Image: Vladimir Putin speaks with Russian oligarch Igor Sechin (center right) in 2009. AFP/AFP via Getty Images
By José Carlos Palma*
In his autobiography, First Person, Putin wrote, “I have a lot of friends, but only a few people are really close to me. They have never gone away. They have never betrayed me, and I haven’t betrayed them, either. In my view, that’s what counts most.”
The collapse of the Soviet Union in 1991 marked the end of a centralized, state-controlled economy and the beginning of a chaotic transition to capitalism in Russia. One of the most significant and controversial aspects of this transition was the privatization of the energy sector, a process that led to the emergence of powerful oligarchs who gained control over vast swathes of the Russian economy. This article delves into how the energy sector, a cornerstone of the Soviet economy, ended up in the hands of a small group of wealthy businessmen, and how Vladimir Putin later consolidated power by reining in these oligarchs.
The Fall of Communism and the Rush to Privatization
The dissolution of the Soviet Union triggered an economic crisis in Russia, characterized by hyperinflation, a collapsing GDP, and widespread poverty. The new Russian government, under President Boris Yeltsin, sought to rapidly transition to a market economy. Guided by Western advisers and economists, the government adopted a policy of “shock therapy,” which involved the rapid liberalization of prices, trade, and ownership.
In 1992, Russia began the process of privatizing state-owned enterprises, including its vast energy sector. The idea was to distribute ownership of these enterprises among the population through a voucher system. Every Russian citizen received vouchers that could be exchanged for shares in state-owned companies. However, the implementation of this system was deeply flawed.
The Rise of the Oligarchs
The privatization process was marred by corruption, lack of transparency, and the absence of effective regulatory frameworks. Ordinary citizens, who lacked the knowledge, resources, or opportunities to effectively use their vouchers, often sold them for a fraction of their potential value. This situation created a fertile ground for a small group of businessmen, later known as oligarchs, to capitalize on the chaos.
These individuals, many with connections to the former Soviet elite, bought up large numbers of vouchers and used them to acquire controlling stakes in the most valuable state-owned enterprises, particularly in the energy sector. Through a combination of financial acumen, insider deals, and outright corruption, these businessmen gained control over Russia’s vast oil, gas, and mineral resources.
One of the most infamous examples of this was the “loans-for-shares” program in 1995. Desperate for cash, the Russian government auctioned off shares in some of the country’s most lucrative companies, including oil giants like Yukos, Sibneft, and Lukoil, in exchange for loans from private banks. These auctions were often rigged, allowing the oligarchs to acquire the companies for a fraction of their true value. By the end of the 1990s, a handful of oligarchs controlled a significant portion of Russia’s wealth and wielded considerable political influence.
The Oligarchs’ Influence in the 1990s
During the Yeltsin era, the oligarchs wielded enormous power. They used their wealth to influence political decisions, finance election campaigns, and secure favorable legislation. In return, they supported Yeltsin’s reelection in 1996, ensuring that their economic empires remained intact. This alliance between the oligarchs and the government created a system where economic power translated directly into political influence, further entrenching their positions.
However, this period of oligarchic dominance also led to widespread inequality, economic instability, and public discontent. By the time Yeltsin left office at the end of 1999, Russia was facing significant challenges, including a financial crisis in 1998 that wiped out the savings of millions of Russians.
Vladimir Putin’s Rise to Power and the Reining-in of the Oligarchs
When Vladimir Putin became president in 2000, he inherited a country where the oligarchs had immense power, often rivaling that of the state. Recognizing that their influence could undermine his authority, Putin embarked on a campaign to curb their power and reassert state control over key sectors of the economy, particularly the energy sector.
Putin’s strategy involved a combination of coercion, legal action, and strategic alliances. He signaled early on that the era of oligarchic impunity was over by targeting some of the most powerful oligarchs. The most notable case was that of Mikhail Khodorkovsky, the head of Yukos, one of Russia’s largest oil companies.
Khodorkovsky was arrested in 2003 on charges of tax evasion and fraud, and Yukos was dismantled, with its assets transferred to state-controlled companies, most notably Rosneft. Khodorkovsky’s arrest sent a clear message to other oligarchs: those who challenged Putin’s authority or sought to engage in political activities independent of the Kremlin would face severe consequences.
At the same time, Putin struck deals with other oligarchs, allowing them to retain their wealth and businesses in exchange for their loyalty and political neutrality. This approach allowed Putin to consolidate his power, reassert state control over the strategic energy sector, and use the revenues from oil and gas exports to stabilize the Russian economy and fund his government’s initiatives.
The Kremlin Meeting: Putin Asserts His Authority
In the summer of 2000, 21 of the richest men in Russia exited their bulletproof limousines and entered the Kremlin for a historic meeting. These men, who had risen to power and wealth during the chaotic post-Soviet transition, now faced a new challenge. Vladimir Putin, the newly elected president, made it clear that the rules of the game had changed.
During the closed-door meeting, Putin offered the oligarchs a deal: they could keep their wealth and businesses as long as they stayed out of politics and recognized his authority. Those who did not comply would face severe consequences. This ultimatum marked the beginning of a new era in Russian politics, where the power of the oligarchs would be curbed, and the state, under Putin’s control, would reassert its dominance.
The Fall of the Oligarchs and the Rise of the Siloviki
Putin’s crackdown on the oligarchs led to the emergence of a new class of powerful figures known as the “siloviki,” or “men of force.” These individuals, many of whom were former military or KGB officers like Putin himself, rose to power through their loyalty to the president and their control over key sectors of the economy.
Igor Sechin, one of Putin’s closest allies, exemplifies the rise of the siloviki. Sechin, who is rumored to have served as a KGB officer, now heads Rosneft, Russia’s largest oil company. Under Putin’s rule, the siloviki have become some of the most powerful figures in Russia, amassing wealth and influence through their control of state-owned enterprises and strategic industries.
The Putin Loyalty Network: The Rotenberg Example
Putin’s inner circle also includes figures like Arkady Rotenberg, a childhood friend who has become one of Russia’s wealthiest men through lucrative government contracts. The Rotenbergs’ wealth is emblematic of how personal connections and loyalty to Putin have become the new currency of power in Russia.
In the 1960s, Rotenberg met a young Vladimir Putin at a martial arts class. Their friendship endured, and when Putin became president, Rotenberg’s fortunes soared. His companies have been awarded billions of dollars in state contracts, including projects like the construction of the Kerch Strait Bridge, linking Russia to Crimea. This project, and others like it, have cemented Rotenberg’s status as one of Russia’s most powerful oligarchs, deeply intertwined with Putin’s regime.
Conclusion
The privatization of Russia’s energy sector in the 1990s led to the rise of the oligarchs, a small group of businessmen who amassed vast wealth and influence. However, their power was curtailed by Vladimir Putin in the early 2000s as he sought to strengthen the state and eliminate any rivals to his authority. Through a combination of legal measures and strategic alliances, Putin reasserted control over the energy sector, transforming it into a key instrument of his power both domestically and internationally.
This period in Russian history underscores the complex interplay between economic power and political authority and how the chaotic transition from communism to capitalism created a new class of powerful elites, only to have them brought to heel by a new leader seeking to consolidate control over the nation. Today, the legacy of this era continues to shape Russia’s political and economic landscape, with Putin and his inner circle maintaining a tight grip on the country’s wealth and power.
*José Palma, a versatile and highly skilled collaborator at Smartencyclopedia. With a multi-faceted role that encompasses project creation, site development, and editorial leadership, José is a vital force behind our platform’s success. His expertise extends into various areas of international relations, IT consultancy, world history, political consultancy, and military analysis.