Russia's Crony Capitalism

by Anders Aslund

  Arkady Rotenberg’s sons have also done very well in two companies privatized from Gazprom. His oldest son, Igor, is the majority shareholder in Gazprom Drilling. His second son, Roman, is a vice president at Gazprombank. Similarly, Yuri Kovalchuk’s son, Boris, is the CEO of Inter RAO, a state-owned electricity holding company.51

  The sons of Putin’s KGB friends have also ascended quickly in the corporate world, but in state enterprises. Sergei Ivanov, the namesake of Putin’s former chief of staff, first became a vice president of Gazprombank at age twenty-five and then was named the president of Alrosa, Russia’s state-owned diamond company, at thirty-six. National Security Adviser Nikolai Patrushev’s son, Dmitri, became CEO of Rosselkhozbank, the state-owned Russian Agricultural Bank, at thirty-three. In May 2018, he was appointed minister of agriculture instead, which was interpreted as Rosselkhozbank having serious financial problems. Rosneft CEO Igor Sechin’s son, Ivan, became deputy director of a Rosneft department at twenty-five. In this context, FSB Chairman Alexander Bortnikov’s son, Denis, was a wise old man of thirty-seven when he joined the VTB Bank management board. Former Russian prime minister (2004–2007) and SVR director Mikhail Fradkov’s son, Petr, was more in the generational mold, just twenty-nine when he became a deputy chairman of Vnesheconombank.52

  Russia’s crony capitalism has bred a small class of incredibly wealthy individuals, whose children have been given top state positions, allowing them to become even wealthier. But with fewer career paths to top positions open, resentment among a generation of young, able, and ambitious young Russians bristles. Brian Whitmore notes that a “new nobility is being born in Russia.” Opposition leader Alexei Navalny concurs: “Today in Russia, it is absolutely normal that the boards of directors at state banks are headed by children of security service officials, who aren’t even 30 years old when they are appointed.”53

  Last, Putin’s real family should also be mentioned: his two daughters, Ekaterina and Maria, and their husbands, Putin’s friend Alina Kalibaeva, and his cousins. Igor Putin, who appears in the Panama Papers, became vice president of Master Bank, Vera Putina a member of the board of Ganzakombank, Mikhail Putin deputy director of Sogaz, and Mikhail Shelomov, who officially works at a state oil firm but lives on dividends. Putin seems to take good care even of rather distant relatives. Each of these people seems to have a fortune of at least half a billion US dollars.54

  In June 2017, Putin was asked in his annual call-in program about his children. He responded that his daughters “live here in Moscow . . . involved in science and education and they stay out of the public eye, out of politics and live normal everyday lives.” Referring to his grandchildren, he stated, “I do not want them to grow up like some royal princes. I want them to live like ordinary people.”55

  Putin is not widely recognized as a man who stands up for human rights, but when it comes to his close friends—Kovalchuk, the Rotenbergs, Timchenko—his heart is bleeding. He has defended them repeatedly and passionately in public.

  On March 21, 2014, the day after the United States had sanctioned them, Putin solicited the question: “The list includes some names that are difficult to explain, such as Mr. Timchenko, Mr. Rotenberg and Mr. Kovalchuk, for example. Are they being targeted because they are considered to be your friends, or because they are somehow connected to the events in Crimea?” Putin answered sarcastically:

  Well, to be honest, they are those very same “polite people”—the ones in camouflage gear, with semi-automatic rifles strapped to their waists [referring to Russian special forces without insignia]. And their last names are a bit odd too. The names you just mentioned, for example: Kovalchuk, Rotenberg, Timchenko are all typical “moskal” [Ukrainian nickname for Russians] names. I think I’d be wise to keep my distance from them. The sanctions target a bank too. Given that this bank definitely has no connection to the events in Crimea, and it has clients, we will certainly have to give it our protection and do everything we can to make sure that there are no negative consequences for the bank itself or for its clients.56

