LONG READ: The oligarch problem

LONG READ: The oligarch problem
At the end of the communist experiment in 1991 the East was supposed to start resembling the West as it increasingly adopted western liberal democratic values, but what has actually happened is that the West is increasingly starting to resemble the East. / wiki
By Ben Aris in Berlin January 17, 2021

Andrew Meier had a good joke about the problems post-Soviet countries face with their oligarchs in his book “Black Earth”: if the two questions that dominated the Soviet-era were “What is to be done?” (Lenin’s famous pamphlet of the same title) and “Who is to blame?” (as nothing in the Soviet Union worked and someone got shot for it), after the collapse of the Soviet Union the question becomes: “What is to be done about those who are to blame?”

The chaos of the 1990s created the oligarch class. They were the fastest to react and pick up the extremely valuable assets that had fallen to the ground amongst the rubble of the collapsing totalitarian system to literally make millions of dollars overnight.

Legend has it that Russia’s uber-oligarch Roman Abramovich made his first million when he managed to divert a train full of crude oil from its destination to some internal refinery in the backwoods of Russia’s regions and sent it instead to the Baltic ports and on to the international markets in 1992.

Once a businessman had several million dollars in his pocket while everyone around him was plunged into poverty then anything became possible.

But these men are not good for the country. They are a corrupting influence as they buy their way – or worse – into the possession of their assets and are in the business of controlling state assets and the men that control them.

Boris Berezovsky, another of the original seven oligarchs from the Yeltsin-era, famously said it was not necessary to privatise a company, only to “privatise its revenues.” Of course this includes not paying any tax.

As time passed the game became more sophisticated. The people remain the biggest source of wealth in any country and access to that wealth is via the government’s taxes on the people and business; oligarchs became expert at setting up schemes to extract an economic rent on any activity. The upshot was inefficient and overly expensive goods and services that have acted as a drag on growth ever since.

More recently in some countries a new generation of “real” businessmen have emerged that do “real” business. The high volume-low margin retail sector, for example, has never appealed to oligarchs, as you can’t charge economic rents. This new generation make up the new flock of millionaires and billionaires, but the old guard are too well entrenched, and to confuse things some of them are investing into the new businesses too to let the younger generation do the work, as many Yeltsin-era oligarchs are in at least their 60s now.

Today Russia is a mixed bag with both real mega-wealthy businessmen and oligarchs. And the oligarchs' star has waned after Russian President Vladimir Putin took over, as his first act was to eject them from the corridors of power, along with their corrupt proxies in the Federation Council, the upper house of Parliament.

While Russia is tarred as a kleptocracy, the irony is that Putin is the only one of the Commonwealth of Independent States (CIS) leaders that has made a successful attempt to break the control of the oligarchs at his famous “oligarch meeting” in 2001, where he told them “keep what you have got, but stop the stealing,” and bring power back into the hands of government officials.

Of course since 2000 the pendulum in Russia has swung too far the other way. Putin experimented with the ZAO Kremlin system in the noughties where he held one-on-one meetings with all the leading businessmen and tried to ensure their plans dovetailed with the Kremlin’s goals.

But the oligarchs proved too hard to control and he eventually replaced them with the stoligarchs – state-sponsored oligarchs, who are given the biggest budget-funded contracts personally by Putin and who can then manually supervise the corruption and keep the stealing to “acceptable” levels.

As bne IntelliNews has argued many times, most of the countries of New Europe have failed to set up working institutions to regulate business. Without strong property rights and a functioning independent judiciary then corruption is the system. The easiest way to bind minions to a leader is give them positions of power where they can charge an economic rent. The power comes from an ability to take those jobs away again. So Russia didn't solve its oligarch problem after all. It just recast it in a different form that gave Putin more political power. It is the system employed by almost all the CIS countries.

On the flip side the reason why the Central European countries have flourished is they were handed those institutions fully formed by the EU. But even the likes of Czechia and the Baltics still suffer from the bane of the oligarchic corruption. Only this week the government in Estonia fell when it transpired the Prime Minister was doing dodgy real estate deals. In Hungary one of the biggest oligarchs in the country is also a close personal friend of Hungarian Prime Minister Viktor Orban. Even the newly minted EU members have not solved their oligarch problem entirely. 

