The Russia Conundrum

CHAPTER 1

HOPES AND ASPIRATIONS

I grew up on Cosmonaut Street in north-east Moscow, where gangs of youths and petty criminals ruled the roost. There were street fights and at times it could be scary. I decided early on that I didn’t want to live my life in fear; I didn’t want the unending stress of living with outside forces that can bully you. For the hooligans, the answer was simple: I trained in martial arts, beefed up my muscles and refused to give in to their threats. But there were other forces in Soviet society that were also aimed at making people cower, and they were harder to confront.

As a child in the 1960s and 1970s, like most Soviet people I believed in the Party. Communism was our universe; it was here to stay and we never even thought there could be other ways of doing things. That’s pretty much how children are: parents, friends, teachers – what they say is a fact; most of the time you accept it without questioning. Sure, we had a little snigger when our leader Leonid Brezhnev used to come on TV mumbling and stumbling or awarding himself yet another medal. That was funny. But maybe it was like that everywhere? I didn’t see a connection between our system and empty shelves in the shops. I didn’t even know that shops could be full.

When I look back, I wonder if I was too naive, too blinkered to see clearly. I understood that lots of things were wrong, and I certainly knew there were plenty of contemptible people running the country, but I didn’t draw a general conclusion from those individual facts. Perhaps I didn’t do a lot of thinking.

I could have protested. There were dissidents at the time, and human rights advocates who pointed out the injustices of our society, but they didn’t make much of an impression on us. The state controlled all the sources of information and there was no internet back then. In those years, a person needed to come to the decision to protest from his or her own independent thinking, from his or her own sources of information. If you didn’t have that spontaneous personal conviction, it was hard to comprehend what the dissidents were saying. Most people – including me – had got used to the world we grew up in and we tended to accept the reality to which we were accustomed.

I was a good student. I was getting good marks and encouragement from the system, so I suppose that made me think twice about opposing it. I specialised in chemistry and I earned a place at the Moscow Mendeleev Chemical Technology Institute, which was a good place to study. I graduated with honours in 1986, a crucial time in Russian history. Mikhail Gorbachev had been in charge of the Soviet Communist Party for just over a year and he was beginning to shake up things that hadn’t been shaken for a long, long time.

My first jobs from the age of 15, while I was still a student, were as a street cleaner, then as a carpenter and finally on the overnight shift in a Moscow bakery. But I also took on another post. In 1986, I became the deputy secretary for organisational affairs of the Committee of the All-Union Leninist Young Communist League – the Komsomol – at the Chemical Technology Institute. Why? Well, first of all because it allowed me to enrol at the All-Union Correspondence Law Faculty. But, to be truthful, it was also an important credential for people like me who were looking to move up in the world. The Komsomol youth movement was an integral part of Soviet society; it gave a seal of approval to the young men and women who joined it, and it brought them into contact with important people who wielded influence in different areas.

My duties were mainly organising Komsomol meetings and collecting subscriptions, but it meant I was in the best place to maximise my future job prospects, something that remained the case when Gorbachev’s perestroika reforms kicked in. Gorbachev figured out that the Soviet centralised command economy, with the state taking all the economic decisions and telling people what to do and how to work, had sucked the energy and enthusiasm out of the country. People had no incentive to work hard; there was no initiative or innovation, because those things were not encouraged or rewarded. We used to say, not altogether jokingly, ‘We pretend to work and the state pretends to pay us.’ Gorbachev decided it was no good and the only way to get things moving was to allow a little bit – really just a little bit – of private enterprise.

At first, it was only work such as driving a taxi, cutting people’s hair, baking bread or running a café. You could own a private business and were allowed to make a profit, but for appearances’ sake, the companies were officially called cooperatives and they had to be run as a communal enterprise, without shareholders and with a strictly limited number of people involved. Gorbachev’s halfway-house approach was like trying to be ‘just a little bit pregnant’, but once the profit motive was accepted, I knew he would have to go all the way. So I decided to get in on the ground floor. A few friends and I used our Komsomol connections to open a café, where we served some very basic food and drink. It wasn’t much, but it gave us an insight into what it was like to work hard and make money. And if perestroika took off, we knew we’d be able to grow and grow.

I met my first wife while we were students and we were married by the time I was 20. But I had another, secret love: like many of my contemporaries, I loved Western pop music – Boney M, ABBA and, most of all, the fabulous Annie Lennox!

Western music was frowned on in Soviet Russia. The old men in the Kremlin said it was a CIA plot to weaken the moral fibre of our youth and infect us with capitalist values. Well, it certainly worked! Like all young people, being told that something was forbidden made us doubly determined to get it. We set up a (short-lived) disco in our school; my classmates pestered Western tourists for LPs or had them mailed by circuitous routes, then we copied them using whatever means we could concoct. The appearance of recordable cassettes in the 1980s sent the black market into overdrive. A young fellow named Artyom Troitsky, who organised covert discos at Moscow Uni, was said to be able to get you pretty much anything you wanted.

