Russian oligarchs: how they came to power and got rich - Profolus (2023)

It was in 1992 that Alexei Mordashov became Severstal's CFO before it was privatized. His senior director instructed him to buy stock to keep the business away from outside investors. He later created two mutual funds to buy stock from workers and increase their stake in the company.

He then became General Manager of the company in 1996, at the age of 31. It was his vision that prompted and inspired him to turn Severstal into a conglomerate through the acquisition of companies in the steel, mining and coal industries.

Mordashov is easily recognized as one of the most popular Russian oligarchs who amassed wealth and then rose to power.Collapse of the Soviet Union in 1991. In addition to being one of the five richest people in Russia, he is also one of the world's top 100 billionaires, with an estimated net worth of $29.1 billion (as of 2021).

Currently in Russia there are more than a hundred oligarchs with different commercial interestssectors and industries. The media described them as ultra-rich people who not only dominate the Russian business scene, but also influence the Russian political scene.

Several of these extremely wealthy individuals and their families owned and operated companies in the hydrocarbon and mining industries. Some retained control of core economic activities such as banking and finance, as well as telecommunications and fertilizers, while others entered new markets.

Then there are those who have become close associates of Vladimir Putin and other top government officials. Not only are they exceptionally wealthy, but they also have close ties to the Russian intelligence community and therussian military.

Oligarchy in Russia Explained: Wealth and Power Accumulation During the Post-Soviet Era

An oligarch is generally considered a person who is among the select few to rule or influence the leaders of an oligarchy. Meriam-Webster defines an oligarchy as a leading state ruled by a few and a government in which a small group of people exercise control or influence over various aspects of society, politics, and the economy.

In Russia, the term "oligarch" is popularly attributed to so-called corporate oligarchs who successfully acquired extreme and disproportionate wealth following the collapse of the Soviet Union. His meteoric rise to power seemed to happen overnight.

But how did these Russian oligarchs get rich? What is your power source? How do they affect the political scene in Russia? To understand the success and status of these individuals and their families, it is necessary to understand the political conditions and economic policies that occurred in the early years of the post-Soviet era.

The birth of the Russian oligarchs.

Severstal was formed from the consolidation of the State Iron and Steel Complex in the city of Cherepovets. In 1993, former Russian President Boris Yeltsin ordered these smelters and mills to become a single joint-stock company.

Details of how Mordashov was able to raise capital and the relevant processes he went through to acquire Severstal are not publicly available. However, for other notable Russian oligarchs, their accumulation of wealth and rise to power can best be understood through Russian privatization during the post-Soviet era.

Privatization was the trend in Russia in the early 1990s after the collapse of the Soviet Union. Russian economist and politician Grigory Yavlinsky was one of the architects behind the market liberalization of the Russian economy.

He crafted reforms aimed at opening up the economy to private investors and reducing government control. These reforms were the result of the perestroika political movement that began in 1985. He worked to rebuild the political and economic system of the Soviet Union. But the movement had limitations and criticisms.

In the late 1980s and early 1990s, a growing economic crisis created political tensions in the political landscape of the Soviet Union. The liberals began to push their agenda, while the hardline socialists tried to keep the status quo in line with socialism.

Yavlinsky developed the 500-day economic reform package, which summarized some of the points raised by the liberal and socialist factions and recommended decentralization and some privatization. The Supreme Soviet included several measures in the program, positioning it as "modern capitalism" rather than a return to capitalism.

But the post-Soviet era proved the latter. Yeltsin took office as Russia's new president in 1991. His government oversaw Russia's transition from aeconomic systemrelated tosocialism and communismto a market economy system.

Conditions under the Yeltsin regime encouraged the participation of some people. These individuals started with nothing and quickly became rich through specific privatization programs, such as the 1992-1994 voucher privatization program, which encompassed cash sales and stock lending programs in 1995.

Analysts noted that some of them had strong ties to government officials who were elected but suspected of corruption. One notable example of corruption was the notorious loan-for-equity scheme that supported Yeltsin's re-election campaign.

The program featured the transfer of shares in former government-owned companies to select individuals in exchange for government-funded loans. However, the government deliberately defaulted on these loans to allow these individuals to auction off the purchased shares of larger companies at a discount.

Most of these people owned the acquiring companies themselves. The auctions were rigged and lacked competition. Yeltsin's rule was instrumental in the rise of the first generation of Russian oligarchs.

Political influence of the oligarchs

The oligarchs of the Yeltsin regime not only acquired wealth but also considerable political influence. Remember, they played an important role in financing Yeltsin's re-election in 1996. Furthermore, their close ties to the Russian president made it easy for them to ask for the privileges necessary to further his business interests.

An example of this privilege was access to inside information about the financial decisions of the Russian government. They used the information to guide their strategies and decisions that allowed them to continue to accumulate wealth.

There were nine Russian oligarchs considered most closely associated with the Yeltsin regime and most influential in the political and business arenas. These were Boris Berezovsky, Mikhail Friedman, Vladimir Gusinsky, Mikhail Khodorkovsky, Vladimir Potanin, Alexander Smolensky, Pyotr Aven, Vladimir Vinogradov and Vitaly Malkin.

