Boris Berezovsky: Tycoon Under Siege

Russia's most notorious oligarch could become Vladimir Putin's biggest target

For more than a year, federal prosecutor Nikolai Volkov has been trying to prove whether large sums of money were stolen from Aeroflot, Russia's national airline. A prime suspect: Boris Berezovsky, the country's most notorious oligarch, who at one time counted Aeroflot among his far-flung business interests.

The fruits of Volkov's labor are displayed on a large diagram taped to the wall behind his desk. It's a jumble of arrows and boxes that looks like a map of the human genome. In fact, it's a sketch of how Aeroflot funds were allegedly routed through a network of companies in countries including Belgium, Cyprus, Germany, Lithuania, Panama, Syria, and Switzerland. Swiss prosecutors are also investigating Aeroflot and sharing information with Volkov. They will soon send him new documents that he believes will make or break a case against Berezovsky on embezzlement.

Relaxing in his posh business club in downtown Moscow, Berezovsky doesn't seem worried. The club's decor is tasteful and elegant--matching silk upholstery on the walls and chairs and a Chinese porcelain vase on the sideboard. It's all a far cry from the grimy prosecutor's office Volkov toils away in. Now and then, Berezovsky taps a bell to summon a waiter to refill his glass of St. Emilion. In a June 30 interview, Berezovsky told BUSINESS WEEK that he has nothing to fear from a renewed investigation of Aeroflot. "Most people in Russia don't like me," he conceded. "[But] I don't care what they think."

He better care what one person thinks: President Vladimir V. Putin. When Volkov's office put out an arrest warrant for Berezovsky in 1999, it was quashed by the businessman's allies in Boris Yeltsin's Kremlin. But now Yeltsin is gone, and his successor, Putin, wants law and order. Already, it's turning into open season on oligarchs in Putin's Russia: Media baron Vladimir A. Gusinsky was jailed, released, then charged with embezzlement; prosecutors slapped metals magnate Vladimir O. Potanin with a lawsuit challenging the privatization of his Norilsk Nickel company; and on July 11, Vagit Alexperov, president of Lukoil, Russia's largest oil company, was charged with tax fraud. Berezovsky, whose connections once made him appear to be Mr. Untouchable, now seems exposed and vulnerable.

Berezovsky's fall, if it happens, would be the most astonishing of all. After all, he is the most politically entrenched of all the oligarchs. He helped to plot Putin's ascent in the Kremlin, culminating in Putin's yearend appointment as acting President by the ailing Yeltsin. In doing so, Berezovsky may have thought he was protecting his own political status and business interests, whatever happened to the other oligarchs. And he still wields enormous clout. "He's going to be the hardest to dislodge," says economist Roland Nash of Renaissance Capital, a Moscow investment bank.

But it looks as if Berezovsky--along with lots of other people--underestimated Putin. The new President has an acute political ear. Through his frequent boasting of his exploits, Berezovsky has made himself into a kind of cartoon villain, the nation's ripest symbol of the distress it has suffered while trying to turn itself into a normal society after the trauma of Soviet rule. Now, Putin is exploiting that symbol to consolidate his power. Whether Berezovsky ends up jailed or not, the Age of Oligarchs--which Berezovsky epitomizes--is passing.

Putin has already taken steps to reduce Berezovsky's influence in the Kremlin. He has fired or demoted high-level Yeltsin-era aides with whom Berezovsky had tight ties--and those who remain are of questionable loyalty to the tycoon. The Kremlin's Security Council, the chief instrument of Putin's rule, is dominated by fellow ex-KGB agents--a group that has long been itching to nail Berezovsky for behaving like a rogue operator. Putin did not even consult Berezovsky on his far-reaching initiative to establish control over Russia's regions. "Berezovsky's role is diminished and will continue to diminish," says former Yeltsin Finance Minister Boris Fyodorov.

HANDY IMMUNITY. Putin aimed a direct hit at the oligarchs in his July 8 state of the nation address. Russia can no longer tolerate "shadowy groups" that divert money abroad, hire their own "dubious" security services, and block the development of a market economy, Putin said. Although Berezovsky was not named, the reference was unmistakable. Prosecutors say they discovered evidence that a team linked to Berezovsky was bugging the Kremlin. "He's the emblem for a group of businesses that are operating in the shadows," says Putin adviser Gleb Pavlovsky.

