Down with Big Brother (60 page)

Behind every successful entrepreneur stood a bureaucrat with the power to grant or withhold a license of some kind and a foreign partner willing to ignore how the license was obtained. In many cases these relationships outlasted the collapse of communism. The key to understanding how
biznes
is conducted in the new Russia frequently lies in knowing who was pals with whom in the old Communist Party and KGB. “What we have in Russia is a pseudomarket, not a real market,” explained Aleksandr Rudenko, a prominent businessman in St. Petersburg, who made his fortune during this early period. “The state has a monopoly over the export of basic goods. The economic conditions have been created in which people who are well connected can steal like crazy. You get three or four officials to sign a piece of paper authorizing you to do something, and you have it made.”
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By refusing to follow Western advice and liberalize prices, Gorbachev fostered the development of the privileged new class. In a market economy entrepreneurs make their profits from tiny percentages. The more imperfect the market, the bigger the potential profit from buying and selling. In the dying days of the Soviet Union the profit margins were so huge that few people who were in a position to manipulate the market to their advantage were able to resist the opportunity. The absurdities of the “planned economy” were screaming to be exploited.

Some of the scams were perfectly legal, if morally questionable. In November 1989 the government slashed the tourist rate of the ruble by 90 percent but left the official rate unchanged. Foreigners living in the Soviet Union were allowed to purchase foreign airline tickets in devalued tourist rubles, even though the price was still calculated at the official ruble rate. As a result, a round-trip business class fare to Paris or London cost less than a hundred dollars, one-tenth of the previous price. For a few glorious months members of the Western community thought nothing of flying to Stockholm to catch the latest Hollywood movie or taking a weekend trip to Rome to visit a new trattoria. Dream vacations in Africa, Australia, and Latin America suddenly became affordable. Since few people bothered to fly economy class anymore, Western airlines flying in and out of Moscow upgraded most of their seats to first class and business class. Everyone was happy. The only obvious loser was the Soviet Foreign Trade Bank, which collected devalued rubles from the foreigners and paid out real dollars to
the airlines. It was hardly surprising that the bank went bankrupt shortly after the loophole was finally closed, almost a year later.

For years one of the few real constraints against private enrichment at the expense of the state was the fear of getting caught. Thanks to Gorbachev, however, even that inhibition had now vanished. The bureaucrats who controlled the Soviet economy scrambled to profit from their positions. It took surprisingly little time for once-doctrinaire Marxists to transform themselves into born-again capitalists. Red Army generals in East Germany stopped worrying about the threat from NATO and began selling fuel and military supplies on the black market. KGB officials, trained to root out any manifestation of free enterprise, founded commodity exchanges. Officials at Gosplan, the state planning agency, used their intimate knowledge of how the Soviet economy actually worked to launch their own trading companies.

Nowhere was the enthusiasm for “nomenklatura capitalism” more apparent than in the Central Committee of the Soviet Communist Party. By the spring of 1991 the inner sanctum of Marxism-Leninism had become a den of money changers.

F
OR MOST OF ITS EXISTENCE
the Soviet Communist Party never had to concern itself with the problem of raising funds. When the party needed money—whether to build dachas for deserving apparatchiks, to pay for the limousines used by Politburo members, or to finance Western Communist parties—it simply issued an instruction to the state bank. In a one-party state there was no distinction between the party and the state. The Politburo’s orders were the law of the land.

The symbiotic relationship between party and state was shaken in February 1990, when the Congress of People’s Deputies voted to abolish Article VI of the Soviet Constitution. When it lost its constitutionally guaranteed monopoly of political power, the Communist Party also lost the right to plunder the state treasury as it saw fit. Even though the party was still an immensely wealthy organization—its property holdings alone were worth billions—its financial managers were extremely worried. The new Russian parliament, headed by Yeltsin, was threatening to levy taxes on a long list of party assets, including its vast media empire, and hundreds of rest homes, hospitals, and vacation resorts.

Determined to protect its economic privileges, the party began to search for ways of hiding its wealth from prying eyes. In a secret memorandum,
dated August 23, 1990, Deputy General Secretary Vladimir Ivashko proposed channeling some of the assets to commercial firms controlled by trusted Communist Party members.
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Assistance would be given to the front organizations to engage in foreign trade activity, in order to generate an “independent source” of hard currency for the party’s international operations. Communist members of the Soviet and Russian parliaments would ensure that the appropriate legal framework was created to defend the party’s commercial interests. Secrecy was essential, of course. Only a very small group of leaders would know the identity of the “friendly firms” or their true relationship with the party.

