BUSINESSMEN OF RUSSIA, UNITE!

John Lloyd investigates the murky world of the new Russian business

class, and hopes that the era of wild speculation and financial scandal is drawing to a close

Moscow THE CASE OF Sergei Mavrodi illuminates the misunderstood world of Russian busi- ness, both in its typicality and in his singu- larity. Mr Mavrodi is head of the MMM finance company, and was arrested earlier this month when the colossal pyramid-sell- ing operation he had created and promot- ed tottered under government pressure.

The manner of his arrest was emblemat- ic, recalling the 1930s raids on Chicago mobsters by FBI agents staged to make the callow young J. Edgar Hoover look good. Assault troops described as tax police assembled before the television cameras outside Mr Mavrodi's Moscow apartment block, then charged in from above and below. A transparent ploy to make it appear that the govern- ment was 'doing something' and was in control, it nevertheless made sense to deploy such hard- ware and such hard men: Mr Mavrodi had troops of hoods around him with automatics, and who was to know how precisely they, or he, would draw the line between legitimate and illegitimate challengers?

All leading Russian businessmen have such people: this is part of what makes Mr Mavrodi typical. Having dined in a friend's flat with Kakha Bendukidze, a former biol- ogist who now runs a successful finance and trading house called Nipek, I banged into his body- guards in the dark corridor outside and though courteously treated — was made aware of their readiness for combat. An evening with Vladimir Gusinsky, one of Russia's richest men and head of the Most finance and publishing group, was passed In his own restaurant (he cannot trust any- one else's restaurant) and ended when we were escorted out in a corridor of body- guards, walkie-talkies crackling and men deployed up and down the quiet street out- side. Mr Gusinsky and his wife got into an armoured, darkened-windowed Mitsubishi jeep: a few moments for the bodyguards to redeploy, then a convoy of seven cars with his in the middle roared off as one down the street, screeched through a traffic-light at the bottom and headed up Chekhov Street — a main central Moscow thorough- fare which runs past the upper house of parliament — as immune from police chal- lenge, it appeared, as if he was the Presi- dent himself (Mr Gusinsky was better guarded).

You see the private 'soldiers' every- where, in all the best places: just as in the

James Cagney movies, they are aimless, vulgar and defensive. They lunch or dine in the western-style hotels in twos or threes, eating their food with open mouths and gazing about them, occasionally exchanging brief sentences or jokes. In the hotel where I sometimes swim, they exercise in the gym while those they defend — who seem more straight criminal than businessmen — sit patting their bellies by the pool-side, as their gorgeous mistresses pout by the bar or phone their friends and relatives on mobile phones.

Mr Mavrodi may not have paid his taxes,

as the government alleges: this is also part of what makes him typical. His MMM cre- ation promised, and for many months delivered, fantastic earnings on 'shares' which were merely redemption slips unbacked by any profitable investments, financed by the continuing flood of new customers. It probably did break rules, but he could be pardoned for not knowing:' since rules of all sorts have poured out of the government for nearly three years, fre- quently contradicting each other or simply making life impossible for the business climate which the govern- ment claims it wishes to promote. Quite possibly the fact that MMM was a pyramid-selling operation was not illegal: much comment focused on the fact that new laws and regulations were needed.

Though Mr Mavrodi was atypi- cally brazen in his business prac- tices (he was also atypically retiring in his refusal to talk to the media), he was also in the main- stream in operating in a shadow- land between the straight and crooked. Research carried out recently by the Academy of Sci- ences for Dr Igor Bunin, a sociolo- gist who has made the study of the new class his life's (fascinating) work, shows that business people here, on their own account, rou- tinely pay protection money and bribes, and avoid taxes. All the while they say, believably, that they would prefer to live in an environment where rational and trustwor- thy transactions are honoured within a sta- ble and secure framework.

But such an environment cannot be pro- vided. The collapse of the order imposed by the dominance and pervasiveness of the Communist Party, which pretended to, and in some senses achieved, a separate civilisa- tion, has left the new businessmen and women (there are a few) in a civic vacuum in which they are obliged to act as feudal lords or mafia bosses — collecting retainers about them, living behind walls in heavily guarded compounds — whether or not they are actually professional criminals.

In fact, they are neither straight nor crooked, but rather operate in an environ- ment in which there are no dividing lines of the kind we have come instinctively to expect as 'normal'. Mr Bendukidze was a head of a biology lab; Mr Gusinsky a the- atre director; Konstantin Borovoi, one of the first finance and trade capitalists, a pro- fessor of mathematics. The rapidity of their success means that they still retain the cus- toms and reflexes of their previous profes- sions — and genuflect, much more than their western equivalents, to the worlds of scholarship, learning and intellectual endeavour. I have seen these men and oth- ers like them spend long hours on argu- ments which would be dismissed by western business people as a waste of time, 'above their heads' or grossly self-indulgent; yet the imperatives of the Russian intelli- gentsia, from which they have sprung, still exert their influence.

