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Russia: Rumors Of Oligarch's Demise Greatly Exaggerated

By Donald Jensen

Prague, 8 December 1998 (RFE/RL) -- Much has been written since Russia's August economic collapse about the demise of the business oligarchs. They are the small circle of influential entrepreneurs who grew rich in the past decade through close ties to the government, through currency speculation, and -- some say -- through criminal activity.

Business empires heavily dependent on the financial sector, such as Vladimir Gusinsky's Most Group and Vladimir Potanin's Oneksimbank, have been seriously damaged by the crash. Two -- Aleksandr Smolensky's SBS-Agro and Vladimir Vinogradov's Inkombank -- are ruined.

Though weakened, however, entrepreneurs with extensive interests in natural resource extraction -- Rem Viakhirev of Gazprom, and Vagit Alekperov of Lukoil -- remain influential. So do two with holdings in industry -- Mikhail Khodorkovsky of Menatep and Boris Berezovsky of LOGOVAZ.

The oligarchs came to the notice of many people in the West in October 1996 when Berezovsky boasted in an interview that he and six other tycoons had ensured President Boris Yeltsin's reelection by bankrolling his campaign. Moreover, he bragged that he and six others controlled much of the Russian economy.

In fact, though the Big Seven, as the oligarchs came to be called, controlled a large chunk of the Russian economy and had the decisive say on some key issues, their influence was less than Berezovsky suggested. There were many issues where they played virtually no role.

There were also many other influential interest groups at the time that Berezovsky did not mention, including Lukoil, Gazprom, holdover Soviet lobbies such as collective farmers, and regional leaders such as Moscow Mayor Yuri Luzhkov.

Following the August financial meltdown some entities in the financial sector remain influential. Moscow's Alfa Bank, which has longstanding ties to the Yeltsin administration, has escaped the worst of the downturn. Its relatively small holdings in the now defunct short-term securities market enabled it to gain competitive advantage over its more exposed rivals. In the absence of a strong treasury, Alfa has been authorized to service the Saint Petersburg City budget, a task fraught with possibilities for corruption. The regional banks and banks that service oil, gas, and precious metals exporters also remain important.

The economic collapse has also accelerated the formation of oligarchic structures in the regions. In Saint Petersburg and Yekaterinburg, local governments have taken over regional banks to ensure ready access to revenue streams. The Nizhnii Tagil Metallurgy Combine has given a 25 percent stake to the government of the Sverdlovsk region in exchange for a restructuring of its tax debts and the cancellation of the firm's wage arrears.

Still other oligarchs are regrouping. The strategic alliance recently announced by Lukoil and Gazprom may actually strengthen their economic and political clout. Gazprom already pays a quarter of all of Russia's taxes. Lukoil also accounts for a major portion of government revenue. Even if they do not unite, the firms will almost certainly remain two of the few effective Russian foreign policy levers, especially toward Europe and Russia's neighbors.

The government of Prime Minister Yevgeny Primakov, far from trying to end crony capitalism, appears to be favoring cronies of its own. Favored banks participated in several debt swaps orchestrated by the Central Bank in September and the Central Bank has sharply cut reserve requirements to increase bank liquidity.

Most of the large banks the government intends to save have ties to the new government, to new Central Bank head Viktor Gerashchenko, or to the administration of Moscow Mayor Yury Luzhkov. SBS-Agro, for example, was one of the first banks to be bailed out. Depositors and creditors received little of the money. It went instead to pay off a loan SBS-Agro owed the International Moscow Bank, which Gerashchenko headed until September. The authorities, meanwhile, have allowed Inkombank to fail, even though it had the second largest retail base in the country.

The government has also announced it intends to save, among others, Menatep and Most. Menatep has strong supporters in power, though few depositors and no regional network. Most's extensive media holdings make it invaluable as the legislative and presidential elections approach.

A shakeup in the leadership of Rosvooruzhenie, the state arms export agency now under the control of a reported Primakov protege, suggests that the arms industry may well experience a resurgence by more aggressively seeking clients for high tech weaponry abroad.

This is not to say that Russia's business interests win every battle. The government has warned six major oil companies that their access to highly profitable export pipelines will be cut off if they do not draft a plan to sell more crude on the domestic market. There are serious policy and economic interests dividing the oligarchs, such as over economic protectionism. Since these differences are often over who is to receive increasingly scarce government favors, however, they are unlikely to benefit the long-suffering Russian public and may well become fiercer as total default looms.

What has survived the August collapse, however, are the rules by which Russian politics is played. Much of politics is informal, institutions are weak, the distinction between public and private is blurred, and money is the currency of political power. That some people will financially profit by these rules is certain; that the rules will advance economic reform and democratic development is not.

It was this absence of the rule of law underlying economic reform that the European Bank for Reconstruction and Development cited in its 1998 Transition Report as part of the explanation for why Russia's transition to a free market democracy has been so difficult.