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  •   In Moscow, Business and Politics Mix

    By David Hoffman
    Washington Post Foreign Service
    Friday, December 19, 1997; Page A01

    MOSCOW—When the new Russian market economy exploded into a frenzy of buying, selling and dealmaking in the early 1990s, one small backwater of the Moscow city bureaucracy took on a new life.

    The Moscow Committee on Science and Technology had been a marginal city department. The boss was Vladimir Yevtushenkov, a plastics engineer who soon discovered that the once-bountiful science budgets of the Soviet era had dried up.

    Yevtushenkov's department had no money, but he had a friend, Yuri Luzhkov. Also a veteran of the Soviet chemical industry, Luzhkov became mayor of Moscow in 1992 as it blossomed into the most vibrant site of the nascent Russian capitalism.

    Today, Yevtushenkov is an influential yet little-known figure in Luzhkov's City Hall, which, far more than a municipal government, has become a bastion of economic and political might in the New Russia.

    One year after Luzhkov became mayor, Yevtushenkov turned his small city department into a company, also called the Moscow Committee on Science and Technology. Since then, he has built up a private, $1 billion financial-industrial conglomerate named Systema, which in Russian means "The System."

    In Moscow, Systema is everything the name implies. Yevtushenkov and his companies are inextricably linked with the city government, and with Luzhkov and his national political ambitions. Some of the companies draw loans and business from the city; others are affected financially by Luzhkov's decisions; and at the same time, Yevtushenkov serves as a close adviser to Luzhkov. The result is a near-complete mixture of politics and business, and a model of economic and political power that is at the heart of Luzhkov's growing stature -- and of his vision for Russia.

    Over the last few years, Russia's economy has come to be dominated by business and political clans, of which Luzhkov's is one of the most formidable. Under his administration, Moscow has become a virtual nation-state inside Russia, an expensive, chaotic, sometimes violent and often corrupt atoll of prosperity amid the sea of Russian economic despair.

    This year, Russia's tycoons and economic reformers in the Kremlin have fought bitterly over the next stage in the country's young capitalism: Should it evolve into a liberal, competitive, free-market system, or one dominated by financial-industrial behemoths? The battle still rages.

    Yet, in Moscow, Luzhkov already has formulated his own answer: state capitalism -- a blend of the market, big money and Soviet-style central government control. Luzhkov openly champions this approach. But critics say Luzhkov's system is also something else -- "crony capitalism," in which cozy relationships and insider deals are critical to success.

    From City Hall, Luzhkov commands businesses from restaurants to billboards, from bakeries to auto factories. Central to his network are intricate relationships between political bosses and private businessmen. And more often than not, Luzhkov has the last word.

    "In the Moscow network, it's important to have two legs -- one in business, the other in the administration," said Alexei Ulyukaev, a member of the city council and deputy director of the Institute for the Economy in Transition, a reformist think tank. "There is no division of economic and political powers."

    Yevtushenkov is a prime example. According to a longtime Luzhkov adviser who asked not to be named, Yevtushenkov is the mayor's closest confidant, "closer than anyone except Luzhkov's wife." At the same time, Yevtushenkov is chairman of the board of both the Moscow Committee on Science and Technology and the Systema conglomerate, which recently moved to a resplendent, chandeliered headquarters in central Moscow.

    The complex links between the two companies and the city government benefit both Yevtushenkov and Luzhkov. Yevtushenkov's bank, the Moscow Bank for Reconstruction and Development, serves city accounts. His construction and electronics subsidiaries are receiving loans from the city, decided by a city committee on which Yevtushenkov serves. One of his companies has bought a third of Moscow's city phone monopoly, which is seeking approval for rate increases from Luzhkov. And Luzhkov's centerpiece Moscow television channel -- a building block for a possible presidential campaign -- is partly owned by the Moscow Committee on Science and Technology and expects to get financing from Systema's bank.

    In a long interview, Yevtushenkov, 49, said he receives no government salary, but he nonetheless spends most of his time working on city projects and holds an official appointment as a Luzhkov adviser. He said he is close to Luzhkov and to his wife, Yelena Baturina. "This whole family is close to me," he said.

