WASHINGTON -- As the Soviet Union splintered in the early-1990s, Sushovan Ghosh packed his colleagues into a van and chugged across the collapsing nation, hitting depressed towns and famished cities, busted up factories and lonely kiosks. In each ragged destination, they stopped long enough to interview cigarette smokers.
Ghosh plied the citizenry with free cigarettes and, sometimes, McDonald’s hamburgers.
They were pursuing a lucrative target: determining what Russian smokers wanted out of a cigarette -- specifically, a Western cigarette. "We had to develop a brand the Russians would smoke," Ghosh explained to The Huffington Post. For one study, they interviewed more than 1,000 smokers. "We stopped the bus and offered them cigarettes. And they all queued."
Ghosh’s work for cigarette companies was chaotic, unbridled and, ultimately, deadly. To Mitt Romney and his colleagues at Bain & Co., it was a chance to rake in money. Ghosh said he reported directly to Romney, who was excited about the Russian market. "He was my boss," Ghosh said.
At the time, Romney was CEO of Bain & Co., the Boston-based consulting firm that launched his white-collar career and led him into the high-stakes world of corporate buyouts. Although Romney's activities helming the private equity giant Bain Capital have drawn significant attention, his role at Bain & Co. has received almost no public scrutiny. A Huffington Post investigation into Bain's tobacco work found that the consulting firm helped Philip Morris increase its revenues in the U.S., and aided two other tobacco titans as they vied to move forcefully into the Russian market.
It's all a long way from some of the deals Romney has used to position himself as the godfather of the big box -- investing in companies like Staples and The Sports Authority -- and a wholesome salesman to the middle class. The modern family spends a lot of time shuttling between Romney's investments -- dropping off toddlers at one of his Bright Horizon daycare centers, celebrating a Little League victory over his Domino's pizza or taking a shopping break in a Brookstone vibrating massage chair. While some Bain Capital deals have ended in plant closings and layoffs, Romney has embraced the family-friendly version on the campaign trail.
"The back-to-school season is here, and as parents take their children to shop for school supplies, I suspect that many of them will be visiting a Staples store," Romney wrote in an Aug. 23 Wall Street Journal op-ed. "I'm very familiar with those stores because Staples is one of many businesses we helped create and expand at Bain Capital, a firm that my colleagues and I built."
Bain's Russian business wasn’t about family-friendly products. Those deals were about cigarettes. And that work sent Bain into the shadows of the post-Soviet economy -– including helping to orchestrate anonymous, convoluted cash transactions to keep major deals hidden from regulators and competitors. It was part of a free-for-all that involved wholesale looting of major industries, as Western technocrats helped facilitate the transfer of Russia's wealth into the hands of a few oligarchs. That set in motion a populist backlash that helped sweep Vladimir Putin into power, giving the Kremlin dominance over a country Romney has lately called our "number one geopolitical enemy."
Bain was in the middle of all of this, putting to work the same skills it had sharpened in the U.S. -- using taxpayer money to help it gain footholds in Russia. In March 1993, the American government gave Bain & Co. a $3.9 million contract to advise Boris Yeltsin's administration on the privatization of the Russian economy, according records detailing the arrangement uncovered by The Huffington Post. Romney's consultants helped foreign firms and aspiring oligarchs decide how to corral Russia's riches -- including writing an official manual that outlined how best to navigate the process. At the same time, Bain leveraged its contacts with senior Russian officials to arrange sweetheart deals for its tobacco clients.
The Soviet Union's downfall meant rich rewards for any company able to move quickly, and the timing was right for U.S. and British tobacco companies eager to control the cigarette market. Under pressure at home for marketing an addictive and deadly product, domestic sales were shrinking. It was a dilemma Bain and Romney knew well, having worked extensively on behalf of Philip Morris in the U.S. beginning in 1990. In 1992, Bain approached British American Tobacco -- the international conglomerate behind Kool, Lucky Strike, Pall Mall and Benson & Hedges -- offering a lucrative partnership in Russia. It worked.
Documents chronicling Bain's tobacco work are housed at the University of California at San Francisco's Legacy Tobacco Documents library. Following a tip from a reader who wrote to OffTheBus@huffingtonpost.com, The Huffington Post reviewed hundreds of Bain documents from Legacy's digital archives, along with materials gathered from industry experts and government databases. The Huffington Post also interviewed former Bain employees who worked on the tobacco projects, additional American experts, tobacco control advocates in Moscow, and those with experience with Russia's early, unbridled privatization years.
The documents show Bain's enthusiasm to help its client enter the Russian tobacco market, despite obvious and well-documented health hazards associated with smoking. "They were a trusted partner,” explained K. Michael Cummings, professor in the Medical University of South Carolina’s Department of Psychiatry and Behavioral Sciences, who is familiar with the Bain-BAT correspondence. "It appears that BAT relied on them. They were a long-term client."
Despite repeated requests, neither the Romney campaign nor Bain would provide specific start and end dates for Romney's tenure running the consulting firm. The campaign has asserted that he "returned to Bain & Co. 1990-1992" -- a key period in the firm's tobacco work. However, government records and several media reports place Romney at Bain & Co. as late as the summer of 1994. Romney's Senate campaign told the Boston Herald in a July 24, 1994, article that their boss was juggling Bain & Co. meetings with the demands of his political race.
