The purpose of this paper is to investigate and to shed light on the nature of the relationship between big business and the state in contemporary Russia. It is commonly assumed that a relatively small number of Russian industrial tycoons, or “oligarchs”, control a substantial share of Russia’s economy and have the capacity to determine policy in the areas that are fundamental to the running of the country. I propose to challenge these assumptions and to argue that between 1996 and 2003 economic power blocks in Russia could never aspire to become the ruling class, as well as to enjoy access to the development of state policy. In contemporary Russia the leading entrepreneurs are no longer in the position to make significant claims on the political power using their economic resources. Fortescue argues that the use of the term “oligarch” is questionable because as an economic power block they never managed to actually run the country and that their policy role even in the economic sphere was minor. This paper argues that the ‘oligarchs’ took advantage of, rather than created, the big business strategy of mass privatization and shares-for-credit scheme. I therefore prefer, when dealing with the subject, to speak of ‘industrial tycoons’, ‘economic power blocks’ or ‘big businesses’.
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The relationship between Russian business and the state swung between two extremes. Under the conditions of a weak state in the early to late 1990’s there was a high degree of state capture by Russian business. State capture or ‘privatization of the state’ is best understood in terms of economic resources being used to influence the policy making process of federal and regional authorities to the benefit of the economic and political agents involved in these collusive agreements. State capture denotes a situation where a narrow set of interests, such as a firm, uses corruption or relies on informal agreements to shape the political and legal environment to its own advantage. This paper explores how the strategy of close integration with the state paved the way for the regional and federal authorities to gradually shift, relationship wise, from state capture to informal submission of private business to the state. In raising critical questions and relying on empirical evidence I attempt to draw a clear picture of the policies pursued by the Kremlin administration to establish an effective political mechanism to control and benefit from the economic performance of the industrial tycoons. I assess the risks taken by Putin in launching a frontal attack on the selected oligarchs and determine whether Putin has been successful in creating a new ‘political order’ that aims at using economic power blocks as a tool of effective state politics.
The first chapter analyzes the state-business relations in the mid-late 1990’s. I look at the privatization of the state and the nature of collusive agreements between leading economic and political power blocks.
The second chapter looks at the consolidation of the state and its changing relationship with the big business community. I look at the way the nature of individual relations with political power was re-assessed and how the consolidation of power contributed to big businesses falling under the command of state bureaucratic interests. This chapter demonstrates how the changing relationship, attributed to the consolidation of the state, created favorable conditions for the development of large-scale financial industrial groups, with the capacity to stimulate the growth of Russian economy and to serve as a strategically important factor in the pursuit of broader political interests.
1: STATE CAPTURE
state-business relations in the mid-late 1990’s
In the early stages of democratic transition and state consolidation between 1993 and 1996 the concept of ‘rent seeking’ was widely used to describe business behavior in Russia. Characteristically, those who were able to accumulate large capital and property relied on a strategy of ‘close integration with the state’ and maximized their profits through privileges, such as subsidies and benefits obtainable from the state. The relationship between business and government was determined by differences in access to rent and its distribution. Those who were closely connected to the state were able to use the changing political and economic system to their advantage. When political and economic systems go through a rapid and challenging change they create a range of opportunities to take over business, using formerly state-owned property, and to make money on the structural disorders of a state in transition. Andrei Yakovlev in assessing the situation in Russia as compared to other Eastern European countries notes that “weakened and half-destroyed public institutions in Russia were unable to build an effective resistance to the attempts of various private interest groups to capture and privatize rent”.
In the first half of the 1990’s Russian political authorities made a strategic choice on the issue of foreign ownership and gave preference to the younger generation of Russian entrepreneurs. The Russian political authorities were faced with a choice-to put their money on either ‘their’ business or on foreign investors. The active lobbying of big capital led to the adaptation of the first scenario. Such a situation created the ideal circumstances for the growth not only of the economic, but also the political influence of big capital.
Most of these entrepreneurs got control of their most valuable assets by shares-for-credit scheme through which Boris Yeltsin funded his successful 1996 election campaign. Yeltsin offered assets of existing state-owned enterprises at a bargain basement price in exchange for loans to the Russian government that could be redeemed for further shares:
“The assets were to be put up for auction, the winner of each auction being the bidder who offered the highest amount of credit to the state. The winner would hold the state’s shares as security on the loan and have the right of operational control”.