    Yevtushenkov said he is careful not to press Luzhkov for favors. "On vacation or at home, we never talk business, never," Yevtushenkov said. Moreover, he said, Luzhkov only recently heard that the Systema conglomerate was connected to Yevtushenkov. Luzhkov "didn't know that such a corporation exists," Yevtushenkov said. "And I'll tell you, it may seem funny, but it's a fact."

    However, others said it would have been hard for Luzhkov not to have known. The longtime Luzhkov adviser said Systema was an example of how Luzhkov's allies have operated. "They were let out on a leash," he said, "and at some stage this leash became longer and longer."

    Moscow's Pools of Money

    When Yevtushenkov turned his Moscow city government committee into a business in 1993, he said, it was for a simple reason -- to make money.

    "There was practically no financing for science," he recalled. Soviet-trained scientists, accustomed to endless resources, were brought up short by the cold reality that cash -- not research -- made the New Russia go round.

    But as a privatized business, the Moscow science committee could earn profits and keep them for its own purposes, such as research, Yevtushenkov said. According to a committee official, one of its main activities was sponsoring the design of an anti-pollution device for trucks and buses in Moscow.

    Luzhkov has championed this approach of mixing city affairs and private interests. He has thrust the city into high-profile businesses, such as the failing Zil truck factory, and launched a chain of fast-food restaurants, Russkoye Bistro. The city owns all or part of 200 other companies and controls the Bank of Moscow, one of the biggest in Russia.

    "From the point of view of the classic political economy, the government should regulate. But we are not living in a country with a normal economy," said Anatoly Lysenko, a veteran Russian television executive who is heading up Luzhkov's new Moscow channel. "The government often has to play God. They have to create something, to inspire it, and like the Bible says, `Go forth and multiply.' "

    Arkady Murashev, a former Moscow police chief who led a liberal opposition campaign for city council, recently infuriated the powerful Luzhkov when he said the mayor has become "the biggest entrepreneur in the city, having taken control of everything."

    Luzhkov shot back, "The mayor is prohibited by law from taking part in any business activity!"

    Nevertheless, in the municipal government, departments are often associated with commercial companies on the side. According to Ulyukaev, these city departments often set the rules and collect fees and fines in their purview, while simultaneously running businesses in the same field.

    "On the one hand, they manage budget money," said Ulyukaev. "But then they are, on the other hand, making money. And thirdly, the city oversees it all. They are supply, demand and administration." He described this as "commercialization" of the government. "Virtually every structure of the city has its own non-budget fund," which are used for collecting profits from their businesses, he said.

    These profits often are not accounted for in the city budget. The city has acknowledged, in a prospectus written for overseas investors, that all of its off-budget funds amounted to a fifth of the city's $9.9 billion in revenues last year, and some experts think the actual amount is far greater. Ulyukaev said details remain largely hidden, even from the city council, which has been weak and passive.

    In the case of the Moscow Committee on Science and Technology, Yevtushenkov said it is both a public and private enterprise. It receives city budget money and also earns outside profits. "This has made it possible, so to speak, to preserve the life of the committee," Yevtushenkov said, adding that without the private profits it would be "like a river with a constantly drying-up source."

    `Buy for a Dollar, Sell for Two'

    In 1993, Yevtushenkov began several other companies, including the Moscow Bank for Reconstruction and Development and the conglomerate Systema.

    Systema then underwent explosive growth.

    According to Evgeny Novitsky, president of Systema, the conglomerate originally was a group of import-export trading companies. He said they earned 200 to 300 percent profit a year by selling Russian oil abroad and importing consumer goods.

    "We took loans, purchased oil, sold this oil to the West. There we bought consumer goods, televisions, computers, food products, sold them in the market here, and on account of this, a large profit margin developed. In 1993, it was possible to make 100 percent in one operation," he recalled. "Buy something for a dollar, sell it for two."

