The Oligarchs

1. The Rot of Soviet Stagnation Fueled a Hunger for Change.

They knew that even as the system declared its greatness, it was stagnating, rotting from within.

Decades of decay. The late Soviet era, known as the "gody zastoya" (years of stagnation) or "marazm" (senility), was characterized by pervasive shortages, inefficiency, and a profound disconnect between official propaganda and daily reality. People spent their lives navigating a system that failed to provide basic necessities, fostering deep cynicism and a loss of faith in the Communist future.

Shortage economy. Life was a constant struggle for goods.

• Desperate queues for scarce items like tea, meat, or even toilet paper.
• State stores offered limited, often low-quality products.
• Mandatory work duties, like sorting rotting vegetables, highlighted systemic absurdity.
• The state's focus on heavy industry and military spending came at the expense of consumer welfare.

Western influence. Despite state control, glimpses of the West fueled desires for a different life. Smuggled goods like jeans and pirated videocassettes of Hollywood films offered tantalizing views of prosperity and individual freedom, contrasting sharply with the drabness of Soviet existence and further eroding belief in the system.

2. The Shadow Economy Provided the Blueprint for Early Capitalism.

They survived thanks to a vast, unofficial second economy—a shadow economy—that somehow provided a cushion against the harsh realities of life.

Survival mechanism. The official, centrally planned economy was so dysfunctional that a parallel "shadow economy" thrived, based on informal networks, favors, and illicit trade. This system, rooted in centuries-old traditions of "blat" (connections) and "svyazi" (networks), allowed people to obtain goods and services the state could not provide.

Exploiting scarcity. Those who controlled access to scarce resources, like butchers or store clerks, wielded real power. Theft from state enterprises was common, and underground production existed despite being criminalized. This informal system demonstrated a latent entrepreneurial spirit suppressed by decades of anti-capitalist ideology.

Market principles. Even within the formal system, transactions often resembled a crude market. Vitaly Naishul, working inside the state planning agency Gosplan, observed that the system was less about top-down command and more about bargaining and exchange, where bureaucratic approvals and access to resources were traded like commodities, revealing market-like dynamics hidden within the socialist structure.

3. Entrepreneurs Exploited State Weaknesses and Connections.

Every one of them learned to manipulate the old system while at the same time making an incredible leap out of it into the new world.

Navigating the cracks. The first wave of post-Soviet entrepreneurs didn't build new industries; they exploited the colossal imbalances and inefficiencies of the collapsing state system. They saw opportunities in the gaps left by central planning and the state's weakening grip on resources and trade.

Arbitrage opportunities. Huge profits were made by taking advantage of price differentials:

• Buying goods cheaply within the subsidized domestic market.
• Using connections to move goods across borders or through state channels.
• Selling goods at much higher prices abroad or on the emerging domestic market.
• Importing scarce goods like computers and selling them for massive markups.

Leveraging patronage. Success often depended less on business acumen and more on cultivating relationships with officials in state ministries, party committees, or even the KGB. These patrons provided essential permits, access to resources, or protection from harassment, allowing favored individuals to operate outside the formal, often contradictory, legal framework.

4. The Cooperative Movement Unleashed Hidden Ambition.

The idea of private enterprises opening up amid a sea of socialist stagnation was a remarkable sight.

Gorbachev's experiment. Desperate to revitalize the economy, Gorbachev's reforms cautiously legalized certain forms of private enterprise, starting with "individual labor activity" and later expanding significantly with the Law on Cooperatives in 1988. This marked a revolutionary departure from decades of state monopoly.

Filling the void. Cooperatives initially focused on providing much-needed consumer services and goods, like shoe repair, bakeries, or simple furniture, activities the state sector neglected. This addressed popular discontent over shortages and demonstrated the potential of private initiative.

Beyond the quaint vision. The movement quickly evolved beyond small workshops. Ambitious entrepreneurs, often with existing connections from the shadow economy or state structures, used cooperatives as a legal cover for more lucrative ventures, including trade, finance, and exploiting state subsidies, far exceeding the original, modest intentions of the reformers.

5. Mastering Finance and Arbitrage Created Easy Fortunes.

In these early years, Russia was a state without the rule of law. Lying, stealing, and cheating were part of daily business, and violence, brutality, and coercion were often tools of the trade.

Alchemy of money. The Soviet financial system had two types of money: scarce cash (nalichnye) and abundant, non-convertible non-cash (beznalichnye) used for state enterprise transactions. Cash was far more valuable. Entrepreneurs discovered how to convert worthless non-cash into valuable cash and hard currency, creating fortunes from thin air.

Exploiting inflation. Hyperinflation in the early 1990s became a goldmine for those who could speculate on currency fluctuations. Borrowing rubles cheaply, converting them to dollars, and repaying the devalued rubles later yielded enormous profits, diverting capital from productive investment.

