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Knights of the Vine RUSSIA

The Way It Was

Shock Troops part II
Art Franczek

fter an arduous three-month training period, the Peace Corps Volunteers (PCVs) were assigned to such military–industrial cities as Volgograd, Samara, Nizhni Novgorod, and Rostov. All of the cities had been closed until 1992. My adopted city was Togliatti which was founded in 1737 as Stavropol and renamed in 1964 in memory of the leading Italian Communist (the old city of Stavropol was drowned in the 1950’s when a hydroelectric dam was built). The centrepiece of Togliatti’s industrial base was Avtovaz which was built by the Italians and produced 80% of Russia’s cars. Togliatti was always an open city.

I was immediately impressed by city officials who had already organized a Department of Economic Development and had requested PCVs to develop investments and organize Inter Volga Business Conferences (Russia’s first business conferences). One of my assignments was to persuade both international and local companies to participate in these conferences. I met with many local businesses and very quickly learned that Russian businessmen based their decisions on instinct and relied heavily on their relationships with partners to make deals. These methods conflicted with the rational economic principles I had been taught for so many years. My lessons in Russian business were usually accompanied by a couple bottles of vodka followed by time in the banya.

In 1993 inflation was 20% per month (annual rate of 840%) while the rouble was devaluing at an annual rate of 67% and the Central Bank interest rate was 140%. Many banks made money simply by holding dollars and taking advantage of these disparities. I remember that a million rouble transfer from one Togliatti bank to another took two weeks. By the time it was received in our city account the value was 900,000 rubles. In these days banking was a dangerous business and in 1994 more than one hundred bankers were killed. In that year I can recall a special banking holiday to honour departed bankers.

Speculators could also make huge profits by buying aluminum, timber or oil at low domestic prices and exporting these commodities at the much higher world prices. The proceeds from these transactions were paid to offshore bank accounts. In 1993 a young Khodorkovsky said, “Many people don’t understand that you can make big money from nothing here in Russia—only here, because this is a turning point. Those who get in on time can do it.”

Each time I visited the Avtovaz plant I could not ignore the incessant noise of workers hammering doors, pistons or gaskets into place. It took 30 times the man hours to produce one Lada than for a comparable US auto worker. In spite of the poor quality there was a huge demand for Avtovaz cars. Especially since the Soviet days when there was a 10-year wait to buy a car. In the early 1990s most Lada cars were sold through its network of distributorships. The distributor could buy a car from Avtovaz for $3,500 on credit (usually 6 months) and sell it for $7000 cash. In early 1993 I introduced a reporter from the BBC to one of the auto distributors and he described a scheme called re-export in which the contracts typically stipulated a lower price for Ladas for domestic contracts and an even longer grace period for payments. The cars were actually sold in Russia, but their “export“ status (under Customs rules) allowed the distributor to receive foreign currency. The cars remained in the country but their documentation showed them to be exported then imported back into Russia. I knew many auto brokers in Togliatti who made huge amounts of money with this scheme. In fact Boris Berezovsky made a fortune doing this. The BBC reporter heard this story, threw up his hands and he said, “I think we have a bit of economic lunacy here.”

In the aftermath of the Cold War, goodwill between the US and Russia was at its all-time high. It didn’t last long. In our Business Centre we could feel Russian euphoria for anything American. Everyday Russians would come in search of US partners for their business ventures. We helped Vladimir Dovgan (Doka Pizza, Doka Khleb) import the first donut-making machine into Russia. I helped organize a military resettlement program in which USAID purchased 100 apartments from a local construction company that were given to Russian officers. The most popular programs were the ones that sent Russians to the US. We sent over 200.

Cultural activities are always important to Russians. We organized the Russian-American Cultural Centre with support from General Motors and the city of Togliatti. In the days before the internet, Togliatti’s sister city of Flint, Michigan, collected and sent more than 6000 books to Russia. I personally sent another 1000 from Chicago. We created the largest English language library in the provinces and a centre for all sorts of cultural and exchange activities. To my surprise this centre lasted until 2007.

Russia is not only an enigma, as Churchill, said but also an addiction.

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