CHAPTER THREE

HITTING THE JACKPOT

As Abramovich headed towards the yacht where his friend Pyotr Aven was hosting a drinks party, he was entitled to think things could not get much better. The sun was shining, beautiful girls lounged around in bikinis, and the food and drink on offer promised to be the finest available. But Abramovich was about to be introduced to the man who was to shift his life into a new dimension - a man who would prove more responsible than anyone else for turning him from a millionaire oil trader into a billionaire industrialist, eventually owning not one yacht but three, all of them far longer and more sumptuous than the one Aven was sitting oo that day.

At the time, Aven was a good friend to have. One of the so-called Young Reformers, the group of youthful radicals whose thinking transformed the Russian economy, he had switched to the private sector by joining the Alfa group, a con­glomerate owned by the oligarch Mikhail Friedman, and was by now an extremely wealthy young man and, rather ifiorc importantly, one who seemed to know all the right people- One of Abramovich's fellow guests aboard Aven's yacht that summer's day in 1995 was a short, balding man who had made his fortune as a car dealer. His name was Boris Berezovsky and he was about to become Abramovich's men­tor. At the time they met, Abramovich was in his mid- twenties but he certainly impressed Berezovsky, twenty years his senior, that day. According to the broadcaster Alexei Venediktov, Berezovsky later told him that Abramovich was 'the most gifted young man he knew^,( although when inter­viewed some years after he had fallen out with his protege, Berezovsky claimed he had in fact said that, of all the businessmen he had met, Abramovich was the best at 'person-to-person relations'). Venediktov recalls:

At that time, Abramovich was already seen as a very good manager and Berezovsky needed him to act as his partner. I once asked Berezovsky what talents Abramovich had and he said he was a good psychologist. And I agree with that, judging by how hard he has tried to recruit me to his cause. He is very good at understanding his interlocutor I have watched him communicate with a range of different journalists and he has his own approach to each person. Obviously he approaches politicians and businessmen in the same manner. He acts as an honest bloke, talks about his weaknesses. He begins by saying, 'Of course you won't believe me', which is always very winning.

This ability to project a fundamentally good nature is some­thing Chrystia Freeland has also spotted: What people say about Abramovich is that one of hisji qualities is he's a nice guy, and certainly in that kind Jl oligarch community, he is someone about whom peop|J have tended to speak with affection. Maybe he's milder i_nl person than some of the others. Purely in manner, he's easy to get along with. I find that quite a flimsy explanation for his business success because these guys are kind of barracudas but that is what people say abouUnm^__J

He also knew how to play the courtier. One Kremlin insider I who got to know Abramovich later, at a time when Berezovsky had secured a position in government, recalls him as a very patient man: 'Berezovsky was very rude. He would keep people waiting outside his office for hours, sometimes forgetting their appointments altogether. But Roman would sit outside in the corridor and never utter a word of complaint/

So Abramovich had the humility to cope with being _a junior partner, and the emotional intelligence to make him a good manager of people, but it was his expertise in the oil business that persuaded Berezovsky to cut him in on one of the most attractive lots offered under Yeltsin's fire sale of Russia's greatest national assets. Within months, Abramovich and Berezovsky were working on a joint bid for what was to turn out to be one of the most profitable of all the privatiz­ations of the Nineties. While Berezovsky had all the political connections to pull off a bid, Abramovich offered expertise in what was a technically complex sector. He was now a seasoned oilman who had been making regular deals with the Omsk refinery for some time. 1995, Russia was in crisis. The year before, share prices had / plunged, inflation was running out of control, and central ■ government was short of cash to pay pensions and teachers. / president Yeltsin needed to restore confidence in his administration and build up a war chest with which to fight the next I election — or he was doomed. The architect of the scheme I (hat was to save his skin, if at great cost to the people of Russia, was a banker called Vladimir Potanin.

Potanin's plan - now immortalized as the 'loans for shares* deal — was breathtaking in its audacity. He proposed that a group of would-be oligarchs give the government a loan in return for the right to buy shares in state industries. In addition, the government would put up its remaining con­trolling interests in the enterprises involved as collateral for the loan and transfer the right to manage that stake to the lender. As the chances of the government ever repaying the loans was remote at best, the long-term effect of this arrange­ment was to hand over the commanding heights of the econ­omy to a handful of speculators at a bargain-basement price. During a four-hour session round a horseshoe table in a Kremlin meeting room on 30 March 1995> Potanin, flanked by two other powerful bankers, Mikhail Khodorkovsky and Aleksandr Smolensky, made his pitch to a full meeting of the Russian cabinet chaired by the then prime minister, Viktor Chernomyrdin. He offered the government a loan of 9.1 trillion roubles (then £1.12 billion) in return for the right to buy minority shares in and manage 44 state-owned companies including Yukos (Khodorkovsky's target) and Norilsk Nickel (Potanin's target).

The scheme was attractive to the government for a variet of reasons. The State Property Committee, which had bee given a brief to generate 8.7 trillion roubles in private receipts, had so far managed to make only 143 ^ According to David Hoffman, author of The Oligarchs, ty_e ? and Power in the New Russia, 'The bankers were offering ^ government a plan to reap the whole year's privati2ati₀* revenue in one fell swoop'. Potanin and the other banl^J also promised political, financial and strategic support fJ Yeltsin's re-election campaign - and anything that would keJ the communist old guard out was guaranteed the backing J the young reformers. The other major plus point was td the scheme was contrived to look like a pawning of staj assets rather than an outright disposal of them, and as _SUcJ would be less likely to arouse public opposition.

