Russian Rublette
Stevenson, Matthew
This is the background image for an unknown creator of an OCR page with image plus hidden text. December 1998 • The American Spectator This is the background image for an unknown creator of an...
...Aside from extortionists and racketeers, the Russian mafia consists of trusts: combinations of political, military, and economic interests that control this mining region or that bank...
...Even Western businessmen operating locally whisper about guardian angels and godfathers as if they were investment-tax credits...
...German banks had more than $3o billion on the table, although most of it was insured by their government...
...HE MAFIA IN RUSSIA IS CALLED ONE OF CAPITALISM'S MUTANT GENES, BUT ITS ORIGINS LIE IN THE PARALYSIS OF COMMUNISM...
...Instead of a market economy, what Russia has is Communism with a consumerist face...
...In the last seven years, I have visited many of these new banks, including one in Ufa, near the Urals, with potatoes for sale in its lobby...
...Nor have the lessons of market illusion been lost on the commissars...
...Heard in the market are apocryphal stories of this minister's links to gas or that group's stranglehold on liquor...
...In the early years, most bank buildings looked like Brooklyn warehouses or empty subway stations, down to the faded marble and worn tiles...
...A hundred years later, the country's assets are as closely guarded as the jewels in the Kremlin...
...of Mobil and Chevron combined...
...As if reading from Jack Kemp's playbook, they made the point that Russia had survived hard winters before, that state intervention had failed for seventy years, and that sooner or later only the markets could set Russian tables with meat and potatoes...
...But shareholders no more decide the fate of their companies than did the electorate invest Prime Minister Yevgeny Primakov with authoritarian powers...
...The market economy has proved little more than a Potemkin village, set up in Western conference rooms to coax easy money from such unsuspecting lenders as hedge funds and the International Monetary Fund...
...On the streets, especially in Moscow and St...
...When Gennady Zyuganov assumed the leadership of the Communist Party several years ago, he was asked if he planned to change its name...
...Needless to say, I got no closer to meeting Boris Yeltsin than would a Russian visitor to the American White House get the chance to give beets to President Clinton...
...It cheered me to think the country would open itself to market ideas...
...With at least a stable currency, Russia could avoid the instability of inflation and trade more easily in the community of western nations...
...Business contacts had arranged a meeting with a deputy minister of economics, and after several days in Moscow I found myself in a taxi heading toward the Russian White House, 32 a figure in one of those diplomatic memoirs that inevitably have a chapter entitled "Mission to Moscow...
...In 1991, Boris Yeltsin defended it from a Communist restoration...
...Even if the amount of the Russian default reaches $200 billion, Western governments and financial institutions will be able to cover their losses, if not their pride...
...Maybe the old brand name had lost its appeal in the market...
...Add previous unpaid debts, some dating to Soviet times, and the amount of the Russian default approaches $2oo billion...
...Nor is it known if western banks will be allowed to seize collateral that includes, in one case, a strategic interest in AO Yukos, a large oil company...
...IN THE EARLY YEARS MANY OF THESE BANKS LOOKED LIKE WAREHOUSES, WITH FILES STACKED IN THE CORNERS...
...Wealth is concentrated in the hands of members of parliament, oil chiefs, or regional governors who manage their spheres of influence as Huey Long ran Louisiana...
...atching the collapse of the Russian economy, I have decided that many in the West were more comfortable when the country was locked away in the prison Wyard of the Soviet Union...
...My first thought was that the Russians were again to starve in the interests of ideology...
...f.1 December 199 8 • The American Spectator...
...With the ruble's recent collapse, logic would suggest making the dollar legal tender, much as South American coins circulated in post-revolutionary America, when there was little confidence in the Articles of Confederation...
...I assumed that all we would discuss was freight forwarding and cold storage...
...Beginning in 1994—when interbank rates in rubles reached zoo percent per year, and 25 percent in U.S...
...BREZHNEV-ERA DISTRIBUTION NETWORKS, RESPONSES TO THE FAILURES OF CENTRAL PLANNING, DRIFTED INTO EXTORTION, DRUGS, AND n MONEY-LAUNDERING...
...Petersburg, the mafia plays a Russian version of numbers and protection...