    Luzhkov was then highly critical of the national mass privatization scheme -- devised by reformer Anatoly Chubais and adopted by President Boris Yeltsin -- in which Russians were given voucher checks for their share of the nation's big state-owned firms. Luzhkov said state property was being sold too cheaply. He got Yeltsin's approval to run Moscow privatization his own way, selling property at "good prices."

    But while Luzhkov was criticizing the voucher system, Yevtushenkov was taking advantage of it. Systema began to buy up shares in many companies.

    According to its own reports, Systema's assets multiplied almost sixfold between 1994 and 1996, to more than $1 billion. The company says it now has more than 100 enterprises and 30,000 employees in 12 regions of Russia and abroad and is hoping to attract foreign capital. Last year, it earned $59.6 million in pretax profits on revenues of $414 million. But unlike some other big Russian companies, Systema has kept out of the limelight. It has issued bare-bones financial balance sheets. Yevtushenkov said Systema only began attracting attention because it got so big.

    The ownership of Systema is murky. Novitsky said the parent company is 100 percent owned by another firm, Systema-Invest. That company is in turn 40 percent owned by a Luxembourg investment company, he said, and the remainder is in the hands of individuals, including Yevtushenkov and other managers.

    Asked who owns Systema, Yevtushenkov said, "A whole number of people, Novitsky and me as well. It's mostly the management." Novitsky said the city of Moscow holds no shares in Systema.

    Yevtushenkov denied that his success was due to his connections in City Hall. "If someone thinks relations with the city can solve something, this is a mistake," he said. "This is wrong, this is impossible, and you understand this very well. . . . To say that it's only good relations with the city that allowed this, it's not right."

    But Systema is in many ways tightly woven into the financial and economic fabric of the city.

    For example, the Moscow Bank for Reconstruction and Development, now part of the Systema conglomerate, is one of Moscow's city "authorized" banks, with the lucrative privilege of distributing city funds. According to the bank's first vice president, Oleg Maslov, the bank channels hundreds of billions of rubles in subsidies from the city government to factories such as Zil, for investment purposes, under a special program to support jobs. The bank also issues promissory notes for firms dealing with Moscow's Property Fund, which oversees the sale of city-owned real estate and businesses.

    Systema's insurance company insures the Moscow subway. Systema-Neft operates a chain of Moscow gas stations and oil refinery interests. Systema-Gals is a major developer in the center of Moscow. Systema Telecommunications has a large interest in two Moscow cellular phone companies. Systema also owns Detski Mir, the famous Russian children's store a few blocks from City Hall, and a group of electronics factories in Zelenograd, a Moscow suburb, and 2x2, a Moscow cable television channel.

    And it was Yevtushenkov's initial creation, the Moscow Committee on Science and Technology, that helped Systema open the door to one of its biggest investments.

    Winning a Stake in Phones

    The Moscow telephone monopoly, the fifth-largest phone system in the world, with 4 million lines, is notoriously creaky. Some equipment dates back to the 1920s. But even so, Moscow and other regional phone companies have been enormously attractive for investors. The new market economy already is demanding more and better phones. Moreover, regions are discovering that while they cannot easily cut off subsidized gas and electricity, they can raise phone rates -- and profitability.

    When Moscow decided to privatize 25 percent of the city telephone monopoly in 1995, Yevtushenkov went for it.

    He created a new version of his old committee. The name was slightly changed, however. After the "Moscow Committee on Science and Technology" were added the words "and Company."

    The "and Company" was, in fact, a group of firms, mostly controlled or owned by Systema.

    Yevtushenkov said the name was unimportant. "It could have been given any name," he said. He added that the name of city committee was used "so that it would sound better for the competition."

    It sounded good enough. His new company won the shares at the Moscow City Property Fund investment tender on April 21, 1995. He said the price was $130 million. When the results were announced, the winner was identified as the "Moscow Committee on Science and Technology and Company." The conglomerate Systema -- the real force behind the deal -- was not mentioned.

