When Boris Yeltsin assumed power in 1991, Russia lacked many of the institutions of a market economy and was in desperate need of capital. The United States and international financial institutions such as the International Monetary Fund were willing to provide Russia with financial aid, but only on the strict condition that the country agreed to implement a series of rapid market reforms. Yeltsin turned to a group of young economists and academics to implement the necessary changes to the Russian economy.
These reformers crafted a set of radical policies designed to privatize and liberalize the Russian economy at a quick pace. As the privatization campaign went into effect, it became evident that the transition of the Russian economy had been sabotaged by corruption and collusion. A group of individuals with close political connections to the Yeltsin government amassed enormous wealth and power through the wholesale transfer of prized state assets and shady deals with government officials. These tycoons, known as "oligarchs," rose to power based in large measure on their ability to navigate and manipulate the rules of a corrupt and lawless post-Soviet Russian economy.
Those that acted quickly and had friends in high places when communism came to an end dide well, as the billions of dollars amassed by the 20 or so Russian oligarchs testified. Cronyism and corruption were identi?ed in the Russian case as nomenklatura capitalism. The government evinced little desire to enforce the rule of law, and organized crime syndicates rushed to fill the void, assuming a prominent presence in the new Russia. As the oligarchs grew their wealth through back-room deals, the rest of the country was thrust into a period of rampant poverty.
To meet the IMF and Clinton administration demands for more government revenues, the Russian government devised a secretive plan in the spring and summer of 1995 for the government to borrow money from Russian banks. As collateral, the government would offer stock in premier state-owned industries. The key feature of the "loans-for-shares" scheme was the proviso that if the government were unable to repay the loans, the banks would have the right to auction the shares-primarily in the energy, natural resources, metals, and manufacturing industries. Given the banks' ability to rig such auctions, and the fact that the loans were heavily over-collateralized, default by the Russian government would yield a bonanza for the banks' owners. A number of observers believe the "loans-for-shares" scheme was actually designed with the intention of turning over these enterprises to the select insider group who were allowed to participate, and that from the inception the government neither intended nor was able to repay the loans.
In its execution, the "loans-for-shares" scheme failed to produce a constituency for reform - the bankers' real interest was in increasingly lucrative sweetheart deals - but did succeed in winning the support of a powerful group of businessmen for the Yeltsin government in the upcoming elections. It is not difficult to see why: exceptionally valuable government assets were virtually given away at a fraction of their true worth. As one of the oligarchs commented with significant understatement, "each ruble invested in one's own politician yields a 100% profit."
When the shares pledged as collateral were eventually sold after the government failed to repay the loans they secured, the winning bid was almost invariably submitted by an affiliate of the bank managing the auction-and typically exceeded the minimum bid by only a nominal amount. Thus the "loans-for-shares" program essentially offered a select group of Russian bankers an opportunity to acquire cut-rate shares in prized state enterprises.
In 1995, CIA officials dispatched to the White House a secret report based upon the agency's large dossier documenting the corrupt practices of then-Russian Prime Minister Viktor Stepanovich Chernomyrdin, who with Vice President Gore co-chaired the Gore-Chernomyrdin Commission. The private assets that Chernomyrdin had accumulated in his official position, according to Russian security sources, ran into the billions of dollars. Chernomyrdin illicitly obtained significant holdings of stock in Gazprom, Russia's gas monopoly, during the firm's privatization -- a privatization that Boris Fyodorov, who had served as Russia's Deputy Prime Minister for Finance, characterized as "the biggest robbery of the century, perhaps of human history." Chernomyrdin was thus made one of the ten richest men in Russia. The CIA had submitted many other reports alleging corruption among other senior Russian leaders, including Anatoly B. Chubais.
The post-Soviet economy as "negotiable" and highly criminalized, with material resources and money obtainable by horse-trading with the government. The whole thing amounted to a select group of businessmen being appointed millionaires (or even billionaires), with the idea that it would become the main sources of support for the Yeltsin regime. To become a millionaire, it was not necessary to have a good head and specialized knowledge. It was enough to have active support in government, the parliament, local power structures and law enforcement agencies. In other words, you are appointed a millionaire, as someone put it very aptly.
