The owners of the two already privatized petroleum companies— Vladimir Bogdanov, the CEO of Surgutneftegaz and Vagit Alekperov of LUKoil—also used Loans for Shares to enhance their personal stock holdings. But at least they had spent many years working out in the oil fields and managing petroleum production. By contrast, almost none of the future owners of the other oil companies, that is, Potanin, Fridman, Berezovsky, and Smolensky, had had much prior experience in the petroleum industry. Khodorkovsky had spent several months as a deputy minister of Fuel and Energy in 1993. But after he took over Yukos and went to look over his company’s newly acquired oil fields in Nefteyugansk to “learn how the drilling process works,” his host Vladimir Petukhov, the mayor of Nefteyugansk and an oilman with a doctorate in oil technology, was appalled to discover that Khodorkovsky, despite that stint in the Ministry of Fuel and Energy, had never seen an oil field before.9
EVERYONE WANTS TO BE A BANKER
To understand how Potantin, Berezovsky, Smolensky, Fridman, and Khodorkovsky managed to be in a position to bid for these large petroleum companies, it is necessary to detour a bit and explain how they came to establish their own banks. After all, only a few years before, none of them had any net worth to speak of.
With so little to begin with, how did they manage by 1997 to become billionaires? The explanation is that all five were able to take advantage of the Russian public’s enormous hunger for consumer goods they had been denied for more than seventy years under Soviet central planning. The demand for personal computers (then a relatively new invention and in any event rare in Russia) was particularly intense. It also helped that when it became legal to establish private commercial banks for the first time in 1987, the capital requirement was the ruble equivalent of only $750,000. As trivial as this was, because of inflation by 1990 the equivalent in rubles amounted to as little as $75,000 in real terms.
The case of Mikhail Fridman is typical. The son of an academic father, Fridman, after graduating from the Moscow Institute of Steel and Alloys, worked in a steel mill for two years from 1986 to 1988.10 Although trained to work in a Soviet state-owned factory, even as a student, Fridman began to take odd jobs on the side. Among other chores he washed windows, organized a discotheque, and did construction work. In 1987, when it became legal to set up a private or cooperative business, he opened Kuryer, a cooperative that offered such services as package delivery, window washing, and assistance with apartment rental. None of these activities required much in the way of startup capital—all they needed was labor. But as he began to accumulate a little capital, he began importing sought-after Western consumer goods, including cigarettes, perfume, computers, and even Xerox machines. He also opened up a network of photo labs. Then in a very distinct departure from such retail operations he opened a commodity trading firm. In January 1991, while Gorbachev was still president of the USSR, Fridman took his newly accumulated capital and established the first office of Alfa Bank. To do this, he needed 6 million rubles which at the time was the equivalent of $100,000, a relatively small amount for the capital of a bank.11 It was through Alfa Bank that in July 1997 Fridman, in partnership with Access Industries—a company established in the United States by Leonard Blavatnik, a Russian émigré—was able to purchase 40 percent of Tyumen Oil Company’s shares for a bid of $810 million. In doing so Fridman and Blavatnik became the effective owners of the company in much the same way Alexander Smolensky began to build his fortune by performing similar odd jobs. They too required little in the way of capital, but if such services were to be performed legally through official Soviet central planning channels, the customer would have had an enormous wait, sometimes months if not years. There seemed to be shortages of almost everything, including plumbers, carpenters, and general repairmen. For that reason, many Russians were willing to pay something extra under the table to have the work done right away. To illustrate how bothersome the shortages and delays were, the Russians delighted in telling the story about Ivan. He had been waiting and waiting for six or seven years to buy his own automobile. After waiting all that time, he finally was notified to appear July 1, 1980, at the regional office of the Ministry of Trade.
“I have good news for you,” said the clerk. “Your car will be delivered to you five years from now on July 1, 1985.”
“Wonderful!” Ivan replied. “But will it be in the morning or the afternoon?”
“What difference does it make?” asked the puzzled clerk. “That is five years from now.”
“Well, I have to be home that morning because it’s the only time I could arrange for the plumber to come.”
Smolensky began to build up his fortune by specializing in construction work. The Russians had a special term for such private work crews—they were called shabashniki. While it was difficult enough to find anyone willing to do such work, it was more difficult to find work tools and construction supplies, even such simple things as two-by-four lumber and hammers and nails. Recognizing an opportunity, Smolensky began to buy up such products where he could and on occasion even manufactured these items and sold them to other moonlighting entrepreneurs.12 All such private activities were illegal and classified as economic crimes. Eventually Smolensky was found guilty of using government printing presses to sell Bibles for private profit and sentenced to jail for two years for just such an economic crime. In 1987, when Gorbachev finally made such activities legal, Smolensky set up the Moscow No. 3 Constructive Cooperative. On February 14, 1989, two years before Fridman did the same thing, Smolensky took the rubles he had accumulated and established what he called the Stolichny (Capital) Bank. He later expanded the bank by buying up Agroprombank, which had been a state-owned bank designed to provide banking services to rural areas. Combining the two banks, he changed the name to Stolichny Bank Savings/Agro or SBS/Agro. Together with Boris Berezovsky, in December 1995 and then again in September 1996, the two men won majority control of Sibneft in one of the Loans for Shares auctions discussed earlier (see Figure 4). The SBS/Agro bid for control of Sibneft was only $100.3 million. Not bad for an asset worth upward of $10 billion.
In the case of Vladimir Potanin, he managed to build up his OneksimBank not so much by using his own labor but by subverting government agencies to his own personal ends. Like his father, Potanin worked for a Foreign Trade Organization (FTO) under the Ministry of Foreign Trade. These FTOs were set up to import and export goods on behalf of the state and to act as agents of the various state enterprises which themselves were not authorized to engage in foreign trade. Only the FTOs were allowed to have foreign currencies. In Vladimir’s case, his FTO was Soiuzpromexport and it specialized in the export of nonferrous metals.13 After he saw how others were enriching themselves with their newly created cooperatives, Potanin decided to capitalize on his own specialization by creating a cooperative that would do privately what he had been doing on behalf of the government. Leaving the government, he created a cooperative called INTERROS that began to trade in nonferrous metals. Next he decided he needed his own bank. To generate the capital he needed, he took advantage of his former government connections and supplemented his own money with borrowed funds from Vneshekonombank, the state-owned foreign trade bank. Once he had the required capital he used it to open OneksimBank, yet another in the series of personal banks established by these newly rich oligarchs.