Who’s to say Mamontova won’t make a profit? Because who can fathom the wacky world of Russian investing, anyway? After all, a significant number of Russians have become millionaires out of thin air, sinking their money into a panoply of scams now available to Ivan Investor. A year ago, in order to follow the fate of privatization in Russia, Newsweek invested in six companies. MMM Invest, part of the same financial empire as MMM Joint Stock Co., was the only one that paid a dividend. That doesn’t make it a good company, but it does help explain how millions of Russians could have been sucked into a pyramid scheme of staggering proportions, in which new investors provided the cash to pay off the old.
Newsweek’s first step was buying privatization vouchers. Petty dealers loitered outside metro stations last summer selling the certificates, which had been issued to every citizen the previous autumn, and which were supposed to be used for investing in newly privatized companies. More than a few, however, were promptly sold for a bottle of vodka. Vouchers were trading for much less than the nominal value of 10,000 rubles. Newsweek paid 5,250 rubles ($4.75) each for four vouchers and, later, 7,000 rubles ($6.35) each for five vouchers. Though the voucher trade was not illegal, the sellers stuffed the rubles into their pockets and slunk quickly into the crowd of Moscow commuters.
Investment options varied widely. The offices at MMM Invest were grubby and unassuming, while those of Alfa Kapital, where Newsweek invested one voucher, were sleek. Shares in Russian factories were available at a “privatization festival” in a nearly deserted Moscow exhibition hall. Young men and women with neat business suits and alarmingly friendly smiles waved photocopies of their factories’ business plans and were happy to overlook a little thing like, for example, a buyer not having the required personal identification. Shares in these enterprises have since turned out to be untradable. Moscow brokers, asked what value these shares might now have, laughed and described them as “exotic”; such obscure companies may never be publicly listed, and hardly anyone in Moscow knows anything about them. At an auction, Newsweek also bought shares in a chain of nine Moscow stores selling imported food and consumer goods – the only investment that could readily be sold today for a profit. MMM shares would be hard to unload today, given the fate of its sister company, but Newsweek’s four vouchers did pay a dividend of about $10 in June.
It’s precisely because investing in real enterprises has proved so slow and unproductive that millions of Russians were attracted to the MMM Joint Stock Co. Its shareholders paid with cash instead of vouchers, and could double their investment in a month. MMM’s massive advertising campaign (evidently where most of its investors’ money went) worked wonders, too. After Newsweek ran a story in August 1993 describing MMM as a “fast-growing” company, TV ads claimed that “according to analysts of the American magazine Newsweek MMM Invest is the most promising company in Russia.” (In a telephone interview, MMM fund manager Aleksandr Bychkov insisted that “fast-growing” and “most promising” meant the same thing, and promptly hung up.) Cease-and-desist letters from Newsweek lawyers had no effect until March 1994, when MMM started a new ad campaign implying it had the imprimatur of the King of Belgium and the United Nations.
The Russian government made it clear last week that it didn’t plan to bail anyone out. That left Russian investors on their own with MMM, a company that once said it couldn’t turn in its first-quarter balance sheets because the only copy was stolen out of a bus on the way to the Finance Ministry. To all our fellow investors: good luck.
