Heart and soul, the late Yeltsin still believed in his right to make decisions on the go. No amount of organizational streamlining could have gotten him to give it up.
A few changes were made in the Council of Ministers after the confirmation of Viktor Chernomyrdin by the Duma in August 1996. Vladimir Potanin, appointed first deputy premier for macroeconomics at Chubais’s behest, was the first private businessman to take high political office. Boris Berezovskii was the second when he was made deputy secretary of the Security Council in October. Chernomyrdin brought in miscellaneous red directors, and Viktor Ilyushin and Aleksandr Livshits moved over from the executive office. The cabinet was adrift, disparate, and, in Yeltsin’s view, “not capable of resolving the country’s slew of economic and social problems.”85
Only on March 17, 1997, did he intervene to replace Potanin with Anatolii Chubais and to recruit Boris Nemtsov, the photogenic governor of Nizhnii Novgorod province and longtime favorite of his, to work alongside Chubais as first deputy prime minister. Chubais (forty-two years old) and Nemtsov (thirty-eight) in turn selected like-minded members of their generation for many of the economic and social portfolios. The press labeled them the young reformers, and it was hard not to see echoes of the Gaidar team of the early 1990s.
There was, though, one difference: Yegor Gaidar as acting prime minister ran the show in the Council of Ministers in 1992; in 1997 Yeltsin would not take Chernomyrdin out of the premier’s chair and award it to one of the upand-comers. It would be another year before he would, and the delay cost them and him dearly. In his memoirs, Yeltsin defended the combination as a way to harness the talents of both sides: “to get [Chernomyrdin] going” by flanking him with “two young and in a good way pushy and aggressive” deputies who would keep him under “high tension and steady, positive pressure.” 86 The arrangement was too byzantine by half. Having learned his lesson and excluded antagonistic factions from his Kremlin sanctum, Yeltsin consciously wove them into the machinery of the government. Chernomyrdin still worked quite amicably with Chubais. He did not warm to Nemtsov and required constant reassurance from Yeltsin that his job was not in jeopardy. A specific source of tension was policy toward Gazprom, the hugely profitable gas producer Chernomyrdin had founded. Nemtsov supervised the energy sector and headed the energy ministry until November 1997, and made attempts to limit Gazprom’s operational autonomy. He also scuppered a deal under which the Gazprom president, a Chernomyrdin man named Rem Vyakhirev, would have acquired a large block of the company’s shares for a few million dollars. Nemtsov came to rue that he had not held out for the retirement of Chernomyrdin, and the hoopla he generated—such as his campaign to have bureaucrats driven only in Russian-made limousines—led Yeltsin to suspect he was not prime-ministerial or presidential timber. Chubais had the aptitude for the premier’s job but was not willing to ride roughshod over Chernomyrdin to get it, and in any event would have had difficulty gaining a majority in the Duma.87
Yeltsin got a kick out of demonstrating to the young reformers he had taken under his wing—and perhaps to himself—mastery of the Soviet functionaries who still predominated in the federal and regional governments. Mayor Luzhkov, long in disagreement with Chubais on privatization, decided to show his annoyance by fouling up Nemtsov’s registration for residency in Moscow, a communist-period formality still required in the capital and routinely expedited for newcomers at his level. Making small talk with Nemtsov, Yeltsin repeatedly asked him if the registration had gone through. Told that it had not, he at some point, with Nemtsov sitting there, picked up his hotline telephone, clicked the Luzhkov button, and without a how-do-you-do or explanation boomed, “You are behaving pettily, Yurii Mikhailovich!” and hung up. Nemtsov was befuddled: How would Luzhkov know what Yeltsin was talking about? Luzhkov was “a Soviet boss,” Yeltsin said. Leave him be, “young fellow”: Luzhkov would call the duty officer, ask who was in the president’s office, and do what was expected. Nemtsov’s registration went through the next morning. But Yeltsin did not identify completely with the Chubais-Nemtsov faction, as his clinging to Chernomyrdin showed. In one conversation, something in Nemtsov’s manner irritated him and Yeltsin accused him and Chubais of laughing at him behind his back and believing “that I don’t understand anything.” “Keep in mind,” Yeltsin said to Nemtsov, “that I am the president and you are simply boyars” (the nobles of Muscovy to Yeltsin’s tsar). “Yes, you are smart and you are educated, but all you are is boyars. I am not afraid of you. It is you who should be afraid of me.”88
