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#4 - JRL 7033
Washington Post
January 25, 2003
Abetting Russia's Oligarchs
By Yevgenia Albats
Yevgenia Albats is a columnist for the Moscow-based political weekly Novaya
Gazeta. She is currently a fellow at the Davis Center for Russian studies
at Harvard University.

MOSCOW -- If there were any remaining illusions about law and order coming
to Russia -- something that President Vladimir Putin promised the nation
when he came to power three years ago -- they have surely been dispelled by
the current financial shenanigans here. First there is the sale of the last
big state-owned oil company, Slavneft, to some of the Kremlin leadership's
cronies, for a price less than half what the government could get in a
truly open market. Then there are the games being played with shares of the
Russian energy monopoly, RAO UES, by the same cronies, and under the
patronage of the same Kremlin.

Russia's young and energetic president loves to talk about the common good
and his desire to turn Russia into a wealthy and civilized nation. This is
all well and good. But the $4 billion-plus that some foreign investors
allegedly were ready to pay for Slavneft would have made a big contribution
toward that end by helping, say, Russia's retirees (the average monthly
pension is $46) and orphans to have a better life.

But the government rejected the offer. Once again it was made clear that
for the sake of securing power and getting reelected, Putin is ready to
reward his cronies with precious pieces of property at the expense of the
well-being of ordinary citizens.

Slavneft is Russia's eighth-largest oil company. The sale of 75 percent of
its stock was announced some time ago by the state: asking price
approximately $1.7 billion. But even some top government officials thought
that was too low; they suggested that a "just price" would be at least $2.5

The government promised that the auction of the company, one of the last
jewels in the state's crown, would be fair and profitable -- nothing like
previous deals in which some of the country's best natural-resources
companies were sold for peanuts. That was the price the Kremlin (and the
country) paid to oligarchs for aiding the reelection of Boris Yeltsin as
president and helping prevent communists from gaining power.

This time, though, there seemed to be no rational basis for such dealings.
Putin's popularity rating is stable and high. Yet, as the process went
ahead, bidders mysteriously began to drop out. One that hung on was the
Chinese firm CNPC, which was, according to sources, ready to pay more than
$4 billion. But on the day before the auction, and after the company's CEO
had spent several hours talking with top Russian economic authorities, CNPC
withdrew. The winner became clear: It was a firm that represented two
bitter rivals, the Sibneft oil company -- owned by Kremlin insider Roman
Abramovich -- and the oil company TNK, which participated in the deal in
exchange for obtaining control it had long sought over some of Sibneft's
assets. The winning bid was $1.86 billion -- less than half what the
government could have gotten.

There was no doubt that Sibneft was the real locomotive of the deal.
Indeed, there had been rumors as early as last summer, well before the
bidding was publicly announced, that the Kremlin had chosen the firm to win
the oil auction. But why would the presidential office grant such a favor
to a particular company?

The reason: Sibneft used to have de facto control of the country's biggest
TV network, Channel One, which reaches about 97 percent of the households
across 11 time zones. Abramovich, one of the main financiers of Putin's
presidential campaigns, yielded his interests in Channel One to the Kremlin
a while back. In return, according to sources, he was assured that he would
be the winner in the Slavneft auction.

The Kremlin, of course, knows that success in future presidential elections
depends to a large extent on its having Channel One under the state's
auspices. According to my best estimates, the Russian state now controls
more than 87 percent of all national media, as opposed to 52 to 53 percent
before Putin became president. And so a country in which two-thirds of the
citizens live below the poverty line helped pay, to the tune of more than
$1 billion, for Putin's 2004 reelection insurance policy.

But apparently this wasn't enough. At the same time the state was preparing
for the oil company bargain sale, some of the same friends of the Kremlin
who were involved in it began a huge effort to water down shares of the
country's energy monopoly, RAO UES, run by Anatoly Chubais. RAO UES is
under pressure to reform, as part of efforts to establish a truly free
market in energy in Russia. But there is considerable resistance from those
who have an interest in maintaining the current monopoly.

Thus, even though this is an enterprise in which the controlling stake
belongs to the state, the effort to water the stock is being made under the
patronage of top Kremlin officials. As reform of RAO UES came closer to
reality, politicians, legislators and media under the control (or on the
payroll) of the Kremlin crowd, as well as top officials themselves, mounted
a vigorous anti-reform campaign mocking RAO UES management and accusing it
of nothing less than undermining national security. The message to
stockholders was clear: Chubais is in bad trouble and so reform isn't going
to happen. They began selling their shares, and the stock fell sharply, to
be snapped up by Kremlin insiders.

It's a good buy. Whoever has a large stake in the unreformed energy
monopoly will have great power in Russia's regions (and thus among their
voters). That's why Putin's Kremlin friends have already spent more than
$600 million to acquire more than 10 percent of the stock, with the goal of
getting a great deal more. Meanwhile, legislative efforts to reform the
monopoly are stuck.

No major corruption scheme in Russia can succeed without the help of the
Kremlin. The past two years of Russia's so-called war on the oligarchs have
made it clear that the Kremlin has plenty of ways and means to destroy any
oligarch it wishes to, and just as many ways to enrich those who are loyal
to it. The loser, of course, is the nation.

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