Oligarchs are losing out as Putin courts a new class of loyal asset owners

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The writer is a non-resident scholar at Carnegie Russia Eurasia Center, a visiting fellow at the German Council on Foreign Relations and a research fellow at the Centre for East European and International Studies

Russian president Vladimir Putin’s recent assurances that “there will be no de-privatisation” are as mendacious as his repeated promises not to invade Ukraine. The authorities have moved to seize control of 17 large enterprises this year alone, according to Ilya Shumanov, the former head of Transparency International Russia.

This is not an attempt by some brazen individuals in Russia to line their pockets. It is part of Putin’s effort to redistribute property from people seen as insufficiently loyal to the Kremlin and create a new class of asset owners who owe their fortunes to the president and his inner circle. Members of this new elite, mostly the siloviki (security services) and their business partners, will be the true winners of the Ukraine war — and a bedrock of the regime’s stability. Putin is not getting any younger, and this group will allow his system to reinvent itself even after he departs the political scene.

Towards the end of Putin’s first presidential term in 2004, a formula for peaceful coexistence was forged between the Kremlin and oligarchs who had made their fortunes in murky circumstances after the Soviet Union’s collapse. The state allowed the oligarchs to retain assets accumulated in the 1990s and continue to thrive in exchange for strict non-interference in politics. The oligarchs largely accepted this formula, while the 2003 imprisonment of oil tycoon Mikhail Khodorkovsky demonstrated what would happen to those who disagreed. Thereafter the formula worked relatively well for both sides: Putin amassed complete control over Russian politics, while the oligarchs kept their assets and increased their fortunes thanks to high commodity prices.

The Kremlin was gradually able to impose additional financial demands on oligarchs — labelled “social responsibility” — as a demonstration of loyalty, but the business elite weren’t unhappy. They had learnt how to make money from lucrative state contracts and were assured that, should a disaster such as the 2008 global credit crunch hit them, state banks would help them out. After all, the Kremlin needed the oligarchs too. With their carefully cultivated networks in the west, they were an indispensable tool for Russia Inc, which still wanted to make money as part of the global economy.

Putin’s invasion of Ukraine has completely redrawn the deal with the oligarchs. The August lawsuit of a Russian court to nationalise a company owned by Andrey Melnichenko, one of Russia’s richest men, is the most illustrative case. Melnichenko is under EU sanctions and doesn’t unequivocally condemn the war. Still, even this may be seen as disloyalty in the current environment, and claims by the exiled Russian banker Oleg Tinkov that Melnichenko “hates Putin” (denied by Melnichenko) may have triggered retribution.

Melnichenko is not alone. Last month, a court in Russia nationalised Metafrax Chemical, a large methanol producer. Prosecutors claimed that the 1992 privatisation deal had “undermined Russia’s economic sovereignty and defence capacity” — words increasingly used in Russia to attack opponents. For some, the war ravaging Ukraine is a convenient pretext to nullify prewar agreements and go after lucrative assets. The de-privatisation campaign obviously includes plenty of opportunism, but the Kremlin’s guiding hand is also visible. As early as January, Putin had identified the reassertion of state control over strategic enterprises as a priority for the prosecutor-general’s office.

Previously, Russian oligarchs believed that being under western sanctions offered a form of protection from extortion at home. The Melnichenko case shows that is no longer true. In fact, international sanctions make the oligarchs increasingly useless for the Kremlin as tools for business abroad. Still, there is little to suggest that any of them will turn soon against Putin. Their ability to influence power struggles has diminished.

Western investors such as Carlsberg and Danone were the first to feel the pain of Russia’s new legal environment. Potential investors from Asia and the Gulf in distressed Russian assets, whom the Kremlin is trying to court, should also take note. As for Russians themselves, the Pandora’s box of redistribution opened by Putin’s war won’t just hit the oligarchs, but will ultimately come back to bite the new beneficiaries. The foundations of property rights in Russia, which were fragile long before the war, will become even shakier with the questionable new court rulings.