Mark Ames: Credit Suisse Decries Russian Inequality After Playing Leading Role in Creating It

Yves here. At the end, Ames explains why this sudden handwringing about Russian inequality is newsworthy:

Without any of this context, it’s as though Russia’s extremes of inequality that Credit Suisse just reported on suddenly appeared out of nowhere, as a manifestation of Vladimir Putin’s innate evil. As though nothing preceded him—the 1990s had never happened, and our Establishment has always sincerely cared about how Russians must suffer from inequality and corruption. Erasing history like this has a funny way of making America look exceptionally good, and Russia look exceptionally bad.

As anyone who knows a smidge about this sordid history could tell you, the US’s neoliberal reforms set the stage for a plutocratic land grab, with members of the Harvard team advising the State Department feeding at the trough in a big way. As we’ve written, the fact that Harvard paid $26.5 million in fines, yet Larry Summer not merely failed to sanction the professor who headed the team, his personal friend Andrei Shleifer, but actually protected him was the proximate cause of the ouster of Summers as Harvard president.

By Mark Ames, founding editor of the Moscow satirical paper The eXile and co-host of the Radio War Nerd podcast with Gary Brecher (aka John Dolan). Subscribe here. Originally published at The Exiled

The Guardian just published a piece on Russia’s inequality problem — first and worst in the world, according to a new Credit Suisse report. Funny to see Credit Suisse wringing its hands over Russian inequality, given that bank’s active complicity in designing and profiting off the privatization of Russia in the early-mid 1990s. Shortly before Credit Suisse arrived in Russia, it was the most equal country on the planet; a few years after Credit Suisse arrived and pocketed up to hundreds of millions in profits, Russia was the most unequal country on earth, and it’s pretty much been that way since.

Credit Suisse’s new Russia branch was set up in 1992, and it was led by a young twenty-something American banker named Boris Jordan, the grandson of wealthy White Russian emigres. Jordan was key to the bank’s success, thanks to his cozy relationships with Russia’s neoliberal “young reformers” in charge of privatizing the former Communist country. In the first wave of voucher privatization—when all Russians were issued vouchers which they could then either convert into shares in a newly-privatized company, or sell off—Credit Suisse’s Boris Jordan gobbled up 17 million of Russia’s privatization vouchers, over 10 percent of the total.

Inside connections were the key. While working for Credit Suisse, Jordan advised the Yeltsin government on how to implement its Russia’s disastrous voucher privatization scheme. Jordan worked together with the two of the most powerful US-backed Russian free-marketeers: Prime Minister Yegor Gaidar, architect of the shock therapy program that led to the mass impoverishment of tens of millions of Russians; and Anatoly Chubais, architect of Russia’s privatization program, which created Russia’s new billionaire oligarch class. Gaidar’s shock therapy confiscated wealth from the masses; Chubais’ privatization concentrated wealth in a few hands. And Jordan’s Credit Suisse advised, traded off, and profited from this wealth transfer. This was the trio that played a central role in creating the inequality that Credit Suisse is now wringing its hands over. (You can read an interview with Jordan about how he co-advised the voucher implementation in 1992, which is stunning for a lot of reasons— he admits they sped up its implementation of voucher privatization to make sure that Russia’s parliament, i.e. representative democracy, couldn’t interfere with it. Democracy was not something anyone involved in Russia’s privatization in the 1990s gave a shit about.)

The conflicts-of-interest here were so over-the-top, they were almost impossible to wrap your head around: Credit Suisse banker Boris Jordan helped implement the voucher privatization scheme with Russia’s top political figures; and Credit Suisse massively profited off this same privatization scheme. And it was all done with the full backing and support of the US Treasury Department and the IMF.

(Another major beneficiary of Russian privatization vouchers was a murky hedge fund run by the billionaire Chandler brothers. They made a killing snapping up vouchers cheap, converting them into stakes in key Russian industries, and selling their stakes for huge profits. I wrote about them a couple of years ago because one of the Chandler brothers plowed some of his Russia loot into something called the Legatum Institute—a Dubai-based neocon front group that’s been bankrolling the “Russia disinformation panic!” for several years now, issuing report after report after report on the Kremlin disinformation scare by their protege Peter Pomerantsev. You have to let these vulture-capitalist billionaires wet their beaks a little, or they’ll raise an army of human rights activists to regime-change your ass.)

