Friday, November 4, 2011

Russia's Robber Barons: The Twelve Men Who Own Russia's Economy

In any other country it would be a paradox: while Russia's president Boris Yeltsin and his ministers pleaded with world leaders to pressure the International Monetary Fund to put up a $20 billion loan, Forbes Magazine released its newest list of the world's wealthiest 200. For the first time it included five Russian businessmen. Even more intriguing, ten years ago none of these new rich had a net worth of as much as $10,000.

Vagit Alekperov; Boris Berezovsky; Vladimir Bogdanov; Anatoly Chubais; Mikhail Fridman; Vladimir A. Gusinsky; Mikhail Khordorkovsky; Vitali Malkin; Vladimir Potanin; Alexander Smolensky; Rem Viakhirev and Vladimir Vinogradov

1. Vagit Alekperov [Oil and Media magnate]
Alekperov is one of the Forbes magazine's five richest Russians, was born in 1950 in Baku. He graduated in 1974 from the Azerbaijan Institute of Oil and Chemistry. Trained as an engineer he went to work in the nearby Caspian Sea oil fields. In 1979 he moved to the Tiumen oil fields in Siberia.

One of his first administrative positions came in 1984 when he was appointed general director of Kogalymneftgaz which he managed until 1990. Then he moved to Moscow where he became deputy and then first deputy minister of fuel and energy and then acting minister of fuel and energy. This put him in a position to influence the breakup and privatization of the Soviet petroleum industry. The following year he designed and then assumed the presidency of what has become the country's largest private oil company, Lukoil. Patterned after the vertically integrated oil companies of the west, Lukoil initially consisted of three production fields, the initials of which also created the company name. In August, 1995 Prime Minister Viktor Chernomyrdin transferred four huge state owned oil fields to Lukoil. Lukoil also acquired some other distribution and service companies.

Lukoil's reserves are now said to match those of Exxon. Lukoil also has its own refineries and filling stations including several in the United States and is participating in the development of the Caspian Sea fields. Having bought 6% of Lukoil stock, ARCO become one of Lukoil's larger shareholders. As with the case with the other oligarchs, Mr. Alekperov has moved into banking and the media. He and Lukoil control the Imperial Bank, several television stations and the newspaper Izvestiya.

2. Boris Berezovsky [Cars and Aeroflot, Media and Political baron]
Berezovsky may not have attended the economic emergency meeting called by Prime Minister Kiriyenko of the Big Ten oligarchs, but this was the first such gathering of the group Boris Berezovsky had missed. He was at an out-of -town, Commonwealth of Independent States meeting as Russia's representative. Usually he convenes such oligarch gatherings. Included in the Forbes Five, Berezovsky, who was born in 1946, has also been described in another issue of Forbes as the head of the Russian mafia.

Berezovsky took exception to this and has been attempting to sue Forbes for slander. Others have also raised questions about how Brerzovsky went about accumulating such wealth. He founded Logovaz, a holding company that began by "prevailing" upon Avtovaz, the country's largest automobile manufacturer, to sell the popular Lada at a sharp discount. Logovaz then resold these cars at a much higher price.

Before long Berezovsky opened a Fiat and Mercedes dealership in Moscow and eventually came to control a substantial share of all the automobiles sold in Moscow. Today Berezovky has effective operating but not ownership control over Aeroflot, several newspapers and magazines, and ORT, the country's state-owned and largest television network.

3. Vladimir Bogdanov [Oil, Gas stations]
Bogdanov, the President of Surgutneftegaz, Russia's second largest oil company. Bogdanov was born in Suyerka in 1951, a small village in the Tiumen region of west Siberia. This also was the prime location of most of Russia's oil fields. He attended the Tiumen Industrial Institute and specialized in oil and well drilling.