Romney's personal involvement with Bain's tobacco business is unclear. But as CEO, he was responsible for the company's work. Ghosh and another executive who was interviewed said they reported to Romney. Bain and Romney would not discuss their respective involvement in the Russian tobacco market. "We adhere to confidentiality agreements and don't confirm who our clients are, nor discuss any of our client work," said Bain spokeswoman Cheryl Krauss.
Jem Maidment, a BAT press relations manager, said his company respected Russian laws in all of its dealings during privatization. "We would have obeyed the laws, privatisation rules and tax regulations in force at that time. We cannot comment further," he said in a statement. He also raised concern about the information contained in the tobacco documents. "These are old documents, context unknown, and being cherry-picked may lead to inaccurate conclusions."
Regardless of the past context for the tobacco documents, the current context for Russian smokers is clear.
“Russia is facing a true public health crisis,” said Matthew L. Myers, president of the Campaign for Tobacco-Free Kids. He added that Big Tobacco's impact on Russia "is directly correlated with skyrocketing smoking rates among young people, particularly young women. The impact is direct and potentially catastrophic."
In 1992, reports showed that only 7 percent of Russian women smoked. Since BAT and other Western companies have taken over Russian markets, that number has more than tripled. In 2009, the Global Adult Tobacco Survey, cited by the World Health Organization, reported that nearly 22 percent of Russian women had taken up the habit.
The same survey found that smoking rates among Russian men -- already high before Communism's fall -- have also risen since Bain's tobacco exploits of the early-'90s, with 60 percent now smoking. Nearly 44 million smoke in Russia, a country of 142 million. Dmitriy Yanin, the head of a consumer protection non-governmental organization in Moscow, said there are 400,000 smoking-related deaths each year in Russia. BAT, largely locked out of the cigarette market before Bain got involved, now controls nearly a quarter of sales. BAT remains close with top government officials.
And the Russians are hooked.
"Tobacco smoke is everywhere," Ireena Slavina, 39, a journalist who lives and works in Nizhny Novgorod, told The Huffington Post through a translator. "Bus drivers smoking. People at bus stops smoking. Someone near you at the beach is smoking. You are always in a cloud of smoke."
Mitt Romney can count the number of cigarettes he's smoked on one finger. Observing his Mormon faith, he does not smoke. "It's a religious thing," he told People magazine last year. "I tasted a beer and tried a cigarette once, as a wayward teenager, and never did it again."
The Romney family had a history of fighting Big Tobacco. In 1971, Marion G. Romney, a cousin of Romney's father, rebuked The Tobacco Institute, an industry lobby arm, for passing out a pamphlet questioning the science linking cigarettes to death.
Marion Romney was a high-ranking official at The Church of Jesus Christ of Latter-day Saints, named to the Council of Twelve Apostles in the early-'50s. As his letter showed, he was not a man to be trifled with over the dangers of smoking.
"I thought you might be interested to know that somebody does know that tobacco is not good for man," Marion Romney wrote on Aug. 11, 1971. "I am enclosing, for your information, a copy of a revelation received from heaven by Joseph Smith, Jr., in which the Lord told him in verse 8, as you will see, 'And again, tobacco is not for the body, neither for the belly, and is not good for man …' There are tens of thousands of people who know this is the word of the Lord, and I am one of them, and I bear you my witness that I know that God has said that tobacco is not good for man. And I know further that you could know it too if you would be humble enough to read this revelation in sincerity and then in the privacy of your own office or home, you would ask the Lord, in prayer, if it is true. He would manifest the truth of it unto you."
Cigarette executives cited Romney's letter in an appraisal of the pamphlet campaign and generally disparaged the results of their efforts: "Mailing copies of 'The Cigarette Controversy' to a large list of ministers (including Mormons), many of who [sic] responded with highly critical letters, might have been wasteful, useless, and counter-productive."
It wasn't just Mormon scripture preaching the evils of cigarettes. The U.S. government had issued its own scientific conclusions in multiple surgeon general reports dating back to the early-'60s. Federal research had long linked smoking to cancer, and in 1988, had stated that cigarettes are as addictive as heroin.
The first modern-era lawsuit against cigarette manufacturers was filed in the early-'80s by Rose Cipollone, a 57-year-old dying of lung cancer. The case made national news, and presented scores of damning internal industry documents to the public. Class-action lawsuits followed.
"Internal documents showed clearly [these companies] understood the full nature of the extent of the full hazards of cigarette smoking in terms of lung cancer and heart disease and later the addictive nature of nicotine," recalled Cipollone’s attorney Marc Edell. "And in fact formulating cigarettes so that they would enhance the addictive aspect of using the product. Those were pretty dramatic revelations."
At the time Romney and Bain came in, cigarette makers were becoming pariahs. "You have to know they are the world's deadliest consumer product and the deadliest invention in the history of civilization, and the world's leading cause of death," said Robert N. Proctor, professor of the history of science at Stanford University and author of a definitive account of the industry, "Golden Holocaust: Origins of the Cigarette Catastrophe and the Case for Abolition." "You have to know those things."
In his book, "Turnaround: Crisis, Leadership and the Olympic Games," Romney describes taking the reins at Bain & Co. in 1990. He writes that the company "was short of cash and short of new clients." His first step, he offers, was to fly around the world to rally what was left of the company’s employees. "The key task was to commit the people, the team, to stay with the firm during the turnaround and to work in lockstep together."