...But with little hesitation, the new chief executive officer answered: "If you bought Coca-Cola, would you change its name...
...Big banks were established around various industries, like petrochemicals and aviation...
...I decided that the best chance to give away the food was to establish a connection with the newly formed government of Boris Yeltsin...
...Ruble credits were transferred from the central government to the banks and then to state enterprises...
...Western governments were sending aid packages to Russia, and on one of my early trips to Moscow, I hoped to arrange a deal in which a western country would give large quantities of meat to the Russians...
...Between Lenin's arrival at the Finland Station and Gorbachev's departure for Sochi, the Soviets used banks to distribute the state budget...
...Other large banks, such an Inkombank, closed, as did a golden era of banking speculation...
...A few banks practiced the habits of thrift and provided their customers with automatic teller machines and MasterCards...
...To be sure, it is possible to trade shares on Moscow's exchange, and competition has spawned new restaurants and software companies...
...Financiers invested in GKO or Russian shares, or issued letters of credit against goods still in country, with the confidence that Russia was now an emerging market, where, it was hoped, they paid more dividends than bribes...
...Western banks and investment funds also threw dice toward Russian markets...
...Those who needed to convert rubles to pay off dollar loans suddenly found that their debts had doubled...
...But when it comes to paying dividends or interest due, the Russian economy, rather than wiring cash, offers up variations on the five-year plan...
...The American equivalent would involve the Secret Service, in disguise, roughing up the guards of Citibank or J.P...
...THESE COUPONS WERE WORTH MORE THAN A TYPICAL MONTHLY WAGE, SO MOST RUSSIANS BARTERED THEIR SCRIP FOR MARLBORO CIGARETTES AND GEORGIAN CHAMPAGNE...
...Riding in a taxi from Sheremetyevo Airport into Moscow, on one of the city's broad boulevards that suggest an empire of tenement housing, I fancied myself part of the relief effort, maybe a spiritual heir of Herbert Hoover, whose American Relief Administration resupplied a hungry Europe after World War I. I was not visiting the Soviet Union that had killed the kulaks or executed Polish officers in the woods at Katyn, but the Russia that, as America's ally, had unloaded Liberty ships in Murmansk and driven the trucks of the Marshall Plan north from Teheran...
...As Marx and Engels put it in the Communist Manifesto: "Pauperism develops more rapidly than population and wealth...
...Several years ago the personal guards of Boris Yeltsin donned ski masks and beat up security agents in the lobby of Most-Bank...
...Charles Ponzi...
...hard currency to defend the ruble, which fell more than loo percent against Western currencies...
...I had come thinking I was bringing food to a church supper...
...In these incarnations, Russian capitalism has less in common with the thought of John Stuart Mill than with the reality of Mussolini's Italy...
...For a while anyway, Russia will live in a hermetically sealed financial world, with barter again the preferred method of payment...
...When the Russian government defaulted on its loans and the banking system failed, Western creditors were left holding a bag they had hoped was worth $7o billion...
...Just as Aeroflot dissolved into hundreds of regional carriers after the Communist collapse, so did the banks spin into the hands of their local directorates...
...Oligarchy is not new to the Russian experience...
...A secretary collected me from the lobby, and I ascended the monolith in a creaking elevator...
...The ruling nobility shared the wealth of the nation only among itself...
...Ruble gold had been spun into straw...
...Large ruble fortunes were made on these interest-free deposits, which attracted factories, unions, even nightclubs, to apply for banking licenses...
...Distribution networks were spawned in the Brezhnev era when the central economy failed to plan for such items as sugar, flour, shoes, and blue jeans...
...Loans were repaid, not from profits, but from an allocation from the successive budget or by a Soviet insurance fund...
...investors, counted their losses at $350 million each...
...On talk shows and the evening news, I hear expert after expert conclude that Russia is dying of an overdose of market forces...
...On the assumption that the ruble was a stable currency and that the Russian government would make good on its obligations, ruble assets were funded with dollar liabilities, which made both Western creditors and Russian debtors hostage to the ruble's fortune...
...Around him sat a group of young men, all in their early twenties, whose idea of a collective was probably to pass around a copy of Policy Review...
