Russia Between Oligarchs & Tycoons

Who were the oligarchs? The question may seem premature, while Russia's economic élite still exerts disproportionate influence over Russian society. Moscow actually has more dollar billionaires than New York. However, a drastic change has occurred during the Putin presidency. Whereas Boris Yeltsin's second presidential term was dominated by the oligarchs, Putin has largely succeeded in breaking away from their influence. Thus, the heydays of Russian business oligarchy seem to have passed, turning oligarchs into mere tycoons.

As Vladimir Putin seized power in Russia in 1999-2000, it was much thanks to the support of a few influential Russian businessmen. Their relations to the Kremlin, and above all president Yeltsin, were so close that Russians referred to them as the "family" - signifying a merger between the Yeltsin clan and the major Russian business tycoons of the 1990s. At the time, the tycoons wielded such influence and power over Russia that the country stood on the verge of oligarchy.

In contrast to Yeltsin, Putin at an early stage signalled that things were about to change. Such signals were initially incomprehensible for most oligarchs, as they were used to easy access to the president. However, access was soon denied with Putin in power - much to the fault of the oligarchs themselves. People like Berezovsky and Gusinsky had major fallouts with Putin already in early 1999, much because they treated him as a puppet on a chain. Hopes that they could control the new and inexperienced president were soon lost.

Instead, Putin formalised relations with major business by channeling contacts through the Russian Union of Industrialists and Entrepreneurs and by regular and more official meetings with leading businessmen. The message that gradually evolved during Putin's first presidency was becoming increasingly clear: Hands off politics! As long as business did not meddle into politics, the oligarchs were to be left alone in generating profits. However, if business ventured into threatening state interests, there would be hell to pay. So, who were the winners and losers of this transition?

The losers
The first victim of Putin's new policy was Russia's "capo di tutti capi" - Boris Berezovsky. His influence over Russia was so great by the end of the 1990s, that he was often called the "Grey Cardinal" of the Kremlin. With six major bank owners, Berezovsky in 1996 formed the "Big Seven" who were instrumental for the reelection of Boris Yeltsin. Seeing himself as a "kingmaker" Berezovsky was rewarded by Yeltsin in becoming first deputy secretary of the National Security Council, then secretary of the Commonwealth of Independent States (CIS). Winning a parliamentary seat in 1999, Berezovsky's luck started to turn. Having first brought Putin to power and then severely aggravated him, the methods of Berezovsky's business conquests - Aeroflot, Sibneft, aluminium industry, the ORT TV-channel etc - were turned against him. Only six months after the 1999 parliamentary elections, Berezovsky was forced to go into exile, on charges of fraud, money laundering and other financial crimes. After several demands for his extradition to Russia, Berezovsky was finally given political asylum in Great Britain.

Putin's second victim was media tycoon Vladimir Gusinsky - Russia's equivalent to Rupert Murdoch. Through his holding company Media Most, Gusinsky had great influence over Russian media, not least through the TV-channel NTV and the newspaper Segodnya. NTV and Segodnya were long regarded the nucleus of new independent media in Russia, even though it is obvious that Gusinsky at times used his media power for political purposes. The most flagrant example was the massive endorsement for Yeltin's reelection campaign in 1996. However, with Putin in power, Gusinsky's overinflated ego, a flamboyant lifestyle, and a propensity for unsound investment were factors that soon put him at loggerheads with the new master of the Kremlin. This all led to his eventual downfall. After a series of police raids and legal actions against himself and his companies, Gusinsky went into exile in Israel in 2001. In his absence, Gazprom and other companies seized the remainder of his business empire, and it its unlikely that the media tycoon will return to Russia, not least because legal authorities have long sought his extradition on fraud and embezzlement charges from several European countries.

The case that has perhaps been given most attention internationally is that of Mikhail Khodorkovsky. Regarded as a banking genius, Khodorkovsky in 2003 was Russia's wealthiest man. Back in 1990, he formed the Menatep bank, which provided credit to state enterprises, and participated in dealing with privatisation vouchers, thus gaining control of several large companies. He entered into chemical and textile industries, construction, mining and oil enterprises. In 1995, Khodorkovsky gained a controlling share of the oil giant Yukos, which soon became the jewel in the crown of his business empire. In the early 1990s, Khodorkovsky was known for his murky business deals in the privatisation of Russian economy. However, at the turn of the millenium he had transformed his public image to that of a protagonist of economic transparency, publicly crusading for stockholder and investor rights. Thus, Yukos was the first major Russian company to publish reliable quarterly reports. Still, economic influence was not enough for Khodorkovsky. He wanted political power as well. In supporting parties opposing Putin and the Kremlin, Khodorkovsky soon became the target of Kremlin's anti-oligarch crackdown. He not only posed a political threat. He also planned the construction of several strategic pipelines, which - if realised - would have given him a disproportionate influence over Russian business making him independent of political pressure. In addition to a political threat, Khodorkovsky thus also posed an economic threat to major interest groups within business and politics. It should therefore have come as little of a surprise when Khodorkovsky was arrested in October 2003. After a lengthy trial, displaying the Russian legal system as a travesty of justice, Khodorkovsky was sentenced to nine years imprisonment and his financial assets were gradually dismembered by his enemies within state and private business. At the time of his arrest, he was considered the most powerful of the Russian oligarchs. Now he has been passed to the sidelines serving his sentence in a Siberian prison camp.