The main beneficiaries of the auction were the ONESKIMbank, Menatep, Lukoil and Surgutneftegaz Pension Fund. It is important to understand that the shares-for-credit scheme involved a strong element of long term strategic thinking among a powerful group of reform oriented policy makers headed by Chubais. Fortescue notes that it was “designed to achieve a strategic goal, laying the foundation for a privately owned big business able to operate competitively in global markets.” This period is best characterized by the creation of government assisted financial-industrial groups with the capacity to improve their economic efficiency and global competitiveness. The inevitable result was high concentration of property ownership and economic power.
The president and parliament that Russian businesses helped elect created the legal environment that their businesses needed to prosper. Yeltsin’s daughter, Tatiana Diachenko served as a political channel through which the ‘oligarchs’ could influence the decisions made by the president’s political entourage in their favour. Shevtsova writes that informal political channels ‘helped to hasten the merging of business with the state authorities at the top, and this blending of power and business spread further to other levels of the system”. Oligarchy became a political reality in its true definition of the term when Vladimir Potanin was appointed first deputy prime minister and Boris Berezovskii was made deputy secretary of the Security Council. These appointments legitimized interference by big business in the affairs of the state and in many cases restricted the playing field for everyone else. The leading tycoons not only restricted the market to other firms but also successfully lobbied for exclusion of foreigners from their fields of activity.
In 1996-97 they fell out with one another and began fighting among themselves for economic resources. It is argued by leading economists and political theorists that ‘lack of collective spirit’ and organized action among the oligarchs sharply reduced their influence on political authorities. They were unable or unwilling to defend each other when the common enemy arose. For example for Bunin and Pete Duncan their inability to influence the Kirienko government and his attempt to rein them in by taxing their companies and to proceed with the devaluation which brought them enormous losses in August 1998, demonstrates their lack of power. Minister of Finance Fedorov in mid 1998 stated the following: “You guys are not paying taxes. We’ll arrest you, we’ll take your property, we’ll make your companies bankrupt”. After the August 1998 crash Berezovskii attempted to have Kirienko replaced by Chernomyrdin. Through informal agreements he persuaded Yeltsin to nominate him for the post twice but the State Duma rejected his nomination. Even Chubais who was instrumental in the privatization process and managed to intervene on their behalf with Yeltsin on a number of crucial occasions was not going to grant them control of the political process: ” So in 1996, using the newly created Russian business, we resolved the problem of communism in Russia. But then that very big business decided that at last everything was in place and now decided to run the country. The government is working hard to get the message across to business that it is not its job to run the country”. Anatolii Chubais, the architect of Russian privatization, in 2004 admitted to having “underestimated the deep feeling of injustice” that shares-for-credit would create, although he still maintained that given the choice between ‘bandit communism’ and ‘bandit capitalism, then the choice he made in favour of the latter was the right one.
The oligarchs were able, on the whole, to withstand the attacks on them from the reformers but it signaled an end to the era of political domination. Pete Duncan notes that “the organs of the state, the security services, the police, the armed forces and the courts remained loyal to the president, and already in the Yeltsin period looked with suspicion and jealousy on them”. In the true sense of the term, the Russian oligarchs never really exercised any high degree of political power and have shown no capacity to determine policy in the areas that are fundamental to the running of the country. First, they took advantage rather than created the major economic transformation policies. Second, their policy role in the state system creating sense was minor. Third, having regained the instruments for the resolution of conflict and determining the ‘rules of the game’, the authorities grew stronger than the businesses that had assisted them by strengthening their power and providing financial support to specific officials. The use of the term oligarch in its traditional sense is therefore questionable. As according to Pete Duncan, “they were lobbyists rather than decision-makers, on the whole.” The shift of balance began to be evident after the August 1998 crisis.
