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Russia Report: October 10, 2002

10 October 2002, Volume 2, Number 33
With this week's news that Boris Berezovskii is seeking a new alliance with the Communist Party , the Russian media's attention has once again zeroed in on the country's oligarchs. Not so long ago the antics of Berezovskii and his fellow oligarchs were a prime focus of Moscow's central media, but now, in the middle of Russian President Vladimir Putin's first term, they have mostly faded from the spotlight. Putin, after all, came to power promising to rein in the oligarchs. Meeting with voters a month before presidential elections, then-acting President Putin declared that "not a single clan or oligarch should be close to regional or federal authorities." "It is extremely important to create equal conditions for everyone who takes part in the political and economic life of Russia," he added (see "RFE/RL Newsline," 29 February 2000).

More than two years later, it's not clear whether the clans or oligarchs have lost their proximity to power or have simply stopped flaunting it. In the regions, a number of prominent industry captains haven't just forged closer ties with regional leaders, they have become governors and presidents themselves (see table below). Unlike Berezovskii, most of the oligarchs who were active during the term of Russia's first president, Boris Yeltsin, are not in exile. In fact, they remain at the helms of their respective industries, and the Russian economy remains as dominated by monopolistic enterprises, such as Unified Energy Systems, Gazprom, Transneft, as it ever was.

This week, "RFE/RL Russian Political Weekly" asked a number of experts to discuss the role of oligarchs in Putin's Russia. David E. Hoffman, "The Washington Post" foreign editor and author of "The Oligarchs: Wealth and Power in the New Russia" (Public Affairs, 2001); Peter Rutland, professor of political science at Wesleyan University and author of the chapter "The Oligarchs: Money Still Talks in Putin's Russia" in the forthcoming book, "Politics Under Putin" edited by Dale Herspring; and Don Jensen, director of communications at RFE/RL, offer their thoughts below. (Julie A. Corwin)

RFE/RL: Has Putin changed the system of oligarchic capitalism, or just the players?

RUTLAND: My general feeling is that he has not changed the system. That's precisely the problem. He's brought a certain degree of stability to it but he hasn't changed the system itself. He seems to be hoping that the oligarchs will change their behavior, that they will stop fighting each other, stop stealing each other's property, stop exporting capital, and start investing. So he's hoping for an evolution of their behavior in the direction of a more constructive capitalism. He's gambling that that will happen in a framework that remains basically unaltered. He has the support of most of the oligarchs who are willing to embrace this new stability if it means that there will be some kind of rules of the game -- if it means that that they won't be whipsawed by different factions in the presidential apparatus, getting the ear of the president this week and losing it the next week, which was the pattern under [former President Boris] Yeltsin.

You can't say that the process has become more publicly transparent, but it's moving in that direction. The oligarchs seem to be meeting regularly as a group with Putin. They moved into the Russian Union of Industrialists and Entrepreneurs, which is a more public organization.. And, there is a huge raft of legislation which is providing more of a legal framework for a lot of these taxation and civil code issues. In the past, these issues were driven by exemptions and decrees issued by government ministers or by the president himself. So there is a kind of gradual progress toward a more transparent system, but it is slow and there is still a lot of backroom dealing and arm twisting. Changes are not occurring as fast as the reformers believe is necessary. Even the reformers in Putin's own apparatus tell him a kind of radical change is required, some kind of systemic change so that Russia will get the kind of economic growth rates that it needs.

HOFFMAN: In the Yeltsin years we witnessed a system in which the tycoons commanded political power at the highest levels, and politicians were capable of arbitrarily choosing winners and losers. The system was also characterized by weak or absent rule of law, lack of competition, nontransparency, insecure property and shareholder rights, and a feeble state unable to perform critical enforcement and regulatory roles for a market economy.

Putin inherited this system; indeed he was chosen by it. He declared straight away his intent to break this fusion of wealth and power and eliminate the oligarchs "as a class." He and his team then proceeded to pressure Vladimir Gusinskii and Boris Berezovskii to leave the country. At the same time, he told the other tycoons: keep out of the Kremlin and you can keep your gains from the 1990s.