Shock therapy, first implemented in 1992 and not really ended until Russia’s devastating financial crash in 1998, was politically useful in that by confiscating the Russian middle-class’s and lower-class’s savings, it created a massively unequal society. And that alone drove Russia further from its Communist recent past, which was the political goal that justified everything.

In 1994, this same young Credit Suisse banker, Boris Jordan, told Forbes’ Paul Khlebnikov about a scheme he was trying to sell to the Yeltsin regime. It was called “loans-for-shares” and when it was finally adopted at the end of 1995, it resulted in what many considered the single largest plunder of public wealth in recorded history: The crown jewels of Russian industry—oil, gas, natural resources, telecoms, state banks—given away to a tiny group of connected bankers. It was this scheme, first devised by a Credit Suisse banker, that created Russia’s world-famous oligarchy.

The scheme went something like this: The Yeltsin regime announced in late 1995 auctions under which bankers would lend the government money in exchange for “temporary” control over the revenue streams of Russia’s largest and most valuable companies. After a period, the government would “repay” the “loans” and the banks would give the their large stakes back to the government.

In reality, every single “auction” was rigged by the winning bank, which paid next to nothing for its control over an oil company/nickel company/etc. Even the little money paid by this bank was often stolen from the state. That’s because Russia used a handful of private banks as authorized treasury institutions to transfer government salaries and other funds around the country. This allowed the same bankers who were authorized as state treasury banks to keep those funds for themseles rather than distribute them to the teachers, doctors and scientists as salaries—so they did what was in their rational self-interest and kept the money, delaying salary payments for months or even years at a time, while they used the funds for themselves to speculate, or to buy up assets in auctions they rigged for themselves. It was pure libertarian paradise on earth—everything von Hayek and von Mises dreamed of—in practice.

By the time the loans-for-shares was actually put into effect in late 1995, Credit Suisse’s Boris Jordan joined up with an anointed banker-oligarch, Vladimir Potanin, to set up their own investment bank, Renaissance Capital. They raised their first private equity fund, Sputnik Capital—with George Soros and Harvard University as co-investors—and Sputnik Capital went on to take advantage of the loans-for-shares investment opportunities, which had even more help from the fact that Yeltsin made Potanin his Finance Minister in 1996.

This sudden mass wealth transfer from the many to the few had a devastating effect on Russia’s population. Inflation in the first two years of shock therapy and voucher privatization ran at 1,354% in 1992, and 896% in 1993, while real incomes plunged 42% in 1992 alone; real wages in 1995 were half of where they were in 1990 (pensions in 1995 were only a quarter in real terms of where they were in 1990). According to very conservative official Russian statistics, GDP plunged 44% from 1992-1998 — others put the GDP crash even higher, 50% or more. By comparison the Soviet GDP fell 24% during its war with Nazi Germany, and the US’s GDP fell 30% during the Great Depression. So what happened in the 1990s was unprecedented for a major developed country—by the end of the decade and all of the Washington/financial industry-backed reforms, Russia was a basket case, a third-rate country with an even bleaker future. Capital investment had collapsed 85% during that decade—everyone was stripping assets, not investing in them. Domestic food production collapsed to half the levels during perestroika; and by 1999, anywhere from a third to half of Russians relied on food grown in their own gardens to eat. They’d reverted to subsistence farming after a decade of free market medicine.

