Oligarchs and Corruption in Putin's Russia: Of Sand Castles and Geopolitical
Volunteering
Author(s): Stanislav Markus
Source: Georgetown Journal of International Affairs , Summer/Fall 2017, Vol. 18, No. 2
(Summer/Fall 2017), pp. 26-32
Published by: Georgetown University Press
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Oligarchs and
centration) than Russia.1 Billionaire wealth
from the crony sectors in Russia is the high
Corruption in est in the world as a percentage of GDP (18
percent), followed by Malaysia (13 percent)
Putin's Russia and the Philippines (11 percent); it has also
risen since 2014 (from 16 percent).2
Of Sand Castles and Russia's two-stage privatization process
drove the initial accumulation of extreme
Geopolitical Volunteering
wealth in the 1990s. The 1992—94 "voucher
Stanislav Markus privatization" of medium and large enter
prises involved significant concessions to
the firm insiders, resulting in the ownership
of newly privatized firms by old Soviet-era
wealth and its symbiosis with po management. The second stage began in
The rapid accumulation
litical power of private
is not unusual in post 1995 and involved for-cash sales to outsid
communist societies. However, Russia's vast
ers. Marred by corruption, this stage saw
energy resources, the absence of societal the exclusion of competitive bidders and
checks on the state, and the power of the the transfer of "commanding heights" of the
security apparatus under Putin have gener Soviet economy—often from the natural
ated a particularly entrenched state-business resource sector—to well-connected indi
nexus. Emerging economies such as South viduals.
Korea or Latvia have moved past their "oli Since Putin assumed power in 2000, the
garchic interlude" via bottom-up popular specter of revising the results of privatiza
pressure. Autocratic rulers in countries such tion has haunted Russia's politics. Yet while
as Belarus or Uzbekistan have disciplined the issue continues to inflame popular senti
oligarchs through top-down crackdowns. ment in Russia, it is largely moot for prac
Russia, however, has settled into an oligar tical purposes. On the one hand, the most
chic equilibrium. valuable energy assets in Russia have been
This article examines three questions. returned to state control through buyouts
First, what is the nature of Russia's oligar with varying degrees of pressure applied by
chic corruption? Second, what do the Rus the state. On the other hand, a whole new
sian oligarchs want? Third, what policy generation of oligarchs has become super
challenges does Russia's corruption present rich in ways other than privatization. State
for the West?
contracts are the key avenue through which
many of the Putin-era oligarchs have become
Oligarchs, Putin, and Corruption super-rich. Public procurement in many
Russia's wealth inequality is among the
sectors, including infrastructure, defense,
highest in the world. The top 10 percent and
of healthcare, has seen regular overcharg
Russian wealth-holders own 89 percent of ing of the state treasury by private suppliers,
total household wealth; the corresponding
sometimes at prices equal to double or triple
figure is 73 percent in China and 78 percenttimes the market rate and with kickbacks to
in the US, the only two countries with more the state officials involved.
dollar billionaires (but lower wealth conAccess to the highly lucrative state pro
Stanislav Markus is an associate professor at the Moore School of Business at the University of South Carolina.
26 GEORGETOWN JOURNAL OF INTERNATIONAL AFFAIRS
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OLIGARCHS AND CORRUPTION IN PUTIN'S RUSSIA
the cement
curement system and other benefits is de of Putin's "sistema."4 Corrup
tionpower.
fined by the oligarchs' proximity to generates oligarchic loyalty to the re
In today's Russia, this proximity implies
gime and gives the regime some control over
the oligarchs.
three types of oligarchic networks. First, Pu Still, the apparent stability of
Russia's
tin's friends are personally connected corruption pyramid is subject to im
to the
president through the Ozero dachaportant
cooperacaveats.
