The oligarchs play a central role in Russia’s political and economic system. Let’s decipher their complex relationship with Putin.
In search of ways to stop and punish Vladimir Putin -as well as those who supported and profited from his rule- after the invasion of Ukraine, Joe Biden and other world leaders are looking at Russian oligarchs. In his State of the Union address, the U.S. president singled them out, promising to « seize (their) yachts, luxury apartments, private jets. » « We’re coming for your ill-gotten gains, » he said. In the UK, a total of eleven wealthy Russians have been or will be personally sanctioned.
Who are these oligarchs, what is their relationship with Putin? And, more importantly, can attacking their wealth help end the war in Ukraine?
A caste that emerged in two stages
As a researcher specializing in emerging markets, corporate strategy and post-Soviet political economy, I have studied the oligarchs closely. They are an ultra-rich business elite with disproportionate political power. This caste emerged in two stages.
The first wave of oligarchs was born out of the privatizations of the 1990s, in particular the cash sales of the largest Russian state-owned enterprises after 1995. All this took place against a background of widespread corruption. One example is the infamous « loans for shares » operation, which allowed tycoons chosen by the government to take stakes in 12 large state-owned enterprises in exchange for loans to shore up the federal budget.
The government deliberately defaulted on these loans, allowing its creditors – the would-be oligarchs – to buy the stakes in major companies such as Yukos, Lukoil and Norilsk Nickel at a discount. The administration of Boris Yeltsin, then president, thus enriched a small group of tycoons by selling the most precious jewels of the Soviet economy at a heavy discount.
Putin’s accession to power in 2000 allowed the emergence of the second wave of oligarchs through state contracts. Private suppliers in many areas such as infrastructure, defence and health care were overcharging the government for their services, offering bribes to the officials involved. Putin enriched a new legion of oligarchs who now owe him their enormous fortunes.
Less political power
In the 1990s, they wielded great influence in the Kremlin and sometimes even dictated Russian policy. Under Yeltsin, many oligarchs held positions in the government. Anecdotes abound of coffers full of cash being transported to the Kremlin in exchange for political favors.
But since Putin has been in office, he has been calling the shots. The former KGB officer has proposed a deal to the oligarchs: they stay out of politics, and in exchange the Kremlin keeps its hands off their business and turns a blind eye to their often illegally acquired profits.
The popular disappointment with the privatizations of the 1990s also facilitated this takeover in the 2000s. Putin’s Kremlin put political pressure on oligarchs in strategic sectors such as media and natural resources to sell majority stakes back to the state.
Putin has also passed laws that give preferential treatment to so-called state-owned enterprises. These measures have allowed the Kremlin to strengthen its control over the economy and the oligarchs.
Three shades of oligarchy
Today, three types of oligarchs can be distinguished by their proximity to power.
First, Putin’s friends, who are personally linked to the president. Many of those close to the Russian president – in particular those from St. Petersburg where Putin was born and raised, as well as those from the KGB – have become considerably richer. Among the oligarchs Putin knew in St. Petersburg are Yuri Kovalchuk, often called Putin’s « personal banker, » Gennady Timchenko, founder of the energy trading company Gunvor, and the brothers Arkady and Boris Rotenberg, who own construction, electricity and oil assets. All of these individuals are targeted by Western sanctions.
The second group includes leaders of the Russian security services, police and military – known as « siloviki ». They have also used their networks to amass fortunes. Some of these « silovarchs » are former intelligence officers of the KGB, and currently of the FSB (Federal Security Service of the Russian Federation). These men jealously watched the power and wealth of the Yeltsin-era oligarchs and got it under Putin. The informal leader of the siloviki is Igor Setchin, chairman of the oil giant Rosneft, often referred to as the most powerful person in Russia after Putin.
Finally, most Russian oligarchs do not have personal ties to Putin, the military or the FSB. Indeed, some of them are from the 1990s. While Putin crushed politically troublesome or recalcitrant oligarchs after coming to power, he has not sought to « systematically eliminate the oligarchs as a class, » as he promised in his first election campaign.
Men such as Vladimir Potanin and Oleg Deripaska, who made their fortunes in the 1990s, are on the list of the richest Russians today.
Putin’s accomplices
Make no mistake: regardless of which category they fall into, these oligarchs have helped Putin stay in power through their political compliance and economic support for Kremlin initiatives. Moreover, my research shows that oligarchs have sometimes used their wealth to influence politicians in other countries.
For example, in 2014, the Russian bank FCRB lent 9.4 million euros to Marine Le Pen’s far-right party, which was still called the National Front at the time, creating a political debt from that outfit to Russia.
In 2016, Lukoil, Russia’s second largest oil company, paid a $1.4 million government fine for Martin Nejedly, a key advisor to the Czech president, allowing him to retain his influential position. This has helped make President Milos Zeman « one of the most ardent supporters of the Kremlin among European leaders.
Some oligarchs appear to be initiating large-scale geopolitical deals on their own initiative to get into the Kremlin’s good graces. While it is difficult to establish direct causal links between what I call the « geopolitical voluntarism » of oligarchs and the pro-Kremlin policies of their beneficiaries, there is strong empirical evidence that the funding of oligarchs facilitates the adoption of pro-Putin positions outside Russia.
Moreover, my research suggests that the use of self-proclaimed apolitical intermediaries, such as private companies, is a key strategy for states such as Russia to mask their attempts at political influence.
Putin’s hostages
This brings us to the question on most of our minds: could the heavy sanctions against the oligarchs cause them to abandon Putin or change the course of the war?
Some oligarchs are already speaking out against this invasion. These include Alfa Group chairman Mikhail Fridman and metals magnate Oleg Deripaska, both of whom have been sanctioned by the West. Lukoil has also called for an end to the war. Although it is not currently subject to direct sanctions, oil traders are already avoiding its products in anticipation.
On the one hand, the oligarchs do not cooperate with each other and act in isolation. Within the « piranha capitalism » that prevails in Russia, these billionaires are in competition for government largesse. From this point of view, their individual survival against the Kremlin has always been the driving force behind their actions. Now it is a matter of defending their common interests – the lifting of sanctions. The Kremlin, for its part, has promised state support for sanctioned companies, especially in the banking sector.
More importantly, it is the power of arms, not the power of money, that dominates the Kremlin today. As long as Putin retains control over the siloviki – the current and former military and intelligence officers close to Putin – the other oligarchs will, in my opinion, remain hostages of his regime.
The generals are more likely to influence Putin than the oligarchs. And an economic collapse of the country could be even more convincing…
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