Russia's Crony Capitalism

by Anders Aslund

  Similarly, the Kremlin sees state enterprises as geopolitical tools. Gazprom has obediently cut off gas whenever the Kremlin has requested it to punish a recalcitrant neighbor, even at major commercial cost, as with Ukraine and the European Union in 2009. Rosneft is happy to take over the responsibility for Venezuela, and VEB has thrown vast amounts on every harebrained scheme suggested by the Kremlin.

  The law is no restriction; Putin’s will appears to be everything. All too obviously, Putin approved of both Sechin’s intricate corporate raiding of Yukos and Bashneft and Chemezov’s of VSMPO-Avisma. Putin has awarded his lords their fiefdoms, and they are entitled to treat them at their discretion as long as they obey Putin.

  The Kremlin considers social peace more important than profits or development. The state enterprises are supposed to pursue government policy inside the country. Gazprom is diligently supplying gas to the whole country regardless of whether people can pay, and the big state companies maintain employment in the many company towns. In his call-in program in June 2017, Putin offered a telling example. When the Kremlin wanted to build a bigger aircraft, “the government did not find the money and I will reprimand them for this. . . . Nevertheless, we found an opportunity and earmarked several dozen billions from Rosneftegaz for the relevant program.” A state company was supposed to offer financing for the Kremlin without regard to the private shareholders of Rosneft.102

  The CEOs of Russian state corporations are very well paid. Standard salaries of the big companies have ranged from $25 million to $50 million. Members of supervisory boards are also well remunerated. As president, Medvedev insisted that these salaries were published, which was done for a few years, but Sechin has made them secret.103

  Can this system continue as oil rents dry up? The answer is not obvious. Putin has allowed the “systemic liberals” to tighten the budget constraints on the large state companies. Even Rosneft was forced to abandon its most value-destroying investments, such as petrochemicals. Yet if the price of oil stays over $50 per barrel, Russian oil rents will remain substantial.

  The Russian model of crony capitalism appears not accidental but deliberate. This is a re-creation of an ancient patrimonial model well described by the dean of Russian history, Richard Pipes. It offers a maximum of freedom to the ruler and far-reaching delegation to the feudal lords. In effect, the state corporations have transformed public property into tsarist ownership. That model lasted for centuries.104

  F • I • V • E

  The Expansion of Crony Capitalism

  In 2004, a previously unknown group of Putin’s friends surfaced, and in an unlikely way. That March, the former oligarch Boris Berezovsky, who had lived in voluntary exile in England since late 2000, sponsored the prominent politician Ivan Rybkin in opposition to Putin in the presidential campaign. Rybkin had been the speaker of the State Duma and was a former national security adviser.

  In a mysterious incident, Rybkin disappeared for five days. When he resurfaced in Kiev in Ukraine, he claimed to have been drugged and kidnapped. At an emotional press conference, Rybkin accused four men of being Putin’s “cashiers”: Roman Abramovich, Gennady Timchenko, and the brothers Mikhail and Yuri Kovalchuk. “I—and not just me—have lots of concrete evidence of Putin’s participation in business. Abramovich, as is known, but also Timchenko, the Kovalchuk brothers and others are responsible for Putin’s business.”1

  Abramovich was on his way to London, and today he appears to play little role in Putin’s circle, though Putin seems to keep him in high regard. The other three, all contemporaries of Putin from St. Petersburg, were completely unknown at the time. The Rybkin affair marked the end of democracy in Russia. The Kremlin reacted sharply: Rybkin’s candidacy was not allowed, and he disappeared from public life. But the cat was out of the bag. Information gradually surfaced about these cronies who were becoming billionaires, and a new side of Putin came to light.

