Privately Enforced Capitalism: The Rise (and Fall?) of Russia’s Oligarchs

Today in Russia, a small group of men called the oligarchs control a disproportionate portion of the Russian economy.  In a capitalist environment, a large disparity between the economic power of the very wealthiest and the rest of society is not unusual.  Yet, in a healthy capitalist system, the economically fortunate are wealth creators, adding to the overall economic performance of their economic system.  In contrast, the empires of the Russian oligarchs are largely based on siphoning the wealth of former Soviet industry, “purchased” by questionable means.  These oligarchs appear to contribute a net loss to the economy.  Who are the oligarchs?  How did they become oligarchs?  How do they operate?  What is going to become of these men and their wealth?  These are the questions that this paper attempts to answer.

The rise of the oligarchy is clearly a strange phenomenon to occur in an industrialized country in the modern economic period.  Crony capitalism is far more familiar in poor unindustrialized countries than it is to the first-world economies.  Many analysts point to Russian culture and unique historical events.  Although culture may help to create an environment in which illegal attainment of wealth and power is acceptable, it is also clear that most societies possess people willing and able to take economic control through illegal actions when the costs of doing so cease to outweigh the benefits.  American (and European) entrepreneurs’ conscience hardly stops them from engaging in illegal activities to increase their wealth.  They obey the law (when they do) because it is consistently enforced, and the cost of subverting the law outweighs the benefits.  Historical circumstances such as the collapse of the Soviet system certainly made the oligarch class possible, but hardly inevitable.  Other transition economies in Eastern Europe have faired much better.  In the Soviet Union, informal and illegal control and use of assets and capital occurred on a regular basis.  If anything, the USSR’s collapse simply made the informal control more formal.  An in-depth analysis is clearly needed to get to the root of the issue.

Therefore, this paper will focus on the transformation of the institutions and structural features of the Soviet and Russian economy that allow various groups to control economic resources and capital.  The first section will begin with an historical discourse that traces the structure of Russian society to the modern oligarch system with a focus on relevant institutions.  The section will then shift focus to how the Russian economy is transforming in the present.  The next section will evaluate various economic and political theories, determine their relevance to our issue, and use them to explain the rise and behavior of the oligarchs by using case studies of individual actors (oligarchs) and overall economic conditions.  The final section will give answers to the specific questions raised in the first paragraph above.

Historical Summary

To understand the oligarchs one must understand Russian society.  To understand Russian society, one must understand the concept of property rights as understood in Russia.  In his book, Russia As It Is Matthew Maly points out that,

“in the West, it was the bourgeois who grew strong enough to demand, and to be granted, the rights that they needed.  In Russia, that would seem like a contradiction: if you are strong, then why do you need rights?  Is not it that your strength allows you to do anything anyway?  To get rights, you need to become stronger, but once you are strong, what do you need rights for?  The Russian struggle is not for universal rights, but for exceptions:  everyone only wants to say, ‘Nobody else can – but I can.'”[1]

This has direct consequences on the rule of law as it evolves throughout the 20th century and beyond. The following historical account will shed some light on the very unequal distribution of power ubiquitous to the Russian economic and political system.  This section will begin with the early 20th century for simplicity, but could surely begin in much earlier Russian history.

  • Pre-Revolutionary Russia

The period of Tsarist rule is not known for its capitalism.  Historically, the Russian economy was based on the surf system.  The Tsar owned all land, but gave long-term temporary rights over that land to certain nobility who would control all resources and serfs that resided on that land.  However, by the 19th and early 20th century the Tsar realized that this was not a sustainable system.  In fact, the early 20th century saw a rise of capitalist activity.[2]

Although Russia at that time had capitalist activity, it was far from a free market, as a 20th century American would picture it.  It would be better to say that there were certain market systems in place that the government promoted for efficiency gains.  Furthermore, the nobility and ruling family were well above those who engaged in business transactions.  These merchants, many of them Jewish, were looked down upon by the real aristocracy.  Entrepreneurial, managerial or mercantile endeavors were seen as “dirty work.”  Businesses were hardly autonomous and to operate with government approval.  The government often granted monopolies.  Laws were skirted or enforced based on businessmen’s connections.

