How Putin Conquered Russia's Oligarchy
Note: This is Part Two of a two-part Planet Money newsletter series on the Russian oligarchs. You can read Part One here and subscribe to the newsletter here.
In the summer of 2000, 21 of the richest men in Russia exited their bulletproof limousines and entered the Kremlin for a historic meeting. In the previous decade, these men had risen seemingly out of nowhere, amassing spectacular fortunes as the country around them descended into chaos. Through shady deals, outright corruption, and even murder, these rapacious "oligarchs" — as Russians had come to derisively call them — had seized control of much of Russia's economy, and, increasingly, its fledgling democracy. But now, their nation's newly elected president, Vladimir Putin, wanted to tell them, face to face, who was really in charge.
"I want to draw your attention to the fact that you built this state yourself, to a great degree, through the political or semi-political structures under your control,'' Putin reportedly said in the closed-door meeting. ''So there is no point in blaming the reflection in the mirror. So let us get down to the point and be open and do what is necessary to do to make our relationship in this field civilized and transparent.''
Putin offered the oligarchs a deal: bend to my authority, stay out of my way, and you can keep your mansions, superyachts, private jets, and multibillion-dollar corporations (corporations that, just a few years before, had been owned by the Russian government). In the coming years, the oligarchs who reneged on this deal and undermined Putin would be thrown into a Siberian prison or be forced into exile or die in suspicious circumstances. The loyalists who remained — and the new ones who got filthy rich during Putin's long reign — became like ATM machines for the president and his allies.
"These individuals have enriched themselves at the expense of the Russian people," the White House said in a recent statement announcing sanctions against over a dozen oligarchs connected to Putin. "[They] sit atop Russia's largest companies and are responsible for providing the resources necessary to support Putin's invasion of Ukraine."
Putin Shows Who's Boss
Putin came to power thanks in no small part to the original class of oligarchs, who got ostentatiously rich through crooked privatization deals during the presidency of Boris Yeltsin. These oligarchs created and bankrolled what became Putin's political party, Unity, the predecessor to what is now called United Russia. They engineered President Boris Yeltsin's stunning comeback victory in the 1996 presidential elections. Without this victory, Yeltsin could have never appointed Putin as his prime minister, a position that proved to be Putin's launching pad for his presidential bid. The oligarchs helped fuel Putin's meteoric rise. Two of them, Vladimir Gusinsky and Boris Berezovsky, deployed their television stations and newspapers to turn Putin from an unknown figure into a household name.
But Putin was a shrewder politician than they initially realized. When Putin's 2000 presidential election campaign heated up, he began paying lip service to Russia's hatred of the oligarchs and the corrupt deals that enriched them. Shortly before election day, Putin was asked by a radio station how he felt about the oligarchs. If by oligarchs, he said, one meant those who "help fusion of power and capital — there will be no oligarchs of this kind as a class."
But, once in power, Putin didn't actually eliminate the oligarchy. He only targeted individual oligarchs who threatened his power. He first aimed at Vladimir Gusinsky, the rare oligarch who built most of his wealth from scratch as opposed to merely taking over extractive industries that once belonged to the government. Back in the mid-1980s, Gusinsky was a cab driver with broken dreams of directing plays in Moscow's theater scene. When the Soviet Union began allowing entrepreneurship in the late 1980s, Gusinsky made a small fortune making and selling copper bracelets, which were apparently a big hit with Russian consumers. In the early 1990s, he flipped buildings in Moscow's burgeoning real estate market and started a bank. By 1993, he had enough money to start a newspaper and Russia's first private television station, NTV.
Tolerated under Yeltsin, NTV ran programs — including a satirical puppet show — critical of the Kremlin. When NTV newscasters — and puppets — began criticizing and making fun of the newly elected president, Putin slammed down his iron fist. In 2000, armed agents in camouflage and ski masks raided NTV's offices. The government alleged Gusinsky stole $10 million in a privatization deal. Gusinsky was jailed and then fled overseas. A state-controlled energy company, Gazprom, ended up buying NTV in a hostile takeover. Rest assured, Putin doesn't have to worry about puppets making fun of him anymore.
