All wealth in Russia is first generation—and that generation is getting old. How can the regime ensure continuity for the future? The Kremlin has found only partial solutions.
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. Russia’s weak institutions and lack of trust has driven money abroad. Most liquid assets still end up in other jurisdictions, not Russia. But you can only siphon off so much. There are factories, oil fields, chain stores that cannot be moved abroad.
The looming generational shift and its accompanying—and inevitable—power and property transfer is Russia’s central political problem. Russia’s vested interests should have been working on promoting strong institutions that would allow their families to hold on to their wealth.
The recent constitutional shake-up means that the Kremlin has recognized the challenge and is front-running an expected demand for change. Its response has been to come up with an array of constitutional reforms intended to address issues of continuity and wealth preservation. But exactly those issues could have been handled from the grass roots up, by pushing for the independence of the judiciary and strengthening institutions, instead of issuing top-down edicts.
Many call them anthills. Rows of nondescript prefabricated blocks of various sizes dot the skyline of every Russian city. The blocks are grouped into so-called mikrorayony (micro-districts or neighborhood units) that were designed in the late 1950s to early 1960s to house tens of thousands of inhabitants each.
Taking up more than 70 percent of all housing development of the average Russian city, neighborhood units complete with prefabricated blocks are the country’s dominant urban form. The vast majority of Russians—this writer included—grew up in this sort of environment.
Those neighborhoods are no picture-postcard view, but they are the only kind of inheritance Russians could take with them when the Soviet Union collapsed 30 years ago. Most families’ savings were wiped out when prices were liberalized overnight in a big-bang transition to the free market. Much of the immaterial wealth perished, too. The skills and experiences passed down from the previous generations were nearly useless in the unregulated free-for-all that unfolded in post-Soviet Russia.
But the prefabricated blocks stood the test of the economic and political crisis. Built by the government to alleviate the postwar Soviet Union’s acute housing shortage, those anthills turned into real estate as soon as Russia’s new government announced its privatization program.
During the past 30 years almost 80 million Russians became homeowners; over 30 million apartments have been privatized. More than 40 million Russian residents own plots of land or other “second” real estate, while about 10 million hold non-residential space in their property. In US dollar terms, the price of a square meter of residential space in Moscow grew, on average, by a factor of three between 1999 and 2019. In ruble terms, the price grew 14 times, from about 10,000 rubles to 140,000 rubles (which is a less reliable indicator, given exchange rate fluctuations).
The anthills in Russia’s biggest metropolitan centers are the largest repository of value for most Russians and their investment vehicle of choice. The post-Soviet transition proved to be not so much about building free market and democratic institutions as about crossing from one historical reality to the next with at least something to take along.
A History of Forced Redistribution
Of the Russian 20th century’s many traumatic transitions, the post-Soviet one was unusual in that it allowed for the preservation of something of value. Previous generations could not build on what, in cultural and material terms, they had inherited from their predecessors because they had no inheritance to build on.
Land, houses, and life savings were lost in the 1917 revolution as the Bolsheviks expropriated factories, banks, and other assets. In rural areas, they allowed the spontaneous repartition of privately-owned land between peasant communes. In 1929-30, that same land was expropriated again, this time from the peasant communes. The most able and well-off farmers were labeled kulaks and executed, imprisoned, or exiled. The rest were forced into collective farms during Stalin’s breakneck collectivization drive of the early 1930s.
Few families could bequeath any possessions to their descendants. Fewer still could imagine sharing their pre-revolutionary memories and experiences with their children and grandchildren. Memories had to be hushed, suspicious last names changed, entire family legacies wiped out and lost forever.
Stalin’s demise in 1953 and the late Soviet Union’s mass housing construction program changed that. Apartment blocks built under Nikita Khrushchev and Leonid Brezhnev were a social phenomenon that affected the way of life and structure of families. In a way, it was a reversal of collectivization. If what took place in the 1930s was a vast destruction of rights, confiscation of property and destruction of value, the 1960s, 1970s, and 1980s saw the creation of property and value. Of course, the phrase “private property” could not be used at the time but, for the majority of today’s Russians, the concept of owning one’s place and passing it down to one’s descendants was born then.
Apartments in ageing prefabricated blocks and other assets acquired over the past 30 years—from humble gardening plots to huge industrial conglomerates—is what constitutes Russia’s living generations’ “patrimony.” Overwhelmingly, today’s Russian citizens are first-generation owners.
