Friday, 14 November 2014

An Introduction To The Russian Billionaire Oligarchy


You probably will have heard of the phrase 'oligarch'- a term most commonly associated with the wealthy business elite of Russian society- the natural resource and media men primarily. This group of people are widely known not just for their massive wealth (the combined fortune of the 131 oligarchs almost $450bn), but also often for their political power- amassing such a wealth has meant that Russian oligarchs have played a role in not just Russian politics but also that of other countries- recently Britain's ruling Conservative Party has come under the spotlight for facilitating this

And the fascinating thing is that while the group itself is relatively well known, receiving much media spotlight, most people know little about the individuals within- even those most well-known, such as Roman Abramovich of Chelsea Football Club or Arsenal Football Club's Alisher Usmanov, remain much of a mystery to even football's biggest followers. Russian oligarchs, while being wealthy, certainly contrast to their Western counterparts- tending more to live reclusive, closed personal lives. 

So who are these Russian oligarchs- and why are they so rich?

The story of the Russian oligarchy begins in the latter years of the Soviet Union. For the majority of the Soviet period, the rulers pursued protectionist economic policies- policies that sought to boost domestic trade by taxing highly, or even outlawing, certain imports. It's a common practice for many nations, developing and developed- for example, Obama placed a 35% tariff on Chinese tyres entering the USA in 2009. The rationale behind such protectionist policy is to discourage purchasing of products from foreign businesses, but facilitate more trade with local, domestic ones.


The AGAT-4, Soviet Russia's answer to Apple.
Anyway, these protectionist policies in Russia, especially towards the end of the century, meant that the Russian people were missing out on many of the western developments, particularly with regards to technology. Cars, for example- as Toyota, Fiat, Volkswagen and the like entered the global market from the 50s onwards, they were simply either unaffordable for the Russian public due to high tariffs, or commonly banned altogether from being imported. The Soviet government, seeking the development of Russian industries, responded by making their own competing car- the wonderful Lada Riva; perhaps an example of how state protectionism does not always produce the best results.

Protectionism affected not just cars but other everyday consumer products- computers, for example. The state's attempt to create a computer system to rival Apple's II, the AGAT computer was almost seventeen times as expensive as Steve Jobs' original computer that it was essentially a clone of. And it wasn't a very good clone either- a reviewer in BYTE magazine in 1984 stated that "even if they gave it away for free, it wouldn't stand a chance". 
So a few people saw solutions to this- such as Mikhail Khordovsky, who in 2003 was Russia's wealthiest man- among his first few business ventures was in the black market, where he bought western computers and resold them for a huge profit back home.

Protectionist policy therefore almost itself triggered the beginnings of these oligarchs, who were in fact largely self-made individuals, with no significant backing from family members as is sometimes the case with businessmen. Roman Abramovich, for example, was in his early years a soldier, and went on to become a mechanic. His first business moves were selling imported rubber ducks and dolls.

Such 'black market' activity was only helped by Mikhail Gorbachev's policy of Perestroika (translated restructuring)- this, among other things, sought to put down barriers to international trade, giving already established traders such as Khordovsky and Abramovich a better platform upon which they could do business, with less concealment.


Boris Yeltsin took Gorbachev's Perestroika policy further
transforming Russia into a capitalist economy.
But without doubt the biggest boost to the oligarchy, verily the match that lit its fire, was the fall of the USSR and the subsequent entrance of Boris Yeltsin into power- now as elected President of Russia. Seeking to overwrite the past seven decades of Communism, Yeltsin pushed for dramatic capitalist movement to be made in the Russian economy. The most significant change he made with regards to the oligarchs came in the mass privatisation of key Russian industries.

The industries in Russia dominated by the oligarchs of today were, during the time of the Communist regime, kept extremely close to the state. As we've already seen, the consumer goods industry was largely under state monopoly, but the biggest profits for the USSR were to come from the natural resource industry. Coal, oil, gold and numerous other valuable commodities were abundant throughout Russia and its associated countries- and the state wished to keep them under their control for numerous reasons, but primarily to a) keep hold of revenue to boost the economy and b) prevent any private party from becoming so wealthy and thus powerful through resources and perhaps challenging the rule of the authorities. 

Yeltsin's rapid privatisation (known informally as Catastroika), the auctioning off of key national industries, did the exact opposite of this. Russian state revenues dropped as some key industries were sold to private hands at prices that were too low (remind you of the Royal Mail?) and as a result those certain 'private hands', certain individuals who had a steady footing in Russian business, became extraordinarily wealthy.

And who exactly these individuals were was determined largely by not just their status in Russia as businessmen, but also their relationship to the authorities. According to The Guardian, "by 1996, at the age of 30, Roman Abramovich had become so rich and politically well-connected that he had become close to President Boris Yeltsin, and had moved into an apartment in the Kremlin at the invitation of the Yeltsin family."- this relationship was one that indeed did play a significant role in Abramovich's subsequent acquisition of most of Sibneft (one of Russia's largest oil producers) for just $100m (the entire company being worth $2.7bn)- one of the biggest sources of profit for him. From this point on, Abramovich's career only went up- and many other oligarchs began their billion-dollar ventures in a similar manner. 

So to conclude- the Russian oligarchy was the controversial product of Russia's rapid shift from Communism to deep Capitalism under Boris Yeltsin- from a totally nationalised economy to a largely privatised one. Vladimir Putin later went on to re-nationalise certain natural resource industries, but the spark that the initial rapid privatisation provided for these individuals is undoubtable- and it has created a generation of Russian business elite who are spreading out their wings internationally- one Russian billionaire purchasing Britain's most expensive home is just a part of it.

It may seem such a phenomenon is exclusive to Russia, but in fact this type of instance can be seen in parts throughout the world- the Middle East, for example. Unlike in Russia, the natural resource industries were almost from the beginning privately owned- but similarly a select group of business individuals have benefited hugely from exploitation of resources available to them, notably oil.


Recommended Reads:
Computing in the USSR http://www.lituanus.org/1980_4/80_4_09.htm

Inside the Hidden World of Roman's Empire http://www.theguardian.com/world/2006/dec/24/sport.football

The Russian Oligarchs of the 1990s www.sjsu.edu/faculty/watkins/oligarchs.htm

Why are rich Russians so obsessed with buying up London property? http://www.theguardian.com/cities/2014/may/09/rich-russians-buying-london-property-real-estate
Mohammad Lone Editor