New Political Economy, Vol. 13, No.

2, June 2008

Putin and the Oligarchs

RICHARD SAKWA

During the election campaign and in his State of the Nation address of 8 July 2000, President Vladimir Putin talked of the need to break the cosy relationship between big business and government. In early 2000 Putin had talked, in language reminiscent of Joseph Stalins plan in 1929 to liquidate the kulaks as a class, of his aspiration to liquidate the oligarchs as a class, stressing the need to create a level playing eld.1 His central idea was that special interests, above all the oligarchs, should be kept equidistant from the government.2 No longer were a select group of oligarchs to have privileged access to the corridors of power or to hold the state hostage whenever the regime needed nancial or other support. Putins approach is neatly summed up in his interview with the Spanish media in early 2006: Back in the mid-1990s oligarchic groups substituted for government in Russia. They were elected to parliament and lobbied laws benecial for specic nancial and industrial groups instead of the society. They also ensured fullment of these laws through their representatives in high places. I do not think this meets the public interest.3 The empirical analysis is probably correct, yet the policy implications that emerge out of such a view had wide ramications. In this essay we will focus on three. The rst was a series of selective attacks against certain major business gures, notably Vladimir Gusinsky at the head of the Media-Most media concern and Mikhail Khodorkovsky at the head of the Yukos oil company. The manner of the attack undermined the independence of the media and the judiciary. The second is the development of a new model of political economy, in which the state reasserted not only its alleged prerogatives over economic policy, pipeline routes and the like, but challenged the inviolability of property rights as a whole to create a state corporatist system in certain sectors. Third, Putins reassertion of state prerogatives raised fundamental questions about the sources of social power and nature of political power in Russia. While Putin repudiated the ability of certain oligarchs to exercise class power over the state, he also challenged the autonomy of the nascent bourgeoisie as a whole. In so doing, he reinforced those who sought
Richard Sakwa, Department of Politics and International Relations, University of Kent, Canterbury, Kent CT2 7NX, UK.
ISSN 1356-3467 print; ISSN 1469-9923 online/08/020185-7 # 2008 Taylor & Francis DOI: 10.1080/13563460802018513

Richard Sakwa to return Russia to an archaic model of economic development and an outmoded form of governance.

The attack on the oligarchs We use the term oligarch purely for the sake of convenience. There was never a coherent and integrated class of that name, and neither did they substantively dominate policy making for any extended period. Even at the height of their inuence, following their support for President Boris Yeltsins successful run for a second term in 1996, oligarchs never ran the country, although the most audacious of the group, Boris Berezovsky, tried to give the impression of doing so. However, business groups were able to inuence certain aspects of economic policy, and access to the corridors of power in the Kremlin gave certain oligarchs a huge competitive advantage over their rivals. Vladimir Potanin at the head of the Interros mining company, for example, entered government in the wake of Yeltsins re-election, and took full advantage of the leverage that this afforded him. The Kremlins attack on these people who fuse power and capital, as Putin put it,4 began within months of his election in March 2000. The rst to feel the cold wind was Gusinskys Media-Most empire, which owned a number of periodicals but most signicantly the independent television station, NTV. Media-Mosts ofces were raided on 11 May 2000, and on 13 June Gusinsky was arrested and held in custody for four days. It is unlikely that Gusinsky was any more corrupt than other oligarchs, but he lost control of NTV and he ed into exile. Soon some of the countrys biggest businesses came under the scrutiny of state agencies investigating alleged tax evasion and privatisation deals. The companies affected included Gazprom, Norilsk Nickel, Lukoil and the biggest car manufacturer, Avtovaz. Norilsk Nickel had fallen into Potanins possession as a result of the notorious shares for loans deals of 1995 6, discussed by David Lane in the previous essay, and now the authorities called for the repayment of US$140 million in compensation for his alleged underpayment when the plant had been privatised in an auction that he had helped organise. The inclusion of Avtovaz in the list suggested that the campaign was beginning to affect members of the family, the group of powerful politicians and oligarchs grouped around Yeltsin personally, since the mightiest of them all, Berezovsky, had gained his rst millions by milking the hugely loss-making motor company through his car dealership business, Logovaz. Berezovsky had moved on and his interests had diversied to include Aeroot, the oil company Sibneft and the media, including a 49 per cent stake in the main TV station, Russian Public Television (ORT).5 Berezovsky was notorious for running down the capitalisation of his companies. For example, Berezovsky had obtained Sibneft in 1995 at a deep discount and, although it produced 40 per cent more oil than Surgutneftegaz, the market capitalisation of the latter (one of the best-managed oil majors in Russia) was 11 times higher. Berezovsky was the classic oligarch, combining nancial, media and political power, more interested in politics than business. On 19 July 2000 he resigned his Duma seat, arguing soon afterwards that everyone who hasnt been asleep for the past 10 years has willingly or unwillingly broken the law.6 186