tive and through Putin's hobbies and Russian
career;corruption is less stabilizing than
this is the most exclusive set of networks. conventionally seen because it is funda
Second, the so-called silovarchs are businessmentally competitive: rival state-oligarchic
elites who have leveraged their networks in clans compete viciously for opportunities
the FSB or the military to amass extreme to monetize state access, a fact that should
personal wealth.3 While the circles of Putin's not be obscured by the universally pro
friends and the silovarchs partly overlap, claimed loyalty to Putin. In the context of
the silovarchs comprise a larger group, most a shrinking economic pie, kleptocratic ri
of whose members are not Putin's friends. valry has undermined key priorities of the
Third, an even larger number of the super regime, including national security, suffi
rich in Russia are outsiders not personally cient popular support, and the prevention
connected to Putin, the military, or the FSB. of an economic collapse.5 Between 2012
(Their "outsider" status is only in reference and 2016, high-profile procurement scan
to the two other groups; most outsiders are dals in the military (particularly through
still deeply embedded in the Russian state.) Spetsstroi, which is responsible for special
military-related construction projects), the
space agency (Roskosmos), and the railways
Access to the highly lucrative state have uncovered that billions of dollars were
procurement system and other drained from the budget to the benefit of
benefits is defined by the oligarchs' affiliated contractors. Since 2014, Russia's
proximity to power. banking sector has seen a wave of fraud and
asset theft by senior bank managers, leading
to widespread bank failure (including that
Putin's friends and the silovarchs domi of large banks such as Vneshprombank, Pro
nate Russia's political economy. Since 2003,businessBank, and Nota Bank). Against this
oligarchs from these networks have steadily background, the government has responded
risen to control crony sectors of the econaggressively, closing some federal agencies
omy and to hold important positions in(Spetsstroi), firing top oligarchs (Yakunin
the executive branch. They are dispropor of the Russian Railways), and revoking the
tionately represented on corporate boardsbanking licenses of circa 10 percent of all
of the so-called "state corporations," and Russian banks.
they often own large stakes in firms from
sectors where profitability depends on gov
ernment favor (e.g., oil, utilities, telecom Russian corruption is less stabilizing
munications, defense, construction). Today, than conventionally seen because it is
politically influential big business in Russia fundamentally competitive: rival state
is as much a subset of the state as it is an oligarchic clans compete viciously for
independent force. opportunities to monetize state access.
Observers commonly see corruption as
SUMMER/FALL 2017, VOLUME XVIII, NUMBER II 27
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STANISLAV MARKUS
Another centrifugal force generated by
To remain
systemic corruption concerns popular sup effective as a source of
port of the regime. Having shifted systemic
his le cohesion, corruption will
require active top-down 'management,'
gitimacy basis from economy to geopolitics,
lest the
Putin has managed to remain popular in castle that Putin built be
torn apart
the wake of the 2011 electoral protests, eco by conflict among predatory
nomic crisis, and sanctions following elites,
the collapse economically, or be
annexation of Crimea. The regime's Achilles' undermined from below.
heel remains corruption, whose exposure
has given rise to Alexei Navalny,escent about corruption until one's wealth
Russia's
only independent politician enjoyinglevel ispopu
perceived as satisfactory, after which
lar support today. the oligarch in question would demand the
Finally, Russia's state control over
rule ofabun
law so as to safeguard his assets in
dant energy resources generates easya predictable
rents, fashion. (Indeed, this was a
key assumption
fuels corruption, and reduces pressures to behind privatization in the
1990s.)
diversify the economy. Through vested in Such demand has not materialized
in Russia.
terests, corruption reinforces the reliance ofWhy?
Russia's budget on revenues from oil and gas.
Such reliance has historically held Corruption
the coun is a double-edged sword not
try hostage to the global energy markets.
only for the Kremlin but also for the
Overall, while corruption serves an im
individual oligarchs. The absence
portant purpose for the Kremlin, it of is rule
also of law implies that political
seen as being dangerously high by the Rus
capital can be converted into immense
sian sovereign.6 In Russia, corruption is not
wealth; at the same time, the legal void
so much cement as it is water holding to this immense wealth will be
means that
gether a sand castle. To remain effective as a
unprotected once acquired.
source of systemic cohesion, corruption will
require active top-down "management," lest
Russia'sby
the castle that Putin built be torn apart business elites have ample possi
conflict among predatory elites, bilities
collapse to ec
retire their capital abroad. Such
onomically, or be undermined from exit decreases
below. their demand for institutional
Too little or too much water, andchange
the sand
at home.7 Furthermore, even when
won't hold. business elites voice their disagreement with
Putin's system, they often limit their de
mands to the protection of a specific firm,
Rule of Law and the e.g., through stakeholder alliances with la
Oligarch's Predicament bor, community, or foreign investors.8 Such
alliances serve as ersatz institutions, allow
Corruption is a double-edged sword not
only for the Kremlin but also for the indi
ing business owners to protect their specific
vidual oligarchs. The absence of rule of law
firms while avoiding the need for country
implies that political capital can be con level rule of law. Finally, the lack of rule of
verted into immense wealth; at the samelaw allows the oligarchs to continue to ac
time, the legal void means that this immensecumulate wealth rapidly, e.g., through a va
wealth will be unprotected once acquired.riety of corrupt schemes commonly referred
to as "raiding."9 Contrary to the "satiation
It is then logical for the oligarchs to be qui
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OLIGARCHS AND CORRUPTION IN PUTIN'S RUSSIA
from contin
hypothesis," as individual fortunes childhood (as in the case of Arkadii
ued to grow, the supposed point atRotenberg).
