10-12 Paged Literature Review on Russia, scholarly sources only

The Russian Oligarchs, from Yeltsin

to Putin

C H A I M S H I N A R

E-mail: [email protected]

Introduction

Yeltsin’s oligarchy1 was 15, or even 20 or even 50, very rich people who featured all the time in the mass media. They were very ambitious. They were prepared to go openly i1nto the government or Duma, or to finance a political party. They were well known because they were popular. However, it would be difficult to argue that they controlled any part of the real economy. Under Putin though, in place of the old Yeltsin oligarchy, a completely new oligarchy appeared, constructed in a rather different way. The Putin oligarchy is much larger, with not just dozens, but hundreds, of serious businessmen, who have cured themselves of wanting to become openly involved in politics. The whole process went into the shadows, but at the same time became more organized. Now every serious politician has his own ‘oligarchs’.

Yeltsin did what his oligarchs told him to do. Putin’s oligarchs do what Putin tells them to do.

(Unknown)

Privatization of State Property2

Privatization is when someone who doesn't know who the real owner is and doesn't know what it is really worth sells it to someone who doesn't have any money. (Polish Privatization Minister Janusz Lewandowski)3

Socialism was a system based on values, both ethical and financial, that were contrary to those of the system toward which the societies in which it emerged were supposedly moving. The matter of evaluation was not an issue in property-rights restitution, but it was the main dilemma in privatization methods designed to sell off state assets to private buyers, who reasonably enough wanted to know what their prospective purchase was worth.

Privatization in post-Soviet Russia most often has been understood as part of the economic transition on the path to market coordination of the economy. But the massive property transfers of the 1990s in post-communist Europe were not parti- cular to post-communism. They involved, above all, the redefinition of public goods as private, followed by the introduction of fees to be paid to new owners for the use of

European Review, Vol. 23, No. 4, 583–596. © 2015 Academia Europæa

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those goods. This shift in the meaning of property was part of a global phenomenon at the end of the 20th century. This was not a phenomenon distinct from the priva- tization that occurred in the West at the same time. Similar ideological currents and market pressure arguably underpinned both post-communist privatization and expansion of the private sector in the capitalist world.

The Process of Privatizing State Property in Post-Soviet Russia

The new Russian government inherited a country with a political and economic culture rooted in centuries of Russian obedience to authority, arbitrarily defined, from tsars to commissars. They inherited a society in which the simplest human instincts of individual initiative and entrepreneurship had been suppressed for seven decades. In the excitement of the years of easy money, a profound fact was often overlooked: from the tsars to the Soviet Communist Party, Russia simply never had a tradition of the rule of law. Russians had spent centuries appealing to individuals – a concrete person with whims, a tsar, or a party boss – rather than to an abstract law that has no personality and that exists above individual discretion.

When the transition started, the obstacles to drastic reforms in Russia were huge. The Soviet communists had left a horrendous economic situation in their wake, which would be extraordinarily difficult for any government to remedy. The final two years of the Soviet regime had been marked by pervasive shortages, burgeoning public discontent, and a precipitous economic decline. Even if conditions had not been so dire, the effects of seven decades of central planning would have weighed heavily on the new Russian government. Moreover, the highly militarized nature of the Soviet economy, encom- passing whole cities devoted to military production, was bound to slow down reform.

The privatization campaign that got under way soon after the collapse of the communist system transformed what used to be nomenclature property into various semi-state forms of ownership. In the course of the period of reforms, the administrative- command nomenclature, as the only social group in Soviet society with well-perceived interests and self-identification, retained controlling positions in the government, and appropriated the bulk of state property as privatization proceeded. Thus, it became to a large extent a quasi-bourgeoisie. Non-radical programmes, which typically feature less liberalization and correspondingly more state intervention, also give rise to new eco- nomic inequalities, the ‘winners’ being those who can successfully lobby the government. In practice, this means that members of the old communist elite, more experienced, better organized, and connected than others, did extremely well. The prospects for the success of the economic reforms largely depended on the legitimacy of the new regime. While Gorbachev was still in power, important government functionaries started to privatize certain state assets under their supervision. Alfred Kokh, who had presided over the privatization plans during the 1990s, wrote:

From late 1988 through July of 1991, thousands of State-owned companies large and small – from two to three percent of all companies that would ultimately be privatized in Russia – were converted in this frightening way en masse into other forms of ownership, lacking any legally established framework. Billions of dollars’ worth of

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State assets was literally stolen this way by management teams brazen enough to risk the consequences in the hazy legal vacuum of the period.4