Authorized banks. The government's reliance on favored commercial banks to handle state funds provided another source of easy money. Banks received government deposits, delayed disbursing them, and invested the money for short-term, high-yield profits, often in government bonds (GKOs), without investing in the real economy.

6. Political Patronage Was the Key to Early Business Success.

All the ventures that were started at this time succeeded only if they were sponsored by or had strong connections with high-ranking people.

Survival in a vacuum. In the absence of clear laws and effective state enforcement, political connections were crucial for business survival. Entrepreneurs needed protection from criminal gangs, corrupt officials, and rival businessmen, often hiring former KGB or military personnel for private security.

Cultivating officials. Building relationships with bureaucrats and politicians was essential to obtain permits, licenses, access to state resources, or favorable treatment. This often involved flattery, gifts, or outright bribes, creating a system where influence was bought and sold.

State capture. As businessmen grew wealthier, they increasingly sought to influence government policy and decisions directly. This "state capture" meant that private interests dictated terms to the state, rather than the other way around, laying the groundwork for the powerful oligarchic system of the later 1990s.

7. Moscow Became the Crucible of the New Russian Elite.

Moscow was the citadel of Russian capital, and the rush of riches became so strong that even St. Petersburg, Russia’s second-largest city, seemed a sleepy backwater by comparison.

Center of power and wealth. As the capital, Moscow concentrated political power and became the primary recipient of financial flows, including foreign investment and the profits from nationwide industries. This made it the epicenter of Russia's nascent capitalism and the breeding ground for its new elite.

Luzhkov's empire. Mayor Yuri Luzhkov, a pragmatic former Soviet manager, built a powerful municipal machine by leveraging the city's vast resources and his own authority. He fostered a system of "state capitalism" or "crony capitalism" where businesses thrived based on their relationship with the city government, often contributing to city projects in exchange for favors.

A world apart. Moscow's boom created a stark contrast with the rest of Russia. While much of the country struggled with economic decline and barter, Moscow became a city of conspicuous wealth, luxury, and opportunity, attracting ambitious individuals and becoming a symbol of the uneven nature of Russia's transition.

8. Early Reformers Were Theorists Confronting Chaos.

They were being called not to save it but to bury it.

Academic origins. Many of the key economic reformers, like Yegor Gaidar and Anatoly Chubais, came from academic backgrounds, having debated the flaws of socialism in secret seminars. They were steeped in economic theory but lacked practical experience in governing or managing a market economy.

Shock therapy. Driven by a belief that gradualism would fail and haunted by the specter of shortages and political collapse, they opted for a rapid, "big bang" approach to reform, freeing prices and trade almost overnight, despite the lack of established market institutions or legal frameworks.

Unintended consequences. Their reforms, while dismantling the old system, unleashed chaotic forces they did not fully anticipate. Hyperinflation wiped out savings, and privatization, intended to create millions of owners, often resulted in wealth concentrated in the hands of a few well-connected insiders, fueling public resentment and undermining the reformers' goals.

9. The First Tycoons Emerged from Diverse Paths.

They came from different walks of Soviet life, from the nomenklatura and sciences, from the shady world of street hustlers and the ranks of Soviet industrial managers.

Varied origins. The individuals who rose to become Russia's first tycoons did not share a common background.

• Some were former Soviet bureaucrats or managers (Luzhkov, Potanin).
• Others were scientists or academics (Chubais, Berezovsky, Khodorkovsky).
• Some came from the fringes of Soviet society or the shadow economy (Smolensky, Gusinsky).

Shared traits. Despite their diverse starting points, they shared key characteristics that enabled their success in the chaotic transition:

• Ambition and a relentless drive for success.
• A willingness to take risks and operate outside established norms.
• A knack for building connections and navigating complex systems.
• An ability to adapt quickly to changing circumstances.

Exploiting the moment. Regardless of their past, they all recognized and seized the unprecedented opportunities presented by the collapse of the state and the emergence of a market economy, leveraging their unique skills and connections to accumulate wealth and power rapidly.

10. The Seeds of Future Power Struggles Were Sown Early.

Their troubled relations became a never ending public spectacle.

Competition for spoils. The rapid transfer of state property and the opportunities for easy money created intense competition among the emerging businessmen. With no clear rules or legal recourse, disputes were often settled through coercion, bribery, or the use of private security forces and media attacks.

Clash of models. Different visions for Russia's future capitalism emerged, notably the liberal, market-driven approach favored by reformers like Chubais and the more state-controlled, patronage-based model exemplified by Luzhkov in Moscow. These competing models led to political conflicts and power struggles.

The embrace of power. As businessmen accumulated wealth, they increasingly sought political influence to protect their gains and further their interests. This led to alliances with political figures, including those in the Kremlin, and set the stage for the later "loans for shares" deals and the direct involvement of tycoons in national politics, blurring the lines between business and the state.

Last updated: May 11, 2025