butnow,inhismomentofvictory,Berezovskyyearnedforrespect,forhimselfandfortheoligarchs.51This desire grew stronger as the tycoons began a romance with foreign

capital after the 1996 election.A turning point came inNovember,when theRussiangovernment floated a $1billionEurobond, the first suchborrowingonglobal capitalmarkets since the1917 revolution.The successful flotationopeneddoorstorelativelycheapforeigncapitalforthetycoons,iftheycouldpass muster with Wall Street and in the financial capitals of London andFrankfurt.Theoligarchsbegantodrawfromavastnewreservoirofcash.But first they had a very important series of transactions to complete at

home.AfterSeptember1,1996, itwas timetocollect the“secondkey”fromtheloansforsharesauctions.Asplanned,thewinnersofthefirstauctionsweregivenpermissiontoselloffthesharestheyhadtakenascollateralfortheloansto the government. And as Ryan had predicted, they sold the shares tothemselves.Khodorkovsky proved the most cunning. Amid the tumult of 1996, he

finagledadealallowinghimtotakecontrolofYukosearly.KhodorkovskygotYeltsintosignadecreethatallowedhimtoissuenewsharesinYukostopayoffthedebtsofthesubsidiaries.Thismeant,simply,thattherewouldbeone-thirdmoresharesoutstandingthanbefore.Theeffectofissuingthenewshareswas to reduce the size of the block that Khodorkovskywas holding for thegovernment. It fell from 45 percent to 33 percent. Then Khodorkovskyappearedagain,on theother sideof thecounter, tobuy thenewshares.Thistime,heboughtmostof thenewshares forwhata source toldmewas$100million. Recall that Khodorkovsky also had purchased a block of shares in1995ataninvestmenttender.Whenthenewshareswerecombinedwiththosehe bought at the investment tender, Khodorkovsky controlled more than 51percentofthecompany.Thepointwasthatnoonecouldtakeitawayfromhim—Khodorkovsky had grabbed the “second key” even before the officialceremony.Khodorkovskyoriginally loaned the state$159million for the45percent

stakein1995.Ayearlater,hesoldthestaketohimself,usingashellcompany,for $160.1million. The state’s profit on the dealwas almost zero. The stategainedlittlemorethanithadin1995,andKhodorkovskygotanoilcompany.In the original concept of loans for shares, there was a hope that when theshares were sold, the state would reap a higher price. But in fact once theoligarchsbegansellingthecompaniestothemselves,thepricesremainedrockbottom.Potaninthensoldthe51percentofSidanco,theoilcompany,forwhichhe

loanedthegovernment$130million.Thewinnerofthestake:Potanin(again).Hepaid$129.8million.Withinayear,Potaninsoldjust10percentofSidancotoBritishPetroleumfor$571million!Laterin1997,hesoldthe38percentofNorilskNickel to himself, for $250million, an improvement over the $170millionhehadloanedthegovernment,butapittanceconsidering thebillionsofdollarsinrevenuesNorilskwastoproduceannuallyinthenextfewyears.BerezovskygotthekeytoSibneftwithoutspendingtoomuch.Hehadloaned

the government $100.1million for 51 percent of the company in 1995 andsolditeighteenmonthslatertohimselffor$110million.Gusinsky never got a chance to play in loans for shares, but after the

election, he too was rewarded. The state natural gas monopoly, Gazprom,purchased30percentofNTV,providingGusinskywithbadlyneededcapitalfor expansion.52 Yeltsin also signed a decree giving Gusinsky twenty-four-hour access to the airwaves on Channel 4, an important concession thatallowedGusinskymore time to broadcast commercials aswell as news andfilms.Smolensky eschewed loans for shares, except to serve as a financier for

Berezovsky. But Smolensky also reaped rich rewards for his role in theelection. He had increasingly set his sights on becoming Russia’s largestprivatecommercialbank,andhisprizecamelatein1996.Theformerlystate-ownedAgroprombank,oneofRussia’slargestbankswith1,254branches,wasfailingdue topoormanagementand thestagnationofRussianagriculture.ACentralBankofficialtoldmeatthetimethatAgroprombankwaswithinsixtoeightweeks of being closed. The government couldn’t afford a bailout, norcould it close the bank, which had branches in the farm belt where theCommunist and Agrarian Parties dominated. So the state announced acompetitivetender,butonlytwobankssubmittedbids.Smolenskywalkedawaywiththebankfor$24million,defeatingBankImperial,whichwasbackedbyGazprom.“Iwas99percentsureIwouldwin,”Smolenskyacknowledged.He

pledgedtoprovide$180millioninloanstofarmersatlowinterestratesoverthe next five years.But the prize for Smolenskywas the branch network—itwouldhelphimmakeagiant leap towardbecoming the largestprivate retailbankinRussia.Iwastoldbyanotherbankerthatproperlyconstructinganewbank branch in Moscow required about $2 million. Smolensky had justpurchased1,254newbranchesfortheequivalentofoneforevery$19,000ofhisinvestment.TheonlybankwithmorebrancheswouldbeSberbank,theoldstatesavingsbank.SmolenskyrenamedhisbankSBS-Agro.The Davos Pact had another unexpected impact. It demonstrated that

television commanded enormous political influence in the new Russia. ThegreatpioneerwasGusinsky,whohadtastedthispoweroftelevisionin1994–1995withNTV’s critical coverage of theChechenwar.But the election hadmade it even more vivid: the television channels could create and destroy.Their next victim was General Lebed, whom Yeltsin appointed to head theSecurityCouncil.Hehadsignedanimportantcease-firedealwiththeChechensinAugustbutgrewoutspokenandinsultingasYeltsin’sheartsurgeryloomed.SensingapowervacuumintheKremlin,LebedwasspeakingaboutYeltsinasifhewerealreadygone.HavingbeenbuiltupasaseriouscandidatebyORTandNTV, Lebedwas unceremoniously crushed by the same channels,whichnowbroadcastunflatteringstoriesabouthim.NTVairedvideotape,someofitadmittedly eighteen months old, showing an extreme nationalist and fascistgroupknownastheRussianLegionmarchinginSt.Petersburgandsuggestedthat these were Lebed’s forces. Lebed was fired by Yeltsin on October 17.AndreiRichter,whotaughtjournalismatMoscowStateUniversityandheadeda media law center there, said the television networks had served as theKremlin’sattackdogs.“Thereisaword,Fas!whenyouhaveadogandyouletitattacksomeone,”hesaid.“Itmeans,‘Goahead,kill!Bite!’”53Berezovsky had no qualms about this; political influence was his main

benefit from ORT. But Gusinsky began to feel doubts that matured in lateryearsintofull-fledgedregret.WhenIaskedhimtolookbackattheeventsof1996, he said his support of Yeltsin was “a conscious decision—a wrongdecision.”“Ithinkwewerelearningasasociety,”hesaid,“andIwaslearningtogether

with the rest.We were learning that no noble aims can be reached by dirtymeans.Iamcertainofthistoday.”After the euphoria of the summer campaign,Chubais ended the year on a

difficult note. Yeltsin admitted openly for the first time that he needed heart

surgery, whichwas scheduled for November. Chubais desperatelywanted towork outside of government but “to my biggest sorrow” was pressed intobecoming Yeltsin’s top aide in the Kremlin. “I was appointed head of thepresidentialadministration,buttherewasnorealpresident,”Chubaisrecalled.“Physically,therewasnopresident.”NooneknewifYeltsinwouldsurvivethesurgery.InsteadofafaststarttoYeltsin’ssecondterm,Russiawentintoalongwinterperiodofstagnation.Theoldmanhibernatedagain.Chubais began to think that maybe it was time to change the rules of the

game.

Chapter14

TheBankers’War

THEWINTERMELTEDintoaspringseasonofpromise inearly1997,andonce again Boris Yeltsin rose from adversity. After risky heart surgery inwhichhis rib cagewasopenedand five arterieswere replaced,Yeltsin spentmonths recovering away from the Kremlin. Anatoly Chubais, chief of thepresidential administration, was effectively the acting president, surmisingwhatYeltsinmightdobutwithnoway toask,nooneat theotherendof thephone.Hiscriticsmockedhimas“regent,”acivil servantbehind the throne,whichisexactlywhathewas.Thethronewasempty.“Itismonstrouslydifficultto run the president’s administration in his absence, a very unpleasantoccupation,”Chubaisconfessed.1Yeltsinhad lost fifty-sevenpoundsby the timeheofficiallyreturned to the

KremlinonDecember24. “Goodmorning,”hegreeted theguard in a slow,breathlessvoice.“I’minagoodmood,ingoodhealth,readyforthefray.”Buthespoketoosoon.Yeltsinfell illwithpneumoniaandhisreturnwasdelayednearlytwomonths.Finally,helaunchedhissecondterminMarch,appointingChubais firstdeputyprimeminister andgivinghimbroadauthorityover theeconomy, including the powerful portfolio of finance minister. Yeltsin thensent his influential daughter Tatyana Dyachenko to Nizhny Novgorod topersuadetheyoungreformistgovernorthere,BorisNemtsov,toacceptapostasdeputyprimeministerinMoscow,alongsideChubais.2Nemtsov had caught Yeltsin’s attention years earlier when, as a young

physicist, he led demonstrations against a nuclear power plant duringperestroika. After Yeltsin appointed him governor of the region, which washeavilydependentonthedefenseindustry,Nemtsovearnedareputationasaneconomic reformer. He quickly privatized small business and experimentedwithchangeonthehideboundSoviet-eracollectivefarms.Tallandexuberant,with a perpetually youthful manner, Nemtsov was never afraid to speak hismind. He once told me that Russia desperately needed young people in

leadership.“Weneedtogetridofthedrunkoldmenatthetop,”hesaid.3Nemtsov 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 wereemboldened by signs the economy was perking up after so many years ofdecline. The sky-high interest rates on short-term government bonds, thesuperlucrativeGKOs,hadsubsidedtoreasonablelevelsaftertheelection.Thegates to foreigncapitalwereopen,notonly for thegovernmentbutalso forRussiancompanies.ThespringbroughtaRussianstockmarketboom,whichin turn gave rise to a young, prosperous, and lively new class of Moscowprofessionalsinthebrokeragesandexchanges.Chubaiswasespeciallyproudthat hyperinflation had finally been quenched. “Let it be etched on mygravestoneasoneofthemostimpressiveachievementsofmylife,”hesaid.4Butintractableproblemsremained;millionsofpeoplewerestillpaidmonthslate.InmanypartsofRussiaoutsideofMoscow,realmoneyhaddisappeared,andamedievaleconomyofbarterhadtakenitsplace.From the outset, Nemtsov declared that his goal was to vanquish “bandit

capitalism.” Nemtsov often, and gleefully, declared, “I am for people’scapitalism.”Inhisfirstmonthsinoffice,hetriedtoshowwhathehadinmind.He ripped up an outrageous sweetheart deal giving huge rewards to themanagement of the natural gas monopoly, Gazprom, which was partiallyowned by the state, and demanded better terms. In a bit of showmanship,NemtsovgotYeltsintosignadecreeorderinggovernmentbureaucratstogiveup their cushy foreign-made limousines and drive Russian cars such as theVolga, a chunky sedanmanufactured inNizhny. Yeltsin, proud of his youngprotégé, gave up hisMercedes for a while and rode in a Zil limo used forSoviet Politburo members. But eventually he went back to the Mercedes.Nemtsovalsopushedthroughameasurecallingforhigh-rankinggovernmentofficials to disclose their income, a novelty for a political elite nurtured onsecretpayoffsandoffshorebankaccounts.NemtsovandChubaispromisedtojunkthesystemof“authorizedbanks”thatthetycoonshadexploitedforeasymoney.Theyalsopromisedtoendwastedsubsidiesonhousingandtoreformthe mammoth energy monopolies. Nemtsov’s showy, populist initiativesattracted wide attention, and his poll ratings zoomed upward. He was oftenmentionedasapossiblesuccessortoYeltsin.However,the“youngreformers,”Nemtsov andChubais, took criticism from their own ranks that their agendawas shallow. Dmitri Vasiliev, the Chubais privatization deputy who became

headofthefederalsecuritiescommission,privatelyarguedtoChubaisthatthesecond termwasagoldenopportunity to strengthen thosevital institutions—rule of law and market regulation—that they had neglected at the outset of“shocktherapy.”ButVasiliev’svoicewentunheard.5In April, Nemtsov met individually with the oligarchs. “I explained my

intention . . . toestablishnewrules,”hesaid—fromnowon, thegovernmentwouldbeopen,transparent,andcompetitive.Nomoreriggedauctions.Therewouldbeopentendersforeverything,evenprovisionofarmyrations.What’smore, he told thebankers that he andChubaiswanted to focuson creating anewmiddleclass.Thebankersrepliedenthusiasticallythattheywouldsupporthim, especially in his desire to create open, above-board rules of the game.Nemtsov recalled the oligarchs’ lament that their previous wars—thekompromat and media combat, violence, theft, and deception—were a wasteandtheywantedtoleavethosedaysbehind.6It was all nice talk. In fact, Nemtsov was suggesting nothing less than

dismantling the system of oligarchic capitalism that had taken shape underChubais,Yeltsin,andthetycoons.Thesystemhadatitscoreaquick-profit,no-tomorrow ethos that was forged in perestroika with the explosion ofcooperatives and banks, reached full strength in the frenzy of vouchers andeasymoney,andripenedintoenormouspropertygrabsintheloansforsharesauctions.Nemtsovdidn’tstandachanceagainstthissystemwithwordsalone.At the time, the oligarchs were given a popular moniker, the

semibankirshchina,orruleofthesevenbankers.ItwasaplayonwordsfromthelabelgiventoagroupofsevenboyarswhoranRussiaintheseventeenthcenturyduringabriefperiodbetweentsars.ThesemibankirshchinaruledevenwhenYeltsinwasintheKremlin.The model of oligarchic capitalism, centered in Moscow, spread quickly

throughoutRussia’sregions,aslocalbaronscopiedwhattheylearnedfromthetycoons. They grabbed control of factory complexes, glued themselves toregional governors, and sought fortunes with the same audacity that hadrewarded the Moscow tycoons. Even in the capital, the ruling oligarchyextendedbeyondtheseventoincludedozensofothermagnateswhowerelesswell known. For example, Vladimir Yevtushenkov, president of theconglomerateSystemaandlongtimefriendofYuriLuzhkov,wasaninfluentialtycoon in his own right who had assembled, with help from the city, a $1billiongroupinmobiletelephones,electronics,hotels,tourism,insurance,oil,andotherproperties.

While Nemtsov played for the television cameras, Chubais quietlyunderwent a fundamental rethinking of his own experience over the last fewyears. He reached a conclusion that had far-reaching consequences. Chubaisdecided that he had to break the incestuous relationship between wealth andpower, a bond he had done somuch to forge. Perhaps loans for shares hadbeennecessary in1995 to selloff the factories toyoungermanagers, crimpthereddirectors,andraisemoneyforthebudget.Thatwasworthit.Perhapsithadbeennecessaryin1996togetYeltsinreelectedanddestroyZyuganov.Thattrade-off too was worth it. But in early 1997, Chubais was troubled by themerger of wealth and power. Chubais never denounced “bandit capitalism”becauseinfactitwashiscapitalism;morethananyoneelse,hehaddesigned,nurtured,andprotected it. In fact,headmiredsomeof the tycoons,whomheconsideredmoderncapitalists.Buthenonethelessdecidedtheruleswouldhavetochange;hecouldnolongerdishoutthegoodiesashehadbefore.7Chubais seethed in anger at Boris Berezovsky’s statements that the

businessmenwould run the country like aboardof directors.WhenChubaisaccepted this arrangement for the sakeof the1996 election, he certainlydidnotseeitaspermanent,asBerezovskydid.8Chubaistoldmethatbefore1996hewastotallypreoccupiedwithdefeatingtheCommunists.“Therewasnothingmore important than this,” he said. “We could sacrifice a lot for this goal.”AfterYeltsinwasreelected,however,hisoutlookchanged.HedidnotwanttobecomeatoolofBerezovsky,andhefiguredtherewasnobettertimetofreehimselfthanatthebeginningofYeltsin’ssecondterm.“Yeltsinwaspresident,butthiswasadifferentpresident,”hesaid.“ThiswasYeltsinelectedanew,andiffromtheverybeginningwedidn’tstartanewlifewithadifferentpresident,lateronitwouldsurelybeimpossibletodoso.”9Chubais had often demonstrated his preferred tactic for achieving change.

Hedrovehard,thencompromised,thencamebackagainseekingtorepairtheearlier mistakes. For example, he made a huge bargain during massprivatizationbyallowingthereddirectorstokeepcontroloftheircompanies.Thenhetriedtocompensatelaterbyshiftingpropertytothetycoonsinloansforshares.Nowhesetabouttryingtofixtheerrorsofloansforshares.Oneofthe mistakes had been the rigged auctions. He decided the days of riggedauctions were over. Regardless of what had gone before, the market wouldnow pickwinners and losers. According toYeltsin, Chubais declared it wastimetoshowtheoligarchswhowasboss.“Weneedtosockthemintheteethforonceinour lives!”Chubaissaid.“Wewon’tachieveanythingifwedon’t

dothis.”10Chubais toldVladimirGusinskyabouthis changeofheart in late1996or

early1997.Gusinskywaspreparingforthenextbigwaveofprivatization.Atstake was an enormous telephone and communications company, whichGusinskywanted badly. “You should keep inmind,” Chubais told him, “thiswill be an auction, and the person who wins will be the one who pays themost.” Chubais was unusually insistent. “Do you understand, VladimirAlexandrovich?”ChubaisaskedGusinsky.“Of course, of course,” Gusinsky said, according to Chubais. “I clearly

understandthat.”11In fact, Gusinsky and Berezovsky did not understand. They heard what

Chubaissaidbutdidnottakehimseriously.Intheirview,therulesofthegamecouldnotbe switchedoff like a light.They thought itwas just rhetoric, likeNemtsov’s“banditcapitalism”slogans.Besides,everyoneknewthatitwasnotsosimple.WasChubais reallychanging the rulesor just findinganew labelfor the same old game? One hint that nothing had changed came whenGusinskywasappointedasconsultanttoorganizethetelephonecompanysale,arolethatinthepasthadbeenreservedfortheprearrangedwinner.GusinskyandBerezovskysimplyassumedthattheoligarchswouldcontinuetocarveupthecountryforthemselves,withChubaisastheirhandmaiden.Soontheywereallheadedfordisaster.AlthoughthetycoonstoldNemtsov

they were fed up with the dirty little wars of Russian capitalism, they wereplungingstraightintothemostvicious,destructivefeudofthedecade.In thespringof1997, thecapitalmarketboomwas infullswing.Russiahadopened itself to the outsideworld, and a torrent of investment in stocks andbondsfloodedintoitsnascentexchanges.PlaneloadsofinvestorswereshuttledintotownandgiventoursofRedSquare,theBolshoiTheater,andtheKremlin;theyboughtbillionsofdollarsinRussianequityanddebt.DanaF.McGinnis,aTexas fund manager, recalled the atmosphere of his early visits, whicheventually led him to invest more than $200million in Russia. “There wasgreatoptimismthattherewouldbeanendtothearmsraceandthatsome250millionpeoplewould be brought into the capitalist fold,”McGinnis toldmycolleague Steven Mufson. “There was a buzz in the air. The country wasevolvingby thehour.Youcouldfeel it.”12By1997, thereelectionofYeltsinseemedtohaveopenedthespigotsalltheway.Russiawasawashinspeculative

portfolioinvestment.Foreigners,whonevervisitedthefactoriesorrefineriesthey were investing in or asked who ran them, plunked down billions ofdollars for stocks and bonds. Foreign portfolio investment—the purchase ofstocks and bonds—rose from $8.9 billion in 1996 to an incredible $45.6billion in 1997, equaling 10 percent of the Russian economy.13 WilliamBrowder, who had come to Russia in the early days of privatization anddiscoveredtheMurmanskshipbargainaswellasdozensofotherundervaluedcompanies, later set up his own fund, Hermitage, which became one of thebest-performing funds in Russia in 1997, with a mammoth $1.2 billion inRussianequitiesundermanagement.ThesavvyBrowder,whowasthenthirty-threeyearsold,wasjustoneofmanywhorodetheboomtonewheights.Theallureofstockswas the“two-centkilowatt.”AMoscowfundmanager

explained it to me this way: shares in a Russian electricity monopoly wereselling at the equivalent of two cents per kilowatt per line,while aBrazilianelectriccompanysoldatfiftycents;intheUnitedStatesitwasfivedollars.Thetwo-cent kilowatt looked pretty cheap if you figuredRussiawould be stableand grow in the years ahead. “It was clear skies as far as the eye can see,”recalledJamesFenkner,abald,acerbicanalystforTroikaDialog,oneofthelargest brokerage firms inMoscow.Fenknerwas a hardened,well-informedveteran of the crazy 1997 boom. “Toward the end, everyone was aftereverything,” he said. “All you had to do is say a Russian word, and if theRussian word had ‘share’ attached to it, you could sell it.”14 The RussianTradingSystem,anover-the-counterelectronicstockmarket,soarednonstopfor months. The index became the best performing emergingmarket in theworld during 1997. The Moscow brokerages opened spacious new tradingfloorswithflickeringcomputerscreens,frantictradersentwinedintelephones,andavocabularyof“bluechips”and“second-tierstocks”thatglossedovertheunderlying problems. It had an aura ofWesternmodernity, but underneath itwascutthroat.Insecurities,dirtydealingwaswidespread,andpractices thatwould landa

broker in jail in the West went unregulated in Russia. Insider trading wascommon,asweretechniqueslike“front-running,”whenalocalbrokerwouldexploit the rise in a stock price created by his own client’s large order, or“ramping,”whichmeant trying torunupastockpriceby issuingglowing—andusuallymisleading—research reports.Brokersoftenmadesidedeals fortheirownaccountswhile trading in the samestocks for clients, a conflictofinterest that the investorsneverknewabout.15Russiahad themarketsbutnot

the rule of law or the business culture of amaturemarket economy, whichwoulddetercheatingandtheft.DmitriVasiliev,thenthesecuritiescommissionchairman,toldmehespentmostof1997tryingtoenactregulationstobringordertotheunrulymarket.Itwasanearlyimpossibletask.Russia’scompaniesbeckoned with cheap kilowatts, and in that summer of frenzied activity,Moscow became a gold rush town. It was easy to conclude that Russia hadclimbedoutof thepost-Soviet economicquagmire for the first time.LeonidGozman,apoliticaladvisertoChubais,marveled,“Ifthisisnotsuccess,whatissuccess?”Everystockdeal,everyloanofferinghadashimmeringstorytogowithit.IgotatasteofthiswhenAlexanderSmolenskysteppedoutontothestageofworldfinance.Smolensky had come a longway from his days as a typesetter.His bank,

SBS-Agro, was one of the largest commercial banks in Russia, with $5.2billion in assets, forty-three thousand employees, and the most admiredcorporate art collection in the country.His plastic credit cardswere used bymembersofparliamentandhisautomatictellermachineswerelocatedinsidetheKremlin.His conference roomwashungwithnineteenth-centuryRussianandGermanportraitsanddecoratedwithsculptedelephants, towhichhehadtakenaliking.Smolenskyneverlosthisearthy,streetwisemanner,buthenowwasat thepinnacleofRussianbusiness.Heno longerneeded tobringa fewextrasuitsinhissuitcaseforhisvicepresidents.Theycouldbuytheirown.16In July 1997 Standard & Poors issued its first ratings of four Russian

commercialbanks,includingSmolensky’sSBS-Agro,whichsoonbecamethefirsttotapintoglobalcapital.17Smolenskyfloateda$250millionEurobondat10.25percent,whichwasjust4.25pointsoverU.S.Treasurybonds.18XavierJordan,avicepresidentofJ.P.Morgan,leadmanagersfortheloan,explainedtomelater thewayhehadpitched theSmolenskyloan to investors.Russianshad an enormous storehouse of savings under their mattresses, he said,perhaps 30–40 percent of the economy. They didn’t trust banks, which heldonlyatinyfractionofthecountry’ssavings.Smolenskywasbuildingaretailbankingempirethatpeoplecouldtrust,hesaid.“IfyouassumeRussiaisgoingto converge into the real world,” he added, Smolenskywould capture thosemattress savings. “That’s a license to print money.”19 It was a wonderfullysimple story: Smolensky, the onetime dump truck driver, builds the RussianequivalentoftheBankofAmerica.Imagine:Smolensky,whose“risk”wasjusta shade greater thanU.S. Treasury bills, could pull all thosewads of dollarbillsoutfromunderthesoggymattresses!Thestorylastedaboutayear.

Intherushforblackgold,Gusinskywasleftout.HenevergotachancetograbaSiberianoilcompany,andheneverparticipatedinloansforshares.GusinskyoftenboastedthathedidnotdirtyhishandsinoldSovietfactories.20Perhapsitwasjustaswellbecausethefailedtheaterdirectordidnotunderstandfactoriesandrefineries,conveyorbeltsandpipelines.Rather,aftertheYeltsinelection,Gusinskyhuntedforhisownblackgold.Hewantedtomakebigmoney,butnotfromminingnickelorhydrocarbons.Gusinskysoughtwealthinthetelevisionairwaves, the silent digits of computer transmissions, the tiny pulses ofelectricity that carried phone conversations. He wanted to become Russia’skingofcommunications.Hisblackgoldshimmeredwithsiliconchips,fiber-opticcables,satellitebeams,andelectronicpixels.ForGusinsky,thekeylessonofRussianbusinessintheearly1990swasto

thinkbig.Nothingwasimpossibleifyoucouldimagineitvividlyenoughandthenworklikeadog.Financesandbusinessplans,lawyersandaccountants—theseweremeredetails.HisexperienceinfoundingNTVwasagoodexample.WhenYevgenyKiselyov andOlegDobrodeyev came to him seekingmoneyfor a single program, Gusinsky expansively proposed building a wholechannel.Theydidnothesitateoverviewerdemographics,broadcastsignals,orlicenses.Theydreamedofa televisionchannel, threw themselves into it, andnow NTV was an impressive reality. The same boundless energy stillmotivated Gusinsky in the spring of 1997. His enormous ambitionwas hisbusinessplan.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, themiddleclasswould fueldemand forconsumergoods, forwashingmachinesandsoftdrinks,andtheadvertisingwouldbecarriedbyNTV.Themiddleclasswould also desire high-classmovies and hard-hitting news and analysis thatNTVoffered.Withmorediscretionary income, themiddleclasswouldgo torestaurants, buy personal computers, and rent telephone lines. They woulddrivenewcars,usemobilephones,andlistentotheradioontheirwaytowork.They would travel and hunger for information about the outside world. Ateveryturn,Gusinskywouldbethere.In January1997,Gusinsky left his post atMostBankanddevotedhimself

full-time to building a communications empire under the new conglomeratename,Media-Most.SergeiParkhomenko,oneofthemostrespectednewspaperjournalists of the day, and Masha Lipman, an exceptional editor who once

workedinourbureauattheWashingtonPost,designedandbuiltfromscratchaglossy,informativenewsmagazine,Itogi,whichGusinskylaunchedin1996.21Alexei Venediktov and other radio journalists who had started the popularEchoofMoscow radio station sold it toGusinsky in1994, and it thrived.Aslick television magazine, Seven Days, rocketed to a half million weeklycirculation. Gusinsky spent long hours with media giant Rupert Murdoch,whomhegreatlyrespected,andembarkedonamajornewventure,NTV-Plus,to blanket Russia with pay satellite television. “There was this terribleenthusiasm,whentherewasanexpectationof theboomingeconomy, that it’sgoingtoexpandvery,veryquickly,”IgorMalashenkorecalledoftheplansforNTV-Plus.GusinskyfinancedthefirststageofNTV-Pluswiththecapitalfromthesaleof30percentofNTVtoGazprom.22Gusinskysaidmarketingstudiesshowedhehadapotentialaudienceof10millionsubscribersforNTV-Plus.Tofulfill his dreams,Gusinsky planned to launch a new, expensive satellite.Healsoneededgoodprogramming.Heonlyhadtoimagineandtobuild,andtheviewerswouldcome.Itmighteventuallycostbillions,butGusinskyneverputfinancefirst.Theywouldfindthemoney.Another vision of electronic black gold that Gusinky harbored was

telephones and communications. In themid-1990s,Russia had only nineteentelephonelinesforonehundredpeople,comparedtofifty-eightfortheUnitedStates and forty-nine forGreatBritain.Oncemodernized and privatized, thetelephonenetworkscouldbeasourceofcolossalprofits.Likeoilreserves,thephone lines represented a concrete, tangible asset: add up the number ofsubscribers and multiply by the payments, throw in new equipment and agrowingmiddleclass,andyougetamachinethatprintsmoney.Gusinskysawtelephones as a communications business that dovetailed with his knack fortelevision. However, in Gusinsky’s circle, there were doubts about this.Malashenko told me he worried Gusinsky was going too far.Whatever thefuture of telecommunications, the existing telephone enterpriseswere creakyoldSovietoutfitsofthekindGusinskyhadsofaravoided.To privatize the phone system, the Russian government created a new

holding company, Svyazinvest. The word svyaz in Russian means a link,connection,orcommunication.Thephilosophywas the sameaswithoil: thestatecreatedaholdingcompanyoutof thinair,gaveitcontrolovervaluablestate-owned enterprises,wrapped it in a prettybow, and sold it off.Thenewholding company was given controlling stakes in Russia’s eighty-eightregional telephone companies, with 22million phone lines. The promise of

Svyazinvestwaslarge,butsoweretheproblems.Theownerwouldhavetogetcontrol over dozens of independent telephone companies and a maddeningpatchworkoftariffs,oldtechnology,andpoliticalcross-currents.Itmighttakeyears, as well as serious investment by a company with real experience intelephones, to straighten out Svyazinvest.Moreover, the phone system had asilentwatchdog.Themilitaryandsecurityservicesviewedthetelephonelinesas their sphere of influence.When the Soviet KGB was broken up, severaldivisions—theEighthDivision,whichdealtwith ciphering, and theSixteenthDivision, which dealt with deciphering and electronic surveillance—wereturned into a new stand-alone security service, the Federal Agency forGovernment Communications and Information, directly under the Russianpresident.23Themilitaryalsohadastronginterestinthetelephonesystem,onwhichitreliedforitscommunications.TheRussian government failed to sell 25 percent of Svyazinvest in 1995.

TheItalianstate-ownedtelephonecompany,Stet,hadoffered$640millionforthestakeplusapromisetoinvest$754millionovertwoyears.Butthedealfellapart.ThepubliclystatedreasonwasthattheItaliansmadecertainlast-minutefinancial demands, but the real reasonwas objections from themilitary andsecurityservicestoaforeignerbuyingupRussia’stelephonelines.24Afterthe1996elections,GusinskysethissightsonwinningSvyazinvest.He

wenttoAlfredKokh,theblunt-spokendirectorofthefederalpropertyagency,who was a Chubais man. Gusinsky wanted to organize another attempt toprivatizeSvyazinvest.He suggestedmakingSvyazinvest a stronger companyby combining it withRostelecom, theRussian long-distance provider. Then,Gusinsky told Kokh, he would try to persuade the generals and securityagencies to approve the sale. Gusinsky toldme that Kokh let him go aheadbecauseKokh thought themilitarywould 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 thecompany. Those were the rules of the game the oligarchs had alreadyestablished. Vladimir Potanin had organized Norilsk and won; MikhailKhodorkovskyhadorganizedYukosandwon.Whycouldn’the?Gusinskycontributedonlya smallportionof the financesbehind thedeal.

He brought in a foreign strategic investor, the Spanish telephone giantTelefonica SA, the investment bank Credit Suisse First Boston, andMikhailFriedman’sAlfaGroup.OneofthebigprivateinvestorsinGusinsky’sgroupwasBennySteinmetz,anIsraelifinancieranddiamondtycoon.Gusinsky’srole

wastoleadthepoliticalchargeforthedeal—tobetheinfluentialpointmanforaconsortiumofinvestors.IftheywontheSvyazinvestauction,theactualday-to-dayworkofrunningthecompanywouldbeinthehandsofTelefonica.Gusinsky worked hard at his role. He drank vodka with the generals and

gentlypersuadedthemthattheSpanishtelephonecompanywouldnotthreatentheirprerogatives. Itwascertainlynotadisadvantage thatFilippBobkov, theformerKGBgeneral,wasnowonGusinsky’scorporate team.SoonRussia’smilitaryandsecurityagenciessignedoff.Gusinsky’s real worry was not the military but the other oligarchs. He

constantly fretted about Potanin. In the early months of his preparations,GusinskypressedChubais tokeepPotanin’sfast-growingbank,Uneximbank,outofthebiddingforthephonecompanywhilePotaninwasfirstdeputyprimeminister.Chubaisagreedandwent toPotanin, askinghim to removehimselffromthecompetition.Potaninconsented,butherevokedthepledgeassoonashe quit the government on March 17. He wanted to play, and he said thepromisetostayoutwasgoodonlyaslongashewasagovernmentofficial.25Theatmosphereamongtheoligarchsgrewtense.Malashenkotoldmeatthe

time:“It’sfunnywhenpeopletalkaboutthesevenbankersrulingthecountry;theyhate each other.Theyhave conflicting interests.When they sit together,aroundthesametable,youcanfeelthetensionintheair.”26Gusinsky nervously watched Potanin’s money. He believed he could

competeagainstrationaloutsideinvestorsforSvyazinvestbecausetheywouldtakeacold-eyedlookatthecompanybasedonitsassetsandthepotentialvalueof the telephone lines. But he feared it was hopeless to compete againstsomeone like Potanin, who commanded so much cash he could practicallythrowitat thedeal.HeknewPotanin’sbankheldanenormousdeposit,morethan$1billion,fromthefederalcustomsservice.GusinskyalsobelievedthatPotanin had obtained, through a leak, Gusinsky’s complete documentationabout the Svyazinvest deal. That documentation would give Potanin a bigadvantage.GusinskyandFriedmanwent toseeChubaisagain,privately.Accordingto

Gusinsky, they told Chubais that they believedKokh, the privatization chief,wastakingmoneyfromPotanin.Chubaisdefendedhisman,sayingKokhwashonest.Thedisagreementwasthefirstdarkhintoftheexplosiontocome.27

Gusinsky’sanxietyaboutPotaninwaswellfounded.Inadditiontosittingatopa

mountainof cash,hehadaccess toevenmoremoney throughBoris Jordan,the hyperactive young financier andbrokerwho scoredbig in vouchers andlater helped conceive loans for shares. Jordan recruited superfinancier andphilanthropist George Soros into Potanin’s deal for buying Svyazinvest.28PotanindidnotmeetSorosuntilmuchlater;theSvyazinvestdealwastheresultofJordan’shustle.“Isoldhimonthebusinessdeal,”JordanrecalledofSoros.“ButIknowwhatsoldhimonRussia—itwasNemtsov.”29SoroswasdeeplyambivalentaboutinvestinginRussia.Asarule,hedidnot

like to invest incountrieswherehewasaphilanthropist.Hiscontributions toRussiaweresubstantial.Amongotherthings,hesinglehandedlyhelpedpublishnew, honest history textbooks for Russian schoolchildren, provided stipendsforscholarsandscientists,andrescuedthe“thickjournals,”arichtraditionofRussian literary magazines such as Novy Mir whose circulation hadplummeted.Sorosalsodisplayedanacuteunderstandingoftheimportanceanddifficulties of building civil society in the post-Sovietworld. Soros shunnedBerezovsky’s solicitation forSibneft in 1995, fearing thepolitical risks.Buttwoyears laterhewas ready tosink real investment intoRussia.WhenImetSoros for breakfast inMoscow at theMetropol Hotel onemorning in June1997,IwasfascinatedtohearhisanalysisoftheRussianeconomy;Soroshadearnedbillionsmakingtherightcallsattherighttime.Russia,hesaid,“movedfrom the excesses of the Soviet system to the excesses of laissez-fairecapitalism, or, more appropriately here, robber capitalism.” The oligarchs?“Theyareprettycrudeandprettyrapacious.”Nonetheless,SoroswasgreatlyencouragedbytheappointmentofNemtsov.

The young reformer persuaded Soros that the time had come to invest inRussia.“Icanseethepathbywhichrobbercapitalismcanturnintolegitimatecapitalism,”Sorossaid.30AlthoughIdidn’tknowitatthetime,afewdaysafterourbreakfast,Sorospersonallyextendedahelpinghand to thecash-strappedRussiangovernment.ChubaisandNemtsovhadpledgedtopayoffgovernmentworkers’ back wages by July 1, but they were short of funds. Kokh calledJordan,sayingthegovernmentwasdesperate.JordanthencalledSorosinNewYork—buthisofficesaidhewas inMoscowat theMetropol. Jordanwent tothe hotel and talked Soros into making a quick personal loan of severalhundredmilliondollarsbetweenJune25andJuly3,untilRussiareceivedtheproceeds of a Eurobond issue.31 Another secret I didn’t discover at thebreakfastwas thatSoroswasalsomakinga large investmentwithoneof therobber barons he denounced, putting $980 million into Potanin’s bid for

Svyazinvest.Thestockmarketboommadeeveryinvestmentseemlikeasurething.SoroslaterdisclosedthathistotalinvestmentinRussiawas$2.5billion,making him by far the largest Western portfolio investor in Russia at thetime.32Hetoowaschasingblackgold.Potanin’sinvestmentconsortiumforSvyazinvestwas,typically,anoffshore

web of shell companies. The chain of transactions flowed from a companycalled Bidco, based in Cyprus, through another company, Investco, in theBritishVirginIslands,whichwasafrontforanothercompany,SvyazFinanceLtd.; then to another company, IFCI (Cyprus) Ltd., based in Cyprus. It alsoincluded Mustcom Ltd. in Cyprus. Russia’s economy may have been on anupswing,butwhenitcametobigmoney,investorsstillwantedtoremainintherelativesafetyofoffshorehavens.33Potanin claimed that Svyazinvest was a “strategic investment,” but his

preparationsspokeotherwise.Potaninwasaspeculator.Hewasputtinginonlyabout$200millionofhisowncash.Jordancontributedanother$200millionfrom Renaissance. The rest was raised from outside investors, includingSoros.Ultimately,Potaninwasgamblingonquicklyresellingthecompanytosomeoneelsewhomightpay twiceasmuchfor it.“Itwasgettingsomethingfornothing,”oneofPotanin’sinvestorstoldmelater.“Ifhespent$1.5billion,hecouldsellitayearlaterfor$5billion.”Thepremisewasnotoutrageousinthesuperheatedboomofthatsummer.34Potanin, likeGusinsky, stakedeverythingonhisown swayas anoligarch.

Accordingtodocumentsthathegavetoinvestors,Potanin’sgameplanwasagutsyone,builtentirelyonhisownclout.Afterwinningthefirst25percentofSvyazinvest, he promised he would elbow into the management suite andassumecontroloversaleofthenext24percent,whichwasgoingtobeofferedwithinninemonths.Potanintoldhisinvestorsthathecouldappointmanagers,get the company’s books, and sell off the next chunk of Svyazinvest to astrategicinvestor.35Theunspokencalculationwasthatthiswouldfattenupthepriceofhisownstake.ItalldependedonPotanin’sabilitytomovequicklyintothecompany.“Weneverthoughtwewouldbuythatsecondstake,”Jordantoldme.“Itwasalwaysintheplanstosellthatsecondstaketoastrategicinvestor,whichwouldhaveboostedthevalueofourstake.”Headded,“Let’sbehonest,GeorgeSorosisnolong-terminvestor.Heneverheldanythinglongerthanaweek! He’s a trader. George Soros was going to trade that baby out to astrategicinvestorrightafterthenextdeal.”Potaninsurelywouldhavelikedtodothesame.Potaninpromisedtoholdthesharesfortwoyears,butIthinkhe

wouldhavegladlysoldthemsooner.GusinskyalsolongedtomakeakillingonSvyazinvest.Onlydaysbeforethe

auction, a friend of mine recalled, Gusinsky was openly talking about thebillion dollars he was going to make on the deal. Gusinsky differed fromPotanin in that he had already brought in Telefonica, an experienced phonecompanythatintendedtoactuallybuildtelecommunicationsinRussia,whereasPotaninwasplayingforcasinoprofits.Inarealcompetition,thewinnerisn’tchosenbeforetheracebegins.Butin

the crude culture ofRussian capitalism in the1990s, thewinnerwasusuallychoseninadvancebytheparticipants.TheSvyazinvestauctionwassetforJuly25. The Kremlin was jittery about deepening tensions among the oligarchs.YeltsinsentYumashev,hischiefofstaff,whohadreplacedChubais,tosuggesttothetycoonsthattheysolvetheissue“peacefully,withoutthenewswarsandwithoutplantingbombsunderthegovernment.”Amazingly,Yeltsin’sownmandid not suggest a fair competition. Rather, as “a last resort,” the two sidesshould divide up the spoils fifty-fifty, among themselves. This was aremarkableglimpseofhowoligarchiccapitalismhadentrencheditselfin1997—the president himself wanted the boys to share the loot, quietly. Theyrefused.36Russianlawrequiredaminimumoftwobiddersforanauctiontobelegal,

but many auctions were rigged anyway. The winner was agreed uponbeforehand, and the second bidderwas a dummy corporation. The trick hadbeenusedofteninloansforshares.Frequentlyaserioussecondbidderwoulddeliberatelywalkaway,foraprice.GusinskyrecalledthatatonepointPotanincametohisofficeandproposedtopayhimseveralhundredmilliondollarstostay out of the auction. Potanin proposed that after he won, he would hireGusinskytorunthecompanyforhim.“Wewillhireyoubecauseyouaretheonlymanwhounderstandsit,”Potaninsaid,accordingtoGusinsky.37ButGusinsky repeatedly refused to cooperatewith Potanin.All hewanted

wastogetPotaninout.Thiswashisdeal!Bothsideshardenedasthedeadlinedrew closer. Neither would walk away. They were getting locked in withforeign investors. Gusinsky warned Potanin: “If you participate, theneverythingthatIknowaboutyourloansforsharesauctionsandallaboutyourdeals and relations will be made public after this!” It was an angry threat,typicalofmanythatbroughtGusinskyhisshareofenemies.Potanin refused to back down. He suggested that they take the case to

Chubais.Chubaiswas the arbiter they all trusted tobe fair.Gusinskyagreed.

PotanintoldmetheoligarchswerewellawarethatChubaiswanted“newrulesof the game” in the Svyazinvest auction. “But Iwould say that, for differentreasons,wewerenotsurethiswasserious.”38TheyalsoagreedtobringBerezovsky,thendeputysecretaryoftheKremlin

Security Council, to the meeting with Chubais. Berezovsky had, in theory,givenuphisbusinessinterestswhileservingingovernment,buthewasactiveinpromotingtheoligarchyandhisownambitions,bothpoliticalandfinancial.AtonepointinJune,Berezovskytried,unsuccessfully,torecruitSorosintoabid to make Berezovsky chairman of the natural gas monopoly Gazprom.BerezovskyflewSoros toSochi, theBlackSea resort, toseeChernomyrdin,theformerchairmanofGazprom,andlaterBerezovskylunchedwithSorosattheLogovazClub.Soros recalled thatBerezovskygrew terribly angrywhenSoros informed Nemtsov, a harsh critic of Gazprom, about Berezovsky’smaneuvering to take over the company. Nemtsov vowed, “Over my deadbody.”39Thedealneverhappened.Berezovsky had become the coach of Team Tycoon and was constantly

scrutinizing and guiding his players. “Berezovsky has to be number oneeverywhere,” Gusinsky told me later. “He has to be the best man at everywedding,thegravediggerateveryfuneral.Ifsomethinghappenssomewherewithout Berezovsky, he is full of anxiety.” Berezovsky had no formalparticipation inGusinsky’sdealbuthadaskedGusinskywhether, in theeventhe won Svyazinvest, he could become a partner. “We’ll discuss it later,”Gusinskysaid.On July 23, 1997, the tycoons—Gusinsky, Potanin, and Berezovsky—

secretly flewout ofMoscowonGusinsky’s private business jet toNice, andthen on to Saint-Tropez.They took a boat to a seaside estatewhereChubaiswasvacationingatthehomeofafriend.Themoodwasrelaxedastheysatinapleasant garden for six hours, replaying their arguments forChubais. “Theycamewiththesamequestion,”Chubaisrecalled.Washeseriousaboutthenewrulesof thegame?According toChubais, the tycoonsproposedadeal.Theywouldcarveuptheforthcomingprivatizationrichesamongthemselves.Inthisplan,GusinskywouldwinSvyazinvestinariggedauction,sincehehadmadeall the preparations. Then the next big company to come up would go toPotanin—UnifiedEnergySystems,themightynationwideelectricpowergridand generating company. Chubais remembered that they had all the detailsready: the shares, the volumes, the conditions. “We came to an agreement,”theysaid,turningtoChubais.“Anddoyouagree?”

“No!”Chubaissaid.“Idon’tagree.Guys,therewillbeanauction!”“Hegotstubborn,”Gusinskyrecalled.“Hesaid, ‘Wetookthedecision that

theonewhopaysmorewillbethewinner.’”Chubaisrecalledthatthetycoonsobjectedtothe$1.2billionstartingprice,

setbythegovernment,forSvyazinvest.“Wewillneverjumpoveraropesetupbyyou,”Chubaisquotedoneof themas saying. “I said, ‘DearFriends,whatyoucalljumpingoveraropeiscalledcompetitionandthat’showittakesplaceeverywhere,andthat’showitisgoingtotakeplacehere.Ifyoudon’tpay,youwon’tgetit.Theonewhopaysarublemorewillgetit.’”40Berezovsky recalled tellingChubais hewas trying to change the rules too

fast.“In the long runeverybodywants toget tonormalcompetition,butyoucan’tchangethesituationinoneday!”Berezovskysaid.“Don’tdictateconditionstothestate,”Chubaisreplied,tersely.What really angered Chubaiswas theway that Berezovsky and the others

tried to force him to accept their cunning insider deals. At the memory ofBerezovsky’s statement to the Financial Times about the group of sevencontrolling half theRussian economy, Chubais flushedwith anger.Who didtheythinktheywere?“Whatdoyoumean,givingthisauctiontoGusinskyandBerezovsky,andthenextonetoPotanin?”heasked.Later,hetoldme,hewasthinkingtohimself,“ThismeansthatIwashiredbythem.Theyhiredmeandtheyaretellingmethatthisgoeshereandthatgoesthere.”Chubaisduginhisheels.Noway!Hewouldnotbetheirpuppet.The talk turned sour.Gusinskyagainblurtedout that ifPotaninwas in the

race,hewouldmakeastink.“Ipromise that Iwillstirascandal,”hewarnedChubais.He remindedChubais that in recentmonths the “young reformers”hadbeentreatedwarmlyinGusinsky’smassmedia.“Weweresayingthatthesemen are making Russia good. We never wrote badly about them. We werealwayssupportingthem.Thiswaseditorialpolicy,”Gusinskysaid.Butitcouldchangeovernight.“I know that Kokh is playing on Potanin’s side!” Gusinsky recalled

protestingtoChubaisinFrance.“AndI’mgoingtoproveit.”TherewouldbeabigscandalunlessPotaninquitthecompetition,hewarnedagain.ThefinalwarningcamefromBerezovsky.“Inoneday,youcan’tjustbreak

the system over your knee,” Berezovsky said. “You are igniting a war. Youdon’twantit,butitisgoingtohappen.”Chubaiswalkedtheangrytycoonsdowntothewaitingboat.Chubaiscould

see trouble brewing.He knewwhat the big gunswere capable of, because a

year earlier, during the campaign, he had commanded those sameguns.Thetelevision channelswhich had destroyedKorzhakovwould now be aimed athim. His image would be smeared, his phones tapped, his movementsfollowed,andthenastykompromatflunginhisfaceeveryday.TheflightbacktoMoscowwassomber.Thetycoonsfeltasenseofimpendingdoom. The gambit to strike a deal with Chubais had failed. Now what?GusinskyrecalledthatPotaninactivelytriedtofindacompromise.Startingontheplaneandcontinuing in threemoremeetings,Potaninsuggested that theyagreeinadvanceonthepriceandthetermsofadeal,accordingtoGusinsky.Potanin claimed he did not discuss the specific price. Chubais said he laterdiscoveredtheyhad.The first meeting was at Berezovsky’s Logovaz Club. “Massive pressure

was put on Potanin to step out of that auction,” recalled Jordan, who waspresent and stood to reap big commissions in the deal.41 “Potanin almostsuccumbedtothepressure,butIsaid,‘Vladimir,it’stoolate.IhavebroughtinaconsortiumofWesterninvestors,includingGeorgeSoros,andtheyarenotgoing to tolerate you stepping out now because of some political deal.’”Jordan recalled Berezovsky complained, “Potanin is breaking with us. He’sbreaking with the way we have run this country for a year and a half. AndPotaninisgoingtodestroythisplacebecauseofthewayheisbehaving.Thesearetherulesofthegame,andPotaninsaidno.”AnothermeetingfollowedatGusinsky’s office. Still no resolution: Gusinsky wanted to win and Potaninrefusedtowalkaway.Thenightbeforetheauction,Potanin’splanssufferedasetback.Oneofhis

investors,KennethDart,thereclusivefoamcupmagnatewhohadalsoinvestedin Russian oil companies, withdrew his $300 million investment from thePotaninconsortium.Jordancoveredthegap,drawingfundsfromhisownfirmaswellasDeutscheMorganGrenfell.Thedealwashot,andwordonthestreetwasthatdozensofinvestorswerelineduptoputinevenmoremoneyifJordanneededthem.Theminimumbid forSvyazinvest setby thegovernmentwas$1.2billion,

but both sides guessed a winning bid would exceed $1.5 billion. The realquestioninthefinaldayswaswhetherthewinnerwouldneedtogoashighas$2billion.Howmuchwasenough?Onthedayoftheauction,July25,atabout3:00P.M.,PotaninandGusinsky

met alone in Gusinsky’s office in the high-rise tower. Personally and

politically,botholigarchshadstakedtheirall—theirreputations—onthedeal.Inthisclimacticfinalface-off,Gusinskywasthemoreemotional.Hehadnevergottenasinglebrickornailfromthestate,andnowitwashisturn.Accordingto Gusinsky, Potanin said he was prepared to lose and named a figure heintendedtobid.Potanin denied that he named a figurewhile inGusinsky’s office. Potanin

claimedthathejusttoldGusinskytobidhighifhereallywantedtowin.“Don’tberelaxed,”PotanintoldGusinsky.ChubaistoldmethathelaterlearnedthatinthefinalGusinsky-Potaninmeeting,theydiscussedthepricetheywouldbid.RightafterPotaninleft,Gusinskyrecalled,allhispartnersconvergedonhis

office.“Potaninnamedthefigure,butIthinkheislying,”Gusinskytoldthem.Headded,“Ithinkwemustpaymore.”GusinskyandFriedmanwerepreparedtoaddanother$100millioneachof theirownmoney to theirbid,Gusinskysaid,butwithlittletimebeforetheauction,theysuddenlyranintoabrickwall.For bureaucratic reasons, they could not get their partner, Telefonica, toapprove a higher bid. The Spanish telephone company required boardapproval,anditwouldtaketime.Gusinskywastrapped.BothPotaninandGusinskywerealsocaughtupinsuspicionanddoubt.They

worriedabout leaksandspies.DidPotaninknow thatGusinskycouldnotgohigher because of Telefonica? Did Gusinsky know Potanin had lost Dart’s$300million?DidGusinskyinterprettherumorsabouttheDartmoneypullingoutasaploytolurehimintomakingalowerbid?OneofGusinsky’smajorinvestors hadhis briefcase stolen just before the auction—had theother sidegrabbedthedocuments?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 thefigure. At the sleek, glass-walled office building of Renaissance Capital,overlookingtheMoscowRiver,managingdirectorLeonidRozhetskinspreadtwentylettersoutonhisdesk.Theletterswereidenticalexceptforonenumber—the offering price for the Potanin-Soros bid. The purpose of themultipleletterswas to avoid leaks right up to the lastminute.Rozhetskin saidhehadstudied the price Telefonica had paid for Latin American phone systems:$2,000andeven$3,000aline.Afterafewphonecalls,hepickeduptheletterwith$1.87billionwrittenonit,whichwastheequivalentof$850aline.Hefeltthere was a good chance they would lose, given Telefonica’s experience inLatinAmerica.42But,heconsoledhimself—thiswasRussia;Telefonicawasinadifferentmarket,outoftheboundsofitsownexperience.Heputtheletterin

a standard letter-sized envelope and slipped it into his suit pocket. HesummonedadriverandheadedtotheFederalPropertyFundbuilding.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 otherenvelopes.TheGusinskyteamhadarrangedapressconferenceandreceptionnearbytocelebratetheiranticipatedvictory.Zverev,theGusinskylobbyist,toldme he had written a press release announcing that Gusinsky had won andwouldworktogetherwithPotanin.Itwasneverissued.43When the bidswere opened at 5:00P.M. for 25 percent plus one share of

Svyazinvest,Gusinskyoffered$1.71billiontoPotanin’s$1.87billion.Potaninhadtriumphed.Jordanwasathome,wearingcasualclothesandpackingforavacation,whenRozhetskincalledhimwith thenews.“I thoughtwehad lost,”Jordanrecalled.“Theyhadastrategicbuyer,andIthoughttheyweregoingtobidmorethan$2billion.”HecalledPotaninwiththenewstheyhadwon.“Hethoughtitwasajoke.”Jordanthrewonasuitandracedtohisoffice.With the loss, Gusinsky suffered a severe blow to his prestige, not to

mentionhis dreamsofbecomingRussia’s communications titan.For severaldays, urgent meetings were held at theWhite House and the Kremlin in anefforttoavertall-outwaramongtheoligarchs.Thewholecampaignteamwasthrown into the crisis:Dyachenko,Malashenko,Chernomyrdin,Chubais, andthe other oligarchs. At stake was their insular, powerful club, their system,theirwholeexperience.“The solution was simple,” Chubais recalled. “When I returned from

vacation,wespentfourorfivenightsinmeetings.Wewereworkingdayandnight.Theirmain ideawas tocancel the resultsof theauctionand return theproperty,andthenallwouldbeinorder.”But,headded,“itwasimpossible.”Chubaisbelievedthenewruleshadworked:theSvyazinvestsalehadbroughtinmoremoney than any other sell-off inmodernRussian history. Privately,Chubaiswasthrilledthatthemarkethadworkedandthatthehighestbidderhadwon. Despite the threat of a war among the tycoons, he was not going toreversetheresultsnow.Perhaps they could not see it at the time, but the tight-knit oligarchy was

breaking down and breaking up. Blinded by greed andwounded pride, theyfailedtolistentoeachother.GusinskyandBerezovskycouldnotimaginethatChubais, once their ally, was serious about changing the rules of the game.ChubaisunderestimatedhowprofoundlyGusinskyandBerezovskyrefusedtohonor 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 waswrong; the twooffended tycoonswentballistic.Theywere infuriated that thewinnerwasPotanin,whoalreadyhaddonequitewell inloansforsharesandwasgrabbinggovernmentcash faster thananyone.Malashenko later recalledthatChubais“startedtopumpresourcesintoPotanin,youknow,tomakehimthetallestguyofall.Andit’slikebasketball,youcannotplaybasketballwhenthereisaguywhoisthreemeterstall.Andfrommypointofview,that’swhatChubaisandKokhweredoingtocreatethismonsteroutofPotanin.”TheSvyazinvestauctionwasheldonalanguidFridayafternooninMoscow,

when traffic on the outbound highwayswas heavywith city dwellers fleeingfor their cool country dachas. The summer news lull had set in. Over theweekend, when most people were hardly paying attention to television, andeven as Gusinsky was madly trying to reverse the result of the auction,Berezovskybeganfiringoffhisbiggun, thecannonofallcannons,Russia’smost powerful television channel, ORT. His agent was Sergei Dorenko, ahusky-voiced, handsome anchorman with a killer instinct for drama andpropaganda.Dorenkohadchiseledfeatures,anextremelyserious,evensolemnlook, and a deep, penetrating voice. He met Berezovsky after the 1994bombingattackonBerezovsky’scar,andhe laterbecameBerezovsky’smosteffectiveweaponontelevision.Nosubtleanalysis,nocrypticbetween-the-lineshintswereusedinDorenko’spresentation.Perhapsbecausehismannerwassobrazen yet so self-assured, Dorenko cast a certain spell over viewers,especially thosewithout a detailed knowledge ofwhat hewas talking about,andthereweretensofmillionsofthem.Dorenkodidhisattack-dogpiecesnoton the regularnewsbutona specialprime-time“analytical” showcalled theSergei Dorenko Program, which he anchored. The elite sniffed at Dorenko:How cheap! How crude! How opinionated! Kiselyov, while not universallyadmired, was the darling of the elite, but Dorenko was the master of themasses.OnSaturday, July 26, the day after the Svyazinvest auction, the history of

Russiancapitalismturnedanothercorner.Upuntil thisday, theoligarchsandreformers had been allies, working together against outside forces, such asGennadyZyuganovorthe“partyofwar.”ButwhenDorenko’stelevisionshowwent on the air that summer Saturday evening, the club of tycoons andreformersbegantofallapart.Theoligarchsandreformersbegantofightoneanotherinwhatbecameknownasthebankers’war.ThedestructionoftheclublefttheRussianpoliticalandeconomicelitevirtuallyparalyzed.

ThefirstsalvowasfiredbyDorenko,agentofBerezovsky.His targetwasPotanin.NeartheendofhisSaturdayshow,DorenkochargedthatPotaninusedmurkyshellcompaniesintheauctionforSvyazinvest;the“profitsaregoingtobesiphonedofftoanoffshorezone.”TheinvestorsinPotanin’sdeal,Dorenkointoned,were“purespeculators,” in theunseemlySovietsenseofpettyblackmarketeers,“peoplewithascandalous,tarnished-to-doubtfulreputation,”who“didnotspendasingleminuteoftheirlifedealingwithcommunications.”Heattacked Jordan and Soros, saying the philanthropist was “one of the mostfamousspeculatorsontheplanet,”anddeclaredthatKokh,theirpatron,“writestheauctiontermsforhisfriends.”DorenkobroughtNemtsovintotheprogramtoo, saying hewas “as active as a roach on thewall.”Two days later, in aninterviewonGusinsky’sradiostation,EchoofMoscow,Dorenkoexpandedonthe metaphor. “Haven’t you ever seen,” he said, “that when you spray acockroachwithaspecialirritantitstartsrunningaroundlikemad?”Dorenkowas asked whether there was a conspiracy between the government andPotanin. “I did not say conspiracy, but the whole thing smacks of it,” hereplied.44Dorenkohadlitthematch,anditdidnottakelongtoigniteafullscalemedia

conflagration,justasGusinskyandBerezovskyhadpromised.Onthefirstdaynewspapers were published after the auction, Monday, July 28, Gusinsky’sbroadsheet,Sevodnya,renderedaverdictintheheadline:“TheMoneyStank.”ThearticlesaidPotaninandKokhhadbecometoofriendlyandthatPotanin’smoney was of questionable origin. The young reformers were immediatelythrown on the defensive, and the feisty Nemtsov wheeled out his favoriteslogans toblast the losingoligarchs,GusinskyandBerezovsky. “Theydon’tneed honest rules and democratic capitalism,” he said. “They want banditcapitalism!” Nemtsov had never really defined his “bandit capitalism,” andSevodnyafiredbackwiththeobviousquestion:Whohadbeenthefatherofit?Perhaps it was Chubais or Yeltsin? “It now transpires,” the newspaperdeadpanned, “that the guarantor of Russian democracy has presided over asustainedefforttobuild‘gangstercapitalism.’”45Thepointwas,IfRussiahadbecomeagangsterstate,weren’ttheyallresponsible?Kokh,theprivatizationchief,resignedonAugust13,announcinghewanted

to go into private business.The initialKremlin reactionwas cordial;YeltsinthankedKokhforhisservices.Uptothispoint,Gusinskyhadsaidnothinginpublic,ashetriedtogetChubaistoreversethedeal.Butbymid-Augustitwasevident Chubais would not budge. Gusinsky then attacked. In an August 14

interviewonEchoofMoscowradio,GusinskysaidofPotanin’swinningbid,“Thereismoney,andthereismoney.AsfarasIamconcerned,moneyhasasmell.”HerecalledthediscussionwithChubaisaboutnewrulesof thegame.“Honestrulesofthegame,”headded,“presupposethatthesellerandthebuyershouldnotbeincollusion.”Gusinskyhintedthat thegovernmenthadbeenincahootswith Potanin, but hewas cautious. (The truthwas thatGusinsky hadexpected that thegovernmentwouldbe incahootswithhim,buthehad lost.)The next day, Yeltsin unexpectedly weighed in, noting that both SvyazinvestandNorilskNickelauctionshadbeenwonbyPotanin.46“Theentirescandal,”Yeltsinsaid,“isconnectedwiththefactthatcertainbanksareapparentlyclosertothesoulofAlfredKokhthanothers.”Kokh’s role now cameunder closer scrutiny.Although no one paidmuch

attention at the time, Kokh had earlier reported on his financial disclosureform that he had received a $100,000 advance to write a book aboutprivatization.AlexanderMinkin, themuckraking journalistwhowasclose toGusinsky since their theater days, wrote an article in the newspaperNovayaGazeta,questioningwhyKokhwasgivensucha largeadvancefromwhathedescribed as a tiny company, Servina Trading, in Geneva. Minkin, using aSwissreportertomakesomechecks,reportedthatthecompanyhadonlyatinyroomand twoor threeworkers.Hequoted aServinaofficial as saying theyhad not yet seen the manuscript. “Servina paid Kokh a hundred thousanddollarsforhopeonly,”Minkinsaid.“It’sobviousthata tinycompanycannotmakesuchluxuriousgestures.ItwasnotServinathatpaid.Itwassomeoneelsepaying throughit. It isalsoclear thatKokhsoldnot thebook,butsomethingtotallydifferent.”47Minkinwasjustgettingwarmedup.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 andwent towatchmy sons playsoccer. But once on the field, I stood riveted, not on the game but onNezavisimaya Gazeta, the Berezovsky newspaper. The paper published aremarkablefront-pageadhominemtiradeagainstChubaisundertheheadline“AnatolyChubaisSeeksControloverRussia.”Whatwas interestingwas thatthe attack was not the usual sleazy kompromat of secret documents orembarrassing wiretaps, but a thinking man’s screed against Chubais. Thebyline was Ulyan Kerzonov, most likely a pen name for Berezovsky. Thecommentary was acid. Chubais, already a hated figure in Russian publicopinion, was portrayed as darkly scheming and power hungry, “a cynical

zealot,”forwhom“theendsjustifiesthemeans,”whosementality“resemblesthat of Lenin,” a “ferocious pragmatist who has placed his faith solely inrevolutionary expediency.” The author complimented Chubais for creating,during the election campaign, “a closed-circuit oligarchic system, laternicknamed‘thesevenbanks.’”Butnow,theauthorsaid,ChubaiswaswreckingthegroupofsevenbankersinordertobuildupPotaninaloneasa“privatelyownedsupermonopoly.”Theessayhadallthemarkingsofanangrypersonalletter from Berezovsky, furious that Chubais had ruined his cozy club ofoligarchs, his bolshoi kapital operating system. “The ‘seven banks’ systemcould have become a normalmarket,” the author said, “butChubais decidedotherwise.”ThearticlewasthetalkofMoscowandreverberatedthefollowingevening

on Kiselyov’s widely watched Sunday television show, Itogi. “We haven’theardor readsomething like that forquitea long time,”Kiselyovmarveled.Hewascautiousandrecalledlaterthathewasdistractedbynegotiationsfortherelease of a kidnappedNTV correspondent in Chechnya.48 Dobrodeyev toldme he felt trepidation and dismay when the bankers’ war broke onto theairwaves.“Ihaddoubts,andverybigdoubts,”hesaid.ItwasonethingtousejournalistsandtelevisionforafightagainstZyuganovandtheCommunists,acausethatwas“clear,explicable,andabsolutelycomprehensibletoeveryone.”But Svyazinvestwas an obscure commercial dispute. Should journalists risktheir reputations on a war between avaricious business interests? “It was ashamefulsituationforthemassmediaasawhole,”herecalled.Yeltsinwas furious at the growing discord, and hewas also confused.He

hadgivenrisetothe“youngreformers”andthetycoons,andnowtheywereateach other ’s throats. The vicious mudslinging every day in the newspapers“irritatedmetremendously,”Yeltsinrecalled.49HesummonedtheoligarchstotheKremlinontheMondayafterthearticleappearedinNezavisimayaGazeta.Gusinsky, Potanin, Friedman, Khodorkovsky, Vinogradov, and Smolenskycame, as did Yumashev, but Berezovsky, deputy secretary of the securitycouncil and theoretically a civil servant, was absent, as was Chubais.Smolensky told me that Chubais was “divorced from the banks, and it’shurting....Weshallhaveahardlifewithouthim.Everybodyfeelsit.Wehavebeentogetheralongtime.”50Itwas thefirst timesince themeetingafterDavos thatYeltsinhadseen the

oligarchs as a group.Vinogradov recalled thatYeltsin appeared self-assuredandwasclearofvoice.“Iurgedthem,andtheyagreed,thatbankscannotbe,as

it were, above the authorities,” Yeltsin told reporters after the two-hourmeeting. Yeltsin said the oligarchs agreed to stop attacking Chubais andNemtsov,and“weachievedmutualunderstanding.”Insidethemeeting,YeltsinalsosaidthatsomebiddersfeltKokhleakedinformationtoonesideduringtheSvyazinvestauction.Potanincamesteeledforcriticism:onthespot,infrontofYeltsin,hevolunteered togiveuphis lucrativeCustomsCommitteeaccountsandtransferthemoneytotheCentralBank.51Lookingback,Yeltsinsaidhefeltestrangedfromthetycoons.“Despitetheir

assurances, I sensed that thesemenhadnot reallybecomemyallies.Potaninseemedtostickoutfromalltheothers.Icouldn’tridmyselfofthehunchthathehadhisownagenda.”Yeltsinsaidthatbehindtheirsmilesandagreements,the tycoons left him cold. “It was as if I were dealing with a people of adifferentrace,”hesaid,“peoplemadenotofsteelbutofsomekindofcosmicmetal. Not a single side considered itself guilty. There was no area forcompromise.Therewerenoconcreteconcessions.”Indeed,Yeltsinat thiscriticalmomentwasbaffled.Heremainsconfusedin

recallingtheroleoftheoligarchsinhismemoir.Hevigorouslydefendshowpropertywas sold off cheaply to the oligarchs, welcomes approvingly theirsupport for him in the 1996 campaign, and notes their interest in politicalstability,sotheircompanieswouldgrow.Heinsiststheywerenotunderworldfigures.Yet,at thesametime,Yeltsindecriesthefact that thetycoonstriedtoinfluencethegovernmentand“triedtorunthecountrybehindthebacksofthepoliticians.” Yeltsin describes this as a “new and dangerous challenge.” Hecalls the businessmen “new and illegitimate centers of power.” He writes,ominously: “Our greatest threat came from the peoplewith bigmoney,whogobbledeachotherupandthustoppledthepoliticaledificewehadbuiltwithsuch difficulty.” Yeltsin obviously both liked and disliked his oligarchs, thechildrenofhiscapitalistrevolution.52Soros,who said he thought investing in the Svyazinvest dealwas helping

establish legitimate capitalism, found himself snared in the sleazy bankers’war. Alex Goldfarb, who had been the intermediary between Soros andBerezovsky earlier, told me that Soros expressed worry about the uproar.“Sorossaiditwillallendverybadly,”Goldfarbtoldme.GoldfarbwenttoseeBerezovskyinthemiddleofthebankers’wartoappealforatruce.HeurgedBerezovsky to stop the combat. “I said itwill destroy everything,”Goldfarbrecalled.“Everyonewassoecstaticwhentheygotridofthepartyofwar.TheygotthegoodsideofYeltsin,thereformistside,andthenafewmonthslaterthis

uglythingcomesout.”“Iamnotanangel,”BerezovskytoldGoldfarb,“butthoseguysareworse.”SoroslaterrecalledthathepersonallytriedtodissuadeBerezovskyfromthe

onslaught,tellingBerezovskythathecouldberichenoughwiththecompanieshealreadyowned.“He toldmeIdidnotunderstand,”Soros recalled.“Itwasnot aquestionofhow richhewas,buthowhemeasuredupagainstChubaisandagainsttheotheroligarchs.Theyhadmadeadeal,andtheymuststicktoit.Hemustdestroyorbedestroyedhimself.”Sorosconcludedthattherewasnoway Berezovsky could be transformed from robber baron to legitimatecapitalist.53Jordan, who had brought Soros into the deal, suddenly found that his

multiple-entry visa to Russia was yanked, just before he left Moscow forLondon in early October. Dorenko, sticking in the knife ever so smoothly,announcedonhistelevisionshowthatJordan,aU.S.citizen,wasinpossessionofRussiangovernmentsecrets,perhapssecretcontractsaboutweaponssales.Jordan,hesaid,must“say‘GodBlessAmerica’everytimehiseyesfallonanysort of classified information.” There was no secret who was behind thedecision to pull Jordan’s visa; it was Berezovsky. He said a few days later,“ThecasewithJordanisamatterofaU.S.citizengettingaccesstoexclusiveinformation about our financial and defense secrets.”54 Jordan’s firmresponded that the real issue was using the visa in a war of businesscompetitors.NemtsovsteppedinandgotJordananewvisa.InearlyOctober,London’sFinancialTimes reported that the tinycompany

whichpaidKokh’s$100,000bookadvancehadtiestoPotanin’sUneximbank:the link thatGusinskyhad suspected.Anofficial ofPotanin’sSwiss affiliate,BanqueUnexim (Suisse), had previously been a director at Servina Tradingand commissioned the book. The Moscow city prosecutor announced acriminalinvestigationintothebookadvance,sayingitseemedtobeunusuallylargegiventhepotentialsubject.PotaninacknowledgedthatheandKokhwerefriends but insisted it “does not affect the work.” Chrystia Freeland, theFinancial Times correspondent inMoscowwho broke the story, later wrotethat even more incriminating kompromat was waiting in the wings—theoffendedoligarchsobtainedashaky,handheldvideoofKokhandPotaninonholidayattheCôted’AzuronemonthaftertheSvyazinvestsale.55Kokh latertoldmehedidn’t seeanythingwrongvacationingwithPotaninsosoonaftertheSvyazinvestdeal.“Butwhat’swrongifIwanttospendsometimewithmyfriendsinFrance?”heaskedcurtly.Headmitted,however,resentmentoverthe

investigation by the prosecutor. “Iwas nearly put in jail,” he complained. 56ChubaiscametoKokh’sdefenseagain,sayingKokhhadindeedwrittenabook.“I have knownKokh for ten years and know that he is aman of integrity,”Chubais toldreporters.“Lavishlypaidliesarereprintedfromonenewspaperowned by a banker to a newspaper owned by another, from a TV channelowned by one of them to a TV channel owned by another.” Gusinsky hadanotherview.HebelievedthatChubaiswasclean,butKokhhadtakenmoneyfromPotaninandChubaiswastryingtoprotecthisfriend.Chubaisdecideditwastimetostrikeback.WithNemtsov,hewenttoYeltsin

athisout-of-townretreat,Gorky9,onNovember4anddemandedthatYeltsinfireBerezovskyfromtheSecurityCouncil.ChubaisarguedthatthewarwouldsubsideifBerezovskyweredismissed.YeltsinlookedatChubaisandrecalledthat only a year beforeChubais had askedhim to appointBerezovsky to thesamepost.Yeltsin laterwrote inhismemoir thathe resentedall theattentionBerezovskygotasthesupposedkingmaker,thepowerbehindthethroneoftheYeltsin years. “I never liked Boris Berezovsky and I still don’t like him,”Yeltsinwrote.HecomplainedthatBerezovskyalwaysoverstatedhisinfluence.“There weren’t any mechanisms through which Berezovsky might haveexercised influenceoverme, thepresident.”Yeltsindidnot address thebookroyaltiesthatotherssaidBerezovskybroughttothepresident’sfamily.Nor was it Berezovsky’s style to whisper directly into Yeltsin’s ear.

