Putin's Reshuffle: Deprivatisation as a 'national project' for elite reformatting and preparation for power transition

Deprivatisation: major and minor

The ongoing campaign of deprivatisation and asset redistribution in Russia is the most discussed topic in Russian business circles and the most significant political news in present-day Russia.

A joint investigation by 'Novaya Gazeta Europe' and 'Transparency International — Russia' finally allows us to fully grasp the scale and contours of this process. Over the past two years of the war, Russian courts have received 40 demands from the Prosecutor General's Office to nationalise more than 180 private companies, whose assets are estimated at 1 trillion rubles, according to the investigators. In the 2010s, such lawsuits in Russia were almost nonexistent, in 2020–2021 the Prosecutor General's Office filed six lawsuits, another six in 2022, but they were not a part of the current campaign. Mass deprivatisation began in 2023 and is now experiencing its second wave. From February to August 2023, 20 similar lawsuits were filed. After Putin's speech at the Eastern Economic Forum, where he had to address concerned questions from businessmen about deprivatisation, there was a small pause. However, from late October 2023, the process resumed at an even faster pace.

The most common basis for 'major deprivatisation' is violations committed during the privatisation of enterprises in the 1990s. The statute of limitations for such cases is only three years. However, the Prosecutor General's Office now counts them not from the date of privatisation but from the moment when the aggrieved party (the state) claimed a violation of its rights. This distorted legal manoeuvre has allowed the revival of 'the cudgel of deprivatisation' as a tool for asset reshuffle.

However, lawyers interviewed by 'Meduza' suggest that the number of cases of private companies being seized by the state in recent years could be significantly higher, possibly ‘several dozen’, as assets can be confiscated through forced bankruptcies. Tracking such cases is difficult due to the large number of such cases. In 2023, external oversight was introduced in 7532 companies — almost one and a half times higher than the figure for 2022 — according to 'Kommersant'. Thus, there may be an invisible and more extensive part of the deprivatisation campaign that involves less significant assets.

Deprivatisation: 'military' and anti-offshore

The campaign of 'major deprivatisation' has several internal triggers. The first is directly linked to the 'needs of wartime'. Most often, in 2022-2023, prosecutors targeted enterprises in the military-industrial complex, engineering, and metallurgy (10 lawsuits). However, another 7 lawsuits concerned companies in the food and fishing industry, and 12 more involved ports and real estate, according to 'Novaya' and 'Transparency'.

The latest high-profile case of 'defence nationalisation' involved the seizure of three plants of the Chelyabinsk Electrometallurgical Plant (ChEMK) from former Forbes list participant Yuri Antipov. ChEMK is the largest producer of ferroalloys with a market share of around 80%. It supplies these alloys to metallurgical plants that support defence factories with steel. The nationalisation process took 'militarily' just three weeks: on February 5, the Prosecutor General's Office filed a lawsuit and on the 26th, an arbitration court satisfied it. The case was heard behind closed doors. According to 'Kommersant', the Prosecutor General's Office deemed the privatisation of ChEMK in the 1990s illegal because it did not receive special approval from the federal government. Moreover, in 2023, according to the agency, the businesses 'fell under the control of residents of unfriendly states', including the Canadian-Swiss RFA International (a trader of ChEMK), which 'damaged national interests, defence, and the security of the country'. Antipov himself, according to media reports, has been detained on charges of fraud.

Declaring current Russian owners 'foreign investors' is the second spring of deprivatisation. Foreign investors are allowed to acquire stakes in companies 'of strategic importance for ensuring the defence and security of the country' with only the consent of a government commission. At the same time, legislation provides an exception for foreign structures owned by Russians if they are tax residents of the country. 'Meduza' counted six cases where the Prosecutor General's Office and the Federal Antimonopoly Service initiated the nationalisation of businesses on the basis that their owners had lost their residency status, years after the deals were concluded. In April 2023, the law was tightened further. Now, a Russian citizen with a residence permit or other document allowing permanent residence in another country can also be declared a foreign investor. Thus, the mechanism of offshoreisation, which has been operating in Russian business for the past decade, has been revised.

Owners of approximately half of the companies affected by the deprivatisation process reside outside Russia. Therefore, the head of Transparency International — Russia, Ilya Shumanov, considers holders of dual citizenship, owners of offshore companies, and Russian businessmen living abroad as the 'main risk group'. Associate researcher at the Davis Center at Harvard University, Andrey Yakovlev, in conversation with 'Novaya Gazeta Europe', sees the expropriation of companies from owners living abroad as a ‘signal to others that they should return’.

For such businessmen, especially if they are subject to international sanctions, what is happening can indeed become a compelling argument for returning to Russia. Among those who have already decided to return, the most noticeable are the founders of Alfa Group, Mikhail Fridman, and German Khan. Both had lived in the UK for many years. After falling under international sanctions (along with partners Petr Aven and Alexey Kuzmichev), they unsuccessfully tried to have them lifted. While their Western assets of businessmen are frozen, they continue to control Alfa Bank, Alfa Insurance, and the X5 Group, registered in Europe but operating in Russia. Recently, the government included these companies in the registry of economically significant organisations. Participants in this register have the right to forcibly transfer the shares of their foreign shareholders to Russian jurisdiction. Fridman and Khan, therefore, will have to 'clean up' their assets from previous legal obligations and also act as a kind of 'bait' for smaller sharks of offshore Russian business.

