In 1985 Mikhail Gorbachev was promoting glasnost (“openness”) and perestroika (“restructuring”) in an attempt to overcome the Soviet Union’s economic stagnation and stunted growth. These initiatives promised the “utmost respect for the individual citizen and favorable consideration for protecting one’s personal dignity.” By creating a dependable and effective mechanism for accelerating economic and social progress, Gorbachev hoped to encourage initiative and creative endeavor.
As General Secretary of the Communist Party of the Soviet Union from 1985 until 1991 and as that country’s de-facto head of state from 1988 until 1991, Gorbachov gained authority to create joint-stock companies out of state enterprises. The shares became available on stock exchanges. Gorbachev was instrumental in diminishing the role of the Communist Party in governing the state. The party’s official role was ultimately removed from the constitution, in a way that enraged some and inadvertently led to crisis-level political instability with a surge of regional nationalist and anti-communist activism. A failed coup attempt in August of 1991 was followed by an acute food shortage. On December 26, the Soviet Union was dissolved.
There were then fifteen new countries, of which the Russian Federation was only one. Roughly 45,000 state enterprises had been controlled by the Soviet Union. Upon its dissolution the planned economy was displaced by a market economy. The large scale privatization of state owned assets flowed primarily to form the financial, energy, and industrial sectors.
Opposing forces insured that Perestroika had more than one unintended consequence. As Russia’s planned economy transitioned from one in which the means of production was held by the state, to one in which work collectives gained a greater role in running enterprises, the country stumbled. It experienced what The Guardian newspaper described, on August 16th 2001, as “the most cataclysmic peacetime economic collapse of an industrial country in history.
Gorbachov’s benevolent vision for the country had been thwarted at almost every turn as the country became divided by winners and losers. The well positioned were able to leverage conditions that were not readily understood by the rank and file. Although Russia’s citizens were generally well educated, most were overly specialized. The university system, while rigorous, provided certifications that were not all that portable as most regions within the USSR were dominated by a single industry or employer, the equivalent of company towns. No national provision was made for basic social services and few employees or front-line managers had any firsthand experience with decision making in a market economy.
Self-centered forces wasted no time in turning Mikhail Gorbachev’s, and Boris Yeltsin’s shared vision into a variety of schemes to exploit the poor. What was intended as an equal distribution of national wealth became concentrated within the ranks of upper management as the starving masses were caught between the proverbial rock and a hard place. Cash strapped workers relinquished whatever they may have held of any value, including personal shares, settling for fire-sale prices just so they could buy foodstuffs. When they did scrape up a little cash, they faced the bleak reality of purchasing power that was dramatically reduced.
In 1995 a Loans for Shares program was adopted by the government of Boris Yeltsin to address a severe fiscal deficit. The auctions were largely controlled by favored insiders and were, therefore, devoid of competition. The same banks that were retained by the government to conduct the auctions ended up winning them and the assets were leased at prices just slightly over the minimum starting bid. Voters in Russia described the process using a term that translates to what our urban dictionaries have coined as grabification.
From Vladimir Putin’s perspective, Russia had lost its national wealth and 2 million square miles of territory under humiliating circumstances. Although thoroughly pissed, he was perceived by Yeltsin as loyal. He commanded the FSB, a successor to the KGB, as Director. He was later appointed as Prime Minister with Yeltsin declaring “There will be no vacuum.” Vladimir Putin was uniquely positioned, early on, to benefit personally from the rise of the oligarchs.
As the gamesmanship over vouchers and loans for shares played out, one such grabber, an oil oligarch, ran afoul of Putin and was put on trial. Putin had then arranged for the oily Defendant to be seated in a cage at the center of the courtroom. According to the prevailing legend, one by one the other oligarchs came to Putin and asked: “How do we stay out of cages?” Putin’s answer: “Fifty percent.”
With all the ink in the water, no one, except Vladimir Putin, knows exactly how he acquired his vast wealth or whether he is, in fact, the richest person in the world. We do know that between 1993 and 1997, as Deputy Chief of the Presidential Property Management Division, Putin organized a transfer of the assets of the former Soviet Union and Communist Party to the Russian Federation. Accordingly, he knew where all the real value was and, as a former Lieutenant Colonel of the KGB, he also knew where the bodies were buried. Consider that in light of the way he works the levers today.