In post-communist Russia, great expectations were held for capitalism. After years of communist rule, many people expected that the benefits of capitalism would be immediately available to the citizens of Russia. Although state-owned enterprises were being sold to investors wishing to experiment with capitalism, there were very few controls to monitor the quickly developing market economy.
Unlike western countries, where legislation had been built up over centuries, to ensure probity amongst corporate financiers and public companies, in the first few years after Russia dismissed the communist regime, a full range of legislation could not be enacted. This unsound environment allowed a number of speculative companies to arise, with one of the most famous being the MMM Corporation.
The man behind the MMM Corporation was Sergei Mavrodi, a middle aged Russian who concocted a massive scheme to defraud millions of Russians of their savings. The other players in the MMM Corporation are not clear. The initials of the company were evidently derived from the surnames of three of the directors of the corporation and it is probable that the other people were relatives of Sergei Mavrodi. (One of the signatories on the initial issue of investment certificates was ‘V. P. Mavrodi’, along with ‘S. [Sergei] P. Mavrodi’.)
The MMM Corporation swindled the people of Russia by creating a huge pyramid scheme. A pyramid scheme takes investors money and offers to return interest on their money at unusually high rates. Investors are paid the interest as expected, but the money used to pay the interest is taken from the investment capital itself or from deposits obtained by subsequent investors. The money deposited by investors is never actually used to invest in business or commercial enterprises, but is simply used to make interest payments on the investments. As long as the rate of investors grows at a certain pace, each investor gets paid their interest and they can even liquidate their entire investment. Of course the bubble bursts when the interest payments required to be made become greater than the money being deposited. The promoters of the scheme have an opportunity to use some of the investments as their personal wealth, although most of the money is used to pay interest to make the scheme grow. If the scheme is well-managed the promoters make most of their profit on the final round of investment, just before they disappear with the money!
Such schemes are not new and, in the post-communist era, many such schemes flourished in the countries of the former Eastern Bloc. What makes the MMM Corporation of interest is that not only were they one of the largest of the pyramid schemes, but they were also responsible for issuing share certificates that looked very much like banknotes.
The origin of the MMM Corporation is not clear, nor when it commenced its business activities. Many reports about MMM state that their activities commenced in 1991, but it appears that their large promotional activities and the implementation of the pyramid scheme began in February 1994. The active marketing of the Corporation was one of the significant aspects of the scheme. Twice the Corporation paid for all travel on the Moscow metro for a day. During the 1994 Soccer World Cup they sponsored the Russian football team and cornered as much as 40% of television advertising in Russia during the event.
Their aggressive marketing program, particularly on state-run television, created much comment and their advertisements became the most well-known commercials in Russia. In one advertisement, the Mexican soap-opera star, Victoria Ruffo, was manipulated through computer graphics to endorse the MMM Corporation. The soap-opera in which Victoria Ruffo starred had been dubbed in Russian and was one of the most popular television programmes in Russia. The Corporation’s most famous television advertisements portrayed a character called Lyonya Galubkov, a seemingly common man who had transformed his life by investing in the MMM Corporation. He was seen holidaying in San Francisco, buying an apartment in Paris, and sometimes in conversation with his friend Ivan, with whom he explained his success and defended his method of obtaining his wealth.
Full-page advertisements appeared in Pravda and Izvestia listing the current prices of the shares and addresses where the shares could be bought. Accompanying the advertisements were cartoons showing how people had achieved almost instant wealth by investing in MMM shares. Small advertisements showing the current and projected buying and selling prices of the shares were published on the front pages of the major Russian newspapers.
The MMM Corporation offered very attractive returns over the commercial banks in Russia. As well as offering better interest rates, the banks themselves had been unstable in some instances, so many people were encouraged to take their savings from the banks and deposit them with the Corporation. By July 1994, when the house of cards began to totter, it was estimated that between five and ten million people had invested in the MMM Corporation. Investors came not just from Russia, but also from former Eastern Bloc countries such as Bulgaria, where agencies sold the shares of the Corporation. With a promise by the MMM Corporation to pay weekly interest of 10% on their shares, the temptation for people to invest large amounts of money was too great, especially when it was seen that people were receiving payments on their investments.
