Inside the White House were the bodyguards’ bosses. Nearly a dozen so-called oligarchs, the superrich businessmen who built financial empires on political connections to Yeltsin’s Kremlin, stalked the country’s key economic policymakers. That any of the oligarchs might be in the White House at this or any other time was not unusual. These men had elected Yeltsin in 1996 (or at least their money had) and so had what could politely be termed a proprietary interest in his government. They descended on the White House Aug. 16 because they knew Russia was bankrupt, a victim of its own incompetence and of the virulent global economic crisis that had earlier laid waste to East Asia. And if the government was broke, several of the banks the oligarchs controlled soon would be, too.
The oligarchs’ target? Russia’s economic brains–the young prime minister, Sergei Kiriyenko; the two principal architects of Russia’s transition from communism to capitalism, Anatoly Chubais and Yegor Gaidar, and the head of the central bank, Sergei Dubinin. These four men, with a handful of top aides, were living through the longest weekend of their lives. Just before midnight, they were holed up in Kiriyenko’s fifth-floor office; outside were the oligarchs, desperate to influence their decisions. The most aggressive of the businessmen, like Vladimir Potanin of Oneximbank (himself a former high-ranking government official), had not hesitated to barge right into the meetings that night.
Just past midnight, the prime minister emerged. The businessmen, some in T shirts and jeans, gathered around him. Their fates–and that of the nation–hung on what the young prime minister was about to say. Kiriyenko calmly ticked off the steps the government would take Monday morning. The central bank would devalue the ruble by more than 50 percent; the government would also effectively default on its domestic debt of $40 billion, and–in a move to protect some of Russia’s private banks–impose a 90-day moratorium on their commercial debts. The assembled plutocrats’ immediate reaction, former central-bank chief Dubinin recalls, was ““pained silence.''
The fallout, for Russia and for the world, was immediate and deeply painful. Moscow’s experiment with capitalism was a shambles, its political future uncertain. Within a week, Kiriyenko and his team of reformers would be gone, eventually replaced by a left-leaning government headed by former KGB spymaster Yevgeny Primakov. The decisions also rocked markets around the globe as investors realized how badly Russia’s transition to capitalism was foundering. How Russia got to its own D-Day–the day of default and devaluation–is the subject of the story that follows. It is based on lengthy interviews with nearly all of the critical decision makers within Russia. The disastrous summer of 1998 represented the collapse of what Alpha Bank chairman Peter Aven called the ““Russian miracle’’: the notion that 1,000 years of history–an era mainly bereft of capitalism and democracy–could be overturned in just six years. The lesson, Aven says, is that ““there never was a Russian miracle–and that there won’t be.''
WHEN A 35-YEAR-OLD, RELATIVELY ANONYMOUS official in charge of Russia’s Ministry of Fuel and Energy was named acting prime minister in March of last year, he self-effacingly told a bemused press corps, ““I’m as surprised as you guys are.’’ Sergei Kiriyenko had been a bright young banker in Nizhny Novgorod, a Komsomol leader during the communist days and a friend of Boris Nemtsov–the deputy prime minister and reformer in charge of economic policy. His task, Kiriyenko would later say, ““was to be a technocrat,’’ to implement economic reforms that had stalled under his predecessor, Viktor Chernomyrdin. In hindsight, Kiriyenko concedes how naive that thought was; Russia’s politics were (and remain) bitterly divided, and Kiriyenko’s boss, the ailing Boris Yeltsin, was rarely around to back him up. There was no way Kiriyenko could avoid playing politics, and his profound lack of clout with Russia’s legislature would come back to haunt him.
