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No More Welfare For Russia's Oligarchs

  • Boris Nemtsov

Putin (left) offers a hand to RusAl Chairman Deripaska (archive photo)

Putin (left) offers a hand to RusAl Chairman Deripaska (archive photo)

A crisis is an opportunity to rid an economy of ineffective owners and make enterprises more agile and innovative. At least, that's the way it works in other countries.

In Vladimir Putin's Russia, we are seeing the preservation of ineffective -- but loyal -- owners. The grotesque structure of the Russian economy, based on monopolies and close ties between the authorities and oligarchic groups, is the main reason for the profound financial-economic crisis in Russia.

This crisis is significantly deeper in Russia than it is in the West, including in the United States. Monopoly and corruption are the main reasons for high prices and the low quality of production. For example, the average price of gasoline in Russia -- the world's second-largest oil producer after Saudi Arabia -- is higher than in the United States, the world's largest oil importer. In New York, gasoline costs about $0.50 per liter, while in Moscow the price is about $0.70.

The overall increase in prices that is attributable to monopoly agreements in the marketplace will certainly exceed 25 percent in Russia this year. Against the background of millions of newly unemployed and a decline in real incomes exceeding 10 percent, Prime Minister Putin has signed a government order increasing the rates charged by the so-called natural monopolies: the price of natural gas will increase 27.5 percent this year; electricity will go up 25 percent; and the cost of rail transport will be hiked 20 percent.

Putin's actions during the current crisis are widely understood -- they amount to supporting oligarchic groups and banks that are close to the government. Saving the banks can be justified by the fact that they hold the public's savings and that by rescuing the banks, you also save the deposits of the public. But it is impossible to see the social benefits of saving the oligarchs.

The official line is that by helping "system-forming enterprises," the authorities are preventing their bankruptcy and saving jobs. However, the concrete actions of the authorities demonstrate that they have no connection with jobs, wages, or even production.

Oleg Deripaska, the first one to line up for state support, got a $4.5 billion loan from Vneshekonombank, using money from the National Welfare Fund. This money was not used to develop production at his RusAl or Norilsk Nickel enterprises. The entire amount was used to pay off a loan from the Royal Bank of Scotland. In addition, the 25 percent block of shares in Norilsk Nickel that Deripaska previously bought from Mikhail Prokhorov was transferred to Vneshekonombank. The bank's oversight board is chaired by Vladimir Putin.

The Usual Suspects

In short, not a kopek of the money diverted from the National Welfare Fund, which was set up to support the state pension system, made it down to the workers. What happened was just an ordinary redistribution of property: Deripaska simply pawned his shares with Putin.

By any internationally accepted standards, Deripaska is bankrupt; that is, his assets do not cover his obligations. RusAl is saddled with $17 billion in short-term debt and a total debt burden of $30 billion. Its shares are worth $10 billion.

Putin then decided to help another oligarch -- his longtime friend and business partner Roman Abramovich, with whom the authorities earlier concluded the amazing deal of selling the Sibneft oil firm to Gazprom for the fabulous price of $13.7 billion. Abramovich is the main shareholder of Evraz. This metals group has lost about 90 percent of its capitalization since the crisis began, its value falling from $45 billion to $3 billion. Evraz has nearly $10 billion in debts to foreign and Russian banks. Putin dipped into the National Welfare Fund and handed Abramovich $1.8 billion to pay off his immediate creditors.

Putin is using practically the same scheme to bail out Igor Zyuzin and his firm, Mechel. Zyuzin got $1.5 billion from the National Welfare Fund.

The efforts to help the chekist oligarchs are particularly touching. Putin handed over $4.5 billion to pay off the debts of Rosneft. That is, he once again came to the aid of his friends from the KGB, First Deputy Prime Minister Igor Sechin and Rosneft President Sergei Bogdanchikov.

An equally boorish example is the creation of what can be called an unnatural monopoly: Rostekhnologii, which controls the shares of more than 400 companies. That corporation is now bankrupt. It turns out that the people put in charge of it aren't capable of managing anything, particularly in times of crisis. Their main qualification is that they worked in the KGB with Putin. Now Rostekhnologii head Sergei Chemezov is demanding that Putin -- using again the National Welfare Fund -- hand over more than $7 billion to support Rostekhnologii enterprises.

The funds handed out to these oligarchs does not have any connection to supporting their companies. The money is going to banks, mostly Western banks. The purpose of quickly paying off these debts accrued by Kremlin-connected oligarchs is to allow them to retain ownership of their firms and, at the same time, to strengthen Putin's control over them. On the surface, it looks like an ordinary swindle under which oligarchs close to the authorities raid the pension fund in order to maintain their wealth. But Putin is also strengthening his hand by taking control -- through Vneshekonombank -- of the shares being offered up as collateral. The workers end up with nothing. The budget gets nothing. Production is not increased, and the economy is not modernized.

'Criminal Matter'

The matter of using funds from the National Welfare Fund to bail out the oligarchs and the banks is not a political question. It is a criminal matter. The legal purpose of that fund is to finance the shortfall in the National Pension Fund.

At the same time, small and medium-sized enterprises have been abandoned to the whims of fate. And their needs are insignificant compared to the money given over to the oligarchs: they need a reduced tax burden; protection from corrupt state agencies; and, most importantly, a transparent, honest marketplace.

If we really want a competitive marketplace, we must immediately stop supporting bankrupt oligarchs and give their creditors the opportunity to settle accounts with them. When that happens, new -- more effective -- owners will emerge, and we will get better management and improved competition. And the state resources that remain can then be more effectively used to help actual citizens and small and medium-sized businesses.

All the talk to the effect that bankruptcy means the loss of millions of jobs is pure demagoguery. As a rule, bankruptcy is mostly a change of ownership. Jobs vanish when enterprises are liquidated, not when they go bankrupt. And they are liquidated when they remain too long in the hands of ineffective owners. Bankruptcy is a civilized means of protecting jobs.

In recent days, Moscow Mayor Yury Luzhkov entered into the debate about anticrisis measures. Luzkov's main thesis is that it is necessary to nationalize enterprises in order to avoid the bankruptcy of oligarchic structures. Luzkov actively supports Putin's policy of giving money to Deripaska and also urges state financial support for the construction sector -- up to and including the nationalization of construction firms.

Luzhkov is basically protecting the oligarchs under the cover of the populist slogan of nationalization. But he should be reminded that nationalization has already begun -- with Roman Abramovich's Sibneft, which was purchased by Gazprom for $13.7 billion. The result was a drop in the company's production by 12 percent and a reduction in state tax revenues.

So why should the state spend money buying up the oligarchs' empires when there is no money to pay teachers, doctors, soldiers, and pensioners?

But I can understand Luzhkov. His wife, Yelena Baturina, is in a tough spot. Her main business -- development and construction -- is in a profound crisis. Her debts are now more than $1 billion. Behind Luzhkov's impassioned calls for nationalization one can see a desperate plea for state money to prop up a bankrupt business. Luzhkov and the Unified Russia party are the exact opposite of the Solidarity opposition movement. We welcome the bankruptcy of ineffective oligarchs, while they (headed by our National Leader) call for saving them by buying up inefficient businesses.

Boris Nemtsov is a former deputy prime minister of Russia and a member of the Solidarity opposition group. This comment originally appeared on "Yezhdnevny zhurnal." The views expressed in this commentary are the author's own and do not necessarily reflect those of RFE/RL

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