Russia's business oligarchs - Greek for the few who rule - have enriched themselves over the past 15 years beyond most people's wildest dreams. They count their fortunes in billions of dollars. But even more spectacular than their rapid rise is the way some rags-to-riches adventures have ended in tears. The careers of two of Russia's most successful oligarchs, Mikhael Khodorkovsky and Platon Lebedev, are now under the microscope in a Moscow court where they face charges of fraud, forgery and tax evasion. The story about the risks they - and other oligarchs - ran and the deals they made says much about Russia's recent history.

Perestroika

The first fortunes made in the new Russia resulted from wheeling and dealing. While the majority of Russians queued for bread, a group of young entrepreneurs experimented with business. For instance, a high powered mathematician and future oligarch, Boris Berezovsky, turned his hand to car dealing. Many businessmen dropped off along the way and failed to make vast fortunes, yet their early forays into the world of capitalism followed similar paths to those taken by Mr Khodorkovsky and Mr Lebedev.

These were risky paths.

After 70 years of Communism, many Russians regarded even honest businessmen as thieves. An early victim of his own success was computer importer Artyom Tarasov, a Communist who loyally dedicated 3% of his salary to the Party. But that was not enough to prevent his vast fame and fortune from annoying the authorities. When it became clear that he earned a million dollars in 1989 he was immediately put on trial for "economic crimes". He was found to be innocent, but his business was ruined. Mr Khodorkovsky was in the same game, importing computers, though he did it under the auspices of the Komsomol, the Young Communist League where he was a leader. Mr Khodorkovsky kept a low profile and escaped the fate of Mr Tarasov, though some believe the start of his troubles came several years later, in 2001, when he became the first oligarch to declare his fortune publicly.

Banking

In the early 1990s, the best way to make money was to work with money. Thousands of banks and insurance companies sprang up overnight. Mr Khodorkovsky used cash from his computer importing business to found Menatep bank. The banks that prospered had licences to work in hard currency. Businesses needed dollars to import goods and banks charged high rates of interest for hard currency. Khodorkovsky's associate Platon Lebedev set up a labyrinth of offshore banking affiliates. This lead to suspicion that Menatep was involved in money laundering. It bothered the CIA, but it has not appeared on the charge sheet against the two men.

Democracy

Offshore banking was barred to all but the select few, but Mr Khodorkovsky cultivated the right contacts to get approvals for his schemes. In sharp contrast to many of his rivals, he had a modest and deferential manner which put those in authority at their ease. Like most of the new businessmen, he saw the link between democratic reforms and the free market. He sided with reformist Communists like Boris Yeltsin, president of Russia which was then still part of the USSR. Mr Khodorkovsky's links with the politicians were further strengthened by his presence in the Parliament building during the 1991 military coup by hard line communists. Having stood shoulder to shoulder with the 'democrats' in their hour of need, he was perfectly placed when they prevailed. Soon thereafter, Mr Khodorkovsky briefly served as deputy fuel and oil minister. Later on, the oligarch Boris Berezovsky would become a member of President Yeltsin's inner circle by masterminding his re-election in 1996. But Mr Khodorkovsky was the first businessman to get close to the heart of power.

Privatisation

But political contacts offered no guarantee for a businessman's life. Throughout the 1990s, many bankers met early deaths at the hands of hired assassins. Menatep's legal adviser was one of the first to be killed. Undeterred, Mr Khodorkovsky and his partners pressed on the path to riches. Among the many businesses Menatep bought from the state in 1994 was a bankrupt fertiliser factory called Apatit. Menatep won the tender by promising an unfeasibly large investment into the business. After it gained control it quickly forgot this obligation. The dispute with Russia's privatisation board about the failure to invest in Apatit rumbled on for years and was eventually settled by an arbitration court. But the fertiliser deal would come back to haunt Messrs Khodorkovsky and Lebedev. One of the charges of fraud that has been laid against them is related to the deal.

Crown jewels

Relatively small deals like the acquisition of Apatit helped make the Russian businessmen wealthy, but it was only in 1995, when Russia's broke government started to auction off the crown jewels of the economy, that the winners were sorted from the also-rans. Minerals and oil assets were sold off en masse as the government tried to fight the threat from resurgent Communists and finalise Russian capitalism. Russia's most valuable assets were sold at bargain prices to insiders such as Mr Khodorkovsky. Other assets were squeezed out by a process which many said was rigged. The banker Vladimir Potanin got the most valuable prize of all - the Norilsk Nickel, one of the world's richest suppliers of raw materials. Menatep bought Russia's second largest oil company, Yukos, for $300m. It also took on $2bn in debts, which made the price more realistic. By the end of 2003 it was worth $27bn, but only after the management had vastly increased production.

The wild frontiers of finance

The auctions of 1995 are the most controversial episode in the history of the oligarchs, but no charges have arisen from them. Moreover, any gains were almost wiped out three years later when the Russian economy all but collapsed. The failure of the economy was the result of wild speculation and financial schemes that were too good to be true. The most egocentric financier of the age, Sergei Mavrodi, issued bank notes bearing his own face as part of a giant pyramid scheme. The public saw this as a chance to join in the capitalist race for riches, but the scheme collapsed taking the savings of the gullible with it. The more sophisticated were investing in government bonds, called GKOs. Fantastic profits were made in this market, but it turned out to be as big a pyramid as Mr Mavrodi's. When the government defaulted in August 1998, the banks followed hard on its heels. The bankers who survived the crisis were those, like Mr Potanin and Mr Khodorkovsky, who had other non-financial assets such as minerals.

