Post-Soviet Russia in the adventurous 1990's – the Wild Decade
Privatization, Oligarchs, Mafia and Vodka
From Russia with Love
In the beginning of 1993, during my absence abroad, a man named Michael Alexandrov appeared at the cement group Holderbank, later called Holcim. He asked to have a discussion with the director about investment possibilities in the Russian cement industry. At the beginning of privatization, this Russian had acquired, together with a group of Russian cement managers, a number of vouchers (financial participations) in various Russian cement works. Mr. Alexandrov was looking for a global industrial partner for increased development of cement interests in Russia. As no one in Holderbank was interested or had time for this matter, it landed eventually with my very agile and clever assistant, Dominik Wlodarczak.
Like me, he was very interested in the political and economic upheaval in Russia. After all, it had been little more than a year since, on December 1, 1991, to everyone’s surprise, the red flag with the hammer and sickle was taken down from the cupola of the Kremlin in Moscow. The Soviet Union finally ceased to exist.
Let us go back a few years.
From the time of the First World War, the Russian imperium was of vast dimensions and included as well the greater part of Poland and all of Finland.
From 1917 until 1941 the Soviet Union (USSR) was a single state of incredible geographical dimensions, presenting a dramatic experiment in its political and economic systems. The economy was based on state ownership of all means of production. All planning was done by the state, as were all production goals and agricultural goals. Between the twenties and the fifties the Soviet Union achieved, with rapid economic growth, the construction of an impressive, almost frighteningly large economic and military power.
The war against the German aggressor (1941-1945) was described as the “Great War for the Fatherland,” a reference to the 1812 “War for the Fatherland” against Napoleon Bonaparte. Fourteen million Red soldiers died in the Second World War. At the beginning the Soviet Union had a very large army, with in part very modern equipment. It had by any measure the greatest army of tanks in the world, a great number of guns and airplanes, and a very large and well-equipped infantry (20,000 tanks, 17,000 airplanes, 34,000 guns, and 5.7 million soldiers)! In 1950 the Soviet army was numerically the strongest army in the world. The Soviet Union strove with all its might to maintain parity with the USA in the arms race.
The Cold War, which lasted from 1945 to 1990, divided the world into two hostile blocs. Throughout these decades almost everyone in the free world saw this as a constant threat, leading both east and west to arming and to a demonstration of military might as had never been seen before. It was, after all, the declared goal of the Soviet Union to command universal power. And various dangerous undertakings showed that it was quite serious in its goals and would not hold back in a military conflict with the west bloc: The Berlin blockade and the American airlift in 1948 to 1949; the march on Hungary with Soviet tanks in 1956; the building of the Berlin wall, forty-three kilometers long of concrete and barbed wire, in 1961 and remaining in place until 1989; the Cuban missile crisis in 1963, with the threat of an atomic war; and the march on Czechoslovakia in 1968, putting brutally to an end the Prague Spring, a period of political liberalization in Czechoslovakia. In 1953 the USSR exploded the first hydrogen bomb and developed intercontinental ballistic missiles. The Soviets also demonstrated military and technical competence with the first Sputnik (satellite program 1957). In 15 years they wanted to gain equality with and surpass the USA. After the USSR demonstrated their mastery in a shocking way with the Sputnik flight on October 4, 1957, they demonstrated again with their Voshod program for manned missiles a superiority in racing and their superior mastery in everything else. On Feb. 21, 1962, Yuri Gagarin circulated the earth in 108 minutes in his Vostok-3 capsule. He became the first USSR pop-star and was the most famous person of the year (Neue Zurcher Zeitung (NZZ), April 2011). As reaction President John F. Kennedy declared on May 25, 1962, in a special joint session of Congress:
“I believe that this nation should commit itself to achieving the goal, before this decade is out, of landing a man on the moon and returning him safely to earth.”
This ambitious aim was actually achieved with the Apollo mission 11 in 1969. The three astronauts Neil Armstrong, Edwin” Buzz” Aldrin, and Michael Collins set forth on July 16, 1969, in a Saturn-V-Rocket from the Kennedy Center in Florida and achieved on July 19 an orbit around the moon. The next day Armstrong and Aldrin landed on the moon in the moon capsule Eagle while Collins remained in the moon’s orbit. A few hours later Armstrong became the first man to walk on the moon, followed by Aldrin. Neil Armstrong pronounced the sentence famous at the time, “That’s one small step for a man, but one giant leap for mankind.”
American president Jimmy Carter and the ailing Brezhnev signed a comprehensive disarmament agreement (Salt II) in 1979 in Vienna. However, the US Senate refused to sign it because of the invasion of Soviet troops in Afghanistan in December 1979. Thus began a new period of armament.
