Sunday 2011-07-10

The Oligarchs by David E Hoffman

The Russia of 90's seemed similar to the 1870's - 90's in the States; businessmen became monopolists, monopolies generated huge flows of cash, cash became power. This ended with the divide-and-conquer of Putin.

I expect this will become a movie. Maybe then they'll have someone with a finance background help emend where needed.

Although, all the politics makes one realize that every business has to fight a war with two fronts: one in the market, and one with the mafia/political/legal system. Reducing the latter makes for lower costs across a society.

The system no longer was really commanded from the top. There was no dictator! Instead the whole bureaucratic planning system had become a strange, never-ending, undisciplined bazaar. At the core there were no firm commands but bargaining. From below, factory directors made demands on the ministries and the ministries made demands on the central planners; all the tugging and pulling went up the ladder and then came tumbling back down again in the form of a cascade of decisions that never matched the initial demands.
If the decision was to take away from one factory and give to another, the loser did not accept the decision and began to lobby others for what it wanted, sometimes not up the ladder but sideways, from other factories. The key players in these transactions were often not the central planners at all, but the factory managers, who gained more and more power as the system weakened.
-- Shadows and Shortages
One method was generally known as arbitrage, taking advantage of the gaping price differentials that existed at teh time between the heavily subsidized, fixed prices of the state-run economy and the free, higher prices of the market, both inside the country and abroad. Another lucrative business was currency speculation, taking advantage of hyperinflation. Between the collapse of the Soviet Union in 1991 and the end of 1994, the ruble exchange rate against the dollar dropped 95 percent. Smolensky and other bankers made enormous profits by essentially gambling on daily fluctuations in the ruble-dollar exchange rate.
-- Alexander Smolensky
( when a Russian says "currency speculation", they probably mean laundering money )
In this environment, Luzhkov was a curator of the new experiment who protected, nurtured, and monitored the cooperatives as they took hold. In his first four months, the number of Moscow cooperatives zoomed from four to more than a thousand. Luzhkov sponsored an exhibition of their work to mark the first hundred cooperatives and spread the idea.
-- Yuri Luzhkov (future mayor of Moscow)
"I realized the coup plotters were going to fail when I saw that Luzhkov was wholly against them," Bokser recalled later. "Why? Because Popov, for them, was a democrat and not one of them. But Luzhkov was a real khozyain. He had given so many people apartments, such as the head of the communications brigade, the pilot of the helicopters. All those people understood that in Moscow, the real khozyain was Luzhkov."
-- Yuri Luzhkov
( quite a feat for Putin to finally pull down Luzhkov )
They were profoundly inspired by a two-volume, 630-page book published in 1980 by a Hungarian economics professor, Janos Kornai. The Economics of Shortage...
Kornai asked his readers to imagine the economic relationship between a parent and child. He described this has five stages of "paternalism": ... "grants in kind -- passive acceptance" ... "grants in kind -- wishes actively expressed" ... "financial allowance" ... "self-supporting -- assisted" ... "self-supporting -- left to himself" ...
he concluded that the real root of the shortage economy ws too much of the first kind of paternalism, in which the state generously doled out subsidies to factories and enterprises, as a mother to a newborn. Kornai found that this led to unhealthy dependence, which he termed "the soft budget constraint", meaning that the firms never had to stop feeding.
-- Anatoly Chubais
Berezovsky told me that the terms were 10 percent down and the remainder to be paid two and 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 they had been when he bought the cars.
-- Boris Berezovsky
( why float a distribution loan for 2.5 years? they're not dumb, boris probably just bribed them into this )
Once I asked a Russian police academy instructor about a string of unsolved murders of bankers. He grew indignant ... "If a banker gets killed, it's because he did not have a strong enough security service" he declared. He did not see protecting a banker as police work.
-- Easy Money
( or maybe he sells security services ... )
The restaurants were part of the Moscow city commercial empire, often described as "state capitalism" in which the city was the direct owner of the business. By 1997 Moscow Inc. included fifteen hundred businesses, mostly former Soviet enterprises, and the city was a partner with outside investors in another three hundred firms.
-- The Man Who Rebuilt Moscow