We present a model in which capital assets can only be owned by members of a relatively small politically connected elite (‘the oligarchs’), each member of which faces a given risk of being expropriated, and we investigate the implications of such an imperfection of property rights for the transition to a market economy. At the start of the transition, the oligarchs are long on local capital assets but short on safe deposits abroad. This causes a depression phase characterized by acute liquidity constraints and large capital outflows at the same time. As the oligarchs acquire enough safe deposits, the economy enters a recovery phase, still accompanied by capital outflows. The model can parsimoniously explain both the steep decline suffered by the Russian economy in the first stage of its transition to a market economy and the subsequent turnaround. The decline could be avoided by allowing foreigners to own some domestic capital assets, but home-country oligarchs may not be able credibly to collectively commit to such a reform.