Putin is using de-privatization to create a new generation of loyal oligarchs

The Russian president is shoring up his position by installing a new cohort of less powerful manager figures in key sectors. The policy might become a liability in the long-term.

Expert comment Published 4 October 2023 3 minute READ

During the Eastern Economic Forum in Vladivostok this September, Vladimir Putin was asked about ‘de-privatization’ – the state takeover of assets from private hands.

The question followed a series of court cases brought against high-profile Russian companies in 2023, spearheaded by Russia’s General Prosecutor’s Office, that resulted in the state seizure of private assets.

Putin denied that any de-privatization was taking place or was planned. Instead, he claimed that the General Prosecutor’s Office was simply doing its job. There was, he said, no de-privatization policy to speak of.

But de-privatization is definitely taking place. These court-mandated asset seizures are not isolated cases, but part of a broader strategy impacting the oil and gas sector, infrastructure facilities, enterprises related to the military-industrial complex, the chemical industry, and agriculture.

The project is intended to redistribute wealth to a new generation of less powerful individuals – and shore up the president’s own position after the shock of the Prigozhin mutiny and the failure to prevail in the country’s war on Ukraine.

‘Severe’ de-privatization

In September this year, a Russian court declared as illegal the 1992 privatization process that resulted in the formation of Metafrax Chemicals – a major methanol producer. The court ordered the seizure of 94.2 per cent of the company’s shares.

Russia’s General Prosecutor’s Office was, therefore, able to challenge a deal more than 30 years old, claiming that the original 1992 privatization – which it stated was made ‘without a decision from the (federal) government or the Federal Property Management Committee’ – was a violation of ‘the economic sovereignty of the Russian Federation and its defence capability’.

Such decisions open many of the privatization deals concluded in the early post-Soviet period to legal challenge.

This formulation retroactively called into question the competence of regional authorities who made the original privatization decisions, even though they had the authority to manage state property at the time. By doing so, such decisions open many of the privatization deals concluded in the early post-Soviet period to legal challenge.

‘Soft’ de-privatization

The case of Metafrax and others are what we might call instances of ‘severe’ de-privatization. But there have also been cases of ‘soft’ de-privatization too, where senior management of companies are removed and replaced by a new generation of Putin allies without the use of courts – de-privatizing the organizations in all but name.

In 2022, for instance, Lukoil’s president, Vagit Alekperov, at the helm of the company for almost 30 years, was removed. He was replaced by Vadim Vorobyov – a former associate of Sergei Kiriyenko, the first deputy chief of staff of the Presidential Administration.

Following Alekperov’s removal, Lukoil’s vice-president, Leonid Fedun, unexpectedly retired. Fedun was the second-largest shareholder of the company after Alekperov, with both having a combined total share of around $20 billion.

On leaving his post, Alekperov received the Order ‘For Merit to the Fatherland’, 1st class. But on 1 September 2022 – Alekperov’s birthday – his long-time associate and head of Lukoil’s board of directors, Ravil Maganov, died under mysterious circumstances, falling from a window on the sixth floor of the Kremlin hospital.

His death put a symbolic end to Alekperov’s leadership of Lukoil.

A new generation of state oligarchs

A new group of quasi-owner state oligarchs is being created, with wealth and control redistributed from the ‘old nobles’ to the new. Although many individuals were coming up to retirement, the Kremlin intends to decide who should succeed them.

But the Kremlin is not simply installing a new cadre of owners and company heads.

Oligarchs and other members of the economic elite are being reduced to roles equivalent to that of ‘red directors’ during the Soviet Union – that is, managers rather than owners of property, and without independent political power.

Previously, many oligarchs saw themselves as private owners. But Putin always saw them as holders of assets that had been transferred into their hands by the state – and, thus, could always be transferred back.

The dramatic nature of these recent asset seizures is intentional. The authorities want to make businesspeople scared.

The dramatic nature of these recent asset seizures is intentional. The authorities want to make businesspeople scared and, therefore, more servile, so that the seizure of large assets and changes in ownership and management can take place more smoothly in the future.

But the president is, of course, not orchestrating all of this directly. Within the General Prosecutor’s Office, it is Deputy Prosecutor General Igor Tkachev who is leading on de-privatization.

The assets of foreign companies

De-privatization is not only affecting Russian companies. This year, the Kremlin has seized the assets of four of the largest foreign companies in Russia. The assets of the German company Uniper and the Finnish company Fortum in the electric power industry were transferred to the external management of the Federal Property Management Agency.

Before the full-scale invasion of Ukraine, their value was estimated at €5.5 billion. In practice, these assets will now be managed by people from Rosneft.

In addition, Putin ordered the nationalization of the Russian assets of the dairy company Danone, as well as the Baltika brewery, owned by the Danish company Carlsberg.

Danone’s assets will now be headed by the former Chechen minister of agriculture and Ramzan Kadyrov’s nephew, Yakub Zakriev.

The new head of Baltika is Putin’s long-time acquaintance, 70-year-old Taimuraz Bolloev, who managed the company from 1991 to 2004.

The restructuring of the system

This all amounts to a significant restructuring of the politico-economic system in Russia. De-privatization is a basic declaration that private property rights in the country are null and void – and that all property is contingent on an individual’s relationship with Putin.

De-privatization represents yet another example of the continuing dismantling of rules and institutions in Russia

It represents yet another example of the continuing dismantling of rules and institutions in Russia, and the further transformation of ‘the Putin system’ into a dictatorship.

This fits with evidence of how authoritarian political systems generally function: the leader uses the distribution of resources to establish ties of patronage and loyalty.

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But if the resource pie stops growing or starts to shrink, then the leader faces a clear problem of where to find new prizes to distribute. One option, therefore, is to redistribute pre-existing wealth. This is what we are seeing with recent de-privatizations in Russia.

During a time of war, all assets – including what used to be considered private property – should be controlled by the commander-in-chief. That is Putin’s thinking, although not articulated openly.

De-privatization may make economic assets more manageable by the Kremlin, but this comes at the expense of efficiency. And that means that a policy aimed at short-term control might become a long-term liability.