The winners
Among the winners of Russia's business oligarchs, Roman Abramovich must be counted as the one who got away scots free. A disciple of Boris Berezovsky, Abramovich benefitted from his patronage in making his way to the top of Russian business. As the Kremlin moved in on Berezovsky in 1999, Abramovich took over Sibneft - one of Russia's largest oil companies - from his patron along with Russia's largest television network. He then went on to expand his nascent business empire by going into aluminium production by forming Russian Aluminium - the world's second largest aluminium producer. He also went into politics, representing the impoverished Chukotka region of the Russian far east, first as Duma deputy and then as governor, making development of the region his pet project. In 2005, Abramovich sold off 72% of his shares in Sibneft to Gazprom - the Russian state energy company. He has also apparently been able to remain good relations with the Kremlin - both the Yeltsin and Putin administrations. Abramovich has, however, increasingly transferred his assets abroad, buying and investing in western business, most notably the purchase of the English soccer team Chelsea. Today, he spends most of his time in Britain, only occasionally visiting Chukotka, where he remains governor. In March this year, Abramovich was listed by Forbes Magazine as Russia's richest man and the 11th richest in the world.

Vladimir Potanin is the golden boy of the post-soviet establishment. The son of a Ministry of Foreign Trade official, Potanin attended the prestigious Foreign Ministry institute, the MGIMO, before going into business. He started out with trading in nonferrous metals with his Interros company in 1991, to be followed by two banks - Oneximbank and MFK. Being an architect of the loans for shares program, he benefitted greatly from being able to buy Russian companies much beneath market value. In 1996, Potanin was one the "Big Seven" who assured Yeltsin's reelection. As a token of appreciation, he was then appointed first deputy prime minister by Yeltsin. The August 1998 economic crisis took a heavy toll on Potanin's business empire, but he succeeded in securing crucial assets. His financial conglomerate holds major assets in Russian business such as Norilsk Nickel - the world's largest platinum and paladium producer - as well as media holdings such as Izvestiya and Komsomolskaya Pravda.

As many other successful Russian businessmen, Mikhail Fridman has kept a low profile throughout his career. Starting out with a plethora of various businesses in the late 1980s, he subsequently managed to finance the establishment of AlfaBank - now one of Russia's biggest banks. He then went into the lucrative oil business and acquired Tyumen Oil. Cooperating with British Petroleum, Tyumen Oil was transformed into TNK-BP, today the world's tenth largest private oil and gas company. Also Fridman belonged to the "Big Seven" endorsing Yeltsin in 1996. The pinnacle of his business empire is the AlfaGroup holding company.

Oleg Deripaska is one of Russia's youngest billionaires (only Abramovich is younger). As so many others, he started out with trading in metals. Together with Abramovich, he formed the Russian Aluminium (RusAl) - the world's second largest aluminium producer - in 2000, and now owns 75% of company shares. He has also major interests in power and car industries and he also owns Russia's largest insurance company. Although Deripaska has been careful to keep off the political arena, he is considered one of president Putin's major business allies. Along with his business partner - Abramovich - Deripaska is by some currently considered Russia's richest man.

Born in Baku, Vagit Alekperov was fostered into the oil business, landing his first job in the sector at 18 years' age. By his growing expertise, Alekperov in 1991 became first deputy minister of fuel and energy and then acting minister. His main political accomplishment was bringing Russia's three biggest oil companies together to form LukOil. Not surprisingly, Deripaska then became president of Lukoil, a position he has retained ever since. Today, Lukoil is one of the world's mightiest oil companies with energy reserves only equalled by Exxon. He is considered Russia's tenth richest and the 38th worldwide.