"Bain & Co.’s turnaround was an incredible success," the Romney campaign concluded. "In just a year, a company on the brink had returned to profitability. Mitt Romney not only saved thousands of jobs, but also set the firm on a course to be one of the largest and most successful management consulting firms in the world."
Bain's comeback would not have been complete without Big Tobacco. According to a Boston Globe story, Romney took over the consulting firm in October 1990. A little more than a month later, the company secured a six-month contract with the Marlboro Man’s progenitor, Philip Morris, estimated to be worth $1 million. It would be just one of many Bain deals with the cigarette giant over the years.
Bain promised to complete a "strategy study" analyzing the cigarette maker's involvement in the discount market and present a “thorough understanding of cigarette consumer buying behavior"
Philip Morris was one of Bain's first new clients under Romney. The consultants were eager for the work. "We pride ourselves on meeting your rigorous standards," Bain executives pledged to the tobacco giant in its Nov. 8, 1990, pitch letter. Philip Morris hired Bain that year. An early project focused on "'switching' behavior." The plan was to convince the established smoker to either change to Philip Morris cigarettes or to keep buying the brand, said one former Bain employee who worked on the project and requested anonymity because of the company's confidentiality policies and the sensitive nature of the story. He told HuffPost that Bain focused on analyzing what made smokers pick one brand over another in convenience stores.
"This was all about established smokers -- choosing one brand of menthol over another," the former employee said.
Philip Morris actively promoted Bain's work in the tobacco giant's PowerPoint presentations, and in sales pushes to retailers. The company paid particular notice to Bain's cigarette display research. In Bains' hands, where stores placed packages of cigarettes became a science. "From industry research done by Bain & Co, the optimum number of displays for peak profitability is six," reads one Philip Morris guide to convenience store owners.
A Bain-tested sale -- 50 cents off a Marlboro pack -- promised higher revenues for retailers: "Cigarette category sales increased by 25% and total store sales increased by 8%," the guide boasts.
Other Bain studies for Philip Morris included analyzing the "optimum product location" for cigarette displays within Kroger supermarkets, and helping to figure potential profits to be harvested from offering a free Coke with every pack of Marlboros at Circle K convenience stores.
John Fitz-Henley, a former Bain employee, told The Huffington Post he was proud of the work. But not everyone felt comfortable assisting a company with products that were increasingly being criticized and sued because of links to disease and death.
Bain consultants were allowed to opt out of the Philip Morris work if they had moral objections, recalled the other former Bain employee. "People had the option of working on the case or not," he said. "Nobody was forced to work on it. There were certain people that didn’t."
The former Bain worker didn’t share those objections. "There was nothing illegal," he explained. "It's a free country. People have the choice to smoke. It wasn’t a moral decision. I don’t eat junk food. I don’t think it’s good for you. I don’t judge people who work for Frito-Lay. That’s how I look at it. Are companies bad because they pollute the environment? Are oil companies bad because there’s drilling involved?"
Whether Romney had qualms about working with Philip Morris, the former employee doesn’t know. "He was a very impressive CEO," he said. "He [had] confidence, a strong vision. He was a real dynamic business leader."
Along with its sales research, in 1992, Bain had been tasked to help Philip Morris address internal corporate inefficiencies, distribution issues, and business challenges. Three years later, the fruits of that work included guides to help the cigarette maker fend off rising public sentiment against tobacco, and increased pressure from federal regulators. In one document labeled "Corporate Affairs," Bain argues that the cigarette maker needs a "coordinated, long-term approach to legal/regulatory/public opinion opportunities and challenges to maximize shareholder wealth."
Bain's advocacy amounted to an early example of corporate "astroturf" tactics that are now commonplace among groups affiliated with the Koch Brothers and the Tea Party. In the same "Corporate Affairs" document, under “mobilizations,” Bain consultants encourage the company “to conduct federal and local grassroots programs in support of the company’s legislative and regulatory efforts.”
For one such mission, Bain called on the company "to initiate and execute programs to support smokers' rights, combat regulatory moves and improve corporate image." Specifically, Bain felt Philip Morris could build support within the hospitality industry and by openly seeking to curtail access to cigarettes for young people.
In another 1995 document, Bain suggested that the company produce smokers' rights newsletters and jumpstart "state-level" lobbying work that involved phone campaigns. Consultants suggested augmenting their "phone scripts" to include the specter of job losses due to cigarette tax increases, and bringing up their own "medical, science related issues." that could "combat regulatory pressure."
Professor Cummings called Bain’s sales advice "brilliant." "If you’re Philip Morris, it was a very successful endeavor," he said. "They turned around a ship that was going downhill. They are a monster today."
THE GREAT HARVEST
Bain & Co. opened its doors in the early-1970s and employed 450 people by the mid-'80s. The edgiest thing the firm may have produced over that period was its in-house 'Bain Band,' which once produced a diss track targeting a rival firm set to the theme song from "Fame." "Bain! We're going to grow forever/And if they might think it's a lie/We’ll keep on working together/And then kiss McKinsey goodbye."
Consulting work can be drudgery, advising on the game but never playing in it, living in Excel purgatory, and talking in PowerPoint after endless PowerPoint. Bain co-founder Ralph Willard thought there could be more to his firm than churning out a direct-marketing analysis for a new toothpaste.
