Customer Reviews

The Oligarchs: Wealth And Power In The New Russia

5 star:		(7)
4 star:		(5)
3 star:		(1)
2 star:		(0)
1 star:		(0)

 

 

David Hoffman's "The Oligarchs" documents in great detail the rise of 6 businessmen--Aleksandr Smolensky, Yuri Luzhkov, anatoly Chubais, Mikhail Khodorkovsky, Boris Berezovsky and Vladimir Gusinsky--who became the "oligarchs" who shaped the political and economic landscape of the New Russia. They were merely ordinary Russians until the Soviet Union collapsed. So how did a mere handful Russians end up controlling such an epic proportion of Russia's economy and have such great influence in its politics? And how did they manage to rise at Russia's decline? Hoffman's book will answer these questions by piecing together extensive research and interview to create a well-balanced, serious but at the same time, a downright fun and readable book. "The Oligarchs" is a landmark.

Much better than I expected, a serious work with a great deal of research invovled. It avoided the typical lurid embellishments of the genre, and also made the point of the important period of transistion in the Gorbachev period, where nascent Russian capitalism started. It lacks somewhat in that it focuses on only six men, and they are of varying importance in the post-Yeltsin period. As Putin reportedly said when asked about Berezovsky--"Who?" Nevertheless, a good job, an interesting read and thankfully avoids falling into the tabloid style of so much of the literature on the topic.

The most stunning suggestion in this chronicle of the making of new billionaires in the Yeltsin era is the theory that in his mid-twenties Mikhail Khodorkovsky caused the bankruptcy of the Communist Party. When it was discovered that billions in cash and gold were missing, the treasurer jumped or was thrown from a window. Several weeks later the previous treasurer jumped or was thrown from the same window.

Although the operational details are left to the reader's imagination, we are told that beginning in the late 1980's the young Khodorkovsky set up "amorphous scientific technical" cooperatives that never did any scientific or technical work. Like an alchemist, he manipulated these shells in order to trade non-cash Soviet credits for actual rubles and even hard currencies from the Treasury. The rubles were used to throw lavish parties and to extend Khodorkovsky's network of shells. The hard currencies were deposited in Swiss and other foreign banks. One investment banker at Riggs Valmet Bank said Khodorkovsky had been a client since 1989.

Today Khodorkovsky remains in prison. Boris Berezovsky emigrated in October 2000 a few weeks after Vladimir Gusinsky and two years before Khodorkovsky's arrest. The other Oligarchs have either lowered their profiles in Russia or left the country permanently in fear of prosecution--all except Yuri Luzhkov, Mayor-for-Life of Moscow since June 1992 when Yeltsin appointed him to the position. "As he built his Empire, every storefront and every factory was a potential source of revenue." Luzhkov may not be a billionaire, though his wife, Elena Baturina, a former factory worker, earned 31 billion rubles (over $1 billion, primarily from public contracts) in 2009, according to Forbes. Yet his salary--8 million rubles a year ($270,000)--is unusual among Russian public employees at any level. Luzhkov's Chechen henchmen have been such effective enforcers that President Yeltsin publicly accused him of running a mafia city. He ignored Yeltsin's Kremlin when he wasn't openly battling it. Yet in 1996, it suited both to plaster all of Moscow with posters of smiling Yeltsin and Luzhkov together. (For the 65th anniversary of Victory Day 2010, Luzhkov spoke of putting up posters of Stalin. One can only guess who vetoed that embarrassing idea with the World War II allies participating for the first time.)

This summer while Moscow choked in record heat and thick smoke from raging wildfires, Luzhkov blithely continued his holiday. High profile contract murders go unsolved but if an unwelcome demonstration is organized in Moscow, Luzhkov springs into action. He bulldozes and fences the planned street or park location. This week Triumph Square is fenced to prevent opposition protests there. Luzhkov is the godfather of the city-state that is Moscow.

Befriending Luzhkov was crucial to the success of Vladimir Gusinsky. Failing to make a career in the theater, he became a fixer, helping western businessmen negotiate the unfamiliar maze of bureaucratic Moscow. He set up a bank with the advice of Lehman Brothers after he and Luzhkov toured the US in Lehman's private jet.
.
One important contribution of this book is the spotlighting of the tutorial provided by George Soros and other American and European investment bankers. From them the young tycoons learned to deal with government "in one crude way: bribery and coercion." It appears that extra-legal appropriation was equally important in building their power networks and fortunes. To keep what they had appropriated, they built private "armies and intelligence agencies..." Force was not the primary method of coercion. The kompromat (compromising evidence) often "...manufactured--using forged documents..." was a preferred tool. It could easily be published or simply revealed to the victim who would comply with any demand to keep the kompromat quiet. Was poisoning Litvinenko just another clever kompromat?