Although the Russian authorities had investigated the Corporation and its associated companies on several occasions, they had done nothing to alert people to the issues surrounding the Corporation’s activities. Simply put, a pyramid scheme was not illegal in Russia and they were legally selling shares; although it was later reported that they had sold far more shares than they were permitted to sell and their promotion of part-shares (see below) was also seen to be contrary to legislation. When questioned as to how they were able to sustain such high returns on investments, spokesmen for the Corporation stated (when they could be found) that they had solid investments, but they did not wish to disclose their investment policies for fear their competitors might take advantage of them.
Several Russian politicians stated that they had reservations about the Corporation and others openly stated that they would not invest in such a company. In July 1994 the Ministry of Finance finally issued statements warning about the nature of the MMM Corporation and the impossibility of the situation being sustained to a successful outcome for all investors. These statements caused many people to cash in their investments and a run on the Corporation commenced. At this time it was estimated that some 10 trillion rubles had been invested in MMM shares, which was then equivalent to US$1.7 billion.
The price of MMM shares had risen from 1,600 rubles in February 1994 to around 115,000 rubles in late July the same year. At that time, 1,600 rubles was worth about US$1.00. By early July the shares had become so expensive that Mavrodi decided to issue part-shares. These part-shares, which were known as biletov but sometimes referred to as ‘Movrodki’, were made available from mid July, at the height of the frenzy.
The first advertised price of the biletov appeared in Izvestia on 14 July. The selling price was 905 rubles and the buying price 870 rubles. These prices were one-hundredth of the price of a share and this ratio between the prices of biletov and shares continued for the short life of the biletov, which saw their demise when the run on MMM shares commenced.
As soon as the run began, it became apparent that Mavrodi’s tactics were to pay claims, but to pay them at such a slow rate that no great amount of money would be paid out. This resulted in the closing of all but one of his offices on 26 July. (There were sixty offices in Moscow and a further seventy-six offices in forty-nine cities across Russia.) At the one office that remained open, a crowd of several thousand people queued to have their shares paid out. Although most shareholders waited for several days, before it became obvious that their money had disappeared, there were numerous reports of senior military personnel and known criminals walking into the office of MMM and having their investments cashed. Such behaviour was already common in Russian society, but it did appear that the payment of officials and criminals was a way whereby Mavrodi hoped to save himself.
The Corporation claimed that the run on the company had forced them into closing most of their offices and limiting payments, but they remained confident that things would improve. Sergei Mavrodi was openly critical of the government, claiming that they were responsible for the situation in which the MMM Corporation found itself.
Mavrodi was reported as saying of his shareholders: ‘It is obvious a new political force has appeared in Russia and it is so powerful that now it would hardly be possible to oppose it.’ He tried to threaten the authorities by implying that, if his company was seriously affected, civil unrest might break out. Mavrodi maintained the support of many investors as the edifice of the MMM Corporation crumbled. A number of investors firmly believed that the collapse was due to the government and that Mavrodi was a victim of the wiles of officialdom.
Mavrodi’s protestations of innocence, and of the wrongdoings of the government, were short lived. On 7 August 1994, the man at the head of the Corporation, who had become the sixth richest man in Russia, was arrested for the failure of ‘Invest Corporation’, one of his companies, to pay the equivalent of US$25 million in taxes. Petitions from MMM shareholders to President Yeltsin sought the release of Mavrodi so that he might compensate shareholders. It was also suggested that the Russian government, MMM, and the Union of MMM Shareholders might join together to arrange compensation for shareholders. However, Prime Minister Victor Chernomyrdin stated that MMM (and similar organizations) had been violating legislation and that the government would not undertake to compensate shareholders for any loss.
