The Expansion of Crony Capitalism in Russia

Rybkin Affair and the Rise of Cronyism

In 2004, Ivan Rybkin, sponsored by Boris Berezovsky, ran against Putin in the presidential campaign.
Rybkin mysteriously disappeared and resurfaced in Kiev, claiming kidnapping and drugging.
He accused Roman Abramovich, Gennady Timchenko, and the Kovalchuk brothers (Mikhail and Yuri) of being Putin’s "cashiers".
The Kremlin reacted sharply by disallowing Rybkin’s candidacy, effectively ending democracy in Russia.
Information about Putin's cronies becoming billionaires began to surface, revealing a new aspect of Putin.

The Crony Circle

Putin’s cronies form the third circle around him, after security officials and state enterprise managers.
These men are private businessmen who have known Putin since his time as first deputy mayor of St. Petersburg (1991-1996).
Their businesses flourished during Putin’s second presidential term.
Key cronies include Gennady Timchenko (oil trading, gas production, pipeline construction), Arkady Rotenberg (state contractor for roads and pipelines), and Yuri Kovalchuk (chief executive of Bank Rossiya).
Other cronies include Nikolai Shamalov (representative of Siemens). Arkady also has a brother Boris and son Igor involved in business.
Karen Dawisha's book, Putin’s Kleptocracy, and Yuri Felshtinsky and Vladimir Pribylovsky’s book, The Corporation, document these individuals.

Background and Early Activities

Putin’s cronies are of his age and from St. Petersburg, with varied education and professions.
They entered businesses around 1990 with limited expertise.
Their wealth accumulation started around 2004.
Andrei Illarionov, Putin’s economic advisor (2000-2005), was unaware of these cronies during his time in the Kremlin.
A presidential order created a state alcohol monopoly (Rosspritprom) but was stopped by reformers like Illarionov, Gref, and Kudrin.

Secrecy and Sanctions

The cronies operated discreetly, with Timchenko giving his first interview in 2008 and Arkady Rotenberg in 2010.
Timchenko and Boris Rotenberg are Finnish citizens.
In March 2014, the US Treasury sanctioned Timchenko, Arkady and Boris Rotenberg, Yuri Kovalchuk, and Bank Rossiya for supporting a senior Russian government official, i.e., Putin.
The EU sanctioned Arkady Rotenberg, Yuri Kovalchuk, and Nikolai Shamalov, but not Timchenko and Boris Rotenberg due to their Finnish citizenship.

Crime and Early Career of Putin

During 1989–1993, Russia's murder rate doubled due to racketeering and gang wars.
St. Petersburg was nicknamed “criminal Peter,” drawing parallels to Chicago during Prohibition.
Contract killings of officials like Mikhail Manevich and Galina Starovoitova occurred.
In June 1991, Putin became chairman of the Committee for International Relations at the St. Petersburg City Hall, later becoming deputy chairman of the St. Petersburg City Government.
Putin was a protégé of Mayor Anatoly Sobchak, characterized as a brilliant orator but a terrible manager.
Putin was in charge of foreign investments amid rising crime.
The Swedish consul general described Putin as “closed, secretive, and German-oriented” and an “independent operator of power in the shade of Sobchak.”
Putin was accused of extorting the Swedish company managing the Grand Hotel Europe and attempting to raid the Astoria hotel.

Putin’s Connections and Corruption Scandals

The first foreign bank office in St. Petersburg was the German Dresdner Bank, represented by Putin’s friend from the East German Stasi, Matthias Warnig.
Warnig remains a key businessperson and sits on Rosneft and Nord Stream supervisory boards.
Finnish consul generals accused Putin of links to organized crime.
Putin visited Finland frequently, allegedly owning a small hotel in Turku.
In December 1991, Putin requested $100 million in commodities to be bartered for food.
A city council commission led by Marina Sal’e concluded that the city did not receive any products and lost approximately $92 million$ .
Putin was protected by Sobchak and the Russian government.
Putin was tied to money laundering via the St. Petersburg Real Estate Holding Co. (SPAG) and was a founding member of its advisory board.
SPAG founders were indicted in Liechtenstein for money laundering.
Putin was involved in the Petersburg Fuel Company with Vladimir Kumarin (Tambov group leader), Yuri Kovalchuk, and Nikolai Shamalov.
Members of the Tambov group were arrested in Spain in 2008 for money laundering.
Kumarin was sentenced to twenty-three years in prison in 2016.
Members of the Tambov gang frequented Putin’s birthday parties.
Putin brought his Labrador Konni to a meeting with Angela Merkel, knowing she feared dogs.

Reliance on Organized Crime

Putin relies on the FSB and the Russian Mafia.
Ramzan Kadyrov has provided willing soldiers for lawless acts.
The Kremlin used Chechen fighters and Russian mercenaries in Crimea and Eastern Ukraine, organized by Konstantin Malofeev.
Evgeny Prigozhin recruited mercenaries and organized the Internet Research Agency for Russian manipulation of US voters.
These actions have criminalized the Russian government and reduced precision.

