UNMASKING OLIGARCHS

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TO A CONSIDERABLE EXTENT, ECONOMIC PREDICAMENT IS OWED TO OLIGARCHS

An update on the sensational report “Post-Pikalevo Russia: New Political and Economic Reality” soon to be published.


This newspaper laid hands on a sensational report drawn by Russian scientists. They analyzed economic standing of the so called oligarchs and drew the conclusion that the incumbent predicament of the national industry was generated artificially. Aware of the forthcoming economic storms, oligarchs deliberately withdrew capitals from Russia and stashed them in offshores. When the storm broke out as predicted and expected, they went to the state for help knowing that it could not very well abandon its citizens. Nationalization of the enterprises running in the red, and with colossal debts to service, might become phase three of this grandiose fraud. Going for it, oligarchs intend to have the debts they made shifted to the shoulders of taxpayers.

“Post-Pikalevo Russia: New Political and Economic Reality” will be published on September 1. Even its interim draft available to Izvestia, however, explains why the economic situation in Russia keeps deteriorating. The Russian GDP dropped 10%, output 15%, and investments 18% in the first six months of 2009. The fall was worse than in foreign countries despite the colossal sums the government of Russia had poured into economy (10% of the GDP, according some estimates).

In the United States, this “cradle of the crisis”, the rate of the GDP decline slowed down to a crawl in the second quarter of 2009. The American GDP is expected to rise 1-2% in the third quarter of the year. Nothing of the sort is observed in Russia which means that anti-crisis measures of the government failed. Why is that? Because as far as authors of the report are concerned, these measures never aimed to modernize economy or encourage entrepreneurship. They were only supposed to aid the companies the government singled out as important for the national economy.

This lopsided support of the select is a direct corollary of the existence of oligarchy in Russia. Oligarchic structures took over and established nearly total control over the national economy. The oligarchs begging for money from the federal budget share three distinctive features that determine the very nature of the economic crisis in Russia.

Feature One: most businesses financially pampered and aided by the Russian authorities are not Russian companies de jure. They are registered elsewhere. In the United States and throughout Europe, aid to companies such as these requires a special permit from the national parliament which does not give it lightly. In Russia, these formalities are dispensed with. Budget money is easily spent on those who withdrew their capitals to foreign banks long ago.

Feature Two: all these companies developed the mechanisms of transfer of assets from corporate to private property. Fortunes of the wealthiest Russians are accumulated on bank accounts of companies in offshores. These companies own oligarchs’ assets. In Russia, oligarchs pay taxes only on trifles.

Feature Three: debts. Foreign debts of Russian corporations soared from $24 billion in January 2002 to $294 billion on July 1, 2009. Collapse of the securities market in June 2008 made lots of major companies technical bankrupts.

These three features explain Russian oligarchs’ ambivalent position. On the one hand, they are an exterritorial force that cares about security of its assets rather than about economic stabilization. On the other, oligarchs as major employers enjoy the ability to dictate their will to the authorities and “milk” the federal budget with the ever increasing ardor. Is it any wonder that a substantial part of the government support has absolutely no effect on the shape of the national economy?

Badgering the state for money, oligarchs display unbelievable acumen. Authors of the report believe that transfer of control over inefficient enterprises with their colossal debts is what oligarchs are ultimately after. Before it happens, however, they hope to pocket as much as possible. “Backed by corrupt state officials, law enforcement agencies, and trade union extremists, major owners openly blackmail the executive branch of the government,” authors of the report say.

Developments in Pikalevo on June 2-4 were a vivid example. It took prime minister of the Russian government to solve one of the numerous problems of Roman Abramovich. Authors of the report are convinced that it was an example of “forcing the state to come to oligarchs’ help”.

In any event, oligarchs have money. So much money as to enable them to do better than just buy new yachts or football clubs. They do return some of what was obtained from the Russian budget into the national economy in the form of foreign investments but these sums are a pittance to what was received in the first place.

Owners of businesses spent literally years stashing dividends safely away and making colossal debts. Here is an example from the report: debts of three companies of Evraz Group total 54.4 billion rubles. The same three assets made 109.6 billion rubles for Evraz Group between 2005 and 2008. By the end of the first quarter of 2009, all three companies reported insolvency so that creditors will probably never see their money again.

