ECONOMY
‘What is Happening Now is an Obvious Reversal of Privatization’
April 29, 2024
- Andrei YakovlevAssociate at Harvard University’s Davis Center and a fellow at Hanse-Wissenschaftskolleg (HWK)
Tatiana Rybakova
Journalist and writer
Economist Andrei Yakovlev argues that all the recent nationalizations represent the state’s new policy and forecasts that in the next 6-12 months companies whose main assets were gotten through the loans for shares scheme in the 1990s will be targeted.
The original interview in Russian was published in Republic. We republish a fragment here with the permission of the author and Republic.
In July 2023, by presidential decree, foreign shares in the Baltika brewing company were transferred to the state. Source: Wiki Commons
Why, in your view, was it decided to start nationalization in the first place? What was the trigger and who initiated it?
In my view, several factors could be involved. The seizure of Gazprom and Rosneft assets in Europe provided a formal reason for retaliatory actions. Putin’s first decrees on Uniper and Fortum, which started this whole process, could be seen as a kind of “symmetrical response.” But then there were Baltika and Danone (see Russia.Post about them here), the nationalization of which was no longer symmetrical, since no one did anything like that with such assets in Europe. And then a “window of opportunity” opened for people who wanted to get either assets or control over assets with the state’s help.
As far as I know, several different stories ran parallel to one another. One is very specific and particular and relates to the activities of the company Roskhim (formerly Russian Hydrogen), considered to be affiliated with the Rotenberg brothers.
Circulating among businesspeople I know was a scanned copy of a letter from the CEO of this company, addressed to Putin, about the strategic importance of the chemicals industry and the need for consolidation in the industry under the direction of Roskhim as a “development institution.” But there are some enterprises that were outside the consolidation perimeter, and the letter proposed that the Prosecutor General be ordered to check the validity of their privatizations.
On top of this letter came Putin’s resolution addressed to [presidential aide Maxim] Oreshkin to discuss the proposal with relevant government agencies. The letter was dated June 2023, and as early as July-August the Prosecutor General launched cases to take under state control assets of enterprises from the list attached to that letter. The claims were justified with FSB-style arguments that the current owners’ actions threatened the economic sovereignty of Russia.
Obviously, in today’s Russia there is hardly a judge who would dare to disagree with such arguments – which seems to have predetermined the speed with which court decisions were made on the claims brought by the Prosecutor General.
Here emerges an important technical difference with the typical schemes used to expropriate property for the last 15-20 years. Usually, those were based on criminal fraud cases, which served as grounds for arresting the owner. And while he was held in pretrial detention, other private players would try to seize the relevant assets. In other words, an asset would pass from one set of private hands to another after a criminal case was initiated. Still, the victim had opportunities to challenge court decisions and sometimes the legal proceedings could drag on for years.
Now everything is done very quickly and technically the asset becomes the property of the state. However, then it is transferred “to be managed” by the private company Roskhim – along the lines of how it was already done with Bashkir Soda Company. So, in contrast to the South Korean chaebols (the experience of which Roskhim cites in its letter to Putin to justify its role as a “development institution”), here we have a classic scheme in which the losses will definitely be on the state, while what will happen with profits, as they say, “we’ll figure out later.”
In my view, several factors could be involved. The seizure of Gazprom and Rosneft assets in Europe provided a formal reason for retaliatory actions. Putin’s first decrees on Uniper and Fortum, which started this whole process, could be seen as a kind of “symmetrical response.” But then there were Baltika and Danone (see Russia.Post about them here), the nationalization of which was no longer symmetrical, since no one did anything like that with such assets in Europe. And then a “window of opportunity” opened for people who wanted to get either assets or control over assets with the state’s help.
As far as I know, several different stories ran parallel to one another. One is very specific and particular and relates to the activities of the company Roskhim (formerly Russian Hydrogen), considered to be affiliated with the Rotenberg brothers.
Circulating among businesspeople I know was a scanned copy of a letter from the CEO of this company, addressed to Putin, about the strategic importance of the chemicals industry and the need for consolidation in the industry under the direction of Roskhim as a “development institution.” But there are some enterprises that were outside the consolidation perimeter, and the letter proposed that the Prosecutor General be ordered to check the validity of their privatizations.
On top of this letter came Putin’s resolution addressed to [presidential aide Maxim] Oreshkin to discuss the proposal with relevant government agencies. The letter was dated June 2023, and as early as July-August the Prosecutor General launched cases to take under state control assets of enterprises from the list attached to that letter. The claims were justified with FSB-style arguments that the current owners’ actions threatened the economic sovereignty of Russia.
