The State Machine Redistributing Property Into The Right Hands
October 24, 2023
  • Nikolai Petrov

    Visiting researcher, German Institute for International and Security Affairs (Stiftung Wissenschaft und Politik)
Political scientist Nikolai Petrov breaks down the large-scale “de-privatization” that is being carried out by Russian courts, as well as through other methods. The threat of being stripped of property is intended to make business pliable, while the Kremlin also wants to decide for itself who can be entrusted with managing major assets.
Sirius is an educational center for gifted children in Krasnodar Region (Russia). It was founded in 2015 on the initiative of Vladimir Putin. Source: VK
The process of “de-privatization” in Russia became widespread by the autumn, with courts, at the request of the Prosecutor General, seizing private companies and turning them over to the state. Regional oligarchs were most often the victims, though there are faces from the top of the Forbes richest people list, such as Oleg Deripaska and Andrei Melnichenko.

How property is being taken away and from whom
Behind the myriad cases, two main reasons can be gleaned why the state targets certain assets for nationalization: the first is the wiping out of previous “good deeds” [toward the state] and bringing strategic entities back under state control; and the second is the creation of a mechanism for the new, quasi-owners to be rotated in.

The most high-profile case of recent times is that which the Prosecutor General filed in August to seize the Sibeko energy company from the above-mentioned Melnichenko (the richest man in Russia). Melnichenko had bought it in 2018 for RUB 31.8 billion from ex-minister Mikhail Abyzov. Recently, the General Prosecutor’s office withdrew the case against Melnichenko’s business entities after one of them made a significant donation in the field of education.

Prior to this, the state had seized 16% of Komi Energosbytovaya Company, part of the biggest private Russian energy holding T Plus, founded by Viktor Vekselberg, as well as 81.66% of the shares of TGK-2 (with energy assets in five of Russia’s regions), which were held by the runaway businessman and former Federation Council Senator Leonid Lebedev.

Among the more high-profile cases was the seizure of land and a hotel complex in Sochi worth $1 billion from Oleg Deripaska in the autumn of 2022. In this case, the “strategic” interest of the state lay in transferring the oligarch’s property to the Sirius University of Science and Technology, which is under Putin’s personal patronage.

In the cases of both Deripaska and Melnichenko, state entities made what they deemed “fair” exactions to address the needs of the state – without delays, persuasion or drawn-out bargaining. In wartime, the Kremlin is seeking to avoid long and complex legal procedures like those that were used to seize property from Mikhail Khodorkovsky 20 years ago.
“Swift requisitions are needed, and by going after high-profile figures, the government is showing business who is boss.”
Less visible, but no less significant, is the case of the seizure of current Duma Deputy Andrei Kolesnik’s controlling stake in the Kaliningrad Commercial Sea Port. Kolesnik is accused of what any businessman-turned-deputy can be accused of: “in violation of the established prohibitions, he acquired assets and made a profit in the industry in which he made legislative decisions as a deputy.”

In the case of Metafrax Chemicals, a major methanol producer, in which 94.2% of the shares were seized, the court declared illegal the privatization that had taken place in 1992. At that time, through a series of transactions, the owner of the plant became the future billionaire and Uralkali owner Dmitri Rybolovlev, who then sold his entire Russian business to his long-time partner Seifeddin Rustamov (#90 on the Russian Forbes list).
The Metafrax case is interesting not only because the Prosecutor General successfully challenged a deal that was more than 30 years old, but also because of the basis on which this was done: according to the Prosecutor General, the fact that the plant was privatized without a decision from the federal government represented a violation of the “economic sovereignty of the Russian Federation and its defense capability.”

This formulation calls into question the authority of regional governments that in the 1990s supposedly had the power to manage state property, including disposing of that property, and provides the legal grounds to challenge many of the privatization deals concluded at the time.

De-privatization is being actively carried out in the oil and gas sector, across infrastructure (mainly ports), at enterprises related to the military-industrial complex, and in the chemical industry and agriculture.

Those caught in the path of the de-privatization steamroller are both businessmen who have emigrated, oligarchs loyal to the Kremlin – including some of the biggest ones – and former bureaucrats. There are former and current deputies of various levels, as well as senators.

It is important to understand that when a privatization from 30 years ago is declared illegal and the asset taken away from the current owner, who often had nothing to do with the original transaction and simply made a bona fide acquisition, this is neither punishment nor a restoration of justice, but rather state banditry.

