The Oligarchs: A Unique Phenomenon in Post-Soviet Russia

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Far too often have I observed that the term ‘oligarch’ is not used in the rightist environment and is, furthermore, almost unknown beyond the borders of the former USSR. People who do use it, consider it just a close synonym to ‘tycoon’. That is why I have decided to write a series of articles about Russia in the 1990s, when the country was in transition from Socialism to Capitalism and from a totalitarian model to a democratic one. The topic of Russia in 1990s is unfairly avoided by Right Liberal and Right Conservative researchers and publicists. To a large extent this is due to the lack of information accumulation culture, as there was no easy access to the Internet. But mostly, it was a question of survival: businessmen strived to endure through the imminent hardships of establishing a viable social and political model in country, a model which would lead neither to a reversal to the Soviet experience, nor to a dictatorship. So they spent little money on public relations or on building of their own propaganda machine, whereas that of the majority of political leaders and journalists, who sympathized with either the Communists or the great-power nationalists, were busy denigrating the big business. That was when and how the term ‘oligarch’ came to be life: dropped from the pens of those who sought to disparage the entrepreneurs, they made sure the common people got used to its negative connotations, while the business environment and the professionals could not care less. Within the scope of my first article about the Russian business in the 1990s I would like to write a little about those who were so dubbed.

The term ‘oligarch’ appeared in the former USSR (although it was mostly in use in the Russian Federation) in the period of privatization of the 1990s. It described quite a unique phenomenon. The collapse of the USSR and Yeltsin’s coming to power dramatically accelerated the transition of Russia to the market economy. A large-scale privatization program had been conceived and partly carried out. and as a result a significant part of the Russian industry came to be concentrated in the hands of several financial-industrial groups, at the cores of which stood the commercial banks owned personally by the oligarchs.

It is important to emphasize this difference between the Russian oligarchs and any other politically influential tycoons in the other countries, like the Peruanian ‘Twelve Apostles’: the lack of any succession, of any links to the Soviet past. There were, of course, exceptions. Alisher Usmanov, for instance, was born in a familty of Tashkent’s public prosecutor. In general, however, the Russian innovational business elite was formed by the young ‘wolves’ who had no influential parents. Let’s see who were the oligarchs before they became the elite of Russian business.

berezovckiyBoris Berezovsky was born in an engineer’s family and started his career as an engineer in a research facility. His parents were not related to abt financial or political Soviet elites. In 1989 he founded ‘LogoVAZ’ — a stock company, selling VAZ automobiles. He got the idea as early on as in the 1970s, when, against the backdrop of a total supply deficit in the Soviet market, there was a significant demand for automobiles. Since 1973 Berezovsky cooperated with ‘AutoVAZ’. where he fought to institute the use of automated computer-aided design systems and software.

For many years he had been pursuing his goal and the result was astonishing: «LogoVAZ» became the official «Mercedes-Benz’ auto-dealer in USSR with many ‘AutoVAZ’ top managers among its shareholders.

In 1991 LogoVAZ got its first live capital in form of syndicated 20 mln USD loan from six Russian banks. After 3 years LogoVAZ sales rose up to 45,000 cars a year and this operation alone gave the company 300 mln USD a year. In general, the LogoVAZ structure united more than 100 commercials and non-commercial organizations.

chodorkovckyMikhail Khodorkovsky’s origins and family background were similar to those of Berezovsky’s. His parents were chemical engineers who lived in a communal apartment (a purely Soviet invention, these widespread hellholes housed several families living each in one room of a large apartment, sharing its facilities and kitchen).

Khodorkovsky began his business career by opening a private café in 1986 when Gorbachev allowed people to open small private businesses. In 1987 he founded NTTM ‘Menatep’. The NTTMs, youth centers for scientific and technical creative work, gave businessmen the opportunity to legally do business. Many people confuse them with the cooperatives. However, the NTTM program was launched by the central Soviet government in 1986, a year before the enactment of the ‘On cooperation in the USSR’ law. NTTMs used to resell production bought at fixed (set by the government) price and paid no taxes except 3% all-Soviet NTTM fund tax and 27% local fund tax. Later NTTMs were allowed to cash in their money. It was NTTMs that made the foundation for future Russian business.

Rational use of all the possibilities of the 1980s allowed Khodorkovsky to become the founder of one of the biggest banks of 1990s — «Menatep»

In 1995 the «Menatep» group won bond auction on the «UCOS» company, which was nearly bankrupt with its more than 3,5 billion USD debt. At that time «UCOS», as well as many other Russian energy companies heavily suffered from economic recession of the early 1990s. When it was privatized, ‘Uganskneftegaz’ (one of the two factories originally forming the «UCOS» group, the other one being «Kuibyshevnefteorgsintez») extracted less natural gas and oil than it did in 1987: 0.5 mln barrels a day in 1995 vs. 1.4 mln barrels a day in 1987.

