Russian Oligarchs: a Quantitative Assessment
Sergei Guriev, and Andrei Rachinsky

A study of ownership concentration in Russia undertaken by World Bank in 2003 broadly confirmed stereotypes about the so-called “oligarchs”. The concentration of ownership in contemporary Russia is higher than in other countries. The 22 largest business groups control about 40% of Russian industry. Micro-level data suggest that oligarchs run their assets better than other Russian private owners. While the relative weight of oligarchs’ firms in the Russian economy is tremendous, the firms themselves do not appear excessively large by the standards of the global markets in which most of them operate. Historical experience from other countries, meanwhile, suggests that such a high level of ownership concentration can create considerable problems in building sustainable democracy in Russia. 

Russian industrial tycoons, or “oligarchs”, are the quintessence of Russia’s transition to capitalism. An oligarchy, as discussed in Plato's Republic and Aristotle’s Politics, is a form of government by a small group. In contemporary Russia, the term denotes a large-scale businessman who controls resources sufficiently vast to influence national politics. The first mention of oligarchs was probably made by Boris Berezovsky (by all accounts, an oligarch himself) who, in a 1996 interview with the Financial Times, named seven bankers who controlled about 50% of Russia’s productive assets. Berezovsky said that these people exerted significant influence on Russia’s state policy.

Are these oligarchs likely to be agents of economic and political change, or opponents of such change? On the one hand, oligarchs are the only feasible counterweight to the predatory and corrupt Russian bureaucracy; and they are a unique constituency that is both willing and able to lobby for the development of market institutions. They are also the only Russian owners who can afford to invest and restructure Russian businesses in a very hostile business climate. On the other hand, the oligarchs have weakened Russia’s economy directly, by stripping assets from Russian firms and sending money abroad, and indirectly, by discrediting the ideas of private property and corporation among the public at large. They have also weakened Russia’s democratic institutions, by capturing of federal and state agencies.

The debate about the role of the oligarchs will probably go on for decades. Several quantitative assessments, however, can already be made. How many oligarchs are there in Russia? What assets do they control, and how well do they manage them? Should the oligarchs’ empires be broken? How high is the concentration of wealth in Russia compared to other countries? The study of ownership concentration conducted for the World Bank’s 2004 Country Economic Memorandum for Russia attempted to answer these and other questions.

The World Bank study identified the structure of control in 45 Russian industrial sectors, including natural resources, manufacturing, construction, and market services. In the resource and manufacturing industries, 32 sectors were selected, representing 77% of total sales. We plied through lists of hundreds of intermediate owners in order to determine the ultimate owners, including foreign firms, individuals, and federal government and regional governments. 

Are the stereotypes true? 

This ambitious project has confirmed common stereotypes. Indeed, ownership of Russian industry is highly concentrated: 22 large business groups control about 40% of industrial output, more than all other private owners put together. The assets of the largest private owners are concentrated in the natural resources industries.

Many of the differences observed between oligarch-controlled firms and other firms are determined by industry specifics. For example, oligarchs’ control over large enterprises can be explained by the fact that they operate in industries where the average enterprise is large. Similarly, oligarchs’ firms are on average more productive, but if we compare productivity levels of firms controlled by oligarchs and by other private owners within the same industries, the difference in productivity turns out to be insignificant.

Still if we look at productivity growth, the oligarchs’ enterprises have fared well, controlling for size, industry and location. In 2002, the oligarchs outperformed other private Russian owners by 8% in terms of total factor productivity growth. Their firms are inferior only to foreign-owned firms (which beat other Russian firms by 12%). It should be noted that fast productivity growth is associated with greater output growth rather than a dramatic decrease in employment.

Do oligarchs hold excessive market power in the sectors that they control? The sectors controlled by oligarchs are those that are highly concentrated. However, these are also the tradable goods sectors that are most subject to global competition. Except for ore and automotive manufacturing, all of these sectors sell to global markets. Ore production is mostly owned by the oligarchs’ steel-making conglomerates, which use the ore as an input, so the problem of concentration is somewhat mitigated by vertical integration. The automotive sector, however, is a classic example of interest-group politics. Russian-made cars are not internationally competitive and the industry has always relied on protectionism, which has increased along with growing oligarchic control over the industry. Thus, except for the automotive sector, there seems to be little reason for concern over the oligarchs’ excessive market power. Some oligarchs are important global players in their industries (especially in oil and metals), but none is a dominant market leader. Russia therefore does not need antitrust policies aimed at breaking up oligarchs’ holdings. 

Russian oligarchs in an international perspective 

Cross-country comparisons of wealth concentration are usually based on the share of stock market capitalization controlled by a certain number of families (e.g. ten). By this measure, ownership concentration in modern Russia is higher than in any other country for which data are available. However, in historical perspective Russia does not seem to be unique. Quite a few countries have gone through a period of high ownership concentration, but they have eventually moved on. Korean chaebols, Japanese zaibatsu, Swedish and Italian family firms, and US “robber barons” all enjoyed similar economic and political power; many acquired wealth with substantial support from the state (through direct subsidies, tax breaks, land grants, subsidized credits, etc). Not surprisingly, many of these dominant owners were at some point considered illegitimate by public opinion.

These countries have achieved high levels of economic growth, although the high concentration of ownership has in all cases slowed down the development of an effective democratic system. The most serious problem created by Russia’s oligarchic capitalism is that privatization has not led to secure property rights. Russian voters still do not fully recognize the legitimacy of privatization. This has created a conflict between the core free market values (private property rights), on the one hand, and crucial democratic values (majority rule), on the other. However, the problem of the illegitimacy of concentrated ownership can not be resolved by a simple redistribution of wealth. Historical experience suggests that the size and composition of conglomerates depends on the institutional environment and market conditions. Hence, if oligarchs’ empires are broken up and sold piece by piece, they are likely to reemerge as unified groups, albeit controlled by new owners. Nationalization will not work, either. The assets currently controlled by oligarchs can and should be run by private owners; there are no externalities or public good arguments involved, and the inefficiency of Russia’s state-owned companies is notorious. It is not surprising that in our dataset privately owned firms consistently outperform public companies, controlling for industry, location, and size. The only way out for Russia lies in further financial development, the enforcement of competition policies, openness, lower entry barriers, and a more effective legal system. 

Who owns Russia? Shares in sales and employment controlled by each category of owners in the sample. 

 Sergei Guriev is the Human Capital Foundation Associate Professor of Corporate Finance at the New Economic School, e-mail sguriev@nes.ru. Andrei Rachinsky is an economist at the Centre for Economic and Financial Research (CEFIR) in Moscow, e-mail arachinsky@cefir.ru. This article draws on the authors’ background paper “Ownership concentration in Russian industry” for the World Bank’s Country Economic Memorandum and the paper “The Role of Oligarchs in Russian Capitalism”, forthcoming in winter 2005 issue of the Journal of Economic Perspectives.