35
International Reserves in 1997, Central Bank of Russia.
36
Sergei Aleksashenko,
Fight for the Ruble
(Moscow: AlmaMater, 1999), p. 129.
37
“T-Bill Market Suffers Biggest Crisis in Its History,”
Interfax
, July 29, 1998.
38
Forwards Are Not the Way Forward,
Troika Dialog Research, November 1998. An indication that the sum was higher came from Vinogradov, who told me he held $2.5 billion as of the August 17 crash. Reporting requirements for banks were skimpy, and information remains incomplete. The $9 billion estimate is from
Surviving Devaluation,
a research report by Brunswick Warburg, June 8, 1998, p. 9.
39
Budberg, “Chicago Boys.” Chubais recalled Luzhkov declaring that “the age of monetarism is over.” But Chubais answered that monetarism had worked. “The sole reason we can seriously talk about economic growth today is that it was preceded by six years of tough monetarism.” Monetarism generally refers to an economic policy in which the money supply is tightly restricted in order to control inflation. The ruble corridor was the mechanism for controlling the money supply, and it meant that the Central Bank dramatically reduced the massive subsidies and cheap credits issued in earlier years. This approach was never really understood by the Soviet-era red directors, who were accustomed to receiving enormous infusions of subsidies.
40
Illarionov later said he also watched the reserves as compared to the total foreign investment in Russian bonds: if all the overseas investors pulled out, would the Central Bank have enough currency to pay off the bonds? As of January 1, 1998, the bank held $12.9 billion in currency reserves and $4.8 billion in illiquid gold reserves. Foreigners held about $18 billion of outstanding Russian treasury bills.
41
Andrei Illarionov, interview by author, October 14, 1999.
42
Pyotr Aven, interview by author, October 22, 1999.
43
Chubais, interview by author, May 13, 2000.
44
Yuri Baturin et al,
Epokha Yeltsina
(The Yeltsin Epoch) (Moscow: Vagrius, 2001), pp. 727â750. This work is a collective memoir by a group of Yeltsin's Kremlin aides.
45
Baturin et al.,
Epokha Yeltsina.
46
Bernie Sucher, interview by author, October 8 and 29, 1999.
47
The situation was never black and white, however. Some market participants also failed to see the devaluation coming until it was too late. Brunswick Warburg's June 8 report stated, “We believe a collapse in the ruble can now be avoided.”
48
Illarionov, testimony before the House committee.
49
Augusto Lopez-Claros, interview by author, September 17, 1999; April 13, 2000.
50
Yeltsin,
Midnight Diaries,
p. 169.
51
Baturin et al.,
Epokha Yeltsina
.
52
Malashenko, interview by author, July 25, 2000.
53
Chubais, interview by author, February 20, 2001; Bill Powell and Yevgenia Albats, “Summer of Discontent,”
Newsweek
, January 18, 1999; Chrystia Freeland,
Sale of the Century
(New York: Crown Business, 2000), pp. 308â309.
54
Berezovsky, interview by author, February 28, 2001.
55
Chubais, interview by author, February 20, 2001.
56
Grigory Glazkov, interview by author, December 1, 1999.
57
Itar-Tass, June 19, 1998.
58
Aleksashenko,
Fight,
pp. 169â171.
59
Joseph Kahn and Timothy O'Brien, “For Russia and Its U.S. Bankers, Match Wasn't Made in Heaven,”
New York Times
, October 18, 1998, p. 1.
60
Baturin et al.,
Epokha Yeltsina;
Charles Wyplosz and Ksenia Yudaeva, “The Costs of Debt Conversion: Russia and Mexico Compared,”
Russian Economic Trends Quarterly,
October-December, 1998; Homi Kharas, Brian Pinto, Sergei Ulatov, Lawrence H. Summers, and John Williamson, “An Analysis of Russia's 1998 Meltdown: Fundamentals and Market Signals/Comments and Discussion,” Brookings Papers on Economic Activity, Brookings Institution, Washington, DC, 2001. The latter study concluded that Russia made a mistake taking on so much debt in the summer of 1998. The country took on $16 billion in external debt between June 1 and July 24, 1998. This, combined with the exposure of Russian banks, “was what triggered the August crisis,” the authors concluded.
