Source: RBC

Much of Russia’s government and its economic management mechanism could easily be termed the “Ministry of Oligarchic Industry.” Now, this ministry is facing a serious problem: Western sanctions. But if sanctions can be applied to any Russian oligarch, their effect depends on the businessman’s relations with the state.

After being slapped with sanctions, businessmen Oleg Deripaska and Viktor Vekselberg have turned to the government for assistance. Their logic is straightforward: since they were targeted for their proximity to the regime, surely it should lend a helping hand.

Meanwhile, other oligarchs who have not yet been sanctioned are trying to prove that they are far removed from the regime. Alfa Bank’s Mikhail Fridman and Petr Aven have argued their case in Washington, DC, at the Atlantic Council, a think tank that employs Anders Åslund, one of the masterminds of the sanctions list. And Roman Abramovich has obtained Israeli citizenship. That allows him to return to his beloved London after the British government—which views him as a member of the Russian oligarchic capitalist system—declined to renew his visa.

Thus, the “classic” oligarchs of the first wave have been hurt the most by a process politely known as “geopolitical tensions.” Deeply integrated into international business, they don’t want to be cut off from the world outside Russia. That isolation would be no less painful for them than a rupture of their “personal union” with the Russian state bureaucracy. Ideally, they would like to maintain their ties with both. But political realities force them to choose: either publicly “nationalize” their business interests or prove to the West that they are truly private.

Of course, some businessmen who remain in Russia in a “semi-nationalized state” are also facing problems. Several recent arrests don’t inspire optimism. As a result, businessmen with few illusions about the situation prefer to sit out this turbulence somewhere far removed from Russia—perhaps, London. In this context, business ombudsman Boris Titov’s attempt to compile a list of entrepreneurs who want to return to Russia is reminiscent of when the Soviet Union invited prominent exiled writers to return home in the 1930s and 1940s: at best, this is a lottery with prison terms for prizes.

Meanwhile, the second wave of oligarchs has neither problems nor illusions. That’s because they are, in effect, part of the state. For the past eighteen years of President Vladimir Putin’s rule, these oligarchs have formed the backbone of state monopolistic capitalism. The union of power and property makes up the foundation of their businesses. This is a special form of property, where the borders between “private,” “public,” and “state-owned” are blurred and the term “private” has a mostly metaphorical meaning.

This cohort of oligarchs is focused fully on the state and is a priori “nationalized.” Nothing epitomizes this better than the image of the president driving a KamAZ truck (produced by Sergei Chemezov’s state corporation Rostec) along the Crimean bridge (built by Putin friend Arkady Rotenberg’s company).

In fact, it is virtually impossible to discuss this power/property system strictly in business terms. Analysts from Sberbank CIB learned this the hard way: when they analyzed state corporations using standard economic measures, they violated the code of relations within the state oligarchy. In the end, Sberbank CEO Herman Gref was forced to apologize to Stroytransgaz owner Gennady Timchenko and Gazprom chief Alexei Miller. Additionally, Gref had to fire several of the best analysts in the investment banking sphere. The bank had already been forced to apologize once before following a report on Rosneft prepared by the same analyst.

One important characteristic of this system is that oligarchic property—in this case, the status of the fathers—is effectively passed down to the children as positions and offices. This amounts to collective succession of power (and, thus, property).

The appointment of Dmitry Patrushev, the son of Russian Security Council Secretary Nikolai Patrushev, as Minister of Agriculture sets an important precedent. Succession now occurs not only via top management positions at major state-owned ventures like the Russian Agriculture Bank, where the younger Patrushev already headed the management board, but also through the appointment of the so-called “golden youth” to government positions. The sons (and, more rarely, daughters) of Russia’s leading families are inheriting positions at Russia, Inc.

In this system, the Russian regime, to a certain extent, is prepared to support valuable oligarchs who have been caught in the sanctions net—in part, out of solidarity and, in part, out of economic necessity. If the government doesn’t lend a hand to a troubled oligarch, this could lead to social tension in his economic sector.

The oligarchs, meanwhile, are torn between their benefactors in the Kremlin, who can strip them of property and liberty, and the capitalist system of the West, which offers them business and economic opportunities.

This article was originally published in Russian on RBC