The oligarchs went on a buying spree, purchasing hundreds of thousands of vouchers, each of which were worth 10,000 rubles, or about $40 or less back in the 1990s. Average Russians, who were struggling during hyperinflation, were often eager to sell. After amassing vouchers, the oligarchs — both come-up-from-nothing hustlers and former Soviet government insiders — used them at auctions to buy up stocks in newly private companies. By all accounts, many of these enterprises were shockingly undervalued — and those who were able to get large chunks of lucrative enterprises became fabulously wealthy in a very short period of time. Between 1992 and 1994, about 15,000 state-run enterprises went private under the program.
By 1994, when the voucher program ended, around 70 percent of the Russian economy had been privatized. But some of the biggest, most valuable industries remained in the government’s hands. Chubais had plans to privatize these state enterprises and raise much needed funds for the government by selling them off for cash to the highest bidder in legitimate auctions. However, politics got in the way of the increasingly unpopular privatization drive — and even threatened to reverse it. That’s when the Yeltsin administration resorted to a much shadier form of privatization.
The “Loans For Shares” Scheme
By 1995, Boris Yeltsin was very unpopular. Hyperinflation. The decline of law and order. The rise of the mafia and execution-style killings on the streets of Moscow. Russia’s inability to pay government salaries and pensions. The sense that unscrupulous men in suits were the only ones winning in the new economy. Plus, Yeltsin was a notorious drunk with serious health problems. Just a year away from reelection, Yeltsin’s approval rating fell to the low single digits, and he faced the specter of an increasingly popular Communist challenger who looked like he could win the 1996 presidential elections.
With privatization stalling, the government desperate for money, and a growing fear that Russia was about to slide back into communism, Chubais and the Yeltsin administration turned to a shady scheme known as “Loans For Shares.” The secret plot basically worked like this: the richest oligarchs loaned the government billions of dollars in exchange for massive shares of Russia’s most valuable state enterprises. When the government defaulted on paying back the loans, as the schemers expected they would, the oligarchs would walk away with the keys to Russia’s most profitable corporations. In exchange, the government would get the money it needed to pay its bills, privatization would keep moving forward — and, most importantly, the oligarchs would do everything in their power to ensure Yeltsin was reelected.
Between November and December 1995, twelve of Russia’s most profitable industrial enterprises were auctioned off to the oligarchs, including a mining company, two steel companies, two shipping companies, and five oil companies. The auctions were a complete farce. Chubais and his team had predetermined with the oligarchs who would get what and for roughly how much. And the prices the oligarchs paid for these corporations were a steal — almost literally. For example, Boris Berezovsky and Roman Abramovich, now well beyond his days of selling rubber ducks, got a large stake in the oil company Sibneft for about $200 million. In 2009, when Putin renationalized the company, Abramovich sold his stake back to the government for $11.9 billion. Talk about a payday.
“Chubais never advertised it publicly — he attempted to keep the goal obscure so as not to alarm the opposition— but loans for shares should really have been called ‘tycoons for Yeltsin,'” writes David Hoffman, the former Moscow bureau chief for The Washington Post, in his book The Oligarchs: Wealth And Power In The New Russia. “Chubais was willing to hand over the property without competition, without openness, and, as it turned out, for a bargain price, but in a way that would keep the businessmen at Yeltsin’s side in the 1996 reelection campaign.”
“We could completely offset the negative consequences of financial sanctions if the Bank of Russia fulfilled its constitutional duty to ensure a stable ruble exchange rate, and not the recommendations of Washington financial organizations…. It was the connivance of the Central Bank which led to the fact that Russia and its industry were drained of blood and unable to develop.” Sergey Glazyev, Russian economist and author
The Russians could close down Western industry if Russia ceased exporting energy and minerals, but is afraid to do so because of the foreign exchange loss….
Russia has no need for foreign exchange. She does not need to import energy and minerals. Russia is full of engineering and science and can make whatever she needs. The central bank can finance all internal projects. But as the Americans succeeded in brainwashing Russian economists, the Russians can’t use the powerful weapon they have at hand to bring the West to its knees begging for mercy. Moreover, the Russian economists don’t have enough sense to demand payment in rubles for their energy and minerals. This would strengthen their own currency rather than the currencies of their enemies. Why does the Russian central bank forgo the opportunity to use Russia’s exports to stabilize the Russian currency?
The conclusion is that in the sanctions game the Russians hold all the cards but do not know how to play them.