Putin's Plutocrat Problem

Lee S. Wolosky

From Foreign Affairs, March/April 2000

Article preview: first 500 of 4,225 words total.

Summary:  Russia's popular new president is better positioned than his predecessor was to enact needed reforms. But all of Vladimir Putin's efforts will come to nought unless he can do what Boris Yeltsin never did: rein in Russia's plutocrats. These ruthless oligarchs have fleeced Russia of staggering sums, seizing control of its oil industry -- one of the world's largest -- in the process. Through payoffs and intimidation, they have insinuated themselves into electoral politics and virtually immunized themselves from prosecution. None of Russia's problems -- neither its crippled economy, nor its emaciated infrastructure, nor its wheezing democracy -- will be solved while the robber barons retain their power. America cannot afford to sit on the sidelines any longer.

Lee S. Wolosky is International Affairs Fellow at the Council on Foreign Relations and Deputy Director of the Council's Economic Task Force on Russia.

FACE OFF

When Russian President Boris Yeltsin resigned on December 31 of last year, he thrust Vladimir Putin, a relative unknown, into the limelight. Today, just a few months later, it is still too early to determine the extent of the former KGB agent's commitment to democracy and free markets. But if Putin decides to match words with deeds, he will enjoy an encouraging alignment of the political stars. Unlike Yeltsin, Putin can count on the support of the public and of the Duma, Russia's lower house of parliament. He has also built bridges with rival political leaders. For a limited time at least, he can use this support to press ahead with difficult reforms.

To do so, however, he must first rein in a dangerous posse of plutocrats riding roughshod over the country. This is something his predecessor could not, or would not, achieve. On the contrary, these oligarchs -- Boris Berezovsky, Mikhail Khodorkovsky, Roman Abramovich, Mikhail Fridman, and others -- largely co-opted Yeltsin's governments, silencing most opposition to their conduct. As a consequence, they now threaten Russia's transition to democracy and free markets. They also threaten vital U.S. interests, because America's long-term security is best assured by the success of Russia's transformation.

The oligarchs dominate Russian public life through massive fraud and misappropriation, particularly in the oil sector. Oil is of overwhelming importance to Russia and the oligarchs. Prior to its collapse, the Soviet Union was the world's largest oil producer. Oil companies account for nearly 60 percent of the market capitalization of the Russian stock market, and oil receipts amount to about 22 percent of the government's budget revenues. Whoever controls this massive industry controls much of the world's oil supply -- and today it is the oligarchs.

The August 1998 financial crisis practically wiped out the plutocrats' financial assets. But those who suggest it undermined their influence are dead wrong. Oil revenues sustained the tycoons' economic and political power, and the oil oligarchs are once again awash with cash, thanks to the ruble devaluation of 1998 (which lowered costs) and the steep climb in oil prices in 1999 (which boosted revenues). Because they remain among the strongest political and economic actors in Russia -- a major nuclear power whose future is crucial to America -- the plutocrats merit close scrutiny.

MAKING IT

In 1995, a businessman named Vladimir Potanin concocted a brilliantly self-serving scheme: the financially strapped Russian government would mortgage the state's most valuable industrial assets to a few politically connected insiders for far less than fair value.

The story of how the Russian government relinquished control of its largest enterprises (almost all of them oil companies) through a rigged "loans-for-shares" program has been described elsewhere.1 In short, government shares in large enterprises were placed under trust management with oligarch-affiliated banks and financial institutions in exchange for loans to the state. When the government defaulted on these loans -- as was all but assured -- the creditor-trustees acquired the right to auction the ...

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