The de-privatization machine

At the Prosecutor General’s office, all de-privatization cases are handled by Deputy Prosecutor General Igor Tkachev, whose portfolio is overseeing the court system. However, the main customer and the brains behind what is happening seems to be the all-powerful FSB economic security department. Moreover, even when Igor Krasnov was appointed prosecutor general in January 2020, experts were saying that his arrival spelled a greatly increased role for the FSB in directing investigations.
It is telling how easily and quickly cases involving the seizure of property from regional and national oligarchs who have had their day go through regional courts.
Until 2022, Vagit Alekperov was president and co-owner of Lukoil, one of the biggest oil companies in Russia. Source: Wiki Commons
Before, such “harmony” between the court and the prosecution had been seen mostly in political rather than economic cases. The obedience of the courts is very likely the result of the expanding Rostov case, where more than a dozen regional court officials, including the entire leadership, have been detained on charges of corrupt decision-making in favor of local businesses and authorities (see Nikolai Petrov’s previous article about this in Russia.Post).

The cases described above – when property is seized through the courts – can be called “hard de-privatization.” However, there is also “soft de-privatization,” when the owner is squeezed out. In my view, this is what happened to Lukoil. It started last year, when Vagit Alekperov, having headed the company for almost 30 years, resigned as president (and was replaced by Vadim Vorobyov).

Following Alekperov’s resignation, Lukoil Vice President Leonid Fedun, the second biggest shareholder after Alekperov (their combined stake is worth about $20 billion), unexpectedly retired. The subsequent changes at the top of the company, including directors on the board, are difficult to assess, since this information is now generally not disclosed amid the fear of Western sanctions against businessmen and top managers.

Upon stepping down, Alekperov received the Order “Merit to the Fatherland I Class,” while on his birthday on September 1, 2022 (in the mafia environment, such a coincidence is considered an important signal), Ravil Maganov, Alekperov’s associate and the Lukoil board chairman, who had remained a key representative of the old team following the departure of Alekperov and Fedun, died under mysterious circumstances, having fallen out of a sixth-floor window of the Kremlin hospital.

Essentially, Alekperov and his team were removed from management of the company without, technically speaking, a change of shareholders, since with such a gigantic private company like Lukoil, that would have been too big and tedious an operation. Instead, Lukoil had its management replaced and was turned into a quasi-state company. And since there is no information about who is now on the board of directors, it is nearly impossible to prove exactly how everything happened. As for Maganov, who was also the brother of the head of Tatneft, his demonstrative murder could have been a chilling signal about the need for complete obedience.

Foreign companies are another case. This year, the Kremlin seized the assets of four of the biggest in Russia. First, the electric power assets of Germany’s Uniper and Finland’s Fortum, which before the war had been estimated at EUR 5.5 billion, were put under external management through the Federal Property Management Agency. In fact, they will now be managed by people from Rosneft.

Later, by Putin’s decree, the Danone Russia dairy company and the Baltika brewery, owned by Denmark’s Carlsberg, were nationalized (see Russia.Post for more about these cases). The dairy business is now headed up by a former Chechen agriculture minister and Ramzan Kadyrov’s nephew, Yakub Zakriev, while the new head of Baltika is 70-year-old Taimuraz Bolloev, Putin’s longtime acquaintance, who had managed the company from 1991 to 2004.

Like any act of repression, the ongoing process of forcibly changing owners of major companies is demonstrative in nature.
Lukoil headquarters in Moscow. Source: Wiki Commons
The point is, as with the murders (besides Maganov, there was another mysterious death at Lukoil – on May 4, 2022, Alexander Subbotin, another Lukoil board member, was found dead in a Moscow basement, allegedly after receiving a dubious treatment from a “shaman”), to make business as a whole more pliable, so that the seizure of large assets, as well as changes of owners/managers, proceeds more smoothly going forward.

Overall, it is probably more correct to talk not about de-privatization, but about an ongoing large-scale redistribution of property in which de-privatization is only one of the tools.

On February 24, 2022, Putin, with an assist from Western sanctions, built a “fence” to keep businessmen and managers in Russia. The institution of private property, together with the presence in Russia of businessmen owning large assets, is the last obstacle in the way of finally establishing a Soviet-style nomenklatura system in which there is no independent elite – only cogs in a single machine, unquestioningly subordinate to the supreme ruler. To get rid of this obstacle, a streamlined mechanism was needed to redistribute property from the old owners, who still remembered the times when owning large assets gave them some independence, to new ones, completely subordinate to the Kremlin.

The tsar, which Putin essentially is today, must dispose of lands and souls, giving them to those who have distinguished themselves in service as he sees fit. Moreover, the time has come for the original owners to retire, and the Kremlin wants to decide itself who will succeed them. They considered themselves private owners, but Putin always saw them only as holders of assets turned over to them by the state.

Just like in 2004 when the “Beslan package” of reforms, one part of which was the cancellation of direct elections for regional leaders, considerably weakened all governors – not just those whose terms were coming to an end – the current wave of de-privatization is turning the once all-powerful oligarchs into a semblance of Soviet “red directors.”
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