By early May, after the Duma finally confirmed him, Kiriyenko was still trying to grasp what he was up against. World oil prices had halved in just two years, thanks to a collapse in demand in East Asia. That in turn had devastated Russia’s trade accounts. On May 17, the men who would be Kiriyenko’s key advisers–led behind the scenes by former prime minister Gaidar–outlined just how precarious Russia’s fiscal situation was. Monthly tax collection was about 22 billion rubles. Domestic spending commitments totaled 25 billion rubles, and the interest on maturing government debt added 30 billion more. In a memo, Gaidar advised the prime minister that Russia’s only way out was to go to the International Monetary Fund for help–seeking its second large loan in four years. On the last weekend in May, with the government bond market collapsing and the ruble under increasing pressure, Chubais and Sergei Vasiliev, the then deputy chief of staff, slipped off to Washington. In a series of meetings with Clinton administration and IMF officials, the Russians were blunt: without quick and substantial outside help, the specter loomed of a collapse as dramatic as that in Indonesia. On Saturday, May 30, the Russians learned that their message had been heard loud and clear. At an informal breakfast meeting at his home, Deputy Secretary of State Strobe Talbott told them that President Bill Clinton firmly backed another package of aid for Russia–never mind that the IMF was effectively tapped out, or that Clinton had not yet persuaded a doubtful Congress to give more money to the Fund. ““We dialed 911,’’ Chubais says, and the call was answered.
For the next six weeks, the young government’s energies went mainly into haggling with the IMF over the bailout’s terms and size. Chubais didn’t necessarily want the job of leading the negotiations. But the oligarchs, desperate to avoid devaluation, begged him to do it. Chubais acted coy. ““Relax, guys,’’ he told them, ““I have other things on my mind,’’ referring to his new post as head of a massive electric utility. Chubais could hardly have forgotten how a group of these men–led by Boris Berezovsky–tried to destroy him during the 1997 ““war between the oligarchs,’’ which erupted over several large privatization deals. Now, as their fortunes dwindled, his erstwhile enemies wanted to let bygones be bygones. On the evening of June 16, a group of them invited Chubais to the Logovaz Club, a two-story 18th-century villa Berezovsky owns. The irony was obvious. ““Why the hell did we do our best for the entire year to destroy this guy in order now to come and beg him to do this job?’’ asked Badre Patrikacishvilli, Berezovsky’s right-hand man.
But the rest of the group aimed to please. June 16 happened to be Chubais’s 43d birthday. The group presented him with ““an awfully expensive watch,’’ he says, and a bouquet. Then Mikhail Friedman, the president of Alpha Bank, sat down at a baby grand piano and banged out ““Happy Birthday.’’ The other oligarchs joined in, merrily singing away in English. The next day Kiriyenko named Chubais his chief IMF negotiator.
TWICE THE TALKS NEARLY WENT OFF THE rails. But in Moscow’s poisonous political atmosphere, they weren’t the only issue the Kiriyenko government had to worry about. As the IMF negotiations entered their final phase in early July, a scheme led by Berezovsky to undermine the government exploded into the open. Berezovsky, whose interests include a major oil company, had tangled with Kiriyenko when he was running the Energy Ministry, and his contempt had only increased once he became prime minister. The public got a whiff of his scheme on July 10, when Nezevisimaya Gazeta, a Berezovsky-owned newspaper, printed an editorial calling for the Kiriyenko team to go, in favor of a government of ““national unity.’’ The purpose of the new government, the article said, would be to conduct early parliamentary and presidential elections. Yeltsin would be a member of the new government, provided he forswore a third presidential term and agreed to serve essentially as a constitutional monarch.
Conspiracy theorists in Moscow see Berezovsky’s hand in virtually everything that happens in the upper reaches of Russia’s government. In this case, they were right. Before the newspaper editorial, Deputy Prime Minister Nemtsov, among others, had got wind that Berezovsky was pushing his ““government of national unity’’ scheme on the Kremlin–and that Tatyana Dyachenko, Yeltsin’s influential daughter, was inclined to consider it seriously. Berezovsky has long advised the Yeltsin family on its finances, and with the president’s health deteriorating, his daughter began to think the time might be right to cut a deal: a more ceremonial role for Yeltsin in return for guarantees on the family’s physical and financial security.
