A true enemy of oligarchs?

Photographer: Kostas Tsironis/Bloomberg

Why Fighting Oligarchs Is a Bad Idea

Leonid Bershidsky is a Bloomberg View columnist. He was the founding editor of the Russian business daily Vedomosti and founded the opinion website Slon.ru.
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The top economic spokesman for the leftist Greek party Syriza, which leads the polls ahead of the Jan. 25 election, says one of the party's goals is to crack down on the nation's oligarchs. Reducing the outsized role of politically connected magnates, George Stathakis argues, will allow smaller, more honest businesses to be more competitive.

Syriza's implied threat to break apart the euro currency union was scary enough. But Stathakis's rhetoric is at least as worrisome. Any regime that wants to fight the oligarchs means to increase government interference in the economy -- to such an extent that it will end up replacing old oligarchs with new ones.

"Oligarch," a word of Greek origin, has long denoted a member of an oligarchy, a small group that runs a country or an organization. In the 1990s, however, it acquired a second meaning: to quote the Oxford English Dictionary, "(Especially in Russia) a very rich businessman with a great deal of political influence." That has become the dominant meaning. In the Collins English Dictionary, four of the five usage examples for "oligarch" refer to Russia.

Inside Russia, the word was used in this sense for the first time on June 2, 1995, in a newspaper article about a once-influential and now all but forgotten tycoon, Oleg Boiko. In this instance, the word was applied to the tenacious clique of bankers who became billionaires in 1995 and 1996 after being allowed to privatize Russia's best industrial assets for a tiny fraction of their true cost -- in reward for backing President Boris Yeltsin's re-election. These guys did, indeed, constitute an oligarchy: I remember one of them explaining his vast political influence by saying, "I am 4 percent of the Russian GDP."

Then, on Feb. 28, 2000, Vladimir Putin, running for president for the first time, told his endorsers:

We must rule out people leeching onto power and using that for their own purposes. No clan, no oligarch should be close to the regional or federal authorities -- they must be equidistant from power.

"Equidistance" promptly became a meme in Russia, though it didn't gain such currency outside the country. At first it was used sarcastically: The same billionaires still controlled the country's resource and financial wealth. But then something strange started happening. First, Vladimir Gusinsky lost the media empire he had built with cheap government loans and a free national broadcasting license from Yeltsin. Then, Mikhail Khodorkovsky, one of the biggest beneficiaries of the 1990s privatization, was jailed on dubious charges, and the assets of his oil company, Yukos, became part of state-owned Rosneft. Most of the old oligarchs were still around, but only the Western press still used the term when referring to them. They were still rich, but they no longer ruled Russia.

On the flip side of that development was the government's growing importance in the Russian economy. Government spending as a share of gross domestic product increased steadily from 15 percent in 1999 to 20 percent in 2013, and that was only the tip of the iceberg: Russian methods of measuring the public sector do not comply with international standards. In 2012, the consolidated public sector accounted for at least 68 percent of GDP by expenditure. The Russian government came to control more than two thirds of the economy, and while comparable data for 2000 do not exist, research into specific sectors indicates how that share was achieved: In 2000, Russia's five biggest state-owned banks accounted for 36 percent of all assets in the banking system. By 2009, that share increased to 52.1 percent. 

Inevitably, an all-powerful state creates a class of beneficiaries. The recipients of big government orders, the controllers of state assets -- these are all Putin's friends. Most of them are now on U.S. and European sanctions lists. And though they are rarely labelled as oligarchs, they fit the definition: They are leeches whose businesses exist only because they know how to exploit their proximity to the government.

Now, Ukrainian president Petro Poroshenko -- himself sometimes called an oligarch because he's a billionaire owner of a big confectionery company who has always played politics -- says more or less what Putin said in 2000:

I guarantee that oligarchs will have no influence on Ukrainian government. I will do my best for that. If big business follows the law, it will get the benefits from the improvement of our country's investment climate. But if someone meddles in politics and uses power for his own enrichment, we will demonstrate our resolve.

So far, Ukraine's war on its oligarchs has been limited to attempts by some rich Ukrainians to squeeze others who made wrong political bets during the country's "revolution of dignity" last year. Metals king Rinat Akhmetov, the country's richest man, and chemical and energy magnate Dmitri Firtash are under particular pressure. Poroshenko's businesses, by contrast, are doing great: His bank increased its assets by about 50 percent in the first nine months of 2014. And despite all the talk of deregulation, government expenditure is set to increase this year, creating fertile ground for more, not less, cronyism.

Syriza's plan to go after oligarchs includes having them compete for media licenses again, investigating their government contracts for road construction, and cracking down on tax evasion through offshore operations. These are all elements of increased government control over business. They can succeed only if Syriza politicians and officials aren't susceptible to corruption. Where old oligarchs fail to get traction, new ones inevitably learn to game the system and grease the wheels. 

The only effective way to fight oligarchies is to shrink government. In Greece, public spending rose to 59.2 percent of GDP last year, from 53.8 percent in 2013. The country is going the wrong way, and Syriza's looming war on oligarchs will only take it further down that path. 

This column does not necessarily reflect the opinion of Bloomberg View's editorial board or Bloomberg LP, its owners and investors.

To contact the author on this story:
Leonid Bershidsky at lbershidsky@bloomberg.net

To contact the editor on this story:
Mary Duenwald at mduenwald@bloomberg.net