Held in jail, awaiting the conclusion of the investigation into his activities, Mavrodi continued to oversee his business activities. Shortly after the run on MMM shares commenced, Mavrodi had suspended trading in his shares and the biletov. He then ambitiously chose to commence a second issue of shares, priced at 950 rubles (about $0.50), which he promised would be redeemed for 1,050 rubles in the following week. These new shares were promoted by the MMM corporation until early October 1994, rising steadily to a selling price of 3,635 rubles on 6 September. On 5 October, in what appears to be the final full-page advertisement in Pravda, the new shares were quoted at the fantastic selling price of 16,535 rubles. This huge increase in the price of the shares appears to have been Mavrodi’s attempt to sell one final round of shares before closing down his operation.
While in jail, Mavrodi decided to seek asylum in the Russian Parliament. Members of the ‘Duma’ are immune from prosecution under the Russian constitution and so Mavrodi sought a seat in a Duma by-election. With election promises based on provision of services to the electorate through his personal wealth, Mavrodi swept to victory on a voter turnout of only 30%.
During the election campaign Mavrodi promised that, if elected, he would commence buying the shares which had been suspended several months earlier. Two days after being elected, on 31 October 1994, he announced via loudspeakers outside his Moscow offices that the earlier shares would not be bought back until after 1 January 1995. He then announced that a completely new set of shares would be issued, commencing with a price of 1000 rubles and rising to 1,270 rubles on Friday of the same week. Despite being ‘bitten’ by Mavrodi in the past, many people began to queue for the shares of the third issue.
Ultimately, Mavrodi was expelled from the Duma in October 1995 and thus had his immunity from prosecution removed. He subsequently sought re-election in the December 1995 elections of the Duma, but failed to get re-elected. Prior to the election, the Central Electoral Commission had refused to register his ‘Party of People’s Capital’, because Mavrodi had stated that only members of his new political party would be repaid their investment in MMM shares.
In early September 1997 an arbitration court in Moscow declared the MMM fund bankrupt, following a court case brought by two investors. In February 1997 Pallada Asset Management in Moscow was entrusted with the responsibility of managing a federal fund set up to compensate victims of numerous pyramid schemes that had wracked the investment economy of Russia, of which the MMM Corporation was the largest. The government had come under pressure to compensate MMM shareholders, with its failure to adequately control the activities of this and similar organizations. Apart from failing to regulate investment organizations, state-controlled television had shown advertisements for the MMM Corporation, and this was seen by many people as tantamount to support by the government for the legitimacy of the Corporation’s activities, at the time they were broadcast. This implied a partial responsibility of the government for losses by investors.
In 1998 a warrant was issued for the arrest of Mavrodi, who seemed to have disappeared. However, on 9 July 2000 the U.S. Securities and Exchange Commission brought a suit against ‘Stockgeneration’, a company based in the Dominican Republic. Using the internet as their promotional medium, Stockgeneration had promised some 275,000 investors in the United States up to 215% annual interest. In bringing their suit against Stockgeneration, the U.S. Securities and Exchange Commission declared that the company had constructed a classic pyramid scheme. It was reported that two of the principals behind Stockgeneration were Sergei Mavrodi and his cousin Oskana Pavlyuchenko.
This is the story of Sergei Mavrodi and the MMM Corporation. So where do the banknote-like ‘notes’ illustrated on this site (see links below) fit into the schemes of Mavrodi? Firstly, they are not the shares that were initially sold by the MMM Corporation. These shares were larger pieces of paper, A5 in size and with the appearance of traditional share certificates. The ‘notes’ illustrated on the links below are the original biletov, prepared in July 1994 so that shares could be broken into part shares and so be affordable to more people, and the biletov of the second and third share issues. (The Russian word for ‘ticket’ is ‘bilet’ and the plural is ‘biletov’.) They were fractions of shares that bore the image of Sergei Mavrodi and came in numerous colours and denominations. One bilet was worth one-hundredth of an MMM share and they were sold at one-hundredth the price of a share. The last advertised price for the original issue of biletov in Pravda was on 28 July 1994, when Mavrodi was trying to sustain the value of his shares. The MMM advertisement stated the day’s price for the biletov as 1,340 rubles (sell) and 1,250 rubles (buy), while projecting the price for 2 August to be 1,500 rubles (sell) and 1,350 rubles (buy). The next advertisement in Pravda on 2 August was for the second round of shares and the biletov were never advertised again. The original biletov therefore had a life of about two weeks. Later share issues, although sold as biletov were always advertised as shares.