After privatization ‘UCOS’ rapidly recovered. In a few short years the company became one of the leading Russian oil companies and also the leader in the field of the corporate management reform. Khodorkovsky employed new corporate management methods and insisted on transparency in his financial activities. He also adjusted the financial accounting to conform to the GAAP requirements, which were more strict than the Russian law. He worked with world class experts, such as Bruce Misamore and Steven Theede and sought the council of PricewaterhouseCoopers — an international consulting company. As a result, «UCOS» became competitive on the global market.

The company became a Russian business leader. Extraction facilities of «Uganskneftegaz» recovered to the 1987 level — more than million barrels of oil a day — and considerably reduced its expenses. In 2003 the Financial Times included «UCOS» in its «Top Ten Companies for Shareholder Confidence» list. By 1998 Khodorkovsky built a large export-import company with 80 mln RUR (about 10 mln USD) annual turnover. Its market capitalization rose from 320 mln USD in 1999 to 21 billion USD in 2003 and to 36 billion USD by 2004. «UCOS» was a symbol of capitalistic modernization made by private persons without any help from the government.

gusinckiyVladimir Gusinsky was a unique figure even among the young business wolves who had no connections to the Soviet elites. He made most of his money not from the privatization of the Soviet industry, but by starting new businesses from scratch. His parents were not rich — they lived in a one-room flat, so Gusinsky spent a lot of his childhood on the streets. Gusinsky was a hereditary dissenter and anti-Communist: his grandfather had been sentenced to death and his grandmother worked through a 10-year imprisonment in Stalin’s camps. The future oligarch began his career as a taxi driver. Later he opened a women’s clothes cooperative having only a meager 1000 USD starting capital. That was in 1987, and his business became one of the first legal businesses in Soviet Russia. A year later he founded the «Infax» cooperative that specialized in the financial and law consuling and political analysis — mostly for foreign clients. In 1988 in cooperation with American law company «Arnold and Porter» he opened a joint-stock venture «Most». «Infax» owned a half of its stocks. In October, 1989 Gusinsky founded «Most-Bank», and in 1992 he founded the «AO Most Group» holding — this time without any foreign investments. In the same year he founded «NTV» TV company and the «Segodnya» newspaper. By 1992 the «AO Most Group» holding was made up of 42 organizations owned by Gusinsky.

In January, 1997 he resigned his post as a President of «Most-Bank’ and as CEO of «Most Group» to become the head of the «ZAO Media-Most» holding (TV companies NTV, NTV+, TNT, the «Segodnya’ newspaper, the magazines «Itogi», «Seven days», «The caravan of history» and the radio «Echo of Moscow»).

The «NTV+» company (a branch of the «NTV» TV channel») was the innovation leader among the Russian media. It was the first TV channel to start satellite transmissions. Research and introduction of the new technologies were Gusinsky’s forte. He was always starting daring experiments, thinking outside the box. His TV channels, unlike all the other Russian channels, showed no continuity with the Soviet TV traditions. Gusinsky was a free-speech enthusiast and so it was common of his TV channels to openly criticize Yeltsyn’s government for corruption and lack of professionalism in crisis management.

Nevertheless, in 1996 Gusinsky supported Yeltsyn’s presidential pre-election campaign. No surprise there: Yeltsyn’s main rival was the head of the Communist Party Gennadyi Ziuganov; the oligarchs united so as not to allow the Communists to take back the power. In the late 1990s Gusinsky’s media empire continued to criticize Yeltsyn for corruption and expose the dirty deals of the President’s family and friends. But Yeltsyn, himself an adherent of the freedom of speech, made no effort to suppress these broadcasts. Yeltsyn’s successor, Vladimir Putin, on the other hand, perpetuated the traditional Soviet-Fascist views on civil freedoms. He used all means at his disposal to ruin Gusinsky’s business and then exiled the oligarch himself.

oligarjsMany other oligarchs, such as Roman Abramovich and Petr Aven, also started their careers with no political or financial foundation. People often blame the oligarchs’s success, at least in part, on their friendship, saying that they ‘ acted in collusion and excluded all outsiders from entering the business». This point of view is provincial and primitive, and shows a complete lack of understanding of financial and corporate interests. People who are far from the business culture extrapolate the sphere of interpersonal relations on the businessmen and companies. Such a view is typical of post-Soviet and Latin American countries and it causes total and self-supporting corruption and nepotism, hampering the progress. The oligarchs of the 90s despite being friends, had been endlessly suing each other because of business interests collision. Their companies often trespassed on one another’s territory and fought bitterly for a market segment. They did, however, keep within certain ethical guidelines, which is why despite all the economic hardships of the 1990s Russia did not revert either to Communism or to a police dictatorship state. The dictatorship was established later: after Yeltsyn had resigned and the oligarchs had been expelled out of the country and replaced by the adherents of Russia as a Great Power and its «Third Way».