Berezovsky operated through intermediaries and agents, through layers andindirection, including his friends in Yeltsin’s inner circle.57 For example,YumashevinvitedBerezovskytotheKremlinthedaybeforehewassackedtoshow Berezovsky the presidential decree, Berezovsky said. Yumashev hadadvisedYeltsinagainstfiringBerezovsky.Yeltsin dismissed Berezovsky November 5. Berezovsky went to Echo of

Moscow radio station to fire back at Chubais, saying he had a Bolshevikmentality.“Hebelievesthatendsjustifymeans.”IfChubais thought thatgettingBerezovskyfiredwouldbe theendof it,he

wasmistaken.“Ihadafeeling,”Yeltsinsaid,“thatChubaiswasabouttogethisheadchoppedoff.”Hewasright.In lateOctober,Chubaismentioned to a group of reporters travelingwith

himtoLondon,at theendofaninterview, thatheandseveralofhisdeputieswerewriting a “monograph” about privatization.Chubais said95percent ofthe honorarium from the book would be given to charity, but he did notmentionspecificallyhowmuchtheywerebeingpaidorbywhom.Chubaissaid

the book was originally designed to celebrate the fifth anniversary of thebeginningofmassprivatization.Theinterviewwaspublishedonthefrontpageof Kommersant Daily, the influential newspaper, on October 28 under theheadline“ChubaisIsNotaReader;ChubaisaWriter.”Thestoryhardlycauseda ripple,but it set inmotionachainofevents thatwouldboomerangagainstChubais.Sergei Lisovsky, the advertising magnate who had worked on the 1996

campaign, recalled being invited to a strategy session by the Berezovsky-GusinskycamptoplanacounterattackonChubais.Theattackwastobebasedon newdocuments that theBerezovsky teamhad obtained about theChubaismonograph. The documents showed that Chubais and four members of histeam received $90,000 each, or $450,000 altogether, for the book. Theinformation could blow up into a scandal because it would reinforce theimpression, created by theKokh disclosures, that the young reformerswerelining theirownpockets.Theamountswererelativelysmallcomparedto thegargantuanprofitsandpayoffsintheyearsofeasymoney,butthesymbolismwasawful.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 herefusedtoparticipate.“Youarecommittingsuicide,”hewarnedtheGusinsky-Berezovskycamp.“IfyoukillChubais,youwilleliminateyourselfinseveralyears’ time, because in the long run,Chubaiswill never sinkyou, never jailyou—hehas createdyouasRussian capitalists.Andanyone else inhisplacewilltreatyouverycruelly.”58The plotters decided to make the material public through Minkin, the

investigativejournalistclosetoGusinskywhoearlierquestionedthe$100,000bookfeepaid toKokh.IknewMinkinfromafewyearsearlierwhenhehadtoldmeaharrowingstoryofhowhewasattackedbypipe-wieldinggoonsinthe middle of the night for a story he had written. In the perestroika years,MinkinwasknownforsomereallypenetratingstoriesabouttheSovietUnion.But there was another kind of investigative reporting that involved simplytaking handouts of compromising materials from commercial interests orsecurity services—thekompromat—and publicizing it. The use of kompromatwasasleazybusiness;itmightbetrue,itmightbeforged,itmightbehalftrue,butitwasalwaysdistributedtotarnishsomeone’sreputationatthebehestofafoe.Inthiscase,MinkintoldmethattheinformationaboutChubaiswasgivento

him outright. He would not say who his source was, but he had no qualmsdisclosingthematerialsbecausehesharedthesame“principles.”And,hesaid,he knew thatBerezovsky andGusinskywere behind it. The samedocumentswere already on the desk of Anatoly Kulikov, the interior minister, Yeltsinrecalled in his memoir.Minkin immediately went public in an interview onGusinsky’s radio station,EchoofMoscow,onNovember12.Notbychance,Minkin’s appearance on the radio station was covered by Berezovsky andGusinsky’stelevisionstations.Thefeesforthebookwere“exorbitant,”Minkinreported. “This is a veiled form of a bribe” and “a method of moneylaundering,”hesaid.Where had the money come from? Minkin said the publisher of the

monographwasSevodnyaPress,whichhadbeenaffiliatedwiththenewspaperKomsomolskaya Pravda (and was not part of the newspaper Sevodnya).SevodnyaPresshadbeenpurchasedthatyearbyPotanin’sUneximbank,butitwasnotownedbyPotaninuntilaftertheChubaisteamhadmadethecontractsto publish the book.Minkin correctly reported thatmoney for the book hadcome from the fund thatChubais set upduring the1996 campaign,whenhehad received the $5 million from the tycoons. However, this accuratesuggestion by Minkin, that Chubais was somehow laundering the campaignmoney,wastotallyoverlookedintheensuinguproar.Theword“bribe”stuckout.SodidthetenuouslinktoPotanin.Chubaisandhisteamkeptquietaboutthetruesourceofthemoneybecausetheydidnotwanttoreopenthefarmoresensitive issue of the “black cash” and how Yeltsin’s 1996 campaign wasfinanced.AsourceclosetoChubaistoldmethatthebookwasactuallyahastilyconceivedcoverstoryfortheplannedtransferoftheleftover1996campaignmoneytotheteam.Minkin’swordsontheradiotouchedoffanewstorm.Chubaiswasdefiantat

first, insisting,“Idonot seeanycrimeagainsthumanityhere”and repeatingthat 95 percent of the money was being given to a “charity,” which hedescribed, puzzlingly, as a fund to protect private property rights headed byYegorGaidar.Thepromisetogivethemoneyto“charity”wasrathervague,andGaidarwasfurious thatChubaishadropedhiminto thescandalwhenhehadnothingtodowithit.TwodaysafterMinkinwentpublic,Chubaissaid“thefeeishigh. . .andwemustadmit this.”ChubaiswroteYeltsina lettersayingthat although the book was real, he “considered himself guilty.” Yeltsinimmediately fired Alexander Kazakov, a Chubais ally, from his post in theKremlinandthensackedMaximBoiko,anotherChubaisprotégéwhoheaded

theprivatizationagency, andPyotrMostovoi,headof the federalbankruptcyagency.AllwereChubaismen in thegovernmentandcoauthorsof thebook.The fifth coauthor was Kokh. Finally, Chubais was relieved of his FinanceMinistryportfolio,amajorsetback,althoughYeltsinsaidherefusedtogiveuponChubaisaltogetherandkepthiminthegovernment.“Thebookscandalwasthe banana peel onwhich thewhole teamof young reformers slipped,” saidYeltsin.ChubaislatersuedMinkinforslanderbutlost.Thebankers’warwasextraordinarilydestructiveforeveryone.Theyoung

reformers and the tycoons squandered most of the year in their struggle.ChubaisandNemtsovnevergotbackontrack.Theirreformagendadied.TheironywasthatoutwardlyRussiaseemedtobeonthecomebacktrail.“Theyear1997 is one ofmissed opportunities,”Vasiliev lamented.ArkadyYevstafiev,theChubais aide, said theoligarchswere toblame. “Theywanted to rule thecountry because they were greedy and wanted everything for themselves.Thereisaproverb:Theappetitecomesintheeating.Andtheirappetitebecamehuge.Berezovskydidn’t needChubais for one simple reason: he didn’t givehimanopportunitytograbeverythinginthishands.Chubaisstoodinhisway.”“We lost 1995–1996—we can excuse that,” said Steven Jennings, the

investmentbankerwhowasJordan’spartner.“Butwehadayearofnochangein 1997. That was when they should have gone for the jugular.” Instead ofaggressivereforms, thecredibilityofChubaisandNemtsovwasbesmirched,their attentiondiverted, their energy sapped. If anything, the events served toetch oligarchic capitalism more deeply into the public consciousness—anddemonstrated how powerful the tycoons and their television weapons hadbecome.Potanin also suffered. After he won the Svyazinvest auction, his plan for

taking over the company and making a quick fortune fell apart. Thegovernmentneverlethiminthedoor.Thesecondstakewasnotsoldoff,andthe value of the $1.87 billion investment collapsed. Soros later calledSvyazinvest theworst investment he evermade. From a business standpoint,Gusinskywasluckyhelost,buthemadelastingenemiesin1997.Kokhneverforgot thewoundsGusinsky inflicted on him and later sought revenge. TherancorofSvyazinvestcamebacktohauntGusinskywhenhewasindesperatetroublethreeyearslater.Gusinsky,whohaddoubtsaboutthe1996flingwithYeltsin,toldmethathewasalsounsettledbytheSvyazinvestdebacle.“Exactlythen,IrealizedthatthefurtherawayIdistancemyselffromtheauthorities,”herecalled, “the safermy business is going to be and themore honestly I can

lookintheeyesofmychildren.”Evenworse than the soiled reputations andbruisedegos, thebankers’war

crippled Russia’s economic and political leadership. Chubias complained,“Themajorplayersonmyteamarebeinginvestigated.Enormousnumbersoftelephone calls are bugged.My closest relatives are being investigated....Myson isconstantlybeing followed.Andmuchelse ishappeningnonstop.Whathas yet to be done? I haven’t been shot at.”59 Casting worried glances overtheir shoulders every day, the Russian reformers were unprepared to lookahead at a critical time, a period when even the most experienced seamanwouldhavehaddifficultynavigating the ship.A financial crisisbrokeout inEastAsiawhiletheywerefightingoverSvyazinvest.WhenRussia’seconomybegantoslowintheautumn,Chubaisandthereformersweresowrappedupinthe Svyazinvest deal that they completely failed to see that Russia wasvulnerable—andexposed—tonastyglobaltrends.TheRussianTradingSystemindexbegan theyearat213,and it reacheda

peakof571onOctober6.Inthemidstofthegoodtimes,therewasasuddendropintemperature:theworld’sstockmarketscrashedonOctober27.Russianmarkets went down with them, but the event was not seen as a catastrophe.Chubais was sanguine, even upbeat, about the year ahead: “This is thebeginningofaturn,”thebeginningofa“long,evermoresteepandpowerfultrajectory of growth,whichwill be clear and obvious . . . to every person’sfamily.Theywilljudgebyhiswages,hisincome,hisabilitytobuyamoderncarandhaveapropervacationinsummer.”60WhenIsawChubaisonDecember2,hewasstillwoundedandangryabout

the bankers’ war. He said he was paying attention to East Asian financialstatisticsbutpredictedthattheAsiancrisiswouldbeasmallsetbackforRussia,perhaps a six-month postponement of economic recovery.61 “Nothing canhappentotheruble,”heinsisted.Laterinthatmonth,Chubaissaid,“Todaywereallyhaveeveryreasontosaythatthemostdangerouspointisbehindus,thatitoccurredearlyinDecember.”62

OnDecember10,Yeltsinwasadmittedtothehospitalagain.63Thebearwentback intohiswinter hibernation.A financial hurricanewasbearingdownonMoscow, and neither the father of Russian capitalism nor his quarrelsomechildrenwerereadyforit.

Chapter15

RoaroftheDragons

THEYEAR1998arrivedwithMikhailKhodorkovskyridinghigh.Knownforhis modest personal tastes, Khodorkovsky preferred polo shirts and sportjackets to suits and ties, buthe celebratedNewYear ’sEve in elegant style atNostalgia, a Parisian eatery in the middle of Moscow. With an understatedinteriorofantiquefurniture,therestaurant’spridewasanunsurpassedcellarofsix hundred exquisite French wines. On New Year ’s Eve, Eric Kraus, astockbrokerandloquaciousFrenchman,caughtsightofKhodorkovskyandhispartyofadozenpeopleatNostalgia—andKrauscouldnotbelievehiseyes.OnKhodorkovsky’stablewasabottleofaprizedBordeaux,ChâteauHaut-Brion.Curious, Kraus asked the waiter for the wine list. Château Haut-Brion was$4,000abottle.“Russiacoulddonowrongin1997,”Krausremembered.“Itwasacountrybeingreborn.Eventhejournalistsweremisty-eyed.Weallfeltlikewewerepartofsomegrandsocialexperiment.”1Khodorkovsky had reason for optimism. He was expanding by leaps and

bounds.2InOctoberheunabashedlytoldabusinesscrowdinWashingtonthathewantedtobeamongthetoptenworldoilcompanieswithinadecade.Onlythirty-fouryearsold,hecommandedYukos,withRussia’slargestoilreserves,100,000workers,andamarketcapitalizationof$9billion.Andhisquestwasnotyetover.3 In thenext fewmonths,hewoncontrolof anotherRussianoiltrophy, EasternOil Company, at a government privatization sale.Unlike thebargain-basement purchase of Yukos, Khodorkovsky paid full price forEastern,$1.2billionfor45percentofthecompanyplus9percentboughtontheopenmarket,whichgavehimcontrol.HeplannedtofoldthecompanyintoYukos.Khodorkovskygot hooked on a new, alluring kind of easymoney—loans

fromabroad.HeborrowedheavilyfromtheWesttofinancetheacquisitionofEasternOilCompany.Hisability toborrowwasmagnifiedmany timesoverbecausehenowcontrolledanoceanofoilinwesternSiberia.InOctober1997

hetookouta$300millionlineofcreditfromCreditSuisseFirstBostonwithnocollateral.HetookoutthreeloansfromCreditLyonnaisduringtheyear,allbased on a promise of future oil revenues, of which $299millionwas stilloutstandingatyear ’send.ThenonDecember7,1997,Khodorkovskysignedamegadealwith threemajorunderwriters,GoldmanSachs,MerrillLynch,andCreditLyonnais,toborrow$500millionagainstfuturesalesofoil.TheypaidKhodorkovskyupfrontinexchangeforrevenuesfrom600,000metrictonsofoil eachquarter tobe sold through twoFrenchoil companies,Total andElfAquitaine.4Ashetooktheseloans,Khodorkovskywasusingtransferpricingtogetthe

oil cheaply. He was demanding that the oilfield extraction companies,Yuganskneftegaz and Samaraneftegaz, sell the oil at dirtcheap prices to hisparentcompany,Yukos.Oncehehadpurchasedthecheapoil,Khodorkovskypledged it,atmuchhigherexportprices, tosecure the loans.Hewasusingaclevermeansof strippingvalueoutof theextractioncompanies,whichwereleftwithdebtsandexpenseswhilehegotthebenefitofthenewloans.ThiswasariskygamebecauseKhodorkovskydidnotownalloftheoilfield

extractioncompanies.Theywere still partially in thehandsofKennethDart,the foam cup magnate who had bought his shares in the early 1990s.Khodorkovsky’s transfer pricing was pumping value away from Dart’sholdings.Khodorkovsky’s strategydemonstratedwhatbecamea fundamentalrule of Russian capitalism in the late 1990s—control over a company waswinnertakeall.UnderRussianlaw,tocontrolthekeydecisions,especiallytoput your people inmanagement, you needed to own at least 51 percent of acompany.Ifyouownedlessthanthat,youwerevulnerabletolosingthevalueofyourholdings.Minorityshareholderswereatthemercyoftheboss—theirrightswereoften trampledandtheirprofitsstolen.Dartowned12.85percentofthesharesofYuganskneftegazand12.3percentofSamaraneftegaz,thetwobig oilfield extraction companies that were the core of Yukos. He watchedangrily as Khodorkovsky drained off the black gold and left him empty-handed.5 Dart’s representative, E. Michael Hunter, said that Yukos was“illegallylootingitspartiallyownedsubsidiaries.”Westernlenders,anxioustocourt Khodorkovsky, didn’t care. Goldman Sachs,Wall Street’s biggest andrichestpartnership,wasespeciallyavid.WhenDartcomplainedthatthelendersweremaking loansbasedonoil thatwasbeingwrongly takenfromhim, thelendersbrushedasidethecomplaints.6InsearchofstillmorecashtofinancethepurchaseofEasternOilCompany,

Khodorkovsky borrowed $236 million from a consortium of threeinternationalbanks,DaiwaofJapan,WestMerchant,asubsidiaryofWestLBofGermany, and Standard Chartered of London. This loan, also arranged byGoldmanSachs,laterturnedexplosive.Theloanwasnotsecuredbyoil,butbyshares of stock inYukos itself. In this arrangement, known as a “repo” dealbecause the shares could be repossessed by the lender if the borrowerdefaulted, Khodorkovsky pledged about 30 percent of Yukos shares assecurity.TheloanobligationwasnottakendirectlybyYukosbutbyMenatep,the Khodorkovsky bank, and the money was used to help buy Eastern OilCompany.Westernerswere tripping over themselves to getmoney into the hands of

Russian companies, often overlooking the pitfalls, lack of experience, poormanagement, corruption, and misleading or missing financial data. “Peoplewere throwing hundreds ofmillions of dollars atMenatep,” a former BankMenatep official told me. When the repo deal was being put together, thisofficial was assigned to help with the “due diligence,” in which the lenderscarry out an investigation of the borrower in order to discover any hiddenproblems.A“duediligence”investigationislikeahouseinspection—youneedtoknowwhetherthereareanycracksinthewallsbeforeyouclosethedeal.InRussia’s speculative, booming economy, these investigations were oftensuperficial. The lenders were so hungry for a piece of the action that theypractically gavemoney away. In this case, the three lending banks sought todiscoverwhoownedMenatep.Accordingtomysource,whowaspresentattheconversation, the lendersweregivensomeabsolutelyuninformativepieceofpaper about the bank’s shareholder structure, butnot information aboutwhoreallyownedMenatep.“Youdon’tneedtoknowwhoownsthisbank; it’snotyour business,” a high-ranking Menatep official told them. “We need $200millionandweneeditinforty-eighthours.”Mysourceadded:“Andyouknowwhatisamazing?Theyturnedaroundandgavethemoney.”Whowasatfaultwhentheloanlaterblewup—thelendersortheborrowers?

Attheoutset,thelendersfailedtocheckforcracksinthehouse.ButaslongasthegoodtimeswererollinginRussia,neitherlendernorborrowerwantedtocheck anything. A crisis in East Asia? Lack of confidence in emergingmarkets? Declining oil prices? Why worry? For Khodorkovsky, anotherblockbusterdealwasintheworks.On January 19, 1998,Khodorkovsky announced plans to combineYukos,

the second-largest Russian oil company, with Sibneft, a smaller but still

formidableoilcompanyBerezovskyhadcreatedforhimselfinthelastdaysofloans for shares. The new oil giant, to be called Yuksi, would be Russia’slargest vertically integrated oil company, with 22 percent of the country’sproduction and the world’s largest reserves. Khodorkovsky would head thenewcolossus,withtheownersofYukoscontrolling60percentandtheSibneftowners 40 percent. Yuksi would be “world-class,” Khodorkovsky declared,and the announcement contained a hint ofKhodorkovsky’smotives: both heandBerezovskywantedtocompetefor theupcomingprivatizationof thelastmajoroilholdingcompanynotyetprivatized,Rosneft.If theyweretogether,their oil companies could pull in moreWestern lending and would stand abetterchanceofwinningRosneftthaniftheywereapart.Theyfacedpossiblecompetition from global energy firms such as British Petroleum and RoyalDutch/Shell.ThelustforWesterncapitalwaspalpable.Whatwas fascinatingabout theYuksiannouncement,however,wasnot the

hypebut thecastofcharacterswhoshowedupthatdayat thedrearyForeignMinistry press center.ViktorChernomyrdin blessed themergerwith a shortspeech. Down in the front row, four tycoons who were almost never seentogether in public were sitting shoulder to shoulder: Vladimir Gusinsky,Alexander Smolensky, Boris Berezovsky, and Mikhail Khodorkovsky. As Iwatched, it was hard to escape the conclusion that Berezovsky’s vision hadcome true.Theoligarchshadbecomeanew“boardofdirectors”ofRussia,andtheywerebeginningtodivideupspheresofinfluence:Gusinskyasmediamagnate, Smolensky as banking king, Khodorkovsky as oil baron, andBerezovsky as their ever watchful coach. On the day of the Yuksiannouncement, the tycoons were, tentatively, making still more ambitiousplans.GusinskyandSmolenskylentKhodorkovskyahandtobuyEasternOilCompany, and discussions took place about a merger of their three banks.Gusinsky’s Most and Khodorkovsky’s Menatep would be folded intoSmolensky’s SBS-Agro, making Smolensky the banking king, whileKhodorkovskyandGusinskycouldthendevotetimetotheirrespectiveoilandmediaempires.Gusinskywasalso expanding rapidly and looking to theWest for finance.

His NTV-Plus satellite television servicewas already on the air, and he hadplaced an order for a high-powered digital satellite fromHughes Space andCommunications International. The $143 million financing for the satellite,whichwastobelaunchedlaterintheyear,camefromabroad—aloanfromtheEximBankof theUnitedStates, guaranteedby theRussianFinanceMinistry.

Gusinsky also launched a new regional television network, TNT, to connectlocal stations with the flagship NTV and started a new internationalbroadcasting service to carry NTV to Russian speakers in Israel. Mostimportantly,Gusinskywas intensivelypreparing an initial publicofferingofNTVstockintheUnitedStatesinthesummer.TheofferingwouldhavevaluedNTV at between $1 billion and $1.5 billion. Gusinsky hoped to raise about$120 million in fresh capital at the outset, and more later. Gusinsky wasexpanding intomovies too, founding a newmovie production company andplanningconstructionofaneleven-screenmegaplexinthecenterofMoscow.HehadhighexpectationsthatNTV-Pluswouldbecomethetelevisionofchoicefor themiddle class, although the level of subscribers, about 130,000 at theturnoftheyear,wasdisappointing.Hewantedmillions.Berezovsky’s businesses were in the shadows; his holdings were a

mysteriousempireshieldedbylayersofshellcompaniesandoffshorehavens.He was known to have obtained a major block of the oil company Sibneftcreated in loans for shares.BerezovskyneverownedAeroflot shares,buthereapedprofitsfrommillionsofdollarsinhardcurrencyticketsales.Heactedasamiddleman,makingloansbacktoAeroflotoutofcashhehadaccumulatedfrom the company’s own revenues. He still owned the Logovaz cardealerships,andhismediaholdingswereexpandingbeyondORTtelevisiontoincludeaboutaquarterownershipofTV-6,aMoscowchannel,thenewspaperNezavisimayaGazeta,andtheglossymagazineOgonyok.7Thepublicationsandtelevision gaveBerezovsky an outlet for his views; his passionwas politics,not business. After the bankers’ war, when he lost his job at the KremlinSecurity Council, Berezovsky remained an adviser to Valentin Yumashev,Yeltsin’schiefofstaff.Smolenskywas also addicted toWestern loans. In 1997 he borrowed $55

million from West Merchant Bank Ltd. and $113 million from ChaseManhattan Corporation, and he floated his $250 million Eurobond.8Smolensky later admitted to me he was not really sure what to do with themoney from the big Eurobond—hewas borrowing because the lenders toldhimhecould.“Inretrospect,allexpertssaythebankshouldnothaveenteredthe international capital markets for another ten years. It was a strategicmistake,andIagreewiththat,”Smolenskysaid.“Wedidn’tneedthecapital.”Nonetheless,SmolenskyandtheothersweregulpingdownWesternmoney

as fast as they could, and they constantly jetted to London and New Yorkfinancialcenterstomakenewdeals.In1997,forthefirsttime,theloanstaken

outfromforeignsourcesbyRussianbanksgrewlargerthantheassetsthatthebankskeptabroad.Thebanksweremadlytakinginoverseasloansandusingthemoneytobuyhigh-flyingstocksandbondsinsidethecountry.9TheYuksimerger itselfwas sohastily prepared thatKhodorkovsky asked

journalistsnottoinquireabouttoomanydetails.OneofKhodorkovsky’scloseassociates later toldme the real reason for theYuksimergerwasnot towinRosneftorborrowmoremoney,althoughbothwouldhavebeennice.“Itwasall about Khodorkovsky’s ambition,” he said, “to create the biggest oilcompany in Russia. The motives were not economic, but ambition.”10 Themergerfellapartinfiveandahalfmonths.Oilpriceswerefallingbecauseofdropping demand in East Asia. The tycoons sitting in the front row weresmilingmerrily,evenastheyfloateddowntheriverinarafttogether—straightforawaterfall.Theghostofthebankers’warstilllingeredinthespring.Angryandsmartingfrom the autumn conflict, Berezovsky and Chubais faced off against eachother.Theirconflictparalyzedthepoliticalelite,underminedtheconfidenceofinvestors, and leftRussiaunprepared for the approachingdisaster.Bothmengaveaseriesof impassionednewspaper interviews inearlyMarch, savagingeachother.TheChubaisera“isover,”Berezovskydeclared.“BigcapitalistheRussiangovernment’sstrongestmainstaynow.”11Chubaisshotback:“Wewillhave to drag ourselves away” from the tycoons, “literally by the hair.”12Chubais taunted Berezovsky, saying the oligarchs’ plan to destroy him afterSvyazinvest “failed to produce the desired result.” Chubais portrayedBerezovsky as an evil power brokerwho “with the snap of his fingers” canreplace a vice primeminister.Berezovsky’s entire business,Chubais said, is“politicalinfluence.”13Inaremarkableperformance,Chubaisgavearesentment-filledinterviewto

NezavisimayaGazeta,whichBerezovskyhadused to attackhim thepreviousfall. “Lies, all lies,” Chubais said. “It’s a sold-out newspaper, sold-outjournalists, and a sold-out chief editor.” Chubais acknowledged that he wassick of work in the government. “Government service—I can’t stand it,” hecomplained.InBerezovsky’ssearchforkompromattouseagainsthim,Chubaisreported, “Mywife’s friendswereofferedmoney—quite decentmoney—foranysleazeagainstme.TheyaskedallmyacquaintancesinSt.Petersburg—fiftyorsixtypeople—iftheycouldtellsomethingaboutme.”14

BerezovskyfelloffasnowmobileracingatnightathighspeedonFebruary15,injuredhisspine,andwashospitalizedinSwitzerlandinMarch.15Restless,hebegananambitiousnewpoliticalgambit,evenmoreaudaciousthanChubaisimaginedwithhiscommentaboutBerezovskysnappingthefingerstoreplaceavicepremier.Berezovskybeganplotting tochooseYeltsin’ssuccessor.Thenextelectionsweretwoyearsaway,butBerezovskydidnotwanttowaituntiljust a fewmonths beforehand, as they had in 1996.Hewanted to install hisbolshoi kapital model in the Kremlin now, a model in which businessmenwouldcall theshotsandserveas the“boardofdirectors”ofRussia Inc.Theprimeministerwouldtakeorders,asagoodchiefexecutiveofficershould.Berezovsky’s insatiable ambition, his desire to set the bar as high as

possible,wascompletelyincharacterwithhispast,fromhiserstwhilevisionsofwinningaNobelPrizetohissuperdealsfortheZhigulicarsandhisrescuemissionforYeltsin.Butthistimesomethingwasdifferent.Russiawasdriftingtowardaneconomicprecipice.Noneoftheoligarchsappearedtorealizethatdanger lay ahead. Berezovsky did not grasp that his games would fuelinstabilitywhencoolheadedstabilitywasdesperatelyneeded.Thebankers’warhad already left a casualty-strewn battlefield. The constant infighting andmudslingingin theautumnof1997hadmadeinvestorsskittishaboutRussia,andthestockmarketdeclined.NowBerezovskystirredupthechaosagain.Hispreciseactionsinthisperiodarenotcompletelyclear.Helovedintrigue

andbackroommaneuvering,andhispublicstatementswereoftenoblique.Butwhatcaughtmyearwasaphrase—typically indirect—thatBerezovskybeganto use over and over again. The oligarchs, he insisted, had to ensure the“continuity of power.”What Berezovskymeant, but didn’t dare say directly,wasthattheywantedastronghandindeterminingRussia’snextpresident.Thevoters? They would do what they were told, and they would be told on theoligarchs’televisionchannels.Moreimportantly,thetycoonswantedtoinstalla leader who would broadly continue the same reform path as Yeltsin butwould heed their demands, someone they could trust and manipulate. Theyneededaleaderwhowouldplaybytherulesofoligarchiccapitalism.What made this choice of a successor more urgent was Yeltsin’s

unsteadiness.Hefrequentlyappearedconfusedandremoteintheearlymonthsof1998.Iheardconstantrumorsthathesufferedperiodsofdisorientationorblackouts.Theoligarchsbegantowonder,seriously,howlonghewould lastas president. They knew that underRussian law, ifYeltsin stepped down forhealth reasons, the prime minister would automatically become the acting

Russianpresidentandwouldhaveagoodchancetowinthejobpermanently.ThuschoosingthenextprimeministerquitelikelymeantselectingRussia’s

next president. “I realized that the prime minister was going to be the nextpresident,”Berezovskytoldmelater.“ThisIunderstoodwell.That’swhyIwassaying,thefirstcriteriawehadtoevaluatewasthatthisisthenextpresidentofRussia.”16Berezovskythought itwas imperative toreplace thesittingprimeminister,

Viktor Chernomyrdin, who was tired and drifting. “Chernomyrdin hadexhaustedhispotential,”Berezovskysaidlater.“Hewastheprimeministerforfive years, in the most difficult time. Yeltsin was often out of shape, andChernomyrdin was bearing a huge load. He was making promises toeverybody—to the right, to the left, and over five years he gave so manypromises that he became completely immobilized, like chains on his feet. Icouldseeitwashardforhimtomoveforward.”Gusinsky,whoparticipatedinthesediscussions,toldmeheheldasimilarview.17That Chernomyrdin was adrift was widely evident at the time. But

Berezovskymayhavehadanothermotive.Hewanted to installhisownman.Berezovskywasalwaysthinkingaboutsettingthebarashighaspossible—andtheideathathewouldliketobekingmakerfortheRussianpresidencywasnottoohigh.ManypoliticiansatthetimespeculatedthatBerezovsky’sfavoritewasIvanRybkin,aformerspeakeroftheDumawhohadbeenchiefoftheKremlinSecurityCouncilwhileBerezovskywasthedeputy.Rybkinwasanunassuming,quiet figure, completely uncharismatic, someone whom Berezovsky couldtrust.Rybkincouldbemanipulatedtoo.However,whenIspoketoBerezovskyabout this several years later, he insisted that he had lobbied for a candidatewho“wouldnotbemanipulatedbyanybody;thesearemywords.”Hesaidhewanted someone who would be independent from the oligarchs, or at leastfromanyoneofthem.“Inevernamedacandidate,”hesaid.GusinskyrecalledthatBerezovskyinfactadvocatedRybkin.Whatisnotdisputedisthattheoligarchswerequietlyworkingasa“board

ofdirectors”intheKremlin.Thisincludedthesamecastofcharactersthathadcome to theYuksi announcement:Gusinsky,Khodorkovsky, Smolensky, andBerezovsky. It also includedYeltsin’s daughterTatyanaDyachenkoand chiefof staff Valentin Yumashev, who succeeded Chubais in the post. Yet anotherplayer was a quiet oil trader, Roman Abramovich, who was Berezovsky’spartnerinSibneftandhadbecomeinfluentialinYeltsin’sinnercircleaswell.“Weallspokeaboutthistopic,”Berezovskyacknowledgedoftheplottingto

dump Chernomyrdin. “All the oligarchs when we would meet, Yumashev,Tatyana, Khodorkovsky—there was a club, and there was a conversation.Aboutwhat?ThatChernomyrdinhadexhaustedhispotential.”18The group, Berezovsky claimed in a newspaper interview, was “more

consolidated” than ithadbeenbefore the1996election.ChubaisandPotaninwere absolutely excluded, however. Uneximbank was “beyond the pale”becauseofthebankers’war,andChubais“shouldknowhisplace—Ihatetobethatvulgar.”19The evidence suggests that Berezovsky and his allies in the Kremlin—

chiefly Dyachenko and Yumashev—hatched the idea of dumpingChernomyrdininFebruaryorMarch1998.Berezovskytoldmethatalthoughhe did not speak to Yeltsin about it directly, “the question” of dumpingChernomyrdin “was debated for severalmonths.”Gusinsky recalled that thetycoonsdiscusseditataboardroommeetingatKhodorkovsky’soilcompany,Yukos.One day in late February, Sergei Karaganov got a call to come to the

Kremlin.The dapper, baldKaraganovwas deputy director of the Institute ofEurope, one of dozens of think tanks in the Russian Academy of Science.Karaganovwasalsochairmanofaprestigiousforeignpolicycouncil.Alwaystailoredinelegantsuitsandbrightties,Karaganovhadwrittenthe1996letterto Yeltsin warning of grave consequences if Yeltsin canceled the elections.Yeltsinreadtheletteranddidnotcanceltheelection.KaraganovwassomeonewhomYeltsinhadlistenedtointhepast.Now Karaganov slipped into the Kremlin. In Yumashev’s small Kremlin

study, Karaganov also found Dyachenko and some of the oligarchs. Theypresented Karaganov with a plan. He would go to Yeltsin and urge him todump the prime minister. They already had several possible candidates toreplaceChernomyrdin. Itwas unspoken but immediately clear toKaraganovthatthiswasnoordinarypoliticalmaneuver.Thenextday,Karaganov,brooding,returnedtotheKremlin.Hehadlunch

privatelywithYumashevandDyachenko.Theyofferedhimahigh-leveljobintheKremlin.ButKaraganovwasdubious.Theplan to replaceChernomyrdinwasanaudaciouspowerplaybythetycoons.Karaganovnearlychokedwhenheheard thewords“corporategovernment.”He thengaveYeltsin’sdaughterandhischiefofstaffasevere,angrysoliloquy.Weretheoligarchsoutoftheirminds? Were they crazy? Were they trying to take over Russia? Perhaps,Karaganovsaid,hewouldsimplytellYeltsinthatitwastimetoretire.Wasn’t

thatreallytheimplication?“No!” Dyachenko insisted; this was going too far. Karaganov left the

Kremlin and never heard about the plan again.20 But the effort to dumpChernomyrdinaccelerated.Inhismemoirs,YeltsinclaimedthatsackingChernomyrdinwasallhisidea,

that he was looking for a “someone younger and stronger” and had beensearching for “three months” before he actually dismissed Chernomyrdin.Yeltsin’s style was to be the power balancer, always scrambling andreassembling his court. But it is not known exactly how he came to thedecision. It is possible Berezovsky succeeded in manipulating Yeltsin frombehindthescenes.ButitisalsopossiblethatYeltsinhaddecidedtomove,andBerezovskywastryingtoexploittheopeningtohisownends.ThefirstspecificactionYeltsintook,byhisownaccount,wasonSaturday,

March21,justtwodaysbeforehefiredChernomyrdin.Yeltsinmettheprimeminister at his Gorky 9 residence outsideMoscow. They talked about wagearrears, and Yeltsin told Chernomyrdin he was unhappy with his work.Chernomyrdin “looked at me with the doomed expression of an old,experienced apparatchik who understood everything,” Yeltsin wrote. Thatevening,Saturday,YeltsinsummonedYumashevandhispresssecretary,SergeiYastrzhembsky,andtoldthemtoprepareadecreeforChernomyrdin’sfiring.YeltsinrecalledthatYumashevaskedhimtopostponetheannouncementuntilMonday, saying itwould be awork day, andmore businesslike.Yeltsinwasreluctantbutagreedtowait.Infact, thebriefdelayallowedBerezovskytowaltzonstage.OnSaturday,

justasYeltsinwastellingaidesofhisplantofireChernomyrdin,Berezovskytaped an interview at his spacious country dacha for Yevgeny Kiselyov’stelevision program, Itogi. His back was still hurting from the snowmobileaccident and he was in discomfort during the taping, perched on a chair,packed all around with pillows. He also posed for the cameras with thesnowmobile onwhich he suffered the accident. In the interview,Berezovskyforeshadowedthechangestocome.Hesaidhewasfocusedonpreparingfortheelectionsintheyear2000,onensuring“continuityofpower.”Then,withtheselfassuranceofarealpowerbroker,hecriticizedvirtuallyalltheleadingcandidates in the polls to succeed Yeltsin, crisply rattling off his verdict oneachone—“electable”or“notelectable.”Itwastheperformanceofaconfidentkingmaker. Berezovsky said he doubted whether the stodgy Chernomyrdincould be elected, and since there wasn’t an obvious favorite, he hinted that

therewouldbetimefor“newpeople.”Buthedidnotsaywho.21On Sunday evening, Yeltsin told his aide, Yumashev, that his choice for

primeministerwasSergeiKiriyenko,thethirty-five-year-oldministeroffueland energy.Kiriyenkowas the banker fromNizhnyNovgorodwho in 1996hadsaidhewantedtocrossthe“ragingriver”tocompleteeconomicreformswith Yeltsin. Kiriyenko was progressive, earnest, and independent-minded,withshorthairandwire-rimglassesthatgavehimayouthful,studiouslook.Aprotégé of Boris Nemtsov, Kiriyenko headed a bank and oil company inNizhny, but he had limited experience in government and had served inMoscowlessthanayear.Yeltsinarrivedat theKremlinonMonday,March23,veryearly, to tapea

television address about Chernomyrdin’s dismissal. In the tape, however,Yeltsin did notmentionKiriyenko’s name. He said that “for the time being,before the appointment of a new prime minister, I will myself perform hisduties.”Headded,“InthenearfutureIwillnominateacandidateforthispost.”Whenhemadethetape,Yeltsinclearlydidnotknowwhohewasgoingtopick.Ithinkafuriouslobbyingcampaignwasstillunderwaythatmorning.KiriyenkosaidYumashevcalledhimathomelateSundayandaskedhimto

beat theKremlinearly thenextmorning.Kiriyenkohadno ideawhyhehadbeensummonedtotheKremlin.HeguessedthathehadbeencalledtoapolicymeetingaboutEuropeanUniontradepolicy.Itwashisdaughter ’sbirthday,andhepromisedherhewouldbehomeearly.Whenthepresidentofferedhimthejob, Kiriyenko was stunned. It was a “total surprise.” The Kremlin had toacknowledgethat,contrarytowhatthepresidenthadsaidinhistapedaddress,hecouldnotserveastheactingprimeminister.Kiriyenkogotthejob.KiriyenkowasdefinitelynotBerezovsky’scupoftea.Berezovskylatersaid

thechoiceofKiriyenkowas“unpleasant”forhim.ChubaiscouldnotconcealhisgleethathehadoutfoxedBerezovsky.“Someoligarchs,”hesaid,“wokeupthismorning in a cold sweat.”22What happened? It is clear thatBerezovskyand the other oligarchs started the process of replacing Chernomyrdin, butBerezovsky lost control of it. Kiriyenko zoomed in with the backing ofChubais, Yumashev, Dyachenko, and some of the other oligarchs. PerhapsBerezovsky mistakenly thought he had more time to manipulate Yeltsin. Orperhaps Yeltsin himself decided to bypass the wily oligarch.Who outfoxedwhom? Itwas typical ofBerezovsky and evenmore characteristic ofYeltsinthattheanswerisnotclear.Buttheoutcomewasthesame:Chernomyrdinwassacked.

YeltsinsaidhewantedChernomyrdintoprepareapresidentialcampaign—alameexcusegiventhathehadjustremovedChernomyrdinfromahigh-profileposition.ThehaplessChernomyrdinwent throughthemotionsofstartingthecampaign, including ameetingwith the “board of directors” of oligarchs atBerezovsky’sLogovazCluba fewdays later.Berezovsky said at the timehesawadifferentChernomyrdin,with“tremendouspotential.”Thatwasnonsense—Chernomyrdin’s political futurewas actually quite bleak; his pro-Kremlinpoliticalparty,OurHomeIsRussia,wasbroke.Still,asbecameapparentlaterintheyear,Berezovskyhadnotyetgivenuponhim.WhateveryonemissedwasthatYeltsinhadjustdecapitatedthegovernment

at the absolutelyworst time.OnMarch 27,Berezovskymetwith a group ofjournalistsoverbreakfastat theelegantMetropolHotel inMoscow.Hisbackstill aching from the snowmobile injury, Berezovsky stood, immaculatelytailoredasalways,aswelistenedtohissoft,rapid-pacedpatterovercroissantsand orange juice. Berezovsky clearly felt that Kiriyenko was a politicalweaklingandthatYeltsinwasnotingoodshape.“Ithinkitisbadbecausethepresident’s health, his condition does not allow him to engage in activepoliticalworkeveryday,which isundoubtedlynecessary.”Headded,“Itwilltaketimetogainexperienceandstrength,andwhowillfillthevacuum?Ihavenoanswertothisquestion.”Kiriyenkohadnopoliticalbase inMoscow,noclout inparliament,andhe

wasdoomedfromthefirstday.Hisplightwasaggravatedbyafive-weekwaitfor confirmation in the Duma, the lower house of parliament. He wasconfirmed on the third and last ballot, having lost the first two votes.23Berezovsky spent most of April plotting against the Kremlin and trying toundermine Kiriyenko in his newspaper and on television, perhaps hopingKiriyenko’s nomination would fail. Yegor Gaidar told me at the time thatBerezovskywashungryforpower,buthisreachmayhaveexceededhisgrasp.“ForBerezovsky,theessenceofhisbusinessispolitics,andintrigue,andthat’sthegameheplays.Hethinkshehastherighttorulethiscountry,”complainedGaidar,nofriendofthetycoon.“Hehasspokenopenly.Thegovernmentistooweaktorule,hesays.Someonehastodoit.They[theoligarchs]arestrongandclevermen, so they can do it, so they say. But I think he has overestimatedhimself.”“Berezovsky’s biggest mistake was that he talked too much about his

importance,”Gaidarcontinued.“Ifandwhenyouhavea lotof influence, thebestthingtodoiskeepquiet.”

In mid-April, Yeltsin had his fill of Berezovsky’s intrigues. He calledBerezovsky and sternly demanded that the tycoon stop trying to undermineKiriyenkointheparliament.24 InaceremonyforRussiancosmonauts,Yeltsinsaidaloudwhathehadbeenthinking:ifBerezovskydidn’tstopthescheminghewouldsendthetycoononalongbusinesstripoutsideofRussia—forever.Itwas an extraordinarymoment, and the newspaperKommersantDaily, whichbrokethestory,saidthatYumashevandYastrzhembskyattemptedafterwardtohush upYeltsin’s outburst. It leaked anyway.25 Twoweeks later, Berezovskygot another appointment, as executive secretary of the Commonwealth ofIndependent States, the loose and largely ineffective organization of formerSoviet republics except for theBaltics.The positionwas based inMinsk butgaveBerezovsky themost important thing:a freshpowerbaseandaccess totheKremlin.One of the most acid critics of the tycoons in this period was Andrei

Piontkovski, a one-time mathematician and nuclear weapons strategist whowrote an entertaining newspaper commentary about the influence of theoligarchy.Hetoldmethat themaneuveringsofBerezovskyinthespringhadbeenextraordinarilycostlyandsenseless.Theoligarchs“havebeendestroyingthemselves before our eyes,” he said. “I think there are no victors, onlylosers.”26Piontkovskywasmorecorrectthanherealized.Therublewasfunnymoney.Russiansdidnottrusttheirowncurrency,orthebanks or government. They kept their money under a mattress—usually indollars. Russia had an estimated $30 billion to $40 billion in Americanbanknotes in circulation, the largest sum in any country outside the UnitedStatesitself.Russiansclungtotheirdollarsbecause,bothbeforeandafterthebreakupoftheSovietUnion,attemptstofiddlewiththerublehadalwaysledtochaos,andGaidar ’shyperinflationerodedanyremainingpublictrust.27So it was with some trepidation that the Russian government and Central

Bankdecidedtomakeanotherrublefix.OnJanuary1,1998,theRussianrublewas redenominated, which meant cutting three zeros off the end of thecurrency.What was six thousand rubles to the dollar became six, a strictlycosmeticchangethatwasdesignedtowipeawaythememoryofhyperinflationand symbolize normalcy. Billions of new banknoteswere printedmonths inadvance. Fearing another panic, the government and Central Bank spentmonthspreparing thepopulationwith advertising and soothing reassurances.

“Newzeroswillneveragainappearonourbanknotes,”Yeltsinpromised.Nothing happened. The redenomination passed quietly, without panic.

Anotherthresholdwascrossedontheroadtonormalcy,orsoitseemed.Theghostsofpastinflationhadreceded.ChubaisproudlydeclaredthatRussiahadtamedtheruble.“Wehaveastablecurrencywhich, incidentally,hasthesameexchange rate as the French franc,” he boasted.28 Chubais told Yeltsin inFebruary that he wanted to leave the government; he had been desperate toleave for a long time. Yeltsin asked Chubais, “What’s with the economy?”Chubais recalled telling Yeltsin that he felt comfortable leaving thegovernment because nothing bad would happen to the economy in the yearahead.“The economy should grow this year. Nothing of any scale, positive or

negative,willhappen,”Chubaissaid.Hewasprofoundlymistaken. Itwas the first ofmany errors in a troubled

yearforChubais,whofailedtoseethatRussiawouldsuffergreatlyfromthechangingwindsoftheglobaleconomy.Hewasintheraftwiththetycoonsastheyblithelyfloateddowntheriver.Russiawassooncaughtinthegripoftwomightydragons—writhingserpentsofmoderneconomicsthattorethecountryapart.Thefirstdragonwasanexplosionofdebt.Thesecondwasafailuretorecognize that the time had come for devaluation of the ruble. The dragonswerecreepinguptogetheronRussiaintheearlyspring.Manypeoplesawthethreat,butveryfewwerecertainthattheywouldstrikeorwhen.Russiawasin“crisis”sooftenthatitsleaderswereparalyzedbycrisisfatigue,numbtomorealarmistwarnings,andinthiscasethegovernmentcontributedtotheproblembyreassuringeveryonefortoolongthattherewouldbenocatastrophe.Whenitfinallydidhit—whenthedragonsattacked—itwastoolatetoescape.IfyoucouldhaveflownoverRussiainearly1998andviewedtheeconomy

in termsof topography,starklydifferentworldswouldhaveappearedbelow.SpanningalandmassaslargeastheUnitedStatesandCanadatogether,Russiahad an economy that comprised several different realms. The timeless rurallandscape remained rudimentary, isolated, and agrarian. Provincial urbanRussiawasatableauofchaosanduncertainty.Industryfunctionedinefficiently;gargantuan factories churned out steel and automobiles but were foreverplaguedbylosses.Workers,factories,andthegovernmentwereallcaughtinacomplexwebofbarter.Cashhadalmostdisappearedfromtheeconomy.Largeenterprisesdid73percentoftheirbusinessinbarterandpaidonly8percentoftheirtaxesincash.Theswapsandtrade-offswereahorriblydistortingfactor

ineverydaylife,promptingtwoAmericanscholarstoconcludethatRussiawasbecominga“virtualeconomy”inwhicheveryimportantfacet,suchasprices,wages,andprofits,weredeceptive.29Finally, if you flew over Moscow, you would have seen a world apart.

Moscow was a throbbing boomtown before August 1998. The Moscowfinancial scene was cluttered with banks and exchanges, tycoons andstockbrokers,andtrappingsofwealthandpower.Moscowwasitsownsortofvirtualeconomy,awashineasymoney.Itwasruledbytheoligarchsandtheirpoliticalpatrons.TheirbattlesandwhimsechoedloudlyintheMoscowmedia,which they largely owned. It was here, in this Moscow boomtown, that thecrisisof1998unfolded.The trouble beganwith the chronically undisciplinedRussiangovernment.

Thecountry’spublicfinanceswereablackhole.Simplyput,Russiaspentmoremoneythan ithad,everyday.Special-interest lobbiessuchasagriculture, themilitary-industrial complex, the banks, and the huge Soviet-era factorieshauled away truckloads of subsidies, with hearty encouragement from theCommunist-dominated parliament. At the same time, tax collection wasabysmal.30Whenthegovernmentranoutofmoney, itsimplystoppedpayingpeople.Russiawaslivingbeyonditsmeans.Intheinflationaryyearsof1993and1994,onewaytocoverthedeficitwas

to print moremoney, but that fueled hyperinflation. Chubais stopped that in1995. Another way to cover the deficit was to obtain loans from theInternational Monetary Fund, which pledged a three-year, $10 billion loanstarting in 1996 before Yeltsin’s reelection. 31 Beginning in 1993, Russiafoundstillanother inflation-freeway to finance thedeficits—itborrowed themoney on capital markets. At home, the borrowing was through the high-flying,short-termbondsknownasGKOs.TheacronymstoodfortheRussianwordsgosudarstvenniyekratkosrochniyeobligatzii,orshort-termgovernmentobligations.TheGKOcametosymbolizeallthatwascrazyaboutthestockandbondmarketboom.Thebondsweredenominatedinrublesandusuallyhadathree- or six-month term. When they were first floated in May 1993, themarket was small. At the end of 1994, only $3 billion in GKOs wereoutstanding. But at the end of the election year of 1996 the total zoomed to$42.7 billion. In 1997, the year of the “young reformers,” the outstandingGKOdebtwentto$64.7billion,andinmid-1998itreached$70billion.Whenrisksseemed tobeon therise inRussia,especiallybefore the1996election,theyieldsonGKOssoared,whichmeantthegovernmenthadtopayevenmore

toborrowevenmore.Butthehighyieldsalsohadasilverlining—thebondswere awonderful source of easymoney forRussian banks and anyone elsewhocouldget their handson them.TheGKOs suckedupcapital that shouldhave gone to productive investments. Victor Huaco, the financier at OrionCapitalAdvisorsLtd. inMoscow, toldme thataRussiancompanywith$200millionwouldobviouslyratherputitinGKOsthaninvestinnewequipment.“Icaninvestinnewequipmentandoveraten-yearperiodgetareturnperyearof20 percent,” he said. “Or, I can invest inGKOs, and in sixmonths get 100percent.”Thechoicewaseasymoney,onceagain.Originallydesignedasawayforthegovernmenttoraisemoney,theGKOs

woundupcostingmoney.Thebondstookonalifeoftheirown—theybecamean unsustainable pyramid scheme in which new investors were desperatelyneeded to pay off the old ones, not unlike theMMM scam. In 1994, three-fourthsoftheproceedsfromGKOswenttotheFinanceMinistrytohelpcoverthedeficit,butby1997,afull91percentoftheproceedswerebeingusedjusttopaybackearlierGKOs,withonly9percentgoingtothebudget.32AfterYeltsin’s1996reelection,globalcapitalmarketsopenedtoRussia.Just

asKhodorkovskybecamehookedonWesternfinance,sotoodidtheRussianfederal government. Cities and regions also found borrowing irresistible.33WithagreenlightfromthefinancialratingsagencieslikeStandard&Poors,Fitch IBCA, and Moody’s Investors Service, Russian government officialswere soon jetting around the world on so-called road shows toutingEurobonds,whicharebondssoldtoforeignersdenominatedinhardcurrency,suchasdollarsorGermanmarksorItalianlira.TheproceedsfromEurobondspumpedcashintotheRussianbudgetandmaskedthefesteringdeficitmessathome.Russiafloatedatotalof$14.9billioninEurobondsin1997and1998.34Thenagging,deepeningbudgetdeficit,andtheborrowingtocoverit,bothathomeand abroad, spawned the first dangerousdragonof 1998: debt.Russiawasfallingdeeperanddeeperintothemaw.Thedangerstooktimetobecomeapparent.Inthefeverishenthusiasmofthe

1997stockmarketboom,GKOswereseenasahot investment.Theywereagovernment-backedTreasurybill, a signofnormalcy,anoninflationarywaytopayforgovernmentspending.ButasRussiasoondiscovered,anemergingmarket remained “hot” only as long as the suitors were ardent. Foreigninvestors could leave almost as soon as they came, for reasons entirelyunrelated toRussia, and theydid.Yeltsin courtedprosperousSouthKorea inthe1990sat theexpenseofthedecrepitNorth,andhisdiplomacypaidoffas

South Koreans helped fuel the portfolio investment boom. But when thefinancialstormhitEastAsiain1997,SouthKoreaninvestorswerethefirsttoabandonRussia.TheyquicklyevacuatedtheGKOmarketandtooktheirmoneyoutofthecountry.Brazilianinvestorsfledtoo.TheRussianCentralBanktriedinvaintocompensatebybuyingGKOsontheopenmarket.TheCentralBankburned up an astounding amount ofmoney inNovember 1997—its reservesplummetingfrom$22.9billionto$16.8billioninthatmonthalone—tryingtostabilizetheGKOmarket.Inoneweek,itlost$2billion,afrighteningdrain.35Itwasacostlymistake,andtheCentralBankdecideditwouldnolongerbuckuptheGKOmarketbutuseitspreciousreservestosupporttherubleonly.TheCentralBankdidnothaveenoughreserves todoboth jobs.Yeltsinapprovedthe decision, and it went into effect December 1. Sergei Aleksashenko, thendeputy head of the Central Bank, recalled watching nervously to see howinvestorswould react. Hewas relievedwhen some investors returned to theGKOmarket and bought another $400 million of the bonds the next week.Aleksashenko recalled considering it “a serious sign that the hardest timeswerebehindus.”36Hewaswrong.Inordertokeepluringinvestorsandthuskeepthebudgetdeficitcovered,on

January1,1998,theRussiangovernmentliberalizedtheGKOmarket,makingitmuch easier for foreign investors to buyGKOs and allowing them to getprofitsout.Thecasinodoorswerenowfullyopen:newforeigninvestorstooktheplaceof theSouthKoreans andBrazilians.TheGKOpyramidgrew stilllarger.Bythespringof1998,foreignersheld28percentoftheGKOs.EachWednesday,theFinanceMinistrypaidofftheGKOsthatwerecoming

due,butitwastrickytokeepthepyramidfromfalling.Theweeklygamewentlike this: the government had to raise an average of 8 billion rubles to rolloverexistingdebtasitmatured.Eachweekithadtomaintaintheconfidenceofinvestors—aboutone-thirdof themforeigners—toreinvestenoughmoneytopay off the bills coming due.With the oligarchs atwarwith each other, thebudget hemorrhaging, and the Asian crisis bearing down on Moscow,investorshadplentytofear.Asinvestorslostconfidenceanddidnotputtheirmoney back into GKOs, the government fell further behind, which causedinvestors to loseevenmoreconfidence,whichcaused thegovernment to fallevenfurtherbehind.Adebtbombwasbuildingup.The crisis was aggravated by the decline in global oil prices. Oil was

Russia’stopexportcommodity;oilpricesfellabout25percentfrom1997to1998,andtaxrevenuesfelltoo.Thegovernmenthadtofuriouslyborrowstill

moretocovertheshortfalls.AturningpointcameonApril1,1998,whentheFinanceMinistryheld its regularweekly auctionof newGKOsbut suddenlyfounditselfshort:for thefirst time,moneycollectedfromthenewissuewasless than the government needed to pay off the maturing GKOs. Thegovernmenthad tocoughupanother$164million just topayoff theearlierinvestors.TheGKOmarket,whichwas supposed tobe financing the federalbudget,nowhadtobefinancedbythebudget.Theshortfallbetweenwhatwasraised at the weekly auctions and what was needed to redeem the maturingGKOswas3.7billionrublesinMay,12.8billioninJune,and10billioninthefirsttwoweeksofJuly.37Thedragonroared.Foreign investors liked the high-flying GKO market but demanded an

insurance policy. TheGKOswere denominated in rubles, so if the currencylost value during the three-month or six-month term of the bond, theinvestmentwouldbealoss.Theinvestorswantedprotectionagainst thisrisk,and Russia obliged because it needed them. The Central Bank approved afinancialinstrumentknownasadollar-forwardcontract,inwhichtheRussiancommercialbanks,forafee,wouldcoveranypotentialdeclineintheruble—theywouldprovideinsuranceagainstdevaluation.Thesedollar-forwardswereverylucrativeaslongastherubleremainedstable.ThebanksbecameacircusbarkerfortheRussianstate.“Comeonin!”theyshouted.“Bigreturns!Takeitout safely in dollars when you leave!” The dollar-forwards business wassnapped up by some of the tycoons, although it was risky. Later aMoscowcourtwas consideringadisputebetween twobanksover thedollar-forwardsand ruled that they were not really financial contracts at all—but rather anunenforceable bet, a gamble, on the ruble rate. Vladimir Vinogradov’sInkombank was the biggest gambler, holding $1.8 billion worth of dollar-forwards,oraboutathirdofthetotal,byJuly1998.Potanin’sUneximbankhad$1.4billion,andKhodorkovsky’sMenatephad$91million.TheTroikaDialogbrokeragehouseestimatedthetotalat$6.5billion,basedonbankreports,butthe summayhavebeenhigher.BrunswickWarburg, anotherbrokerage, saidthe total was $9 billion.38 The big gamble was that the ruble would remainstable in the next six months, and in fact the Central Bank had promised itwould.Chubaisalsobelievedintherock-hardstabilityoftheruble.The“corridor”

of1995—inwhich theCentralBankpledged tokeep therubleexchangeratewiththedollarwithinanarrow,definedlimitandsucceededindoingso—ledtohisproudestaccomplishment,thedeclineofinflation.Thiswasmorethanan

economicgoal.ForChubaisandagenerationofyoungRussianpoliticiansandbusinessmen, the stable rublewas an icon of their long quest for normalcy.Theywerecriticizedasharsh“monetarists”and“Chicagoboys”inthemoldoftheUniversity ofChicago’sMilton Friedman, but they had no regrets—theyhad slain the awful inflationof the early1990s.39The ruble corridor,whichoriginallywas an experiment, became a fact of life. InNovember 1997, theCentralBankwentfurtherandannounceditwouldkeeptherublestable,withina 15 percent “band,” until the year 2000.The average exchange rate for thecomingyearswastobe6.3rublestothedollar.Thispromisewasasignaltothetycoons:theCentralBankwouldnotdevaluetheruble.Even as the Central Bank pledged stability, the outside world was not

standingstill.ThedeclineinoilpricesbegantobefeltinRussia’sbalanceoftrade. Previously Russia had a strong trade surplus because, with massivereserves of oil and gas, it was exporting far more than it imported. Thecountry could afford imports formany things itwantedbut didnot have—itwasdelugedwith imported food,cosmetics,andelectronics.Theoil andgaswentout,andOreocookies,L’Orealshampoo,andSonyvideorecorderscamein.InMoscowandotherbigcities,halfthefoodsupplywasimported,muchofitexpensiveandfavoredbythenascentmiddleclass.AslongasRussiahadastrongtradesurplus, thearrangementwasfineandtherublestable.However,whenthevalueofoilexportsfell,thetradesurplusshrank.Todefendtherubleatthesamelevel,theCentralBankhadtouseupitsreserves,weekafterweek.Globalsentimentwaschangingaboutemergingmarkets,ofwhichRussiawasone.ForeigninvestorswerelesswillingtobringtheirmoneytoRussia,sotheCentralBankhadtoofferhigherinterestratestoattractit,whichalsodraineditsreserves.Iftherublewereallowedtodevalue,say,tosevenoreightrublesperdollar,thepressurewouldease.Russiacouldcopewiththeshiftingwindsoftheglobaleconomyifitwasflexible.ButfortheeconomicandpoliticaleliteinRussiainearly1998,theideaof

rubledevaluationranagainsteverythingtheyhadworkedfor.ChubaisandtheCentralBankchairman,SergeiDubinin,aswellashisdeputy,Aleksashenko,weredeathlyafraidthatdevaluationcouldleadtopanicandpoliticalupheaval.A devaluation would probably cost them all their jobs. For some of theoligarchswhohadoilandmineralstoexport,itwouldbesalutary,sincetheycould sell oil abroad for dollars, while their ruble costs at home, such aswages at the refinery,would drop. But a farmoreworrisome considerationwas that devaluation would wreck the banks with big portfolios ofWestern

loansanddollar-forwardcontracts.Theirfinancialobligationswereindollars,buttheirassetswereinrubles.Iftherubleassetsplungedinvalue,theywouldbehard-pressedtopaybackthedollardebts.Devaluationwas the second dragon, and the elite—especiallyChubais, the

CentralBank,andsomeofthetycoons—weredeadsetagainstit.ThatiswhattheytoldAndreiIllarionovinearly1998.Illarionovwasamaverickeconomist,aradicalfreemarketeerwhohadonce

beenanadviser toChernomyrdin.Directorofasmall thinktank, theInstituteof Economic Analysis, he worked out of a narrow, document-stuffed, two-roomofficeincentralMoscow.Illarionovhadareputationforbeingapricklycontrarian. He scolded Russian politicians, frequently lambasted the CentralBank, and was a thorn in the side of the reformers because of his constantharpingthatRussiahadreallynotaccomplishedliberalreform;therewastoomuchleftoversocialismforhistaste.Asearlyas1994,hedeclaredtherehadneverbeen“shocktherapy.”Itwasareminderthattheyoungreformersdidnotliketohear.They also did not like to hearwhat Illarionov had to say in the spring of

1998.Hestudiedthenumbers:importandexportstatistics,theCentralBank’sreserves,and themonetarybase.Hewasespeciallyalarmedbythedecline inthe Central Bank’s currency reserves, made up of gold as well as foreigncurrencysuchasdollars. Illarionovusedasimplecriterion to judgewhethertherublewouldbestable.HecomparedthesizeoftheCentralBank’sreservestotheoverallmonetarybase,abroadmeasureofthemoneysupply.Whenthereserves declined, it was a warning, a flag, that the ruble could becomeunstable. 40 Illarionov first mentioned possible ruble instability in hisinstitute’sNovember1997newsletter;byspring,hewasgrowingalarmed.Hedecided—in his own stubborn way—that devaluation was inevitable, and itwouldbeeasiertodoitsooner,gradually,ratherthanlater,abruptly.Itwaslikeletting thesteamoutofapressurecooker—better todo it slowly thanwitharushofexplosiveforce.Illarionovknewdevaluationwasasensitivesubject,givenRussia’shistory

ofcurrencypanic.Hegingerlybegantryingtopersuadegovernmentofficialsthattheyneededtoconsiderit.Hevisiteddeputyfinanceministers,bureaucrats,theKremlin.Hesometimesusedchartsbutusuallylikedtojustsketchhisideason a sheet of blank white paper. “And the reaction, the first reaction wasabsolutelystupid,completestupidity,”hesaid.Theofficialsalltoldhim:therewill be no devaluation. Why? “Because we decided that there will be no

devaluation.”“Itwassostrange,”Illarionovtoldmelater,“becauseallthesepeopleareso

young, advanced, so open to the new ideas, to theWest—to everything.Andthere was such ignorance and pride; they felt that they knew everything.”Illarionov was twenty minutes into his presentation when the officialsinterjected:buttheCentralBankpromisedtherewouldbenodevaluation.Afteranothertwentyminutes,theywouldnod.Perhapshewasright.“Andtheywouldbesittingthere,sayingokay,maybe,butwehaveonlyone

requestforyou,”Illarionovrecalled.Therequestwasalwaysthesame:“Pleasedon’t tell thejournalists!”TheRussianofficialsfearedapanic.“Don’tattractpublicattention,”theywarnedhim.41TheCentralBankwasparticularlyloathtolistentoIllarionov.Dubinin,the

chairman,hadpresidedovertheendofhyperinflation,andhejustfinishedthesuccessfulredenominationoftheruble,withoutpanic.Whycreateunnecessarytrouble? One Finance Ministry official told me that talk of devaluation leftDubininparalyzed. “Hewas extremely scaredof doing anythingof this sort.Hejustcouldn’tdoit.”ChubaisgenerallytrustedDubininandAleksashenko,andhemisjudgedthe

economy completely in the first months of 1998. Illarionov gave apresentationcallingfordevaluation toasmallclubof liberaleconomists ledbyGaidar.WhenIllarionovmadehiscase,PyotrAvenrecalled,“GaidarandChubaisjustlaughed.”42(Chubaissaidhedidnotattend.)Chubaiswas blinded by signs of growth in the economy.Growthmeant a

“qualitative”changeforthebetterwascoming.Therewouldcome“adifferentstandardof living,adifferent relationshipbetween richandpoor,adifferentdynamicofinvestment,adifferentfoundationforgrowth,adifferentsituationwithnonpaymentoftaxes.Generally—everythingisdifferent.”43Chubaisproudlysurveyedwhathadalreadybeenaccomplished:Russiawas

admitted to global financialmarkets; Russian companiesweremaking dealswith Goldman Sachs; inflation, the great threat of the last five years, wastamed.Chubaiscouldhardlyseeareasontothrowitallawayfordevaluation.Hesimplydidnotbelievedevaluationwasinevitable,andhefearedthedamagewouldbeenormous—especially to thebanks, to theoligarchs,andtoYeltsin.“Atthattime,whatdiditreallymeantoconductdevaluation?”Chubaistoldmelater. “A devaluation of even 20 percent or 25 percent meant a total, massbankruptcyofthecountry’sbankingsystem.”WhatChubaisreallyfearedwasthepoliticalfallout.“Wewouldhavegottenmassdiscontentofthepopulation,”

hesaid.“Theprotests,thelackofunderstanding,thelackofacceptanceofthatdecisionwouldhavebeenabsolutelyterrible.”Butthetwindragons—debtanddevaluation—couldnotbewishedaway.