The rise of the oligarchs and the deterioration of the Russian economy was the subject of intense discussion in the United States and the rest of the world. Policy makers debated the causes and the potential cures of the various problems gripping Russia. Western intelligence agencies grew increasingly concerned that the country was becoming a haven for money laundering, arms trafficking, and gun smuggling. The Director of the Federal Bureau of Investigation estimated in testimony before Congress that the Russian mafia had taken control of more than 70% of all Russian commercial enterprises and that most of the 2,000 banks in Russia were "controlled by organized crime."
Most of the new robber barons -- an estimated three out of five of Russia's richest people, according to one study -- simply turned the socialist enterprises they had managed into their own private companies. Others built their fortunes on the criminal trading they had done secretly during Soviet times. The result was a pervasive sense of unfairness.
At critical points in Russia's history, they had stepped forward to direct the course of the nation's events. When Yeltsin was confronted with a coup attempt in the fall of 1993, Fridman and the other oligarchs were called to the Kremlin. Several years later, with privatization deeply unpopular and Yeltsin in danger of losing his bid for re-election to a communist, Fridman, Aven and the remainder of the oligarchs banded together to save the Yeltsin re-election campaign, installing a new campaign manager and (it is alleged) backing the re-election bid with money and support in the media outlets owned by the oligarchs. Two years later, Yeltsin recruited the oligarchs to serve as a sort of economic advisory counsel, and during a market crash several months later, the oligarchs backed the government and reassured a concerned public.
Russian newspapers coined a name for the leading oligarchs (Aven and Fridman among them) and the power they wielded: "semibankirschina," or the "reign of the seven bankers." The Financial Times in 1996 named Aven and Fridman as among the "group of seven businessmen and bankers that, according to one of their number, is now running Russia." As the Moscow Times put it: "When Soviet leaders were in trouble, they turned to the Politburo for help. When President Boris Yeltsin is in dire straits, he turns to his own, updated version of the Politburo -- the coterie of bankers and businessmen who, by all accounts, run modern Russia."
Amidst the ruins of the former Soviet state, by 1998 a vast portion of the country's wealth has quickly fallen into a very few hands. Identified as 'the seven boyars' or 'the Magnificent Seven,' a small group had taken control of a major chunk of the Russian economy. Though not necessarily linked with organized crime, these large conglomerates had drawn the attention of law enforcement agencies around the world. Fortune magazine ran an article entitled "Russia's Robber Barons," profiling ten of the most important Russian business tycoons who had catapulted to economic dominance in Russia with the collapse of communism; these included Gusinsky, Berezovsky, Boris Hait, Mikhail Friedman, Vladimir Vinogradov, Vladimir Potanin, Mikhail Khodorkovsky, Alexander Smolensky, and Pyotr Aven.
Vagit Alekperov controlled Lukoil, Boris Berezovsky built his empire with LogoWAS, the Lada distribution network; owns newspapers, television stations and shares in oil companies and the Russian airline Aeroflot, Oleg Deripaska controls a privately held company called Russian Aluminum, or Rusal, Vladimir Gussinsky ran the MOST Bank group, Michael Khodorkovsky controlled Bank Menatep and Yukos-Oil Vladimir Potanin of Oneximbank, was one of the richest men in Russia, according to Forbes, with $1.6 billion, Alexander Smolensky headed SBS-Agrobank), and Vladimir Vinogradov headed Inkombank. Under the old regime, Vladimir Gusinsky of the Most Group was a theater director, Boris Berezovsky was a mathematician, and Mikhail Friedman of the Alpha Group was a physicist.
On 17 August 1998 the roof caved in. The Russian government announced that it would no longer be able to pay its official debts. The ruble was devalued at the same time. Following the complete collapse of the Russian economy in 1998, the number of people living below the official poverty line -- in Russia, a measure of truly desperate conditions -- rose to nearly 40%. Seniors in urban areas--with no access to jobs or land -- were the hardest hit. Unlike those in rural areas, who could subsist on homegrown food, they had nowhere to turn. As in Soviet times, Russians were waiting in lines, hunting for scarce goods, and hoarding what they could find. The devastation of Russian life was by some measurements worse than America's Crash of 1929. US unemployment at the end of 1929 reached 1.5 million, representing 1.2% of the total population, but more than 11.3 million Russians were jobless at the end of 1998 -- 7.7% of the nation's total population. In the 1929 crash, stock prices fell 17% by year-end -- and 90% by the depth of the Great Depression, four years later. By contrast, the Russian stock market lost 90% of its value in 1998 alone. Millions of ordinary men and women who had deposited their money in Russian banks lost everything.
