MMM Leaves Bitter Taste of Capitalism in Russia : Finance: Investors panic after fund’s collapse, as shares worth $50 days earlier drop to value of 50 cents.

MMM. The three letters were on everyone’s lips all week long, zigzagging across headlines in every national newspaper, dominating top-level meetings in the Kremlin and humming through a monstrous Moscow line of more than 17,000 people and smaller ones across Russia.

The name sounds like a candy treat or dairy product. But MMM is something far more sinister--a financial Frankenstein that taught Russians one of their most painful lessons yet on capitalism.

The rise and fall of MMM, this country’s largest investment fund, is a drama on a typically Russian grand scale. In half a year, the secretive fund rose from nothing to claim 10 million investors, gather $1 billion, according to very rough estimates, and force the government into an unprecedented battle for market control.

And when the MMM pyramid wobbled late last week--in response to belated government warnings to investors and the news that the tax police had hit the firm with a fine of $25 million--the panic reached a grand scale as well. It spawned the kind of lines of frightened investors that America has not seen since the bank closings of the Great Depression.

On Friday, the crash came.

Outside MMM’s central Moscow office, some of the more than 17,000 people in line had been waiting three days and nights in hopes of selling their shares back to the company at the promised price of about $50. At midday, the devastating news came: They could sell out, but the company, which had formerly furnished about 100% profit per month, was paying only about 50 cents a share.

Some elderly women wept, their meager savings gone. Some enraged investors briefly blocked traffic. A few threatened to immolate themselves. Most investors, in one of the mysteries of the Russian mentality, blamed the government rather than themselves or MMM.

“My pension is 61,000 rubles (under $30) a month after working 37 years in a defense factory,” said pensioner Nina Petrovskaya, 55. “Can you live on that? No, you can’t. But the government doesn’t care. The government never cares if you get poor. It only cares if you get rich. MMM was my only hope in life.”

If the investors learned the first lesson of Capitalism 101--the greater the profit, the greater the risk--the Kremlin too learned what happens when securities are allowed to run wild without regulation.

Most economists held that Russian investors were painfully naive but that the government had only itself to blame for the greatest private financial scandal post-Communist Russia has ever seen.

The MMM collapse had long been brewing, but it accelerated late last week, when the tax police announced that MMM owed them $25 million in fines and the Finance Ministry disavowed all responsibility for MMM’s dealings. Stories on MMM suddenly dominated the media, and feverish selling of MMM shares began at Moscow’s stock exchanges.

The panic quieted on Monday, but on Tuesday, MMM closed most of its offices, claiming lack of cash and poor security, and began complaining loudly of government persecution.

In a direct challenge to President Boris N. Yeltsin, MMM President Sergei Mavrody turned the stock fund into a political weapon in hopes of fending off attempts to regulate him.

If the government continued to attack the firm, Mavrody said, MMM could call on the support of up to 50 million Russians--the 10 million shareholders plus their relatives. It could also launch a referendum, he said in an apparent veiled threat to call for early elections.

“A new political force has appeared in Russia, one so powerful that to stand against it is hardly possible,” Mavrody, who never makes public appearances, warned in a statement.

Although MMM share prices have dropped to rock-bottom, the company may yet resurrect itself. The line to sell had turned into a line to buy Friday afternoon, and Mavrody was promising that share prices would rise every day and be back to $50 within a couple of months.

Nothing the Kremlin has done so far would prevent that, leaving it with a no-win dilemma.

If the firm does grow and grow, millionaire businessman Artyom Tarasov conjectured, “the number of investors could reach 40 million, and MMM could just take over running the country’s finances from the government.”

But if the government tries to close MMM, it will again incur the wrath of millions of remaining shareholders.

The newspaper Izvestia compared the government’s position as it watched MMM grow to colossal size to that of decent parents who find out their high school-age daughter is four months pregnant.

“What to do now that things have gone so far?” it asked. “Sue? Punish? Forgive? Help?”

By Thursday, the MMM crisis had grown so acute that the Cabinet devoted more than an hour to discussing it, then conveniently leaked some of its choicer comments denouncing the firm.

MMM “is a group of skilled swindlers who take advantage of flawed legislation to bamboozle people and fill their own pockets,” tax police chief Sergei Almazov reportedly said.

Despite its harsh words, the Kremlin appeared to be opting for low-key action--hoping MMM will collapse of its own weight and meanwhile writing a fast decree that would prevent another MMM from growing.

Whether or not they are swindlers, the leaders of MMM are clearly masters of manipulation. They took advantage of the confusion in Russian law and lack of legislation on securities to sell an estimated $2 million of shares a day in a company that has virtually no publicly disclosed assets. They reportedly managed to bungle their books so badly that tax inspectors could make no sense of them.

Unknown as recently as last year, MMM launched a saturation advertising campaign over the winter, promising the average Ivan Ivanovs of Russia that they could get rich quick if they invested in the company. The latest ads, still running on Russian TV, feature a dream trip to San Francisco for the MMM Everyman hero, known as Lyonya Golubkov.

Unlike normal stock market shares, the prices of which are decided by the market, MMM set the prices itself, and they shot up and up, averaging a jump of about 100% a month since May. With inflation dropping but still running at 5% a month, few could resist, despite warnings from economists that MMM and other funds like it were merely classic pyramid schemes that depend on pulling in new suckers to pay dividends to initial investors. All such scams eventually collapse.

Economist Boris Raizberg said conservative estimates put MMM’s worth at up to 5 trillion rubles, or about 2% of the Russian state budget.

Reformists worry that the MMM scandal will undermine faith in the market-driven system they are trying to create in post-Communist Russia and damage the already shaky investment climate.

The political exploitation of the MMM crisis has already begun. Members of ultranationalist Vladimir V. Zhirinovsky’s faction in Parliament on Thursday called for a special session to discuss MMM.