When Gorbachev decided to ease the stagnation of the Brezhnev era, he allowed some British and American pop to be played on the radio. The Soviet state label Melodiya put out a couple of Paul McCartney albums and Billy Joel played a gig in Moscow in 1987. But it was Annie Lennox I was waiting for … and in 1989, she came.

An image of me in my youth

Annie Lennox in Red Square, Moscow 1989

Along with Peter Gabriel, Chrissie Hynde and the Thompson Twins, Annie was in the USSR to launch a double album titled Breakthrough, with music by 25 different artists, including Sting, Bryan Ferry, Sade, Dire Straits and the Grateful Dead. Soviet fans mobbed the state record stores and the discs were sold out within hours. But what was most remarkable to us was that the singers and musicians had given their services for free and that all the profits were going to the environmental pressure group, Greenpeace. This made a big, big impression. Along with hundreds of thousands of other Russians, I suddenly understood that the world outside was very different from the one we were living in. The West now appeared to me as a world of freedom and energy and colour. I loved the music, the outspokenness, the lack of fear and the independence of mind. I loved how these stars were devoting their time and energy to global issues like the environment, matters that affected and united all humankind. It was the polar opposite of how we were living – in a country that repressed music, freedom and thought. It aroused my first serious doubts about the communist system and autocratic rule; it made me admire the West and want to be part of a free, prosperous, equitable society.

It was Mikhail Gorbachev’s acceptance of economic free enterprise that allowed me to improve my own fortunes. A group of us, mostly students in our mid to late twenties with backgrounds in physics, chemistry, economics and geology, had a shared desire to prove ourselves, to make a success of our lives, to take on the world. It all began with a little computer cooperative we opened in 1987. That was what set us on a lifetime adventure, beset with both triumph and tragedy.

When Gorbachev announced in 1987 that universities could form research and development centres, and could use their expertise to offer services and earn an income, we jumped at the chance. We founded the impressively named Centre for Inter-Industry Scientific and Technical Progress, known by the acronym Menatep, selling computers and providing programmers to service the IT systems of state enterprises and government ministries. It was the age of the computer revolution, IT experts were in short supply and the country needed us to keep all the new technology running. We provided a quality service, charged high fees and made big profits.

What’s more, demand for personal computers was about to go through the roof. These weren’t being made in the USSR, so we arranged for people to bring them back from abroad when they went on official business trips. We bought the computers from them, reprogrammed them with Russian keyboards and Russian software, and sold them on for a profit. By late 1988, we’d accumulated some substantial cash reserves that were sitting unused, just in time for Gorbachev’s announcement that, after 72 years of banning private capital, the Kremlin was going to allow private banks to be formed. It was a massive change and we weren’t going to miss the chance.

Looking back, I don’t think the men who were introducing all those reforms understood that they were sealing the fate of Soviet communism. They were permitting an element of free enterprise because they needed to kick start the moribund economy. Capitalist aspiration, the urge to work hard and get rich, is, in my view, an instinct in the human brain. The communists had repressed it for seven decades, and now they let people see that it was possible again. Russians, I thought, weren’t going to be satisfied until the whole nation had returned to free-market capitalism. People wanted to work hard and improve the quality of their lives, which they hadn’t been able to do under Soviet rule. They wanted the freedom to start their own businesses, feed their families and achieve a level of prosperity that had eluded them for so long.

By the end of the 1980s, our little computer cooperative had 150 employees and around 5,000 people contributing to its research and development. These were brilliant, sparky youngsters, mainly students and recent graduates, who were coming to me every day with ideas for new projects. We were desperate to develop the ground-breaking innovations they came up with, but we didn’t have the funds. In a free, democratic society, we would have tapped up investors, explained the potential of our new projects and everyone would have benefited. But in those days, the only source of money was the official state banks. Loans were available only to state industries as part of the State Loan Plan.

Someone must have been watching over me, because out of nowhere an angel appeared: the remarkable Mrs Krushinskaya, manager of the state bank branch where we had our account. For some reason, she took it upon herself to help us. She took me aside and said, ‘Look, I’ve heard you’re after a loan. And maybe you’ve heard that the government has just authorised the creation of independent banks. Well, if you were to go out and create a bank like that, I might be able to give you a loan as an official banking institution…’ She gave me the number of a contact at head office and suggested I try my luck. I met the man in question, Viktor Bukato, who told me, much to my surprise, that he would provide the recommendation needed to get our charter written. ‘What would you like your bank to be called?’ he asked me. It really was as easy as that.

Within a month, we had set up the KIB NTP Bank (later called the Menatep Bank), one of the first private Russian banks since 1917, with an authorised capital of 100,000 roubles and an approved credit line. It was the start of a new world. Finally, we could expand into new areas, develop new IT solutions and kick start the projects we’d been sitting on for a year or more. We bought a company car and moved into bigger premises. I started wearing a suit and a tie, and all at once we started to look like a grownup business.

