By Renfrey Clarke
MOSCOW — Some 67% of Russians, a recent survey discovered, have no savings. Those who do have money saved up protect it against inflation through a variety of methods. These include depositing it in savings banks or in the profitable but risky commercial banks; purchasing hard currency; or buying real estate. And for about 5% of the population, the attractions of the share market are compelling.
Russia might seem the last place on earth likely to boast a lively market in securities. The economy is collapsing, and there is hardly such a thing as a productive enterprise able to pay a dividend. But with securities and exchange legislation ill-framed and haphazardly applied, there is an open invitation for speculators and swindlers to turn the share market into a huge casino.
There are also millions of people prepared to gamble, even with the riskiest of stocks. Many of these individuals are obviously naive. However, there is little reason to doubt that the majority of the people playing the Russian share market are conscious gamblers. Many of them are not conspicuously greedy; they are people who have little choice but to gamble with their savings, since their wages or pensions have become too small to live on.
Typically, such people are skilled workers in near-bankrupt enterprises, or members of the wretchedly-paid rank and file intelligentsia — teachers, engineers and health workers. Intelligent and analytical-minded, these people often invest shrewdly, spreading their risks and shifting money out of the most speculative schemes after a few months. With reasonable luck, they can build up a modest capital, deposit it in a reliable bank, and use the interest to supplement otherwise inadequate incomes.
The share market has periodically been an irritant to the Russian government, with scandals breaking out as directors of investment funds have disappeared with investors' money. But at the same time, the government has profited from the existence of a securities "casino". Gambling with high-risk shares has acted as a kind of political anaesthesia for a whole social layer which might otherwise have moved into articulate, organised opposition.
For this and other reasons, the Russian authorities have been in no hurry to introduce Western-style regulation to the securities market, curbing the dangers but also the potential returns. Responsibility for policing the area has been allowed to remain split between a series of ill-funded state agencies, and practices that would see investment fund directors jailed in the West have been freely tolerated.
However, the state's indulgent attitude has been fraught with the risk that a gifted operator would fully exploit the possibilities of the situation, and finish up creating a major political shock. This finally occurred in the last week of July with the notorious "MMM".
The brainchild of sometime computer salesperson Sergei Mavrodi, MMM first became widely known in 1991 when it hired the Moscow Metro for a day, allowing commuters to travel free. Mavrodi's gift for securing public attention continued to serve him well in 1992 and 1993, when his organisation became a prominent speculator in the market for privatisation vouchers. MMM grew and became diversified. By early in 1994 it consisted of a group of at least 22 related firms.
The first months of this year brought a striking new development. MMM began a lavish advertising campaign, offering its shares for sale and promising to buy them back at higher prices specified as much as a week in advance.
There was no shortage of people prepared to accept guaranteed high profits. The scheme was aided by eerily fascinating television ads featuring characters such as vodka-drinking Russian Everyman, excavator operator Lyonya Golubkov. With the gains from his MMM shares, the fictional Golubkov first bought boots and a fur coat for his wife Rita, and finally prospered to the point of attending World Cup soccer games in the US and thinking about buying a house in Paris.
MMM eventually swelled to the point where it boasted nearly 140 offices throughout Russia, including 60 in Moscow. At one point 7% of the population of the Russian capital were shareholders. The directors claimed 10 million shareholders Russia-wide, and indeed, probably had close to half that. The price of MMM shares rose by as much as 100% a month, from the equivalent of US$1 in February to $50 in late July.
Inevitably, there were problems. The most fundamental was that MMM had no major source of income apart from the money subscribed by new shareholders. The funds that were not spent on advertising — which reportedly consumed as much as $4.5 million a week — appear at least in part to have been invested in large industrial concerns such as car maker AvtoVAZ. But these investments can scarcely have returned more than a few per cent over the period the scheme operated.