Anatoly Chubais, the former Minister of Privatization, wrote in the same spirit: ‘The result of spontaneous privatization, in reality was theft of the state property by the factory managers, but it was not illegal, because there was no legal basis for transfer of property into private hands.’5 The managers of the state industrial units were the ‘overlords’ during the transition period, enriching themselves at the expense of the state and society. As the foremost assets-seekers, they were the main obstacle to financial stabilization, because they fought for subsidized credits and large subsidies from the state budget, which destabilized Russia’s state finances. The privatization process did not transfer state property to those with the greatest right to it, nor even to those who would have been able to utilize it most effectively in the interests of the society. ‘The property went to those who were most prepared to take it’.6

On 28 October 1991, Yeltsin made his greatest speech ever to the Russian Congress of People’s Deputies. He emphasized the need for an instant liberalization of prices, macroeconomic stabilization, and privatization. ‘A large-scale reformist break- through is needed … We shall finally begin in earnest, and not just talk about it, to haul ourselves out of the quagmire that is sucking us deeper and deeper.’7 On 2 January 1992, the liberalization of prices was declared.

In an interview reported in Literaturnaya Gazeta on 18 November 1992, Chubais, the Minister of Privatization, mused: ‘If the problem is only that the rich will buy up the property, I am sure that is the way it must be’.8 The privatization of Russia’s state-owned assets occurred in two stages. The first stage involved the distribution of vouchers worth 10,000 roubles to every man, woman and child in Russia, including workers and managers of firms; they could be used to purchase shares of privatized companies. In the second stage of the privatization, the shares owned by the Russian government in some of Russia’s prized companies, such as Norilsk Nickel, were traded to a small number of oligarchs in exchange for loans they granted to the state budget.

Yeltsin’s Oligarchs

The oligarchs were everything that the Soviet Union was not. They acted rapidly, were innovative, unconventional and conspicuous. They were the ultimate opportu- nists, prepared to do whatever it took to become truly wealthy. The sky was no limit for these men. The only thing they had in common with the Soviet system was contempt of the law. Smolensky told Stephen Handelman on his visit in Smolensky’s office: ‘The truth is that everything you see around you, all of our success, is not thanks to our wonderful economic laws. It’s thanks to the fact that we do not obey them.’9

All the oligarchs were products of prevailing conditions, which changed at a tremendous speed. Most of them had set up early cooperatives in 1988, doing all kinds of trading. Some had taken off by importing computers from the West, and

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most of them had become millionaires by exporting oil. They entered banking. They established new banks and attracted capital from old state banks. They benefited from cheap credit from the Central Bank of Russia. In the early 1990s, successful businessmen traded and made sure to tap the cash flow of state enterprises. Virtually all the early oligarchs were bankers, and their rise signified the defeat of the indus- trialists by the bankers. Yeltsin’s oligarchs were more a symptom than the disease. Far from being rogues who have hijacked an otherwise benign market transforma- tion, the oligarchs were merely the breed that has perfectly adapted to the Darwinian rigours of Russia’s young capitalism. The oligarchs arose as an economically and legally rational response to adverse conditions for business. When assessing the behaviour of the Russian oligarchs, it is important to note that from their individual point of view, their behaviour has been quite rational. They were faced with a state that not only refused to accept responsibility for enforcing the rule of law, but also encouraged expectations of reward in exchange for political support. Thus, it would be indeed irrational for them to pass up the opportunity to steal, in particular when the state’s mechanism was there to help them out in doing so.

The Rise of the ‘seven Oligarchs’10

The seven most influential businessmen who were supposed to have ensured Yeltsin’s re-election in 1996 were Potanin, Berezovsky, Gusinsky, Smolensky, Khodorkovsky, Vinogradov and Friedman.

After graduation, Vladimir Potanin landed in the Ministry of Foreign Trade, where his father had made a career for himself. He was assigned to a Soviet state export company. Potanin was a Soviet salesman-bureaucrat of a phosphate fertilizer company. He travelled to the Far North, where the Soviet Union had a huge potash mine, and found out about an enormous amount of metal that had been excavated, the Norilsk Nickel. At the time of the Soviet collapse, Norilsk produced 98% of Russia’s valuable platinum-group metals and 90% of its nickel.

In 1993, Potanin created the United Export-Import Bank, the Unexibank. The licence for the bank was approved with unprecedented speed by the Russian government and Central Bank, with support from Potanin’s friends in high places. In 1994, Unexibank began the year with US$322 million in assets, and it ended the year with US$2.1 billion.

The Russian stock market had gone through its first major decline in late 1994, and the government was desperate for cash to pay overdue wages and pensions. Potanin suggested a deal to the government: the banks would give him a loan holding some factories as collateral. A consortium of the commercial banks was prepared to loan the government US$1.8 billion, in exchange for collateral in the shares of 44 com- panies that the bankers wanted. If the government failed to pay back the loans, the banks could sell the shares for a handsome commission. The process was not open to foreigners, and was not transparent. Among the 44 companies that the bankers wanted, it was no accident that both Norilsk Nickel and Yukos were on the list: Potanin had put them there.