On taking office May 12, Kiriyenko vowed to keep his distance from thetycoons. He said his government would show them no favor. “There areinterests of the state, and they will be ensured at all costs,” he announced.Fastidiously, perhaps a little too enthusiastically, Kiriyenko refused to meetwiththeoligarchs.Herefusedtoplaybytheirrules.ButKiriyenkowasintrouble.Onthedayhefinallynamedhiscabinet,coal

minerswent on a nationwide strike, blocking key Siberian rail routes. TheyalsocametoMoscowandnoisilybangedtheirhatsonthepavementoutsidetheWhiteHouse in protest. In another harbinger of difficulty, the parliament inMaypassedlegislationtolimitforeigninvestmentinUnifiedEnergySystems,thehugeRussianelectricitymonopoly,whichwasalreadyafavoriteofforeignportfolioinvestors.Chubaishadjustbeenappointedpresidentofthecompany.The bill sent the worst possible message to skeptical overseas markets—foreign investment in Russia was not secure. On May 27, Khodorkovsky’smegadeal,theproposedmergerofYukosandSibneft,fellapart.Onthesamedaycamestillmorebadnews.ThegovernmentannounceditcouldnotfindabidderforRosneft,oneofthelastbigverticallyintegratedoilcompaniestobeprivatized.Thisblewa$2.1billionholeinthebudget.Aftermonthsofpoliticalinstability,investorssawthatRussiawouldbethatmuchfurtherbehindintheweekly race to pay off the GKOs. According to Aleksashenko, foreigninvestorswerealreadyfleeingandhadyankedbetween$500millionand$700millionoutofthegovernmentbondmarketintwoweekspriortotheRosneftdisclosure.Thestockmarket,whichhadbeenslidingallyear,tookaplungeontheRosneftnews,andtheCentralBankwasforcedtoraiseinterestratestoanextraordinary 150 percent. The Central Bank, which had reserves of $23.1billionthepreviousOctober,wasdownto$14.6billion.Thebankspentabout$900million supporting the ruble onMay 26 andMay 27 alone.44 DubinininsistedtheCentralBankwouldnotdevaluetherubleandsaidthehighinterestrateswereintendedasa“coldshower”to“preventcurrencyspeculatorsfrommaking quick money by playing games with the Russian ruble.” ChubaisquicklymadeatriptoWashingtontomeetwithU.S.officials,includingDeputySecretary of State Strobe Talbott, Deputy Treasury Secretary LawrenceSummers, andStanleyFischer,deputymanagingdirectorof the International

Monetary Fund. President Clinton issued a written statement suggestingconditionalsupportforfurtherfinancialaidforRussia.TheChubaismessageto the administration in Washington was, Russia urgently needs help. ButClinton’s statement contained no specific promises and no numbers, and nopackage was forthcoming. Kiriyenko was losing time but didn’t seem torealizeit.OnJune2,YeltsinsummonedtheoligarchstotheKremlin.Themeetingwas

heldinthesamegreenroomwithahugewhitemarbletablewhereYeltsinhad,the previous fall, implored them to stop quarreling over Svyazinvest.Smolenskylookedthinandwaschewinggum;Gusinskywassmartlyoutfittedinadouble-breastedblazer.Chubaiscame,Berezovskydidnot.Atatimewhenforeigninvestorswerefleeing,Yeltsinwaggedhisfingerat thebusinessmen,insisting they not pull theirmoney out of theRussianmarkets. “If youwantforeign investors to invest, you should invest your own money as well,”Yeltsin said. In fact, most of those at the table were rooted in Russia. Theyprobablywished theycouldescape,but theycouldnot. “Allourmoney is inRussia,”Gusinsky protested.After themeeting,AlexanderLivshitz,Yeltsin’seconomicadviser,suggestedthatthemarketjitterscouldbecalmedifalargesumweresimplydepositedforRussiaattheIMFheadquartersinWashington.Yeltsinsatquietlyforalongtime,thensaid,“No,weneedtotakethemoney.Otherwisewe’llfailforsure.”45BackinMoscowafterhisvisittoWashington,Chubaisexpressedhopefora

calmGKO auction on June 4, the first after the market slump the previousweek.Butitwasnottobe.Thedebtdragonroaredagain—theFinanceMinistryraisedonly5.8billionrublesinnewsecurities,comparedtothe8.4billionthatcame due. The government had to dip into its accounts to pay off the rest.Kiriyenko was still sanguine. “I am absolutely certain the situation is undercontrol,”hesaid.Gaidar,whowasworkingcloselywithKiriyenko,said that“only illiterate half-wits” would want to see a controlled devaluation of theruble. In fact, Russia was facing a crisis of confidence in the markets andpretending it did not exist. Chubais, the most experienced of the Russianeconomic reformers,missed the turning point.Hewas out of touchwith thetrading-floorsentiment,whichwasgrowingbearishdaybyday.ThiswasnotjustanotherRussiangovernmentfinancial“crisis,”likethoseofrecentyears.Thiswasastorm.ThiswasMeltdown.Bernie Sucher was on that trading floor, and he felt like a prizefighter

gettingsluggedeveryfewminutes.Sucher, thenthirty-eight,wasaveteranof

WallStreetwhohadspentafewyearsinRussiaandtookalongbreakbeforethepeakof thespeculativebubble in1997.Hereturned toMoscowinMarch1998 just in time to see the crisis unfolding.Hewas a tall, powerfully builtman, who looked like a high school football lineman. When he came toMoscow, he couldn’t get a decent steak, so he opened his own steak house.LaterheopenedapairofpopularAmerican1950s-stylediners.Oneofthemwasastone’sthrowfromthestatueofLeninatopoftheOktyabrskayaMetrostation.Milkshakes, hamburgers, equities,GKOs—Sucher knew them all.Hewasmanaging director of TroikaDialog, a stock brokerage that at the timewasownedbyBankofMoscow,partofLuzhkov’sempire.Everydayin theearlysummerof1998,Sucherwatchedthestockmarkets

slide.Thequotationsonhiscomputerscreensneverreflectedtherealpriceofstocks; any genuine attempt to sell chased the prices down still further. Theeffectwaspunishing.“ItwaslikebeingonthewrongendofaRockyfight,”hesaid.“Itwaslikeoneofthoseidioticsequencesinthemoviewherethereisjustonce punch after another landing on your chin and on your belly, and nohuman being can handle that punishment. Nobody could possibly throw thatmanypunchesandnobodycouldpossiblytakethatmanypunches.”46“Every single day you had the stock market going down 3 percent, 5

percent,7percent,10percent!Everysingleday!Youcomeinthemorning,andyoutryandseeifthereisanypossibility,ifthingswillbebetterthantheywerelastnight.”Asanexample,hesaid,forahypotheticalstock,hewouldseethatthe previous day’s price was $10. Sucher would offer $9.75 just to test thewaters.Noaction.Also,hesaid,aclientinNewYorkwhoboughtthestockat$15mightwanttosellitat$10,butnotat$9.75.Forcedtoholddeterioratingpositions,clientsandbrokersgrew increasingly frantic.“And thesame thinghappens thenext night.Andbefore youknow it, the price has gonedown to$9.50or$9.40.”Asickeningpatternwastakingshape.Thedownwardspiralwasfueledbywhatthetraderscouldeasilyunderstand

—theRussiangovernmentwaslivingbeyonditsmeans,andtherubleneededto be devalued. But the officials in government would have none of it. Adangerousgulfopenedupbetweentheperceptionofthemarketsandtheviewof the government. The markets heard the roar of the dragons, but thegovernmentdidnot.47In June, Kiriyenko summoned private foreign investors to Moscow,

includingrepresentativesofthemajorinvestmenthousesonWallStreetandinLondon.Kiriyenkoandotherofficialsallbutbegged thebankersnot to flee,

not to give up hope that Russia could straighten out the mess. But thejawboning betrayed a nervousness that had the opposite effect. “Foreigninvestors listened to theofficialsveryattentively,” recalled Illarionov. “Theywereamazedattheamountofattentiondevotedtothemduringthetwoweeksand drew what was a natural conclusion: the situation is serious and theyshould leave as soon as possible.”48 Augusto Lopez-Claros, a former IMFresidentrepresentativeinMoscowandlateraneconomistforLehmanBrothersin London, recalled that investors asked Kiriyenko whether the governmentneeded a bailout package from the IMF. “No, we really don’t need it,”Kiriyenko said, promising that his government would get the budget deficitundercontrol.“Thefiscalmeasuresaregoingtobearfruitandthemarketwillrebound.”“They were slow in coming to the realization that Russia was the next

domino,”Lopez-Clarostoldme.“Theywerelate.”49Kiriyenkofacedadifficultchoice.Heverymuchwantedtoavoidwrecking

thebankingsystem.Healsowantedtokeephisdistancefromtheoligarchs.Butatthesametime,itbecameincreasinglyobviousthatthetycoonsandthebankswereone.Therewasnoseparatingthem.Devaluationwouldwreckthebanks,including the ones at the core of the oligarchs’ empires. Gaidar recalled,“There was no easy way out.” Yeltsin recalled that Kiriyenko “knew that ahorriblefinancialcrisiswasbearingdownonthecountry.”50Still,theKremlinwassanguine.Yeltsinwasgettingoptimisticreports from

thegovernmentandtheCentralBankthattheworstscenarioscouldbeavoided.Hewas told that Julywas the“peak”of their troublesand that in theautumnthere would be more money, perhaps new sell-offs of both Gazprom, thenaturalgasmonopoly,andSvyazinvestcouldbearrangedtoraisemorecash.51Itwasnonsense.Thetycoonswerehurtingmoreeverydayasthepriceoftheirrubleassets

dropped. The squeeze was excruciating for them all. Gusinsky suffered hisowndisappointment.Afteralongwait,hewaspreparedtofloatsharesofNTVintheUnitedStates.Butatthelastminute,hisfinancialadviserssaidthemarketwas too uncertain. They urged him to wait until the fall—when conditionswouldsurelybebetter.Gusinskyagreed towait,but itwasafatefuldecision.Henevermadeittothestockmarket.52Finally the oligarchs could remain on the sidelines no longer. After six

monthsofdrifting,theywokeup.OnJune16,the“boardofdirectors”metatBerezovsky’sLogovazClub.TheyinvitedChubais,whorecentlyhadtakenon

amajornewjobaschiefofUnifiedEnergySystems,theelectricitymonopoly.Sensingdanger,theyimploredChubaistotakeontheaddeddutiesofRussia’sspecialenvoytotheIMFandWorldBank.TheywantedhimtogoWashingtonand come home with a multibillion dollar bailout. They realized that aninternationalrescuepackagewastheonlyhope.TherewasnoothersourceofmoneytosaveRussia:notthemarkets,nottheCentralBank.Chubais had repeatedly denounced the cozy clubhouse of oligarchs and

vowed to break their hold on power. Now the oligarchs, gathered underBerezovsky’s roof, aswell as adozenof their top lieutenants,werebegginghimtosavethecountryandsavetheirnecks.Atthemeeting,Chubaisrecalled,he insisted that someone else should take on the new responsibility, perhapsGaidar or Boris Fyodorov, who was serving as tax minister, or AlexanderShokhin, a member of parliament who was close to the reformers. But thetycoonsinsistedonChubais.Theydecidedtotakeasecretballot.Chubaisgottwentyvotes,theothersgotoneortwoeach.Chubaisrelented.“Iacceptedtherule that there would be a vote,” he told me, “which means I accepted theresult.” It was his birthday, and the businessmen presented him with anexpensivewatchwhileMikhailFriedmanplayed“HappyBirthday”onapianoandtheyalljoinedinsingingtohim,inEnglish.53Even Berezovsky was willing to extend his hand to Chubais, reluctantly.

Berezovsky recalled later, “At the time, I believed Chubais was the bestnegotiator. No one could solve this problem better than Chubais, so Ithought.”54 Badri Patarkatsishvili, Berezovsky’s deputy, turned to him inamazement. “Listen, like idiotswe spent two years destroying thisman, andnowweaskhimtorescueus?”55ThetycoonsthenwenttotheKremlinandgotYumashevtosignoffonthe

deal.YumashevgotYeltsintosignthedecree,andtheoligarchsheadedouttosee Kiriyenko at an old government rest home in Volynskoye, in westernMoscow.“Kiriyenkowasforcedtobackofffromhisvownevertodealwiththeoligarchsordependontheminanyway,”Yeltsinrecalled.“Kiriyenkotoldthembluntlythatheneededhelp.”Herealizedhehadnochoice.Chubaisannouncedthathewouldseeka$10billionto$15billionloanfrom

the IMF.Chubais thought that just a showof force—abigcredit toboost theCentralBankreserves—wouldbesufficient tocalm themarkets.Hewasstillnot prepared to think about devaluation. Grigory Glazkov, the friend ofChubaiswhohadarguedwithhimatthecollectivefarmin1979,hadbecomeadeputyfinanceministeratthetime.HerecalledtalkingtoChubaisjustafterhe

wasappointedspecialenvoy.“Youhavetodevalue,”GlazkovtoldChubais.“No!”Chubaisresponded.“Canyouimaginetheconsequencesofwhatwill

happen?”Glazkovreplied,“Youhavenochoice.Youwilldevalueanyway,butitwill

bemuchworse than if you do it now.”Chubais stuck by his position—therewouldbenodevaluation.56Hestubbornlytoldjournalists,“Therumorsaboutadevaluationoftherubleareabsolutelythereverseofthetruth.”57AsChubaisspoke,thingswerebeginningtounravel.OnJune17,theCentral

BankreturnedtothepracticeofthepreviousyearandbegantogiverublestotheFinanceMinistrytopayfortheGKOscomingdue;onthatday,the“credit”wasmorethan$1billionworthofrubles.58TheCentralBankwasunderfiercepressuretopropuptherubleandtopreventtheGKOpyramidfromcrashing.ButthereserveshadshrunkevenlowerthanthepreviousNovember,whenthebankgaveuptryingtodoboth.Inthesecriticalweeks,Russia’saddictiontoborrowingdeepenedfurther.On

June 18, Goldman Sachs celebrated the opening of a new Moscow office,flying in former President George H. W. Bush and paying him more than$100,000. “I am optimistic,” Bush, having just come from a meeting withYeltsin, told the city’s financial elite at a reception in the elegant baroqueHouseofUnionsincentralMoscow.“IbelieveRussiaisgoingtothrive.”Theboys at Goldman Sachs were feeding Russia’s debt addiction. Goldman hadpulledoutofRussiain1994butcamerushingbackthreeyearslater,arrangingits loan to Yukos in 1997 and arranging Eurobonds for the cash-strappedRussiangovernmentinthesummerof1998.The Eurobonds were essentially loans from overseas investors to Russia.

ThefirstthatGoldmanSachsarrangedwasa$1.25billionEurobondonJune3. Two weeks later, in a surprise move, Russia went back to global capitalmarkets and borrowed $2.5 billion, with Deutsche Bank as the underwriter.Althoughitwasnotknownatthetime,theFinanceMinistryhadsecretlytakenout $500 million “bridge loans” from Goldman Sachs and Deutsche Bank.When the proceeds of the Eurobonds came through, some of the cash wasturnedrightaroundtopaybackthebanks.In July,GoldmanSachs came throughwith the biggest deal of the year, a

$6.4 billion Eurobond. This transactionwas a swap inwhich Russia said toinvestors,Giveusbackyour short-term,high-yieldingGKOs, andwe’ll payyoubacklateron,indollars.Theholdersoftheshort-term,ruble-denominated

GKOs would be offered seven-year and ten-year dollar-denominated bondswith lower interest rates.TheGKOswerepayingabout50percentwhile theEurobondspaid8.75percentand11percent.Thedealpromisedtotemporarilyrelieve pressure on the FinanceMinistry’sweeklyGKO squeeze; about $4.4billion inGKOswere retired.But inotherways, itwasa fatefulmistake forRussia.Ifdevaluationwascoming—andthedragonwasroaringeverlouder—thenthoseEurobondswouldbemuchmoreexpensiveforRussiatopaybackinthefutureindollarsthantopaybackthesameamountofGKOsindevaluedrubles.Russiawasmortgaging itselfdown the line for apossible short-termfix. Goldman Sachs was walking away with a handsome commission as areward—about$56millionfortheJuneandJulybondissues.GoldmanSachsdidnotwanttotakeanyrisksinRussiaandjustskimmedtheprofits.59Yeltsin’sadvisers later concluded that the deal “failed to rescue” the government, andseveraleconomistsalsoconcludedthattheswapfailedtoachieveitsadvertisedgoals.60AtthesametimeGoldmanSachswassponsoringitsglitteringcoming-out

party, the firm stonewalled the Russian Securities Commission, which waslookingintochargesthatYukoshadhurtminorityinvestors.GoldmanSachs,which surely would not have been so cavalier with the U.S. Securities andExchange Commission, essentially told the Russian regulator, “Forget it.”When Dmitry Vasiliev, the Securities Commission chairman, wrote toGoldmanandtheotherloanarrangersaskingforinformationabouttheYukosloan,hegotbackacurt reply.Although theywould like tohelp, thebankerssaid, “we are unable to provide youwith any of the information requested.”Goldman,whichFortunemagazinedescribedthatmonthas“themostpowerfulinvestment bank in the world,” was more than willing to enjoy the juicycommissionsfromRussia’sEurobonds,butwhenitcametoansweringabasicquestionfromtheRussianSecuritiesCommission,theresponsewassilence.61ChubaisfinallysucceededinwinningapprovalforanIMFrescuepackagein

mid-July.The totalwas$22.6billion in loans fromavarietyof internationalsources, but the critical first installmentwouldbe$5.6billion.The ideawasthat the money would bolster the Central Bank’s currency reserves andpersuade themarkets thatRussiacouldweather the storm.At the lastminute,the IMF cut $800 million off the planned first installment of its packagebecause the Kiriyenko government had been unable to get promised taxlegislation enacted.Kiriyenko struggledvaliantly to cut spending andpush alegislativepackagethroughtheDuma,butthebillswereonlypartiallyadopted.

Nonetheless, Chubais was relieved when the IMF board approval was madefinal on July 21. He told one of his aides, Leonid Gozman, after thenegotiationswiththeIMF,“Nowwearesafe.”Headded,“Ifithadn’tbeenforthis,wewereseveraldaysawayfromcatastrophe.”Gozmanrecalled,“Hewasreallyhappy.”62ButChubaishadmiscalculatedagain.The rescue package had the desired effect for aweek or so. Themarkets

calmeddown.Chubaisconcludedthatthebailoutwasworking.“So,whatisacrisis? A crisis is a matter of trust,” Chubais told me later. “The financialmarkets’ trust of thegovernment’s policy.Wehadn’t been able to create thattrust,but theIMFenabledus tocreate it.After thatdecision, the interestrateswent down, the market went up a little bit.” Chubais went on a vacation toIreland.But then the twindragonsbegan to roaragain. Illarionov,whohadat first

predicted devaluation quietly in his conversations with bureaucrats andpoliticians, spoke out more loudly in newspaper articles, especially inNezavisimayaGazeta,Berezovsky’spaper.IllarionovgaveapressconferenceJuly 29, saying devaluation was “inevitable.” Illarionov said it would bedangeroustowait,justashehadarguedinthespringthatitwasbettertoletoffthepressureattheoutsetthanallatonce.“Itisbettertoaccepttheinevitable,”hesaid,“anditwillbelesspainfulthanthesubsequentdevaluation.”As the government continued to insist there would be no devaluation,

Russianandglobalfinancialmarketsconcludeditwascoming.Lopez-Claros,the Lehman Brothers economist, recalled meeting with Finance Ministryofficials in early August. The government showed private bankers itsassumptions,includingthewildlyoptimistichopethatinvestors—Russianandforeign—would not exit theGKOmarket. The same assumptionswere builtintotheIMFdeal,andtheyweredreadfullywrong.“Wewereaghast,”Lopez-Clarossaid.“Theydidn’trealizetheforeigninvestorsweregettingout.”Thedepartures turned into a stampede. “By the time the IMF package had comedown,”BorisJordantoldme,“mostofinvestorsentimentwas—great,wearegoingtogetliquidityandwe’lltryandgetwhatwecanout.”Inotherwords,investorswerenotreassuredaboutanythingexcepttheprospectthattheymightbeabletocashintheirstocksandbondsfordollarsandthenrunfortheexits.Theissueof“liquidity”—theabilitytoswitchtherubleassetstodollars—waskey.Thebankingsystemwasincreasinglyilliquid.Noteveryonecouldmakeitto the exits. Why some investors got liquidity and others did not was acombinationoffactors—connections,luck,rumors,bribery,andsheertiming.

TheCentralBankspent$3.5billionbetweenJuly20andAugust19tryingtosupport the ruble. The ratings agencies, Moody’s Investors Service andStandard&Poors, loweredthecreditratingsofRussiaandits leadingbanks.Smolensky’s SBS-Agro tried to unload truckloads of government securities,desperate to raise cash. The Russian banking system sank into a full-blownliquidity crisis, and banks stopped making loans to one another. OneworrisomesigntothemarketswasthatSberbank,thestate-ownedsavingsbankthat held a total of $17 billion in government debt, refused to roll over, orreinvest, itsmaturingGKOsoneweekwhen they camedue in late July.Thecash-strapped governmentwas forced to dig deeper to pay off thematuringbonds.Sberbankwas controlledby theCentralBank.Whydid they suddenlystop playing the game?Were they fleeing their ownmarket? If so, that wasverybadnewsindeed.63“Russiagetsthe$4.8billionfromtheIMF,anditgetsblownout thewindowbecause nobody rolls over theirGKOs,” Jordan said.“Everybodyisexitingthemarket,includingtheRussians!”Chubaisadmittedthathelosttouchwithmarketsentiment.“Weweresurewe

couldbreakoutofthesituationwiththispackage”fromtheIMF,hesaid.“Iwasmistaken.Itdidn’tbreak thesituation.”Gaidarsaid theyfailed torealizehowprofoundly the markets had lost confidence in the government. “A lot ofpeople, including myself, thought that the July package would change theattitudes of the market,” he recalled. They were wrong, but Gaidar was sopreoccupied by the day-to-day financial firestorm that he didn’t evencontemplatethepossibilitythattheywerefightingalosingbattle.Yeltsin was also restless and feeling helpless. According to his aides’

memoir, “When the Central Bank said everything was under control, worsethingshadhappened,we’llmake it,hewasnervousand tormentedbydoubtsbutstillbelievedit.”Yeltsindidnotunderstandeconomics,buthewashauntedby fears he had erredwith the one currency that he profoundly understood,politicalpower.Hewondered—towhomhadhenotgivenenoughauthority?Whomhadhefailedtosupport?64ThedoomedKiriyenkocoulddolittletosalvethewrathofthemarkets.He

hadtriedtodrawupresponsible,long-termplans,buttheywereuselessinthefaceofabrutal,immediatecrisis,andnoamountofpromisescouldsoothethepanic. “Themarketsproclaimed their ownverdict,”he lamented later. “Theycanreadourbalancesheetaswellaswecan.”KiriyenkowasclobberedonthemorningofAugust13byaletter thatwas

published in theFinancial Times from Soros.Known to all as themanwho

broketheBankofEnglandforhisbetagainsttheBritishpoundin1992,Soroswrote, “Themeltdown inRussian financialmarkets has reached the terminalphase.”Soroscalledforanimmediateinjectionof$15billionbytheWesternindustrial democracies, a devaluation of the ruble by 15 to 25 percent, andcreation of a currency board, a complex mechanism in which a troubledcurrency isbackedupbyamore solidone suchas thedollar.Soros saidheintendedhislettertobea“wake-upcall”toWesterngovernmentsandwasnottrying to profit from the situation. Ironically, Soros hadwritten the letter inpartbecausetheRussiangovernmenthadquietlycometohimseekinganother“bridge loan” prior to the planned sale of the next packet of shares inSvyazinvest.65 His letter hit like a thunderclap. The Russian stock exchangetook a nosedive and trading was stopped; soon the first signs of disquietappeared on the streets. Modest lines began to form at currency exchangepoints—theRussianEverymanwasonce again fleeinghisowncurrencyandtryingtobuydollars.OnthemorningofFriday,August14,YeltsinflewtoNovgorodtobegina

vacation.As soonashishelicopter landedat10:00A.M., journalists shoutedquestions to him.Would there be a devaluation? Yeltsin: “There will be nodevaluation,Istatethisloudlyandclearly.”Yeltsin added, “It’s not that I am making it up, or it’s a fantasy.” No, he

reassured the journalists, “We’ll keepcontrol.”Yeltsin saidhewouldnot cuthisvacationshortandreturntoMoscow.“IfIamback, they’llbesayingthismeansthingsareinarealmess,thatadisasterhasstarted,andthatthingsarereally going to pieces.... No, on the contrary, everything’s going the way itoughtto.”66But by this time the dragonswere roaring louder thanYeltsin.During the

week, several banks, including Smolensky’s SBS-Agro, had failed to meetmargin calls. Tokobank, once considered a model Russian bank, which hadbeen in trouble since May, defaulted on a $60 million loan onWednesday.Then on Friday, Imperial Bank defaulted on a $50 million syndicated loan.Menatepwas next—onMonday,Khodorkovsky’s bank had a payment on an$80 million loan coming due that it could not possibly make. Jordan toldKommersantDaily inan interviewpublishedAugust12,“Todayallourgreatoligarchsarebankrupt.Why,forexample,isMenatepfightingforTokobank,which is in theholefor$250million?Whydo theyneed thisbank?BecauseforthereconstructionofTokobank,theCentralBankisgiving$100million,andMenatephopestosolvetheirproblem,makepaymentsontheircreditthis

way.”MenatepexecutiveswerefuriousatJordan.On August 14, the same day that Yeltsin insisted there would be no

devaluation, the Russian government and Central Bank faced the reality thatdevaluation was inevitable. Aleksashenko recalled that at a meeting atKiriyenko’s office in the Russian White House, “the final diagnosis” wasacknowledged.“LonglinesofpeopleappearedatcurrencyexchangesinallthebigcitiesofRussia,”hesaid.“TheCentralBanktookitasasignthatpeoplehad lost faith in the ruble.” The bank might be able to fight off marketpsychology,butnotmasspsychology,hesaid.Moreover,itbecameclearthatthedebtdragonwasalsoonthevergeofattack:therewerenomoresourcesofmoneytopayofftheGKOscomingduethefollowingweek.TheCentralBankreserves were low. Foreign countries and investors refused to help. No onewouldlendmoneytoRussiaunderanycircumstances.67Chubaiswastryingtoenjoyhissummervacation,drivingaroundIrelandon

thatFriday,whenhismobiletelephonekeptringing.Heabandonedthevacationand flew back toMoscow, arriving at 5:00A.M. on Saturdaymorning. Thegovernment’s brain trust assembled at Kiriyenko’s government dacha,including Chubais, Gaidar, Dubinin, Aleksashenko, the finance minister,Mikhail Zadornov, and others. They acknowledged that devaluation was“inevitable,”Aleksashenkosaid,buttherealdebatewasovertheGKOs.Shouldthegovernmentwalkawayfromitsobligations?Theydecidedto“restructure”the GKOs, issuing new bonds at a later date. (That plan was neverimplemented;thegovernmenteffectivelydefaultedandstoppedpayingGKOsaltogether.)Weretherealternatives?Yes.TheycouldforcetheCentralBanktouseitsreservestopayofftheGKOdebts,butnooneknewhowlongthebankcould hold out. They could print money to pay off the debts and riskhyperinflation. No one wanted to even contemplate that, haunted by theinflationdisasteroftheearly1990s.The Saturday meeting did not settle the most sensitive issue—what to do

about the banks. The fear of a banking crisis was real. On Sunday, underpressure from some of the oligarchs, in circumstances that have never beenfully clear, Kiriyenko agreed to protect the banks. He consented to a“moratorium” underwhichRussian banks and companieswould not have topay back any foreign debts for three months. It was an invitation for thetycoonstorunawayfromtheirobligationsforever,morethan$16billioninloans, according to an estimatemade soon thereafter byChubais.68 ItmeantthattheRussianstatewasparticipatingintherapeofforeigninvestors.

Itwasanextraordinarymeasure—agiftforthetycoons.AvenrecalledthatBerezovskycalledhiminItaly,whereAvenwasvacationing,urginghimtoflybacktoMoscowimmediately.BerezovskytoldmeheurgedAventoreturntoMoscow to help Chubais with the impending difficulties of devaluation.Berezovsky said he felt Chubais and his aides “didn’t understand what theywere doing.” Khodorkovsky also sought the moratorium, Aven recalled.MenatepfacedtheMondaydeadlineforaloanpaymentitcouldnotmake.69Avenhadexpecteda rubledevaluation, andhisbankcarefullyavoided the

dollar-forwardcontracts,buthewas stunned thatChubais andKiriyenkohaddecidedonbothdevaluationanddefaultat thesame time.“Itwasanabsolutesurprise,” he said. “We had $100 million of GKOs, so we figured with adevaluationwemight lose20percentof theirvalue.Wehadno ideaaboutadefault—absolutelynoidea.”Malashenko,whowas the political eyes and ears forGusinsky, had heard

rumorsbutrecalledthathealsodidnotthinkthatthegovernmentwouldcarryoutdefaultanddevaluationatthesametime.“Ididn’ttakeitseriously,”hetoldme,“because itwas incredible.What thehell—youaregoing tohavedefaultanddevaluationsimultaneously?Everyexpertwasjustlaughingatthisbecauseitneverhappens.SoI thought thatmaybe itwasnotactuallygoing tobe thatbad.Icantellyouonlyonething:thereareprobablysomeinsiderswhosimplyknewwhatwasgoingtohappen,butnobodyelseunderstood.Andthat’swhysomany Russian companies and oligarchs found themselves in such deep shitafterAugust17.”OnSunday,August16,KiriyenkoandChubaisflewbyhelicoptertoYeltsin,

whowasatRus,ahuntinglodgeaboutsixtymilesnorthwestofMoscow.Theyoutlinedtheirplanandofferedtheirresignations,butYeltsinrefusedtoacceptthem.Twodaysafterhepromisedthecountrytherewouldbenodevaluation,Yeltsin agreed to the twinmeasures of default and devaluation,without evenwaiting for Kiriyenko to explain the details. “Go ahead,” Yeltsin cut offKiriyenko,“Taketheemergencymeasuresnecessary.”70WhenKiriyenkoandChubaisreturnedtoMoscow,theywentdirectlytothe

White House. It was late, nearly midnight, and the parking lot outside theimposingwhite stone towerwas filledwith the blackmonster jeeps that thetycoons used as security chase vehicles. The oligarchs’ own limos had beenallowed inside the perimeter gates, but their thick-necked, black-jacketedbodyguardswaitedoutside.Therestofthecountryslept—astheoligarchsandthegovernmentgaveeachotheronelast,heartyembrace.

Across Russia, the millions of people who would feel the impact ofdevaluationanddefaultgotnowarning,whileahandfulofbusinessmen,whohad once gathered at the villa on SparrowHills,were invited towitness thefinalactandevenshapeittosavetheirownskins.Theirverypresenceatsucha delicate moment—the onset of Russia’s biggest economic crisis since theSoviet collapse—was testimony to the bonds betweenwealth and power. Fortheoligarchs,itmarkedthepeakoftheirauthority,thezenithoftheircollectivemight, but in many ways it was a crisis of their own making. Their noisyquarreling over Svyazinvest, their kingmaker games in the Kremlin, theiraddictiontoeasymoneyandforeignloans—allthisbroughtthemandRussiatotheprecipice.Inthebroadcarpetedhallwaysonthefourthandfifthfloorsofthe White House, the oligarchs lingered into the early morning hours andwonderedwhatwasinstore.Theworldtheyhadbuiltwasabouttochangewithaferocitytheyhadnotforeseen.Couldtheirsystemsurvive?Couldthey?Atmidnight,awearyChubaisretiredtoanofficeonthefourthfloor.Gaidar

waswithhim.Dubinin, theCentralBankchairman,drifted inandout.Coffeeandteawereserved;ChubaisstillworeatiefromthemeetingwithYeltsinandopenedhislaptopcomputer.InafilenamedMeeting,Chubaishadmadenotesthedaybefore,reconstructingwhathappenedthepreviousweek.Hewrote:

DeteriorationofsituationduringthewholeweekandanabruptslideonFriday:1.Ratesatexchangepoints—withtheofficialrateof6.18,itis7atexchange

points,andonMondayitcanbe7.2or7.3—thatis,theupperboundaryofthecorridorsetforthreeyearswillbebreached!2. Beginning with Thursday—margin calls have not been paid, that is,

mandatory bank payments on borrowed credits. Therewere two of them byFriday;therewillbeanotherfourbeginningMonday.3. A slowdown of payments in the banking system begins to turn into a

completehalt.Receiptsofrevenuefromtaxationtothebudgetdropssharply.Ifmargin call payments are not postponed beginning Monday, the halt mayhappenalreadybythemiddleoftheweek.4.DecliningCentralBank reserves—in the course of theweek about $1.5

billionwasspent,whichisalmosttwicemorethanthepreviousweek.And$1billion was spent on Friday alone. It is obvious that without taking toughdecisionstheunfoldingpanicatthecurrencymarketcanfullydraintheCentralBankofreservesinlessthanaweek.

Chubais knew they could not go on like this, but he dreaded what was

coming.Helookeddefeated,feltatrockbottom.ThedefaultmeantthatRussiacheated foreign investors out of billions of dollars they had brought toRussia’sboisterousnewmarketsfordebtandequity.True,theyhadcomeoutofgreed,seekingobsceneprofits,collectinghandsomefees,andoverlookingthe serious risks.But they also had come becauseChubaismade it possible;indeed,hebeckonedthemtoapromisedland.Inhisownmind,Chubaisoftenreplayed this landscape, where he had seen only great promise. The GKOs,Eurobonds, stocks, and dollar-forwards were all signs of how far they hadtraveledinsofewyears.TheywerecrazyaboutmarketsandthemarketswerecrazyaboutRussia.Then the romance fellapart.“Financialmarketsareveryneurotic creatures,” Chubais mused later. “Like a young lady, they respondsharply to doubtful news—they faint.” Chubais also insisted that thegovernmenthadnochoice,attheend,buttolietoinvestorsaboutimpendingdevaluation.71Late Sunday night, a new difficulty arose. Earlier in the day, Chubais

believedhehadreceivedagreen light fromtheIMFforRussia’sdefaultanddevaluation plans, and he told this to Yeltsin while they were at the huntinglodge.On his return to theWhiteHouse, however, the IMF began to object.ChubaistelephonedMichelCamdessus,managingdirectorofthefund,Fischer,Summers, and the undersecretary of the Treasury for international affairs,DavidA.Lipton.TheIMFofficialssaid,Don’tdoit.TheysuggestedaskingtheDumafornewtaxincreasesandappealingtoparliamentforaspecialsession.Chubais said itwas impossible.Tensehoursofphonenegotiations followed.TheIMFthreateneda“divorce”fromRussiaiftheplanwentahead.Finally,thesteely Chubais just exploded. “Do you realize whatmight happen here?” heshoutedoverthephone.“WewillhaveIndonesiahere.It’snotjusttheminersbanging their hats outside theWhite House. Therewill be a collapse of thebanking system of Russia. A real collapse!” Chubaiswas emotional, severe,uncompromising. Chubais said the plan could not be stopped and would beannouncedthenextmorning,August17.Thelongnightofphonecallsended.Before hanging up, one of the Westerners said simply to Chubais, “Goodluck.”72During the long night, Chubais called in the oligarchs—Berezovsky,

Khodorkovsky,Aven,Friedman,andPotanin.Heexplainedtheplan.Therublewould be allowed to sink to 9.5 to the dollar. More painfully, their GKOswould become worthless paper. The tycoons just sat there, in dreadfulsilence.73 The consequences were clear: they were about to be hit hard,

especiallythebanks.“Theyareallbankrupt,”Jordanrecalledofthescene.“Alltheywantedtodowasprotectthemselvesforaslongastheycould.”Berezovsky had supported the idea of a gradual devaluation earlier in the

year; his newspaper, Nezavisimaya Gazeta, provided a platform forIllarionov’s warnings. But at this late hour, Berezovsky was alarmed thatChubais was acting against the advice of the IMF. Vinogradov, the mostvulnerable, recalled he was furious about the devaluation, since his dollar-forwardcontracts,nowupto$2.5billion,wouldcrushhim.Hehadgambledonastablerubleandlost.“Whydoyouhavetoconductdevaluationnowandsodrastically?”hepleaded.“Thiswillleadtowindowsofbanksbeingbroken,stores being robbed!”74 But some of the others were spared from utterdestruction. Those who had natural resources—Khodorkovsky andBerezovskyhadoil,whilePotaninhadmetalsandoil—wouldstillenjoyamplecash flow from hard-currency exports. However, the banks would go up insmoke;bothKhodorkovskyandPotaninhadlargebanks.The three-monthmoratoriumwasa lifeline thrown to the tycoonsby their

creator, Chubais. It gave them enough time to protect at least some of theirassets.Chubaisrecalledtheoligarchspointingtothewreckedbankingsystemand imploringhim to“makeat least somereciprocalstep,helpusat least insome way to escape the obligations that we have.” Chubais agreed. Thatreciprocal step was the moratorium. It was supposed to be ninety daysprotectionfromtheircreditors,but infact thetycoonsgotmore.Someloanswereneverrepaid,justforgotten;otherspaidjustpenniesonthedollar.“Itisagifttothepeoplewhosearmsandlegsyouhavejustcutoff,”Chubais

recalled.“Thenyougivethemcrutches.”Thedefault,devaluation,andmoratoriumwereannounced thenextmorning,August 17.The crutcheswere justwhatKhodorkovsky needed towalk awayfrom loans he had taken on earlier, and that is what he did. According to aformerMenatep official, the bank’s leadership anxiouslywatched onFriday,August14,toseeifImperialBankwouldfailtomakeitspayments.Adefaultby Imperial could trigger a crisis and relieve them of a loan payment dueMonday.Khodorkovsky still hadYukos, and he still had the ocean of oil inwesternSiberia.Butfortheloans,hisanswerwas,Toobad—forcemajeure—andgood-bye.75“Menatep treated the West as they had always treated the Russian

government,asafreesourceoffunds,”theMenatepbankertoldme.“Wecangetallthemoneywewantbysayingtherightthings.Theypresoldtheoilandpledgedtheoil,andborrowedfromallsortsofprograms,andplayedofftheheatedcompetitionfromtheforeignbanksthatwantedtoestablishaclientbasehere.Theysimplyoverleveragedthemselves.Theywerethirty-four-year-oldswho suddenly had hundreds of millions of dollars thrown at them and theyoverborrowed.”Theglittering,go-godaysoftheMoscowboomwereover,forawhile.In

thefirstfewweeks,theCentralBanktriedtoholdtherubleatabout9.5tothedollarbutonSeptember2 let thecurrencyfloatfreely.Iteventuallysettledatmorethantwentytothedollar.Aneeriemoodsettledoverthecityinthosefirstdays,asenseofopportunitylost.Theautumnbillboardadvertisingcampaignswere all launched in late August, as if nothing had happened. The ItaliandesignerErmigildoZengaopeneda fancyboutique as if theremight still becustomers. In Kommersant Daily, ads beckoned for Gucci, DeBeers, LuisVitton,asifthepartywouldstillgoon.Theneonlightsinthecitykeptflashinginthemonthaftertherubledevaluation,butonthestreetswasanemptiness,astillness,likeacommercialneutronbombhadgoneoff.Itleftallthesymbolsofprosperitybutdestroyedthepeople,andtheirmoney.Summer vacationswere stillwinding down, but in early September,when

peopledraggedthemselvesbackintothecityfromtheirdachas,panicbegantosetin.Thebankingsystemwaslockeduptightandpayrollswerestalled.Theautomatic teller machines turned cold and silent; the most common sign instore doorwayswas “closed for technical reasons,”whichmeant, nomoneytoday. The city felt aimless, in free fall, especially as the supply of importsbegan to dwindle and prices rose suddenly.76 Shoppers panicked overshampoo,raidingstoreshelvesasiftheywouldneverseeL’Orealagain.ThememoriesoftheoldbrownsoapofSoviettimes—onechunkforafamilyoffour—suddenly floodedback.Crazybuy-anythingmoodsgrippedpeople forweeks.Intheoutdoormarkets,simplethingslikesalt,sugar,flour,andmatchesdisappeared. Every hour, currency exchange points posted new ruble-dollarexchange rates. The gyrations took on an otherworldly dimension inSeptember.When some of the dollar-forward contracts came due, the rublesuddenlyand stronglyappreciated invalueand then just asmysteriously fellback again. Living standards took a tumble, falling by 40 percent. Theeconomicshockwavehurteveryone,butitwasespeciallycrueltothemiddleclass,whichhadjustbarelyputdownrootsinthenewmarketeconomy.They

were peoplewho had given up their state jobs towork for themselves,whotraveled to Paris and bought jeans and cosmetics and dined out late atMoscow’sfancyrestaurants.Theywerepartofahardworkingentrepreneurialclass that tasted the fruits of the first prosperity, mostly in Moscow, andcontributed to it. “It’s reallybeenveryshaky,” sighedNatalyaToumashkova,anadvertisingandpersonnelconsultantwhosawherbusinesscollapsealmostovernight after the devaluation. “I remember in the first coup, in 1991, wewerereallyscared.Wefeltitcouldgoback.Butthesecondtime,in1993,wealreadyfelt thingswereirreversible.Nowweareinshock—thatthingscouldchangebackso fast!”Wewere talking in thealmostemptycavernousdininghallofLeGastronome,arestaurantofmarblepillarsandtinklingchandeliersthat was once filled shoulder to shoulder with designer-suited businessexecutives.MarinaBoroditskaya,awriterand translatorwhowasa longtimefriend of Toumashkova, sadly surveyed the immaculate white tablecloths,shiningcrystalwinegoblets,andemptychairs,asthesunglintedinthroughthemassivearchedwindows.“Iwentoutandboughtfifteenrollsoftoiletpaper,”shesaid,“just incase.”Thecrashhitespeciallyhardatsmallbusinesses likeToumashkova’s thatwerebuilt from scratch andprosperedon the energyofthefinancialcommunity—banks,advertising, theexchanges,andall thatwentwiththem.Intheyearofthedragons,thetradeandcateringbusinessinRussiafell 46 percent, while entrepreneurial small businesses declined 31 percentfromtheboomyearof1997.77The oligarchs were restive in the days after the crash. On August 20,

Kiriyenko recalled, Berezovsky, Gusinsky, Smolensky, and some otherbankers came to him seeking a bailout for Smolensky’s SBS-Agro bank.Berezovskywanted the bailout without changing the ownership of the bank,Kiriyenko said. Kiriyenko refused. “Wewill make sure you are dismissed,”Berezovskyreplied.“Justtry,”Kiriyenkosaid.78Berezovsky laterdenied thatthismeetingtookplace.“Absolutestupidity,”hesaidofKiriyenko’sclaim.OnAugust23,YeltsindismissedKiriyenko,settingoffastrangefree-for-all

inwhichBerezovskyagainrushedintoplayhishandatpowerbroker.Yeltsinreappointed Chernomyrdin as acting prime minister, a proposal thatBerezovsky said he made to Yeltsin through Yumashev.79 Months earlier,Berezovsky helped engineer Chernomyrdin’s firing, but now he broughtChernomyrdin back. On the day of the appointment, according to aneyewitness,whenChernomyrdin arrived andwalked down the long carpetedcorridor at the Russian White House, he paused before entering the prime

minister ’s office. There Berezovsky was waiting for him. It was fitting thatBerezovskywent in first—andChernomyrdin followed.Berezovskywas stillthinkingabout the2000election,whichwouldpickYeltsin’ssuccessor.“Ourinterests for2000are to ensure thecontinuityofpower,”he said.Yeltsin, inlanguagethatsuggestedBerezovskywaspullingthestrings,repeatedwhatthetycoon had said, almost word for word, in appointing Chernomyrdin. “Oneimportantconsideration”favoringChernomyrdin,Yeltsinsaid, is“tosupportthe continuity of power.” Berezovsky was back in business, snapping hisfingersandchoosingwhowouldrunthecountry.RumorssweptMoscowthatYeltsinwasbeingurgedbymembersofhisown

familyandbythetycoonstostepdownonceChernomyrdinwasconfirmedbyparliament. Looking terribly weak and vulnerable, Yeltsin appeared ontelevisiononAugust28seatedatasmallroundtableintheKremlin.“IwanttosaythatI’mnotgoinganywhere,I’mnotgoinganywhere,”hesaid,speakingslowly but clearly. “I’m not going to resign.” A few days later, BerezovskyopenlybroachedtheideaofYeltsin’sresignationinaradiointerview.“Ifthereisnostrongauthority,BorisNikolayevichwillhavetoresignbeforehistermexpirestoclearthefieldforthecreationofsuchstrongauthority.”YetBerezovsky again lost the initiative.Yeltsin’s authoritywas at a nadir,

andparliamentvotedChernomyrdindownafternearlytwoweeksofbickering.The economy slid further. Markets and banks were paralyzed. LuzhkovdenouncedtheStateDumaforinaction.“Iamterriblyupsetthatfortwoweekstheycan’tmakeoneconcretedecision,”hesaid.“Astwomicemightsay,whydoweneedcheese?Rightnow,weneedtogetoutofthismousetrap.”Facingarecalcitrantparliament,YeltsinabandonedChernomyrdinonSeptember10andnominatedYevgenyPrimakov,theforeignministerandstaidsymboloftheoldschool,whowasconfirmed.Berezovsky’slatestflingwithpowerpoliticswasover—forawhile.Smolensky did not have an ocean of oil, just a sea of depositors, and theyturned angry at the doors to theSBS-AgrobranchonPushkinSquare in thecenterofMoscow.InearlySeptemberamobbesieged theoffice,demandingtheirdeposits.Smolensky’sdreamofbecoming theRussianequivalentof theBankofAmericawasgoingupinsmoke;hishopesofwinningoverthetrustofmillionsofdepositorswasvanishingbeforehiseyes.Twoweeksafter thecrash, Isawhimat thebank’soffices,andhebore thebaleful lookofamanunderstress,nervouslyfoldingasmallsheetofwhitepaperinhishands,ever

tighter and tighter. “At themoment,” he acknowledged, “I donot knowwhatcanmake people keep theirmoney in banks. I do not seewhat canmotivatepeopletodoit.”After thecrash,Smolensky’sbank,SBS-Agro,with its1,200branches,5.7

milliondepositors,automatictellers,creditcards,andaspirationstobecomeacommercialretailbankinggiant,becamethesymbolofallthatwentwrong.Itwas hit by a classic bank run as panicky depositors begged for theirmoneyback.The tycoonsmayhavewonprotection from foreign creditorswith themoratorium,buttheydidn’thaveprotectionfromtheirownpeople.InAugust,Russianspulled17billion rublesoutof the thirty largestbanks,or about10percentofalldeposits,comparedtojust2billionthemonthbefore.80Bymid-September,Kiriyenko’sfearswererealized:thebankingsystemwascrashing.Payments just stopped,even though theCentralBank tried furiously to injectmorerublesintothesystem.Crowdsofcheateddepositorsangrilyspatepithetsat Smolensky from the streets. He had fooled them. “Banks cannot expectdepositors back in the near future,” Smolensky sighed, “and they are right,becausetheyweredeceived.”Inside,Smolensky’sbankwasalsoa strangehouseof funnymoney. In the

firstweekofSeptember,SmolenskytoldmethatSBS-Agroheld$1billioninGKOs that had been frozen. It also had $1 billion in obligations to foreigninvestors, including the Eurobond, syndicated loans, and credits. Smolenskysaidpayments of $162millionwereoverdue.Hewas ruined, he said, by theGKOdefault.“LikeBolsheviks,theyjusttookawaythismoney.Wesawthisin1917.”ButwhenIsawSmolenskyayearafterthecrash,hetoldmeadifferentstory.HesaidthatSBS-AgroreallyhadonlykopeksinGKOs,anditwastheWesternloansthatwreckedhim.Smolenskywasalwayssecretive,andthetruthwasimpossibletofindout.Hetooka$100millionstabilizationloanfromtheCentralBankonAugust14,threedaysbeforethecrash.DubininsaidthatSmolenskycametohimafterAugust17anddemanded2

billion rubles immediately and “afterward maybe 8 or 10 billion more.”81Otherbankswerealsodemandingliquidity,andtheCentralBankmadeaseriesof mysterious “stabilization loans,” the fate of which was never clear. TheCentralBankdishedouta$345millionloantoSBS-Agro,guaranteedby40regionalgovernments,inOctober1998.ButwhentheCentralBankattemptedto impose a temporary administration on SBS-Agro, trying to take it over,Smolensky barred the door, just as he had done toCentralBank auditors in1993.HesimplyrefusedtolettheCentralBankcomein.

DubininclaimedBerezovskyrosetothedefenseofSmolensky,warningtheCentralBanknot to tryandtakeoverSBS-Agro.“Wewillnot letyoudoit,”Berezovskysaid.82DubinincouldnotgetafixonwhatSBS-Agroassetscouldbeseized,ifany.“Theholdingcompanyisbuiltinsuchawaythatitlooksasifnothingbelongs to thebank,”hesaid.“So ifwebankrupt, roughlyspeaking,the bank, then we can’t legally get near this property.”83 Smolensky haddeliberatelybuilthisempire thatway,and themurkystructurewouldbedevilthose chasing Smolensky’s wealth in the months and years ahead. Dubininfailedtogetinthedoor,andheresignedonSeptember7,accusingSmolenskyof“sabotage.”HewasreplacedwithViktorGerashchenko,theformerCentralBankchiefwhohadbeenSmolensky’sarchfoeintheearly1990s.Like Khodorkovsky, Smolensky made good use of the crutch to avoid

repaying his debts to foreigners, during themoratorium and afterward. TheRussiandepositorswhoentrustedhimwiththeirsavingswerealsoleftoutinthecold.After thecrash, thousandsofSBS-Agrodepositorsmetregularly tovent their rage. They passed around leaflets that described how the bank’sassetshadbeenmysteriouslyspiritedaway, leaving justanemptyshell.Theysharedtheirmiserywitheachother.LyudmilaIsayeva,atrim,elderlywomanwithaveryuprightposture,cametooneofthemeetingsinaneatgrayblazer,herhair pulledback in aballerinabun.Sheworepink lipstick and carried aclutchof documents.Aprofessional translator, Isayevawas a pensionerwhohaddeposited$10,000inSBS-Agro,moneyshehadsavedforyearsinhopesof buying a bigger apartment. Shewithdrew hermoney from the state bankafterthehyperinflationoftheearly1990s,whicherodedhersavingsuntiltheywereworth “just bread,milk, and sausage.” In the boom of 1997, shewentlooking for a commercial bank to deposit her life savings. “One that wasreliable,”shesaid,repeatingthewordoverandoveragain.“Reliable.”Sheporedoverthemagazinestoseewhichcommercialbankwasthemost

reliable. “Therewere bankswithA, A1, A2 ratings. Bwas less good. SBS-AgrowasconstantlyintheA1position,”shesaid.“Itwasconstantlyamongthebestofthecommercialbanks.”HerdepositinSBS-Agropaidmonthlyinterest,whichshecollectedat thelocalbranch.Sheauthorizedthedeposit toremain,monthaftermonth.“Eventually,sinceIcameeverymonth,thepeopleworkingtherestartedtoknowme.Finally, theyconvincedmetoputmymoneyinforoneyear.Theone-yeartermendedinJuly1998,andIpreparedtotakeoutmymoney.Iwantedtofinallypayforthatapartment.”ItwasearlyAugustwhensheaskedforthewithdrawal.“Theysaidtheircash

registersdidn’thavethatmuchmoneyinthemandtocomebackinfivedays.”They gave her the same excuse several times, each time providing awrittenpromisetopay.OnFridayevening,August14,sherecalledseeingthetelevisionbroadcasts

ofYeltsin inNovgorodpromising that the situationwas“undercontrol.”OnMondaycame thecrash, and shenever saw the$10,000again. “I justwasn’tlucky,”sherecalledayearafterthecrash,standinginacrowdofthecheateddepositorsatapressconference.TatyanaKazantseva, fifty, an economistwhoworked at another bank, said

shelost$20,000inSBS-Agro.Hersalaryhadbeenautomaticallydepositedinthedoomedbank.“Iblamethegovernment,butIalsoblameSmolensky,”shesaidaftertwoyearsoffailedattemptstorecoverhermoney.“Wetrustedhim.We wanted to be like civilized people. We didn’t put our money under thepillow.Wetrusted.”WhenIheard thesesadstories, Iwasreminded thatonlytwoyearsearlierthe$250millionEurobondwasarrangedforSmolenskyonthepremisethathewouldbeabletopersuadeRussianstotrusttheirbanks.InOctober 2000AndrewHiggins of theWall Street Journal asked Smolenskyabout the foreign creditors who lost more than $1 billion in SBS-Agro.Smolenskyrepliedthattheydeserveonly“deaddonkeyears.”84Itwastheyearofdeaddonkeyears.Berezovskystumbledinhisaspirationto

become a power broker, and his political gamesmanship stirred up a costlydistraction justasaneconomiccrisiswasbearingdownonRussia.Fromtheearlydays,theoligarchshadmanipulatedpoliticalpowertotheirends,butthistime it backfired.Chubais,whose stubborn determination had served him sowell before, this timewas blinded by it—he hadworked so long to create astablerublethathecouldnotletgountilitwastoolate.Chubaisalsosufferedacostly lesson in how suddenlymarkets can render their own, harsh verdicts.Foreigninvestors,whohadpliedtheRussianswitheasymoney,foundthattheyhadbeendeceived.Theyhaddeceivedthemselvestoobyfailingtolookmorecloselyattheirborrowers.Afterthecrash,theoligarchswereinvariousstagesofagony,escape,andrecovery,and thecomingmonthswouldbeamong themostdifficult intheiryoungcareers.Theywouldneverbetogetheragain,asthey had been on the SparrowHills and during theDavos Pact. Their backswere to thewall,but theirbrandofwildcapitalismendured. Itdidnotperishwiththeroarofthedragons.

Chapter16

HardballandSilverBullets

VLADIMIR GUSINSKY’S dream machine was launched on November 22,1998, at Cape Canaveral, just five years after he and two discouragedtelevision journalists came up with an improbable plan to start their ownchannel fromscratch.On theFloridacoast,GusinskywatchedanxiouslyasaDelta II rocket launched into orbit his new 3,141-pound satellite, Bonum-1,whichcouldbroadcastdozensoftelevisionchannelsdirectlytohomesacrossEuropean Russia. As he gazed skyward, Gusinsky felt enormous pride: hissatellite was the first ever built by an American firm for a customer in theformer Soviet Union.1 After launch, the Hughes 376 high-powered satellitespreadoutitsround,two-meterwideantennaandbegananeleven-yearflight,sending streams of digital news and entertainment down to the waitingtrademark-greenNTV-Plusreceiverdishesbelow.Gusinsky’s dream was that a carpet of NTV-Plus receivers would spread

acrosstheRussianlandscape,linkingmillionsofviewerswithhissatellite.Butthe dream was inexorably linked with the fate of the Russian economy.Gusinskygambledthatanewmiddleclasswouldtakehold,includingmillionsoffamilieswhowouldwant—andcouldafford—topay$299forthesatellitedish to receive around-the-clock movies, sports, news, children’sprogramming,andotherchannelsthathehopedtooffer themsomeday.Bothtechnically and financially,Gusinsky’s expansion goalswere extraordinarilyambitious. The satellitewas controlled from a new ground stationGusinskybuilt outside Moscow. He planned a sprawling new production facility forNTV.Hewasmakingthreehundredhoursayearoftelevisionsoapoperas.JustfiveyearsafterstartingNTV,healreadythoughtofhimselfasoneofEurope’slargest media companies. He was trying to cover three different levels oftelevision in Russia all at once: by satellite, direct to people’s homes, withNTV-Plus;bytraditionalterrestrialsignal,fromabroadcastingtower,withhisflagshipNTVchannel;andwithTNT,thefledglingaffiliatenetworkthatwas

beginningtosnakeacrossRussia’sregions.ButtheAugust17,1998,rublecrashcameattheworstpossiblemomentfor

Gusinsky. The first shockwave of devaluation prompted the nascentmiddleclasstoreducealldiscretionaryspending—forrestaurants,forelectronics,andforentertainment.ForGusinsky,theresultwaslikeaslow-motioncarwreck;the disaster took some time to sink in, but it was inevitable. NTV-Plus hadreached180,000 subscribers at the endof 1998, but a year later it hadonly109,000.Theoriginalplanhadbeenforhalfamillionormore.Evenworse,many of Gusinsky’s current subscribers could not afford to pay their bills.Thenthetelevisionadvertisingmarketcollapsedinlate1998inawaythatwasparticularly painful for Gusinsky. The devaluation made imported productssuddenlymoreexpensive,andimportswerethemainstayofhisadvertising—commercials pushing American toothpaste and Japanese electronics. AfterAugust17,NTVadvertisingrevenuesfellbytwo-thirds.2Gusinsky scaled back. He scrubbed plans for the expanded NTV studios,

gaveuphisdreamtobuildmovietheaters,andabandonedhopeoffloatingthecompany’s stock on Wall Street, the most important part of his expansionstrategy.“Thecrisiscameandeverythingdied,”hetoldmeafewyearslater.Gusinskywasavictimofbadtiming,outsizeddreams,andasuddenreversalin the fortunes of his longed-formiddle class.Hewas a product of his ownimpulsiveexpansionintheearlyyears.Hisphilosophyhadbeen,Builditandtheywillcome.ThewholesatellitebusinesshadbeenbasedonEuropeanandAsianmodels inwhich the first five yearswere investment intensive.Profitscame later, in theseventhoreighthyear.Gusinskyhadnotyetmade it to theprofityears.Now,likeatide,themoneyflowschangeddirection;Gusinsky’scosts were high and his revenues dwindled. He would have to pay off theexpensivesatellite,forwhichhestillowed$123.7milliontotheExport-ImportBank of theUnited States,without the expected profits. “What is a business,particularly one you have built?” Gusinsky asked me, rhetorically, lookingback on his plight. “It is like a bicycle racer who races very fast. He leansforwardandpedalsso fast . . .because ifhedoesn’tkeeppedaling,he’ll falldown and break his head and hands.You have to run fast if youwant to befirst.”Gusinskyfell.Theeconomiccrisiswaslikeapatchofgravelthatcausedhis

bike to skid out from under him. The satellite turned out to be a financialalbatross. Igor Malashenko, the NTV president, asserted later that it wasGusinsky’s singlebiggestbusinessmistake.Heandothers close toGusinsky

saw the satellite as a symbol of Gusinsky’s early style—to dream theimpossible dream and hope it would come true. In this case, the economytumbledandthedreamwasnolongerviable.Gusinskydidn’tshifthisvisionfastenough.“My partners said tome that Iwas a fool for trying to build an empire,”

Gusinsky said. They wanted Gusinsky to set aside his profits as a cushionrather thanplowthemback into thebusiness.Gusinskytold themthesatellitewasthebestwaytodelivertelevisioninacountrywithdecrepitinfrastructure.He toldmehe invested$1.2billion in retainedearningsand loans intoNTV-Plus. But he didn’t count on the ruble crash. “The mistake was, we thoughtRussiawasstableenoughtoinvestinthebusiness,andgrowth.”3Gusinsky wasn’t alone in his troubles after the crash. Berezovsky, still

anxious to play the role of wheeler-dealer, was threatened with arrest andpolitical exile by an openly hostile prime minister, Yevgeny Primakov.Khodorkovsky,failingtopayoffhisloans,wagedadirtycampaigntogetridofhisWesterncreditorsandminorityshareholders.Smolensky’sbankclosedandheslippedoutofpublicview.Luzhkovweatheredtheeconomiccrisis,andforawhilehewasconsideredapotentialsuccessortoYeltsin.Buthispoliticalaspirationswerequickly,andcrudely,destroyed.Thehappydayswereover.For the oligarchs, events took a particularly ominous turn in late autumn.

