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Contemporary Oligarchies in Developed Democracies pp 65–97Cite as

Palgrave Macmillan

Privatization and the Rise of the Oligarchy

Abstract

The following two chapters examine the main stages of the formation and evolution of oligarchy in most states in which oligarchy was an outcome of the transition from market coordinated economy to a so-called free-market mode; this chapter thus analyzes the way the oligarchy consolidated and commandeered the economy following the implementation of key reforms. The first stage is defined by privatization and the subsequent emergence of new business groups, and is the topic of this chapter. The second stage of the rise of the oligarchy, which traditionally took place in the early 2000s, evolved as a process of financialization and is the topic of the next chapter. This chapter describes the ensuing transition from the old business groups or corporations to pyramidal business groups, showing how this process resulted in a few individuals becoming extremely powerful and wealthy, by means of their control over the market. This was largely due to the way in which states conducted the privatization process, along with their retreat from an active role in the market and from solid and robust responses to economic changes, and not due to oligarchies’ competitive virtues. This development or mechanism of wealth accumulation was a political rather than purely economic process, with its beneficiaries tightly linked to the political circles. The assets of the states were privatized with the logic of transferring control to a stable pool of shareholders.

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Notes

  1. 1.

    In Russia, for example, the chaos of transformation was largely led by six people, protégés of then President Yeltsin, who took over key industries: Mikhail Khodorkovsky—Yukos; Anatoly Chubais—electricity monopoly; Yuri Luzhkov—Khozyain of Moscow; Alexander Smolensky—banks; Vladimir Gusinsky—oil and Media ; Boris Berezovsky—media and metals.

  2. 2.

    In this scheme, the government appointed a commercial banker to run an auction that would allocate a controlling stake of a large state resource or enterprise in exchange for a loan to the federal government, which they never intended to repay. The auctioneer could thus award the stake to himself for a nominal bid (usually, slightly above a low reserve price) by excluding all other bidders, even if the price they offered was more competitive. The advocates of the scheme argued that differently from other privatizations, money was actually paid, and most of the enterprises involved in loans-for-shares did extremely well, notably Yukos and Sibneft, which led the revival of the Russian oil industry (Freeland 2000; Aslund 2004; Li-chen 2008).

  3. 3.

    Roman Abramovich is perhaps the most notorious but not the only example of a wealthy businessman rising to a position of political office.

  4. 4.

    Often the oligarchs and the bankers were part of the same group structure, like in Yukos—the oil company of Mikhail Khodorkovsky and the bank MENATEP which belonged to the same group.

  5. 5.

    Key institutional structures such as the Communist Party and the central planning system were dismantled, and the new entities that emerged, such as the presidential administration, the State Committee for the Administration of State Property, and regional governors, were pushed to expand their effective zone of control (Rutland 2009).

  6. 6.

    Western observers were initially uncomfortable with the rise of the oligarchs, whose ascendancy coincided with a wave of lawlessness, assassination contracts, and displays of wealth. However, Western economists soon started arguing that the oligarchs were playing a key role in creating the Russian market economy (Guriev and Megginson 2007).

  7. 7.

    This analysis is based on the author’s Ph.D. thesis, published in 2015.

  8. 8.

    The 1995 Brodet committee forced the banks to sell a large percentage of their real assets in industry and services; the 2004 Bachar Committee forbade banks from managing mutual funds and provident funds. The actions of these committees are detailed in subsequent chapters.

  9. 9.

    A nonrecourse debt is a loan secured by a pledge of collateral, with no personal liability. For more see Pavlov and Wachter (2004), Weidner (1978). Afterwards, there was a retreat from nonrecourse, but the collapse of some Israeli pyramidal groups in 2013 exposed that is has not entirely vanished.

  10. 10.

    It derived from a concern that smaller banks have neither sufficient size to support the higher regulatory costs arising from initiatives like Basel II, anti-money laundering rules, and accounting requirements, nor the ability to compete with larger banks.

  11. 11.

    Mikhail Khodorkovsky, the head of Russia’s largest oil company, Yukos, is the most prominent illustration of the threat posed by the oligarchs to the state leaders. Khodorkovsky was sentenced to eight years in jail for tax evasion, an accusation which is commonly believed to cover the real reason of his arrest—his political aspirations, as suspected by President Putin (Byanova and Litvinov 2003). Conversely, the lack of firm legal basis for the rapidly acquired wealth of oligarchs in some states, such as Russia, made the new business elite vulnerable to attack by the state (Rutland 2009: 3–4).

  12. 12.

    The New Order economic policy was prevalent from the mid-1960s till the end of the 1990s (Robison and Hadiz 2004).

  13. 13.

    Furthermore, parallel to market liberalization, the role of the state was conveyed in other critical channels, namely immigrant absorption (from both the USSR and Ethiopia in 1991), and peace negotiations (with the Palestinian Authority in 1993, which failed, and with Jordan, in 1994). The exclusive responsibility of the state for security and the particular nature of a Jewish state have constantly shaped its pivotal position in the political economy.

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  1. City Political Economy Research Centre (CITYPERC), City, University of London, London, UK

    Shelly Gottfried

  2. Beit Berl College, Beit Berl, Israel

    Shelly Gottfried

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Correspondence to Shelly Gottfried .

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Gottfried, S. (2019). Privatization and the Rise of the Oligarchy. In: Contemporary Oligarchies in Developed Democracies. Palgrave Macmillan, Cham. https://doi.org/10.1007/978-3-030-14105-9_3

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