Certainly, the oligarchs today do not enjoy the same role in the Kremlin as some of them did in Yeltsin's day. The system is more opaque. But it would be hard to argue that the oligarchs have been eliminated as a class. They still exist and new players have joined them. There are still enormous resources to be divided up -- gas and electricity liberalization, for example -- and an oligarch must still deal in political influence, in both Moscow and the provinces.

Putin has changed one aspect of the system: he made gains in structural reform by carrying through important legislative changes which had languished under Yeltsin. More structural reform -- such as fixing the financial system -- could further weaken the power of the oligarchs and promote the rise of small and medium-sized businesses.

What Putin has not done is dismantle the oligarchic structure of the economy. It remains dominated by large industrial groups. Peter Boone and Denis Rodionov, in their recent paper, provide good evidence of this. They found that Russia's economy is still structured around the kind of large oligarchic groups which took root in the 1990s. Of Russia's top 64 companies, where the government no longer has a controlling stake, 85 percent of the value is controlled by just eight shareholder groups, which generally hold 40 percent-100 percent stakes in the companies they control.

Bigness is still an important asset in Russia. The large groups can hire the best managers, have the best access to credit, and can often defend themselves against the state. The oligarchic system is often declared dead, but lives on.

JENSEN: Let me give you a complicated answer. Let's go back first of all to the [presidential] election campaign. It was said that Putin intended to do three things with the oligarchic system that had developed under Yeltsin. One, eliminate them as a class. (I do not think he ever actually said this but that was what many believed he wanted.) Two, he said that he would keep them "at an equal distance" from the Kremlin -- that is, not favor one or a few over the others. Three, he said that he would try to nose them out of politics.

In each case, nothing of the sort has happened. First, [the oligarchs] are still key centers of power in the Russian system and are hardly eliminated as a class, even as the kinds and numbers of oligarchs have changed and some have stepped up their activities. (I should add that available data suggested that the Russian economy today is about as monopolistic as it was under Yeltsin.) Second, I don't think Putin can keep them at equal distance. He has to forge alliances with certain oligarchs in order to govern the country, or to establish Kremlin control over the finances they provide. Third, I think it is not at all true that [the oligarchs] are out of politics. He has nipped at Berezovskii and Gusinskii, which has had a chilling effect on some of the other oligarchic groups, but far from all. Many, however, pursue their agendas in a quieter, less public way.

But let's get back to the central question of how Russia is ruled. I think Putin needs [the oligarchs] for resources, policy formation and implementation -- and above all to preserve his political position -- just as he needs the support of some of the other elite power centers -- parts of the military, the security services, and the federal bureaucracy.

More broadly, I think the question of what has changed and what remains after Yeltsin is a systemic one, not just a question of Putin vs. Yeltsin. What has changed is the economic situation, and a political system with a president who is not infirm. What has not has been the strong role business plays in government. The fact is that successful oligarchic networks have expanded their activity at the regional level, and have got into new industries -- for example, the export of raw materials, rather than banking which was the case before the 1998 crash. Those that have been able to adapt their enterprises/empires to the changing economic circumstances have been successful. Informal ties to the elites remain key. By elites I mean not only Putin but the Federal Security Service (FSB) and ministries. I would guess, moreover, that the extent to which individual government units engage in autonomous entrepreneurial activity -- for example, atomic energy, customs, or railroads, has increased under Putin. There is evidence as well that parts of the FSB are more involved in business now than under Yeltsin.

One might characterize the late Yeltsin period as aberrant. When Yeltsin was very ill, so ill, in fact that Berezovskii could openly brag about the power that the oligarchs wielded, it showed how the system worked without Yeltsin there to cover it up.

The deeper continuity -- one that carries on today very much with the Yeltsin era as well as Soviet and Russian history -- is the interrelationship of power and money. It is striking, for example, how the political rhetoric of many Russian leaders is redolent with language that we reserve for the commercial world. Moreover, private property rights are weak and poorly protected. I think this balance between the political and the economic ebbs and flows, but in any case they are much more intertwined than in most Western countries.