Some Things Are More Ownable
Mass attitudes to owning different kinds of assets still reflect private property’s peculiar beginnings in the Soviet Union of Khrushchev and Brezhnev. As the concept of private property was forming in mass consciousness during the boom years of housing construction and late-Soviet consumerism, some assets were seen as more ownable than others.
In the late Soviet Union, it was highly desirable to have an apartment that one could leave to one’s children. It was also a matter of prestige to own a car and a dacha. Today’s studies show that Russians fully recognize an apartment (93 percent of those polled), a car (83 percent), and a dacha (81 percent) as legitimate “private property.” Passing down all those “anthill burrows” is not seen as a political problem: it has become routine. Meanwhile, only 52 percent of those polled by Levada Center, Russia’s leading independent polling organization, recognize securities as private property. Owning a company is defined as private property only by 59 percent of respondents.
Levada Center polls show that larger businesses are often associated with the privatization campaign of the 1990s, and privatization brings to mind oligarchs, fraud, and the inequitable distribution of state resources. Respondents believe that the three main beneficiaries of privatization were the oligarchs of the 1990s, government officials, and big business, with the oligarchs being far in the lead.
This is why an overwhelming majority of Russians polled believe that striking it rich while remaining honest is impossible. Passing on private companies, especially large ones, down to posterity is bound to be controversial because the Russian public considers owners of major assets to be suspect. The provenance of riches is still shrouded in mistrust, and attitudes toward private business overall, even when it is truly private and not oligarchic, are often negative. This is the background against which Russia’s next wealth transfer is going to unfold.
Billionaires and the State
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.
A Dangerous Political Environment
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.
The Kremlin’s Dilemma
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.
Less Corruption, Not More Freedom
In mid-January 2020, Putin announced an array of changes to Russia’s constitution. The draft amendments appear to give more powers to the office of the prime minister, the Duma, Russia’s parliament, and the State Council, a body comprising Russia’s regional governors and a number of top-ranking officials. Putin may have to leave the presidency in four years, as the Russian constitution requires, but he is expected to move on to the State Council or some other vantage point from where he would be able to oversee a transfer of wealth and power.
A reformed office of the president will share some of its policy-making powers with other bodies, but the president will continue to be the commander-in-chief and the foreign-policy czar. “I would agree, Putin is moving away from personalism,” Konstantin Gaaze, a sociologist at the Moscow School for Social and Economic Sciences, tells me. And to ensure the kind of transfer that is favorable to the Kremlin, they [the leaders] “also need a clear legal order on top of the informal hierarchy they have long established,” Gaaze observes.
It is important to understand, though, that none of this is meant to make Russia’s governance system less authoritarian. It is meant to make it less corrupt, chaotic, personalized, and thus prone to human error. Mikhail Mishustin, a former technocratic head of Russia’s tax service and one of the leading officials responsible for the state digitalization drive, has now become Russia’s new prime minister. Mishustin’s mandate is to cement the system, not to develop it.
Putin may be genuinely convinced that he is leaving the presidency in 2024, but that conviction hinges on an assumption that, by 2024, the economy will run nicely and Putin’s power base—employees paid out of the state budget—will be happy. If the base is unhappy and the broader society is in turmoil, Putin will find a pretext to stay on. Russia’s political transition thus depends in large part on the country’s new prime minister. Mishustin’s future success, meanwhile, is not to be taken for granted just because Putin and his close allies will continue to be around.
In fact, Mishustin’s is not the first technocrat entrusted with the task of turning Russia’s economy around. On multiple occasions since 2000, when he first took office, Putin has from time to time hired a “technocrat cabinet” and thought that Russia’s economy was taken care of. He then proceeded to wage wars, annex other countries’ territories, crack down on media, quash protests, and let his businessmen friends enjoy government-funded contracts. In Russia, by now, there are lots of able bureaucrats well-versed in public administration. But the ever-unpredictable Kremlin sets limits to what a technocrat can do.
On the Threshold of a New Period
Russia’s current leaders have been successful in anticipating a bottom-up call for change and thus staying on top of the institutional game. It is not surprising that the Kremlin knows how to intercept Russian society’s bottom-up drive to transform Russia’s institutions. This is what Russia’s center of power has traditionally been good at.
Still, this current decade will likely see Russia crossing into a new period. Creating a less personalized and more rules-based governance system that is still authoritarian might not solve the fundamental problem, namely that of succession. It is supposed to do so, but it will not.
Nonetheless, for the first time in many years Russian society has a chance to pass a substantial amount of wealth and experience to the next generation. The wealth is highly concentrated, and the experience is all about living for the moment, however. Planning ahead will continue to be difficult.