Given Chernomyrdin’s success with Gazprom, in May 1992 Yeltsin chose him to be his deputy prime minister. He was promoted again in December 1992, this time to the top position as prime minister, a post he finally relinquished in March 1998, shortly before the financial crash of August 17, 1998.
When Chernomyrdin returned to a formal government position in May 1992, his deputy, Rem Vyakhirev, who had been deputy minister and then followed him to become vice chairman after Gazprom had been established, moved up again and took Chernomrydin’s place as both chairman and CEO.
Like Chernomyrdin, Vyakhirev also came with considerable experience as a natural gas and petroleum specialist. He was also a graduate of the Kuibyshev Polytechnical Institute. After stints in Samara (called Kuibyshev at the time) on the Volga and Orenburg and Tiumen in West Siberia, in 1983 Vyakhirev was appointed first deputy minister of the Ministry of the Gas Industry under Deputy Minister Chernomyrdin, who would himself be promoted to minister two years later.
With Chernomyrdin as prime minister and his old deputy as CEO and chairman of Gazprom, the state did not closely regulate Gazprom. Taking advantage of this, Gazprom paid very little in the way of taxes or dividends to its principal shareholder (the state). Not only did the state see little in the way of taxes or dividends from Gazprom while Vyakhirev was in charge, but many of Gazprom’s gas-producing wells, pipelines, and distribution entities were freely parceled out in unrestricted fashion to a wide collection of Gazprom executives’ wives, children, and mistresses. Some of the largest spin-offs were transferred to ITERA, a company relocated from Russia to Jacksonville, Florida.
THE PETROLEUM INDUSTRY IS BROKEN UP
While the ultimate fate of the Ministry of the Petroleum Industry was very different, initially its privatization began in much the same way. The first step, in September 1991, was to transform the Ministry of Fuel and Energy into a joint stock company called Rosneftegaz (Russian Oil and Gas) (see Figure 4). But unlike Gazprom, which remained more or less whole, Rosneft was soon subdivided into what would eventually be almost a dozen more or less independent entities. Vagit Alekperov, acting minister of the Petroleum Industry, was one of the first to see the industry’s potential. In November 1991, before the collapse of the USSR, Alekperov used his authority to set aside the Langepaz, Urengoi, and Kogalym petroleum fields and combine them into a package, call it LUKoil, and put himself in charge as the CEO. (Much earlier Alekperov had managed the West Siberian Kogalym region).4
The process of breaking out chunks of the former Ministry of Fuel and Energy continued and even accelerated after December 25, 1991, when the USSR split apart. In November 1992, Rosneftegaz was reduced to Rosneft. Two more companies, Yukos and Surgutneftegaz, were spun off in 1993. Vladimir Bogdanov took over as CEO of the latter, in essence the same producing combine he had supervised as a government manager under the Ministry. As for Rosneft, while bereft of LUKoil, Yukos, and Surgutneftegaz as of 1993, it nonetheless still produced more than 60 percent of the country’s crude oil output. The raids on it were far from over, but at the time it controlled twenty-six oil-producing regional associations and twenty-three refineries.5
As questionable as it may have been to allow two senior ministry executives to seize ownership for themselves of the billion dollar assets they had been operating, that was almost benign compared to the way the rest of Rosneft was privatized as part of what came to be called the Loan for Shares initiative.
LOANS FOR SHARES
What turned out to be the biggest and most controversial transfer of wealth ever seen in history began in 1995 and evolved out of a proposal conceived by Vladimir Potanin. At the time Potanin was deputy prime minister under Prime Minister Chernomyrdin. Potanin proposed the Loans for Shares plan as a novel way to compensate for the fact that so few Russian individuals (especially those who came to be known as oligarchs) or businesses were paying their rightful share of taxes. Without the tax revenue, the state could not pay its bills. Under Potanin’s plan, several of the banks newly opened by the oligarchs would offer to lend the government money so it could pay its bills. As collateral for those loans, Potanin proposed that the state turn over shares of stock in several of the country’s petroleum companies that had not yet been fully privatized. Once the state had collected its taxes, the loans would be repaid and the collateral—that is, the shares of stock—would be returned by the bank to the state. If for some reason the loans could not be repaid, the banks, on behalf of the state, would then be authorized to auction off the collateral they were holding. After they had taken out the money they were owed, the banks would then turn the remaining proceeds over to the state.
Given the climate of the time and the rush to seize state assets, not surprisingly, this turned out to be a massive scam. Everyone knew from the beginning that there was little likelihood that the state would be able to collect the taxes it needed to repay the bank loans. How could it when the oligarchs themselves and their companies, as well as their banks, were among the largest tax delinquents? As for the auctions, almost all of them turned out to be rigged. Foreigners and most other viable bidders were excluded from the bidding. With the number of bidders sharply limited, it was no wonder that in virtually every case, the auction winner turned out to be the bank running the auction itself, or its straw or accomplice, and for a price that barely covered the amount of the loan. It was part of the Loans for Shares scheme that allowed Mikhail Khodorkovsky and his Menatep Bank to end up as the owners of Yukos that was also spun out of Rosneft, bidding a mere $309 million. (Not pocket change but cheap for even a poorly operating oil company. It soon had a market value of $15 billion.)
In a somewhat similar pattern in July 1997, Mikhail Fridman—a colorful figure whom we will turn to shortly—used his Alfa Bank and Renova, a holding company, to win control of Tyumen Oil (TNK). Subsequently, after a very contentious legal and public relations battle, TNK joined up with its one-time rival, BP, to form the TNK-BP 50–50 partnership.
Since it was Potanin’s idea, it would have been unfair if he had not been able to benefit from his own program. Not surprisingly, therefore, in addition to the modest $170 million he paid to acquire Norilsk Nickel, which once privatized became one of the world’s largest nonferrous metal conglomerates (its profits in 2000 were reported to be $1.5 billion),6 Potanin and his OneksimBank also won control of the oil company, Sidanko, for $130 million. This had been one of the Ministry of Petroleum Industry’s operating units located in West Siberia, and it, like the other privatized oil companies, was spun out of Rosneft.
The duo of Boris Berezovsky and Alexander Smolensky were more devious in their efforts. Berezovsky, who at the time had close relations with the Kremlin, particularly one of Boris Yeltsin’s daughters, was behind the August 29, 1995, Presidential Edict which spun off Sibneft from the Ministry of Energy and Rosneft. Alexander Korzhakov, Yeltsin’s one-time bodyguard, claims that as part of the deal, Berezovsky promised Yeltsin that if he were given ownership of Sibneft, he would then see that ORT, the TV network Berezovsky controlled, did all it could to back Yeltsin in the 1996 campaign for reelection as president. Not surprisingly, the bidding process for Sibneft was even more opaque than normal. In a December 1995 Loans for Shares auction, a heretofore unknown company FNK (Finansovaia Neftyanaia Kompaniia— Financial Oil Company), acquired 51 percent of Sibneft shares for a paltry bid of $100 million, plus the promise that more money would be invested subsequently.7 FNK turned out to be a front for Alkion Securities, which turned out to be 100 percent owned by SBS/AGRO, which— surprise, surprise—was run by Alexander Smolensky in partnership with Berezovsky. As a further indicator of how rigged the whole process was, the auction for Sibneft was conducted by the Neftyanaia Finansovaia Kompaniia or NFK (note the similarity in name and initials), which turned out to be controlled by Berezovsky.8