The loan money and the excitement of owning our own bank went slightly to our heads. We branched out into some wacky projects, including the import of Napoleon brandy, but we weren’t much good at anything other than our core speciality. Computers and IT remained our mainstay, especially when we discovered a way for our clients to buy and sell them in hard currency, i.e. using stable foreign currencies rather than roubles. At that time, the rouble was non-convertible – you couldn’t use it for purchases outside of Russia – so there was a premium attached to being able to trade in dollars and other foreign denominations. We were eventually earning so much hard currency that I was summoned to see the state bank chairman, Viktor Gerashchenko, who wanted to know how we did it. I explained it all to him and he looked through the regulations, hoping to catch us out, but in the end he had to admit we hadn’t broken any rules.

An interview during the peak of my business years

We were pretty good at exploiting any opportunities that the rules allowed. Because there had never been any private enterprise in the Soviet Union, people just accepted that it wasn’t a possibility: the guiding principle of Soviet law was, ‘everything which is not authorised is forbidden’. But Gorbachev’s new spirit of enterprise flipped that to, ‘everything which is not forbidden is allowed’. We took him at his word.

We moved into so many fields of IT supply and cornered so many markets that several government departments, including the Soviet Committee for Science and Technology, took an interest in us as an example of the success of the new economic policies. It was while we were working for them that the Moscow mafia took an interest in us.

Organised criminal gangs had always existed, but they became much more powerful in the perestroika era. It was a time when businesses were turned over by the mafia as a matter of course. In our case, contact came from the Izmailovo crime syndicate, who invited me for a ‘friendly chat’ and offered us ‘protection’ from their own henchmen. As you can imagine, I was on my best behaviour. I conversed politely and respectfully, and agreed that we would be in touch.

When I got back, I wrote to the local KGB department (back then, it was the KGB that took the lead in the fight against organised crime), where we had good contacts – they were responsible for the Mendeleev Chemical Technology Institute, where I had been a student, our office was on their territory and, what’s more, we had plenty of defence industry clients, so they paid attention to us. That was the last we heard from the Izmailovo mob. Years later, I learned that the boss of the Organised Crime Unit of the regional KGB had a quiet word with the mafia and told them that our contracts with official government departments meant we were off limits. That’s how things worked in those days. There were endless reports of premises being blown up and entrepreneurs having their throats cut, but I never had a problem. Perhaps I should have been more worried. On a few occasions, I was warned there was a contract out on me so I hired a couple of bodyguards, but I never paid for ‘protection’. I told my staff that I didn’t want any security briefings so that I could try to remain oblivious. I didn’t want to live in fear.

My son Pavel was born while my first wife and I were still students. We were very young, times were hard and the marriage didn’t last. The fact is that I met someone else. It happened while I was doing my stint as Komsomol deputy secretary at the Mendeleev Chemical Technology Institute. I was 23, Inna was just 17 and she was pretty wary of this cocky fellow with big ambitions; but I knew from the very first moment that I loved her and wanted to be with her for the rest of my life. I moved out of my family apartment and slept in my car until Inna took pity on me. We are now in our fourth decade of married life together, with a grownup daughter and twin boys. In my business life, I always felt I was in control, but I learned that love is a lot less predictable.

At first, Inna and I lived in rented flats with two small rooms and second-hand furniture, plus chairs and a table that I borrowed from the office. The business climate was cutthroat. It is no exaggeration to say that I had enemies and could have been killed, and Inna was also at risk. But she stayed with me, stayed cheerful, supportive and endlessly beautiful; I can’t thank her enough for all she has done for me.

My wife, Inna Khodorkovskaya

Progress became easier as the years went by. It was a lawless decade in Russia, but we worked hard and Menatep Bank gained a reputation for honesty and reliability. People came to understand that their cash was safe with us. It helped us not only to acquire many private investors, but also to build relations with ministries, departments and state organisations, which opened accounts with us. Within a couple of years, we had a large number of branches and a substantial turnover. We were the first Russian bank to list its shares.

Things were changing fast in the USSR and anyone with the nous and agility to keep up could make a lot of money. There was no stock exchange back then and no developed system of private banks, so if a company managed to earn hard currency it could only exchange it through the state bank at a very uncompetitive rate. Our idea was to find companies in that position and offer them a better exchange rate to convert their hard currency to ‘soft’ roubles. At the same time, we knew that many state enterprises had massive reserves of soft roubles that they were desperate to turn into foreign currency in order to purchase vital technology from abroad. We travelled up and down the country looking for such firms, offering to help them out and charging healthy margins for doing so. This in turn allowed us to enter the field of foreign currency trading, which had been forbidden under the old Soviet Constitution, punishable by long prison sentences or even death, but was not specifically banned under the new legislation of the Gorbachev era. We were a bunch of youngsters – most of us were still under 30 – but we had grown Menatep into one of the biggest commercial banks in Russia, and the future offered even greater possibilities. Gorbachev’s liberalisation was beginning to allow us to see how things were done in the West and we wanted the same freedoms for ourselves.