Putin’s People. Catherine Belton

from the KGB controlled networks, and without them nothing would move.’[85]

      At first, many of the senior KGB operatives involved in forging Russia’s market transition went to work for the young tycoons they’d helped create through Gorbachev’s perestroika reforms.[86] They were mostly there simply to take their cut, but in some cases they had control. ‘They said, “You’ll make money and kick it back to us,”’ said Yury Shvets, the former foreign-intelligence operative.[87]

      But as the young tycoons gained wealth and power under the market reforms launched by Yeltsin’s government, gradually they began to eclipse their former sponsors in the KGB. A new Russia seemed to be emerging, in which the former Komsomol members became brash symbols of the new capitalist age. Khodorkovsky and his team from Menatep even issued a manifesto, issuing 50,000 copies of a screed handed out on the streets that proclaimed the virtues of getting rich: ‘Our compass is profit. Our idol is his financial majesty capital.’[88] Their goal was ‘to become billionaires’, and they wanted to demonstrate that there was nothing wrong with getting wealthy after decades in which making a profit was considered a crime. But they benefited from an inside track to riches from the start.

      The market reforms of Gaidar’s new government aimed to bring the market to Russia as fast as possible – regardless of the consequences. They were encouraged by a team of American economists from Harvard led by Jeffrey Sachs, who hoped to emulate the success of so-called ‘shock therapy’ reforms in Poland, where two years before a rapid transition to the market seemed to have been successfully launched.[89] But in Russia, the legacy of the Soviet state weighed far more heavily. Gaidar’s market reformers were in a minority, and the corrupted system in which they launched the reforms only further warped the economy. Only those, like Khodorkovsky, who’d set up banks in the final years of the Soviet Union were in a position to benefit. For a while, however, the American economists seemed to go along with that. They believed they were helping create a new class of entrepreneurs, and seemed ready to do anything that would help break the hold of the Soviet old guard.[90]

      When the Yeltsin government freed prices overnight on January 1 1992, lifting decades of Soviet controls, the young tycoons made money, while the population and the government struggled to survive. The price-freeing unleashed a devastating bout of hyperinflation, as suppliers and producers struggled to overcome the shortages long built into the Soviet economy. Unlike in Poland, where inflation had soon settled after an initial surge, Gaidar was contending with a wily old-guard central bank chief, Viktor Gerashchenko, who’d once worked at the pinnacle of the Soviet foreign-bank network funding the operations of the KGB, and who now continued to print money no matter what. Prices of consumer goods soared by 400 per cent, sometimes many times more. While the hyperinflation ravaged the government’s spending power, and wiped out what little savings the population had, Khodorkovsky and other young tycoons were able to hedge against devaluation. They could access hard currency through their banks, and were able to swiftly transfer any rouble income into dollars.

      The tycoons also benefited from the next planned market reform of the Gaidar government, the privatisation of state enterprises. The only people with funds to participate in the so-called mass privatisations were the narrow elite who had already taken over much of the enterprises’ cash flows under Gorbachev’s perestroika reforms: the young businessmen from the Komsomol, the black marketeers, the organised-crime groups, the KGB and the state directors.

      Privatisation at a time of hyperinflation could only further concentrate the country’s wealth in the hands of this small group, said Grigory Yavlinsky, one of Russia’s most principled economists, who’d argued strongly for more gradual reforms. ‘How is it possible to have privatisation when money has been wiped out as an institution? There can only be a criminal privatisation. The next step was criminal privatisation.’[91]

      ‘When Gaidar tried to conduct the first privatisations, everything had already been seized,’ said Gleb Pavlovsky, a former Kremlin adviser.[92] ‘Gaidar’s biggest mistake was that when he began his reforms he considered that what was before him was still the Soviet economy of 1987. But already the Soviet economy did not exist.’ The Gaidar government had sought to keep the privatisation process open to all, by giving plant workers vouchers to take part in the sell-offs. But the workers were often forced to exchange their vouchers for cash, or even for bread, just to survive the hyperinflation.

      The new tycoons from the Komsomol benefited most of all when the Yeltsin government granted them access to deep stores of cash, without their having to lift a finger. Instead of having its own treasury, the government authorised the tycoons’ banks, including Khodorkovsky’s Menatep and Fridman’s Alfa, to hold strategic funds from the Russian budget on deposit. It was a get-rich-quick scheme for the chosen favourites of the Yeltsin regime. They could direct hundreds of millions of dollars in government funds into high-yielding investments, sometimes even into the privatisation auctions, while the government was left waiting for the disbursal of its funds. Vital programmes such as defence spending or aid for citizens half-abandoned in the crumbling industrial wastelands of Russia’s far north were delayed or simply unpaid, while the ruthless new bankers fobbed the government off with promissory notes. The government was being bled dry, while the new wolves of the Russian economy concocted elaborate schemes to avoid paying taxes or customs duties.

      Faster and more adept in the ways of the market than their one-time masters in the KGB, the young tycoons from the Komsomol were becoming a sort of Frankenstein’s monster, fast outrunning the men who had made them. The real turning point, when control of the economy appeared to transfer irrevocably into the hands of the new tycoons, came towards the middle of 1995. Russia was entering the final year before the first post-Soviet presidential elections, and the government’s coffers were empty. Wages and pensions were months in arrears, and Yeltsin’s approval ratings were terrifyingly low, at 6 per cent. The tycoons feared a return to Communism, that would strip them of their fortunes and could even land them in jail. Even more importantly, they’d long been eyeing the crown jewels of Soviet industry, the state’s biggest industrial giants. What they’d acquired so far was small-scale compared to the vast resources still under the control of the state.

      Vladimir Potanin, the smooth-talking son of a senior Soviet diplomat, who’d become one of the country’s major new bankers, concocted what seemed an ingenious scheme. He proposed that the young bankers offer to help out the cash-strapped Yeltsin government with a series of loans. As collateral, the tycoons would take stakes in a select handful of the nation’s biggest enterprises. The tycoons would manage the enterprises, and could sell off their stakes if the government was unable to pay the loans back. When the idea was first floated, outside observers scoffed that it would never gain any traction. The potential for corruption, they said, was too great.[93] It would be too easy for the bankers simply to sell the stakes to themselves.

      But the young tycoons had powerful friends in the Yeltsin government. Prime among them was Anatoly Chubais, the red-haired deputy prime minister and close Gaidar ally who’d been the architect of the privatisation programme so far. With strong support from the team of US economists, Chubais had been intent on breaking the hold of the state over the economy at any cost. Too much of industry was still in the hands of the state, of ‘red’ Soviet-era directors and the KGB, while the threat of a return to Communism seemed all too real. If the government signed off on the bankers’ proposal, it would create a major new class of property owners overnight, as well as filling empty government coffers with a proposed $1.8 billion in loans. The tycoons would then back Yeltsin to the hilt against the Communists to preserve their new wealth. Chubais believed it would signal a final victory for liberal reformers over the forces of the old guard.

      But the scheme would become one of the original sins of Russia’s market transition. It tainted everything, and opened the way for constant threats over the legality of the property the young tycoons acquired at that time. It became known as the loans-for-shares privatisations, an insider deal that transferred the nation’s resource wealth into the young bankers’ hands at a knockdown price. Far more financially nimble, and able to access much bigger pools of ready cash through the rapid growth of their banks and the government deposits they held, the young tycoons outmanoeuvred their former KGB masters. The combined forces of the KGB and the former Soviet directors managed