In the early 2000s, another oligarch, Mikhail Khodorkovsky, crossed the line with Putin and also paid a hefty price. Khodorkovsky, a square-jawed magnate built like a retired linebacker, was then the richest man in Russia, estimated to be worth around $15 billion. He made his fortune largely through a corrupt deal with the Yeltsin administration under a scheme known as "Loans For Shares" (read our last newsletter for more details). Khodorkovsky was able to buy a 78 percent stake in the state-controlled oil company Yukos for only $310 million, even though it was then worth an estimated $5 billion.
Khodorkovsky proved to be a capable oil baron and brought Western-style management and transparency to his empire. As corporations do in the United States, he spent generously on lobbying and campaign contributions to politicians in Russia's legislature. He funded opposition political parties. He even hinted he might run for president. As his empire grew, he became increasingly strongheaded. In February 2003, Khodorkovsky challenged Putin in a televised meeting, alleging corruption at a state-owned oil company. Meanwhile, Khodorkovsky was mulling a merger with the American oil company Exxon Mobil. Putin and his allies hated all of this.
In 2003, masked agents stormed Khodorkovsky's private jet during a refueling stop and arrested him at gunpoint. Authorities charged him with fraud and tax evasion. They imprisoned him in Siberia, where he would languish for the next decade. The government took over his oil empire and handed the keys to one of Putin's longtime associates, Igor Sechin.
The Rise Of The Siloviki
Igor Sechin is one of the leading figures in a new breed of oligarchs, who have accrued wealth and power under Putin: the siloviki, which translates roughly to "men of force." Most are military men or former KGB officers, like Putin himself. Sechin, who has a PhD in economics, is rumored to have served as a KGB officer in East Africa during the 1980s.
Whereas the original class of oligarchs arose during the era of "shock therapy" and rapid privatization in the 1990s, the siloviki — or silovarchs, as they're also called — made their fortunes under Putin, largely through government contracts, Putin's re-nationalization of extractive industries, and good, old-fashioned corruption. Like Putin, most silovarchs revile the reform era of Gorbachev and Yeltsin, when Russia lost its empire and saw a host of liberal and pro-Western intellectuals take the helm of the government and the economy.
Sechin has worked for Putin for decades. In the 1990s, when Putin served as an aide to the mayor of Saint Petersburg, Sechin served as Putin's assistant. Later he served as Putin's deputy prime minister. A 2008 U.S. embassy document leaked by Wikileaks said, "Sechin was so shadowy that it was joked he may not actually exist but rather was a sort of urban myth, a bogeyman, invented by the Kremlin to instill fear." Some in Moscow call him "Darth Vader." Sechin now serves as the chairman and CEO of the state-controlled oil company, Rosneft, which is the largest corporation in Russia, producing around six percent of the world's oil and employing about 300,000 people.
In his autobiography, First Person, Putin wrote, "I have a lot of friends, but only a few people are really close to me. They have never gone away. They have never betrayed me, and I haven't betrayed them, either. In my view, that's what counts most."
Which brings us to another important subset of oligarchs, who are buddies with Putin but who did not serve in the military, police, or Russian security apparatus. A prime example of this type of oligarch — a Putin buddygarch, if you will — is Arkady Rotenberg.
It Pays To Be A Judo Partner With Putin
In the 1960s, a twelve-year-old Arkady Rotenberg was forced by his parents to go to a martial arts class. They didn't know it was like handing their son a winning lottery ticket. At that judo class, Rotenberg met a young Vladimir Putin. Rotenberg and Putin quickly became friends. For years, they sparred against each other and traveled to judo tournaments around their hometown of Leningrad (aka Saint Petersburg). The two were known as pranksters, getting into trouble doing silly things like popping balloons at parades by throwing wire pellets at them.
