During Yeltsin’s loans-for-shares program during the early 1990s, a number of Russian entrepreneurs became oligarchs overnight. At first this was not an issue for Russia’s central government because it allowed Yeltsin and his team to gain some very powerful friends with the 1996 elections coming up.
Some of Russia’s most lucrative state assets were sold to these entrepreneurs at very low prices. Norilsk Nickel, YUKOS, LUKoil, Sibneft, Surgutneftegas, Novolipetsk Steel, and Mechel are all state assets put on the line for the central government to generate some money for the upcoming election and after these loans were defaulted they quickly became ownership of these present-day oligarchs. At first, this was fine because Yeltsin was able to retain his position as president and the oligarchs for the most part stayed out of Russia’s political sphere. But recently there has been friction between Putin and his wealthy compatriots because they are keeping their wealth out of Russia and some are even aspiring to enter the political environment.
As Putin and his government are trying to initiate programs during this economic crisis their biggest stumbling block is acquiring assets through taxation because Russia’s wealthiest are keeping their assets in overseas accounts, out of the reach of Putin. Offshores are the main tool for Russian businessmen to protect their assets from state authorities, rivals and all kinds of raiders. All of Russia's 20 richest people — with a combined net worth of more than $227 billion — control a portion of their fortune through holding companies registered outside the country. But most recently during his electoral campaign, Putin has emphasized the need for Russian oligarchs to pay their fair share of tax and last year he took control of the Federal Financial Monitoring Service, an executive body to combat money laundering.
The State Duma, Russia's lower house of parliament, also introduced a series of amendments to existing laws, tightening control over companies' financial transactions. But this could actually have a negative effect as Swiss attorney Tutykhin claims, “The more restrictions on money flows Russian authorities will impose, the more reasons Russia’s rich would have to hold their assets abroad,” in the face of Putin’s new measures. In all likeliness Russia’s wealthiest like Roman Abramovich, Alisher Usmanov, and Vladimir Lisin will continue to hold offshore assets in Gibraltar, Cyprus and the British Virgin Islands. Cyprus in particular is an interesting location for Russian wealth to be stored because of the 1998 Tax Treaty signed by the Russian and Cypriot governments.
The condition of the treaty allows Russian holdings to be taxed at Cyprus’ 10% corporate tax rate rather than Russia’s 20%. This was a desperate move by Yeltsin in 1998 to bring revenue to Russia’s crumbling economy, but is now working to benefit the oligarchs that came into power during his reign. So this is the main reason why Russia was so disturbed by Cyprus’ economic crisis and eventual bailout as further analyzed by Talal Alyan in his article for PolicyMic.
The other difficulty that Putin has had with oligarchs recently involves their involvement in Russian politics. Putin is willing to overlook the wealth the oligarchs have accumulated as long as they do not threaten his power. Oligarchs such as Boris Berezovsky, Vladimir Gusinsky, Mikhail Khodorkovsky all eventually challenged Putin and lost. Berezovsky was a powerful tycoon during Yeltsin’s presidency and even played a role in bringing Putin to the fold. But once he started challenging Putin he was quickly turned into an enemy and fled the country. Gusinsky, an oligarch that controlled television, radio, and print media, started using these resources to oppose Putin and just as quickly he became a target of the state. He was coincidentally accused of money laundering and fraud and had to flee Russia. Khodorkovsky was not as lucky as he has been jailed since 2005 for multi-million dollar tax evasion, fraud, and money laundering. Khordokovsky has been one of Putin’s biggest critics and his conviction seems to be politically motivated because Khodokovsky openly funded opposition parties during Putin’s electoral campaign.
The largest threat to Putin’s power is the oligarchs that he helped create. For now Putin can continue to implement harsher restrictions on offshore transactions and imprison political opposition, but he can only count on oligarchical allies like Mikhail Prokhorov for so long because a patriarchal system like the one Putin has established in Russia can only exist as long as he can continue to please his oligarchs. And if Putin is threatening the wealth of the oligarchs, he could consequently create enemies that not even he can suppress.