All these intramural frictions make it impressive to a double degree that the young reformers, with a pat on the head from Yeltsin, put forward a program for reforming the Russian reforms and made a start on implementing it. The timing was auspicious in one regard: The decline in the country’s economic output had halted, and it experienced a boomlet of 0.8 percent growth in 1997. Its stock market was the best-performing in the world in percentage gains from the summer of 1996 through 1997. The benchmark RTS (Russian Trading System) index of publicly traded stocks, set at 100 on September 1, 1995, and having lost value in late 1995 and early 1996 in anticipation of a communist election victory (it reached a low point of 67 in March 1996), rose to 201 points by the end of 1996 and to a peak of 572 on October 6, 1997. In January 1998 the government redenominated the ruble, lopping three zeros off the old notes, in a sign of confidence that inflation had been conquered. It was understood on all sides that a new round of changes to build on these gains could not be accomplished by executive edict. After issuing a high of thirty-eight decrees per month in 1996, many of them election-related, Yeltsin lowered his monthly output to sixteen in 1997, eighteen in 1998, and twelve in 1999, well below the pace of his first term.89 The volume of legislation was up at that same time, and it was laws, adopted by the federal parliament and approved by the president, that Russia required to underpin its market economy.
The progress made was skimpy, for one simple political reason—lack of support in the legislature elected in December 1995. An attempt to tie old-age pensions to workers’ lifetime earnings rather than rely exclusively on the public purse, on the model of a number of Latin American countries, was debated by the Duma in 1997, then taken out of consideration by the government in July 1998, when it was apparent that it would not pass. A new tax code had been under discussion since 1995. It was with difficulty that Yeltsin got the leftist and nationalist majority to approve a first part, setting out general principles and duties, in July 1998; the remaining parts had to await a new president and a new Duma. Yeltsin was especially eager to get through the legislative pipeline a framework that would permit the commercial sale of rural land and knock down barriers to private farming. A conservative land code drafted by socialistic deputies from the Agrarian Party passed the two houses of parliament in 1997 but was blocked by a presidential veto that July. Yeltsin emceed a forum on the statute with lawmakers and interested parties in December. “Life itself” and the failures of collectivized agriculture had put the question on the agenda, he said, and he was prepared to accept restrictions on the resale of land and a ban on foreign ownership. 90 The compromise bill that emerged fell one vote short of the majority needed for adoption in the State Duma on July 16, 1998. This proposal, too, was in abeyance until 2000.91
In the first leg of Yeltsin’s second term, the most portentous event in Russia’s evolving political economy was, on the face of it, one of the more esoteric. On July 25, 1997, the government entertained bids for a 25 percent share in Svyazinvest, a company formed in 1994 to hold the assets of regional telecommunications firms. Chubais and Nemtsov organized the equity sale to revive the privatization process and to help with the budget deficit, and did it in such a way as to prevent the pitfalls of loans-for-shares. Bids were submitted to a state auctioneer (the property ministry), and they were sealed, making collusion difficult. Nemtsov wanted the new rules to signal a break with what he called “bandit capitalism”; although Chubais did not use this phrase, he
agreed with the sentiment and with the criticism of the corruption bred by the loans-for-shares mechanism. Two groups entered bids, one led by Vladimir Gusinskii of NTV and one by Vladimir Potanin, now back in the private sector. Potanin, who partnered with American trader George Soros, was victorious with an offer of $1.87 billion; Gusinskii bid $116 million less and lost.
