Regular readers will remember the article, “On the Politics of Russia”, which appeared here as a translation from Alexander Latsa’s great blog, “Dissonance”. It inspired a spirited and excellent discussion, and I hope others learned as much from it as I did. Recently Dissonance featured a republication of the controversial, “Brève histoire de l’oligarchie en Russie”, by Xavier Moreau of Realpolitik.tv. I’m delighted to offer it to you here, in translation from the original French.
Mr. Moreau is certainly not afraid to commit to an opinion, and some may find his analysis a little on the rosy side. That might be a result of my translation, as any translation must fail to capture entirely the passion of the original in its initial language. He might also be taking the long view, as some will argue that the Russian government has certainly not removed the oligarchical system. But he didn’t say that, if you look; Mr. Moreau’s contention is that businessmen who use their government connections to add to their fortunes are certainly not unique to Russia, and that such businessmen are by nature much less a threat to the country’s leadership than those who involve themselves – through their wealth – directly in policymaking to their personal advantage.
Most interesting to me, though, was the way people – many of them journalists – toss around the term “oligarchy” without understanding much about it except that Glenn Beck can’t spell it. Or the way some people howl that Russia is ruled by crooked businessmen with money practically falling out their asses, but who remove their hats in reverent solemnity whenever they say the words, “Mikhail Khodorkovsky”. Is it possible that in the mid-nineties, more than 50% of the Russian economy was concentrated under the direct – and private – control of only seven people? If that seems crazy to you, buckle up – it’s going to be a wild ride. Let’s meet them. Allons y, Monsieur Moreau.
“The word “Oligarch” is itself symbolic of Russian history over the past twenty years, and has been used to mean anything and everything. Synonymous with power and openly claimed if not sought after in the mid-nineties, its use is now challenged by the great fortunes of Russia as they relate to the darkest hours of the Yeltsin era.
The oligarchy has evolved substantially in this period – some oligarchs are forgotten, others have fled and still others are imprisoned. The more pragmatic have adapted by renouncing all claim to political influence, which makes it a less appropriate label for them today. Boris Berezovsky, the eminence grise of President Yeltsin, first popularized the term in 1996 during an interview with the Financial Times. He described himself as one of seven bankers who had pooled their resources to enable President Yeltsin’s re-election. Disastrous management, and the resultant anarchy and misery into which Russia was plunged, made a second term unlikely. These seven bankers claimed control over 50% of the Russian economy, and were nicknamed “semibankirschina”. The term was a contemporary adaptation of “Semiboyarschina”, the seven boyars who betrayed the Tsar and defied Moscow for the invasion of Poland in 1610. In 1996, it was for these seven bankers to save the industrial assets dishonestly privatized during the early years of Yeltsin, against a possible return of the Communists to power.
After enriching themselves through the diversion of public funds with the complicity of highly-placed politicians, these businessmen next secured control of large shares of Russia’s industrial heritage worth ridiculous sums, especially in the Natural Resources sector. In these uneasy times, to ensure the safety of their stolen spoils, they formed associations with the emerging Russian mafia. These Mafiosi included economic entities with substantial liquidity, at a time when that capability was lacking and everything was for sale. The most notorious of these thugs was Anatoly Bykov, who took part in the “aluminum war”.
Boris Abramovitch Berezovsky, a Russian-Jewish businessman, is the best-known of the oligarchs. His fortune has its origins in the fraudulent sale of automobiles produced by the state company AvtoVAZ, better known in Europe as Lada. He became a member of the Yeltsin “family”, seizing control of oil and industrial assets as well as management of Aeroflot, and bringing them to the brink of bankruptcy. The (former) editor of Forbes Russia, the Russian-American Paul Klebnikov, devoted a highly critical book to him: “The Godfather of the Kremlin”. His free speech ended in his murder July 9th, 2004, in Moscow. His open support for the restoration of Vladimir Putin’s rule perhaps accounts for his murder’s lack of resonance in France, unlike that of Anna Politkovskaya two years later.