Kyrgyzstan, Georgia and Ukraine in trouble

Most of the other countries in the region are far less advanced and their oligarchs have had an extra decade on Russia’s oligarchs to entrench themselves.

If anything, the oligarch problem is getting worse. Kyrgyzstan just had its third colour revolution but Sadyr Japarov, who just took over and legitimised his presidency with elections on January 11, was in jail in December on kidnapping charges before the mob freed him. Not only is he an oligarch; he is also accused of having links to organised crime.

Georgia became a poster boy for democratic transition following the Rose Revolution in 2003 that catapulted Mikheil Saakashvili into the presidency. He allied with the West and made some successful reforms, but he lost touch with the people and lost elections in 2012 to Bidzina Ivanishvili, a Georgian-born oligarch who made his money in Russia in the 1990s.

Ivanishvili said last week that he was leaving politics as “mission accomplished”, but after his dominating Georgian politics for almost a decade the country has lost its poster boy sheen and has reverted to type. Corruption and insider dealing is back with a vengeance and the country has seen a string of protests as a result. Ivanishvili has used his vast fortune to run politics from behind the scenes.

Things in Ukraine are even worse, where the oligarchs are increasingly taking complete control of the political process. About 100 out of the 422 active MPs in Ukraine’s parliament are accused of being under the control of billionaire Rinat Akhmetov, and another 70 work for the oligarch Ihor Kolomoisky, who is also a personal friend of comedian-turned-president Volodymyr Zelenskiy, according to an investigation by bihus.info news site published on January 11.

Zelenskiy was swept to power in April 2019 on the promise of ending corruption, but since then he has lost control of the parliamentary majority and the oligarchs are actively working to undermine him. Specifically, Ukraine has been rocked by a string of scandals that have upset the International Monetary Fund (IMF), including physically attacking the employees of the reform-minded National Bank of Ukraine (NBU), a Constitutional Court decision to strike down most of the anti-corruption legislation and most recently to cap the domestic tariffs for gas. All these scandals have been laid at the feet of oligarch machinations.

“We identified billionaires Akhmetov and Kolomoisky as the most powerful players in Ukrainian politics as early as April. And much of the Ukrainian public understands this, with even Zelenskiy’s own 95 Kvartal comedy troupe performing skits depicting the two oligarchs abusing their excessive power,” Zenon Zawada of Concorde Capital said in a note. “While Akhmetov has been treading between the pro-Western and pro-Russian camps, never committing himself to either one, Kolomoisky has swung entirely to the pro-Russian camp since Zelenskiy’s election in spring 2019.”

Ukraine has a long history of abuse by oligarchs. Under Leonid Kuchma, the country’s second president, the country’s gas transit business was notoriously corrupt, conducted via “independent” trading companies such as Eural Trans Gas, controlled by oligarch Dmytro Firtash, that siphoned off billions of dollars on behalf of the elite – both Ukrainian and Russian – among many other scams.

More recently Kolomoisky had inserted himself into the state oil procurement auctions and was extracting a 15% commission on all the deals, according to a senior Ukrainian politician speaking to bne IntelliNews off the record.

Even former President Petro Poroshenko, who took over after the 2014 Revolution of Dignity that was supposed to restart reforms, was an oligarch.

He was the only oligarch to see his wealth increase in the first years after the revolution, while the others lost billions of dollars. Although Poroshenko promised to put all his businesses into trust, he never did. The Panama Papers leak showed he lied and remained in control of his assets – including a chocolate factory in the Russian region of Lipetsk, although he eventually sold this – which was backed up by an investigation carried out by bne IntelliNews on his business empire.

More tellingly, despite actively lobbying Washington and the IMF for help as a counter to Russian aggression, true to his oligarch form, Poroshenko vociferously resisted the IMF’s attempts to impose anti-corruption legislation and institutions on Ukraine.

According to bne IntelliNews’ high-placed source, Poroshenko spent most of his time trying to place his own people to control the main sources of money flows in the administration.