Goldman notes that many business practices of the late 19th and early 20th century are similar to current ones in Russia: businessmen stole from the government, cheated foreigners and each other.  Like today, powerful businessmen were difficult to distinguish from powerful officials and regulators.  In fact, like today, to get a high-power government job one needed business connections (money) and to get into big business, one needed political connections.   Not surprisingly, even with the serfs freed, social stratification was extreme and a select few dominated the market.[3] However, even this limited economic freedom would end. The Russian Revolution deposed the Romanovs and the Bolshevik Revolution would depose everything else.

  • The Bolshevik Revolution and Transformation to Communism

This period was relatively short lived because Lenin recognized the inherent limitations of collectivization and central planning, if only after the fact.  Nevertheless, after the Bolsheviks took control, there was an immediate push to collectivize and nationalize all property.  This may have been the most egalitarian period for Russian workers.  Obviously the old establishment was killed off or sent off into exile, but at least the rest of society could take their possessions and wealth.  At this period, ideology seemed to keep most people in check.  This is because the people with power were party members who had lived their entire lives for this cause.  It would be foolish to question the sincerity of such revolutionaries as Lenin and Trotsky.  Unfortunately, for various reasons the country was not ready for a completely state-run economy.

The biggest obstacle to central planning was the lack of capital and economic infrastructure.  This is not surprising considering the heavy destruction inflicted on Russia in the First World War.  Effective central planning takes complete control.  While workers were used to an iron hand regulating all of their actions, it seems that the Communists were not ready or equipped to handle such a big undertaking as the regulation of all aspects of the economy.  As a result of these factors, the communist economic system was not very effective; a new if temporary solution was needed.

  • The New Economic Policy

Lenin’s solution was the introduction of the New Economic Policy or NEP.  The NEP was basically a retreat back to markets and private trade.[4]  However, the NEP was definitely not capitalism.  Mostly, this was a way to encourage people to produce on a small level.  For example, instead of just confiscating grain quotas from the collectives, a tax was levied.  This encouraged peasants to grow more, not less food.  By letting allowing small businesses, it was hoped that these would augment production.  Lenin did not intend to give up the large-scale industrial enterprises that the Communists had nationalized.  In fact, they intended to focus their energies on these concerns and let the rest of the economy heal itself.  As they saw it, this was the only way to get back on track to the revolution.

This was also the time when the Nomenklatura system took hold.  New, lower level party officials, who perhaps were not as ideologically motivated as original party members, were recruited to help control the one-party system.  Even if limited economic freedoms were given, political dissent was not to be taken lightly.[5]  This creation of an elite also led to conditions that supported economic corruption.  It would be almost impossible for a revolutionary, no matter how ideological, to resist profit motives when put in charge of regulating a semi-market system he believes is evil.  This led to increased social stratification as the bureaucracy solidified its power. Businessmen could get privileges by bribing.  Furthermore, there was a certain irony in having semi-capitalism in the first major socialist revolution.[6]

Yegor Gaidar quoted Trotsky as writing in the 1930’s:

If…[the bureaucracy] now considers it possible to introduce ranks and decorations, then as the next stage, it will seek support for itself in the realm of property.  Some might object that a high-ranking official would hardly care what form of property ownership prevailed, as long as it assured him the income he needed.  This reasoning ignores not only the fact that a bureaucrat’s rights are never entirely stable, but also the question of his progeny and their future.  Our new cult of the family has hardly appeared out of the blue.  Privilege is not really privilege if one cannot pass it on to one’s children.  Yet-the right to will property to one’s heirs is inseparable from the right to own it.  That is, being the director of a concern is not enough; only being a shareholder is.  A victory for the bureaucracy in this crucial area would signal its transformation into a new class of “haves.”[7]

This is very insightful. It predicts the future rise of the aristocracy, better known as “Nomenklatura” that had already begun to form.  This rise would have to wait for Stalin to finish his purges, however.  The next, very dark period of Russian history was to be the closest the Soviet Union came to real Communism.