RFE/RL: Do you see Putin as a kind of referee or noncombatant in the disputes between oligarchs or do you see him as a strong -- if not dominant -- player in these struggles?

RUTLAND: Putin doesn't want to get involved in micromanaging the business of the oligarchs or adjudicating their disputes over property or market access. He wants to let them compete and sort it out themselves without getting involved in a politicized struggle which was a characteristic of the system prior to his arrival in power. He seems very reluctant to play the role of broker. In most cases, his role is get everyone to sit around the table and to make mutual concessions. He tries not to come down strongly on one side in favor of one player or another. However, he has been dragged into some conflicts because some issues are just too big for him to avoid. The metals industry in general, the electricity industry in particular are two big areas. That's where the state can't avoid getting involved because that's where the government is a player in designing the tariff rates and deciding which export strategies to pursue.

HOFFMAN: Is Putin an agent of change, or a bystander? He can certainly pick winners and losers, as he demonstrated in the first two years with Gusinskii, Berezovskii, Viktor Gerashchenko, and Rem Vyakhirev. But he seems averse to confronting the oligarchy as a class. While less is known about backroom deals than in Yeltsin's time, Putin seems to have chosen some favorites, and kept a wary distance from the other tycoons, and they from him.

Perhaps more important than Putin's role is the issue of whether the oligarchs will change their behavior. This is still an open question. Mikhail Khodorkovskii, no stranger to the rough-and-tumble of the 1990s, now preaches transparency and Western standards. At the same time, other players are still using the old playbook. The real question is: will the oligarchs as a "class" over time become better corporate citizens -- with or without discipline from the state -- and how?

JENSEN: I have another complicated answer: that depends on the policy. He acts as an arbiter over policies such as which elite interest group gets the proceeds of the pension fund. This resembles Yeltsin in his heyday. But in other areas, where big business resists, such as the restructuring of Unified Energy Systems or Gazprom, you see that there is very little progress being made, despite Putin's apparent wishes. The more deeply entrenched oligarchic groups can resist Putin's authority and thus he can't deal with them or reform them in a top-down way.

There are those policies where oligarchic interests in foreign policy match Putin's preferences, such as, in some cases, the pursuit of closer economic ties with the West. This is probably true of the oil industry and its need for new markets in the West and foreign investment. And thus you see Putin's relative success on these issues. But on other issues, where economic entrenched interests resist the trend of Putin's foreign policy, most notably in Iraq and Iran, you can see the difficulties Putin faces trying to get what he wants. (I should add that this state of affairs poses problems for Western foreign policymakers as well, since it is sometimes difficult to know with whom to deal on these issues).

Thus, coming to firm conclusions about Putin and the oligarchs very much depends on how the costs and benefits of various policies are perceived by affected interest groups. I should add, however, that the preferences of oligarchic groups do not determine everything. There are those policies where they have little interest, or conflicting preferences, or even those where other values, such as national security, take precedence.

Let me conclude by hazarding a guess about the future: This system of oligarchic capitalism, weak property rights, and strongly informal political relationships is likely to mean that the division and redivision of property is likely to remain a central feature of Russian politics.

Following is an unofficial guide to the national-level oligarchs or business captains and their allegiances during the terms of Russia's first president and second as viewed through the eyes of the Russian press. The list is not meant to be authoritative. Nor is it completely comprehensive since it does not include members of the security organs, who have adopted more oligarchic behavior under Putin. Some cabinet-level ministers have been included in the ranks of the oligarchs -- not because of their private business dealings but because of the way in which they run their ministries. But as the table shows, there has been a great deal of continuity in the ranks of the oligarchs from the Yeltsin presidential administration to Putin's. JAC

Oligarchs Under Yeltsin

Boris Berezovskii, exiled media magnate
Vladimir Gusinskii, exiled media magnate
Rem Vyakhirev, former head of Gazprom
Vladimir Vinogradov, head of now defunct Inkombank
Aleksandr Smolenskii, head of now defunct SBS-Agro Bank
Nikolai Aksenenko, former railways minister
Yevgenii Adamov, former atomic energy minister
Viktor Gerashchenko, former Central Bank chairman

