Putin and the Oligarchs Part I: Origins and Implications

By Dmitry Filippov

The 1990s has become a much maligned era in the eyes of most Russians, as it witnessed the breakdown of Soviet systems and institutions - political, economic, and social,  - though it also saw attempts by the  nascent Russian Federation to build a democratic state and embrace free-market capitalism. While these years brought about near-absolute freedoms of speech and press, competitive elections, and a lack of censorship, for the majority of Russian people, this period has come to be associated in popular memory with unemployment, widening wealth inequality, and soaring crime rates. Among other things this lawless decade bred that special class of the Russian elite, the Oligarchs.

While in the Western understanding, the concept generally refers to a select few individuals or families (not necessarily representing big business) who hold the reins of power in a state, in Russia the word oligarch has a more specific meaning. Russian oligarchs are entrepreneurs who, during the country's transition to capitalist economy, managed to accumulate enormous sums of money through government-initiated privatisation, particularly in the energy sector. Evgeny Primakov, a patriarch of 1990s politics, known for his brief stints as Foreign Minister and Yeltsin's government, put it well:

 

"Our oligarchs were the big business leaders who strived for power, appointed their people to various government positions, created and perpetuated the corrupt bureaucratic practices. After making obscene amounts of money thanks to the predatory nature of privatisation, these people developed ties with the Yeltsin government and assumed a special role in the country".

    

    Or, put another way, the Oligarchs were able to appropriate the resource base that sustained a Global Superpower and convert it into private wealth.

 

The most prominent oligarchs of the 1990s were almost all bankers, which is no coincidence given the situation at the time. After the disintegration of the Soviet Union, Russia's new government was eager to accelerate privatisation as means to break away from the socialist, state-owned economy, especially given the decrepit condition of many big oil and gas companies. Under the new, government-promoted scheme, usually referred to as "loans-for-share", budget funds were deposited in the nascent private banks, which then used them to acquire stocks in big businesses that the government auctioned off. Thus, the banks essentially returned to the government the same public money it had deposited earlier, while assets had been transferred to private hands. Such ethically dubious, though not illegal, actions were not simply acknowledged by the Kremlin, but actively encouraged, as the new regime wished to get rid of onerous, ineffective companies as quickly as possible, and the bankers were the only ones who could afford the shares.

Naturally, of crucial importance for the oligarchs were personal connections in the government; recent research indicates, almost 65 percent of Russian billionaires owe their wealth to political connections, a sharp contrast to the global average of 10 percent. The extent of the oligarchs' power, however, was not limited to controlling oil, gas, or media giants. Some also exerted influence over Russian politics, becoming king-maker type figures in their own right. The most prominent example of the latter was Boris Berezovsky, a prominent mathematician-turned businessman and politician who arguably became the most influential power broker of the late 1990s, responsible in large part to the rise of Vladimir Putin. Berezovsky, whose name was marred by constant scandals, shady dealings, and borderline illegal activities, controlled multiple media outlets including the ORT, one of the most watched TV channels in Russia (now known as Channel One). He adeptly wielded his media power to shape Russian politics by building up and knocking down public figures through manufactured scandals or smear campaigns.

The mid-1990s was the pinnacle of the Russian oligarchs' power and clout. By Berezovsky's own account he and six other oligarchs between them controlled over 50 percent of Russian economy and played part in decision-making at the highest level. This admission prompted the Russian media to start referring to this group of businessmen as the Seven Bankers, a reference to the Seven Boyars, a short-lived government of Russian nobles in 16th century Russia. While it is has not been - nor arguably ever could be - decisively proven, the Seven Bankers most likely played a key role in securing Yeltsin's re-election as president in 1996 when he almost lost to the Communist Party challenger Gennady Zyuganov. While Yeltsin was recovering from a heart attack and mostly shunned media appearances, the oligarch-controlled TV channels and newspapers constantly ran pro-Yeltsin stories, and the oligarchs poured cash into Yeltsin's campaign. It should be noted, however, that the oligarchs of the 1990s almost never held any official government positions and exerted their influence through informal channels, with the notable exception of Berezovsky who served a brief stint as Assistant Secretary of the Russian Security Council. Even so, in the absence of effective countervailing forces or institutions at the highest levels of Russian Society, their influence remained enormous.

Yeltsin went on to govern through a highly unpopular second term and resigned in a televised appearance on the 2000 New Year's eve, officially endorsing then-Federal Security Service (FSB) chief Vladimir Putin. Putin's rise heralded a new period for the oligarchs who approached the new president in different ways. Some managed to keep their wealth, while others shared a far less fortunate fate. At any rate, the 1990s oligarchs' influence over the political process under Putin was hugely diminished.        

 

While the oligarchs’ power and influence over Russian politics decreased dramatically under Putin, they nonetheless survived, and some of them still prosper today. Understanding the nature of their wealth and ties to the government is crucial for Western policy-makers who have tried to use sanctions against oligarchs as a means to apply pressure on Putin. For them, material wealth and – more importantly – the opportunity of living in the West with their families and making use of Western markets demonstrably trumps whatever ideological considerations they might otherwise possess. Understanding this, ramping up sanctions against the oligarchs closest to Putin and carefully exploiting this weak spot could potentially create rifts within their relationship with Putin. Naturally, oligarchs are not the only ones who benefit from and validate the Russian regime but weakening them could help serve to undermine one of the strongest pillars of its support.