Most of these men make money from money, if less flamboyantly than Mr Mavrodi. The commodity traders of the late Eighties set up exchanges in which goods produced by the state sector were traded at much higher than state prices. Those, like Mr Borovoi, who have profited from commodities, are essentially operat- ing in a black market which has come out of the closet.

The bankers made their money — and make it still — out of currency exchange with high margins, short-term lending at high rates and, at the criminal end of the business, money laundering. Though some of the larger banks are developing rapidly and offering a greater range of customers' services, none has a retail network and only a few can do any serious financing. For the moment, the large-scale banking for Rus- sian businesses and wealthy individuals is done offshore — which is where, probably, the bulk of the money goes. As long as commodities like oil, gas, weapons and metals trade at low prices within the for- mer Soviet Union and at higher prices out- side, so the demi-monde of traders, financiers and bankers will operate at fan- tastic profits. Industrialists and the oil men

will be cut in to keep them sweet, and the workers are paid one month in three, if that Meanwhile, the world of production, although nominally in the private sector because mass privatisation has pushed enterprises out of state ownership, remains in the hands of the old management class.

Privatisation has in fact given the paper economy, and the financiers who run it, an extra boost. Shares were, for the most part, either given to the workers or sold at very low prices. In the past two years, the larger Russian financial groups like Menatep, Most, Alpha Capital and Mikrodin have been buying up these shares cheap and sell- ing them as dear as they can — and if they do so to foreigners, prices can be many times higher than the purchase price. In these operations, one sees the development of the conflicts which face all economies — that between the financiers, for whom for- eign investment is a Klondike, and the industrialists, for whom it could be death by competition. In Russia, where the mar- ket is raw and unformed, such conflicts can be bloody and will continue to be.

The trick, if capitalism is to survive in Russia, is to persuade the financiers to grow interested in funding production. MMM's crash may help, by shaming the crooked financiers to clean up their act. Mr Pyotr Aven, the former trade minister who is now chairman of Alpha Bank, even pre- dicts this year will be the year of 'strategic investment' for Russian capital.

Yet the challenge is massive. The enter- prises of Russia were designed not to be part of a market, but to be part of a plan: quality was always second to quantity, and quantity was usually too low. The workers acquired huge powers to block change, and management had no incentives to promote it on its own account. Enterprises were, and remain, feudal structures, providing housing, food, medical services and child care to workers who were tied to them with bonds much more important than the mere nexus of cash. The more talented among them are now drifting off into the private

Or criminal economies. Those organisations left with the least motivated workers will be all the harder to reform.

You always get stuck behind a bloody caravan.'

Besides, the new class is rich: wealth is too beguiling to be traded in for the hard labour of producing goods. The richest are multi-(dollar) millionaires, with jets, yachts, houses abroad, racehorses and Mercedes. They can be seen in Harrods and Bloom- ingdales, or in the first-class lounges of Charles de Gaulle and West Palm Beach. Their families have rocketed out of two- room apartments into mansions and five- star hotels. They have traded the world's worst queues for the world's top shopping catalogues. Once, they bought scratchy plastic discs and watched grainy bad televi- sion on sets which tended to explode. Now they have wrap-around sound and personal video theatres.

Moreover, even if they were to try to move into production, they would find it hard to be accepted. For part of the fragili- ty of this class is that many of its members are not ethnically Russian. Mr Benukidze is Georgian-born, Messrs Gusinsky, Borovoi and Aven are wholly or partly Jew- ish. This is a trait shared, according to Mr Aven, with the majority of bankers. Rus- sian anti-Semitism has been much exagger- ated of late: there has been less physical threat to Jews than to Caucasians, because of the latter's strong links to organised crime. But a society where anti-Semitism is widely spread, even if inactive, is likely to be a potentially dangerous place for Jews who can be plausibly represented as rich oppressors.

Russian or not, the new class is also frag- ile by its nature. Poised between cultures, uncertain of its identity, its professionalism and its acceptability, it still trembles on the surface of society rather than being a part of it. Its predecessors were ruined, exiled or killed 80 years ago: the memory still haunts, even as they console themselves that they are the future.

Their greatest hope for success is their toughness. Mr Mavrodi the MMM chief, denounced, accused and imprisoned, will not lie down — and his shareholders con- tinue, desperately, to believe in him. Busi- nessmen like them live in fear, but they carry on doing business. They are wholly conscious of the precariousness of their position, and often compare themselves to 19th-century American railway barons or Victorian industrialists. They crave success: they want to be the Americans, the Japanese, the Germans of the 21st century.

Russia has the business class it could not avoid. Its members express and detest the Soviet system in which they were formed. They want respectability, but hold in con- tempt the softer men from rich and settled countries who do not have to struggle as they do, nor appear to enjoy the rewards of success as they do. Taught that they were part of the great project of burying capital- ism, they and their heirs may yet bring it to life in the East.

John Lloyd is the Moscow bureau chief of the Financial Times.