In 1990, Willard formed Bain Link, a subsidiary aimed at generating business in those once-forbidden markets of the Soviet Union. "We had this idea -– wouldn’t it be cool to be the first ones in this mysterious place?" Willard explained in an interview with The Huffington Post. "It was the idea of being a pathfinder, sort of cutting edge -– we’re Bain & Co., we're great, we opened the first ever consulting service in Moscow."
Willard and his Bain crew partnered with Abel Aganbegyan, a prominent academic who was serving as Mikhail Gorbachev’s top economic advisor. Aganbegyan would help supply Bain with Moscow-based researchers and networking contacts, which eventually brought Willard to the Kremlin.
The Kremlin reminded Willard of the hotel in the movie "The Shining," with its endless corridors of faded carpet and empty, rundown ballrooms -- decaying glamour hinting at a deeper, darker menace. Soviet officials wanted Willard to evaluate a joint venture from a foreign car company looking to establish manufacturing in the USSR. It was a huge step up from toothpaste.
But Willard had to pass. He’d grown up during the Cold War. "I remember thinking 'You know what, I don't feel comfortable helping these guys against a Western company. … I'm not sure I want to be an agent of this dying Stalinist regime," he recalled feeling.
Willard agreed that the firm could work with Western companies seeking to invest in the Soviet Union. He remembers how depressing the early days could feel -– dreary city after dreary city after dreary city. When his driver would pick him up at the airport, the chauffeur would have to jam his car’s windshield wipers in his pockets. If he left them on the car in the airport's lot, they'd be stolen.
Willard still remembers the Pan Am flights out of Moscow on his way back to the London office. "The captain would announce when we crossed the border –- 'We are now leaving Soviet airspace' –- and everyone would break out into applause," Willard said.
But Willard and Bain kept coming back. Back at company headquarters, fellow consultants were "pumped" by Willard's work, he said. The thinking was: "You know what? The Bain model works -- let's go help a country."
Willard agreed. "There was that feeling that you were potentially doing something world important," he said, adding later, "I think what we did there was noble."
In September 1991 and in early-1992, as it continued doing American marketing research for Philip Morris, Bain's consulting team took on a more ambitious project for Gallaher Limited, a tobacco wing of a conglomerate called American Brands Inc., which peddled cigarettes, bourbon and golf supplies. The company has since been broken up.
Bain was prepared for the work. In various pitches, the company wrote that its "principal business is assisting western companies to establish themselves in Russia." Ghosh was a vice president of Bain Link, working alongside Willard, documents show.
As one of the top managers on the Gallaher contract, Ghosh's responsibilities included contributing to an extensive study of the Russian smoking market. Willard said he had no problem with helping a cigarette company expand its business. "I never smoked a cigarette in my life," he said. "But I've never seen a Russian without a cigarette. It wouldn't be my idea of a client I would be very interested in myself. It was legal. … They were replacing nasty cardboard tubes with Western cigarettes."
Bain's top analysts viewed the country as the ultimate prize for Western cigarette manufacturers: a market that had been underserved by harsh cigarettes and antiquated factories. And most importantly, Russia did not face civic watchdogging, or, as the consultants would note, enforceable regulatory rules. To Bain and the tobacco industry, it was like selling American cigarettes in 1950.
Tobacco companies had the potential to move 253 billion "units" a year in Russia, but were only selling 180 billion, according to a confidential Bain analysis from 1993 -- a shortfall of almost 33 percent in a nation of 150 million citizens.
But Bain did much more than market research for Gallaher. Serving as a negotiator with Russian tobacco factories and distributors, Ghosh's team took on a role typically identified in the United States with investment bank merger specialists. Ultimately, Bain hammered out terms for the purchase of three tobacco factories for Gallaher.
But in the summer of 1992, with the Russian political system in chaos, Gallaher decided to walk away from the deal.
Bain didn't let that setback get in its way. Instead of retreating from Russia, Ghosh repackaged the Gallaher failure into a proposal for British American Tobacco. On Nov. 17, 1992, he dashed off a memo to BAT. He kept the subject line simple: "Cigarettes for Russia."
"We carried out extensive work for American Brands," Ghosh wrote, including a "detailed analysis of the Russian cigarette market," thorough research into "major consumer segments ... by age, sex, occupation and purchase preferences" based on "focus groups, customer interviews and detailed customer questionnaires."
A week later, BAT executive Nick Brookes received a memo indicating that an underling had met with Ghosh "to pursue the sale of our brands to him."
The memo also noted that Bain was willing to sell BAT its study on the Russian tobacco market that it had performed for Gallaher. The company followed up with a letter to Ghosh asking to purchase the complete analysis. In December, a BAT official gushed to Ghosh: "I assure you that we are very anxious to build our business with you."
Romney was an advocate for the Russian tobacco work, Ghosh said. He explained that although Romney did not delve into the specifics of his projects, he received reports on the Russian business periodically. Romney knew what Ghosh worked on and approved.
Willard left Bain in 1991, but said he stayed on as an advisor to the company's Russia contingent and helped secure the BAT deal. He recalled personally briefing Romney on the work, possibly a couple of times. He said that Romney was encouraging -- the costs to run the Moscow operations were low and the territory was all Bain's for the taking. "I certainly have the impression he was in favor of what we were doing," he explained.
