The World Bank dispatched dozens of researchers to cut through the murk and produce the first clear view of just who controls Russia. Last week it released the surprising findings: the 23 biggest oligarchs control 35 percent of industrial sales, high by European standards but less than the 50 percent claimed by earlier estimates. The oligarchs do dominate the heights of the Russian economy–including oil, gas, metals, autos and banks–but not much else. They have only a 2 percent share of the fast-growing service sector. Yet they may also be a bigger threat than even some pessimists thought.
The World Bank echoes those who say Russia’s recent boom is a precarious “jobless recovery,” with annual growth inflated by high oil prices, productivity built on restarting empty factories, and a fat public sector growing fatter. To create lasting economic growth and diversify away from oil, these bears argue, Russia needs to create a more efficient private sector, on which the oligarchs now act as a drag.
Some of this is the fault of Soviet central planners, who built standardized factories and cities and spread them across the breadth of Russia, creating a unique industrial structure that makes no economic sense. Most factories are too big, in the 1,000-worker range, and cities too small, around 500,000 to 1.5 million people. When leaders began to privatize the economy in the 1990s, they sold factories one by one, creating one-plant companies; again, the plants are too large and the firms too small. What Russia needed were efficient conglomerates like General Electric or Siemens. What it got were oligarchs–cutthroat bosses who own many firms but run most badly.
The World Bank distinguishes the bad from the good, focusing attention on the men Ruehl describes as “classic robber barons.” Typically, they are bankers who in the mid-’90s granted free loans to the Kremlin in exchange for shares in state companies, handed out in rigged auctions that the bankers themselves often ran. The report doesn’t name names, but bank insiders say the “classic” examples are Vladimir Potanin, Roman Abramovich and Mikhail Khodorkovsky.
All three are in the top 10 of the new World Bank list of 23 major oligarchs (chart). Khodorkovsky was recently jailed on tax charges after he threw his billions behind political opponents of President Vladimir Putin. The others have stayed out of election politics and thrived, gaining a general reputation in global markets as a necessary evil–a positive influence on the Russian economy at this stage in its transition from communism to capitalism.
The World Bank finds the opposite: labor productivity is lower in companies run by oligarchs than in every other kind of enterprise–other than those still owned by the state. (This is controversial: two Russian researchers who worked on the report say the evidence does not fully support it.) Less debatable: small businesses are now the most significant source of desperately needed new jobs in Russia.
The oligarchs undermine such small businesses. The bank studied regions in which local government had been “captured,” meaning that one business won more than half of all preferential legislation–tax breaks and the like–between 1996 and 2002. The top 23 oligarchs as a group won fewer favors than other businesses. But the robber barons won 20 percent more. And they did so at the expense of competitors, who saw sharp drops in profit and productivity. Where smaller businesses or foreign companies received preferential treatment, rivals didn’t suffer–or in some cases actually gained. Why? Local legislatures normally weigh the special pleading of businessmen against other interests, but it’s hard to resist big tycoons who can threaten to throw thousands out of work if they don’t get their way. “They are ruthless,” says Ruehl. “After all, that’s how they got their fortunes in the first place.”
Aluminum tycoon Oleg Deripaska, for instance, “captured” the government of the Krasnoyarsk Krai region of Siberia in 1999 and 2000. Deripaska won tax breaks, discounted rail-freight and electricity rates. Local business groups protest that they pay far higher electricity bills than Deripaska’s plants, but such firms are no match for oligarchs. “They all have their people in federal government, in the bureaucracy. Their lobbying takes place in a matter of seconds,” says Alexander Spiridonov, who owns a dental clinic and three stores in Krasnoyarsk.
The upshot of all this is that Putin needs to launch a broader campaign to restrain all the oligarchs. Critics like the World Bank say Russia needs to encourage both the downsizing of its oversize factories and the consolidation of its undersize companies. They recommend opening the economy to more foreign competition, encouraging mergers and acquisitions in hopes of transforming the oligarchs’ holding companies into Russian versions of GE. At the same time, the country needs an aggressive trust-busting agency to break up the monopolies run by the oligarchs, much as America did with its own robber barons in the 1920s. Rather than jailing personal foes like Khodorkovsky for political reasons, Putin would do well to loosen the grip of all the top oligarchs, for the sake of Russia’s economy.