which anIs there a guarantee that Putin
oligarch's wealth would turn hiswill not "unfriend" some of them, too?
incentives
from acquisition (predation) to defense (in is demand for greater pre
Overall, there
stitution building) has continueddictability
to recede.in business-power relations on
Yet to conclude that the oligarchs are
the part of the oligarchs—but no vision on
content with the status quo is premature.it.12 Given Putin's erratic de
how to achieve
To identify what the oligarchs want,
cisions,
wethe
must
oligarchs have no reason to trust
him with the role of a stabilizer or enforcer,
move beyond "rule of law" as the benchmark.
Russia's super-rich may not want institu
even if he plays that role by default. A more
institutionalized
tionalized accountability writ large (competi form of authoritarian le
tive and honest elections as well asgality is also unpalatable to many oligarchs,
legislative
and judiciary independence). Butgiventhere is
how diligently the FSB has been col
demand for de facto elite accountability.10
lecting kompromat (evidence of legal wrong
From the oligarchs' perspective,doing
the that can be used for blackmail) on
latter
business
could theoretically be achieved in elites, including the silovarchs
several
ways, including (1) a relatively impartial
themselves. Meanwhile, popular resentment
elite arbiter, a la Soviet Brezhnev or Ukraine's
of the super-rich in Russia makes honest
Kuchma before the Orange Revolution;
and competitive
(2) elections a risky proposi
tion. Russian
an empowered oligarch-controlled parlia business elites have watched
ment, e.g., the Ukrainian Radaclosely
after the instability in Ukraine in the
the
Orange Revolution; (3) Singapore-style au
wake of democratizing, including both the
reprivatization
thoritarian legality guaranteeing property attempt after the 2004 Or
rights without competitive politics;
ange Revolution
or (4) and some anti-corruption
initiatives
powerful associations of large businesses after the 2014 ouster of Yanu
that
can check the state, as in Porfirian Mexico.
kovych.13 Finally, the oligarchs' experience
The demand for such de facto elite ac with the Russian Union of Industrialists
countability, in whatever form, is rising. and Entrepreneurs (RUIE) and its mixed
The conditional nature of oligarchic owner record in improving state-business relations
ship in Russia has long been acknowledged, has cooled business elites' enthusiasm for
another local joke being that there are no association building.14 RUIE's requests on
billionaires in Russia, only people workingbehalf of Khodorkovsky and Yevtushenkov
as billionaires. Yet the conditionality im were ignored by the Kremlin. At the end of
the day, the question facing the Russian oli
posed on the oligarchs by Putin early in his
first tenure (stay out of politics, keep your
garchs is urgent but unanswered: which way
property) is becoming unreliable.11 The fromir here?
regular application of unwritten rules makes
Russia's business elites nervous. A careful
observer may also note that the group of International Dimension
Putin's friends itself is rather fluid. By 2010, If corruption in Russia were a purely domes
Putin distanced himself from friends of the tic problem, the analysis could stop here. It
late 1990s and his first presidency, reach is the international dimension of Russia's
ing out instead to friends from his younger corruption that presents urgent policy chal
years, i.e., from the early to mid-1990s (e.g., lenges for the West.
from the Ozero dacha cooperative) and even First, its provision of employment, loans,
SUMMER/FALL 2017, VOLUME XVIII, NUMBER II 29
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STANISLAV MARKUS
or donations to potential political
taldecision
at over $1 trillion. Some of this money
makers abroad has allowed Russia wastolegally
place earned. Of concern here is dirty
bets on political players who may
money,have
which is, in effect, laundered in the
West. Funds
strategic value for Russia in the future. The obtained through bribery, sto
Russian bank FCRB lent nine million eu len from the Russian treasury, or plundered
ros in 2014 to the populist anti-EU party
from the Russian bank deposits find safe ha
of Marine Le Pen in France. Russia's biggest
ven in the West through luxury investments
private oil company, Lukoil, paid a $1.4
and, most importantly, through secret bank
million state fine for Martin Nejedly, a deposits.
key The ramifications of this arrange
adviser to the Czech president in 2016,ment
al are profound. To begin, the availability
lowing Nejedly to keep his influential of
posi
Western havens for dirty cash adversely
tion. Germany's former chancellor Gerhard
changes the incentives of the Russian elites.
