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The curious case of Russian oligarchs

(Clockwise, from left) The combination photo showing Chelsea football club owner Roman Abramovich, banker Oleg Tinkov, Mikhail Fridman, co-founder of Alfa-Group, and Russian metals magnate Oleg Deripaska — AP/Files (Clockwise, from left) The combination photo showing Chelsea football club owner Roman Abramovich, banker Oleg Tinkov, Mikhail Fridman, co-founder of Alfa-Group, and Russian metals magnate Oleg Deripaska — AP/Files

In Russia, in contrast to America, the government machine has always been much stronger than any individual or any company or any set of companies — Mikhail Khodorkovsky.

Sanctions on the Russian oligarchs have become the new buzzword around the news in recent days in the wake of the largest economic warfare being conducted against Russia by the West.

The oligarchs are important to understand Russian politics and economy, and therefore, imposing sanctions upon them will hurt the ‘madman’ of Russia quite a lot.

The effects are already being felt all over the world, one such instance being Roman Abramovich, despite not having been sanctioned, is selling his club Chelsea, putting the curtain on an era.

Who are these Oligarchs?

In the 1990s, during the Yeltsin government, a new class of politically well-connected young men earned billions by using the arbitrage of natural resources between the former Soviet-era low price and international high price; later stashing the money into Swiss bank accounts rather than investing in the domestic market.

They were the first generation oligarchs, who were hardly popular or welcomed by the common Russian population. They manipulated the privatisation process to amass enough fortune to influence the existing political institutions and economic policies.

However, after the 1998 Russian financial crisis, most of the oligarchs, who relied on the financial institutions, were hit hard, and later, in the early 2000s, they met the stalwart roadblock - Vladimir Putin.

Russia’s wealth is even more concentrated in the hands of a few people today than it was when Putin took power. The 500 Russians with a net worth of more than US $100 million control 40 per cent of the country’s household wealth, making them richer than their international counterparts.

Virtually, all their wealth came from the seizure of Russia's raw material assets, which until 1992 had been owned and managed by the state.

An oligarch's success, in other words, almost always depended on his connections to the government officials in charge of privatising the country's rich energy and mineral deposits, as well as on his ability to outmanoeuvre or intimidate rivals.

How Putin controls the oligarchs

One of Vladimir Putin’s primary objectives on assuming power was to re-establish the authority of the Russian state, which had been severely weakened from the late 1980s on, and, in particular, to strengthen the presidency vis-à-vis the other major institutions and actors in the political system.

Since the 2000s, Putin, his KGB colleagues, businessmen and mobsters pieced together a croony system where the oligarchs thrive at the common Russians’ expense.

Putin already controlled the FSB and soon Russia’s legislative body, the Duma, when he consolidated his power using the KGB men as a counterweight to Yeltsin’s oligarchs.

Several of them created media empires of television stations, newspapers, and magazines and used these outlets to attack not only each other but also Putin, particularly for his policies in Chechnya and his response to the 2000 sinking of a nuclear-powered submarine in the Barents Sea.

Putin curtailed the Yeltsin-era oligarchs, first by seizing the media outlets, and later by taking down the biggest of all them, Mikhail Khodorkovsky, by confiscating the Yukos Oil Company.

He created a new, loyal batch of oligarchs, who relied on his whims to stay afloat. Some of them had been taught a lesson for not complying with his wishes, like Sergei Pugachev or Mikhail Khordovosky.

Why is the global community putting pressure on the oligarchs?

Starting from 2018, the West has been on their feet to put sanctions on the oligarchs. Proximity to Putin, which used to be considered most important for capital growth in the Russian oligarchic system, became a potential risk as ten oligarchs were targeted.

“Elites close to Putin continue to leverage their proximity to the Russian President to pillage the Russian state, enrich themselves, and elevate their family members into some of the highest positions of power in the country at the expense of the Russian people," the US Department of the Treasury said in a statement on March 2.

Dmitry Peskov, Mr Putin's press secretary, is among those targeted in the latest blockade along with 19 other oligarchs and 47 of their family members.

The US and the EU have put sanctions on them. Financial institutions in jurisdictions where there are no sanctions, such as the United Arab Emirates, are following the lead of the US and European Union and freezing accounts held by Russians.

Some Caribbean countries, where Russian-controlled entities have domiciled offshore businesses for secrecy, will no longer serve as corporate secretaries for such entities, leaving many of them unable to operate.

Sanctions would prove effective by constraining the ability of these players to conduct business abroad, keep assets in secure banks and open accounts in reputable Western institutions, and therefore, be a lethal blow to the Russian president.

Now it needs to be observed to which extent the cronies of Putin share the punishment, and if the sanctions work on them.

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