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Putin's new Soviet economy: after a decade of "market reform," the Russian economy under the presidency of ex-KGB chief Vladimir Putin appears to be returning to its Soviet roots.

It's not exactly a tourist Mecca on par with the likes of Vail, Colorado, or California's wine country or the Grand Canyon, but nevertheless, word is getting out about the little Siberian village of Listvyan. The tiny village sits on the shores of mighty Lake Baikal, the world's deepest freshwater lake and home to 20 percent of the world's fresh water. There, the deep, primeval waters are now bringing tourists to Baikal, and hence, to Listvyan. The beauty of the area is not lost on those who make their homes in the Siberian wilderness. "There are the Alps, the Caucasus, the Black Sea ... but there's nothing like Baikal," Lyudmila Sigayev, a local Baikal resident, told CNN.

Tourists from around the world are beginning to visit the remote area, both for the beauty of the region, and for the smoked fish. Smoked omul, a fish caught only in Baikal's deep, cold waters, is regarded by many to be the best smoked fish in the world. Writing about his trip to Lake Baikal for the New Zealand Herald, journalist Jim Eagles admitted to finding omul to be a tasty treat indeed. "I don't know about the best in the world," he wrote, "but it sure is delicious, midway between smoked salmon and snapper, and it goes extremely well with cold Siberian vodka."

It may seem trivial that tourists, and travel writers, are now eating smoked omul in Listvyan on the shores of Lake Baikal. In actuality, though, the growth of a tourism industry around Lake Baikal reveals that the Russian economy has become markedly more open to tree enterprise than was the case under the old Soviet planned economy. Business in Listvyan, however, is literally and figuratively worlds apart from the world of business in Moscow and at the Kremlin. There, the big business that grew in the wake of perestroika and the "liberalization" of the Yeltsin years was not the entrepreneurship that marks the small businessmen of the Siberian frontier, but a predatory corporatism.

Russia's market reforms were supposed to privatize the majority of the old Soviet state-run operations, with all Russians having the opportunity to buy in. What really happened was the concentration of ownership in the hands of a few wealthy, scheming, and well-connected insiders who, it now seems, were conveniently placed to hold Soviet-era enterprises intact until the day when they could again be nationalized outright or brought under central control. Under the regime of Russian president Vladimir Putin, that day is here.

Creating the Oligarchs

With close-cropped stubble on his chin, marked by hints of gray, a twinkle in his blue eyes, and a baseball cap on his head, Roman Abramovich wouldn't look out of place in suburban America. His collection of mega-yachts and his private Boeing 767, however, might make him stand out just a bit. He can certainly afford the extravagance: according to Forbes, only 10 other people in the world can claim fortunes larger than Abramovich's.

Abramovich, considered to be the 11th richest man in the world, did not come to his money through old-fashioned entrepreneurship. Like the other so-called oligarchs of the Russian economy, his money came as the result of the acquisition, at incredible bargain prices, of former state-run companies. It would seem like luck, for Abramovich and the other oligarchs, of the sort that occurs when one just happens to be in the right place at the right time--except for the fact that the creation of the oligarchs took place in Russia where planning has been a central part of life since Lenin. In fact, the oligarchs may owe their wealth, in a sense, to Lenin, the godfather of communism, who once opened the windows of Soviet Communism with his "New Economic Policy" to allow a semblance of a market economy to fill communist coffers with capitalist cash.

In that sense it is intriguing that the financial schemes of more recent vintage that created the massive wealth of today's oligarchs were planned and executed by former members of the Communist Party. The "reforms" were begun under Yegor Gaidar, who served as finance minister and, briefly, as prime minister under Yeltsin. Gaidar was a longtime member of the Soviet Communist Party and was editor of the party's journal Communist, before becoming a so-called "liberal" under Yeltsin. Working on the liberalization project under Gaidar was Anatoliy Chubais, another former member of the Soviet Communist Party.

Under Gaidar and Chubais, the Russian government began a program of privatization by distributing shares of state-owned property to ordinary Russian citizens. One-time Wall Street Journal correspondent Matthew Brzezinski--the nephew of Carter administration internationalist Zbigniew Brzezinski--described the scheme in his book Casino Moscow. According to Brzezinski, under the program "every Russian citizen received a voucher that could be traded for shares in various State enterprises.... There were a lot of dogs, but a savvy voucher-holder could pick up shares in some real jewels--oil companies, aluminum smelters, airlines--all valued at ridiculously low prices." The problem was, most Russians had no experience with such arrangements and were happy to give them up for small, short-term gains. "Most Russians, especially outside of Moscow," wrote Brzezinski, "had little use for the voucher scrip, which to their inexperienced eyes was just a piece of paper, and they were only too happy to part with their vouchers for a few dollars or a bottle of vodka."

Instead of a broad base of stock holders among the entire Russian population, the program instead led to a concentration of ownership in the hands of a few "investors." This privatization effort became the first step in the creation of what at the time appeared to be Russia's new ruling class.

