Flush with cash, Khodorkovsky was now able to target the industrial enterprises next in line to be sold off. It was the sale of the vast Siberian oil company Yukos, in what was a remarkably profitable deal that was to turn Khodorkovsky into a super-rich international tycoon. The process of transfer of vast state industries via the ‘loans for shares’ scheme was supposed to be handled by open auctions. In reality they were nothing of the sort. Only select bidders were invited to tender, and in many cases the auctions were actually controlled by the very people making the bids - sometimes using companies to disguise their identity.
In the case of Yukos, it was Khodorkovsky’s Menatep that was in charge of processing the bids in the auction. In a hotly contested auction, higher bids were disqualified on ‘technical grounds’ and Khodorkovsky won the auction. In this way he and his partners acquired a 78 per cent stake in Yukos and 2 per cent of the world’s oil reserves for a mere $309 million. When the shares began trading two years later in 1997, Yukos’s market capitalization was worth thirty times that figure. One by one, the state’s industrial conglomerates were being sold off at ‘liquidation-sale prices’ according to Strobe Talbott, former US Assistant Secretary of State.14
It was a pattern repeated in the other auctions. The Sibneft auction for example, was managed by NFK. In most cases there was ultimately only one bidder. In some instances the auction was not even won by the highest bidder.
The ‘loans for shares’ scheme turned many of the buyers from rouble multi-millionaires into dollar billionaires almost overnight. Initially, the lenders acquired only a proportion of the assets, but over the next couple of years the government also sold off the remaining tranches of shares in a series of lots, again without the competitive bids and auctions promised, and with the original lenders securing the remaining shares for themselves.
By now ordinary Russians had lost patience with the process of privatization. The economy was in tatters, few had benefited from the voucher fiasco, while many had ploughed their savings into schemes that had simply swallowed up their money. There was widespread disbelief that a few dozen political and business insiders were walking off with Russia’s industrial and mineral wealth at cut prices. Disillusioned with the President and his policies, ordinary Russians began to exhibit a yearning for what they saw as the security and stability of communism. There was suddenly a real prospect that the shambolic, drunken Yeltsin would lose the forthcoming election in 1996 to the revitalized Communist Party candidate Gennady Zyuganov.
Opinion polls recorded Yeltsin’s popularity at a derisory 6 per cent. ‘It’s all over,’ said one American diplomat in Moscow. ‘I’m getting ready for Yeltsin to go.’15 Promising to stop the auctions for the remaining shares, Zyuganov fully intended to pursue the oligarchs. At the time the international investor and philanthropist George Soros, now one of the oligarchs’ greatest critics, warned Berezovsky somewhat acidly that if the communists were to win, ‘you are going to hang from a lamppost’.16
Berezovsky was only too aware that he had enemies among the communists. At a secret meeting in Davos in the Swiss Alps during the World Economic Forum in February 1996, he galvanized the wealthiest businessmen known in Russia as ‘the Group of Seven’. They agreed to bankroll Yeltsin’s election campaign in return for the offer of shares and management positions in the state industries yet to be privatized.
The seven parties privy to the ‘Davos Pact’ were mainly bankers - Mikhail Khodorkovsky, Vladimir Potanin, Alexander Smolensky, and Petr Aven, as well as media tycoon Vladimir Gusinsky, industrialist Mikhail Fridman, and, of course, Berezovsky himself.
Television was the key to the election campaign. The campaign was bankrolled through a secret fund known as the Black Treasury. Money was spent cultivating journalists and local political bosses. But most was used to pay for flattering documentaries of Yeltsin shown on private TV stations, billboards put up by local mayors, and even on pro-Yeltsin rock concerts. And Berezovsky brazenly used his ownership of Channel One, Russia’s most powerful television network, to lionize Yeltsin and attack his communist opponent.
Central to the campaign were Western spin doctors. Tim (now Lord) Bell, the media guru who had helped Margaret Thatcher win three elections in Great Britain between 1979 and 1990, was hired. Bell had also worked closely with the campaign team responsible for California Governor Pete Wilson’s remarkable comeback election victory in 1994, just two years earlier. In conditions of secrecy likened to protecting nuclear secrets, the American image consultants Dresner-Wickers moved into Suite 120 of the President Hotel in Moscow. ‘Secrecy was paramount,’ recalled Felix Braynin, a Yeltsin aide. ‘Everyone realized that if the Communists knew about this before the election, they would attack Yeltsin as an American tool. We badly needed the team, but having them was a big risk.’17
Working closely with Yeltsin’s influential daughter Tatyana (Tanya) Dyachenko, who was based next door in Room 119, the Americans were treated like royalty. They were paid $250,000 plus expenses and enjoyed an unlimited budget for polling, focus groups, and research. They were told that their rooms and phones were bugged and that they should leave the hotel as infrequently as possible.
The Americans suggested employing dirty tricks such as trailing Zyuganov with ‘truth squads’, which would heckle him and provoke him into losing his temper, but mostly they campaigned in a politically orthodox style. Photo opportunities and TV appearances were organized so as to appear spontaneous. Focus groups, direct mailing, and opinion polls were also widely employed, and the election message was hammered home repeatedly: ‘Whatever it is that we are going to say and do, we have to repeat it between eight and twelve times,’ said one of the American political consultants.18
Yeltsin proved to be an adept, populist campaigner. He smiled more and was even inspired to get on stage at a rock concert and do a few moves. From facing the political abyss, Yeltsin was re-elected with a 13 per cent lead. It was a staggering result and with it the newly enriched oligarchs had protected their fortunes and their power base. ‘It was a battle for our blood interests,’ acknowledged Berezovsky.19
The now all-powerful Berezovsky had proved a master manipulator. When asked about his influences, he rejected Machiavelli in preference to Lenin. ‘Not as an ideologue,’ he remarked, ‘but as a tactician in political struggle. Nobody had better perception of what was possible…Lenin understood the psychology of society.’20
It was now payback time and Yeltsin kept his part of the deal: some oligarchs received huge new government accounts, bought more state assets on the cheap, and paid only minimal taxes. In his memoirs, Strobe Talbott described the deal in the run-up to the presidential elections as a ‘Faustian bargain in which Yeltsin sold the soul of reform’. But the Russians replied that the favour they were doing the oligarchs was nowhere near as bad as the communist victory it helped to avert. As they saw it, unlike Dr Faustus who made a pact with the Devil that guaranteed his damnation, Yeltsin had made an accommodation with what he was convinced was the lesser of two evils - a deal that would help Russia avoid the real damnation of a return to power by the communists.’21
Some of the oligarchs, notably Abramovich and Berezovsky, formed a coterie around Yeltsin that became known as the ‘family’. The leading member of the ‘family’ - and the gatekeeper to the President - was Yeltsin’s youngest and much loved daughter, Tatyana. Despite having no knowledge of business or political affairs, she was his most influential adviser, could secure special favours from the state, and became very rich in her own right. The friendship between the two oligarchs and the President’s daughter blossomed. According to Aleksandr Korzhakov, Berezovsky lavished Tatyana with presents of jewellery and cars, notably a Niva (a Russian version of a Jeep). ‘The vehicle was customized to include a special stereo system, air-conditioning and alarm system,