In 1989, managerial personnel and figures from the state apparatus began directly appropriating pieces of the planned economy. This was the beginning of what is called latent privatization.{8} Local bosses turned factories into joint-stock companies in which they awarded themselves majority stakes. Meanwhile, regional officials used Party funds to set up banks and firms where they would then take up cosy executive positions.
The party–state apparatus was also rushing into business: the Communist Party set up commercial banks and hard-currency hotels, while the KGB developed similar business interests of its own. At the same time, entire blocs of the Soviet economy were being taken out of ministerial control and placed under that of new commercial entities. In 1989, the natural gas ministry became the company Gazprom, and the same year the ministry of metallurgy spawned the firm Norilsk Nickel, while the state bodies responsible for water, construction, chemicals and petroleum refining had morphed into dozens upon dozens of new firms. Most of these were still ‘state-owned’, but did not remain so for long.
At this stage, then, there were two main pools of recruits for the emergent economic elite: entrepreneurs, who capitalized on the Soviet state’s disintegration, and Party apparatchiks and industrial managers, who increasingly seized assets under their purview. Common to both groups was the essentially parasitic nature of their fortunes. Much would change during the upheavals of the 1990s, but the foundational dependence of economic wealth on political power would not be undone.
The disappearance of the USSR in 1991 was followed by one of the most dramatic transfers of property in history. Brash new private fortunes were made, giving rise to a layer of oligarchs who came to dominate the headlines. The likes of Berezovsky, Smolensky, Gusinsky and Khodorkovsky looked to be the new power in the land. For many Russians, the sudden arrival of these nouveaux riches demonstrated the ascendancy of private wealth over state authority. Yet their wealth was essentially created by the largesse of the country’s political rulers.
Nothing demonstrates this more clearly than the process of privatization – widely referred to at the time as prikhvatizatsiia, ‘grab-it-ization’. The Yeltsin government’s massive sell-off of state assets was explicitly designed to smash the Soviet command economy and create a market system dominated by a new class of wealth-holders. Anatoly Chubais, head of the State Property Committee, told one interviewer that ‘every enterprise ripped out of the state and transferred to the hands of a private owner was a way of destroying Communism in Russia… At that stage, it didn’t matter at all to whom these enterprises went, who was getting the property.’ The huge imbalances of wealth, power and opportunity this created were just something the populace would have to accept: in November 1992, Chubais shrugged that ‘if the problem is only that the rich will buy up the property, I am sure that is the way it must be.’{9}
Privatization took three forms, each of which benefited different segments of the nascent economic elite.{10} The first was a ‘mass privatization’ scheme, launched with great fanfare in October 1992, in which citizens were issued with vouchers entitling them to buy shares in enterprises slated for privatization. By June 1994, some 15,000 enterprises, employing 17 million people – around two-thirds of the industrial workforce – had been auctioned off.{11} Nominally intended to create a kind of ‘popular capitalism’, in practice this produced a concentration of ownership and control among well-placed insiders from the nomenklatura and Soviet managerial elite. Managers often gained control of their workers’ shares, either by purchasing them or through more underhand means. And because voucher privatization took place in the middle of a catastrophic downturn, many workers sold their vouchers at a fraction of their face value to get hold of desperately needed cash. There was also a rash of speculation: by mid-1994, ‘voucher funds’ had hoovered up almost a third of all the vouchers in the country.{12}
The crisis conditions had another crucial effect: the assessed value of state enterprises was not indexed to inflation, so the real cost of acquiring them was plummeting by the day. The result was a fire sale of the Soviet economic apparatus. The voucher-auction price of shares in Gazprom, the Soviet gas monopoly, implied the company’s total value was $228 million – about one-thousandth of the estimation made by Western investment banks at the time. All told, the total value of Russian industry, according to voucher auction prices, was a mere $12 billion. As the Washington Post’s former Moscow bureau chief David Hoffman put it, this meant that ‘the equity of all Russian factories, including oil, gas, some transportation, and most of manufacturing, was worth less than that of Kellogg or Anheuser-Busch’.{13}
The second main form privatization took was even less transparent, involved much larger sums of money, and transferred far more significant assets out of state hands. Starting in mid-1992, Yeltsin effectively created a pool of magnates by state fiat, through a process of ‘privatization by decree’ that kept transactions free from democratic scrutiny. This involved, in particular, the enormous assets of the natural resource sector – oil and gas, coal, diamonds, gold, and so on. The new owners were initially drawn mostly from among the ‘red directors’ who had managed these concerns under Soviet rule. Among the enterprises sold off or turned into joint-stock companies by executive order were Gazprom; Rosugol, the state coal concern; Alrosa, a diamond company; and, crucially, three giant oil companies – Yukos, Lukoil, and Surgutneftegaz.{14} Again, the prices these assets fetched were light-years from any market valuation; the Yeltsin government’s eagerness to shift chunks of the economy into private hands took precedence over rational economic calculations.
A third form of privatization involved not state assets but budgetary flows. After 1991, Komsomol entrepreneurs such as Khodorkovsky and canny operators like Berezovsky or Smolensky acquired formidable power and wealth by acting as ‘authorized’ intermediaries for a range of government bodies. Funds for many of the ministries were not handled by the central bank, but instead routed through accounts in various privately owned ‘plenipotentiary’ banks. Like the winners of the voucher auctions and the magnates designated by decree, the new financial tycoons were effectively subsidized by the state. They even admitted as much: Khodorkovsky confessed to one interviewer that his Menatep Bank was deliberately organized to mirror the structure of the government, the better to maintain its grasp on federal revenues. As another banker, Pyotr Aven, observed:
To become a millionaire in our country, it is not at all necessary to have a good head or specialized knowledge. Often it is enough to have active support in the government, the parliament, local power structures and law enforcement agencies. One fine day, your insignificant bank is authorized to, for instance, conduct operations with budgetary funds. Or quotas are generously allotted for the export of oil, timber and gas. In other words, you are appointed a millionaire.{15}
Similar processes were taking place at the regional level, though the pace and scale varied. In Moscow, Mayor Yuri Luzhkov governed in the manner of an old-school Party boss from 1992 to 2010. Instead of selling off their massive portfolio of properties, the municipal authorities kept hold of them, and retained a far greater degree of financial autonomy than any other Russian region. Here private fortunes were made mainly through lucrative city contracts secured thanks to connections with the mayor’s office, notably in construction – Luzhkov’s wife, Elena Baturina, head of the building firm Inteko, was coincidentally among the tiny number of women to join the hyper-rich.