The BAT contracts would be worth millions. "Bain doesn't do anything if it's not lucrative," Ghosh explained. The two companies would go on to work on a number of joint cigarette endeavors with increasingly militaristic names: Project Olga, Project Umpire, Project Battalion, and the Matrix. Bain would work in Russia, Eastern Europe, and Asia for BAT with the goal of establishing the company as the world's dominant cigarette maker. It advised the company on everything from distribution to young-adult marketing to dealing with the blowback from selling a cancer-causing product. Later documents would include such Bain advice as "support consumers' freedom of choice to smoke."
But first, the consultants had to figure out what Russians would smoke -- and how to get BAT cigarettes into their hands.
"BAT realized the potential opportunity to expand their brand throughout Russia," Ghosh explained. "We were asked to help them."
Initially the work, Ghosh said, was "very difficult" because of cigarette shortages. It felt as chaotic and dangerous as the Wild West gold rushes. He remembered transactions all done in cash. "You basically make up the rules as you go along," Ghosh explained. If Bain bribed anyone, he said he doesn't remember.
"We started sending out a container load of BAT cigarettes with no logistics,” Ghosh recalled. He later clarified that the "we" meant BAT. "And just basically selling it."
DEPENDENT ON GOVERNMENT
Just as Bain began to deepen its relationship with BAT, Romney's firm endeared itself to two other huge clients: the American and Russian governments.
USAID, an American international development agency that answers to the foreign policy directives of the State Department, contracted with Bain in March 1993 "to accelerate the privatization of Russian enterprises," with a particular focus on small cities and rural manufacturing regions. Within months, Bain was a top adviser to Yeltsin's administration, with U.S. taxpayers footing the $3.9 million bill for Bain's services.
"Bain/VASG worked to ensure that as many companies as possible were auctioned," reads an August 1994 USAID government review. Bain had already facilitated nearly a third of all of the smaller privatization deals in Russia outside of the Moscow-St. Petersburg hub, including 40 percent of all total capital involved in the transactions, according to the report.
Privatization in Russia was supposed to be a democratic exercise. Citizens would be given vouchers worth a certain stake in local businesses, which could then be traded in for cash, a stake in that actual business, or a stake in a Wall Street-style investment fund that bought and sold Russian assets. But through rigged auctions and other dubious land grabs engineered by the Russian government and its financial advisers, Russian citizens quickly found themselves with almost no stake in the post-Soviet economy, while a few politically connected elites took over nearly everything.
"The voucher program traded people's de facto property rights in their enterprises for vouchers worth a few bottles of vodka, so the enterprises could then be sold to foreigners or oligarchs," notes economist David Ellerman, who worked at the World Bank on privatization issues in Russia and Eastern Europe during the early-1990s. "Russia was like a conquered province with Bain et al. as the carpetbaggers to help divvy up the prizes."
Willard said he had left Bain before the privatization racket really took off, but he kept in touch with his former colleagues, and believed at the time that Russia's voucher system had potential to be abused. "You'd have to say that some regrettable people ended up on top," he admitted, adding that he believed it would be easy for "some operator to buy up these vouchers at a big discount and assemble enough vouchers to gain control. I remember thinking, 'Why are we doing that?'"
A dark chapter of economic history soon unfolded, in which nearly all of the superpower's assets were steered into the hands of a few local oligarchs and cutthroat Western corporations.
"Privatization was basically totally corrupt in most of Russia," Nobel Prize winning economist Joseph Stiglitz told HuffPost in an interview. Stiglitz served as chief economist at the World Bank during the final phase of Russia's privatization project, after Bain's activities in the region. "The whole thing was a criminal charade."
As the Russian government's "principal adviser" on privatization transactions, Bain was tasked with compiling the official government manual laying out the rules for bringing state resources into the marketplace.
The post-Soviet scramble was about much more than government contracts, and Bain pursued every profitable angle. In addition to overseeing thousands of voucher privatizations, Bain pitched its Russian team to multinational corporations as experts on Russian privatization, promising big profits squeezed from its connections with Russian authorities. By working both sides of the deal, Bain epitomized the corrupt nature of Russia's privatization swindle -- taking government money to secure an efficient public offering, and then locking in below-market terms from that deal for a corporate client. The USAID performance review and dozens of confidential memos between Bain and BAT reveal that while Bain was under contract to push privatization in the Russian region of Saratov, Bain was also advising BAT on purchasing a Saratov tobacco factory.
"I have never come across an instance of 1990s privatization in Russia without deep conflicts of interest," said Princeton history professor Stephen Kotkin. "Theft was colossal, but there was no one to prevent that theft, just people –- including some foreigners, but mostly domestic types -– to abet the theft."
USAID told HuffPost it could not determine whether Bain violated any American conflict-of-interest rules by working simultaneously with a private corporation and the Russian government. The agency said the answer would depend on whether Bain informed USAID about its work with BAT. Bain and BAT declined to comment on the matter.
Much of the privatization rush was simple financial chicanery. In the absence of any functional financial system, many citizens saw their shares of local businesses stolen by con-men. Others ended up with shares of long-outdated Soviet manufacturing operations, which proved worthless. Few Soviet-era factories survived in the face of international competition.
But some resources held real economic value, particularly oil, gas, precious metals, mining -- and tobacco. There may have been no market for Soviet clothes or cars, but tobacco was still a cash crop, and cigarette factories -- with the right marketing behind the right brand -- could be a goldmine for whoever ended up controlling them. The most valuable state assets, like oil, fell into the hands of oligarchs, giving them, for a time, relatively unchecked domestic political power. Tobacco was auctioned off to Western multinationals.