  The cronies form the third circle around Putin, after the first two circles of security officials and state enterprise managers. Since around 1990, they have been private businessmen, and they have known Putin for a long time. They went into business with him when he was first deputy mayor of St. Petersburg, responsible for foreign economic relations, from 1991 to 1996. Yet their business took off only during Putin’s second presidential term.2

  The three prime cronies are Gennady Timchenko, Arkady Rotenberg, and Yuri Kovalchuk. Timchenko is the most prominent of these businessmen, having made his money in oil trading, gas production, and pipeline construction. Arkady Rotenberg is a major state contractor for roads and pipelines. Yuri Kovalchuk is the chief executive of Bank Rossiya and has made his money by purchasing financial and media assets from Gazprom. Judging from Forbes’s published lists of the rich, these three seem to be the most successful businessmen among Putin’s cronies.3

  Other cronies also exist. Nikolai Shamalov was the representative of Siemens and sold its medical equipment to the Russian government. Arkady Rotenberg has a younger brother, Boris, who has lived for many years in Finland, and a son, Igor, who has taken over much of Arkady Rotenberg’s business. Yuri Kovalchuk’s brother, Mikhail, is director of the Kurchatov Institute in Moscow, Russia’s foremost nuclear research institute, but he is hardly a prominent businessman.

  Numerous people of lesser significance could be added. Some have taken off commercially, while others have departed, but the stability in Putin’s inner circle is striking. In her outstanding book Putin’s Kleptocracy, Karen Dawisha names them all. So have Yuri Felshtinsky and Vladimir Pribylovsky in their detailed book The Corporation. The documentation has been done, and I shall focus on their functions.4

  Putin’s cronies are all men of his age from St. Petersburg. Their education and professions vary, but all have completed higher education. Around 1990, they entered varied businesses, with little expertise. Their accumulation of great wealth did not begin until around 2004.

  Andrei Illarionov, a liberal reformer who served as personal economic adviser to Putin from 2000 to 2005, says that he never heard of or saw the cronies as long as he was in the Kremlin. Yet in 2000 a presidential order arrived in the Kremlin that had not gone through ordinary government channels, ordering the formation of a state alcohol monopoly, Rosspritprom, with more than one hundred liquor factories. When Illarionov saw this, he called on fellow reformers Economy Minister Herman Gref and Finance Minister Alexei Kudrin. Together they managed to stop an obvious rent-seeking scheme. Many years later, Illarionov learned that Arkady Rotenberg had been behind it, which is indicative of how discreetly the cronies operated.5

  The cronies never wanted to go public. Timchenko gave his first interview in 2008, and Arkady Rotenberg in 2010. Putin’s close friends are few, perhaps a score of men (and no women). As mentioned, they are mostly of Putin’s age and from St. Petersburg. Timchenko lived for a long time in Helsinki and then in Geneva, while Boris Rotenberg appears to have resided in Finland for the past two decades. Both Timchenko and Boris Rotenberg are Finnish citizens.6

  On March 20, 2014, two days after Russia’s annexation of Ukraine’s Crimea, the US Treasury sanctioned “Members of the Inner Circle”: Gennady Timchenko, Arkady and Boris Rotenberg, and Yuri Kovalchuk, as well as Bank Rossiya. They were sanctioned “because each is controlled by, has acted for or on behalf of, or has provided material or other support to, a senior Russian government official,” that is, Vladimir Putin. The European Union has sanctioned Arkady Rotenberg, Yuri Kovalchuk, and Nikolai Shamalov, though not Timchenko and Boris Rotenberg because they are Finnish citizens. It is easier to write about them following the sanctions, since they can no longer sue for libel with merit.7

  During the years 1989–1993, Russia’s already high murder rate doubled. Racketeering and gang wars over turf drove this violence. The government’s monopoly on violence had broken down during the collapse of communism, and private entrepreneurs in protection took over. Political scientist Vadim Volkov remarks that “property exists only as lo
ng as it can be protected by the claimant.” Gang wars were particularly severe in St. Petersburg, which earned the nickname “criminal Peter.” Russians drew parallels between St. Petersburg and Chicago at the height of the Mafia violence during Prohibition in the early 1930s. Contract killers murdered Mikhail Manevich, the deputy mayor for privatization, in 1997 and the prominent liberal parliamentarian Galina Starovoitova in 1998.8

  In June 1991, in the midst of this violence, Vladimir Putin became chairman of the Committee for International Relations at the St. Petersburg City Hall, and from 1994 he also became deputy chairman of the St. Petersburg City Government. Putin was the protégé of the newly elected liberal mayor Anatoly Sobchak, a very likable man and a brilliant orator, but a terrible manager. I attended a speech he gave in the St. Petersburg City Hall in 1992. It was outstanding, and he received rapturous applause. Realizing his success, Sobchak repeated the same speech immediately afterwards, to more muted praise. Sobchak was a prominent professor of law, but he constantly improvised and never followed up on his decisions, generating chaos.9