Taxes

Mr Khodorkovsky proved himself to be a better owner of Yukos than many had expected. The business grew and paid $1.9bn in taxes in 2000. But the authorities say this was not enough. Yukos is currently in danger of being torn apart by bailiffs who have said they might sell off its main operating arm to settle a $3.4bn bill for back taxes. Under Russian law, directors face charges, while shareholders foot the bill for corporate misdemeanours. So as a former chief, Mr Khodorkovsky is charged with both corporate and personal tax evasion. At stake is Yukos's decision to arrange its affairs to benefit from low local tax rates introduced as part of the government's efforts to bring developments to the regions. But Yukos was not the boldest in this regard. The owner of Chelsea football club, Roman Abramovich, was elected as Governor of the remote region of Chukotia. He moved the legal address of his oil companies to Chukotia and awarded them tax breaks.

The Charges

The charges of fraud which Mr Khodorkovsky and Mr Lebedev face go back to the early to the very early days of privatisation which now seem like distant history. The charges of tax evasion are more recent, but Yukos's accounts had been signed off by government tax inspectors. The most controversial episode of all, the 1995 auction of Yukos, has been left off the charge sheet. To include it would be seen as an attack on all the oligarchs who won the auctions for Russia's mineral wealth. Nor has there been any mention of Menatep's offshore network which might have concealed many ill-gotten gains of its clients. The events which have been left off the charge sheet speak volumes about the current situation Russia. There are some stones which the authorities still think are best left unturned.

(from: BBC News.)

Map Russia

The USSR had a totalitarian political system in which Communist Party leaders held political and economic power. The state owned all companies and land, and the government controlled most aspects of the economy. After the Soviet Union broke apart in 1991, Russia began transforming itself into a more democratic society with an economy based on market mechanisms and principles. For many Russians the transformation brought a severe decline in standard of living. At the same time, Russia became more integrated with the global economy and benefited from improved relations with the countries of the European Union as well as its neighbors in Asia.

Russian economy

The Soviet Union had a planned socialist economy, in which the central government controlled everything from production targets and prices to distribution. The Soviet satellite states in Eastern Europe had planned economies as well. After the breakup of the USSR, Russian reformers were confronted with the daunting task of building a modern capitalist economy while simultaneously striving to create a democratic state based on effective laws and reliable administrative structures. The collapse of communism in Eastern Europe in the late 1980s and the dissolution of the Soviet Union at the end of 1991 disrupted the close economic relations Russia had previously enjoyed with neighboring communist states and other Soviet republics. Political turmoil and uncertainty inside the Russian government also contributed to the country's economic woes. Compared with most of the former planned economies of Eastern Europe, Russia experienced a severe and protracted drop in officially reported economic output.

In 1992 the new Russian government led by President Boris Yeltsin launched a comprehensive program to create a market economy. In the mid-1990s, after several years of runaway inflation, the economy began to stabilize. Inflation fell to manageable levels and the exchange rate of the Russian currency (the ruble) stabilized. Nonetheless, severe structural imbalances persisted, and the introduction of market competition continued to encounter stiff resistance from the ranks of conservative politicians and industrial managers. Many unprofitable state-owned enterprises remained open, in part by simply not paying employees, suppliers, and taxes. Federal and regional governments allowed tax arrears to accumulate, even while government spending continued to outpace revenue generation. Meanwhile, a new class of well-connected business tycoons, commonly known as "oligarchs," exploited the reform process to promote their own narrow interests. Their manipulation of the privatization of industry and the banking sector contributed to the country's budget deficits and the spread of corruption.

In late 1997 the national economy began to feel the effects of an international financial crisis in Asia, and the following August Russia experienced its own financial crisis. Alarmed by the Asian meltdown and the growing imbalances in Russia's public finances, many foreign investors withdrew from the Russian market. The flight of foreign capital forced Russia's Central Bank to devalue the ruble and to default on foreign and domestic debts. The crisis rocked the Russian stock market and plunged the living standards of ordinary Russians to new lows.

Moscow

All of these factors combined to bring an impressive economic recovery that exceeded the expectations of most Western economists. Russia's gross domestic product (GDP) grew an average of 6.7 percent annually from 1999 to 2003. Public finances also improved dramatically. From 1996 through 1999 the government's annual budget deficit averaged 6 percent of GDP, but from 2000 through 2003 the government budget generated a surplus averaging 2 percent of GDP.

However, it remains unclear whether Russia can sustain a high rate of economic growth over the long term. Skeptics have emphasized the country's heavy reliance on oil exports and its vulnerability to oil price swings. They have also pointed to signs of mounting government hostility toward private business and the persistence of corruption under President Putin. On the other hand, the government has sought to address the problem of long-term sustainability. In addition to strengthening the fiscal system, it set up a stabilization fund in 2004 to save revenue generated during periods of high oil prices as a cushion against lean periods of low prices. How effective these measures will be in practice remains to be seen.

According to the International Bank for Reconstruction and Development (World Bank), Russia's GDP in 2004 totaled $581.4 billion. Services, including the banking sector, accounted for 60 percent of the GDP. Industry, which includes manufacturing, mining, electricity generation, and construction, accounted for 35 percent, and the agricultural sector, including forestry and fishing, contributed 5 percent. Adjusting official data to take account of the peculiarities of Russian energy prices, the Organization for Economic Cooperation and Development (OECD) estimates that the service sector generates about 46 percent and industry about 41 percent of GDP.

Comments (0)

Subscribe to this comment's feed

Name

Email

Website

Title

Comment

smaller | bigger

Subscribe via email (Registered users only)

I have read and agree to the Terms of Usage.

Write the displayed characters

Add Comment Preview