All of this had a catastrophic effect on Russians’ health and lives. Male Russian life expectancy dropped from 68 years during the late Soviet era, to 56 in the mid-1990s, about where it had been a century earlier under the Tsar. Meanwhile, as births plunged and child poverty and malnutrition soared, Russia’s death-to-birth ratio reached levels not seen in the 20th century. According to Amherst economist David Kotz, over 6 million Russians died prematurely during the US-backed free-market reforms in the 1990s. What’s odd is how little pity or empathy has ever been shown for those Russians who were destroyed by the reforms we backed, advised funded, bribed, coerced, and were accessory to in every way. They weren’t entirely America’s fault; Yeltsin and his US-backed “market bolsheviks” had their own cynical, ideological and political reasons to restructure Russia’s political economy in the most elitist, hierarchical unequal manner possible. But if the US had acted differently, given how much influence the Clinton Administration had with the Yeltsin regime, things could certainly have turned out differently. The point is—they didn’t. The inequality was the surest sign of success. It only became something to wring our hands about later, a soft-power weapon to smack them with, now that we have little to zero influence over Russia.

It’s interesting that our literature is filled with plenty of official empathy for Weimar German victims of that country’s hyperinflation, but nothing of the sort for Russians of the 1990s, who were, it was argued, being ennobled and lifted up by the linear thread of liberal history—they were heading towards the bright market-based future, can’t let a few knocks and scratches distract us! Can’t make an omelet without cracking a few eggs, as the West’s Stalin apologists used to say.

Here, for example, is a typical cheerleader story about the new Russian inequality, published in Businessweek in 1996—a fluff job on Boris Jordan’s Russian backer, Vladimir Potanin. Notice how the headline/subheader make clear that the hero of this narrative is the Russian billionaire, and the villains are the “angry masses” of poor envious Russians:

The Battle for Russia’s Wealth

Can hugely rich new capitalists weather a backlash from the angry masses?

Russia’s answer to J.P. Morgan could not be less like the eccentric, bulbous-nosed original. Vladimir O. Potanin is a shy, athletic man of 35. Holding court in his rosewood-paneled office on Moscow’s Masha Poryvaeva Street, the president of Oneximbank quietly gives instructions to two strapping bodyguards at his door. Cool and controlled, Potanin is a standout in a group of dynamic businessmen who have seized huge slices of the economy.

Which reads a lot like this fluff job in the Los Angeles Times, published around the same time, headlined “Whiz-Kid Banker Named to Russian Cabinet”. Which reads a lot like a Businessweek followup up with even more shameless hagiography, headlined “The Most Powerful Man in Russia”. You can try reading that  last one if you want, but I recommend keeping a vomit bag close by—and a cyanide pill for good measure.

So this is the sordid and depressing backstory to the Credit Suisse report on Russian inequality—the story you definitely won’t and don’t read about in Credit Suisse’s own account. They’re a bank; their reports, while perhaps truthful, are far from The Truth—more like marketing pamphlets than serious scholarship.

Credit Suisse made a killing in Russia in the early-mid 1990s, dominatingtwo-thirds of Russia’s capital markets deals—while tens of millions sank into desperate poverty. That too is inequality.

Jordan himself remained a powerful celebrity-investor through the early Putin era. In 1997, Boris Jordan was caught up in a major scandal surrounding the privatization of the national telecoms concern, Svyazinvest—which was won by a consortium that included Soros, Harvard, and a bank owned by Finance Minister Potanin and his partner, Mikhail Prokhanov, who today owns the Brooklyn Nets. The scandal was this: The government official in charge of auctioning off the telecoms to Soros-Harvard-Potanin-Jordan consortium, Alfred Kokh, had been given a shady $100,000 book advance by a shady Swiss company connected to Potanin’s bank. The book had not been written; the advance was unusually high; and the Swiss “publisher” which had never published a book before was itself incorporated and led by none other than Boris Jordan’s cousin, Tikhon Troyanos.

The revelations led to scandals, and Yeltsin was forced to fire his privatization chief Alfred Kokh, along with a handful of other corrupt US-backed “young reformers” caught getting paid on the eve of a rigged auction.