TheRussianpeoplewereresentfulandconfusedbytheeconomiccollapse,anda search for scapegoatsbegan.Therewereplentyofpotential targets.ApolltakeninMoscowtwoweeksafterthecrashshowedthatViktorChernomyrdin,BorisYeltsin,andSergeiKiriyenkowerethefirstthreenamesmentionedwhenpeoplewereasked,Who is toblame?Thencame theoligarchs,bankers,andfinanciers,followedbyparliament,thereformers,andtheCentralBank.4ButthemostominousthreatscamefromanoutspokenCommunistextremist

inparliament,AlbertMakashov,acrude,vengefulmanwhohadbeenjailedin1993forhispartinanarmedattempttostormtheOstankinotelevisionstationduringYeltsin’sviolentconfrontationwithparliament.Asfarbackas1996,thetycoonshadfearedananti-Semiticbacklash;nowMakashovtried to ignite it.OnNovember11, he attackedBerezovsky. “Don’t behave as aYid,” he said,usingaslurforJew.“Givethiscountry,thisnation...abillionortwoofyourgreen money and this nation will calm down.” Communist leader GennadyZyuganovrefusedtodenounceMakashovinpublic,sayingthatitwasenoughthat Makashov had received an internal party reprimand. Then ZyuganovjoinedtheattacksontheJewishbankers,revivinganti-Semiticrhetoricofthe

Soviet era. “Our people are not blind,” Zyuganov said. “They cannot turn ablind eye to the aggressive, destructive role of Zionist capital in ruiningRussia’s economy and plundering her property owned by all. There is agrowing understanding among the people that the origin of all the currenttroubles is thecriminal courseof anantipeople, supranationaloligarchy thatseizedpower.”5After awhile it became evident thatMakashov andZyuganovwere out of

touch.Theirattempt to incitehatredseemedmenacing in theaftermathof therublecollapse,butwithinafewmonths itdisappeared,andthepublicdidnottakeup theirbattlecryagainst theJewishbankers.Anti-SemitismremainedalatentforceinsomepartsofRussiansociety,andtheoligarchswereunpopularin many quarters, but the spark did not ignite. Perhaps anti-Semitism wasfadingsince itno longerhad theofficialbackingof thestate;orperhaps theurgetosurviveinhardtimeswasstrongerthantheurgetohate.Whathurt theoligarchswasnotpublicopinionbut internecinebattleswith

outsideinvestors,witheachother,andwiththeKremlin.Inthetwoandahalfyears after the ruble crash, the oligarchs fought costly, self-destructiveconflictsmotivatedbyarawhungerforpowerandgreed.Thischapteristhestoryoffourofthoseconflicts.Itdoesnotmarktheendoftheoligarchs,butitdoesmarkthesunsetoftheroaring1990sandtheYeltsinepochinwhichtheyplayedsuchaprominentrole.Hard timesmeant hardball, andMikhail Khodorkovskywas amaster of thegame.WhenhefirstwonYukos,Khodorkovskysentthreehundredofhisbestsecurity men to Siberia to physically take over the company’s wells andrefineries, according to a former Menatep official. Oil towns likeNefteyuganskwerenotoriouslyfilledwithgangsterswhosuckedmoneyoutofthe industry. Khodorkovsky paid special attention to the accountants andfinancialcontrollersathisnewproperties.“Hepersonallywenttoeverysinglefinancial controller and head accountant in all the daughter companies andsaid, ‘This is who you work for now, don’t screw around,’” the formerMenatepofficialtoldme.Therulesofthisgamewerewinnertakeall.6After the crash, Khodorkovsky took a scorched earth approach to his

Western creditors andminority shareholders.Hewanted to shake them fromhis tail and reclaim ownership of all, or at least most, of Yukos.When theninety-day moratorium had expired,Menatep defaulted on the $236 million

loan from Daiwa of Japan, West Merchant of Germany, and StandardCharteredofLondon,forwhichMenatephadpledgedabout30percentofthesharesinYukosascollateral.7At the time,Khodorkovskywasalsonose tonose in an increasingly tense

confrontation with Dart, the minority shareholder in the Yukos extractionsubsidiaries. For more than a year, Dart, a reclusive billionaire, seethed asKhodorkovskydrainedawaythevalueofhisinvestments.NowKhodorkovskywas ready for war. He didn’t need to coddle investors any longer becauseRussiahadtheworld’sworstcreditratingasacountry,andtheWesternlenderswouldnotbebackforawhile.KhodorkovskystruckagainstbothhisWesterncreditors and his minority shareholders by hijacking the oil company awayfromthem.Evenmoreaudaciously,hetriedtotakeitoutofRussiaaltogether.In the early turbulent years of his banking career,Khodorkovsky built an

offshore financial network. Menatep branched out to offshore havens inSwitzerland, Gibraltar, the Caribbean, and other secretive locations wherehundreds of millions of dollars could easily be hidden. When he obtainedYukos,Khodorkovskymovedhismoneyintothisoffshorefinancialnetwork.This was a common practice in the oil industry; oil was one of the mostsurefiremethodstomovewealthoutofRussia.WheneverYukosoilleftRussiaforabroad,itwassoldthroughoffshoretradingcompaniesthatKhodorkovskycontrolled.TheoilwealththenaccumulatedoutsideRussia,avoidingtaxesandotherrisksinsidethecountry.Theoffshorenetworkwasaneverrotatingmenuofoddnamesandplaces.Onekeycomponent,forawhile,wasJurbyLakeLtd.on theIsleofMan,awell-knownoffshore taxhaven in theUnitedKingdom.Jurby Lake was a group of oil trading companies that handled the YukosexportsandthendepositedtheearningstootherselectcompaniescontrolledbyKhodorkovsky and his partners, according to documents describing thestructure and a formerMenatep official who spoke tome about it.MenatepBankhad its ownwebof offshore links, such asMenatepLtd.Gibraltar andMenatep Finance SA of Switzerland. Moreover, Khodorkovsky in 1994purchased 20 percent of Valmet Group, a Geneva-based global investmentmanagementcompanywithoffices inGibraltar,Cyprus, the IsleofMan,andother financial centers catering to clients who wanted to avoid taxes anddetection.8Khodorkovsky’sfar-reachingoffshorenetworkwastypicalforRussianbig

business.Alltheotheroligarchs—indeed,thousandsofRussianbusinessmen—didthesamething,althoughmanyonascalelessgrand.Everymonth,byvery

rough calculations, up to $2 billion slipped out of Russia in wire transfers,phonyimport-exportdocuments,oilshipments,andothermeans.Theleakagewas known as capital flight, and it became one ofRussia’smost debilitatingsicknessesinthe1990s.Overthedecade,perhaps$100to$150billionflowedout of Russia, money that was needed for investment at home, to rebuildfactoriesandstartbusinesses.Instead,Russiancapitalfounditswaytooverseasbankaccounts,realestate,luxuryresorts,andoffshoretaxhavens.Themoneywasontherunformanyreasons:tohideitfromtaxes,shareholders,investors,and creditors; to conceal the pillage of natural resources or stripped factoryassets;orjusttoskirtpoliticalandeconomicupheaval.Sadly, capital flight was a sickness that no one in the Russian elite was

willingtocure.Amidlevelbankeroncetoldmethatgettingcapitaloutofthecountrywas so easy because no onewanted to stop it. AlthoughRussia hadsomeCentralBank rulesagainstexportingcapital, theywerewidely ignoredand almost never enforced. Too many people benefited by the leakage—politicians, tycoons, and even small-time factory directorswho stashed theirrake-off abroad.9 Stopping capital flight really meant changing the entireoperating systemof the country, creating a stable, rule-of-law state, and thattask was too big for Yeltsin and his generation in the first decade of post-Soviet Russia. Occasionally the Russian government machine would rouseitself to attempt halfhearted police state methods to stanch the leakage.DepartingairportpassengerswereaskedbyCustomsServiceofficerstoopentheirwallets toshowhowmuchcashtheywerecarryingoutofRussia. IsawthishappenmanytimesatSheremetyevoAirportasIwaitedimpatientlyinline.Itwasapatheticandsillyexercise,wheneveryoneknewthat$1billioncouldfly out bywire transfers, undetected. Capital flight did not have a departuregate.Stunning evidence of the full extent of the phenomenon of capital flight

cameintheaftermathoftherublecrashwhenitwasdisclosedthattheRussianCentral Bank had sent billions of dollars out of the country through a tinyoffshore company, the FinancialManagementCompany in Jersey, a favoritetax haven in the United Kingdom. The full story of this obscure company,FIMACO, was never disclosed, but the obvious message was that even thegovernment was taking advantage of offshore havens. If the Central Bank,paragon of stability, guardian ofRussia’s treasure, could divert its currencyreserves to a tiny offshore company, then there was no telling what othersmightdare.10

TowrestYukosoutof thegripof itscreditorsandminority shareholders,Khodorkovskycreatedanelaborateplantomovetheoilcompanyoffshore.AcomplextransferofshareswouldscatterYukosanditsdaughtercompaniestothewinds,makingit impossibleforotherstofindwherehewashidingthem.The plan was even more audacious than moving oil profits abroad.Khodorkovskywastakingthewholecompanyoffshore.TheplanwastoleavetheminorityshareholdersandtheWesterncreditorswithanemptyshell,whilehe took the company’s shares to small, remote islands in the Atlantic andPacificOceans.Khodorkovskybeganwithaschemeto issuemillionsofnewshares in the

subsidiaries. The new shares would dilute the value of those held by Dart.Dart’s shares in the subsidiaries were relatively small—12.85 percent ofYuganskneftegaz, 12.3 percent of Samaraneftegaz, and 13 percent ofTomskneft, which gave him little leverage in how the companies were run.Evenso,KhodorkovskyresortedtobattleshiptacticsagainstDart,justtomakesuretherewasnoquestionaboutvictory.Forexample,at thetimetherewere40millionsharesofYuganskneftegazoutstanding.Khodorkovskylaidplanstoissue 77.8 million new shares. This meant that Dart’s share of the overallcompanywoulddropfrom12.85percenttolessthan5percent.Thestorywasthe same with the other subsidiaries. For Samaraneftegaz, Khodorkovskyplannedtoadd67.4millionsharestotheexisting37.6million.AtTomskneft,heplannedtoadd135millionsharestotheexisting45million.Inshort,Dart’sholdingswerebecoming the incredible shrinkingoil company.Thisoneroustactic was the same as the transfer pricing that had originally drawn Dart’sangerin1998.Hundredsofmillionsofdollarswereatstake.11Forhisnextsleightofhand,Khodorkovskydecidedtosellallthesemillions

of new shares in the oil extraction subsidiaries to obscure, distant offshorecompanies. For example, Yuganskneftegaz shares would be sold to AsburyInternationalInc.of theBahamas,RenningtonInternationalAssociatesLtd.ofIreland,ThorntonServicesLtd.oftheIsleofMan,andBrahmaLtd.oftheIsleof Man. Who were these mysterious new buyers? Khodorkovsky-affiliatedshell companies, most probably. Khodorkovsky could not admit that hecontrolledtheseoffshorecompanies,sincethewholegambitwouldbeillegalunder Russian law, but he was surely not selling his oil company tostrangers.12In yet another brazen twist, Khodorkovsky proposed that the additional

millions of shares would be purchased not with cash but with veksels, or

promissorynotes, issuedby theotherYukosextractionsubsidiaries.Howthemysteriousbuyerswouldobtainthevekselsinthefirstplaceisjustoneofthemany mysteries about Khodorkovsky’s plan that I could never fathom. Thewhole transactionwas a circular, deceptivepaper chase:one company issuesmillionsofnewshares,sellsthemtodistantoffshorecompanies,andcollectsapromissorynotefortheshares.TheloserwasgoingtobeDart.Toratifythesharedilutiongambit,threeemergencyshareholdermeetings,

one foreachoilextractionsubsidiary,werecalledonMarch16,23,and30,1999.Themeetingswereheldatapalatialprerevolutionarycastleinthecenterof Moscow at 5 Kolpachny Lane, once a Komsomol building and laterMenatep headquarters. Outside the gate, shareholders of Yuganskneftegazpresentedtheirpapers toaclerkforadmittance.Somewereallowedtoenter,butoneofDart’srepresentatives,JohnJ.Papesh,wasnot.Heaskedforapassbutwas refused.Hewaspresentedwith a court order signedbyaprovincialjudge justafewdaysearlier.TheorderfrozeDart’ssharesona technicality.Papeshwasleftout inthecold.Insidethemeeting, the77millionnewshareswere quickly issued, dramatically shrinking Dart’s holding. “This is theRussianversionoftheftintheexecutivesuite,”Papeshfumedafterward.“Itisred-collar crime.”Thehuge shareemissionswereapprovedat theother twomeetingsaswell.AnevenmorebizarredodgeoccurredinJuneatasubsequentscheduled meeting of Tomskneft shareholders. When the minorityshareholdersarrivedat5KolpachnyLane,theysawasignsayingthemeetinghadbeenmoved toa small townsouthofMoscow,and itwould start in twohours.Theyjumpedintheircarandracedoff;theaddressturnedouttobeanold building under reconstruction. Inside, up a makeshift stairway withouthandrails,theyfoundaroomwithsevenchairs,atable,andtwocopiesofthemeetingagenda.Theconstructionworkers said the“meeting”hadconcludedtwentyminutesearlier.Theywereoutofluck.Yetthebattlewasnotover.Whenitcametobusinessinoffshorezones,Dart

wasnoneophyte,beingheirtoa$3billionfortunecreatedwhenhisfatherandgrandfather invented a way tomass-produce foam cups. Dart renounced hisU.S. citizenship to become a citizen of Belize, a tiny country known as anoffshore tax haven.Hewas a hard-nosed player in global investments, oncefacingdownthegovernmentofBraziloverabondissue,andhewaspreparedfor toughbattleswithKhodorkovsky. In theearly1990s,DartsunkhundredsofmillionsofdollarsintoRussiaduringmassprivatization,buyingupstakesinmanyoftheoilextractioncompaniesandotherproperties.Likemanyother

foreign investors,hewasaspeculator,buying lowandhoping tosellhigh.13WhileDartsoughtprofit,Khodorkovsky,whoboughtYukoscheaplyinloansforshares,didnotwantDart’sprofittocomeoutofhisownpocket.HewantedDarttogoaway.Acollisionwasinevitable.Thetwomagnateshadbeenthrowntogetherinashotgunwedding:Dartas

minority shareholder in the extraction subsidiaries andKhodorkovsky as thewinneroftheYukosholdingcompany.Itwasalwaysexpectedthat,soonerorlater,theywouldhavetosettle.Butfirsttheyweremakingwar.Eachsidethrewlawyers, public relations companies, and private detectives into the battle.YukosissuedstatementscallingDarta“greenmailer”(someonewhopracticespressure tactics in hopes of reaping a fat profit) and a “vulture.” Dart saidKhodorkovskywas“looting”thesubsidiaries.When Dart got wind of Khodorkovsky’s offshore gambit with the Yukos

subsidiaries, he began to chase the shares around the globe. Dart’s lawyersfiled suit in such offshore jurisdictions as the Marshall Islands, the BritishVirgin Islands, and the Isle of Man to try and stop Khodorkovsky. In aremarkable piece of detective work, Dart lawyers and private investigatorscompiled a dense, complex flow chart, showing what they believed to beKhodorkovsky’s far-flung corporate structure. The chart was a jungle ofarrows and boxes illustrating shell companies, ownership ties, and sharetransfers stretching fromCyprus in theMediterranean toNuie in the PacificOcean.Across thebottom it included, in smallboxesmarkedwitha star, thenamesand locationsofoffshorezones thatKhodorkovsky intended touseasthenew“home”baseforhisoilsubsidiaries.Thechart,whileimpressiveinitsdetail, was still not complete; in fact, Khodorkovsky’s offshore empirestretchedevenfurtherthanthedocumentsuggested.Forexample,thechartdidnotmentiontheJurbyLakestructureofoilexportingcompanies.WhilefightingDartwithonehand,KhodorkovskytriedtoshakeoffWestern

creditorswiththeother.ThethreebanksthathadloanedKhodorkovsky’sBankMenatep$236millioncould,undertermsofthedeal,claimatotalofabout30percentofYukoswhenMenatepdefaultedon the loan.The30percentwasasizablechunkoftheoilcompany.IfKhodorkovskyrelinquishedit,hecould,atsomepointinthefuture,bevulnerabletolosingcontrolofYukos.Thishedidnotwanttodo,atanycost.Khodorkovsky’sgamewith thebankswaspartlypsychologicalwarfare. If

hemadeastrongenoughcasethathewasnotgoingtopaybackthemoney,hecalculated,maybe theWesternerswouldeventuallygiveupand justwriteoff

thedebt as a loss at the endof the fiscalyear.Thiswasnot anunreasonableexpectation:thebigWesternbanksandinvestmentfundsknewtherewerehugerisksinemergingmarketslikeRussia.TheyhadreapedfortunesinthelastfewyearsastheRussianstockmarketskyrocketed.Sowhatiftheyhadabadyear?Theymight try and squeeze the debtor a little, but they knew they had littleleverage insideRussiabecause thecourtswereweak.TheWesternbankshadbotha limitedattentionspanandadiffusechainofcommand.Themanagerswerenotmakingdecisionswiththeirownmoney;itwasotherpeople’smoney.They would not suffer just because of some bad loans in Russia. ButKhodorkovsky, by contrast, had everything at stake. He was playing for hisownsurvival.Heusedruthlesstacticstomakesurehisfoesgot thepoint.Hetook theYukos-owned shares in theoil-extraction subsidiaries and sent themoffshore alongwith the new, diluted shares. (This action only came to lightwhenoneofthesmallminorityshareholderslookedattheregister,thebookinwhichshareownershipisrecorded.)Thebottomlinewasthat thebankswerebeing leftwith 30percent of an empty shell.DaiwaEuropeLtd.,whichheldabout13percentofYukos,issuedastatementexpressingconcernthatitsassetswouldbe“irretrievablylost.”14 Thatwasputtingitmildly.JamesFenkner,theTroikaDialoganalystIhadmetduringtheboomyears,

wroteanotetoclientsaboutKhodorkovsky’sgambitentitled“HowtoStealanOilCompany.”FenknertoldmehewasstunnedatKhodorkovsky’snerve.“It’sincrediblybrazen,”Fenknersaid.“Acoupleofyearsago,peoplesaidRussianmanagerswillsteal,butonlya littleanditwill improveover time.What thiscaseshowsisthatitisallornothing.It’skindofshocking.Thesecond-largestoilcompanyinRussiaisnolongerheldunderRussia’sjurisdiction.”Perhaps no one in Moscow watched these developments with more

foreboding than Dmitri Vasiliev, the chairman of the Russian FederalSecurities Commission. The lively, diminutive Vasiliev, who was AnatolyChubais’s deputy during mass privatization, had argued that the greatestmistake inRussian capitalismwas the failure to build institutions thatwouldcreaterulesandlawstoregulatethemarketafterthefirstwaveofreforms.Hisown Securities Commission was an example—its enforcement powers wereextremelyweak. I often thoughtofVasiliev as the referee at a soccermatch,blowinghiswhistleandwavinghisarmsaroundwildlyas thebig,muscularplayers ran roughshodover anything in theirway and ignoredhim.VasilievwasasmallheroofRussiancapitalismatatimewhenitneededabighero.Hebelievedintherulesandtriedtomakethemstick,buthewasoverwhelmedby

asystemthatoperatedonalevelthatwasbeyondtheofficialrules.Vasiliev chose his fights very carefully. He was especially fearful of the

tycoons because they could strike back against him personally. Investigatingthe tycoons was risky and sometimes impossible. For example, a truckcarrying607boxesofMenatepBankdocumentsmysteriouslyplungedintotheDubnaRiveronMay24,1999.15ThatwashowthingsweredoneinRussia,astatewheretheruleoflawhadyettobeestablishedandenforcingthesecuritieslawwasadistantdream.VasilievheldalongtalkwithChubaisaboutthebestwaytoinvestigateoneoftheoligarchs.Fortacticalreasons,Vasilievlikedtostrike first and settle later. But it could be risky to take the oligarchs bysurprise;theyhadlegionsofspies,guards,andguns.ChubaisurgedVasilievtobemorecautious.Bettertowarnthesleepingbearbeforeyoupokehimintheeye,Chubaissuggested.Vasiliev scored an importantvictory in1998 inhis first test case, forcing

VladimirPotaninandBoris Jordan tobackdownfromaplanneddilutionofminority shareholders in the oil company Sidanco. 16 At the time, Vasilievraised concerns about a similar sharedilution atYukos, but he toldme laterthat includingYukoswasa tactic to show thathewasnotpickingonPotaninalone.Vasiliev recalled thathegotawrittenpledge in1998fromYukos thattheywouldfollowtherules.Butinearly1999,aftertherublecrash,investors’complaints,chieflyfromDart,continuedtopileupaboutYukos.InthespringKhodorkovskylaunchedhisbrazenplantohijacktheentireoil

company. Vasiliev announced in April that he would conduct a full-fledgedinvestigation intowhetherYukos hadviolatedminority shareholder rights. Itwas a risk he had to take, but how? At first, he tried to get the minorityshareholderstodothehardwork—heloudlyandpubliclyinsistedtheyshouldgo to thecourts.Dartdidsoandwasable topersuadesixcourts inoffshorezonestotemporarilyblockthesharetransfers.AttheSecuritiesCommission,Vasiliev had little real power and only one option: to decide whether toformally register, or approve, the millions of new shares that were beingissued. The only legal grounds for rejecting the shares would be adetermination that the offshore havens were in fact controlled byKhodorkovsky;thentheissuanceofthesharesmightbeillegal.ButpenetratingtheoffshorehavenswaswaybeyondVasiliev’sability.Thecommissionhadasmallbudgetandcouldnotsendlawyersglobe-trottinginsearchoftheelusiveYukosshares.Inthenextfewweeks,KhodorkovskysentamessagetoVasiliev:Getoutof

my way! A vice president of the oil company warned him privately, in apersonalmeeting,thatYukoswoulddoeverythingitcouldtoblocktheFederalSecuritiesCommission.Yukoswasabigoilcompanybackedupbyapowerfuloligarch,andtheSecuritiesCommissionwasaweakagency.Vasilievtookthethreat seriously, recalling what Chubais had said about going on the attackagainstthetycoons.Vasiliev had precious few weapons at his disposal. His feeling of

helplessnesswasdeepenedbyaproblemwithinhisowncommission,unknowntoallbuta fewpeopleat the time.TheSecuritiesCommissionhadbenefitedfroman$89millionloanbytheWorldBanktohelpRussiaimproveitscapitalmarkets. Vasiliev used some money from the project to pay for thecommission’s press office and computers that allowed outsiders to readreportsaboutitsregulatorydecisionsontheInternet.Thepressofficewasrununder a contract with Burson-Marsteller, a global public relations company.The key official at the public relations company was Mark D’Anastasio,managingdirectoroftheinternationaldevelopmentpractice,whowasbasedinWashington. D’Anastasio was a public relations man who specialized inbuildingupa long-term image forhisclient.He toldme thathehadworkedhardforseveralyearstobuilda“squeaky-cleangoodguy”imageabroadforVasiliev.ThegoaloftheWorldBankprogram,whichpaidthebillforBurson-Marsteller ’s work, was to improve “transparency” and to provide more“completeandreliable”informationaboutcompaniesinthestockmarket.17But Vasiliev discovered in 1999 that D’Anastasio and Burson-Marsteller

werealso,atthesametime,representingYukosandKhodorkovsky,whomthecommissionwasinvestigating.WiththeWorldBankmoney, thePRcompanywas supposedly building “transparency,” but with Yukos they were activelydefendinganoligarchwhowashidingsharesofanoilcompany inoffshorezones.Vasilievconcludedthat itwasadirectconflictof interest.ButVasilievwasafraid to fireBurson-Marstellerbecausehedesperatelyneeded thepressoffice and the computer support—he had little to workwith as it was. If hethrew out Burson-Marsteller, he told me, he probably would lose the badlyneededWorldBankmoney.“Theyhadmebythethroat,”herecalled.D’Anastasioacknowledged tome later thathewasrepresentingbothsides.

AfterVasilievprotestedprivatelytohim,thepublicrelationscompanywrotealetterpromisingtherewouldbenocontactbetweenthetwoclients.Butinfact,D’Anastasiocontinued todealwithbothof them.According tobothVasilievand D’Anastasio, the public relations man at one point even proposed to

Vasiliev that hemight be an interlocutorwithYukos, a peacemaker.Furious,Vasilievwonderedwhatkindofpeacewouldthatbe.Howcouldherepresenttheinterestsoftheregulatorandtheregulatedatthesametime?WhenIaskedD’Anastasioabouttheconflictofinterestafewyearslater,he

saiditmighthavebeenaproblemhadthehostilitycontinuedforalongtime,buthedidnot think itwouldgoon.Besides, the rules inRussiawerenot asclearas rules inadevelopedmarketeconomy,hesaid.D’Anastasioalsohadhisownpreferences:headmiredKhodorkovsky,whomhecalled“afigureofhistoric proportions.” Khodorkovsky complained frequently to D’AnastasiothatVasilievwasgoingtoofar.D’Anastasioagreed.18My own view was that Burson-Marsteller was playing a direct role in

weakeningtheverycapitalmarketstheywerebeingpaidtoimprove.Whatisamazingisthatitdidn’tseemtobotherthem—theyplayedbyRussianrules.ItisnothardtoseewhyVasilievfeltvulnerable.Hisfriendswerehisenemies.In late June, as a result of a complaint from the trade association of

stockbrokers,alltradinginYukosandtheoilextractioncompanieswashaltedonRussia’s chief stock exchange, theRussianTradingSystem.19 Thiswas asetbackforYukos,butVasilievadmittedatapressconferenceonJune29thathisprobeofYukoswasrunningintoabrickwall.Thesecuritiescommissionlackedinvestigativepowers—allitcoulddowasaskforinformation.Noone,noteventheRussiangovernmentagencies,cameforwardwithanyanswersorhelp for his investigation. The Fuel and EnergyMinistry and the State TaxServiceignoredhisrequests.Evenso,Vasilievinsisted,“Theinvestigationwillnotbestopped.”Then,onJuly21,Vasilievannouncedthathewasturningthefilesovertothelawenforcementauthoritiesforacriminalinvestigation—theInteriorMinistry,theFederalTaxPolice,andtheFederalSecurityService.Onthesameday,Yukosfiredbackwithanangrystatement,accusingVasilievoftaking sides with the “famous speculator” Kenneth Dart.20 More pressurefollowed.OnAugust 18, theYukos vice presidentwho hadwarnedVasilievearlierthatYukoswouldfighthimtookactionagainstVasiliev.HequietlyfiledacomplaintagainstVasilievinthegeneralprosecutor ’sofficeonthegroundsofslander,basedontheJuly21newsconference.UnderRussianlaw,slanderwasacriminaloffense.IwasappalledwhenIheardaboutthis.Ihadbeenatthepress conference, and it was clear that Vasiliev had not slanderedKhodorkovskyorYukos,sinceinvestigatingtheoilcompanywasclearlypartof his official responsibilities. But Vasiliev saw the criminal complaint forwhat it really was, a message. He would face interminable difficulties,

interrogations, and who knows what else they could come up with. Theprosecutor ’sofficewasnotoriouslyonthetake.Itwascommonatthetimeforalldifferentkindsoflawenforcementbodiestotakebribestoframesomeoneinadispute. Iknewayoungman involved inacommercialdisputewhowasframed;thepolicehadplantedabombinhistrunkandthenarrestedhim.Inthelawlessstate,anythingwaspossible.Poke thebearbetweentheeyes,andyoutookenormousrisks.Rather than fight, a frustrated and discouragedVasiliev resigned from the

commission on October 17. “The system here doesn’t protect investors,”Vasilievlamented.Afewdaysbeforehisdeparture,theSamaraneftegazsharedilution—the proposed issuance of 67million new shares—came before thecommission. Although the application was in order, Vasiliev said he votedagainst it on principle. “It was all legal, but from a moral point of view, Iunderstood it was theft.” He was outnumbered. The commission voted itsapproval.21Khodorkovsky hadwon. Eight weeks after Vasiliev quit, Dart settled with

Khodorkovsky and sold his shares for an undisclosed sum. It is not knownwhetherDartsufferedalossormadeaprofitonhisinvestmentinRussianoil.ButitisclearthatKhodorkovskyachievedhismaingoal:gettingcontrolofhisoil companyandgetting ridof theminority shareholder.The scorchedearthplanhadworked.Khodorkovskydefeatedthecreditorstoo.Thethreebanksthatloanedmoney

toKhodorkovskydidnothave infinitepatience,andKhodorkovskyoutlastedthem.WestMerchant,which had suffered heavy losses in theRussian crash,had originally loanedKhodorkovsky’sMenatep $135million. According toone well-informed insider, Khodorkovsky went to Germany and told topofficialsofWestLB,theparentbank, thathecouldnotpossiblypaybacktheMenatep debt because of the Russian economic crisis. Menatep Bank hadcollapsed in the crash. But one German bank official threw up his arms inexasperation,notingthatKhodorkovsky’soilcompany,Yukos,wasstillgoingstrong.Whatdidhemean,hecouldnotpaythemback?ButKhodorkovsky put on a very persuasive show, and theWestern banks

lost theirnerveindealingwiththewilyRussian.“Khodorkovskysaidhewashard-hit,” said the insider at the German bank. “He got sympathy andunderstanding, when he should have been hit with a hammer.” As a result,ratherthanpressKhodorkovskytopaybackthemoney,theGermanbanksoldoff the assets for $67.5million, or halfwhat the bankhadoriginally loaned

Khodorkovsky.A similar thing happened toDaiwa, the Japanese bankwhichhadbeenpartofthedeal.Daiwasoldoutitssharefor$40million.Thelendershad given up and taken a loss.Next,Khodorkovsky quietly bought back hissharesatbargain-basementprices.Oftheapproximately30percentofYukoshe had pledged for the original $236million loan, hemanaged to buy back23.7 percent after the lenders threw in the towel.22 It was a good deal: hisreward for defaulting on the loan was that Khodorkovsky got most of hissharesback,andforlessthanhalfthecashhehadoriginallyborrowed.AlthoughKhodorkovskytoldtheGermanbankthathehadbeenbadlyhurt

by the crash, the conditionofYukos soon improveddramatically.Oil priceswentbackup,andYukosamassedanestimated$2.8billionincashbytheendof the year 2000. If the banks had been willing to wait a little longer, theymighthaverecoveredtheir$236millionloan.ButtheWesternlendersprovedtobeweak-kneed.Khodorkovskyhadtriedtohijacktheoilcompanyoutfromunderthem.ForKhodorkovsky,hardballpaiddividends.23

The shattered landscape of the Russian economy left no one who hadparticipatedintheeventsofrecentyearsunscathed—notAnatolyChubaisandtheyoung reformers, notBorisBerezovsky and theoligarchs, not the ailingBoris Yeltsin. They were all tarnished by the upheaval; the Russian people,resentfulandbewildered, regarded themwithsuspicion.Theeconomiccrisisleftapoliticalvacuumin itswake.Thequestionof“continuityofpower,”asBerezovskyhadputit,remainedunresolved.TherewasnoobvioussuccessortoYeltsin.But Yuri Luzhkov was still on his feet. No one could blame theMoscow

mayor for the nationwide flirtation with easy money and GKOs. Luzhkov’sreputationwasnotdamagedbythecrash,althoughtheshockwavehitthecityhard,especiallythenewmiddleclass.WhilevisitingLondononSeptember30,Luzhkovhintedfor thefirst time

thathewouldrunforpresident.Speakingto journalistsatapressconferenceheldattheRussianembassy,Luzhkovsaidhewantedtoremainmayorforthetimebeing.But,headdedcautiously,“IfIseethatpresidentialhopefulsdonotpossess the necessary statesmanlike views to ensure Russia’s stability andprogress,Iwilljointherace.”Onhearingthesewords,IimmediatelyrealizedthatLuzhkovhadmadethedecisiontorun.Perhapshehadconcludedthatthe

othercontendershadbeencrippledby thecrash.Behindthescenes,VladimirYevtushenkov, chief of the Systema conglomerate, the most influentialbusinessman in city affairs, encouraged Luzhkov in his ambition.Yevtushenkov was a prime mover behind the creation of Center TV, thechanneloftheLuzhkovempire,whichcouldbecomeakeybuildingblockforapresidentialcampaign.AlthoughCenterTVsufferedfromamiserablydullprogramming schedule, it quickly acquired some of the most modernbroadcastingequipment and technology in the countryanddevotedgeneroushours of airtime to uncritical interviews of Luzhkov. Another sign ofLuzhkov’s ambition was the formation of a political movement, Otechestvo(Fatherland),withLuzhkovat thehead.Politicalconsultantswerebeing linedup.YevtushenkovtoldmehebelievedLuzhkovcouldsucceedbycampaigningon the slogan thathewould transformRussiaashehadchangedMoscow.“Ibelievedthathehadachance,anhistoricchance,andhehadtotakeadvantageofit,”Yevtushenkovsaid.Luzhkovconsideredrunningata timewhenagreatpowervacuumopened

upinRussianpolitics.Yeltsinwas in illhealth,hisauthoritybadlyerodedbythe economic crisis, and he had not handpicked a successor. The oligarchs,especiallyBerezovsky,wereworriedthatthespoilstheyhadwon,thefantasticwealth andproperty, could be taken away.Theyworried thatLuzhkovmightsaunter right into the Kremlin in the next election, given the lack of otheralternatives, and impose his Moscow model on Russia. They did not likeLuzhkov’smodel,inwhichhewasthebossandtheywerethesupplicants.ButtheKremlin—Yeltsin,hisstaff,andtheoligarchswhowereclosetothem—didnotknowwhattodoaboutthepowervacuum.Themonthsaftertherublecrashfoundtheminsecure,paranoid,andatsea.Luzhkov had weaknesses too. Running for president in Russia required a

certain all-out competitive character, such as Yeltsin, who was a politiciandown to his very core and thought about power and politics all the time.Luzhkovwasnotthissortofpolitician.Hesawhimselfasakhozyainwho,tosucceed,fortacticaladvantage,hadtoengageinpolitics.Luzhkovhadtailoreda system inMoscow to serve his own ends, a politicalmachine that did nottoleratecompetition tohis rule.Hewasacclaimedat thepollsandpraised inthenewspapers.Thereisnodoubthewasagenuinelypopularfigure,buthiswasaveryprotectedlife.JumpingintothenationalpoliticalscenemeantthatLuzhkovwassteppingoutsideMoscow,leavingtheplayingfieldhecontrolledfornewanduncertainterritory.

Luzhkov attempted to make the leap, but his steps were plagued withdifficultyfromtheverybeginning.Ifhehadthoughtaboutit,Luzhkovmighthave sought Yeltsin’s blessing or at least tried to steer clear of the erraticpresidentandhis innercircle.Instead,LuzhkovimmediatelypointedhisgunsatYeltsinandopenedfire,criticizingYeltsinasunfittoremainpresident.WhenYeltsin was reported by the Kremlin to be suffering from bronchitis at hiscountryresidenceoutsideMoscowinOctober,Luzhkovsaid,“Ashortailmentis one thing, but if the man cannot work and fulfill his duties, then it isnecessarytofindthewillandcouragetosayso.”LuzhkovandYeltsinhadbeenallies in the past—Yeltsin had picked Luzhkov out of the sea of bureaucratsduringtheperestroikayearsinMoscow;LuzhkovwasonYeltsin’ssideinthe1993 confrontation with parliament; they had campaigned together in 1996.But nowLuzhkovwas plunging headlong into conflict not onlywithYeltsinpersonallybutwiththepresident’scoterie,agroupthatincludedBerezovsky.Itwas a battle that would be far more destructive than Luzhkov realized. In aclimateofuncertainty,theearlymonthsof1999broughtaseriesofeventsthatfrightened Yeltsin’s inner circle, including Berezovsky. The result was thatLuzhkov was put on the Kremlin enemies list. The people around YeltsindecidedtodestroyLuzhkov’schancesofbecomingYeltsin’ssuccessor.Inthisperiod,Berezovskywasagainthrownonthedefensive, this timeby

YevgenyPrimakov,theprimeminister.PrimakovwasanoldwarhorseofthelateSovietyears.Hiseconomicpolicyinearly1999wastoholdthestatusquo,leadingtoaperiodofrelativecalmafterthetumultofthecrash.ButPrimakovwas less reticentaboutBerezovsky.Heactivelywentafter theoligarch.Afterthe Duma approved an amnesty freeing 94,000 prisoners, Primakov told acabinetmeetingonJanuary28,1999,that“wearefreeingupspaceforthosewho are about to be jailed—people who commit economic crimes.”Withindays,prosecutorsandgun-totingmen incamouflageandblackmasks raidedBerezovsky’s companies in Moscow, the Sibneft headquarters and Aeroflot.Themessagewasunmistakable:Berezovskywasatarget.At theSibneft building, themaskedmen seizedboxesofmaterials froma

small company, Atoll, which was reportedly a Berezovsky security service.OneofLuzhkov’smost loyalnewspapers, thepopularbroadsheetMoskovskyKomsomolets,saidinvestigatorsbelievedBerezovskyusedAtolltospyontheYeltsin family, includingYeltsin’s daughterDyachenko.Berezovsky believedthat Primakov had personally ordered the investigations and arrest warrantsagainst him. Sometime later, Berezovskywent to see Primakov,who denied

thathehadharassed theoligarch. Inamomentofhigh tensionanddrama inPrimakov’s office, Berezovsky told me he took a document from his coatpocketandconfrontedPrimakovwithevidencethathehadpersonallyorderedthe probe. According to Berezovsky, the former prime minister,Chernomyrdin, was also present at this moment and was so stunned andembarrassed that he got up from the table and left the room in a hurry.Chernomyrdin’s discomfit was understandable: Berezovsky had managed toobtainacopyoftheprimeminister ’sownsecretorder.24WhilePrimakovpursuedBerezovskyfromoneside,afreshscandalbroke

tofurtherdeepenthesenseofparanoiainYeltsin’scircle.Thenewcontroversyinvolved the general prosecutor, Yuri Skuratov, who was probing Kremlincorruption. Some of the allegations pointed to payoffs made by a Swissengineering company, Mabetex, which had carried out Kremlin remodelingwork,topeopleinthetight-knitYeltsinclan.Skuratov, a colorless figure, had broad powers, yet he was singularly

ineffective as chief law enforcement officer in Russia’s years of crazycapitalism.Hehadnotbroughtanymajorfigurestoaccountforcorruptionorsolvedanyofthehighlypublicizedcontractkillings.Moreover,Skuratovhadpersonal problems. He had been secretly set up with some prostitutes andvideotaped.Thetapewasbeingusedtoblackmailhim.OnthesamedayastheraidsagainstSibneft,YeltsinabruptlyaskedSkuratov

to quit. A copy of the tape was leaked to state television. At first Skuratovagreed toquitbut thenchangedhismindanddecided to fight. Inadesperateattempt to save himself, Skuratov began to publicize his half-finishedinvestigations, including theprobe intoKremlinbuildingcontracts.Skuratovwas a contradictory and maddening figure whose hints of corruption wereneverfollowedbyconcreteprosecutions.Still, themerementionofSkuratovandhisinvestigationintoMabetexwasenoughtopanictheKremlinteam.The Skuratov affair, the raids on Berezovsky firms, the fallout from the

ruble crash, Primakov’s vow to put the tycoons in jail, and the launch ofLuzhkov’s presidential campaign all came in the same few months. Inretrospect,achainofeventswassetinmotion.SkuratovthrewoutthedirtontheKremlinfamily,alarmingYeltsin’sinnercircle.Luzhkovpickedupontheallegations, saying the prosecutor should be allowed to continue hisinvestigations,which antagonizedYeltsin and his aides. Then, fighting back,BerezovskyandtheKremlinsetouttowreckLuzhkov.25The Skuratov affair was followed by an arrest warrant issued by the

prosecutor ’sofficeonApril5forBerezovskyongroundsthathehadmisusedcashfromAeroflotforeignticketsales.Berezovsky’sreplywasthathe“neverworked a day at Aeroflot.” This was literally true, but beside the point.Berezovsky never needed to work at Aeroflot to rake off the company’sforeign currency earnings. The announcement was a major blow toBerezovsky,whowasinFranceatthetime.Theraids,investigations,andarrestwarrantswereunprecedentedforamanwhohadsooften—andsoeffortlessly—strolled through the corridors of power. Berezovsky also lost his post asexecutivesecretaryoftheCommonwealthofIndependentStatesonMarch4.SpringwasatimeoftroublefortheYeltsininnercircle.Skuratovthreatened

newdisclosures.Berezovskyfacedarrest.TheninMaytheCommunistsintheDumatriedtoimpeachYeltsin.Theimpeachmentfailed,buttherewererumorsthattheKremlin,oritscorporateallies,paid$30,000eachforvotestosupporttheailingpresident.LuzhkovopposedYeltsin’s impeachment,buthebecamemorevocal inhis

attacks on the Yeltsin camp. Russia was not being run by Yeltsin, Luzhkovdeclared, but by a cabal, a “regime” in the Kremlin. His use of this word“regime” over and over again particularly riled the Yeltsin circle. Luzhkovsingled out Berezovsky as part of the “regime,” along with AlexanderVoloshin,abearded,baldingone-timerailwayworkerandeconomistwhohadworkedwithBerezovskyduringtheAll-RussianAutomobileAllianceproject.Voloshin,whoenteredtheKremlinasaneconomicsspecialist,rosetobecomeYeltsin’schiefofstaff,succeedingValentinYumashev.Voloshinwasafigureintheshadowswhorelishedhardballtactics.LikeBerezovsky,hewasdeterminednottoletLuzhkovbecomethenextpresidentofRussia.Berezovskyknewthatif Luzhkov came to power, the tycoons could be at risk of having theirpropertytakenaway.Therulesofthegamewouldbechanged,andtheywouldnolongerrunthecountry.Berezovskybegan toponderhow to attackLuzhkov.OneofBerezovsky’s

mosteffectivespearcarrierswasSergeiDorenko,thetelevisioncommentatorwho had participated in the bankers’ war. With a husky voice, manly goodlooks,andamischievoussenseofshowmanship,Dorenkowas the televisionpersonalitythatpoliticianslovedtohate.ToaWesterner,Dorenko’stelevisionstyle might seem crude, unpolished, even down-market, but time and againDorenko scored in Russia as a television ringmaster who gleefully put thepoliticiansintheirplace.Berezovsky thoughtDorenkowas amagnificent talent.He toldme that he

firstrecalledseeingDorenkoontelevisionafterhisMercedeshadbeenblownup.Hewaswatching television andDorenkowas using a snide tone, sayinganother moneybags was hit by a bomb today, too bad. Berezovsky was notoffended and called his secretary immediately. “Would you please findDorenko?”heasked.“Itseemstomeheisavery talentedguy.”Headded,“Ihavenevertakenthecontentseriously.Buttheformthathecreates,Itakeveryseriously;Ilikeit.”Dorenkorememberedthattheymetmuchlater.WhenBerezovskywantedto

see him, Dorenko at first refused. “I said I was busy,” Dorenko told me.Berezovskypersisted.HeshowedupandwaitedinDorenko’souteroffice.Andwaited.ThiswasBerezovsky’strademarkstyle:hewasalwayswillingtowait,never too humble. It was summer and there was sliced watermelon in theoffice.“MyassistantswereaskingmewhattodowithBerezovsky;hesitsthereanddoesn’tgoaway.”Dorenkoadded,“AndIsaidIdidn’tknow.Isaid,‘Givehimsomewatermelon.’Hesatthereforfortyminuteseatingwatermelonandthenwentaway.”LatertheyagreedtomeetoverlunchataJapaneserestaurantand found that therewas a chemistrybetween them.Within anhour that day,BerezovskysignedupDorenkoforhisORTtelevisionchannel.Dorenko’s particular style of television was what the Russians called an

“author ’sprogram,”which isamixtureofvideofootageofnewseventsandcommentary. The format gives the anchor wide latitude to express himself.NTV’s Yevgeny Kiselyov had a similar show, the popular Itogi on Sundayevenings, but Kiselyov was a high-brow presence. Dorenko was different—blunt,sarcastic,flamboyant.Berezovskywasatworkbehindthescenes,tryingtoeaseoutPrimakov.On

May 12, 1999, Yeltsin fired Primakov. Yeltsin appeared to be increasinglyremoteandeccentric.HemayhavebeenjealousofPrimakov’spopularityorpersuaded that Primakov could not copewith the economy. Yeltsin replacedPrimakov with Sergei Stepashin, a one-time interior minister with thedemeanorofaloyalpolicecaptain.Hewasasobedientasamancouldbebutnotstrong-willed.OneofStepashin’sfirstactswastoannouncethathewouldnotprosecuteBerezovsky.Stepashin had hardly settled in when the Kremlin began discussing his

dismissal.Berezovsky later recalled that Stepashinwas viewed as “weak” bythe Kremlin inner circle.26 Stepashin was a legal expert, but he seemedparalyzedwhenitcametopolitics.Everyday,supportwasdrainingawayfromYeltsin and toward Luzhkov. The Kremlin circle decided they had to find

someone else. They had to solve the problem of “continuity of power.” OnAugust10,YeltsinfiredStepashin,thefourthpremierYeltsinhaddumpedinayearandahalf.InStepashin’splace,YeltsinappointedVladimirPutin,aspryman with cold eyes and sandy hair who was the little-known chief of theFederal Security Service. Putin was initially viewed as a caretaker, but hebecamemuch,muchmore.Thatsummerthepoliticalvacuum,thepalpablelackofleadership,settledon

Moscowlikea fog.Berezovsky,no longerbeinghoundedbyPrimakov,wasanxious toplaykingmakeroncemore.Hecame toDorenkoandproposed anewprogramtailoredtoDorenko,apureauthor ’sdelight:TheSergeiDorenkoShow.Then came another bolt of alarming news for theKremlin circle.Twoof

Berezovsky’sarchfoes,LuzhkovandPrimakov,wereteamingup,announcinga political alliance, and setting their sights on the Kremlin. They wereattracting support from key governors and mayors around the country, andwhentheymadetheannouncement,itwascleartheywerebecomingaforcetobereckonedwith.TheyhadwhatiscalledmomentuminAmericanpolitics—asenseofinevitabilityhungoverthem.Theywerenotverycharismatic,butthatdidn’tmatter.What countedwas a perception that theywould be heirs to theKremlin. There wasn’t another obvious successor to Yeltsin. Luzhkov knewtheywereintroubleforjustthatreason.HesensedthattheKremlinstaffwasalready gunning for them. There was “powerful pressure and opposition toformationofourbloc,”hesaid.“Butwearenotafraidofit.Wearestrong.”27The Kremlin inner circle was distressed. Three days after the Luzhkov-

Primakovpressconference, severalWestern journalistsand Iwere invited tothe Kremlin to speak to Voloshin, Yeltsin’s chief of staff. It was a rareopportunity toheardirectlyfromtheYeltsin“family,” theembattledKremlincircle that included Berezovsky, Voloshin, Dyachenko, and Yumashev.Voloshin, dressed casually on a Saturday, spoke very softly in a room ofgleamingwhitemarble.Hewassurprisinglycandid.Hemadeitclearthat theKremlin could not tolerate the thought of Primakov and Luzhkov becomingYeltsin’s successors. Primakov was a wily old Soviet spy, he said. Luzhkovbroughtnomoresympathy.“Hissurroundingissemicriminal,”hesaid.“Itisnotasecrettoanyone.ThewholeofRussiaistalkingaboutit.”ButheadmittedthatLuzhkovhadachievedsomeresults.“OfcourseMoscowcouldafford tobuild a lot of things, for example, the Ring Road. Luzhkov is known as abuilder. He built a lot. Some economists calculated that the money that was

spent on the road would be enough to pave it with silver—three or fivecentimetersthick!”I leftwith a feeling theKremlinwas lashing out at Luzhkov because they

lackedasuccessortoYeltsinanddidn’tknowwhattodo.Itwasahot,breezyAugustafternoonasIwalkedacrossthecobblestonesofRedSquareafterthemeeting—the autumn political season seemed distant, the intrigues andbackbitingsosenseless.Ishouldhaveknownthat thecluesfromtheKremlinwere not accidental. Berezovsky never rested. Only a few months before,thrownonthedefensivebyPrimakov,hehadbeenontherunfromprosecutorsand masked men breaking into his businesses. Now the compressed ball ofenergywasback—andpreparingtostrike.Dorenko also watched the Luzhkov-Primakov alliance with disdain and

decidedtomakeLuzhkovthe“star”ofhisautumntelevisionprogram.Hehadoftenbeenat loggerheadswithbothPrimakovandLuzhkov, so theattackonLuzhkovwoulddovetail perfectlywithhis personal feelings.He relished theidea.BerezovskyandDorenkospokebytelephoneabouthowtocarryouttheonslaught.Berezovsky:“Seryozha,thisisBoris.Hellodear.Howarethings?”Dorenko:“Theclerksarewriting.”Berezovsky: “Think—what kind of scheme. Think!” Berezovsky used a

Russianslangword,razvodka,whichmeansaschemeinthesenseofasettingone partner against the other. Then Dorenko and Berezovsky brainstormedhow to smear Luzhkov’s reputation and destroy his political viability. Theirconversationswerewiretappedandlaterprintedinanewspaper.28Dorenko’sprogramsalwaysincludedabitoftruthtokeephiscommentary

plausible, but thenhe tried to twist the facts tomake a point.OftenDorenkotook his show to the absurd.To highlight Primakov’s ill health after his hipoperation,Dorenkoshowedthegorydetailsofsurgeonscuttingawayat legsand thighs.“Oh, thatwasapieceofwork!”Dorenko laughedat thememory.AnotherpartofDorenko’spowerwasthecreativesideoftheshow,presentedwithnoapologies,nohesitation,andmorethanalittletabloidembellishment.DorenkowouldhavebeenperfectlyinhiselementannouncingaUFOsighting.Throughout the autumn, Dorenko toyed with the powerful mayor of

Moscow, not in a slugfest but in a teasing, wicked series of broadcasts thatalwaysportrayedthemayorinaterriblelight.DorenkowaitedforLuzhkovtoreactandthenusedthereactiontorepeatthesmear.“Theseprogramsweren’tdonesolelybymeofcourse,”Dorenkocommentedfacetiously.“Luzhkovand

Primakovwerehelpingme;thethreeofusweremakingthoseprograms.Wewereworkingasateam.”For Luzhkov, the televised assault by Dorenko came at an awful time in

Moscow.Aseriesofbombblaststerrorizedthecity’spopulation.InSeptember,explosionsrippedapartthreeMoscowapartmentcomplexes,killingmorethanthreehundredpeopleintheirsleep.Luzhkovrushedtothesceneeachtime.Hestruggled tomaintain calm and oversee the rescue operation as hysteria andangerspread.Putin, thenewprimeminister,wascatapulted to leadershipat thismoment.

Putin had an ultracool demeanor; a voter once remarked to me that Putinlookedlikeacheetahreadytostrike.PutinblamedthebombingsonChechens,and, in the climate of fear, his public approval ratings skyrocketed as heprepared to launch a new large-scalemilitary offensive in Chechnya.At thesametime,Luzhkovsawhisownpoliticalratingcollapse,hiscityaflameandcrazedwithfear,andhisreputationtorntoshredseverySundayontelevision.Itallhappenedatonce.Dorenkowasmore interested indestroyingLuzhkov than thebrewingwar

in Chechnya. On October 17, Dorenko devoted most of his program toportraying Luzhkov as a hypocrite. Dorenko described how a hospital wasrebuiltinthesouthernRussiancityofBudyonovsk.Thehospitalwaswreckedduring a terrorist raid in the firstChechenwar.Dorenko saidLuzhkov tookcredit for rebuilding the hospital but never thanked the donor of themoney.Dorenko repeated the point several times, saying Luzhkov hogged all thecreditforthehospital.“Darlings!”Dorenkosaid,figuratively,totheMoscowmayor ’soffice.“Whatareyoudoing?Whydon’tyoujustthank”thedonor.29In the next segment Dorenko hinted at mysterious money transfers from

Moscowtoforeignbanks.DorenkonotedrecentarticlesintheNewYorkTimesabouttheBankofNewYorkchannelingRussianmoneyoutofthecountry.30Adocument flashed on the screen: a bank transfer to the Bank of New York.Fortymillion dollars!Another!A third!No onewho saw the show—myselfincluded—could quite figure out what was going on, but Dorenko was allaboutform,notsubstance.HeclosedwithakillerlineimpugningLuzhkov.“IsupposethatLuzhkovisnotgoingtosharethedetailswiththepublic,”hesaid,“but perhaps hewill have to share the peculiarities of his economic activitywith the investigating teams working on the theme of Russian moneylaunderingintheBankofNewYork.”Attheendoftheshow,DorenkodroppedanothervideobombonLuzhkov’s

head.Heshowedaseriesoffast-paced,alternatingvideoclips.First,Luzhkovatthemayor ’soffice,attackingtheKremlin“regime,”andtheillYeltsin;thenLuzhkov at the climactic rally of the Yeltsin 1996 campaign, supportingYeltsin. “I say, Russia, Yeltsin, freedom!” Luzhkov bellowed at the rally.“Russia,Yeltsin,victory!”Thecrowdroared.“Russia!Yeltsin!Ourfuture!”Dorenko saidnothing—hedidn’t need to.Hehad savagedLuzhkov.There

was nothing inconsistent in what Luzhkov had really said. Yeltsin was hischoicein1996,andYeltsinwassicktwoyearslater.ButDorenkoflashedthetwoscenesbackandforthinawaythatmadeLuzhkovlooksilly,andthetacticwas damaging. “I think this is hypocrisy,” Dorenko recalled, relishing thememoryofhishandiwork.“Hy-poc-ri-sy!”LuzhkovwasstunnedattheDorenkoshow.HehadbeenmayorofMoscow

formorethanfiveyearsandwasthebossofhiscity.LuzhkovsputteredangrydenunciationsatDorenkoandtookhimtocourtforslander,atacticthathehadalways used in Moscow politics. But it had not been very effective againstDorenko.“It’smadness,”Luzhkovsaid.“It’sakindofpsychoticattack,inthesensethatitisusuallymentallyunstablepeoplewhodothissortofthing,”hedeclared.31“ItisshockingforRussia.Itincludesliesandslander,floodsofdirtpouredonpoliticiansandstatesmen.”32LuzhkovgotsocaughtupintheDorenkotelevisiontorturechamberthathe

didnotbreakouttomakeacaseforhimself.HeneverlaunchedtheonesloganthatYevtushenkov thoughtmight be the basis for a presidential bid—that hecould rebuild Russia. His wife, Yelena Baturina, told me at the time that“politicsfrommypointofviewisaveryhardchoiceforYuriMikhailovichnow.Politicsdoesn’talwaysusepropermethods.Hefindshimselfataloss.Hehasalotofprinciples,andveryoftenhisopponentsdonothaveanyatall.”33WhenItalkedtoYevtushenkov,healsorecalledthatLuzhkovwasnotpreparedfor what hit him. “For long years,” he said, “YuriMikhailovich lived in anenvironment,inanatmosphereofbeingeverybody’sfavorite.Andonalargescale,hewasasacredcowwhomnobodydaredcriticizemuch....Hewasnotprepared,morally,forwhatwouldhappen.Hejustwasn’tprepared.”Therelentlessdrumbeatofnegativebroadcasts took their tollonLuzhkov.

DorenkohadenormousreachonORT,sincethesignalcoveredthewholeofRussia. InOctober, thePublicOpinionFoundation, a leading private pollingcompanythatalsoworkedfortheKremlin,reportedthatLuzhkov’sstandinginthe polls was beginning to collapse. It was common for presidential front-runnersinacrowdedfieldtohaveonly20percentorslightlymoreinweekly

polls. In January, 15 percent of those questioned said they would vote forLuzhkov as president. In October it had fallen to only 5 percent. Thepercentageof thosesaying theymistrustedLuzhkovwent from35percent inlate1998to51percentayearlater.DorenkoreachedtheapogeeofhissmearcampaignonNovember7,1999.

Againhereachedforatopicthatwasconnectedtorealevents—themurderofPaulTatum,theU.S.businessmangunneddownin1996afteradisputeovertheRadisson-SlavyanskayaHotel.Noonewaseverapprehendedorevenchargedforthemurder.DorenkotoldmethattheTatumshowfellintohislap.Eversincehebegan

theon-airsmearcampaign,hisofficewasdelugedwithpeoplebringinghimcomplaintsaboutLuzhkov.“DozensofpeopleaskedtomeetwithmeandwerebringingdocumentsonLuzhkov,”herecalled.“Andamongallthosepeople,aguycomestomeandtellsme,‘Look,twomonthsagoIwasinFloridaandItapedaninterviewwithsomecrazyAmerican....Heiskindofdisturbed.’”ThecrazyAmericanclaimedthatLuzhkovwastoblameforTatum’smurder.ThecrazyAmericanwasabouttobecomeDorenko’svideoGatlinggun.Dorenkospoke to Berezovsky about how to cast the Tatum program for maximumeffect to smear Luzhkov. Berezovsky suggested a convoluted, bizarre storyline that involved theFederalSecurityService.Buthewascareful to instructthatPutin,theformerFSBhead,beleftoutoftheshow.Dorenkowentontheair.Hesaidattheopeningoftheprogram,“Luzhkovis

guiltyofTatum’sdeath,asTatumsaid the instantbeforehedied.So testifiesJeffOlson,friendofthedeadman.”Olsonwasthe“crazyAmerican.”Olson was then shown sitting in an enormous leather chair, a can of Dr

Pepper™ on a stand next to him. Olson made a surprising claim that wasdifficulttobelieve:HewasaTatumfriendwhowasthefirsttobecalledaboutthemurder.“Paul,whenhewasshot,wasstillaliveforseveralminutesafterhewashitbythebullets.Hewascommunicatingalittlebitwiththebodyguards,the bodyguards were communicating with the office, the office wascommunicating tome.His lastwords to theoffice, tome,were: ‘Luzhkov isresponsible,hedidthistome.’”Dorenko then plunged into a long, twisted narrative, following

Berezovsky’scues.TherawthrustofDorenko’spointwastoblameLuzhkovfor themurder.The restof the facts,conspiracies,and testimonypassed inablur.Totopitoff,DorenkoclosedtheeveningwithapieceattemptingtolinkLuzhkovwiththeheadoftheAumShumriko, theJapanesesect thatpoisoned

the Tokyo subway, and the Church of Scientology. No bit of guilt byassociation,noscrapofammunitionescapedDorenko.Itwasallashow.Berezovsky loved it. That autumn, he was campaigning for a seat in the

Duma from Karachayevo-Cherkessia, an ethnically divided republic insouthern Russia. Berezovsky was also actively organizing the newparliamentary party to support Putin. The gathering storm of a militaryoffensive in Chechnya was highly popular, and Putin was riding a wave ofacclaim.BerezovskywasalsoservingaskingmakertoPutin.HeletDorenkohandletheassaultonLuzhkov,aseriouspotentialrivaltoPutin,whoneededtobepushedoutoftheway.WhenIaskedBerezovskyatthetimewhathethoughtoftheDorenkoshow,

heanswered,“Thevoterswatchitwithpleasure.Andtheanswertowhetheritisgoodorbadcanonlybe thedemocratic tradition: ifyoudon’t like it, turnyourTVoff.Ifyoulikeit,goaheadandwatchit.Frommypointofview,itisabrilliantshow.”“I absolutely don’t attempt to analyze the content,” he added. “I am an

admirerofhistalent:frommypointofview,theformisamazing.Thatis,thelevel of influence that he achieves. It is real talent.”34 In other words,Berezovskylovedthesmearanddidn’tcareifitwasfarfromthetruth.Attheendoftheparliamentarycampaign,Luzhkov,woundedandbitter,held

one last rally inMoscowon theedgeofRedSquareatVasilyevskySlope. Itwasdarkas thecrowdgathered. In thebackground,St.Basil’sCathedralwasbrightly illuminated by spotlights. The moment was filled with distress forLuzhkov.Nearthesamespot,threeandahalfyearsearlier,LuzhkovdeliveredhisrousingendorsementofYeltsin.NowhewasreducedtoshoutingatYeltsin,shouting in vain into the cold night air, shouting so his voice reverberatedagainst theKremlinwalls just beyond. Luzhkov,wearing his trademark cap,rattledoffhiscritiqueoftherulingpowers,recallingtheGKOpyramids,therublecrash,massprivatization.“Theyareafraidofus!”hedeclared.“Theyareafraid of us becausewe say it is necessary to bring to justice all thosewhoallowedthislawlessness,andthistheftofthecountry’spropertyandmoney!”Thecrowdwaswooden,mostlycityworkersandtradeunionsupporterswhowerebusedinandmarchedtotheirpreassignedspotonthecobblestoneslope.They left immediately after it was over. They carried placards such as“DorenkoIsBerezovsky’sPuppy,”and“HandsOffOurMayor!”Itseemedtome that Luzhkov made a huge mistake in devoting his final energy toshadowboxingwithDorenko.Hecouldhaverunapowerfulpoliticalcampaign

basedonMoscowasashowcasecity,butheneverdid.IwroteinmynotebookthatLuzhkov“isakhozyainatheart,who’smadesomeefforttobeapolitician,but he’s beenmowed down by Dorenko and the rest, and he surely doesn’tknowhowtorespondtoit.”Luzhkovwasstillfumingaboutthe“regime”attheendoftherally.Hesaidbitterly,“Wehadtoshowthosescoundrelsthatwearearealforce, thatwewon’tgive in.Wehadtoshowthatwecanstanduptoaflood of lies and slander. We are against the ways in which the regime isstartingtoruleinthecountry.”LuzhkovwonhislibelsuitsagainstDorenko,buthelostthelargerpolitical

war. His hopes of running for president were dashed, although he wasreelectedMoscowmayorinDecember1999by70percent.Luzhkovcontinuedto rule Moscow, but the chance that he might lead Russia after Yeltsin wasdestroyed.When I asked Luzhkov about the events of that autumnmore than a year

later, he was still furious. He blamed Yeltsin, Yeltsin’s inner circle,Berezovsky,and“parasiticcapital.”WhenIsuggestedhehadnotfoughtbackvigorouslyenough,Luzhkovgrewquiteanimated.Herecalledthelawsuitshefiled and insisted that he had tried to respond. “Were we supposed to drivetanksinthedirectionoftheOstankinoTVcenter?”heasked.“Itisabsolutelywell-knownthatinallhisepisodes,Dorenkowasslanderingme,andheknowsit. He received hugemoney fromBerezovsky, a fee, hugemoney. By courtdecisionhewasorderedtopay$4,500.Heislaughingatjustice.Wedon’thaveeffectivejustice.”Dorenkowas proud of his work. He created fifteen shows that decimated

Luzhkov’s hopes of becoming president of Russia. He called them “fifteensilverbullets.”Therublecrashhitall three televisionchannelsveryhard,butGusinskywasparticularly vulnerable because his ambitions had once soared so high. ForORT, still 51 percent owned by the state but controlled by Berezovsky, thegovernment provided a lifeline, a $100 million loan from a state bank.KiselyovtoldmethatNTVwasanxiousforaloanfromthestateaswell.Eventhough the channel took pride in the fact it was outside control of the state,eventhoughitfreelycriticizedYeltsinandthegovernment,KiselyovsaidNTVwouldhavegladly accepted agovernment loan too, andwent so far in thesedesperatetimesastobroachtheidea.Hebelievedthegovernmenthadcausedthe crisis, so the government should help the television industry as awhole

survive. The financial health of Gusinsky’s companies began to deteriorate.TheRussiantelevisionadvertisingmarketfell47.5percentfrom1998,anditwas down 77 percent from precrash projections. 35 Meanwhile, the cost ofservicinghis debtswas large.Thegovernment remained silent about a loan.“So, ORT got a government loan of $100 million, and we got nothing,”Kiselyovsaid.“Thatwasoneofthemostworryingthingsthathappenedtous.”NTV carried increasingly critical coverage of the Yeltsin circle—includingunflatteringreportsaboutVoloshin,thechiefofstaff,whowasdepictedinoneKiselyovbroadcast asLenin.Viewerswere clumsily remindedofVoloshin’spast working with Berezovsky on the AVVA scheme. The show was poorlyproducedandnotverypersuasive.Thedeposedprosecutor,Skuratov,whosoinfuriated the Kremlin, also got a generous amount of airtime on NTV tospreadhischargesagainsttheYeltsinfamilyandinnercircle.Inmidsummer1999,GusinskymetwithVoloshin.Inthisperiod,Gusinsky

andBerezovskywereatloggerheads.Theremayhavebeenotherreasons,buttheobvioussourceoftensionwaspolitics.GusinskywasbettingonLuzhkov,andBerezovskywasdeterminedtodestroythemayor.Atthetime,theKremlinstilldidnothaveasuccessortoYeltsin.Theproblemof“continuityofpower”remained. Voloshin had the coming election on his mind when he metGusinsky.Atthispoint,Gusinskymighthavepulledbackandthusavoidedapotentially

catastrophic collision with Yeltsin and his team. He might have focused onbuilding up his media empire and avoided taking sides in the comingcampaign. But he did not take this route.Hewas an oligarch, and oligarchsplayedfor thebigstakes.Theyruled thecountry.Remainingon thesidelineswas not an option. Gusinsky pushed ahead—backing Luzhkov—and made amistakethatledtothedestructionofallhehadbuilt.AtthemeetingwithVoloshin,Gusinskylaterrecalled,“Voloshinsaid,asif

hewas joking, ‘Let’spayyou$100millionso thatyouwon’tbe inourwaywhile theelectionison.Youcouldgoonavacation.’”GusinskysaidhetoldVoloshinthathecouldnotrepeattheexperienceof1996,whenthenewsmedialinedupbehindYeltsin.36Voloshin was not in the mood to help Gusinsky, and the Kremlin instead

begantoturnthescrewsonhim.VoloshinaccusedGusinskyofrunningupbigdebtstoGazpromand“resortingtothetried-andtestedmethodofinformationracketeering,” pressuring the Kremlin for loans. Voloshin told Gusinsky toforget about any assistance from thegovernment. “Since themanagement of

the holding company and specifically NTV television channel have such anunfriendly attitude toward the authorities, it is not entirely clear why theseauthorities should be helping Media-Most resolve its problems,” Voloshinsaid.37 Kiselyov, the popular television anchorman, later recalled the dialogwith theKremlin thatsummer inblunter terms.TheKremlindemandedNTVsupportforwhoeverwashandpickedtobeYeltsin’ssuccessor;littlechoicewasoffered.“Joinusorrotinhell,”Kiselyovsaidtheyweretold.38When the Chechen war reignited in August 1999, Gusinsky’s troubles

deepened. A band of Chechen rebels led a cross-border incursion intoneighboring Dagestan, an internal Russian republic that is a patchwork ofnationalities. The attack came in a remotemountainous zone. The Chechenswere led by Shamil Basayev, a bearded, ruthless Chechen warrior who hadalso,overtheyears,beenonspeakingtermswithBerezovsky.Berezovskysaidhe warned the Kremlin that the incursion was coming. Despite the advancesignals,theKremlindidnotmakeaseriousattempttostopit.39The fresh hostilities propelled Putin to prominence. He wasted no time

ordering the Russianmilitary to attack the Chechen rebels. His ratingswentthroughtheroof to levelsofapprovalnotseensinceYeltsin’searlydays.Asprimeminister,hewasalsointhelineofsuccessionshouldYeltsinresignorbecome incapacitated.Hecameoutofnowhere inanatmosphereof fearanduncertainty, a time of hysteria, when thirteen-floor prefabricated concretebuildings inMoscow imploded violently and randomly in themiddle of thenight; sleeping children, mothers, and fathers were crushed instantly by anightmare of falling stone, steel, and glass.Without any debate,with nary acritical question asked, the political environment was transformed from avacuumtoaone-manregime.WithPutin,theKremlinhadsolvedtheproblemof“continuityofpower”inonefellswoop.NooneknewwhatPutinstoodforor what he had done during his career as a KGB spy. He appeared to bestanding up, decisively, to defend them against the Chechens, after Yeltsin’syearsofweaknessandvacillation.PutinembodiedandarticulatedtheRussianhatred for the Chechens. Putin vowed to wipe out the Chechens “in theouthouse.”Theonset of newhostilities putNTVoutside theKremlin circle, just as it

hadinthefirstwar,butthistimethecircumstancesweremarkedlydifferent.Inthe first conflict, theRussianmilitarymade only lame efforts to control theflow of information, and journalists from NTV made their mark bringinghomethegruesome,vividimagesofbattlethatoftencontradictedtheofficial

version.But in late1999, theKremlinand themilitaryattempted tobottleupthe television channels. The scenes on televisionwere not of combat but ofRussian generals reading official statements. Battlefield information wasstrictlycensored.InamajorsetbackforGusinsky,oneofhisfirstpartnersinNTV,OlegDobrodeyev,whochampionedthegroundbreakingcoverageofthefirstwar in 1995, left the channel in a disagreement over how to cover thesecondwar.This timeDobrodeyevwas sympathetic to the army. “Whenyousee everything with your own eyes,” he toldKrasnaya Zvezda, the militarynewspaper, “when in real time theDefenseMinistrygenerals aregivingyouinformation,youdon’thavetoaskanyoneforanythingelse.”40The first Chechen war had become intensely unpopular at home, but the

secondoffensive,carriedoutinanatmosphereofpublicfearaftertheMoscowexplosions,washugelypopular.ThistooputGusinskyandNTVinadifficultposition; the public did not want to hear criticism of the war. Yet anotherdifference was that NTV journalists did not have as much access to theChechensidebecauseofthethreatofkidnapping.AnNTVstarcorrespondent,Yelena Masyuk, and two members of her crew had been ransomed fromChechenkidnappersin1997.Afterthis,manyjournalistshadlesssympathyforthe Chechens. Still, NTV correspondents attempted to cover the war as besttheycouldunderextremelydifficultconditions.Berezovsky was hospitalized in the fall for hepatitis, but even from his

hospitalbed,hewasinhyperspeed.Heorganizedandbankrolledthecreationof a new political party, Unity, which he hoped would later support Putin’sagenda in theStateDuma, the lowerhouseofparliament.For thosewhohadwatched the labored, difficult work of party building in Russia, the rise ofUnity insuchashortperiodwasnothingshortofstupendous,sincethepartyhadnodiscernibleideology,platform,orcharismaticleaders—butithadPutin.His popularity, combined with Berezovsky’s money, was sufficient to winenough seats tomakeUnity the second largest bloc in thenextparliament.41Berezovsky simultaneously won his own seat from District 15 inKarachayevo-Cherkessia.42Berezovskydidmore thananyone to set the stage forPutin tobecome the

next leaderofRussia,but thefinalactcamefromYeltsinhimself.Ailingandisolated,YeltsinresignedonasnowyNewYear ’sEvein1999andappointedPutinactingpresident.Itwasasurpriseannouncementdeliveredwithacertaininevitability,givenYeltsin’slongabsencesandillhealth.“Russiamustenterthenewmillenniumwithnewpoliticians, new faces, new intelligent, strong, and

energetic people,”Yeltsin said in a television address. “And for those of uswhohavebeeninpowerformanyyears,wemustgo.”Yeltsin had informedPutin that hewould turn the reins over to himabout

two weeks earlier. Yeltsin told his family just that afternoon that he wasstepping down. Moscow was amazingly calm. There had been weeks ofspeculationaboutsomekindoftechno-catastropheascomputerclocksturnedovertotheyear2000,andperhapsthatwasonereasonforthequiet.OnNewYear ’s Eve, I found people shopping and thinking of themselves and theirfamilies, and politics was simply drowned out. The streets were empty andfireworkssplittheairthroughoutthenight.Whatwasworrisome that nightwas the speed and suddennesswithwhich