After graduating in 1973 he went to work as a technician in the nearby oil fields of Nizhnevartovsk, Nefteyugansk and Surgut. He eventually became deputy general director of drilling in Surgutneftgaz and then general director. He remained as general director when the oil company was privatized in 1993. Unlike Lukoil, Surgutneftegaz consisted primarily of producing fields and only in 1994 did it branch out to encompass oil refineries and gasoline service stations.

4. Anatoly Chubais [Kremlin insider, Economist, Politico]
Of all the oligarchs, Anatoly Chubais has the least experience as a businessman. Until he became the president of UES, the electricity monopoly, in April 1998, most of his work had been as an academic, political reformer and then a government bureaucrat. He was born in Leningrad in 1955 and graduated from the Leningrad Engineering Economic Institute. With the coming of Gorbachev's glasnost and democratization, he joined the political reform and ultimately joined the reform administration of Mayor Anatoly Sobchak.

When Yegor Gaidar was asked to draw up a reform program for Boris Yeltsin, he brought in Chubais and put him in charge of the State Committee on Privatization. He designed and implemented the voucher program and the subsequent privatization of state enterprises.

Somehow Chubais managed to survive the various purges imposed by Yeltsin on other reformers. He rose through the bureaucracy to become Deputy Prime Minister, though he was fired and rehired several times between 1992 and 1998. Most recently Yeltsin assigned him the task of negotiating with the International Monetary Fund. Chubais managed to convince the IMF to provide Russia with over $22 billion in loans, double what had been expected.

To the extent that Chubais has built up his personal wealth, he has done it by providing services for some of the other oligarchs. For example, shortly after Yeltsin fired him in December 1995 as Deputy Prime Minister, Alexander Smolensky provided Chubais with a $3 million interest free loan. With the help of his banker friends, Chubais has provided himself with a nice personal cushion but of those listed in this collection of oligarchs, Chubais is probably the poorest.

5. Mikhail Fridman [Steel, Alloyed, Timber, Cement]
Along with Peter Aven, Fridman founded the Alfa Group Consortium, a holding company which today controls the Alfa Bank (opened in 1991), Alfa Capital, Tiumen Oil and several construction material firms (cement, timber, glass) as well as food processing businesses and a supermarket chain. The two are also major holders of tea and sugar plant processors. The youngest of the newly rich presented here, Fridman was born in 1964. He is a graduate of the Moscow Institute of Steel and Alloys. From 1986 to 1988 he worked as an engineer in the Electrostal factory. When it became legal to open cooperative and private concerns under Mikhail Gorbachev in 1987, Fridman was well prepared and in 1988 he set up his own photo cooperative, Alpha photo and then ALFA/EKO, and AlfaKapital. This was the precursor of the Alfa Group Consortium.

6. Vladimir A. Gusinsky [Financial and Construction entrepreneur]
Born in 1952, has probably one of the most unique backgrounds. He attended not only the Gubkin Institute of Petrochemicals and Natural Gas but also became a theatrical producer in the provinces. In another incarnation, after two-year term in the army he returned to Moscow and drove a cab on the side.

His theatrical work, which included a stint at the University of Virginia, helped him make some important connections. In particular he helped to do some work for Ted Turner and his Goodwill Games as well as the International Youth Festival in 1986. Two years later in 1988 in the wake of Gorbachev's authorization of cooperatives, Gusinsky formed Most, a consulting firm. Gusinsky's cooperative bridged out in several directions. He moved into renovation and construction especially for apartment and office rentals for foreigners. His construction work also brought him into contact with the vice mayor in charge of construction, Yuri Luzhkov. When Luzhkov subsequently became mayor, he assigned prime properties to Gusinsky and also designated Most Bank, the new banking affiliate of Most Group, as one the main depositories for Moscow municipal funds.

