Death of a Dissident (25 page)

By August 1998 clouds were gathering over Russia’s economic horizon. Few people predicted a storm more accurately than George Soros. The slide toward financial crisis started with turmoil in Asia. Global investors began pulling out of many emerging markets, including Russia’s. This coincided with a major drop in the price of oil—the principal source of Russia’s revenue. In January 1998, it dropped to
$15 per barrel, the lowest level since early 1994. By August, it was below $13. The Russian government collected little tax revenue; most of the economy operated off the books. In May, the Communist-dominated Duma dealt a blow to investor confidence by restricting foreign ownership of shares in the major electric utility, UES. Then came another blow: no one bid at the auction for Rosneft, the last big oil company still in state hands. Unpaid wages plagued the government, and coal miners protested by blocking major railways.

To boost revenue, the government relied on short-term ruble-denominated treasury bonds. But as the perceived risk increased, buyers demanded higher and higher interest, which at times reached 150 percent. To pay the interest, the government had to issue more and more bonds, tightening the noose around its neck.

Russia’s economic managers were convinced that if bad came to worse, the West would bail them out, as it had Mexico in 1994. Russia was “too nuclear to be allowed to fail,” they assumed.

So they kept issuing bonds and nagged the International Monetary Fund for more loans. As Anatoly Chubais, who remained the behind-the-scenes brains of Yeltsin’s economic team, put it: we “conned” the international community out of $20 billion in loans because “we had no other way out.”

But George Soros knew what was going on, because he himself had been lending Russia money to keep it afloat between infusions of Western cash. In early August, when shortages in liquidity briefly paralyzed the Russian interbank market, he decided it was time to sound an alarm.

On August 13, he published a letter in the
Financial Times
that began, “The meltdown in Russian markets has reached the terminal phase.” To avoid catastrophe, he urged the Russian government to “modestly” devalue the ruble by 15 to 25 percent and introduce a “currency board,” which in effect meant a new currency linked to the dollar, backed by a $50 billion Western infusion into the Russian treasury.

George simply wanted to offer advice and alert the West to the problem. Instead, his letter acted as a match to a gasoline tank: stocks on the Moscow exchange plunged, the price of dollars soared
in the streets, and banks became incapable of paying each other. On August 17, the Central Bank could no longer defend the ruble, so it freed the exchange rate. Prices skyrocketed. People rushed to the streets in search of dollars. Regional authorities reported shortages of supplies due to widespread hoarding. On August 23, Yeltsin sacked the Kiriyenko government. Russians lined up to withdraw their savings. Banks failed. The government defaulted on its short-term bonds.

When the dust settled, several major banks were wiped out, together with the savings of millions of depositors, and foreign investors were left with losses amounting to $33 billion, of which George Soros’s share was about $2 billion.

As for Boris Berezovsky, the crisis did not hurt him economically; he did not own a bank, and his oil company took in revenues in dollars and paid most bills in rubles. The devaluation only helped him.

But politically it was a disaster. After two failed attempts in the Duma to reinstall Viktor Chernomyrdin as prime minister, Yeltsin bowed to Communist pressure and accepted the compromise candidate, Evgeny Primakov, the foreign minister and former chief of the Foreign Intelligence Service (the SVR). He was Boris’s sworn enemy.

For the first time since the dissolution of the Soviet Union, someone who was neither a democrat nor a reformer headed the government. Primakov, a sixty-eight-year-old veteran of KGB foreign intelligence who was derisively nicknamed “Primus” behind his back, was a staunch ideologue of the Russian empire who viewed the West as a long-term geopolitical threat. From his KGB days, he was a friend of many anti-American dictators, from Saddam Hussein to Slobodan Milosevic.

He leaned toward a state-dominated economic model. In the realm of political reform he preferred law and order to rights and freedoms. As for his attitude toward Russian capitalism, he sent chills through the business community when he announced an amnesty for 100,000 Russian prisoners by saying, “We are freeing up space for those who are about to be jailed—people who committed economic crimes.”

For Primakov, no one personified capitalist evil more than Boris Berezovsky. They had an old feud to settle: the contest for the Russian national airline, Aeroflot.

Boris had first become interested in Aeroflot in early 1995, when he was setting up ORT. He quickly discovered that of all the giants of the ex-Soviet economy, Aeroflot was perhaps the most saturated by spy agencies. He knew that to take hold of this prized asset, he would have to confront very powerful and resourceful interests.