PutinwasforcedonRussia.WhenhewasappointedactingpresidentbyYeltsin,he had less than a year ’s experience in leadership of the grinding, torturedmachine that was Russia’s protodemocracy and newborn market economy.FormerSovietPresidentMikhailGorbachev,whohadbeenclosetoPrimakov,spoke for many when he said, “Putin is holding on, thanks to his mystery.Mysterious appearance, mysterious glance, mysterious phrases. But it sohappensthemanopenshismouthandhasnothingtosay.”Putinhadpreviouslythrivedinclosedworlds,spendingseventeenyearsasa

KGB agent and several years after that as a behind-the-scenes deputy toAnatolySobchak,thefirstelectedmayorofSt.Petersburg.UntilhandpickedbyYeltsintobeprimeminister,Putinhadneverbeenapublicfigure.Whenhewasnamedactingpresident,hehadnoideawhatitwasliketocampaignforoffice.Hehadneverbeenforcedtodealwithangryvotersorcriticalnewsmedia.Heagonizedovergivinginterviewstothepress.Hefoundcampaignsdistasteful.“Youhavetobeinsincereandpromisesomethingthatyoucannotfulfill,”hesaid.“Soyoueitherhave tobeafoolwhodoesnotunderstandwhatyouarepromisingordeliberatelylie.”Oddly,Putindidnotthinktherewasanhonestway—tomakepromisesandtrytofulfillthem.MyownimpressionisthatPutinknew,fromhisKGByears,thateconomic

modernizationwastheonlywayforwardforRussia,buthedidnotunderstandhow to build a democracy, or evenhow it functioned.His own rapid rise topower offered him few, if any, useful lessons about democracy. He waselevated to the presidency on the updraft of a military campaign, while hischiefopponents,LuzhkovandPrimakov,weredestroyedontelevisionbyhisbackroomteam.Heneverhadtogothroughtheexperienceofbeingdefeatedat the polls.He never had to engage in real political competition.He rarely

subjectedhimselftothegive-and-takeofpressconferencesandnevertookpartinadebate.Duringhis fiveyearsasaSovietKGBspy inEastGermany,Putinmissed

the critically important political and economic upheavals in Moscow. Hemissed the periodwhen journalistswere considered beacons of freedom; hemissed the triumph of public associations, like the human rights groupMemorial,whichbecamepowerfulforcesforchangeinsociety;andhemissedthe early experiments in electoral politics such as the Congress of People’sDeputies.Putinsimplymissedthebirthofcivilsociety.Whenhebecameactingpresident, he was light-years away from the open, rambunctious media thatGusinskyhad created.Putinwas a closedmanwhodidnot see theneed, forexample,toexplainhimselftothepublic.Hetoldjournaliststhathesawthemasbelongingtohis“command,”anus-or-them,suspiciousmentality.Hepaidlip service to freedom of speech, but his own viewwas entirely Soviet, thattelevisionshouldbeanorganofthestate.Putin told Dorenko once that television shaped reality. “You understand,”

Putinsaid,“therearecertaincaseswhen ifyoudon’t tellaboutsomething, itdidn’thappen.”Dorenko,whoknewaswellasanyoneinRussiathepoweroftelevision,saidofPutin:“Asapolitician,hebelieveshimselftobeaproductoftelevision.Andhethinksthatonlytelevisioncandestroyhim.Notnewspapers—heisnotafraidofnewspapersbecausepeopledon’treadnewspapers.”InPutin’sworld,Gusinskywasamarkedman.His televisionchannel,with

its open criticism of the Kremlin and Putin, ran counter to all of Putin’sinstinctsanddesires.“HehatesGusinsky,”Dorenko toldme.“Firstofall,hebelievedGusinskywasworking forLuzhkovandhewanted to take revenge.Second,withLuzhkovdefeated,PutinthoughtGusinskyhadrebuilthimselftoserveAmericanpolitical interests.And third,Gusinsky cannot be controlled.He is strongandnotaPutinman.That is,Putincannotstandbesideanybodywhoseopiniondiffersfromhisown,especiallypublicly.Youcantryandarguewithhimprivately;Ihavedonethat.Butpubliclyyoucannot.”Gusinskywasamarkedmaninanotherwaytoo.Putin,whowasstationedby

the KGB in Dresden during the Gorbachev period, not only missed thepolitical upheaval in the late 1980s but also the wild, crazy economicexplosion of the final Soviet years, the period of the cooperatives and earlybanks when Gusinsky, Berezovsky, Smolensky, and Khodorkovsky had allmade their leapfromtheoldsystemto thenewone.Throughoutmostof theYeltsinperiod,whentheoligarchsweregainingpowerandinfluence,Putin’s

perchwasas a second-tiermunicipalofficial, thenanobscureKremlin aide,and finally head of the Security Service for one year. Rushed to the seat ofpowerasYeltsin’ssuccessor,hetookasuspiciousviewofthetycoons.Whenaskedinaradiointerviewwhatthefutureheldfortheoligarchs,Putinsaid,ifonemeant“thosepeoplewhofuse,orhelpfusionofpowerandcapital—therewillbenooligarchsofthiskindasaclass.”43At the time, this comment unleashed a torrent of speculation about what

Putin really meant. My own view was that Putin understood full well thedistortions that oligarchic capitalism had brought to Russia. That was notreallytheissue;thequestionwaswhatPutinintendedtodoaboutit.Didhewantto change the system? Many Westerners, especially those in the financialmarkets,rejoicedatPutin’swordsbecausetheybelievedhewouldcarryoutanassault on the system of opaque, dirty deals, clean up the mess, and makeRussia safe for foreign investment. If Putin had really been serious aboutsystemic change, about building a competitive, market-oriented, rule-of-lawapproach,thenitwouldhavebeenwelcomenewsindeed.ButPutindidnotbeginwithanassaultonthesystem.Hebeganwithanattack

ononeoftheoligarchs:Gusinsky.StartingsoonaftertheMarch2000election,which Putin won, the Kremlin intensified a relentless campaign, throughsurrogates, todestroyGusinsky’smediabusinessandlargelysucceededoverthe following year. Putin’s backroom team had already ruined Luzhkov’spresidential hopes. Then they turned on Gusinsky and, amazingly, theyeventually turned on their own creator, Berezovsky. Putin’s approach tooligarchiccapitalismduringhisfirstyearwasnottochangethesystem.Hejustwantedtogetcontrolofit.Gusinsky recalled with some pride how he had once taken the chairman ofGazprom, Rem Vyakhirev, to see the ground station that Gusinsky’sconglomerate, Media-Most, had built to operate the satellites for NTV-Plus.Eversinceitbought30percentofNTVin1996,Gazpromhadbeenafriendlyinvestor in the television company. Gazprom, a gargantuan, hideboundmonopoly that operated by its own secretive methods, was a pillar of theRussianeconomy.Thecompanyearnedbillionsofdollarsfromlucrativegasexports to Europe. It was a cushion of capital for Gusinsky after the 1996election. Gazpromwas there for Gusinsky again after he failed to float hissharesonWallStreet.Itagreedtoguaranteea$211millionloanforGusinskythroughCreditSuisseFirstBostonandpaidofftheloanwhenGusinskycould

not. Gusinsky now had a debt to Gazprom. A deal was struck to boostGazprom’sstakeintheholdingcompany,Media-Most,inexchangeforpayingoffthedebt.Undertheterms,Gazpromwouldget25percentplusoneshareofMedia-Most.Gazpromagreed to thedeal,butdetailswerestillbeingworkedoutearlyintheyear2000,whenPutinwaselected.Then everything changed. The Kremlin entered the picture, and Gusinsky

felt a noose tightening around his neck. Gazprom would no longer be hisfriend.A disturbing sign of trouble came in early May 2000. Gusinsky was

negotiating to sellhisMostBank toaCentralBanksubsidiary.Theplanhadbeendrawnupandwas ready tobesignedwhen thechairmanof theCentralBank, Viktor Gerashchenko, received a phone call from the Kremlin. ThecallerwasPutin’schiefofstaff,Voloshin,andhetoldthecentralbankernottogo ahead with the deal. According to several accounts I heard at the time,GerashchenkotoldVoloshintogotohellandhungupthephone.The next call came ten minutes later from Putin, who also instructed

Gerashchenkonottosignthedeal.Thistime,Gerashchenkoobeyed.On the morning of May 11, three minibuses of armed, masked men

identifying themselvesas taxpolicepulledupat theheadquartersbuildingofGusinsky’s holding company, Media-Most, in the center of Moscow. Thebuildingwas lavishlyappointedbyRussian standards,with fountains,marblefloors, and a luxurious amphitheater.The raiders,wearing blackmaskswithonly their eyes showing and wielding semiautomatic rifles, ordered theemployees to leave their offices and remain in the cafeteria while theysearchedthebuilding.Whatweretheysearchingfor?Whowerethey?Alldaytheauthoritiesgaveconflictingaccounts: theywere taxpolice;no, theyweresearching for bugging equipment; no, they were investigating Gusinsky’sdebts.Theraidwasjustthefirsthintofwhatwastocome.ToGusinsky’ssurprise,Gazpromturnedhostile.GazpromappointedAlfred

Kokh,thesaltyformerprivatizationchiefwhohadoverseenloansforsharesandSvyazinvest, tomanage its shareofMedia-Most.Kokhwasstill angryatGusinsky three years after the Svyazinvest fiasco. He knew Gusinsky wasbehindthedisclosurethathehadreceivedthe$100,000bookadvancefromacompanylinkedtoPotanin.HewasstillseethingatthewayGusinskyhadusedhis media to disclose the book advance. This was no casual decision byGazprom; it was tantamount to putting Gusinsky’s most hateful enemy incharge of his business. I ran into Kokh during this period at his office in

centralMoscow. He was extremely agitated at something he had seen abouthimselfononeoftheproliferatingInternetsitesthatcarriedkompromat fromanonymous sources. Kokh invitedme to look at the computer screen in hisoffice.Idon’trememberwhatitwasthatsoagitatedhim,butIwellrememberhis shouting that itwas allGusinsky’s fault. “Bandit!”he saidover andoveragainofGusinsky.ThewoundsofSvyazinveststillfestered,andKokhwasinapositiontoextracthisrevenge.On the day of the raid against his headquarters, Gusinsky flew back to

Russia fromabusiness trip to Israel.Speaking to reportersat theairport,hedenouncedtheshowofforceas“politicalpressure.”Still,Gusinskycouldnothelpbutfeelthathehadbeenthroughallthisbefore,whenKorzhakov’sgoonshad chased his car into the center of Moscow in 1994. The Kremlin hadpressured him then too, and he had been forced to flee the country for sixmonthsuntil thingscooleddown.Buthesurvived that,andNTVhad thrived.“History repeats itself somehow,” he said, rather philosophically. “If youremember1994,allthishashappenedalready.”More worrisome was the changed attitude of Gazprom. The mammoth

companywas run like a private fiefdom inwhichVyakhirev could do as hepleased. This worked to Gusinsky’s advantage from 1996 until 2000, whenGazprom was his ally. Gusinsky said that, as a major shareholder in NTV,“Gazpromneverattemptedtointerfere.”Onlyafewmonthsearlier,VyakhirevagreedtotakethelargershareofMedia-Mostinexchangefortheunpaiddebt.It was a debt-for-equity swap, a transaction hardly unusual in the West.Gazpromwasa“partner,”Gusinskytoldme,“andIhadnoreasonnottotrustthedeal.”But after Putin took office, Gazprom was no longer willing to take

Gusinsky’s equity. Gazprom demanded that Gusinsky pay cash, which theKremlinknewGusinskydidnothave.GusinskysaidhebelievedthatVyakhirevwas personally pressured by the Kremlin into the aboutface. Moreover,Gusinsky,who hadwide contacts in theWest, found itmuch harder to raisenewcapitalabroad.Themaskedmenraidinghisofficeshadtakencareofthat.Just the news photos of a police investigation were enough to scare awayinvestors. “You understand, investors are afraid of scandals,” Gusinsky toldme. His attempts to borrow from abroad were effectively blocked by theKremlin. Gusinsky, stubborn, emotional and vain, concluded that Putin waspersonally out to get him. “If the president of such a big country asRussia,who has internal problems, problems with governing, problems with

Chechnya,problemswiththegovernment,findstimetocallupGerashchenko—IthinkitisclearwhoisdealingwithGazprom,andwhy.”44ThenextblowfellonGusinskypersonally.HeopenlycriticizedPutin.“The

mythofPutinasapresidentwhoadvocatesreforms,democracy,freespeech,andsoon,ishistorynow,”GusinskysaiddefiantlythefirstweekofJune.“Hisrealactionsunmaskhim, revealinghis true face,youknow.”45Aweek later,Gusinsky was asked to come answer questions at the general prosecutor ’soffice. At issue was the origin of several bullets for a decorative pistolbelongingtoaGusinskyaidethathadbeenconfiscatedintheMay11raid.Forreasons thatwere not clear,Gusinskywas not alarmed by the summons andwent to answer the questionswithout a lawyer, taking only a bodyguard.Hewasoriginallyscheduledtoanswerquestionsat2:00P.M.butwasdelayedandarrivedat5:00P.M.Then,at6:15P.M.,his lawyers receivedanote from theprosecutor ’s office thatGusinskywas under arrest. Later in the evening, theprosecutors announced that Gusinsky was being held as a suspect in an oldfraud case involving privatization of a St. Petersburg television company,Russian Video. The whole arrest was carried out with haste; the originaldocumentssaid thatGusinskywas tobe taken toLefortovo, the largefederalprison, but instead he was thrown in Moscow’s most notorious prison,Butyrskaya, an overcrowded, eighteenth-century jail, and denied access to alawyer.Putin,whowasonastatevisittoSpain,pretendedthathehadnoideawhat

washappeningandclaimedthathecouldnotevengetthegeneralprosecutor,VladimirUstinov,onthetelephone.ButPutindisplayedasurprisinglydetailedknowledgeofthecase.HeclearlyhadbeenbriefedaboutGusinsky’sfinancialplight.PutinclaimedthatGusinskyhadtaken$1.3billioninloansforMedia-Most but “returned almost nothing,” including debts to Gazprom. “SeveraldaysagoGusinskydidnotpaybackanother$200millionloan,”Putinadded,“andGazpromagainpaidtheoutstandingdebt.IwonderwhyGazpromshouldspendmoneyon this.”Putin’swords revealed theKremlin’s crude tactics: toforce Gusinsky to pay all his debts at once, effectively to bankrupt him.46AlthoughPutinclaimedhewasnotinvolvedinGusinsky’sarrest,itwasalie.Hehadhishandsonthehangman’snoosenowbeingstrungaroundGusinsky’sneck.Whenheheardaboutthearrest,SergeiDorenkogrewangry.Dorenkohad

indirectlyhelpedPutincometopowerwithhisfifteensilverbullets,buthedidnot like what he saw unfolding. That evening, NTV was broadcasting an

edition of its popular talk show,GlasNaroda (Vox Populi). The subjectwasGusinsky’s arrest.The showwasbroadcast froman amphitheater-like studioandencouragedparticipationbyalargeaudience.DorenkowasBerezovsky’sman, but he rushed to Gusinsky’s defense. Wearing jeans and a sweatshirt,Dorenkodrovemadlytothestudio.Halfwaythere,hisbeeperwentoff.ItwasKiselyov,invitinghimtoappearontheairimmediately.Berezovskycalledonhis mobile phone, seeming a bit confused about what was happening. “OhBorya!”Dorenko replied. “They are simply idiots!” he said of the arrest ofGusinsky. “And you know I am onmy way to the studio.” Berezovsky wassurprisedbutsilent.Theshowwasfilledwithpassion.Politicians,lawyers,andjournalistsfrom

Gusinsky’spublications, andotherswhowere just his friends, appearedwithemotions flashing in their eyes, their anger searing and deep. Theimprisonment of Gusinsky was nothing other than an assault on Russia’sfragilefreedoms,theysaid,anarbitraryreversiontotheoldauthoritarianism.“This is an actionof threat and revenge,” saidAndreiCherkizov, an acerbicradiocommentatoronGusinsky’sEchoofMoscowstation.“It’sathreateningaction—ifyoumisbehave,thiswillhappentoyoualso,”saidBorisNemtsov,theyoungreformerwhowasnowaprogressivememberofparliament.Dorenkowashardlyabeaconofidealismwhenitcametodefendingafree

press. He was a showman, and he had personally carried out a debilitatingsmearcampaignagainstLuzhkov.Buthehadguts,andonthisnighthewasnotafraid to say what he saw happening. Dorenko’s comments were the mostmemorableof the entire evening.Hedeclared thatPutinhadgiven thegreenlightforthe“robots”oftheoldregime,thesecurityservices,toreturntothefore.Dorenko had disliked Primakov as a symbol of this old regime.Now,Dorenko realized, Putinwas turning out to be just a continuation of the oldschool—arbitrary attacks, total control. Just six weeks after Putin had takenoffice,andatatimewhenhewasstillbeinghailedintheWestasayoung,post-Yeltsin remedyforRussia’sailments,Dorenkopunctured the imagewith justasmuchenergyashehadsmashedLuzhkov.“We thought something happened over these last ten years,” he said,

referring to the rise of Russian democracy since the collapse of the SovietUnion.“Wethoughtthattheoldsystembrokeoverthesetenyears.Wedumpedthe robots. They have been lying there.And they stirred and startedmovingagain,asiftheyheardsomemusic.Theygotupandstartedmoving.Todaythesecurity structures throughout thewhole country are taking amessage from

Putin’s rise topower....Theyhearmusic thatwedonothear,and theygetuplike zombies and walk. They surround us. And they will go far if there issilence....Weneedtobashthemovertheheadeveryday.”MoreamazingthanDorenko’seloquentandrevealingspeechthatnightwas

thephonecall hegot a fewdays later, afterPutin returned toMoscow.Putininvited Dorenko to the Kremlin, urgently. Putin behaved like a KGB man,alwaysseekingcontrol,evenoverhisenemies.PutinofferedDorenkoteaandpastryandthensaid,“Sergei,somethinghashappenedwithourrelationship.”Dorenko replied that was not the point. “You have sent a very important

message toeveryone in thiscountry, toeveryone,”Dorenkosaid.“Toall thepolicemen, to all theFSBpeople.You told them to try and catch journalists,businessmen, and Jews. This is what you said. Because Gusinsky is a Jewconnectedwiththepressandabusinessman.Andnowyoucanissueanykindsof decrees or laws, but people will know what you really want: to catchjournalists,businessmen,andJews.”47Dorenko recalled that, at the mention of Jews, Putin told him that Israeli

PrimeMinisterEhudBarakhadcalledPutinandaskedwhyhewasattackingGusinsky. Putin then recounted how he had told Barak that Gusinsky “isn’tpayingtaxesinIsrael”orRussia.Dorenkowasappalled.“Itoldhim,‘VladimirVladimirovich,thathasnothingtodowithyou.You

arenotaninvestigator,areyou?Youareapolitician.It’snotyourlevel;thereareotherpeoplewhosejobitistodealwiththat.It’sabsolutelynotyourlevelwhere he is paying his taxes. And second, in Russia, it is ridiculous. Thepolicemanwhowill tomorrowsmash Jews, journalists, andbusinessmen . . .doesn’tevenknowtheword‘taxes.’”Putinseemeduneasy.He tried tochange thesubject.“Youand Iareon the

sameteam,”heappealedtoDorenko.Dorenkoreplied,“Iamnotonanyone’steam.”Gusinsky was formally charged with fraud and released late on Friday

evening,June16,onapledgenottoleaveMoscow.Afewdayslater,GusinskysatawkwardlyinachaironapedestalforalivebroadcastinterviewonGlasNaroda, questioned by his partner Kiselyov. Gusinsky was never an easyinterview;hisemotionsseemedtocreepuponhim,andhewouldchangehisthoughtsinmidsentence.Hewassurroundedbysympatheticjournalists,andheappeared uneasy as the center of attention. But he was very clear and lucidaboutPutin.TheRussianpresident,he said,kneweverythingabouthisarrestand imprisonment. “More than that,” he added, “the decision was taken

personallybyMr.President.”TheKremlin,Gusinskydeclared,haddividedthetycoons into“friends”and“foes,”andhewasoneof thefoes.Gusinskyalsoacknowledged that the oligarchs had given the Kremlin plenty of reason tothink they could command the news media—the 1996 campaign for Yeltsinwas theprecedent.“Averybigandgravemistake,”Gusinskysaid.“Itwas in1996thatwegavebirth toasmallmonster....Todaytheauthoritiesarereallyusingtheinstrumentsthatwepresentedtothemin1996.”48ThenextsixweeksunderscoredthatPutinwasplayinghardball.Hewanted

to break Gusinsky. The raids on Gusinsky’s corporate headquarters, thechargesoffraud,andthejailepisodewerejustthebeginningoftheend.TheKremlin intensified the pressure in June and July. The pointman behind thescenes was Mikhail Lesin, founder of the advertising agency VideoInternational,whohadbeennamedpressministerbyPutin.Lesinoncedid aflourishing business with Gusinsky. His advertising agency had been theexclusive broker for airtime on NTV, and both men prospered in the mid-1990s.ButVideoInternationalpulledupstakesandterminatedtherelationshipin late1999.Soon thereafter,Lesin joined thecampaignagainstGusinsky.AcloseassociateofLesintoldmethatLesinharboredpersonalanimositytowardGusinsky,feelingthathehadnevershownhimenoughrespect.Lesinhadquitewillingly thrown himself into the attack on Gusinsky and was joined byKokh.49A long, secret negotiation began between Gusinsky and his tormentors.

Gusinsky was in a financially vulnerable position. In addition to the $211million loan thatGazpromhadguaranteed, thenext loan,alsoguaranteedbyGazprom, of $262million,was coming due in July 2001. The total debt ofGusinsky’scompanytoGazpromwas$473million.Intheolddays,Gusinskycouldcountonstrongtelevisionrevenuestocarrytheburdenofdebtservice,butaftertherublecrash,hisfinancialsituationwasstrained.In the talks, theKremlin’s goal,working throughKokh andLesin,was to

wrestNTV away fromGusinsky,whowas still facing criminal prosecution.Malashenko told me that Lesin presented Gusinsky with an ultimatum. If hesold the business to Gazprom, he could go free. The deal offered was this:$300 million in cash for the whole of Gusinsky’s empire, Media-Most andNTV,aswellasforgivenessoftheoutstanding$473millionindebts.GusinskyrecalledthatNTValonehadbeenvaluedatmorethan$1billionoverallwhenhe was thinking of selling shares in NewYork before the crash—now theywereofferinghimnickelsanddimesforhiscompany!Still,hefeltpressured.

Hedidnotwanttogobacktojailandtherewerecontinuingraidsagainsthiscompanies. On July 7, investigators carted off more documents from NTV.Gusinsky later told me, “They said it more than once. There were constantthreatstoputmeinjailcellswithtubercularprisonersandpeoplewithAIDS....I was indeed a hostage.When you have a gun to your head, you have twooptions:tomeettheconditionofthebanditsortakeabulletinyourhead.”OnJuly18Gusinskysignedawrittenstatement,secretatthetime,witnessed

bytwoofhislawyers.Thestatementsaidhewasbeingforcedagainsthiswillto sell his business, in exchange for a promise to drop the criminal chargesandpermissiontogoabroad.GusinskysaidLesin,thepressminister,wastheone “forcing me to conclude this transaction.” Two days later, on July 20,againactingsecretly,hesignedtheagreementtoselloutfor$300million.AdocumentattachedtothesalecalledforthecriminalchargesagainstGusinskytobedropped.50 A few days later, Putin returned from a summitmeeting atOkinawa, where he had been lavishly praised by leaders of the Westernindustrialdemocracies.On July27Russianprosecutors abruptly andwithoutexplanationannouncedtheyweredroppingallchargesagainstGusinsky.Thesecretagreementtoselloutwasnotmentioned.Gusinskyimmediatelyboardedhisprivate jet and flewoutofRussia tovisithis family inSpain.Hedidnotcomebackagain.Over the next severalweeks, negotiationswere quietly held in London to

iron out the deal. But in September, Gusinsky was having second thoughts,even though some of his partners and his wife urged him to take the $300million.GusinskysaidhefeltthatNTVwaslikeahomehehadgrownupin,andhefearedPutinwantedtoturnitintoa“brothel.”Hedecidednottoselloutandtoreupthedeal.ItwasanotherturningpointforGusinsky,wherehemighthaveavoidedmoretrouble.Buthewasstillfeelingthedriveandambitionofanoligarch—hewouldnotletthempushhimaround.ImetGusinskyone rainySeptember afternoon inLondon.Hewas defiant

andenergized.HewantedtoresisttheKremlinandstandupforNTV,ashehadsuccessfullydoneunder fire in1995.Hiscellular telephone rang incessantlywith calls from Moscow. His four top journalists and editors—Kiselyov,Sergei Parkhomenko of Itogi magazine, Mikhail Berger of the newspaperSevodnya, andAlexeiVenediktovofEchoofMoscowRadio—flewbackandforth toLondonandGusinsky’shome inSpain for conferences.Malashenkowent to Soros seeking help. Soros told Malashenko that he had found aninvestor willing to take the risks: CNN founder Ted Turner. But all the

wranglingcametonaught.PutinwantedGusinskyout,andPutinwasstronger.The prosecutor issued new warrants for Gusinsky’s arrest through Interpol.GusinskywasdetainedinSpainandtwicejailedthere,beforetheSpanishhighcourt threw out the case, saying there was no evidence Gusinsky hadcommittedacrime.Gusinsky’sexecutives,includingMalashenko,fledRussia,fearing they would be arrested. Kiselyov fought on. In the year of pressuretactics, there were more than thirty raids by the prosecutor and other lawenforcementagenciesagainstGusinsky’sbusinesses.“There is nothing I can do,” Putin lamely told journalists from NTV on

January29ataKremlinmeeting.Thiswasjustnonsense,anduntrue.Putinwasactuallyquitedeeplyinvolvedinthecase.HetookKiselyovasideonthedayoftheKremlinmeeting.“Iknoweverythingaboutyourhoursandhoursofphoneconversations with Gusinsky,” he said, revealing that he was readingtranscriptsofthewiretaps.“Sowhat,wehavebeenpartnerssince1993!”Kiselyovprotested.“IknowalltheinstructionsyougetfromGusinsky,”Putinsaidcoldly.Putinwas the driving force behind the entire affair, andhe, aswell as his

backroom boys, were intent on victory. Kiselyov told me there were twogroupsaroundPutinhelpingcrushGusinsky.Onewas the“grudge”group—Lesin and Kokh, who had their own reasons for taking revenge on theoligarch.Theotherwerethesecurityservices,Putin’sfriendsandpowerbase.Ustinov,thegeneralprosecutor,twicesummonedKiselyovforsecretmeetingsattheheadquartersoftheprosecutor ’soffice.Toavoiddetection,Kiselyovwasbrought into the building in centralMoscow in an unmarked car through abackdoor.Kiselyovthoughtthemeetingswerestrange,andUstinovstilted,asif he were talking to hidden microphones. Ustinov wanted to know what itwould take to resolve the crisis. Kiselyov demanded that charges againstGusinskybedropped.Thetalkscametonothing.GusinskyfinallylostcontrolofthetelevisionstationinApril.Gazprom,ina

hastilyassembledboardmeeting,gotcontrolof25percentplusoneshareandmoved to seize controloverNTV.Theoldmanagementwas removed.Kokhappointed a new general director, Boris Jordan, the young hustler who hadbeen Potanin’s fast-talking partner in the Svyazinvest auction. Jordan hadpromisednottouseforcetotakeoverthestation,butat4:00A.M.onApril14he arrived at NTV with his own security guards and assumed control. ThearrivalofKokhand JordanatNTVwasmetbyhissingandmoans from thestaff. Kiselyov and many other journalists walked out. Gazprom also took

controlofSevodnya,Gusinsky’sfirstnewspaper,andclosedit.Thencamethenewsmagazine Itogi. Themagazine’s staff, arriving forwork onemorning,was ignominiously fired and locked out of their offices, including thefounders,chiefeditorParkhomenko,andhisdeputy,MashaLipman.Theageofdreamswasover.

Forseveralyears,Berezovskyhaddoggedlypursuedhisgoalofmaintainingthe “continuity of power” after Yeltsin. He finally found his preferredsuccessor to Yeltsin in Putin. With slavish coverage of ORT television,BerezovskyhelpedPutingetelectedpresidentforafour-yeartermonMarch27, 2000. Once he had made the ultimate power play in delivering a newRussian president, I assumed Berezovsky would feel secure and powerful. Iwaswrong.Little more than a year after Primakov had frightened Berezovsky, the

oligarchwasontherunagain.HadBerezovskymisjudgedPutin?OrdidPutintoss him aside, no longerwanting a reminder that he toowas a creation ofRussia’smostambitiouskingmaker?JustasGusinskywasbeinggrounddownbytheKremlin,PutinandBerezovskyhadtheirownfallingout.At first Berezovsky seemed to have little to worry about. He told me

approvinglythatPutinwasloyaltohisfriends.Tomakethepoint,Berezovskyoffered a personal anecdote. He said Putin, at some risk, had come to abirthdayparty forBerezovsky’swifeat theLogovazClubduring the timeoftensionwithPrimakovthepreviousspring.PutinwasthenheadoftheFederalSecurityService,anditcouldnothavebeeneasytoshowupatBerezovsky’sfamous club. But Putin took the risk, Berezovsky boasted, to show thatpersonalfeelingsofloyaltywereabovepolitics.“IrealizeitwouldbeveryinterestingforthepublicifPutin,afterbecoming

the president, would jail Berezovsky,” the oligarch told me, referring tohimself in the third person. We were sitting at the same large table at theLogovazmansionwhereIhadoftentalkedwithBerezovsky,althoughthistimeheseemedmoreserenethaninthepast.Hetookoffhissportcoatandsavoredred wine from a tall glass. “To be honest, I am not expecting this, neithertomorrownorinthenearestfuture.”ThatwasMarch22,2000.But then came the unexpected. First, Putin and Berezovsky had a

disagreement over Chechnya. Putin was vigorously prosecuting the waragainstChechen separatists,whileBerezovsky began calling for peace talks.Putin asked Berezovsky to cut off all ties with the Chechen warlords.

BerezovskysaidheagreedtoPutin’srequestbuttoldthenewRussianpresidenttherewasnomilitarysolutioninChechnya.Next, Berezovsky grew alarmed at Putin’s proposal for strongerKremlin

control over Russia’s independent-minded regional governors. In a majorpower play, Putin announced a plan to impose seven new unelectedsupergovernorson theexistingeighty-nineregionalchiefs.Fiveof thesevenPutin appointees were former KGBmen ormilitarymen. Putin also soughtlegislationallowinghimtofiregovernors.Berezovskysawitasanautocraticmove.Helikedtheideaofaloosecollectionofindependentgovernors,eventhough he realized that the Russian Federation under Yeltsin had become acrazy-quiltmixofbothstrongandweakregionalpowers,andthatgovernorsoften defied the Kremlin. Berezovsky also knew governors were extremelyimportant in decisions about heavy industry—such as aluminum andautomobiles—and he clearly did not relish the thought of all power in thecountrybeingcontrolledbytheKremlin.Berezovsky,forexample,hadtriedtoplay power broker in more than one Russian region and had succeeded ingettingtheformergeneralAlexanderLebedelectedinKrasnoyarsk.Berezovskymadeanappeal toPutin that theRussianFederation shouldbe

loosened, perhaps even turned into a confederation of more autonomous,independentstates.ButPutinwasnotlistening.Putindidexactlytheoppositeofwhat Berezovsky recommended. They had a long talk, Berezovsky recalled,andherealizedthathisfearsaboutPutin’sautocraticstreakwerewell-founded.“He said he still believed that we had to build a liberal democratic state inRussia,”Berezovskysaid later,“butwehadtodo itbyforce,becausepeoplewerenotreadyforit.”Headded,“Putinbelieveseverythinghastobegovernedfrom above, so it is necessary to concentrate power, concentrate the massmedia,andtorulebusiness.”Berezovsky wrote Putin a lengthy private letter, but the Russian president

brushedhimaside.OnMay30BerezovskypubliclybrokewithPutin for thefirsttimeandissuedanopenletterattackinghim.Ispoketohimonthatsteamyafternoonat theLogovazmansion,wherehe seemed frazzled.The serenity Ihad noticed inMarch was gone. Berezovsky accused Putin of “demolishingsomedemocratic institutions”inmovesthatwould“cheat”Russia’svotersoftheir elected local leaders and destroy the regional political elites. ThecriticismcannothavegonedownverywellwithPutin.OnJuly17BerezovskysurprisedmeagainbyresigninghisseatintheStateDuma,whichhehadheldonlysixmonths.“Idonotwanttotakepartinthisspectacle,”hetoldreporters,

“Idonotwant toparticipate inRussia’s collapseand theestablishmentof anauthoritarianregime.”Whenanuclear-poweredsubmarine,theKursk,sankinAugust,takingwith

itthelivesofall118onboard,Putinreactedawkwardly.Television,includingBerezovsky’sORT,showedtheRussianpresidentridingajetskiintheBlackSeawhile vacationing at the southern Russian resort at Sochi. Putin seemeduninformed,hesitatedtoacceptcallsforinternationalaid,andrepeatedlyliedaboutthefateofthesailorstrappedinthesubmarine.Putineruptedinangeratthenewscoverage.Hesaidtheoligarchsandtheir

televisionchannelshadbeendestroying thestate,and thearmyandnavy too.Dorenkowasorderedtakenofftheairimmediately.PutincalledBerezovskytocomplain that ORT had compared the sunken submarine to the Chernobylnuclear accident. Berezovsky suggested a meeting. Putin said fine. The nextday, Berezovsky arrived at the Kremlin to find Voloshin waiting for himinsteadofPutin.“Listen,” Voloshin told Berezovsky, “either you give up ORT within two

weeksoryouwillfollowGusinsky.”“Thisisnotthewaytotalktome,”Berezovskyreplied.“Youareforgetting

something.IamnotGusinsky.”Berezovsky asked Voloshin to set up the meeting with Putin. Voloshin

agreed.HecalledBerezovskythenextdayat2:00P.M.andaskedthetycoontoshow up at the Kremlin in an hour. Berezovsky came. Voloshin was againwaiting in his office. Putin arrived, tense, and Berezovsky launched into adefenseofhowORThadcovered theKurskdisaster, including its interviewswithbereavedwidowsofthelostsailors.“This is helpingyou, it’s not obstructingyou,”Berezovsky said, “because

onlyopennesscanhelpyou,nothingelse.”“Isthatall?”Putinasked.“Yes,that’sall,themainthing,”Berezovskyreplied.“Andnow, I have something to tell you,”Putin said.Heopened a file.He

begantoreadinamonotone.Berezovskydidnotrecalltheexactwords,butthegist of it was that ORT was corrupt and managed by just one person,Berezovsky,whotookallthemoneyunderhiscontrol.Berezovsky had a flashback to his nemesis, Primakov. The documentwas

right out of Primakov’s campaign against him the previous year. This wasreally galling to Berezovsky. “The signature down there, is it YevgenyMaximovichPrimakov?”BerezovskyaskedPutin.“Whyareyoureadingitto

me?”“IwanttorunORT,”Putinsaid.“IpersonallyamgoingtorunORT.”Berezovskywas stunned.Dorenko had said that Putin viewed himself as a

creature of television, and now it was clear that hewanted to control everyminute on the air. “Listen, Volod,” Berezovsky replied, using a friendly,shortenedformofVladimir.“Thisisridiculous,ataminimum.Andsecond,itisunrealizable.”“ORTcovers98percentofRussianterritory,ofRussianhouseholds,”Putin

replied,coldly.“Don’t tellme the statistics!”Berezovsky answered. “I know them all.Do

youunderstandwhatyouaretalkingabout?Infact,youwanttocontrolallthemassmediainRussia—yourself!”51Putinstoodupandleft.Berezovskywentbacktohisofficeanddashedoffa

short letter to Putin. He wrote that Putin was committing the samemistakesover and over again, first by escalating the conflict in Chechnya, then byimposinghiswillonthegovernors,andfinallyintakingoverthemassmedia.Berezovsky lamented that the president was trying to “find solutions tocomplexproblemsbysimplemeans.”Putinwastryingtobecomeanautocrat.Itwouldn’twork.HegavethelettertoVoloshin.ThelettermarkedBerezovsky’sbailoutfromtheKremlininnercircle.The

powerbrokerhad reachedadeadend.Hehadgivenuponhisown creation.BerezovskyconcludedtherewasnopointinfightingPutinoverhistelevisionstation. He sold his interest in ORT to Roman Abramovich, who was hispartnerinSibneft,andoneoftheyounger,newgenerationofoligarchswillingtocooperatewiththeKremlin.Berezovskythenleftthecountry.When I sawBerezovskya fewmonths later inNewYorkCity,he recalled

onefinalscenefromhisencounterwithPutin.IntheirlastconversationintheKremlin, Putin had turned to him plaintively, fixing his cold stare onBerezovsky,theshort,hyperactivemanwiththesoftrat-a-tatvoicewhowouldwait on your doorstep for hours. Putin looked at him, the power brokerextraordinairewhohad,withhisownhandsandtirelessambitionanddreamsofgreatwealth,donemorethananyonetoshapetheageoftheoligarchs.Nowtheirdaysofglorywereover.Newplayerswerecoming,newfortunesbeingmade.AndanewRussianleadersatintheKremlin.“You,”Putinsaid,“youwereoneofthosewhoaskedmetobepresident.So,

howcanyoucomplain?”Berezovskyhadnoanswer.

Epilogue

THESOUNDANDFURYoftheYeltsineracametoamuffledend.Yeltsinwasasadfigureon the lastnightofhispresidency.His televisedfarewellspeechfrom the Kremlin on December 31, 1999, was laced with words of regret.“Manyofourhopeshavenotcometrue,”heacknowledged,askingtheRussianpeople to forgive him. “What we thought would be easy turned out to bepainfullydifficult.”Theoligarchs,thesonsofYeltsin’sunrulycapitalism,tookdifferentpaths.Of the six,MikhailKhodorkovsky ended up thewealthiest.After the dark

days of 1999, when he played hardball with lenders and investors,Khodorkovsky demonstrated once again his shrewd judgment. He switchedfromtoughguytogentleman,realizingthathisfortunecouldbemultipliedifhe played by more open and honest Western rules. He paid dividends toshareholders for thefirst time,publishedaccountsby internationalstandards,andreinvestedprofits intohisoilbusiness.Yukosshares resumed tradingonthe Russian stock market and soared from $0.20 a share to $3.60 a share.Khodorkovskybecamemuchwealthier,sinceheandhispartnerscontrolled69percent of the company. His coffers overflowed with cash after world oilpricesrosesuddenlyin1999and2000.IntheannualForbesmagazinelistofthe world’s five hundred wealthiest men in 2001, Khodorkovsky was therichestRussianonthelist,withanetworthestimatedat$2.4billion.AnatolyChubais,wholedthereformersintheYeltsinyears,wasnolonger

at center stage.Gonewere thedayswhenhis everywordmadeheadlines. In1999,hethrewhimselfintofixingRussia’sdecrepitelectricitymonopoly,andhe became just one among many Russian industrial barons. ChubaisenthusiasticallybackedVladimirPutinattheoutsetofthesecondChechenwar.ChubaisdidnotseePutinasathreattoRussiandemocracyorafreepress,butratherasastrong-willed leaderwhowould throwhisweightbehindRussia’smodernization.WhenPutincrushedVladimirGusinskyandwrestedNTVawayfromhim,ChubaisexpressedregretbutdidnotdefendGusinsky.HehadonlybadmemoriesofthebankerswarandGusinsky’sroleinit.Afterthepresidentialcampaign,YuriLuzhkovwentbacktohisfamiliarrole

askhozyainofMoscow.Henolongerharboredambitionsforthepresidency.

Chastened,hepaiddeferencetoPutinandreturnedtohisownprotectedrealm,asbuilderandbossofthecapitalcity.Alexander Smolensky dropped out of sight. For a while he worked on

establishinganewbank,usingsomeoftheofficesofthebankruptSBS-Agro,butthensoldit.Gusinsky’smediaempirefellapartunder therelentlesspressureofPutin’s

Kremlin, but the journalists who worked for Gusinsky were not destroyed.Many of them stuck together and attempted to rebuild. With Gusinsky’sblessing,YevgenyKiselyovtookacoregroupoftheNTVstaffandsetupshopat a smallerMoscow television station,TV-6.BorisBerezovsky,whoownedthe station, now shared it with Gusinsky’s journalists. But starting over washardwork,andtheNTVdreamwasdifficulttorekindle.Gusinskyownedpartof the Israeli newspaperMa’ariv and often visited the United States. But hecouldnotgohomeagaintoRussia.Berezovskywasasrestlessasever,buthisdaysaspowerbrokerwereover.

He felt it was risky to return to Russia and did not go back, although hispredominant business and political interests were inside the country.Berezovsky still controlled two influential daily newspapers and the TV-6television station, but he was forced by the Kremlin to sell the larger ORTtelevision channel, which had been his most influential tool. BerezovskyconcludedthathehadmadeamistakebringingPutintopower,buthecoulddolittleaboutitfromabroad.Berezovsky,whoonceepitomizedtheinsider,whochampionedtheembraceofwealthandpower,wasnowontheoutsidelookingin.On July 18, 2001, after more than a year in office, Putin held a news

conference.AreporteraskedhimaboutBerezovsky.Hesighedandresponded,“BorisBerezovsky—who’sthat?”

Afterwordtothe2003PaperbackEdition

Ofalltheoligarchs,nonesurvivedandthrivedquiteaswellasMikhail Khodorkovsky in the years 2000 to 2003. World oil prices

remainedhigh,andYukosbecamethelargestcompanyinRussia,asmeasuredbymarketcapitalization.Khodorkovskyandhiscorepartnersreapedbillionsofdollarsindividends.In2002,forthefirsttime,KhodorkovskydisclosedtheownershipstructureofYukos.Withthisdecision,hebecamethefirstownerofa major company to break with the climate of secrecy in which Russiancapitalismwasborn in the1990s,and thispioneeringstepforwardwasevenmoresurprisingbecauseofKhodorkovsky’sownhistoryofmurkydeals.ThedisclosurerevealedthattheoilcompanywascontrolledbyGroupMenatep,aGibraltar company owned byKhodorkovsky and a handful of close friends.Khodorkovsky’sshareofYukoswasworthabout$8billion.LeonidNevzlin,thecomputerprogrammerwhohadbeenanearly recruit toKhodorkovsky’syouth science center, was also a billionaire shareholder. So was VasilyShakhnovsky, theonetime engineerwho thought up the idea for theClubonSparrowHillsandlaterbecomeaYukosexecutive.When I finished writing TheOligarchs in 2001, Khodorkovsky’s shift in

approach towardmore openness and towardWestern business practices wasalreadyevident.Inthesubsequenttwoyears,ashesoughttoturnYukosintoaglobal oil giant, the change deepened. He proposed building a pipeline toChinaand,inademonstrationofhowRussiacouldsupportAmericanenergyneeds,shippedatankerfullofcrudeoiltoTexas.Khodorkovsky also talked about becoming a major force behind the

developmentofphilanthropyandcivilsocietyinRussia.Theseambitionswentwellbeyondthestatushehadalreadyachievedasthewealthiestoligarchofhisgeneration. He supported a widening circle of charitable activities insideRussia. When American financier George Soros pulled out, saying that hisworkwas finished after donating billions of dollars toRussia in the 1990s,Khodorkovskybecamethelargestsingleprivatephilanthropistinthecountry.Hebeganafoundation,OpenRussia,toadvocateexpandedtiesbetweenRussiaandtheWest,especiallyBritainandtheUnitedStates.Hisinitialinvestmentwas$16 million—a fraction of the billions of dollars in profits and dividends

generatedbytheoilcompany.The launch of Open Russia in Washington was a businesslike affair and

spokevolumesabouthowfarKhodorkovskyhadcome.TheeventwasheldinthehistoricThomasJeffersonBuildingoftheLibraryofCongress.Aboutonehundred lobbyists andgovernment officials dined in theMembersRoom, anornatechamberwithpaintedsilkpanelsinthehighceilingswheretheHouseofRepresentativesoncemet.ThehostwasJamesH.Billington, theLibrarianofCongress and one of the leading scholars of Russian history in the UnitedStates.Billington’sclassicworkTheIconandtheAxe,an interpretivehistoryofRussian thought and culture,was published in 1966,whenKhodorkovskywasjustthreeyearsold.ThescholartoldhisdinnergueststhatKhodorkovskywas a “visionary” and added, “It’s not oftenyouget someonewhohas donewellandwantstodogood.”Khodorkovskymadea$1milliondonationtotheOpenWorldexchangeprogram,inspiredbyBillington,whichbroughtyoungRussian leaders to theUnitedStatesforshort-termvisits.KhodorkovskyalsodonatedmoneytotheNationalBookFestival,sponsoredbyBillington.AtthateventhewasphotographedwithPresidentBushandFirstLadyLauraBush,apotentreminderofhowmuchthingshadchangedforKhodorkovskysincethedarkdaysof1999.Khodorkovsky’s ambitions, however, were not yet satisfied. On April 22,

2003, Yukos announced plans to merge with Sibneft, the oil companyoriginallycreatedbyBorisBerezovsky.Thereadermayrecallthataproposedmerger of these two oil companies fell apart in 1998. Now the combinedcompany,tobecalledYukosSibneft,wouldbethefourth-largestoilcompanyintheworldbyproduction.Oncecombined,thecolossuswouldbeatemptingtargetforamergerwith—orsaleto—anotherinternationaloilcompany.ThiswasKhodorkovsky’sintent,andhismostambitiousgoalever:tobuilduphisempire and then sell it off to ExxonMobil or ChevronTexaco. The rewardswouldbefantastic.Hisvastoilreserveswouldbeturnedintocashworthtensof billions of dollars. And the dream was not implausible: the Russian oilcompanieswerestillcheapby internationalstandards,andearlier in theyearBritish Petroleumhadmade a $6.7 billion investment in anotherRussian oilcompany.AstudybyUnitedFinancialGroupshowedthattheenterprisevalueof Yukos, per barrel of oil, was the equivalent of only about 10 percent ofExxon.ItwasnothardtoseewhyYukoswouldbeatemptingcatch.Khodorkovsky was never comfortable in public, but as his fortunes

improvedhebecameapublicfigureandfoundhimselfspotlightedwithgreat

intensityastherichestmaninRussia.Stillfreshinmyownmindwerethenastycorporatedisputesofthelate1990s.Iwonderedwhetherthesamebusinessmanwhohadchampionedsuchshadytransactionsafewyearsearliercouldbecomethenewstandard-bearerforcorporategovernanceandtransparencyinRussia.ButKhodorkovsky’snewdirectionwastangible,andimpossibletodismiss.AfterPutinhadforcedGusinskyandBerezovskytoleaveRussia,hecameto

anunderstandingwiththeoligarchswhoremained:don’tinterfereinKremlinaffairs,andyoucankeepyourgainsfromthecrazycapitalismof the1990s.ForKhodorkovskyand someof theotherbusinessmen, thesegainswere thehuge natural resource companies, such as Yukos, that they had obtainedcheaplyintheprivatizationofstateassetsandthatnowproducedmountainsofcash for them.Ashiswealth andprominence steadilygrew, it seemed tomethat Khodorkovsky was careful to toe the Kremlin line. When it came topoliticalsupportforpartiesinparliament,Khodorkovskytoldmethathemadethe expected donations of tens of millions of dollars, including bigcontributions to the progressive parties Yabloko and the Union of RightForces, but he did so with Kremlin supervision, like most of the otherbusinessmen.Khodorkovskystirredquietspeculationthathemighthaveapoliticalfuture

inmindforhimselfwhenheannouncedhewouldleaveYukosin2007,ayearbeforeapresidentialelection.ButhisactivitiesseemednaturalforarichandpowerfultycoonanddidnotappeartobecrossingthelinePutinhaddrawn.Then suddenly, something snapped in the Kremlin. The big screen of

Khodorkovsky’sdreamswentdark.The trouble began on February 20, 2003, whenKhodorkovsky and other

businessmen gathered in the Kremlin for one of their periodic formalmeetingswithPutin.Whenhisturncametospeak,Khodorkovskycomplainedaboutthecontinuingscourgeofcorruptioningovernment,andthenhesingledoutarecentmurkyoildeal.Asmallcompany,SevernayaNeft,hadbeensoldtoa larger, state-owned oil company, Rosneft, for a wildly inflated price,hundredsofmillionsofdollarsmorethanitwasworth.Whatwasgoingon?AfterKhodorkovskymentionedthis,Putinrespondedsharply,inathreateningtone.“Yukoshasexcessreserves,”heasked,“andhowdiditgetthem?”Soon, Khodorkovsky was the target of a Kremlin campaign to intimidate

him. A small, relatively unknown Moscow think tank published a reportwarning ominously of a “creeping oligarchic coup” in Russia in which thetycoonssupposedlywereplanningtotakeoverparliamentandpusharoundthe

Russian president.Next, a glossymagazine,Kompromat.Ru, which publishedkompromat, themixture of fact and fiction thatwas often used inRussia forsmear campaigns devoted an entire issue toKhodorkovsky.TheYukos teamwas no stranger to kompromat, but it looked at the article with a sense offoreboding.Itwasanotherwarning.Then, on July 2, 2003, one of Khodorkovsky’s key lieutenants, Platon

Lebedev,wasarrestedbytheRussianauthoritiesonchargesofembezzlementinconnectionwith theprivatizationofa fertilizercompany in1994. Itwasaflimsycharge,sincetheprivatizationhadbeenlitigatedandsettledincourttheprevious year. The arrest stunned Khodorkovsky. Lebedev was director ofGroupMenatepandoneofthebillionaireshareholdersofYukos.ThedayofLebedev’sarrest,themarketcapitalizationofYukoshadreached

$31billion.The arrestwas followedbymore police raids on companybuildings, and

investigations were launched against other core partners of Khodorkovsky,who was personally interrogated. Agents from the Federal Security Serviceshowedupathisdaughter ’sschoolandaskedtheprincipalforalistofallthestudents.ThepatternwasexactlythesameasthatusedagainstGusinskyearlier.Khodorkovskywassuddenlythrustonthedefensive.Khodorkovskysaidthecampaignagainsthimwasbeingdirectedbyagroup

ofsecurityservicemenaroundPutinwhowantedtodrivehimoutofRussia.Theirmotivationswerenotclear.Khodorkovskyhad trippedoversomethingbig when he raised the oil company deal during the Februarymeeting withPutin.Thesecurityservicesretaliated.ItwasnothardtoseethatKhodorkovskywasoneofthebigwinnersoftheage.AmongthelosersweretheformerKGBmen who had been left behind by the collapse of the Soviet Union and theensuing decade of turmoil. They had not managed to grab large corporateassetsintheYeltsinyears,andtheywereenviousoftheoligarchs.WithPutininpower, theysawachancetoenrichthemselves.Putin toldreportershewouldnotinterferewiththeirinvestigations.Khodorkovsky, the epitome of self-confidence for so many years, was

unsettled. He told me that he would not give in to the security services. HevowednottofleeRussia.Heponderedputtingupapublicfightbutheknewitwouldbedifficult.Khodorkovsky realized thatPutinhadcertaincorebeliefsthat were shaped in his years in the KGB. Putin looked with disdain on thebrashtycoons.InaninterviewwiththeNewYorkTimes,Putingavevoicetothisresentment.“Wehaveacategoryofpeoplewhohavebecomebillionaires,as

wesay,overnight,”hesaid.“Thestateappointedthemasbillionaires.Itsimplygave out a huge amount of property, practically for free. They said itthemselves.‘Iwasappointedabillionaire.’Then…theygottheimpressionthatthegodsthemselvessleptontheirheads,thateverythingispermittedtothem.”Khodorkovsky celebrated his fortieth birthday in June 2003 at a time of

deepeninggloom.TheKremlinpermittedthemergerofYukosandSibneft,butat the same time intensified the campaign of intimidation aimed atKhodorkovskyandhispartners.Events tookadramatic turnonOctober25,2003.Khodorkovsky’sprivate

planetoucheddownintheSiberiancityofNovosibirsk,wherehewasmetbyarmedcommandos.Hewasarrested,flowntoMoscowandjailedonchargesof fraud and tax evasion. “I’m not sorry about anything I’ve done,”Khodorkovsky said in a statement released by his lawyer, “Nor am I sorryaboutwhat’shappenedtoday.”The attack onKhodorkovskyunderscored yet again that the oligarchs and

thesystemtheyhadbuiltremainedapotentforceinPutin’sRussia.Itwastruethat Putin set a different tone thanYeltsin.He talked about reestablishing thepowerofthestate,andheprohibitedtheoligarchsfromopenlypullingstringsin theKremlin. Indeed,Putinshowedlittle toleranceforpoliticalcompetitionof any kind. He pushed for the creation of parties in the lower house ofparliamentthatwouldrubber-stampKremlindecisions.Hesoughttolimitthepowersoftheelectedgovernors,weakenedtheupperhouseofparliament,andbymid-2003hadeliminatedalloftheindependentnationaltelevisionnetworksremaininginRussia.Butoligarchiccapitalismwasentrenched.TworesearchersinMoscow,Peter

Boone and Denis Rodionov, prepared a study of Russia’s sixty-four largestcompaniesinAugust2002—allfirmsinwhichthegovernmentnolongerhadacontrollingstake.Theyfoundthat85percentofthesalesofthesecompanieswerecontrolledbyjusteightlargefinancial-industrialgroups.The bigger companies thrived, but one consequence of the age of the

oligarchswasthatsmallandmedium-sizeenterpriseswerestuntedanddidnotexpand. A huge obstacle for these firms was lack of access to capital. Thebanking systemwas still largelydysfunctional, a legacyof the1990s. Itwashardforentrepreneurstogetloanstostartnewbusinesses,whiletheoligarchshadplentyofcapitalandcouldeasilyfinancetheirownneeds.AsKhodorkovskyshowedintheseyears,thenatureofoligarchiccapitalism

was evolving. Khodorkovsky’s transformation raised a very important

question for Russia: Would the other oligarchs also eventually mend theirways?WouldtheybecomemoreliketheAmericantycoonssuchasCarnegieand Rockefeller? And what were the forces of change that caused such anevolution?Oneanswerwas that as theoligarchsgainedmore andmore control over

theircompanies, theybecamebetterstewardsoutofsheerself-interest. In the1990stheyfoughtbitterfightstogainmajorityownership;nowthatitwasalltheirs, theyweremore inclined to treat the company nicely. TheBoone andRodionovstudyfoundthatbig tycoonsstoppedcorporateabusebecausenowthey were the uncontested owners. “The new property owners,” they wrote,“have now turned from promoting lawlessness and low transparency tosupportingtheruleoflawandpropertyrights.”AnothersignofchangeseenatYukosandothercompanieswasthatoncethe

oligarchsgainedcontrol,theybegantofocusonbringingingoodmanagers,oftenfromabroad.Theyfoundthatbettercorporatebehavior tendedtodriveupthemarketvalueofeachcompany.Thisargumentsuggestedthat,overtime,otherswould also see the riches that flowed fromKhodorkovsky’s exampleandtheywouldfollowit.ButtheattackonKhodorkovskyalsoofferedastarkreminderofthedarker

side of Russian capitalism. When Khodorkovsky opened up his books andownership structure, few other major companies followed his example, andalmost no one among the businessmenwaswilling to defend him in public.Khodorkovsky’s transparency seemed to have backfired; others werefrightened, and secure in the old ways of secrecy and coercion. NastycorporatebattlescontinuedunderPutin,muchas theyhadunderYeltsin.Newoligarchs, hungry for property, continued to use the same shadymethods—coercionandsubterfuge—thattheYeltsingenerationhadused.TheeconomistJoel Hellman described this continuing battle for property as “permanentredistribution”:aslongasatycooncouldgetpropertycheaplybyusingforceorbribery,andaslongasthestateremainedweakandwithouttheruleoflaw,therewouldcontinuetobeunseemlycontestsforwealthandpower.BorisBerezovskyremainedinself-imposedexileinLondon.Hecontinued

to attack Putin and sponsored a parliamentary party, Liberal Russia. TheRussianauthoritiespressednewchargesagainstBerezovsky,stemmingfromabusiness deal with Avtovaz in the 1990s, and sought to extradite him.Berezovsky denied the charges. In September 2003 hewon political asylumfromBritainandaLondoncourtthrewouttheextraditionrequest.

VladimirGusinskywasunbowed.Hesoldhis remainingshares inNTVtoGazpromfor$50million.Hecontinued toshowaflair forentrepreneurshipandlaidplansfornewbusinesses.HecontrolledpartoftheIsraelinewspaperMaarivandaRussian-languagesatellitetelevisionchannelinNewYork,wherehelived.HedidnotreturntoRussia.InAugust2003GusinskyflewtoGreeceforavacationonhisyacht.TheGreekauthoritiesarrestedhimbasedonanoldextraditionrequestfromtheyear2000,issuedbyRussia.Gusinskythoughttherequesthadlapsed.Hewasreleasedonbail,andonOctober14,2003,aGreekappeals court threw out the Russian extradition request. Gusinsky was freeagain.AlexanderSmolenskydidnotreappearonthebusinesssceneinRussia.He

hadestablishedasmallbank,butlaterheturneditovertohissonandbusiedhimself with a small jewelry boutique. Yuri Luzhkov was enthusiasticallybuilding bridges, office towers, and highways asmayor ofMoscow, but hekeptalowprofileinnationalpolitics.AnatolyChubaisremainedanimportantbusiness andpolitical figure as theheadof the electricitymonopoly.Hehaddevoted years to trying to overhaul the mammoth company, and a majorreformofthesystemwascomingclosetorealityin2003.

DavidE.HoffmanWashington,D.C.October27,2003

Postscript

WhereTheyAreNow,May2011

Mikhail Khodorkovsky was sentenced on December 30, 2010, to serve inprison until 2017, following a second trial and conviction on charges ofembezzlement. The proceedings were widely criticized as rigged by theKremlinandpoliticallymotivatedtopunishKhodorkovsky.BorisBerezovskyreceivedpoliticalasyluminBritain,whereheremainedanoutspokencriticofPutin.Vladimir Gusinsky lived in the United States and built his media andentertainmentbusinesses.YuriLuzhkovwasoustedasMoscowmayorbyPresidentDmitriMedvedevonSeptember 28, 2010. Medvedev said he had “lost confidence” in thelongservingmayor.ThemoveendedLuzhkov’snearlytwo-decadedominanceoverthecity.Anatoly Chubais led the break-up and further privatization of the Russianelectricitymonopoly.In2008,hewasappointedchiefexecutiveoftheRussianCorporation of Nanotechnologies, or Rusnano, to lead research anddevelopmentinhightechnology.AlexanderSmolenskyslippedentirelyfrompublicview.

Notes

AUTHOR’SNOTEONSOURCES

Inthe1990sthenewRussiawasoftenobscure,impenetrable,anddeceptive.Manyof thosewhomade the fortunesdescribed in this book sought tokeeptheirstoriessecret.Yet,comparedwithearlierperiodsinRussianhistory,myimpressionasacorrespondentinMoscowfrom1995to2001wasthatRussiahadbecomea relativelyopenplace.The financial empiresand tycoonswereoften at war with one another—and that was good for openness. Thecacophonyofvoiceswasconfusingbutalsorevealing.Inorder toassemble theportraitsandchronicle theriseof theoligarchs, I

reliedonmanydifferent sourcesof information.Themost important sourcewasmore than twohundred interviews I conductedwith participants in theseevents. All six subjects—Boris Berezovsky, Anatoly Chubais, VladimirGusinsky,MikhailKhodorkovsky,YuriLuzhkov,andAlexanderSmolensky—grantedmeinterviews.I also relied on a number of memoirs that offered valuable firstperson

accounts of important events, verbatim transcripts of press conferences,severalacademicstudiesoftheperiodbyAmericanandRussianscholars,andtherichliteratureaboutthecollapseoftheSovietUnion.Thedocumentary trail issketchyon thesuccessesandfailuresof theearly

banksandcooperativesmentionedhere.Forthisperiod,Ireliedheavilyonthepersonalrecollectionsoftheparticipants.When Western investors began to scrutinize the factories and refineries

being sold off during the privatization of state property in the 1990s,moreinformation became available. Western brokerage firms published a largenumberofresearchreportsonRussianbusinessesandindustries.Also,astheRussians began to borrow on global capital markets and trade shares onRussia’s own stock exchange, they were required to issue more detailedfinancialstatements.Ihaveporedovermanyofthesedocuments.SomeoftheearlyreportingontheRussianoilandbankingindustrieswasespeciallyuseful.

But all these sources required caution. The financial reports rarelyacknowledgedsuchabusesasassetstrippingandtransferpricing,andresearchreports were sometimes little more than glossy advertisements from stockbrokerstryingtosellshares.IalsoviewedmanystoriesintheRussianpresswithcaution.Asajournalist,

IadmiredthepioneeringworkofafewRussiancolleagues.Butall toooftenthepresswasatoolthattheoligarchsusedintheirwars,andnewsreportshadtobeweighedinlightofwhichfinancialgrouportycoonwastheunderlyingsponsor.Ihaverelied,asmuchaspossible,onpublishedinterviewsinwhichthesubject isquoteddirectly inquestion-and-answerformat. Insomecases, Ihave returned to the journalists or the subjects of the articles for a betterexplanationofwhowasdoingwhattowhom.A serious problem for any understanding of Russia in the 1990s is

kompromat—the materials used by businessmen, politicians, and others tosmeartheirenemies.Oftenkompromatisamixtureofgenuineinformationandfalsifiedmaterials,impossibletosortout.AnenormousamountofkompromatfounditswayintothepressandontotheInternet,andIhavesoughttoavoiditasasourceforthisbook.Even the most aggressive research on my part often ended in

disappointment.Thereaderwillnoticemomentswhentheinexplicablehappens—whenabanksuddenlyinheritsawindfall,whenafactoryisgivenawayfornothing,whenatinycompanyexplodesfromzeroto$1billion.Whatoccurredat thesecritical junctureswasoften impossible to reconstruct, and it remainspartof themysteryof thenewRussia. Ihope thisbookbegins tounravel themystery,butIacknowledgethatmanysecretsoftheoligarchsremainuntold.

SHADOWSANDSHORTAGES

1AndreiSinyavsky,SovietCivilization:ACulturalHistory(NewYork:Arcade,1990),p.181.2LevTimofeyev,“ANewTheoryofSocialism,”MoscowNews,December10,1996.3AlenaV.Ledeneva,Russia’sEconomyofFavors:Blat,Networking,andInformalExchange(Cambridge:CambridgeUniversityPress,1998).4IgorPrimakovandMashaVolkenstein,interviewbyauthor,December11,

1999.5ThisaccountisbasedonmanyinterviewswithIrinaMakarova,whoretracedthetrainridewithmeonDecember2,1999.ThetrainrideoutofKurskyStationisalsothesettingforabookthatwashugelypopularamongyoungpeoplewho,likeIrina,hadcomeofageinthe1970seraofstagnation.VenedictErofeyev,amaverick,rebelliouswriter,capturedthemeaningofescapeinMoskva-Petushki.Theworkwaspublishedinsamizdat,booksoutlawedbythestatebutself-published,oftenascarboncopymanuscripts,andpassedfromhandtohand.Moskva-Putushkiwasatragic,satiricalwork.Erofeyevwasarebelagainstthesystem.Hewroteinslang-filledproseaboutthetrainridefromKurskyStationtohisowntown,Petushki,aparadiseofjasmineandsingingbirds.ErofeyevdrinksduringtheentiretrainridetoPetushki,andinacruelparodyheneverreacheshisparadise.HecomesfullcirclebacktoMoscowandperishes.ErofeyevcameacrosstoIrina’sgenerationastheantisystemhero.Insteadofthebold,optimistic,modern,utopianSovietmanwhochangesthefuturethroughsupremeeffort,heiscapableofchangingnothingandisjustcarriedalong.Ultimately,thesystembreaksitsteethonhimbecausehedoesnotcare.Heneitherfearsnorconforms;hedrifts.6JohnKennethGalbraith,AHistoryofEconomics:ThePastasthePresent(London:HamishHamilton,1987).7AtthetimeMarxwrote,therewasvividevidencetosupporthisviews.TheindustrializingEuropeaneconomiesimposedgreathardshipsonworkersandgaverisetohugeinequalitiesbetweentherichandpoor.8AlecNove,AnEconomicHistoryoftheUSSR,1917–1991,3ded.(London:Penguin,1992).9VitalyNaishul,interviewbyauthor,October7andDecember9,1999.Naishul’swork,DrugayaZhizn,orAnotherLife,isavailableinRussianatwww.inme.ruandwww.libertarium.ru.AmonghismanypublicationsIfoundespeciallyusefulwasTheSupremeandLastStageofSocialism(London:CenterforResearchintoCommunistEconomies,1991).10MoiseiEydelman,“MonopolizedStatisticsunderaTotalitarianRegime,”inTheDestructionoftheSovietEconomicSystem:AnInsiders’History,ed.MichaelEllmanandVladimirKontorovich(NewYork:Sharpe,1998),p.75.11SergeiErmakov,ademographerandprofessorattheInternationalInstituteofEconomicsandLaw,toldmethatinformationonmortalitywaskeptsecretwellintoGorbachev’sglasnostreforms.ThusSovietcitizenswerenottoldthat

theirlifeexpectancywasfallingbelowthatofWesternEuropeans.Ermakovsaidhisownworkwaslongconfinedtotheoreticalmodels.Ermakov,interviewbyauthor,November27,1999.

ALEXANDERSMOLENSKY

1ThelyricswerewrittenbyAlexanderGalich.2AlexanderSmolensky,interviewbyauthor,October10,1997,andAugust30,1999.3EduardKrasnyansky,interviewbyauthor,September2,1999,andMarch17,2000.4Thiswasamodestsalaryatthetime.TheSovietrublewasnotconvertible.Itsvalueindollarsishardtomeasurebecauseconsumergoodswereinsuchshortagethathavingmoneywasoftenlessimportantthanhavingaccesstogoods.InthelateSovietperiod,blackmarketrateswereaboutfiverublesperdollarandroseby1990tobetweentwentyandthirtyrublesperdollar.AftertheSovietUnioncollapsed,therublecouldbeexchangedfordollars.AndersÅslund,Gorbachev’sStruggleforEconomicReform(Ithaca:CornellUniversityPress,1991),p.184.5AlexGoldfarb,interviewbyauthor,February27,2000,andMay27,2000.6“Report,basedonoperationaldata,inregardstoStolichnySavingsBank,”undated,inRussian.Ireceivedthistwelve-pagelawenforcementdossieronSmolenskyin1997fromtheorganizationofarivalbanker.PortionsofitconcerningSmolensky’sbiography,includingthe1981arrest,IhaveconfirmedfromothersourcesandfromSmolenskyhimself.However,someofitisunconfirmedandappearstobepolicespeculation,whichIhaveomitted.Smolenskyclaimedhereportedtotheconstructionbrigadebutdidnotserveouttheterm.7TimothyJ.Colton,Moscow:GoverningtheSocialistMetropolis(Cambridge:HarvardUniversityPress,BelknapPress,1995),p.494.8MikhailGorbachev,Memoirs(NewYork:Doubleday,1995).Gorbachevrecalls,“Wefeltthatwecouldfixthings,pullourselvesoutofthisholebytheoldmethods,andthenbeginsignificantreforms.Thiswasprobablyamistakethatwastedtime,butthatwasourthinkingthen”(p.218).9Åslund,Gorbachev’sStruggle,p.161.