Forbes Editor Paul Klebnikov titled his book about Boris Berezovsky, "Godfather of the Kremlin." He documented Berezovsky's relationship with Chechen gangsters and close proximity to murder victims until Klebnikov himself was murdered one night in 2003 on a Moscow street. Victims included journalists who spotlit unsavory deeds or means of acquiring his wealth, business associates who were in his way or to whom he was indebted and even a flamboyant nuisance like Litvinenko, who depended entirely on Berezovsky for his own and his family's existence. This phenomenon did not end when Berezovsky settled in London. The unlikely death of Badri Pataratsishvili 4 hours after he was with Berezovsky reminded some of the death of 39-year-old Boris Fyodorov, a founding shareholder of one of Berezovsky's companies. No murder charges have ever been filed against him, so they must be a series of coincidences.

Berezovsky is the most visible Oligarch in exile, just as he was the most visible inside Russia in the Yeltsin era. He acquired ownership of the vast Ostankino broadcast television network by promising to turn it into a Yeltsin propaganda machine. He controlled the news coverage to make Yeltsin popular throughout all the Russian time zones, assuring electoral victory if ballot fraud didn't. "By dictating the news coverage, Berezovsky could become a power broker." And Kremlin power broker he became, seeing himself as the ultimate ruler to the point of choosing Prime Ministers and even terminating them. Prime Minister Chernomyrdin learned his fate on Sunday night when Berezovsky predicted the change during a TV interview taped several days earlier at his luxurious dacha. Chernomyrdin was fired the next morning, Monday, March 23, 1998.

Alexander Smolensky had no fancy education, nothing more than a dump truck. Yet somehow he formed a cooperative, Moskva 3. His SBS Agro banking group grew out of Stolichny Bank which he created without knowing anything about banking. Instead of making loans, he engaged in currency speculation and pumped up the value of his bank by owning shares in the other new banks while they owned shares in Stolichny, creating the fictional value. No financial reports were published and his activities were conducted in complete secrecy. In the early 1990's fake avisos from Dagestan and Chechnya ordered Russia's Central Bank to transfer millions of rubles to Stolichny Bank. By the time it was discovered they were fake, $30 million had been transferred. Nevertheless, no charges were brought against Smolensky before he emigrated.

Anatoly Chubais is the odd man out--neither a billionaire nor an exile--but he was once the bureaucrat who made billionaires through his giveaways of Russian national assets. Growing up in a patriotic Soviet family, he only reluctantly gave up Soviet orthodoxy after intense debates with fellow economics students about the shortage economy of socialism.

In the epilogue to this chronicle of the Soviet origins and rise of six prominent men in the Yeltsin era, the author quotes the subsequent President at a 2001 news conference. Putin responded to a question about his former supporter, "Boris Berezovsky--who's that?'

David Hoffman, the author of this fascinating book, intends to give us a portrait of dynamic, progressive entrepreneurs. But he actually gives us a picture of greedy criminals.

Russia's privatisation programme was huge, rapid and unprecedented. By 1996, 18,000 industrial enterprises, 80% of the total, employing 80% of Russia's industrial workers, producing 90% of Russia's industrial output, had been privatised.

Russia's 1992 Privatisation Programme, which the Russian Union of Industrialists and Entrepreneurs fought for, allowed directors and workers to buy 51% of the voting shares in their organisation, at a nominal price, using the enterprise's own funds. All were given vouchers, which could buy shares.

All too often, workers agreed not to interfere with the management, in exchange for promises of job security. Often, managers bought workers' shares before they had any market value, or outbid the workers, in collaboration with banks. In some cases, President Boris Yeltsin issued special decrees, excluding outsiders.

Factory managers used cooperatives, joint ventures and later, shell companies and offshore havens to leach cash and raw materials out of public enterprises. They created banks and trading companies that seized the factory's output and put the profits into their offshore accounts. Law and order were shredded.

These management buyouts led to short termism, parasitic profits (not productive investment, not rebuilding), asset stripping and capital flight (totalling possibly $150 billion between 1991 and 1999). Russia's wealth, produced by its workers, went into thousands of offshore bank accounts, real estate holdings and offshore companies.

