How 'shock therapy' spawned Russian oligarchs and paved the way for Putin (2023)

Russian Prime Minister Vladimir Putin during a meeting with Russian oligarch Roman Abramovich (center left) in 2010.Alexei Nikolsky/AP hide title

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Alexei Nikolsky/AP

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Russian Prime Minister Vladimir Putin during a meeting with Russian oligarch Roman Abramovich (center left) in 2010.

Alexei Nikolsky/AP

It's been a tough couple of weeks for Roman Abramovich.

The British government banned him from entering the country, froze his assets and stole his glamorous sports car collection.15 bedroom mansionin central London, its penthouse overlooks the River Thames and Chelsea football club.

The European Union also meddles in your finances and bans you from entering its 27 member states. There is no longer summer in Saint-Tropez or winter in Chamonix.

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In the United States, congressmen now ask President Biden to sign Abramovich and threaten himmegavillae o Upper East Side.

It's not just governments. Last week, a pro-Ukrainian activist rented a boat in Spain and tried to deface Abramovich's boat.458 cakesuperyate,Solaris, which was docked at a marina in Barcelona. Although the activist failed, Abramovich led hisdos super yates(still has one) to go east safely.

Abramovich himselfran awayeast to safety, back home to Russia, which appears to be one of the few nations currently hosting him.

This is all a lot of unwanted publicity for a man who has a reputation for avoiding the spotlight. An orphan raised in the frozen Siberian tundra, Abramovich rose from nowhere to become a prized tycoon.13 billion dollars. Younger than most first-generation Russian "oligarchs," as Russians disparagingly called them, the young Abramovich became known as "the sneaky oligarch" because, unlike many of his plutocratic contemporaries, he kept his head down.

In the 1990s, Abramovich became a protégé of Boris Berezovsky, who probablyAt leastsecret oligarch. Berezovsky had a big mouth. In 2000, he made the mistake of openly defying a new president named Vladimir Putin, someone for whom Berezovsky played a significant role in his election as president. When Putin threw the sledgehammer, Berezovsky was forced to flee Russia, and Abramovich, a staunch (and reserved) Putin loyalist, took over much of Berezovsky's oil and media empires. Even after moving to London, Berezovsky remained a vocal critic of Putin. He was found dead there in 2013, hanging from a noose in his bathroom. investigatorare sharedWhether it was suicide or murder.

With the exception of Abramovich and a few other figures, the occupation of the Russian oligarchy has largely been overcome since the 1990s, after Putin began purging oligarchs and anointing his own oligarchs to bolster his rule. However, the power structure remains the same. It is a symbiotic relationship in which the economic power of the oligarchs supports the political power of the Russian president, and the president's power supports the economic power of the oligarchs, like a medieval king who receives tribute from his aristocracy for his protection. It's a deal the West is now fighting.

It's impossible to know what would have happened to Russia in an alternate universe, where the nation's transition to capitalism was more gradual and smoother and oligarchs never took charge of the Russian economy. However, we know that his story is crucial to understanding Putin's rise.

The Rise of the Oligarchy

The Russian oligarchy emerged from the chaos of rapid privatization in the 1990s. After the collapse of the Soviet Union in 1991, Russian President Boris Yeltsin, leader of the revolt against communism, had to figure out how to move from a command-and-control economy to a market economy. Yeltsin turned to Russian economists Yegor Gaidar and Anatoly Chubais, who worked out the details with the help of Western advisers.

There were many economists - including Gaidar and Chubais himself before they became government officials - who believed that the transition to capitalism was best managed gradually. They knew the transition would be complex and painful, and it made sense for Russia to first create the institutions that healthy, competitive markets need to thrive, such as independent courts, functioning capital markets and strong regulators.