  • Stalin

Stalin was so powerful that he was able to force the Soviet economy to grow through violent means.  In this period, there was probably the least amount of corruption in Russian history.  That said, Braguinsky and Yavlinsky point out that managers still engaged in parallel market economic activity in order to achieve the results demanded by the plan.  This is a key point because Stalin constantly demanded more and more, and would kill if this were not achieved.  Braguinsky and Yavlinsky write that, “The tolerance of ‘the unlawful practices of management’ was produced by the desire to alleviate the problem or poor governance by owners themselves, resulting from an extreme concentration of wealth.”[8] Therefore, it was in the government’s interests to allow managers to break rules that hindered meeting targets.  Note that while the managers did this out of self-interest, it was not in pursuit of money; They were motivated by the threat to their lives.

Even though managers were allowed to engage in limited quasi-market activity, they were not allowed to grow strong. “Those purges,” point out Braguinsky and Yavlinsky, “apart from their psychological effects, also effectively reshuffled the hierarchy so that no stable lower-tier hierarchical structures could be formed and assume too much real power.”  From Mancur Olson, we know that large distributive institutions based on secretive illegal activity cannot form in such an environment.  However, the structures of the parallel economy were actually formed during Stalin’s reign.  Once Khrushchev came to power, the reigns of power were significantly loosened.  “Once the fear of purges was removed, it would not (and actually did not) take the agents and intermediate level controllers much time to discover that they could engage in mutually beneficial slack not only to fulfill the plan, but also for their own private benefit.”[9] Ironically, Stalin’s demands and rules created the need for a parallel economy that would become a chaotic and free place (opposite of everything that Stalin stood for) and would help eventually to lead to the collapse of the Soviet Union.

  • Post-Stalin

For a society that was supposed to be anti-capitalist, anti-consumerist, anti-elitist, and fair, the Soviet Union’s post-Stalin period was the opposite.  A few well-connected people, primarily the Nomenklatura, made and hoarded a lot of money while the rest of society stagnated.  To understand how and why this happened, we need to understand Soviet society of this period.  There are two main factors that come into play: the long period of stability, unusual for Russia, and the release from Stalin’s repression.  Mancur Olson predicts that right after a social upheaval, small groups of individuals with similar interests will be the first to form because it is easier for them to overcome problems of collective action.  This indeed happened in this period.  But Mancur Olson also predicts that over time, larger, more inclusive interest groups will form.  This did not happen in the Soviet Union.  Why not?

Although there was limited economic freedom given to the Nomenklatura, this was not extended to the larger population.  The average citizen’s economic freedom amounted to access to the black market.  This presented more consumer choice, but hardly a way to get rich because participation in the informal economy was based on political connections.  The Nomenklatura benefited most by granting rights which allowed others to trade illegally or use state enterprises for personal profit.  Managers of state-owned enterprises often managed their firms as if it were their private property.  The Nomenklatura had a huge collaborative interest in keeping their economic power and it was they who called for Perestroika (restructuring) because they knew it could only work to their advantage.  This is not to say that top people did not benefit; the Brezhnev family was reported to have controlled significant portions of the Soviet economy.[10] Yet, what is clear is that once the reigns were loosened, top officials became a special economic class benefiting from Perestroika, while the very top stood to lose their positions of power.

  • Perestroika and Transformation

Perestroika and the subsequent dissolution of the Soviet Union were not, as popularly believed, a revolution of the people.  Like almost all 20th century revolutions, it was staged by the middle class and for the middle class (top officials) against the nobility (elite Nomenklatura).  Those who most benefit are always “almost-elites.”  In the Bolshevik revolution, the Communist (upper-middle-class) intelligentsia benefited.  In Perestroika, the semi-elite Nomenklatura benefited the most.  Like other social revolutions, they used the masses by promising them a brighter future, but in the end fought for their own interests.  This is unfortunate, because the beginnings of Perestroika brought hope and optimism, as well as mass opportunities.