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On 30 August 1995, Yeltsin signed a decree putting loans for shares in motion. On 17 November 1995, Potanin seized a stake of 38% in the metal giant Norilsk Nickel, by offering US$170 million. Although the truth of the company’s financial condition was murky, it was clear Norilsk had enormous potential. On 8 December 1995, Potanin won 51% of the shares of the oil company Sidanko, for US$130 million.

Boris Berezovsky founded his business empire in the last years of the Soviet Union. The economic liberalization launched by Soviet leader Mikhail Gorbachev legalized small-scale private enterprises and made it possible for ingenious Soviet businessmen to privatize the profitable parts of the state-owned businesses. They could also exploit the gap between the controlled prices set by the state and the prices Soviet-produced goods could fetch on the free market. Berezovsky typified the ‘New Russians.’ He had worked as a consultant on information management to AvtoVas, Inc, the largest Soviet car producer. In 1989, Berezovsky used these contacts to set up LogoVaz, the USSR’s first capitalist car business. LogoVaz bought cars at the state-set price for cars intended for export and sold them at the much higher price such cars could fetch inside Russia. The profits enabled Berezovsky to expand his interests into oil and banking. His cultivation of Yeltsin’s bodyguard and of Yeltsin’s daughter gave Berezovsky access to the Kremlin. As a result, he won financial control of the former Soviet state airline, Aeroflot, and of Russian Public Television (ORT), Russia’s main television channel.

In 1996, Berezovsky helped bankroll Yeltsin’s re-election as president. He was rewarded with political appointments, first as deputy secretary of the Security Council in 1996 and then in 1998 as executive secretary of the Commonwealth of Independent States. Under his management, ORT supported first Yeltsin and then Yeltsin’s designated successor, Vladimir Putin. In 1999, he won a seat in the State Duma (the lower chamber of the Russian parliament), but six months later, amid unrelenting pressure from the new regime of President Vladimir Putin, Berezovsky resigned and soon after fled Russia.

Vladimir Gusinsky studied at a petrochemical institute and began his career as an actor and director of a theatre in the provincial city of Tula. In the late 1980s he took advantage of a new atmosphere of economic liberalization to establish himself in private business. Gusinsky differed from the majority of those who made their fortunes at that time by exploiting privileged backgrounds to strip the assets of the Soviet state. In cooperation with an American partner, Gusinsky set up a consulting company that facilitated joint ventures between Soviet and Western firms. In 1989 he established Most Bank, which soon became one of the most active and innovative commercial banking groups in Russia. In 1993, Most began to handle the accounts of the Moscow city government and the vast amounts of money passing through these accounts. In turn, Mayor Yury Luzhkov’s administration reportedly helped Most acquire some of the choicest development plots in Moscow’s booming real-estate market. In 1992, Gusinsky founded the newspaper Sevodnya and the independent television channel NTV. Later, he acquired the Eco Moskvy radio station, and in 1996 he launched a weekly political magazine, Itogi, a joint venture with Newsweek. In 1997, Gusinsky left his post at Most Bank to concentrate on his media interests, run by the private holding company Media-Most.

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Following Russia’s 1998 financial crash, revenues from advertising dried up. To keep his publications afloat, Gusinsky was obliged to borrow large sums of money. He turned for funding to the natural gas monopoly Gazprom. This put him heavily in debt to a company seen by many as an arm of the Russian state. Russia’s new president, Vladimir Putin, came to power in 2000, vowing to strip the ‘oligarchs’ of their privileged access to political power. Within weeks of Putin’s inauguration, Gusinsky had been jailed on embezzlement charges. Then Gazprom began to demand repayment of its loans. After a bitter court battle, Gusinsky was forced to relinquish control of his media holdings and left the country for exile to Spain.

Alexander Smolensky was the founder and president of one of the largest private banks in Russia, Bank Stolichny, which collapsed in the 1998 Russian financial crisis. Smolensky established his business on the black market during the later years of Soviet rule. His private ventures included trading in foreign currency, typesetting and printing Bibles using government presses and ink.

In February 1989, Smolensky registered his Stolichny Bank. Bekker, who had kept in touch with Smolensky, told Hoffman, ‘In Russia, there were only two ways to get seed capital for a bank. One was to service suspicious accounts and have the principle that “I don't care what kind of money is in my bank. It’s not my responsibility to check the passport of every depositor.” Another way was to work closely with the authorities and government officials and get budget accounts and profitable con- tacts.’ But Smolensky, he recalled, ‘didn't have any political contacts’ (Ref. 8, p. 48).

