Putin's Plutocrat Problem

FACE OFF

When Russian President Boris Yeltsin resigned on December 31 of last year, he thrust Vladimir Putin, a relative unknown, into the limelight. Today, just a few months later, it is still too early to determine the extent of the former KGB agent's commitment to democracy and free markets. But if Putin decides to match words with deeds, he will enjoy an encouraging alignment of the political stars. Unlike Yeltsin, Putin can count on the support of the public and of the Duma, Russia's lower house of parliament. He has also built bridges with rival political leaders. For a limited time at least, he can use this support to press ahead with difficult reforms.

To do so, however, he must first rein in a dangerous posse of plutocrats riding roughshod over the country. This is something his predecessor could not, or would not, achieve. On the contrary, these oligarchs -- Boris Berezovsky, Mikhail Khodorkovsky, Roman Abramovich, Mikhail Fridman, and others -- largely co-opted Yeltsin's governments, silencing most opposition to their conduct. As a consequence, they now threaten Russia's transition to democracy and free markets. They also threaten vital U.S. interests, because America's long-term security is best assured by the success of Russia's transformation.

The oligarchs dominate Russian public life through massive fraud and misappropriation, particularly in the oil sector. Oil is of overwhelming importance to Russia and the oligarchs. Prior to its collapse, the Soviet Union was the world's largest oil producer. Oil companies account for nearly 60 percent of the market capitalization of the Russian stock market, and oil receipts amount to about 22 percent of the government's budget revenues. Whoever controls this massive industry controls much of the world's oil supply -- and today it is the oligarchs.

The August 1998 financial crisis practically wiped out the plutocrats' financial assets. But those who suggest it undermined their influence are dead wrong. Oil revenues sustained the tycoons' economic and political power, and the oil oligarchs are once again awash with cash, thanks to the ruble devaluation of 1998 (which lowered costs) and the steep climb in oil prices in 1999 (which boosted revenues). Because they remain among the strongest political and economic actors in Russia -- a major nuclear power whose future is crucial to America -- the plutocrats merit close scrutiny.

MAKING IT

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