The Oligarchs and the President

A Farce in Three Acts

Starring:

Boris Yeltsin • Vladimir Putin

Boris Berezovsky • Vladimir Gusinsky

Roman Abramovich • Vladimir Potanin

Mikhail Khodorkovsky

.. and a colorful cast of supporting characters

Act I

The Oligarchs Make a President

Russia. June 1996. The largest country in the world, endowed with huge riches in oil, gas and mineral resources, had just reelected Boris Yeltsin. Earlier in the year, Yeltsin’s approval ratings were in the single digits (just 8% of Russians, whose standard of living had nosedived since 1991, said they trusted him). The one-time hero of Russian democracy was seen to be an aging, ailing leader who was losing his grip on the reins of power. And yet, despite all this, when the votes were tallied in June, Russians returned Yeltsin to the Kremlin.

The man who explained this miraculous turn of events to Russians was a dark-haired, balding, diminutive figure. As he addressed TV audiences that summer, he exhuded a boundless energy. He could hardly stand still, and seemed to be hopping around while speaking in a rapidfire staccato. There was the glitter of schemes and plots in his eyes.

The man was Boris Berezovsky. He was a former mathematician and car salesman turned rainmaker. And he would soon be infamous throughout Russia.

Berezovsky declared that the main thing that had made Yeltsin’s reelection possible was the tireless efforts and funding of a group (of which he was one) of seven bankers and businessmen (later to be known as semibankirshchina, derived from “seven” and “bankers” and hearkening back to when boyars manipulated the early tsars).

Although Berezovsky failed to mention it explicitly, there were, of course, other factors that ensured Yeltsin’s success, like the fact that his team had employed American political consultants who brought negative campaigning to bear on the president’s communist opponent, Gennady Zyuganov. And then there was the genuine fear amongst the intelligentsia, and eventually amongst most Russians, about what might happen if the communists returned to power. But this was all a by-product of these bankers’ and businessmen’s involvement, Berezovsky asserts. After all, the Group of Seven controlled a large part of the country’s media.

Soon, these immensely rich tycoons, who claimed to control 50 percent of Russia’s wealth, become known as oligarchs, literally, “the few that rule.” Berezovsky’s announcement was their official coming out. And, by inexplicably bragging about what he and the other six have done, Berezovsky gave a fairly accurate description of what they are.

“The oligarchs are not just very rich men, they are people who have very close connections to power. They did not get their fortune through their entrepreneurial skills, but through their ability to obtain bureaucratic decisions in their favor,” said political analyst Andrei Piontkovsky. Buying a presidential election, as Berezovsky declared they had done, was the ultimate way of “obtaining bureaucratic decisions in their favor.”

Sergei Markov, a Kremlin-connected political analyst and director of Moscow’s Institute for Political Studies concurred: “Oligarchs are potentially very dangerous, because they tend to get profits, not from the market, but by using political means and taking advantage of the bureaucracy’s corruption so as to suppress business competition. They tend to corrupt the government and tie it to special interest groups,” Markov said.

m

Those who were to become the oligarchs started amassing their wealth in the latter days of Mikhail Gorbachev’s perestroika. Some had close ties with the Communist elite, others were self-made men (see profiles). But almost all eventually set up banks, where Russian ministries deposited their funds.

Immediately after the collapse of the Soviet Union in 1991, the Russian government initiated a wave of privatizations. The capital of state-owned companies was divided into vouchers, which were then distributed to ordinary Russians, who mainly sold the vouchers for a pittance to emerging business interests, which converted the vouchers into voting blocks in large companies. A few years after, in 1995, the government decided, under the supervision of Deputy Prime Minister Anatoly Chubais, to undertake a second wave of privatizations, particularly of oil and mineral resources companies. This time, the stakes were higher, so Chubais left nothing to chance.

“Chubais’ idea was to make sure these companies would go to people he thought could run them,” said Michael Heath, an analyst with the Moscow-based investment bank Aton. Or, as Chubais was quoted as saying in Elena Tregubova’s book, Tales of a Kremlin Digger, he decided how to distribute key assets by “following (his) conscience.” This, in effect, meant transferring the assets to a few Kremlin-connected businessmen, whose banks managed Russian ministry deposits. There would be no auctions, no highest bidders. It would all be done among friends, with the winners acquiring multi-billion dollar companies for a fraction of a fair price. “The unique thing about the oligarchs is that they were appointed (as tycoons) by the government,” said Piontkovsky.

The process, known as “loans for shares” went something like this. The businessmen, through their banks, loaned the government money. This money, as it turned out, was the same money that Russian ministries had deposited into these  businessmen’s banks. In other words, the bankers loaned the government its own money. As collateral, the government gave the bankers shares in the privatizing enterprises. It was common knowledge among those in the know that the government would never be able to repay the loans (they were borrowing their own money, after all), and that the bankers would keep the shares. Which is exactly what happened.