Obviously, in today’s Russia there is hardly a judge who would dare to disagree with such arguments – which seems to have predetermined the speed with which court decisions were made on the claims brought by the Prosecutor General.
Here emerges an important technical difference with the typical schemes used to expropriate property for the last 15-20 years. Usually, those were based on criminal fraud cases, which served as grounds for arresting the owner. And while he was held in pretrial detention, other private players would try to seize the relevant assets. In other words, an asset would pass from one set of private hands to another after a criminal case was initiated. Still, the victim had opportunities to challenge court decisions and sometimes the legal proceedings could drag on for years.
Now everything is done very quickly and technically the asset becomes the property of the state. However, then it is transferred “to be managed” by the private company Roskhim – along the lines of how it was already done with Bashkir Soda Company. So, in contrast to the South Korean chaebols (the experience of which Roskhim cites in its letter to Putin to justify its role as a “development institution”), here we have a classic scheme in which the losses will definitely be on the state, while what will happen with profits, as they say, “we’ll figure out later.”
“Overall, I would say that there has been an evolution from dividing up the assets of foreign companies that left Russia in 2022 to a large-scale redistribution of property.”
The Russian Union of Industrialists and Entrepreneurs (RSPP). At the RSPP congress at the end of April, President Putin assured business that “it is not about overturning privatization, but about cases where the actions or inactions by owners of enterprises... have done direct harm to the security of the country.”
Source: VK
Source: VK
Sure, foreign companies were forced to sell their assets at low prices through a special decision of a government commission. But, still, it was for money. And, as far as I can tell, the foreigners who wanted to leave have all already left. But appetite comes with eating. And so these people came up with an idea: why not start taking assets not from foreigners, but from Russian owners, who are less protected from such pressure, and get them not for money, but for free? Of course, they cite “national security,” but they are pursuing their own purely private interests.
Yet there is another level that to some extent may reflect national interests, as people in the Kremlin understand them. This is pressure on large companies to transfer their main management structures to Russian jurisdiction.
Since the 1990s, most large Russian companies have set up their internal management through offshore companies – not even to minimize taxation, but primarily to protect their property. Because people did not really trust the Russian courts and Russian legislation and thus insured themselves against that.
Since the summer of 2023, the owners of such companies have been under pressure to bring their management structures back under Russian jurisdiction. In that case, it would be easier for the Ministry of Finance and the Federal Tax Service to control financial flows and collect taxes. To be sure, the governments of the US and European countries also do not like it when the head offices of their large companies are located in obscure jurisdictions.
However, redomiciling to Russia will not only help the Ministry of Finance to control financial flows, but also make it easier to seize assets – after all, that is much simpler when the company is headquartered in Russia. I think that many people in Russian business understand this very well.
Based on your answers, already nationalized assets are being handed over to private owners. After that, losses are put on the nationalized company’s books, while the profits are siphoned off to a private shop. Do I understand that correctly?
All this, of course, is formally justified by national interests: security, sovereignty, development.
For sure, there is nothing that cannot be justified by national interests. However, here’s the question. You were saying that the letter from the head of Roskhim triggered...
No, it was not a trigger, just a concrete example of a new scheme. Because the nationalization of the aforementioned Danone and Baltika happened in July, but in May there had been a speech by [Investigative Committee chief Alexander] Bastrykin at the St Petersburg Legal Forum, where he publicly stated that nationalization of key industries is necessary in wartime. So, you can understand what’s behind all this. By the way, Prosecutor General [Igor] Krasnov has worked with Bastrykin since 2007.
Yet there is another level that to some extent may reflect national interests, as people in the Kremlin understand them. This is pressure on large companies to transfer their main management structures to Russian jurisdiction.
Since the 1990s, most large Russian companies have set up their internal management through offshore companies – not even to minimize taxation, but primarily to protect their property. Because people did not really trust the Russian courts and Russian legislation and thus insured themselves against that.
Since the summer of 2023, the owners of such companies have been under pressure to bring their management structures back under Russian jurisdiction. In that case, it would be easier for the Ministry of Finance and the Federal Tax Service to control financial flows and collect taxes. To be sure, the governments of the US and European countries also do not like it when the head offices of their large companies are located in obscure jurisdictions.
However, redomiciling to Russia will not only help the Ministry of Finance to control financial flows, but also make it easier to seize assets – after all, that is much simpler when the company is headquartered in Russia. I think that many people in Russian business understand this very well.
Based on your answers, already nationalized assets are being handed over to private owners. After that, losses are put on the nationalized company’s books, while the profits are siphoned off to a private shop. Do I understand that correctly?
All this, of course, is formally justified by national interests: security, sovereignty, development.
