The Battle For Russia's Wealth
Russia's answer to J.P. Morgan could not be less like the eccentric, bulbous-nosed original. Vladimir O. Potanin is a shy, athletic man of 35. Holding court in his rosewood-paneled office on Moscow's Masha Poryvaeva Street, the president of Oneximbank quietly gives instructions to two strapping bodyguards at his door. Cool and controlled, Potanin is a standout in a group of dynamic businessmen who have seized huge slices of the economy.
Five years after the fall of Communism, bankers such as Potanin are at the center of a fierce battle for Russia's wealth. Having amassed cash in the chaotic early years of Russia's economic transformation, they have scooped up formerly state-owned oil, mining, forest products, and real estate assets to create sprawling financial-industrial conglomerates that resemble Japan's prewar zaibatsu or today's South Korean chaebol.
About 32 of these giants have taken shape, linking more than 500 factories and 72 banks and employing more than 2.5 million people. Dozens more are being formed. The top six already control Russia's oil, gas, and metals industries (table) and bring in the bulk of the country's hard currency.
These titans of industry and their companies are the symbols of the new Russian capitalism. They are big, with billions in assets and tens of thousands of employees. Each has political "uncles," or dyadyas, in the government to grease the bureaucratic wheels. And they use their contacts to win special privileges: tax concessions, protectionist measures against foreign competitors, exemptions from duties. Gas monopoly Gazprom, whose patron is Prime Minister Viktor S. Chernomyrdin, has paid hardly any taxes since 1993, for example. Its new headquarters, a $150 million skyscraper, towers over southwest Moscow.
Such jarring symbols of privilege and wealth are fueling a political backlash against capitalism. Russians who once made fun of doddering Communist leaders now joke about the New Rich, with their vulgar, free-spending ways. One anekdot features a biznesman who replaces his $160,000 Mercedes 600 every time its ashtray overflows.
But to ordinary Russians, the growing disparity between rich and poor is no laughing matter. Although stores, unlike before, are full of goods, many people can't afford them. To babushki selling vodka on street corners to supplement their pensions, every Mercedes that zooms past is a bitter reminder of an easier, more predictable yesterday.
Opponents of Russian President Boris N. Yeltsin are making the most of the discontent, with Communist Party chief Gennady Zyuganov leading the charge. Yeltsin's main rival in the upcoming presidential elections in June, the former schoolteacher rails about the "mass plunder" of Russia's wealth: "Our country is seriously ill....Workers are being abused, and the population is dying out or drinking more than ever before." One poll by Moscow's Institute of Sociology shows that 80% of voters are so fed up that they may vote Communist.
WITCH HUNT? Not surprisingly, the new Russian capitalists and their companies are a major target of the backlash. Zyuganov has called for a review of the controversial loans-for-shares privatization scheme, which last fall allowed banks such as Oneximbank to snap up lucrative shareholdings at rock-bottom prices in exchange for low-interest loans to the government. The program netted state coffers only $1 billion, less than half of its target. The public outrage was so great that Yeltsin dismissed its architect, Deputy Prime Minister Anatoly B. Chubais. Now, some businesspeople fear that a victorious Zyuganov would launch a witch hunt for free marketeers, jailing them or seizing their assets. "If Zyuganov wins, I am emigrating," claims one leading executive.
The upcoming election could turn out to be a defining moment in Russia's tumultuous transition to free markets. Zyuganov, who is leading in the polls, has pledged not to turn the clock back to full state ownership of the economy. But he might come under pressure from his party's left wing, which includes figures such as former KGB chief Vladimir A. Kryuchkov and former speaker of the Soviet parliament Anatoly Lyukanov. Both backed the 1991 coup against Mikhail Gorbachev in a frantic move to prevent the breakup of the Soviet Union and the return of private property. They might press Zyuganov to nationalize property, reintroduce price controls, or take over the banks.
There's no doubt that the stakes are high. Throughout Russian history, the battle for political power has revolved around the control of Russia's property--whether its vast mineral resources, its land, or access to the state budget. When the Bolsheviks seized power in 1917, they nationalized scores of privately owned enterprises. When communism collapsed in 1991, Yeltsin's government grabbed Communist Party offices, dachas, hotels, and businesses. And after other former Soviet republics declared independence, the Communist Party lost an empire of assets that had supplied revenues to Communist governments and to the party itself.
With June's elections, then, the Communists may have their first big chance since their humiliating defeat to settle scores. But during Yeltsin's five-year term as President, one crucial thing has changed: State ownership of the economy has dropped from close to 100% to about 30%, through one of this century's most sweeping privatization programs.