Vladimir Aleksandrovich Gusinsky is also a Russian-Jewish businessman. His fortune originates with the bank he founded in 1989, as well as his alliance with (former) Moscow mayor Yury Luzhkov. He founded the first Russian private media group, and consolidated its activities as “MediaMost”. He offered Berezovsky a fight to the death in the early nineties, but reconciled with him to support Yeltsin’s candidacy. A prominent member of the World Jewish Congress, he co-founded the Russian Jewish Congress with Mikhail Friedman. The 1998 crisis weakened him for the long term.
Vladimir Olegovitch Potanin – whose position in the Department of Foreign Trade enabled his considerable self-enrichment – is the creator of the financial group Interros, the bank ONEXIM, and another famous oligarch. In 1995 he was the architect of the system of loans against shares which allowed bankers to gain control over entire sectors of Russian industry for bargain-basement prices. For hundreds of millions of dollars lent to the Russian state to stave off bankruptcy, the oligarchs seized control of assets worth billions. Through this system, Vladimir Potanin took over Norilsk Nickel.
Mikhail Borisovitch Khodorkovsky began his career as an influential member of Komsomol; with the support of this organization and its ties to the Communist Party, he founded his bank, Menatep. Using the loans-against shares instrument, he gained control of energy company Yukos. The privatization of Yukos was punctuated with numerous murders, and displayed the grossest contempt for the rights of minority shareholders, including foreigners. The mayor of Nefteyugansk, centre of Yukos’s assets – who had begun a hunger strike to protest the non-payment of fees while his city was on the brink of ruin – was murdered June 26th, 1998. Yukos (former) Chief of Security Alexei Pichugin is still in prison for that crime. Those who sympathize with the oligarchs for the financial risk they incurred would do well to learn from the Khodorkovsky era. Khodorkovsky bonds with the American business community and its free-spending advertising agencies to build a positive image, abusing the compliant Western media.
Mikhail Maratovich Friedman remains one of Russia’s most powerful businessmen. With his business partner Pyotr Aven, Minister of Foreign Trade in the early nineties, he founded the group consortium Alfa, whose flagships are Alfa Bank and the oil company TNK.
Vladimir Viktorovitch Vinagradov privatized state bank Inkombank to his own profit in 1993. He disappeared from the political-economic scene following the bankruptcy of his bank in the 1998 financial crisis.
Alexander Pavelovitch Smolensky was condemned during Soviet times for his involvement in the creation of the Stolichny bank. Privatization-for-profit of state bank Agroprom allowed him to start SBS AGRO, the first private bank and second-largest bank in Russia. In 1998 the bank was wiped out by the financial crisis, ruining millions of small savers. He lost political influence, but held onto his fortune.
Not the only wealthy and influential men of the Yeltsin era, surely: these are, however, the “kingmakers”. They built their fortunes on the triptych “Tchekovnik”; politician/mafia/businessman. Local and very powerful oligarchs of the Russian provinces built their power on the same base. The 1998 financial collapse led to the disappearance of two of the seven bankers; Vinagradov and Smolensky. A new generation sprang from the ruins of post-crisis Russia. They made their fortunes during the nineties, and are now at the height of their power: younger than the first generation, they remain very much connected to it.
The most celebrated are Mikhail Prokhorov, Vladimir Potanin’s partner in Norilsk Nickel; Roman Abramovich with his close ties to Berezovsky, and Oleg Deripaska, vassal of the Chernoy brothers Mikhail and Lev (formerly) of Russian Aluminum (RUSAL). It is also during this time that businessmen begin to distance themselves from the mafia who had been their protectors.
In the early 2000’s, the oligarchs were – again, as in 1996 – facing the risk of a return to power of the Communists. Even with almost complete control of the Russian media, the oligarchs needed a credible candidate who would defend their interests. They set their sights on a man whose loyalty to President Yeltsin causes them to suppose he can be as easily manipulated as the outgoing president. Buoyed by his victory in Chechnya, Vladimir Putin is elected president March 26th, 2000. But for the oligarchs, it is the beginning of the end.
After his election, the question that occupies the western press is whether the new president will be a puppet in the hands of the oligarchs. Surprisingly, the more Putin goes over the heads of the oligarchs, the more he is the target of attacks by this press, which only a few months ago denounced their grip on Russia. The first to feel the winds of change is Vladimir Gusinsky, whose media had attacked Putin during the elections. He flees to Spain, and then to Israel in 2000. The MediaMost holding company, riddled with debt, ends up in the hands of the public gas monopoly GAZPROM. That same month, July 2000, Vladimir Putin calls the oligarchs together to announce new rules with which they must comply if they do not wish to be held to account for their predatory practices. These rules are fourfold: Pay taxes, stop tax evasion, reinvest profits in Russia. Finally, and most importantly, stay out of policy-making.