Less well known to most people in the West than the military might of the Soviet Union was the economic decline that began in the nineteen sixties and the end of all growth that began in the nineteen eighties. Technical innovation also began to stagnate. It was not known to me either that because of the information blockade in the West there was no reliable source of information concerning the Soviet economy. In addition, possible economic deficiencies were overshadowed by the dangers of the Cold War.
In his book, “The West and the Rest of the World,” the brilliant historian Niall Ferguson writes that the CIA (1985), when Michael Gorbachev became the general secretary of the Communist Party of the Soviet Union, erroneously estimated the size of the Soviet economy to be about 60% of that of America. He states that the Soviet nuclear arsenal was actually larger than that of the United States. Harvard professor Ferguson states further, “If the Cold War had ever become hot, the Soviet Union would very probably have won.” For one thing, its political system was far more able to compensate for heavy war losses; in the Second World War there were fifty times as many Soviet deaths in relation to those before the war in comparison to American deaths. For another, the Soviet economic system was ideal for the mass production of highly developed weapons. In 1974 the Soviets possessed a much greater arsenal of strategic bombs and ballistic rockets. Scientifically they were only slightly behind. Moreover, they possessed an ideology far more attractive to post- colonial societies throughout the Third World, as it is now called.
The Soviet secret service, the KGB, with its gruesome methods, was strongly anchored in the consciousness of my generation. In the western newspapers the views of the official “Pravda” concerning political events were repeated. Other than that we knew very little about what was really happening in the Soviet Union. Not until Michael Gorbachev became the general secretary of the Communist Party, and later president of the Soviet Union, did we learn that he had tried in 1985 to overcome economic stagnation with the catch words Perestroika (economic reform) and Glasnost (openness). He began a development that under his successor Boris Yeltsin led to the end of Soviet communism. Unlike Gorbachev, Yeltsin did not want to rescue the Soviet economic system, but rather to destroy it.
Russian arms were the legal successor of the Soviet arms. At the beginning of 1992 Russia found itself with a catastrophic shortage of food coupled with the return of five hundred thousand soldiers to Russian soil. With a consistently negative attitude towards the military this led to a situation of organizational and psychological chaos. The minister of defense of the Russian Federation tried to call up every possible part of the population in order to assure that the Russian military potential in the long run would have the status of a military world power. This involved above all control of atomic weapons.
The Iron Curtain signified not only a political dividing line in the middle of Europe, but also a barrier against the free flow of news and information. Facts concerning events in Russia and in Eastern Europe countries under Soviet domination were sparse and had to be regarded with the greatest suspicion. In August 1968 as I experienced myself as a tourist, Leonid Brezhnev suppressed the Prague Spring forcefully with Warsaw Pact troops. Yet he allowed foreigners for the first time to drive in their own cars, but only on precisely specified roads: from Hungary over Kiev or from Poland by way of Smolensk to Moscow and Leningrad. These corridors, defined by the state tourist bureau Intourist, could only be traveled if a visa was stamped for a specific period. In addition, travelers were carefully observed by the KGB. In Switzerland it was known that such tourists were listed in an index of people who had made communist contacts in the east, which sometimes had a negative impact on a career.
Everybody in the west who experienced the Cold War in any form was impressed by the threat of the Soviet Union. It was clear to all of us that the communist leadership, while pretending to be government by the people, was in fact a dictatorship of a self-selected political elite. But we knew practically nothing about the life of a simple Soviet citizen, for the Iron Curtain did not allow a look into an authoritarian state with a collective economy. To be sure, there were individual left-leaning politicians, authors, and artists for whom going to the Soviet Union became a place of a sort of pilgrimage, giving them no dependable picture of the Soviet Union. These people hoped to see the first socialist state of workers and farmers, which to be sure gave them a distorted picture of socialism. Let us take just one example of these biased left-leaning intellectuals and artists who, as admirers of communism, made a pilgrimage to the Soviet Union: the great Chilean poet Pablo Neruda (1904-1972), who, said Hans Magnus Enzenberger (a German intellectual and an expert of Neruda’s work), had “the most powerful voice in the Latin American continent.” Yet according to the NZZ (August 8, 2011) Neruda had a second face which is usually suppressed today. The philanthropist extolled mass murder: “People of Stalin: we bear this name proudly!”
Stalin himself gave the key to his understanding through his credo: “Choose one’s victims, prepare one’s plans minutely, slake an implacable vengeance, and then go to bed - there is nothing sweeter in the world.” According to careful estimates Stalin had forty million people on his conscience.
The few western businessmen who were traveling in the Soviet Union for foreign firms also had no overview, as they were constantly under surveillance and could only see what the government was prepared to show them.
Karl Eckstein, who settled in 1982 behind the Iron Curtain - when Brezhnev still ruled the Kremlin - wrote me something that did not quite agree with this opinion. “For instance, since 1982 I have often traveled around the Baltic States, when practically no one knew the names of Estonia, Latvia, and Lithuania. The problem is rather that we had no interest in first-hand information and reports from the Soviet Union were nothing but Kremlin astrology. The surveillance had in my time almost ceased to function.”
