Why Fighting Oligarchs Is a

Bad Idea
18

JAN 7, 2015 9:08 AM EST

By Leonid Bershidsky

The top economic spokesman for the leftist Greek party Syriza,
whichleads the polls ahead of the Jan. 25 election, says one of the
party's goals is to crack down on the nation's oligarchs. Reducing the
outsized role of politically connected magnates, George Stathakis
argues, will allow smaller, more honest businesses to be more
competitive.
Syriza's implied threat to break apart the euro currency union was
scary enough. But Stathakis's rhetoric is at least as worrisome. Any
regime that wants to fight the oligarchs means to increase
government interference in the economy -- to such an extent that it
will end up replacing old oligarchs with new ones.
"Oligarch," a word of Greek origin, has long denoted a member of an
oligarchy, a small group that runs a country or an organization. In
the 1990s, however, it acquired a second meaning: to quote the
Oxford English Dictionary, "(Especially in Russia) a very rich
businessman with a great deal of political influence." That has
become the dominant meaning. In the Collins English Dictionary,
four of the five usage examples for "oligarch" refer to Russia.
Inside Russia, the word was used in this sense for the first time on
June 2, 1995, in a newspaper article about a once-influential and now
all but forgotten tycoon, Oleg Boiko. In this instance, the word was
applied to the tenacious clique of bankers who became billionaires in
1995 and 1996 after being allowed to privatize Russia's best
industrial assets for a tiny fraction of their true cost -- in reward for
backing President Boris Yeltsin's re-election. These guys did, indeed,
constitute an oligarchy: I remember one of them explaining his vast
political influence by saying, "I am 4 percent of the Russian GDP."
Then, on Feb. 28, 2000, Vladimir Putin, running for president for the
first time, told his endorsers:
We must rule out people leeching onto power and using that for their
own purposes. No clan, no oligarch should be close to the regional or
federal authorities -- they must be equidistant from power.

"Equidistance" promptly became a meme in Russia, though it didn't

gain such currency outside the country. At first it was used
sarcastically: The same billionaires still controlled the country's
resource and financial wealth. But then something strange started
happening. First, Vladimir Gusinsky lost the media empire he had
built with cheap government loans and a free national broadcasting
license from Yeltsin. Then, Mikhail Khodorkovsky, one of the biggest
beneficiaries of the 1990s privatization, was jailed on dubious
charges, and the assets of his oil company, Yukos, became part of
state-owned Rosneft. Most of the old oligarchs were still around, but
only the Western press still used the term when referring to them.
They were still rich, but they no longer ruled Russia.
On the flip side of that development was the government's growing
importance in the Russian economy. Government spending as a
share of gross domestic product increased steadily from 15 percent
in 1999 to 20 percent in 2013, and that was only the tip of the
iceberg: Russian methods of measuring the public sector do not
comply with international standards. In 2012, the consolidated public
sector accounted for at least 68 percent of GDP by expenditure. The
Russian government came to control more than two thirds of the
economy, and while comparable data for 2000 do not exist, research
into specific sectors indicates how that share was achieved: In 2000,
Russia's five biggest state-owned banks accounted for 36 percent of
all assets in the banking system. By 2009, that share increased to
52.1 percent.
Inevitably, an all-powerful state creates a class of beneficiaries. The
recipients of big government orders, the controllers of state assets -these are all Putin's friends. Most of them are now on U.S. and
European sanctions lists. And though they are rarely labelled as
oligarchs, they fit the definition: They are leeches whose
businesses exist only because they know how to exploit their
proximity to the government.
Now, Ukrainian president Petro Poroshenko -- himself sometimes
called an oligarch because he's a billionaire owner of a big
confectionery company who has always played politics -- says more
or less what Putin said in 2000:
I guarantee that oligarchs will have no influence on Ukrainian
government. I will do my best for that. If big business follows the law,
it will get the benefits from the improvement of our country's
investment climate. But if someone meddles in politics and uses
power for his own enrichment, we will demonstrate our resolve.

So far, Ukraine's war on its oligarchs has been limited to attempts by

some rich Ukrainians to squeeze others who made wrong political
bets during the country's "revolution of dignity" last year. Metals king
Rinat Akhmetov, the country's richest man, and chemical and energy
magnate Dmitri Firtash are under particular pressure. Poroshenko's
businesses, by contrast, are doing great: His bank increased its
assets by about 50 percent in the first nine months of 2014. And
despite all the talk of deregulation, government expenditure is set to
increase this year, creating fertile ground for more, not less,
cronyism.
Syriza's plan to go after oligarchs includes having them compete for
media licenses again, investigating their government contracts for
road construction, and cracking down on tax evasion through
offshore operations. These are all elements of increased government
control over business. They can succeed only if Syriza politicians
and officials aren't susceptible to corruption. Where old oligarchs fail
to get traction, new ones inevitably learn to game the system and
grease the wheels.
The only effective way to fight oligarchies is to shrink government. In
Greece, public spending rose to 59.2 percent of GDP last year, from
53.8 percent in 2013. The country is going the wrong way, and
Syriza's looming war on oligarchs will only take it further down that
path.
To contact the author on this story:
Leonid Bershidsky at lbershidsky@bloomberg.net
To contact the editor on this story:
Mary Duenwald at mduenwald@bloomberg.net