Freeland (2000:11): 1998 crisis: government devalued rouble, defaulted on domestic treasury bills, and announced a moratorium on repaying foreign debt.
Freeland (2000:11): “Russia had freed itself from communism but not from the communist legacy; it had constructed its own capitalist system, only to discover it had built the wrong kind.”
Freeland (2000:28): Aleksey Ulyukayev was one of the young reformers' and a protege of Gaidar. [Minister of Economic Development 2013-2015. Deputy Chairman of the Russian Central Bank 2004-2013].
Freeland (2000:37): Describes the young reformers as "McKinsey revolutionaries," filled with revolutionary ideas but uninterested "in the mundane, messy work of winning the political power necessary to implement it. The result was that they were ultimately never more than salaried advisers always at the mercy of the man who hired them."
Freeland (2000:57): Each citizen given a voucher worth RUB 10,000 (about $25). They could use this to buy the reserved share in their enterprises, buy stakes in companies that would be publicly auctioned, invest in voucher mutual funds, or they could trade them on the street.
Freeland (2000:67): By 1994, most firms were in private hands.
Freeland (2000:71-72): Gazprom privatisation as an illustration: 15% of company sold to employees and management; 10% retained by company; 35% sold to domestic investors, usually at closed auctions; 40% retained by government. Created by Chernomyrdin, whose former deputy, Rem Vyakhirev, became head. The Gazprom boss managed the state's share and voted on the government’s behalf at shareholder meetings. Gazprom benefitted from generous tax concessions, export tax exemptions, and some import tax and VAT exemptions. But it sold domestically at low rates and tolerated high levels of non-payment.
Freeland (2000:94-102): Mikhail Gutseriyev was the originator of an “off-shore zone” in Ingushetia. A presidential decree signed 1 July 1994 created it, meaning companies registered there paid no local or regional taxes, 80% lower federal taxes, and 50% lower regular import and export tariffs. Bin Financial Group, based in Moscow’s suburbs, was the only company authorised by the Ingushetian government to register companies. The logic was that it would benefit Ingushetia, and therefore encourage it to remain within the Russian Federation. The taxes that did have to be paid went to Ingushetia and Bin, the latter of which took a 10% cut. All registered companies were required to bank with Bin Bank. The zone survived efforts to clamp down on loopholes because major companies, like Lukoil and Logovaz (Berezovskiy’d), benefited from it. Gutseriyev entered politics, by his own account, because it was easier to become an official than fight them; without such political power, his profits were vulnerable to seizure.
Freeland (2000:130): "After decades of communist subsistence, suddenly it was okay to get rich - but only a very visible minority seemed to know how to do so. Following a few months of mute shock, the rest of Russia threw itself into a panicked search for the secrets of its lucky compatriots' success, which made Russians an easy mark for pyramid schemes."
This is an important point to capture: in the early 1990s, it was common for lot of people to attempt different ventures in diverse sectors, in an effort to take advantage of the apparent opportunities and weakly regulated and controlled environment. Schemes could either produce immense wealth or enormous losses - or both, depending in where one stood in the pyramid. And the people designing the rules of the game were learning about capitalism at the same time as everyone else, and were unaware of the market value of some assets.
Freeland (2000:161-163): Describes loans-for-shares as a radical idea that deformed capitalism in the country. It was "a crude trade of property for political support" but its scale made it much more than just corruption. Whereas the vouchers scheme gave enterprises to those who already controlled them (the red directors), loans-for-shares gave the world's largest nickel producer and several major oil companies to trusted entrepreneurs - who became oligarchs. "Ultimately, loans-for-shares destroyed the young reformers: it cost them their ideals, their reputations and eventually their jobs. Worse yet, ultimately it scotched any remaining short-term hopes for the emergence of healthy, prosperous Russian capitalism. Instead, Russia's market economy is now corrupt, distorted and inefficient and loans-for-shares is both cause and symbol of its malaise."
Freeland (2000:165): Potanin came up with the idea for loans-for-shares and wanted control of Norilsk Nickel, which had sales of $25bn. He met with Aleksandr Smolenskiy (Stolichnyy banking group), Khodorkovskiy, Vladimir Vinogradov (Inkombank), Petr Rodniov (Imperial bank), Vitaliy Malkin (Rossiyskiy Kredit bank), and Friedman.
Freeland (2000:170): The directors of Lukoil and Surgutneftegaz, Vagit Alekperov and Vladimir Bogdanov, managed to retain control of their companies by being included in the scheme. UES and Rostelecom featured in the initial plans but were eventually excluded.
Freeland (2000:176): Foreign companies were banned from bidding for Yukos as a strategically important company. Nevertheless, Khodorkovskiy feared that a foreign company would find a loophole and a Russian partner and thus thwart his bid for control. Konstantin Kagaolvskiy headed Menatep’s efforts to secure the company. He later claimed that he wrote the law himself, keeping it “intentionally vague and open to multiple interpretations,” so that Menatep could sue and foreign companies would not be able to evaluate the legal case or the risks.