Suddenly everything was different. In November 1989, to almost everyone’s surprise, the Berlin wall fell, and, even more surprising, at the end of 1991, the Soviet Union ceased to be. The infamous Iron Curtain, only three hundred kilometers from Switzerland, was completely open. The unexpected possibility of getting an ideological view of the post-communist world, at that time at first only partly private, and of the communists, still well organized and with many adherents who hoped for a return to power, had for Dominik and me a tremendous attraction. Despite great hurdles we were motivated to experience personally the transition, regarded by the west as the “upheaval in time,” and described as a decisive transition from the Soviet to post-Soviet Russia. The hurdles made this a risky enterprise, but at the same time it presented an irresistible temptation.
THE ADVENTURE BEGINS IN MOSCOW
During my absence from the home office, at the beginning of 1993, while I was engaged in business trips abroad, a young man named Michael Alexandrov appeared at the Holderbank cement group, wanting to talk with management about investment opportunities for foreigners in Russia’s cement industry. Together, with a group of his peers, this individual had bought some shares in Russia’s cement industry for Alfa Bank’s branch in Moscow, a possibility that had arisen in Russia during a period of privatization. Now he was looking for an industrial group outside of Russia for expanding the development of her cement industry on a more global level.
By default, as no one else at Holderbank had time for him, Alexandrov landed in the office of my very resourceful and forward-looking colleague, Dominik Wlodarczak - who, like me, was very interested in exploring the political and economic underpinnings that would support sound investments in Russia. Dominik filled me in on the interesting conversation he had had with this stranger, focused mostly on the possibility of cutting advantageous deals for our Swiss company concerning cement shares in Russia. In the course of conversation, Alexandrov had invited him to Moscow to discuss this topic further. As my colleague and I were fascinated by both the unique opportunity for doing business with the Russians and by learning more about the country generally (a country often referred to as the workers’ paradise), we discussed going forward with fostering a reliable bond with this individual. Since we were in no way authorized to arrange cement acquisitions in Russia for our Swiss cement group, we contemplated making an exploratory trip to Moscow as counselors for a TACIS Project for the European Union; if not this, should we perhaps take a completely different political and economic approach. TACIS, a financial instrument of the EU, is an anagram for Technical Assistance to the Commonwealth of Independent States. It was founded in 1991 to support the connection of the EU with the countries of Eastern Europe and Central Asia through a program of technical assistance. The program supports the process of effectuating a transition to a market economy and the democratization of the countries in question. Switzerland could also participate in this development program.
Without giving exact information about our plans to promote and join a TACIS project in Russia, Dominik and I flew to Moscow in the spring of 1993. We had been rather nervous during this Swissair flight, for it had occurred just fifteen months following the dramatic fall of the Soviet Union; an event symbolically represented on December 31, 1991, when the red flag, with hammer and sickle, was removed from atop the Kremlin and replaced by the old Russian flag that had been used unofficially during the period of the Provisional Government, a period spanning the years from the fall of the czar to the October Revolution. Russia now stood at the threshold of an enormous economic, political, and social transformation - a time when there would be many losers and few winners. In this enormous land, populated by a broad spectrum of ethnicities, nobody knew exactly what direction this new political system would take.
The officious personnel we encountered while going through customs at the antiquated Sheremetyevo Airport, a transportation facility located near Moscow, seemed frightening to us. The excessive military protocols of the customs officers, especially with regard to examining our passports, conveyed an obvious distrust of foreign visitors, an expression of disapproval and suspicion much like the one conveyed by the East German soldiers I had encountered on my trip to East Berlin in the spring of 1965; on that occasion, at Checkpoint Charlie, I had been interrogated in a prolonged interview, with my passport scrutinized in every minute detail, as only a very dangerous political conspirator would expect. It seemed to us as though not much had changed with immigration and customs since Soviet times.
Fortunately, Michael Alexandrov had organized VIP service so that we were able to bypass the long lines for entry and be taken instead to a quiet spot where the custom procedures were somewhat abbreviated and less formal, allowing us to retrieve our luggage with relative efficiency. All it took to get VIP service, including the chance to converse with some influential people in a private room, was to purchase this special treatment with enough rubles or dollars, at that time amounting to about fifty dollars per person.
Alexandrov, along with his employees (who also worked in the Moscow branch of the famous Alfa Investment Fund) was waiting for us. Both he and his staff had come with their own cars and with the bank’s chauffeur; for, as they explained to us, using one of the many available taxis would be far too dangerous for non-Russians. On the way into the city, evidence of the recent construction explosion was yet to be seen; but, on the edge of the city, we saw many tacky prefabricated apartment buildings; finally, upon reaching the center of the city, close to the hotel where our rooms were reserved, we confronted a chaotic pattern of traffic that challenged both drivers and pedestrians alike.
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