...In his book about the Russian mafia, Comrade Criminal, Stephen Handelman makes the point that Russia need not fear a counterrevolution from the Communist Party because so many of its former members are now millionaires...
...At least when the Politburo ran things, you could get someone on the hot line with the power to release hostages or break off an invasion...
...To stabilize the banking system and meet payrolls, the government decided to print new money...
...The so-called Russian White House is actually a towering federal building, admittedly white, that would look more at home in Fritz Lang's Metropolis than in Mr...
...It had sat too long in freezers to rate a spot on the counters of Zabar's or Covent Garden, and contained more fat than Martha Stewart would approve of, but they could do with it as they wished and pay in the future with a surplus of their own...
...I knew the Russian people were suffering food shortages and believed that my offering of government surplus meat would be welcome...
...FTER THE COMMUNIST COLLAPSE, THE BIG SOVIET BANKS DISSOLVED INTO HUNDREDS OF REGIONAL INSTITUTIONS...
...The economy is the province of oligarchs, who use a combination of state power, violence, and industrial strength to control votes in parliament or the distribution of Heineken beer...
...Instead I had walked into a symposium in which Laffer curves had replaced the tired fare of Marx and Lenin...
...The government became the banks' biggest borrower, issuing paper that allowed investors to double their money in a year...
...Yet in my seven years of Russian travel, I have seen few signs of free enterprise...
...Not counted in the initial loan losses were open foreign exchange contracts, estimated at another $io billion, or certain syndicated loans yet to mature...
...The word also describes muggers, bodyguards, political officials, and conglomerates as diversified as Time Warner...
...In the liberalized economy, especially after 1993, new Russian banks flourished because they paid little if any interest on deposits, thus prompting a large transfer of wealth from the industrial sector to the banks...
...December 1998 • The American Spectator This is the background image for an unknown creator of an OCR page with image plus hidden text...
...As Machiavelli advised his prince: "It cannot be called talent to slay fellow citizens, to deceive friends, to be without faith, without mercy, without religion...
...Smith's Washington...
...The descriptions of Russia's market excess are as familiar as the empty pill vials on the bathroom floor at the Beverly Hills Hotel...
...The dictators of the proletariat still control the means of production...
...Then as now, there were reports in the western press about Russia "not lasting through the winter," as if the entire country were huddled in tents on the German front...
...such methods may gain empire, but not glory...
...hat triggered the panic of 1 998 was the collapse in the market for Russian government bonds, which in turn brought down the banking system, one of W the government's largest creditors...
...Although I left with my meat unsold, I was comforted to learn that Russia wanted to get along without handouts...
...HE GOVERNMENT GAVE EVERY CITIZEN A VOUCHER THAT COULD BE REDEEMED FOR SHARES IN STATE INDUSTRIES...
...To many older Russians, anyone making money selling used cars or running a hardware store is mafia...
...The minister, who wore a flannel shirt and hiking boots, reminded me of a teaching assistant...
...The unscrupulous washed dirty money or skipped town with depositors' money...
...For example, during privatization, banks such as Menatep and Oneximbank leveraged their influence to buy, at steep discounts, blocks of shares in the largest oil companies...
...In America, the analogy would have involved the loans of a Tobacco Bank repaid from next year's subsidies to the growers...
...started traveling to Russia in winter, 1991-92, after the aborted coup against Mikhail Gorbachev had the unintended I effect of putting the Soviet Union into receivership...
...December 1998 • The American Spectator This is the background image for an unknown creator of an OCR page with image plus hidden text...
...Bankers Trust and Smith Barney, among the U.S...
...Our meeting took place in a cavernous conference room where it was easy to imagine a subcommittee of the 19th Party Congress voting on production quotas...
...For example, Promstroy Bank, with a branch in every city to lend money for Stalin's industrial dreams, broke into more than zoo pieces, as if all the branches of the Chase Manhattan Bank were to declare themselves independent...
...AT ONE I SAW POTATOES FOR SALE IN THE LOBBY...
...A generation that expected to stoke the furnaces of the central plan now controls banks and nightclubs, and pays in cash for vacations in the south of France...
...In their judgment, Russia was better off making a go of market economics than cultivating a dependence on Western assistance...
...Shareholders in banks routinely borrowed more than the capital they had invested...