Freeland (2000:242): Describes Vladimir Yevtushenkov as Luzhkov's "shadowy consigliere and the chief of Sistema," a broad conglomerate that Luzhkov used to build an independent power base.
Freeland (2000:246): Yevtushenkov "was not one of the oligarchs, but he had come to rival them in wealth and power" by late 1997.
Freeland (2000:260-265): So-called "bankers' war" broke out in late 1997. Primary cause was Gusinskiy, who felt aggrieved to be left out of loans-for-shares when his media outlets had been so important to reelection. He wanted control of Svyazinvest, the state-owned telecommunications company that was ultimately privatised for $1.875bn. But the deeper cause was that the reformers wanted to rein in "bandit capitalism" and create a law-governed market economy; they thought the oligarchs would understand that this was in their own interests, given their commanding position in the Russian economy. Gusinskiy oversaw the preparations for privatising what was actually an umbrella holding a 38% stake in 88 regional telecoms firms and Rostelekom, and in winning over the red directors and the military who shaved the network. But he was disappointed when the bid was open and other oligarchs were allowed to participate. There were also tensions between Potanin and the other oligarchs, who felt Potanin was using his role in the government to enrich himself while refusing to help them set up favourable decals, and who were also suspicious of Potanin’s alliance with Chubais. Potanin originally agreed not to bid on Svyazinvest, but reneged when he lost his government post in a reshuffle. Two founding partners at Renaissance Capital, Boris Jordan and Leonid Rozhetskin, were key to setting up foreign investment to support Potanin’s bid,including from Soros (Potanin held a stake in Renaissance). Potanin ultimately defeated Gusinskiy’s bid of $1.71bn.
Freeland (2000:273-280): Gusinskiy's and Berezovskiy's TV stations began to attack the government, Chubais, Koch and Potanin. Chubais tied to mediate a truce with the oligarchs, but most of them believed Potanin had wronged Gusinskiy and should give him Svyazinvest. Chubais refused to annul the auction and allow Gusinskiy to match Potanin’s bid. Gusinskiy's and Berezovskiy's media outlets used the same mixture of publicity, biased coverage, and underhand tactics they had used in the elections, including kompromat on Kokh, who was accused of accepting a bribe disguised as a book advance. The campaign worked to discredit the reformers. Prosecutors began to investigate Oneximbank. Kokh left his role at the state privatisation agency, but Chubais and Nemtsov also secured Berezovskiy’s dismissal as deputy head of the Security Council. Then Chubais, Kokh, and Kokh’s replacement, Maksimum Boiko, were attacked over another alleged book payment. Yeltsin fired Chubais’ co-author and close ally, deputy presidential administration head Aleksandr Kazakov, then Boiko and another co-author, Petr Mostovoy, head of the federal bankruptcy agency. A week later, Chubais was stripped of the role of finance minister but remained first deputy prime minister with few allies. Nemtsov also came under attack and became more isolated.
Freeland (2000): A recurring theme is the continual tension between the oligarchs and the reformers: they occasionally needed each other, their interests occasionally converged, and to a degree they either existed a survived because of each other; but they also despised each other and had very different goals and visions that brought them into continual conflict.
Freeland (2000:291): In May 1998, the government was unable to find a single bidder for Rosneft, which a year earlier had been expected to bring in at least $2.1bn. The announcement led to a stock market crash, sent interest rates rocketing, and created fears of a ruble devaluation.
Freeland (2000:297-298): In July 1998, Russia and the IMF agreed a $22.6bn two-year rescue package, with $4.8bn arriving at the end of the month. The aim was to restore confidence in the Russian economy and alleviate the short-term debt burden of the government. Instead, it allowed western investors to exit Russia with fewer losses. By early August, the economy was collapsing as a result.
Freeland (2000:299-305): By mid-august, SBS-Agro (formerly Stolichnyy bank) and Inkombank - both of which were heavily indebted through hard currency loans secured against now-collapsing Russian stocks and bonds as collateral - failed to meet obligations. Imperial was on the verge. This impacted all the other banks, which were all connected through mutual loans. The government was complacent and failed to acknowledge the seriousness of the issue, with key figures either downplaying developments or on holiday. Then Imperial collapsed, leading the public to withdraw money en masse from other banks. Yeltsin refused to devalue the ruble, but Kiriyenko was forced to admit privately that the government was broke and the Central Bank could no longer defend it.
Freeland (2000:319-320): Smolenskiy’s SBS-Agro went into receivership; Khodorkovskiy’s, Potanin’s and Gusinskiy’s banking arms virtually collapsed too. But overall Gusinskiy came out of the crisis relatively unharmed, as did Friedman, and Berezovskiy still had control of Sibneft. Those still standing tried to take advantage of their counterparts’ weakness, Gusinskiy pursuing control of Svyazinvest from Potanin and Friedman Chernogorneftegaz from Oneximbank and BP.