OAO Mechel is tottering on the brink of catastrophe too. Its debts totalled 87 billion rubles on March 31, 2009, and 71 billion rubles were to be paid back to creditors by the middle of the year. That Mechel, a company running in the red in the first quarter of 2009, is unlikely to be able to raise the money anywhere goes without saying.

Authors of the report point out that oligarchs do not care that their companies’ debts to budget increase, that they lack floating assets, or that wage arrears become a grim inevitability. Their holdings are blithely making lists of would-be bankrupts. These bankruptcies will hurt the banking sector and require additional government support to banks worth untold billions.

The conclusions are forbidding: Russian oligarchy entered a new phase of its development in 2009, the period when major businessmen are aware of the hold they maintain on the powers-that-be. Fearing social unrest and disturbances, the authorities are compelled to dance to the businesses’ tune. Not a single major enterprise was nationalized in nearly twelve months, no oligarchic structure changed hands (or management). Aid goes to owners rather than to fired employees. Elementary calculations show that it takes $13 billion per annum to provide all 7 million of the Russian unemployed with the established dole (4,900 rubles). These days, analogous sums are handed out once a month (!) with nothing to show for it.

A good deal of oligarchs’ empires nowadays are technical bankrupts. Supporting them as before, Russia will but pour money into offshores where it will be used to maintain oligarchs’ property abroad. It follows that the authorities had better withstand the temptation to assist oligarchs again and refuse to share with them responsibility for debts and commercial errors. It is time the government understood the difference between collapse of oligarchic empires and insolvency of Russia.

P.S. Authors of the report: Vladislav Inozemtsev (Director of the Center for Post-Industrial Society Studies) and Nikita Krichevsky (Director of the National Strategy Institute). Responses to the piece are welcome on Izvestia web site and on www.economics&izvestia.ru.

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Russia belongs to… Cyprus?

Izvestia studied a list of 295 strategic enterprise last winter and discovered an amazing abundance of foreign companies on it. Authors of the report confirm this conclusion. Offshore companies controlled by oligarchs are owners of the largest Russian enterprises, these days. Staying abroad, they duck taxation and secure themselves from raiders. Authors of the report conclude that oligarchs bear no responsibility for socioeconomic commitments of their companies in Russia. Offshores offer major owners an easy way of draining capitals from Russia.

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When the crisis became imminent and prices of raw materials plummeted, companies resorted to payment of dividends.

Authors of the report keep tabs on the dividends major Russian companies paid their shareholders in 2005-2008. Abramovich and Evraz Group are undeniable favorites in this dividends race. More than 112 billion rubles worth of dividends were paid to shareholders of four companies comprising Evraz Group. Three non-ferrous metallurgy colossi – Severstal, Magnitogorsk Metal, and Novolipetsk Metal – did fine too. Severstal paid its shareholders 83.1 billion rubles, Magnitogorsk 68.6 billion rubles, and Novolipetsk 65.9 billion rubles.

Also importantly, companies kept spending more and more on dividends to shareholders. Severstal shareholders were paid 4.6% of net profits as dividends in 2005 and 45.7% in 2007.

Or consider Deripaska. On December 31, 2008, i.e. right in the midst of the crisis, OAO RUSAL Krasnoyarsk opted to pay shareholders dividends for the first nine months of the year. The sum amounted to 8.956 billion rubles. The whole company in the meantime netted 261 million rubles less than that in 2008. In other words, shareholders ended up with 103% of net profits.

No need to try and prove that oligarchs knew that the crisis was imminent. Lots of major Russian enterprises decided to pay their shareholders dividends for the first six or nine months of 2008 – and the decisions were made in September and October, with the crisis all but knocking at the door. Deripaska’s RUSAL Krasnoyarsk, RUSAL Bratsk, and RUSAL Novokuznetsk had paid no dividends at all between 2005 and 2007 but recompensed for it in 2008 with a hefty sum of 13.8 billion rubles all at once. Authors of the report maintain that shareholders deliberately stripped their companies of floating assets.

The report accounts for only some Russian businesses and enterprises but its authors are convinced that the practices uncovered in the document were emulated by very many others. Deliberate withdrawal of untold billions from the real economy is one of the causes of the currently dramatic socioeconomic situation, the situation oligarchs are perfectly happy to leave to the Russian state to ameliorate.

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