61
Letter from Credit Lionnais S.A., Goldman Sachs International Bank, and Merrill Lynch Capital Markets Bank Ltd., to Dmitry Vasiliev, August 14, 1998.
62
Leonid Gozman, interview by author, October 27, 1999.
63
Illarionov told me that Sberbank was the largest player to withdraw from the GKO market in the two weeks before August 14, and he questioned whether the Central Bank had influenced this decision. Illarionov said he believed the Central Bank was playing political games, trying to undermine the Kiriyenko government, perhaps to deflect the blame for any crisis over a coming devaluation. The Central Bank in late July mysteriously froze the Finance Ministry accounts for several days, paralyzing its ability to make routine payments. Yeltsin had to intervene, according to the memoir by Baturin and colleagues. Dmitri Vasiliev, a frequent critic of the Central Bank, also mentioned this episode as an example of how the bank was playing a dangerous political game with the government. “It
was a complete, 100 percent provocation,” Vasiliev said of the freeze on the accounts. “I think they wanted to either overturn the government or make the government do somethingâto have them be the first to do it.”
64
Baturin et al.,
Epokha Yeltsina.
65
Soros said he offered some ideas for a public-private fund but was overtaken by events. George Soros,
Open Society: Reforming Global Capitalism
(New York: PublicAffairs, 2000), pp. 247â250.
66
“Yeltsin Denies Plans to Devalue Ruble, Says Markets Under Control,”
Interfax,
August 14, 1998.
67
Aleksashenko,
Fight,
p. 199.
68
Yevgenia Albats, “Anatoly Chubais: We Await a Difficult Year and a Half or Two Years,”
Kommersant Daily
, September 8, 1998, p. 1.
69
Aven, interview by author, October 22, 1999.
70
Yeltsin,
Midnight Diaries,
p. 175.
71
Albats, “Anatoly Chubais.” Chubais read from the computer file to Albats in this interview. Chubais also addressed the issue of deception of investors. A devaluation or default on GKOs earlier in the year “would have been perceived in an extremely negative way around the world,” he said. “By not doing it back then, we demonstrated that the government was struggling to the end. It undertook all the possible thinkable and unthinkable efforts not to fail the expectations of our partners both inside the country and abroad.... Right, it did not work. Right, we failed. It was impossible to wait longer to take the decisions that were made on August 17. The abyss was next.” Chubais defended Yeltsin for lying about the coming devaluation on August 14. “This is exactly what needed to be said,” Chubais insisted. “Any sober-minded politician will tell you that unfortunately this is exactly how the authorities must behave in such extreme situations.... authorities have no right to announce in a difficult financial situation, âWe don't know if we are going to cope or not,' [people] will start running away at once.” Chubais was then asked if the authorities have a right to lie. “In such a situation, it is the duty of the authorities to do it. They are o-b-l-i-g-e-d to. Hence now, the international financial institutions, despite everything we did to themâand we cheated them for $20 billionâthere is an understanding that we had no other way out any longer, and had we done it the way suggested by Illarionov, they would have stopped doing business with us forever. That is, that catastrophe would have been the same as now, but any hope that investors would return would have been lost.” This remark caused a stir when the
Los Angeles Times
quoted Chubais as saying Russia had “conned” the IMF out of $20 billion. Chubais replied in a letter to the newspaper that he meant the $20 billion was “cheated” from foreign creditors by Russian banks taking advantage of the moratorium. Albats told me that Chubais in the interview was referring to foreign investors, not the IMF.
72
Chubais did not know how the IMF would react until a statement was released the morning of the decision, in which Camdessus reiterated the view that it was important for Russia to carry out reforms. He went on, “It is important that the international community as a whole, both public and private sectors, show solidarity for Russia at this difficult time.” Chubais was relieved.
73
Andrei Trapeznikov and Leonid Gozman, interview by author, August 20, 1998.
74
Vinogradov, interview by author, June 28, 2000.
75
Former Menatep Bank official who asked to remain anonymous.
76
Monthly consumer inflation shot up 38 percent in September, but the hyperinflation that some predicted would follow devaluation never appeared.
77
Organization of Economic Cooperation and Development,
Russian Federation Report
, March 2000, p. 44.
78
Natalya Gridneva, “Former Prime Minister Sergei Kiriyenko Tells All About Dismissal,”
Kommersant Daily
, January 19, 1999.