2: Consolidation of the State
re-assessment of individual relations with political power
Local and regional authorities began to undermine the power of the federals (who were largely dependent on oligarchs) by supervising the territories within their jurisdiction for tax evasion. In exchange for ensuring electoral support local and regional authorities bargained for more power and resource regulation in strategically important regions. As we have already noted, the conflicts between the leading industrial tycoons (along with their respective sponsors in the federal administration) over sources of rent extraction eventually produced the financial crisis which ended with the breakdown of the largest banks and a radical replacement of the federal government. Contrary to the situation before the 1996 presidential election (when powers of the oligarchs, regional and federal authorities were united to preserve the nature of the political regime), the 1998 crisis, stimulated by the political tensions between leading industrial groups and authorities produced a deep split in the ruling elite. The split in the ruling elite is well documented. Yakovlev writes that “influential regional governors, together with their business associates, attempted to use the crisis to make the federal government even weaker.” Narrow circle of politicians and top bureaucrats, financed by the economic power of the JSFC ‘Sistema’ created by the Moscow government and Yuri Luzhkov attempted to undermine the position of the federal elite and Boris Yeltsin’s associate business group. In order to ensure succession of power in a deeply discredited federal government the federal elite had to resolve their conflicts with the powerful governors gathered around ‘fatherland-Russia’ and to win the support of the federal bureaucracy. It was important for the super elite not to ignore the strategic interests of the nation; otherwise they would run the risk of the complete loss of their personal authority and influence. Measures were taken to (1) provide financial support to the army, the FSB and to other law enforcement agencies (2) to strengthen the status of federal bureaucrats (3) to win the support of ‘non’ oligarchic business by revising tax legislation and alleviating the tax burden. Actors involved in the process of power consolidation used the new image of a strong and responsible leader personified in Vladimir Putin to increase the public support of society that has grown tired of chronic state weakness, corruption and looked with suspicion on the close contacts of the presidential administration to the business tycoons. The first steps that Putin took as the prime minister, particularly his initiative to work out a long term policy for the strategic development of Russian economy, boosted the Social Sentiment Index from 85 points to almost 140 points. The index shows that trends in public opinion, based on how people assess the political, social and economic situation in the country, were in favor of the newly established political order. With social support and federal bureaucracy under the control, the newly emerging federal elite strengthened their position by limiting the powers of the governors through the creation of a system of federal districts and through a delimitation of statutory powers between the federal government and the regions. Yakovlev notes that these steps sufficiently ‘diminished the rights and fiscal resources of regional authorities” and paved way for a consolidation of a new political system with rules of the game changed in favor of the state rather than private interests of individual political and economic agents.
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Federal authorities and economic power blocks of the Yeltsin regime failed to introduce effective means of state regulation and economic and social development. These failures should be attributed to the politics of favoritism and informal collusive agreements between political agents and industrial tycoons. The political and legal environment was shaped by a set of narrow interests that undermined the development of the strategic interests of the nation. The new ‘super elite’ of the Putin era took into account an important factor: in order to consolidate personal authority and influence it is essential to take into account not only the interests of the groups they arose from, but also strategic interests of the nation. This is an objective condition which places this narrow group above the other groups of the elite. What the oligarchs of the 1990’s could not do and that is to serve the common purpose and enjoy a common set of principles and rules, the new emerging elite consolidated their power and influence by promoting the strategic interests of the nation. This strategy did not only win them popular support but also guaranteed loyalty from federal agencies that have already in late 1990’s have been critical of public officials operating for the benefit of individual market players connected to the highest echelons of political power.
Curbing the oligarchs’ political influence was an essential part of Vladimir Putin’s state politics. He promised to treat the oligarchs in the same way as other entrepreneurs and announced that all interest groups would be kept at an equal distance from his government. The much quoted term “equidistance” refers to a situation when the state no longer plays favorites and refuses to promote special interests. In the first meeting with the leading oligarchs Putin made it clear that it is not their business to get involved in politics and that they should concentrate purely on running their businesses. It is documented in some literature that there was a pact between Putin and the leading industrial tycoons: As long as the oligarchs paid taxes and did not use their political power to undermine the development of a new political order, the state would respect their property rights and refrain from revisiting shady privatization schemes. The nature of the meeting cannot be disputed; leading businessmen and Putin met to discuss possible patterns of interaction between business and the state. However, I am inclined to argue that because big business in Russia never developed a corporate interest that it could defend collectively, backed both by the population and the state apparatus which outweighed any special interests that oligarchs could have attempted to lobby for. Tompson, for example, describes the agreement as “something akin to a foundational political myth” and Pete Duncan argues that there is “little evidence that Putin promised them anything”. Putin’s priority was not to arrange a certain ‘hypothetical’ agreement between the oligarchs. (If Russian politics of the Putin era would be interpreted in these terms it would imply that the state was not in the position to use its bureaucratic means to restrict the political influence of the leading business tycoons.) The opposite was true: big businesses were increasingly subjected to searches, summonses and charges from various government agencies, usually related to tax and privatization issues.