According to Hoffman, ‘Mikhail Khodorkovsky was an offspring of the last-ditch effort of the Soviet system to save itself’ (Ref. 8, p. 101). Desperate for a way out of stagnation, the Soviet leadership permitted a modest experiment in capitalism. The experiment occurred in the Young Communist League, the Komsomol. Khodorkovsky was the deputy chief of Komsomol at the Mendeleyev Chemical Technical Institute where he was a student. Khodorkovsky rapidly exploited his connections with tireless determination and a sophisticated understanding of loop- holes and gaps in Soviet socialism. Khodorkovsky had many patrons in high places, including the KGB. ‘All the ventures that were started at this time succeeded only if they were sponsored by or had strong connections with high-ranking people,’ Kho- dorkovsky acknowledged in 1991. ‘It wasn't the money but the patronage. At the time, you had to have political sponsorship’ (Ref. 8, p. 101).

The crack in the Soviet economic system started to open in the Komsomol, which was looking for a way to stay afloat. For millions of youths, the main reason to join the Komsomol was a cynical pragmatism; without it, a young person might fail to get a place at a university or a good job. Gorbachev, who had once been a Komsomol activist himself, opened the floodgates to other organizations and other voices.

On 28 December 1987, the central committee of the Komsomol gave its local organizations a new set of financial rules, allowing them to spend money as they pleased and set up their own accounts. This was in keeping with the spirit of self-financing. One of the rules was extremely significant: Komsomol organizations could, in certain cases, mix the ‘nalichnye’ and ‘beznalichnye’.11 The Komsomol became a Communist Party business school. The Komsomol plunge into business

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marked an abrupt change of ideology, from decaying socialism to crude capitalism. Imbalance was an invitation to huge profits. Someone who figured out how to turn the beznalichnye into cash would make a fortune. The planners’ greatest nightmare was that someone would do this and pump the relatively worthless state subsidies into real cash roubles. Khodorkovsky figured it out. Starting in 1987, he began to turn the relatively useless beznalichnye into cash and even more valuable hard currency. ‘The process,’ wrote Hoffman ‘was a matter of trial and error’ (Ref. 8, p. 110).

When Igor Primakov, a scientist living in Moscow, was invited to go abroad on a business trip in 1988, he managed to buy in Italy an Amstrad 286 desktop computer for about US$3000. Once at home, Primakov sold the computer for 70,000 roubles. ‘It was my salary for forty-eight years!’ he recalled. Khodorkovsky, always on the lookout for new opportunities, plunged into trade in personal computers, spending his hard currency to buy them abroad, importing them, selling them for beznalichnye, and changing the non-cash back into cash or hard currency again. Khodorkovsky read every decree and announcement carefully, looking for loopholes. ‘It is possible to find loopholes in every law, and I will use them without an instant of hesitation’ (Ref. 8, p. 118), he boasted. Personal computers were one of the profitable means of arbitrage – taking advantage of the enormous differences in prices inside the Soviet Union and outside it. In this case computers were as good as gold.

Khodorkovsky’s next move was into banking. The Law on Cooperatives permitted the setting up of commercial banks. The management of Zhiltsotsbank helped Khodorkovsky establish his own commercial bank and then gave him loans to finance the computer deals. He said the bank’s original capital included 2.5 million roubles. ‘We were meeting practically no obstacles from the state structures,’ he commented. ‘A rare occurrence of circumstances. Rare indeed,’ wrote Hoffman, ‘but not for a favourite son of the system’ (Ref. 8, p. 119). Alexander Sheindlin, the manager of the Institute of High Temperatures agreed to sit on the board of the new Bank Manatep.

Another case was that of Vladimir Vinogradov. In the uncertain times of the end of the Soviet era, Vladimir Vinogradov, then an employee of a state bank, established in 1988 a commercial bank, Inkombank. He managed to attract nine shareholders, including the economic think-tank, the Plekhanov Institute; the association of air- craft manufacturers, Sokol; and the oil and gas pipeline operator, Transneft. He then approached Central Bank for a credit of 10 million roubles. In 1989, the progressive newspaper, Moscow News, held the first ever roundtable discussion with the nascent commercial bankers, who were unknown to most of the public and deeply distrusted. A leading participant was Vladimir Vinogradov, one of the first commercial bankers.

In 1998, when the devaluation of the rouble took place, Vinogradov had US$2.5 billion dollar-forward contracts. He had gambled on a stable rouble and lost. In September 1998, Vinogradov’s Inkombank got its last break from the Central Bank – a US$100 million loan – from another outgoing official, its chairman Sergei Dubinin. The loan was just one of many parting gifts to troubled commercial banks from Dubinin, who knew he was leaving the bank.