Berezovsky may be down, but he's not out--yet. He retains tight ties to officials in government ministries and regional administrations. He ran for a seat in Russia's parliament, the State Duma, in December and won. That gives him immunity from prosecution unless the Duma votes to strip him of it. He's using television network ORT, his most potent remaining power base, to exploit popular fears that Putin aims to become a dictator. "All the decrees, all the laws proposed by Putin are directed at again enslaving people," he declared in a June 27 interview with an ORT news anchor. "People were given a whiff of freedom, and now they are to be forced to their knees again." After Putin's July 8 speech, Berezovsky announced plans for an opposition party made up of governors and others threatened by Putin's drive for power.

Putin himself is engaged in a complex dance with Berezovsky. Putin's office has not taken any direct action against the mogul. But Putin's rhetoric gives prosecutors the belief that they can move ahead with embezzlement or fraud cases without political interference.

Such cases are hard to win. Indeed, it's next to impossible to determine exactly what Berezovsky owns or what it's worth. In 1997, when Russia's economy was enjoying a boom, Forbes estimated his fortune at $3 billion, including stakes in Aeroflot; TV network ORT; oil company Sibneft; and auto dealership Logovaz. But Berezovsky has always been cagey about confirming any holdings in Aeroflot and Sibneft. Shareholder lists don't clarify matters, as most of the names listed are shell companies whose ownership is hard to trace.

That may have been a good tax-avoidance strategy in the past. But now it's making Berezovsky's business empire vulnerable. For example, at its annual meeting in June, Aeroflot refused to elect any of his candidates to the board of directors. At ORT, Berezovsky's allies are still in key positions--one is program director, and another is financial director. He recently appointed his daughter to the network's board. But the government owns a 51% stake. If Putin wants to, the government's representatives on the board could fire Berezovsky's people and wrest control of programming--a key component of Berezovsky's political power.

Volkov is determined to press ahead with the Aeroflot embezzlement case. Former federal prosecutor Yuri I. Skuratov, who initially supervised Volkov's work on the case, thinks the case against Berezovsky is strong. He alleges that Berezovsky and Aeroflot managers diverted at least $600 million to Andava, a Swiss company. "From the beginning, I had enough material to accuse Berezovsky," Skuratov told BUSINESS WEEK recently. But Berezovsky's allies in the Kremlin quashed the investigation, says Skuratov.

CLOSE CALL. Berezovsky, 54, was not alone in glimpsing the possibilities afforded by the crackup of the Soviet Union, but nobody moved faster to exploit them. A former mathematician and management consultant, he began assembling his financial empire in 1989, at the age of 43, with the creation of the Logovaz car dealership chain. The car-sales industry was rife with organized crime, feeding suspicions from law enforcement officials that Berezovsky himself was a gangster, but he has never been charged on anything relating to his Logovaz activities. Yet he was clearly on somebody's hit list: In 1994, a car bomb exploded next to his Mercedes, decapitating his driver. Berezovsky escaped with burns and continued his business climb, coming to exercise control or influence over a huge portfolio of assets. Shortly before Putin's election, he managed to grab a chunk of Russia's huge aluminum industry.

Berezovsky may be a rich man, but companies linked to him are performing poorly. Autovaz, the auto maker with which Logovaz joined hands, is today loaded with debt and facing a fresh criminal case launched by the tax police. Sibneft, which he obtained in 1995 at a deep discount, produces about 40% as much oil as Surgutneftegaz, another of the oil companies established in the mid-1990s. But Surgutneftegaz's capitalization is nine times higher.

Why? Investors are shunning Berezovsky's companies. Many consider him less of a stakeholder than a cash-flow manager who diverts funds from one operation to another. At a recent conference in Moscow, Ian Hague, manager of the emerging-market Firebird Fund, jolted Berezovsky with this question: "Could you explain how it is that every time you've been involved with a company, its capitalization has run down to zero?" At first speechless, Berezovsky replied that political uncertainty drove down the value of just about all Russian companies. He told BUSINESS WEEK that each of the companies to which he has been connected has improved its performance.

Berezovsky, the quintessential backroom operator, knows he has to change: The implosion of the Soviet Union afforded him a once-in-a-lifetime opportunity, but a new Russia is now emerging. "Today, I am at a crossroads," he told BUSINESS WEEK. "Even if I have more personal possibilities, I probably won't be able to realize them because such events will never happen again."

Russia's rule by a Putin-led band of ex-KGB agents is not a hopeful prospect. Yet most Russians will rejoice if Berezovsky falls, and understandably so. He was the leading architect of a political-economic structure that exploited rather than nourished a fragile, disoriented society. The best response to the passing of the Age of Berezovsky: Good riddance.

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