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We’re pretty well protected from fraudsters in the UK, wouldn’t you say? There are scammers, of course, but there’s regulation to protect us, bodies to oversee standards, and if it looks like a bank is going to crash, well, the government is ready to step in, and the whole thing gets shored up. We know our investments can go up, as well as down. It could be worse.
In fact, it could be much worse. Let me take you back to the wild east – newly capitalist Russia in the 1990s, the setting for my novel Two Cousins of Azov. In my story, ordinary people in a provincial town lose their entire life savings to a pyramid scheme called PPP Invest, and everyone is in the market for an investment of one kind or another. Sounds far-fetched? I admit, there never was a PPP Invest, but there was an MMM Invest – I was there, and I remember it. MMM milked millions from Russia’s huge contingent of ‘just about managing’ by promising enormous, almost instant dividends on investments, and it did it extremely quickly. People invested whatever they could: a privatisation voucher, a month’s wages, a life’s savings. And most of them lost out. MMM became notorious.
I know this because I was working as an editor/translator in Moscow at the time, but my memory is admittedly patchy, so I talked to two old friends, Marina and Roman, about what happened back in 1994, when we worked together for a well-respected investment bank, just when the crazy pyramid schemes – and privatisation – were at their height.
As I recall, every adult in Russia was given a ‘share voucher’ to represent their stake in the companies that were being privatised, is that right?
Marina: Well, sort of! Privatisation vouchers were issued to all adults in August 1992 under a decree from President Boris Yeltsin. It was a way of giving all the people – who used to own companies via state ownership – a share in those companies that were now being privatised.
The vouchers were issued as actual pieces of paper – A4-size certificates with the nominal value of 10,000 roubles printed on them. It’s worth remembering that 10,000 roubles were worth about $62 when the vouchers were issued, but only $5 two years later, due to hyperinflation. The vouchers had their own value, though, which fluctuated from day to day and place to place, as they could be traded and invested like shares.
Yes, I remember people could invest in companies, or sell to traders, or put them in “investment funds”, is that right? There was a voucher market, like a stock exchange, in Moscow, wasn’t there, which traded literally suitcases full of vouchers?
Marina: Yes. You could sell your voucher for cash, which many people did. If you invested your voucher in a company via an investment fund, you might be promised more money, but many of the funds were badly managed. You have to remember, there was a hurry to privatise, encouraged perhaps by the West, and the government had very little experience of privatisation and didn’t know how to control what was happening, so there was no regulation. Hundreds of investment funds were set up.
Some ‘investment funds’ started promising investors huge returns. That’s when I first heard the phrase ‘pyramid scheme’: they weren’t really investing in anything, were they? They were raking in money and paying dividends, for a while, using that money. And MMM was the biggest.
Marina: Yes. MMM was set up by a man called Sergei Mavrodi, originally as a legit import-export company in about 1989. But then he saw an opportunity to make a fortune. It became massive, very quickly, by promising annual returns of up to 1,000% and using really aggressive marketing.
I remember MMM was everywhere! They ran a huge TV campaign with famous actors and folk characters.
Roman: And jingles, don’t forget the jingles.
Yep, the jingles. And they were on the radio, on buses, in the Metro – everywhere, targeting ordinary working people. It was like you were stupid if you weren’t investing in MMM – everyone could be rich!
Marina: Yes, everyone knew the jingles, they had a really recognisable logo, and it was all so believable – how could they be lying if they could afford all these ads and the government let them do it? Added to that, the shares weren’t quoted on any stock exchange – so MMM set its own share price and claimed a phenomenal annual growth.
Roman: Yes, of course – people trust TV – at least, they did back then. The adverts were so aggressive and persuasive; so many times a day they showed the current rate of MMM stock and how it grew all the time. People felt they had to hurry to invest.