Many entrepreneurs took advantage of Gorbachev’s legalization of some economic transactions.  As a result of pent-up demand, anybody smart enough to sell consumer items made a lot of money very quickly.  Goldman tells a story of some people who factory-produce pantyhose.  This item was extremely scarce in the Soviet Union, but every woman wanted them.  They make so much money so quickly, they close shop after only six months for fear that people would think they earned their money through illegal means.  With no laws to regulate this new economic system, the market was one of the world’s freest.  This is unfortunate, because it allowed for corruption and crime.  However, this was still a market where ordinary people could make a living and get ahead.  With proper safeguards and government effort to institute ordinary market laws, this could have developed into a proper capitalist system.  However, the Nomenklatura that still controlled state enterprises were left out of much of this action.  Therefore, it was in their interests to dissolve the Soviet Union and create a society in their image.  Goldman quotes President Putin warning the oligarchs:

When you demand political guarantees for yourselves and your businesses from the government, I want to draw your attention to the fact that you built this state yourself, though a great degree through the political or semi-political structures under your control.  So don’t blame the reflection on the mirror.[11]

This interesting speech illustrates who really created the Russian federation.  However, at the eve of transformation, the Nomenklatura were not yet oligarchs.  This is why the early 1990’s was such a violent time.  Various proto-oligarchs were consolidating and fighting for power.  The oligarchs were also competing with other elements of society such as the Mafia and the non-Nomenklatura oligarchs who made money in slightly more legitimate ways.  In the end, the Nomenklatura oligarchs won largely because of political connections and their long-term entrenchment.  The oligarchs made sure that society would be a pleasant place for them to do business.  They ensured that friendly leaders such as Yeltsin were kept in office.  According to David Satter, the final oligarch consolidation came with Putin’s election.

The Oligarchs Today

Characterizing Putin as solidifying the oligarchs’ power may seem strange.  Most western observers would point out that he cracked down and even arrested many oligarchs, that he seems most interested in his own power.  But the oligarchs who lost favor were not well-connected, traditional oligarchs.  Furthermore, they were political opponents of Yeltsin and Putin.  Putin is simply favoring the old Nomenklatura, which he comes from.  There should be no doubt that Putin’s power is based on the oligarchs as much as the oligarchs’ power is based on President Putin.  Will this change?  Will Putin be able to wean himself from the oligarchs?  Where would he get his power?  Perhaps from intelligence and military structures?  These are the some of the questions that will be touched on in the rest of this paper.

Table: Russian History and Power

Period Formal Economic Freedom Informal Economy Property Rights Power Gap between Haves and Have-nots
Pre-Revolutionary Yes, but not for everyone Yes Officially Yes High
Revolutionary No No No Medium, Lenin like king
NEP Some Yes Not really Medium, Lenin like king
Stalin No Small, some during WWII No High, Stalin like god
Post Stalin No Yes No High, party leaders like nobility
Perestroika Some Yes Some, but difficult to enforce In a transition state from high Nomenklatura to low Nomenklatura
Transformation A lot Yes Officially Yes, but difficult to enforce Beginning of rise of oligarchs, but still room for newcomers
Present Officially, Yes Yes, but waning Officially Yes, a bit easier to enforce High, oligarchs and political elite far above masses

Theory and Explanation

What motivates homo sapiens? An intelligent observer might say the pursuit of wealth, power, pleasure and survival. Mancur Olson predicts that interest groups will form in any stable society and will come to dominate the institutions of that society. All interest groups, by definition, attempt to mold systems for their own purposes.

On the surface, this appears to be what the oligarchs have done, yet the reality is complicated by the incomplete transition of the Soviet Union to the Russian Federation and the legacies of history.  Furthermore, this picture is complicated by the fact that the oligarchs have not usually cooperated with each other, except under extraordinary circumstances.  This is why theories of international relations and state conflict such as balance of power theory are also applicable on the level of the oligarchs.  In a sense, the Oligarchs behave like city-states.  They fight amongst themselves until a bigger enemy (such as an unfavorable political candidate) comes along.  Therefore, this paper will rely on two levels of analysis.  First, utilizing theories by Mancur Olson and Douglas North, it will focus on institutional formation and how this allowed the oligarchs to take control. When dealing with oligarchic behavior, Mancur Olson’s theory used with classic balance of power theory, modified for the oligarchs, will be used.