At the time that the biletov appeared for sale, there were a number of investigative articles published in the Russian press, which sought to challenge the legitimacy of the biletov. The London Times reported on 26 July that ‘The [Russian] Finance Ministry has declared that the latest MMM share issue was illegal, and warned the public against unbacked securities.’ It is likely that this statement was making reference to the issue of the biletov. It is probable that the investigation into these part-shares was a contributing factor to the fall of the MMM Corporation. It is also probable that Sergei Mavrodi saw the writing on the wall at this stage and, since pyramid schemes make most of their money in the last round of selling, he saw an opportunity to optimize his sales with the issue of part-shares. On the other hand, it must have taken some time to prepare the biletov for issue and it is possible that they were a long-term strategy to increase the sale of shares.
All biletov carry a portrait of Sergei Mavrodi, a serial number and a denomination. It cannot be a coincidence that the biletov have the appearance of banknotes. There is anecdotal evidence that MMM shares were used to pay debts and Mavrodi may have sought to promote this use of his part-shares. Think of this scenario. A Russian buys his biletov for a given amount of rubles, but because the price of the biletov continue to rise, his purchasing power rises week after week. Should he find a merchant willing to accept them in payment, he can use them to purchase goods and services. A merchant may be willing to accept them because he believes that next week he can redeem them and make a profit.
There are three series of biletov issued by the MMM Corporation. It is believed that the series were: 1) the first issue of biletov, 2) the second series of shares issued by Mavrodi after the run on the MMM Corporation began, and 3) the series issued in November 1994. While this is believed to be the case it is not certain. The later two share issues were quoted as ‘shares’ in the press and not as biletov. However, as the biletov were being issued in denominations that were greater than one share (i.e. 100 biletov was equal to one share and so a 1000-biletov note was equal to ten shares), it is probable that this was the medium by which all shares were sold in the second and third issues. In support of this theory, is a warning reportedly issued by the Russian Finance Ministry on 21 August. The warning stated that the second issue of ‘tickets’ being sold were simply ‘pretty postcards’ which did not have the legal status of shares and that purchasers should not expect any revenue from purchasing these items. So, although the shares of the second series were quoted as shares in the newspapers, it seems that they were being sold as biletov.
The three series of notes are described below. It is not known in which order the series were issued. It is believed that ‘Series 1’ is the original issue of biletov but this has not be confirmed. The order of issue for ‘Series 2’ and ‘Series 3’ is not known.
The biletov in this series come in seven denominations – 1, 10, 20, 50, 100, 500 and 1000 biletov. The three lower denomination biletov share common design features, while the four higher denomination biletov share the same designs. All notes of this series carry a portrait of Sergei Mavrodi and are printed by the intaglio and lithographic processes, with the heavy intaglio border being a feature of the lower denomination notes. Micro-printing is used on all notes, repeating ‘MMMBILETOV’ in Russian. Each note is printed on watermarked paper, but the watermark is not note-specific and the pattern of watermark is not readily discernable.
All notes have fluorescent features, but the features differ amongst the notes. The 1- and 10-biletov notes are printed on paper with fluorescent fibres embedded in it and a yellow MMM logo appears to the right on the front of the note when the note is submitted to ultra-violet light. The 20-biletov notes, while carrying the fluorescent MMM logo, are not printed on paper carrying fluorescent fibres (and are the only denomination in this series not to have this feature). It is also noticeable that the font used for the serial numbers on the 1- and 10-biletov notes is different to that used on the 20-biletov notes.
