By Daniel J. Arbess
NEW YORK – Russian climate envoy Anatoly Chubais’s decision last week to resign from the government and leave Russia may turn out to be highly significant. By reopening a window on recent Russian history, Chubais’s exit could bring some order to the West’s “KleptoCapture” strategy, which aims to freeze the assets of about a dozen Russian “oligarchs” described as “appendages of Putin’s regime.” But it could potentially do much more.
Chubais, who was responsible for Russia’s mass privatization programme under President Boris Yeltsin in the 1990s, is a living digest of how the country’s wealth was distributed. He was also an early promoter of Vladimir Putin as a competent successor to Yeltsin. And although Chubais has long since been outside Putin’s inner circle, he might well be able to lead the West to the president’s money – if he feels secure enough to talk.
Sanctioning Putin’s “appendages” sounds like a good idea, but Chubais knows that KleptoCapture, as it is currently conceived, is probably more smoke than fire. The current handful of targets got rich in the Yeltsin years but eventually found themselves at odds with Putin and left Russia, or remain there at his pleasure. They own what Putin allows them to own so long as they stay out of his way, and they have minimal influence. Today’s Kremlin insiders are Soviet-era spies and “red-director” holdovers who control most of the thousands of firms that were privatized between 1992 and 1996.
Back then, the oligarchs being targeted now were bankers who lent the Russian government $800 million, typically secured by minority stakes in 12 major oil and metals companies. This scheme was intended to help Yeltsin plug a giant budget deficit and avoid hyperinflation before the 1996 election, which he was otherwise expected to lose to his communist challenger, Gennady Zyuganov. If the government did not repay the loans immediately after the election, then the lenders could auction the stakes, thus consolidating privatization no matter who won.
Although Yeltsin was surprisingly re-elected, the state still defaulted – probably intentionally, to reward the bankers for their help. The ownership stakes, then valued at $1.5-2 billion, were “sold” in mostly rigged auctions to the lenders, transforming a few young financiers into oligarchs.
As an adviser to Chubais and his team at the time, I argued that “loans for shares” would corrupt the privatization process and create the appearance that Yeltsin was intentionally enriching a small group of tycoons by effectively selling off important stakes on the cheap. Chubais would later admit that the scheme was “bandit capitalism,” but necessary to avoid a return to “bandit communism.”
Loans-for-shares came to assume mythical significance in the story of Russian privatization, overshadowing the mass privatization of thousands of other firms that Chubais oversaw. But the real tragedy for Russia turned out to be Chubais’s promotion of Putin, who quickly reconsolidated corporate control – for himself.
In 1999, an ailing Yeltsin resigned before the end of his second term and appointed Putin, a former head of the Federal Security Service (FSB, the successor to the KGB) who had earlier established a reputation as an efficient reformer while deputy mayor of St. Petersburg. Financial markets broadly supported Yeltsin’s pick, which Chubais himself lauded as “a brilliant decision, extremely precise and profound and, apart from anything else, very brave.”
On becoming president, Putin promised that “freedom of speech, freedom of conscience, freedom of the press, the right to private property – all of these basic principles of a civilized society – will be reliably protected by the state.” Putin actually supported market reforms for a while, provided that the oligarchs stayed out of politics and shared the economic benefits with him and his cronies in the security apparatus. But when Mikhail Khodorkovsky – the founder of Menatep Bank who acquired control of the oil firm Yukos under loans-for-shares – signaled his political ambition, he was jailed for nearly a decade and Yukos’s assets were renationalized.
Putin also turned against Boris Berezovsky, another Yeltsin crony, who is thought to have played a key role in persuading Yeltsin to pick Putin as his successor. And he exiled Bill Browder, a successful Moscow-based American “constructive activist” investor who took on large Russian companies. Browder’s tax lawyer, Sergei Magnitsky, was later arrested and died in jail in 2009; Browder has since devoted himself to securing justice for Magnitsky.
Several Russian oligarchs made their fortunes on the rough-and-tumble sidelines of Russia’s privatization program. Some, like metals magnate Oleg Deripaska, have stayed in Russia, wielding diminishing influence at home while investing in properties abroad. Others, such as bankers Mikhail Fridman and Petr Aven, retained their Russian businesses but were probably compelled to share ownership or wealth with Putin and other governmental “protectors.” All three have acquired foreign passports. Those who, like Berezovsky, openly opposed Putin died in mysterious circumstances, as did active political opponents like Boris Nemtsov, who was assassinated outside the Kremlin in 2015.
A few entrepreneurs who built their businesses from scratch had the foresight to sell them and leave Russia when Putin came to power. Vladimir Gusinsky – my first Russian entrepreneur friend in 1989 – founded NTV, Russia’s first independent media company, but in 2001 sold it to state-controlled Gazprom and emigrated with his family to Israel. NTV is now one of Putin’s main mouthpieces.
Whether self-made or canny beneficiaries of Yeltsin’s crony capitalism, most of these rich Russians with overseas assets seem to share a desire for social acceptance outside Russia. Many have made substantial investments in Europe and the United States, where they have become bright stars in the philanthropic firmament of museums, philharmonics, and other cultural institutions.
None of these men appears to have influence, much less control, over Putin. On the contrary, he poses a constant threat to their wealth and safety. Instead of vilifying and sanctioning them, Western leaders might gain more by making them – and Chubais, their former patron – comfortable enough to share whatever they may know about where Putin’s money might really be found.
Copyright: Project Syndicate, 2022.
