Putin and the Oligarchs

Marshall I. Goldman

From Foreign Affairs, November/December 2004

Summary:  The jailing of Russian oil tycoon Mikhail Khodorkovsky has revealed the fault lines running through the post-Soviet political economy. The reforms and privatization of the 1990s were so flawed and unfair as to make them unstable. A backlash was inevitable. Given Vladimir Putin's authoritarian tendencies, that backlash has proved equally flawed and unfair-and perhaps equally unstable.

Marshall I. Goldman is Kathryn W. Davis Professor of Russian Economics, Emeritus, at Wellesley College, Associate Director of the Davis Center for Russian and Eurasian Studies at Harvard University, and the author of The Piratization of Russia: Russian Reform Goes Awry.

Ironically, just a few years earlier, Khodorkovsky had decided to turn over a new leaf, at least in financial matters, and he started to change the way he ran his business. In 1999, he espoused the importance of transparency for himself and his fellow oligarchs. He hired Western accounting firms, and Yukos became one of the few Russian companies to acknowledge who its main stockholders were. It began to pay back wages to its employees and publish a more complete statement of its tax obligations. Khodorkovsky reorganized Yukos' board of directors, bringing in several well-respected Western investors, lawyers, and businessmen. He also established the Open Russia Foundation, a charity supporting educational and cultural projects, and recruited Henry Kissinger, Lord Rothschild, and Arthur Hartman, the former U.S. ambassador to the Soviet Union, for its board. Once he had made his billions, he, like the American robber barons, decided it was time to become charitable and play by the rules.

As many in the West applauded these changes, Khodorkovsky became increasingly self-confident and even brazen. Eager to export more oil, he called for the building of new pipelines: one to the Arctic port of Murmansk (a base for exports to the United States), another through Siberia (toward Asian markets). For the latter, he favored a pipeline to China, despite the government's preference for a route to the Pacific, which would serve Japan. Although both proposals already were a direct challenge to Transneft, the state monopoly that owned and operated all of Russia's pipelines, Khodorkovsky announced that he was prepared to build his own pipelines if necessary.

To top it off, at a February 2003 meeting in the Kremlin, Khodorkovsky complained to Putin that the executives of a state-owned oil company, Rosneft, had overpaid for a smaller company in a sweetheart deal. (He was angry because Yukos had also been interested in the company but had refused to buy it at what it considered an inflated price.) Khodorkovsky's denunciation of Rosneft was an open challenge to Putin because Rosneft's head, Sergei Bogdanchikov, was closely associated with the siloviki. More and more, it appeared that, with his immense wealth, control over what was about to become the world's fourth-largest oil company, and considerable influence in the Duma, Khodorkovsky saw himself as beyond the control of the Kremlin. No businessman had ever reached that point before, neither under the tsar nor under Yeltsin, and Putin was determined not to let it happen on his watch either.

Khodorkovsky's financial shenanigans were hardly exceptional. The authorities could have brought similar charges of underpayment, tax evasion, bribery, murder, or attempted murder against many of the oligarchs. It was the audacity that Khodorkovsky and his Yukos subordinates displayed in interfering directly in politics that made them a special target. Like Gusinsky (who was jailed for a time) and Berezovsky (who was exiled) before him, Khodorkovsky provoked Putin by criticizing him and supporting opposition parties and candidates.

To those who believe in the supremacy of the state-as most Russians do-Khodorkovsky's aggressive behavior was suspect on any number of counts. An even more basic question, however, was whether he has the right to claim for himself so much of the wealth that had until recently belonged to the state or, supposedly, to the people at large. This issue loomed increasingly large for the Kremlin and the siloviki. From their perspective, the oligarchs had done nothing to deserve such good fortune. The country's resources had been stolen through the manipulation of a poorly conceived privatization process, thanks to rigged bids, bribes, violence, and dubious interpretations of the law. Until late 1999, moreover, almost none of the oligarchs had done much to restructure or improve the assets they had acquired from the state.

As a few private individuals seized state property, a third of Russia's population was thrust below the poverty line, exacerbating public resentment over such radical redistribution of wealth. According to a recent poll, 77 percent of Russians feel that privatization should be either fully or partially revised. Only 18 percent oppose renationalization. Many of those interviewed were also unhappy with the market system in general and sought to discredit the whole privatization process.

The siloviki, meanwhile, had become concerned that access to and ownership of more and more of Russia's mineral deposits were being sold to foreign multinational corporations, including some owned predominantly by Americans. By the time of Khodorkovsky's arrest in October 2003, Tyumen Oil had formed a partnership with BP, and several other companies (such as ConocoPhillips) were secretly engaged in similar negotiations. When Khodorkovsky, after announcing a pending merger between Yukos and Sibneft, began to negotiate with both ExxonMobil and Chevron-Texaco, government hard-liners grew truly alarmed. They feared that Putin would wake up one morning and discover that Russia's most strategic and valuable energy companies had been taken over by Western corporations. It was one thing for the foreign companies to be minority investors, but quite another for them to buy operational control, especially when some of their payments to the oligarchs were being diverted abroad. Roman Abramovich's purchase of London's Chelsea soccer team for $400 million may have pleased Londoners, but it angered Moscow's mayor, Yuri Luzhkov, who wanted to know why the money was not going to improve a Moscow team instead.

That many of the oligarchs were Jewish also helped revive some old and ugly prejudices. It was only a matter of time before a Russian nationalist like Alexander Tsipko dusted off the image of "Jewish capital" from the tsar's days, claiming (incorrectly) that Khodorkovsky had arranged for the transfer of his "stake in Yukos to the guardianship of Lord Rothschild's Institute of Jewish Policy Research in Britain" if anything happened to him.

In short, the oligarchs were an easy target. After Khodorkovsky's arrest, Putin's poll ratings rose from an already high 70 percent to an impressive 80 percent. In addition, running on the slogan "Russia for Russians," Rodina, a nationalist political party only a few months old, was able to win nine percent of the vote in Duma elections two months later. Most Russians feel, with good reason, that if the country's economic reforms in general, and privatization in particular, had been carried out more honestly and equitably, the economic results would have been better, the country's income disparities less pronounced, and control over its resources more widely dispersed.