But what did it really matter? What really mattered to everyone who matters was the political structure of Russia’s economy. No longer egalitarian, no longer a threat to the neoliberal order—it now had the world’s most unequal society, and that was a good thing, because the new elites would identify their interests more with the interests of their Davos counterparts than with the interests of the “backwards” Russian masses, whose fate was their problem, not ours. This is when racist caricatures of the “backwards” Russian masses help—you don’t have to empathize with them, history is sending them to the trash heap of history, not you. The world was safe for business, and that was all the affirmation anyone needed to hear.

At the end of the Yeltsin era, I visited the sprawling suburban Moscow “compound” owned by Potanin and his banking partner, Mikhail Prokhorov, as well as Renaissance Capital—the bank first founded with Boris Jordan in the mid-1990s. It was a huge gated compound with several buildings, a mini-hotel, and a nightclub/concert hall. One of the first things I saw entering the gaming hall building was two familiar-looking men in track suits playing backgammon: Vladimir Potanin, billionaire oligarch; and Alfred Kokh, the fired, disgraced head of Yeltsin’s privatization committee.

The financial crisis of 1998 left Russia’s in complete tatters, and Boris Jordan was never the big shot that he had been before. His real value was providing cover for the new boss Vladimir Putin as he re-centralized power under Kremlin control. The first upstart oligarch that Putin took down was Vladimir Gusinsky. He was briefly jailed and then exiled to Israel. His once-respected opposition TV station, NTV, was “bought” by Gazprom, and Gazprom, needing a western-friendly face for its hostile takeover, hired Boris Jordan as the new general director of the network—and his old partner-in-crime, Alfred Kokh, the disgraced ex-privatization chief, as chairman of NTV’s board. Almost immediately, 25 NTV journalists— half the staff— “resigned”. Jordan’s job was to blunt western criticism of the Kremlin as it destroyed the lone critical voice on Russian television, and two years later, his job done, he moved on.

Today Jordan still runs the Sputnik Fund, such as it is—mostly a web site as far as I can tell. And he is listed as the founder of New York University’s “NYU Jordan Center for the Advance Study of Russia”. He looks like such a minor figure now.

Without any of this context, it’s as though Russia’s extremes of inequality that Credit Suisse just reported on suddenly appeared out of nowhere, as a manifestation of Vladimir Putin’s innate evil. As though nothing preceded him—the 1990s had never happened, and our Establishment has always sincerely cared about how Russians must suffer from inequality and corruption. Erasing history like this has a funny way of making America look exceptionally good, and Russia look exceptionally bad.

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  1. Temporarily Sane

    Great piece. Mark Ames and his former eXile comrades Yasha Levine and Matt Taibbi write some of the most honest and ideologically neutral critiques of the current political and economic clusterfuck. The Guardian, OTOH, is pure neoliberal establishment propaganda. It really went downhill after Katherine Viner replaced Allan Rusbridger as chief editor. If the Snowden affair happened today they would probably be loudly calling for his arrest.

  2. ambrit

    Why do I get the feeling that this “playbook” is being resurrected to manage a “privatization” of the American “safety net?” When it happened in Russia, the Russians ended up with Vladimir Vladimirovitch rising to stem the tide of officially sanctioned criminality. One could say that Russia has had precious little experience with “representational” governance, and thus a return to some form of autocracy was understandable. America, on the other hand, has, supposedly, a storied history of representative governance. So far, that “story” isn’t showing signs of turning out so well for the “angry masses” of the Homeland. What, then, will America “put up with” to see the mere appearance of social justice? This is where the supposed “opposition” party, the Democrats, have fallen down. They aren’t even “talking” a good game today. The longer these tensions continue, and increase, the greater the damage from the eventual unwinding will be.

    1. Carolinian

      The job of the Dems is to herd the sheep in the right direction. They do this by pretending to be lefties while keeping the true alternative, socialism, in its box. One could argue the whole history of the 20th century after WW1 was about keeping socialism in its box. Funny how the end of the Evil Empire–at least notionally committed to socialism–has made the situation in the West so much worse. It’s almost a though those 20th century progressive reforms were only intended to keep the commies at bay. Now the plutocrats don’t have to pretend any more.