10Åslund,Gorbachev’sStruggle,pp.167–181;DimenicoMarioNuti,“TheNewSovietCooperatives:AdvancesandLimitations”(EuropeanUniversityInstitute,Florence,Italy,July1988).11ViktorLoshak,interviewbyauthor,March18,1999.12YelenaBaturina,interviewbyauthor,August23,1999.13AlexanderPanin,interviewbyauthor,March11,1999.14JoelS.Hellman,“BreakingtheBank:BureaucratsandtheCreationofMarketsinaTransitionalEconomy”(Ph.D.diss.,ColumbiaUniversity,1993).15AlexanderBekker,interviewbyauthor,October3,1997.16Hellman,“BreakingtheBank,”p.150.17RonChernow,TheDeathoftheBanker(NewYork:Vintage,1997).Chernow’smajorworkonMorganisTheHouseofMorgan:AnAmericanBankingDynastyandtheRiseofModernFinance(NewYork:Touchstone,1990).18Hellman,“BreakingtheBank,”p.166.19Hellman,“BreakingtheBank,”p.162.20Hellman,“BreakingtheBank,”p.163.21JoelHellman,interviewbyauthor,June4,1998.22“OfferingCircular,”SBS-Agro,$250millionnotes,July18,1987.23Anonymoussource,interviewbyauthor,October3,1998.24SergeiPluzhnikov,SergeiSokolov,“OperationSBS,”SovershennoSekretno6(1999).

YURILUZHKOV

1YuriLuzhkov,WeAreYourChildren,Moscow(Moscow:Vagrius,1996)inRussian.InEnglish,revisedas:MoscowDoesNotBelieveinTears:ReflectionsofaMoscowMayor,trans.MarkDavidov(Chicago:Martin,1996).2LeonAron,Yeltsin:ARevolutionaryLife(NewYork:St.Martin’s,2000),p.153.3AlexanderVladislavlev,interviewbyauthor,April15,1999.4ViceRectorVladimirKoshelev,interviewbyresearcherAnneNivat,April28,1999;andRectorAlbertVladimirov,interviewbyauthor,May7,1999,attheRussianStateUniversityofOilandGasinthenameofI.M.Gubkin.Also,“InformationforEnteringStudentsinMoscow,”GubkinInstitute,1954.

5Luzhkov,interviewbyauthor,February5,2001.Luzhkovrecalledthatthemeetingendedwithadramaticconfrontation.Thehallwasemptiedoftheaudience,soonlythetopmanagersremained.Onebyone,theyroundlydenouncedLuzhkov.Thepartymansuggestedthathebefired.“Iamreadytoleave,”Luzhkovrecalledsaying.Buthewasnotfired.Hereceivedareprimand,stillprotestingthathisideawasagoodone.6TimothyJ.Colton,“UnderstandingYuriLuzhkov,”ProblemsofPost-Communism,September-October1999,pp.14–26.7Colton,“UnderstandingYuriLuzhkov,”pp.14–26.8AlexanderPanin,interviewbyauthor,March18,1999,andApril9,1999.9YelenaBaturina,interviewbyauthor,August23,1999.10ViktorLoshak,interviewbyauthor,March18,1999.11YuriBortsov,YuriLuzhkov(Rostov-on-Don:Feniks,1999),p.148.ThequotationoriginallyappearedinVechernayaMoskva,February20–27,1997.12DavidRemnick,“HundredsofCo-OpsLeadaSovietRevolution,”WashingtonPost,February4,1988,p.A25.13Luzhkov,Seventy-TwoHoursofAgony(Moscow:Magisterium,1991),pp.79–80.InRussian.14VladimirBokser,interviewbyauthor,November13,1999.15Colton,Moscow,p.615.16FrancisX.Clines,NewYorkTimes,March22,1990,p.1;April16,1999,p.1.17JamesBlitz,“MoscowIs‘ClosetoCatastrophe,’”LondonSundayTimes,May27,1990.18BenjaminB.Fischer,ed.,AtColdWar’sEnd:U.S.IntelligenceontheSovietUnionandEasternEurope,1989–1991(Washington:CentralIntelligenceAgency,1999).SeeNationalIntelligenceEstimate(NIE)11–18–90,November1990,“TheDeepeningCrisisintheUSSR:ProspectsfortheNextYear.”19VasilyShakhnovsky,interviewbyauthor,November26,1999.20AnotherpopularperceptionatthetimewasthatPopovwastolerantofcorruption.Popovhadoncesaidthatbureaucratsshouldlisttheirpreferredpayoffslikeitemsonarestaurantmenu.21IamindebttoMargaretL.Paxsonforthisdefinition.22MikhailShneider,interviewbyauthor,March26,1999.23GavriilPopov,interviewbyauthor,February13,1997.24AlexanderOsovtsov,interviewbyauthor,March29,1999.25MichaelDobbs,“SovietPriceHikesDrawAnger,Pessimism,”Washington

Post,April3,1991,p.A19.26ElizabethShogren,“ReformertoFaceThreeCommunistsinMoscowVote,”LosAngelesTimes,June6,1991,p.8.27Colton,Moscow,p.651.28Luzhkov,Seventy-TwoHours,p.38.29AlexeiVenediktov,interviewbyauthor,August28,1999.30Luzhkovwasappointedtoafour-mancommissionthatrantheSovieteconomyinthefinalmonthsbeforetheSovietUnioncollapsed.Heappearedfrequentlyontelevision,touringconstructionsites,busstops,andfoodlines.

ANATOLYCHUBAIS

1NinaOding,interviewbyauthor,October23,1999.2Foradescriptionofthelibraryatthistime,IamindebtedtoAlexeiYurchak,lettertotheauthor,June9,2000.3GrigoryGlazkov,interviewbyauthor,December1,1999;andYuriYarmagaev,interviewbyauthor,October22,1999.4AnatolyChubais,interviewbyauthor,May13,2000.5ObshchayaGazeta,interviewwithChubais,February22–28,1996.InRussian.6IgorChubais,interviewbyauthor,May25,2000.7VladimirKorabelnikov,interviewbyauthor,October21,1999.8Chubaisrésumé,providedbyRAOUnifiedEnergySystems,October25,1999.9SergeiVasiliev,interviewbyauthor,August24,1999.10JanosKornai,EconomicsofShortage(Amsterdam:NorthHolland,1980).11FriedrichA.Hayek,TheRoadtoSerfdom(Chicago:UniversityofChicagoPress,1944).12FriedrichA.Hayek,“TheUseofKnowledgeinSociety,”AmericanEconomicReview,September1945,pp.519–530.13Gaidar ’sthesiswasentitled“IndicatorsforEvaluatingActivityinSelf-FinancingEnterprises(BasedonaStudyoftheElectricalEngineeringIndustry).”14PyotrAven,interviewbyauthor,October22,1999;July11,2000.15YegorGaidar,DaysofDefeatandVictory(Seattle:Universityof

WashingtonPress,1999),p.29.OriginallypublishedinRussian(Moscow:Vagrius,1996).16Chubais,interviewbyauthor,February20,2001.17Gaidarrecalledinhismemoirthat“IshouldpointoutIwasrightonthemarkincastingChubaisinakeyrole.”Hedoesnotsaywhichrole.NinaOdingtoldme,“Chubaistooktheroleofpublicrelations.HewasinPRbecauseheknewhowtotalkaboutideas,tosimplifythem,betterthananyone.Theydidn’tthinkhewoulddoprivatization.TheythoughthewouldbeentirelyresponsibleforPR.”18Dmitrievtoldmethattheirinstitute,theInstituteofEconomicsandFinance,heldatreasureofeconomicsworks,alibraryfromtheImperialRussianCentralBankwithalargenumberofbooksaboutcapitalism,somedatingbacktoprerevolutionarydays,whichtheauthoritieshadneverbotheredtolockup.DmitrievsaidhealsoreadcontemporaryWesterntextsthroughaprogressivesupervisorwhogavehimaccesstothespetzkhran.Finally,Dmitrievpointedoutthathisinstituteemphasizedsystemsanalysisandmathematics,amoretechnicalapproachtoeconomicsthatminimizedideology.19Naishul,AnotherLife.20ThisaccountoftheseminarisbasedonmyinterviewswithNaishul,Chubais,Glazkov,Gaidar,Dmitriev,andDmitryVasiliev.21AnatolyB.ChubaisandSergeiA.Vasiliev,“EconomicReformandStructuralChangeintheUSSR,”inTenYearsofRussianEconomicReform(London:CenterforResearchintoPost-CommunistEconomies,1999).22SergeiBelyaev,interviewbyauthor,October18,1999.BelyaevwasthenamemberofthecouncilandrecallsthatChubais,“verysureofhimself,”deliveredaspeechonhowshocktherapycouldbeappliedtoRussia.

MIKHAILKHODORKOVSKY

1PeterSlevin,thenareporterfortheMiamiHerald,gavetheauthornotesfromaninterviewwithKhodorkovskyinthefirstweekofAugust1991beforethecoupattempt.SeealsoSlevin,“TheNewSovietUp-and-ComersTradePartyLineforBottomLines,”MiamiHerald,August18,1991.2AlexeiYurchak,lettertotheauthor,February17,2000;Yurchak,interviewbyauthor,October9,1999,January3,2000.Yurchak’sdoctoraldissertation,

“TheCynicalReasonofLateSocialism:Language,Ideology,andtheCultureoftheLastSovietGeneration”(DukeUniversity,1997)isacompellingworkthatIfoundimmenselyhelpful.3StevenL.Solnick,StealingtheState:ControlandCollapseinSovietInstitutions(Cambridge:HarvardUniversityPress,1998),p.60.Chapter4describestheKomsomol’stroublesandcollapse.4Earlier,theKomomsolhadofficiallysponsoredmanyyouthactivitiessuchasconcerts,andtherehadbeenayouthundergroundaswell.ButKomsomol’sroledeclinedinGorbachev’syearswhiletheinformalassociationsrapidlyexpanded.5Solnick,StealingtheState,p.288n.168.6OlgaKryshtanovskaya,interviewbyauthor,November3,1999.AccordingtoSolnickandothers,self-financinghadanotherside:hugecentralbudgetaccountsoftheKomsomolwerespiritedawayintoprivatehandsandcommercialbanks,includingone,Finistbank,whichwasfoundedbyfundsfromtheKomsomolcentralcommittee.Atthesametime,thepartyandtheKGBalsotransferredenormousrichestotheirownfrontcompaniesandbankaccounts,manyoverseas.Thefullextentofthisprocesshasneverbeenrevealed,butitwasundoubtedlyquitesubstantial.7KonstantinZatulin,interviewbyauthor,March22,1999.8AlexanderKhachaturov,interviewbyauthor,November19,1998.9MikhailKhodorkovsky,interviewbyauthor,June19,2000.10SheindlinrecalledthatKhodorkovskywasaccompaniedbyLeonidNevzlin,wholaterbecameacloseassociate.However,Nevzlinsaidhewasnotthere.ItcouldhavebeenanotherKhodorkovskyassociate.Sheindlinwasalsouncertainofthedate.11Khodorkovskygaveadifferentaccount:“Ifoundagroupofyoungspecialistsinmyinstitutewhocouldmakeaspecialdevicetomeasureahightemperatureinanalloy.Afterthat,togetherwiththem,wefoundaninstitutethatcouldordersuchworkfromus.ItwastheInstituteofHighTemperaturesoftheAcademyofScience.Andweaskedthemiftheywouldliketoorderthisworkfromus.”Hesaidtheanswerwasaffirmative.(Khodorkovsky,interviewbyauthor).InhisremarkstoIgorBuninin1994,Khodorkovskysaidhis“firstcredit”was164,000rublesandthatheusedthemoneyforinvestment.HetoldauthorRoseBradythathe“hiredstudentstodoresearch”fortheInstituteofHighTemperatureand,Bradysays,the“jobpulledin169,000rubles.”RoseBrady,Kapitalizm(NewHaven:YaleUniversityPress,1999),p.55.

12AccordingtothedecisionoftheKomsomolcentralcommittee,localgroupswere“givenanopportunitytodetermineforthemselvesaformofexpenditureofKomsomolfunds—incashornoncash.”KomsomoliMolodezh’Rossii(Moscow:Komsomol,1990),p.33.InRussian.13AlthoughtheKomsomolplayedaroleinhissuccess,Khodorkovskyexpresseddisdainforit.Hetoldmehehadbeenpassedoverforahigher-leveljobandhadbecomedisenchantedwiththeorganization.“IhadbadrelationswiththeKomsomol,”hesaid.14TheconnectionwashisfriendSergeiMonakhov,whowasleaderofthelocalKomsomolorganizationandremainedamemberofKhodorkovsky’steam.15LeonidNevzlin,interviewbyauthor,March16,2000.16AndreiGorodetsky,interviewbyauthor,November24,1998.17PeterSlevin,notesfrominterviewwithKhodorkovsky,August1991,giventoauthor.18IgorBunin,FortyStoriesofSuccess(Moscow:CenterforPoliticalTechnology,1994),pp.169–178.19Slevin,notesfromKhodorkovskyinterview;andSlevin,“NewSovietUp-and-Comers.”20YelenaBaturina,whowasthenanassistanttoLuzhkov,saidthatKhodorkovskywasrefusedbecauseitwasunclearwhetheroneoftheyouthsciencecenterscouldbeturnedintoapurelycommercialorganization,acooperative.Butsheaddedthattherewasgreatconcernaboutmixingnoncashandcashtogether,thatitwoulddo“bigdamage”totheSovieteconomy.Baturina,interviewbyauthor,August23,1999,Moscow.PaninsaidthatLuzhkovwassoworriedaboutthisthathetestifiedonthesubjectbeforeparliament.21IgorPrimakov,interviewbyauthor,December11,1999.22Anonymoussource,interviewbyauthor.23Bunin,FortyStories,p.172.24Khodorkovsky,intheBunininterview,gaveaslightlydifferentaccountofwhyhewaspressed,sayingitwastheresultofanewgovernmentrulethatbarredhimfrompayingpeopleinadvance,upsettingthechainofcashconversions,trade,andpayments.Hedidnotsaypreciselywhenthistookplace.25YuliaLatynina,“MikhailKhodorkovsky:ChemistryandLife:UnknownPagesfromtheLifeofaSuperoligarch,”SovershennoSekretno,August1,

1999,pp.3–5.26InhisremarkstoSlevinin1991,KhodorkovskyofferedaclueaboutthedealwithZhiltsotsbank.“Wewenttogetaloanandweendeduppayingthemtowriteasetofrulesforus,”hesaid.27ThenamewasderivedfromtheRussianacronymforInter-branchCenterforScientificandTechnologicalPrograms.28Bunin,FortyStories,p.171.29JoelHellman,interviewbyauthor,June4,1999.30MikhailBerger,“ConversationwiththePresidentonReform,”Izvestiya,July28,1990.31DanielSneider,“TheSovietEconomy:CommercialBankingIsOffandRunning,”ChristianScienceMonitor,December31,1991,p.5.32MikhailKhodorkovskyandLeonidNevzlin,ChelovekcRublyom(Moscow:Menatep-Inform,1992).33VladislavSurkov,interviewbyauthor,October18,1999.SurkovhadbecomeatopKremlinpoliticaladviserbythistime.HeendedourinterviewsayinghehadtorushofftoattendameetingwithKhodorkovskyandtheKremlinchiefofstaff.34Latynina,SovershennoSekretno.35Hellman,“BreakingtheBank.”Hellmanwrote,“Severalcommercialbanksmaintainedcovertcorrespondentrelationswithforeignbanks,wellbeforetheyweregrantedalicensetoconducthardcurrencyoperations.MenatepevensetupaffiliatesinBudapest,Switzerland,andGibraltarfortransferringandmaintaininghardcurrencyaccountsabroadforSovietclients.”HellmansaidhisinformationwasbasedonaninterviewwithAlexanderGolubovich,avicepresidentofMenatep(p.163).Healsosaid,“Thoughvirtuallyallcommercialbankswereofficiallyprohibitedfromdealingwithhardcurrency,thisrestrictionwasroutinelyignored.Fromtheverybeginning,commercialbankswereengagedinawiderangeofillegalhardcurrencytransactions”(pp.162–163).36KathleenDay,“RiggsHadTiestoFirmsinProbe,”WashingtonPost,September18,1999,p.E1.37Sneider,“SovietEconomy.”38Bunin,FortyStories,p.174.39Gaidarwroteinhismemoirthattheissuecameupbecausetwohigh-rankingformerSovietintelligenceofficialshadwrittentoYeltsinaboutthematter,andYeltsinaskedGaidartolookintoit.

40FritzW.Ermarth,“SeeingRussiaPlain:TheRussianCrisisandAmericanIntelligence,”NationalInterest,Spring1999.

BORISBEREZOVSKY

1LeonidBoguslavsky,interviewbyauthor,April26,2000;May16,2000.2VladimirGrodsky,interviewbyauthor,June30,2000.3BorisBerezovsky,interview,NovoyeRusskoyeSlovo(NewYork),March11–12,2000,pp.10–11.4BorisBerezovsky,interviewbyauthor,March22,2000.5AlexanderOslon,interviewbyauthor,May29,2000.OslonbecameoneofRussia’sleadingpoliticalpollsters:headofthePublicOpinionFoundation.6Berezovsky’spublicationsincludeacandidateofsciencedissertation,“DispatchingbyVectorCriteriaofQueuesofRequestsinComputerSystems,”whichhedefendedin1975,whenhewastwenty-nineyearsold.In1981hecowroteBinaryRelationsinMulticriteriaOptimization,withV.I.BorzenkoandL.M.Kempner(Moscow:Nauka).In1983hedefendedadoctoroftechnicalsciencedissertation,“WorkingOuttheTheoreticalFoundationsfortheAlgorithimizationofPreprojectDecisionmakingandItsApplication.”In1984hewrote,withA.V.Gnedin,ProblemoftheBestChoice(Moscow:Nauka).In1989hewrote,withY.Barishnikov,Borzenko,andKempner,MulticriteriaOptimization:MathematicalAspects(Moscow:Nauka).AllthesepublicationsareinRussian.7MarkLevin,interviewbyauthor,June9,2000.8Thiskindoftrade-offisdescribedinBolshayaPaika,byYuliDubov(Moscow:Vagrius,2000)InRussian.ThebookisdescribedbyDubovasfictionbutappearstobeathinlydisguisedmemoirofBerezovsky’searlyyearsinbusiness.Onpage40,DubovdescribeshowtheBerezovskycharacterhelpsascientistattheinstitutebuyhisfirstcarinexchangeforreadingadissertationandagreeingtobethe“opponent”atthedefense.9PyotrAven,whosefather,Oleg,wasafounderandleadingscientistattheinstitute,toldmethatmanyofthemathematicianswhomBerezovskybroughtintohislaboratorywereJewswhocouldnotgetworkelsewhere.10Levin,interviewbyauthor.11Berezovsky’sfinalacademicquestwastobecomeacorrespondingmember

oftheRussianAcademyofSciences,whichheachieved.12“Berezovsky:TheMostReliableSystemIsMe,”ObshchayaGazeta,December3–9,1998,p.8.13Forconnections,Avtovazwasagoldmine.Berezovskyusedhissvyazitheretogetsparepartsforfriends.Berezovskyearnedarespectableprofessor ’ssalaryoffivehundredrublesamonth,buthewasalwaysscroungingformoney,Grodskyrecalled.“IjustrecallthatBoryawasusedtoborrowingmoney.Andhealwayslackedmoney.Heborrowedfromme,fromothercolleagues.Boryaspentalot,andheneverhadenoughmoney.”14ThestatisticsaretakenfromadisplayonthehistoryofthefactoryattheofficialmuseuminTogliatti.15AlexanderZibarev,adeputydirectorofthefactory,toldareportertheRussiancarmarket“islikeahungrydog;youthrowitanewcaranditgobblesitup.”NewYorkTimes,June30,1992,p.D2.16ItmayhavehelpedBerezovskythathismentor,anddirectoroftheinstitute,AlexanderTrapeznikov,wasadeputyheadoftheStateCommitteeonScienceandTechnology.Still,itisnotclearwhythestatecommitteewouldhavepaidsuchalargesum.17NationalIntelligenceEstimate(NIE)11–23–88,reprintedinBenjaminB.Fischer,ed.,AtColdWar’sEnd:U.S.IntelligenceontheSovietUnionandEasternEurope,1989–1991(Washington,D.C.:CentralIntelligenceAgency,1999),p.1.18YuliDubov,BolshayaPaika(Moscow:Vagrius,2000).Thewordpaikahereisprisonslangfortherationaninmatereceivesinaprisonorlaborcamp,whenfoodisdividedamongmembersofagroup.Thetitlemeans“bigpiece,”andtoexplainit,Dubovreferstoanotherauthorwhowrotethat“inacampit’snotthesmallpaikathatgetsyou,butthebigone.”Thepointisthatyoudienotwhenyoudon’thaveenoughfoodbutwhenyouhavemorethanothersandtheystartenvyingyou.Dubov’scommentthathepaintedwhathesawwasmadeinaNovayaGazetainterview(February28,2000).IalsointerviewedDubovaboutthebookandBerezovsky’searlyyearsonMay3,2000.ManypeopleIspokewithsaidBolshayaPaikacontainsaccuratedescriptionsofspecificevents,suchasBerezovsky’sdealingswiththefactory.However,thebook’sbiastowardBerezovskyisplain—heisportrayedasabusinessgenius.19BerezovskylaterbecametheexclusivedealerforMercedesinRussia.HetoldmehowfascinatedhewastodiscoverGermanefficiency.TheGermans

plannedsixmonthsinadvancetostageabanquettomarktheopeningofadealership,andtheycarriedouttheplan.“IthoughtIhadfallenintoacrazyhouse,”Berezovskytoldme,recallingthedaythattheMercedesrepresentativetoldhimoftheplan.“Ahalfyearbeforehand,”hewasgivenacardthatsaid“thistableandthattable,thesepeoplearesittinghere,howmanysausages,howmuchbeer.Andeverythingwentoffexactlyastheyhadplannedit.”TheexamplesuggestshowtumultuouslifewasinRussiaatthetime—sixmonths’timewasconsideredaneternity.20OnceBerezovskyrecalledhowhestoppedataGermangasstationandforgottopayafterfuelingup.“Iforgot!”hesaid.“AndIdroveoff.Ihearsomekindofhorrifyingscreambehindme.IlookinthemirrorandIseethatapersonisrunningaftermeandisscreamingsomethinginGerman.Istoppedandrightawayunderstoodwhathappened.ThatIhadn’tpaidthemoney.“Igobackward,driveuptotheperson,andheisscreaming,‘POLITSA!POLITSA!RUSSIAN!’Idon’tknowwhattodo,nowthatI’mgoingtohavetodealwiththepolice.Idon’tknowhowtostophim.He’sagrown,middle-agedman.Andsuddenly,youknow,again,it’sthatintuition,suddenlyIrealizedthatIcouldstophimonlyinoneway.Istartedcursingathim.Really.WithRussiancurses.Andhesuddenlystopped.Wassilent.Heschlumpedoverlikeadogwithatailbetweenitslegsandsaid,‘Enough,enough.’Iwent,paidmymoney,anddroveaway!”21YuriTselikov,interviewbyauthor,March31,2000.22ValeryIvanov,interviewbymyresearcherMargaretPaxson,February16,2000.WeweredeeplysaddenedtolearnIvanovwasmurderedinTogliattionApril29,2002.23AnatolyIvanov,interviewbyauthor,March29,2000.24Byoneaccount,therewerefourmajorcriminalwarsinTogliattiinthe1990s.VladimirOvchinskydescribedtheminMoscowNews,June18–24,2000.Thefirstoccurredwhencriminalgroupstookoverbusinessesinthecityinthelate1980sandbeganblackmailingcitizensbuyingZhigulis;theyalsotookcontroloftheassemblyline.ThefirstwarclimaxedwithafightinvolvingseventygangmembersneartheHotelZhiguli.Thesecondwarwasfoughtin1994–1996;sixty-sixpeoplewerekilled.Afterthewarthecityandfactoryweredividedintozonesofinfluencecontrolledbypowerfulclans.Athirdcriminalwarbrokeoutin1996andwasfollowedbyOperationCyclone,aneffortbythefederalInteriorMinistrytocleanupthefactory.“Avtovazwasliterallyinthehandsofbandits,”Ovchinskywrote.Inthefirsthalfoftheyear

2000,thefourthwarbrokeout:sixteencontractmurders.Ovchinskysaid500millionrublesayearwerebeingsiphonedoffbycriminalgroupsin1999.“OnecanconcludethatTogliattiisstillanepicenteroftheRussiancriminalworld.TheMafiastructureshaveanabilitytoimitate,adjustthemselves,andliveseparately,apartfromanyeconomicorpoliticaltransformations.Themurderofleadersofcriminalgroupshardlyinfluencesthesituationbecausenewleadersappear.”25“ChangesintheFreeDeliveryPrice,ontheBasisofModelsManufacturedbyVAZ,”achart(inRussian).26LogovazofficialpricelistasofJanuary1,1993.27Exchangeratetable,CentralBankofRussia.28“VolgaAutomobileWorks,DescriptiveMemorandum,”BearStearns,1991.29BolshayaPaika,p.247.

VLADIMIRGUSINSKY

1VladimirGusinsky,interviewbyauthor,September22,2000.2ValeryBelyakovich,interviewbyauthor,September12,2000.3J.A.E.Curtis,ManuscriptsDon’tBurn:MikhailBulgakov,ALifeinLettersandDairies(London:Bloomsbury,1991).4AlexanderMinkin,interviewbyauthor,July12,2000.5TatyanaVolodina,actress,TulaAcademicDramaTheater,telephoneinterviewbyauthorfromTula,September27,2000.Volodinaprovideddetailsfromtheprogramoftheperformance.Also“YouthofanOligarch,”MoscowNews,July4–10,2000,p.13.6GusinskylatersaidofBobkov,“WhentheCommunistshadalotofclout,hehelpedusalotbecausehehadsomeinfluenceoverthem....Bobkovhadconsiderablecloutwithold-timersintheCommunistParty....Asforme,thisiswhatIthinkhappened.DissidentswereharassedbythestatemachineinwhichBobkovusedtobeacog.ButIneverfoughttheregime;IstudiedattheGITIS[statetheaterinstitute],anideologicalinstituteofhighereducation,onemightsay.Iwasapersonabsolutelyloyaltotheauthorities.ItisanotherthingthatIwasanunrulycharacter,andaJew.Ididn’thavemuchofafuturethen.Youcancondemnmeasyoulike,butI,personally,don’thavetherighttojudgeandpunishBobkov.Dissidents,fightersagainstthatregime—theyhavevarious

rights.”ObshchayaGazeta,June8–14,2000,pp.1–3.7MargeryKraus,interviewbyauthor,July13,2001;“U.S.Firm,SovietsEstablishJointVenturetoVentureJointly,”AssociatedPress,December13,1988.8BorisKhait,interviewbyauthor,September14,2000.9YuriSchekochikhin,“Fear,”LiteraturnayaGazeta,June10,1992,p.11.10LloydGrove,“RusskyBusiness:TheMogulinExileWho’sGotMoscowUpinArms,”WashingtonPost,April7,1995,p.D1.11OlegDobrodeyev,interviewbyauthor,July20,2000.12MikhailLeontiev,interviewbyauthor,July4,2000.13SergeiZverev,interviewbyauthor,June23,2000.14LeeHockstader,“BraveNewWorld:MoscowAnchorLeadsBold,BloodyExperimentinPressFreedom,”WashingtonPost,March29,1995,p.B1.15YevgenyKiselyov,interviewbyauthor,August2,2000.16IgorMalashenko,interviewbyauthor,July25,2000.17ChrystiaFreeland,SaleoftheCentury(NewYork:CrownBusiness,2000),p.155.

UNLOCKINGTHETREASURE

1Inhismemoir,Gaidarrecallsthathebrokepartytaboosinthejournalandwroteaboutsuchtopicsasinflation,unemployment,poverty,socialstratification,thebudgetdeficit,andmilitaryspending.Moreover,“wetriedtoexplaintotherulingelitehowruinousitscoursewas.”YegorGaidar,DaysofDefeatandVictory(Seattle:UniversityofWashingtonPress,1999),p.35.Gaidarhailedfromawell-knownfamilyoftheintelligentsia.Hisgrandfather,ArkadyPetrovichGaidar,wasauthoroffamousSoviet-erachildren’sstories.Hisfather,Timur,wasaforeigncorrespondentforPravda.2BorisYeltsin,TheStruggleforRussia(NewYork:TimesBooks,1994),pp.125–126.3PyotrAven,interviewbyauthor,July11,2000.4MikhailBerger,interviewbyauthor,October10,2000.5MikhailDmitriev,interviewbyauthor,November19,1999.6Yeltsinhadasimilarconception.Herecalled,“Gaidar ’sministersandGaidarhimselfbasicallytookthispositionwithus:Yourbusinessispolitical

leadership;oursiseconomics.Don’tinterferewithusaswedoourwork,andwewon’tbuttinonyourexaltedcouncils,yourcunningbehind-the-scenesintrigue,whichwedon’tunderstandanyway.”Yeltsin,StruggleforRussia,pp.156–157.7MaximBoycko[Boiko],AndreiShleifer,andRobertVishny,PrivatizingRussia(Cambridge:MITPress,1995).Accordingtotheauthors,whoparticipatedontheChubaisteam,privatizersbelievedthat“politicalinfluenceovereconomiclifewasthefundamentalcauseofeconomicinefficiency,andthattheprincipalobjectiveofreformwas,therefore,todepoliticizeeconomiclife”(pp.10–11).8YegorGaidar,interviewbyauthor,September29,2000.9Chubaispressconference,April21,1993.10Gaidar,Days,p.129.11Gaidar,Days,p.66.12JefferySachs,Poland’sJumptotheMarketEconomy(Cambridge:MITPress,1993).13Gaidar,Days,p.86.14AnatolyChubais,ed.,PrivatizatziaPo-Rossiiski(Moscow:Vagrius,1999),p.20.InRussian.15Chubaisinterview,LiteraturnayaGazeta,October12,1994,p.10.16Chubais,Privatizatzia,p.28.17Chubais,Privatizatzia,pp.29–31.TheKolostorywasoriginallyreportedbythenewspaperKurantyinlateFebruary,andtheschemewasalsodescribedbyBergerinIzvestia.ChubaisdenouncedtheschemeatapressconferenceonFebruary28,1992.SeeFrancisX.Clines,“RussiantoFightPrivateSell-offsbyEx-Officials,”NewYorkTimes,February29,1992,p.5;andJohn-ThorDahlburg,“Russia’sNeo-CapitalistsLearningArtofRip-Off,”LosAngelesTimes,March1,1992,p.1.18DmitriVasiliev,interviewbyauthor,September16,1999;November20,1999;andSeptember18,2000.19Gaidar,interviewbyauthor,September29,2000;ChubaisrecollectionsfromPrivatizatzia.TheauctionwasdescribedbyFredHiatt,“RussiaAuctionsOffState-ownedFirms,”WashingtonPost,April5,1992,p.A1.20Gaidar,interviewbyauthor,September29,2000.21Gaidar,Days,p.13122Vasiliev,interviewbyauthor.23SachshadrecommendedAndreiShleifer,aprofessorofeconomicsat

HarvardUniversity.AlongwithJonathanHay,heplayedakeyroleinorganizingWesternhelptosupportChubaisandVasiliev.Amongotheractivities,theWesternershelpeddesigntheRussianprivatizationvouchers,helpedwritethelawsanddecrees,andhelpedsetupandcarryoutthegreatsell-off.Somecriticismhassubsequentlybeenaimedattheseefforts.Theauthoracknowledgesthatthisissueisbeyondthescopeofthisbook.However,theauthorbelievesitismistakentocriticizetheWesternersaloneforwhatoccurredinRussia.ManyofthemostfatefulchoicesweremadebytheRussians,suchasthedecisiontofreeprices,property,andtradebeforebuildingtheinstitutionsofafreemarket.TheWesternersoftenadvisedandencouragedtheminthedirectiontheytook,butYeltsin,Gaidar,andChubaisledtheway.24AnatolyChubais,interviewbyauthor,May13,2000.25Chubais,Privatizatzia,p.34.26Intheendtherewerethreeoptions.Thefirst,proposedbyChubais,distributed25percenttotheworkers,whocouldthenbuyanadditional10percentofthesharesat70percentofthe(low)bookvalueoftheenterprise,andmanagementcouldbuy5percentatthebookvalue.Thiswaseffectively40percenttoinsiders.Option2,proposedbytheindustrialists,allowedworkersandmanagerstobuy51percentoftheenterpriseat1.7timesthebookvalue.Athirdoptionformedium-sizedcompaniesallowedmanagerstobuyupto40percentifemployeesagreed,butwithrestrictions.Intheend,studiesshowedtheoverwhelmingmajorityofenterpriseswereprivatizedusingoption2,theoneproposedbythefactorydirectors.AndersÅslund,HowRussiaBecameaMarketEconomy(Washington,DC:BrookingsInstitution,1995),pp.233–235.27TherewasamajordebatewithintheprivatizationteamonwhethertomodelRussia’sprivatizationaftertheCzechorthePolishmodels,bothofwhichweregettingunderwayatthetime.ThePolishmodelinvolvedlargemutualfundsinwhichpeoplewouldobtainshares.TheCzechvariantwasmoreopen,usingvouchersthatpeoplecoulddisposeofastheywished.“Fromthepoliticalviewpoint,thesignalscomingfromPolandandCzechoslovakiain1992madeitclearthattheCzechswereexcitedaboutprivatizationandinvolvedwithit,whilethePoleswerenot.Choicemadeallthedifference.SincepopularinvolvementwasdeemedabsolutelyessentialforthesustainabilityofRussianprivatization,voucherswereaclearchoice”(Boycko[Boiko],Shleifer,andVishny,PrivatizingRussia,p.83).28ChubaismadetheclaimatanAugust21,1992,pressconference

introducingthevouchers.HesaidhefiguredthatthepriceofasecondhandVolgawasonly2,000or3,000rubles—thiswastheso-calledresidualprice,afterdepreciation,whichwassometimesusedforsellingoffstatepropertysuchasten-year-oldtaxistotheirdrivers.Itwasnotarealprice.Sincethefacevalueofavoucherwas10,000rubles,avoucher“couldbesufficienttobuytwooreventhree,andwithluckevenmoreVolgacars,”Chubaisclaimed.Infact,Chubaislateracknowledged“errors”inhispublicrelationspitchforvouchers.Hesaidhewasthinkingatthetimethatavouchermightbuyasharethatwouldappreciatesignificantly.ThetwoVolgasclaimwasoneofChubais’sbiggestgoofsandthebuttofjokesformanyyears.Chubais,Privatizatzia,p.191;Chubaispressconference,August21,1992.29CelestineBohlen,“CitizensofRussiatoBeGivenaShareofState’sWealth,”NewYorkTimes,October1,1992,p.1.30Chubais,Privatizatzia,p.157.31Vasiliev,interviewbyauthor,November20,1999.32PaulBograd,interviewbyauthor,March26,1999.33InPrivatizatzia,Chubaisrecalled,“Wehadtomakehundredsofthousandsofpeopledosomethingtheyhadneverdonebefore.Wehadtofundamentallychangetheirattitudetoproperty....IremembersittingwithGaidaratsomeregionalmeeting.Thereare,maybe,athousandpeopleintheaudience.AndIfeelwithmyskinthatweareliketwoMartiansforthem.Completelyalien....Youhadtoadjusttotheirownwayofthinking.YouhadtorealizethatyoucannotmakedozensofthousandsofpeopleallofasuddenunderstandtheMartianlanguageyouaretalking.Youmustspeaktheirlanguage”(pp.144–145).34Boycko[Boiko],Shleifer,andVishny,PrivatizingRussia,p.86.35LeonidRozhetskin,interviewbyauthor,March10,1999.36Chubais,speechtotheStateDuma,April12,1994.37Chubais,Privatizatzia,p.187.38Boycko[Boiko],Shleifer,andVishny,PrivatizingRussia,pp.100–101.39DmitryVasiliev,pressconference,July13,1999.40Thevoucherfundssufferedfromacrucialdesignerroraswell.BecauseChubaisandVasilievfearedtheycouldbecometoopowerful,thefundswerelimitedtoowning10percentofanyonecompany.Thismeantthefundswereaweakvoiceintheboardroomsofthecompaniestheyowned.“Thevoucherfundsfailedbecausepeoplefearedtheywouldbecometoopowerful—andasaresultweendedupwithnothing,”oneofthedesignerstoldme.

41Hans-JoergRudloff,interviewbyauthor,September7,2000;November10,2000.42BorisJordan,interviewbyauthor,October1,2000.43Rudloff,interviewbyauthor,November10,2000.44StevenJennings,interviewbyauthor,March3,2000.45Chernomyrdin,pressconference,RossiiskieVesti,December16,1992,p.1.46AndersÅslund,“WhyHasRussia’sEconomicTransformationBeenSoArduous?”(paperdeliveredattheWorldBankAnnualBankConferenceonDevelopmentEconomics,April28–30,1999);Åslund,“HowRussiaBecameaMarketEconomy,”(Washington,DC:BrookingsInstitution,1995),pp.191–193.47MikhailBerger,interviewbyauthor,October10,2000.48ArkadyYevstafiev,interviewbyauthor,March7,2000.49“AnatolyChubais:Upto80percentofStatePropertyforVouchers,”LiteraturnayaGazeta,November18,1992,p.10.50Chubais,interviewbyauthor,May13,2000.51Chubais,Privatizatzia,pp.160–161.52Ipersonallyinterviewedtheintermediary,whoaskedtoremainanonymous.WhenIaskedChubaisaboutthecontribution,hesaid,“Sorosbackthenreallyplayedapositiverole”butrefusedtodiscussdetails.53LiteraturnayaGazeta,November18,1992,p.10.54WilliamBrowder,interviewbyauthor,March21,2000.55YuliaLatynina,SovershennoSekretno,Moscow,August1,1999.LatyninaaddedofKhodorkovsky’sbuyingbinge:“Nopublicfundswouldhavebeensufficientforsoextensiveaprogram,but,fortunately,alargepartoftheenterpriseswerepurchasedatinvestmentcompetitions,atwhichthewinnerwastheonethatpromisedtoinvestmoremoneyintheenterprise.AsaconsequenceofMenatep’sextremeattentivenessinregardtothegovernmentofficialsthatorganizedthecompetition,andalsotothe‘reddirectors’incommandoftheenterprises,itspromiseswerebelievedmoreoftenthanthoseofothers.Menatepwas,generally,invariablycourteoustothedirectorsandwouldinvariablytossthemontothegarbageheapaftertheshareshadbeenpurchased.”56Boycko[Boiko],Shleifer,andVishny,PrivatizingRussia,pp.109,119.57ChrystiaFreeland,SaleoftheCentury(NewYork:CrownBusiness,2000).58“SaleoftheCentury,”Economist,May14,1994,p.67.ThearticlepointedoutthatthebookvalueofRussiancompanieswasfixedonce,inJanuary1992,

andwasnotadjustedeventhoughRussianpriceshadrisen10,500percentsincethen.Thebookvalue,whichisbasedonthedepreciatedvalueofanenterprise’scapitalstockandtakesnoaccountofpropertyorintangibleassets,wasstillbeingusedasthebasisforthevoucherauctions.Jordanwasquotedassayingthattherewerestillbigrisks.“Theseareextraordinarilylowassetvalues,butyoumustbecarefulaboutusingthewordcheap,”hesaid.59Chubais,interviewbyauthor,May13,2000.

EASYMONEY

1Kadannikovinterview,Profil,October23,2000,pp.22–27.InRussian.2BryanBrumley,“FactoryManagersBackPrivatizationPlans,CriticizeFinancialPolicy,”AssociatedPress,October26,1992.Kadannikovopenedaone-daymeetingwithGaidarandcabinetministersinTogliatti,praisingprivatizationbutcriticizingtheGaidargovernmentonfinancialandtaxissues.3BellaZlatkis,interviewbyauthor,October18,2000.4InternationalMonetaryFund,“InternationalFinancialStatistics,”quotedinEvolutionofMonetaryPolicyInstrumentsinRussia,IMFWorkingPaper,December1997,p.17.5InternationalMonetaryFund,RelativePriceConvergenceinRussia,IMFWorkingPaper,May1995,p.1.6YegorGaidar,DaysofDefeatandVictory(Seattle:UniversityofWashingtonPress,1999),p.80.7YevgenyMyslovsky,Beware:SwindleInvest,AGuideforLawEnforcementAgencies(Moscow:Spas,1996),p.21.8AlexanderOslon,interviewbyauthor,May29,2000.9“RussianCarAllianceStartsSalesofRegisteredStocks,”Business-Tass(Moscow),December14,1993.10Thefounders,accordingtoLeonidValdman,deputygeneraldirectorofAVVA,wereAvtovaz,25percent;Logovaz,15percent;ForusHolding,aSwissfirmofBerezovsky’s,15percent;theRussianFederalPropertyFund,15percent;ObedinennieBank(closetoBerezovsky),10percent;Kuibyshevneft,anoilcompany,10percent;SamaraOblastadministration,5percent;andAvtovazbank,5percent.ThedataaccompaniedaValdmaninterviewthatwaspublishedNovember4,1994,inthemagazineKommersantVlast.

11“CarConsortiumtoRunLottery,”MoscowTimes,February18,1994.12YuriZektser,interviewbyauthor,October30,2000.13Avtovazwasprivatizedbyoption2,whichmeant51percentforworkersandmanagers,27percentinvoucherauctions,and22percentinaninvestmenttender.14YuliDubov,BolshayaPaika(Moscow:Vagrius,2000),pp.247–275.ManydetailsdescribedbyDubovarecorroboratedbyotherevidence,includingnewsreportsandAVVAannualreports.15TranslationsoftheMMMcommercialsarefrommyowntape.However,IbenefitedfromasuperbanalysisoftheMMMadvertisingcampaignassoapoperainConsumingRussia:PopularCulture,Sex,andSocietySinceGorbachev(Durham,N.C.:DukeUniversityPress,1999).Seechapter3,EliotBorenstein,“PublicOfferings,MMM,andtheMarketingofMelodrama”(pp.49–75).16JamesMeek,“RussianInvestmentFirmsHeadfortheRocks,”Guardian(London),April28,1994,p.12.17MaryDarby,“InPonziWeTrust,”SmithsonianMagazine,December1998.18MikhailDubik,“MMM:IsSeeingSuccessBelieving?”MoscowTimes,May19,1994.19CareyGoldberg,“It’sRiskyBusinessinRussia,”LosAngelesTimes,June9,1994,p.1.20Golubkovwasplayedbyanactor,VladimirPermyakov,whorelatedhisownrags-to-richesstory.“IcamefromSiberiaanddraggedoutamiserableexistenceplayingoccasionallyatasmallMoscowtheater.Ihadnomoneyandverylittlehopetosucceedasanactor,butmyworkwithMMMturnedeverythingaround.”MikhailDubik,“LyonyaintheFlesh:ATaleofRagstoRiches,”MoscowTimes,August25,1994.21Depositor ’sinformationsheet,providedbyYevgenyKovrov,director,FederalFundfortheDefenseoftheRightsofDepositorsandShareholders.22Goldberg,“RiskyBusiness.”23YevgenyKovrov,interviewbyauthor,April28,2000.24HelenWomack,“GamblersPushMMM’sSharePriceUpAgain,”Independent(London),July29,1994,p.12.25Russia’sItar-TassnewsagencyreportedSeptember26,2000,thatinvestigatorswerestillseekingMavrodi’swhereabouts.26Goldberg,“RiskyBusiness.”27YevgenyMyslovsky,interviewbyauthor,October10,2000.

28HiscommentsweremadeonanNTVdocumentary,IndependentInvestigation,producedbyNilcolaiNikolayev,broadcastMarch16,2000.29Zektser,interviewbyauthor.HesaidAVVAhadfulfilledtheobligationsoftheinvestmenttender,whichcalledfor$111milliontobeinvestedinthefactorybytheendof1995,butitishardtoseehowAVVAaccomplishedthis.30“InterviewwiththePresidentofAOAvtovaz:V.Kadannikov,”Trud,November2,1994.InRussian.31“InformationReportabouttheGeneralMeetingofShareholdersoftheAOOAll-RussianAutomobileAlliance,”EkonomikaiZhizen,May20,1995.InRussian.32Kadannikovcontinuedtomasktheeventsyearslater.InaninterviewinApril2000,whenaskedwhetherhehadusedAVVAtoseizeAvtovaz,hereplied,“Icannotquiteunderstandwhyanybodywouldneedaplant;whyseizeit?It’shardwork,lowprofit.Andwhat’stheuseinjustmakingdowiththeturnover?Youcandoitforacoupleofmonths,andthenwhat?”Healsoblamedthegovernment,sayingithad“eatenupthepeople’smoneyveryfast.”Vedomosti,April5,2000,p.A5.33Berezovskyinterview,MoscowNews,May16,1996.34Speculationfinallycametoanendinmid-1995whenthegovernmentandCentralBankannouncedaruble-dollar“corridor”thatlimitedcurrencymovementandthuscrimpedthesuperprofitsoftraders.35Smolensky,interviewbyauthor,August30,1999.36YegorovmadethecommentstotheseventhcongressoftheAssociationofRussianBanks.“ChubaisTellsBankstoFocusonIndustry,”MoscowTimes,April23,1997.37“LearningtoLend,”CentreInvestSecurities,October24,1997,p7.38BankMenatep(Group),IndependentAuditorsReport,ArthurAndersen,1995.39FormerMenatepvicepresident,interviewbyauthor.40VladimirVinogradov,interviewbyauthor,June28,2000.41YuliaLatynina,“MikhailKhodorkovsky:ChemistryandLife:UnknownPagesfromtheLifeofaSuperoligarch,”SovershennoSekretno,August1,1999,pp.3–5.42VictorHuaco,interviewbyauthor,April14,1999.43“MMMDeflatesShares,RussiaWeighsActiononStockScandal,”AgenceFrancePress,July29,1994.44GrigorySatarov,aone-timeadvisertoBorisYeltsinandpresidentof

INDEM,theInformationforDemocracyFund,MarkLevin,aneconomicsprofessor,andM.L.Tsirik,agraduatestudent,layoutthisargumentintheiranalyticalstudy,“RussiaandCorruption:WhoIsDoingWhattoWhom?”preparedfortheCouncilonForeignandDefensePolicy,Moscow,1998.TheyconcludedthatamongthemostimportantreasonsforcorruptioninthenewRussia,asidefromhistoricalones,were“therapidtransitiontoaneweconomicsystemthatwasnotsupportedbythenecessarylegalbaseandlegalculture;theabsenceduringSoviettimesofanormallegalsystemandthecorrespondingculturaltradition;thecollapseofthepartycontrolsystem.”45“Diagnosis:Corruption:IsItPossibletoKilltheIllnessofRussia?”VechernayaMoskva,October18,1999,p.3.Aroundtablediscussion,inRussian.

THEMANWHOREBUILTMOSCOW

1RyszardKapuscinski,“TheTempleandthePalace,”TheNewYorker,May23,1994.2VladimirMokrousovandValentinaMokrousova,interviewbyauthor,November3,2000.Inanothersignofhiscaution,Makrousovsubmittedthemock-uptwinnedwithanother,theSt.GeorgesCathedral.3FloreMartinantdePreneuf,“TheHistoricalandPoliticalSignificanceoftheReconstructionoftheCathedralofChristtheSaviorinMoscow”(M.Phil.thesis,Oxford,1997),anexcellentrecountingofhowthecathedralwasrebuiltintheearly1990s.4DePrenuef,“Historical,”p.29.5VasilyShakhnovsky,interviewbyauthor,November26,1999.6Mokrousovainterview,November3,2000.7WhenIinterviewedLuzhkovonFebruary5,2001,hehandedmeathirty-fourpageresponsetoquestionsIhadposedinadvance.Ofthecathedral,hesaid,“IalwaysbelievedthattherevivalofRussiamustnotbeginwithdemagogueryonmacroeconomicsubjectsbutwithspiritualrevival.Ithoughttherestorationofthecathedral—barbaricallydestroyed—wasasymbolofthisrevival.”8AndreiZolotovJr.,“ResurrectingthePast,”MoscowTimes,August19,2000,p.iv;MikhailOgorodnikov,interviewbyauthor,November2,2000.

OgorodnikovisspokesmanfortheFundfortheRestorationoftheCathedralofChristtheSavior.9DePreneuf.Thisstoryisattributedtoanengineer-metalworkerinterviewedonthesite.10Ogorodnikovinterview.InhiswrittenanswerstomyquestionsabouttheCathedral,Luzhkovsaid,“Investmentsintheconstructionofthecathedralarevoluntarycontributions.Doyoureallythinkthatpeoplewouldhaveinvestedsomuchmoneyforconstructionofmoredown-to-earthprojects?”Heclaimedneitherthecitynorthefederalgovernmentsuffered“losses”asaresultofthereconstruction.TheprojectcreatedthousandsofjobsandboostedMoscowtourism,henoted.11LarisaPiyasheva,interviewbyauthor,March23,1999.12Popovnewsconference,December19,1991.13Luzhkov,interview,KomsomolskayaPravda,November26,1997.14Luzhkov,interview,KomsomolskayaPravda.15ValerySimonov,“MoscowDoesNotBelieveinRubles?”KomsomolskayaPravda,November24,1993,p.1.16Luzhkov,writtenanswers.17Luzhkov,interview,KomsomolskayaPravda.18Chubaispressconference,March23,1994.19Yeltsinnewsconference,June10,1994.20JohnLloyd,“RussianInvestment‘ToSurge,’”FinancialTimes,July5,1994.21AndreiShatalov,interviewbyauthor,February14,1997.22Luzhkov,interviewbyauthor,February5,2001.23YaroslavSkvortsov,KommersantVlast,April29,1997.24ObidJasinov,deputygeneraldirector,andotherofficialsofMoscowMechanizedConstructionno.5,interviewbyauthor,February12,1997;“MoscowConstruction:TogetheronthePathofCreation,”MoskovskayaPravda,January29,1997,p.9.25MikhailMoskvin-Tarkhanov,interviewbyauthor,November2,2000.26TatyanaTsyba,“WhyDotheRussiansSoDislikeMoscovites?”KomsomolskayaPravda,February12,1997.27PavelBunich,interviewbyauthor,February18,1997.28LeeHockstader,“MoscowIsaHavenofHavesamidRussia’sSeaofHave-Nots,”WashingtonPost,December27,1996,p.A1.29DonaldJensen,“TheBoss:HowYuriLuzhkovRunsMoscow,”

Demokratizatsiya,Winter2000,pp.83–122.30YegorGaidar,“WhytheLivingIsGoodinMoscow”(speechtotheMoscowbranchoftheDemocraticChoiceofRussiaParty,publishedinMoscowNews,February26,1998);Gaidarpressconference,February6,1998.31Luzhkov,writtenanswers.32VladimirYevtushenkov,interviewbyauthor,April9,2000.33YelenaBaturina,interviewbyauthor,August23,1999.34Baturinainterview.35Luzhkov,interviewbyauthor,February5,2001.36BaturinatoldmetheLuzhnikicontractwas“mygreatluckandsuccess,”sinceherfirmwentontowindozensmoresuchcontractsinMoscowandotherRussiancities,aswellasabroad.Thestadiumwas49percentownedbythecity.Baturinasaidshewonatenderfortheseatswithalowbid,but,justasimportant,shesaidshewastheonlybidderwiththecorrectspecificationstomeettheEuropeanstandards.37YuriMinkovski,“TheFirstUndergroundShoppingMallintheHeartofMoscow,”CostEngineering,February1998,pp.15–17.CostEngineeringispublishedbytheAmericanAssociationofCostEngineers.38NatalyaShulyakovskaya,“DefiningtheMoscowStyle,”MoscowTimesBusinessJournal2(1998):6.DozensoftheseuselessspirescouldbeseeninMoscowatopnewglass-and-steelofficebuildings.39LeonidFilatyev,headofthecoordinationgroupfordecorationofthecathedral,interviewbyauthor,December6,2000.“Take,forinstance,thetextinscribedonthedomeatthetop,”hesaid.“Howdoyouputthetextinplacesothatitwouldexactlyfitthelengthofthesphere?Ifyoudoitmanually,itwilltakealongtime.Thecomputercandealwiththisquicklyandproduceaprintfromwhichthepainterscancopythedrawingontothewall.Butthetechniqueofpaintingwastheoriginalonefromthenineteenthcentury.”40“MoscowCelebrates,”Time,September8,1997,p.38.41LeeHockstader,“Puttin’ontheRitzinRussia,”WashingtonPost,August3,1995,p.22.42Hockstader,“MoscowIsaHaven.”43AlongbattleagainstthepropiskawascarriedoutbyVeronikaKutsillo,ajournalistwhowantedtoliveinMoscow.ShehadgrownupinKazakhstan.AsastudentatMoscowStateUniversity,shehadapermit,butwhenshegraduatedandgotajobatthenewspaperKommersantDaily,sheneededanothertolive

permanentlyinthecapitalandtobuyanapartment.TheMoscowpolicesaidtheywouldonlygiveherthepermitifshepaidthe“fee”forcityservices,thensetatfivehundredtimestheminimumwage,orabout$2,000.“Inmyviewthiswascompletelygroundless,”Kutsillotoldme.“Theycouldnotexplainwhatthemoneywasbeingtakenfor.Theytriedtoexplainitwasforthemetro,forusingroads,movietheaters,andsoforth.Butanypersonwhocomesherepaystotakethemetro,paysforallofthis.”Kutsillowantedthepermitbecauseshedidnotwanttoliveasasecond-classcitizen;shewantedtobelegal.“Whatdoesitmeannottohaveapropiska?”sheasked.“Apersoncan’tgetalicenseforacarwithoutit,can’tregisteracarintheirname,can’tgotothelocalhealthclinic,andyoucan’tevencallanambulancewithouthugeproblems.Icouldn’tgetmarried.Iftherearechildren,youcan’tsendthemtoschool,tonurseryschool,andyoucan’tgetapassportfortravelabroad.”Kutsillohadreadallthefederallawsonresidency,whichwereclearthattheonlyrestrictionsonfreedomofmovementcouldbewarorcatastrophe.TherewasneitherinMoscow.KutsilloappearedbeforetheRussianConstitutionCourttopresenthercasepersonallyandwonamajordecisiononApril4,1996.Thecourtdeclaredthatalthoughrequiringpeopletoregisterwaspermissible,theprocesscouldnotbeusedasa“foundationforlimitingaperson’srightsorfreedoms.”Thecourtdeclaredthateverycitizen“hasarightforfreemovement,arighttochooseaplaceofresidence,”andthatpayingaresidencyfee,asMoscowhadrequired,“contradictstherightofcitizenstofreelychooseaplaceofresidence.”Thecitygovernmentquicklyresponded.Themayor ’spressofficeissuedastatementwarningthenewsmedianottoportrayMoscowasa“citywithoutborders”ortosaythatpeoplewerefreetocomeliveinthecity.Thestatementdeclaredthat“anendlessinflowofpeopletoresideheremaybetheendofMoscow,andthiswouldbetrueforanyotherbigcityaswell.”Luzhkovformallycanceledthepropiska.Butthemayordecidedtotryandimplementitbyanothermeans—todemandafee,slightlylowerthanbefore,fromanyonewhopurchasedanapartmentinthecity.Atopcityofficialsaidatthetime,“TherulingoftheConstitutionalCourtismandatoryforMoscow,butthelifeofthecitywillbedeterminedbyitsownrules.”Kutsillohadwonaround,butthefightwasnotover.Twoyearslater,onFebruary2,1998,theConstitutionalCourtagainupheldtheprincipleoftheKutsillocase,thatacitymayregisterpeopleonlyto“certifytheactofthefreeexpressionofwillofacitizen”tolivethere.Thecitycannotbe“grantingpermission”orlimitingwherepeoplechoosetolive,norcanitdictatehowlongapersoncan

liveinaparticularplace,thecourtsaid.Luzhkov’sdefianceofthecourtwasclearlyirritatingthejustices.Oneofthem,VladimirYaroslavtsev,readastatementtoKutsillo’snewspaper,KommersantDaily,whichhadcampaignedagainstthepropiska,saying,“WewouldliketowarnLuzhkovandotherregionalheads:therewillbenoclosedcities!”Eventually,afeewascreated,ofathousanddollarsormore,fortransferofrealestate,sothatthecostofgettingresidencewasbuiltintothepurchasepriceofanapartment.AlthoughKutsillohadwoninprinciple,thegreatwallaroundMoscowremained.44ChrystiaFreeland,“Moscow:MayorSaysNyettoForeignWords,”FinancialTimes,March1,1997.45ChrystiaFreelandetal.,“AMayorwithAttitude,”FinancialTimes,November4,1996,p.22.46Luzhkov,writtenanswers.Headded:“Ialsodealalotwiththeproblemsofcorruption.Andnotjusteveryday,buteverymorningandeveryevening,andsometimesatnight.Tomydeepbelief,theincreasedcriminalizationoftheeconomyandoflifeistheconsequenceoftheeconomicsystemthatwasbuiltbyourliberalreformers,onemoreconsequenceofprivatization.”Healsosaid,“Inmyview,thelevelofcorruptioninMoscowisrelativelyquitemodest,byRussianstandards.”AlthoughthesituationinMoscowisnotideal,Luzhkovargued,theenormousinvestmentinMoscowwouldnothavecomehadcorruptionactuallybeensosevere.47JuliaRubin,“U.S.BusinessmanSlainamidRussianRivalry,”AssociatedPress,November28,1996.48TheU.S.embassysaidthedecisiontorevokethevisawasbasedonaprovisionofthelawprohibitingentranceto“anyalienwhotheConsularOfficerortheAttorneyGeneralknowsorhasreasontobelieveseekstoentertheUnitedStatestoengagesolely,principallyorincidentallyinunlawfulactivity.”Dzhabrailovangrilyreplied,“ThisisadisgraceforAmerica.Havetheyanyproofofthis?”NickAllen,“U.S.RevokesRadissonTVChief’sVisa,”MoscowTimes,November30,1996.49IntheMarch26,2000,election,Dzhabrailovtooklastplace,receiving78,498votesoutof75millioncast.Helaterboastedabouttheresultwithanewsetofbillboardadvertisements.50AlessandraStanley,“ThePowerBroker,”NewYorkTimesMagazine,August31,1997,p.44.51Luzhkov,writtenanswers.52AndrewKramer,“DetectivesFightOddsinContractHitCases,”Moscow

Times,November27,1996.53VladimirYevtushenkov,interviewbyauthor,April9,2000.54Gaidar,“WhytheLivingIsGood.”55MarinaRassafonova,“YuriLuzhkovFailedtoDefendHisHonorandDignity,”KommersantDaily,May20,1998;AnnaOstapchuk,“LuzhkovAgainstGaidar,”MoscowNews,May26,1998;AlexanderFedorov,“YuriLuzhkovWoninCourtClaimtoYegorGaidar,”MoskovskaPravda,October29,1998.56AnaUzelac,“Police:MoscowOfficialPut$700KinSwitzerland,”MoscowTimes,November25,2000.57AdiIgnatius,“MayorYuriLuzhkovLeadsaCapitalCityRifewithCorruption,”WallSreetJournal,February13,1995,p.1.58MarkWhitehouse,“MoscowMayorStealsPoliticalSpotlight,”WallStreetJournal,May20,1999,p.14.59VladimirYevtushenkov,interviewbyauthor,December1,1997;April9,2000.Yevtushenkovtoldmethat,amonghisearlybusinessventures,hehelpedVladimirVinogradovsetupInkombank,whichbecameoneofthelargestcommercialbanks.MystoryontheriseofSystemaappearedintheWashingtonPost,December19,1997,p.1.60NatalyaShulyakovskaya,“AFamilyofBornLeaders,”MoscowTimes,February9,1999.61InterfaxTelecommunicationsReport,February4–10,1998.Theoldexchangewasremovedin1998.62MattBivens,“TheMeteoricRiseofLuzhkov’sSystem,”MoscowTimesBusinessReview,February1999,p.11.63Russianlawstipulatesthatanyauctionmusthaveaminimumoftwobidders.Yevtushenkovsaidtherewereseveralbiddersinthistender,butaccordingtonewspaperreportstherewasonlyonebesidestheMoscowCommitteeonScienceandTechnology,andthesecondbidderalsohadtiestoSystema.64Perhapsonereasonfortheirsecrecywasaprovisioninthedeal,notapparentatthetime,thateventuallyallowedYevtushenkovtotakecontrolofthephonecompany.Oncehesatisfiedtheinvestmentrequirementsintheinitialtender,theprovisiongrantedYevtushenkovtherighttoissuenewsharesinthetelephonegiant.Thephonecompanyissued638,634newsharesinadditiontothe1.2millionalreadyoutstanding.Thishadtheeffectofallowinghimtotakecontrol,increasingSystema’sshareto59.9percentofthevotingsharesofthe

phonecompany,asolidmajority.WhenIheardaboutthisprovisionin1998,Iwasdumbfounded.Iwentbacktotheoriginal1995faxIhadreceivedfromtheMoscowpropertycommitteedescribingtheconditionsofthetender.Itsaidnothingabouttherighttoissuenewshares.Thekeyprovisionintheprivatization—whichallowedSystematobootstrapitselfintocontrolofRussia’slargestcityphonecompany—hadbeenkeptoutofthepubliceye.ThebiggestloserwasSvyazinvest,thelargelystate-ownednationaltelephoneholdingcompany,whichwentfromowning46.6percentofvotingsharesintheMoscowphonecompanyto27.9percent.65Speakingtodiplomats,journalists,andbusinessmenMarch4,1999,Luzhkovsaid,“Icanofficiallytellyouthatallthosemythsthatarespreadaroundhavenothingtodowithreality.AsfarasSystemaisconcerned,attentiontoitisveryhightoday,butmanyhavetriedtoviewSystemaassomesortofextrapocketoftheMoscowgovernment,orasparepocketforthemayorwhohassomesortofpoliticalmotivationsbeforetheelections.Dropallthesethoughts.Weworkhonestly.Wearenotusingwhatyousuggest.Andthesuggestionsthemselves—whenwereadthem—speakonlytothebadtasteofthosewhomakethem.”NatalyaShulyakovskaya,“Luzhkov:IDon’tFunnelCityDealstoWife,”MoscowTimes,March5,1999.66AlexeiUlyukaev,interviewbyauthor,October31,1997;Ulyukaev’sessayonMoscowpublishedOctober13,1997inExpertmagazine;andanunpublished,undatedpaperbyUlyukaev,“TheMoscowMayor ’sAppetite,”p.38.Theprospectuswasforthecity’s$500million1997Eurobond.67Luzhkovpressconference,March10,1995.

THECLUBONSPARROWHILL

1ThelocationwasrenamedLeninHillsin1935butisstillknownbymanyasSparrowHills.2VasilyShakhnovsky,interviewbyauthor,November26,1999;December18,2000.3Shakhnovsky,interviewbyauthor,andLeonidNevzlin,interviewbyauthor,March16,2000;MikhailKhodorkovsky,interviewbyauthor,June19,2000;VladimirVinogradov,interviewbyauthor,June28,2000;AlexanderSmolensky,interviewbyauthor,August30,1999.

4Anonymoussource,notesofconversationwithparticipantintheclubmeetings.5ReportoftheDepartmentforPublicRelationsofAOLogovaz,undated,butpreparedforameetinginsummer1994.6Hetoldmehedidnotstaytherelong.BorisBerezovsky,interviewbyauthor,December20,1996.7ThisgangwarfareisdescribedbyPaulKlebnikovinGodfatheroftheKremlin:BorisBerezovskyandtheLootingofRussia(NewYork:Harcourt,2000).However,muchaboutthisconflictremainsunknown.ItisnotcleartowhatextentBerezovskywasavictimoracauseofthegangviolence.Itlaterbecameevident,duringtheRussianwarinChechnya,thatBerezovskyenjoyedexcellentconnectionswiththeChechens.8Berezovsky,interviewbyauthor,February28,2001.9LeonidBoguslavsky,interviewbyauthor,May16,2000.10EllenMickiewicz,ChangingChannels:TelevisionandtheStruggleforPowerinRussia(Oxford:OxfordUniversityPress,1997),p.238.11IgorMalashenko,interviewbyauthor,July25,2000.12Forthechannel,thiswassupposedlyanimprovement.AlexanderYakovlev,thenchairmanofOstankino,saidthatwhenReklamaHoldingwasformed,thechannel’srevenueswentfrom5billionrublesamonthto35billion.JeanMacKenzie,“ListyevKillingLinkedtoTVShakeup,”MoscowTimes,March3,1995.Alengthy,unsignedstoryinthemagazineKommersantWeeklyonMarch28,1995,saidthatChannel1received16billionrublesinthefirsthalfof1994.AfterthecreationofReklamaHolding,theamountroseto104billioninthesecondhalf.StillotherssaidthatReklamaHoldingwassimplycentralizingthesameprocessofrippingoffChannel1thathadbeencarriedoutbytheindependentproducers.13ReportoftheDepartmentforPublicRelationsofAOLogovaz.14StephanieBaker-Said,“TVAdvertisingSales,AdTimeUpin1996,”MoscowTimes,March4,1997,p.3.15Berezovskyhadbothmoneyandpoliticsinmind.Hewaswillingtotakeearlylossesinexchangeforimmediatepoliticalinfluenceandbigprofitslater.Inour1996interview,Berezovskytoldmethatheinvestedinmediafor“influenceonthepoliticalprocess.Andatthesametime,atthefirststage,Iunderstooditwasn’tgoingtogiveprofits.Idon’twanttotalkaboutexactnumbers,butIcansaythatORTtodayisformenotasourceofprofitsbutasourceofenormousexpenditures.”However,hesaiditcouldbe“madevery

profitable,”withtherightinvestment.“Theseinvestmentsaren’tenoughtoday.Butalreadytodayitispossibletoattractbigmoney.”Hesummedupbothreasons.“Oneispolitical:theprotectionofmyinterests.Andthesecondreason:itisbusiness.”Hetoldmein2001thathelostcontrolofORTbeforeeverrealizingthebigprofits,butallofhishopesforpoliticalinfluencewerefulfilled.“AllthepoliticaltasksthatIformulatedforORTwerefulfilled.”16OnMarch27,1998,BerezovskytoldagroupofjournaliststhatAvenintroducedhimtoYumashev.17AlexanderKorzhakov’srecollectionsarecontainedinhismemoir,BorisYeltsin:FromDawntoSunset(Moscow:Interbook,1997).Despitetheironcecloserelationship,YeltsinandKorzhakovdisplayedgreatanimositytowardeachotherafterKorzhakov’s1996dismissal.Inhismemoir,YeltsinsaidhehadnotreadKorzhakov’sbook,but“Iamtolditcontainsmuchuntruthandsleaze.IdecidednottoreaditbecauseIcouldn’tcontainmyrevulsion.”HesaysKorzhakovwasoverpromotedandhad“concentratedmorepowerintohishandsthanhecouldhandle.”YeltsinsaidKorzhakov’sinfluence—appointingpeopleingovernment,forexample—is“entirelymyfault.”Yeltsin,MidnightDiaries(NewYork:PublicAffairs,2000),p.69.18KorzhakovmadethiscommentonthetelevisionprogramSovershennoSekretno,November21,1999.19Korzhakov,BorisYeltsin,p.283.20Berezovskyrecalledinthemeetingwithreportersin1998,“Earlierthanothers,westartedthinkingaboutwhatwasgoingtohappenin1996,andtogetherwelobbiedtheideaofcreatingORT.”21Theagreementbetweenthenewcompany,ORT,andOstankinowaspublishedinRossiiskayaGazeta,February16,1995.22BerezovskyalsogaveKorzhakovpowerofattorney,turningallthesharesovertoYeltsinincasetherewasanydoubtaboutBerezovsky’sloyalty.ButthisappearstohavebeenmoreagambittoreassureKorzhakovthananythingelse.KorzhakovsaidataNovember30,1998,pressconferencethathenevershowedthedocumentstoYeltsin.Detailsoftheauthorizationwerefirstpublishedin“YeltsinIsShareholder,”KommersantDaily,November19,1998.23IvanFranko,“AManCapableofResolvingQuestions,”KommersantDaily,November2,1996,p.15.24Berezovsky,interviewbyauthor,February28,2001.25TextofYeltsin’sremarkstoOstankinojournalists,March2,1995,BBCSummaryofWorldBroadcasts.