Ivashko’s plan was hardly original. A similar scheme—to channel funds to pro-Moscow organizations around the world—had been in operation for several decades. “Friendly firms” controlled by foreign Communist parties were granted special trading privileges in the Soviet Union, enabling them to purchase raw materials at deeply discounted prices. A typical example of such an operation was the delivery of free or subsidized newsprint to left-wing publishing houses in Italy and Greece. Some of the newsprint was resold at market prices, in order to provide income for political activities. An alternative method of subsidizing “friendly firms” was to purchase goods from them at inflated prices. After the failed coup of August 1991 Russian prosecutors drew up a list of around one hundred foreign companies that received Soviet subsidies of one kind or another.
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In order to put Ivashko’s ideas into effect, the Central Committee recruited a KGB colonel, well versed in the art of clandestinely channeling funds to “friendly firms.” Leonid Veselovsky had previously served as a KGB field officer in Portugal, where he was responsible for contacts with the local Communist Party. Soon after his appointment he wrote a memorandum for his new bosses describing a mechanism for shifting party funds to the West by starting joint stock companies in countries “with a mild taxation system,” such as Switzerland. According to his plan, details of which were later leaked to the Russian press, the companies would be headed by trusted party agents.
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The extent to which the Communist Party succeeded in laundering its assets later became a subject of great political controversy. After the failed coup Russian prosecutors claimed to have traced billions of rubles of party funds that had been “loaned” to Russian companies and joint ventures. The list of alleged recipients of Communist largess included some of the best-known Russian banks and holding companies. Hardly any of this money was ever recovered, leading prosecutors to complain that their investigation
was blocked for political reasons. Veselovsky himself insisted that most of his ideas for shifting party assets overseas never got beyond the planning stage.
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What is clear, however, is that many apparatchiks chose precisely this moment to launch their own careers as private businessmen. Veselovsky himself was a prime example of this phenomenon. In early 1991, while still working for the Central Committee, he hooked up with a flamboyant Canadian millionaire named Boris Birshtein. A Soviet émigré who had once run a textile factory in Lithuania, Birshtein understood the importance of establishing a mutually beneficial relationship with well-placed bureaucrats. That, after all, was the way
biznes
had always been conducted in Russia. Personal connections were the key to business success. “You just need to get in the saunas, and that’s where you really do business,” he boasted to a Western reporter.
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Unlike most foreign businessmen, Birshtein deliberately flaunted his wealth. With his fleet of private jets, sable-lined coat, and diamond-studded brooch, he was almost a caricature of the Russian idea of the successful capitalist. When he came to Moscow, he hired the biggest limousine possible and traveled from office to office in a motorcade worthy of a head of state. The Moscow Police Department, which had itself benefited from Birshtein’s generosity, was happy to provide the tycoon with an impressive escort.

By his own account, Veselovsky helped Birshtein rent a luxurious party-owned mansion on the Lenin Hills that had previously been reserved for such visiting foreign dignitaries as Fidel Castro and Henry Kissinger. The two men hit it off immediately. Veselovsky provided Birshtein with introductions to party bureaucrats, whose assistance was essential for the conclusion of lucrative foreign trade deals. Birshtein permitted Veselovsky to escape from the stifling world of party apparatchiks into the world of private jets and diamond brooches. After the negotiations for the mansion had been concluded successfully, Birshtein offered his new friend a one-year contract as a “consultant.”

“He was influential and intelligent. He had a Ph.D. in economics,” Birshtein recalled later. “We started to think about different businesses. He said, ‘I’m sick of the party. It’s all bullshit. I want to leave.’ It was then that I offered to hire him.”
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The relationship between Birshtein and Veselovsky proved beneficial for both men. The Canadian millionaire helped the former KGB colonel move to Switzerland, giving him the use of a lakeside villa in Zurich and a silver Mercedes. In the meantime, Birshtein’s own fortunes began improving
sharply. Prior to 1991 his private Toronto-based company, Seabeco, had been struggling with creditors and disgruntled former employees. In 1991 business suddenly took off. The Seabeco Group spawned dozens of offshoots, including a number of highly profitable joint ventures with Russian trading companies. The business grew and grew until, one day, Birshtein overreached himself. At the peak of his influence, in September 1993, he was caught up in a sensational bribery scandal involving the Russian security minister and declared persona non grata.
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E
XCEPT FOR THE FACT
that it attracted a lot of attention, because of the mystery surrounding Communist Party finances, there was nothing unusual about Veselovsky’s transformation from apparatchik to businessman. There was a
fin de régime
atmosphere in Moscow in the spring of 1991, and bureaucrats were lining up to jump ship before it was too late. Many of Veselovsky’s colleagues in the Central Committee apparatus found jobs in the emerging private sector at this time, as “experts” or “consultants.” Veselovsky himself later said that from April 1991 onward practically all the senior officials in the administration department of the Central Committee were involved in commercial activity of one kind or another.
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This was a crucial turning point. In the past Communist ideology had provided the ultimate justification for the power and privileges of the Soviet elite. But many members of the elite were now discovering that they could maintain their privileged positions in society even without the ideology. If they were clever enough and agile enough they could trade their positions in the old Communist regime for equally comfortable positions in the nascent capitalist order. In many cases they were trading up. Why drive a Volga when you could be driving a Mercedes? It was no longer necessary to pretend that they were the vanguard of the proletariat, chosen by history to build a socialist utopia.

Not all members of the elite arrived at this conclusion at precisely the same time, of course. Some apparatchiks lacked the wits to succeed as entrepreneurs; some were scared by the thought of changing careers in midstream; some believed that the Communist Party was the only organization capable of holding the Soviet Union together. Mixed in with the thousands of careerists and cynics—people who worried only about their “bottoms,” to use the popular expression—were a few true believers. What mattered, however, was that the party was no longer a monolith. And once it ceased to be a monolith, it was no longer invincible.

The collapse of communism unleashed a ruthless struggle for the vast economic resources that had previously been controlled by the state. The nomenklatura capitalists grabbed whatever they could, while the going was good. In many cases assets were sold off for practically nothing; this was “grab-it-ization” rather than privatization. The wild scramble for property that got under way in the Soviet Union at the beginning of 1991 represented the relatively benign form of this struggle for power and wealth. But the potential for violence was always just beneath the surface, as events in Yugoslavia soon demonstrated.

BOROVO SELO
May 2, 1991

T
HE FALL OF THE
B
ERLIN
W
ALL
produced a wave of self-congratulation in Western capitals. When communism collapsed in Eastern Europe, many people in the West assumed that the new order would be represented by politicians like Václav Havel and Lech Wałęsa, who had spent most of their lives struggling against totalitarian dictatorship. The slaying of the Communist dragon appeared to represent the final victory of the liberal, free market values dear to Western democracies. Adam Smith and Thomas Jefferson had triumphed over Karl Marx and Vladimir Lenin.