It was a scam on a grand scale. “Khodorkovsky bought Yukos for $300 million,” Heath said. “In just a little while, it was valued at $12 billion. It is now worth $24 billion.”

After ensuring that Yeltsin, whose government had been so good to them, was reelected, the oligarchs started waging wars amongst themselves, vying for control of even more assets and influence. They acted with a brazen disregard for legality, clearly grounded in the perception that they had won for themselves lifetime immunity. After all, having made a president once, surely they could pull the same rabbit out of the hat four years later. But something went dreadfully wrong.

In mid-1999, with presidential elections just a year away, the prospects for Yeltsin’s entourage, commonly known as “The Family,” once again looked desperate. Yeltsin, according to the constitution, could not run for a third term, and was as ill and as unpopular as ever. It seemed unlikely that any successor hand-picked by The Family could ever win the coming election. But just such a victory was vital for them. For, if a rival candidate came to power, he would more than likely look into how the favored oligarchs (and the politicians and bureaucrats protecting them) had acquired their fortune. Their wealth, and, for many, their freedom, was on the line.

Different oligarchs reacted differently to this situation. A number seemed content to wait and see who would be the next president, hoping to reach an understanding with whomever that would be – perhaps to bribe their way out of trouble. But Gusinsky made what ultimately proved to be the wrong choice: he sided with the Family’s bitterest foes, former Prime Minister Yevgeny Primakov (then the country’s most popular politician and someone who seemed poised to become the next president) and his ally, Moscow Mayor Yuri Luzhkov.

Berezovsky and Abramovich decided to buck the trend. They joined The Family’s search for the unlikely candidate who, anointed by The Family, would, against all odds, win the popular vote and succeed Yeltsin. The Family’s choice fell on an almost unknown bureaucrat, head of the FSB intelligence agency, Vladimir Putin.

In August, soon after Chechen militants briefly invaded the southern Russian republic of Dagestan, Yeltsin appointed Putin as prime minister, later announcing to disbelieving audiences that his pick would soon succeed him. A few days later, hundreds of Russians perished in a series of apartment block bombings, which Putin immediately blamed on Chechen terrorists, despite a lack of evidence. Within a matter of days, Russian troops marched back into Chechnya, which had enjoyed de facto independence – and near absolute chaos – for the previous three years.

The war went down spectacularly well with the Russian public, still traumatized by the bombings. Putin surfed on a wave of nationalism and rapidly achieved enormous popularity. As for Berezovsky, he threw all the weight of state-owned ORT TV – which boasted the country’s highest ratings and which he de facto controlled – behind Putin. Day-in and day-out, ORT sang Putin’s praises, while savaging his opponents. As a result, Unity, Putin’s newly created party, placed a strong second in the December 1999 parliamentary elections, just behind the Communists.

Putin’s Duma performance was so stunning that Primakov exited the presidential race before even entering it. The rest was just details. Yeltsin’s surprise resignation on December 31, 1999 left Putin as the country’s acting president, and, crucially, advanced the presidential election by three months. Continued savaging of Putin’s remaining rivals by ORT helped Putin – six months earlier a political nobody – seize the Presidency in the first round of voting.

It was Berezovsky’s finest hour since Act I in 1996. Once again, he had created a president. There seemed to be no limit to his power. Little did he know.

Within a year, Putin had pushed into exile both the oligarch who had resisted him (Gusinsky) and the oligarch who had crowned him (Berezovsky). The others well understood that times had changed: Putin was no Yeltsin.

“The symbiotic relationship between oligarchs willing to bribe and bureaucrats extracting bribes remained,” Piontkovsky said. “But there was a shift in roles. In the Yeltsin years, the businessmen were dominant, but now it was the bureaucrats who exerted domination.”

How was a Russian leader created by the oligarchs able to turn on them and submit them to his will?

Piontkovsky explained the change simply: “Putin just used the power structure and his right to arrest criminals.” Markov concurred: “Yeltsin was a lazy, drunken revolutionary who did not want to run the country, whereas Putin is a manager, who wants to do it and is ready to work hard.”

Moreover, Markov added, Putin was able to rely on assets Yeltsin hardly ever had. “Putin can rely on the power entities, like the FSB and the police, who want to restore state institutions, and on a majority of the people, who do not want to see oligarchs in power.”

The bureaucracy’s attitude has also been important, Markov said. “Putin has also been able to rely on the bureaucracy, which wanted to get its revenge on business, so as to become stronger, more independent, and take larger bribes.”

Ultimately, said columnist Yuliya Latynina, the bribing oligarchs themselves were responsible for the reversal that clipped their wings. “The oligarchs created Putin and his system. During the privatization period, they used bureaucrats, prosecutors, policemen and intelligence agents to increase their wealth. But these people eventually asked themselves: ‘Why should we steal for others, when we can do it for ourselves?’”