As Freeland wrote later in her book Sale of the Century] Russia's Wild Ride from Communism to Capitalism       \

Loans-for-shares was ... such a cynical manipulation of I a weakened state, that - especially now, as Russia continues to fell apart - it is tempting to dismiss the rapacious oligarchs who instigated it as just plain evil. Yet, as I watched them plot and profit, I couldn't help asking myself how different the Russians really were from our own hero- entrepreneurs, the gizmo-makers and Internet tycoons and financial wizards our society so fewningly lauds for pro­ducing an era of unprecedented prosperity ... The real problem was that the state allowed them to get away with it.

There was one significant absentee from the meeting on 30 March - Boris Berezovsky. Of all the oligarchs, Berezovsky is the one with the widest spread of experience. Many of the men who made it big from the Russian privatization jamboree are little more than opportunists with an eye tor I the main chance, but Berezovsky, partly because he was older and had spent more than 20 years doing a job of work before taking advantage of Russia's new spirit of free enterprise, had some wisdom to impart. Before going into business, he had spent almost two decades at the Institute of Control Sciences, home to some of the Soviet Unions most brilliant mathema­ticians and theorists, who were charged with coming up with the wherewithal to control a new generation of industrial hardware — from guidance systems for intercontinental missiles to automation programmes for assembly lines. Bere­zovsky thrived in this environment, not only as a scientist but as an organizer and networker. He even aspired to win the Nobel Prize — but then perestroika intervened.

At the time Gorbachev's market reforms were taking shape, Berezovsky was forty years old and had never owned a car. Nor did he have any prospect of obtaining one, and correcting this terrible situation became the governing issue in his life. The solution to his problem finally came in the shape of a battered old Lada that was always breaking down. It belonged to his old friend Leonid Boguslavsky. Through his work with the institute, Berezovsky had made contacts at the giant Avtovaz plant producing Ladas at Togliatti on the River Volga. He managed to persuade Boguslavsky to let him have a half- share in his car if he could arrange a comprehensive overhaul for it at Avtovaz.

Having secured his time-share car, Berezovsky began to think seriously about how to exploit his links to Avtova2 for his own ends. He realized that, like him, the average Russian was desperate to own a car. His first move was typically off-beat but inspired. He volunteered to act as chauffeur to an Avtovaz executive called Tikhonov when he visited I cow and he absorbed everything his passengers discusscd I he ferried them around town. Having cemented his lj_njJ with senior management, he set up a joint venture with th Italian company that maintained the assembly line at Avtova- Meanwhile, he didn't neglect opportunities to make a small| profit on the side. He made ten trips to Germany, buying _a Mercedes each time and driving it back to Russia for resale.

But it was in early 1993 that Berezovsky began to make serious money. In cahoots with a man called Kaddanikov, the director of Avtovaz, he obtained 35,000 Ladas on extremely generous terms. The deal was that he paid ten percent of the cost on signature in roubles and the remainder two and a half years later. In a volatile economy like Russia's, where inflation was already spiralling out of control, such an arrangement was commercial folly for Avtovaz. Sure enough, as Hoffman points out, as the rouble went into freefall the dollar value of the cars went from $2,989 each to $360. Hoffman puts the partners' gross profit on the deal at $105 million. Berezovsky went on to make even more cash out of a highly imaginative scheme to raise money for a car manufacturing business called AWA by selling bonds to members of the general public Suffice to say, Berezovsky prospered greatly.

The buzz phrase of the early Nineties in the Russian oil business was 'vertical integration', the practice of combining an otJ driller with a refiner. Plans to create Sibneft (Siberian 00) had been in the pipeline since November 1992, when oftnak at the production company Noyabrskneftegaz and the Omsk refinery, Russia's largest and most modern refinery, first submitted a proposal to the Ministry of Fuel and Energy to put the two enterprises under a single holding company. But it took the intervention of Berezovsky to speed up the process. He lobbied Aleksandr Korzhakov, head of the Presi­dential Security Service, who, together with another senior Yeltsin aide, put in calls to a regional governor and the minis­ter for energy to clear the way for the creation of the new enterprise. Within months, Sibneft had been created via a decree signed by Yeltsin on 29 September 1995. Apart from Noyabrsk and Omsk, the company included the exploration outfit, Noyabrskneftegazgeophysica, and a marketing com­pany, Omsknefteprodukt. The sale of what was then Russia's sixth largest oil company was hastily added to the loans-for- shares schedule, and the auction date set for 28 December. The government was looking for a minimum loan of $100 million, for which it would put up its 51 per cent share of Sibneft as collateral and grant the lender the right to manage its stake and to bid for the remaining 49 per cent in a series of lots.

Having established their quarry, Berezovsky and Abramovich then had to find the wherewithal to buy it. Despite his success in the auto business, Berezovsky was only able to raise $35 million of his $50 million contribution from his own resources and so he embarked on a globetrotting fund- raising trip, taking in Japan, Germany and New York in a bid to make up the $15 million shortfall. However, interesting foreign investors in a Russian enterprise in those days was an uphill task. The spectre of Gennadi Zyuganov, the then popular leader of the communists, loomed large and none of the people Berezovsky approached was prepared to lend