In the aftermath of the Soviet Union’s demise,
Russia saw its wealth get concentrated into the hands of just a handful of businessmen. These oligarchs, known as the New Russians,
came to own over half of the Russian economy, including its vast oil industry. That’s why today we’ll learn exactly how
this transition happened, especially in the context of one of Russia’s biggest oil companies,
Lukoil. On Christmas Day in 1991, the president of
the USSR Mikhail Gorbachev announced on national television that he had resigned. The bigger shock of this announcement was
that Gorbachev would have no successor; instead, the Soviet Union would be dissolved. On the following day, the Russian flag was
flown over the Kremlin and Russian president Boris Yeltsin was now in power. His vision for the future of Russia was one
of drastic reforms; he wanted to transition Russia to a free market economy as fast as
possible. With funding from the Bush Senior administration
and the research from a Harvard University think tank, Yeltsin put the Russian economy
in shock therapy. He removed price and currency controls, lifted
barriers on international trade, but most importantly he privatized the country. Obviously in a free market economy you can’t
have the state running major industries, but Yeltsin didn’t have time to set up a proper
infrastructure for the transition. Instead, he opted for a very simple solution:
Every Russian citizen was issued a voucher that could be exchanged for shares in any
recently privatized business. The idea was for workers to convert their
vouchers for shares in the company they worked for, essentially getting regular people to
benefit from the success of their chosen industry. While the idea sounded good on paper, it was
extremely easy to abuse. Most Russians at the time had no concept of
capitalism or shares in a company. In fact, in the aftermath of 1991 people were
happy to even get their wages with just a few months delay. Now these vouchers were worth the equivalent
of about $30, which back then amounted to one month’s wage. So what happened in reality is that a vast
majority of people immediately sold their vouchers for cash, either to feed their families
or to buy otherwise lavish luxuries like a refrigerator. Very few Russians in 1991 were both educated
enough and rich enough to take advantage of the opportunity these vouchers presented,
and the ones that could ended up becoming very wealthy, often through rather dishonest
practices. The oil company Sibneft, for example, stopped
paying the salaries of its workers for several months in a row because supposedly it didn’t
have any money. But the owner of the company, Roman Abramovich,
was generous enough to offer to buy the shares of the few workers who were smart enough to
convert their vouchers instead of selling them. And just to be sure, some of the newly privatized
oil companies issued more shares to be sold privately in order to dilute the few stragglers
that remained. Of course, all of this was done through various
shell companies so that regular people didn’t know what was going on until it was too late. So let’s walk through the whole process
of becoming a billionaire Russian oligarch, using as an example Vagit Alekperov. He was born in the capital of present day
Azerbaijan. His father was an oil worker so he studied
engineering and eventually moved to work in Western Siberia, where large oil fields had
been discovered in the early 1960s. In 1983, he became director of oil production
in a town called Kogalym, where he dramatically boosted their output, from a few million barrels
a year in 1983, to 240 million seven years later. He did that by integrating the three branches
of the business – exploration, refining, and distribution, which under the Soviet system
were entirely separate. His performance caught the attention of Moscow,
and he was invited there to serve as deputy minister of oil and gas. Then he did what he knew best: integrating
the oil business, but on a much more massive scale. When he realized that the Soviet Union was
on its way out, he made great efforts to build up favor with Boris Yeltsin, who in return
granted Alekperov autonomy to consolidate the Russian oil business in the most profitable
part of the country. That’s how he created Lukoil, as a merger
of three big oil producers in the region. Now under the privatization scheme, the state
would keep one third of the shares, the workers would get a third through the voucher system,
and then the final third would be reserved for outside investment. Alekperov and the other oligarchs, of course,
quickly bought out the workers. They also got a chance to buyout the shares
held by the government, when Boris Yeltsin needed to raise money for his reelection campaign. Despite the consolidation though, Lukoil’s
production was still inefficient compared to Western oil companies due to its declining
Soviet-era equipment. So Lukoil struck a deal to sell 70,000 barrels
of oil per day to Chevron, and using the revenues as collateral for a $700 million loan from
a Japanese company. With new equipment, Lukoil soared to record
profitability, even in the midst of the oil crash of 1998. Of course, the main benefactors here are the
oligarchs. They’ve been doing pretty much everything
they can to move as much of their wealth as possible outside of Russia, mostly by purchasing
stock in foreign companies and real estate. As to what the future holds for Lukoil and
the other Russian oil companies, the truth is that they aren’t gonna disappear any
time soon. Oil remains the lifeblood of the Russian economy,
even though prices have been low for over two years now. So essentially, the Russian oligarchs have
many decades of oil revenue to look forward to, while the Russian people, well not so
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