Russia's oligarchy tumbles downward Nation's tycoons lose their power in wake of ruble's decline

October 05, 1998|By Will Englund | Will Englund,SUN FOREIGN STAFF

MOSCOW -- Because of its towering, glimmering-green headquarters here, Russia's sprawling and powerful natural gas monopoly came to be known to admirers and critics alike as the Emerald City.

And its boss, Rem Vyakhirev, was the Wizard.

Vyakhirev himself said he liked the image. Gazprom, as the company is more formally known, became a domain unto itself in post-Soviet Russia, a Land of Oz that made the mighty tremble and left plain folks in awe. It dictated to the government and vaulted Vyakhirev, a grandfatherly lover of fishing and Russian folk songs who once wanted nothing more than to run away to sea, into the ranks of the tycoons who sat at the heart of Russia's peculiar capitalism.

In the seven years since the end of the Soviet Union, fewer than a dozen men amassed enormous wealth, strung together far-flung empires, bought the Russian press outright, and came to wield tremendous power. They rose through connections, patronage, charm, intimidation and an adroit use of other people's money. They maneuvered the Kremlin into handing out vast portions of the Russian economy, through privatization.

They were called the oligarchs.

Yet it came tumbling down, because there was something about Oz that all the wizards seem to have forgotten.

Last spring a young man named Sergei V. Kiriyenko was anointed as prime minister just when it appeared that the Russian economy was in trouble. His role, it now seems evident, was to play the fall guy, taking the unpopular but necessary steps to save everyone's investment. But he did something else: He was Toto, pulling the curtains aside and showing the world that the whole thing was a fraud.

On Aug. 17, Russia defaulted on its pyramid of debt, and took the banks that had feasted on the debt down with it. The Russian economy is following.

Most of the oligarchs managed to stash personal fortunes abroad during the avalanche, but the financial structures they built are paralyzed and broke. Kiriyenko was swept aside, but so was their grip on power.

Vyakhirev was left with more than his comrades, because Gazprom is a real company that sells a real product. The others -- men like Vladimir Potanin, Alexander P. Smolensky and the manipulative Boris A. Berezovsky -- have little to show for their gilded decade but an acquired taste for fine Cognac, expensive cars and vacations on the Cote d'Azur.

'Puppet show has ended'

Something else has collapsed, too, says Lilia Shevtsova, an analyst with the Carnegie Moscow Center. That is the myth of the oligarchs, a myth that they themselves, through their press holdings, actively encouraged.

"But the oligarchs were not oligarchs in fact," Shevtsova said. "They were favorites. It was all court politics."

They were not like America's Vanderbilts or Rockefellers or Carnegies. They were as ruthless, but built nothing. Their success depended on the extent to which they could rely on the government to fuel their wealth. When the government's finances went south, theirs quickly followed.

"This kind of puppet show has ended," said Shevtsova.

The idea of the oligarchs began to attract attention in late 1995, when a group of bankers got together with Anatoly Chubais, in charge of Russia's privatization program, and devised what was called the loans-for-shares plan. In exchange for loans from the banks, the government would deposit, in trust, shares in publicly owned companies. When the government didn't pay back the loans, as everyone knew it wouldn't, the banks took the shares for a fraction of their worth.

Potanin himself temporarily left Oneximbank, one of the participating banks, and took a post in the economics ministry, where he oversaw the government's inability to redeem the shares.

But by this time they were already wealthy and adept at playing the inside game. The men who came to be known as the oligarchs had perfected the gift of grab several years earlier.

Several rose to prominence strictly through dealings in finance. Vladimir Gusinsky, a one-time theater director, produced a cultural program for the 1986 Goodwill Games and in 1989 put his experience to use setting up Most Bank. Smolensky started off in 1987 with a "cooperative" that bought construction materials at subsidized state prices and sold them at vastly higher market prices. With his profits he established Stolichny Bank. In 1996 the government asked him to take over a surviving Soviet-era agricultural bank, and the result was SBS-Agro, the second-largest bank in Russia.

Not everyone worked as hard. Potanin, a former junior bureaucrat in the Soviet Ministry of Foreign Trade, set up a bank to handle overseas trade in 1992 and found himself blessed with a torrent of business. Mikhail Khodorkovsky established his Menatep Bank in 1988 with money from the Komsomol, or Young Communist League.

Unconventional methods

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