That would have been the end of it were it not for the refusal of Gusinskii, “blinded by greed and wounded pride,”92 to accept the result. He had not participated in loans-for-shares, unlike Potanin, and felt it was his turn at the trough; being in the media business, he saw Svyazinvest as a natural fit. Boris Berezovskii, whom Potanin had outmaneuvered to get control of Norilsk Nickel in 1995, was barred as an officeholder from formal involvement, yet took part informally as an impassioned ally of Gusinskii. Berezovskii and Gusinskii had their press and television outlets vilify Potanin, the auction, and the integrity of the public servants, chiefly Chubais, who stood by it.
Much ink was expended in the late 1990s on the thesis that Russian big business had “captured” the post-communist state and subordinated it to its purposes.93 The Svyazinvest fiasco, and Yeltsin’s role in it, suggests the outcome was more complex than that.
In their several prior encounters with the president, the moguls gathered the impression that he was well disposed toward them. Yeltsin, Mikhail Khodorkovskii said in an interview in 2001, looked upon the oligarchs the way CPSU bosses used to see members of the Komsomol—as individuals of a different generation, with strange opinions, perhaps, but on the right track and “following the defined rules of the game.” Mikhail Fridman of Alpha Group felt Yeltsin regarded them as “the product of his hands” and as “one of the instruments for realizing his plans,” and that he was sure “that all he needed to do was snap a finger and we would do what he said.” To Potanin, Yeltsin’s attitude was akin to that of a headmaster toward star athletes who sometimes break windows in the schoolyard: He approved of their talents more than he disapproved of their hooliganism. Yeltsin’s tsarist self-regard and playacting, all report, inoculated him against envy of their money and influence, and he was untouched by the anti-Semitism common in the old CPSU apparat (many of the most successful businessmen were of Jewish origin). 94 As it had been with other players, Yeltsin badly wanted not to appear beholden to the nouveau riche. He needed prodding to accept their help in 1996, and they would have donated almost any sum to fund his campaign if ordered to do so. Had he wished, Yeltsin without question could have financed his campaign from state coffers.95 After the election, he had no patience with warnings that the oligarchs were capable of causing him trouble. When he recruited Nemtsov from Nizhnii Novgorod, Nemtsov shared with him the perception that they were beginning to behave as if Yeltsin no longer counted. “Nonsense,” Yeltsin replied. “That is what they think.”96
Yeltsin received intelligence about the budding conflict over Svyazinvest and had Yumashev confer with Potanin and Gusinskii before July 25. Yumashev’s recommendation was that they divide the company down the middle—a notion hard to reconcile with the principle of market competition—but Chubais would not hear of it. One week after the auction, Berezovskii took advantage of a phone call Tatyana Dyachenko made to him on another matter to bend her ear on the injustice of the result.97 He addressed her in the second person singular and struck a cloying tone which she did not reciprocate.98 Dyachenko sounded politely receptive, although she did have doubts about Gusinskii’s belligerency. “Some kind of compromise” should be found on the case, she said, and on the whole the rules should require “normal competition” for state assets. Tatyana did not indicate her father’s opinion and Berezovskii did not ask her to influence it. When he opined that the minister for privatization, Al’fred Kokh, should be dismissed, she replied that would be up to Chubais, who supervised his department. Berezovskii went on to put in a good word for another cause close to his heart (and wallet)—a general amnesty for back taxes owing, with “a normal tax regime” instituted only after previous illegality had been forgiven. “Let me tell you with certainty,” he said knowingly, “no one [in Russia] has filed an honest tax return, except for the president, naturally.” Dyachenko took exception. Her entire family had paid all its taxes; a free ride for tax delinquents would be unfair to the upstanding majority of Russians; and, by some formula or another, business should pick up more of the tab for government.99 Berezovskii signed off by telling her he had been talking with “Valya” (Yumashev) and giving her his cell phone number. She had to ask him what codes to use to dial. The conversation demonstrated that the country’s best-known businessman had access to the president’s daughter and adviser in 1997, but also that they were not close and she had a mind of her own.