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Mikhail Friedman formed the Alpha Group, a conglomerate dealing in oil, finance, and industrial goods trading. He also learned how to pay the political establishment to get the things he wanted. In September 1994, a few wealthy Russian businessmen gathered at a private villa on the crest of the Sparrow Hills to create a club where they could be free to talk, argue and exploit their common interests. Mikhail Friedman, who made his first money in a cooperative, washing windows, but was now also the head of a fast-growing bank and the Alpha Group, was one of the businessmen invited to this gathering.

Putin’s oligarchs

In Putin’s first term as president of Russia, from 2000 to 2003, he balanced elegantly between his own rising circle of former KGB men from St. Petersburg, the silovki, and the declining oligarchs. A few liberal technocrats were even able to carry out impressive market reforms.

Putin’s men did not break the link between wealth and power created by Yeltsin and the oligarchs; rather, they took it over. One of Putin’s close advisors, Igor Sechin, became chairman of Rosneft, a state-owned oil company that gobbled up Yukos’s assets. New oligarchs emerged, among them Alexei Mordashov, head of metallurgy conglomerate Severstal, Oleg Deripaska, who privatized Russia’s aluminium indus- try, and Sergei Pugachev, a St. Petersburg banker who allegedly was close to Putin’s team. It was the same system as before, just with different actors. Dmitri Trenin of the Carnegie Moscow Center concluded, ‘Private and corporate interests are behind most of Moscow’s major policy decisions, as Russia is ruled by people who largely own it.’ Under Putin, he said, ‘the government has been turned into Russia Inc., with top Kremlin staffers and senior ministers sitting on the boards of various state-owned corporations and taking an active interest in their progress and profits.’12 Few of these new billionaires have in any way added value to their holdings by unearthing deposits that were previously unknown or inaccessible. Instead, in almost every instance, the new owners of big companies simply took control of already existing state companies through intimidation, legal and stock manipulation, and laws that at best were imperfect crafted.

During Putin’s presidency, the number of Russian oligarchs has increased. In 2003 the number of Russian participants in the ‘Forbes’ rating was 17 persons; in 2004, 25; in 2006, 53, and in 2007, 87. Between 2000 and 2007 the majority of top Russian oligarchs greatly increased their fortunes.

Putin’s oligarchs, intimidated like the boyars before them, bowed to power but were then allowed to share their wealth with power. Oligarch sycophancy became the norm. They have taken billions of their acquired wealth abroad, both legally and by money laundering. Even though Putin has publicly complained that ‘We are seeing the laundering of billions of roubles every month within the country. We are seeing the movement of enormous financial resources abroad,’13 Russia’s wealthy silovki and oligarchs, their nationalism notwithstanding, have preferred to invest in real

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estate on the Riviera and in London or simply deploy their cash to Cyprus or the Cayman Islands.

The Attack on the Oligarchs

The Kremlin’s attack on the oligarchs began within a month of Putin’s elections in March 2000. The first to come under attack was Gusinsky’s Media-Most empire, which owned a number of periodicals but most significantly the independent televi- sion station, NTV. Gusinsky lost control of NTV and he fled into exile. Berezovsky sold his shares in ORT television channel and also fled Russia. Soon the companies Gazprom, Norilsk Nickel, Lukoil and Avtovaz came under the scrutiny of state agencies investigating alleged tax evasion. The Yukos campaign signalled the Kremlin’s determination to assert its authority over the business community. Many oligarchs, in particular Roman Abramovich, Mikhail Fridman and Oleg Deripaska, focused on developing their business and kept out of politics. They accepted the new rules of the game, including clearing major initiatives with the Kremlin, and thus went on to become key figures in the new era.

By 2004, Lilia Shevtsova saw the renewed assault against the oligarchs as part of the revenge of the bureaucracy and so-called ‘power structures’ to establish a corporate system. As far as she was concerned, ‘The oligarchy is a myth. Bureaucracy continued to be the dominant force within the Russian system of governance, as it has been through the ages.’14

State and big business relations in the period 2000–2008 passed through two quite different stages. Initially, business positions were not placed under any significant restrictions: in fact, they were even strengthened. Breaking up the Gusinsky and Berezovsky business empires did not automatically imply curbing business interests in general; instead, it meant disgrace for the most notorious Yeltsin-era oligarchs. According to data collected by the Elites Department of the Institution of Sociology of the Russian Academy of Sciences, during Putin’s first two years in office, business representatives in power bodies reached 11.3%, compared with 1.6% in Yeltsin’s presidency term.15 According to Stanislav Markus:

The biannual meetings of the Russian Union of Industrialists and Entrepreneurs’ (RUIE) Management Bureau with Putin became a routine by 2003 and have con- tinued into Putin’s second term. Furthermore, upon Putin’s instructions, RUIE’s Management Bureau members were mandatory included in consultative commis- sions and organs at the presidency and the government of the Russian Federation.16

The Khodorkovsky Affair

When Putin came to power, 22 business groups controlled 40% of Russia’s industrial output according to the World Bank. The attack on Yukos marked the beginning of a system whereby a cabal of bureaucrats and businessmen friendly to the Kremlin manage important assets for their own benefit and what they deem to be the benefit of the state.