To be sure, Yeltsin's reformers failed to create the open, transparent Western-style market economy they envisioned, with a broad-based middle class of shareholders that presumably would have wanted to defend capitalism and democracy. Instead, a more concentrated, shadowy, and oligarchic form of capitalism dominated by a small group of powerful shareholders has emerged.
Looking back, some say that such an outcome could have been expected: In Russia, big has always been better, the bureaucracy has always played a giant role, and corruption has long been a part of life. Despite the rhetoric under communism and the unrealistic expectations of Yeltsin's reformers (and the West), ordinary Russians have long been low on the list of worries for those in power.
In any case, Zyuganov will have a tough time figuring out what to do about the conglomerates if he wins the election. For starters, he is probably receiving money from some of them. Although they won't talk about it, banks and businesses are helping to finance the campaigns of Yeltsin, Zyuganov, and others among the more than 70 candidates who are running in the first round on June 16. Says one prominent banker: "You can say there's a little bit of diversification of the portfolio going on."
What's more, Zyuganov would run into former comrades among Russia's capitalist barons. Despite its reputation, the new elite includes shrewd industrialists and entrepreneurs who were once members of the old structure. Some, such as Lukoil's Vagit Alikperov or Gazprom's Rem Vyakhirev, were party members and industrial managers who saw the tide turning from planning to a more market-based economy and adapted to the new climate quickly.
HARD TO CURB. Others got their start in business through the Young Communist League, which supported young businesspeople as part of Gorbachev's early perestroika reforms in the late 1980s. Indeed, the powerful Menatep Bank began as a scientific research center for youth in a Moscow Young Communist branch where Menatep President Mikhail B. Khodorkovsky, then a chemistry graduate student, was active.
Menatep earned its first profits doing research for Moscow-area factories. After it built up initial capital, it was one of the first groups to get a banking license under another Gorbachev experiment in 1988. When communism collapsed, the bank was rumored to have helped the Communist Party funnel funds to the West, but Khodorkovsky always denied it. Menatep grew fast as it played the game of lending and currency trading in the era of high inflation and soaring interest rates in 1992-93. When Yeltsin's reformers began privatizing state industry, Menatep began buying up stakes.
Now, Menatep is Russia's 10th-largest private bank, running the most diversified financial-industrial group in the country. Its assets, which totaled $2.1 billion in 1995, include the 19th century castle that served as Young Communist headquarters in Moscow and now houses some bank operations. Menatep also controls more than 20 companies that make plastics, textiles, chemicals, and food and employ some 150,000 people. Its crown jewel is Yukos, Russia's second-largest oil company, which is worth an estimated $700 million. In December, Menatep and its allied banks picked up rights to 78% of Yukos for $350 million in loans and promised investments.
Yukos will serve as the cash cow for Menatep's conglomerate, Khodorkovsky says. The 32-year-old financier also wants the state to provide financial backing for his group. "We don't have the luxury of taking 150 years to develop the same kind of modern corporations the West did," he argues.
It's hard to say whether Zyuganov would seize Menatep. Although the party's platform calls for strategic companies, including energy, to be returned to state hands, Zyuganov has also said he won't tamper with private companies that perform well. "One should support everything that is working effectively," he told U.S. executives at a luncheon last fall. Should he become president, he may pick and choose which corporations to take over or interfere with.
There are also key economic reasons why curbing the conglomerates might prove difficult. Although controversial, the groups play a crucial economic role. With foreign investment at just $1 billion a year, the government deep in debt, and Russia's capital markets too illiquid to tap, the groups are channeling capital, technology, and new management into enterprises sorely in need of restructuring. "Many of these enterprises can't survive without financial backing," says Maxwell Asgari, president of ABB Asea Brown Boveri Ltd.'s Moscow unit, which has stakes in several Russian enterprises.
UNPAID WORKERS. Observers such as Asgari see the Russian-style zaibatsu as the best potential engines for spurring an economic revival. Since Yeltsin launched his reforms on Jan. 2, 1992, Russia's gross domestic product has plunged 19%, with industrial production falling 40%. While the decline is still devastating in industries such as machine building, many believe the economy has hit bottom and could begin to grow next year.
Much depends on attracting investment and using it to boost production rather than allowing it to be siphoned off by corrupt managers. Indeed, a major debate is heating up about the future of so-called Red Directors, Communist-era managers who were able to buy shares at low prices and thus hold onto their jobs when their enterprises were privatized in 1992-93. Some have been bleeding their companies and refusing to pay workers. But as outside shareholders have built up controlling stakes--either through the secondary market or the loans-for-shares scheme--they have begun pushing to oust the old bosses.
