Russia: Privatization and the Rise of the Oligarchs

One of the notorious results of privatization ? la Chubais was the emergence of new wealthy private owners, dubbed “oligarchs.” In Greek, oligos means “few” and archon means “power.” Basically, then, an oligarchy is a system in which a few people control a lot, and an oligarch is one of these people. A typical oligarch of the mid-Yeltsin period was a man in his mid-30s to mid-40s with a Soviet background (e.g., a Komsomol leader or son of a well-heeled party bureaucrat); he usually also had an engineering degree, personal connections with Yeltsin's family, and a few hundred million dollars in a bank (Hoffman, 2003). Some oligarchs had been members of the Communist elite in the past, but the majority were either children of the nomenklatura bosses or obscure engineers who emerged due to their entrepreneurial spirit, lack of scruples, and uncanny business sense. Some were economists or mathematicians, others came from the petroleum and metallurgy industries, and still others were former managers of state factories or cities. Contrary to the common belief, few had criminal backgrounds; however, more than a few used the services of shadowy protection bureaus.

How did these people become so wealthy so fast, in a country with inflation in double digits and an average salary of less than $100 per month? Well, all had some key “insider” connection that enabled them to get in on the grand privatization early. Some of the earliest fortunes, not surprisingly, were made by cashing in the wealth accumulated by the C.P.S.U. from both domestic and foreign sources (real estate, gold, jewelry, Swiss bank accounts, etc.). Privatizing the Soviet state treasury was the goal of the late Soviet apparatchiks who supported Gorbachev's reforms. One of the early oligarchs, Vladimir Potanin, was a son of the Soviet chairman of the state foreign exchange bank. Potanin was able to set up one of the first private banks under Gorbachev. The initial capital clearly had to come from a state (party) source. A few other oligarchs were somehow known to one of Gorbachev's top aides through their party or Komsomol connections (e.g., Mikhail Khodorkovsky) and were likewise allowed to set up commercial banks early. In this initial period, the banks were little more than cash machines designed to convert state noncash accounts into real rubles, and increasingly into dollars. A few oligarchs who had risen seemingly out of nothing (a toy coop entrepreneur, a physicist, etc.) turned out either to have married someone close to the president, or to be personally trusted by Yeltsin and his close family.

Once a few banks started out, they were able to make money through a variety of creative “get rich quick” schemes. Importing all sorts of Western goods duty-free because of bribes or permissions to bypass customs; cashing in noncash factory accounts; withholding interest on state workers' wages for a few weeks; directly looting the state treasury via fake invoices; and many other creative schemes generated millions of dollars very quickly for those few who knew how to work the system. Besides the oligarchs themselves, a few other new categories of wealthy Russians emerged, usually collectively known as “new Russians” (novye russkie):

Small private entrepreneurs, many of whom got wealthy early by either importing Western goods or privatizing bakeries, barber shops, shoe repair businesses, and the like, and who gradually grew to become owners of larger firms.
Professional voucher traders and commodity traders.
Stockbrokers and investment bankers.
any Soviet-era factory directors who simply pocketed their entire factories without paying a dime for them.
Former Soviet mob bosses (vory v zakone) with criminal connections and black-market cash, who had been released by Gorbachev's government from the overflowing state prisons.
Local, regional, and federal politicians, as well as army, police, and KGB bosses, who were able to convert their relational capital into real cash. For example, many ex-KGB agents started their own protective services by using their connections in the local underworld.
Anyone with solid foreign connections, including some emigrants who came back, or enterprising and bold citizens of Western countries. A few particularly lucky individuals who happened to be in the right place at the right time.

The key characteristic of all these individuals was the desire to take very high risks to make a lot of money quickly (Tikhomirov, 2000). Many of them paid with their lives, particularly in 1993–1995, when full-blown gangster wars erupted over the key state assets that were up for grabs (e.g., aluminum smelters in Krasnoyarsk). By 1996 some of the most dangerous criminals had exterminated each other, and from then on business contract killings became less useful, as the legal and economic system evolved.

In 1996 Yeltsin came up for reelection. Given the hardships endured by most people because of his reforms, his approval rating was less than 5%, much lower than that of his main opponent (a Communist, Gennady Zyuganov). In one of the most fateful stories of the reform period, a group of seven oligarchs controlling a little less than 50% of all privatized assets of the entire country (according to them) came to the president and proposed a Faustian bargain: They would use the power and money of their new private media empires to rally public support, if Yeltsin would agree to let them keep shares of some of the most lucrative, yet still unprivatized, enterprises. This loans-for-shares program was originally conceived by Potanin, the owner of the Interros business empire. However, it was not until the 1996 elections that the oligarchs received this unprecedented leverage. The program would let the oligarchs loan some money to the state and keep state enterprise shares as a collateral for a while, but in reality everybody understood that the state government would default, and so those assets would forever be transferred to the oligarchs (for details, see Freeland, 2000; Hoffman, 2003; and Klebnikov, 2000). In return, the oligarchs promised that they would support Yelstin's bid for reelection with all the means at their disposal. Some of the best assets were privatized very cheaply under this scheme, including the Norilsk nickel combine (worth billions) for $170 million, and many oil fields and refineries for a fraction of their cost.

Yeltsin agreed to the deal. With the private NTV and ORT television channels bombarding the public with the images of an apparently reenergized Yeltsin dancing on stage; with the relentless private newspaper coverage of the sinister plots to restore Communism, should Zyuganov come to power; and with massive financial backing from the oligarchs as well as some Western funding, Yeltsin's victory was assured. However, he suffered a massive heart attack and almost died just a few days before the second round of elections in the summer of 1996. He did win the round, but few people understood just how sick he was then. It is unclear how much electoral fraud was perpetrated by Yeltsin's electoral commission during the vote counts, but he won by only a slim margin; nevertheless, he stayed in power for another 4 years. After the summer of 1996, Boris Berezovsky (the leader of the so-called gang of seven oligarchs) began wielding an ominous influence behind the scenes at the Kremlin, largely through free access to Yeltsin's two daughters and some of his key staff (Klebnikov, 2000). Every oligarch on the team had received very lucrative rewards: Potanin got hold of the Norilsk nickel combine, Khodorkovsky got the Yugansk oil field and some key refineries in the Volga region, and so on. The independent press critical of the Kremlin concluded that oligarchic capitalism not only had taken root in Russia, but had grown to become the main trunk of the economic tree.