After the fall of the Soviet Union in 1991 many previously state-owned companies were privatised. The aim was to move towards capitalism and to bring order to the economy which was in a state of complete disarray. President Boris Yeltsin and the leaders of other ex-Soviet republics needed a way to raise capital while redistributing the poorly managed state-owned companies to private concerns.
In 1994, Oneksim Bank devised a plan that involved banks lending the government money, using shares in the state-owned companies as collateral. The plan was called ‘loans for shares’. When the government defaulted on payments, the shares used as security became the property of the banks and the balance was auctioned. Foreign bidders were excluded in the sales and the shares were often sold at a fraction of the price to the very banks that were in charge of the auctions, and already held shares.
The proprietors’ net worth increased overnight, making them extremely wealthy and powerful very quickly. This was how most of the early generation of oligarchs made their money. Since then, more oligarchs have emerged using political and family connections to acquire former state-owned assets at bargain prices. These oligarchs now control the economies of the former Soviet republics.