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But Yeltsin and his allies believed that time was not on their side. FORcoup attemptin August 1991, Soviet hardliners against the reformers nearly derailed the entire project. Deep-rooted Soviet industrialists and party members wanted a return to the old order. The Yeltsin administration decided that a program known as “shock therapy” – the rapid unleashing of market forces – was the way to shock the old Soviet system and make Russia embrace capitalism.

Primarily US advisors and global lendersthe International Monetary Fund, played a notable role in the advocacy of shock therapy. But some influential shock therapists, like the economist Jeffrey Sachs, then at Harvard, believed that such a radical program needed support. HeHe suggestedThe United States and multilateral development agencies are helping Russian reformers succeed with a $30 billion aid package similar to the one the United States provided to Europe after World War II under the Marshall Plan. Sachs also called for debt relief from Russia. But these ideas were rejected by American leaders.

President Yeltsin dealt the first major blow to the Russian economy when he lifted price controlsin december 1991. However, when the Soviet economy collapsed, the policy ended up triggering hyperinflation. In 1994, consumer prices in Russia nearly skyrocketed.2000 malwhat they were in 1990. That candy bar that cost $1 now cost $2,000. Hyperinflation has devastated ordinary Russians.

Meanwhile, Chubais was tasked with overseeing mass privatization. This involved transforming a nation whose economy consisted almost entirely of state-controlled industries (factories, oil refineries, mines, media companies, cookie factories, etc.) into a private enterprise. It was probably the largest transfer of state assets to private owners in world history to date.

Privatization took place in two waves. The first wave that started inoctober 1992At least it appeared to be a fair and open process. Russia issued 148 million "privatization checks" or vouchers to Russian citizens. These coupons can be freely sold or traded. They could then be used to buy shares in state-owned companies being privatized at public auctions across the country. It was as if the former Soviet Union had the biggest flea market in the world and the coupons were the ticket to shopping.

People on their way to becoming Russia's first class oligarchs roamed the country trying to buy as many coupons as possible. Many of the oligarchs came out of nowhere. They originally got rich but not yet very rich in superyachts, operating on the black market or through legitimate businesses when the Soviet Union first allowed private enterprise in the late 1980s. For example, Roman Abramovich made his first sale of marihuanarubber ducksand other random objects for Russians from his Moscow apartment (seriously). He was also a mechanic. When privatization started, many would-be oligarchs owned banks and had enough money to buy lots of vouchers.

The oligarchs went shopping, boughtHundreds of thousands of coupons, each worth10,000 rubles, or around $40 or less in the 1990s. Average Russians, struggling with hyperinflation, were often eager to sell. After accumulating coupons, the oligarchs, both con artists out of nowhere andInsider information from the former Soviet government— used them at auctions to buy shares in newly formed private companies. By all appearances, many of these companies were woefully undervalued, and those that managed to acquire large chunks of profitable businesses became fabulously wealthy in a very short time. Between 1992 and 1994 approx.15,000 state-owned companiesit was made private as part of the show.

In 1994, when the voucher program ended, around 70% of the Russian economy had been privatized. But some of the largest and most valuable industries remained in government hands. Chubais had plans to privatize these state-owned enterprises and raise much-needed funds for the government by selling them to the highest bidder for cash at legitimate auctions. However, politicians opposed the increasingly unpopular course of privatization, even threatening to reverse it. At this point, the Yeltsin government resorted to a much more obscure form of privatization.

The stock loan program

Until 1995, Boris Yeltsin was very unpopular. hyperinflation The decline of law and order. Hecrowd riseand executions in the streets of Moscow. Russia's inability to pay government wages and pensions. The feeling that unscrupulous men in suits would be the only ones to win in the new economy. In addition, Yeltsin was a notorious drunkard with serious health problems. Just a year before re-election, Yeltsin's approval rating had dropped into the single digits, and he faced the specter of an increasingly popular Communist challenger who looked poised to win the 1996 presidential election.