Like Dr. Frankenstein, the oligarchs had brought to life a creature that they could not control and which finally turned against them.

The oligarchs quickly found out they were no longer powerful enough to defy, let alone outmaneuver, the Kremlin. Berezovsky was the first to get slapped down. He could not help himself. He was the Tsarmaker, after all, and hubris came naturally. Soon after the 2000 elections, Berezovsky, still in control of ORT, began to criticize Putin’s authoritarian leanings. Within months, he had lost ORT, his stake in Sibneft, and, eventually, his resident status in Russia. Gusinsky, who at least was not turning on someone he supported, let his media outlets criticize the new president and the war in Chechnya. Not surprisingly, he fared no better.

In Putinspeak, the new game had two rules: the “dictatorship of the law,” and the “equal distancing of all oligarchs from power.” Most observers translated this into the terms of a deal the Russian leader allegedly struck with the oligarchs: you can keep the assets you grabbed in the 1990s, provided you do not interfere with politics.

“The pact Putin made with the oligarchs actually had several clauses,” Markov said. “Clause one was that they renounce their weapons of mass destruction against the Kremlin, that is, their national TV channels. They were also not to challenge the government on sensitive issues, like Chechnya, and were to admit the preeminence of the political authorities over money. They had to renounce individual lobbying. And, finally, they had to [financially] help the authorities solve some problems, for instance by financing foundations helping the families of officers and policemen killed while on duty, or by funding the renovation of palaces used for state functions.”

There was another clause to the pact: oligarchs had to donate to fund Putin’s political activities. Markov, the Kremlin-connected  analyst, does not deny this, although he plays down its significance. Yet others contend this plays an important part in understanding Putin’s grip on power. “This provided the Kremlin with a substantial source of grey money during the December parliamentary election campaign, which was money initially stolen by the oligarchs,” Latynina said.

Latynina meanwhile challenged Markov’s view that the oligarchs had to give up individual lobbying. “It seems pretty clear that the Kremlin does quite a lot to help Roman Abramovich these days,” she said. “I doubt it would do that for free.”

One oligarch, Mikhail Khodorkovsky, chairman of Yukos, recently challenged a core element of the pact. It landed him in jail. Khodorkovsky was arrested at gunpoint two months before the 2003 parliamentary elections, shortly after he had publicly announced he was funding Putin’s opposition in those elections.

Few deny that political motives played a part in Khodorkovsky’s arrest. “I think the Kremlin overestimated (Khodorkovsky’s electoral influence) a bit,” Markov said. “But these people are spies, that is just their psychology: if they see a signal, they have to execute all these special measures.”

In reality, Markov said, Khodorkovsky posed a very real threat on a level few have recognized. “Last summer, Yukos used its huge financial resources to prevent parliament from passing legislation that would have increased taxation of oil revenues,” Markov contended. “Faced with this kind of behavior from an immensely rich and powerful company, the Kremlin had no choice but to use force to restore its authority.”

Markov is not alone in this opinion. In an editorial in The Moscow Times in January, William Bowder, head of the Moscow-based investment brokerage Hermitage Capital Management, claimed that the recent action against Khodorkovsky was part of “a battle that President Vladimir Putin has been fighting to stop the oligarchs from taking over the country.”

But others argue that the Kremlin went after Khodorkovsky exactly as he was trying to depart from the oligarchic model and become a legitimate businessman, running a transparent, well-managed company. Moreover, they say, that legitimacy is exactly why the authorities went on the offensive – they fear nothing more.

“Khodorkovsky was in the process of getting out of the oligarchic system, by hiring Western top executives and running Yukos according to Western standards,” Piontkovsky said. “He did in five years what it took America’s robber barons 30 years to accomplish. But, in doing that, he handed the bureaucracy  a death warrant. For if Yukos turns legitimate and abides by the laws, it will not need to bribe bureaucrats any more. So bureaucrats will lose their main income and will be faced with extinction.”

Latynina concurred that transparency poses the greatest threat to Putin’s bureaucratic system. “The message the Kremlin sent the oligarchs by arresting Khodorkovsky was this: if you run transparent companies, it means you are not loyal to us. The Kremlin does not want transparent companies.”

Piontkovsky agreed: “The Kremlin wants to always keep the oligarchs on the hook. So it has introduced a process of natural selection among them. But it is a negative process: it destroys those who run their companies efficiently.”

As a result, oligarchs are likely to be around as long as Putin stays in power, provided they remain obedient. “Putin needs someone to manage the country’s resources,” Latynina said. “I do not think he wants to nationalize companies. I think he wants to go on receiving a guaranteed income from the oligarchs. So, as long as they remain docile, they can go on.”

And there is one final thing, Latynina added: since most Russians hate the oligarchs, they are ideal scapegoats, standing in the wings for whenever the Kremlin needs someone to beat up on.

With enemies like that, you hardly need any friends.  RL