Nemtsov’s fear was straightforward. “"[Some of] the oligarchs wanted to control Russia,’’ he would say later, referring specifically to Berezovsky. Alarmed–and confident in his relationship with Yeltsin–Nemtsov confronted Dyachenko on July 9 in the Kremlin office of Valentin Yumashev, the president’s chief of staff. ““You behave like Pavlik Morozov,’’ he said to her, referring to a famous Soviet-era story of a teenage son who sells out his father to the secret police. ““You are ready to betray your father.''
Not taking any chances, Nemtsov had also phoned Yeltsin himself on July 9 to make sure the old man knew what was happening. ““You don’t have to teach the president how to hang on to power,’’ Yeltsin responded. ““I know what to do.’’ On July 10, the day of the newspaper article, Yeltsin met with his ““power ministers’’ (Defense, Interior, the Federal Security Bureau) and declared that ““we have enough forces in order to stop any plans for taking power.’’ The apparent allusion to some sort of coup only exacerbated the jumpy, unsettled atmosphere in Moscow–and did nothing to soothe financial markets desperately hoping for an imminent IMF deal. Most people didn’t have a clue what Yeltsin was talking about. But in fact, the remark was his response to Berezovsky’s scheming against the government, and for the moment put an end to it.
ON JULY 13, AFTER SIX WEEKS OF DIFFI- cult negotiations, the IMF approved a $22.6 billion package of loans to be spread over the next two years (and which included new commitments from the World Bank and the Japanese). In return, Russia had to deal immediately with its disastrous budgetary situation. Greatly relieved–and believing the worst was over–the principals eventually scattered to the places where the rich and powerful take summer holidays. Chubais went off to cruise the Irish countryside in a rented car; central-bank chief Dubinin headed for northern Italy; the IMF’s first deputy managing director, Stanley Fischer, headed to France and the Greek Islands. Oligarchs took off, too: Berezovsky and Potanin to the south of France, Aven to Sardinia.
Their holidays would end badly. In Moscow, the Kiriyenko government’s relations with the Duma deteriorated as the IMF package’s terms became clear. The government was forced to pass some of the IMF-mandated anti-crisis program by decree–which it has the authority to do in most instances. But the Duma balked on a couple of key changes, including (unexpectedly) one that would have directed Russia’s regions to funnel more tax revenue to Moscow.
Kiriyenko, the self-described ““economic manager,’’ simply lacked the clout to cut deals. And Duma members had little to fear from a chronically ill Yeltsin. Kireyenko admits to being surprised when Duma faction leaders took him aside and said, "” “Listen, old pal, we are not going to put our signatures on all these measures a year away from elections.’ They didn’t want,’’ he says, ““to take any risks. ''
By THE SECOND WEEK OF AUGUST, THE Russian markets were in free fall. The intent of the IMF package, to provide stability, had failed, and failed quickly. Exactly why will be debated for years. The IMF deal was supposed to provide the confidence that would persuade investors to stay in the markets. Instead, many fund managers took the brief uptick in prices that followed the July deal as an excuse to leave the markets for good.
The plunge in the markets brought Russia’s banks to death’s door. Their foreign creditors began calling in loans that had been secured by Russian government bonds. The value of the bonds had plummeted, and the banks didn’t have the cash. Then, on Thursday, Aug. 13, came what many of the participants regard as the death blow. Financier George Soros wrote an opinion piece in the Financial Times saying Russia had no choice but to devalue. The IMF’s Fischer, still on holiday in Greece, read the article and reached a conclusion shared by many investors around the world: the jig was up.
When markets are in a full-bore panic, as Russia’s then were, they are a sort of doomsday machine. Investors were making ruthlessly rational decisions–decisions that were driving the Russian government and financial system to total ruin. The only way to stop the machine was to switch it off. And by midday Friday, says Chubais, that was the only option. ““The situation was very, very bad,’’ he says. Chubais frantically drove four hours to reach Shannon airport. There he chartered a plane and got to Moscow early Saturday morning. Dubinin rushed back from his holiday in Northern Italy. John Odling Smee, the Fund’s point man on Russia, booked an IMF delegation into the plush Metropole Hotel.
