The Russia Conundrum

The thing that made me most angry – and one of the reasons I decided to quit – was the way in which the Russian oil industry was unnecessarily torn apart. Despite all advice, the decision was taken to privatise the main branches of activity – mining, processing, marketing and distribution – separately from each other, with the inevitable result that production collapsed. In an industry where the product is mined in inhospitable conditions hundreds or thousands miles from ports and even from populated areas, with little capacity for prolonged storage, it is obvious that any disruption to the established supply chain will lead to problems of shortages, the loss of wells frozen because of inactivity and the destruction of expensive equipment in processing facilities. I argued against the decisions that were taken, but my views were ignored. Ironically, just a few years later, it would fall to me to undo the damage that was done to the oil industry by the misguided policies of the Chicago Boys and their Russian counterparts.

Boris Yeltsin meets with leading industrialists and bankers, including myself, in the Kremlin, 1997

I saw so much going wrong that, in 1993, I stood down from my role in the Reform Cabinet. I told the cabinet that if entrepreneurs like me were not listened to, then we would inevitably take advantage of their mistakes. I decided to go fulltime into business.

The voucher scheme failed because it distorted the realities of the Russian economy. The sums involved were illogical. The population of Russia was 150 million, so 150 million vouchers were issued, meaning that the greater part of Russian industry was being valued at a mere $9 billion. Anyone who did the maths could see this was wrong, and anyone with a business brain could see it presented an opportunity. But most Russians had no experience or understanding of the concept of private ownership and were more than happy to sell their bits of paper for a few roubles. Group Menatep bought up large numbers of vouchers, which were being traded on street corners, and acquired shareholdings in many different industries, including textile mills, chemicals, metallurgy, glass, food processing, wood pulp and paper, fertilisers and oil. It was a risky process because no one was sure what condition these industries were in – the Soviet way was never to open the books; official profit and loss figures were unreliable, and we often discovered huge debts that had not figured in the accounts – but we took the gamble. Many of the firms we bought turned out to be hard to resurrect, several produced no returns and one even went bankrupt; but all enterprise involves an element of risk. When things worked out for us, we were accused of buying businesses on the cheap, but the fact is that we played by the rules that were in force at the time.

I took a hands-on role in running the companies we acquired, some of which we grew into multimillion-dollar businesses; but it soon became clear to me that our portfolio of interests was too big. Menatep needed to slim down; we needed to concentrate on one thing and, in 1996, I chose oil. The decision was partly influenced by the experience I had gained at the Ministry of Fuel and Energy and by my own background in chemical engineering, as well as my business partners’ qualifications in oil engineering. Russia has vast natural supplies, but her state-owned oil companies had been appallingly inefficient, operating at a loss for many decades. The industry was in sharp decline. I could see the wasted potential and I knew how things could be turned round; but Russian law specified that strategic industries should not be sold to private owners. While Yeltsin had managed to privatise many branches of industry, the remaining communist faction in the Russian parliament had fought to block the sale of land, iron and steel, oil and gas.