Seven of these people made up the Seven-Banker Outfit or Semibankirschina. Together, they controlled 50 to 70 percent of Russia's financial and banking sector, particularly access to capital and other investment opportunities. They also controlled all of the Russian media and influenced Yeltsin's views and positions.

In addition, these individuals also controlled the natural resources and metals sectors. His source of power or political influence came essentially from his wealth and control over important Russian industries and sectors.

Russian oligarchs under Vladimir Putin

Note that Yeltsin's oligarchs were the first generation of Russian oligarchs to come to power as a result of Russian privatization and Russia's transition from socialism to a free market system. His rise to power was a product of the political and economic conditions of the early post-Soviet and post-socialist eras.

However, after the Yeltsin regime, a new wave of oligarchs emerged. These individuals represent the second generation of Russian oligarchs whose meteoric rise to wealth and power is attributed to Vladimir Putin.

Putin was a former KGB foreign intelligence officer who rose to the rank of lieutenant colonel before resigning in 1991 because he did not want to be part of the Yeltsin government's intelligence services. He remained virtually unknown as he entered Russian politics in various capacities from 1991 onwards.

Yeltsin appointed him Deputy Chief of the Presidential General Staff in 1997. He was later appointed Director of the Federal Security Service, or FSB, in 1998. Keep in mind that the FSB is practically the successor to the KGB. From here he took off his political career.

He was later appointed by Yeltsin in 1999 as one of the first three Deputy Prime Ministers and Acting Prime Minister of the Government of the Russian Federation. Putin has been defined as the next Russian president. In fact, after Yeltsin's unexpected resignation due to ill health on December 3, 1999, Yeltsin became acting president.

Some first-generation Russian oligarchs, such as Boris Berezovsky, claimed they were primarily responsible for Putin's promotion to prime minister and his eventual consideration for the presidency. But Putin's presidency was different from Yeltsin's regime.

Most of the members of the Seven Banker group saw their political influence quickly dissipate. In Russia, Khodorkovsky, Berezovsky and Gusinsky were declared "persona non grata" by the Putin government. Berezovsky and Gusinsky fled the country in 2000, while Khodorkovsky lost his company and his freedom in 2003.

Putin's regime marked the emergence of a new dynamic between the Russian oligarchs and the Russian government. Recall that during the Yeltsin regime, the oligarchs had significant influence over Yeltsin himself and the government. Yeltsin owed these people something.

Under Putin, however, the situation was reversed. He facilitated the rise of a new generation of Russian oligarchs by various means. State treaties are an example. These deals allowed companies to charge inflated government fees to pass bribes on to the government officials involved.

Another reason is a big deal in which Putin allowed the oligarchs of the older generation to retain their influence in exchange for their explicit support for his rule. Those who opposed him were prosecuted with the legal instruments available.

Several people close to Putin also became wealthy under his regime. One example is his childhood friend Arkady Rotenberg, whom he put in charge of a newly founded state distillery in 2000. Another example is his former campaign manager Vladimir Litvinenko, who bought a sizeable stake in a mining company from phosphate.

The current Russian president is instrumental in enriching the new generation of Russian oligarchs and maintaining the influence of the oligarchs of the older generation. Putin was willing to show them that they owe him their fortune.

Side note: explaining the rise of Russian oligarchs to wealth and power and their status under Putin's rule

Russian oligarchs were essentially the major players in Russian politics and business in the 1990s. While the post-Soviet Russian government was instrumental in accumulating wealth, they ended up using their wealth to gain political influence. This became clear during the Yeltsin presidency.

The former Russian president owed a debt of gratitude to these corporate oligarchs for funding his 1996 re-election bid. He granted them political and business favors that furthered their business interests and gave them control over political decisions.

However, the tide turned when Yeltsin resigned and Putin replaced him as interim president. While some oligarchs have claimed that they were responsible for bringing Putin to power, the current Russian president has been indifferent. He launched campaigns designed to deprive these individuals of political influence and power.

Putin has used his political authority to use any legal means necessary to subdue first-generation oligarchs and has also used the same authority to create a legion of second-generation oligarchs who are generally friendly and easy to deal with.

The Russian president's objective was clear: he wanted these Russian oligarchs to stay out of politics in exchange for commercial favors. His government also promised to stay out of his affairs as long as they remained loyal to his government and submitted to his wishes. Putin has been in charge since he took office.

It is also interesting to note that the post-Soviet era under Putin's rule also marked the rise of Russian oligarchs who had no political or other connections. This includes Russian-born Israeli tech investor Yuri Milner.

The depth of the relationship between Putin and Alexei Mordashov remains unclear. But it is important to note that Mordashov was one of the Russian oligarchs who facedEconomic sanctionsimposed by numerous governments, such as the United States andEuropean UnionafterRussian invasion of Ukrainein February 2022.

Mordashov remains the majority owner and has full control of Severstal. The company also remains the largest steelmaker in Russia and the 37th largest in the world. Mordashov's wealth continues to expand his company's operations.

It has also invested in companies from various industries and sectors. These include British travel and leisure company TUI Travel, Russia-based National Media Group, steam turbine maker Power Machines, formerly owned by Siemens, a gold mining company and a telecommunications service provider.

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