What’s to be done about those who are to blame

And this is where Meier’s joke comes in: what can be done to break this system when the leaders of these countries have no interest at all in ending it?

The EU has real leverage over the countries that joined the union in 2003. The IMF has leverage over cash-strapped Ukraine too, although as the events of 2020 and before show, very little progress has been made there. But the international community has no leverage over the rest of the region and so change will have to come from within, forced on the governments by the emerging middle classes which are slowly becoming politicised. That could take generations, although the popular revolutions in Armenia and Belarus give cause for hope a shortcut is possible.

Thanks to this penetration of politics by the oligarchs the IMF and other international financial institutions (IFIs) are fairly helpless in countering the influence of the oligarchs.

All they can do is insist on anti-corruption laws and institutions that are too easily circumnavigated by the oligarchs.

Even Poroshenko only caved in to the IMF demands to set up an anti-corruption court (ACC) when Ukraine was facing a financial crisis and when the IFI became the only sources of funds to stave off an economic collapse. However, the ACC has yet to jail anyone significant. When the National Anti-Corruption Bureau of Ukraine (NABU) indicted the first big fish in 2017, Roman Nasirov, the head of the State Fiscal Service of Ukraine and a close Poroshenko ally for embezzling up to $50mn, not only did the courts fail to prosecute him, but he was eventually re-instated and even ran for president in 2019.

Part of the problem is that the IMF’s own insistence on sticking to the letter of the law means it has to accept the decision of courts and elections even when it is obvious they have been perverted by oligarch bribes. However, the oligarchs only follow the letter of the law when it suits them and when they have bought a decision that is in their interests.

Examples of this duplicity abound. The most recent example is Ukraine’s Constitutional Court’s decision to strike down most of the anti-corruption laws.

The court is supposed to be the ultimate guarantor of the rule of law in Ukraine, but with five of the 15 judges themselves already under investigation for corruption it is patently obvious that the decision was bought by oligarchs looking to scupper the IMF deal and halt the anti-corruption drive.

Ironically the IMF had to accept the Constitutional Court’s decision, because it is the Constitutional Court, and rebuke Zelenskiy who attempted to sack the judges – for which he doesn't have the constitutional power.

Western commentators are also caught in the paradox of the need to follow the letter of the law versus the realities on the ground.

The arrest of US fund manager Michael Calvey on February 14 in 2019 caused a huge scandal and the international business community (and several very senior Russian officials) called on Putin to stop the case and let him go. Putin responded, correctly, that as president he had no power to order the courts to do anything, whereas it is also perfectly obvious the courts will do exactly as they are told, if Putin asks.

The irony in this case is it was the international community that was asking that Putin ignore the rule of law, whereas Putin insisted on following it. This contradiction in views comes up time and time again as each side flip-flops between insisting on the law or conceding to the realities of the way things really work.

Anti-corruption blogger and opposition activist Alexei Navalny was due to return to Russia on January 17, but during the previous week a court took his suspended sentence for an old embezzlement case and turned it into an actual jail-time sentence. Commentators widely saw the ruling as an attempt by the Kremlin to persuade Navalny to remain in exile, but it also shows the courts will do whatever the Kremlin tells them to – not that anyone will ever admit to that in public.

CE & Belarus

Even Central Europe is not immune to the oligarch problem. Czech Prime Minister Andrej Babis is an oligarch and was caught directing EU structural funds to his own companies.

Hungarian Prime Minister Viktor Orban is not an oligarch, but his close personal friends are and they have been making a fortune from state contracts in recent years.

Lukashenko is an interesting case, as while there are a few oligarchs in Belarus, men who are close to the president, as the country has yet to go through mass privatisation their power and wealth is limited. They make their money from securing what government contracts are available rather than charging economic rents, which is a much bigger business. Lukashenko’s fixation on concentrating all power in his own hands means the Belarusian oligarch system has never been able to develop very far. One of the big dangers of the changes that follow his mooted ouster is that in the economic chaos that follows Belarus will finally get its own oligarch class.