For sure, there is nothing that cannot be justified by national interests. However, here’s the question. You were saying that the letter from the head of Roskhim triggered...
No, it was not a trigger, just a concrete example of a new scheme. Because the nationalization of the aforementioned Danone and Baltika happened in July, but in May there had been a speech by [Investigative Committee chief Alexander] Bastrykin at the St Petersburg Legal Forum, where he publicly stated that nationalization of key industries is necessary in wartime. So, you can understand what’s behind all this. By the way, Prosecutor General [Igor] Krasnov has worked with Bastrykin since 2007.
“Russian law enforcers have never liked private business; for them all these ‘merchants’ are by definition swindlers and crooks, and state property is much more understandable and right.”
They have always had a control mindset, and it’s easier to control what’s public. But for quite a while, their impulses – the same Bastrykin had said similar things before – were restrained by two factors.
One, the loyalty of business was important to the Kremlin, and two, top officials from the government’s economic cabinet were on the side of business. This resulted in real efforts to remove barriers to doing business (think of the program to improve Russia’s ranking in the World Bank’s Doing Business report).
The stance of top officials from the economic cabinet also helped directly deter the siloviki – take high-profile affairs such as the criminal case against Colonel [Dmitri] Zakharchenko of the Ministry of Internal Affairs or [that against] two FSB colonels with billions of rubles’ worth of cash seized. These were the signals that the Kremlin gave to the security forces: you need to know when to stop. In general, as long as there was at least a minimal balance between the siloviki and the highest civilian bureaucracy, businesses had a chance to fend off raids by “people in uniform.”
But with the outbreak of the war, this balance completely broke down. If we look at relations with elite groups, then today Putin depends on the siloviki. Meanwhile, business and the civilian bureaucracy are, roughly speaking, in a semi-feudal position where they were presented with a fait accompli: we started the war – now you need to work in these conditions; we got sanctioned – now you need to work under sanctions. Get us out of it as best you can. Otherwise prosecutors will come after you with criminal cases about corruption or “abuse of office” – this concerns bureaucrats. Disaffected businesses, meanwhile, will have their assets seized with arguments about “violating Russia’s economic sovereignty.”
Until now, the results of the loans for shares scheme have not been touched. Will it come to that?
In my view, in the near term the assets of companies that received their main assets within the framework of loans for shares will be redistributed.
I think in the next six months or a year. Because, again, appetite comes with eating. The economic situation in the country, despite all the rosy reports, is not so good. And those who now have the power to redistribute property are placeholders, much like the oprichniks under Ivan the Terrible: they understand that time is passing and at any moment the “tsar” can replace them. Therefore, they have strong incentives to get everything here and now. And they will try to use their power. Moreover, the taboo on overturning privatization has essentially been lifted.
The siloviki talked about this a lot, but at the same time Putin said many times that there will be no de-privatization. Even in the case of Yukos, it was formally a matter of tax evasion, not improper privatization.
What is happening now is an obvious reversal of privatization. At this point, some formal violations have been cited – for example, the enterprises had been subordinated to the federal government, but the decisions on their privatization were made by regional authorities. But everyone is well aware that almost all privatizations were carried out on the margins of the law. Simply because there was no legislation; rather there were either presidential decrees or some other decisions by government bodies. Therefore, with such arguments you can review almost any privatization deal.
One, the loyalty of business was important to the Kremlin, and two, top officials from the government’s economic cabinet were on the side of business. This resulted in real efforts to remove barriers to doing business (think of the program to improve Russia’s ranking in the World Bank’s Doing Business report).
The stance of top officials from the economic cabinet also helped directly deter the siloviki – take high-profile affairs such as the criminal case against Colonel [Dmitri] Zakharchenko of the Ministry of Internal Affairs or [that against] two FSB colonels with billions of rubles’ worth of cash seized. These were the signals that the Kremlin gave to the security forces: you need to know when to stop. In general, as long as there was at least a minimal balance between the siloviki and the highest civilian bureaucracy, businesses had a chance to fend off raids by “people in uniform.”
But with the outbreak of the war, this balance completely broke down. If we look at relations with elite groups, then today Putin depends on the siloviki. Meanwhile, business and the civilian bureaucracy are, roughly speaking, in a semi-feudal position where they were presented with a fait accompli: we started the war – now you need to work in these conditions; we got sanctioned – now you need to work under sanctions. Get us out of it as best you can. Otherwise prosecutors will come after you with criminal cases about corruption or “abuse of office” – this concerns bureaucrats. Disaffected businesses, meanwhile, will have their assets seized with arguments about “violating Russia’s economic sovereignty.”
