Hard capitalist lesson may be last dividend of Russia's largest investment firm

July 28, 1994|By Will Englund | Will Englund,Moscow Bureau of The Sun

MOSCOW -- Besieged by thousands of anxious investors yesterday, Russia's largest investment company teetered on the brink of something dramatic -- but no one knew quite what.

Was it the collapse of a fraudulent pyramid scheme? A manipulation of stock prices dramatically downward? Or perhaps the manipulation of the investors themselves, pawns in a larger struggle between company and government?

In any case, Russia has clearly opened a new chapter in its crash course on capitalism.

The company, called MMM, had been the shining ideal of the new market economy. And over the past six months it had inflated a particularly enticing and dazzling bubble.

It promised returns of up to 1,000 percent, and it signed up between 5 million and 10 million willing investors, ordinary people who eagerly forked over their cash and didn't stop to ask too many questions.

Indeed, MMM's share price soared 50-fold in the first six months of this year, surpassing even its promises.

But on Tuesday, when the investment company stopped redeeming its own shares, the rush was on.

Thousands of people descended on its headquarters -- perhaps 20,000 -- to ask for their money back.

The government said flatly that MMM was a pyramid scheme whose promises finally outstripped its ability to sign up new suckers and that its collapse should surprise no one.

The crowds kept up their watch outside its headquarters building in southern Moscow.

They sprawled on the grass, climbed atop sidewalk kiosks, traded rumors on the street. Traffic police cursed as more and more cars brought more and more people to the scene.

Kiosk vendors did a terrific business, profiting from adversity. They fueled the masses with bananas; peels were everywhere underfoot.

"It's the beginning of the end," moaned a young woman who gave her name only as Yelena.

But in late afternoon the investment company began letting in a trickle of people to cash in their shares. By 6 p.m. just 100 had been admitted, from a list of more than 5,000, but it was enough to set people thinking.

Maybe something else was going on here.

MMM always had the most brilliant ads on TV. One showed a backhoe operator who used the profits from his shares to pay for a vacation in San Francisco.

The company had endeared itself to Muscovites by paying the city to let everyone have a free day on the subway -- twice.

People flocked to join up, in Moscow and around the country: people like Vladimir Zhmurov, a construction chief who wanted money for a dacha, or Ilya Malamud, a graduate student hoping to pay for a summer vacation.

It had all the hallmarks of a classic pyramid scheme, like similar FTC schemes that have flourished among the unsophisticated populations of Eastern Europe.

"This is a brilliant example of how millions of people are duped by high quality advertisements into buying paper which is worth nothing," Alexei Vlasov, president of the Russian Commodities and Raw Materials Exchange, told the Itar-Tass news agency.

The money came in -- every week enough to pay off handsome returns on earlier shares -- but how long would it continue? And there was something else going wrong: MMM had tax problems.

The government now says the company owes about $25 million. Last week it began issuing warnings about MMM and pointing out that it was not going to bail out investors in the event of a bust.

The company's president, Sergei Mavrodi, took out full-page newspaper ads in which he talked about the "new political power" inherent in the 40 million people who are either shareholders or in the families of shareholders.

"It's impossible for anything now existing to oppose it," he said.

In a letter to tax officials published in Rossiskaya Gazeta, he warned of "revolution, civil war or something else" if people are

"robbed" by an MMM collapse.

This is the key to the events of the past two days, said Mr. Zhmurov, the construction chief, as he surveyed the nervous but quiet crowds outside MMM's headquarters.

"All this fuss is artificial," he said. "They're trying to concentrate people here to pressure the government. He's threatening the government."

"Our people are politically passive," said Mr. Malamud, the graduate student.

"But add economic pressure and that gets them out on the street.

"OK, now they've let 100 people in, so they lost a little, but they've established a reputation -- especially with the government."

And if the government doesn't flinch, and MMM goes under?

"We are children at business," said Mr. Zhmurov. "This will be good practice for us. You only learn through adversity. You know, we survived the war, the siege of Leningrad. We can certainly survive MMM."

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