Private investors lost billions upon the devaluation of the ruble, reports surfaced that billions more in foreign aid had been diverted to private accounts overseas, and many called for a reassessment of the United States' and the International Monetary Fund's policies regarding the country. In a few months, 99 per cent of the savings of the Russian population disappeared. Persons who had put money aside to buy a car or apartment or to pay for a wedding or funeral were left with nothing. By 1999 the 'reform' had brought poverty, alcoholism, and health care disaster. Russia was a handful of thieving 'oligarchs' feasting amid general starvation.
Putin achieved Soviet-style stability through eliminating or neutralizing all alternative centers of power. Putin broke the influence of the Russian oligarchs who had dominated the economy under Yeltsin in the 1990s. With the jailing of Mikhail Khodorkovsky, "the richest man in Russia," the business elite - and not only the wealthiest oligarchs - expressed concern about further efforts on the part of the Kremlin to interfere in their affairs and complain that government initiated corruption was on the upswing.
On 31 December 1999, Vladimir Putin became acting President, on 26 March 2000 he was elected President of Russia, and was inaugurated as president on 07 May 2000. The mass media, largely under control of the oligarchs - e.g., Boris Berezovsky and Vladimir Gusinsky - helped elect Putin in 2000. Soon afterwards, however, Putin turned against those of his benefactors whom he considered a political threat to him and his entourage of siloviki.
The situation did not immediately change when Vladimir Putin took power. Putin, said one analyst close to the Kremlin, has had dealings with several 'oligarch' groups. The closest, initially, was Alfa Group, led by Pyotr Aven, who as Russia's foreign trade minister in 1992 approved Putin's export contracts in St. Petersburg.
But President Putin signaled his intention to alter the government's relationship with Russia's oligarchs not too long after assuming power. He held an informal meeting with more than 20 of the country's prominent oligarchs in the summer of 2000 and reportedly stated that they would be treated fairly and equally if they agreed to forfeit their political ambitions, refrained from interfering in political and economic reforms, and avoided interacting with the state's media outlets altogether. Many experts surmised that Putin used this event as a method to indicate the demise of big business's immunity in Russian affairs.
Putin and his team hounded the oligarchs and ultimately forced some to leave the country or face much worse outcomes; Berezovsky and Gusinsky were among the richest and most prominent who sought the safe harbor of exile. Gusinsky, who with his NTV had backed the wrong horse, came first: his arrest in June 2000 signaled the launching of a massive legal offensive that ended with Gusinsky in exile in Spain, his Media-Most in the hands of State-owned Gazprom (now run by another St.-Petersburg Putin ally, Aleksei Miller), and NTV's independence drastically curtailed. In November 2000 criminal charges were initiated against Berezovsky, and he fled to London.
In October 2003, Khodorkovsky, the wealthiest oligarch, celebrated by foreign investors as the most progressive oligarch, was arrested for tax evasion and other "economic crimes." In 2005, he received a 9-year jail sentence. Other oligarchs remain free because they have not challenged Putin.
The first issue of the Russian edition of Forbes was published in April 2004. In May 2004 the magazine published a list of Russia's 100 richest people, some of whom later protested that their fortunes were greatly exaggerated. Forbes reported that Moscow had 33 billionaires, more than any other city in the world. Publication of the list focused attention on Russia's billionaires, many of whom are trying to keep a low profile as President Vladimir Putin uses the country's courts, prosecutors, and security services to rein in Russian oligarchs and strengthen the state's role in the economy. Paul Khlebnikov, editor-in-chief of the Russian edition of Forbes magazine, was shot and killed outside his office in Moscow on 09 July 2004. Khlebnikov had written about Russian billionaire businessman Boris Berezovsky in 1996 and wrote a book about him in 2000 called "Godfather of the Kremlin" which said he had ties with the Chechen mafia and had smuggled hundreds of millions of dollars out of the country. Berezovsky told journalists after the murder that Khlebnikov had reported things inaccurately, which had probably strongly displeased someone.
In 2005 Russian Finance Magazine published its second rating of Russian richest men. Such lists are ironically referred to as "police instructions" in Russia. Mikhail Khodorkovksy is listed on the 109th position with $220 million dollars and the "prisoner" status. A similar situation can be found with Platon Lebedev (Menatep Group) - the 134th place with $150 million. Sergei Bidash, the former director of Tagmet, is the third prisoner on the list (he was arrested in November of 2004). Bidash is listed on the 393th position with $35 million.
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