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Analysis & Opinion
22.05.08 Equally Distanced Oligarchs
By Graham Stack

Roman Abramovich’s name is back in the headlines this week in connection with yesterday’s UEFA champions’ league final in Moscow, where Chelsea, the team he has pumped hundreds of millions into, lost to Manchester United. But coming a week after the new Russian government and Kremlin administration were formed, it is telling that, nowadays, political intrigue surrounding Abramovich concerns the Chelsea board and locker rooms. Only a few years ago, Abramovich was regarded as one of the main power brokers in the Kremlin. So what has changed?

Veteran head of the opposition Communist Party Gennady Zyuganov, whose party voted against Putin's appointment as prime minister on May 8th, commented in an interview with the Vedomosti daily, "Putin started with seven billionaires, and now there are over 100." But even he did not allege that the oligarchs had a say in last week's major government reshuffle.

When compared with the recent past of Boris Yeltsin’s era, a qualitative difference is evident. In 2004, Yeltsin's former finance minister, the liberal Alexander Livshits, vividly recalled how the late 1990s oligarchs exercised control over government appointments. “There were three stages in the 1990s. At the start there were simply rich people, for whatever reasons. Then they became magnates at the head of banks. And then these magnates became oligarchs. They started to participate in politics, and they laid hands on the holy of holies. In politics, especially in Russia, there is one thing sacred - cadres. Laws, decrees, resolutions are important, but the oligarchs should never have been allowed to determine who was minister, who was deputy prime minister. But they did. And I know about it not from rumors, but from my own experience. They called me in front of them after the 1996 elections and explained how I was to behave, and what I was to do, who I was to report to and what I was to show them. And they answered my question ‘and what will happen if I don't?’ with the words ‘we'll remove you.’ And they did remove me, and not just me.”

Boris Fyodorov, another prominent Yeltsin era liberal reformer, describes in his memoirs how oligarchs reacted when officials thwarted their wishes. In late 1997, 25 percent of the telecommunications giant Svyazinvest was put up for sale - and the much criticized privatization authorities got what was generally recognized to be a fair price of $1.25 million from an international consortium, including Oneksim Bank and George Soros, despite media oligarchs Boris Berezovsky and Vladimir Gusinsky having laid claim to the asset as their own.

According to Fyodorov, Berezovsky’s response by phone was abrupt: "You're f****d.” Two days later, the infamous “writers' scandal” began, with Berezovsky’s and Gusinsky’s television channels relentlessly pounding the government, by unveiling “proof” of kickbacks taken by privatization officials. The scandal lead to a spate of reformers’ dismissals, paralyzing a government struggling to handle the effects of the Asian crisis, and delaying any coherent response until it was too late.

As distinguished political scientist Philip Hanson wrote, by the end of the Yeltsin era, “The dominant paradigm in analyses of Russian development was one of state assets ruthlessly plundered by a tiny, grasping elite of business ‘oligarchs,’ who had ‘captured’ the state and taken over its functions.” Western journalists and analysts routinely referred to Russia as a kleptocracy.

Some oligarchs are more equally distanced than others

Looking back, the astonishing thing about the all-powerful, but permanently feuding oligarchs of the Yeltsin era, is not the extent of their power, but the puniness of their wealth. None of the notorious oligarchs of the 1990s would have ranked among today's 100 wealthiest Russians.

In 1998, the Forbes magazine counted only four billionaires in Russia. Ten years later, in March 2008, there were a staggering 110 billionaires, worth a total of $522 billion, topped by Oleg Deripaska, the head of the Basic Element holding company, at $28.6 billion. This begs the question of why the oligarchs lost their grip on the state, while having grown so astronomically in size and number.

The turning point seems to have come on July 28th, 2000, when then newly-elected President Vladimir Putin met with the oligarchs. Recorded at the now legendary meeting were Putin's words: “We will prevent anyone sucking on to political authority and using it for their own goals. No clan, no oligarch should come close to regional or federal authorities - they should be kept equally distanced from politics.”

The “equal distancing” expression immediately anchored in Russian political jargon, flavored with massive skepticism: Putin had come to power principally on the back of the Yeltsin family, the collection of bureaucrats and businessmen including Boris Berezovsky and Roman Abramovich, and was regarded as entirely their creation. Any talk of equal distancing seemed pie in the sky.

But times have changed. Now the criticism leveled at Putin and his friends is not that equal distancing is purely rhetorical, but that it is all too real. Moreover, some oligarchs have been more equally distanced than others: criminal proceedings caused Berezovsky and Gusinsky to flee the country, and Mikhail Khodorkovsky was jailed after crossing swords with the Kremlin behind the scenes.

As Philip Hanson wrote, the decrease in oligarch power is partly due to a more disciplined state apparatus. “Putin has re-established central control over the machinery of state, while economic recovery has strengthened public finances. The state is therefore now a unified and stronger interlocutor, more able to assert itself over private interests.”

According to Richard Sakwa of the University of Kent, “three things changed” for political power shifting from the oligarchs to the Kremlin. “Firstly, the nature of big business influence changed--now it is allowed to comment on socio-economic matters within the framework of government policy, but not to infringe on the clear sphere of governmental authority in public; secondly, the structure of big business also changed, with a number of 'state' oligarchs, including those at the head of state corporations; thirdly, oligarch factions in government are offset and counter-balanced by other factions.”

“The answer is very simple: in 1999, Russia was poor and falling apart. The handful of oligarchs of the Yeltsin era was running the Russian economy, and appointed ministers and state officials. Eight years later, the overall situation has changed. Russia is a rich capitalistic country, and has a huge number of billionaires and millionaires who mainly have risen from the energy sector. They are an indication of Russia's economic boom, not Putin's effective policy," said Alexander Rahr, one of Germany's leading foreign policy advisers on Russia. “Putin stopped consulting with the oligarchs, as Yeltsin had. They lost access to the Kremlin,” he added.

Although the Kremlin still consults the oligarchs and they pack the official Kremlin delegation on the president’s foreign trips, even the fiercest Putin critics do not allege that Deripaska, Abramovich or their colleagues dictate policy or appointments. The opposite is true. Philip Hansen believes that the current dominance of the state over business in Russia has “no parallel” in other similarly situated countries.

This was well illustrated in an interview Deripaska gave to the Financial Times last year. Deripaska ate humble pie, saying all he owned had fallen on his lap from the sky, and he would be prepared to cede his main asset, RusAl, the world's largest aluminum producer, to the state at any time. This was the polar opposite approach to Boris Berezovsky at his zenith, who notoriously informed the Western press that he and his oligarch colleagues had the right to rule Russia because they owned half of it.

Will the current business acquiescence last, as Russian business expands further? According to Hanson, one factor leading to the pacification of the Yeltsin era oligarchs was their massive unpopularity, stemming from the uncompetitive privatization by which they came to their assets.

However, among the new billionaires is an increasing number who have built up their own businesses, by providing new services to the population: in telecommunications, retail, and now even on the Internet. Yesterday, Russia’s prospective newest billionaire and the first Internet oligarch stepped forward - founder and co-owner of the Yandex search engine, Arkadiy Volozh, is evaluated at $5 billion, in the run up to an IPO this year.

In the Russia of ten years ago, Volozh would have ranked among the richest men in the country - and speculation would have mounted over which government faction he was backing. Yesterday, no one blinked an eye.
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