Plunder Tsar: Putin the Plutocrat

How Russian president Vladimir Putin used vodka, oil, propaganda, and power to become the richest man in the world.

Guest Column by Moscow Never Sleeps

It’s been a year since my guest columns on PREVAIL started with the first part of the Putin Troika. I quickly got distracted giving extension class lectures on post-Soviet US-Russian engagement and armchair critiques of our own Supreme Court. Now that we are twelve weeks and counting since inauguration, I have to be honest about where my marginal utility really lies. Plenty of writers with greater credibility than me can unpack today’s domestic political and legal puzzles: whether Chuck really has the guts to vaporize the filibuster (knowing when we lose the upper house, McConnell will live up to every threat he’s made over it) or whether the American criminal justice system actually wants to punish systemic corruption by prosecuting the former guy (allowing us to show our faces in the good company of South Korea and France). I may come back to these, but if I’m the resident Russia hand in this outlet, I should first wrap up my tour of the man who held Trump’s leash and is sputtering whatabouts at Biden…

AT SOME POINT in the Nineties, we all started to refer to Russia as an oligarchy and to the richest of the New Russians as oligarchs. The words were novel to most American mouths, and they seemed to work for the intended purpose: vaguely insulting, oleaginously slippery, definitely foreign. Terms that defined how they live, nothing to do with us. But the terms are misnomers.

An oligarchy is any system of government run by a few self-selected insiders who prevent most outsiders from gaining power. Most socialist countries have been run as oligarchies. The term for an economic system run for the benefit of a very select few insiders who divide the market among themselves is an oligopoly. Most social media is run as an oligopoly. The richest Russians (whom contemporary Russian media during its brief period of absolute freedom referred to simply as “The Seven Bankers”) were not oligarchs. They may have been oligopolists economically, but their resultant wealth and control over post-Soviet Russia made them, politically, plutocrats.

Plutocracy simply means “government by and for the wealthy.” Despite its obvious Latin and Greek roots (Pluto was the Roman god of the underworld, but the word derives from the Greek ploútos, meaning “great wealth”), it was coined in English by 16th century political philosophers. The United States, according to every anti-American Soviet propaganda poster I brought home from Moscow in 1984, was a plutocracy. The Russian Federation, according to anyone who knows how to call things by their right names, is one.

A plutocrat, therefore, is any member of the richest and therefore most powerful subgroup of a state. Arguably, the top plutocrat in any system, the pluto di tutti pluti, should be called a plutarch—but that term, in English, refers to the first century B.C.E. Greco-Roman historian and philosopher whose master works were first being translated into English at the same time plutocracy was coined. In the context of the last two decades of Russian history, Vladimir Putin is the consummate plutocrat, running his country and its major sources of wealth like a closely held corporation.

In “What Does Vladimir Putin Want,” I covered how Russia has always looks at the rest of the world through a lens of xenophobia and fear of attack, regardless of whatever surface-level politics the country espoused: monarchy, socialism, or democracy. Russian macroeconomics is similarly unaffected by its stated form of government: Russia, Inc. as a concept has survived from the days of the tsars, as can be demonstrated by the two fluids the world most associates with the land of samovars and dancing bears—one clear and the other opaque.

Ever since the Russians learned how to make their national firewater in larger quantities than small barrels, the distillation and refinery of grain alcohol has been a government business (with a brief hiatus in the 1980s, as discussed below). The Romanov dynasty made itself the exclusive legal producers and distributers of vodka, a right they licensed to a select few families like the Smirnovs, who paid the crown enormous fees for the privilege and became phenomenally wealthy in return. Moonshiners risked Siberian exile for jugging samogon or bottling what they euphemistically called “white table wine.”

The Soviets, on brand, nationalized all distilleries, gave the output names like Stolichnaya, pocketed every kopeck from production (at a profit margin of somewhere north of 85%), and summarily shot anyone caught with an unlicensed backyard still. The Reds somehow managed to make even more money off the sale of alcohol than the Pennsylvania Liquor Control Board.

Then Gorbachev came along and opened up booze production to private industry. In the process, he unwittingly did Ronald Reagan a phenomenal favor by shutting down a massive predictable input into the USSR’s treasury. When I was in college (starting with Brezhnev and graduating with Gorbachev), American experts on Russian/Soviet economics referred to vodka as “liquid taxation.” They estimated that from the 18th century on, the government generated up to 25% of its revenue from a nation of alcoholics. For most of the Soviet period, official rotgut sold for three rubles a liter, most of it pure profit. But in the mid-1980s, Mikhail Sergeevich, under perestroika, cut that off. Maybe he was motivated by an understandable desire to sober up his workforce, or maybe he wanted to wean the government and the Party off of dealing drugs for a living, but the immediate effect was a drastic fiscal shortfall that coincided with the only Republican the Politburo ever truly feared introducing “Star Wars” into the world’s vocabulary and proving that mujahideen is Arabic for “Viet Cong.”

