As an adviser to Yeltsin’s Reform Cabinet, I followed the process from the inside. I was never particularly close to Yeltsin himself, but in 1992 I was appointed chairman of the Investment Promotion Fund, with the rank of deputy minister of fuel and energy. I saw at first-hand the mistakes that were being made and I raised the alarm about the pitfalls that awaited us. Many of the problems were down to the Chicago Boys. Much has been written about their role, but I saw with my own eyes how systematically they took apart the country’s national economy and dismantled structures that had taken decades to build up, breaking things that should never have been broken. I don’t know exactly what authority these American consultants had been given – or who gave it to them – but our Russian politicians deferred to them and, when disputes arose, it was the Americans who got their way.
The thing that made me most angry – and one of the reasons I decided to quit – was the way in which the Russian oil industry was unnecessarily torn apart. Despite all advice, the decision was taken to privatise the main branches of activity – mining, processing, marketing and distribution – separately from each other, with the inevitable result that production collapsed. In an industry where the product is mined in inhospitable conditions hundreds or thousands miles from ports and even from populated areas, with little capacity for prolonged storage, it is obvious that any disruption to the established supply chain will lead to problems of shortages, the loss of wells frozen because of inactivity and the destruction of expensive equipment in processing facilities. I argued against the decisions that were taken, but my views were ignored. Ironically, just a few years later, it would fall to me to undo the damage that was done to the oil industry by the misguided policies of the Chicago Boys and their Russian counterparts.
Boris Yeltsin meets with leading industrialists and bankers, including myself, in the Kremlin, 1997
I saw so much going wrong that, in 1993, I stood down from my role in the Reform Cabinet. I told the cabinet that if entrepreneurs like me were not listened to, then we would inevitably take advantage of their mistakes. I decided to go fulltime into business.
The voucher scheme failed because it distorted the realities of the Russian economy. The sums involved were illogical. The population of Russia was 150 million, so 150 million vouchers were issued, meaning that the greater part of Russian industry was being valued at a mere $9 billion. Anyone who did the maths could see this was wrong, and anyone with a business brain could see it presented an opportunity. But most Russians had no experience or understanding of the concept of private ownership and were more than happy to sell their bits of paper for a few roubles. Group Menatep bought up large numbers of vouchers, which were being traded on street corners, and acquired shareholdings in many different industries, including textile mills, chemicals, metallurgy, glass, food processing, wood pulp and paper, fertilisers and oil. It was a risky process because no one was sure what condition these industries were in – the Soviet way was never to open the books; official profit and loss figures were unreliable, and we often discovered huge debts that had not figured in the accounts – but we took the gamble. Many of the firms we bought turned out to be hard to resurrect, several produced no returns and one even went bankrupt; but all enterprise involves an element of risk. When things worked out for us, we were accused of buying businesses on the cheap, but the fact is that we played by the rules that were in force at the time.
I took a hands-on role in running the companies we acquired, some of which we grew into multimillion-dollar businesses; but it soon became clear to me that our portfolio of interests was too big. Menatep needed to slim down; we needed to concentrate on one thing and, in 1996, I chose oil. The decision was partly influenced by the experience I had gained at the Ministry of Fuel and Energy and by my own background in chemical engineering, as well as my business partners’ qualifications in oil engineering. Russia has vast natural supplies, but her state-owned oil companies had been appallingly inefficient, operating at a loss for many decades. The industry was in sharp decline. I could see the wasted potential and I knew how things could be turned round; but Russian law specified that strategic industries should not be sold to private owners. While Yeltsin had managed to privatise many branches of industry, the remaining communist faction in the Russian parliament had fought to block the sale of land, iron and steel, oil and gas.
Times changed, however, when a combination of the inevitable crisis in the old state industries (especially defence), the splintering of the Soviet economic space, the Chicago Boys’ shock therapy and Boris Yeltsin’s clumsy management of the economy resulted in a massively inflated budget deficit that came close to bankrupting the country. Wages and pensions were left unpaid and people lost their jobs. To make things worse, presidential elections were due the following year and the Communist Party, under its new leader Gennady Zyuganov, was leading in the polls. Yeltsin needed cash to keep the economy going and get a grip on the main industries that were spiralling out of control if he were to have any chance of being re-elected. He asked Russia’s leading businessmen, including myself, to come to his aid and we agreed to do so. It was certainly in our interests to prevent a Communist Party victory, as it was already promising to renationalise our businesses and restore the state-run economy of old. In return for our help, the government agreed to revise the law on state industry and put up for sale the assets we were keen to purchase. The whole deal was quite remarkable: we were a bunch of young men who had started out less than a decade earlier doing petty business deals in defiance of a disapproving Soviet state, and now the state was coming to us for help.
Russian businesses advanced Yeltsin around $1.8 billion and, most importantly, helped to end the chaos and stabilise the situation in the big industries, which resumed the payment of taxes to the state and wages to their millions of employees. It allowed the government to head off the massive wave of strikes in both the cities and the regions, and to pay pensions and wages. Yeltsin’s poll numbers rebounded and, in July 1996, he was elected to a second presidential term. In a state-run auction, my partners and I bought the oil company, Yukos. It was a turning point for me that would define the rest of my life.
CHAPTER 4
GAMBLING BIG
Yukos was a major oil producer, but it had been run by uninterested state bureaucrats for so long that it was unprofitable, inefficient and deeply in debt. In 1996, we paid $309 million for a controlling 78 per cent of the holding company, despite knowing that it controlled only a minority of the shares in its oil production and other assets, and had debts exceeding $3.5 billion. We did so because we understood the potential that Yukos offered – and because we were sure we could bring the leadership, enterprise and commitment that would turn it around.
It worked. Under our leadership, Yukos would ultimately grow into the biggest oil producer in Russia, responsible for 20 per cent of the nation’s output, and one of the largest in the world. By 2003, its value on the Moscow stock exchange would rise to a market capitalisation of over $30 billion. But it wasn’t easy. Back in 1996, the Russian oil sector was in chaos. The major companies were in meltdown, not paying wages to their workers, not paying taxes and threatened with bankruptcy. Yukos owed $2 billion in taxes to the state; wage arrears and debts to contractors were spiralling; output had fallen from 45 million to 35 million tons per year, with the result that the infrastructure for production, processing and transportation had collapsed. The Kremlin was unhappy, the workers were unhappy and tensions were growing. When Boris Yeltsin agreed to privatise the oil industry, he knew that that was the only way to save it, and he laid down strict conditions. ‘We have to immediately ensure the receipt of taxes from the largest industrial enterprises,’ the Kremlin negotiators told us. ‘That is why we are ready to sell those enterprises to you. But, to begin with, you must go and persuade the directors of those enterprises to hand over power to you. You have to do that yourselves. And you have to start paying workers’ wages and state taxes immediately.’