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(The author is a non-resident scholar at the Carnegie Russia and Eurasia Center, a visiting scholar at the German Council on Foreign Relations, and a researcher at the Center for Eastern European and International Studies)
Russian President Vladimir Putin’s recent pledge that “privatization will not be cancelled” is as much a lie as his repeated promises not to invade Ukraine. Ilya Shumanov, the former head of Transparency International in Russia, said authorities had moved to seize control of 17 large companies this year alone.
This is not an act of some shameless people in Russia trying to line their own pockets. It’s part of Putin’s effort to redistribute the wealth of those deemed insufficiently loyal to the Kremlin and create a new class of asset owners who owe their wealth to the president and his inner circle.Most of the members of this new elite are silowiki (The security services) and their business partners will be the real winners in the war in Ukraine and the cornerstone of the regime’s stability. Putin is no longer young, and even after he leaves politics, this group will allow his system to reinvent itself.
In 2004, toward the end of Putin’s first term as president, the Kremlin worked out a plan for peaceful coexistence with the oligarchs who had made their fortunes in the dark environment after the collapse of the Soviet Union. The state allowed the oligarchs to retain the assets accumulated in the 1990s and continue to prosper in exchange for strict non-interference in politics. The oligarchs largely accepted the formula, and the 2003 jailing of oil tycoon Mikhail Khodorkovsky showed what would happen to those who disagreed. Since then, the formula has worked relatively well for both sides: Putin has taken complete control of Russian politics, while the oligarchs have retained their assets and grown their wealth due to high commodity prices.
The Kremlin is increasingly able to impose additional financial demands on oligarchs – labeled “socially responsible” – as a sign of loyalty, but the business elite is not unhappy. They have learned how to make money from lucrative state contracts and have been assured that if a disaster like the global credit crunch of 2008 hits them, state-owned banks will bail them out. After all, the Kremlin needs oligarchs too. With networks carefully cultivated in the West, they have become indispensable tools for Russian companies that still hope to make money as part of the global economy.
Putin’s invasion of Ukraine radically changed the deal with the oligarchs. The most telling case was a lawsuit filed in a Russian court in August seeking to nationalize a company owned by Andrey Melnichenko, one of Russia’s richest men. Melnichenko is subject to EU sanctions and has not explicitly condemned the war. Still, in the current environment even this could be seen as disloyal, with exiled Russian banker Oleg Tinkov claiming Melnichenko “hates Putin” (denied by Melnichenko) Possibly triggering retaliation.
Melnichenko is not alone. Last month, a Russian court nationalized large methanol producer Metafrax Chemical. Prosecutors claimed that the 1992 privatization deal “undermined Russia’s economic sovereignty and defense capabilities” – terms Russia has increasingly used to attack its adversaries. For some, the war raging in Ukraine is a convenient excuse to scrap pre-war agreements and chase lucrative assets. The deprivatization movement clearly involves a great deal of opportunism, but the Kremlin’s guiding hand is also visible.As early as January, Putin had It has been identified Reasserting state control over strategic enterprises is a priority for the Office of the Attorney General.
Previously, Russian oligarchs believed that being subject to Western sanctions would provide some form of protection from domestic extortion. The Melnichenko case shows that this is no longer true. Indeed, international sanctions render oligarchs increasingly useless as tools for the Kremlin to conduct business abroad. There is no sign, however, that any of them will turn against Putin anytime soon. Their ability to influence power struggles has diminished.
Western investors such as Carlsberg and Danone were the first to feel the pain of Russia’s new legal environment. It should also be noted that the Kremlin is trying to attract potential investors in Russian distressed assets from Asia and the Gulf. For Russians, the Pandora’s box of redistribution opened by Putin’s war will not only hit the oligarchs but also ultimately bite new beneficiaries. Russia’s property rights foundations, already fragile before the war, will become even more shaky with the court’s new questionable ruling.
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