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With privatization stalled, the government desperate for cash and fears growing that Russia would revert to communism, Chubais and the Yeltsin government resorted to an obscure scheme known as "loan for shares". Basically, the secret conspiracy worked like this: the richest oligarchs lent the government billions of dollars in exchange for massive stakes in Russia's most valuable state-owned companies. If the government defaults on the loans, as the conspirators had hoped, the oligarchs would walk away with the keys to Russia's most profitable companies. In return, the government would receive the money it needed to pay its bills, privatization would continue, and most importantly, the oligarchs would do everything in their power to secure Yeltsin's re-election.

Between November and December 1995,sweetSome of Russia's most profitable industrial companies were auctioned off to the oligarchs, including a mining company, two steel companies, two shipping companies and five oil companies. The auctions were a complete scam. Chubais and his team had predetermined with the oligarchs who would get what and for approximately how much. And the prices the oligarchs paid for these companies were a bargain, quite literally. For example, Boris Berezovsky and Roman Abramovich, long past their days as sellers of rubber ducks, bought a large stake in the oil company Sibneft for around €1,000.200 million dollars. When Putin nationalized the company again in 2009, Abramovich sold his stake to the government for $11.9 billion. Talk about a payday.

"Chubais never defended this publicly, he tried to keep the objective unclear so as not to alarm the opposition, but stock lending should have been called 'Yeltsin tycoons,'" writes David Hoffman, former head of the Moscow bureau forMuere Washington Postin your bookThe Oligarchs: Wealth and Power in New Russia. "Chubais was ready to hand over land without competition, without opening and, as it turned out, at a bargain price, but in a way that would keep businessmen on Yeltsin's side in the 1996 election campaign."

Yeltsin is re-elected with money from the oligarchy

The oligarchs, often at odds with each other, kept their end of the bargain and joined forces to support Yeltsin's re-election campaign. They donated millions of dollars to the effort. They hired the best political agents they knew. They laundered money from the government through their banks and fed it into Yeltsin's election campaign machine. Two of the oligarchs, Boris Berezovsky and Vladimir Gusinsky, controlled two of Russia's three main television channels and flooded the airwaves with pro-Yeltsin propaganda. Buoyed by the immense power of the oligarchs, Yeltsin ran the first American-style Russian presidential campaign.

As the election approached, Yeltsin took a cynical step to appease critics of his privatization plan by publicly sacking his hugely unpopular privatization czar, Chubais. "He sold a big industry for next to nothing," Yeltsin told reporters. "We can't forgive that."

Perhaps ironically, while flying the banner of free markets and democracy, reformers of the 1990s carried out many of their reforms in undemocratic ways, often through presidential edicts secured by backroom deals with the rich and powerful. Not least, thanks to the oligarchic beneficiaries of these agreements, Yeltsin overcame all odds and was re-elected. Russian-style crony capitalism is here to stay.

Weeks after the win, Boris Berezovsky bragged about itFinancial Times diesthat he and six other Russian oligarchs controlled half of the Russian economy. This number appears to have been significant.inflated. However, in 1996, the world could see that Russia had a new class of industrialists and bankers who wielded enormous power. A class that made its fortune not through ideas of social improvement, consumer-friendly products, or technological innovations, but through corruption, treachery, and plunder of Russia's natural resources. Many Russians would resent the oligarchs and liberal reformers who empowered them.

As Yeltsin's health continued to deteriorate into the late 1990s, oligarchs began to worry about his successor. Yeltsin's natural heir would be the prime minister. If Yeltsin resigns, the prime minister automatically becomes interim president and would have the advantage of being able to officiate during the election period.

In 1999, Boris Yeltsin and his oligarchic allies agreed that an obscure former KGB officer named Vladimir Putin was the man who would become Yeltsin's prime minister and soon the next president of Russia. He was nobody, just a public figure, but he had a reputation for being loyal. They trusted that, once in power, he would look out for their interests. Little did they know they were unleashing a monster they would soon be unable to control.

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