Until now, the results of the loans for shares scheme have not been touched. Will it come to that?
In my view, in the near term the assets of companies that received their main assets within the framework of loans for shares will be redistributed.
I think in the next six months or a year. Because, again, appetite comes with eating. The economic situation in the country, despite all the rosy reports, is not so good. And those who now have the power to redistribute property are placeholders, much like the oprichniks under Ivan the Terrible: they understand that time is passing and at any moment the “tsar” can replace them. Therefore, they have strong incentives to get everything here and now. And they will try to use their power. Moreover, the taboo on overturning privatization has essentially been lifted.
The siloviki talked about this a lot, but at the same time Putin said many times that there will be no de-privatization. Even in the case of Yukos, it was formally a matter of tax evasion, not improper privatization.
What is happening now is an obvious reversal of privatization. At this point, some formal violations have been cited – for example, the enterprises had been subordinated to the federal government, but the decisions on their privatization were made by regional authorities. But everyone is well aware that almost all privatizations were carried out on the margins of the law. Simply because there was no legislation; rather there were either presidential decrees or some other decisions by government bodies. Therefore, with such arguments you can review almost any privatization deal.
“An important ‘innovation’ of the latest claims filed by the Prosecutor General was the effective cancellation of the statute of limitations.”
Sergei Petrov, founder of Rolf Group, Russia’s largest car dealer. In December 2023, Rolf was taken over by a presidential decree, the first nationalization of a Russian-owned business. Source: Wiki Commons
The Prosecutor General now believes (and the courts agree) that the statute of limitations is counted not from the moment when an act that violates the law is committed, but from the moment when the “injured party,” that is, the Russian Federation, discovered that state authorities had done something wrong. This approach essentially leaves any privatization deal up in the air.
But things have gone from bad to worse. In December, there was the case of the company Rolf, which had nothing to do with privatization. It had been a new private company, but it was also nationalized. The official argument of the Prosecutor General: its owner, Sergei Petrov, continued to “do business” when he was a Duma deputy. The same arguments were used in the recent case of the pasta producer Makfa. But with this approach property can be taken away from half of Russian big business owners tomorrow. In other words, there are no barriers left.
At the same time, after all the criminal cases against generals from the Prosecutor General and the Ministry of Internal Affairs and colonels from the FSB, the siloviki no longer have the freedom at the ground level that they had 10 or 15 years ago. And the new model itself – when assets are not transferred from one private player to another through criminal cases initiated by law enforcement agencies but are taken over by the state and only then “transferred for management” by or sold to new owners – involves centralized decisions about whom to take from and whom to give to. So, for the siloviki, moves to expropriate property require approval. And from this standpoint it makes no sense for the siloviki to put their resources to use [in order to seize] some small or medium-sized enterprises; it is more logical to go right after big fish. And the big fish are the oligarchs.
Obviously, the only defense mechanism for big business in this situation remains access to Putin – as the “supreme arbiter.” But the oligarchs of the Yeltsin period and the oligarchs of the Putin period have different opportunities in this regard. Obviously, the latter are “closer to the body.” And I think that is why it is the oligarchs of the Yeltsin period whose assets were acquired through loans for shares who now face the greatest risks of having their property expropriated.
But things have gone from bad to worse. In December, there was the case of the company Rolf, which had nothing to do with privatization. It had been a new private company, but it was also nationalized. The official argument of the Prosecutor General: its owner, Sergei Petrov, continued to “do business” when he was a Duma deputy. The same arguments were used in the recent case of the pasta producer Makfa. But with this approach property can be taken away from half of Russian big business owners tomorrow. In other words, there are no barriers left.
At the same time, after all the criminal cases against generals from the Prosecutor General and the Ministry of Internal Affairs and colonels from the FSB, the siloviki no longer have the freedom at the ground level that they had 10 or 15 years ago. And the new model itself – when assets are not transferred from one private player to another through criminal cases initiated by law enforcement agencies but are taken over by the state and only then “transferred for management” by or sold to new owners – involves centralized decisions about whom to take from and whom to give to. So, for the siloviki, moves to expropriate property require approval. And from this standpoint it makes no sense for the siloviki to put their resources to use [in order to seize] some small or medium-sized enterprises; it is more logical to go right after big fish. And the big fish are the oligarchs.
Obviously, the only defense mechanism for big business in this situation remains access to Putin – as the “supreme arbiter.” But the oligarchs of the Yeltsin period and the oligarchs of the Putin period have different opportunities in this regard. Obviously, the latter are “closer to the body.” And I think that is why it is the oligarchs of the Yeltsin period whose assets were acquired through loans for shares who now face the greatest risks of having their property expropriated.
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