Magazine article Newsweek

The End of the Miracle Exclusive: The Inside Story of How a Handful of Businessmen and Politicians Brought Russia to Its Knees

Magazine article Newsweek

The End of the Miracle Exclusive: The Inside Story of How a Handful of Businessmen and Politicians Brought Russia to Its Knees

Article excerpt

It was the middle of the night on Sunday, Aug. 16, but Moscow's White House was surround- ed by four-wheel-drive Jeeps -- the "chase cars" of choice for bodyguards in postcommunist Russia. They were parked not far from the spot where in 1991 Boris Yeltsin, standing atop a tank, had defiantly turned back a coup and saved Mikhail Gorbachev's skin. But on this summer night a different kind of history was being made. And if Yeltsin's heroics had signaled the dawn of the new Russia, what happened Aug. 16 may well be the beginning of its long twilight.

Inside the White House were the bodyguards' employers, a dozen of Russia's richest businessmen, the oligarchs. They had elected Yeltsin in 1996 (or at least their money had), and they had more than a passing interest in his government. The oligarchs had descended on the White House Aug. 16 because they knew Russia was bankrupt, a victim of its own incompetence and of the virulent global economic crisis that had earlier laid waste to East Asia. And if the government was broke, several of the banks the oligarchs controlled soon would be, too.

So they waited restlessly for word from Russia's economic brains -- the young prime minister, Sergei Kiriyenko; the two principal architects of Russia's transition from communism to capitalism, Anatoly Chubais and Yegor Gaidar, and the head of the central bank, Sergei Dubinin. Just past midnight the prime minister emerged. The businessmen, some in T shirts and jeans, gathered around him. Their fates -- and that of the nation -- hung on what the young prime minister was about to say. Kiriyenko calmly ticked off the steps the government would take Monday morning. The central bank would devalue the ruble by more than 50 percent; the government would also effectively default on its domestic debt of $40 billion and -- in a move to protect some of Russia's private banks -- impose a 90-day moratorium on their commercial debts. The implications were clear: Moscow's experiment with capitalism was a shambles, its political future uncertain. The assembled plutocrats' immediate reaction, former central-bank chief Dubinin recalls, was "pained silence."

The fallout, for Russia and for the world, was immediate. Within a week Kiriyenko and his team of reformers were gone, eventually replaced by a government headed by former KGB spymaster Yevgeny Primakov. Financial markets around the world lost billions of dollars in value as investors realized how badly Russia's transition to capitalism was foundering. The Russian collapse also sent the global financial crisis hurtling across the world.

How Russia got to its own D-Day -- the day of default and devaluation -- is the subject of the story that follows. Based on interviews with most of the critical decision makers within Russia, it's a cautionary tale for policymakers struggling today with similar peril, most pressingly in Brazil. For Russia itself, the disastrous summer of 1998 marked the collapse of what Alpha Bank chairman Peter Aven called the "Russian miracle": the notion that 1,000 years of history -- an era mainly bereft of capital- ism and democracy -- could be overturned in just six years. The lesson, Aven says, is that "there never was a Russian miracle -- and that there won't be."

When a 35-year- old, relatively anonymous bureaucrat was named acting prime minister in March of last year, he self- effacingly told a bemused press corps, "I'm as surprised as you guys are." His task as prime minister, Sergei Kiriyenko would later say, "was to be a technocrat," to implement economic reforms. In hindsight, Kiriyenko concedes how naive that thought was; Russia's politics were (and remain) bitterly divided, and Kiriyenko's boss, the ailing Boris Yeltsin, was rarely around to back him up.

By early May, after the Duma finally confirmed him in office, Kiriyenko was still trying to grasp what he was up against. World oil prices had halved in just two years, thanks to a collapse in demand in East Asia. …

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