Oligarchic Capitalism in Russia: The Past, Present and Future

Speaker: David Hoffman, Foreign Editor, The Washington Post

On Wednesday, February 27th, David Hoffman spoke at the Carnegie Endowment about his new book, The Oligarchs: Wealth, Power, and the New Russia, which has just been published by Public Affairs Press. Based on extensive interviews and exhaustive research, Hoffman has assembled a remarkable account of the lives of six of Russia's most influential personalities: Boris Berezovsky, Vladimir Gusinsky, Mikhail Khodorkovsky, Alexander Smolensky, Anatoly Chubais, and Yury Luzhkov. Before taking up his current post as Foreign Editor of the Washington Post, Hoffman headed the Post's Moscow bureau from 1995 to 2001.

For some, Russia's oligarchs are criminals, for others they are capitalists. For David Hoffman, there is no clear-cut answer. What is a capitalist in a country without private property? Likewise, the term, 'criminal' is a misnomer in a system without the rule of law. 'Oligarchic capitalism' may be a controversial term when used to describe the economic system that has developed in Russia, but it is necessary. There is more to being an oligarch, according to Hoffman, than just stealing. Becoming an oligarch requires cunning, ingenuity and, above all, an indefatigable reserve of energy. That is why the common assumption that these oligarchs came from the underworld of the Soviet Union is wrong. The roots of Russia's oligarchs stem primarily from neither organized crime, nor the Soviet nomenklatura, but from entrepreneurs who got their starts taking advantage of the opportunities created by the shortage economy in the waning days of the Soviet Union.

The evolution of Russia's oligarchs over the past ten years can be broken down into three distinct phases. The first of these phases coincides with the early days of Gorbachev's reform initiatives, when state control of the economy began to loosen and opportunities for turning an easy profit first appeared. Hoffman illustrated this by recounting how Vladimir Gusinsky got his start. In the late 1980s, Gusinsky worked as a taxi driver in Moscow until he happened upon a surplus of copper wire at a tram station. Seeing an opportunity, he acquired the wire and began producing bracelets. With clever marketing, these bracelets made Gusinsky a fantastic profit.
In the second phase of the oligarchs' development, banking became the endeavor of choice. As Hoffman describes, this was the time of 'easy money' when pyramid schemes and ruble-dollar speculation were rampant. It was during this period that the emerging oligarchs discovered the 'time-value' of money. 'Time-value' being the profit oligarchs were able to make by diverting government transfers that passed through their banks to other ventures while stalling for time with IOUs. One of the key players in this scheme was Alexander Smolensky. In the Soviet Union, Smolensky had been a construction foreman who began a small dacha building business on the side during perestroika. By 1991, with his dacha building business booming, Smolensky opened SBS-Agro bank to handle his cash flow. Before long, SBS-Agro emerged as the largest bank in Russia and a large handler of government transfers.

In September of 1994, the oligarchs embarked on the third phase of their development with the formation of a private club designed to facilitate the transformation of their wealth into political power. Hoffman succinctly dubbed this phase, 'the grab for power.' The paramount issue was how to limit competition among themselves so that each could focus on accumulating as much wealth as possible. The fruits of this cooperation came in schemes like the loans for shares program, export control manipulation and culminated in the Davos pact that helped to re-elect Yeltsin. It was during this period that the oligarchs began searching for political sponsorship and influence within the Kremlin. The oligarchs also began to diversify their holdings, expanding their holdings to include ownership of natural resource companies and media outlets. Boris Berezovsky was able to use his growing political influence to gain ownership of ORT, Russia's state television, while Gusinsky established NTV.

This third period of oligarchic expansion reached its peak in the late 1990s and, to a certain extent, has stabilized since President Putin came to power. Although Putin has declared that the 'oligarchic method is the worst system for Russia,' it is not clear that he knows how to move beyond it. Putin did move assertively to rid Russia of the two oligarchs that were most threatening to him politically - Gusinsky and Berezovsky. However, Hoffman does not believe that this spells the end for Russia's remaining oligarchs, rather he posits that Putin has reached a modus vivendi with the remaining oligarchs that will allow most of them to retain their holdings as long as they do not oppose the Kremlin. At the same time, Putin is attempting to address the systemic flaw that allowed for the initial rise of the oligarchs, the weakness of the state. This weakness was the result of conscious decisions made by early Yeltsin administrations to pursue liberalization and to maximize freedom at the expense of creating a stable rule of law.

Looking back on ten years of oligarchic capitalism in Russia, the negative impact it had on Russia's development is obvious. Clearly, this rent-seeking class of oligarchs hurt the market system by failing to establish rules of the game that were stable over time. Yet, this period was not completely devoid of positive developments. Hoffman proposed three ways in which oligarchic capitalism may actually have been good for Russia. For one, the loans for shares program may have resulted in grossly unfair distribution of property, but it did facilitate the expulsion of some of the worst red directors. Wherever oligarchs took over, be it Yukos or Sibneft or Norilsk nickel, improvements in management were made and the focus of the companies were shifted to turning a profit. Oligarchic capitalism was also good for Russian democracy. For all their rapacity, the media wars the oligarchs waged did support a struggling media establishment and provided a spectrum of media outlets. The ends may have been wrong, but the means were of benefit to Russian society. In the end, oligarchic capitalism did bring a form of pluralism to Russia. For better or worse, power and wealth were taken from the state and diffused among independent actors. That diffusion is now an established fact that guarantees Russia cannot easily return to its past.

The question for Russia's future is whether these oligarchs will go the way of America's robber barons from a century ago. For David Hoffman, figuring out how to turn a Khodorkovsky into a Rockefeller is key. Whereas the robber barons of America were so successful because they were able to serve as conduits for the immense amounts of capital flowing into the United States, Russia's oligarchs have protected their wealth sending capital abroad. Of course, the robber barons had 60 years of growth in the United States to learn the benefits of philanthropy and legitimacy; the Russian oligarchs have only had 10. The answer to this last question will have to wait for the future.

Summary by Karlis Kirsis, Junior Fellow, Russian and Eurasian Program.