BOOTS ON THE GROUND
While performing its duties for the U.S. and Russian governments, Romney's Bain & Co. continued to negotiate with BAT throughout 1993. In February of that year, Bain arranged a meeting between BAT executives and Aganbegyan, the Gorbachev advisor.
Bain boasted to BAT that year that the "Russian government has named Bain Link its 'principal adviser' in its privatization efforts." Bain wrote that the firm was "proud of our experience and track record assisting the Russian government in its privatization program."
"Based on our work with the Russian government and our knowledge of the regions," Bain promised BAT that its consultants could help the tobacco giant pick the right locations and right factories to do business. Bain made it clear that its relationship with Russian officials would be of great benefit to BAT on the retail end as well. After all, Bain noted they were working with the Russian government to assist in retail business development.
BAT recognized Bain's unique position. In a September 1993 memo, BAT's Edouard Ettedgui notes that Bain is "somewhat different to our other advisers," because "approximately half" of the Bain staff works for the Russian government, administering the very auctions BAT wanted to exploit.
Bain also noted that it was in "'close contact'" with Anatoli Chubais and one of Chubais’ deputies, Dimitri Vasiliev. Chubais was, perhaps, the most powerful government figure overseeing the Russian privatizations, serving as Boris Yeltsin's privatization czar during the early-1990s.
Bain mapped out for BAT the important regions worthy of the cigarette maker's investment. They answered questions like "Is the governor a Yeltsin appointee?" "Who are the key players on the local political scene? Are local officials interested in foreign investment? Willing to cooperate/assist?"
Bain produced statistics on cigarette popularity in various regions, generating demographic breakdowns of smokers by gender, and the average number of cigarettes smoked per day. In another report from August 1993, Romney's experts developed a database for BAT of hundreds of distributors and wholesalers throughout Russia listing their names, addresses, phone and fax numbers.
"They are almost like from the front lines of a battle," explained Louis Kyriakoudes, an associate professor at the University of Southern Mississippi and tobacco expert who has testified against the industry in court and who reviewed the Bain-BAT documents. "Bain is acting as a kind of boots on the ground intermediary. ... It's almost like a race -- first person in wins the market-share."
Bain made sure to show BAT that it was loyal to the cause. Documents show that Bain conducted opposition research on BAT's rivals, detailing the number of Philip Morris and R.J. Reynolds employees based in Russia and breaking them out by ethnicity. Bain also reported a total of four Philip Morris Volvos congesting Moscow's busy streets.
In another 1993 study, Bain noted the size of RJR's Moscow and St. Petersburg office space. Bain also produced an organizational chart for RJR's St. Petersburg office and produced a list of their Moscow distributors and contact information.
Keeping BAT as a client was critical to maintaining Bain's prestigious image and keeping the struggling consultancy out of bankruptcy. The same month that Bain began working under its USAID contract, Romney was still negotiating a debt reduction package between Bain & Co. and the FDIC, a government agency to which Bain owed money, according to documents obtained by Rolling Stone. In Russia, its consultants were highlighting all the ways BAT could theoretically avoid paying taxes.
Bain reported to BAT that nearly everyone in the cigarette supply chain was resorting to convoluted tax tricks. The black market was elaborate and widespread enough that Bain presented it as a flow-chart to BAT, titled, "Tax Avoidance Mechanisms," a one-stop guide to dodging Russian taxes. It cited the common practice of "invoice manipulation," which relied on "cash carried out of the country by couriers" a process that is a "major source of violence." It also discusses the "bribery of customs officials."
A subsequent Bain briefing to BAT suggested the consultants knew the business was rife with corruption. Retailers, according to Bain experts, were often "controlled by a 'Mafia' type organization, with regionally protected territories." And Bain understood that BAT was doing a great deal of its business in Russia by illegally smuggling cigarettes into the country, an awareness first detailed by Anna Gilmore, a professor of public health at the University of Bath in the U.K., in a 2004 research paper. "The [distribution] structure in place could serve as the skeleton for backward integration into [a] fully integrated distribution network when and if Russia becomes a duty-paid market," Bain wrote in its report.
While his consultants were continuing to untangle Russia's off-the-books business practices, Romney began to prepare for a possible future in politics. He formally switched his party identification from independent to Republican in October 1993. But he still appeared to be working for Bain & Co.
That same month, The Boston Herald identified Romney as the "chairman and former CEO of Bain & Co." On Nov. 15, Roll Call previewed the coming Massachusetts Senate race, saying that "Romney, 46, runs the international management consulting firm Bain & Company."
Moscow had descended into bloody chaos that fall, with thousands of protesters marching on the capital to object to Yeltsin's economic plans. Yeltsin attempted to dissolve the Russian parliament, which in turn attempted to depose Yeltsin. The crisis was not settled until the Russian army decided to back Yeltsin, meeting the protesting citizenry with gunfire.
Yeltsin held onto power, maintaining Bain's connections with the Russian federal regime. On Nov. 17, 1993, Bain pitched a major project to BAT. Promising "access to key local and federal decisionmakers," extensive experience with "privatisation" and "the tobacco industry in Russia," Bain secured a contract worth $487,500 -- plus expenses -- for three months of work. The task? Securing the sale of a Russian tobacco factory to BAT.