Potanin's Oneximbank is waging a public campaign against the Red Directors. Potanin wants to oust General Director Anatoly Filatov, 60, and several managers of Norilsk Nickel, the world's largest producer of nickel and platinum, which Oneximbank acquired in a loans-for-shares deal last December. Potanin accuses the managers of allowing $1 billion in debts to accumulate at the company, even as its pretax profits doubled, to $1.16 billion, in 1995.
What's more, Norilsk's 155,000 workers haven't been paid for two months. Says Vladimir Zakarchenko, vice-president of United Labor Unions at Norilsk: "We don't know where our money is spent, but the ships leave with our product, and our metals are sold." Union reps were shocked to read in local papers that Norilsk's board held a meeting in Barbados last year. Despite company denials, the unions figure profits are stashed in banks in the West.
TOUGH CHOICES. Potanin, a former Soviet bank official, is no angel himself. His acquisition of Norilsk was hotly contested. In an auction that the bank itself ran, Oneximbank offered a $170 million loan for a 38% stake in the company. Another bank, Rossiskiye Kredit, complained bitterly that Oneximbank refused to consider its bid for twice as much because it arrived 20 minutes after the deadline. Counters Michael M. Kozhokin, an Oneximbank executive: "If you know a shop is closed at 6 p.m. and you come at 6:15 p.m., well, the shop is closed."
Nevertheless, Potanin has big plans for Norilsk. He wants to put together a $1 billion syndicated loan to modernize the company, which was built in the 1930s by prisoners in a region 200 miles above the Arctic Circle. Although Norilsk is already a global metals player, Potanin thinks he can retool it to make it even better--and an example for the rest of his group.
Since bringing together several cash-rich former Soviet trade associations to create Oneximbank in 1993, Potanin has bought control of 30 companies. They range from the auto maker Zil to Lomo, a high-tech manufacturer of optical equipment for the military. His goal is to build a group that will trade goods as well as resources in the global markets. "You're seeing the beginning of Russian transnational companies," he says.
If Potanin wins his fight with Norilsk's management, it will mark a turning point for Russia: The new elite of financiers and businesspeople will have gathered enough strength to curb long-entrenched industrial managers. Shaking up that old elite could be the fastest road to spurring Russia's growth. But the Red Directors aren't giving up easily. In some industries, they have banded together to create their own conglomerates, with the backing of key figures in Yeltsin's government.
Indeed, First Deputy Prime Minister Oleg N. Soskovets--Yeltsin's campaign manager--is behind a group linking the Magnitogorsk steel works with 13 other metals plants and institutes, most of which are losing money. Called Rossiskaya Metallurgia, it is controlled by the government and plans no management shakeups. A proponent of slower reform, Soskovets is pushing Yeltsin for more tax relief, subsidies, and protection for Russian industry.
Russia's economic landscape will thus pose uncomfortable choices for the next president. Russia watchers see both dark and bright outcomes. If Zyuganov is elected and gets pulled to the left by hard-liners, Russia could plunge into chaos. An attempt to renationalize industry could even spark civil war, warns former Deputy Prime Minister Chubais, who ran Yeltsin's privatization program. Most Russians hope he's exaggerating, but the most powerful conglomerates could try to resist a takeover. They've built up security forces made up of former army and KGB soldiers to combat the mafia.
WESTERN MODELS. Yet there is also an optimistic view. If Yeltsin or another pro-reform candidate wins, the new president could push for a faster shakeup in industry, open trade, and a better investment climate. That could attract some of the more than $80 billion Russians have banked overseas. If all goes well, predicts Moscow investment banker Boris Jordan, Russia's economy could take off at a 3%-4% clip.
What less sanguine observers hope is that Russia will, at least, continue to muddle through its effort to develop free markets. This could happen if either Yeltsin or Zyuganov wins and adopts a centrist course. Then Russia would continue to zig and zag between reform and retrenchment--just as it has since 1992. Given popular discontent, government and industry leaders are sure to be cautious about allowing mass unemployment. But the more they slow down, the longer they delay an industrial shakeup and return to growth.
Russia is developing its own version of capitalism, and conglomerates are, for now, leading the way. Unless a Communist backlash sets in, they will eventually try to model themselves after more sophisticated Western and Japanese groups like Siemens, Mitsubishi, and United Technologies. Potanin's Oneximbank is the beginning. Now, as ever, Russia's future depends on who wins the battle for its wealth and what the victors make of it.