...The minister and his acolytes, however, lacked the fervor of either commissars or pennystock investors...
...Morgan...
...MATTHEW STEVENSON THE RUSSIAN ECONOMY IS TODAY THE PROVINCE OF OLIGARCHS— GANGSTERS, POLITICIANS, AND INDUSTRIALISTS—WHO USE MONEY AND VIOLENCE TO CONTROL THE GOVERNMENT AS WELL AS THE BUSINESS WORLD...
...Instead, the Yeltsin government has discouraged the circulation of dollars and bet the bank on the ruble, ignoring that its value is pegged to political confidence...
...Maybe a new one referring to Labor or Social Democracy might find more customers...
...Nor does supply and demand matter when the state's chief means of revenue is defaulting every few years on its loans...
...At a major bank in Moscow, I had to step over two sleeping dogs to enter the elevator...
...To my surprise, the minister answered me with a lecture on price inelasticity and the conclusion that food relief was not compatible with the doctrines of Friedrich von Hayek...
...Are these new men a mafia...
...But the delegation gathered there was not made up of gray party men with flat shoes and Andrei Gromyko hats...
...Just like Wharton and Stanford MBAs, graduates of the workers' paradise learned little about contract law or warehouse operations, but a lot about how to reach a certain minister on the phone...
...dollars—Russian banks moved their deposits to the gaming tables of government securities, known locally as GKO...
...The mafia in Russia is billed as one of capitalism's mutant genes, but its origins lie in the paralysis of the dying Communist system...
...Even the December 1998 • The American Spectator This is the background image for an unknown creator of an OCR page with image plus hidden text...
...Accounts were often kept by hand and the filing was stacked in corners...
...For the third time in ten years, those holding the ruble found their assets, in effect, nationalized...
...Instead there huddled before me at one end of the plenumsized table what looked like a university seminar...
...But in our optimism both the minister and I failed to notice that the Party wasn't over...
...Soon Russia had more than 3,000 banks, some even in glass-tower headquarters, although I remember one that set up shop in the back of a Mexican restaurant...
...Commentators use the same tones of sorrow and delight MATTHEW STEVENSON (matthewstevenson@compuserve.com) travels for an international bank and lives in Switzerland...
...he successful people in Russia today used to be the life of the Communist Party, which gave them the opporT tunity to travel, learn English or French, and to have the contacts that now allow them to deal in oil products or Scotch as once they delivered reports On the Solidarity and Fraternal Relations of the Peoples of Tadzhikistan...
...In the nineteenth and early twentieth centuries, Russia failed to develop either a constitutional monarchy or a broad middle class...
...Some of these groups drifted into extortion, drugs, money laundering, and drive-by shootings while others used their talents for overnight delivery to set up supermarkets or distribute the ornaments of the duty-free lifestyle...
...Not content simply to risk local depositors' money in these getrich-quick schemes, the Russian banks raised additional money from syndicates of Western banks...
...In the aftermath, large bank holding companies such as Oneximbank, Most-Bank, and Menatep, merged operations, perhaps in the hope of confusing the depositors lined outside their respective headquarters...
...The American Spectator • December 19 98 in which Bob Woodward described the last temptations of John Belushi...
...Two years later he turned his own guns on the Duma, housed within, and set it ablaze as if it were a rebel stronghold in a breakaway Caucasus republic...
...The appellation is one of choice today in Russia...
...The conscript at the front door, not more than eighteen years old and thinking only of his next cigarette, flipped through my passport back to front, as if it were in Arabic...
...But many paid interest by raising new deposits, a system of asset and liability management perfected by Mr...
...But such provisions will virtually sate their appetite for Russian investment, denying capital to markets that had their previous dose before 1917...
...On loan applications to the International Monetary Fund and in pitches to foreign investors, the government promotes the classless society of stock exchanges and market equilibrium...
...THE PROBLEM IS NOT TOO MUCH CAPITALISM, BUT TOO LITTLE OF THE LEGAL AND SOCIAL INSTITUTIONS NECESSARY TO SUPPORT IT...
...Among the banks, Credit Suisse had exposures that exceeded $1 billion...
Vol. 31 • December 1998 • No. 12
