How Did The Russian Workers' Paradise Suddenly Wind Up With So Many Billionaires?

A few days ago, the History Channel, debuted a much-anticipated episode in it's Book of Secrets series, "The Billionaire Agenda." I wish I could share it with you but History 2 isn't into sharing, as you can see above. Early in the program, though, there was a chart showing that the U.S. has the most billionaires, followed by China and then Russia. They reported that there are 111 Russian billionaires, although other sources have the number as high as 133. That was fast! If I remember correctly, Gorbachev ushered in perestroika in 1987, less than 39 years ago, making it possible, eventually, for the accumulation of personal wealth. But the workers' paradise spawned 111 billionaires that fast? I mean, we're not talking about millionaires here, these are billionaires and there weren't even any millionaires in Russia until after perestroika So how did it happen that this new elite sprang up out of nowhere?

When the Soviet Union started disintegrating, certain focused, avaricious characters with good government connections started jockeying for placement in line as state companies began planning for privatization. The state-owned companies, for the most part, were badly managed and the economy was faltering, to put it mildly. Anyone paying attention to how Russian was faring under Boris Yeltsin was aware that profound restructuring was coming. Many today still recall when the transfer of wealth from the Russian state to individuals began and how Yeltsin kick-started Russia’s privatization era, declaring in an April 1992 speech a future with “millions of owners, not hundreds of millionaires'”

But there were people who realized that meant there would be immense resources and opportunities in play. One such character was Vladimir Potanin, now one of Russian's 111 billionaires and already wealthy then as president of Oneksim Bank. From a 1996 report by Alessandra Stanley in the NY Times:

Oneksim Bank, which was founded in 1993, is the only Russian commercial bank to have met the starchy conditions of the Swiss Central Bank, a feat so challenging that a financial reporter in Moscow likened it to "me flying to the moon." Almost as if feting a lunar landing, Russia's Prime Minister, Viktor S. Chernomyrdin, sent the bankers an effusive congratulatory telegram.

These days, Government officials are no longer leaping to embrace Oneksim Bank-- at least not publicly. For it was the initiator of a privatization program whose blatant favoritism ignited a political scandal that inflamed the presidential campaign and cost Anatoly B. Chubais, the last free-market reformer in President Boris N. Yeltsin's Cabinet, his job.

Privatization began two years ago as a revolutionary step to roll back 70 years of Communism, selling off state assets to create a society of property owners with a stake in the success of a free-market economy. But its inequities-- most vividly illustrated by the bank's scheme-- have led the Yeltsin administration to disavow the process.

Under the deal, known as loans-for-shares, a few Kremlin-favored banks lent the Government money last year in return for a chance to buy shares in some of the state's most valuable assets at dirt-cheap prices.

As Mr. Yeltsin struggles to distance himself from the more unpopular economic policies of his tenure, some of the very advisers who helped push the loans-for-shares plan through the upper echelons of power are now saying, Casablanca-style, that they were "shocked, shocked" to find abuses.

Some Communists say they will reverse privatization if they come to power. Communist members of Parliament are already calling for immediate renationalization of the industries involved. And so is the populist Mayor of Moscow, Yuri Luzhkov, who is the deputy chairman of Mr. Yeltsin's election campaign.

Mikhail G. Delyagin, an economic adviser to the President, said many companies the Government planned to privatize will almost certainly not be privatized any time soon. "Nobody wants to unleash another scandal before the election," he said.

Privatization is deeply unpopular with voters, who cynically refer to it as "prikhvatizatsiya," or "grabification," the giving away of government wealth to a few well-connected and unscrupulous businessmen and bankers.

While the loans-for-shares program briefly lifted the thin veil covering the symbiotic relationship between Government officials and major banks, the political and economic consequences are far broader.

If the Government halts further privatization, it will lose a means of raising badly needed cash to cover its deficit -- and the already strained good will of the International Monetary Fund, which is now negotiating a $9 billion loan to Russia.

Loans-for-shares was only one program among many in the Government's ambitious drive to redistribute the property of a state that once owned everything. During the last two years, more than 100,000 state companies-- from small shops to oil conglomerates to enormous, and enormously inefficient, factories-- have been transferred to public ownership, at least formally. (Often, Soviet-era directors bought the companies themselves, and continue to run them Soviet-style.) The 15,000 factories involved thus far represent two-thirds of industry and 60 percent of the industrial work force.

The idea was first floated on March 30 at a Cabinet meeting presided over by Prime Minister Chernomyrdin. The hard-driving 35-year-old president of Oneksim Bank, Vladimir O. Potanin, proposed that a consortium of major banks could fill the Government's budget gap by lending it $2 billion in exchange for a first crack at shares in some of Russia's most valuable industries, like oil, shipping and metals. When Mr. Chernomyrdin expressed doubts at the meeting, he was assured by Mr. Chubais and Oleg D. Soskovets, a Deputy Prime Minister, that they approved of the deal.

The chosen banks like Oneksim Bank, Menatep, Rossiisky Kredit and a half a dozen others just happened to be those with deep financial and personal ties to the Government-- and a vested interest in helping it stay in power through the coming presidential elections.

When the auctions began last fall, it became all too obvious that a fix was in. Foreign investors were barred from bidding for the most desirable assets, and the same banks that were assigned by the Government to organize the auctions ended up winning them, and usually at only a fraction over the minimum bid.

Oneksim Bank, for instance, organized the auction for 38 percent of Norilsk Nickel, which produces platinum and a quarter of the world's nickel, and won it for $171 million, only $100,000 above the minimum bid and half as much as the rival Rossiisky Credit bank was prepared to pay. Oneksim Bank spokesmen say they disqualified Rossiisky Credit because it filed its applications late and wanted to guarantee its bid with treasury bills as well as cash. Rossiisky Bank said it would sue.