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Khodorkovsky started funding human-rights groups, opposition political parties, and a charity called Open Russia. He talked about selling off a quarter of Yukos to ExxonMobil or Chevron, retiring from the business, and devoting much of his time to some kind of public service.

Putin was infuriated by Khodorkovsky’s attempt to negotiate independent deals with foreign partners. He had instructed the oligarchs that he would not question the origins of their lucre so long as they kept out of politics. And yet, in February 2003, at a televised meeting at the Kremlin, Khodorkovsky sparred recklessly with Putin, challenging him on questions of government corruption, and implying that top state officials were pocketing millions of bribes. Privately, Putin told Lord John Browne, the former head of BP, ‘I have eaten more dirt than I need to from that man.’17

In October 2003, Khodorkovsky was arrested. Yukos’s huge oil fields and assets were absorbed by the state oil conglomerate, Rosneft. From his prison cells, Khodorkovsky wrote articles and gave interviews in which he spoke up for demo- cratic norms. Elena Boner, Andrei Sakharov’s widow, was among the pro-democracy activists who came along to defend Khodorkovsky. ‘I think that any person becomes a political prisoner if the law is applied to him selectively, and this is absolutely a clear case. This is a glaringly lawless action,’ she said.18 White House spokesman Scott McClellan said in Washington: ‘It is important for the Russian Authorities to dispel any concern that this case is politically motivated. The manner in which the case is being addressed had raised some serious concern about the state of the rule of law and business and investment climate in Russia.’19

The Yukos affair signalled a new model of political economy in which the line between the public and the private was no less blurred than in the 1990s, but now state capture gave way to business capture. In addition to re-imposing state control over domestic players, Putin understood that it would also be necessary to break the influence of the foreign oil majors, and the Yukos affair was designed to meet both these requirements. Ultimately, the issue was about the autonomy of the business class and thus economic power in its entirety. In his analysis of the role of big business in post-communist Russia, Stephen Fortescue tends toward the view that patri- monialism is deeply embedded in Russian political culture, and that the Yukos affair was ultimately a reminder about who was boss in Russia. The BBC elucidates, ‘Critics of the Russian government have said Mr. Khodorkovsky’s arrest and the subsequent seizure of Yukos main assets were motivated by President Vladimir Putin’s irritation at Mr. Khodorkovsky’s involvement in politics.’20 The US State Department’s human rights report in March 2010 cited Khodorkovsky among the six Russian political prisoners it identified by name. ‘The arrest, conviction, and subsequent treatment of Khodorkovsky,’ the report said, ‘raised concerns about due process and the rule of law.’21

The outcome of the Yukos affair sent a powerful message to other members of the former oligarchy, who would prove more than willing to bow to the Kremlin’s demands. In September 2005, oligarch Roman Abramovich agreed to surrender Sibneft to Gazprom for US$13 billion, and in July 2007 billionaire Mikhail Gutseriev announced that he was giving up control over Russneft.

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In the summer of 2009, Deripaska was about to share the fate of Khodorkovsky who has languished in prison since 2003. The closure of an aluminium factory near St. Petersburg had left 500 workers without pay. In protest they had blocked the road and called for help from Vladimir Putin, the prime minister. Putin instructed Deripaska to sign an agreement to restart the factory by promising to extend a US$4.5 billion loan of Rusal, Deripaska’s aluminium company, to the state-owned VEB bank for another year.

Deripaska openly admits that his Rusal holdings are subservient to the Kremlin’s wishes, telling the Financial Times in 2007, ‘If the state says we need to give up, we'll give it up. I don’t separate myself from the state. I have no other interests.’22

Mikhail Prokhorov, Russia’s third-richest man, repeatedly criticized the country’s leadership, saying that Russia was becoming ‘a farce and parody of the Soviet Union.’23 On 15 September 2011 he had to step down as chairman of the Pravoye Delo party because the government had hijacked it. The Kremlin has not commented on Prokhorov’s outburst, which recalls the clash between former oil oligarch Khodorkovsky and Putin. Khodorkovsky ended up in jail, his oil empire dismantled. Ariel Cohen, a senior research fellow in Russian and Eurasian studies at the Heritage Foundation in Washington, says the Kremlin does not want another Khodorkovsky trial, which generated bad publicity.