Bank Rossiya and Ozero Dacha Cooperative

Bank Rossiya and the Ozero dacha cooperative are central to the Putin circle.
Bank Rossiya is known as the “bank of the president’s friends.”
Founded in June 1990 by the Leningrad regional committee of the Communist Party, Yuri Kovalchuk became its chief executive.
Putin’s city committee for foreign liaisons coinvested with Bank Rossiya in July 1991.
In December 1991, Putin’s friends became co-owners of Bank Rossiya.
In November 1996, eight friends set up the Ozero dacha cooperative.
In March 2014, the US Treasury called Bank Rossiya the personal bank for senior Russian officials and members of Putin’s inner circle.
Bank Rossiya is ranked as the 17th largest bank in Russia with assets of approximately $10 billion$ .

Gennady Timchenko

Gennady Timchenko has made his fortune as an oil trader, at Novatek, and by building gas pipelines for Gazprom.
Timchenko met Putin in connection with barter trade in 1991 or earlier.
In 1999, he became a Finnish citizen and in 2001, he moved to Geneva.
In the early 2000s, Timchenko’s business took off with the oil-trading company Gunvor.
Beginning in 2003, Gunvor started trading a large share of Russian oil exports.
There were suspicions that Putin had a third share in Gunvor.
In March 2014, the US Department of Treasury sanctioned Timchenko due to Russia’s annexation of Crimea, stating that Putin had investments in Gunvor.
Timchenko sold his shares in Gunvor to Törnqvist before being sanctioned.
Timchenko has much bigger investments in Novatek and Stroitransgaz.
Novatek succeeded in getting production licenses and using Gazprom’s pipelines.
In 2008–2009, Timchenko bought 23.5 percent of stocks in Novatek, and has since benefited through purchases of gas assets from Gazprom.
In August 2018, Novatek had a market capitalization of $47 billion$ , meaning $11 billion$ for Timchenko.
In 2009, Timchenko bought 80 percent of Stroitransgaz, which is one of Russia’s two biggest builders of gas pipelines, thanks to preferential public procurement.

Arkady and Boris Rotenberg

On March 20, 2014, the US Treasury announced that Arkady and Boris Rotenberg had provided support to Putin’s pet projects and received high price contracts for the Sochi Olympic Games and Gazprom.
The Rotenberg brothers received approximately $7 billion$ in contracts for the Sochi Olympic Games.
Arkady and Boris Rotenberg are among Putin’s oldest friends, doing judo together from 1964.
In the early 1990s, Arkady went into the business of protection.
In 2008, Arkady Rotenberg bought five construction subsidiaries from Gazprom for $348 million$ , forming Stroigazmontazh.
Stroigazmontazh became Gazprom’s biggest contractor.
Stroigazmontazh won the contract to build the Sakhalin-Khabarovsk-Vladivostok pipeline for nearly $7 billion$ without competitive tender.
In 2010, Arkady Rotenberg acquired Mostotrest, a big Moscow road construction company.
Rotenberg’s companies received projects worth almost $10 billion$ for the Sochi Olympics.
In 2015, he obtained state orders of no less than $8.3 billion$ , of which Gazprom’s Power of Siberia pipeline comprised 36 percent.
Big state orders are allocated without open competition at prices that are generally considered to be three times higher than competitive market prices.
- Cost comparison between the Blue Stream gas pipeline which cost around $3 million$ per kilometer; whereas, competitive world market price would have been $1 million – 1.5 million$ . Initial price estimate for Nord Stream was $5 billion$ , but the final cost was $15 billion$ .

Yuri Kovalchuk

Yuri Kovalchuk has been the chief executive of Bank Rossiya since 1991.
He is regarded as the personal banker for senior officials of the Russian Federation including Putin.
In 2000, when President Putin forced Vladimir Gusinsky to sell his NTV, Gazprom bought it, but in 2004, a subsidiary of Bank Rossiya purchased Gazprom Media Group for $166 million$ .
Bank Rossiya also bought Gazprom’s financial assets, notably Gazprombank and its insurance company Sogaz, in a series of complex transactions from 2004 to 2007.
During the years 2004–2007, Gazprom transferred vast assets to Bank Rossiya.
Nemtsov and Milov estimate the 2008 market value of Gazprombank at $25 billion$ , and all its assets were spirited out of Gazprom for virtually nothing.
Nemtsov and Milov estimate that adding up the market value of the assets that Gazprom transferred to Putin’s cronies during the four years 2004–2007 equaled a stunning sum of $60 billion$ .

