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. Last Updated: 07/27/2016

THE ANALYST: Luzhkov Joins the Oligarchs But Preaches for the People




It's high time someone came out and said it. Mayor Yury Luzhkov is a shameless hypocrite. The economic success story of Moscow has apparently gone to his head, and now he blurts out populist dogma with increasing frequency.


Luzhkov is a busy man of late, and the fact that the president is teetering on the edge of resignation (or death) only makes the mayor's schedule more hectic. He is one of three people with a good chance of becoming Russia's next president. He is campaigning both at home and abroad, diligently networking and garnering support. His frenzy of activity in the regions looks like an attempt to overcome the stigma associated with Moscow and its politics in the mind of non-Muscovite Russians.


But in the midst of this bustle of "pre-election" activity, Luzhkov is saying some very peculiar things. Russia's privatization program, he claims, was carried out using the same methods the Bolsheviks employed in 1917, only the "Bolsheviks nationalized property while [Anatoly] Chubais gave property to the criminal world." Privatization, in the mayor's opinion, was "inequitable" and a "terrible, dangerous mistake." A class of oligarchs seized the country's prize assets for ridiculously low prices, and then turned out to be incompetent managers of these assets.


Many people would readily agree with most, if not all, of these observations. But what boggles the mind is Moscow City Telephone Network, or MGTS. Here's a company that controls some 95 percent of the capital's land-based phone lines, had almost $500 million in revenues last year, and boasts an excellent cash flow (at least it did until Aug. 17).


In 1994, Luzhkov managed to arrange a deal whereby a controlling stake in MGTS was sold to the city's Committee for Science and Technology, supposedly to clear a debt of $110 million that MGTS owed the city for "construction."


During more confident times the market had valued this phone company somewhere between $800 million to $1.2 billion (at one point its market cap hit $2 billion), and yet 51 percent was handed over to the city government not for cash, but to wipe out a vague debt.


Municipal construction, with its generous kickbacks, is all over the world one of the most corrupt enterprises known to man.


Another example of Luzhkov's own questionable asset acquisitions is ZiL, the joke-of-a-carmaker that the Sergei Kiriyenko government sold to the Moscow city government back in April for an undisclosed sum. (Imagine that!)


Then there's the enigmatic Sistema, a labyrinth with holdings in everything from oil to real estate to insurance to media, and an institution ultimately anchored in one institution: Moscow City Hall. Incidentally, MGTS is now a proud Sistema property.


When an oligarch grabs an asset for the price of dirt, it is an evil deed; but when the Moscow mayor does the same thing, he is an entrepreneurial virtuoso. When oligarchs lack transparency they are criminals; with Moscow's various commercial satellites, it's just good business.


The same Luzhkovian logic holds true for deficit financing.


The domestic bond market was a pyramid scheme, suggests the mayor, and its organizers should be brought to trial. Those who put their money into this debt paper, says the mayor, should be blaming themselves for their steep losses. Understandably, there is an echo of justifiable anger in Luzhkov's words, as the GKO market has placed unnecessary leverage on the next generation of Russians, who will be burdened with paying off this nightmare in future years.


The mayor, however, conveniently leaves out the dimensions of Moscow's own borrowing. In the course of one year the city borrowed $1.1 billion on international markets through Eurobond offerings, and also issued about $2 billion worth of ruble securities at home (now tremendously devalued, so he may consider thanking Kiriyenko again).


Luzhkov stresses that all money raised was put into profitable projects. In fact, his aides say 6 percent went to pay ordinary budget spending. But in any event financing this debt will come from future budgets, and last Friday investors who held Moscow city bonds up for maturity were offered 2-year paper instead of cash. Sounds like the illustrious capital is having a few financial problems of its own.


Again, when the government finances the deficit through the issuance of treasury bills, it is a powder-keg pyramid scheme and everyone involved should be arrested; when the Moscow mayor offers debt instruments to investors, it is financial genius.


The net result is two of the highest crimes ever committed against the Russian people, claims Luzhkov: privatization and the GKO market. Funny, but who has benefited more from Russia's insane system of asset distribution and capital markets than Luzhkov himself?


For a man who wants to be president, he should stop and ask himself this question.