When Yeltsin took the helm of the newly independent Russian Federation, vodka production continued privatizing. In addition to the partially divested Stoli, hundreds of licensed bottlers popped up manufacturing this absurdly simple liquor, and the government was capturing only minimal fees—stamp duties, excise taxes, profit taxes, etc.—off of one of the largest commodities in the domestic economy. Then, as I would learn a decade letter in my first posting in-house with a vodka company in Moscow, the Russian government recaptured its stranglehold over the industry.

There are a number of ways to make vodka. Some French distill it from wine; some Brits distill it from whey byproducts of cheesemaking, selling the cheddar with the spirit. But traditional Russian vodka is produced by using sugar to bind grain alcohol to purified water to keep them from separating over time, maybe adding some flavoring agents, and refining the result in separation and filtration towers that look like oil refineries without the offtake pipes. In most countries outside Russia (like Finland, Poland, even Ukraine), vodka makers distill their own grain, control their own water supplies, and buy sugar, pepper, buffalo grass, etc. from the agricultural markets.

In today’s Russia, vodka makers aren’t actually distillers, they’re refiners. The RF government forces them to buy spirt from state-owned monopolist kombinats and water of whatever quality the government deigns to sell them. All of that money, minus whatever the bureaucrats figure out how to steal, goes straight to the government’s coffers. Having paid the state a monopolist price for the two main ingredients, the producer is now forced to spend further capital on binding and flavoring agents and then expend the costs necessary to refine grain and branch into something that doesn’t smell precisely like it came out of the radiator of a Zhiguli. And since vodka is essentially the Ivanomics equivalent of insulin, the definition of an inelastic commodity, the Russian government is again taking a large amount of the gross revenues from the production and consumption of Potato Sauce Plus.

Don’t worry, we’ll get to Putin. Let’s talk about the black stuff for a minute first. Depending on which version of history you believe, petroleum or its predecessors such as paraffin was being produced in Baku anywhere between the 1840s and the mid-1870s. In any event, by the last decades of the 19th century, Tsarist Russia was producing oil out of the Caspian at a rate that rivalled Texas. It was in Russian oil that Alfred Nobel made the fortunes that endowed his Prizes. As with vodka, the licenses paid to the Crown helped keep the country afloat.

And as with vodka, dinosaur juice was quickly nationalized by the Bolsheviks, who realized the commodity was global, fungible, and dollarized. The Russian petroleum industry—which by the fall of the Soviet Union was sitting on top of the world’s second or third largest crude reserves and the world’s largest natural gas reserves, with pipelines crossing eleven time zones, and with refineries from Vladivostok to Klaipeda—was briefly privatized in Mr. Yeltsin’s Neighborhood, when it opened up to foreign and private investment. Russian oil became a free-for-all of carpetbaggers, wildcatters, majors from all the non-OPEC countries, New Russians, government bureaucrats on the take (even by local standards), oilfield services and seismic mad scientists, all ready to tame the Wild East for their taste of the black and the blue.

Of course, the Russian government was getting its taste—sort of. Emerging new petroleum giants like Gazprom were on paper government-owned and controlled, but it was not always clear who was controlling whom. A fellow named Viktor Chernomyrdin alternated for several years between running Gazprom and serving as Yeltsin’s Prime Minister. In both jobs, Chernomyrdin made it clear that he considered company and country to be his personal property. He even ran Yeltsin’s political party, Our Home Is Russia, that was roundly nicknamed Our Home Is Gazprom. Chernomyrdin was a no-doubt-about-it plutocrat.

How that all ended up is simple. In August 1998, one of the world’s largest producers and exporters of the most important commodity on the planet had approximately $5 billion in hard currency reserves against a foreign hard currency debt of several multiples of that amount. In other words, the Russian state had not much more cash on hand than Steve Mnuchin’s shiksa is going to get in the divorce, and it had debts that would make even Deutsche Bank think twice before lending. It got there because while everyone— the oilmen, the bankers, the locals, the expats, the Party, the spooks, the mafia, the international financial institutions, Bill and Hillary, etc.—was busy stealing wealth from the Russian people, the government was too lazy, distracted, or compromised to steal any of it back. Russia had become a plutocracy.