From managed democracy to managed oligarchy?
Russia during the 1990s has often been compared to the United States during the early 20th century, when Rockefeller, J.P. Morgan and other business tycoons succeeded in forming next to total monopolies in various areas of business. Thus, the Wild West of this era should be equalled to the Wild East of Russia during its first post-soviet decade. Those who seek similarities may today also compare US President Woodrow Wilson's measures to bring down Standard Oil and other monopolistic companies. Thus, today Putin would allegedly be trying to regulate the market after the necessary turmoil of the liberalisation of the 1990s. The Russian state would consequently be trying to regain its position as a macroecnomic arbitrator in order to regulate the market and set the rules of the game.

However, this argument falls flat as the Putin administration displays such a blatant disregard of basic property rights - the very nucleus of a working market economy. That the oligarchs may have done the same in the early 1990s is no excuse for a state to follow such conduct. Moreover, one may argue that one oligarchy today is replaced by another, while the spoils of state action against the oligarchs partly end up in the hands of Putin's entourage, thus effectively redistributing assets from private to private hands instead of to government control. Consequently, Putin's people enrich themselves by forcing parts of Russian business into their own hands. Of course, such behaviour is but a parallel to Putin's political agenda, gaining control over all relevant areas of society. Seeing similarities between Russia of the 1990s and the US of the 1910s becomes laughable if turning to president Wilson's credo of "making the world safe for democracy." It is quite apparent that Putin neither makes Russia safe for democracy nor makes Russia safe for market economy.

Russkoe Bistro vs. McDonald's

Great fortunes are made by catering to the basic needs of people. This is a fundamental economic fact. What all people need is what all people buy. This is why potatoes during famines have been more expensive than meat. People buy first what they think is most needed, even if better alternatives are cheaper. Alternatively, if there is a choice, subjective factors such as taste and image play an important role in consumer behaviour. The company that succeeds in combining needs and tastes truly sits on a money making machine.

Fast food is perhaps not the first thing that comes to mind when thinking of basic needs, but today the industry generates massive profit worldwide, because an increasing number of people find the relative price in time of fast food lower than that of home-cooking. The niche of fast food manufacturers has broadened to such an extent in many industrialised countries, that the industry is on the verge of catering to the basic needs of people.

One has only to think of the McDonald's saga to realise the enormity of potential revenues if one succeeds in getting a cut of the fast food market. McDonald's success relies on great sensitivity in forming and doctoring a positive trademark for its consumer target group by a common and dynamic concept worldwide. This is McDonald's success story no matter what one may think of how the food chain generates profits. In big-busines, morality has no place when it comes to making money.

So, are McDonald's products significantly superior to those of all other fast food chains as to earn it the market share it has. No, certainly not. What McDonald's offers is simply a well-tuned concept - balancing pricing and trademark - to make customers prefer their products. One always knows what one gets at McDonald's. It is a safe bet. Objectively, though, there are certainly many other better alternatives for consumers. What most alternatives however lack is the concept that continuously draws new generations of customers.

In 1995, Russkoe Bistro was founded as Russia's first fast food chain. The concept was simple and elegant, namely providing high-quality traditional Russian cuisine in a fast food package at lower prices than its competitors. The products on offer were what customers in Western Europe and the US paid several dollars more for at more up-market restaurants than what they would if having a hamburger at McDonald's. Russkoe Bistro simply offered better products at lower prices - real food and not the junk offered by most fast food chains.

The menu was meticulously elaborated by the All-Russian Food Institute and little effort was spared to present customers with an appetising assortment of cheap but tasty traditional Russian dishes made entirely out of high-quailty domestic products. The simple and wholesome menu seemed a sure recipe for success.

Furthermore, Russkoe Bistro's trademark was carefully chosen to align with an image susceptible to Russian tastes also on the subjective level. The company logotype portrayed a cossack, which in combination with its name - Russkoe Bistro - conveyed positive historical connotations to consumers.

There is a well-known popular story on how the Russian troops that defeated Napoleon in the 19th century, sat about the Paris cafés and restaurants urging the waiters for food by shouting "быстро, быстро!" (fast, fast!). Thus, the world-renowned Paris "bistros" would have originated from Russian troops in Paris celebrating one of their country's greatest historical victories. This was the positive image Russkoe Bistro exploited. Russia was simply the origin of fast food, so why not reconquer it?

The backside of the logo, some people argued, was however that portraying a cossack in full uniform also brought forth visions of extreme Russian nationalism. Still, having a military as symbol is not unique to Russkoe Bistro. The well-known logotype of Kentucky Fried Chicken (KFC) portrays an image of its founder - Colonel Harland Sanders. Even if his title was honorific, many Americans still refer to him simply as "the colonel" without thinking the least about the propriety of a military man being the symbol of a fast food chain. It thus seems that the choice of symbol for Russkoe Bistro was truly ingenious, while most consumers would associate the image with the historical pride of how Russian culture once set a postive landmark far beyond the country's borders.

