Hoffman: Boris Berezovsky was a kingmaker in 1990s Russia
Among the Russian tycoons who emerged after the fall of the Soviet Union, there were many reclusive figures who sheltered behind the tinted glass of their armored limousines, their armies of public relations men and bodyguards. They kept the outside world at bay, including the people of Russia who came to despise them. Boris Berezovsky had his share of protection, too, but he could not resist the limelight and the lure of being a kingmaker.
He would hold court at news conferences and breakfasts, give interviews in his club and appear endlessly on television. He was a short man, with arching eyebrows and a soft, hurried voice. He was always rushing toward something big. When he was in mathematics in Soviet times, it was a quest for the Nobel Prize. When he was in politics, it was controlling President Boris Yeltsin.
At the time of his death outside of London on March 23 at age 67, he had slipped into near-obscurity, known primarily for his periodic outbursts against Russian President Vladimir Putin and for a legal battle with another oligarch, Roman Abramovich.
Perhaps the final irony of Berezovsky's life is that his last great act as kingmaker -- bringing Putin to power -- backfired on him, and he was never able to recover. After a series of disagreements with Putin, Berezovsky moved from Moscow to London in late 2000 and never went back.
But the most important part of Berezovsky's story is not the last. Rather, it is how he rose to power.
He wasn't the most visionary oligarch. Others began to squeeze fortunes from the dying Soviet state much earlier. But once he got going, Berezovsky showed a particular knack for exploiting the nexus between wealth and power.
The collapse of the Soviet Union gave rise to enormous imbalances. Prices, property, and trade were set free. The transition between failed, centrally-planned socialism and the rapacious new market capitalism left a huge opportunity for arbitrage and rent-seeking. The hyperinflation of the early 1990s destabilized the economy and wiped out the savings of the population. But for the most daring businessmen -- men like Berezovsky -- the wave of inflation was an incredible opportunity. The lure was especially strong for those who already had connections.
Berezovsky grasped how connections were vital in the lawless days of the early 1990s, an era when the state was feeble and power was something to be wrangled and co-opted.
An early example was his move on the Soviet-era car factory, Avtovaz. He knew that the boxy little Zhiguli cars made on the banks of the Volga were a dream of many people in the late Soviet era.
"I understood one important thing," he told me once in an interview. "At that time, an enormous number of people wanted to buy cars. It didn't matter if they lacked an apartment. It didn't matter if they lacked clothes. But if only there would be a car!"
When he said this, Berezovsky was sitting in the 19th-century mansion he had transformed into the Logovaz club, wearing a pressed white business shirt and an elegant maroon silk tie, sipping from a glass of red wine. He savored the memory, as if it had rushed back to him again through all the years, of how desperately people wanted a car of their own, a dream that he too had shared. He once swapped a car with a friend every other week.
"Possessed," he told me, pausing again. "I remember myself. My first car appeared when I was 40 years old. Half a car. One week mine, the other week his."
The Avtovaz car factory was a leviathan, three times the size of the average U.S. automobile plant, with four assembly lines, capacity to produce 740,000 cars a year, and a country of people who were eager to own a car. In the Soviet Union there was one car for every 22.8 people, compared with one for every 1.7 in the United States.
To become the largest distributor in the country, Berezovsky ingratiated himself with the management.
The factory was a state enterprise that had been built by the state and received state subsidies. The Zhigulis came out of the gate with artificially low, subsidized state prices. Then they were sold at a huge markup. Traders would take a batch of cars -- 100 or 200 -- on "consignment," meaning that they could take the cars now for a small sum and pay the rest back later, or not at all. Bureaucrats who worked in the factory took bribes to grease the way for the deals, which were measured in a special code: the height in centimeters of a stack of dollars. Criminal groups stood on the assembly line and claimed the cars as they rolled off; anyone who interfered would suffer. Violence was endemic.
Berezovsky didn't bother with small consignments or the small-time criminals. He went right to the executive suite.
Instead of 100 cars, he persuaded the factory to give his dealership a huge fleet of cars on consignment -- tens of thousands. Berezovsky later recalled the terms were 10 percent down and the remainder to be paid two and a half years later. The hidden trick in the deal was that Berezovsky was going to repay Avtovaz in rubles -- and hyperinflation was just around the corner. The hyperinflation meant that he would pay back for the cars in rubles that were worth far less than when he bought the cars.
For example, in January 1993, the wholesale price of a basic Zhiguli, the model VAZ 2104, was 1.9 million rubles, or about $3,321. At Logovaz, Berezovsky's dealership, the retail price for this car at the time was $4,590, or a markup of $1,269 per car. Over the next two and a half years of inflation, the ruble went from 527 to the dollar, when Berezovsky made the deal, to 4,726 to the dollar. The deal meant that Berezovsky was getting the cars for a song. He knew what he was doing. If he took a consignment of 35,000 cars and made, conservatively, $3,000 on each, that was a $105-million deal.
"Of course, we would return the money as late as we could, because the value of the money was falling," Berezovsky told me. "We understood that a powerful process of inflation was going on. The devaluation of the ruble. The economists at Avtovaz didn't understand this." Berezovsky went on to apply similar cunning to other deals, and ultimately rose to become the most prominent of the oligarchs who wielded power behind the scenes in Yeltsin's Kremlin. They saved Yeltsin's re-election campaign in 1996 and reaped handsome rewards: privatization of still more state assets, including some of the crown jewels of the oil industry, at fire-sale prices. The marriage of wealth and power was complete.
It couldn't go on forever. Yeltsin, frail and exhausted, eventually relinquished his office. Berezovsky was not the most astute politician, and he badly misjudged the man he helped select as Yeltsin's successor, Vladimir Putin, who did not want to be a puppet and had nothing but disdain for the oligarchs. He set out to break their grip on power.
Berezovsky was among the first to go.
David E. Hoffman is a contributing editor to FP and author of "The Oligarchs: Wealth and Power in the New Russia."