The second, and crucial, step in the privatization process came a couple of years later. In 1995 and continuing into 1996, the Yeltsin government was on the ropes, and it looked like it might be swept out of office in the upcoming elections. Yeltsin's trouble with voters was also a promising opportunity for former communists who were still running the economic show in Moscow. One of these was Vladimir Potanin, the billionaire head of Oneximbank. And Potanin, a former commissar, had a plan.

Potanin had been born into a high-ranking party family and, after coming of age, duly took his place in the Kremlin bureaucracy beside his father in the Soviet Department of Trade, where, trading on his family's standing in the party, he grew ever more powerful himself. According to Brzezinski, during the last years of the Soviet state, Potanin "specialized in the procuring of jealously guarded export licenses." This was during the time, according to the private intelligence firm Stratfor, when the KGB was directed to hide Soviet assets abroad. "The scale of the KGB project was impressive," the Stratfor intelligence report says. "From 1989 to 1991, the KGB first chief directorate funneled at least 60 metric tons of gold, 150 metric tons of silver, 8 metric tons of platinum, and from $15 to $50 billion in hard currency abroad, according to Russian investigators."

There's no direct proof that Potanin was involved, but he was well placed to have had a hand in that scheme. Shortly after, in 1992, he founded his Oneximbank, largely on the ashes of the Ministry of Trade. Interestingly enough, then, it was the well-connected Kremlin insider Potanin who thought up the next scheme for transferring the remaining major state-owned businesses in their entirety to a select group of bankers.

In 1995, when the shaky and cash-strapped Yeltsin regime looked like it might lose in the upcoming elections, Potanin met with then-Prime Minister (and longtime Communist Party member) Viktor Chernomyrdin and Chubais to convince them of the necessity of a bold plan. According to Brzezinski, "Potanin proposed forming a consortium of Russia's biggest private banks to lend the Treasury the money that the Yeltsin machine required to get itself reelected. In return, the Kremlin would put up as collateral shares in Russia's biggest and best State enterprises. These shares, it was agreed, would be worth tar more--as much as a hundred times more--than the value of the loans, and the Kremlin could simply turn them over to the banks instead of repaying the debt."

Among the oligarchs thus enriched were Boris Berezovsky and his protege Roman Abramovich, both of whom wound up with controlling stakes in such former state-run enterprises as Soviet airline Aeroflot and several oil properties that were reorganized as the energy company Sibneff. Another of the powerful oligarchs was Mikhail Khodorkovsky, a veteran of the Young Communist League, who emerged from the loans-for-shares deal with Yukos, Russia's largest oil company. Another winner in the selective privatization of former state-run enterprises was Vagit Alekperov, the former first deputy of the Soviet Oil & Gas Ministry, who used his position to create the giant energy firm LUKoil.

Profits, Purges, and Privatization's End

Freed from the stifling effects of direct state control, the newly privatized entities quickly moved to adopt Western business practices that attracted investment and led to marked improvements in performance. This has been particularly true regarding the energy sector, where Sibneft, Yukos, and LUKoil grew to become major players, both in Russia and internationally.

But once grown strong, these businesses attracted the attention once again of the Russian state, now under the presidency of Vladimir Putin. The new president was eager to reassert the old prerogatives of the state. In 1999, Putin published his Millennium Manifesto, wherein he expounded on Russian greatness and pointed to the importance of state power in Russian life. "For Russians a strong state is not an anomaly which should be got rid of," Putin insisted in his Manifesto. "Quite the contrary, they see it as a source and guarantor of order and initiator and main driving force of any change." This insistence is the "essence of Putin's neo-Sovietism," according to Gavin Slade, a political science scholar affiliated with the School of Russian and Asian Studies at Moscow State University. Under Putin's neo-Sovietism, the new Russian government began working to bring privatized companies back under government control.

According to Prospect, a British magazine, Berezovsky was the kingmaker that put Putin on the throne. In 1999, "Berezovsky steered the sick, drunken, Yeltsin into appointing FSB chief Vladimir Putin as prime minister," Prospect reported. Interestingly enough, Berezovsky then became the first oligarch to be purged by Putin. Accused of a variety of crimes, the oligarch fled to England. After Berezovsky's exile, his protege Abramovich stepped in to take full control of Sibneft and other firms. The removal of the mercurial Berezovsky would prove to make it much easier for control of the important companies he formerly owned to be transferred back to the Kremlin at a later date.

The next oligarch to fall was Mikhail Khodorkovsky, the billionaire owner of oil firm Yukos. At its height, Khodorkovsky's Yukos was producing one out of every five barrels of Russian oil and the company was valued at some $27 billion. For a time, this made Khodorkovsky the richest man in Russia. But, charged with tax evasion and fraud, the FSB (the renamed KGB) arrested Khodorkovsky in 2003 in a spectacular paramilitary assault, and he remains imprisoned. His arrest led to the transfer of Yukos back to the Kremlin in 2004. "Yukos, once a leader of the move towards privatization in Russia, has now been renationalized," correspondent Jeffrey Brown reported on NewsHour with Jim Lehrer on December 23, 2004.