And here is where Putin comes in. To those of us who lived there at the time, the Little Colonel seemed to appear out of nowhere, transferred from running the municipal property management division of the St. Petersburg city government to a similar but much larger function for the federal President—then running the FSB—then named as Prime Minister—and then, suddenly, on New Year’s Day 2000, Acting President. Less than two years had passed since Dobby-in-Epaulets appeared in Moscow, and the public persona he projected was one of a colorless, competent technocrat, unconcerned with personal aggrandizement. As he took on the role of President—he was formally elected, without serious opposition, twenty-one springs ago—he made it clear that his role was to rebuild the country’s wealth so that its natural resources, if not nationalized, would be rationalized. Foreign investors would be treated, he promised (as Lenin had promised 80 years earlier), with equal opportunity economically and equal standing legally. Russia would no longer be run politically by its oligarchs (his word; you already know mine), but they would be allowed to keep the assets they had acquired (“to use the charitable term for what we all know they did” he would sometimes add). And corruption, of course, would not be tolerated in the modern, democratic, capitalist Russia.

Meet the new boss, same as the old boss.

It looked good for maybe a year or two. He sidelined most of Yeltsin’s Family, his inner circle of cronies—Chernomyrdin, Mikhail “Two Percent Misha” Kasyanov (another Prime Minister whose nickname came from his supposed cut of every deal he authorized), even Yeltsin’s daughter (think Ivanka, only smart)—for a while. Then he started to put his own people in: Igor Sechin, Nikolai Patrushev, other hard men from his KGB and FSB days. He chased one or two of the weaker and more political oligarchs like Vladimir Gusinsky and Boris Berezovsky (both of whom were media magnates) into exile and put Mikhail Khodorkovsky in jail, but he dealt magnanimously with richer and more politic oligarchs like Mikhail Fridman, Vladminir Potanin, and Roman Abramovich. As a result, Putin quickly tamed the press, the oligarchs, and the country.

And, of course, he got his taste. Yeltsin’s Russia had struggled to survive on oil that rarely cracked twenty bucks a barrel for most of his term. The same cheap oil that fueled a painless Clinton recovery from the first Bush recession condemned a country with the second-largest stockpiles of nuclear weapons on Earth to beg the IMF for ten billion dollar lines of credit. But Putin got lucky, and the price of oil skyrocketed for the next eight years, quadrupling from about $25/bbl the day he took office to a high of nearly $100 when the 2008 crisis hit.

By the end of his first term in office, Putin had paid off Russia’s foreign debt and built a budget surplus, and the value of the currency was naturally stabilized against the dollar. As with Yeltsin, every major natural resource deal—oil, gas, gold, platinum group metals, diamonds, etc.—went across Putin’s desk for approval. And just as with Yeltsin, two percent might be what Prime Minister Misha got, but the President? Oh, that’s REALLY going to cost you, rodnoy...

So here we are a generation later. Putin is still in power and there are no signs he has any intentions of leaving. A few things have changed about him: he gets nenaturalny doses of Botox, he’s gotten divorced, he doesn’t take his shirt off as often for calendar beefcake, and he seems to have forgotten all the German they taught him in the KGB. He lives in palaces that would make a Bond villain whimper in impotent envy. Because after twenty years of skimming double-digit percentages off of one of the world’s largest commodity exporters, nobody on this planet has more personal money than Vladimir Vladimirovich Putin. Even Crown Princes have to share with the rest of the House, but Putin is a Dynasty of One.

The country has changed with him. There are no longer any truly independent petroleum companies in Russia (although there are certain long term production and revenue sharing deals in place). Much of media remains under Kremlin control, as does all of the federal legislature and judiciary. Most of the “oligarchs” have either been eliminated or are now fully absorbed into the Putin machine. The financial system has been centralized into a few government-owned banks whose risks are subsidized and whose profits are drained off through opaque accounting structures. The domestic capital markets are no more developed than they were two decades ago.

Russia, Inc. may no longer really be open for business for the outside world, but that’s the way they’ve always liked it. As a plutocracy, they function best when everything— lawmaking, law enforcement, diplomacy, trade—is focused on maintaining the concentration of wealth into fewer and fewer hands until everyone from peasant to prelate has to live off the largesse of the Prince. And if you ask the average Russian to be honest, he may well tell you that it is a point of pride to live in a country whose ruler knows how to steal more than anyone else in history.