Sympathy for the oligarch

It may sound strange, but I feel sorry for Petr Aven and Mikhail Fridman, the billionaires behind the Russian financial conglomerate Alfa Group, who were sanctioned by the British government last year and by the United States government last week. Of course, this is nothing compared to the deep sorrow I feel for the innocent Ukrainians who have become victims of Russia’s brutal and unprovoked invasion. Nonetheless, there is something pitiable about pioneers of Russia’s post-Soviet market economy being punished over Soviet-style geopolitics.

Aven and Fridman – possibly more than any other high-profile Russian businessmen – embraced the new economic model introduced in Russia after the collapse of the Soviet planned economy. Exploiting any opportunity they could find, they made large investments – and earned big profits – in oil, telecoms, and finance. If they needed to strongarm others to maximise their returns, so be it. They were textbook capitalists, destroying the old and creating the new.

To appreciate fully what these oligarchs achieved, one must recall the deterioration and ultimate collapse of the planned economy. For years, factories churned out tanks and missiles, while grocery-store shelves grew progressively emptier, until, in 1983, the government began rationing basic foods, such as grains and butter. It also raised food prices sharply, though this failed to spur production. Shortly before the Soviet Union’s collapse in 1991, industrial production plummeted.

What the Soviets left behind was an economy where potentially valuable assets were indistinguishable from worthless ones, with legal and economic institutions that were not suitable for a market economy. As private actors sought to navigate these conditions, they ended up shaping the economy into something far more functional and prosperous.

Russia’s budding oligarchs were far from perfect. At the beginning of the economic transition, there were high hopes that business leaders would provide the political pressure needed to drive institutional progress: an independent judiciary, less corruption in law enforcement, and better regulation. Harvard’s Andrei Shleifer, who advised the Russian government on privatisation, predicted in 1995 that the “transfer of control rights from politicians to private parties” would create “political demand for the protection of property rights.” This is not what happened. Instead of lobbying for the development of stronger state institutions, private actors went to work building their own mechanisms for, say, protecting property rights. Russian oligarchs in the 1990s took on local criminals themselves, because they could not count on the police to protect their assets.

These figures also encouraged corruption by state officials, because honest officials still followed Soviet blueprints and norms. And they bought members of parliament, because it was the only way to move business-friendly legislation forward. In post-Soviet Russia, businessmen had to be “big,” powerful, and politically connected, because nobody would honor contracts with them otherwise.

This does not, however, mean that all the rumors about figures like Aven and Fridman are true. There is no reason to believe, for example, that Aven handed out favors during his tenure as Minister of Foreign Economic Relations in the reformist government of Russia’s first post-Soviet prime minister, Yegor Gaidar. He certainly did not help out Fridman, whom he met a year after he left the cabinet. And Alfa Group did not receive any assets via the notorious “loans for shares” privatization scheme, which delivered the crown jewels of Soviet industry to Boris Yeltsin-era oligarchs in exchange for their political support.

In any case, much of what oligarchs like Aven and Fridman were criticised for in the 1990s constituted what academic economists call second-best solutions: the best approaches that are feasible under imperfect or distorted economic conditions. In this sense, far from causing the economic upheaval that followed the Soviet Union’s collapse, this first generation of oligarchs were symptoms of Russia’s institutional weakness. But, given their role in building the alternate systems that made the market economy run, they were also a kind of cure.

The situation changed when Vladimir Putin rose to power a generation ago. As rising global oil prices filled the state’s coffers, the role of oligarchs diminished. But, instead of building effective state institutions – including a credible property-rights regime – Putin created a bloated state that primarily served his interests and those of his cronies.

There was no level playing field in Putin’s Russia. Corruption and political connections were the only ways to win. Aven and Fridman adapted to the change, skillfully navigating the Putin-era markets and maintaining excellent ties with the Kremlin. When Putin told them to sell their oil business to the state-owned firm Rosneft, chaired by his crony Igor Sechin, they obliged – but made sure they got full price for their shares.

As Putin eschewed the free-market ideal, in favor of a heavily regulated economy dominated by state-owned monopolies, Aven and Fridman kept quiet. They knew that Putin was no friend of business. But they assumed that they could do little about it, so they found ways to succeed under the conditions they were given.

I wish that powerful business leaders like Aven and Fridman had felt more responsibility to their country and spoken out against this transformation. I wish they had realised that the accumulation of enormous, unconstrained power by Putin and his henchmen could end only in tragedy. And I wish that, once the scale of the tragedy became apparent – when Putin launched his genocidal war of imperial conquest against Ukraine – they had condemned it, and even donated some of their fortunes to the Ukrainian cause.

Still, I feel sorry for those Russians who believed that all they needed to do to secure their futures was to embrace capitalism. The system Russia has today looks nothing like what might have emerged in the 1990s. Copyright: Project Syndicate, 2022.