MMM was thus a classic "pyramid" operation, as the more canny of its shareholders realised. The amount of money stowed beneath the mattresses and in the biscuit jars of Russia was not infinite, and once the flow of new capital dried up, MMM would swiftly and inevitably collapse. The game was to get out with your profits before the collapse came. Several times, hints of major problems sent investors stampeding to the company's offices to sell their shares.
A lesser problem, with which the MMM directors coped quite successfully almost to the end, was that what they were doing was flagrantly illegal. Under its charter, MMM was licensed to issue 991,000 thousand-rouble shares. For these shares to become the property of the buyers, the sales had to be recorded in an official register. But these requirements placed obvious limits on a pyramid scheme, which needed to keep growing exponentially. The share register was therefore "lost". MMM carried on selling, in the guise of securities, scraps of paper that in legal terms were worthless. The authorities charged with regulating the share market turned a blind eye.
The tax police were more importunate. But by the time they demanded MMM's records in April this year, the company was large and powerful enough to be able to make effective threats of political reprisals against anyone who challenged it. Mavrodi published a letter in the newspaper Segodnya warning that if the authorities insisted on an audit, he would suspend all activities and let the government face the firm's millions of shareholders. The officials then backed off.
For another three months the authorities procrastinated, while their dilemma with MMM grew worse. The company was aggressive and lawless, and the government's failure to discipline it was an invitation to swindlers to treat the legal constraints on them with scorn. At the same time, the authorities were wary of Lyonya Golubkov, now referred to only half-jokingly as a living being, the embodiment of a whole social stratum of petty speculators. What would be the political price of seeming to take away his car, his house in Paris, Rita's fur coat?
It was the tax authorities who acted first, announcing on July 21 that one of MMM's divisions owed more than $24 million in taxes and fines. On July 22 the Finance Ministry published a statement warning that large numbers of false securities were being sold on Russian stock exchanges, and that the issuing, advertising and sale of such securities was illegal. With knowledgeable shareholders sensing that there were no more tiers of fresh investors to be added to the base of the MMM pyramid, the hints of legal action were enough to topple the whole structure. On July 25 the firm reneged on its promise to redeem its shares. When it resumed making purchases on July 29, the price was less than a hundredth of what had been guaranteed a week earlier.
The Russian government is still afraid of Lyonya Golubkov. While it seems likely that MMM will be forced to bring its operations within the law by registering its shareholders and publicly listing its assets, there was no indication in the early days of August that the firm would be shut down or that its executives would face criminal charges. MMM, meanwhile, is setting out to rebuild its pyramid, again publishing promises of future share prices.
Among the key consideration now restraining the government from shutting down MMM and its various imitators, and prosecuting their executives, is evidently a fear that exposing the full details of what goes on in the wild end of the securities market would destroy public faith in capitalism. But an opinion survey whose results were published in Izvestiya on August 2 shows that this fear is quite misconceived. Few of the people interviewed reacted strongly to Russia's largest-ever company crash, and the survey revealed a striking lack of sympathy for the people who had lost their savings.
Indeed, it is too much to expect the two-thirds of Russians who do not have any savings to grieve for Lyonya Golubkov. But the real reason for the lack of indignation is that most Russians, and even large numbers of petty speculators, simply do not have major illusions in capitalism to be shattered. Long before the MMM crash, the government had lost the ideological battle, as secure, modestly comfortable lives were transformed into impoverished, precarious ones. If capitalists are now exposed as deceiving and robbing the population on a vast scale — well, they would do that, wouldn't they?
Still, there is no doubt that the collapse of MMM has hurt the Russian government. Among the millions who were "burnt" are large numbers of impoverished skilled workers and half-starved members of the intelligentsia. In these politically pivotal layers, there are now substantially fewer people able to dream of escaping their predicament by becoming petty capitalists living on their investments. And ahead, in the autumn and winter, lies another trauma for small investors — the predicted collapse of as many as half of Russia's 2000-odd commercial banks.
The "anaesthetic" that has helped keep Russian political life near-comatose throughout this year is wearing off — and millions of "patients" are waking up in the middle of a botched operation.