Special Section: The Resurgence of Russia? In November 2000 he went into exile in London and used Britain as a base to launch ever more strident calls for Putins overthrow. The assault against the oligarchs as a class was renewed in the run-up to the December 2003 parliamentary elections and the March 2004 presidential campaign. The target this time was Khodorkovsky and the Yukos oil company. On 2 July 2003 the head of the Menatep international nancial association (Yukoss main shareholder), Platon Lebedev, was arrested in connection with US$280 million worth of share acquisitions in 1994, in the countrys largest fertiliser company, Apatit. The charges against him were of large-scale fraud. Months of pressure culminated in Khodorkovskys arrest on 25 October in a dawn raid on his plane in Novosibirsk. The planned merger between Yukos and Sibneft to create one of the worlds largest oil companies was suspended. The new company would have been one of the biggest in Russia, and the company would have been one of the most powerful non-state actors in the country once its plans to sell a large bloc of shares, possibly even a majority stake, to an American oil major had been completed. The Yukos campaign signalled the Kremlins determination to assert its authority over the business community. Numerous factors were involved in the case, ranging from Yukoss attempts to pursue an independent energy policy (favouring the building of a private pipeline to Daqing in North China, rather than the Transneft-controlled route to the Far East and the Japanese market) to Khodorkovskys eclectic support for numerous political parties, stretching from liberal Yabloko to the Communists. Perhaps most controversial were Khodorkovskys independent political ambitions, appearing as he was to be positioning himself for a possible presidential bid in 2008. More broadly, the social contract between business and the Kremlin in 2000 was being redrafted.7 It was no longer enough for big business to stay out of politics as Putin had argued in 2000: in the circumstances of a revived state, the economic sphere was to be controlled by the authorities and the oligarchs were to understand that their historic role as the creators of capitalism was over. A new model of political economy was to emerge in which the very notion of oligarch was to become anachronistic. A new model of political economy The selective nature of the anti-oligarch campaign provoked the suspicion that it was directed not so much against real crimes and corruption as against Putins critics and opponents. While the attack was undoubtedly selective, it was far from arbitrary. Putin targeted those who had aunted their closeness to power in the most provocative manner, allegedly abused their dominance of the media or egregiously exploited various tax minimisation schemes. Putin was setting the rules of the political game, and in attacking a few oligarchs he was disciplining the rest. There was an implicit threat: toe the line if you wish to keep the assets gained in the 1990s.8 By 2004 this was no longer enough, and commentators such as Lilia Shevtsova saw the renewed assault against the oligarchs as part of the revenge of the bureaucracy and so-called power structures to establish a corporatist system. As far as she was concerned, the oligarchy is 187

Richard Sakwa a myth. Bureaucracy continues to be the dominant force within the Russian system of governance, as it has been through the ages.9 Pervading the anti-oligarch campaign there hung the suspicion that one set of tycoons was using the law and the presidency against another. In particular, Roman Abramovich, who in early 2000 had participated in the creation of a holding that controlled most of Russias aluminium production, was known to covet Norilsk Nickel and Gusinskys NTV. Other oligarchs, notably Mikhail Fridman at the head of the Tyumen Oil Company (TNK), Oleg Deripaska and many more focused on developing their businesses and kept out of politics. They willingly accepted the new rules of the game, including clearing major initiatives with the Kremlin, and thus went on to become key gures in the new era. While business was now taken out of politics, politics entered ever more decisively into business. A new type of state oligarch emerged, permitted to conduct business at home and, indeed, to go global as long as they recognised the Kremlins claimed prerogatives. Twenty-one top gures of Russias business elite met with the president on 28 July 2000 to lay down the ground rules of relations between the government and business. This was not the rst meeting between the business elite and the Kremlin. In September 1997, in the wake of the Svyazinvest privatisation scandal,10 the top oligarchs had been invited to meet Yeltsin to lay down the rules of engagement. Not much had come out of that meeting, and the Kremlin now sought to ensure that the business leaders did not gain the impression that they were equal political interlocutors with the elected presidency. The aim of the July 2000 meeting was to establish the new rules of the game, in which the role of the state would be enhanced and respected. Boris Nemtsov, the leader of the Union of Right Forces (SPS) Duma (parliament) faction, drew up the agenda and argued that the business and power should not attack or blackmail each other, they should be partners working towards the economic recovery of Russia.11 The business leaders presented a three-point declaration to the government: rst, the Kremlin must declare a moratorium on any investigations into the legitimacy of privatisation over the preceding decade and not initiate any redistribution of former state property; second, the business community must undertake to play by the rules, pay taxes and scrupulously obey the law; third, the government must rid itself of corrupt bureaucrats, while the business tycoons on their part must undertake not to use government institutions or bribe state ofcials to ght their competitors.12 As many noted at the time, however, the link between power and property was hardly challenged by such an extra-constitutional pact, which in any case left out some of the key players. As long as Putins anti-oligarch campaign was conducted by the presidency, there could be legitimate questions about its political selectivity. Instead of using the courts, he relied on strong-arm tactics led by the MVD (the Ministry of the Interior, which is responsible for the police), the FSB (the Federal Security Service, the KGBs domestic successor) and the Prosecutor General. Only when the anti-corruption campaign was conducted by a demonstrably free and independent judiciary would fears that it was designed to further political ends be allayed. There were signs of this in the enhanced role played by the Audit Chamber, an independent body authorised to monitor the use of federal budget funds and 188