The authorities are preparing a kind of internal imitation of offshore managers and trusts for these individuals. Only very large companies, the asset value of which exceeds 150 billion rubles, can be included on the register of economically significant organisations. For the return of smaller businesses, valued from 100 million rubles, the Ministry of Economic Development has prepared a draft law on the simplified creation of so-called personal funds – special non-profit organisations without membership, which can engage in entrepreneurial activities and create companies. Moreover, after the death of the fund's founder, the property is inherited not according to the norms of inheritance law (as in the case of inheritance funds) but according to the rules established by the founder himself.

All this bears some resemblance to Stalin's campaign to bring back well-known compatriots who left Russia during the Civil War. This comparison is particularly apt since, in our opinion, the deprivatisation campaign today takes on a much broader perspective than the tasks and triggers that drove it in 2023.

Putin's redistribution, kleptofascism, and power transit

The deprivatisation campaign may become a tool for a much more radical restructuring of the elites than it might seem at first glance. Putin first spoke about this in September when, responding to a question about the 'deprivatisation' that had begun, he, rejecting the term itself, immediately remarked: 'Certainly, in many cases, the emergence of a new class, a young class of businessmen, is also necessary'. And finally, the same idea was formulated as a key theme in his pre-election message on February 28, 2024: 'The genuine, true elite are all those who serve Russia, workers and warriors', and not those 'who in previous years filled their pockets at the expense of various economic processes in the 1990s'. This thesis put forward by Putin was immediately picked up and developed in a propaganda article by RIA Novosti titled 'Russia has waited for a change of elites'.

The extensive social transformation launched within Russia by the war in Ukraine is likely not only unfinished but, on the contrary, is still gaining momentum and will fully unfold after the presidential elections. The murder of Alexei Navalny exactly a month before the official voting began was a sign of the final determination to 'put an end to the legacy of the past', when Putin was forced to tolerate opposition and its supporting segments of society. The second preparatory and truly epoch-making step was the actual abolition of the unofficial moratorium on 'reviewing the results of privatisation'.

These results were never a 'sacred cow' for Putin, but after the Yukos case, a de facto order was maintained where the 'old business' could remain part of the Putinist political-economic system, in exchange for non-support of Khodorkovsky at the time of his conflict with Putin, renouncing political ambitions, and showing active loyalty. In many cases, redistribution occurred in the interests of building a new oligarchy but did not have a systemic character.

As a result, a significant part of the Russian elite supported the mode of dual identity set by the first generation of Russian oligarchs, having, in addition to Russian assets and real estate, backup plans, including in the form of business projects, investments, and residencies in the West. Many Russian businessmen maintained this dual identity even after the start of the war, continuing to manage their Russian assets from abroad. The abolition of the moratorium on 'reviewing privatisation' means that Putin not only intends to put an end to this but also plans to reformat the Russian elite.

The beginning of a massive redistribution of property, the inevitability of which we had previously cautioned, is designed to put an end to the era of early Russian oligarchs and their culture of dual identity. Similar to the Stalinist purges, this campaign aims to open career opportunities and form a support base for the 'new regime', the construction of which Putin turned to in 2020 during the rewriting of the constitution. Thus, the deprivatisation and property redistribution campaign is likely to become an instrument of post-Putin transit, creating a new elite — an elite of 'military redistribution' - which, in turn, will be interested in preserving Putin's ideological legacy after he is gone. The redistribution will not necessarily be total, but its beginning undoubtedly means a review of 'loyalty rules': owners who attempt to retain their assets must now not shy away from politics, as demanded by the 2003 pact, showing active loyalty, mainly privately, but openly and convincingly swearing allegiance to the new ‘kleptofascism’ that has grown from Putin’s justification of the war. The major redistribution, the floodgates of which were opened in 2023 and which became the central idea behind Putin's pre-election message, is designed to create a new anti-Western elite of 'kleptofascism' that will outlast Putin.

However, this clear plan has its pitfalls. As rightly noted in the investigation by 'Novaya' and 'Transparency', many of the assets being expropriated are clearly intended for specific owners who will act as consolidated managers of entire industries. The logic of Putin's management model implies an extremely high degree of concentration of 'management', up to the creation of mega-holdings — a kind of political-economic 'chaebols’, as political scientist Nikolai Petrov defines them — under the control of especially trusted and close 'families' to Putin, ultimately controlling the majority of Russia's economy and the rent it generatest. This logic of extreme concentration and chaebolisation in the absence of any guarantees other than personal trust in the leader may cause acute conflicts during the major redistribution process and Putin's departure, as well as disappointment in the results of this redistribution from the revanchist wing of the new elite. Moreover, the viability of the rhetoric of 'democratic fascism' and its potential for open rebellion have already been demonstrated by Yevgeny Prigozhin.