  Amid this criminal chaos, Putin was in charge of foreign investments, which was suffering from the soaring crime rate. The Swedish consul general in St. Petersburg from 1992 to 1996, Sture Stiernlöf, wrote a devastating picture of Putin, characterizing him as “closed, secretive, and German-oriented” and “an independent operator of power in the shade of Sobchak.” Foreign visitors tended to underestimate Putin, who said little, revealed nothing, and was generally unhelpful. The Swedish authorities blamed Putin for ordering the tax police to extort the Swedish company that managed the elegant Grand Hotel Europe, forcing the Swedes out in favor of a German company. Similarly, the European Bank for Reconstruction and Development complained that Putin tried to raid the Astoria, St. Petersburg’s other grand hotel.10

  The first foreign bank office permitted to open an office in St. Petersburg was the German Dresdner Bank, whose local representative was Putin’s old friend from the East German Stasi in Dresden Matthias Warnig. He has remained one of Putin’s key businesspeople and sits on the supervisory boards of both Rosneft and Nord Stream. Finnish consul generals accused Putin of links to organized crime in Finland in this period. During his five years as deputy mayor, Putin visited Finland sixty to seventy times, nurturing business interests in Turku, where the Finnish authorities asserted that he owned a small hotel.11

  Several American and German visitors to St. Petersburg in the early 1990s noted that Putin performed services without asking for a bribe, but he appears to have focused on a few big deals. Karen Dawisha tells the story about Putin’s engagement in organized crime in St. Petersburg well. My own visits in St. Petersburg in the early 1990s verify many of her points. Yuri Felshtinsky and Vladimir Pribylovsky have also described these events.12

  One big crime has stuck to Putin. In December 1991, Putin wrote to the Ministry of Economy in Moscow, requesting from state companies some $100 million of commodities, including oil, scrap metal and wood, to be bartered for food because St. Petersburg feared famine during the winter. A prominent liberal St. Petersburg politician, Marina Sal’e, led a city council commission that investigated what happened with these resources. The commission published a substantial report, concluding that “the city did not receive any products and ‘lost’ about $92 million.” Nothing had been delivered, and all the money had been embezzled. Her commission called for Putin’s prosecution. Thanks to protection from Sobchak and the Russian government in Moscow, Putin got out of this conundrum. This was presumably Putin’s first big money, but he shared it with many.13

  Putin was tied to another big corruption scandal involving the Tambov group—money laundering via the St. Petersburg Real Estate Holding Co. (SPAG). The Tambov group was the city’s leading Mafia group in the early 1990s, and it was headed by Vladimir Kumarin. Putin was a founding member of SPAG’s advisory board. Here as in many other cases, Putin appeared both as a representative of the city and as himself, which was often the case in Russia at that time. As Dawisha puts it: “Putin’s price for doing real estate deals generally was that 25 percent had to go into the city’s coffers for infrastructural and social projects, but there is no evidence of his seeking any commission for this deal.” He did not need to because he determined where the money went. In 2001, two of SPAG’s founders were indicted in Liechtenstein for money laundering and investment scams.14

  A third big scandal tying Putin and the Tambov group involved the Petersburg Fuel Company, which Kumarin had set up together with Putin in 1994. The scheme included Putin, his cronies Yuri Kovalchuk and Nikolai Shamalov, and the hard-core organized criminals Vladislav Reznik (later a member of the State Duma), Ilya Traber, Gennady Petrov, and of course Tambov’s leader, Vladimir Kumarin. The Tambov group moved to Spain after they had gentrified, and there several of their members were arrested for money laundering in 2008, providing us with ample evidence. In 2007, three hundred police arrested Kumarin, and in 2016 he was sentenced to twenty-three years in prison for attempted contract murder, homicide, extortion, and corporate raiding.15 Hard-core criminals such as Traber and Petrov, as well as other members of the Tambov gang, are reputed to be fixtures at Putin’s highly secretive birthday parties.

