The Russian oligarchs and the theft of the century

As of this week, one of Russia’s richest men is going on hunger strike.

It’s the latest act in a Russian power play that began in the mid-1990s with a collection of history’s greatest robberies.

These were committed by the ‘oligarchs’, a dozen or so wealthy and connected businessmen who acquired their wealth in the shadiest of circumstances.

The hunger striker

The man going on hunger strike this week is Mikhail Khodorkovsky. He used to be Russia’s wealthiest man thanks to his part ownership of Yukos, formerly the country’s largest oil company.

However, following a crackdown by President Vladimir Putin, he was arrested in 2003 and sentenced to 8 years in prison for tax evasion and fraud.

He is now up for parole but faces new charges of theft and embezzlement that could land him another 22 years in jail.

He claims he should still be allowed parole as the law permits. However, the government is still detaining him, perhaps fearing he will flee the country.

This is why he has gone on hunger strike. But due to the events of the 1990s, ordinary Russians may have little sympathy.

The lead up to the robbery

During the communist period when Russia was called the Soviet Union (1922-1991), it was illegal to own a business. The communist ideal was that it was better for the government to own all businesses and distribute the wealth evenly.

However, in 1991 when the Soviet Union came to an end, private business ownership was reintroduced.

The roughly 240,000 government-owned businesses were put up for sale, and it was this privatisation process through which the ‘robbery’ took place.

It started out honourable. To ensure that this new private wealth was distributed evenly, every person in Russia was given a voucher.

They could exchange this for shares in a company, put it in an investment fund, or sell it to their manager or on the street.

The value of the voucher was calculated by a government committee. They combined the value of all the businesses, and divided it by the population of 144 million.

But here’s where things started going wrong.

Firstly, the businesses were grossly undervalued (at US$10 billion), and therefore so were the vouchers. Secondly, the government put all the businesses up for sale at the same time, meaning their value dropped even further due to oversupply.

Because of the confusion over the different companies and the diminishing value of the vouchers, most people either invested their voucher in a fund or sold it.

Managers bought most of these vouchers, as did politically-connected businessmen.

Many managers had their own money, having stolen it from their companies. And Russians had also been able to start earning private money since the late 1980s.

All of the sudden, the outcome that the system had been designed to avoid – vouchers in the hands of a wealthy few – had occurred.

The great heist

The government businesses were sold at auctions in the early and mid-1990s.

The poorly run investment funds ended up with the lousy smaller companies, and over half of them went bankrupt.

The medium and large businesses were mainly bought by managers and a small group of businessmen, including the oligarchs, who had very close ties with the new capitalist government under President Boris Yeltsin.

As well as having the bulk of the vouchers, and valuing the businesses at ridiculous discounts, they used a number of cunning tricks to ensure they were the buyers.

For example, they created rules saying people could only buy the shares in remote corners of Russia. Or they secretly changed the auction dates and locations, or banned people from going.

They also loaned the government money in return for, in particular, shares of Russia’s mineral resources (the hallmark of the oligarchs).

Gazprom, which owns a third of the world’s natural gas, was bought at less than 1% of its value. Others were in the 5-10% range.

It has been referred to as the ‘second gold rush’, or one of the great robberies of the century. Among the government resources to be pillaged were oil, gas, gold, aluminium, nickel, electricity, banking and pretty much every other industry.

And this was just to own the companies. Some of the oligarchs, particularly Boris Berezovsky, had their men working inside remaining government-owned companies to sign contracts with private companies they owned to do all the work. They called this “privatisation of profits.”

Berezovsky now lives in London as there is a warrant out for his arrest in Russia. In fact a number of the oligarchs fled overseas after Putin came to power.

Roman Abramovich, the owner of Chelsea Football Club, and a number of others also now live in upmarket parts of London, leading it to be dubbed “Moscow on Thames.”

So when Mr Khodorkovsky goes on hunger strike this week, people may think he’s the unlucky one for getting caught, but they will have little sympathy for his cause – after all, it was them he stole from.

By The Casual Truth

Photo – Mikhail Khodorkovsky awaiting trial