Nikolai Shamalov and Corruption Scandals

Nikolai Shamalov is one of Putin’s contemporaries from St. Petersburg and a member of the Ozero dacha cooperative.
His primary business was to represent German Siemens in Russia in the sale of medical equipment.
In 2008, Siemens sacked him after the US Securities and Exchange Commission fined Siemens $1.34 billion$ for violating “the Foreign Corrupt Practices Act (FCPA)."
The US authorities assessed the corrupt payments for medical devices in Russia from 2001 to 2007 at $55 million$ , for which Shamalov was responsible.
Sergei Kolesnikov revealed that $1 billion$ of public funding for medical equipment had been diverted to build a palace for Putin in Gelendzhik near Sochi.
Kolesnikov clarified that Putin personally owned individual shares in each of these offshore companies.

Nepotism and Nationalization of Elites

Putin revealed that loyalty and trust are paramount to him.
Putin has nationalized Russia’s elites.
The children of Russia’s oligarchs and state officials have largely emigrated, and the children of Putin’s cronies have taken their place.
The “children of Vladimir Putin’s cronies” are already billionaires, “and most of them are under 40.”
Younger generation cronies are given career jobs at state-owned banks or companies, such as Gazprom, where they usually become a vice president of a big state company.
Nikolai Shamalov’s sons became chief executive of Gazfond and vice president at Sibur, respectively.
Kirill Shamalov married Putin’s daughter and acquired 17 percent of Sibur at a favorable price from Timchenko, and the National Welfare Fund gave Sibur a cheap loan of $1.75 billion$ .
Arkady Rotenberg’s sons have also done very well in two companies privatized from Gazprom, Gazprom Drilling and Gazprombank.
Yuri Kovalchuk’s son is the CEO of Inter RAO.
The sons of Putin’s KGB friends have also ascended quickly in the corporate world, but in state enterprises.

Concerns and Consequences

Russia’s crony capitalism has bred a small class of incredibly wealthy individuals, whose children have been given top state positions, allowing them to become even wealthier.
Resentment among a generation of young, able, and ambitious young Russians bristles.
Alexei Navalny stated that boards of directors at state banks are headed by children of security service officials, who aren’t even 30 years old when they are appointed.

Putin’s Family and Defenses

Putin’s real family includes his two daughters, his friend Alina Kalibaeva, and his cousins, who seem to have fortunes of at least $0.5 billion$ US dollars each.
Putin defended his daughters and grandchildren in public regarding their ordinary lives.
Putin strongly defends his close friends—Kovalchuk, the Rotenbergs, Timchenko-- against sanctions by the United States. Specifically saying they are being target due to being his friends, not because of any wrong doing.
Putin claimed that the sanctions against his friends were based on false assumptions and violate human rights.

Sanctions and Laws

As a consequence of European sanctions against Rotenberg, Italy froze luxury properties belonging to Arkady Rotenberg in September 2014.
The Duma responded by authorizing the Kremlin to seize foreign assets in Russia and use them as compensation for individuals and businesses being hurt by Western sanctions over the Ukraine crisis, called the Rotenberg Law.
The Kremlin later changed its mind, and Putin never signed this into law, presumably because doing so would scare away foreign investors.
In 2017, Putin signed an alternative Rotenberg Law where the Russian state itself would offer compensation to Russian individuals who had suffered from Western sanctions out of the state coffers.
Arkady Rotenberg transferred much of his ownership to his son Igor, who was subsequently sanctioned by the United States.

Additional Policies and Controversies

On November 15, 2015, the Russian government introduced a new road tax, Platon, which provoked large-scale protests among independent long-haul truckers.
A road toll monopoly was given to an operating company half-owned by Arkady Rotenberg’s son Igor.
Putin defended Platon and Igor Rotenberg during his annual press conference.
Igor Rotenberg’s company guaranteed a payment of $150 million$ a year until 2027, despite Putin’s reassurances.
The Platon tariff was doubled on April 15, 2017, arousing mass protests.
Putin reacted particularly sharply against the 2016 revelation of the Panama Papers, seeing it as a US provocation and an attempt to destabilize Russia.

Putin’s Kleptocracy

Putin’s support for his friends reflects his financial interests.
Putin’s Russia is an authoritarian kleptocracy.
In Putin’s Russia, the central state rules, and there is no balance of power because Putin rules supreme.

The Old Oligarchs

By and large, the old oligarchs of the 1990s have lost out both politically and in business, while most of them remain very rich.
Many, perhaps most, have emigrated to the West.
The two big media oligarchs, Vladimir Gusinsky and Boris Berezovsky, were dispossessed and chased out of the country by Putin in 2000.
In 2003, Khodorkovsky was arrested, and his impressive group of associates and Yukos managers fled Russia.
Roman Abramovich sold Sibneft and moved to London.
Of the original seven oligarchs from the mid-1990s, only three hold up: Vladimir Potanin, Mikhail Fridman, and Petr Aven.
Unfortunately, the most criminal of the survivors seem to be the most successful.
The state has come back and taken over, but it has not become legal.