Institutions and Oligarchs

How do new institutions form after a peaceful (and perhaps therefore only partial) economic and political transformation such as occurred in Russia?  Obviously, even after the most violent of revolutions, pieces remain of the old society’s culture and perhaps even institutions.  However, in a classic textbook case such as Germany or Japan after the Second World War, institutions were so damaged and incentives to change so great that we can assume they started from almost zero.  Political revolutions such as the Bolshevik Revolution in Russia are also examples of a society undergoing fundamental change.

When the Soviet Union collapsed, many observers believed that a fundamental institutional and cultural change was taking place.  Indeed, Russia adopted a new economic and political system.  People could theoretically choose their leaders.  Business and trade were to be dominant in economic activity.  Citizens who once relied on the government to take care of them and make all economic choices now had to fend for themselves.

Once the dust of transformation began to settle, the most striking feature of the Russian system was the parallel economy.  Initially, it formed in response to the inherent problems and inefficiencies of the planned economy.  Soon however, the harsh controls of Stalin were replaced by those of “softer” leaders, and profit incentives grew.  Eventually,

“once the management, together with middle rank Nomenklatura, attained a large degree of control over the planning procedure and cash flows of SOEs, and the system of monitoring by the communist principal virtually broke down, subtler agents promptly discovered the richness of new opportunities offered by the parallel economy.”[12]

Over time, especially after Perestroika, the parallel economy came to dominate the emerging market economy.  In other words, the parallel economy became the market economy.  It can be said that new market institutions did not develop, but evolved from old institutions. Therefore, any analysis of the oligarchs will have to account for the evolution of the economic system from middle to late Communism.

Institutions that perhaps changed even less after the fall of Communism were those of government.  In fact, any traveler (or Russian for that matter) can attest to the “Communist feel” of all institutions.  This was stronger earlier but was still an overwhelming presence.  For example, all foreigners are required to register in every city that they stay (and still are in many).  This can bring a traveler head on with an unwelcoming bureaucracy.  In fact, the bureaucracy of Russia has actually grown since the fall of Communism.[13] Under the Communist system a large bureaucracy was needed for the tremendous work of economic planning, and even with so many people they failed.  Most bureaucrats are still doing the same work that they for the Soviets, which appears to be regulating enterprises into paying bribes.

The essential reason this still occurs is because a large part of the oligarchs’ wealth is based on corruption, made difficult by a society of laws.  Therefore, the oligarchs desire a “Wild West.”  Corruption on the higher levels seeps into the lower levels of society and corruption thus becomes normative behavior.  This in turn allows the most powerful people to control virtually everything.  A corrupt society is actually a very competitive one, though one in which it is much more difficult to succeed.  Therefore, people with the right character traits, basically the same traits that one needed to succeed in the post-Stalin corrupt state, will succeed.  So not only did the Nomenklatura start with an advantage, but they also had the right character traits to survive in a corrupt society.  They were greedy, dishonest, and ruthless.

Oligarchic Behavior

When studying the Russian oligarchs, the key aspect to remember is Russia’s historic lack of strong property rights.  This has serious ramifications throughout the entire Russian economic and political system.  In short, this situation gives an advantage to those who are better able to protect their property rights.  Therefore, oligarchs tend to seek ways to do so.  There are four main avenues of power for a Russian oligarch: political, economic, violence management and media.  They typically gain control through most if not all categories.