Putin’s Russia Today

Today, officially, Russia has many political parties and a vibrant media landscape. But none of these matter, as real political control is in the hands of Mr. Putin’s United Russia party, and economic power is shared between approximately 20 oligarchs, rich men who own most of the country’s oil, gas and other natural resources.

Benjamin Cunningham, the managing editor of the Prague Post writes: ‘Vladimir Putin’s United Russia party pulls the political strings from the halls of the Kremlin to the Sakhalin oblast on the Pacific coast and regulates, in collaboration with powerful business interests, what are and are not acceptable topics for discussion of, not a check against, these self-interested elites.’24 Official complicity has to be assumed, at least initially.

Vladimir Putin’s decision to stand again as Russian president is no big surprise, but will he be able to stop the growing torrent of capital flight out of Russia, which reached US$21 billion in the first quarter of 2011? Putin’s ideologue, Vladislav Surkov, once coined the term ‘offshore aristocracy’ to abuse the ‘cosmopolitan’ oligarchs and Western advisers of the Yeltsin era; but this is precisely what Putin’s oligarchy has become.

Russia is going backward. Russia is not regressing from an idyllic democracy; the perception that the country was ‘freer’ under Boris Yeltsin came about because the state was weak, not liberal. Putin’s vision for the future of Russian society is ‘state capitalism’ married with ‘controlled democracy’. After the horrific terrorism of Beslan and then Putin’s speech of 13 September 2004, in which he proposed

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appointing rather than electing governors, Leon Aron wrote: ‘In one fell swoop, the Russian president took the country twenty years backward, casting aside perhaps the key historic achievement of Russian democracy under Yeltsin: a Russian free and whole for the first time in its history.’25

Conclusion

In the 1990s, Russia was the freest it had ever been. For a short time there was a democracy that was highly imperfect but it was quite real. There was a stalemate between the leftist, nationalist plurality in the parliament and the right-of-centre, liberal and international executive. In the 1999 elections, the oligarchs too were divided – into those, led by Boris Berezovsky, who supported the pro-Kremlin centre- right Edinstvo party and those, most notably Vladimir Gusinsky, who backed the Luzhkov-Primakov centre-left Otechestvo-Vsya Rossiya.

Under Putin, the executive has decisively won over the legislature; the genuine left and right have been superseded by Kremlin-made parties that stand for little else than the perks of Duma membership; the Kremlin has triumphed over the oligarchs. Anna Politkovskaya, a year before she was murdered, wrote: ‘Putin’s rule represented Neo-Sovietism with a new secret service nomenclature attempting to centralize power and to enrich them from the new hybrid capitalism.’26

References and Notes

1. The origin of the term ‘oligarchy’ is Greek: it means government by the few. Aristotle introduced the use of the term as a synonym for rule by the rich; Kryshtanovskaya applied it to the idea that the tycoons were becoming an oligarchy – a small group of men who possessed both wealth and power, in D. E. Hoffman (2003) The Oligarchs: Wealth and Power in the New Russia (New York: Public Affairs), p. 321.

2. The theoretical case for privatization rests in part on removing enterprises from political oversight, so that managers’ decisions are motivated by profit, not by whatever motivates politicians, in B. Black, R. Kraakman and A. Tarassova (2000) Russian privatization and corporate governance: what went wrong? Stanford Law Review, 52(6), p. 37.

3. K. Verdery (2003) The Vanishing Hectare: Property and Value in Postsocialist Transylvania (Ithaca, NY: Cornell University Press), p. 1.

4. A. R. Kokh (1998) The Selling of the Soviet Empire: Politics and Economics of Russia’s Privatization Revolutions of the Principal Insider (New York: S.P.I. Books, Liberty Publishing House), p. 186.

5. D. E. Hoffman (2003) The Oligarchs: Wealth and Power in the New Russia (New York: Public Affairs), p. 186. see also: M. D. Intriligator (1996) Reform of the Russian economy: the role of institutions. International Journal of Social Economics, 23(10/11), pp. 58–72; L. Shevtsova (2001) Russia’s hybrid regime. Journal of Democracy, 12(4), pp. 65–70; A. Aslund and M. Brill Olcot (1999) Russia after Communism. Washington, DC: Carnegie Endowment for International Peace, p. 14; The Economist (2003) Special Report: Putin’s way – the Russian elections. The Economist, 369(8354, 13 December), p. 22.

594 Chaim Shinar

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6. R. Medvedev (1998) A new class in Russian society. Russian Social Science Review, 39(5), p. 61. Currently, the US government is pouring money into failing companies in order to prevent their downfall.

7. A. Aslund (2007) Russia’s Capitalist Revolution: Why Market Reform Succeeded and Democracy Failed (Peterson Institute for International Economics, Washington, DC), p. 90.