  On April 17, in his annual phone-in program with the people, Putin took another question about the Crimean sanctions: “These sanctions hit several major businessmen such as Yury Kovalchuk, Gennady Timchenko and the Rotenberg brothers. They are rumored to be your personal friends and part of your inner circle and that their fortunes were made thanks to that friendship. Now as it happens, they have sanctions imposed on them, also to a large extent due to their friendship with you. Don’t you get the feeling that the main target of the EU sanctions is you, personally?” Once again, Putin stood up for his friends:

  It looks as if they are trying to make me the object of these sanctions. As for the people you mentioned, they are indeed my good acquaintances, my friends. But for the most part they had made their fortunes before we even met. Mr. Timchenko, for example, has been doing business since the 1990s. . . . Mr. Timchenko’s wife had serious surgery and was unable to pay for it because her bank account and credit cards were frozen. This is a flagrant violation of human rights. . . . I also have to tell you that I am not in any way ashamed of my friends.57

  In an interview with TASS on November 24, 2014, Putin once again defended his cronies, claiming that the Americans “proceeded from a false assumption that I have some personal business interests due to ties with the people on the list. And by pinching them, they were kind of hitting me. This absolutely does not correspond to reality. I believe, we have to a great degree put an end to the so-called oligarchy.” He continued:

  We have no oligarchic structures, which substitute state power or influence upon state decisions in their interests. . . . All of them are rich and they made their fortunes a long time ago. . . . They took nothing, they privatized nothing like what it was done in the 1990s. . . . What state property did Timchenko get? Please name at least one asset. Nothing. . . . They are Russian nationals, they consider themselves patriots of this country and this is true. Someone has decided they should be punished for this. And it just strengthens the acknowledgement of such their quality. . . . This is a direct violation of human rights.58

  As discussed above, Timchenko benefited from the privatizations of Sibur and Stroitransgaz from Gazprom. Timchenko and Boris Rotenberg are Finnish citizens and have lived primarily in Finland and Switzerland since the early 1990s. None of the cronies was particularly wealthy before 2004. They set up their schemes largely during Putin’s second term, 2004–2008. They made their fortunes from the state, though Putin might be right that this is not a new oligarchy but an aristocracy.

  As a consequence of the European sanctions against Rotenberg, Italy froze luxury properties belonging to Arkady Rotenberg in September 2014. These assets included the Berg Luxury Hotel in Rome and properties in Sardinia, which together were valued at $36 million. The Duma responded by authorizing the Kremlin to seize foreign assets in Russia and use them as compensation for individuals and businesses being hurt by Western sanctions over the Ukraine crisis. This bill was called the Rotenberg Law. In the end, however, the Kremlin changed its mind, and Putin never signed this into law, presumably because doing so would scare away foreign investors. In 2017, Putin signed an alternative Rotenberg Law. The Russian state itself would offer compensation out of the state coffers to Russian individuals who had suffered from Western sanctions. Because of the sanctions Arkady Rotenberg transferred much of his ownership to his son Igor, who was subsequently sanctioned by the United States.59

  Putin’s loyalty to his friends extends also to their families. He lives by the old authoritarian motto: “For my friends everything, for my enemies the law.” On November 15, 2015, the Russian government introduced a new road tax, strangely called Platon, which provoked large-scale protests among independent long-haul truckers. A road toll monopoly was given to an operating company half-owned by Arkady Rotenberg’s son Igor.60

  Putin defended Platon and Igor Rotenberg during his annual press conference in December 2015. A
questioner claimed, “Rotenberg Jr . . . has received the country’s long-haul truckers as a present.” Putin brushed off her concerns as being “of secondary importance.” He continued, “Take young Rotenberg, whom you mentioned: his father does not hold any government posts, as far as I know.” According to Putin, revenues from the tax “do not go into somebody’s pocket but into the Road Fund of the Russian Federation, down to the last cent.” He also claimed, it “is spent on road construction in Russian regions.” In fact, Igor Rotenberg’s company, which received the contract without competition, was guaranteed a payment of $150 million a year until 2027. Despite Putin’s reassurances, massive protests have continued, but so has the flow of money into Igor Rotenberg’s pocket. On April 15, 2017, the Platon tariff was doubled, arousing mass protests among thirty thousand truckers in at least sixty cities around Russia.61