Bain had been doing USAID-funded work for Yeltsin in several regions of Russia, including the area surrounding the southwestern city of Saratov. Within days of securing its new contract with BAT, Bain submitted an exhaustive analysis of the Russian tobacco market to BAT insiders, zeroing in on Saratov as an ideal locale for BAT's factory purchase. Bain remained under contract with USAID and the Russian government for ensuring swift, democratic and fair privatization of local resources until the summer of 1994.
The consultants interviewed workers and managers at tobacco factories, trying to conjure a bargain price for their ownership stakes. They called the effort: "Project Olga." By the end of December 1993, Bain sent back to BAT notes from their factory meetings including a discussion with the factory's chief engineer who seemed ready to deal. "He agreed that the period 'of vodka and smiles' was over and that the hard part had begun," the consultants wrote.
PAID IN CASH
BAT never could have pulled off its factory deal without Bain. The consultants negotiated purchase prices with individual workers and shady investment funds, and orchestrated complex, legally questionable transactions. Bain employees personally delivered cash to the factory owners.
According to an internal fax at BAT, Bain worked out a $457,000 deal with a Russian hedge fund called Oil & Diamond for its 13 percent stake in the Saratov factory -- less than the amount BAT paid Bain for its consulting work on the deal.
But there was a hitch. A handful of investment funds also held key stakes in the factory. BAT wanted to buy those shares, but didn't want to announce its identity, fearing the fund managers would jack up the price. So BAT went to Bain. It was these kinds of problems that the global consulting firm was paid sizeable fees to solve. The answer this time: play a financial shell game.
Bain employee Todd Berman provided payment instructions to BAT in a March 11, 1994, memo, and on March 16, BAT summarized the plan in an internal fax.
"Tactically, it has been agreed that, to avoid bidding up the price, BAT should not be
seen as the purchaser or registered owner in the [Saratov factory] share register until a majority share holding has been secured," the fax reads. "As a result shares will be acquired using Bain."
Even that plan had problems, the memo notes. Bain would be required to register as a broker if it bought shares on behalf of a corporate client, and Bain did not want to be subjected to Russian financial regulations. More importantly, the deal could create tax trouble for Bain that the company would rather avoid, the memo says.
"Entries in the accounts for a purchase and sale at no profit, despite its legitimacy, would be targetted [sic] by the tax authorities and could lead to an extended investigation on all company transactions," reads the fax.
Bain and BAT agreed to an elaborate international transaction, in which the tobacco giant would wire American dollars from its account at Chase Manhattan Bank in the U.S. into the account that the Russian firm Dialogue Bank held in Moscow.
Instead of naming Bain directly as the recipient, the transfer would be directed to the personal accounts of Bain employee Todd Berman and BAT lawyer Carol Patterson, who would, in turn, forward the money along, keeping the corporate entities of Bain and BAT out of the transaction.
"The wire transfer should be made to favor of myself and Carol," instructed Berman.
"The transfer details will not name BAT as transferor to ensure confidentiality," the March fax reads. "The Chase Manhattan payment instructions will not specify the ultimate recipient of the funds."
In a country with a more robust rule of law, this kind of activity is illegal. In the pell mell Russian market, the legal consequences were murky.
"It does appear Bain engaged in illegal, or at least highly unethical, actions," noted David Katz, an economics professor at the University of Massachusetts at Amherst, when shown the relevant documents by HuffPost. He said the Bain-BAT transaction fits a pattern of illegal activity in Russia at the time. "Sending a payment for Bain's work to an individual employee was a typical technique" for Western companies engaging in "tax evasion, money laundering, and/or to hide its involvement in a shady deal and its connections with very unsavory characters."
The complicated shell transaction used to buy the Russian factory soon went through. But in June, Berman wrote an irritated memo to BAT's John Paterson, justifying expenses incurred by Bain's team on the factory deal, noting Bain's unusual role setting up transactions.
"We handled many aspects of the project that were not part of the original work plan that would have resulted in significant additional expense to BAT had they been outsourced," Berman wrote. "For example, funds transfers were managed by us that in fact should have been managed by your bankers, Citibank."
A separate June 22 memo details massive cash holdings of Russian rubles that Bain has been taking care of for BAT in order to buyout specific workers and pensioners who owned stakes in the Saratov factory.
A month later, everyone was happy. In an Aug. 1 BAT memo, Paterson urged BAT executive Brookes to pay Bain a "success fee" for the project, highlighting, in particular, Bain's influence with Russian authorities.
"The relationships Sergei [a Bain employee] developed with the anti-monopoly authorities and the Saratov Property Fund and Tender Commission substantially assisted in a quick anti-monopoly clearance," the memo reads. It doesn't say what was done to forge such a fast bond with regulators.
The memo also cites Bain's willingness to continue working with BAT on other projects. Bain would go on to assist BAT in the tobacco markets for Turkey, Uzbekistan, Kyrgyzstan and Kazakhstan, along with additional Russian projects.
There was no shortage of cash around this dealmaking. A letter from BAT to its own bank, Citibank, dated April 1994, is characteristic of the period, requesting "prepared cash packets" to buy up shares of a factory from small owners identified by Bain. It also requests "a packet of ruble cash in the amount of RUR 11,000,000 ... to be held in reserve in the event that a cash counting discrepancy arises."