Oligarchs Under Putin

Sergei Pugachev, Mezhprombank head
Aleksei Miller, Gazprom head
Vladimir Kogan, Bankirskii Dom St. Petersburg head
Aleksei Mordashov, head of Severstal
Boris Zolotarev, Evenk Autonomous Okrug governor (former Yukos executive)
Vyacheslav Shtyrov, Sakha Republic president (former Alrosa head)
Leonid Reiman, minister of communications
Mikhail Lesin, minister of mass media

Oligarchs Under Both

Vagit Alekperov, LUKoil head
Anatolii Chubais, Unified Energy Systems head
Vladimir Potanin, Interros head
Oleg Deripaska, Russian Aluminum head
Roman Abramovich, Chukotka Autonomous Okrug governor (former head of Sibneft)
Aleksandr Khloponin, Krasnoyarsk Krai governor (former Norilsk Nickel head)
Petr Aven, Alfa Bank head
Mikhail Fridman, Alfa Group head
Mikhail Khodorkovskii, Yukos head
Arkadii Volskii, Russian Union of Industrialists and Entrepreneurs head
Vladimir Yevtushenkov, Sistema head
Kakha Bendukidze, United Machine Works head
Aleksandr Mamut, former MDM Bank head
Andrei Melnichenko, MDM Bank head
Semen Vainshtok, Transneft
Vladimir Bogdanov, Surgutneftegaz head
Yurii Luzhkov, Moscow mayor
Mikhail Zurabov, Pension Fund head

Sources: "RFE/RL Newsline" 1996-2002, Peter Rutland, David Hoffman

OUT: Boris Berezovskii was expelled on 9 October by the political council of the Liberal Russia party that he co-founded and financed. Twenty-two members of the council voted in favor of his expulsion compared with four against and four abstentions.

IN: Lyudmila Narusova, the widow of former St. Petersburg Mayor Anatolii Sobchak, was approved on 8 October to represent the legislature of the Tuva Republic in the Federation Council, Russian news agencies reported. Narusova replaces Chanmyr Ydumbar, while banker-oligarch and fellow St. Petersburger Sergei Pugachev will continue to represent the republic's executive branch.

OUT: Black Sea Fleet commander Admiral Vladimir Komoedov was dismissed from his post on 9 October. Replacing him will be Vice Admiral Vladimir Masorin, who previously commanded the Caspian Sea flotilla.

IN: Garri Mikha has been named to a newly created post of government's envoy to the Federation Council, reported on 7 October. Previously, Mikha was deputy head of the Main State-Legal Administration of the president.

INVITED: In attendance at a birthday supper for President Putin on 7 October were Prime Minister Mikhail Kasyanov, Federation Council Chairman Sergei Mironov, presidential chief of staff Aleksandr Voloshin, Constitutional Court Chairman Marat Baglai, Supreme Court Chairman Vyacheslav Lebedev, Supreme Arbitration Court Chairman Veniamin Yakovlev, Security Council Secretary Vladimir Rushailo, Prosecutor-General Vladimir Ustinov, Foreign Minister Igor Ivanov, Defense Minister Sergei Ivanov, Interior Minister Boris Gryzlov, State Customs Committee head Mikhail Vanin, the director of the Federal Service of Tax Police, FSB Director Nikolai Patrushev, Foreign Intelligence Service Director Sergei Lebedev, Federal Bodyguard Service Director Yevgenii Murov, Director-General of the Federal Agency of Government Information Vladimir Matyukhin, President of the Russian Academy of Sciences Yurii Osipov, and Chief of the General Staff General Anatolii Kvashnin, Interfax reported. Patriarch of Moscow and all Russia Aleksii II, State Duma Speaker Gennadii Seleznev, and Emergencies Minister Sergei Shoigu were also invited but could not attend.

