Russia's 'Loans-for-Shares' Auctions Transfer $100 Billion in State Assets to Oligarchs for Pennies on the Dollar

The Russian government under President Boris Yeltsin implemented the ’loans-for-shares’ privatization scheme between November and December 1995, auctioning twelve of Russia’s most profitable industrial enterprises—including mining, steel, shipping, and oil companies—to a small group of businessmen who would become Russia’s oligarchs. The scheme was originally proposed by banker Vladimir Potanin of Oneximbank and endorsed by Deputy Prime Minister Anatoly Chubais as a way to raise cash for Yeltsin’s 1996 re-election campaign while accelerating privatization. In exchange for approximately $800 million in loans to the cash-strapped government, private banks received minority stakes in state-owned enterprises as collateral, with the understanding that the government would default and the banks would acquire full ownership. The auctions were rigged and lacked genuine competition, being largely controlled by favored insiders with political connections. At bargain-basement prices, Potanin acquired Norilsk Nickel (the world’s largest palladium and nickel producer) worth billions for a fraction of its value, Mikhail Khodorkovsky’s Menatep bank gained a 78% stake in Yukos oil company worth $5 billion for just $310 million, and Boris Berezovsky obtained Sibneft oil company worth $3 billion for approximately $100 million. Roman Abramovich also acquired key assets at massive discounts. The auctions yielded evident undervaluation, with prices trailing 1995 market capitalizations by discounts ranging from 13% (Norilsk Nickel) to 89% (LUKoil), far exceeding the 34% average seen in comparable emerging-market privatizations. According to Forbes research in 2012, two-thirds of Russian dollar billionaires secured the main part of their fortunes during this privatization period. The loans-for-shares scheme is widely perceived as unfair and fraudulent, and directly gave rise to Russia’s oligarch class, who concentrated enormous wealth while the broader Russian population faced economic devastation. The scheme’s implementation contributed to massive wealth inequality and political instability that would enable Vladimir Putin’s rise to power.