Shroeder has been employed by Gazprom Why invest in any future-oriented policy
in its Nord Stream pipeline projects (state for building, economic growth, rule of
more than ten years. In 2010, Renaissance law, societal peace) if one can plunder and
Capital, a Russian investment bank, paid hide successfully? By dramatically lowering
$500,000 to Bill Clinton for a speech whosethe risk of domestic exposure and punish
timing coincided with the review by the ment for corruption or theft, foreign off
Committee on Foreign Investment in the shores reward such behavior.
US of a sensitive purchase by Rosatom, the Furthermore, the deluge of corrupt pro
Russian nuclear agency, of a Wyoming ceeds ura from Russia, China, and many other
nium mine. To the extent that the use of developing
po countries has created an entire
litical influence by Western public figuresmoney
in laundering industry in the West,
exchange for monetary benefits from Rus involving bankers, lawyers, accountants,
sia qualifies as corruption, these are cases
andofother professionals who instruct their
Russia's propagation of corruption abroad. Russian clients on the specifics of shell
It is noteworthy that such monetary bene companies, artificial bankruptcies, reputa
tion-enhancing investments, and financial
fits are not directly provided by the Russian
government but rather by Russian compa secrecy.16 This manifold Western money
nies or banks. It is likely that at least some
laundering industry is a vested interest in
the status quo on behalf of Russian cor
oligarchs initiate geopolitically significant
transactions voluntarily to create rapport rupt officials and oligarchs, particularly in
with the Kremlin. In the 2000s, the strat countries such as Switzerland, the United
egies of Russian oligarchs to protect their
Kingdom, Austria, the United States, Lux
companies from the Kremlin centered embourg,
on and others. The expectation that
closer socioeconomic engagement would
cultivating foreign investors;15 today, they
seem to involve "geopolitical volunteering"
transform economic elites in the developing
on behalf of the Kremlin. countries was rather nai've—the transforma
Second, consider the effects of massive
tion goes very much both ways.
Finally, weak enforcement of anti-laun
flows of Russian capital to Western jurisdic
tions, both offshore and onshore. Accorddering laws in the West further undermines
its soft power in Russia by exposing the
ing to government figures, since Putin came
to power in 2000, Russia has experienced
promise of clean government, a key attrac
a total net outflow of more than $550 tion
bil of Western democracy that inspired
lion; some independent experts put thetwo
to Maidan revolutions in Ukraine, as hyp
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OLIGARCHS AND CORRUPTION IN PUTIN'S RUSSIA
ocritical. The Russian state mediaover
hasbureaucrats
been and oligarchs, two groups
at pains to criticize the Western for whom offshore nest eggs provide an al
governance
ternative toen
model: the fact that the West indirectly Putin's Russia. Since 2013, the
courages Russian corruption by Kremlin has pursued a "deoffshorization"
accepting
campaign
and safeguarding its dirty cash supports encouraging businesses to repa
that
narrative.17 triate capital and stop registering companies
The United States has already begun to offshore; additional legislation has restricted
address some of these issues. If initially the the Russian state employees' foreign as
United States erred on the side of attract set ownership. A joint US-Russian effort,
ing foreign capital by not fully implement however limited, to end the anonymity of
ing the OECD anti-laundering standards, corrupt cash flows in Western jurisdictions
the Department of Justice has recently ag would serve the interests of both countries.
gressively pursued suspect foreign cash. The
governments Kleptocracy Asset Recovery
Initiative, launched in 2010, combines the Perhaps the greatest challenge, with
respect to Russia and more generally,
expertise of the Department of Justice, the
concerns the anonymity of global
FBI, and other enforcement agencies to
offshore finance.
confiscate corrupt proceeds of foreign of
ficials (and, if possible, return them to the
countries harmed). With almost $3 billion
in currently frozen foreign assets in twenty Notes
eight different cases, the Initiative has taken 1. Shorrocks, A. and others, Global Wealth Re
aim at officials from Nigeria, Ukraine, Uz port 2016. Credit Suisse.
bekistan, Malaysia, Honduras, and other 2. The Economist (2016) Comparing crony capi
talism around the world. May 5.
developing countries (plus Canada). No
3. Treisman, D. (2008) Putin's Silovarchs. Or
tably absent from this list is Russia. The
bis, 51, 141-153.
