Kremlin Capitalism

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As Vladimir Putin nears the end of what he insists will be his last term as president, analysts can not help but notice how different the country is today from the one he inherited from his predecessor, Boris Yeltsin, in 2000. Most critics have focused on the way the Kremlin has increased its control of the media and eliminated regional gubernatorial elections. There have also been far-reaching changes in the ownership and management of several of the country's largest and richest energy and metals companies, however. Here, too, the Kremlin once again has begun to play a more intrusive role. Not only has the management of several of the richest resource companies been replaced, but the trend today is toward re-nationalization rather than privatization.

Given the flawed design of the economic reforms in the 1990s under Yegor Gaidar and Anatoly Chubais, particularly the privatization and "loans for shares" initiatives, it was all but inevitable that sooner of later there would be a backlash. How could there not be when after more than 70 years of indoctrination that national resources belong to the country as a whole, those resources almost overnight ended up as the wholly owned assets of a narrow circle of what came to be called "oligarchs." (At one point Boris Berezovsky boasted erroneously that seven of these oligarchs controlled 50 percent of the country's wealth.) There might have been less resentment if at least some of those oligarchs had been self-made men similar to Bill Gates, who created Microsoft out of nothing, as did Edwin Land with Polaroid. But in almost all cases, the wealth of these new Russian billionaires resulted from their takeover of already existing assets. And once in control, for a time at least people like Mikhail Khodorkovsky and Berezovsky engaged in stripping, not enhancing assets.

It also did not help that so few of these among the new rich were insiders, from what had been the ruling circles in the Soviet era -- the nomenklatura. A disproportionate number were from minority groups, not ethnic Russians nor part of what in the United States we would call "the ol' boy network," or as the Russians say, the siloviki. There was great resentment of these upstarts, an attitude reminiscent of how aristocrats in the tsarist era also viewed the businessmen of their time, few of whom were ethnic Russians.

The oligarchs of the 1990s, and former Media-MOST owner Vladimir Gusinsky in particular, were never entirely accepted by Yeltsin. But since Yelstin was also a rebel and other oligarchs like Berezovsky and Roman Abramovich were sources of financial help to the circle around him, Yeltsin did little to curb their powers. He also felt beholden to them for helping him win the 1996 presidential election.

Putin's reaction was very different. Despite the fact that some of the oligarchs, and Berezovsky in particular, had been instrumental in arranging his appointment as prime minister, Putin warned them early on to stay out of politics. When two of them, Gusinsky and Berezovsky did not, Gusinsky was jailed, Berezovsky was threatened with jail and both were eventually hounded into exile.

Mikhail Khodorkovsky was not so lucky. Seemingly convinced of his invulnerability (a net worth of $15 billion will do that to you), he openly sought to buy up members of the State Duma, provoking the ire of the siloviki. In what was alleged to be a wiretap between Sergei Bogdanchikov, the CEO of the state-owned Rosneft, and Igor Sechin, then- deputy head of the Kremlin administration and soon also to be chairman of the board of Rosneft, Sechin complained about Khodorkovsky's efforts to "to buy the Duma." In a subsequent wiretap before Khodorkovsky's arrest, Bogdanchikov purportedly boasted that once they had succeeded in putting Khodorkovsky in prison, "face down on the floor ... he will then understand who is the master of the forest." The Financial Times did write that it was impossible to verify the authenticity of the recording.

Once many of the original oligarchs had been pushed aside, these siloviki quickly moved into their places. What is unique, however, is that senior Kremlin officials have kept their day jobs while also taking on additional positions in the country's largest state-owned businesses. Russia is possibly the only country in the world where someone like Sechin is not only a senior official in the country's presidential administration but simultaneously the chairman of the board of the country's second-largest publicly traded company, Rosneft. Given that it is difficult enough to perform just one of these jobs well, it is hard to see how anyone can do both effectively. (Holding two jobs in this manner was even banned in the tsarist era).

While this may satisfy those determined to push out the original oligarchs -- four of the big seven under Yeltsin have lost control of their business empires -- Russia now finds itself with what we can call "Kremlin oligarchs." It is all but inevitable that before long they too will appear on Forbes magazine's list of billionaires. Moreover, when asked how these Kremlin oligarchs can avoid a conflict of interest when an issue comes before the Kremlin concerning their companies and a competitor, Putin insisted at the most recent Valdai Discussion Club meeting that there is no problem; his appointees, he implies, are incorruptible.

By initiating efforts to reclaim majority state ownership of companies such as Gazprom and Avtovaz, both of which had been at least partially privatized, and by staffing these companies with his former comrades from either the KGB or the staff of the late Mayor Anatoly Sobchak of St. Petersburg, under whom he served as first deputy mayor, Putin has restored the role of the state over some of its more important assets while at the same time putting his crowd in control. This must increase anxiety among those few original oligarchs who have yet to experience Putin's wrath. But Putin now has several giant state-owned industrial champions that he can use as instruments of foreign policy. Yet it is hard to see how a return to state ownership and the political patronage that is already evident can enhance industrial productivity or lead to the most efficient use of the country's resources.

Marshall I. Goldman, the author of "The Piratization of Russia," is professor of economics, Emeritus at Wellesley College and senior scholar, at Harvard's Davis Center.