    2. Mark P.

      Ambrit wrote: ‘Why do I get the feeling that this “playbook” is being resurrected to manage a “privatization” of the American “safety net?”

      Because many of the same sociopaths who learned how to loot a collapsing empire after the fall of the USSR took the lessons learned and applied them over here.

      ‘The Harvard Boys Do Russia’

      ‘Harvard Mafia, Andrei Shleifer and the Economic Rape of Russia’

  3. Thuto

    Well this is to be expected isn’t it. The same banks that go around the world selling their brand of “market based reforms” then turn around and wring their hands when the post-reform economy has been stratified in favour of the 1%. It’s almost as if registering their concern about the inequality levels they had a hand in creating somehow assuages their guilt. In my own country South Africa, one of the most unequal societies in the world, we are drowning in a constant, ad nauseum barrage of media commentary about how orthodox neoliberal thinking is the only thing that will save the country. Such stories of how orthodoxy itself plunged a country like Russia into economic anarchy are sadly lacking, in fact speaking ill of orthodoxy is anathema and one suspects that journalists are either infected with terminal gullibility vis a vis neoliberal thinking or are towing the line to stay in their jobs…

  4. David Barrera

    Thanks for this great article… It looks like Popper’s positivism did wonders for George Soros. As he would say: “I made a killing”. Sure nothing a couple of his humanitarian NGO’s can not fix!

  5. Fool

    This is terrific — and the Yeltsin-Clinton photograph is too perfect.

    I suppose we’ll never forgive the Russians for how bad they let neoliberal capitalism look.

    1. Martin Finnucane

      I suppose we’ll never forgive the Russians for how bad they let neoliberal capitalism look.

      I think that in some circles there’s a deeply seated viral antagonism toward Russia and Russians that goes far beyond, and is far more deeply laid, than the liberal-v-not-liberal clash of civilizations du jour. Like herpes, this particular disease bubbles to the surface under certain conditions, such as a the Ukraine coup. Perhaps the virus first broke out around the time of the Venetian Sack of Constantinople?

      Ask a Russian. If you ask a Western liberal and you’ll get nothing but a blank stare. Of course Russia bad. That’s all we need to known. Full stop. My Western liberal conscience is clean.

      The rank hypocrisy involved reminds one of Obama’s gratuitous Russia bashing. And who is more iconically Western, more iconically liberal, than President Obama? Obama is nothing if not cool, and Western liberalism is coolness itself.

      1. Fool

        It is certainly bizarre. Maybe it’s our vastly inferior literary canon that engenders the nationalistic ressentiment.

  6. Susan the other

    I’ve wondered what a better alternative would have looked like – instead of looting and refitting Russia to join a neoliberal capitalist world. Wasn’t it Jeffrey Sachs, now reformed, who said shock therapy would be the fastest and least painful way to get Russia up and running? And Putin has been a tightrope walker all along and seems to be very sensible. Almost too sensible. He has his nationalist opponents on one side (the late, great Boris Nemtsov was one) who say he is giving Russian wealth away to the West and his western-neoliberal detractors one the other side who call him a nationalist tyrant. In between he has the backing of the Russian people. Very agile.

    1. PlutoniumKun

      The obvious alternative way would be the various routes followed by the former Iron Curtain countries. Most had some form of shock therapy, if none as extreme as that in Russia, probably because they don’t have the easy to grab mineral resources. None have done as well as hoped, but some have been moderately successful by steering a middle course – The Czech Republic and Poland have done reasonably well over the past 20 years. In general, I would say that those which opted for slower and gentler market reform did better than the ‘get it over quick’ ones. The one country that tried not to change – Belarus – is still standing, if a bit of a basket case.

      1. JohnnyGL

        Keep in mind the EU played a much more constructive role back then. The elites at the time really wanted integration and modernization to work, especially in the Central European countries like those ones you listed.

  7. JohnnyGL

    Not directly related, but for wider context, very similar programs happened in Mexico during the Salinas administration (1988-1994) around the same time. NAFTA in 1994 was the ‘reward’ for the Mexican elites doing as they were told.

