Last Days of the Oligarchs?

That is the title of this article in the New York Times. There seems to be this conventional wisdom that the oligarchs are finished in Russia. The basic point:

Once-invincible oligarchs now look extremely vulnerable. With or without state aid, the government is likely to gain more control of their operations. If they get no help, many could go into bankruptcy, with nationalization of one form or another likely to follow. And any new bailout would probably mean larger equity stakes for the government.

And here is an interesting snippet:

In the initial collapse of the Russian stock market from May to October last year, Bloomberg News has calculated, the richest 25 people on the Forbes magazine list for Russia lost a collective $230 billion. Some of those unable to win state bailouts put up planes, yachts and mansions on the Côte d’Azur as collateral for loans, said Oleg V. Vyugin, the director of MDM Bank.

But the article does not really focus on the question of what would replace the oligarchs. And this is a key point. Putin does not believe that the state can effectively run industry. He wants private owners who are beholden to him. (Cliff Gaddy and I have been talking about this in many places, see for example, this article in The National Interest, Putin's Third Way). He is much more likely to protect them and thus tie them even closer to him than let them go. If he got rid of the oligarchs he would have to create a new group of them anyway.

Behind the TNK-BP Affair

There has been much recent discussion about the contest over TNK-BP, Russia's third largest oil company. Some of the background is available in this Washington Post article. The dispute pits powerful Russian oligarchs, Mikhail Fridman, Viktor Vekselberg, and Len Blavatnik (actually American, but of Russian origin) against the mighty oil giant, BP. The Russian partners, known as AAR after their respective holding companies, accuse the management of the joint venture of running the company in BP's interest. For example, here is Mikhail Fridman (also see his comment in the Financial Times):

"The conflict between AAR and BP is about control of TNK-BP. We want the company to be managed as an independent oil company in the interest of all shareholders, including the 5% minority shareholders. BP wants to operate our joint venture like a BP subsidiary and it wants to control all aspects of its business. If the company is to compete against the best and to have a successful future as a leading international oil business, this state of affairs must change."

BP claims that the Russians want to force BP out so they can cash in. BP's chair, Peter Sutherland, (quoted here in the New York Times) blames the Russian oligarchs for engaging in corporate raiding, and wonders why the Russian government does not stop it:

“This is just a return to the corporate raiding activities that were prevalent in Russia in the 1990s,” Mr. Sutherland said at a conference in Stockholm. “The leaders of the country seem unwilling or unable to step in and stop them. This is bad for us, bad for the company and, of course, very bad for Russia.”

Many argue that AAR is just acting on behalf of the Kremlin, though BP strictly avoids making this claim.

How should we think about this conflict? In the next post, I offer an explanation based on the work I have been doing with Clifford Gaddy.