You can be a little more optimistic in Belarus’ case, as with luck the country’s economic revival will be led by the IT entrepreneurs who have the money, the relations with outside investors, and most importantly, ethical business principles thanks to their self-made wealth, rather than having earned their first fortunes from good connections with government.

Oligarchs in media

Media ownership plays an important role in the oligarch problem, as by controlling TV stations in particular, oligarchs gain real and unregulated political power.

When Putin took over in 2000 the two oligarchs he chose to attack first were Boris Berezovsky and Vladimir Gusinsky, who controlled the state-owned ORT (now the First Channel) and the largest privately owned broadcaster NTV respectively.

And it wasn't done subtly. Berezovsky was driven into exile and his stake in ORT was taken over by Abramovich, who was a Putin ally, and the channel is only now about to be “privatised”. Gusinsky was arrested and later complained that a figurative “gun was held to my head” forcing him to give up control of NTV, which was quickly taken over by Gazprom Media.

Putin’s control of the media was an essential part of his programme to defang the oligarchs and was extended to the extreme of banning any foreign organisation from owning more than 20% of a Russian media business. Poroshenko played the same game: despite promising to put all his businesses in trust he explicitly excluded his TV station, which he overtly retained control of throughout his presidency.

Leading Ukrainian oligarch Kolomoisky is widely credited with putting Zelenskiy into power in April 2019 thanks to the backing of his 1+1 TV station and other media holdings. Moreover, it has recently transpired that the pro-Russia politician and personal friend of Putin, Viktor Medvedchuk, is also an investor in Kolomoisky’s media empire that is now agitating in Moscow’s interests.

The story is similar in Georgia, despite its democratic reputation, where there has been a running battle for control of the leading TV station Rustavi 2, an influential but financially troubled broadcaster.

Happily the power of the media is waning slowly as internet use becomes widespread. In Russia the young have more or less abandoned watching TV in favour of YouTube videos, bloggers and a plethora of alternative online news sources that will contribute to the slow politicisation of the emerging middle classes.

The growing importance of truly independent online news was highlighted in the Belarusian mass protests last summer. Lukashenko flew in technical staff from Russia’ state-owned RT broadcaster to take over the Belarusian state media and pump out pro-regime propaganda very early on in the revolution, but to little effect, as almost the entire population had turned to the independent Nexta Telegram channel that briefly became the most read news outlet in the world in August.

Oligarchs in the West

The West is not immune to oligarchic influence either. Their huge fortunes and their yearning for political influence makes them tempting sources of funding for western politicians.

Senior British politician George Osborne vacationed on Oleg Deripaska’s yacht, one of the top oligarchs from the end of the Yeltsin era and Abramovich’s protégée. And UK Prime Minister Boris Johnson went as far as ennobling Evgeny Lebedev in November, the son of Russian oligarch Alexander Lebedev and former head of the KGB station in London in Soviet times, and who now owns the UK newspapers the Evening Standard and the Independent.

Deripaska got caught up in another scandal after a Belarusian escort Nastya Rybka claimed she had evidence that Deripaska was actively planning to interfere in the US elections in February 2018.

In the US the Russian oligarchs Viktor Vekselberg and the US-based Len Blavatnik were major sponsors of Trump’s inauguration, while Trump has been linked to a major Russian real estate magnate, who probably lent him money when his business was going badly.

Kolomoisky is also finally under federal investigation in the US for laundering billions of dollars he stole from his PrivatBank through companies based in Delaware for years.

Most recently, the US imposed sanctions on seven Ukrainians in January who are accused of interfering in US elections on Russia’s behalf. Deripaska has been sanctioned on the same grounds, as the Russian state sometimes makes use of its oligarchs for its own benefit or they act on their own hoping to curry favour with the leadership.

Ukrainian opposition leader, former Prime Minister and head of Batkivshchyna (Fatherland) Party Yulia Tymoshenko was exposed using a US lobbying firm to meet with senior US politicians close to Trump during a trip in December 2018. Tymoshenko is also an oligarch, dubbed the “gas princess” after she participated in the oligarchic gas trading scams of the 90s to amass a fortune believed to be worth some $350mn during her time as Energy Minister in the years before the Orange Revolution.