That the end was nigh was clear to everyone, save the one man who had had virtually no role in dealing with the unfolding disaster: Boris Yeltsin himself. On Friday, Aug. 14, on a trip to Novgorod ostensibly to display that he was still fit to run the country, the president declared: ““There will be no devaluations of the ruble. I say it firmly and clearly. It is not just my fantasy. Everything has been calculated.’’ Kiriyenko, home alone in Moscow planning an emergency meeting for that very evening in the White House, couldn’t believe what he had heard. ““I was flabbergasted,’’ he says. For good reason: the prime minister hadn’t had a single substantive discussion about the national economy with his disengaged president since early July.
Yeltsin was right about one thing: everything had been calculated. Saturday morning, Kiriyenko convened a meeting at the prime minister’s dacha, in the woods about 40 minutes outside Moscow. It is a large, austere two-story house fronted by four giant white pillars–a Soviet vision of a cozy house in the forest. Kiriyenko’s subordinates ticked off the devastating numbers: on Monday nearly all of Moscow’s biggest banks would be insolvent; to support the ruble’s prevailing level of 6.2 to the dollar, the central bank estimated it would have to spend $1 billion on Monday alone (the government’s total unpaid pensions at that point amounted to just over $4 billion). During the next week, Dubinin said, the government could well shoot its entire wad–both hard currency and gold reserves–propping up the ruble. On Wednesday, moreover, $5 billion worth of ruble bonds–GKOs (pronounced gekkos)–were coming due, and the government was unable to pay.
No one disputed the facts, and the group, led by Kiriyenko, quickly moved on to consideration of how best to shut down the doomsday machine. Devaluation and ““involuntary restructuring’’ of GKOs–in effect a default–as well as some form of moratorium on the private banks’ debt payments, were all discussed. Only one significant voice was raised in opposition. In a two-page memo that he delivered to Kiriyenko, Boris Fyodorov, an economist who was then the government’s chief tax collector, argued against the immediate GKO default, saying that at a minimum the foreign institutional investors burned by the decision needed to be brought into the negotiations. Gaidar and Chubais disagreed; as unpalatable as these measures were, they argued, they needed to be immediate and simultaneous. Later that afternoon, Kiriyenko agreed.
THE MEETING AT THE DACHA BROKE UP after four hours. Chubais, Gaidar and Dubinin immediately went to the Metropole to brief Odling Smee. The Russians knew that any plan would need the IMF’s blessing. That day Odling Smee didn’t tip his hand. But by 6 o’clock on Sunday, all the key players in Moscow had signed off on the proposal that would be presented to Yeltsin for approval. Kiriyenko, Chubais and Kremlin chief of staff Yumashev then helicoptered to the presidential residence Rus, in Tverskaya Oblast–a hunting compound beloved by communist leaders in the old days. They outlined the plan to Yeltsin, and offered two devaluation options. The ruble could either float freely–the option most advisers favored–or they could try to keep the currency within a strict ““corridor,’’ with the outer limit set at 9.5 to the dollar. Yeltsin replied that there should be a corridor–apparently unwilling to put his name behind an uncontrolled devaluation two days after declaring such a thing would never happen.
Then Michel Camdessus, the IMF’s managing director–keeping abreast of the talks while on holiday in France–balked. ““We were absolutely sure by Sunday evening that the IMF was going to back us,’’ Dubinin says. But the IMF itself was at odds over what Moscow was about to do. Specifically, Camdessus wanted the Russians to delay the GKO restructuring and–fearing an inside deal that would benefit the oligarchs at foreign investors’ expense–he wanted representatives of Russia’s Western creditors in the discussions. On the phone with Chubais Sunday night, Camdessus at one point threatened to expel Russia from the IMF if the plan went forward. ““It was a very tough discussion,’’ says one Western source with knowledge of the exchange.
