The economic crisis has taken its toll on the Russian oligarchs. Forbes list of the richest people revealed that Russia, once home to the most billionaires in the world, lost two thirds of its billionaires in the past year.
Russia's oligarchs are failing as fast as they rose to the forefront of Russian business. This begs the question, will the oligarchs regain their top positions or will the economic crisis be the beginning of a major restructuring in Russia's privatization?
Oligarchs Created by Loans for Shares Program
The oligarchs rose to power out of the Loans for Shares program of 1993, designed to give the government loans from major businessmen in exchange for shares of Russia's natural resource industries.
After the government could not repay the loans, the tycoons auctioned the companies to themselves.
The oligarchs took advantage of the weak property rights laws and ineffective legal system to push minority share holders out of their companies.
The Role of the Oligarchs in Russia's Economy
Although Loans for Shares was corrupt, it put nationalized companies into private hands, which was the goal of privatization in the 1990s. This allowed for more expansion and efficiency than if the companies were solely controlled by the Kremlin.
The oligarchs attracted foreign money and partnered with foreign businesses, such as when British Petroleum and Russian companies Alfa Group and Access Renova bought Russian oil company Tyumen to form TNK-BP.
After Putin brought charges against Khodorkovsky in 2003, there was a reduction in foreign and domestic investment and an increase in capital flight. The Central Bank determined capital flight in 2004 to be $9.4 billion, four times higher than in 2003.
For the West, it is better for these companies to be in the hands of oligarchs, many of whom are Western leaning, than in the hands of Putin. The government's increased stake in Gazprom, the world's largest oil producer, and Rosneft and control of the pipelines gives Putin the strength to flex his muscles at the West. In 2006 and 2008, Putin shut off gas to Ukraine creating a gas shortage in Europe.
Will the Oligarchs Survive the Economic Crisis?
Before the economic crisis, oligarchs took out large loans on cheap credit. Now they are drowning in debt due to the decline in commodity prices and ruble devaluation.
Oleg Deripaska, a metals investor whose fortune has fallen from $28 to $3.5 billion in the past year, is unable to pay his outstanding loan of $14 billion for his aluminum company Rusal.
The Russian Central Bank reported that Russian companies must repay roughly $128 billion by the end of 2009. Most oligarchs will need to sell assets to repay their loans.
Alexander Lebedev, who owns a stake in Aeroflot and Novaya Gazeta, said, "Some of them will definitely lose their property, either to the state or to investors."
The Kremlin is strapped for cash due to diminishing surpluses, but is offering $78 billion in assistance to select oligarchs, including Roman Abramovich and Oleg Deripaska.
For one year loans, state lender Vnesheconombank requires a representative at the company and the power to veto the sale of any debt or major asset. In exchange, the billionaires relinquish shares, assets, or export revenue as a loan guarantee. Putin is head of the board supervising the loans.
Zina Psiola, a money manager for Clariden Leu Ag in Zurich, said "It's extremely unlikely they'll be able to repay in a year," resulting in a reversal of Loans for Shares.
The financial crisis has hit Russia hard, but it might give Putin what he has wanted since his first term as president: greater state control of natural resource industries.
Sources:
Humber, Yuriy and Clark, Torrey. "Oligarchs Seek $78 Billion as Credit Woes Help Putin" Bloomberg. December 22, 2008.
"Poor little rich kids" Economist. March 12, 2009