A NECKLACE IN EVERY PACK
By 1995, Romney was out of Bain & Co., but the gears set in motion under his leadership continued to turn. The cigarette business had become part of Bain's culture. No one had a problem with the work. "I can tell you that there was absolutely no worry about the health concerns at all," recalled a former employee who contributed to BAT projects. "The concern was only about making money."
Bain appreciated the rewards enough to send BAT the occasional mash note. “It was a real pleasure and a terrific experience both personally and professionally," Berman, the Bain dealmaker, wrote to BAT in June 1994. "Despite being quite a difficult project at times, it was nevertheless extraordinarily interesting, challenging and rewarding. We hope BAT is as pleased with the outcome as we are at Bain."
In October 1994, BAT finalized another Bain-assisted Russian tobacco factory purchase, vowing to boost production by over 40 percent. The factory formed the basis for BAT's Java brand, which has since become the top cigarette brand in Russia, according to Forbes.
Bain's Russian deals culminated with some of the firm’s most dangerous and effective projects -– marketing cigarettes to young adults and women.
"The profit numbers are on an annual basis, and do not yet account for the lifetime value of young smokers," one Bain consultant wrote in a November 1995 memo on the young adult market. “The ‘get them early, keep them for life argument’ is critical to the whole debate … and we will be doing further analysis on this.”
Documents show that Bain consultants helped organize and perform market research on what the tobacco industry called Young Adult Urban Smokers (YAUS) and "Lights" which targeted potential female smokers. Meeting notes suggest that Bain and BAT were looking for a comprehensive, global approach to marketing cigarettes by studying the role of menthol in light cigarettes in Malaysia, to milds in Latin America, to mid-priced brands "amongst young in France."
There also was the idea of studying the popularity of Oxy acne treatment for clues about how to increase the appeal of cigarettes to young consumers. According to notes from a January 1996 meeting, a Bain consultant reported: “There was a high level of interest in drawing parallels with other consumer goods, industries. Examples include beer, coffee, Oxy, Coke … Nike/Reebok vs Puma/Addidas. Also how do you keep fresh and trendy while maintaining brand equity?”
In April 1996, Bain contributed findings to a BAT study the company called "The Matrix YAUS Factbase." With Bain data spliced into charts on contestable profits by country, BAT thought the young adult market offered a huge opportunity for growth. The company wrote "the importance of YAUS in emerging markets will rise as loyalty and affluence increases."
In the former Soviet Union, BAT could roll back the clock and deploy the same gimmicks as the U.S. tobacco industry before the era of class-action lawsuits and federal regulation. "I think [Russians] were easy targets," Proctor explained. "I'm sure the level of awareness, the knowledge of the hazards was nowhere comparable to the U.S. … You get this robber capitalism going in and exploiting any naiveté that was there."
Jem Maidment, the BAT spokesman, said the company's marketing campaigns target appropriate age groups. "In regard to the marketing of our products, we market to adults -- men and women who are old enough to make an informed choice," he wrote in an emailed statement. "We didn't and do not market to the under-age."
In Russia today, BAT sells cigarette packs accompanied with free costume jewelry. They’re called Vogue. They can’t churn them out fast enough.
The effect of BAT and other multinationals on Russian public health has been devastating. A late-'90s survey of 15 years in Russia found that 24 percent of males and 22 percent of females smoked. The numbers keep rising. A 1999 Global Youth Tobacco Survey in Moscow found that nearly 40 percent and 30 percent of Russian boys and girls from grade 7 to grade 10 are smoking. According to a 2009 Global Adult Tobacco Survey, the smoking rate among Russian women ages 19 to 24 is now among the highest in the world -- 37.9 percent.
Russian teens could not avoid the cigarette industry if they tried. In Russia, tobacco companies manufacture certain cigarette brands to look like candy. Some offer peach and bubblegum flavors. "They are everywhere," explained Maria Skatova, press secretary of the Russian Coalition for Tobacco Control.
Cigarette ads appear in glossy magazines, in movie theaters. Cigarette brands are advertised on backpacks. Companies run sales promotions -- for example, if you buy three packs, you could win an iPad."I noticed a Marlboro ad in a hospital for children," Skatova said.
Ireena Slavina, the reporter from the town of Nizhny Novgorod, said her own son started smoking when he was about 12. His brand was Pall Mall, a BAT product. "I felt pain at the moment when I found my son is a smoker," she said. Last week, her son, now 20 years old, told his mom he has quit.
The consequences of smoking had been felt by her family. Slavina's father-in-law died from smoking-related causes. She said she pressed her son about the health consequences and has become an anti-smoking activist.
"It's our national problem," Skatova said. "It's happened in '90s and beginning of this age when international companies came to Russia. They promoted smoking as something trendy, glamorous."
That was something that appealed to Victoria Kerskaey, now 20, when she started smoking Vogue at age 12.
"When I bought pack of Vogue I dreamed ,'Oh it's Vogue, it's not like ordinary cigarette,'" she said from Moscow. "It's brand, it's fashion, it's style of life. Vogue you can be like magazine Vogue."
"When I was 12, there was a lot of advertisements," Kerskaey added. "If you smoke you are cute."
Kerskaey said she has no immediate plans to quit her Vogue Blues, which is good news for BAT. "I don't have any problem with it," she said. "I don't want to give up."
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