The renationalization of Yukos must have hit home with another oligarch, Roman Abramovich. Though he retains control of other prominent Russian firms like steel maker Evraz, currently in a bid to take over the American firm Oregon Steel, Abramovich padded his personal bottom line by selling Sibneft to the Russian government-owned Gazprom. The Sydney Morning Herald, in its report on the 2005 sale valued at more than $13 billion, observed: "The deal ... effectively nationalises Sibneft at a time when global supply remains tight."

This wasn't the first time that Abramovich played a prominent role in helping the Kremlin regain control of ostensibly private businesses. He was also instrumental in helping Putin recover ORT, the television station owned originally by Berezovsky. According to a 2001 CNN report, Russian "business dailies Kommersant and Vedomosti said Abramovich acted as the Kremlin's middleman, buying the [ORT] stock so the government could control it." The nationalization of ORT has been part of the Kremlin's remarkably successful program of consolidating its control of Russian media organs. According to Harvard International Review senior editor Alex Captain, the Putin government now "controls over 75 percent of all media companies in Russia."

The Russian government has not stopped its efforts to nationalize important industries. Most recently, the Putin government, according to London's Guardian newspaper, has forced oil major Shell "to hand over its controlling stake in the world's biggest liquefied gas project," the so-called Sakhalin-2 project that is scheduled to go online in 2008. Shell appears to have been blackmailed into relinquishing its controlling interest to state-run Gazprom. The Guardian reported on December 20 that Shell "needs a deal to end a long-running campaign by local ministries over alleged environmental violations which have threatened to halt the scheme and led to demands for fines of up to $30bn." Apparently, the Kremlin believes that since Western investors have already shelled out $20 billion dollars to make Sakhalin-2 a reality, they are no longer needed and the whole operation can revert to state ownership.


The centralization of the Russian economy under Putin should not come as a surprise. The "liberalization" efforts that culminated in the work of communist officials Yegor Gaidar and Anatoliy Chubais were never intended to be permanent. They were instead outgrowths of Gorbachev's ruse known as perestroika. According to high-ranking Soviet defector Anatoliy Golitsyn, whose predictions about perestroika, the breakup of the Warsaw Pact, and the fall of the Soviet Union have been eerily accurate, as early as the late 1950s, "the KGB was assigned a key role in the execution of the strategy" that would become known as perestroika. The objective was "the neutralisation and dissolution of genuine opposition."

If Golitsyn is correct, and this was indeed the strategy put in place by Soviet planners decades ago, then this objective was achieved with spectacular success in the 1990s, when it became common knowledge that the Soviet Union had fallen. Acting on that "knowledge," Western businesses and governments flocked to the opportunities presented by the "new" Russia. Now the KGB, having played, according to Golitsyn, a central role in preparing for and implementing perestroika, has regained almost complete control in Russia. According to a study by Olga Kryshtanovskaya of the Russian Academy of Sciences, as reported by the German magazine Der Spiegel, an incredible 78 percent of the leaders in Russian government and business have a KGB/ FSB background. Consequently, it seems a foregone conclusion that, under such circumstances, further nationalization of the Russian economy is imminent.

As in the forced removal of Shell from control of the Sakhalin-2 project, this will have consequences for both Europe and America. The Kremlin already supplies about 40 percent of Europe's natural gas needs and has just cemented exclusive distribution deals with France and Italy, further strengthening its position in Europe where it is likely to use its new-found energy clout for political purposes.

It has, in fact, done this before. Last winter the Kremlin cut natural gas shipments to Ukraine and demanded a steep increase in the price Ukrainians paid for gas. According to the BBC, the Ukrainians believed the Russian disruption of gas supplies was punishment for Ukraine's "attempts to become more independent from Moscow and develop stronger ties with the West."

There may come a time when the Kremlin can put similar pressure on the United States. Already LUKoil owns over 2,000 gas and service stations in the Northeastern states, most of which it acquired after its takeover of Getty Petroleum Marketing in 2000. According to the company, those stations "generate over two billion gallons of gasoline sales annually." LUKoil has not yet been nationalized, and perhaps it won't be. But that doesn't mean the company won't become an instrument of Kremlin policy. According to Forbes, Vagit Alekperov, the former Soviet energy minister who is the chief shareholder in LUKoil, "is a noted Putin loyalist at a time when much of Russia's oil and gas industry is being renationalized under state energy giant Gazprom." It doesn't take much imagination to see Alekperov as a state asset in a Russian government that presides over an economy that is looking more and more like the Soviet economy of old.
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Title Annotation:RUSSIA
Author:Behreandt, Dennis
Publication:The New American
Article Type:Industry overview
Date:Jan 22, 2007
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