8. D. E. Hoffman (2003) The Oligarchs: Wealth and Power in the New Russia (New York: Public Affairs), p. 203.

9. S. Handelman (1995) Comrade Criminal: Russia’s New Mafiya (New Haven, CT: Yale University Press), p. 139.

10. This section is based on: D.E. Hoffman (2003) The Oligarchs: Wealth and Power in the New Russia (New York: Public Affairs), pp. 11–177 http://www.britannica. com/EBchecked/topic/711022/Boris-Berezovsky#tab=active~checked%2Citems ~checked&title=Boris%20Berezovsky%20–%20Britannica%20Online%20Encype- dia; Moscow, Rich in Russia, October 2003, http://www.pbs.org/frontlineworld/ stories/moscow/smolensky.html; Moscow, Rich in Russia, October 2003, http:// www.pbs.org/frontlineworld/stories/moscow/berezovsky.html; J.A. Corvin (1998) The decline and fall of Vladimir Vinogradov. American Russian Law Institute, RFE/RL, 22 December 1998, p. 1; (2010) Year in Review 2001 Gusinsky Vladimir. Encyclopedia Britannica 2007 Deluxe Edition (Chicago: Encyclopedia Britannica, 2010).

11. Money, at this time, was of two kinds: cash (nalichnye) and nominal (beznalichnye). Only cash was money in the real sense; bank credits were necessary for purely paper transactions between state organizations. An enterprise deducted what it needed for the pay of its employees, whose rates of remuneration were strictly regulated by the state, and no other source of income was possible than the one that came from a regular salary or bonus payment, in O. Kryshtanovskaya, O and S. White (1996) From Soviet Nomenklatura to Russian elite. Europe-Asia Studies, 48(5), pp. 711–733; A. Aslund (1992) Post- Communist Economic Revolutions: How Big a Bang? (Washington, DC: The Center for Strategic and International Studies), p. 30; Cash was much more valuable and sought after. By some estimates, a cash rouble was worth ten times a non-cash rouble, in D.E. Hoffman (2003) The Oligarchs: Wealth and Power in the New Russia. (New York: Public Affairs), p. 109.

12. D. E. Hoffman (2011) How’d we do covering the revolution? Foreign Policy, 187), (Jul/Aug), p. 5.

13. Z. Brzezinski (2008) Putin’s choice. The Washington Quarterly, 31(2, Spring), p. 108.

14. L. Shevtsova (2003) Whither Putin after the Yukos affair. The Moscow Times (27 August), p. 7; in R. Sakwa (2008) Putin and the oligarchs. New Political Economy, 13(2, June), p. 188.

15. O. Kryshtanovskaya and S. White (1996) From Soviet Nomenklatura to Russian elite. Europe-Asia Studies, 48(5), pp. 711–733.

16. S. Markus (2007) Capitalists of all Russia, unite!. Polity, 39(3, July), p. 285. 17. D. Remnick (2010) Gulag lite. New Yorker, The Talk of the Town, 86(41, 12/20), p. 2. 18. P. Baker and S. Glasser (2010) The billionaire dissident: an oil tycoon in a glass

cage aspires to be the Russia’s next Sakharov. Foreign Policy, 179(May-June p. 64; D. Remnick (2010) Gulag lite. New Yorker, The Talk of the Town, 86(41, 12/20), pp. 1–2.

19. T. Land (2004) Putin pursues Russia’s oil oligarchs. Contemporary Review, 285(1663, August), p. 69.

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20. Christian Science Monitor (2003) Russia’s muzzled democracy. Retrieved April 27, 2004 from Christian Science Monitor Web site: http://www.csmonitorser- vices.com.

21. P. Baker and S. Glasser (2010) The billionaire dissident: an oil tycoon in a glass cage aspires to be the Russia’s next Sakharov. Foreign Policy, 179(May-June), p. 62.

22. M. Ames and A. Berman (2008) McCain’s Kremlin ties. The Nation, (October 20), p. 20.

23. H. Meyer and C. Matlack (2011) Another tycoon defies the Kremlin. Bloomberg Businessweek, Global Economics, 26 September – 2 October, pp. 1–3.

24. B. Cunningham (2010) Opposing Putin. The New Presence, (Winter), p. 38. 25. L. Aron (2005) Whither Putin? Commentary, Letters from Readers,

119(1, January), p. 10. 26. A. Politkovskaya (2008) La Russie selon Poutine (Paris: Gallimard, 2005), p. 139.

in A. Rothacher (2008) Putin’s Russia: spy rule and post-Soviet transformation. European Political Science, 7(4, December), p. 545.

About the Author

Chaim Shinar holds an Israel Open University BSc in Natural Sciences and an MA degree in Interdisciplinary Democracy Studies. His research is on current political and economic developments in Russia.

596 Chaim Shinar

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