Marina: at its peak, it was taking more than $50 million each day from sale of its ‘shares’. I’ve read the cash-flow at the MMM central office was so huge they had to start counting money in roomfuls (one roomful of money, two roomfuls of money, etcetera). (Source: A New Capitalist Order by Hilary Appel.)
Its astonishing people believed you could make 100% in a couple of weeks. But I guess it’s because they came from a different background – a Soviet background, with a state-run economy.
Roman: Yes, people didn’t understand – not then, and I’m not sure if they do now. All this is too complicated for ordinary people. Not only in Russia but anywhere in the world, I think. Even for people who knew about finance, it was difficult to keep out of MMM. Remember where we worked? Lots of employees rushed to buy MMM shares when the returns were crazy high. They were caught up in it – and they lost out too.
Marina: People believed because, for a while at least, MMM was paying out on its promises. But, you know, the end was always in sight.
MMM didn’t implode though, and it wasn’t shut down because of fraud. It’s the old story: it’s bubble was burst by a failure to pay taxes.
Marina: The tax police raided MMM’s central offices in July 1994, more or less freezing its operations. Amazingly, the company continued running ads and scooping in people’s money for another couple of weeks, but it stopped paying out, and eventually, everything ground to a halt. When it did, it owed its investors – ordinary Russian people – somewhere between $50 – 150 million. No one really knows. They say at least 50 people committed suicide immediately following the crash, but I’d think it’s probably more.
Do you think ordinary people understood there was a risk investing in MMM?
Marina: No. Or rather, they thought any risk wasn’t theirs: if something happened, the government would protect them.
But it didn’t.
Roman: No, it didn’t. The new economy was forming and there were a lot of things that were new, or simply of a higher priority for the government – like hyperinflation, non-payments, debts on salaries, etcetera. And, to be honest, MMM got so rich they may have “worked” with the government to be able to operate, if you know what I mean.
Did the people get any compensation for what they lost in MMM?
Marina: No, there was no compensation. And the CEO, Sergei Mavrodi, was very clever – he blamed the collapse on the government. He tried to make himself into a “Robin Hood” figure, and even managed to get himself elected to the Russian parliament – the Duma – to avoid being charged with any crime. Duma deputies have immunity from prosecution, you see.
Marina: Yes. He was eventually stripped of his immunity in 1997, and did stand trial.
So, with hindsight, do you think pyramids like MMM affected how people felt about investing, and how they felt about Yeltsin’s government?
Roman: You know, I don’t think most people made the connection. Yeltsin became unpopular, but it wasn’t because of this. And people didn’t learn a lesson – not ordinary people, and not banks. Look at the financial crisis of 1998; the returns of government bonds were 100’s of percentage points per annum in hard currency, and all the international investment banks bought them, and then the government went into default. Even some quick and basic analysis would have shown that the government was in effect operating a pyramid scheme, where the income of new issues of bonds were used to redeem previous issues. But greed prevailed.
And what about now; do older people have enough to live on now, through their state pensions?
Roman: No, the state pension is minuscule and certainly doesn’t provide for any decent living standards. But, you know, some people get additional payments – like second world war veterans. But it’s still very tough.
Do you think older people are happy with President Putin – because things more stable now?
Roman: I’d say they are much happier with Putin than they were about Yeltsin. This doesn’t mean that everything’s perfect, but it’s mainly the younger people who want political change. The older generation are quite content.
By the way, Sergei Mavrodi, the mastermind behind MMM, is still in operation, despite his previous conviction. He has a website, MMM Global, which is popular in emerging markets, so it seems he’s found new ordinary people to fleece. The website states:
‘This is a community of ordinary people, selflessly helping each other, a kind of the Global Fund of mutual aid. This is the first sprout of something new in the modern soulless and ruthless world of greed and hard cash. The goal here is not the money. The goal is to destroy the world’s unjust financial system. Financial Apocalypse! Before you join, be sure to be acquainted with ideology.’
Proceed with extreme caution, if you’re going to take a look.