79
Berezovsky, interview by author, February 28, 2001.
80
“Resolving the Banking Crisis,”
Russian Economic Trends
, November 1998, pp. 1â8.
81
Dubinin press conference, September 7, 1998.
82
Dubinin press conference, September 7, 1998.
83
Jeanne Whalen, “SBS-Agro Chief Faces Fall of Empire,”
Moscow Times
, September 12, 1998.
84
Higgins, “Insufficient Funds.”
HARDBALL AND SILVER BULLETS
1
Vladimir Gusinsky, interview by author, May 4, 2001. Gusinsky also was proud of the fact that the satellite would make his television truly independent, as his signal would be outside the control of the state.
2
By one estimate, annual NTV revenues prior to the crash exceeded $100 million.
Kommersant Vlast
, January 27, 1998. The station was Russia's most profitable major television broadcaster before the crash, but it suffered a net loss of $25 million in the following year. Chris Renaud, letter to the editor,
Wall Street Journal Europe
, April 30, 2001.
3
Gusinsky's enterprise experienced other troubles as well. The global shift from analog to digital signals for satellite television came just as NTV-Plus was taking off. The Bonum-1 satellite was digital, but Gusinsky had trouble managing it. One NTV official told me that NTV-Plus went through five different managers in this period.
4
In late August, 936 Moscow residents were polled by the All-Russian Center for the Study of Public Opinion, one of Russia's leading pollsters. The results were published in
Moskovskaya Pravda
on September 4, 1998. The question was: “Who in your opinion is guilty first of all for the present financial crisis in Russia ?” The former government of Chernomyrdin received 38 percent; Yeltsin, 36 percent; the government of Kiriyenko, 15 percent; oligarchs, bankers, and financiers, 9 percent; the State Duma, 8 percent; policies of the reformers-democrats, 8 percent; Central Bank (Sergei Dubinin), 6 percent; global financial crisis, 2 percent; foreign banks and financiers, 1 percent; those who do not pay taxes, 1 percent; others, 10 percent; difficult to say, 14 percent. (Respondents were allowed to choose more than one item, so the results exceed 100 percent.) A similar poll of 1,862 people nationwide taken at the same time showed that a far larger number of people in the nationwide sampleâ56 percentâblamed Yeltsin.
5
Zyuganov circulated an open letter including these remarks,
Washington Post
, December 25, 1998, p. A42.
6
In the summer of 1998, before the crash, workers in Nefteyugansk held a rally to denounce Yukos for months of unpaid wages. The rally was led by Mayor Vladimir Petrukhov. The mayor had sent telegrams to Yeltsin, Kiriyenko, and others in June denouncing Khodorkovsky and Yukos, saying they were “suffocating” the town. At the rally one protester held a sign reading “Bring Khodorkovsky to Justice.” On June 26, Petrukhov was shot and killed as he walked to work. The murderer was never found. Yukos said it had nothing to do with the crime.
7
West Merchant was a London-based subsidiary of West LB, a huge German bank based in Dusseldorf.
8
Kathleen Day, “Riggs Had Ties to Firms in Probe,”
Washington Post
, September 18, 1999, p. E1.
9
The reformers and liberals acknowledged that capital flight was a problem, but they took a classic free market view: that capital flight could only be stopped when the conditions were created inside Russia to attract capital into the country, namely, stability, rule of law, and protection of property rights. In theory they were right, but practically those conditions did not exist in the lawless, chaotic years of the 1990s. Waiting for the right conditions meant watching capital flee at a debilitating pace.
10
It is not unusual for countries to park their currency reserves abroad in safe securities or bonds of other countries. But it is highly unusual for a country to turn over its reserves to a small, little-known management company like this one. The Central Bank claimed it was trying to shield reserves from threat of legal seizure. However, Eric Kraus pointed out, “If you are going to shelter Central Bank assets, you don't set up a Jersey shell company which any bright divorce lawyer could crack open in an afternoon.” Moreover, many of the transactions remain unexplained and look suspicious. For example, the Central Bank used the offshore shell company to make secret backdoor investments in high-yielding Russian government bonds known as GKOs, according to my own research and a letter from PricewaterhouseCoopers to Gerashchenko, August 4, 1999.