More insidiously, oligarchs in Eastern Europe have taken to funding think-tanks in an effort to manage the message and influence lawmakers and policy wonks in Washington.

The Atlantic Council is nominally a foreign policy think-tank, but it took in $21mn of donations in a year according to its website, receiving significant donations from Rinat Akhmetov and Viktor Pinchuk, two of Ukraine’s biggest oligarchs and the same Akhmetov that is believed to control 100 deputies in the Rada.

The Atlanitic Council also took $100,000 per year for three years from 2016 from Mykola Zlochevsky, who owns energy company Burisma that famously hired US President-Elect Joe Biden’s son Hunter to lobby its interests in the US.

Not surprisingly, the Atlantic Council treads lightly when it comes to criticising its oligarchic sponsors and has taken an extreme anti-Russian position on the showdown between Ukraine and Russia.

Despite this ideological stance, the Atlantic Council has not shied away from approaching Russian oligarchs for money too. It also counts Russian fertlisier producer Eurochem amongst its sponsors, owned by super-wealthy oligarch Andrey Melnichenko, who made his first fortune as a talented banker before switching into the raw materials processing business.

And recently it transpired that Anders Aslund had dinner with Pyotr Aven, the co-owner of the Alfa Group that was set up by Mikhail Fridman, another Yeltsin-era oligarch and also a business partner of Vekselberg and Blavanik in the TNK BP oil company. Aslund touched Aven for a donation to the Atlantic Council, despite the fact that Fridman is on the US sanctions list.

“This could open an opportunity. To date Fridman has been extremely stingy,” Aslund said in an email that became public as part of a legal process in a US court case. “I shall tentatively have dinner with Aven in Moscow Sunday night so I might be able to ask him what he wants. As you remember, we hosted him here in November and got nothing.”

While nominally a think-tank, the Atlantic Council has invested heavily in its media profile and actively produces op-eds, webinars and commentary for mass consumption, as it is as much about influencing the narrative as it is about doing academic research on foreign policy goals. For example, during the high of the Belarusian mass protests last summer, it scooped up the two leading social media commentators – journalists Hanna Liubakova and Franak Viacorka – making them associate fellows of the organisation despite the absence of any higher academic qualifications. Viacorka has also become opposition leader Svetlana Tikhanovskaya’s media spokesman.

Aslund also worked for Tymoshenko as an advisor while she was Prime Minister after the Orange Revolution.

None of the oligarchs’ funding of Western politicians or institutions is illegal. The Atlantic Council dismisses the unsightly oligarch funding by saying: “We are transparent about it”, as it does publish all their names on its website.

Moreover, what is bribe paying in Russia is legalised in the West under the term “lobbying”, where cash donations by oligarchs, or employing well connected Americans to change the course of legislation in their favour, is allowed and regulated. It could also be described as “legalised corruption.”

The oligarch problem is not unique to the new countries of the Former Soviet Union (FSU), but is becoming a general problem for the whole world. Following capitalism’s defeat of socialism the West decided the way forward was “more capitalism.”

That lead to things like the US Supreme court’s Citizens United in 2010 that gives explicit political power to corporations. In the US there are constant complaints about “Big Pharma” and “Corporate Media” that are undermining democracy. The NRA’s power to block gun laws, despite the overwhelming public support for those laws, because it is representing the industry’s interests is another example of explicit political actions by companies.

And the issue was thrown into really stark relief in the last weeks by Twitter and the other social media’s decision to ban Trump – who incidentally sold himself as an oligarch in all but name, highlighting as his main qualification for the job of President his ability to make money.

The Trump ban has raised the question: do private companies with commercial interests have the right to block the comments of an elected public official, where social media obviously now has largely usurped the tradition role of the press as the “fourth estate.”

What has emerged in the US is an oligarch set-up that would look extremely familiar to anyone in Russia: independent businessmen in charge of vast fortunes, who control the most important media outlets and are actively manipulating the narrative for their own political and commercial ends that are not beholden to anyone.

At the end of the communist experiment in 1991 the East was supposed to start resembling the West as it increasingly adopted Western liberal democratic values, but what has actually happened is that the West is increasingly starting to resemble the East.