  • Political

Political connections can buy an oligarch protection of property rights, but it can also grant him control over more property.  Being in politics or having political connections has created many of the oligarchs.  Many were senior-level Nomenklatura in the Communist political system.[14] Rem Vyakhirev and Viktor Chernomyrdin, for example, were Soviet apparatchiki but were able to translate this to modern political and hence economic power in the new Russia.[15]

As with many oligarchs, these two derive their wealth from resource extraction.  Russia is one of the world’s top producers of gas.  Chernomyrdin and Vyakhirev had the advantage of coming from the old Soviet Ministry of the Gas Industry.  They turned the ministry into a single company, Gasprom, in late 1989.  This ensured that they remained in control of a single entity, instead of it being broken up into many small private companies.  Like many oligarchs, Chernomyrdin drifted from business to politics and back and forth.  In 1992 he became Deputy Prime Minister of Russia.  He was able to use this power to convert Gazprom from a state-owned enterprise to a private one, with himself and his friends in control.  He, with his partner, used this position to extract wealth from “their” company to the detriment of other shareholders including the state.  It is obvious why the most powerful oligarchs often come from the Nomenklatura; they can use political connections to gain control of industry and then destroy all competition.

Political connections also work to the advantage of businessmen in the United States.  Just think of any president who has left office.  They are all rich now.  The elder President Bush’s consulting firm is one of the most successful in the world, so is that of former New York Mayor Rudolph Giuliani and former Secretary of State Henry Kissinger.  Although it is clear that politics can be a useful tool for making money in America, there is a difference of degree between the United States and Russia.  Imagine if the United States government decided to privatize the country’s highway system as some economists are urging.  An auction is held, but only two companies are invited to bid, the other potential bidders being “discouraged” from participating.  These two companies happen to be owned by close business partners who happen to be friends and business partners with the Vice President.  With no competitive biding, the entire US highway system is sold for 500 million dollars.  This would begin to approach the scale of political corruption in Russia that has led to the Nomenklatura oligarchs.

  • Economic

It is possible to become rich in Russia through economic means without many political connections, but the case against Mikhail Khodorkovsky squashed all assumptions that money alone was enough.  Today, Khodorkovsky, formerly the richest man in Russia, sits behind bars.  It is not fare to say that Khodorkovsky had no political connections.  He just did not have the same connections that other more established Nomenklatura oligarchs had.  In fact, he started in business with first a discothèque and then a service business offering scientific, technical as well as sales in computers.  Later, he started a bank, which allowed him to go into big business and finally to buy YUKOS from the government through questionable means.[16]  Obviously, he had connections, but on a much lower level than the Nomenklatura.  This would be a fateful mistake that would end with Khodorkovsky in jail as he attempted to gain political power, in the process going against the interests of the established Nomenklatura oligarchs.

Many of the other oligarchs who relied primarily on economic power are now too in exile.  Examples include Boris Berezovsky and Vladimir Gusinsky, both of whom are currently in exile after meddling with established political elites through their media empires.  One may be successful without political connections of the highest degree, but one cannot become a true oligarch, and then challenge those oligarchs with these greater political connections.

That said, the source of economic control should and cannot be underrated.  Economic control gives an oligarch a base of power and allows him to spend his way to the top by bribes, etc.  This economic control spans not only industry and natural resources but also banks and finance.  Every major oligarch bases their wealth on their financial networks as much as on the output of their industries.  Yet, the limitations of money are that people will not risk political power for money if the danger is too great.  Also, money cannot always motivate people to act in one’s interests and this is when violence management is needed.

  • Violence Management

In many ways, violence management is less important now than in the “wild west” days of early reform.  If any business hoped to survive, it needed a “roof” to protect it from too much fear of being taken over by armed gangs or simply stolen by a more powerful businessman.  The need for violence management directly results from the lack of government ability and/or willingness to physically protect property rights.  In the early 1990’s it seemed that this was the way to conduct business in Russia and that the Mafia bosses would end up controlling the country.  Fortunately, this is not exactly what happened.

It should be realized that there are two forms of violence management in Russia.  These include the classic Mafia model where gangsters provide “protection” for their clients.  Another form of violence management is that of private security firms.  These can range from a few armed bodyguards to a full army of thousands, such as are employed by the largest of Russian companies.  Most oligarchs rely on private agencies or connections to the police or FSB (formerly the KGB) for security and violence management.