United States government could also work
4. Ledeneva, A. (2013) Can Russia Modernise?:
closer with the private sector, particularly
Sistema, Power Networks and Informal Gover
banking, to ensure its compliance with the nance, Cambridge University Press.
Bank Secrecy Act, which requires financial 5. Markus, S. (2015) Property, Predation, and
intermediaries to know their customers and
Protection: Piranha Capitalism in Russia and
report any suspected unlawful activity. (In a Ukraine, Cambridge University Press.
promising development, since 2016, trans 6. Ibid.
actions of cash buyers of luxury real estate 7. Markus, S. (2017) The Atlas That Has Not
in Manhattan and Miami must now be re Shrugged: Why Russia's Oligarchs Are an Un
ported to the Treasury Department's Finan likely Force for Change. Daedalus 146 (2).
cial Crime Enforcement Network.) 8. Markus, S. (2008) Corporate Governance as
Political Insurance: Firm-level Institutional
Perhaps the greatest challenge, with re
Creation in Emerging Markets and Beyond.
spect to Russia and more generally, concerns
Socio-Economic Review, 6, 69—98; Markus, S.
the anonymity of global offshore finance.
(2012) Secure Property as a Bottom-up Pro
On this front, the US administration would
cess: Firms, Stakeholders, and Predators in
find some cooperation from Moscow. Eco Weak States. World Politics, 64, 242—77.
nomically, the Russian treasury has been 9. Markus, Property, Predation, and Protection.
losing vast sums to offshores. Politically, the10. See, for example, the Mikhail Fridman's 2016
Kremlin is keen to strengthen its control interview with the Financial Times. Available
SUMMER/FALL 2017, VOLUME XVIII, NUMBER II 31
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STANISLAV MARKUS
/30924l-krizis-v-golovakh-kak-rossiiskaya
at https://www.ft.com/content/9527e2be-f5b5
-1 Ie5-96db-fc683b5e52db. -elita-poteryala-obraz-budushchego
11. The contrast between the 2004 case of 13. Markus, S. (2016) Sovereign Commitment
Mikhail Khodorkovsky and the 2014 case of and Property Rights: The Case of Ukraine's
Vladimir Yevtushenkov, both oligarch targets Orange Revolution. Studies in Comparative
of Putin's Kremlin, is telling. One could easInternational Development, 51, 411—433;
ily argue that Khodorkovsky flouted Putin's Markus, S. and Charnysh, V. (2017) The
"rules" by financing opposition parties and Flexible Few: Oligarchs and Wealth Defense
in Developing Democracies. Comparative Po
threatening to interfere with Russia's foreign
policy (via plans for Yukos's pipelines and litical
as Studies.
set sales to US firms). Yevtushenkov, however,
14. Markus, S. (2007) Capitalists of All Russia,
epitomizes oligarchic loyalty to Putin. Yev Unite! Business Mobilization Under Debili
tushenkov abandoned his patron Luzhkov, tated Dirigisme. Polity, 39, 277-304; Markus,
the ex-mayor of Moscow, when Luzhkov's re S. (2015) Property, Predation, and Protection.
15. Markus, S. (2008) Corporate Governance as
lations with the Kremlin grew tense in 2010.
But no matter: Yevtushenkov's oil company Political Insurance, 69-98.
Bashneft was expropriated, decimating 16. theSee the excellent report by Judah, B. (2016)
oligarch's wealth, despite the fact that Yev The Kleptocracy Curse: Rethinking Contain
tushenkov's progressive buy-up of Bashneft ment. Washington, DC, Hudson Institute.
shares in 2005-09 had been meticulously 17. co
E.g., Chesnokov, E. (2016) Biznesmen Alek
ordinated with the Kremlin. sandr Lebedev: V Londone - rai dlia nashikh
provorovavshikhsia chinovnikov i bankirov
12. Yakovlev, A. (2015) Krizis vglovakh: kak rossi
[Businessman Alexander Lebedev "London
iskaia elita poteriala obraz budushchego [Ruin
in the Heads: How the Russian Elite Lost Im is paradise for our thieving bureaucrats and
age of the Future]. Forbes. Available at http:// bankers"]. Komsomol'skaia Pravda.
www.forbes.ru/mneniya-column/vertikal
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