photo by John Ranard
photo by John Ranard
photo by John RanardMy money works for me.
Lyonya Galubkov and his cohort, Ivan, are fictional characters familiar throughout Russia. They were created in a serial television commercial to hook investors into the MMM Corporation's vast pyramid scheme. The commercials ran sometimes twice an hour.

Lyonya, an awkward Russian slob, had easily obtained a small fortune through investing in MMM shares. Sitting around a table, drinking vodka, and slobbering away, Lyonya discusses the good life. Another segment takes place on a California beach among scantily clad women, and a third takes place in Paris. When Ivan accuses Lyonya of being a parasite, Lyonya replies: "I'm not a parasite, I'm a stockholder."

MMM stock shares first became available in February of '94 for 1,600 rubles ($1.00 US) with the guarantee that MMM would buy back all shares at the end of every week at a 10% appreciation. A price list was published each week listing the projected values, emphasizing the growth of the stock. In July, only six months later, the shares were worth 105,000 rubles ($50). MMM estimated 10 million Russians were investing.

This was a primitive pyramid scheme where the few investors who sold out were paid with money collected from new investors. This works as long as more money comes in than goes out. MMM refused to disclose anything about its portfolio as required by law -- asking why should it reveal its secrets to its competitors; declaring simply that it was heavily invested in Russian industry. There was no evidence that the shares represented anything at all.

In July a new form of MMM stock was offered for sale, a "Movrodki." It was a fraction
of a share that looked like monopoly money with the face of MMM president Sergei Movrodi on each note. They were printed with a separate color for each denomination using an ink that would glow under a black light to distinguish them from counterfeits.

A series of investigative articles appeared in the local press questioning the legality of this new note. Movrodi was also being investigated by the Ministry of Finance for a number of other infractions, including tax evasion. His entire operation was thrown into question.

When investors began to cash out, MMM restricted access to their 50 offices in Moscow. On July 26, to instill confidence among the public, MMM declared that the present stock, worth R105,000, would be purchased as promised by MMM the following week for R115,000. This promise was repeated continually. Investors wishing to sell, forming lines around MMM headquarters, were herded behind barricades like cattle. A few every hour were permitted in to cash out.

In Moscow anyone can enter the commodities exchange and trade stock on the open market. Moscow was now the freest city in the world. On July 29, a riot broke out among investors gathered outside the conunodities exchange. They began smashing out windows in a desperate frenzy to sell their shares; there were no buyers. MMM announced that morning that the R105,000 shares would not be bought back until further notice, due to the crisis instigated by the Finance Ministry.

Also on the 29th, MMM declared that "new" shares were for sale for 950 rubles (about 50 cents) that would be bought back the next week for R1,050. Concerning the "old shares" MMM released a statement advising shareholders to keep them, that in three months they would be worth R105,000 again.

During the 10 days prior to July 29, a black market developed of people buying and selling at a furious pace on the street in front of the headquarters. Speculators held a calculator in one hand and a small black light in the other. Behind them surrounding the building was a line of people slowly being given access inside to sell at the official price of 105,000. The black-market price was dropping quickly from 4/5 of the MMM published price of 105,000 rubles, then 2/3 and then 1/2. On July 29, the black-market price of the R105,000 share was 4,000 rubles.

I met an investor, a young, smooth character, who told me he unloaded all of his 1,000 shares at 80,000 rubles each, in 15 minutes on the street at the beginning of the crisis. He had purchased the shares at R50,000 in May, netting a quick profit equivalent to $13,000 dollars in five weeks.

We were talking on Sunday, July 30. The street price of an "old share" had doubled to R8,000 in spite of the fact that MMM was only selling "new shares" at R950. He was looking to spend his bankroll of $40,000 US but wanted a better price than R8,000.

I express disbelief. He pulls out of his front pants pocket a huge wad of $100 bills. "If I had bought yesterday I could have doubled my money in one day! If you know the cards you can live in Sochi" he tells me. (Sochi is the Russian Riviera on the Black Sea.) This thing had taken on a life of its own.

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photo by John Ranard