The Russia Conundrum

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.’

I remember very clearly what Yukos was like back then. Salaries were six months in arrears and employees were either grumbling to themselves or complaining out loud. The level of theft of company property and corruption by workers and managers was staggering. Yukos was running a massive operating loss, and the company was only functioning in nine regions of Russia. When I left Yukos seven years later, however, average salaries had reached $1,000 per month; there were no delays in pay; production had doubled; and tax payments reached $3.5–4 billion per year at an oil price of just over $20 a barrel. Privatisation had allowed us to establish proper management, which simply did not exist in the era of the ‘red directors’ – the old Soviet bureaucrats who continued to run the big national industries.