Across the other eighty-odd federal components of Russia, the picture was complicated: while some local elites enthusiastically embraced free-market reforms, others created personal fiefdoms, sometimes on a clan or ethnic basis. But overall, the peripheries echoed what was happening in the Kremlin: in one region after another, the governor served as ‘midwife to the creation of financial-industrial groups’ – as political scientist Thomas Remington described it – forming a local elite by means of privatization.{16}
Who were the men – and they were almost without exception men – who made up Russia’s new elite in the 1990s? In an impressive 2009 statistical study, economist Serguey Braguinsky profiled nearly 300 of its members.{17} He divided them into two categories that to some extent reflected the pools from which the embryonic elite of the late 1980s was drawn – the canny operators versus the apparatchiks. Almost half of Braguinsky’s sample – 45 per cent – were what he called ‘insiders’: managers of Soviet enterprises prior to 1991, members of the nomenklatura, and relatives or close colleagues of people in the first two groups. The slight majority, by contrast, were classed as ‘outsiders’, with no visibly important ties to the previous system. The people in these two categories had quite different demographic and social profiles. The majority of ‘insiders’ were from the provinces (66 per cent), and overwhelmingly Slavic in origin (85 per cent); by contrast, two-fifths of ‘outsiders’ were born in Moscow, and a quarter were Jewish.[1] (Part of the reason for this disproportion is that in the late Soviet period Jews had faced a good deal of discrimination, and were hence much less likely to be appointed to ‘insider’ managerial posts.)
This distinction between ‘insiders’ and ‘outsiders’ is especially significant because it sheds light on the murky battles over power and property that were then unfolding. Often depicted as a simple struggle between oligarch-entrepreneurs and the vestiges of the planned economy, between business and the state, these battles should more properly be understood as fluctuations in the relative influence of the two categories of tycoon. Both ‘insiders’ and ‘outsiders’ profited from the different forms of privatization – ‘red directors’ seizing the factories under their control, entrepreneurs setting up banks, ex-Komsomol members and oilmen acquiring mines and wells by decree. But there were also some crucial differences between the two groups, and these help us understand what did and did not change in Russian capitalism from the 1990s to the 2000s.
One was the broad sectoral division that emerged. ‘Insiders’ dominated large-scale industry – natural resources, energy, metallurgy, engineering – while ‘outsiders’ mostly made their initial fortunes in banking, consumer goods, the media. One group tended to own physical assets, the other financial wealth. For much of the 1990s, economic conditions favoured the ‘outsiders’: industrial production was crippled, and those with access to large reserves of cash had the edge.[2] By the middle of the decade, ‘outsider’ oligarchs had used this advantage to extend their holdings into other sectors, grabbing assets ranging from mines to airlines, factories to TV stations. Berezovsky, for instance, came to own Aeroflot, the car giant Avtovaz, the public TV station ORT and the newspaper Nezavisimaia gazeta. Gusinsky’s holdings included Most-Bank, the television station NTV and newspapers such as Segodnia. Smolensky owned Agroprombank and the newspaper Kommersant. Mikhail Fridman and Pyotr Aven jointly dominated Alfa-Bank.
A second key difference lay in the two groups’ attitudes toward the state. These were rooted in fundamentally divergent experiences. Insiders, as their name suggests, tended to be better connected to the regional and national government apparatus, often through informal ties forged in the Soviet era. These now served as a form of political insurance, allowing them to secure state approval or assistance for their business activities. Outsiders, on the other hand, had largely profited from symptoms of the USSR’s collapse, and lacked such connections. As a result, they had to seek insurance in other ways: either through bribery or by funding their own candidates for political office. During the course of the 1990s, when ‘outsiders’ had the advantage economically, they were also more active than ‘insiders’ in pressing forward their interests politically. The penetration of state institutions by business interests was especially marked in the Duma: according to one astute analyst, in the 1990s ‘most deputies were more or less openly on the payroll of one oligarch or another.’{18}
By the mid-1990s, it had begun to seem as if the ‘outsiders’ had gained the upper hand not only over the ‘insiders’, but also over the state itself. Perhaps the most flagrant demonstration of this came in late 1995, with the infamous ‘loans-for-shares’ deals. Strapped for cash and in desperate need of support for his re-election bid the following year, Yeltsin authorized a series of rigged auctions through which stakes in a dozen companies were offered to select oligarchs as collateral on loans totalling $1 billion. In exchange, the media outlets they owned offered full-throated backing for Yeltsin’s presidential campaign. When the auctions went ahead in November–December 1995, rival bidders were excluded, in some cases physically: local authorities in the Siberian town of Surgut ordered the airport to be closed while the oil company Surgutneftegaz sold a 40 per cent stake to its own pension fund.
The biggest winners, inevitably, were the most powerful billionaires. Vladimir Potanin, who had come up with the scheme in the first place, paid just $170 million for Norilsk Nickel, a company with revenues of $3.3 billion and profits of $1.2 billion in 1995. He and his associate Mikhail Prokhorov also picked up a majority stake in the oil company Sidanco for $130 million. Khodorkovsky acquired 78 per cent of the oil company Yukos for $300 million; within two years it would have a market capitalization of $9 billion.{19} Another oil company, Sibneft, went to Berezovsky for just $100 million; a few years later it had a market capitalization of $1 billion.{20}
‘Loans for shares’ is often invoked as the most brazenly crooked of the Yeltsin government’s privatizations, which it probably was. But it was not, as is commonly supposed, the origin of the leading oligarchs’ wealth. Rather, it stood as public proof of these outsider tycoons’ hold on the country, and of their ability to bend the state to their will. Having acquired phenomenal wealth during the first half of the decade, they now used it to obtain political power, the better to cement their grip on their fortunes. After all, they had so far made their money between the cracks of the state; how much more could they make if they were in control of the whole thing? Sure enough, once Yeltsin was safely reinstalled in the Kremlin in the summer of 1996, the oligarchs began to arrange a further carve-up of state assets. In 1997, for example, a bitter feud erupted among them over telecoms provider Sviazinvest. That year, when American diplomat Thomas Graham asked an unnamed oligarch if it wasn’t time to start investing in production, he replied, ‘No… we still have to divide up all the property.’ Since Russia was a big country, he added, this would take some time.{21}
1
In Russia, Jewishness is generally held to be an ethnic category, and is often registered in official census data along with other
2
Of course, ‘insiders’ could still make money from their industrial holdings through transfer pricing, creative accounting or asset-stripping; but it was much more difficult to turn a profit from production itself.