But he was not deterred. His moment of opportunity came in the late summer of 1995, when Yeltsin replaced a Communist holdover at the helm of the national airline with Marshal Evgeny Shaposhnikov, Gorbachev’s defense minister, who had sided with Yeltsin in the last days of the USSR. Shaposhnikov, a complete novice in business management, asked Boris to help streamline the company, which was losing money. That year it carried 3.5 million passengers to 102 countries on its 110 aircraft. Hoping to eventually privatize the airline, Boris installed his best management team, headed by Nikolai Glushkov, the forty-five-year-old PhD physicist turned financial expert who had been his principal associate in the automobile business. When Glushkov arrived at his new offices in February 1996, he was shocked to discover that the “spy problem” was much greater than anyone could have expected.

The spy agencies were largely left to their own devices during the “shock therapy” of 1991-1993, with little supervision and insufficient funding. What Glushkov discovered was that the spies had turned the national airline into a cash cow to support international spying operations and the livelihood of thousands of operatives around the world.

“The things we found were absolutely mind-boggling,” Glushkov told me in a conversation in London ten years later. “Aeroflot finances abroad were managed by mysterious off-shore companies; we could not identify the people behind them.”

Proceeds from ticket sales went to 352 foreign bank accounts, but it was impossible to establish who controlled them. All heads of foreign
Aeroflot offices were operatives of the SVR or GRU; they were not accountable to the company management.

“To compound the problem, there were secret services personnel on the staff: 3,000 people, out of the total workforce of 14,000! The head of human resources was an FSB officer. The head of security was an FSB officer. And we could not touch them. So you know what I did?” Nikolai smiled. “I sent them a bill. I wrote a letter to the head of the SVR, Mr. Primakov, and the director of the FSB, General Barsukov, asking them to pay for their people’s salaries.” It was the summer of 1996.

The next thing he knew, he received a phone call from Korzhakov. He screamed and yelled, promising to “destroy” Glushkov if he “continued to violate the rights of the services.”

“But that was just the beginning,” Glushkov continued. “The real blow to them came when we reorganized our cash flow. We simply closed all of the 352 accounts and channeled all foreign revenue into one financial and accounting center in Switzerland, which we controlled. The company name was Andava. That’s what really infuriated them.”

Years later, when I was researching this book, I spoke to a Russian defector who lives under an assumed name in a quiet European town. He told me that starting in 1995, the SVR station in Geneva began watching Boris during his visits. They monitored his business in Switzerland, particularly Andava. The SVR information was fed to prosecutors in Moscow and later formed the basis for the so-called Aeroflot case.

My source told me of one SVR station chief who used to freely avail himself of Aeroflot cash for SVR business—that is, before Glushkov took over the company’s finances. One day, the local Aeroflot man—an SVR officer as well—told the station chief that he no longer had access to the cash. According to my informant, more that 30 percent of the station’s operational funds—hundreds of thousands of dollars—dried up as a result of the Aeroflot cleanup.

“The station chief cursed Boris endlessly and said that if one of the guys took him out, he would do a great service to the Motherland,” said my source. He added that when Korzhakov visited, “Much of the
time that they spent talking—and drinking—was devoted to the Aeroflot problem, and Boris,” my informant recalled.

After the spies were purged, the performance of the airline improved steadily. Glushkov obtained Western insurance coverage for the planes; replaced its aging fleet of Russian aircraft with leased Boeings; hired attractive, bilingual staff; and improved the quality of food. Within three years, the company became profitable; its stock skyrocketed from $7 to $150.

Yet as of early 1998, 51 percent of Aeroflot still belonged to the government. The rest was in the hands of private investors, mostly staff members. Boris’s partner, Roma Abramovich, began quietly buying up Aeroflot stock from small shareholders in anticipation of the privatization of the government’s majority stake.

In the spring of 1998 I myself got entangled in the Aeroflot saga. I introduced an American strategic investor to Boris. He was a major airline financier, a buyout specialist who had a history of taking on risky projects and turning companies around. It was my second attempt to join the Russian gold rush.

After taking a hard look at the company and the market, the investor offered to join Boris in a deal to take Aeroflot private, adding a huge infusion of cash and talent. When the financial crisis erupted, he still was enthusiastic. He was prepared to go ahead, he said, because he took a long-term view.

A couple of weeks later, the investor was totally bewildered when Boris unexpectedly called off the deal. His reason was simple, but baffling to the American: the “Primakov factor.” With the new prime minister in the White House, not only was Boris convinced that there would be no Aeroflot privatization, but he also could not guarantee that the Glushkov team would survive in the company, or that he himself would be around for long.

The American went home disappointed. Once again I had just missed being in the right place at the right time.