26Thekillingwassurroundedbyanumberofstillunexplainedevents.Iofferasummaryheretogivethereaderasenseoftheunansweredquestionsthatfollowedthemurder.Thedaybeforethemurder,February28,Berezovskymetwithamanhehas

identifiedasNikolaiPlekhanov,amemberofanunderworldgang.Accordingto Berezovsky, he was told by police who came with Plekhanov that thegangster knew who had planted the bomb attack against Berezovsky thepreviousyear,andthatPlekhanovhadonceagainbeenorderedtoassassinatehim.BerezovskysaidhegavePlekhanov$100,000thatday,inthepresenceofthe militiamen. Berezovsky also videotaped the encounter. The money wasintendedtoforestallanotherassassinationattempt,Berezovskysaid.BerezovskythenflewofftoLondononanofficialtripwithChernomyrdin.

Upon hearing about Listyev’s murder, Berezovsky returned immediately byprivatejettoMoscow.Twodaysafterthemurder,BerezovskyandoneoftheindependentChannel

1 producers, Irena Lesnevskaya, recorded a videotaped appeal to Yeltsin.Berezovsky told me the tape was Lesnevskaya’s idea. They had sought ameetingwithYeltsin,butKorzhakov insisted theymake the tape instead.Thetapewasrecorded inKorzhakov’soffice in theKremlin. (KorzhakovsaidheneveractuallyshowedthetapetoYeltsin.)Onthetape,theynervouslypointedthe finger at some vague, power-mad, spooky Moscow organization thatincludedGusinskyandLuzhkov.Lesnevskayasaid,“Ihavenodoubt that thislogicalschemewasbuiltupbytheMostgroup,byMr.Gusinsky,Mr.Luzhkov,and the structure under him, a huge pyramid with islands; the former KGBcame upwith this [devious] plan to assassinateVlad.”A twenty-three-minutesegment of theBerezovsky-Lesnevskaya tapewas played byKorzhakov at aMoscowpressconferenceNovember30,1998;alongerversionisreproducedinKlebnikov,Godfather.OnthetapewithLesnevskaya,Berezovskyalsocomplainedatlengthabouta

long standoffwith armedantiriotpoliceoutside theLogovazmansion in theaftermath of Listyev’s murder. They came wanting to search the club.Berezovsky refused to let them in but eventually, after phone calls to thegeneralprosecutor(amongothers),agreedtobequestioned.TheinvestigatorswantedacopyoftheORTcharter,hesaid,andhegaveittothem.Threedaysafterthekilling,Berezovskysaid,“Ibelievethatreasonsforthe

assassination of Vladislav Listyev are political, although many now speakabout his commercial activities.” In 1999, Berezovsky went further and

accusedKorzhakovandhiscircleofresponsibilityforthekilling.Berezovskysaid that Listyev’s murder was linked to Korzhakov and former FederalSecurityService directorMikhailBarsukov.Themurder “was committed bythisgroupofpeople,”hesaid.BerezovskytoldmethathebelievesKorzhakovattemptedtoframehimfortheListyevmurder.Lisovsky’s offices were also searched after the murder. When I asked

Lisovskyaboutitfiveandahalfyearslater,heshowedaflashofemotionanddescribedbittermemoriesaboutwhathecalledListyev’sarrogance.LisovskyclaimedthemurderstemmedfromListyev’spersonallifeormayhavebeenanattempttoframeLisovskyandothersinthetelevisionbusiness.“Naturally,thisdeath made all of us who were members of the television communityaccomplices and witnesses,” Lisovsky said. Lisovsky, interview by author,December15,2000.27Anonymoussource,interviewbyauthor.28Berzovsky,interviewbyauthor,February28,2001.29Franko,“Man.”30JulieTolkacheva,“Moscow’sCapitalistElite:WealthyandWary,”MoscowTimes,July22,1994.31“NikolaiGlushkov:TheMassMediaShouldKnowtheFactsEarlierThantheInvestigators,”KommersantDaily,November23,2000,p.1.ThisarticleisaninterviewwithGlushkov.32SergeiZverev,interviewbyauthor,June23,2000.33VladimirGusinsky,interviewbyauthor,September22,2000.34JohnLloyd,“TheGeneralwithaHotLinetoYeltsin,”FinancialTimes,December22,1994,p.3.35Korzhakovsaidina1999televisioninterview,“Thiswasmydecision,Ididnotlethimout.IlockedtheplaneandtoldSoskovyets,‘Onyougo.’”SovershennoSekretno,November21,1999.36“TheSnowIsFalling,”RossiyskayaGazeta,November19,1994.37CarlottaGallandThomasdeWaal,Chechnya:CalamityintheCaucasus(NewYork:NewYorkUniversityPress,1998).Thisbookcontainsthebestaccountoftheoriginsofthewar.38AccordingtotheaccountGusinskygaveChrystiaFreelandinSaleoftheCentury,RogozinalsodemandedthatGusinskycoughupsomekompromatagainstLuzhkov.39SavostyanovwasthenheadoftheMoscowbranchoftheFederalCounterintelligenceService,whichwasasuccessortotheKGBandwaslater

foldedintotheFederalSecurityService(FSB),themaindomesticfederalsecurityservice.40Gusinsky,interviewbyauthor,September22,2000.41YegvenyKiselyov,interviewbyauthor,August2,2000.42TheSovietwarinAfghanistan,1979–1989,hadbeenhiddenandpropagandized.43YuriBogomolov,“NewsBattlesMirror‘HotWar,’”MoscowNews,January13,1995.44Mickiewicz,ChangingChannels,p.256.

THEEMBRACEOFWEALTHANDPOWER

1CharlesRyan,interviewbyauthor,March16,1999;January30,2001.2TheRussiangovernmentandCentralBankannouncedonAugust24,1995,thattheywouldmaintainthecorridor,whichhadbegunonJuly5,untiltheendoftheyear.Theouterlimitsweresetat4,300and4,900rublestothedollar.Therubleclosedthatdayat4,428tothedollar.Chubaisclaimedthatthefirsttwomonthsofthecorridorhadchilledspeculation;beforethelimitswereintroduced,hesaid,about$1billionaweekwaspassingthroughexchangemarkets,whichfellto$400million.3Theannualinterestratesonthesebondswas262.9percentinJanuary1995and236percentinFebruary,anditremainedabove100percentforeightmonthsofthatyear,accordingtotheRussianCentralBank,“InterestRatesin1995,”availableatwww.cbr.ru/eng/statistics/creditst_statistics/print.asp/file=interestrates_95_e.htm.4BankMenatep(Group)IndependentAuditor’sReport,ArthurAndersen,InternationalAccountingMethods,1995.5MikhailKhodorkovsky,interviewbyauthor,June19,2000.6AlmanacofRussianPetroleum1999(NewYork:EnergyIntelligenceGroup,1999),p.65.7NatMoserandPeterOppenheimer,“TheOilIndustry:StructuralTransformationandCorporateGovernance,”inBrigitteGranvilleandPeterOppenheimer,eds.,Russia’sPost-CommunistEconomy(Oxford:OxfordUniversityPress,2001).

8KhodorkovskywroteanarticleinaRussiannewspaperatthetimedescribingthe“radicalchanges”intheoldstate-runstructureoftheoilindustry,anditsneedsfornewinvestmentcredits.MikhailKhodorkovsky,“InvestmentActivityIsVitalforRussia’sFuelandEnergySector,”FinansovyeIzvestia,November19,1992,p.7.MenatepBankalsoannouncedin1992thatitwasseekingoutsidecreditstohelptheoilindustry.In1992KhodorkovskytoldThaneGustafson,along-timespecialistinSovietandRussianenergyissues,thathewasprovidingcreditstotheoilindustry.ThaneGustafson,CapitalismRussian-Style(Cambridge:CambridgeUniversityPress,1999),p.121.9Priobskoyefield,discoveredin1992,occupiesanareaof5,466squarekilometersalongtheObRiver,onehundredkilometerswestofNefteyugansk,withabout4.5billionbarrelsofoil.Yuganskneftegazhasalicenseforabout72percentofthefield,theNorthernTerritory,accordingtoaYukospressrelease,October28,1999,onpassageofproduction-sharinglegislationforthefield.10StephenO’Sullivan,RussianOil:FinancialAnalysis,MCSecuritiesLtd.,London,February26,1997;“Yuganskneftegaz,”MN-Fund,Moscow,undated;AnnualReport,Yuganskneftegaz,May1997.11SalomonBrothers,Yuganskneftegaz,June25,1996,p.24.12Oneimportantreasonwhyforeigninvestorsboughtstockinmanyoftheseoilextractioncompanieswasavailability.Intheearly1990sitwasnotyetpossibletobuysharesinthebigholdingcompanies,whichwerejustbeingcreated.Investorsalsothoughttheoilfieldextractioncompanystockswerecheap.13Dartboughtotheroilfieldstocksaswell,butthesetwowerethecoreofYukos.14AlexeiMitrofanov,telephoneinterviewbyauthor,October29,1998.15NinaYermakovaandotherteachersatSchool58,interviewbyauthor,November12,1998.16OlegChurilov,interviewbyauthor,March1,1999.17OlegKlimov,interviewbyauthor,February25,1999.18Norilskwasamajorplayeringlobalmetalsmarketstoo.By2001Norilskwasproducing20percentoftheworld’snickel,20percentoftheplatinum,and40percentofthepalladium,accordingtocompanyestimates.19Dun&BradstreetRussia,UneximGroup:ReportonFinancial-IndustrialGroup,updatedMay1997;ThompsonBankwatch,UneximBank:CompanyReport,September27,1996;Uneximbankannualreportsandpublications.The

$300millionisPotanin’sownestimate.TheletterurgingclientstojoinPotaninwasquotedinKommersantWeekly,June1,1992,andinKommersantDaily,October15,1992,byreporterDmitrySimonov,andagainbyYaroslavSkvortsovandMikhailLoginovinKommersantDaily,November16,1995.20ThomsonBankwatch,UneximBank:CompanyReport,September27,1996.Thebank’sassetsreached$3billionbytheendof1995.21BorisJordan,interviewbyauthor,October1,2000;StevenJennings,interviewbyauthor,March3,2000.22“WhoWillBuyRussia?”Economist,September9,1995,p.73.23DmitriVasiliev,interviewbyauthor,September16,1999.24AnatolyChubais,ed.,PrivatizatziaPo-Rossiiski(Moscow:Vagrius,1999),p.183.25SergeiBelyaev,interviewbyauthor,October18,1999.26Chubais,interviewbyauthor,May13,2000.27VladmirPotanin,interviewbyPatriciaKranzofBusinessWeek,September8,1997.HerarticleonPotanin,“Russia’sMostPowerfulMan,”appearedinBusinessWeek,November24,1997.28PaulBograd,interviewbyauthor,March26,1999.29Khodorkovsky,interviewbyauthor,June19,2000.30Gaidar,interviewbyauthor,September29,2000.31WilliamFlemming,“Business-StateRelationsinPost-SovietRussia:ThePoliticsofSecondPhasePrivatization,1995–1997”(M.Phil.thesis,OxfordUniversity,1998).IamindebtedtoFlemmingforhisexcellentresearchandthoughtfulassistanceonloansforshares,especiallytheimportantlinkwiththe1996election.32TransitionReport1999(London:EuropeanBankforReconstructionandDevelopment),chap.6,“GovernanceinTransition,”p.115.33Chubaislateracknowledged,aftertheauctionswerenearlyover,thatallowingtheauctioneertobidonthepropertieswasamistake.“Notforlegalbutratherforethicalreasonsitcanbesaidwemadeamistakehere,”hetoldjournalistsDecember15,1995,promisingitwouldnothappenagain.Butinfactitdid.34AlfredKokh,TheSellingoftheSovietEmpire(NewYork:SPI,1998),p.121.35AlexanderVorobyev,“Amnesty’sEffectonCorruptionCaseProsecutionNoted,”RossiyskayaGazeta,January18,2000.VorobyevwaspresssecretaryoftheInteriorMinistryunit,whichinvestigatedthedealsandsaidtheprobe

wasdroppedattheendof1999becauseofanamnestystatuteapprovedbyparliament.36TheKhodorkovskylieutenanttoldmethisstory.37Thebankers,inastatementpublishedNovember26,accusedMenatepofrenegingonitsearlierpromisedinvestments.TheysaidKhodorkovskywondozensofauctionswithpromisestoinvest$600millioninthefactoriesthathetookoverbutthenfailedtoinvest.“Practicallynotasingleobligationwasfulfilledbythebank,”thebankersdeclared,mentioningKhodorkovsky’svoraciousappetiteforfactories:phosphates,aluminum,food,andsteel,amongothers.SimilarchargesweremadeagainstKhodorkovskyinlateryearsaswell,thathescoopedupcompaniesatinvestmenttenderswithoutmakingthepromisedinvestments.ReplyingonDecember10inaninterviewpublishedinKommersantDaily,Khodorkovskysaidhehadnotgivenabsoluteguaranteesfortheprivatizationtendersbutinsteadhadissuedletterspromisingtomaketheotherinvestments.AfootnoteinMenatep’s1995auditsaidthebankinggroup“hasparticipatedthroughout1995ininvestmenttendersandloan-for-sharesauctionswhichresultedindrawingcomfortletterswithanexpectedvalueofinvestmentsuptoRbm1,047,359.Thecomfortlettersdonotcontainanyobligation.”38ChubaissaidinhisDecember15pressconference,“Iwouldn’tliketooffendanybody,butsomebanksareknowntohavechosensuchtacticsforthemselves:theyneededtheseauctions,inwhichtheyhadnofundstotakepart,inordertoraiseahueandcryoverrejectionoftheirapplicationsandthen,relyingonthosescandals,totryandnegotiatewiththewinnersinabidtogettheirshare.Unfortunately,thesetacticsarequitewellknownandsomebankspursuedtheminexactlythisway.Suchthingsdidhappen.”39Menatepatthetimehelda12percenttakeinSmolensky’sbank,theauditshows.40ChrystiaFreeland,“BiddersClaimExclusionfromRussianOilSell-off,”FinancialTimes,November1,1995,p.3,andFreeland,“WarofWordsintheReformClub:ProtestsareGrowingoverRussia’sPrivatizationProgram,”FinancialTimes,December2,1995,p.7.41YuliDubov,interviewbyauthor,May3,2000.42“KorzhakovSaysBerezovskyStoleORT,”KomsomolskayaPravda,January28,1999.43LeonidKrutalov,“AlexanderKorzhakov:SleepingwiththeEnemy,”MoskovskyKomsomolets,November3,1999,p.2.

44Berezovsky,interviewbyauthor,February28,2001.45BerezovskydisclosedthisinaninterviewpublishedinNezavisimayaGazeta,February3,1998,p.1.46Smolensky,whoeschewedRussianindustry,toldmeheknewofPotanin’seffortstoorganizeloansforshares,buthedidn’twantanyfactories.HerecalledthatPotaninhadorganizedmeetingsathisbanktochoosethepropertiesthatwouldbeincludedinloansforshares,but“Ididn’tvisitasingletime.”However,heparticipatedinraisingthemoneyforBerezovsky’sinvestmentinSibneft,whichhesaidwasnotbudgetmoneyfromthestatebut“realmoney.”47Boiko’scommentsweremadeinaninterviewinKommersantDaily,March14,1995,p.3.48“Russia’sFinancial-IndustrialElite,”acablebyWaller,May26,1995;Waller,multipleinterviewsbyauthor,1996–2000.49ThomasE.Graham,interviewbyauthor,June22,2000.GrahamsaidthatheoriginallywrotetheessayforpublicationbytheMoscowCenteroftheCarnegieEndowmentforInternationalPeace,butthetextlanguishedthereandwaspickedupbyTretyakovinstead.50Gusinskytooknochances.HecamebackjustasPresidentClintonwasvisitingforasummitwithYeltsintocelebratethefiftiethanniversaryoftheendofWorldWarII.GusinskyfiguredthatnoonewouldcausetroublewhiletheU.S.presidentwasintown,andhewasright.

SAVINGBORISYELTSIN

1MikhailBerger,“TwoZyuganovs:OneforWest,OneforHome?”Izvestiya,February6,1996,pp.1–2;Berger,interviewbyauthor,January17,2001.2AnatolyChubais,interviewbyauthor,May13,2000.3ArkadyYevstafiev,interviewbyauthor,March7,2000.4Chubaispressconference,February5,1996.5VladimirGusinsky,interviewbyauthor,September22,2000.6BorisBerezovsky,interviewbyauthor,July5,1996.7NatalyaGevorkyan,“YoungRussianCapitalHelpedthePresidentWintheElection,”KommersantDaily,June17,1997,p.4.8GeorgeSoros,OpenSociety:ReformingGlobalCapitalism(NewYork:

PublicAffairs,2000),p.242.9Berezovsky,interviewbyauthor,February28,2001.10BergertoldmethatthetwomendiscussedhiringChubaisforthecampaignatthatmoment.11Chubaisdiscussedthe$5millionarrangementwithagroupofreportersonDecember2,1997.EarliernewsreportsstatedthatSmolenskygaveaninterest-free,five-yearloantoChubaisof14billionrubles,thenworthabout$3million,whichwaspaidoverthreeinstallmentsinMarch1996totheChubaisfund.ThismayhavebeenjustpartofthesumwhichthetycoonspaidChubais.ThenewspaperIzvestiapublishedthestoryofthe$3millioninterest-freeloanonJuly1,1997,andSmolenskytoldmeasimilarstoryina1997interview.Chubais,withoutmentioningtheprecisetotal,alsosaidinaresponsetoIzvestiaonJuly5,1997,thathehadcreatedthecenter.“Thefoundationindeedconductedfinancialactivity:wereceivedaninterest-freeloan—whichisabsolutelynormalinrelationsbetweensocialorganizations,ofwhichthefundwasone,andcommercialstructures,bothforRussiaandanydemocraticcountry.”Chubaissaidhepaid515millionrubles,orabout$95,000,intaxesonhisincomeof1.7billionrublesor$300,000whichhesaidwasearnedbetweenhisfiringinJanuaryandhisreturntogovernmentservicewhenappointedchiefofYeltsin’sadministrationaftertheelection.“ThemajorpartcamefrommytrulywellpaidlecturesandconsultingservicesandformyworkintheCenterforProtectionofPrivateProperty,fromwhichIcametothepresidentialadministration.”Interfax,January21,1997;AssociatedPress,“LawmakersAccuseChubaisofViolatingCivilServiceLaw,”February5,1997.12Chubais,interviewbyauthor,May13,2000.13BorisYeltsin,MidnightDiaries(NewYork:PublicAffairs,2000),p.1714LeeHockstaderandDavidHoffman,“YeltsinCampaignRosefromTearstoTriumph,”WashingtonPost,July7,1996,p.1.15Yevstafiev,interviewbyauthor,March7,2000.16Yeltsin,MidnightDiaries,p.1917Berezovsky,interviewbyauthor,July5,1996.18Yeltsin,MidnightDiaries,p.2119AlexanderOslon,interviewbyauthor,May16,1996.20MichaelKramer,“RescuingBoris,”Time,July15,1996,p.28.21Korzhakov,appearanceonSovershennoSekretno,November21,1999.22VladimirChernov,“IfPapaHadn’tBecomePresident,”interviewof

Dyachenko,Ogonyok,October23,2000,p.5.23Gevorkyan,“YoungRussianCapital.”24AnatolyKulikov,“IWillNotParticipateinAdventures,”interview,NezavisimayaGazeta,July23,1999,p.8.25Chernov,“Papa.”26Karaganov,interviewbyauthor,November9,2000.27Yeltsin,MidnightDiaries,p.25.28YevgenyKiselyov,PresidentofAllRussia,April2000.Four-partNTVdocumentary.29Yeltsin,MidnightDiaries,p.27.30YavlinskysaidYeltsinonceaskedhimtopulloutbeforethefirstround.Herefused.Kiselyov,PresidentofAllRussia.31PaulBograd,“SummaryofElectoralStrategy,”memotoChubais,April25,1996;Bograd,“SecondRoundStrategy,”memotoYevstafiev,May7,1996;Bograd,“The30PercentTarget:AStrategyforanElectoralMajorityBaseduponEconomicReform,DemocraticPrinciples,andStrongLeadership,”undated;Bograd,interviewbyauthor,March26,1999.32MikhailMargelov,interviewbyauthor,November2,2000.33AlexeiLevinson,interviewbyauthor,June1996.LevinsoniswiththeAll-RussianCenterfortheStudyofPublicOpinion.34Hockstader,“YeltsinPayingTopRubleforPositiveNewsCoverage,”WashingtonPost,June30,1996,p.1.TheEuropeanInstitutefortheMediainDusseldorf,whichmonitoredtheRussianelectionsandcameupwiththeestimates,alsosaiditcounted300positivereferencestoYeltsincomparedto150forZyuganov.35VladimirVinogradov,interviewbyauthor,June28,2000.36Plentyofcrisp$100billswereavailableatthetimetoo.Inthespringof1996,theU.S.Treasuryreplacedtheold$100billwithanewonethatwasbetterprotectedagainstcounterfeiting.Averylargesupplyofthenewbills—millionsofdollarsworth—wasshippedtoRussiaandkeptforawhileintheU.S.embassyinMoscowbeforebeingswappedfortheoldbillsthroughtheRussianbankingsystem.TheUnitedStatescarriedoutapublicrelationscampaigninRussiatoreassurepeoplethatthenewbillwaslegaltender.37Kiselyov,PresidentofAllRussia.38ThenewspaperNovayaGazetapublishedalengthyarticleonthesubjectinMarch2000,statingthatithadthirty-sevenpagesofdocuments,includingthelistofoligarchsandtheirstructuresthatpaidfortheYeltsincampaign.The

articlecontainedmanytantalizingconclusions,includingasimilardescriptionoftheschemeofreprocessingtheMinFinbonds.However,Iwastoldbyaninformedsourcethatthearticlewasnotproducedbythenewspaperbutwasreceivedfromanoutsidesourceandpublishedverbatim.Theidentityoftheoutsidesourceisnotknown.39KonstantinKagalovsky,“CorruptioninDefenseofDemocracy,”Sevodnya,July6,1999,p.1.40VictoriaClark,“Yeltsin’sManStillsHisMaster ’sVoice,”Observer,May5,1996,p.20.41Korzhakov,SovershennoSekretno.42Streletskyclaimshismencarriedoutasecretoperation,lateatnightonJune18,toopenthesafeintheofficeofGermanKuznetsov,deputyfinanceministerforinternationalfinancialsettlements.Itwasroom2–17intheRussianWhiteHouse,headquartersoftheChernomyrdingovernment.StreletskysaidhesuspectedtheroomwasatthecoreoftheChubaiscampaignfinanceoperation.AccordingtoStreletsky’saccount,duringthenighttimeincursion,hismenfound$1.5millionincashwrappedinplasticandblankformsformoneytransfersof$5millioneachforprintingservicesandadvertising.TheblanksshowedthatmoneywasbeingtransferredtotheBahamasandtoBalticdivisionsofAmericanbanks.Thefiveblanksinthesafewerenumbers19–23.Iftherewereeighteenpreviousones,heconcluded,thatmeantatotalof$115million.Streletsky’smenbuggedtheroom,hesaid,listeningtoeverythingfromthefloorabove,hopingtocatchwhoeverdrewcashfromthesafe.Streletskyisnotaneutralsource.HewasattemptingtodisrupttheChubaisteam,andhisaccountshouldbereadinthatlight.ItseemsstrangethattheKremlin’sownsecurityservicehadtobugthegovernment’sownbuildingtogatherinformationonYeltsin’sowncampaignoperatives.Streletsky’sversionofhowthetrapwassetappearedinhisbook,Obscurantism(Moscow:Detektiv-Press,1998).43SergeiLisovsky,interviewbyauthor,December15,2000.44AtapeofLavrov’scommentswasmadepubliconJune26,1999,byViktorIlyukhin,chairmanoftheDumasecuritycommittee,aSoviet-eraprosecutorwhowasclosetoKorzhakov.45SergeiZverev,interviewbyauthor,June23,2000.46ChubaissaidinanNTVinterviewthatBarsukovatfirstreactedtothecall“likeanastonishedchild,”sayinghedidnotevenknowYevstafievorLisovsky.HerooftheDay,June20,1996.

47TapeofKiselyovbulletin;ChristopheBeadufe,“YeltsinElectionAidesArrested,CancellationofVoteFeared,”AgenceFrancePresse,June20,1996.48YevgenyKiselyov,interviewbyauthor,August2,2000.49Therealsourceofthe$538,850wasneverdetermined.Yevstafievsaidhedidnottouchthebox.WhenIaskedLisovskyaboutitfouryearslater,hesaid,“Itisaltogetherunclear”iftherewasaboxofmoney.Ireplied,“It’snotclearthattherewasn’t.”Lisovskyretorted,“Letusstophere;thatit’suncleariftherewas,anduncleariftherewasn’t.”InDecember1996,thepopularbroadsheetnewspaperMoskovskyKomsomolets,whichispartofLuzhkov’sempire,publishedwhatitdescribedasatranscriptofaconversationbetweenChubais,Ilyushin,andathirdman,identifiedasSergeiKrasavchenko.Theconversationwassupposedlysecretlytape-recordedJune22bytheRussian“specialservices,”twodaysafterthedetentionofYevstafievandLisovsky.Chubaisexpressesfearforthefateofhisaidesandsuggeststhedocuments

inthecasebehushedup.Allthreemencalledthetranscriptafake,denyingthemeetinghadtakenplace.Theveracityofthetranscriptisnotknown.OnApril7, 1997, the general prosecutor closed the investigation without finding outwherethemoneycamefrom.Noonewaschargedwithwrongdoing.Anauditof the 1996 campaign said of themoney: “There are no official documentsconfirming ownership of this sum by the federal budget or by a private orlegalentity.”ThemoneywasturnedovertothegovernmentonApril17,1997.50BerezovskyaddressedtheissueNovember17onNTV.Hisexplanationincludedthestatementthat“IsimplyexercisedtherightofanyJewtoformalizemyrelationswithIsrael.Youknow,Israelisauniquecountry.AnyJew,whereverhelives,hastherighttobeacitizenofIsrael.”Hewasdescribingthe1950LawofReturn:“EveryJewhastherighttocometothiscountryasanoleh”(aJewimmigratingtoIsrael)andthatavisaforanolehshouldbegrantedto“everyJewwhohasexpressedhisdesiretosettleinIsrael.”ManyIsraeliJewsalsoretaincitizenshipinothercountries.51Berezovsky’sdesireforrespectwasseverelydentedbyahighlycriticalarticleinForbes,publishedinDecember1996,headlined,“GodfatheroftheKremlin?”HesuedthemagazineforlibelinBritain.OnMarch6,2003,priortoatrial,ForbesacknowledgedinaBritishcourtthatitdidnothaveevidencetosupportsomeallegationsinthearticle,andthat“itwaswrongtocharacterizeMr.Berezovskyasamafiaboss.”Berezovskydroppedthelibelsuit.52AlaterestimatewasthatGazpromloanedGusinsky$130millionandthe

debtwasconvertedtoequity,givingGazpromthe30percentshareinNTV.53AndreiRichter,interviewbyauthor,October1996.

THEBANKERS’WAR

1AnatolyChubaisinterview,NewTimes,December1996.2BorisYeltsin,MidnightDiaries(NewYork:PublicAffairs,2000),p.80.3BorisNemtsov,interviewbyauthor,November1995.4“ManofPower,”Chaubaisinterview,ObshchayaGazeta,January9–15,1997,p.9.5DmitriVasiliev,interviewbyauthor,September16,1999;November20,1999.6Nemtsov,interviewbyauthor,September20,1997.7ChubaisrecalledthatonavisittoLondon,heandNemtsovaskedPrimeMinisterTonyBlair,“Whatdoyouthinkisbetter,Communismorbanditcapitalism?”AccordingtoChubais,Blairthoughtforaminuteandsaid,“Banditcapitalismisbetter.”Chubaisadded,“Absolutelyright.Andthenthequestionarises,Banditcapitalismornormalcapitalism?Whenthisdilemmaarises,youhavetosolveit.”Chubais,remarkstoreporters,December2,1997.Author ’stranscript.8ChubaislatergavewhatIthoughtwasacogentdescriptionofthethreecompetingmodelsofcapitalisminthelate1990sinRussia.“PositionofBerezovsky:businessmenmustcontrolthevlast”(awordthatmeanstheauthorities,thepoliticalpowers).“Luzhkov’sposition:thevlastmustcontrolbusiness.”Theyoungreformers,hesaid,wantedto“separatebusinessfromvlast—separateownershipfromvlast.”Chubais,remarkstoreporters.Author ’stranscript.9Chubais,interviewbyauthor,May13,2000.Chubaisalsosaidatthetime:“Imagineasituationinwhichapersonwhohasearnedalotofmoney,whoregardshimselfasthemasterofthecountry,reasonsasfollows:Igotthepresidentelected,Igotthegovernmentappointed,andnowitisthetimeformetocollectmydividends.Suchanattitudeisrepulsiveandunacceptabletome.”Chubais,interviewbyV.Bazhenov,Argumenty&Fakty,November20,1997,p.1.10Yeltsin,MidnightDiaries,p.90.

11Chubais,interviewbyauthor,May13,2000.12StevenMufsonandDavidHoffman,“RussianCrashShowsRisksofGlobalization;SpeculatorsIgnoredEconomy’sRealities,”WashingtonPost,November8,1998,p.1.13AndersÅslund,“WhyHasRussia’sEconomicTransformationBeenSoArduous?”(paperpresentedtotheWorldBankAnnualBankConferenceonDevelopmentEconomics,April29–30,1999).Åslundpointsoutthatanotherfactor,inadditiontoYeltsin’sreelection,wasthe1996agreementforathree-yearextendedfundfacilitywiththeInternationalMonetaryFund.TheseloanswereconditionedonperformancebenchmarksbyRussia,whichwereoftennotmet.The“soft”agreement,Åslundsays,“convincedforeignersandRussiansalikethatRussiawastoobig—ortoonuclear—tofail,andthatanythinggoesinRussia”(p.12).14JamesFenkner,interviewbyauthor,September26,1998.15Ihaveheardmanystoriesabouttheseabuses.TheywerenicelysummarizedbyMarkWhitehouseintheMoscowTimes,“DirtyDealing,”April7,1998,p.1.16Smolensky,interviewbyauthor,October10,1997;August31,1999.17Standard&Poorpressrelease,July14,1997.Theagency’s“speculativegradelong-termcounterpartyrating”forSBS-Agrowassingle-Bandtheoutlookwas“plus/positive,”thebestofthefourbanksrated.18Offeringcircular,SBS-AgroFinanceB.V.,prospectus,July18,1997.19XavierJordan,interviewbyauthor,July1997;Jordan,telephoneinterviewbyauthor,October6,1997.20Hadhebeenoffered,Gusinskyconfessedthathemighthavegrabbedanoilcompanytoo.Gusinskytoldme,“Hadtheyinvitedme,itwouldhavebeenadifficultdecisionformetomake.IthinkIwouldprobablyhaveparticipatedifIhadbeeninvited.”21ThemagazinewaspublishedinassociationwithNewsweek,whichisownedbytheWashingtonPostCompany.ItogiwastypicalofGusinsky’sstart-ups:smart,entertainingandprovocative.Ifyouwereexhaustedfromthepoliticaltediumallweeklonginthenewspapers,youcouldlookforwardtoreadingItogi,whichwasaimedatanintelligent,middle-classaudience.Travel,leisure,andconsumergoodswerefeaturedprominently,aswellasthoughtfulcoverageofthearts.22Gusinskyhadsoughtforeigninvestorsforthestake,butitwasstilltooearly;hedidnotwanttogiveupcontrol,andtheydidnotwanttotaketherisks.

23AlexeiMukhin,SpecialServicesandTheirRepresentativesinRussianSociety(Moscow,1999),pp.35–36.Pamphlet.InRussian.24GusinskysaidtheItalianswantedthestake,but“themilitaryblockedtheselling.”Chubaissaid,“Gusinskywashelpingtoconvincethespecialservicesthatwerecategoricallyagainsttheauction.”25GusinskyandPotaninconfirmedthisinOctober1997interviews,asdidAndreiTrapeznikov,Chubais’spresssecretary.Gusinsky,interviewbyauthor,October15,1997;Potanin,interviewbyauthor,October14,1997;Trapeznikov,telephoneinterviewbyauthor,October25,1997.26IgorMalashenko,interviewbyauthor,March7,1997.27Gusinsky,interviewbyauthor,September22,2000.28JordanandPotaninannouncedonJuly9thattheyweremergingJordan’sRenaissanceCapitalwithPotanin’sInternationalFinancialCompany.ThemergerdidnotgothroughuntilaftertheSvyazinvestauction,butthetwowerealreadyworkingcloselytogether.29Jordan,interviewbyauthor,October1,2000.30Soros,interviewbyauthor,June1997.31Jordan,interviewbyauthor,May22,1998.ThestoryoftheloanwasfirstdisclosedbyChrystiaFreeland,“Soros‘LentMillions’toBailOutKremlin,”FinancialTimes,March5,1998.32JohnThornhill,“RobberCapitalismtoShareholderRights:GeorgeSorosHasOvercomeHisMisgivingsAboutInvestinginRussia,”FinancialTimes,July30,1997,p.38.33Subscriptionagreement,July24,1997:“SubscriptionAgreement.DeutscheBankAGandOpenJointStockCompanyand‘UnitedExportImportBank’andRenaissanceCapitalInternationalLimitedandSvyazFinanceLtd.andMustcomLimitedandICFI(Cyprus)LimitedandTheInvestorsandRenaissanceSubscribers.”Draft,July23,1997,inpossessionoftheauthor.34Thisinvestor,whoaskedtoremainanonymous,toldmeheboughtintobothPotanin’sandGusinsky’sinvestmentconsortiumsforSvyazinvest—itwassohothewantedtobecertainofwinningsomething.35Potanin’sstrategyisdescribedinofficialdocumentsandinternalmemosonthedeal,whichIobtainedfromapotentialinvestor.36Yeltsin,MidnightDiaries,p.95.37Gusinsky,interviewbyauthor,October15,1997.Potaninalsoconfirmedthatdiscussionsaboutamergerordealtookplacebeforehand.InPotanin’sversion,“Iproposedfromtheverybeginningourparticipationinhis

consortium,whereheistheleader.Ifwewintogetherhecandowhateverhewants.”ButGusinskyrefused.38Potanin,interviewbyauthor,October14,1997.39GeorgeSoros,OpenSociety:ReformingGlobalCapitalism(NewYork:PublicAffairs,2000),p.259.40Chubais,remarkstoreporters,December2,1997,author ’stranscript.41Jordan’sRenaissanceCapitalcontributedabout$200millionoftheofferedprice.Buthehadbroughtinoutsideinvestorsfortheconsortium,andiftheywontheauction,hestoodtoreapabout$39millionincommissions,accordingtointernalmemos.Thecommissionswouldbeevenhigherifthewinningbidwasover$1.5billion.42Credinstaltinvestmentbankestimatedatthetimetheaveragevaluefortelecommunicationscompaniesinemergingmarketswas$2,500perline.“StateNets$1.9BlnfromSvyazinvestSale,”MoscowTimes,July26,1997,p.1.43LeonidRozhetskin,interviewbyauthor,October8,1997;SergeiZverev,interviewbyauthor,June23,2000.44Exceptwhereotherwiseindicated,allquotationsfrombroadcastshavebeentakenfromverbatimtranscripts.45AntonZvyagilsky,“TheMoneyStank,”Sevodnya,July28,1997,p.1.46ThesecondsaleofNorilsk,thelastchapterinloansforshares,hadcomejusttendaysafterSvyazinvest.Potaninsoldittohimself,asexpected.47Thecontextforthisscandalhadbeensetearlier.MinkindisclosedonAugust4,1997,inNovayaGazetathetranscriptofaconversationbetweenNemtsovandtheadvertisingmogulLisovsky.Nemtsovwasquotedassayinghewasowed$100,000foranautobiographicalbook,Provincial,andhewantedthemoneyurgentlyinordertodeclareitonhisdisclosureform.ThefinancialdisclosureformswereNemtsov’sownidea.NemtsovsaysheisinatightspotbecauseYeltsinisabouttosignthedecreerequiringthedisclosures,andheisafraidthatifheleavesthemoneyoffhisform,therewillbecriticismlater.Thepublicreactiontothedisclosurewasnegative:$100,000seemedlikeahugesumforabook.Minkin’sstoryonKokhappearedsoonthereafter.“KokhLeftHisChairtoAvoidGoingtoJail,”NovayaGazeta,August18,1997,p.1.48CorrespondentYelenaMasyukandherNTVcrewwerekidnappedMay10,1997,inChechnya.TheywerereleasedAugust18afterBerezovskypaida$1millionransom.

49Yeltsin,MidnightDiaries,p.91.50Smolensky,interviewbyauthor,October10,1997.51TheYeltsincommentsaboutKokhandPotanin’sofferweredisclosedthateveningbyKhodorkovskyinatelevisioninterviewbyKiselyov.HerooftheDay,NTV,September16,1997.52Yeltsin,MidnightDiaries,pp.88–101.53Soros,OpenSociety,p.245.54“BerezovskyBacksRevocationofVisaforFinancierJordan,”MoscowTimes,October11,1997.55ChrystiaFreeland,SaleoftheCentury(NewYork:CrownBusiness,2000),p.288.56Kokh,interviewbyauthor,May14,2000.AninvestigationbytheMoscowprosecutorwasclosedinDecember1999becausetheDumapassedabroadamnestyforminoroffensesthatprecludedprosecution.57TheseincludedYumashev,whowasYeltsin’schiefofstaff,andlaterAlexanderVoloshin,whosucceededhim.BothhadworkedwithorhadbeenclosetoBerezovsky,nottomentionBerezovsky’stiestoDyachenkofromthe1996campaignonward.58Lisovsky,interviewbyauthor,December15,2000.59Chubais,remarkstoreporters,December2,1997,author ’stranscript.60Chubais,interviewbyV.Bazhenov,Argumenty&Fakty,November20,1997,p.1.61Chubais,remarkstoreporters,December2,1997,author ’stranscript.62Chubaisinterview,MoskovskyKomsomolets,December19,1997,p.2.63Yeltsin’spresssecretary,SergeiYastrzhembsky,saidatthetimethatYeltsinwastakentoBarvikha,butlateritwasdisclosedhehadalsobeentakentothehospitalwherehehadhisheartoperation.

ROAROFTHEDRAGONS

1EricKraus,interviewbyauthor,January22,2001.2Inonesignofthisexpansion,KhodorkovskywaspoisedtogainfullcontrolofagiantSiberianoilfield.In1993Amocowonaninternationaltenderfor50percentofthehugePriobskoyefield,whichwasthenheldbyYuganskneftegaz.WhenKhodorkovskytookoverYuganskneftegazanditsholdingcompany,

Yukos,in1995,heproposednewterms.Amocorefusedtoacceptthenewtermsandthedealwasparalyzedforseveralyears.In1998AmocowasmergedintoBP,andthejointcompanyabandonedthePriobskoyefieldonMarch19,1999,afterinvestingmorethan$100million.3AndreiSheatov,“RussianOilTycoonPlanstoPlaceAmongTenWorldOilFirms,”Itar-TassdispatchfromKhodorkovsky’sappearancebeforetheRussian-AmericanBusinessCouncilinWashington,October23,1997.4YukosconsolidatedfinancialstatementsfortheyearendingDecember31,1997,publishedJune26,1998,byPriceWaterhouse;“PreliminaryInformationMemorandum,”YukosOilCorporation,Five-YearExportSecuredCreditFacility,March1998.5Thispractice,transferpricing,wascontroversialyetwidespreadintheRussianoilindustryatthetime.AccordingtoanalystsNatMoserandPeterOppenheimer,Yukosrecordedanafter-taxprofitin1996of$91.5millionwhiletheoilextractioncompaniesYuganskneftegazandSamaraneftegazlost$345million.In1996Yuganskneftegazlost$195millionalonethroughtransferpricing.MoserandOppenheimer,“TheOilIndustry:StructuralTransformationandCorporateGovernance,”inBrigitteGranvilleandPeterOppenheimer,eds.,Russia’sPost-CommunistEconomy(Oxford:OxfordUniversityPress,2001.)6HunterofArrowheadEnterprisesLtd.,aninvestmentcompanyofDart,madethe“looting”commenttotheFinancialTimes,March11,1998.HunterfurtherdetailedtheallegationsintwoletterstoJonS.Corzine,chairmanandchiefexecutiveofficer,GoldmanSachs,January28andFebruary17,1998.Thethreebanksrepliedperfunctorilythattheycouldnotdisclose“anyinformation”abouttheloan.7NezavisimayaGazeta,abroadsheetnewspaperwrittenfortheintelligentsia,thefirsttrulyindependentpaperborninperestroika,fellonhardtimesinthemid-1990s.Afteraninternalstaffdispute,thepaperlockeditsdoorsandstoppedpublishing.EditorVitalyTretyakovwenttoatinyGreekislandforaholiday.Berezovskyflewahelicoptertotheisland,flewhimbacktoMoscowonacharteredplane,paidforguardstobreakopenthedoors,andtookoverasfinancialsponsorofthepaper,whichhadvirtuallynoadvertising.VitalyTretyakov,interviewbyauthor,March10,1997.8AndrewHiggins,“InsufficientFunds:HowaRussianBankerOutfoxedCreditorstoRebuildanEmpire,”WallStreetJournal,October4,2000,p.1.9ForeignliabilitiesoftheRussianbankingsystem—moneyraisedabroad—

rosefrom11percentto17.5percentoftotalliabilitiesduring1997.“RubleCrisisAgain,”RussianEconomicTrends,June1998.10CreditSuisseFirstBoston,inaresearchnoteonthemerger,madeasimilarpoint:“Inourview,themainbenefitsofthemergertothegrouparegreaterpoliticalcloutandgreatervisibility.ThecombinationofthepoliticalcloutofMr.KhodorkovskyandMr.BerezovskywillmakeYuksiapowerfullobbyistwithinRussia.”11Trud,March4,1998,p.2.12AnatolyChubais,“IAmAgainsttheBoardofDirectorsofRussia,”interviewbyYevgeniaAlbats,KommersantDaily,March5,1998,p.1.13AlexanderBudberg,“ChicagoBoysNeverGiveUp,”MoskovskyKomsomolets,March5,1998,p.2.14NezavisimayaGazeta,“VenalNewspaper,VenalJournalists,VenalChiefEditor!”March8,1998,p.1.15BerezovskysaidonItogi(NTV)onMarch22thathesufferedabrokenspineandunderwentsurgeryinSwitzerland.HewasdischargedfromthehospitalMarch13,1998,butcontinuedtoundergorehabilitationuntilreturningtoMoscow.16BorisBerezovsky,interviewbyauthor,February28,2001.17VladimirGusinsky,interviewbyauthor,June7,2001.18Berezovsky,interviewbyauthor,February28,2001.19MoscowNews,February26-March4,1998,pp.1–4.20SergeiKaraganov,interviewbyauthor,November9,2000.21Itogi,March22,1998.Berezovskylatertoldmethatwhenhetapedtheinterview,hedidnotknowYeltsinwouldannouncethedecisiontofireChernomyrdinonMonday.Kiselyov,whoconductedtheinterview,recalledthatBerezovskyflewbacktoSwitzerlandformorebacktreatments—whichhemightnothavedonehadheknownYeltsinwasabouttoact.22AlessandraStanley,“Shake-upinRussia:TheMeaning;TheReformersDidIt.No,BlametheBankers,”NewYorkTimes,March24,1998,p.8.23KiriyenkowasconfirmedonApril24inasecretballotbyavoteof251to25inthe450-memberchamber.24BerezovskysaidinaninterviewonNTV’sHerooftheDay,April16,thatYeltsinhadcalledhimandtheyhadhada“friendlyandconstructiveconversation.”25AndreiBagrov,“YeltsinThreatensBerezovskywithDeportation,”KommersantDaily,April15,1998,p.1.

26AndreiPiontkovsky,interviewbyauthor,May1998.27Repeatedattemptstofiddlewiththecurrencyledtopanicandpublicdistrust.TheSovietgovernmentdecreedonJanuary22,1991,thatallfifty-andonehundred-rublebanknoteswouldhavetobeexchangedinthreedaysinordertoreducethemoneysupply,settingoffapanic.Manypeoplecouldnotchangetheirmoneyintime.In1993Yeltsin’sgovernmentstumbledbadlyoveraplantoforceeveryonetochangetheirSoviet-erarublesintonewRussianbanknotes.Inaddition,hyperinflationduringtheearly1990swipedoutthesavingsofmillionsofpeople.Andon“BlackTuesday,”October11,1994,therubleplunged27percentagainstthedollar.ThelessonmanyRussianstookfromthisperiodwas,Keepyourmoneyindollars.28Chubaisinterview,Interfax-AiF,March23–29,1998,pp.2–3.29GliffordG.GaddyandBarryW.Ickes,“Russia’sVirtualEconomy,”ForeignAffairs,September-October1998,p.53.Thisimportantarticlecalledattentiontothepowerfuldistortionscausedbybarterandnonpayments.30Taxdodgingwasendemic,inpartbecausethetaxeswerepunitiveandthecodeunreformed.However,economistAlBreachpointedoutanadditionalfactor.Inaneconomythatwasawashinbartertransactions—afactorywouldtradeitsrefrigeratorsforatwo-monthsupplyofelectricityorswapmetalpipeforatruckloadofsocks—itwasextremelydifficulttocollecttaxesincash.Breachcalculatedthatcashmadeuponly60percentofthetaxrevenuesin1997,andtryingtoextractmoreinthebartereconomywaslike“tryingtosuckwateroutofastone.”Itwasimpossibleinthisenvironmenttoraiseenoughtaxestobalancethebudget,hesaid;theonlythingtodowasslashspendingfurther,whichistheonethingRussianpoliticiansrefusedtodo.Kiriyenkotried,butitwastoolate.AlBreach,Russia:NowaCompetitiveExchangeRate—TheRevivaloftheRealEconomy,GlobalEconomicsPaperno.22,GoldmanSachs,July23,1999.Theproblemofdemonetizationoftheeconomy,thedisappearanceofcash,wassevereandplaguedenterprisesaswellasthegovernment.ChubaissaidinWashingtononJuly21,1998,thatUnifiedEnergySystems,theelectricitymonopolythatheheaded,collectedonly14percentofitspaymentsincashand86percentinbarter,“whichisawful.”31TheIMFloansweresupposedtobelinkedtoconditionsthatRussiawouldmakekeyreforms,buttheconditionswereoftensoftenedorbentwhenRussianreformsfellshort.BetweentheadmittanceofRussiantotheIMFonJune1,1992,andSeptember1,1998,theInternationalMonetaryFundprovidedRussiawithabout$18.8billion.Theloansapprovedinapproximate

dollartermswereasfollows:astandbyarrangement,August5,1992,toJanuary4,1993,$1.1billion;systemictransformationfacility,July6,1993,toApril10,1995,$2.9billion;standbyarrangements,April11,1995,toMarch26,1996,$6.8billion;extendedfundfacility,March26,1996,toMarch25,1999,$10billion(notincludingtherescuepackageapprovedbytheIMFin1998,whichwasonlypartiallydisbursed).AndreiIllarionov,director,InstituteofEconomicAnalysis,testimonybeforetheHouseBankingandFinancialServicesCommittee,GeneralOversightandInvestigationsSubcommittee,September10,1998.32GaryPeach,“PyramidCrashBeganonFool’sDay,”MoscowTimes,August17,1999.33Morethantwentyregionsissuedtheirownbonds.Oneofthemorebizarredebtschemeswastheagro-bond,ashort-termdebtpaperthatrepresentedrestructuredfederalagriculturalloanstotheregions.Bysomeestimates$830millioninthesebondswasoutstandingat1998precrashexchangerates,and90percentofthemlaterwentintodefault.SujataRao,MoscowTimes,April27,1999,p.15.34TheCrisisoftheRussianFinancialSystem:KeyFactors,EconomicPolicies,andInitialResults,InstitutefortheEconomyinTransition,2000,p.26.35InternationalReservesin1997,CentralBankofRussia.36SergeiAleksashenko,FightfortheRuble(Moscow:AlmaMater,1999),p.129.37“T-BillMarketSuffersBiggestCrisisinItsHistory,”Interfax,July29,1998.38ForwardsAreNottheWayForward,TroikaDialogResearch,November1998.AnindicationthatthesumwashighercamefromVinogradov,whotoldmeheheld$2.5billionasoftheAugust17crash.Reportingrequirementsforbankswereskimpy,andinformationremainsincomplete.The$9billionestimateisfromSurvivingDevaluation,aresearchreportbyBrunswickWarburg,June8,1998,p.9.39Budberg,“ChicagoBoys.”ChubaisrecalledLuzhkovdeclaringthat“theageofmonetarismisover.”ButChubaisansweredthatmonetarismhadworked.“Thesolereasonwecanseriouslytalkabouteconomicgrowthtodayisthatitwasprecededbysixyearsoftoughmonetarism.”Monetarismgenerallyreferstoaneconomicpolicyinwhichthemoneysupplyistightlyrestrictedinordertocontrolinflation.Therublecorridorwasthemechanism

forcontrollingthemoneysupply,anditmeantthattheCentralBankdramaticallyreducedthemassivesubsidiesandcheapcreditsissuedinearlieryears.ThisapproachwasneverreallyunderstoodbytheSoviet-erareddirectors,whowereaccustomedtoreceivingenormousinfusionsofsubsidies.40IllarionovlatersaidhealsowatchedthereservesascomparedtothetotalforeigninvestmentinRussianbonds:ifalltheoverseasinvestorspulledout,wouldtheCentralBankhaveenoughcurrencytopayoffthebonds?AsofJanuary1,1998,thebankheld$12.9billionincurrencyreservesand$4.8billioninilliquidgoldreserves.Foreignersheldabout$18billionofoutstandingRussiantreasurybills.41AndreiIllarionov,interviewbyauthor,October14,1999.42PyotrAven,interviewbyauthor,October22,1999.43Chubais,interviewbyauthor,May13,2000.44YuriBaturinetal,EpokhaYeltsina(TheYeltsinEpoch)(Moscow:Vagrius,2001),pp.727–750.ThisworkisacollectivememoirbyagroupofYeltsin’sKremlinaides.45Baturinetal.,EpokhaYeltsina.46BernieSucher,interviewbyauthor,October8and29,1999.47Thesituationwasneverblackandwhite,however.Somemarketparticipantsalsofailedtoseethedevaluationcominguntilitwastoolate.BrunswickWarburg’sJune8reportstated,“Webelieveacollapseintherublecannowbeavoided.”48Illarionov,testimonybeforetheHousecommittee.49AugustoLopez-Claros,interviewbyauthor,September17,1999;April13,2000.50Yeltsin,MidnightDiaries,p.169.51Baturinetal.,EpokhaYeltsina.52Malashenko,interviewbyauthor,July25,2000.53Chubais,interviewbyauthor,February20,2001;BillPowellandYevgeniaAlbats,“SummerofDiscontent,”Newsweek,January18,1999;ChrystiaFreeland,SaleoftheCentury(NewYork:CrownBusiness,2000),pp.308–309.54Berezovsky,interviewbyauthor,February28,2001.55Chubais,interviewbyauthor,February20,2001.56GrigoryGlazkov,interviewbyauthor,December1,1999.57Itar-Tass,June19,1998.58Aleksashenko,Fight,pp.169–171.

59JosephKahnandTimothyO’Brien,“ForRussiaandItsU.S.Bankers,MatchWasn’tMadeinHeaven,”NewYorkTimes,October18,1998,p.1.60Baturinetal.,EpokhaYeltsina;CharlesWyploszandKseniaYudaeva,“TheCostsofDebtConversion:RussiaandMexicoCompared,”RussianEconomicTrendsQuarterly,October-December,1998;HomiKharas,BrianPinto,SergeiUlatov,LawrenceH.Summers,andJohnWilliamson,“AnAnalysisofRussia’s1998Meltdown:FundamentalsandMarketSignals/CommentsandDiscussion,”BrookingsPapersonEconomicActivity,BrookingsInstitution,Washington,DC,2001.ThelatterstudyconcludedthatRussiamadeamistaketakingonsomuchdebtinthesummerof1998.Thecountrytookon$16billioninexternaldebtbetweenJune1andJuly24,1998.This,combinedwiththeexposureofRussianbanks,“waswhattriggeredtheAugustcrisis,”theauthorsconcluded.61LetterfromCreditLionnaisS.A.,GoldmanSachsInternationalBank,andMerrillLynchCapitalMarketsBankLtd.,toDmitryVasiliev,August14,1998.62LeonidGozman,interviewbyauthor,October27,1999.63IllarionovtoldmethatSberbankwasthelargestplayertowithdrawfromtheGKOmarketinthetwoweeksbeforeAugust14,andhequestionedwhethertheCentralBankhadinfluencedthisdecision.IllarionovsaidhebelievedtheCentralBankwasplayingpoliticalgames,tryingtounderminetheKiriyenkogovernment,perhapstodeflecttheblameforanycrisisoveracomingdevaluation.TheCentralBankinlateJulymysteriouslyfrozetheFinanceMinistryaccountsforseveraldays,paralyzingitsabilitytomakeroutinepayments.Yeltsinhadtointervene,accordingtothememoirbyBaturinandcolleagues.DmitriVasiliev,afrequentcriticoftheCentralBank,alsomentionedthisepisodeasanexampleofhowthebankwasplayingadangerouspoliticalgamewiththegovernment.“Itwasacomplete,100percentprovocation,”Vasilievsaidofthefreezeontheaccounts.“Ithinktheywantedtoeitheroverturnthegovernmentormakethegovernmentdosomething—tohavethembethefirsttodoit.”64Baturinetal.,EpokhaYeltsina.65Sorossaidheofferedsomeideasforapublic-privatefundbutwasovertakenbyevents.GeorgeSoros,OpenSociety:ReformingGlobalCapitalism(NewYork:PublicAffairs,2000),pp.247–250.66“YeltsinDeniesPlanstoDevalueRuble,SaysMarketsUnderControl,”Interfax,August14,1998.67Aleksashenko,Fight,p.199.

68YevgeniaAlbats,“AnatolyChubais:WeAwaitaDifficultYearandaHalforTwoYears,”KommersantDaily,September8,1998,p.1.69Aven,interviewbyauthor,October22,1999.70Yeltsin,MidnightDiaries,p.175.71Albats,“AnatolyChubais.”ChubaisreadfromthecomputerfiletoAlbatsinthisinterview.Chubaisalsoaddressedtheissueofdeceptionofinvestors.AdevaluationordefaultonGKOsearlierintheyear“wouldhavebeenperceivedinanextremelynegativewayaroundtheworld,”hesaid.“Bynotdoingitbackthen,wedemonstratedthatthegovernmentwasstrugglingtotheend.Itundertookallthepossiblethinkableandunthinkableeffortsnottofailtheexpectationsofourpartnersbothinsidethecountryandabroad....Right,itdidnotwork.Right,wefailed.ItwasimpossibletowaitlongertotakethedecisionsthatweremadeonAugust17.Theabysswasnext.”ChubaisdefendedYeltsinforlyingaboutthecomingdevaluationonAugust14.“Thisisexactlywhatneededtobesaid,”Chubaisinsisted.“Anysober-mindedpoliticianwilltellyouthatunfortunatelythisisexactlyhowtheauthoritiesmustbehaveinsuchextremesituations....authoritieshavenorighttoannounceinadifficultfinancialsituation,‘Wedon’tknowifwearegoingtocopeornot,’[people]willstartrunningawayatonce.”Chubaiswasthenaskediftheauthoritieshavearighttolie.“Insuchasituation,itisthedutyoftheauthoritiestodoit.Theyareo-b-l-i-g-e-dto.Hencenow,theinternationalfinancialinstitutions,despiteeverythingwedidtothem—andwecheatedthemfor$20billion—thereisanunderstandingthatwehadnootherwayoutanylonger,andhadwedoneitthewaysuggestedbyIllarionov,theywouldhavestoppeddoingbusinesswithusforever.Thatis,thatcatastrophewouldhavebeenthesameasnow,butanyhopethatinvestorswouldreturnwouldhavebeenlost.”ThisremarkcausedastirwhentheLosAngelesTimesquotedChubaisassayingRussiahad“conned”theIMFoutof$20billion.Chubaisrepliedinalettertothenewspaperthathemeantthe$20billionwas“cheated”fromforeigncreditorsbyRussianbankstakingadvantageofthemoratorium.AlbatstoldmethatChubaisintheinterviewwasreferringtoforeigninvestors,nottheIMF.72ChubaisdidnotknowhowtheIMFwouldreactuntilastatementwasreleasedthemorningofthedecision,inwhichCamdessusreiteratedtheviewthatitwasimportantforRussiatocarryoutreforms.Hewenton,“Itisimportantthattheinternationalcommunityasawhole,bothpublicandprivatesectors,showsolidarityforRussiaatthisdifficulttime.”Chubaiswasrelieved.73AndreiTrapeznikovandLeonidGozman,interviewbyauthor,August20,

1998.74Vinogradov,interviewbyauthor,June28,2000.75FormerMenatepBankofficialwhoaskedtoremainanonymous.76Monthlyconsumerinflationshotup38percentinSeptember,butthehyperinflationthatsomepredictedwouldfollowdevaluationneverappeared.77OrganizationofEconomicCooperationandDevelopment,RussianFederationReport,March2000,p.44.78NatalyaGridneva,“FormerPrimeMinisterSergeiKiriyenkoTellsAllAboutDismissal,”KommersantDaily,January19,1999.79Berezovsky,interviewbyauthor,February28,2001.80“ResolvingtheBankingCrisis,”RussianEconomicTrends,November1998,pp.1–8.81Dubininpressconference,September7,1998.82Dubininpressconference,September7,1998.83JeanneWhalen,“SBS-AgroChiefFacesFallofEmpire,”MoscowTimes,September12,1998.84Higgins,“InsufficientFunds.”