    Nor is it clear whether there was any real competition. Moscow officials refused to divulge details about the other bidders. Yevtushenkov said there were several, but newspaper reports at the time said that there was only one other bidder, a firm that had ties to Systema.

    Since winning the stake, Systema's role in the Moscow phone monopoly has grown. Yevtushenkov serves on the board. The phone company recently became a major shareholder in Systema's bank, according to Maslov, the bank's first vice president. Systema set up a joint venture to manage some of the phone company's subsidiaries, documents show.

    According to Systema, the conglomerate now controls 33.3 percent of the Moscow phone monopoly. The company has a total market capitalization of about $1.4 billion at current stock prices.

    Luzhkov may soon be faced with a big decision that will have a major effect on Yevtushenkov's stake -- whether to raise residential phone charges.

    In the Soviet era, home telephones were practically free. The rates are still far below cost; Moscow residential users pay $3.49 a month for unlimited local calling. The phone company wants to boost rates further and introduce pay-per-minute pricing for the first time.

    The decision rests with Luzhkov. He approved an earlier rate increase, which was followed by a boost in the telephone company's revenues. Yevtushenkov said he has not talked to the mayor about it. "The raising of tariffs is not a popular measure," he said. "It's very difficult to decide."

    Loans From and for the City

    Yevtushenkov said he devotes 80 percent of his time to city projects. For example, he is advocating creation of a new city company, to be called Concern Mostelkom, to oversee building of a huge underground telecommunications network in Moscow, and Luzhkov has ordered a study of the idea. Yevtushenkov also is chairman of the council of the Moscow Stock Exchange, a Luzhkov pet project.

    Yevtushenkov's role seems to straddle business and government. Moscow borrowed $500 million from overseas investors earlier this year. The city is making loans from that money to encourage investment. The decisions about who gets the loans are made by a 24-member council on investment and the economy.

    Yevtushenkov is a member of that council, which Luzhkov chairs.

    One of the investment projects that came before the panel recently was a partially finished office complex at 12 Petrovsky Blvd., an eight-story building and reconstruction of four old mansions in the center of Moscow. The office is being erected by Systema's construction subsidiary. The city owns a fifth of the project.

    The investment council agreed to give an 18-month, $16.5 million loan to Systema to complete the project. The panel also approved two other loans to Systema electronics subsidiaries: $16.5 million for a factory making television sets, and $15 million for another plant making digital telephone exchanges.

    Sergei Pakhomov, first deputy director of the city municipal debt committee, said Systema "has a good track record." Asked about Yevtushenkov's role in awarding the loans, he said Yevtushenkov "is just one member" of the investment council. "His voice is just one."

    "When these projects were discussed, he was silent," Pakhomov said. "He just sat there."

    Yevtushenkov said, "I wasn't even present when these questions were examined."

    Yevtushenkov is looking out for Luzhkov. He said he enjoys working on large-scale projects for the mayor, such as the ever-expanding TV Center, a new television channel. It is already on the air 18 hours a day, has 937 employees and is laying plans to become a national channel, according to Lysenko, chairman of the city's telecommunications and mass media committee.

    The television channel is widely seen as the launching pad for a Luzhkov presidential campaign. Currently, the Moscow Committee on Science and Technology holds 33 percent of the new channel; the city holds the rest.

    Luzhkov, who did not respond to a request for an interview, has said repeatedly he is not running for president. Yevtushenkov said it was "hard to say" what would happen in two years, when the next presidential campaign gets underway. But, he added, if Luzhkov runs and asks for his help, "of course I am going to engage in it, help him."

    The Moscow Bank for Reconstruction and Development is considering a loan to finance the new TV Center, Lysenko said. Yevtushenkov said he works late into the night on the television project. Eventually, he added, shares in the new television channel would be sold to investors.

    "It gives me pleasure to create some large projects, to organize them," he said. "Everyone has their own hobby. I engage in this, it gives me pleasure, great pleasure."

    "By nature, I'm not a businessman," he said. "I don't even know how to make money."

    © Copyright 1997 The Washington Post Company

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