Shares in some of Russia's largest oil conglomerates, including Lukoil and Yukos, were sold off for what Western analysts considered to be a fraction of their real value. When the buying frenzy subsided, the Government collected $1 billion, half of what it had expected to collect.

Bloomberg follows the Russian billionaire beat closely. Last month Irina Reznik and Evgenia Pismennaya filed a piece about how Ukraine-related sanctions were hurting a few billionaires with close ties to Putin. "Bank Rossiya’s rise from a Communist Party shell company to a conglomerate with $12.6 billion of assets dovetails with President Vladimir Putin’s own ascent to power," they wrote. "At least three of the lender’s early shareholders, including Yury Kovalchuk, who now has 40 percent, and OAO Russian Railways chief Vladimir Yakunin have homes at Putin’s lakeside dacha compound near St. Petersburg. Another stakeholder is one of Putin’s relatives. [Bank Rossiya has] a relationship with Putin that dates back to 1991, when the former KGB colonel was named head of St. Petersburg’s foreign relations committee, just six months before the collapse of the Soviet Union."

The decline of the command economy was giving way to an era of chaos and opportunity, forcing millions of people to adapt to the emerging form of capitalism. Just as Putin traded espionage for politics, Kovalchuk, 62, and fellow physicist Andrei Fursenko, proteges of future Nobel Prize winner Zhores Alferov, swapped physics for finance.

As research funding dried up, Kovalchuk and Fursenko, now an adviser to Putin, abandoned their scientific careers to try their luck in the free market. With funding from a shoe mogul, they bought Bank Rossiya, a little-used deposit holder for the Communist Party, partly because it had an office in city hall, according to Young Russia, a film about the new band of bankers that director Igor Shadkhan shot in 1994 to 1996.

…In 1998, the year Yeltsin defaulted on domestic debt and devalued the ruble, tipping the economy back into recession, Bank Rossiya got another new shareholder, Gennady Petrov, a local businessman who owned 2.2 percent of the company until at least the end of 1999, when Yeltsin stepped down in favor of Putin, according to company documents.

A decade later, Petrov was arrested in Spain during an organized-crime sting codenamed Troika and charged with trafficking arms and drugs and smuggling tobacco and cobalt. Spanish authorities in 2009 sent a letter to law-enforcement bodies in Moscow, a copy of which was seen by Bloomberg, asking for help in the case against Petrov, who they accused of running an organized-crime ring.

A Spanish judge, “in a surprise decision,” granted Petrov bail in 2010, the U.S. Embassy in Madrid said in a secret cable published by Wikileaks. He hasn’t been tried.

“Petrov, the chief target of Spain’s Operation Troika, was engaged in a ‘dangerously close’ level of contact with senior Russian officials,” the embassy said, citing Spanish prosecutors. The embassy’s press service declined to comment.

A Spanish lawyer for Petrov, Luis Fernando Granados, said he didn’t know where his client is and declined to comment on the case.

…After Putin was elected in 2000, he vowed to eliminate “as a class” the Yeltsin-era insiders who got rich through their ties to the government. While Putin tightened his grip on power and gained popularity by reining in the oligarchs, oil output and prices surged, triggering an economic expansion that averaged 7 percent a year in his first two terms. That helped lay the groundwork for the emergence of a new class of billionaires, this one with ties to Putin himself, including Arkady Rotenberg, his former judo partner, and Timchenko.

Kovalchuk and Bank Rossiya were no exception. From 2000 through 2003, when OAO Severstal steel billionaire Alexei Mordashov bought an 8.8 percent stake, the lender’s assets surged 13-fold to 6.5 billion rubles ($180 million). Since then, after acquiring state-run OAO Gazprom’s pension fund and insurance arm, the lender’s assets have jumped another 69-fold to 449 billion rubles, making it the 14th largest bank in the country, central bank data show.

Bank Rossiya’s business depends on Gazprom, the former Soviet gas ministry and a minority shareholder in the lender, Standard & Poor’s said last August. Gazprom and the other of Bank Rossiya’s 20 largest depositors account for about 60 percent of the lender’s total liabilities, according to S&P… Being a stakeholder in a bank run by Putin confidants and a relative of the president provides “administrative resources” that are essential to doing business in Russia, the banker said.

…In an open letter to then-President Dmitry Medvedev in 2010 complaining about corruption, St. Petersburg businessman Sergei Kolesnikov said he had been compelled by former partner Nikolai Shamalov to help secretly finance and build a $1 billion palace for Putin on the Black Sea. Putin denied the claim through aides and Shamalov declined to comment.

About a year ago, Robert LaFranco and Alex Sazonov wrote, also for Bloomberg, that many of Russia's billionaires keep much of their wealth outside of Russia, offshore, where the authoritarian government could grab it at any moment. "All of Russia’s 20 richest people -- who have a combined net worth of more than $227 billion," they wrote, "control a portion of their fortune through holding companies registered outside of their home country. The billionaires, most of whom built their fortunes during the violent and unpredictable post-communist economic environment, use the entities to manage, preserve and conceal their wealth."

Yeltsin’s moves led to the so-called loans-for-shares program, which allowed a small number of private banks and the entrepreneurs who led them to make loans to the Russian government in exchange for liens on state assets. When the government defaulted, those entrepreneurs took control of large swaths of the country’s oil, aluminum, precious-metal and mining assets. They soon moved those assets offshore.

Oleg Deripaska, Russia’s 15th-richest man, described Russia’s economic environment at the time as one of beatings, boardroom intimidations and public assassinations, according to his written defense in a 2012 London lawsuit.

Are there honest billionaires in Russia who earned their wealth without resulting to criminal behavior. Not likely… just like the U.S.-- maybe a little worse. Do you feel sorry for them and their problems?