Wealth and Power Transfer as Russia’s Central Political Problem

BY MAXIM TRUDOLYUBOV

This is a shortened version of a piece published in full in Internationale Politik (German).

Russia’s ruling elites have been successful in preserving regime stability for two decades now. But their success cannot even begin to resolve a succession dilemma hanging over the Kremlin. No proven power transfer mechanism exists: when the man at the top goes, everything goes.



It is not just about political power; it is about businesses, properties, investments, and all other repositories of value. All wealth in Russia is first generation—and the principals are getting older.

An array of demographic and political factors point in the direction of a looming generational shift and a large family wealth transfer in Russia. Many of Russia’s private businesses, both oligarchic and non oligarchic, will have to change hands. According to Ruben Vardanyan, a former investment banker who is now running a wealth management consultancy, there are about 200,000 dollar millionaires in Russia. Counting all the family members, we are talking about up to 700,000 people. About 70 percent of principal owners are older than 50, and many are 70 or older.



Forbes Russia estimates the number of billionaires in Russia at 100. In its Global Wealth Report, Credit Suisse puts the number at 110. According to Credit Suisse, the top decile of wealth holders owns 83 percent of all household wealth in Russia. That is a high level even in comparison to the United States, which has one of the most concentrated distributions of wealth among advanced nations (in the US the top 10 percent owns 76 percent of all household wealth). Russia’s concentration of wealth is also higher than China’s.



Alisher Usmanov, an Uzbek-born Russian magnate who controls the USM industrial group, told the Financial Times recently that he had drawn up plans for dividing up his $16.5 billion empire between his family and the top managers of his businesses. “Fifty per cent to family, 50 per cent to management who deserve this, in my view,” Usmanov told the FT. The shares would be sold “at a friends and family price,” he added.



One way of looking at Usmanov’s interview is to place it among other tycoons’ public pledges. Ultimately, all such statements have one addressee: President Vladimir Putin. Oleg Deripaska, the owner of the Rusal aluminum corporation, told the FT in 2007 that he did not see himself as separate from the state and would unhesitatingly surrender his assets to it. Vladimir Potanin, the majority owner of the Nornickel corporation, has confirmed on various occasions that he will not bequeath all his property to his children. Oligarch Gennadii Timchenko said in a 2014 interview with Itar-Tass that he was entirely prepared to hand his assets over to the state. It is likely that most of Russia’s largest fortunes will not be passed to the next generation intact. They will either be diversified or pledged to causes directed by the Kremlin.



This kind of certainty is rare. It is characteristic for many of Russia’s business owners to keep a close eye on their companies’ day-to-day operations and see themselves as indispensable to their companies. Many of the “fathers” are unwilling to contemplate succession. According to a joint study by the Skolkovo Wealth Transformation Centre and UBS, the overwhelming majority of the wealthy parents’ children are not willing to take up responsibility for their parents’ companies. “We are talking about hundreds of thousands of people who are in their 50s to 70s and whose children are loath to take over their family businesses,” Vardanyan told me.



Wealth transfer in Russia is tricky not just because of the business owners’ management styles and family disagreements. It is a political problem which cannot be solved by the “fathers” alone. The children, in their turn, don’t just loath responsibility; they are afraid to take on the impossible task of running a private business in an environment like Russia’s. This environment is unpredictable at best and outright dangerous at worst.



In truth, the reason why few business owners have clear road maps for succession is that the “fathers’” ability to navigate the opaque and fluid world of Russian politics is hard to pass on to the next generation. And without this set of political skills and personal connections, private ownership in Russia is precarious: private property and political power are too closely intertwined.



Russia’s looming transition of wealth and power is the elephant in the room but few seem to be ready to address it. “Properties that are contingent on political power are impossible to pass on to the next generation,” one of the high-ranking officials told the Levada Center as part of the center’s study of Russia’s political transition. When fathers are thrown out of the system of power, their children cannot get in and become business leaders.



Younger generations of wealthy Russians study abroad, but neither knowledge nor skills acquired at a Western university can prepare them for the task of running a business that the Kremlin does not consider fully private. In fact, the knowledge gained at Western universities could even be harmful in their case. Seizing a market and maintaining a monopoly by cementing it with legislation made possible through access to the lawmaking process is very different, after all, from running a textbook business.



The Kremlin is pursuing two goals that seem to be in conflict with one another. One is to hold on to uncontested autocratic power; the other is to ensure continuity of the regime. To reach the first goal, the leader needs personal agreements, informal arrangements with law-enforcement agencies, and de-institutionalized arbitrary rule. Those are the kinds of tools that allow one to quash opposition and keep officials and the public on their toes.



To achieve the second goal, i.e. to transfer one’s wealth and power to the next generation and thus provide for the regime’s continuity, the leader needs to build impersonal institutions that provide citizens with the right to personal inviolability and to a fair trial, and that ensure the inviolability of property, enforcement of contracts, and control of corruption.



There are indications that President Vladimir Putin does understand the challenge of the coming wealth and power transfer. A demand from the grass roots for more impersonal institutions and fair rules also seems to be causing some soul-searching in the Kremlin. Judging from his recent constitutional amendments, Putin is trying to solve a complicated problem: he seems to be undertaking to turn his regime into a more rules-based governance system without making it any less authoritarian.

The opinions expressed in this article are those solely of the author and do not reflect the views of the Kennan Institute.