  Putin reacted particularly sharply against the 2016 revelation of the Panama Papers, leaked documents from Panamanian law firm Mossack Fonseca. He clearly saw it as a US provocation against him personally, lashing out sharply and claiming that the Panama Papers investigation was “an attempt to destabilize the situation” in Russia. He insisted that this investigation did not show corruption but was an attempt to “make Russia more yielding,” carried out by US officials, “as Wikileaks has shown.”62

  Why has Putin gone to such lengths to protect his dubious friends? He has built his career on trust, but it is difficult to escape the suspicion that his adamant support for his friends and his fury over the US sanctions against his close friends reflect his own financial interests.

  Many still talk about Russia as an oligarchy, but Putin’s Russia—as he rightly claims—is not an oligarchy. It is something much worse, an authoritarian kleptocracy. An oligarchy implies some balance between different forces based on wealth. In Putin’s Russia, the central state rules, and there is no balance of power because Putin rules supreme. With this concentration of political power, wealth also appears to have been more concentrated, while transparency has declined, so that we now know less than in the happy years of openness before 2003 when Khodorkovsky was arrested.

  This book does not discuss the old oligarchs of the 1990s, but many people ask about them, so here’s a quick review. By and large, they have lost out both politically and in business, while most of them remain very rich. Many, perhaps most, have emigrated to the West, mainly London, but also Monaco, southern France, and the United States. Predominantly, their outstanding skill was to adjust rapidly to a new and quite different situation. They were skillful opportunists rather than innovators. Some were good managers, while most of them were clever private equity investors.

  Most of the oligarchic banks went bankrupt in the financial crash of 1998. The foremost among the oligarchs, Alexander Smolensky of SBS-Agro Bank, disappeared from public view. The two big media oligarchs, Vladimir Gusinsky and Boris Berezovsky, were dispossessed and chased out of the country by Putin in 2000. Gusinsky lives quietly in exile in New York and Israel, while Berezovsky and two of his closest associates died under mysterious circumstances in London. In 2003, Khodorkovsky was arrested, and his impressive group of associates and Yukos managers fled Russia.

  Many others have disappeared less dramatically. The enigmatic Roman Abramovich sold Sibneft and moved to London. The late Kakha Bendukidze, who became minister of economy in Georgia under President Mikheil Saakashvili, had little choice but to sell his heavy machine–building company OMZ to Gazprom at a low price. An even wealthier Georgian, Bidzina Ivanishvili, left for Georgia slightly later and became prime minister there in 2012. The only female billionaire, Elena Baturina, left the country when her husband, Moscow mayor Yuri Luzhkov, was ousted. Russia’s leading high-tech investor, Yuri Milner, decided to move to Silicon Valley. The top producer of fertilizers, Dmitri Rybolovlev, was more or less compelled to sell his company Uralkali after it suffered a major ecological disaster. Instead he bought a house from Donald Trump in Palm Beach, while settling in Monaco. Yevgeny Chichvarkin developed the extraordinary Euroset chain of five thousand mobile phone outlets, which became too much for others, so he had to escape to London after having been forced to sell for too low a price. Russia’s top Internet geek, Pavel Durov, beat Facebook in Russia with his vKontakte, but since he refused to give his database to the FSB, he hastily fled the country for Dubai. The list could be made much longer.

  Of the original seven oligarchs from the mid-1990s, only three hold up. Vladimir Potanin still owns and controls the giant company Norilsk Nickel that he acquired in the loans-for-shares auction in 1995. Mikhail Fridman and Petr Aven have turned their Alfa Group into the biggest private corporation in Russia, with a bank, a mobile phone company, and a big retail company, although they were forced to sell their quarter of TNK-BP in 2012. In general, the big metallurgical businessmen hang on and seem to do the best at present.

  However wealthy these men may be, they are not running the show. Unfortunately, the most criminal of the survivors seem to be the most successful, but they must not be mentioned here. The state has come back and taken over, but it has not become legal.