The higher denomination notes, while sharing a common design can be split into two groups. The 50- and 100-biletov notes have fluorescent fibres of a certain density embedded in their paper, a green fluorescent feature of the MMM logo, and a heavy serif font for the serial numbers (that is usually offset from the serial number prefix). The serial numbers fluoresce, but the prefix does not. The 500- and 1000-biletov notes are printed on paper that has a higher density of fluorescent fibres, a pink fluorescent feature of the MMM logo, and a serial number and prefix printed in a fine sans-serif font that fluoresces green.
Only four denominations have been recorded in this series, but it is suspected that there may be more. The recorded denominations are 1, 100, 1000 and 10,000 biletov. Again, all denominations carry a portrait of Sergei Mavrodi, a serial number and the MMM logo.
While the notes are printed on watermarked paper (with an indeterminable watermark), the notes are all printed by the lithographic process. The paper used for the notes carries embedded fluorescent fibres, and the 1-, 100- and 1000-biletov notes carry a halo of fluorescent ink around the serial number. The 10,000-biletov note has a serial number that fluoresces green when submitted to ultra-violet light.
The notes of this series have very few common design features. The three lower denominations carry the same portrait of Mavrodi. However, while the 1-bilet note has a white margin, the other denominations do not. The 10,000-biletov note carries a different portrait of Mavrodi and the year 1994, with the only other denomination to carry a date (year) being the 100-biletov note.
The1-bilet note of this series was prepared in two varieties and this is probably unknown to many collectors. One variety has Mavrodi’s portrait printed in blue, while the other has it printed in black (or perhaps grey). The two varieties appear to be equally as common.
The third series has been recorded with only four denominations, although there could be more. The denominations recorded for this series are 10, 50, 500 and 1000 biletov. Once again, there are different characteristics for each denomination, although the usual features of watermarked paper and embedded fluorescent fibres can be found in all notes in this series. The principal identifier of this series, is the size of the notes. They are noticeably smaller than the notes of Series 1 and 2.
The 10-biletov note looks a cheaply produced note, with the portrait of Mavrodi appearing to have been scanned from a photograph. It has a large fluorescent logo of the MMM Corporation in the centre of the note.
The 50-biletov note is similar to the 10-biletov note, also carrying a large fluorescent logo of the MMM Corporation in the centre of the note.
The 500-biletov note is noticeable for several reasons. Dominating the design of this note are butterfly patterns. The use of these patterns extends to the fluorescent feature of the note, which is the outline of three red butterflies. Also unique to this note is the claim to copyright on the back of the note by ‘NTGRAF’.
The 1000-biletov note also uses butterfly patterns in the designs on the front and back of the note. However, the fluorescent feature is once again the MMM logo and there is no claim to copyright on the design of the note. Both the 100- and 500-biletov notes carry a red serial number with an asterisk placed a short distance after the serial number.
The 500-biletov note has been recorded with a stamp in Russian that states ‘Not convertible into cash’. Who placed the stamp on the note and why it was done is open to speculation. The fact that only one note, or a bundle of notes, has this stamp placed on it suggests that it was either a local measure, undertaken at just one or two offices of the MMM Corporation prior to issue, or it was placed there after being purchased. Evidently, such stamps were commonly found on documents in Soviet Russia, in an effort to remove the temptation of fraud.
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Most of the biletov prepared by the MMM Corporation for their audacious crime are common, although a few of the notes, such as those in Series 3, are a little harder to obtain. There is the added difficulty of trying to establish from dealers’ lists exactly which of the biletov are being offered for sale. Because they are not banknotes, it is unlikely they will be catalogued in any current reference work. Therefore, there remains a challenge for each collector to compile their own list. Hopefully, the description of biletov in this article will give collectors a starting point to compile their own list, or information to expand their existing list. Another interesting aspect to the acquisition of the biletov is the range of prices for the items. As much as $5.00 for a single piece and as little as $2.00 for all the notes of Series 1 have been observed, but despite the range of prices they are all affordable.
This article was completed in February 2003
© Peter Symes