Did Russia’s oligarchs cause or exploit a weak state?

The short answer

• The state could not collect its own taxes. The government depended on revenue from large firms after privatization and inflation, but those firms often paid late, in goods or not at all. Regions retained much of what they collected, and the new rich moved money abroad. The shortage made it difficult to pay soldiers, officials and creditors; it ran through crises from the poor performance of conscripts in Grozny to the 1998 default.
• The regions had taken power as the Union fell. Yeltsin had encouraged the republics to claim sovereignty in 1990–91 to weaken Gorbachev. Once the Union fell, their leaders controlled resources, police and votes that Moscow needed. Bilateral treaties kept most regions in the federation, but the special terms produced a patchwork of authority, echoing the domains Japan’s leaders abolished in 1871.
• Chechnya’s history made compromise harder. Chechen resistance to Russian conquest in the nineteenth century was followed by Stalin’s deportation of the entire nation in 1944; survivors returned only in 1957. Dudayev’s demand for independence drew on that memory. After Russian authority withdrew, weapons and smuggling flourished. Moscow refused serious negotiations with the elected leader and expected a quick victory, turning a political problem into war.
• The government needed cash and a re-election. With an empty budget and the 1996 election approaching, Yeltsin’s government needed both money and allies. Banks lent against valuable state shares, then auctioned them when the loans went unpaid, usually to themselves. The arrangement resembled a pawnbroker selling an unredeemed pledge to his own relatives. Ownership gave the bankers a reason to support Yeltsin; the immediate struggle for survival helped shape one of modern history’s largest transfers of wealth.

What it changed

Oligarchs became a power in politics. Ownership gave oligarchs tools with which to shape politics after 1996. Boris Berezovsky and Vladimir Gusinsky used banks and television channels to influence ministers and elections; Berezovsky briefly became deputy head of the Security Council. Their leverage depended on a weak Kremlin, and a stronger president would move first against the most politically active among them.

An unresolved war and a humiliated army. Khasavyurt left Chechnya effectively independent, but did not settle its future. The elected president Aslan Maskhadov struggled to control warlords and kidnapping gangs. Many Russian officers saw the accord as betrayal, and many Russians blamed Chechens for kidnappings and bombings. Raids from Chechnya into neighboring Dagestan in 1999 would provide the occasion for a second war.

The default cleared the ground for recovery. The cheaper ruble made imports expensive and Russian products more competitive, helping output grow in 1999. Oil prices rose afterward and state revenue recovered quickly. Yeltsin’s successor inherited a country emerging from its deepest crisis and a budget refilled by oil; he would take much of the credit for recovery.