HARDBALLANDSILVERBULLETS

1VladimirGusinsky,interviewbyauthor,May4,2001.Gusinskyalsowasproudofthefactthatthesatellitewouldmakehistelevisiontrulyindependent,ashissignalwouldbeoutsidethecontrolofthestate.2Byoneestimate,annualNTVrevenuespriortothecrashexceeded$100million.KommersantVlast,January27,1998.ThestationwasRussia’smostprofitablemajortelevisionbroadcasterbeforethecrash,butitsufferedanetlossof$25millioninthefollowingyear.ChrisRenaud,lettertotheeditor,WallStreetJournalEurope,April30,2001.3Gusinsky’senterpriseexperiencedothertroublesaswell.TheglobalshiftfromanalogtodigitalsignalsforsatellitetelevisioncamejustasNTV-Pluswastakingoff.TheBonum-1satellitewasdigital,butGusinskyhadtroublemanagingit.OneNTVofficialtoldmethatNTV-Pluswentthroughfivedifferentmanagersinthisperiod.4InlateAugust,936MoscowresidentswerepolledbytheAll-RussianCenterfortheStudyofPublicOpinion,oneofRussia’sleadingpollsters.Theresults

werepublishedinMoskovskayaPravdaonSeptember4,1998.Thequestionwas:“WhoinyouropinionisguiltyfirstofallforthepresentfinancialcrisisinRussia?”TheformergovernmentofChernomyrdinreceived38percent;Yeltsin,36percent;thegovernmentofKiriyenko,15percent;oligarchs,bankers,andfinanciers,9percent;theStateDuma,8percent;policiesofthereformers-democrats,8percent;CentralBank(SergeiDubinin),6percent;globalfinancialcrisis,2percent;foreignbanksandfinanciers,1percent;thosewhodonotpaytaxes,1percent;others,10percent;difficulttosay,14percent.(Respondentswereallowedtochoosemorethanoneitem,sotheresultsexceed100percent.)Asimilarpollof1,862peoplenationwidetakenatthesametimeshowedthatafarlargernumberofpeopleinthenationwidesample—56percent—blamedYeltsin.5Zyuganovcirculatedanopenletterincludingtheseremarks,WashingtonPost,December25,1998,p.A42.6Inthesummerof1998,beforethecrash,workersinNefteyuganskheldarallytodenounceYukosformonthsofunpaidwages.TherallywasledbyMayorVladimirPetrukhov.ThemayorhadsenttelegramstoYeltsin,Kiriyenko,andothersinJunedenouncingKhodorkovskyandYukos,sayingtheywere“suffocating”thetown.Attherallyoneprotesterheldasignreading“BringKhodorkovskytoJustice.”OnJune26,Petrukhovwasshotandkilledashewalkedtowork.Themurdererwasneverfound.Yukossaidithadnothingtodowiththecrime.7WestMerchantwasaLondon-basedsubsidiaryofWestLB,ahugeGermanbankbasedinDusseldorf.8KathleenDay,“RiggsHadTiestoFirmsinProbe,”WashingtonPost,September18,1999,p.E1.9Thereformersandliberalsacknowledgedthatcapitalflightwasaproblem,buttheytookaclassicfreemarketview:thatcapitalflightcouldonlybestoppedwhentheconditionswerecreatedinsideRussiatoattractcapitalintothecountry,namely,stability,ruleoflaw,andprotectionofpropertyrights.Intheorytheywereright,butpracticallythoseconditionsdidnotexistinthelawless,chaoticyearsofthe1990s.Waitingfortherightconditionsmeantwatchingcapitalfleeatadebilitatingpace.10Itisnotunusualforcountriestoparktheircurrencyreservesabroadinsafesecuritiesorbondsofothercountries.Butitishighlyunusualforacountrytoturnoveritsreservestoasmall,little-knownmanagementcompanylikethisone.TheCentralBankclaimeditwastryingtoshieldreservesfromthreatof

legalseizure.However,EricKrauspointedout,“IfyouaregoingtoshelterCentralBankassets,youdon’tsetupaJerseyshellcompanywhichanybrightdivorcelawyercouldcrackopeninanafternoon.”Moreover,manyofthetransactionsremainunexplainedandlooksuspicious.Forexample,theCentralBankusedtheoffshoreshellcompanytomakesecretbackdoorinvestmentsinhigh-yieldingRussiangovernmentbondsknownasGKOs,accordingtomyownresearchandaletterfromPricewaterhouseCooperstoGerashchenko,August4,1999.11DartwasalsoangryatKhodorkovsky’sridiculouslylowoffertobuyouthisshares.AccordingtoaworksheetfromABImage,apublicrelationsagencyrepresentingDartManagement,Khodorkovskyofferedtopayfifty-fourcentsashare.ThatvaluedYuganskneftegazat$22million.However,thesubsidiary’sannualproductionof25milliontonsofoilwasworth$2billioninglobalexportpricesatthetime.Khodorkovskyofferedthirty-twocentspershareforSamaraneftegaz,oravaluationofthesubsidiaryat$11million,whenitsannualproductionwasworth$840milliononglobalmarkets.HisofferwaselevencentspershareforTomskneft,foravaluationof$3.1million,comparedtoannualproductionworth$640million.12TheRussianJointStockCompanylawhadaprovisiononso-calledinterestedpartytransactions.Theideawastoavoidaconflictofinterestinwhichthepeoplewhocontroldecisionstosellassetsorshares,the“interestedparty,”couldselltheassetstothemselvesorcompaniestheycontrolled.IfKhodorkovskycontrolledtheoffshorecompanies,thenvotingtosellthesubsidiariestothemcouldbreakthelaw.However,enforcementwasweak.13ItisimpossibletoestimatewhatpriceDartpaidinitially.SharesinYuganskneftegaz,forexample,tradedfrom$5ashareattheoutsetinmid–1994toasmuchas$40asharewhenthemarketreacheditspeaklaterintheyear,andlaterfellagaintobelow$5ashare.DartmayhavebeenoneofthetwoorthreelargestprivateinvestorsinRussiainthemid1990s,althoughhewasverysecretiveabouthisholdings.14TelephonestatementbyDaiwaEuropeLtd.totheauthor,undated.15GlebPyanikh,KommersantDaily,May29,1999,p.1.16OnereasonPotaninandJordanwereforcedtobackdownwasapubliccampaignagainstthedilutionwagedbyWilliamBrowder,thesuccessfulfundmanager,whohada$100millionstakeinSidancoandwasfuriousattheirplanstoreducehisstake.17WorldBank,CapitalDevelopmentProject,TechnicalAnnex,May6,1996,

pp.9,28.18MarkD’Anastasio,interviewbyauthor,May29,2001.Burson-Marsteller ’sworkforKhodorkovskyincludedtheuseofpressinterviewstoimprovehisimageduringavisittotheUnitedStatesinthespringof1999,justasVasilievwasconductinghisinvestigation.KhodorkovskyspokeforeighthourstoaNewYorkTimesreporteronthistrip.ButtheresultwasnotwhatKhodorkovskyhadintended.ThearticlewasnotpublisheduntilSeptember,anditcamejustasnewallegationsaboutRussianmoneylaunderingwerebeingraised.TimothyL.O’Brien,“FollowtheMoney,IfYouCan,”NewYorkTimes,September5,1999.19AlexeiTsyganok,vicepresident,RussianTradingSystem,lettertotheauthor,November16,1999;NationalAssociationofParticipantsintheStockMarket,lettertothecouncilofdirectorsoftheRussianTradingSystem,June19,1999.20Yukos,pressrelease,July21,1999:“ThepositionofDmitryVasilievintheconflictofYukoswiththeDartgrouphasbecometendentious.”21ThecriminalcaseagainstVasilievwasquietlydroppedamonthafterhisresignation.22“Yukos,RisingtotheFirstTier,”CreditSuisseFirstBoston(Europe)Ltd.,March8,2001,p.27.23Khodorkovskylaterdisclosedthattwoofthethreelendersinthe1998$500millionloan,MerrillLynchandGoldmanSachs,hadpanickedafterthecrashandsoldtheirpaperforaslittleaseighteencentsonthedollar.TheysoldbecausetheythoughtYukosmightdefault.Khodorkovskysaidthetwolostabout$150million“needlessly”(KhodorkovskytoreportersandeditorsattheWashingtonPost,May18,2000).Yukoslatercanceledalltheplannedshareemissionsandtransferstooffshorezones—thethreathadsufficed.24Berezovsky,interviewbyauthor,February28,2001.25LuzhkovsaidSkuratovhadbeensubjectto“blackmail”withthevideo,whichhesaidwasmadeayearearlier.Theupperchamberofparliament,theFederationCouncil,wasresponsibleforoverseeingtheprosecutor.Whenthematterarose,Luzhkov,aleadingmemberofthechamber,joinedhisfellowregionalleadersinvotingtokeepSkuratovonthejob.Yeltsinwasfurious.26Berezovsky,commentstoreportersandeditorsoftheWashingtonPost,September19,2000.27Asaprecaution,Luzhkovrequested,andwon,approvalfromthecitycounciltoadvancethedateofthenextmayoralelectionfromJune2000to

December1999.Luzhkovwonreelectionby70percentofthevote.28SomeoftheBerezovsky-DorenkocallswerepublishedinthenewspaperNovayaGazetaonDecember16,1999.Thenewspaperoftenpublishedmaterialsfromshadyspecialservices.DorenkotoldmethatthetranscriptwasaccuratebutmayhaveincludedseveralcallsbetweenhimandBerezovskyastheyplannedtheattack.Dorenkocalledthetycoon“Bor”insteadofBoris,andBerezovskycalledDorenko“dear.”Berezovskyconfirmedtheaccuracyofthetranscriptsandalsosaidtheymayhavebeenacompilation.29ThedonorwasBehjgetPacolli,theSwissbusinessmanwhowasreportedlyatthecenteroftheKremlinreconstructionscandal.Pacolli,whosefirmsrestoredtheKremlinhalls,complainedratherpiouslythathespent$870,000torebuildthehospitalatLuzhkov’srequestbutneverreceivedsomuchasathank-younote.30TheNewYorkTimesreportedinmid-August1999thatU.S.investigatorswereprobinga“moneylaundering”schemeinwhichbillionsofdollarswasspiritedoutofRussia.InFebruary2000,aformerbankvicepresident,LucyEdwards,andherhusband,PeterBerlin,pleadedguiltytorunningtheschemethroughacompany,BenexInternational,thatchanneledmoneyfromRussiathroughtheBankofNewYorkandontootherdestinations.However,theywerejustcouriers,andthepeoplewhoorderedthemoneysentoutofRussiawerenotidentified.Mostofitappearedtobecapitalflight:moneyavoidingtaxes,duties,andrisksinsideRussia.31KomsomolskayaPravda,October5,1999,p.2.32Luzhkovinterview,broadcastonTV6,aMoscow-basedchannel,October31,1999.33YelenaBaturina,interviewbyauthor,August23,1999.34Berezovsky,meetingwithcorrespondents,November26,1999.35Renaud,lettertotheeditor.36RobynDixon,“PushingtheBoundariesofaFreePress;Russia:MediaTycoon’sStrugglewiththeKremlinIsSeenasaLitmusTestofWhatPresidentPutinWillAllow,”LosAngelesTimes,June1,2000.Gusinskyrepeatedhisversionofthemeetingatabriefingforcorrespondents,includingtheauthor,onJune2,2000.37AndreiVandenko,“TheKremlinWillBePayingBackwithInterest,”KomsomolskayaPravda,August3,1999,pp.3–5.InterviewwithVoloshin.38SusanB.GlasserandPeterBaker,“KremlinWagesWarofNerves:TVNetworkStruggleswithOutsidePressuresandInternalTension,”Washington

Post,January29,2001,p.A13.39Berezovsky’sroleintheonsetoftheChechenhostilitieshasbeenthesubjectofmuchspeculation.BerezovskyhadgoodconnectionsamongsomeChechengroups,butIthinkhewasmoreofanintermediarythananinstigator.TheoriginsofthesecondwarlieprimarilyindisorderinsideChechnyaandwearinesswiththeconflictinMoscow.Thefirstfactor,internaldisorder,wascausedbyasplitbetweenAslanMaskhadov,theChechenpresident,andBasayev.Maskhadov,whohadbeenMoscow’sinterlocutor,lostcontrolofthedisparateChechenfightinggroups.ThesecondfactorwasKremlinindecision.AntonSurikov,aformerRussianmilitaryintelligenceofficerwholaterbecameastaffdirectorofaRussianparliamentarycommittee,toldmeRussianofficialshadindicationsthatBasayevwasplanningsomethingontheDagestaniborderthatsummer.“Itwasnotbeinghidden,”hesaid.“Therewasacertainpanichere.Therewasafeelingofcompletehelplessness.”Likewise,VoloshinsaidinAugust,“Thedates[oftheBasayevassault]weredefinitelyknownseveraldaysbefore.”But,headded,the“areaishillyanddifficulttoguard.Therearehundredsofdifferentpaths,plentyofcanyons,mountainpaths.Thereisnoborder,actually....Thatiswhyitisnotpossiblejusttolineupsoldierstoguardtheborder.”BerezovskytoldmethathebeganwarningtheKremlininMayandJune1999thatChechencommandersweretellinghimthatthingsweregettingoutofcontroland“theremaybetroubleinDagestan.”Berezovskyadded,“IpasseditallontoStepashin,whowastheprimeministerthen.Ihadameetingwithhimandtoldhim.Hesaid,‘Boris,don’tworry.Weknoweverything,allisundercontrol.’”Separately,StepashintoldmetheplanningforacrackdownonChechnyawasunderwayearlierintheyearafteraRussianInteriorMinistrygeneralwaskidnapped.HesaidtheRussianauthoritieshadintelligenceinJuneofapossibleattack,and“wewereplanningtoimplement”acordonaroundChechnya“irrespectiveofBasayev’sassault.”StepashinsaidhechairedameetingoftheKremlinSecurityCouncilinJuly,and“weallcametotheconclusionthattherewasahugeholeonourborderthatwon’tbeclosedifwedon’t[advance]totheTerek[RiverinsideChechnya].Itwasapurelymilitarydecision.”Stepashinsaidthatafterhisdismissal,Putinpickeduptheplanshehadputinplaceandcontinuedwiththem.Basayev’sreasonsforstagingthedramaticcross-borderincursion,andhisreadingofhowRussiawouldrespond,arenotclear.HedeclaredatthetimethathehopedtotriggeranuprisinginDagestan,rallyingsupportforthecreationofanIslamicstate.Butitwasafutileeffort.Theraidtriggeredalarms

inDagestan,whichisamosaicofethnicgroups,andmanyvillagesbeganarmingthemselvestofighttheChechens.EventuallyRussiantroopsbeatthembacktotheborder,andPutinlaunchedthelargeroffensive.Anotherunansweredquestioniswhowasresponsiblefortheapartmenthousebombingsthattriggeredthewar.PutinandhisgovernmentblamedChechens.InsideRussia,somehavespeculatedthattheblastswerecarriedoutbyshadowygroupspossiblylinkedtosecurityservicesasawaytopropelPutintopower.WhenBerezovskywasaskedaboutthisonSeptember19,2000,duringameetingwithWashingtonPosteditorsandreporters,hesaidthatatfirsthecouldnotbelievethesecurityserviceswouldhavedoneit;hewassureitwastheChechens.But,headded,“IhavemoreandmoredoubtsthatitwasdonebyChechens.”40“OlegDobrodeyev:TheArmy:TheseAreOurBrothersandSons,”KrasnayaZvezda,September29,1999.DobrodeyevleftNTVinJanuary2000andwasappointedheadofthegovernment-ownedchannel,RTR.41BerezovskytookcreditforthecreationofUnityintheMayinterviewandagaininameetingwithWashingtonPostreportersandeditors,September19,2000.42Asamemberofparliament,Berezovskywouldalsoenjoyautomaticimmunityfromprosecution,unlessrevokedbyamajorityofthechamber.However,hedeniedrunningforthisreason.43RadioMayak,March18,2000.44Gusinsky,remarkstoreportersatMedia-Mostheadquartersbuilding,June2,2000.45Gusinskyinterview,ObshchayaGazeta,June8–14,2000,pp.1–3.46Putinandhisrepresentativesrepeatedlyusedthis$1.3billionfiguretosuggestthatGusinskyowedallthemoneyatonce.Infact,thedebtswerespreadoutoverthecomingyears,accordingtoaschedulepreparedbyGusinskyinJuly2000.The$211millionCSFBloanguaranteedbyGazpromcamedueinMarch2000.ThenNTVhada$40millionloanfromGazprombankdueinNovember.A$262millionloanfromCSFBtoMedia-MostwasdueinJuly2001.A$223millionloanfromthecityofMoscowtoMedia-MostwasdueinFebruary2003,anda$40millionloantoMedia-MostfromVneshtorgBankinMay2003.TheGusinskycompaniesalsohad$222millioninloansfromthestatesavingsbank,Sberbank,whichwascollateralizedbyRussiangovernmentdollar-denominatedbondswhich,onmaturityin2003,willbe$72.3millioninexcessoftheloans.By2009Gusinskymustpayoff

the$123.7millionbalanceontheU.S.ExImBankloanforthesatellite.TheRussianFinanceMinistryalsoguaranteeda$32.5millionloanforpurchaseofaRussiansatellite.Gusinskyandhistopofficialsoftensaidthatalthoughthecompanyhadlargedebts,itwasgrowingrapidlyandNTVwasprofitablebeforethe1998crash.47Dorenko,interviewbyauthor,February16,2001.48Gusinsky,inappearanceonGlasNaroda,June20,2000.49Ionceattendeda“background”briefingbyLesinforagroupofjournalists.LesintoldjournalistshewasonlytryingtoserveasanintermediarybetweentheKremlinandGusinsky.ButnumerousothersourcessaidLesinplayedakeyroleinbringingpressuretobearonGusinsky.50Thispart,protocol6,oftheagreementwascontroversial.ItsaidthatthecaseagainstGusinskywouldbedroppedandthatGusinskyandmembersofhiscompaniescouldstayinRussiaorleaveastheypleased,aslongastheydidnotdamagetheRussianstate.ThedocumentisinitialedbyLesinandKokh.LesinclearlydidnothavethepowertodropthecaseagainstGusinsky.KokhlaterclaimedthedocumentwasGusinsky’sidea.51Berezovsky’slongtimeconfidantanddeputy,BadriPatarkatsishvili,addeddetailsabouttheKremlin’sintentionsinaninterviewpublishedJuly4,2001,inKommersantDaily,Berezovsky’snewspaper.HesaidthatanotherBerezovskyaide,NikolaiGlushkov,hadbeenarrestedtopressureBerezovsky.InordertogetGlushkovoutofjail,Patarkatsishvilisaid,theKremlininsistedthatBerezovsky“sellthemediaempireand...endhispoliticalactivity.”HesaidtheconditionsweresetbyVoloshin.AfterBerezovskygaveuphissharesinORT,theKremlinrefusedtohaveGlushkovreleasedfromjail.Voloshin“deceived”them,hecharged.

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Acknowledgments

I benefited from the generous assistance of many people who offeredrecollections,documents,andcommentsonthisbook.MashaLipman,themostskilled and insightful of a newgeneration ofRussian journalists, guidedmefor more than five years through contemporary Russia, and brilliantlyscrutinized every chapter. Natalia Alexandrova was a tireless translator, aninspiringcritic,andafrienddedicatedtotellingthisstoryaswellasitcouldbetold.IrinaMakarovanotonlytookmeonatrainridetothepast,describedinChapter1,butdevotedgreatenergyandtalenttotranslatingandresearch.Glenn Waller, one of the most astute observers of Russia in the 1990s,

sharedhisexperiencesandthoughtsovermanyhoursofconversation.MichaelMcFaul provided a spark of inspiration and years of valuable counsel.OlgaKryshtanovskaya patiently tutoredme on the structure, history, and habits oftheoligarchy.ChrystiaFreeland,theFinancialTimesbureauchiefinMoscowduringthe1990s,oftenscoopedmebutneverfailedmeasfriend,colleague,and traveling companion in these tumultuous years, which took us throughdecaying factories, ghostly coal mines, and mysterious Russian corporateboardrooms. Anders Åslund chronicled the economic history of theGorbachev and Yeltsin years in his own works, and in many conversationsenhancedmyunderstandingoftheunfoldingstory.StevenL.SolnickprovidedencouragementandkeymaterialsonthecollapseoftheKomsomol.ThomasE.Graham helped me sort through countless riddles of the oligarchy. JoelHellman had the good fortune to see the tycoons in action during the earlyyears, and he provided sharp analysis of the later period in many of ourmeetingsinMoscow.WilliamBrowderwasawisetutorinhowtopenetratetheobscurebusinessempiresoftheoligarchs.At the Washington Post, I am especially indebted to the late Katharine

Graham,forherearlyfaithinme,andDonaldGraham,forbothhispersonalencouragementandhisprofoundcommitmenttojournalism.Withrarevision,JacksonDiehlsawtheoligarchsasastoryforthePostandencouragedmetowritethisbook.IoweaspecialdebttoRobertKaiser,wholedthewaywithhislong-standing interest inRussia and his leadership as an editor; he providedconstantsupportandvaluedcriticism.BenjaminC.Bradlee,LeonardDownie

Jr.,andSteveCollbuiltagreat reportingenterprise thatdevoted time,space,andresourcestothestoryofRussiainthe1990s.GlennFrankelwasaterrificwritingcoach.PhilBennetttaughtmeaboutelegantediting.LouCannonwasamentorandpartnerfrommyfirstdaysatthePost.MichaelGetlerlaunchedmeintotheworldofforeigncorrespondence.MichaelDobbsandDavidRemnickshowed the way with greatMoscow correspondence during perestroika andafter.IalsoreceivedhelpandcontributionsfromPostcolleaguesPeterBaker,PaulBlustein,AlanCooperman,DouglasFarah,MaryLouFoy,SusanGlasser,Virginia Hamill, Fred Hiatt, Jim Hoagland, Lee Hockstader, SharonLaFraniere, Robert McCartney, Steven Mufson, Don Oberdorfer, LucianPerkins,GeneRobinson,MargaretShapiro,PeterSlevin,andDanielWilliams.In Moscow, Jörg Eigendorf was gracious and unstinting with his

experiences and archives. PatriciaKranz ofBusinessWeek shared importantmaterial from her interviews. Flore de Preneuf made available her fineresearchontheCathedralofChristtheSavior,andWilliamFlemmingsharedhiscarefulstudyoftheloans-for-sharestransactions.IamdeeplyindebtedtoMargaretPaxson,ananthropologist,whodevoteda

yeartoresearchontheoligarchy,andtoMashaDanilova,whotranslatedwithcuriosity and enthusiasm. Jeff Kahn, Anna Masterova, Marlena Hurley, andAnneNivatalsocontributed.IthankmyfriendSergeiBelyakov,navigatoroflife;VolodyaAlexandrov,managerofallthings;andNadiaAvinerious,patientteacher.IamgratefultoStAntony’sCollege,Oxford,andProfessorArchieBrown

foranenrichingyearofstudythere.EstherNewbergfoundthisbookahome.PeterOsnosofPublicAffairswas

anenthusiast from thebeginning,when itwasadistantdream,andmade it areality.KateDarntonwasasplendideditor.Alargenumberofpeoplegrantedinterviews,offereddocuments,andfreely

gaveadvice.TheyincludeTomAdshead,YevgeniaAlbats,PyotrAven,VasilyBabikov, Oleg Babinov, Mikhail Baev, Yelena Baturina, Alexander Bekker,SergeiBelyaev,ValeryBelyakovich,MikhailBerger,BernardBlack,AndreiBogolubov, Paul Bograd, Leonid Boguslavsky, Maxim Boiko, VladimirBokser,MarkBond,ArtyomBorovik,KonstantinBorovoi,AlBreach,PavelBunich,IgorBunin,MichaelCaputo,NikolaiChetverikov,IgorChubais,OlegChurilov, Timothy Colton, Mark D’Anastasio, Mikhail Dmitriev, TamaraDobretsova, Oleg Dobrodeyev, Mikhail Dodonov, Sergei Dorenko, YuliDubov, Sergei Ermakov, James Fenkner, Murray Feshbach, David Filipov,

Andrew Fox, Yegor Gaidar, Natalya Gevorkyan, Martin Gilman, GrigoryGlazkov, Alex Goldfarb, Andrei Gorodetsky, Leonid Gozman, VladimirGrodsky, Peter Halloran, Jonathan Hay, Victor Huaco, Andrei Illarionov,ValeryIvanov,SergeiIvanov,AnatolyIvanov,StevenJennings,DonaldJensen,Boris Jordan, Xavier Jordan, Konstantin Kagalovsky, Jan Kalicki, SergeiKaraganov,AlexeiKara-Murza,IrinaKarelina,AlexanderKhachaturov,BorisKhait, Alexander Khandruyev, Sergei Kiriyenko, Yevgeny Kiselyov, SoniaKishkovsky, Oleg Klimov, Alfred Kokh, Anatoly Kolosov, VladimirKorabelnikov,VladimirKoshelev,YevgenyKovrov,AndrewKramer,YelenaKrasnitskaya, Eduard Krasnyansky, Eric Kraus, Margery Kraus, VeronikaKutsillo,ViktorKuvaldin,Mikhail Larkin,Yulia Latynina,Mikhail Leontiev,MarkLevin,TatyanaLikhonova,RuslanLinkov,SergeiLisovsky,AlexanderLivshitz, John Lloyd, Augusto Lopez-Claros, Vladimir Lopukhin, ViktorLoshak, Vladimir Lototsky, Igor Malashenko, Mikhail Margelov, SergeiMarkov, Andrew Meier, Andrei Melnichenko, Alexander Minkin, VladimirMokrousov, Valentina Mokrousova, Sergei Monakhov, Nat Moser, MikhailMoskvin-Tarkhanov, Alexei Mukhin, Arkady Murashev, AlexanderMuzykantsky, Yevgeny Myslovsky, Vitaly Naishul, Boris Nemtsov, LeonidNevzlin, Leonid Nikitinsky, Vyacheslav Nikonov, Kemer Norkin, StephenO’Sullivan, Nina Oding, Mikhail Ogorodnikov, John Ordway, AlexanderOslon, Alexander Osovtsov, Dmitri Ostalsky, Alexander Panin, SergeiParkhomenko, Sergei Pashin, Masha Pavkenko, Boris Pavlov, Gary Peach,Brian Pinto, Andrei Piontkovsky, Larisa Piyasheva, Dzhokhan Pollyeva,DmitriPonomarev,GavriilPopov,VladimirPotanin,IgorPrimakov,ThomasReed, Yuri Reva, Andrei Richter, Sergei Rogov, Leonid Rozhetskin, Hans-Joerg Rudloff, Charles Ryan, Yevgeny Savostyanov, Vasily Shakhnovsky,AkexanderSheindlin,LiliaShevtsova,MikhailShneider,YuriSkuratov,DmitriSliko, Tim Smith, Galina Starovoitova, Olga Starovoitova, Sergei Stupar,Bernard Sucher, Vladislav Surkov, Ludmila Telen, John Thornhill, GaryTitarenko, Andrei Trapeznikov, Vitaly Tretyakov, Yuri Tselikov, AlexeiUluykaev, Chris Van Riet, Levan Vasadze, Dmitri Vasiliev, Sergei Vasiliev,Alexei Venediktov, Vladimir Vinogradov, Alexander Vladislavlev, MashaVolkenstein, James Wallar, Brian Whitmore, Richard Wirthlin, AlexeiYablokov, Yuri Yarmagayev, Nina Yermakova, Yevgeny Yasin, ArkadyYevstafiev,VladimirYevtushenkov,AlexeiYurchak,KonstantinZatulin,YuriZektser,LarisaZelkova,BellaZlatkis,AndreiZorin,AlexanderZurabov,andSergeiZverev.

Most of all, I am forever indebted to my wife, Carole, for her care andsupportof thewholeproject, from the first files to the final sentences, and Ithank my sons Daniel and Benjamin, and my parents, for their forbearanceduringmylongabsences.

Index

Advertising: Bank Menatep; Logovaz; MMM; Yeltsin re-election campaign;Yeltsin referendum on reforms. See also Newspaper advertising; TelevisionadvertisingAeroflotairline:Berezovskyand;Berezovskyvs.GusinskyandAganbegyan,AbelAizerman,MarkAlekperov,VagitAleksashenko,SergeiAnotherLife(Naishul)Anti-Semitism.SeealsoJewsArbitrageArt:Mokrousov;Tsereteli.SeealsoRockmusic;TheaterAuctionsofstateproperty,cashAuctions of state property, loans for shares: Berezovsky and Chubais andKhodorkovskyandPotaninand;riggingofAuctions of state property, Svyazinvest: attempted agreements betweenGusinsky and Potanin Berezovsky vs. Potanin; bidding and results; Chubaisand;Chubaisvs.Berezovsky;Chubais vs.Gusinsky;Gusinsky consortiumofinvestors; Gusinsky vs. Kokh; Jordan and Kokh and; Potanin consortium ofinvestors;Sorosand;reasonsforpurchase,Gusinskyvs.Potanin;YeltsinandAuctionsofstateproperty,vouchersAuthorized banks. See also Bank Menatep; Bank Stolichny; Most Bank;UneximbankAutomobiles: Berezovsky and the people’s car; Fiat; Mercedes Volgas andvouchersZhiguli.SeealsoAvtovaz;LogovazAven,Pyotr;devaluationoftherubleandAvtovaz assets (1991);AVVA andBerezovsky buys partial control; vs. blackmarkets;constructionof;falseexportsand;Logovazand;vnedrenieandAVVA(All-RussianAutomobileAlliance);Avtovazand

Bankers’war:BerezovskyandSoros;Berezovskyvs.Chubais;Berezovskyvs.Potanin; vs. economic reform; Gusinsky vs. Kokh; Gusinsky vs. Potanin;Jordan and; oligarchic capitalism and; Potanin and; Svyazinvest auction and;YeltsinandBanking,banks,anti-Semitismand;authorizedbanksand;BankMenatepandRiggs Valmet; crash of ‘98 and; currency transactions and; Gosbank;Inkombank; Khodorkovsky and youth science centers (NTTMs); liquiditycrisisof‘98andforeigninvestors;loansand;Moscow;inperestroika.SeealsoCentralBankofRussia;CommercialbanksBank Menatep, advertising and; becomes an authorized bank; becomes firstRussian investment bank created; currency operations abroad and dollar-forwards and; foreign loans to; government programs and; loans-for-sharesandBankStolichny:avisosand;founded;loansby;revenues(1992);renamedSBS-Agro.SeealsoSBS-AgroBankBarsukov,MikhailBarterBaturina, Yelena, on Luzhkov and construction as an ideology; on LuzhkovandMoscowcooperatives;onLuzhkovandpolitics;marriesLuzhkov;stadiumseatstenderBearercertificateschemes:Berezovsky;MavrodiBekker,AlexanderBerezovsky,Boris;acquiresChannel1,;Aeroflotairlineand;Aeroflotairlineand arrest warrant; appointed deputy secretary of the Kremlin SecurityCouncil; appointed executive secretary of the Commonwealth of theIndependentStates;attemptedbombingof;bankers’warand;bearercertificatescheme;buysmajoritycontrolofSibneftoilcompany;character;Chechenwarand vs. Chernomyrdin; Chubais and Chubais book scandal and; Club onSparrow Hills and; creates car dealership network; creates the Unity party;devaluationoftherubleand;earlyconnectionwithAvtovaz;firstbusinessdeal;founds Logovaz; Gusinsky on; holdings; vs. Kiriyenko; Listyevmurder andloans for sharesand theLogovazClub; losespostasdeputy secretaryof theKremlin Security Council; loses post as executive secretary of theCommonwealth of the Independent States; vs. Luzhkov; as a mathematician;media and politicsMercedes andNezavisimayaGazeta and patience of; paysransomforkidnappedNTVcorrespondentvs.Potanin;vs.Primakov;vs.Putin;Putin and; scientific authorship sellsORTand leavesRussia; Smolensky and

Sorosand;onYeltsin;vs.Yeltsin;Yeltsin’ssuccessorand;YeltsinandYeltsinreelectioncampaignand;youth;andZlatkis;vs.Zyuganov.Seealso Avtovaz;Logovaz;ORT;SibneftBerezovskyvs.Chubais;successortoChernomyrdinand;SvyazinvestauctionBerger,MikhailBeznalichnyeBlack markets: car parts; currency exchange rates Gusinsky and; vs. pricecontrols;recordalbumsandBobkov,FilippBogdonov,VladimirBograd,PaulBoguslavsky,LeonidBoiko,Oleg;ClubonSparrowHillsandBokser,VladimirBolshayaPaika(Dubov)portrayalofBerezovskyBolshevikBisquitCompanyBreach,AlBrezhnev,Leonid;Decree695,Browder,William;vs.sharedilutionBulgakov,MikhailBunich,PavelBurson-MarstellerBush,GeorgeH.W.

CapitalflightCentralBankandFinancialManagementCompanytheKGBand;Khodorkovsky and; money laundering Smolensky and. See also OffshorenetworksCapitalism:absenceoflawandfreemarkets;absenceofmarketregulationand;clanstructureof;corruptionand;distortionofeasymoneyand;vs.Marx;newvocabulary of; oligarchic; Smolensky and; tycoons andWestern models of;Yeltsinvs.Zyuganov.SeealsoLuzhkovcapitalism;MarketeconomyCathedralofChristtheSaviorconstructionanddestructionof;reconstructionofCenterTVCentralBankofRussia:avisosand;bankingsystemliquiditycrisisand;capital

flight and Financial Management Company; devaluation of the ruble and;exchange rate corridor and freezes FinanceMinistry accounts andGusinskybank sale; inflation and; inflation and subsidized credits by; plummeting ofreserves; raises interest rates in response to plunging stockmarket; reservesvs.foreigninvestmentinbondsstabilizationloanstoSBS-AgroCentralCommitteeCentralplanning:Avtovazand;factoriesand;vs.Gaidar;vs.Hayek;Stalinand;vegetablebasesandChechens;vs.journalistsvs.PutinChechenWars;BerezovskyandPutinandYeltsinreelectioncampaignandChernomyrdin,Viktor;creates thesecuritiescommission;vs.MMM;replacesGaidarasdeputyprimeminister;replacedbyKiriyenkoChubais,Anatoly;appointedchiefofthepresidentialadministration;appointedfirst deputy prime minister; bankers’ war and; becomes a deputy primeminister;Berezovskyand;bookscandal;vs.Chernomyrdin;vs.Communism;compromises of; consents to devaluation of the ruble; creates the StatePropertyCommittee;Decree695and;vs.devaluationoftheruble;economicsvs.politicsand;economists inspirational to; fired frompostasdeputyprimeminister; vs. gradualism;hiredby theoligarchs tomanageYeltsin reelectioncampaign;IMFandinstitutionsandmarketeconomy;joinsGaidarbraintrust;Leningrad Engineering Economic Institute and; Leningrad seminars and;Leningrad freeeconomiczoneand; loans for sharesand, ;meetsGaidar;vs.Naishul privatization plan; Putin and; Smolensky and SnakeHill group and;Vasilievand;youth;vs.Zyuganov.SeealsoBerezovskyvs.ChubaisChubais,BorisChubais,IgorChubais privatization: Chubais privatization law; first sale of a factory;freedomand;vs.Gusinsky;vs.Luzhkov;marketcompetitionand;politicsandvs. the Supreme Soviet; the Supreme Soviet approves; voucher funds;vouchers;WesternadvisorsandYeltsin referendumonreformsand.SeealsoAuctionsofstateproperty;LoansforsharesClub on Sparrow Hills blacklisting of Gusinsky; charter; first order ofbusiness;Kokhand;members;politicalpatronageandCommercialbanks:avisosand;capitaland;crashof‘98loandefaults;cross-ownership and; currency operations abroad and dollar-forwards anddevaluation of the ruble; Gosbank and; Gusinsky expands Most Bank;Inkombank; Khodorkovsky starts Bank Menatep; Kiriyenko default

moratoriumand;SmolenskystartsBankStolichny.SeealsoAuthorizedbanks;Banking;MostBank;SBS-AgroCommodities: books; computers; copperbracelets; figurines; fur coats jeans;meat; Melnichenko commodity exchange at Moscow State University;minerals; nickel; research results; seaweed; software; tea; tin; toilet paper;vodka.SeealsoAutomobiles;Oil;Shortages;StoresCommunism: vs. Berezovsky; vs. Chubais; vs. Yeltsin reelection campaignjournalismCommunistManifesto,The(Engels/Marx)Communist Party: Chubais and; vs. Gusinsky; Gusinsky and; hierarchy of;Khodorkovsky and; leading democrats turn in their cards; Luzhkov and; vs.Yeltsinreelectioncampaign;vs.youth.SeealsoKomsomol,theCommunists: vs. Jewish bankers; vs. privatization. See also Zyuganov,GennadyCommunistYouthLeague.SeeKomsomolCongressofPeople’sDeputiesConsumergoods.SeeCommoditiesCooperatives: banks as; computers and; Gusinsky and; Khodorkovsky vs.Luzhkov Komsomol and; Law on Cooperatives and; Luzhkov and; andmonitoringof;Paninand;shadoweconomyand;Smolenskyand;VasilievonprivatizationinLeningradCreditSuisseFirstBoston(CSFB)Crime: at Avtovaz factory bombing of Berezovsky; bribery; business as;entrepreneurship as; framing by police; Luzhkov and; murders pyramidschemes; smuggling. See also Bearer certificate schemes; Black markets;Gangs;Law,absenceof;SecurityservicesCurrency: American banknotes in circulation (1997); Berezovsky and;commercial banks and operations abroad exchange rate corridor and exportcompanies and; the government vs. offshore networks; inflation and;redenominationof;U.S.Treasuryand.SeealsoMoneyCurrency,devaluationoftheruble;becomesinevitable;Berezovskyand;BlackTuesday,vs.Chubais,;Chubaisconsents,;Chubais’noteson;dollar-forwardsand;exchangeratecorridorand;

Gaidaron;Illarionovand,;IMFand;vs.Kiriyenko;themiddleclassand;smallbusinessand;SoroslettertoFinancialTimeson,Yeltsinconsents

D’Anastasio,MarkDaiwabank(Japan)Dart,Kenneth:vs.KhodorkovskyDebtcrashof‘98 loandefaults;GusinskytoGazpromandKiriyenkodefaultmoratoriumand.SeealsoForeignloans;GKOs;Governmentbonds;LoansDemocracy:corruptionindefenseof;Putinand.SeealsoFreedomDmitriev,MikhailDobrodeyev, Oleg; leaves NTV; NTV coverage of the Chechen War and;YeltsinreelectioncampaignandDorenko,SergeiarrestofGusinskyand;vs.Luzhkov;onPutin;Putintakesofftheair;SvyazinvestauctionandDreiser,TheodoreDubinin,Sergei;vs.SBS-AgrostructureDubov,YulionBerezovsky;oncrimeattheAvtovazfactoryDuma,the(Moscow)Duma, the (State);Berezovsky resignshis seat;Communists and;Unitypartyand

Easymoney:absenceoflawsand;authorizedbanksvs.thestate;BankMenatepand the government; Berezovsky bearer certificate scheme; GKOs and;hyperinflation and; insider information and; Khodorkovsky and friendships;Mavrodi bearer certificate scheme; pyramid schemes; Yeltsin reelectioncampaignfinancingand.SeealsoCurrencyexchange;ProfitEcho ofMoscow radio; bankers’ war and; Chubais-Kokh book scandal and;coupagainstGorbachevand;GusinskybuysEconomics, the economy: absence of law and free markets; bolshoi kapitalgroupand;BritainandtheIndustrialRevolution;businessandtheKomsomol;capitalism vs.Gosplan; capitalism vs.Marx; central planning and; command

economy; vs. commercial banks; factories and self-financing; financialmarkets and; freeprices and; global;Gorbachev and;Gosplanvs. the supplyanddemandmarketsystem;inflationandeasymoney;inflationandsubsidizedcreditsbytheRussianCentralBank;institutionsandmarketeconomy;militarystores and; monetarism New Economic Policy; paternalism; vs. politics;politics and self-interest and; shadow economy; shortage economy; socialistresearch and; vnedrenie and; Yeltsin and. See also Capitalism; Currency,devaluation of the ruble; Free markets; Market economy; Privatization;Shortages;Stockmarketcrashof‘98EconomicsofShortage,The(Kornai)EconomistElections:DemocraticRussiawinsmajorityofseatsintheMossovet;Luzhkov(1991);Luzhkov(1996);Luzhkov(1999)PopovbecomesmayorofMoscow;Putinassumespresidency;Yeltsinbecomeschairmanoftheparliament(1990);Yeltsin reelection, first-round vote; Yeltsin presidential reelection, second-roundvoteEurobonds:GoldmanSachsand;SBS-Agroand

Factories:beznalichnye vs.money and; in the paternalistic state;Decree 695and;Gosplan and; inflation and subsidized credits to;Khodorkovsky and theLenin index; and managers of self-financing and Luzhkov proposal; self-financingandtheKomsomol;shortagesand;vnedrenieand;Ziltrucks.SeealsoAvtovaz;ManufacturingFactory privatization; Chubais’ privatization law and; first sale of;Khodorkovskyand;Naishuland;andnewownersofFarming:Chubaisoncollectivefarm;loansand;vegetablebasesFenkner,JamesFiat;BerezovskyandimportingofFinance: American railroads and; Berezovsky bearer certificate scheme;cooperatives and;Mavrodibearer certifitives and;Mavrodibearer certificatescheme;SovietbankingsystemunderGorbachev;andSovietsystemof;Yeltsinreelection campaign. See also Banking; Foreign investors; Loans; RussianFinanceMinistry;Self-financingFinancialmarkets:absenceofregulationand;ChubaisonFinancialTimes;publishesSoros’letteronRussianmeltdown

Financier,The(Dreiser)Foodshortages:grain;radicaldemocratsand;storesandForeign investors: Amoco view financial crisis; bonds vs. Central BankreservesBrowder crash of ‘98 and;Dart exclusion from theYukos auction;Fenkner;GKOsand;vs.Kiriyenkodefaultmoratorium;McGinnis;oilPotaninand; privatization of state property and; Svyazinvest auction. See alsoCurrency,devaluationoftheruble;Jordan,Boris;Soros,GeorgeForeign loans: to Bank Menatep; crash of ‘98 commercial bank defaults;Goldman Sachs to Russia; to Gusinsky to Gusinsky, guaranteed by FinanceMinistry (n46); to Gusinsky, guaranteed by Gazprom IMF to Russia IMF toRussia,GKOrolloverand;toKhodorkovsky;toKhodorkovsky,crashof‘98andvs.Kiriyenkodefaultmoratorium;toSmolensky;WorldBanktoRussianSecuritiesCommissionFreedom: Chubais view of privatization and; cooperatives and; the Russianpeopleandwealth.SeealsoDemocracyFreeland,ChrystiaFreemarkets:absenceoflawand;Chubaisand;Gaidar-Chubaisgroupand;vs.shortages;vs.socialistindustrialindicatorsFriedman,Mikhail;ClubonSparrowHillsand

Gaidar,Yegorappointeddeputyprimeminister;onBerezovsky;cashauctionsof statepropertyand;Chubais-Kokhmonograph scandal and;ondevaluationof the ruble; economics vs. politics and; free prices and; vs. gradualism; onloans for shares; memoir missing money of the Communist Party and; onMoscow corruption; replaced as deputy prime minister by Chernomyrdin;YeltsinappointstoleadeconomicreformGangs: vs. Avtovaz; vs. car dealerships; car parts and; vs. Gusinsky; vs.Khodorkovsky;vs.Moscowbusinesses;StolichnyBankand;warsbetweenGAZ(GorkyAutomobileWorks)Gazprom; acquires Gusinsky media empire; Berezovsky bid for company;buyspartialcontrolofNTVCathedralofChristtheSaviorandGerashchenko,ViktorGKOs (gosudarstvenniye kratkosrochniye obligatzii); Central Bank andChubaisand;easymoneyand;GoldmanSachsand;interestratesinloans-for-sharesauction;rolloverand;SBS-Agroand

Glazkov,Grigory;Decree695and;devaluationof the rubleand;vs.Naishulprivatizationplan;SnakeHillgroupandGlobal capitalmarkets: Russian Eurobond and; Russian Eurobond and SBS-AgroGlobaleconomyGlushkov,NikolaiGoldfarb,AlexGoldmanSachs:loanstoKhodorkovskyandloanstoRussiaandGorbachev,Mikhail;cooperativesand;coupof‘91and;economicsvs.politicsand;theMoscowintelligentsiaand;neformalnyand;privateeconomicactivityand;onPutin;resignsfrompresidencyGosbank.SeealsoCentralBankofRussiaGosplan;centralplanningand;vs.thesupplyanddemandmarketsystemGovernment, the:BankMenatepand;bigcapitalgroupand;vs.capital flight;downwardspiralofthe‘98stockmarketcrashand;financingthedeficitwithGKOs; vs. MMM; Moscow, commercialization of; vs. NTV; vs. offshorenetworks; oil extraction companies vs. holding companies and; RussianSecuritiesCommission;statecapturebybigcapital;StateCustomsCommitteeandUneximbank.SeealsoRussianFinanceMinistry;State,theGovernmentbonds:agro-bondsEurobonds;MinFins.SeealsoGKOsGraham,ThomasE.GreatBritain:Americanrailroadsand;IndustrialRevolutionandGrodsky,VladimirGubkinInstituteofOilandGasGusinsky,Vladimir;arrestduringNTVcrisisandarrests inSpain;automatictellermachinesand;bankers’warand;beginsMostBank;vs.Berezovsky;onBobkovvs.Chubais;crashof‘98and;enrollsintheStateInstitutefortheStudyof Theatrical Arts; as an entrepreneur; fighting and; first fortune; as a Jew;leavesRussiain1994leavesRussiain2000losesSvyazinvestauction;opensInfeks; protection and; vs. Putin; stages Tartuffe; tours the United States; vs.Voloshin; onYeltsin;Yeltsin and;Yeltsin reelection campaign and; youth; vs.Zyuganov.SeealsoMostBankGusinsky-Luzhkovpartnership;Moscowcityrevenuesand;Moscowrealestateand;touroftheUnitedStatesGusinsky business empire: bought by Gazprom; debt holdings; GusinskyacquiresEchoofMoscow;GusinskymeetsKiselyov;Gusinsky formsMedia-

Most; Gusinsky founds first independent television station; Gusinksy startsSevodnya.SeealsoMedia-Most;NTV;NTV-PlusGusinsky vs. Kokh: Chubais-Kokh book scandal and; sale of Gusinsky’scompaniestoGazpromand;Svyazinvestauctionand

Hay,JonathanHayek,FriedrichvonHellman,Joel;onstatecaptureHockstader,LeeHousing:apartments,Gusinsky-Luzhkovand;dachas,SmolenskyandHuaco,Victor

Illarionov,AndreiIlyushin,ViktorIMF(InternationalMonetaryFund)ChubaisandImperialBankIndustrialRevolution:Britainand;BritainandAmericanrailroadsIndustry; American railroads; cooperative banks and; economic reform andinstitutions; electricity Gosplan and; inflation and subsidized credits to;Khodorkovskyand;mines;moneyandproduction;reddirectorsand;shortagesand; socialist economic research and; Stalin and. See also Aeroflot airline;Avtovaz;Factories;Gazprom;Oil;TelecommunicationsIndustryprivatization;KhodorkovskyandInflation:Berezovskyand;Chubaisand;currencyand;easymoneyand;Gaidarand; andmonetarism redenominationof the ruble and;RussianCentralBankand; Russian Central Bank and subsidized credits. See also Currency,devaluationoftherubleInkombank;dollar-forwardsandInstituteofControlSciencesInstituteofHighTemperaturesInstitutions: free markets and; market economy and; regulation of financialmarketsandIntelligentsia,the:journalistsand;Moscow.Seealso:Radicaldemocrats

Isayeva,LyudmilaItogitelevisionnewsprogram;KiselyovapproachesGusinskytofinanceItoginewsmagazineclosedbyGazpromIvanov,AnatolyIvanov,ValeryIzvestia

Jennings,StevenJews: Berezovsky Friedman; Gusinsky; Khodorkovsky; Smolensky. See alsoAnti-SemitismJordan, Boris; banker ’s war and; vs. Communists; NTV and; Potanin andPotaninandsharedilutionSvyazinvestauctionandvouchersandJournalists; vs.Chechens;Gusinsky and;Luzhkovand;murderofKholodov;societyand;YeltsinreelectioncampaignJurbyLakeLtd.

Kadannikov,Vladimir;AVVAand;Logovazand;replacesChubaisasadeputyprimeministerKagalovsky,KonstantinKaraganov,SergeiKGB(Komitetgosudarstvennobezopasnosti);vs.Chubais;coupof‘91and;vs.economicreform;vs.Gusinsky;Gusinskyand;vs.libraries;missingmoneyoftheCommunistPartyand;Putinand;vs.Smolensky;thetelephonesystemandKhait,BorisKhasbulatov,RuslanKhimavtomatikaKhodorkovsky, Mikhail beznalichnye and; buys control of Eastern OilCompany;ClubonSparrowHillsand;computersand;createsBankMenatep;creates Rosprom; as deputy Komsomol chief; devaluation of the ruble and;exportcompaniesand;vs.gangs;InstituteofHighTemperaturesandKiriyenkodefaultmoratoriumand; loans for shares andLuzhkov registers cooperativenetworth(2001);NTTMsand;Nevzlinand;offshorenetworksand;offshorenetworksandsharedilution;privatizationvouchersand;sourcesofpatronage;starts the Foundation of Youth Initiative; Surkov and; transfer pricing and;

writes Man With a Ruble; Yeltsin and. See also Bank Menatep; Yukos oilcompanyKhodorkovskyvs.Dartsharedilutionand;VasilievandKholodov,DmitriKiriyenko,Sergei;consentstoforeigndebtmoratorium;vs.devaluationoftheruble;replacesChernomyrdinasdeputyprimeminister;replacedbyPrimakovKiselyov,Yevgeny;afterthefallofGusinsky’smediaempire;vs.Dorenkoasananchorman;on theListyevmurder;meetsGusinsky;onNTVcoverageoftheChechenWar;YeltsinreelectioncampaignandKokh, Alfred book scandal; Svyazinvest auction and. See also Gusinsky vs.KokhKommersantDailyKommunistjournalKompromat;Chubais-KokhbookscandalandKomsomol, the;Avtovaz and; business and; cooperatives and;Gusinsky and;Khodorkovskyand;mainreasonforjoiningKornai,JanosKorzhakov,Alexander;vs.Gusinsky;Listyevmurderandmemoirthepartyofwarand;vs.YeltsinreelectioncampaignKrasnyansky,EduardKraus,MargeryKryshtanovskaya,OlgaKuklytelevisionshowKulikov,AnatolyKutsillo,Veronika

Latynina,YuliaLavrov,BorisLawonCooperativesLaw, absence of: Berezovsky and the AVVA scheme; easy money and; freemarkets and; Gusinsky and; police and; securities and; Zlatkis and. See alsoCrime;RussianSecuritiesCommissionLebed,AlexanderLenin,VladimirLeningradEngineeringEconomicInstitute

LeningradPublicLibraryLeontiev,MikhailLesin,MikhailLesnevskaya,IrenaLevin,MarkLevinson,AlexeiLipman,MashaLisovsky,Sergei;Chubais-Kokhbookscandaland;ListyevmurderandYeltsinreelectioncampaignandListyev,Vladislav;andmurderofLiteraturnayaGazetaLoans: to Berezovsky’s television channel; to businesses vs. transactions ongovernment debt; Central Bank to SBS-Agro; Gazprom to GusinskySmolensky to Chubais Smolensky to farmers; by Stolichny Bank. See alsoForeignloansLoansforshares;BerezovskybuysSibneftChubaisand;exclusionofforeigninvestorsfromtheYukosauction;Jordanand;PotaninandwhitepaperLogosystemLogovaz; advertising expenditures; Fiat importing and; founding of;hyperinflationandLopez-Claros,AugustoLoshak,Viktor;conversationwithLuzhkovLukoilLuzhkov,Yuri;becomesmayorofMoscow;becomesvicemayorofMoscow;vs. Berezovsky; businessmen vs. bureaucrats and; capitalism model of; vs.Chubais;ClubonSparrowHillsand;constructionandcomfort;constructionasan ideology of; construction of Moscow toxic waste dump; coup againstGorbachev and; as director of Khimavtomatika; enforces the propiska firesPiyasheva; vs. Gaidar; and Khodorkovsky made a deputy chairman of theispolkom; as a micromanager; Moscow cooperatives and; on Moscowcorruptionpopularityasamayor;presidentialambition;presidentialambitionvs. Dorenko smear campaign; the press and; radical democrats and;reconstructs the Cathedral of Christ the Savior reelected mayor ofMoscowshuttle traders and; Skuratov and tours the United States; Tsereteli and;vegetablebasesand;vs.Yeltsin;Yeltsinand;Yeltsinreelectioncampaignand;Yevtushenkovand;youth.SeealsoGusinsky-Luzhkovpartnership

Luzhkovcapitalism;Ziltruckfactoryand;andSystema

MabetexMakarova,IrinaMakashov,AlbertMalashenko,Igor;ondevaluationoftheruble;fleesRussia;Gusinskyhires;onOstankinotelevision;YeltsinreelectioncampaignandMelnichenko,AndreiManwitharuble(Khodorkovsky/Nevzlin)Margelov,MikhailMarketeconomy:absenceoflawand;cooperativesandthepeople;economicpaternalismand;theEurobondandglobalcapital;freepricesand;institutionsand;Naishuland;reformersandRussianhistoryand.SeealsoEconomics;Freemarkets;Governmentbonds;StockmarketMarx,Karl;vs.capitalismMavrodi,SergeiMedia-Most: conglomerate created; Gusinsky sells to Gazprom; outstandingdebtattimeofsellMedvedev,DmitriMendeleevInstituteofChemicalTechnologyMercedesMerrillLynchMiddleclass,the:devaluationoftherubleand;GusinskyandMilitary, the; Chechen War and NTV; economic shortage and stores of;Gusinskyand;SmolenskyandMinFingovernmentbondsMinkin,Alexander;Chubais-KokhbookscandalandMMMMokrousova,ValentinaMokrousov,VladimirMoney: beznalichnye and nalichnye; destructive impact of easy money;Gusinsky experience with; hyperinflation; Khodorkovsky and state credits;meaning of in planned economy; and ruble-dollar speculation; Soviet-eraattitudestoward;Smolenskyand.SeealsoCurrencyMorgan,J.P.

Moscow:theautomobilewar;bombings;bribery;businessmenvs.bureaucrats;casinos; Cathedral of Christ the Savior; cooperatives and the people;corruption fooddistributionsystemand;Gorbachevand the intelligentsiaof;Gusinsky and theater; health care systems; Kursky Station; legislatures;Luzhkov and residency permit Luzhkov becomes mayor; Luzhkov enforcespricecontrols;murders;thenewlyrich;Popovelectedmayor;SparrowHills;statistics;SystemaTsereteliandMoscowNewsMoscowStateUniversityMoskin-Tarkhanov,MikhailMoskovskyKomsomoletsMoskva–3constructioncooperativeMossovet,the;DemocraticRussiawinsmajorityofseats;Luzhkovbecomesamember;LuzhkovintroducedtotheradicaldemocratsMostBank;Aeroflotairlineand;MoscowcityrevenuesandMuravlenko,SergeiMurders:gangwarsKholodov;ListyevTatumMusic.SeeRockmusic

Naishul, Vitaly: Another Life; Gosplan and; privatization plan; privatizationplan,GaidarandChubaisobjectionstoNeDaiBog!Nemtsov,Borisbankers’warand;vs.Berezovsky;vs.oligarchiccapitalismNevzlin,LeonidNewspaperadvertising;currencyexchange;easymoneyNewspapers:bankers’warand;Gusinskymotives;Sevodnyabeginspublishing;YeltsinreelectioncampaignandNewYorkTimesNezavisimaya Gazeta; bankers’ war and; Berezovsky and Yeltsin reelectioncampaignandNomenklatura,theNorilskNickel;Potaninbuyspartialcontrol;UneximbankandNotesofthePresident(Yeltsin)NovayaGazetaNTTMs(CentersforScientificCreativityofYouth)

NTV-Plus television; digital satellite;Gusinsky’s investment in; launching oftheBonum–IsatelliteandNTV television; advertising and; Berezovsky and blocking of presidentialdecree for;ChechenWars and; crash of ‘98 and; crash of ‘98 and revenuescrushes Lebed; goes on the air; Gusinsky sells partial control to Gazprom;Gusinsky loses control to Gazprom; outstanding debts Yeltsin reelectioncampaignandObschina,theOding, Nina on Chubais’ driving; on Chubais in America; on Chubais inHungary;collectivefarm;attheLeningradPublicLibraryOffshore networks: Khodorkovsky and; Khodorkovsky and share dilutionSvyazinvestauctionandOil:AmocoBrowderanddeclineinglobalpricesand;EasternOilCompany;gap between domestic and export prices and; Lukoil; Potanin buysmajoritycontrolofSidanco;PotaninsellscontrolofSidanco;PriobskoyefieldRosneft;Sibneft;inWesternSiberia.SeealsoYukosoilcompanyOil extraction companies: foreign investors and vs. holding companies; vs.Khodorkovsky Surgutneftegaz; Tomskneft vs. transfer pricing. See alsoSamaraneftegaz;YuganskneftegazOligarchic capitalism: described by Kryshtanovskaya; Nemtsov and;Berezovskyand;Chubais-Kokhbookscandaland;theSvyazinvestauctionandYeltsinOligarchy, the Oligarchs: anti-Semitism and; bankers’ war and Yeltsin;Berezovsky on power; as a board of directors of Russia; crash of ‘98 and;crashof‘98andYeltsin;theDavosPact;devaluationoftherubleand;groupofseven; vs. Kiriyenko; Kiriyenko default moratorium and; Kryshtanovskaya’sessayon; thepressand;vs.Putin;Soroson;Yeltsin reelectioncampaignand.SeealsoClubonSparrowHills;Power;Tycoons;WealthOrgkomitetORT (Russian Public Television) Berezovsky creates; Berezovsky hiresDorenko;BerezovskysellsandleavesRussiaPutinandOslon,AlexanderOsovtsov,AlexanderOstankino television (Channel 1); advertising and; Berezovsky privatizes;ReklamaHoldingand

Panin,Alexander;onthemonitoringofcooperativesPapesh,JohnJ.Parliaments.SeeCongressofPeople’sDeputies;Duma,the;SupremeSovietofRussiaPerestroika: Berezovsky and; and cooperatives; impact on Chubais seminarsof;theintelligentsiaand;ZaslavskayaandPiontkovski,AndreiPiyasheva,LarisaPolandPolice;briberyand;andframingby;raidsagainstGusinskybusinessesPolitburo,the:Chubaisand;vs.Luzhkov;privateeconomicactivityandPolitics:BerezovskyandmediaBerezovskycreatestheUnityparty;bigcapitaland; business and; dismissal of Chernomyrdin; Gaidar brain trust andGorbachevonPutin;Gusinskyandvlast;Gusinsky vs.Korzhakov; loans forsharesandYeltsin reelection;Luzhkovvs. television; thepowerof televisionand; radical democrats and; state capture by big capital;Yeltsin’s health and;Yeltsin’s successor and; Yeltsin appoints Putin to the presidency. See alsoElections;YeltsinreelectioncampaignPonzi,CharlesPopov,Gavriil;becomeschairmanofDemocraticRussia;becomesmayorofMoscow;resignsfromMoscowmayoraltyPotanin, Vladimir; bankers’ war and; buys majority control of Sidanco oilcompany;ClubonSparrowHillsand;createsUneximbank;devaluationoftherubleand;earlycareer;JordanandJordanandsharedilutionloansforsharesandsells10percentofSidancotoBP;statecashflowand;winspartialcontrolofSvyazinvest;youth.SeealsoNorilskNickel;UneximbankPoverty:healthcareand;hyperinflationimpactonpopulationPower: Berezovsky on; Chubais on Graham’s essay; Gusinsky and; oftelevision;tycoonsand;Walleron.SeealsoOligarchyPricing,prices:cashauctionsofstateretailoutletsand;freemarketvs.socialistindustrialindicators;Gaidarand;oiland;privatizationvouchertradingand;vs.shortages; oil extraction companies and; Yeltsin and. See also PrivatizationvouchersPrimakov,Igor;computersandPrimakov,Yevgeny,appointedforeignminister;appointedprimeminister;vs.Berezovsky; firedbyYeltsin and replacedbyStepashin; creates alliancewith

Luzhkov;subjectofDorenkosmearPrinting;SmolenskyandPrivateproperty:Chubaisand;Luzhkovand;Naishuland;Naishulvs.Gaidar;vs.theSovietmind-setPrivatization: Chubais vs. theft of state property; freedom and; of money;Naishul and; Naishul vs. Gaidar; Ostankino television; Piyasheva plan;spontaneous;bySystema;Vasilievon;Yeltsinreferendumonreforms.SeealsoAuctions of state property;Chubais privatization;Economic reform;Factoryprivatization;Industryprivatization;LoansforsharesPrivatization vouchers auctions and Jordan and; Khodorkovsky and; mutualfundsWesternadvisorsandPrivatizatzia(Chubais)Prokhorov,MikhailPromstroibankPutin, Vladimir; appointed prime minister; appointed to presidency; vs.Berezovsky; Berezovsky and; vs. Chechens; ChechenWar and Chubais and;democracy and; vs. Dorenko; elected to presidency; vs. Gusinsky; Russiangovernorsand;televisionandPyramidscams;absenceofgovernmentregulationand

Radical democrats: in Moscow; Chubais and Leningrad; the khozyain inMoscowand;winthemajorityofseatsintheMossovetRavenskikh,BorisReklamaHoldingRemnick,DavidRenaissanceCapitalResearch: business and theKomsomol;Luzhkov self-financing idea; Instituteof High Temperatures; Leningrad Engineering Economic Institute; NTTMsand;socialisteconomicsand.SeealsoScienceRiggsNationalBankofWashingtonRoadtoSerfdom,The(Hayek)Rockmusic:Avia;theBeatles;vs.Chernenko;Televisor;TimeMachineRogozin,GeorgiRosneftRossiiskayaGazeta

Rozhetskin,LeonidRudloff,Hans-JoergRussian FinanceMinistry BankMenatep and; guarantees Exim Bank loan toGusinskyissuesMinFinbonds.SeealsoGKOs;GovernmentbondsRussianOrthodoxChurchRussian people, the: attitude toward private property and bribery and;cooperativesand;crashof‘98andSBS-Agrodepositors;crashof‘98andthemiddle class; exhorted to get rich; health care and; inflation and pyramidscams; privatization vouchers and; seek scapegoats for the crash of ‘98 andstate care of; distrust of the peasantry in Soviet times. See also Moscow;Society;YouthRussianRawMaterialsandCommodityExchangeRussian Securities Commission: Chernomyrdin creates; vs. Goldman Sachs;Vasilievresigns;andweakpowerofRyan,CharlesRybkin,Ivan

Saikin,ValerySalomonBrothersSamaraneftegazoilextractioncompany;Khodorkovskyandlosses(1996)Savostyanov,YevgenySBS-Agrobank:floatsEurobond;SmolenskyformsSBS-Agrobank,crashof‘98;CentralBankstabilizationloansand;depositorsandSchekochikhin,YuriScience: Chubais and economic research; Foundation of Youth Initiative;Institute of Control Sciences; Jews and; Mendeleev Institute of ChemicalTechnology; NTTMs and; politics and; vnedrenie and. See also Economics;TechnologySecurities: absence of market regulation and; Berezovsky bearer certificatescheme; Mavrodi bearer certificate scheme. See also GKOs; Governmentbonds;RussianSecuritiesCommissionSecurity services: Berezovsky; businessmen; Gusinsky; Khodorkovsky;KorzhakovandYeltsin;PutinSelf-financing:factoriesandLuzhkovplan;Khodorkovskyand;theKomsomol

andSevodnya;bankers’warand;closes;firstappearsSevodnyaPressShadoweconomy:carpartsand;cooperativesand;thesvyazinetworkShakhnovsky,Vasily;ClubonSparrowHillsandSheindlin,AlexanderShleifer,AndreiShneider,MikhailShortages:theblatnetworkand;carparts;constructionand;factoriesand;vs.free markets; vs. Gorbachev; Gosplan and; grain; vs. price liberalization;storesand;vegetablebasesandSibneftoilcompanySidancooilcompanySinyavsky,AndreiSkuratov,YuriSmith,AdamSmolensky, Alexander; avisos and; banking empire; Berezovsky and Biblesand buys Agroprombank; capital assets and; capital flight and; Cathedral ofChristtheSaviorand;ChubaisandclosesSBS-Agroandslipsfromview;ClubonSparrowHillsand;asaconstructionboss;currencyspeculation;distrustofthe state and; establishes Moskva–3; foreign loans to; Kiriyenko defaultmoratorium and; loans for shares and; loans to farmers and; as a printer;protocapitalismand;startsBankStolichny;thestateand;Yeltsinand;youth.SeealsoBankStolichny;SBS-AgroSmuggling;BiblesSobchak,AnatolySocialism:andbankers; capitalismvs.Gosplanand;disenchantmentofyouthwith;economicresearchand;vs.Hayek;hoardingfoodand;periodofmarazm;stealingand;vnedrenieandSociety:Berezovskyon;cashauctionsofstatepropertyand;entrepreneurshipand;journalistsand;themiddleclassanddevaluationoftheruble;themiddleclassandGusinsky.SeealsoMoscow;Russianpeople,theSolnick,StevenL.Solovyova,ValentinaSoros, George; bankers’ war and; Berezovsky and; letter to the FinancialTimesand;philanthropyof;Svyazinvestauctionand

Soskovyets,Oleg;YeltsinreelectioncampaignandSouthKoreaSovershennoSekretno,newspaperSovietCulturalFoundationSovietUnion;alcoholism;vs.theBeatles;CentralCommitteevs.art;doubtsinWest about Gorbachev; financial system; gas and oil fields; Gosplan vs. thesupplyanddemandmarketsystem;vs.rockmusicStalin,Joseph;destructionoftheCathedralofChristtheSaviorState,the:Avtovazand;bankingsystemunderGorbachev;asthebiggestsourceofcapital;booksdeemedsubversive78;careofthepeopleand;citytransportvs.privateenterprise;cooperativebanksandgovernmentministries;distrustofthe peasantry and; Gaidar vs. Naishul privatization plan and; vs. individualcommercialactivity; institutionsandmarketeconomy;vs. Jews;NTTMsand;paternalism,distributionof resourcesand;privatizationand theftofpropertyof;relianceonauthorizedbanksassubstitutesforacentraltreasury;shortagesand stores of; Smolensky and; television Channel 1 (Ostankino); televisionchannels; vs. tycoons;weak state and rule of law. See also Auctions of stateproperty;Centralplanning;PrivatizationStateCommitteeonScienceandTechnologyStateInstitutefortheStudyofTheatricalArtsStatePlanningCommitteeStatePropertyCommittee;loansforsharesandStepashin,SergeiStock market: boom of ‘97; Yukos trading halted on the Russian TradingSystemStocks:Avtovaz;Khodorkovsky offers shares inBankMenatep;Naishul andprivatization;offshorenetworksandsharedilution;oilandforeigninvestors.SeealsoLoansforshares;SecuritiesStores;inHungary;Luzhkovand;military;raspredelenieand;vegetablebasesandStreletsky,ValerySucher,BernieSupremeSovietofRussia;approvesChubais’privatizationlaw;inflationand;journalistsandSurgutneftegazSurkov,Vladislav

Svyazinvest.SeeAuctionsofstateproperty,SvyazinvestSystema

Tarpischev,ShamilTatum,PaulTaxes;bartereconomyandChubaisandMoscowandTelecommunicationsSvyazinvest;Systema.SeealsoAuctionsofstateproperty,SvyazinvestTelefonicaSATelevision;CenterTV;crashof‘98and;Dobrodeyevand;Dorenkoand;NTVgoes on the air; and power of; Putin and; vs. Yeltsin; Yeltsin reelectioncampaignand.SeealsoNTV;ORT;OstankinoTelevision advertising: AVVA certificates; Bank Menatep; capitalism newvocabulary and; crash of ‘98 and; MMM; Moscow; NTV; ORT; Ostankino(Channel 1); privatization vouchers andChubaisYeltsin reelection campaignandTikhonov,VladimirTimofeyev,LevTogliatti;criminalwarsTokobankTomskneftoilextractioncompanyTradingcompanies;Interos;offshore,KhodorkovskyandTransferpricingTretyakov,VitalyTrusova,VeraTsereteli,ZurabTulaStateDramaticTheater

U.S.S.R.SeeSovietUnionUlyukaev,AlexeiUneximbank;Chubais-Kokh book scandal and; created; andCustoms serviceaccounts;dollar-forwardsand; InternationalBankforEconomicCooperationand

UnifiedEnergySystemscrashof‘98andforeigninvestmentUnitedStates:Chubaisvisit;Gorbachevand;GusinskytourUnitedStatesTreasury

Vasiliev, Dmitri; advises Chubais on privatization; becomes chairman of thesecurities commission; vs. Goldman Sachs; vs. Khodorkovsky; loans forshares and; resigns from commission; as securities regulator; on YeltsinsecondtermVasiliev,SergeiVegetablebases:centralplanningand;Luzhkovvs.spoilageVenediktov,AlexeiVideoInternationalVinogradov, Vladimir; Club on SparrowHills and; devaluation of the rubleand;Lebedand;onYeltsinreelectioncampaignfinancing;Yeltsinand.SeealsoInkombankVladislavlev,AlexanderVoloshin,Alexandervs.GusinskyVolsky,Arkady

Waller,GlenWealth:Berezovskyand;loansforsharesand;politicsandtycoons;theRussianpeopleand.SeealsoOligarchy;TycoonsWealthofNations,The(Smith)WestLBbank(Germany)WorldBankWorldEconomicForum

Yakovlev,VladimirYarmagaev,YuriYefanov,AlexanderYeltsin, Boris: announces privatization voucher scheme; arrives inMoscow;bankers’warand;vs.Berezovsky;BerezovskyandBerezovskyon;Cathedral

of Christ the Savior and; vs. Chubais; Chubais-Kokh book scandal and;Communistsattempttoimpeach;consentstothedevaluationoftheruble;coupagainstGorbachev and; vs. devaluation of the ruble; economics and; electedchairmanoftheparliament(1990);electionsof‘96and;firesChernomyrdin;fires Kiriyenko; fires Korzhakov; Gaidar brain trust and vs. Gorbachev; vs.Gusinsky;healthand;heartsurgery;Korzhakovand;leavesSovietCommunistParty; vs. Lebed; vs. Luzhkov; Luzhkov and; MMM; meets oligarchs; andPopov; privatization of oil companies and; privatizes television Channel vs.raspredelenie; reappoints Chernomyrdin briefly after crisis; referendum onreforms; replaces Primakov with Stepashin; replaces Stepashin with Putin;resignsfrompresidencyandappointsPutin;signspresidentialdecreeforNTVYeltsin,daughterTatyanaDyachenko;YeltsinreelectioncampaignandYeltsin reelection campaign (1996): arrest of Chubais campaign staff andBerezovsky and; black propaganda; budget; Chubais and; Chubais vs.Korzhakov; and financing of; first-round vote; Luzhkov and; polls; second-roundvote;televisionadvertisingand;Yeltsin’shealthand;andYeltsinplantoabandonYevstafiev,Arkady;YeltsinreelectioncampaignandYevtushenkov,VladimirSystema’sholdingsYouth:thedvorand;filmand;popculturevs.Sovietideology;rockmusicvs.authority;Yeltsinreelectioncampaignand.SeealsoKomsomol,theYouthsciencecenters(NTTMs)Yuganskneftegazoilextractioncompanyvs.Khodorkovskylosses(1996)Yukosoilcompany;cashvalue(2000);Dartvs.Khodorkovsky;Khodorkovskybuys majority control; Khodorkovsky buys partial control; merger withSibneftannounced;mergerwithSibneftfallsapart;profit(1996)sharevalue;statistics;tradinghaltedontheRussianTradingSystemYumashev,Valentin;Berezovskyand;YeltsinreelectioncampaignandYurchak,Alexei

Zaslavskaya,TatyanaZatulin,KonstantinZhiguli;Berezovskyconsignmentdeal;criminalwarsoveranddistributionof;falseexportsofZhiltsotsbank

Zibarev,AlexanderZiltruckfactoryZlatkis,Bella;vs.BerezovskyZverev,SergeiZyuganov,Gennady;vs.Chubais;vs. Jewishbankers;at theWorldEconomicForumZyuganovelectioncampaign(1996);vs.NezavisimayaGazetaand

DAVID E. HOFFMAN is a contributing editor for theWashington Post andForeignPolicymagazine.HecoveredtheWhiteHouseduringthepresidenciesofRonaldReagan andGeorgeH.W.Bush, andwas subsequentlydiplomaticcorrespondentandJerusalemcorrespondent.From1995to2001,heservedasMoscowbureauchief,andlaterasforeigneditorandassistantmanagingeditorfor foreignnews. Inaddition toTheOligarchs, he is theauthorofTheDeadHand:TheUntoldStoryoftheColdWarArmsRaceandItsDangerousLegacy,whichwasawardedthe2010PulitzerPrizeforgeneralnonfiction.HelivesinMaryland.

PublicAffairs is a publishing house founded in 1997. It is a tribute to thestandards, values, and flair of three personswho have served asmentors tocountless reporters,writers, editors, and bookpeople of all kinds, includingme.I.F.STONE,proprietorofI.F.Stone’sWeekly,combinedacommitmenttotheFirstAmendmentwithentrepreneurialzealandreportingskillandbecameoneofthegreatindependentjournalistsinAmericanhistory.Attheageofeighty,IzzypublishedTheTrialofSocrates,whichwasanationalbestseller.HewrotethebookafterhetaughthimselfancientGreek.BENJAMINC.BRADLEEwasfornearlythirtyyearsthecharismaticeditorialleader ofTheWashingtonPost. ItwasBenwhogave thePost the range andcouragetopursuesuchhistoricissuesasWatergate.Hesupportedhisreporterswith a tenacity that made them fearless and it is no accident that so manybecameauthorsofinfluential,best-sellingbooks.ROBERTL.BERNSTEIN,thechiefexecutiveofRandomHouseformorethanaquartercentury,guidedoneof thenation’spremierpublishinghouses.Bobwaspersonallyresponsibleformanybooksofpoliticaldissentandargumentthatchallengedtyrannyaroundtheglobe.Heisalsothefounderandlongtimechair of Human Rights Watch, one of the most respected human rightsorganizationsintheworld.

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LibraryofCongressCataloging-in-PublicationdataHoffman,DavidE.,1953–

Theoligarchs:wealthandpowerinthenewRussia/DavidE.Hoffman.p.cm.

Includesbibliographicalreferencesandindex.eISBN:978-1-610-39111-5

1.Entrepreneurs—Russia(Federation)2.Russia(Federation)—Economicconditions—1991–3.SovietUnion—Economicconditions—1985–1991.

HC340.12.H642001338’.04’0947—dc21

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