Special Section: The Resurgence of Russia? headed by the former prime minister and one-time head of the FSB, Sergei Stepashin. A law adopted in 2005 offered a partial amnesty for economic crimes committed during the privatisations of the 1990s, but the threat of tax investigations remained. The law allowed existing businesses to consolidate, but, while the threat of criminal prosecution had receded, the threat from the state intensied. On the eve of the Yukos case Putin noted: I dont really like the word oligarch used to describe big business representatives in Russia. In the sense that we usually use this word, an oligarch is a person with stolen money, who continues to plunder the national wealth, using his special access to bodies of power and administration. I am doing everything to make sure this situation never repeats in Russia.13 He took up the theme in his address to the Federal Assembly on 10 May 2006, when he was unrepentant about having trodden on some toes. He acknowledged that the phrase had been used by Franklin D. Roosevelt at the time of the Great Depression in 1934, but he vowed to continue on this path: And we will continue to tread on them. But these are the toes of comparative few who seek to retain or gain position or riches or both by some short cut that is harmful to the greater good.14 This was the voice of a leader concerned with restoring the presumed prerogatives of the state, framed in a narrative of overcoming past difculties, accompanied by the imperious tone of a neopatrimonial state builder. Putins new rules of the game opened the way for Russias oligarchic capitalism to be transformed into a new system. The conglomerate-dominated Russian economy remained highly concentrated, but its relations with government changed. Putin met regularly with business leaders in round tables of the sort held in July 2000, but the days of oligarch dominance were over. Many companies saw improved corporate governance, greater transparency in nancial process, greater economic competitiveness and an orientation towards prot rather than rent seeking. However, the states whip hand in 2003 and the attack on Yukos represented the beginning of a new phase in which the administration sought to shape the economic sphere by sponsoring national champions, primarily in the energy sector, and to ensure that big business was socially responsible. The security of property rights was undermined and, as in Soviet days, law was used instrumentally. The Yukos affair signalled a new model of political economy in which the line between the public and the private was no less blurred than in the 1990s, but now state capture gave way to business capture.15 Class power and class conict The repudiation of Yeltsin-style politics was accompanied by fears that democracy would be swept away at the same time. Gusinsky argued that a police regime was being established in Russia and said that he feared for his life. He asserted that Putin had turned against him after Media-Most began criticising the war in Chechnya. He added that one of the reasons he had become a victim 189