The results of privatization are often heavily criticized. The media and the populist politicians claim that the new owners got the property not because of their merits, but thanks to their connections and informal relations with the state leaders and their relatives. They constantly chew over the ideas of a static bliss and the dangers of straying from it: ‘poor defenseless state’, starving police and ‘orphans of whom no one takes care’. The populists emphasize the negative role of the ‘almighty oligarchs’ and stress that the state is powerless against them. This is a lie. The fact is that privatization required innovative methods and radical means at the background of high ratings of Communists and National Socialists. When the privatization started there was much protectionism in Russia. That is why many segments of economy, including the natural resources extraction, auto roads, TV channels, etc. could not have been privatized – as they should have been.

The privatization program had 7 main goals:
• Creation of a class of private owners.
• Improving the efficiency of the industries.
• Increasing everyone’s social security.
• Development of social infrastructure at the expense of the privatization fund.
• Stabilization of the country’s finances.
• Demonopolization and creation of a competitive business environment.
• Attraction of foreign investors and improvement of conditions for further privatization.

The state could not realize this program. By 1994 Duma (the State Parliament) voted a resolution which characterized the results of privatization as unsatisfactory. So why did the program fail? A. Chubais, one of the ‘founding fathers’ of the program, stressed the two main reasons. First, that it was done too fast: «The Communist directors possessed huge power — political, administrative and financial….we had to get rid of them, but had no time to do that — we only had days, not even months.» Second, an absolute majority of the Russians was financially illiterate: «We had to convince 150 mln people to go get their vouchers and then to invest them rationally!»

Most people in Russia had no idea what to do with the vouchers even though the purpose of these papers was written on them and there was a wide discussion in the media about them. Inherent distrust of the government and the media may also have played a role. Long story short, the people started to sell their vouchers to unscrupulous buyer-ups. As a result, the voucher price fell to 3000-4000 RUR by May, 1993.
The whole situation was quite unfavorable and by the end of the voucher program in 1995 the Russian economy was in a lot of trouble. State sector and commercial sector employees received no salaries for months at a time. The exhausting war in Chechnya required more and more money. That is why the government found no way out but to turn to large commercial banks for loans. As a guarantee for these loans the banks requested control packets of shares in the industries that the government previously declined to privatize: oil companies, steamship lines, large ferrous and non-ferrous factories. The condition was as follows: if the state fails to pay the interest rate, the industries will be sold at ‘bond auctions’. The state with its awkward bureaucracy and dominance of Communists in the important positions could not pay its debts. The packets of stocks of «UCOS». «Norilsk Nikel», «Sibneft», «Surgutneftegaz», «Lukoil», «SIDANCO», «Mechel», «Nafta-Moscow», «New Lipetsk Metallurgical Factory», Murmansk and Novorossiyskyi shipping companies – all passed into private ownership. A considerable part of the large state assets became concentrated in the hands of oligarchs. That was how Chubais, by then the owner of «RAO UES of Russia», got his name as the founder of the oligarchic Capitalism in Russia.

All this went on until the early 2000s. The new President of Russia, Vladimir Putin, declared a war on all the disloyal oligarchs of the 1990s and won. Whether by using corrupt pro-government judicial system or by direct pressure, he eliminated all the democratic oligarchs of the ‘hard times of the 90s’. Instead, he appointed loyal people to the positions of CEOs of the biggest companies (for instance he gave «Russian Nano-technology Company» to Chubais), and appointed the so-called ‘power oligarchs’ (former Soviet and Russian security officers) to other similar positions. Some big companies such as «Gazprom» have been nationalized (as of 2005 the Russian state owns 51% of Gazprom stocks). Putin aimed at the total replacement of the «parvenus of the 90s» with the Soviet and Russian security elites. He reinstated the succession of the elite crust who now owns most of the resources and capitals of Russia, and who are completely loyal to the government. This spelled the end of the era of Russian oligarchs of the 1990s, and the collapse of the American dream in Russia.

Kitty Sanders, 2014

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