Most Bank thus prospered a interest free basis to earn speculative profits on foreign exchange and also use funds for the purchase of federal state securities earning from 150 to 200 percent. By 1994 it was one of the country's largest banks. Ultimately, Luzhkov ended Most's controversial special relationship with Moscow. Unlike the other oligarchs, Gusinskii has very few industrial holdings except for some construction and pharmaceutical companies. Gusinsky also differs from the other oligarchs in that much of what he has was created anew unlike the others whose wealth comes largely from taking over former state industrial properties. His new ventures include his radio and TV network ECHO and NTV, his newspaper Sevodnya and several magazines. This has made Gusinsky one of Russia's most influential media barons.

7. Mikhail Khordorkovsky [Computers, Electronics]
Unlike some of the oligarchs who in their youth made their way by rebelling against the Soviet State and central planning, Mikhail Khodorkovsky initially was a very model of the young communist bureaucrat. Born in 1963, his rise to power and wealth and inclusion in the Forbes' Five began in the Komsomol, the Young Communist League. In December 1987, he helped to form the Center for Inter Industry Scientific and Technical Progress. Its initials in Russian were MENATEP. This was a catch all cooperative which sought to finance the work of thirteen fellow graduates of the Mendeleeva Institute. They offered their skills in scientific research, particularly in chemistry as well as in automation and computerization.

MENATEP became an active player in acquiring state enterprises when the state began the campaign to privatize state enterprises. MENATEP created a market for the vouchers issued by the state and used these vouchers to gain control of many enterprises which had just been privatized. In 1992 the bank created Rosprom as a holding company to oversee its industrial portfolio. While MENATEP directly controls some businesses particularly metallurgical and paper manufacturers, most of its forty or so industrial holdings are divided into six categories. The six are chemicals, construction, textile, consumer goods and mining and oil. Its most prominent oil holding is YUKOS, the country's third largest oil company, which it obtained for a mere $309 million in one of the controversial Loans for Shares auction that was conducted in 1995.

8. Vitaly Malkin [Metals, Banking, Technology]
A graduate of the Politechnical Institute, Vitaly B. Malkin was born in 1952. He attended graduate school and worked in the research institute of the Golograficheskia Control Institute and authored twenty academic reports. He also organized a cooperative business that specialized in the use of computer technology. He became the chairman of the board of the Russian Credit Bank in 1991 and its President in 1994. He is also a principal investor and office holder in several metallurgical firms.

9. Vladimir Potanin [Import/Export, Heavy industry, Media and Banking]
The president and founder of Onexinbank, Vladimir O. Potanin was listed by Forbes' Magazine in 1998 as the richest of all the Russians with an estimated net worth of $1.6 billion. Forbes' also selected him as one of the world's top ten smartest businessman. Born in 1961, Mr. Potanin attended the Moscow Institute for International Relations, an elite school for those headed for work in the Ministry of Foreign Affairs, Foreign Trade and the KGB.

Calling on his early career connections, Potanin managed to utilize the funds of Vneshekonombank, the foreign trade bank, to provide the capital in 1993 for his new start up Oneximbank -- in English, for United Export/Import Bank -- and became its president. From August 1996 to March 1997 he served as First Deputy Prime, a post that meant that he was the number two man in the government but he left after criticism that he couldn't divorce his political from his business interests.

Mr. Potanin has become most notable however, for creating the country's largest industrial empire. Bundled under Interros, his original cooperative, Mr. Potanin has acquired control over twenty formerly state owned enterprises. Potanin's industrial enterprises now encompasses Norelsk Nikel, the world's largest producer of nickel and palladium; Svyazinvest, a telecommunications company; Sidanko oil and number of other industrial and metallurgical firms, including Perm Motors, Northwest Shipping, Magnitogorsk, the Gas automobile plant, various metallurgical plants. There are also a host of newspapers including Izvestia, Komsomolskaya Pravda and the magazine Expert.

10. Alexander Smolensky [Media, Oil, Banking]
Like some of the other one time black market traders, Alexander P. Smolensky also prepared himself during the Soviet era for what ultimately was to become a market economy. Some might say he over prepared himself.