In 2000, Arkady and his brother Boris were small-time oil traders. But then something crazy happened: one of Arkady's best friends became the president of Russia. That same year, Putin created a new state liquor monopoly, Rosspirtprom, by merging more than a hundred liquor factories. Rosspirtprom controlled around 30 percent of Russia's vodka market. Putin put Arkady in charge of it.
A year later, Putin installed his own henchman on the board of Gazprom, a large state-run gas company. Arkady and Boris saw an opportunity. They started a new bank, SMP Bank, and began acquiring construction, gas, and pipeline companies that could service Gazprom. Since then, the Rotenbergs have emerged as the greatest beneficiaries of a government with a penchant for awarding no-bid contracts. The government has forked over billions upon billions of dollars to the Rotenbergs to construct things like pipelines, roads, and bridges. Curiously, they are known to significantly overcharge for these projects, but the Kremlin seems to be cool with it. Evidence suggests it might be because someone in the Kremlin is getting a cut.
Stanislav Markus, an economist at the University of South Carolina who studies Russian oligarchs, recently told The Indicator that Putin's buddies kick back some of the extra money they charge the state to the president himself. "That's what makes Vladimir Putin one of the wealthiest people on the planet," Markus said. "Nobody knows exactly how wealthy, but that's one of the key processes."
Much of the money that has flowed to the oligarchs and to Putin — whom historian Timothy Snyder calls "the head oligarch" — has been stashed in accounts and assets located outside of Russia. "There is as much financial wealth held by rich Russians abroad — in the United Kingdom, Switzerland, Cyprus, and similar offshore centers — than held by the entire Russian population in Russia itself," a 2017 study by economists Filip Novokmet, Thomas Piketty, and Gabriel Zucman found.
Although it's been hard to see exactly where all the money ends up — and how much of it is actually Putin's — it's easy to see that loyal oligarchs are making bank through extra fat government contracts. In 2014, as Putin grew excited about hosting the Winter Olympics in Sochi, his government spent lavishly preparing for the Games. The biggest winner of this spending? Arkady and Boris Rotenberg. A 2017 profile of Arkady in The New Yorker found, "In all, companies controlled by Rotenberg received contracts worth seven billion dollars — equivalent to the entire cost of the previous Winter Olympics, in Vancouver, in 2010."
Shortly after the Sochi Olympic Games, Putin invaded Ukraine for the first time, annexing the Crimean Peninsula. Naturally, Ukraine sealed off the one land entrance to the area, which is on their southern border. Looking to unite Russia with its new territory, Putin decided to create a 12-mile bridge over the Kerch Strait. Given it was a warzone with lots of logistical and political challenges, many contractors were reluctant to build that bridge. Not Arkady Rotenberg. His company took on the multibillion-dollar project, despite the political headaches it posed, and completed it in 2018. "A miracle has come true," Putin said about the bridge's completion.
The Obama administration sanctioned the Rotenbergs to punish them and Putin for the invasion of Crimea. "Arkady Rotenberg and Boris Rotenberg have provided support to Putin's pet projects by receiving and executing high price contracts for the Sochi Olympic Games and state-controlled Gazprom," said the U.S. Treasury Department. "Both brothers have amassed enormous amounts of wealth during the years of Putin's rule in Russia." European nations also sanctioned them. For example, Italy seized Arkady's multimillion-dollar mansions in Sardinia and Tarquinia.
The sanctions proved to only bring the Rotenbergs and the Kremlin closer together. The Russian legislature even tried to pass a law, called "the Rotenberg law," which sought to compensate citizens who had their assets stripped by foreign governments. It didn't pass. However, the Rotenbergs have been compensated generously in the form of lucrative state contacts that got even bigger after they were targeted by foreign sanctions.
Western authorities are again targeting the Rotenbergs and other Russian oligarchs in response to Putin's second invasion of Ukraine. This script is similar to the prequel, but the sanctions are tougher and more coordinated than they were after Putin's first invasion of Ukraine. Last time, the sanctions proved to be largely ineffective. The people of Ukraine can only hope that this time will be different.