At first, criminal gangs and Mafiosi seemed successful.  They started businesses or stole them but the criminals have either all killed each other or were destroyed by the government when it cracked down or when oligarchs fought them for interfering with their businesses.  Today the Russian Mafia still exits and continues to be very powerful.  However, any fantasies of grandeur have long since disappeared.  The Mafia and criminal gangs now prey primarily on small and medium size businesses.  For example, I was told by Russian friends that street stalls and kiosks pay monthly “rent” to small time gangsters (banditi in Russian) and that banditi also prey on handicapped people, placing them on street corners and giving them containers for money given by unsuspecting pedestrians.  This money is then collected by the gangster who gives the invalid a piece of bread for their work.  Academic sources back these stories up.

The point is that Russian criminal nature goes to such a low level of society that it, in fact, helps the powerful oligarchs.  It would take a very audacious criminal to attempt to steal or extort from an oligarch.  Moreover, the violence management capabilities of the largest Mafia bosses pales in comparison to the several thousand strong “private army” security branches of the largest oligarchs, who employee many ex-intelligence or Special Forces operatives, making them worthy opponents.  In any case, as the “rule of law” is more firmly established, violent criminals have been pushed out of the top rungs of society, so that only the average person has to deal with them.  The top oligarchs are not rganized criminals, but instead are well-placed individuals who have taken advantage of the institutional structure of the Russian economic and political system to make money and gain power.  Although the way they acquire and run their businesses may be illegal, the businesses themselves are quite legal.

The violence the oligarchs use is largely of a security and intelligence nature. Former intelligence officers may be hired to gather intelligence on an upcoming bid or a competitor.  These services would not engage in the gang wars prevalent between criminal organizations. Violence management is a way to keep power, not a way to gain it for the oligarchs.[17]

  • Media Control

Media control has very different properties than any of the other three forms of control.  It helps oligarchs to change public perceptions about themselves and their patron politicians.  Therefore, media control is very much a political tool.  The most prominent instance in which the oligarchs used media to their advantage was in the reelection campaign of President Boris Yeltsin in 1996.  The legal spending limit was a mere $1.7 million, but the campaign actually spent up to $1 billion.[18] This is more than the combined total spending of both contenders in the last United States presidential election.  Every penny was needed.  Yeltsin’s approval rating had hit single digits leading up to the election.  It is rumored that he even considered postponing or canceling the election.  The oligarchs realized that the alternative to Yeltsin was a reformist, perhaps Communist president who would take away their ill-gotten gains of and redistribute their wealth.  Even though previously most oligarch-owned media outlets had been critical of the President, the oligarchs pulled together to help Yeltsin win his near landslide victory.

Again, when President Putin was faced with a similar situation, the oligarchs banded together to give him favorable media coverage.  However, once the election was won, the oligarchs reverted to their old ways of criticizing the government and each other.  Unlike Yeltsin, Putin was unwilling to tolerate this.  The government cracked down on the media by ousting Gusinsky who controlled NTV and Berezovsky who controlled ORT.  Both oligarchs are currently in exile.  Putin had virtually all independent media effectively nationalized by having state-owned or -controlled industry buy it.  Now, all coverage that Putin gets is very favorable.  Moreover, in the recent election he did not even have to advertise because he got so much favorable coverage as it is.  Today, media control is not a viable option for the oligarchs as it is almost all government controlled.

Table: Forms of Control for Oligarchs

Type Importance Limits How to Get
Political Way to gain an empire, protection Need top dog, risk that patron will loose power Need to be from former Nomenklatura
Economic Able to pay bribes, buy power Money will only go so far Political power, rig auctions, connections
Violence Physical protection Cannot be too open with violence, it can backfire Money
Media Public opinion Has been taken away by government Money

The above table illustrates the various forms of control for Russian oligarchs.  Notice how the primary reason for all types is to gain or protect property rights.  This is not surprising, considering that the main reason that oligarchs were able to become so powerful in Russia was the lack of property rights in the Russian system


Imagine a market economy without property rights.  To substitute for government protection, the oligarchs’ main goal is to gain power so that he can protect his property and to do so he employs the four forms of control.  In the introduction I asked some questions about the oligarchs.  This paper has answered them.  This section will answer them again, concisely.

  • Who are the oligarchs?