For example, in 1993 Boris Berezovsky, Yeltsin's friend, bought 35,000 Ladas at low export prices from the producer Avtovaz, Russia's largest car factory, paying 10% down, the rest to be paid 30 months later in a time of huge inflation, nearly bankrupting the producer. He then sold them to Russians at high market prices, making $3000 a car, in a $105 million deal. Later, Berezovsky bought a third of the company for just $3 million, in a one-bidder auction. Berezovsky loaned the government $100 million for 51% of Sibneft, Russia's sixth biggest oil company, in 1995, and sold it to himself 18 months later for $110 million.

Anatoly Chubais, head of the State Privatization Committee, said of Russia's capitalists, "They steal and steal and steal. They are stealing absolutely everything and it is impossible to stop them." By 2002, five capitalists controlled 95% of Russia's aluminium, 18% of her oil, 40% of her copper, 20% of her steel and 20% of car production. The Mafia ran nearly half the private sector and owned half of Russia's largest banks. Criminal gangs controlled 80% of Avtovaz's output, which did not deter General Motors from starting up a joint venture with the giant car company.

"In sum, neither the workers nor their unions have much power over privatisation", said a US privatisation adviser. By 1999, 38% of Russia's people existed below the poverty line. 90% of the people endured worsening conditions, while the handful of arrogant capitalists made colossal profits by crime and corruption.

Hoffman did a good job. Six main characters, Smolensky the Banker, Luzhkov the Mayor, Chubais the Economist-reformer, Khordorkovsky the oligarch, Berezovsky the Master Mind, and Gusinsky the TV Media King, controlled the Russia Yeltsin-regime economy. Many of them are Jewish, started from humble beginnings and got rich at the right place at the right time. Unfortunately, with 1998 stock crash, ruble devalutaion, Putin as the new president, their wealthy empires quickly fizzled. It is a must read for any one doing business in Russia.

This is a comprehensive and compelling exAmination of a fascinating phenomenon in Russia in the 1990's. The author's access to sources and ability to piece together the labyrinth of Russian political and business life is amazing and also a darn good read. This was a unique period in Russia and this book is one of a kind. I very much appreciate the extent of investigative journalism that went into producing the profiles as well as the clear explanations about how these men once attained such political power under Yeltsin.

This book is the best starting point for a novice's study of modern Russia. While much of the information is now dated, it provides a thorough description of the new Russian state following the fall of communism in the 1990s. The schemes and intrigues are explained in detailed but understandable terms. As a warning to those seeking a comprehensive overview of Russia "today," this book centers on the Yeltsin era, with Putin arriving only in the final pages. Following the book's 2002 publication, a whole new chapter begins in Russia. Read this book as the background for current works discussing what is unfolding there now.

I have just finished reading The Oligarchs - all 496 pages of it, and I just wanted to let anyone know who was thinking of reading it that it is an absolutely, incredible piece of quality work. I enjoyed every page.

A common mistake Western observers made was to think the Soviet Union's fundamental problem was a lack of democracy. They completely overlooked that the institutional structure of the political system cannot overcome the problem inherent in an economic system with no means of rational calculation. The Soviet Union had a number of leaders who promised political reform, but none was able to put bread on the table. In fact, the primary problem in the Soviet Union was socialism, and it is still far from being dismantled in the nations that once made up that evil empire.

The present "capitalist revolution" in Russia was best described by Russian publicist Viktor Kopin: it is a "quasi-democratic society with a quasi-market of quasi-legality and quasi-morality. The predominant conclusion out of this is that freedom leads to the destruction of spirituality, crime, pauperization of the masses, and the emergence of a class of fat cats."

The decades-long effort to eliminate markets destroyed the work ethic, the mass misallocation of resources through centralized investment, the demolition of the base for private capital accumulation, distorted means of economic calculation, and technology so obsolete that the capital value of industrial enterprises is zero or negative. Most heavy industries were built during Stalin's Industrialization Program in the 1930s and have not been updated since. A huge part of Russian industrial stock is as productive as an industrial-history museum.

Daniel Hoffman of the Washington Post has written a good introduction to the interregnum between the reign of the Commununist Party of the USSR and the Presidency of Vladimir Vladimirovich Putin. When Communism and the Russian legal system collapsed, the boldest and brashest quickly amassed fortunes in rather unusual circumstances.

Hoffmann's account is a good introduction to these times and to the "oligarchs" who shaped these times. His book is by no means a work of investigative reporting, being liberally littered with phrases along the lines of "we'll never know the whole story", "there must have been more going on, but there are no authorative sources," "we can only surmise that much of the episode is opaque." Nor do I understand why Hoffman considers mayor Luzhkov of Moscow, Moscow's answer to Richard Joseph Daley of Chicago, an "oligarch."

All the same, this is a well-written and entertaining book about an extraordinary time.