Whatever Dyachenko may have preferred, Yeltsin was opposed to reconsideration of the Svyazinvest auction, as Gusinskii and Berezovskii were demanding, but made oracular comments that sounded more critical of Potanin and his government backers than of the sore losers. He did not want to meet with the parties. Yumashev brought him around after an alarming article in the Berezovskii-owned Nezavisimaya gazeta painted Chubais as power-mad, Potanin as in cahoots with him, and the two of them as conspiring to find a “Trojan horse” candidate for president in 2000; in the interim, they meant to castrate Yeltsin politically, and would be much more devious at doing so than Aleksandr Korzhakov and Oleg Soskovets before them, who could not see “beyond the tennis court and the steambath” (no compliment to the president who whiled away so many hours with them in those locations). 100 Potanin’s Russkii telegraf and Izvestiya, which his conglomerate partly owned, replied in a like manner.
On September 15, in the Oval Hall of Building No. 1, Yeltsin hosted the third of his four roundtables with high-flying businessmen. At the table with him and Yumashev were five of the six (Gusinskii, Khodorkovskii, Potanin, Aleksandr Smolenskii, and Vladimir Vinogradov) who had conferred with Yeltsin in February 1996 (see Chapter 14), plus Fridman as a substitute for Berezovskii. Yeltsin maintained neutrality between Gusinskii and Potanin but tested Potanin with a barb about how much government money (from taxes and customs duties) he had on deposit in his bank. Hearing that, Potanin feared the Svyazinvest auction was going to be overturned. Then Yeltsin pulled back. Potanin was at once relieved and let down: “Essentially, [Yeltsin] said, ‘Guys, I have had a look at you, and in principle I remind you that I am the chief here, so everybody should go ahead and live in friendship !’ But nobody was arguing with him about whether he was the chief. The chief is the chief. How were we to live from now on, and by what rules? He didn’t explain anything about the rules.” Yeltsin was to recount in his memoirs that he could tell as the conference broke up that no good would come of it. He does not say why. Be it out of fatigue, confusion of the oligarchs with state employees whose standing depended completely on him, or some other cause, Yeltsin had failed to lay down the law.101
For the Svyazinvest combatants, the only law for the moment was the law of the jungle. President and government did not act to change the auction result. After another six weeks of mudslinging, Yeltsin on November 4 agreed to a proposal by Chubais and Nemtsov to remove Berezovskii from his position in the Security Council. The decisive consideration was conflict of interest: He was mixing business and politics. Yeltsin was disgusted with Berezovskii and made a show of firing him by minor executive order (rasporyazheniye) rather than full-dress presidential decree (ukaz).102 On November 12 Berezovskii and Gusinskii struck back by releasing “kompromat,” compromising material put together by their corporate security branches, to the effect that Chubais and four of his young reformers had accepted honorariums of $90,000 each for a not-yet-written book on the history of Russian privatization. The money had come from a firm that was soon to be purchased by Potanin. Within days, Yeltsin felt compelled to dismiss all of the coauthors except Chubais, who had to relinquish his second cabinet title, as minister of finance, on November 20.103 Nemtsov was also lowered a notch, losing his second position as minister o
f fuel and energy to Sergei Kiriyenko. After that, writes Yeltsin, “My meetings with Chubais became much less frequent.” 104 Nemtsov noticed the same, as he dropped from two audiences a week to one every several weeks.
The Svyazinvest imbroglio turned into a loss maker for all, and not least of all for Boris Yeltsin. On business’s role in the new politics, he had to concede after the fact that he “did not immediately grasp the scale of this phenomenon and all the dangers it posed.”105 The winners of the auction did not make money from it, and George Soros sold his stake in 2004 at a loss. The oligarchs as a group also lost and were revealed, not as omnipotent, but as selfish and even rapacious and as politically inept—disunified, shortsighted, overplaying their hands. The scandal would have echo effects for years to come. After the 1996 election, it had been understood in all quarters that the cream of Russian business and the Yeltsin government, to quote Nemtsov, were “in the same boat.”106 The question was now not only about who had captured whom but about whether anyone would be moving the boat forward, and toward what destination. In certain regards, as the Washington Post’s David Hoffman has written, the business elite and Westernizing politicians, with Yeltsin looking on at a regal remove, had been functioning as a comfortable club. When the members came to blows over one obscure company, “the club of tycoons and reformers began to fall apart.”107
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