Most of the oligarchs bow to the winds, and accept the changes. Two of the seven bankers still attempt to oppose the new president’s will. The first is Boris Berezovsky, who will not submit to his new status. But Vladimir Putin now leads Russia with an iron fist. He rapidly purges the presidential administration, knowing he can count on the support of force structures. In 2001, Berezovsky is forced to flee to London. Since then, he plots from the English capital, and becomes a sworn enemy of the Kremlin. He funds all manner of opposition to Vladimir Putin, domestically and abroad. He supports the ascension to power of Mikheil Saakashvili in Georgia in 2003, followed by the Orange Revolution in Ukraine in 2004. He supports the Chechen terrorist Ahmed Zakayev, also a refugee in London. He regularly promises major revelations about Vladimir Putin, but nothing substantial is ever published. He also enjoys the protection of the British Secret Service.
The second oligarch not to accept the new order is Mikhail Khodorkovsky. The western media, fuelled by U.S. public relations agencies, wrongly attributes the oligarch’s arrest to his supposed political ambitions, and portrays him as a new Solzhenitsyn. The reasons for Khodorkovsky’s fall are less glorious: from 2003, he begins to fund all potential opposition in the Duma, from the Communists to the liberals. He hopes to form a parliamentary bloc which will allow him to block Vladimir Putin’s tax reform plans. Between 2003 and 2004, effective taxes on profits jump from 5% to 30% on average. The oligarch also plans to significantly increase the involvement of American companies in Yukos’s shareholdings, which would be Chevron or Exxon. Finally, he wants to break the Transneft oil transport monopoly and, with the Chinese, build a direct pipeline from the wellhead to China. Real political ambition on Khodorvsky’s part is unlikely, as he is too smart not to know that he represents everything the Russian people hate. The conviction of Khodorkovsky and his associates – extremely popular among Russians – marks the real end of the oligarchy in Russia. It appears Vladimir Putin also personally considers that Khodorkovsky must pay for bloody crimes that attended the privatization of Yukos, notably the murder of Nefteyugansk’s mayor. It is in this context that Putin recently likened the Khodorkovsky situation to that of American mobster Al Capone – brought down not by his bloody but unproven crimes, but for tax evasion.
The Khodorkovsky example bears fruit, and raw-materials conglomerates pay their taxes. The Kremlin profits from the opportunity to lay hands on several industrial assets; those of YUKOS come under the control of public company GAZPROM in 2004. In 2005 Sibneft – Berezovsky’s company, acquired by Abramovich – is also bought by GAZPROM and becomes GazpromNeft.
Of the seven bankers of 1996, only two remain. One of them, Vladimir Potanin, announces in February 2010 that he bequeaths his entire fortune of over $5 Billion to charitable organizations. The fall of the second, Mikhail Friedman, is announced several times over the years without it ever actually happening. The younger generation of Deripaska, Prokhorov and Abramovich have largely abandoned politics in favour of business and ski and football clubs. Moreover, the 2008 financial crisis severely weakened Deripaska, who would have been unable to preserve his empire were it not for a $4.5 Billion loan given him by the Russian government through VnechEconomBank.
As a sign of the times, Dmitry Medvedev and Vladimir Putin announced the launch of a wave of privatizations, but this time they will return more than $40 Billion to the Russian state, and allow foreign companies to participate in the capital and management of these companies. The era of the oligarchs is ended: no Russian businessman, no matter how rich, will have the means to challenge the President of the Russian Federation. Contrary to the fictitious assertions of Pierre Avril in Le Figaro, those he calls the “new oligarchs” are actually businessmen who, while remaining close to government and profiting from opportunity to increase their fortunes, are not influential in politics. This challenge which Vladimir Putin has managed to overcome, the vanquishing of the oligarchs – some of whom had aspirations to power – is the same as that which today confronts Viktor Yanukovych of Ukraine and….Barack Obama of the United States.”