  No picture of Putin is complete without recognizing his deep involvement in organized crime since at least 1991. Putin is no gentleman but a seasoned street fighter. Few facts reflect his personality more clearly than when he brought his big black Labrador Konni to a meeting with German chancellor Angela Merkel in 2007, knowing that she was scared of dogs.16

  With his background in organized crime, Putin relies not only on the FSB but also on the Russian Mafia. Mark Galeotti has analyzed how Putin’s Kremlin has used criminals for its rule. Chechnya’s president Ramzan Kadyrov, whom the United States has sanctioned for human rights violations, has repeatedly given the Kremlin willing soldiers to carry out various lawless acts, such as the murder of opposition leader Boris Nemtsov outside the Kremlin in February 2015. In Crimea and in Eastern Ukraine in 2014, the Kremlin used both Chechen fighters and Russian mercenaries, organized by the Russian businessman Konstantin Malofeev, whom the US government has also sanctioned. The St. Petersburg businessman Evgeny Prigozhin was also involved in recruiting mercenaries for eastern Ukraine as well as for Syria, and he was the organizer of the Internet Research Agency, which organized the Russian manipulation of US voters through Facebook and other social media. Prigozhin, too, has been sanctioned by the United States. This extensive reliance on organized crime has not only criminalized the Russian government but also led to less precision.17

  Two institutions in St. Petersburg are central to the Putin circle: Bank Rossiya and the Ozero dacha cooperative. Bank Rossiya appears to be the permanent center of the Putin financial network. It is widely known as the “bank of the president’s friends.”18

  In June 1990, the Leningrad regional committee of the Communist Party of the Soviet Union established Bank Rossiya. Yuri Kovalchuk was one of its founders and original owners, and he became its permanent chief executive. Putin got involved during his first weeks in office, when his newly formed city committee for foreign liaisons coinvested with Bank Rossiya in July 1991, and the bank was the primary funding vehicle for Putin’s city funds.19

  In December 1991, Putin’s close friends—the brothers Andrei and Sergei Fursenko, Nikolai Shamalov, Vladimir Yakunin, and Kovalchuk—became co-owners of Bank Rossiya. Kovalchuk owns one-third of Bank Rossiya, and the other tight friends of Putin own about one-tenth each. In 1997, Timchenko also became a co-owner, and Matthias Warnig has been a board director since 2012. Bank Rossiya was a medium-sized local bank and was virtually unknown in Russia until 2008. At that time, Moscow Times published an excellent article detailing its ownership shares, with the telling headline “Bank Rossiya Emerges from Shadows.” It was important not as a bank but as the treasury of the Putin group.20

  In November 1996, an important group of eight friends set up the Ozero dacha cooperati
ve on the leafy outskirts of St. Petersburg. In addition to Putin, members included Yuri Kovalchuk, Vladimir Yakunin, an active KGB officer who later became minister of the Russian Railways, the brothers Andrei and Sergei Fursenko (Andrei was Russian minister of education and science from 2004 to 2012), Shamalov, Viktor Myachin, the head of Bank Rossiya, and Vladimir Smirnov, who became Ozero’s head. The local official who assisted them was Viktor Zubkov, Russia’s prime minister in 2007–2008. The Ozero cooperative was protected by Kumarin, the head of the Tambov gang.21

  In March 2014, the US Treasury issued its verdict: “Bank Rossiya . . . is the personal bank for senior officials of the Russian Federation. Bank Rossiya’s shareholders include members of Putin’s inner circle associated with the Ozero Dacha Cooperative, a housing community in which they live. Bank Rossiya is also controlled by [Yuri] Kovalchuk, designated today. Bank Rossiya is ranked as the 17th largest bank in Russia with assets of approximately $10 billion, and it maintains numerous correspondent relationships with banks in the United States, Europe, and elsewhere. The bank reports providing a wide range of retail and corporate services, many of which relate to the oil, gas, and energy sectors.”22

  Gennady Timchenko has made his fortune as an oil trader, at the independent gas producer Novatek and by building gas pipelines for Gazprom. Among Putin’s three main cronies, he appears the most like a real businessman.