The Fall of the Soviet Union- Part 2: The Rise of the Oligarchs

The Fall of the Soviet Union- Part 2: The Rise of the Oligarchs
(AP Photo/Alexander Zemlianichenko, File)

In the 1990s, Russia looked more like the Wild West than a Eurasian power.  There were very few clear rules and plenty of opportunities for financial gain and political power.  The Russian oligarchs emerged from this wreckage and created multi-billion dollar empires from the political, economic, and social chaos.  Large portions of the old Soviet law were tossed and replaced with vague Russian laws while other portions of the Soviet law, often at odds with the new laws, remained adding to the confusion.  Much of the law under Yeltsin became contradictory and unevenly enforced. 

Some oligarchs banded together to rig privatization auctions which allowed them to purchase large sections of the economy at rock-bottom prices.  Others monopolized the export of raw materials.  Some purchased stock certificates from unwitting workers and they often swindled themselves into total ownership of businesses.  With their amassed wealth, they made loans to the government, then seized government-owned assets when the loans defaulted.  

These empires were a hodgepodge of unrelated assets with steel companies owning pig farms.  They were simply grabbing whatever they could whenever they could and wherever they could.  The goal was to acquire more of anything whether it made business sense or not.  It was wealth extraction, not wealth generation.  They shared one thing in common- their view of the state: it was irrelevant, nothing of a threat, and something from which one can steal.

By 1993, frustrated with legislators, the country almost collapsed into open civil war.  Yeltsin and his supporters barricaded themselves in the parliament building and survived only after he called in the tanks.  However, his weakness simply emboldened separatists in Chechnya and a year later Yeltsin found himself in open military combat with the would-be breakaway state. 

There were some successes for Yeltsin.  He and President George H.W. Bush signed a trade agreement making it easier for Americans to do business in Russia.  In 1996, new elections rolled around and Yeltsin seemed crippled with a terrible economy and a brutal conflict in Chechnya.  Additionally, the Communist Party seemed revived and poised to make gains.  Although Yeltsin prevailed, he was a spent force.  Yet in 1997 for the first time, Russia participated in a G7 economic summit in Denver and was integrated as a full member the following year when the G7 became the G8.

Meanwhile, it was business as usual for the oligarchs.  Initially, after the collapse of the Soviet Union, there were three factions vying for political control of Russia- the siloviki (men of power), the family, and the oligarchs.  The silovaki consisted of former KGB and security force members and were mostly nationalists who wanted to see Russia restored to its former glory.  They occupied the Foreign and Interior Ministries and the KGB’s successor, the Federal Security Service (FSB).  Initially, Yeltsin feared this group, but a series of preemptive restructuring moves of these Ministries held them at bay until 1999.

The family was the close friends and associates of Yeltsin who had infiltrated government and businesses in Russia.  After the 1996 elections, this group had been infiltrated by Western-leaning technocrats who kept foreign capital flowing into the country, but on new terms.  They controlled the Finance and Economic Ministries.  This new breed was referred to as the “St. Petersburg Brigade.”  While the siloviki and family fought it out, the oligarchs ruled most of Russia’s vital business sectors.  

Until 1998, the oligarchs leeched off their corporate empires with little attention to the damage they were inflicting on the country and their own assets.  When the value of the ruble collapsed, many of the business elites found out their assets were not that healthy.  While the country was plunged into poverty, the oligarchs, realizing their assets were not performing that well, faced a crisis.   For example, the oligarchs simply pumped and pumped until fields ran dry.  By 1998, Russian oil output had decreased one-third.  When international oil prices sunk amidst the ruble crisis, many oligarchs found it difficult to break even.  The result was a massive consolidation as a new crop of oligarchs pushed aside the old.

Con men and thieves gave way to actual businessmen.  Some cons and thieves transformed themselves into businessmen.  Although they had their roots in the chaos of the early 1990s, it is inappropriate to consider them law-abiding with kind hearts, but they did take a longer view of things.  Industrial empires were reformed where, for example, steel companies got rid of their pig farms.  Standard reinvestment practices were instituted.  There also resulted some semblance of actual, legitimate financing.

There were basically nine key oligarchs in the Yeltsin era.  Four of them were- Mikhail Fridman and Petr Aven of Alfa Bank, Vladimir Potanin, and Vitaly Malkin- and they would cross paths with Donald Trump or his family.  A fifth- Boris Berezovsky- sought refuge in the United Kingdom and became a vocal critic of Yeltsin’s successor, Putin.  Russia charged, tried and found him guilty in absentia of fraud and embezzlement.  Alexander Smolensky was charged with fraud and embezzlement by the Putin government, but the charges were eventually dropped.  Vladimir Vinogradov, a key banker in the 1990s, saw his bank go under in 1998 and he quietly disappeared from public life.  Media tycoon, Vladimir Gusinsky was arrested but avoided prosecution when he ceded some of his holdings to the government.  Mikhail Khodorkovsky eventually lost his Yukos Oil company to the government and ended up in prison convicted of embezzlement and fraud.As the Yeltsin era winded down, the new breed of oligarch started to move in and they are the ones who now find themselves sanctioned by the United States government. 

An example of the new breed is Alexander Abramov.  In 1992, he formed Evraz Metal which was successful exporting coal and metals from Siberia and the Ural Mountains.  In the 1998 financial crisis, many producers ended up owing Abramov who decided to trade debt for shares of stock in the companies.  He managed to purchase failing coal mines and steel mills for practically no money.  The company today employs over 125,000 people and is valued at $20 billion.  It controls almost one-quarter of Russia’s total steel output.

Aras Aragalov is another who realized there was money to be made in Moscow.  He formed Crocus International late in the 1980s as Gorbachev was reaching out for foreign investment.  He eventually made the move into real estate development.  In many ways, he is the Donald Trump of Russia having made his fortune in real estate and construction.  He also personally invested $20 million to get Trump to bring the Miss Universe contest to Moscow in 2013.

After the fall of the Soviet Union, Oleg Derispaska– perhaps the most important oligarch here- struggled to feed himself.  In the early 1990s, he started trading metals.  In 1994, he negotiated to acquire a large stake in the Sayonagorsk Aluminum Smelter in Siberia.  He became manager and worked to make the operation efficient and profitable.  By 2000, the new company had a hand in the oil business and had become one of the world’s largest producers of aluminum.  In 2001, he founded Basic Element which branched out into other ventures.

Finally, there is Dmitriy Rybolovlev who made a killing in 1995 in the potash industry.  He managed to seize the controlling shares in Uralkali- the largest Russian producer of potash fertilizers.

Join the conversation as a VIP Member

Trending on RedState Video