Born in 1954, Mr. Smolensky moonlighted on a second job in a bakery for which he lacked a permit and then he helped typeset and publish a Bible using government presses and ink to do so. For this he was arrested by the KGB in 1981 and charged with economic crimes. Today such initiatives would be applauded. Then he was sentenced to two years at hard labor although he only served one day.

A born risk-taker, he responded to Gorbachev's 1987 decree allowing the formation of cooperatives and private businesses by founding the Moscow No. 3 construction cooperative which quickly became an vital source of supplies to Moscow tradesmen. He made money so fast it became a problem, so, rather than trust state banks which were not accustomed to dealing with large private accounts he decided to create his own bank, the Stolichny Bank. It has grown into one of Russia's largest, now known as SBS/AGRO. Unlike many of his fellow bankers Mr. Smolinsky has not actively sought to build up a large industrial empire. While his bank does control the newspaper Kommersant and Novaya Gazeta and he shares in the ownership of the Sibneft oil company and the television network ORT with Boris Berezovsky, for the most part he has focused instead on developing a large network of bank branches.

11. Rem Viakhirev [Natural gas, Utilities]
Except for Rem Viakhirev, none of the other oligarchs was born before World War II. For that matter except for Boris Berezovsky who was born in 1946, no one else was born before 1951. However, like many, Viakhirev's influence and wealth stems from his control of a former Soviet monopoly: Gazprom, the natural gas monopoly that controls not only the production fields but also the pipelines. Viakhirev treats Gazprom as if it were his personal domain, he even looks the part.

Born in 1934, Viakhirev moved up through the ranks of the Soviet gas industry. He was a deputy minister of the gas industry in 1986 and served under Viktor Chernomyrdin, who then headed the ministry. Chernomyrdin realized early in the late 1980s that given the trend of the Gorbachev reforms, he should transform the Ministry of the Gas Industry into to a joint stock company. Some allege that both Chernomyrdin and Viakhirev benefited from this denationalization although Chernomyrdin denies that. In any case when Chernomyrdin was appointed Deputy Prime Minister in 1992,. Viakhirev took his place as the chairman of the of Gazprom.

Gazprom produces the equivalent of 8 percent of Russia's Gross Domestic Product, has one third of the world gas reserves and 24 percent of the market share of the gas sold in Western Europe. Once freed from state control, Viakhirev began to spend liberally on building homes, gas facilities and the company headquarters. That alone cost $150 million.

To do what it can to insure that public opinion remains supportive of its operation, Gazprom has become an active participant in the media business. It now controls or has a share in newspapers Rabochaya Tribuna, Trud, the television network NTV, ORT, as well as several banks including Imperial, the National Reserve Bank and Most Bank.

12. Vladimir Vinogradov [Banking]
A bit of a maverick Vladimir V. Vinogradov has sometimes found himself excluded from the inner circle of the big banks. Given that in 1997 he was the vice president of the Association of Russian Bankers, this is somewhat surprising. Yet he was not among the Big Ten who met with former Prime Minister Kiriyenko and President Yeltsin in June 1998 to discuss the country's economic crisis.

Inkombank, Mr. Vinogradov's bank, was also attacked by among others the Central Bank in June 1996 for what was claimed to be inadequate reserves. In effect the Central Bank tried to create a run on the bank and Inkombank lost $39 million in assets in a few days. Fortunately for Inkombank, following Black Thursday on August 13, 1998, the Central Bank did help Inkombank with a temporary loan so that it could continue to service its depositors.

Vinogradov founded Inkombank in 1988 as one of the country's first wholly private commercial banks. Since then, some of the very firms that invested in the startup grew into subsidiaries of the bank including Magnitagorsk Steel, the Babayevskaia candy factory and Sameko metallurgy. Inkombank also has substantial control of various timber operations, Transneft oil pipe line and the Sukhoi aircraft design bureau as well as several other confectionery manufacturers.

By Marshall Goldman
August 28, 1998
[Marshall Goldman is the Associate Director of Davis Center for Russian Studies at Harvard University.]