  S • I • X

  How Large Is Russian Wealth, and Why Is It Held Offshore?

  Nobody who studies modern Russia can avoid being stunned by the large concentrated wealth. Although the owners of these riches prefer to shroud their fortunes and live in secrecy, substantial knowledge is nonetheless available. This chapter is devoted to decoding this wealth.

  What can we know about the enrichment of the Russian top elite? We can tell a lot about what the top individuals earn and own in Russia, and we have a reasonable idea of how much the collective elite takes out of their country each year, but we know far less about what happens to their money when it leaves Russia.

  The fundamental source for our understanding of the enrichment of Putin’s cronies is the excellent work of the opposition activists Boris Nemtsov and Vladimir Milov. In their pioneering study of Putin and Gazprom, they establish four sources of crony enrichment: privileged public procurement, stock manipulation, asset stripping, and privileged trade. Adding up the market value of the assets that Gazprom transferred to Putin’s cronies during the four years 2004–2007, Nemtsov and Milov arrive at the stunning sum of $60 billion.1

  Amazingly, Russia still publishes total public procurement in a database, which makes it possible to see who gets how much. The Rotenbergs and Gennady Timchenko are the steady kings of public procurement. Because literally all their contracts are no-bid for big infrastructure projects, their rent is tremendous. Half of the contracts in sheer rent would make sense. The other elements are much more difficult to assess.

  Stock manipulation is often published in the Russian business press, since purchase prices are often given in specific transactions, but that requires great labor, though excellent investigative Russian journalists often do that job.

  The same is true of asset stripping, though it is often so blatant that it appears in the media. For an analyst, asset stripping is complicated because it occurs ad hoc and irregularly. Moreover, the same asset is often subject to many confusing transactions.

  Privileged trade—when someone buys at one low price and resells as a monopolist at a much higher price—used to be blatant, as with Dmytro Firtash’s gas trade between Russian and Ukraine, but often a variety of markets are simply monopolized, making it less apparent.

  As Russia has grown more kleptocratic and authoritarian, another form of elite enrichment has become more important—namely, extortion by the Kremlin and law enforcement of the truly rich. Bill Browder argues that after Mikhail Khodorkovsky’s conviction in 2005, Putin demanded 50 percent of the wealth of the other oligarchs. “He wasn’t saying 50 percent for the Russian government or the presidential administration, but 50 percent for Vladimir Putin personally. From that moment on, Putin became the biggest oligarch in Russia and the richest man in the world.” This is possible, but not proven. What we do know from many interviews is that Kremlin
extortion is a standard procedure, and it is at least in the tens of millions of dollars in donations to “charity” from each individual oligarch. Visits to the Kremlin are costly, so most oligarchs stay abroad most of the time. Much of the wealth officially belonging to Russian oligarchs may be owned or at least controlled by Putin. President Viktor Yanukovych’s family acted in that way in Ukraine, which was one reason why the Ukrainian oligarchs turned against him.2

  There are also important sporadic sources. Sergei Kolesnikov, the junior partner of Putin and Nikolai Shamalov who fled to the West in 2010, has offered substantial evidence. The Panama Papers, which were publicized in April 2016 to Putin’s great chagrin, are a rich source. Currently they have all been overtaken by the anticorruption investigations by Alexei Navalny and his Anti-Corruption Foundation.

  Since the early 2000s, Russian Forbes has maintained a standard rich list of the wealthiest Russians. Russia has about a hundred official billionaires, which is a lot, but the real numbers are probably even higher. Forbes can presumably capture the wealth of the old Yeltsin oligarchs from the 1990s rather well, since it is publicly displayed, but hardly the hidden wealth of the later Putin cronies.

  Evgeniya Albats, editor of the independent weekly Novoe Vremya, told me that the best sources are divorced wives and dismissed commercial lawyers. Both groups tend to have valuable documents and a personal interest in harming their personal nemeses. Business competitors are another good source, especially those that have been forced to leave Russia.