The owners of big business who found themselves under federal investigation were no longer in the position to use direct informal contacts with the authorities (that they relied on in the Yeltsin era) to resolve their problems through some form of payment or favor. The change in the situation should be understood in the following terms: individual public officials who operated for the benefit of individual market players in the 1990’s were integrated into a larger system of a consolidated state. Consolidated state and its administrative apparatus is interested in the pursuit of long term strategic objectives rather than short term private gains and in order to secure and strengthen its position it will suppress any opportunistic behavior of its members whose private interests are in conflict with the interests of the state. Hence, the term ‘equidistance’ is characteristic of policies pursued by the consolidated regime: oligarchs could no longer rely on the support of state institutions or individuals working within these institutions if their interests were in conflict with the strategic interest of the state.
Putin’s priority was to rebuild the central state and to establish the presidential administration as the dominant political institution. State consolidation was a priority for two reasons: (A) consolidated government institutions recognize their collective interests (state policy) and abilities much better (B) consolidated governmental organizations can influence the rules of the game and are much stronger than any individual player in the political and economic system. With consolidation of the state there is a consequent informal submission of business to the command of state bureaucratic interests. If under the Yeltsin regime chronic weakness of the state meant that individual public officials operated for the benefit of individual market players, under the consolidated government it is either the organization as a whole that operates in favor of certain actors or the organization plays in favor of itself. The relative weakness of the industrial tycoons in the new institutional order was confirmed by the exile of Berezovskii and Gusinskii and the Yukos case.
During the Yukos case selective justice was used in means to consolidate power. The case is well documented and it shows that financial-industrial groups that pursue strategic economic and political interests independent of the collective bureaucratic interest of the state would be persecuted and would fall under the control of the state. Yukos dared to take direct action against the authorities by openly funding Putin’s opponents ( Khodorkovskii was giving financial support to the Communist Party and other deputies to influence their votes on legislation related to taxes in the oil industry) and the announcement of a merger of Yukos and Sibneft, with a possible further sale of a large block of shares to ExxonMobil or Chevron corporations, carried the implication that the state could actually lose control over strategic assets in the oil industry. In 2003 Yukos became the ‘victim of a crippling tax demand’ which led to its bankruptcy and sale of its assets to government assisted financial-industrial group Rosneft. The Yukos affair has clarified the rules of the game between oligarchs and Kremlin: (A) they should pay their taxes (B) they should not interfere in national politics (C) they should not attempt to undermine the strategic interests of the state in the pursuit of its energy policy. It can be argued that the Yukos affair had limited but generally positive implications for the development of Russia into eventually a normal market economy. Paul Khlebnikov wrote in 2003:
“The arrest of the oligarch is indeed an example of selective justice. But that is better than no justice at all. Put yourself in the place of the oligarchs. What conclusions will you draw from the Khodorkovskii case? What will you do as not to find yourself behind bars. Obviously, you will prefer always to be on the side of the president, and even better to keep your distance from politics. But you will also direct all your energies to remaining within the boundaries of the law”.
What befell the oligarchs under Putin shows that as a class they cannot aspire to become the dominant force in Russian politics. The regime may exploit big business and at times share power with them, but the dependency of the state on the capital of economic power blocks is purely temporary Even though the oligarchs remain economically powerful, they have no longer any weight in politics. Shevtsova notes that “once the state has re-established itself and gained the support of other forces, the master of the Kremlin can shake off oligarchic influence”.
Where does this leave the other oligarchs in relation to the state? Consolidated state bureaucracy brings advantages to the development of big business and the economy. For the oligarchs who accepted the new political structure, rebuilding the state meant more security and guarantees for business. Businesses interact with monopolistic departments instead of individual bureaucrats and their relationship to the state is, therefore, more stable, predictable and effective. Putin and the country’s most prominent business leaders are working to convince Western investors that the Russian government and business can create law-abiding and transparent market economy. Leading Russian firms are moving towards corporate transparency and are trying to observe international accounting standards, pay regular dividends and protect minority stockholders’ rights. Russia’s industrial tycoons are becoming global players with the support and encouragement from their government: Lukoil CEO Alekperov stated in a 2001 interview that “for the past two years we sense support of the Russian leadership, which now understands the importance of creating a transparent business environment that can serve to facilitate not only political ties but also strategic interests”. The relationship between the state and business in Russia is one of mutual strategic interest that largely depends on the powers inherent in the presidency. It is in the interest of Russian big business to have behind it the support of the state and its guarantee of property rights, but at the same time it has to accept that the state operates on the basis of informal rules and agreements and places national strategic interests above market mechanisms.
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