The oligarchs are a group of Russians who control much of the Russian economy.  There are two main types of oligarch: the Nomenklatura oligarch who came from the mid-level to upper ranks of the Communist party, and business oligarchs who took advantage of the Wild West climate of Perestroika and reform.  The Nomenklatura oligarchs seem to have won with the election of President Putin and the subsequent crackdown on some of the business oligarchs.

  • How did they become oligarchs?

The Nomenklatura oligarchs largely took their positions in the parallel economy and their political power and brought this to the market economy.  The business oligarchs were able to make lots of money initially and then emulate the Nomenklatura oligarchs.  Both types of oligarchs gained their enterprises through rigged privatization auctions and outright stealing.

  • How do they operate?

Individual and group interests, as has been shown, can explain the behavior of the oligarchs.  The main determinants to oligarchic behavior are: the pursuit of power, personal protection, and the retention of a favorable society.  Their behavior is motivated by the pursuit of wealth and protection of their property rights.  They have four main areas of control: economic, political, violence and media.  This system is in their interests because they wish to pursue wealth and because only they have the means to protect their property rights, the government not providing adequate protection.  Therefore, the oligarchs band together when it is in their interests to defend the society that they created.

  • What is to become of the oligarchs?

It appears that with the election of President Putin, the Nomenklatura oligarchs have solidified their position.  Therefore, the questions are: how long Putin will stay in office?  Who will replace him?  And will Putin or his predecessor find a way to deal with the oligarchs if it is indeed in their interests to do so?  The first two questions are of course impossible to answer.  It does appear that Putin is still popular with the oligarchs and they have a history of helping to reelect friendly presidents, so I see no reason why they would not do so next time, should Putin find a way to run again.  However, with the loss of media control, it is unclear what kind of impact the oligarchs could actually have on an election.  President Putin spent $0 on the last election.  He simply did not campaign.  Favorable media coverage by government-controlled networks was enough.

The real question is: will the oligarchs lose favor with President Putin?  I do not see that it is in the interest of the President to completely get rid of the oligarchs and to create a society based on laws.  However, if the oligarchs give Putin reason to fear them, he will pounce on them quickly.  The situation will likely continue for a long while.  What the oligarchs are attempting to do is to create wealth for their children.  They are slowly legitimizing their businesses while sending their children to elite European and American private schools.  Slowly, the oligarchs may melt away or be replaced by their cultured children who are not interested in illegal games.


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Kornai, Janos.  “Making the Transition to Private Ownership”.  IMF, Finance and Development.  September, 2000.

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North, Douglass C.  Institutions, Institutional Change and Economic Performance.  Cambridge University Press, Cambridge.  1990.

Odling-Smee, John and Henri Lorie.  “The Economic Reform Process in Russia”.  IMF.  1993.

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Satter, David.  Darkness at Dawn:  The Rise of the Russian Criminal State.  Yale University Press, New Haven.  2003.

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[1] Maly, Matthew (Page 49)

[2] Service, Robert (Pages 4-8)

[3] Goldman, Marshall I.  (Pages 33-44)

[4] Ibid (Page 45)

[5] Service, Robert (Pages 123-149)

[6] Gaidar, Yegor (Pages 67-68)

[7] Ibid (Pages 66)

[8] Braguinsky, Serguey and Grigory Yavlinsky.  (Pages 39-41)

[9] Ibid.  (Page 42)

[10] Goldman, Marshall I.  (Page 43)

[11] Goldman, Marshall.  (Page 22)

[12] Braguinsky, Yavlinsky (Page 46)

[13] In fact, in 1982 the entire USSR (including all member countries) had a bureaucracy of 800,000 people while in 2001 Russia alone had over 1.2 million people.  Goldman (Page 221)

[14] Goldman (page 103)

[15] Ibid.  (Page 105)

[16] Ibid, (Pages 146-148)

[17] Vadim Volkov.

[18] Satter, David.  (Page 53)

About the Author

Jeffrey Louis Weichsel

Jeffrey Louis Weichsel graduated Cum Lade in International Relations from Connecticut College in 2004. He is currently studying International Relations in Russia with SRAS.

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