Economy Brings Down Russian Oligarchs

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Such flamboyant personalities were the driving force behind the privatization of the Russian economy after the collapse of communism. The more unscrupulous oligarchs milked ailing companies for all they were worth, while the respectable ones restructured the old Soviet firms. They brought international management practices and cutting-edge technology to Russia. In addition to the state-owned energy giant Gazprom (GAZP.RTS), it is the oligarchs who have spearheaded the expansion of Russian companies in the West over the past few years.

But the halcyon days now appear to be over. The US business magazine Forbes estimates that the 25 richest Russians alone have lost nearly €180 billion during the current global economic crisis. Abramovich, who invested his money primarily in the holding company Evraz (HK1Q.L), lost a staggering amount of money on the London Stock Exchange within just six months as Evraz's value plummeted from €28 billion to just €3.2 billion. Russian steel baron Alexei Mordashov, who has a stake in the German travel giant TUI (TUIGn.DE), lost €18 billion.

The total amount of debt owed by large Russian companies and banks comes to an estimated €360 billion. That is almost as much money as the Russian state, which controls the third-largest gold and currency reserves in the world, still has set aside for a rainy day, after weeks of market interventions to shore up the faltering ruble and costly bailout packages for financial institutions and companies.

Times are tough for the Russian oligarchs, who are now dependent on the government for help. The yacht aficionado Abramovich has received €1.4 billion, and Yevtushenkov keeps a close eye on the Kremlin from his window on the third floor of an imposing Stalin-era building.

"I would be a lousy captain of industry if I didn't maintain relations with our government," he says. "Things are no different in America and Europe. I can only dream of the billions of euros that the German government spent to bailout a bank."

Yevtushenkov is currently negotiating the sale of his stake in the telecommunications company Svyazinvest. The buyer would be the Russian state. That would generate money to settle the firm's debts and bring in new investments. The banker Pyotr Aven recently had the pleasure of flying to Siberia with Prime Minister Vladimir Putin. Just a few days later, the government granted him a loan worth €1.5 billion.

All of this stands in stark contrast to the 1990s, when the oligarchs used their money to secure the re-election of then-President Boris Yeltsin. Four years after that, financial magnate Boris Berezovsky helped his erstwhile protégé Putin become Yeltsin's successor. Now it is no longer the oligarchs who are supporting the Kremlin—it is the Kremlin that is bailing out the oligarchs.

Politics determines who can continue to play in this enormous game of Monopoly, and who will vanish from the board. The kingmakers of yesteryear, so it seems, are now forced to beg for favors.

Aluminum czar Oleg Deripaska, who was once the richest of them all with an estimated pre-crunch net worth of €23 billion, would be teetering on the brink of bankruptcy if the state had not granted him a €3.5 billion loan.

During the boom years, Deripaska purchased so many production plants and companies that his industrial holding Basic Element today includes everything from carmakers and insurance companies to banks and aviation firms. He operates plants from Nigeria to Tajikistan.

But the size of his burgeoning workforce, which had reached nearly 300,000 by late summer, didn't grow as fast as Deripaska's obligations. At his aluminum subsidiary Rusal alone, accounts payable have soared by 500 percent since 2004, while profits have only risen half as fast. Deripaska has built his entire empire on credit.

When the tycoon took over the world's largest nickel producer, Norilsk Nickel (GMKN.RTS), in April, he pledged his shares as collateral to a consortium of 11 international big banks. During the financial crisis, the value of that stock plummeted, and the banks have started to press for new guarantees.

In order to prevent foreign financial institutions from becoming co-owners of this jewel of the Russian metal industry, the Kremlin loaned Deripaska billions of rubles and, in exchange, placed its own representative on the supervisory board. Now a number of experts are afraid that the state will become a kind of super-oligarch and roll back many of the privatizations carried out in the 1990s.

Back then, the oligarchy supported the Yeltsin government with billions of rubles and, in return, received choice segments of the country's industry—and ministerial appointments. Now the Kremlin has thrown this process into reverse. Most of the oil and gas industry had already reverted back to government control before the crisis. Last summer, Putin transformed a government defense export agency into a holding with a total of 423 companies. This new entity—which receives subsidies and essentially acts as a huge state corporation—is headed by Sergei Chemezov, a close ally of Putin and a former colleague from the days when they both worked as KGB intelligence agents in the former East Germany.