    Here’s an old NYT article which aims for a tone of ‘cheerleading with reservations’, but does give you a sense of the corruption involved during the biddings, especially around TelMex and the resulting problems.

    Of course, we know how the story ends in Mexico with the 1994-5 Tequila Crisis, much like the story ended in Russia with the 1998 default which crushed the LTCM hedgies.

    1. Martin Finnucane

      Also, Carlos Slim became the richest man in the world. Meritocracy rocks! Go suck a heuvo gordo, you socialistas sucias!

  8. Susan the other

    I’ve wondered what a better alternative would have looked like – instead of looting and refitting Russia to join a neoliberal capitalist world. Wasn’t it Jeffrey Sachs, now reformed, who said shock therapy would be the fastest and least painful way to get Russia up and running? And Putin has been a tightrope walker all along and seems to be very sensible. Almost too sensible. He has his nationalist opponents on one side (the late, great Boris Nemtsov was one) who say he is giving Russian wealth away to the West and his western-neoliberal detractors one the other side who call him a nationalist tyrant. In between he has the backing of the Russian people. Very agile.


    My one minor quibble is the assertion that those in the West put the blame of the downfall of the Russian masses on the masses themselves. Most of those in the West are either ignorant, or in denial, of how bad it got for the average Russian in the aftermath of the fall of the Soviet Union. They were taught that the USSR was a hellhole where everyone lived in horrific poverty except for the party leaders. So they saw the horrible conditions under Yeltsin and company as a continuation of how things had always been. Some even argue it got better, painting any report showing things were better under the USSR as communist propaganda.

    1. hemeantwell

      It is hard to believe that if, as Ames says, the economy were contracting by 40%, there were many who were experiencing improvement. The late Soviet economy was failing because it was growing anemically, on the order of 1.3% or so, and there were few incentives to innovate. (I’m citing David Kotz’ Revolution from Above here.) The shortages and queuing that were widespread in the runup to the dismantling of central planning institutions in ’87-88 were significantly due to the fact that enterprise managers had been given wider rein to set wages. They did, upwards, and thus strongly increased demand for price-controlled goods. Once central planning disintegrated and the economy began to be opened up to the West, kablooey.

  10. hemeantwell

    Ames’ piece is one of the best brief summary of the crimes of that period. I’m reading Tariq Ali’s The Dilemmas of Lenin, and it is (self-censorship) “surprising” (/self-censorship) that, in the absence of the possibility of a more organized, mass-based political response to this human-wrought disaster, there weren’t some People’s Will identifiers in the population. As Ali tells it — and he’s drawing on Franco Venturi, whose Roots of Revolution I’d also recommend — anti-Tsarist terrorism held considerable legitimacy in the minds of a broad stratum of not only the peasantry and the working class but also some sections of the middle class. One of the first benefits of Lenin’s enlistment to Marxism was to tear him away from the terrorist political tendency, particularly powerful in his case since his brother had been hung for plotting against the Tsar.

  11. Sluggeaux

    Good to see Mark Ames back in form, and good comments!

    Russia-bashing has been ingrained in American culture since the Bolshevik Revolution 100 years ago — along with union-bashing and worker-bashing. FDR’s New Deal was intended as a bulwark against the ComIntern and socialism. The anti-Fascist alliance of World War II was never serious on either side, and the take-over of Eastern Europe by the Stalinist machine cemented a new generation in Russophobic paranoia, confirmed in Korea, Hungary, Vietnam, and Czechoslovakia. Television commentators still make slips about “the Soviets” twenty-five years after the USSR collapsed. In popular American culture, Russians are all shifty or drunks. Or in the case of Yeltsin, shifty drunks. They are seen as incapable of good intentions.

    What irks me most about The Guardian reporting is that it appears to be by design a sleight-of-hand to distract readers from the near-Russian levels of inequality in the U.S. and the U.K., countries that don’t have the excuse of the Goldman Sachs/Credit Suisse/Harvard Endowment “shock doctrine” as applied in Russia. — Or maybe we do?

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