So, did the company owners realise that they were sitting on a potential gold mine? Regretfully not, by all appearance. Originating as a pet project of Moscow mayor Yuri Luzhkov, Russkoe Bistro had a grand opening intended to score political points for its founder. Its commercially viable trademark was used for political purposes to the degradation of its worth. In a few years, the fast food chain - based on franchising as McDonald's - grew from a mere three to 37 restaurants only in Moscow. This was not least because of massive financial backing from Moscow City. The financial feasibility of the project was a completely different matter as it was run as a quasi-public service.

Instead of generating the big profits that the Russkoe Bistro concept might have vouched for, little effort was made either to exploit the company's true potential or bring in the revenues that were so close at hand. Russkoe Bistro was simply mismanaged. This became evident by the August 1998 financial crisis, when the company quickly found itself on the verge of bankruptcy. Trying to respond to crisis, the company management - in contradiction to sound economic judgement - vastly expanded the menu, making it even more difficult for franchisers to break even financially.

The very concept of the fast food industry is to offer an easy-to-make menu with a limited quantity of dishes at low prices for as many customers as possible. The opposite is tantamount to increased costs, higher prices, and much more complex logistics. Expanding the menu is simply a textbook recipe for failure for a fast food company facing crisis. It is no wonder that the turnover of Russkoe Bistro and its franchisers alike dropped even more drastically than was the case for competing fast food chains.

As the company attracted increasing losses after the 1998 crisis, questions started to amass why Moscow City should keep on funding a defunct enterprise on the verge of collapse. It seemed clear to all, that if Moscow withdrew its support, the company would fall apart within days. Still, the City continued its support in contradiction to financial soundness. Soon, however, other dark clouds started to gather over the company. Thus, the Interior Ministry started an investigation on the imbestlement of Moscow public funds to the amount of $1,3 million. Apparently, large funds had been transferred via the company in a complex string of financial transactions to foreign bank accounts. The case of Russkoe Bistro soon became part of the 1999 fraud and money laundering investigation that came to be known as the Chase Manhattan Bank scandal. To this day, many of the financial irregularities surrounding the scandal remains buried by politicians and businessmen that have no interest in the truth being made public. Needless to say, mayor Luzhkov assumed no responsibility for the Russkoe Bistro part of the scandal and came out of the affaire scots free.

Still, somehow Russkoe Bistro managed to survive. The company brand had however become strongly tarnished and the fact that it was so heavily associated with public services and handouts, resulted in consumers never feeling that there was something special about the company. Instead of prouding themselves of a food chain that in objective terms was far superior to McDonald's, Muscovites regarded Russkoe Bistro as an improved version of the traditional Russian stolovaya - poor quality workplace restaurants. In 2005, the company was sold by public auction at a bargain price. The restaurant chain still exists and is highly recommendable for its good and cheap food. However, the very real chance of creating a contender to McDonald's in Russia was lost, and the value of the company both financially and as a trademark does not vouch for any rapid expansion.

What is perhaps the most tragic element of the Russkoe Bistro saga is that Russian business for once had a winning concept on their hands, which did not involve the usual easy-to-get profits emanating from natural resources. Russian entrepreneurs stood to gain the great fortunes associated with catering to basic needs. The Russkoe Bistro concept was not only competitive on the domestic market, but could also have been exported with great succees to Western consumers longing for higher-quality fast food. The paradox is perhaps that a concept so well-tuned to consumer preferences in the West, was not valued highly enough by Russians themselves.

All things that come out of Russia must not be grandiose. Even small things can be great. Regretfully, lack of vision, self-confidence and entrepreneurship remain hallmarks of Russian business to this day. It is true, that the aftermath of the 1998 financial crisis was an eye-opener for the ability of domestic high-quality production of consumption goods. Still, Russia is far from realising that its businesses may be internationally competitive also when it comes to areas beyond exports of natural resources.

With Russkoe Bistro, Russia had a potential McDonald's on their hands, but lost it due to lack of vision and sound management. If Russia had believed in itself, Russkoe Bistro might well have reconquered the boulevards of Paris - or for that sake the streets of London, Berlin or New York. Still, just like the cossacks in Paris in 1814 felt ill at ease in a foreign sorrounding, Russian entrepreneurs today may feel that the international market is foreign to them. The question is also if hypothetical current "business cossacks" would bring back unwelcome ideas of reform to Russia as their predecessors once did after the Napoleonic wars. Perhaps Russia will never be ready for the international business battle bringing back ideas for the transformation of economy, society and politics. Or is this what is gradually happening as western-educated Russians now are increasingly returning to do business on their home-turf? Only future can tell.