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What Will Be the Fate of Russia’s Oligarchs?

Russian oligarchs came about as an unforeseen consequence of Gorbachev’s partial market liberalization process, when rare commodities were smuggled into the country to be sold with large profit margins.

Russian oligarchs came about as an unforeseen consequence of Gorbachev’s partial market liberalization process, when rare commodities were smuggled into the country to be sold with large profit margins. In the 1990s, the oligarchs emerged as well connected entrepreneurs who started from nearly nothing and got rich through participation in the market via connections with the government of Russia during the state's transition to a market-based economy.

Oligarchs became widely unpopular in Russia as poverty was widespread during this time and they were commonly thought to be the cause of much of the turmoil that plagued the country following the collapse of the Soviet Union. At the time, The Guardian newspaper said the oligarchs were “about as popular with your average Russian as a man idly burning bundles of £50 [notes] outside an orphanage”.

Post-Soviet business oligarchs includes relatives or close associates of government officials, even government officials themselves as well as criminal bosses who achieved vast wealth by acquiring state assets very cheaply (or for free) during the privatization process controlled by the Yeltsin government.

Although the wealth of the oligarchs has given them much power, they have never truly been free or autonomous. Mikhail Khodorkovsky who is currently locked up in a Serbian jail is a bitter reminder of this. Some have fled Russia in order to cut ties with the government. In order to be prosperous, oligarchs with business still based in Russia must be prepared to share their assets with the Kremlin. There's a saying among Moscow's jaded old market watchers that the oligarchs don't really own Russia's industries; they're merely their Kremlin-appointed caretakers.

And now, the oligarchs are vulnerable to another power: the financial crisis.

For many, the temptation to borrow money from Russian and foreign banks to buy shares was great during the 1990s. If loans dried up, lending could be revived by using share portfolios as collateral for further loans, which in turn were used to invest in more equities. When Russia needed a cash injection, many oligarchs handed over money in return for stakes in state-owned firms. In recent weeks, the high level of debt, or leverage, has blown up in the faces of many, including some of the high-flying oligarchs. This time around, there has been a role reversal.

The terms of a government support programme have yet to be hammered out, though analysts suggest the Russian government will want the oligarchs to pledge the same stakes - as collateral in return for state loans - as they pledged to the Western banks. In the process, Kremlin's muscle continues to grow.

The financial crisis seems to have given the Kremlin the opportunity to reassert at least some control over the industries that were so haphazardly discarded during the Yeltsin era. The agent of influence is a government development agency called Vnesheconombank (VEB).

The chairman of its supervisory board is Mr. Putin. Some of Russia's most powerful government officials, including the finance and transportation ministers, prop up the rest of the board. They are running to the Kremlin for state-sponsored loans to refinance their companies' foreign debts. While the loans might not translate into nationalizations, they are likely to come with conditions that will give the Russian government extraordinary power to dictate the companies' direction.

According to some estimates, more than two thirds of the oligarchs' $300bn (£183bn) wealth mountain has evaporated, leaving them with a paltry $70bn to weather what could turn into a global recession.

A Bloomberg News assessment of the collapsing fortunes of the men who made out like bandits on communism's collapse puts the numbers in high relief: Deripaska's holdings have hemorrhaged $16 billion in value, a figure that pales against the $20.3 billion wipeout of Roman Abramovich, the owner of Britain's Chelsea FC soccer club.

Elsewhere in the bling-flinging realm of the oligarchy, Alisher Usmanov is down a mere $11.7 billion. And so it goes across the board for Russia's estimated 110 billionaires, many of who will no longer qualify for the list when all the rubles are counted.

The scale-levelling downturn now has some analysts wondering whether the power-hoarding era of the Russian oligarchs is approaching its end.

But that notion may be little more than wishful thinking, according to Philip Hanson, who tracks Russia's stakeholders for the British Royal Institute of International Affairs. "It is fascinating, but it could go either way," Hanson told the Toronto Star. "There may be an opening for a return to the more liberal market reforms that were halted early in the era of Vladimir Putin. "Or it could go the other way and strengthen the 'Fortress Russia' mentality among the business elite.

"Much will depend on the price of oil, which, if it remains below, say, $80 a barrel, could knock the stuffing out of support for the energy-rich regime. It will depend largely on whether and how the turmoil filters down to the actual purchasing power of the citizens".

Deripaska, 40, is a cardinal example of how Russia's super-rich have survived and thrived by deepening their ties to their country's political elite. Already a mogul after emerging as the victor of Russia's brutal aluminum wars in the 1990s, Deripaska cemented his rise in 2001 by marrying the granddaughter of former Soviet president Boris Yeltsin.

That "untouchable" status shielded Deripaska during the Kremlin’s 2003 campaign against the tycoons of the formerly state-owned industries. He thrived, in stark contrast to Mikhail Khodorkovsky, who was stripped of the oil giant Yukos and jailed for nine years.

"The surviving oligarchs got the message, which was, essentially, that they make absolutely clear: 'I am at one with the Kremlin.'." said Hanson. The result is that these assets are not just the property of the oligarchs who appear to own them. They are also indirectly at the disposal of the Kremlin clans in an arrangement of shared power, said Hanson.

"Together, the oligarchs and the political elite have been able to have their cake and eat it too — by enjoying direct control of the economy and at the same time enjoying high levels of popularity because the economic growth, until how, has been absolutely terrific.

"Now, that era of control and prosperity is under threat, something will have to give. We won’t know for some time what it will be."


Source : Neftegaz.RU