Michael Dobbs - Down with Big Brother

Hundreds of similar get-rich schemes were implemented in the early months of 1991. A subsequent parliamentary investigation showed that only a small proportion of the several billion dollars earned by semiprivate companies like Istok during 1990–91 ever returned to Russia. 45These were halcyon days for the emerging class of nomenklatura capitalists.

Behind every successful entrepreneur stood a bureaucrat with the power to grant or withhold a license of some kind and a foreign partner willing to ignore how the license was obtained. In many cases these relationships outlasted the collapse of communism. The key to understanding how biznes is conducted in the new Russia frequently lies in knowing who was pals with whom in the old Communist Party and KGB. “What we have in Russia is a pseudomarket, not a real market,” explained Aleksandr Rudenko, a prominent businessman in St. Petersburg, who made his fortune during this early period. “The state has a monopoly over the export of basic goods. The economic conditions have been created in which people who are well connected can steal like crazy. You get three or four officials to sign a piece of paper authorizing you to do something, and you have it made.” 46

By refusing to follow Western advice and liberalize prices, Gorbachev fostered the development of the privileged new class. In a market economy entrepreneurs make their profits from tiny percentages. The more imperfect the market, the bigger the potential profit from buying and selling. In the dying days of the Soviet Union the profit margins were so huge that few people who were in a position to manipulate the market to their advantage were able to resist the opportunity. The absurdities of the “planned economy” were screaming to be exploited.

Some of the scams were perfectly legal, if morally questionable. In November 1989 the government slashed the tourist rate of the ruble by 90 percent but left the official rate unchanged. Foreigners living in the Soviet Union were allowed to purchase foreign airline tickets in devalued tourist rubles, even though the price was still calculated at the official ruble rate. As a result, a round-trip business class fare to Paris or London cost less than a hundred dollars, one-tenth of the previous price. For a few glorious months members of the Western community thought nothing of flying to Stockholm to catch the latest Hollywood movie or taking a weekend trip to Rome to visit a new trattoria. Dream vacations in Africa, Australia, and Latin America suddenly became affordable. Since few people bothered to fly economy class anymore, Western airlines flying in and out of Moscow upgraded most of their seats to first class and business class. Everyone was happy. The only obvious loser was the Soviet Foreign Trade Bank, which collected devalued rubles from the foreigners and paid out real dollars to the airlines. It was hardly surprising that the bank went bankrupt shortly after the loophole was finally closed, almost a year later.

For years one of the few real constraints against private enrichment at the expense of the state was the fear of getting caught. Thanks to Gorbachev, however, even that inhibition had now vanished. The bureaucrats who controlled the Soviet economy scrambled to profit from their positions. It took surprisingly little time for once-doctrinaire Marxists to transform themselves into born-again capitalists. Red Army generals in East Germany stopped worrying about the threat from NATO and began selling fuel and military supplies on the black market. KGB officials, trained to root out any manifestation of free enterprise, founded commodity exchanges. Officials at Gosplan, the state planning agency, used their intimate knowledge of how the Soviet economy actually worked to launch their own trading companies.

Nowhere was the enthusiasm for “nomenklatura capitalism” more apparent than in the Central Committee of the Soviet Communist Party. By the spring of 1991 the inner sanctum of Marxism-Leninism had become a den of money changers.

FOR MOST OF ITS EXISTENCE the Soviet Communist Party never had to concern itself with the problem of raising funds. When the party needed money—whether to build dachas for deserving apparatchiks, to pay for the limousines used by Politburo members, or to finance Western Communist parties—it simply issued an instruction to the state bank. In a one-party state there was no distinction between the party and the state. The Politburo’s orders were the law of the land.

The symbiotic relationship between party and state was shaken in February 1990, when the Congress of People’s Deputies voted to abolish Article VI of the Soviet Constitution. When it lost its constitutionally guaranteed monopoly of political power, the Communist Party also lost the right to plunder the state treasury as it saw fit. Even though the party was still an immensely wealthy organization—its property holdings alone were worth billions—its financial managers were extremely worried. The new Russian parliament, headed by Yeltsin, was threatening to levy taxes on a long list of party assets, including its vast media empire, and hundreds of rest homes, hospitals, and vacation resorts.

Determined to protect its economic privileges, the party began to search for ways of hiding its wealth from prying eyes. In a secret memorandum, dated August 23, 1990, Deputy General Secretary Vladimir Ivashko proposed channeling some of the assets to commercial firms controlled by trusted Communist Party members. 47Assistance would be given to the front organizations to engage in foreign trade activity, in order to generate an “independent source” of hard currency for the party’s international operations. Communist members of the Soviet and Russian parliaments would ensure that the appropriate legal framework was created to defend the party’s commercial interests. Secrecy was essential, of course. Only a very small group of leaders would know the identity of the “friendly firms” or their true relationship with the party.

Ivashko’s plan was hardly original. A similar scheme—to channel funds to pro-Moscow organizations around the world—had been in operation for several decades. “Friendly firms” controlled by foreign Communist parties were granted special trading privileges in the Soviet Union, enabling them to purchase raw materials at deeply discounted prices. A typical example of such an operation was the delivery of free or subsidized newsprint to left-wing publishing houses in Italy and Greece. Some of the newsprint was resold at market prices, in order to provide income for political activities. An alternative method of subsidizing “friendly firms” was to purchase goods from them at inflated prices. After the failed coup of August 1991 Russian prosecutors drew up a list of around one hundred foreign companies that received Soviet subsidies of one kind or another. 48

In order to put Ivashko’s ideas into effect, the Central Committee recruited a KGB colonel, well versed in the art of clandestinely channeling funds to “friendly firms.” Leonid Veselovsky had previously served as a KGB field officer in Portugal, where he was responsible for contacts with the local Communist Party. Soon after his appointment he wrote a memorandum for his new bosses describing a mechanism for shifting party funds to the West by starting joint stock companies in countries “with a mild taxation system,” such as Switzerland. According to his plan, details of which were later leaked to the Russian press, the companies would be headed by trusted party agents. 49

The extent to which the Communist Party succeeded in laundering its assets later became a subject of great political controversy. After the failed coup Russian prosecutors claimed to have traced billions of rubles of party funds that had been “loaned” to Russian companies and joint ventures. The list of alleged recipients of Communist largess included some of the best-known Russian banks and holding companies. Hardly any of this money was ever recovered, leading prosecutors to complain that their investigation was blocked for political reasons. Veselovsky himself insisted that most of his ideas for shifting party assets overseas never got beyond the planning stage. 50