OUT: The Foreign Ministry on 8 October confirmed the death the previous day from a heart attack of Deputy Foreign Minister Yevgenii Gusarov, ITAR-TASS reported. Gusarov was appointed deputy foreign minister in 1999 and oversaw Russian relations with Europe and NATO.

IN: Prime Minister Kasyanov signed an order naming Dmitrii Antonovich Kislitsyn as head of the Control Administration of the government's apparatus, "Kommersant-Daily" reported on 8 October. Kislitsyn previously served as head of the government apparatus's department for cadres and services.

8-11 October: World Food Program Executive Director James Morrison will be in Russia

9-16 October: National census will be taken

9-13 October: Secretary-General of the Vietnamese Communist Party Nong Duc Manh will visit Russia

10 October: Representatives of Moldova, Russia, Ukraine, the OSCE, and the Transdniester Republic will meet in Tiraspol to discuss the conflict in Transdniester

10 October: Federation Council Committee on Social Policy will hold a hearing with Pension Fund head Mikhail Zurabov

10-11 October: British Prime Minister Tony Blair will visit Moscow

11 October: Sweden's Queen Silvia will visit St. Petersburg

11 October: State Duma will consider president-sponsored bill on holding elections in Chechnya

11-12 October: Federation Council Chairman Sergei Mironov will meet with the head of the Georgian parliament in Tbilisi

12-14 October: Japanese Foreign Minister Yoriko Kawaguchi will visit Russia

13 October: The 450th anniversary of the conquest of Kazan by Ivan the Terrible will be marked

15-19 October: Mozambican Foreign Minister Leonardos dos Santos Simao will visit Russia

16-17 October: Passenger trains between Moscow and St. Petersburg will be cancelled due to construction work on railway line between two cities

17 October: Foreign Minister Igor Ivanov will hold consultations in Moscow with the EU Ministerial Troika

17 October: Independent trade unions will hold protests across Russia demanding full payment of wage arrears and higher wages

18 October: Inauguration ceremony for Krasnoyarsk Krai Governor Aleksandr Khloponin will be held

18 October: State Duma will consider 2003 budget in its second reading and hold a hearing on Russia's energy strategy through the year 2020

20 October: By-election in single-mandate district in Khanty-Mansii Autonomous Okrug for State Duma seat once occupied by Aleksandr Lotorev, who now directs the Duma's apparatus

20 October: Presidential elections in Kalmykia

22 October: World Bank's Board of Directors to consider $100 million loan for Tax Ministry, according to Interfax

22-23 October: State Council will meet to discuss local self-government

23 October: A new power-sharing agreement between the federal center and Bashkortostan will be signed, according to Bashkortostan President Murtaza Rakhimov on 7 October

23-26 October: Fourth World Congress of the Russian Press will be held in Berlin

24 October: Communist Party and Movement in the Support of the Army will hold joint protests in Moscow

26-27 October: Putin to attend APEC summit in Los Cabos, Mexico

1 November: State Duma to consider law on elections to the Duma in its second reading

3-4 November: Prime Minister Kasyanov will visit Armenia

5 November: Central Election Commission Chairman Aleksandr Veshnyakov to visit the U.S. to observe elections

6 November: Tenth anniversary of the adoption of Tatarstan's Constitution

14 November: Meeting of united political council of Union of Rightist Forces and Yabloko is scheduled

15 November: Russian and French foreign and defense ministers to meet in Paris for the Russia-France Security Cooperation Council

end of November: President Putin will visit Yekaterinburg, reported on 3 October

December: Armenian President Robert Kocharian to visit Russia

1 December: Date by which Gennadii Seleznev's Russian Revival Party will be registered at the Justice Ministry, according to party spokesman Sergei Kostornoi on 30 September

8 December: Parliamentary elections in the city of St. Petersburg

1 January: Date by which Unified Energy System plans to redeem 80 percent of its debts to Russian coal companies, according to company statement on 29 August

1 January: Jury trials will begin to be held in St. Petersburg, according to RFE/RL's Russian Service

3 January: Date until which Colonel Yurii Budanov will remain in custody on charges of murdering a young Chechen woman

1 February: New Labor Code will come into effect.