Richard Sakwa of persecution is that Russians try to destroy rich people, who (he argued) they inherently envy and hate, and because he was a Jew.16 Russian commentator Vitaly Tretyakov provided a more subtle analysis of the situation. Several logical approaches, he noted, were in conict here: while the Kremlin still saw the world in terms of the traditional nation-state, the owners of NTV saw the world like any transnational corporation, above all one concerned with the media, as a single borderless sphere of economic activity. At the same time, given the rather amorphous nature of most Russian parties, Gusinskys media empire had become effectively the leader of the opposition to Putin, subjecting his actions and motivations to sharp criticism. When the interests of the state are seen as synonymous with those of the government, any criticism of the government can be seen as anti-state. As Tretyakov put it, Media-Most from the Kremlins perspective was a radical opposition political party disguised as a media holding.17 While the Yukos case may have been about tax, it was about far more than this. Ultimately, the issue was about the autonomy of the business class and thus economic power in its entirety. In his analysis of the role of big business in post-communist Russia, Stephen Fortescue tends towards the view that patrimonialism is deeply embedded in Russian political culture, and that the Yukos affair ultimately was a reminder about who was boss in Russia.18 The political ambitions of the nascent bourgeoisie were nipped in the bud. Instead, a neocorporatist statesponsored model of economic development was favoured by Putin. Another Russian commentator, Andrei Piontovsky, notes that those who argue in favour of some sort of controlled democracy to accompany economic development based on giant corporations, like Korean chaebols, were once again imposing on Russia an anachronistic model, one that would be inappropriate for a postindustrial society.19 In the wake of the Yukos affair this is precisely what the Russian government sought to do, creating a number of state holding companies in key areas, including arms manufacturing and sales, ship building and aircraft manufacturing. Conclusion For many, the Yukos affair of 2003 5 marked a watershed in Putins presidency. Dominating the middle part of his rule, the struggle against Khodorkovsky and his associates threw the spotlight on Putins political style, the groups able to seize the policy agenda and the tensions in the whole Putinist project. Coming at a time when energy prices were rising to their historically second highest point (in relative terms) and the Kremlin was showered with the accompanying bonanza, competition over the appropriation and application of these resources became ever more intense. These two factors the struggle against the over-mighty oligarch and competition over control of rents exacerbated ssures that are inherent in Russias political system and intensied the struggles at the heart of Russian politics. A new model of political economy emerged in which the state advanced political claims that were historically anachronistic, namely, that while a capitalist economy was welcomed, the political demands of the capitalist class were to be constrained. Thus Russia in the early years of the twenty-rst 190

Special Section: The Resurgence of Russia? century joined countries such as Venezuela under Hugo Chavez in questioning some fundamental postulates of the liberal market economy. Globalisation had certainly not hollowed out the Russian state, and instead a traditional model of state sovereignty was reasserted in both domestic and foreign affairs. Notes
1. Interview on Radio Mayak, 18 March 2000, reported by Peter Reddaway, Will Putin be Able to Consolidate Power?, Post-Soviet Affairs, Vol. 17, No. 1 (2001), p. 27, fn. 5. 2. See Andrei Kolesnikov, Vladimir Putin: Ravnoudalenie oligarkhov (Eksmo, 2005). 3. Intervyu ispanskim sredstram Massovoii, informatsii, 7 February 2006, http://president.kremlin.ru/text/ appears/2006/02/101129.shtml (accessed 7 April 2008). 4. Cited by Stephen Fortescue, Russias Oil Barons and Metal Magnates: Oligarchs and State in Transition (Palgrave Macmillan, 2006), p. xii. 5. See Paul Klebnikov, Godfather of the Kremlin: Boris Berezovsky and the Looting of Russia (Harcourt, 2000). 6. Moscow Times, 18 July 2000. 7. William Tompson, Putin and the Oligarchs: A Two-sided Commitment Problem, in Alex Pravda (ed.), Leading Russia: Putin in Perspective (Oxford University Press, 2005), pp. 179202. 8. For an analysis of this, see A.A. Mukhin, Novye pravila igry dlya bolshogo biznesa, prodiktovannye logikoi pravleniya V.V. Putina (Tsentr politicheskoi informatsii, 2002). 9. Lilia Shevtsova, Whither Putin after the Yukos affair?, The Moscow Times, 27 August 2003, p. 7. 10. Svyazinvest is a telecom rm and its privatisation led to open conict between oligarchs and mutual accusations of corruption in what was dubbed the bankerswar. 11. Arkady Ostrovsky, Oligarchs to seek peace deal with Putin, Financial Times, 24 July 2000. 12. Ibid. 13. Steogracheskii otchet o press-konferentsii dlya rossiiskikh i inostrannykh zhurnalistov, 20 June 2003, http://president.kremlin.ru/text/appears/2003/06/47449.shtml (last accessed 7 April 2008). 14. Poslanie Federalnomu Sobraniyu Rossiiskoi Federatsii, http://president.kremlin.ru/text/appears/2006/ 05/105546.shtml (last accessed 7 April 2008). 15. See Andrei Yakovlev, The Evolution of BusinessState Interaction in Russia: From State Capture to Business Capture?, EuropeAsia Studies, Vol. 58, No. 7 (2006), pp. 103356. 16. Reported in El Mundo and Russian agencies, in Jamestown Foundation, Monitor, 14 July 2000. 17. Vitaly Tretyakov, Editorial, Nezavisimaya gazeta, 22 June 2000. 18. Fortescue, Russias Oil Barons and Metal Magnates. 19. Andrei Piontovski, Russias Misguided Democracy, The Russian Journal, 8 14 July 2000.

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