Gaidar and Chubais knew well the choices they were making would have devastating consequences–““It was a catastrophe,’’ Gaidar says. But they believed they had no options. The restructuring of the ruble debt would give the government some budgetary breathing room and enable it to meet other commitments–like the massive wage arrears to what Kiriyenko called ““rank and file’’ workers. And devaluation would eventually build up hard-currency reserves as imports plunged and exporters benefited from a weaker currency. But it was a disaster for the banks, which had become addicted to the easy money that they had been making in the GKO market. From 1996 to 1998, when inflation was coming down and the ruble was stable, the high interest rates offered on GKOs were a primary source of income for the banks. ““The whole [banking] system was geared toward moneymaking [on GKOs],’’ Alpha bank’s Aven says. ““They were a source of life.''
That’s why the moratorium on the banks’ debts was so critical–and controversial. Without it, Russia’s largest banks were finished. But precisely when the moratorium became part of the plan is still a mystery–which has fueled speculation that it was an expedient to salvage the oligarchs. A senior Ministry of Finance official told NEWSWEEK that as of 7 p.m. on Sunday–one hour after Kiriyenko & Co. had departed to see Yeltsin–the moratorium was not in the plan. Sergei Vasiliev says there is ““no doubt’’ that the oligarchs, who gathered at the White House that night, pushed hard to get it in. But both Kiriyenko and Chubais deny there was ever any controversy. The alternative, they argue, was simple: ““the total collapse’’ of the Russian banking system, as Chubais puts it–something no country could accept, whatever anyone might think of the bankers themselves.
At midnight, Kiriyenko made his announcement outside his office. ““We promised them that the program on restructuring the GKOs would be announced very quickly,’’ Dubinin says, ““and that the devaluation would not exceed 12.5 rubles to the dollar.’’ Neither forecast would turn out to be accurate (the negotiations over the terms of GKO restructuring–which the IMF insisted had to treat foreign investors fairly–are still going on, and the ruble is now at 21 to the dollar). Chubais and Gaidar continued to haggle with the IMF. At about 4 a.m., according to Chubais, Odling Smee signed off on a written document approving each point of the Russian program–after the Russians had agreed to bring in two foreign investment banks to advise on the GKO restructuring.
THE CONVENTIONAL WISDOM HAS IT THAT Kiriyenko and his team were fired a week later because of the devaluation and default. But the story behind his dismissal, NEWSWEEK has learned, is not quite so straightforward. Yeltsin’s health had deteriorated steadily throughout the summer. By mid-August, sources say, his inner circle was getting more concerned that if the worst occurred–if Yeltsin died–Kiriyenko would become acting president for three months, at the end of which new elections would be held. They considered Kiriyenko too weak and inexperienced to handle all that. The decisions of Aug. 17 added greatly to the pressure for Kiriyenko’s dismissal. But asked flatly why Kiriyenko was dismissed, a senior Russian government official replied: ““the president’s health.''
Early on Aug. 23, Kiriyenko was told to appear at Gorki 9, a presidential residence about a half hour from the Kremlin. This was the end. He spoke for an hour with Yeltsin, and left as the former prime minister. The next morning, the man Kiriyenko replaced, Viktor Chernomyrdin, was back in as acting prime minister; he was escorted into his office by none other than Boris Berezovsky.
In his final conversation with the man who had made him prime minister, Kiriyenko told Yeltsin ““that if somebody–anybody–thinks Russia’s crisis ended on Aug. 17, then that somebody is wrong.’’ Five months later, trying–just like his predecessor–to deal with Russia’s disastrous budget, keep the oligarchs off his back and get the IMF to help Russia yet again, Prime Minister Yevgeny Primakov learns that every day of his life. He, too, now knows that in modern Russia, there are no miracles.
