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Russia: The End Of Loans-For-Shares

Nearly a decade ago in a move that reshaped Russia's political landscape, the ailing and embattled Kremlin leader Boris Yeltsin sold off the crown jewels of the country's economy to a select group of oligarchs. Russian President Vladimir Putin is now ready to buy them back.

When the state-controlled natural gas monopoly Gazprom announced on 28 September that it was buying Roman Abramovich's oil giant Sibneft for $13.1 billion, analysts said the deal had at least as much to do with politics as with business and energy policy. "The group of individuals who control the country's energy resources will be the real political and economic powerbrokers" in Russia, political analyst Peter Lavelle wrote in a commentary for RIA-Novosti on 27 September.

Putin's government will now de facto control at least 30 percent of the country's crude oil production, tightening the Kremlin's grip on the energy sector and creating a state-run company that can compete with oil majors like ExxonMobil, BP, and Royal Dutch Shell. But just as importantly, the deal puts a key asset that can be used for political leverage and influence firmly in the hands of Putin's inner circle.

"The state is going to run the energy business in Russia for the foreseeable future," said Chris Weafer, head of strategy at Alfa Bank in Moscow, in remarks reported by

Loans-For-Shares And The Rise Of The Oligarchs

Like the Kremlin's campaign against the Yukos oil company and its former CEO Mikhail Khodorkovskii, Gazprom's acquisition of Sibneft is part of an effort by Putin to reverse the political effects of the so-called "loans-for shares" auctions of 1995-96.

In those auctions, well-connected businessmen like Abramovich, Khodorkovskii, Boris Berezovskii, and Vladimir Potanin bought key state assets -- including major parts of the energy, telecommunications, and metallurgical sectors -- at bargain basement prices.

The Kremlin sold off 51 percent of its most productive Siberian oil operation, which would later become Sibneft, in 1996 for a meager $100 million -- a fraction of its value.

Defenders of the auctions said they would create a permanent capitalist class that would have a stake in market reforms.

The loans-for-shares auctions took place in the politically charged run-up to the 1996 presidential elections when a deeply unpopular Yeltsin was badly trailing Communist challenger Gennadii Zyuganov. Organized by Berezovskii, the oligarchs contributed generously to Yeltsin's campaign and used their media empires to guarantee the president positive coverage - and frighten the public with the specter of a return to totalitarianism.

But getting Yeltsin back into the Kremlin came with a price: with their vast wealth, the oligarchs became an independent source of political power in Russia and were able to wield vast influence over public policy.

The End Of An Era

Putin's rise to power following Yeltsin's surprise resignation on New Year's Eve in 1999 was widely believed to have been orchestrated by Berezovskii and other oligarchs who believed -- incorrectly as it turns out -- that they could control him and maintain their influence.

But as Putin consolidated his power, the former KGB colonel and FSB director began to marginalize the Yeltsin-era power brokers in favor of the so-called "siloviki" -- veterans of Russia's security services. To the oligarchs, Putin purportedly proposed a deal: you can keep your wealth and avoid prosecution for the shady privatizations of the 1990s if -- and only if -- you stay out of politics.

Berezovskii, who sold his stake in Sibneft to Abramovich for a reported $1.3 billion in December 2000, went into exile in London. Khodorkovskii stayed in Russia and tried to finance political opposition parties. He was arrested in October 2003 and later sentenced to eight years in prison for tax evasion and fraud.

Others, including Potanin and Abramovich, decided to play ball.

"Abramovich's sale of Sibneft also ends one era and starts another," Lavelle wrote in RIA-Novosti on 28 September. "Russia's market economy started with a small group of 'oligarchs' amassing huge fortunes from the purchase...of state assets at knock-down prices. This trend was reversed when the Kremlin demanded, using any and all administrative means, the return of oil assets from Yukos and the re-introduction of state control over Russia's energy sectors. Now, the Kremlin is willing to buy out the oligarchs."

See also:

"After Khodorkovskii, What Next For Oligarchs?"

"Leonid Nevzlin -- How The Mighty Have Fallen"

"The Oligarchs Strike Back?"

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