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.

THE KHODORKOVSKY AFFAIR

In mid-September, Russian President Vladimir Putin announced plans for a radical overhaul of his country's political system, with the goal of centralizing power in the Kremlin. Acting in the wake of the hostage crisis in Beslan, during which Chechen separatists killed hundreds of children, Putin claimed that his power grab was necessary to help Russia win its own war on terrorism. Whatever his motivations, the move represents a major step backward for Russian democracy.

Putin's recent actions may be the most drastic of his tenure so far, but they were hardly the first signs of his willingness to deploy the power of the Russian state for his own purposes. A year earlier, he had Mikhail Khodorkovsky, the head of the oil group Yukos and one of the world's richest men, arrested and thrown in jail on charges of fraud and tax evasion-a move widely interpreted as a declaration of war against the so-called oligarchs, who have amassed phenomenal wealth and power since the collapse of the Soviet Union in 1991. A key question now is whether Khodorkovsky's arrest is the forerunner of what will happen to many of his business colleagues.

The Khodorkovsky affair has been a shock for those who had come to believe in the "new Russia." During the previous dozen years, Russians had rejected the Communist Party and the Soviet Union's command economy. To the applause of most of the outside world, Russian and foreign economic advisers drew up an elaborate program for the privatization of industry, housing, and land. In an attempt at "people's capitalism," virtually every Russian was issued a voucher good for shares in a soon-to-be-private enterprise. Stock markets sprouted almost everywhere, while industrial ministries gave way to privately owned, Russia-based multinational corporations.

The largest of these corporations were producers of petroleum, natural gas, or metal that had previously been controlled by a Soviet industrial ministry. Their new executives became dazzlingly wealthy almost overnight. In May 2004, the Russian edition of Forbes identified 36 of these oligarchs as being worth at least $1 billion. Khodorkovsky topped the list with an estimated net worth of $15 billion.

These events appeared to signal the triumph of the market and private industry. To be sure, there were unsettling reports of shady dealings during the takeovers, but most observers explained them away as inevitable side effects of such a far-reaching transformation. After all, did the United States not once have its own robber barons, who, despite early roughhouse tactics, became the leaders of some of the country's most prominent corporations and the benefactors of its most respected charities and foundations? Besides, many argued, it was only a matter of time before the Russian government would intervene to correct the most flagrant misbehavior, much as Theodore Roosevelt did with the passage of the Sherman Antitrust Act and other Progressive reforms during the early years of the twentieth century.

The difference in Russia is that the basic reforms and privatization of the 1990s were so flawed and unfair that they created an unstable business environment. A radical resettling of existing ownership arrangements was thus all but inevitable. And given Putin's authoritarian tendencies, it is hardly surprising that when the move came it was equally flawed and unfair-and perhaps equally destabilizing. What has happened to Khodorkovsky and nine of his now-jailed or exiled senior associates is, in short, more than the dramatic saga of a rich man's fall from grace or a despot's capricious revenge: it is a window onto the cracks that run through Russia's post-Soviet political economy.

OIL SLICKS VS. GOVERNMENT STIFFS

The reforms of the 1990s were mainly the work of the advisers brought in under then president Boris Yeltsin. Fearing that the population might soon have a change of heart and turn its back on reform, Yegor Gaidar and Anatoly Chubais, the chief Russian architects of the process, decided to accelerate it, selling off state resources and enterprises at little or no charge. Not long into the process, ownership of some of Russia's most valuable resources was auctioned off by oligarch-owned banks under a scheme called "Loans for Shares." Although they were supposedly acting on behalf of the state, the bank auctioneers rigged the process-and in almost every case ended up as the successful bidders. This was how Khodorkovsky got a 78 percent share of ownership in Yukos, worth about $5 billion, for a mere $310 million, and how Boris Berezovsky got Sibneft, another oil giant, worth $3 billion, for about $100 million.