Economic Changes Taking Place During Vladimir Putin's First Term Of

Key points

1. The most significant achievement of Vladimir Putin’s team over the three years of his term of office is the realisation of legislative changes, which may constitute a base for further – more detailed – political and economic reforms. This is, to a certain degree, a return to the economic tasks set out by a team of reformists in the early 1990s, which were impossible to realise at the time due to conflicts between the Kremlin and legislative powers.

2. The political reforms introduced during Pu- A summary of the tin’s term of office aimed primarily at increasing the Kremlin’s control over Russia’s socio-political p o l i t i c o - e c o n o m i c life. This goal has been achieved to a large extent. In effect, it has given rise to a growth in the authority and position of the Kremlin, on the changes taking place one hand and, on the other, to the authoritarisa- during Vladimir Putin’s tion of Russia’s political system. 3. Within the economic sphere, over the past first term of office three and a half years, a land reform was carried out (enabling land sales transactions in the Rus- Jadwiga Rogo˝a, sian Federation), and changes were also introduced within the budgetary-fiscal sphere and the Iwona WiÊniewska pension system. Russia was crossed off the Fi- nancial Action Task Force’s (FATF) blacklist and granted the status of a market economy by the EU and the USA. Simultaneously, however, pres- s u re from various groups from the pre s i- dent’s entourage opposing the reforms, and also business and regional elites, meant that reform projects often lost their liberal undertone and radicalism already at the stage of forming a legal base. For this among other reasons, the changes initiated in almost all spheres of the Russian economy in many cases proved to be inconsistent and incomplete. Problems with their implementation and the slow pace of structural reforms did not allow for the strengthening of spheres other than the raw material sector or making the Russian economy less dependent on the situation on foreign raw material markets. Therefo- re, the main goals of President Putin’s economic reform programme have not been realised.

4. Non-legislative changes undertaken by the presidential circle were also of particular significance for Russia’s present situation. These chan-

CES Studies ges had no legal basis and resulted from infor- I n t r o d u c t i o n mal actions undertaken or inspired by the authorities. As a result of these activities, the presi- Following his rise to power in 2000, Vladimir Pu- dent gained a loyal majority in parliament, in- tin presented a comprehensive socio-economic creased the role of security services in the coun- programme for the development of Russia thro- try, simultaneously putting a stop to the direct ugh to 20101. This programme was prepared by influence of big business on the Kremlin’s politi- a team of economic experts from the Centre for cal decisions. Non-legislative changes have also Strategic Studies (CS S )2 led by St. Pe t e r s- led to the restriction of freedom of speech and burg’s German Gref. In spite of the fact that this pluralism of information in Russia. document was never accepted in its entirety, and only its main assumptions were approved, as of 5. It seems that the reform process initiated by 2000, short- and medium-term socio-economic President Putin still depends primarily on the government programmes have been based on support of the Kremlin. Because of this, the con- the same principles. tinuation of reforms over the coming years will be closely linked with Putin’s position following The medium-term goal of this development stra- his likely re-election in March 2004, and his poli- tegy through to 2010 was the reduction of the tical determination to continue with the chan- widening gap between Russia and developed na- ges. Aside from internal factors, petroleum pri- tions. The long-term goal, on the other hand, ces on the global market will also be of key signi- was the restoration and strengthening of Rus- ficance for the reform process. Such dependence sia’s position as a leader on the global scale3. is limiting Russia’s chance for real modernisa- The reforms of Russia’s political system, social tion over the next few years. policy and the modernisation of the economy were intended to help achieve these goals.

The aim of this study is to describe and analyse political and socio-economic reforms, as well as non-legislative changes initiated under Vladimir Pu t i n’ sp re s i d e n c y. New reform activities will probably not be initiated over the six months rem a - ining until the presidential elections. For this re- ason, it is already possible to summarise the changes achieved in the political, economic and social spheres during President Put i n’ s first term of office. A description of the political and economic reforms and also of non-legislative changes, which took place in the Russian Federation over the past three and a half years, has been included in Part I of this study. The conclusion hereof attempts to summarise the actual achievements of President Put i n’ s team, and to answer the qu- estion concerning perspectives of the reform process and factors determining the shape thereo f .

CES Studies Reforms and changes president dismissing regional heads6 on the basis of a court verdict, and dissolving local parlia- Reforms realised during Vladimir Putin’s presi- ments. Governors, on the other hand, were gran- dency have taken place on two levels. ted the right to dismiss the mayors of larger On the one hand, reforms were carried out on towns in their own regions. It is worth noting, the basis of legislative changes prepared by the ho w e v e r , that over more than three years since government (the CSS’s strategy) or the Presi- these reforms were accepted, the Kremlin has not dent’s Administration, and voted on by the par- yet resorted to using the mechanisms establi- liament. These primarily concerned the econo- shed at the time for dismissing regional heads. my, but also political matters. Actions underta- Informal mechanisms (blackmail, the nomination ken in these areas aimed, above all, at strengthe- for another position, etc.) were used instead in ning and centralising the state, as well as imple- the few cases when governors were rem o v e d . menting changes of a market character in the Russian economy. In summer of 2000 parliament adopted a law On the other hand, other transformations also changing the procedure of electing the upper took place in Russia that did not result from le- chamber of the Russian parliament – the Federa- gislative changes, but from informal activities tion Council. Instead of ex officio governors and either undertaken or inspired by the authorities. heads of local parliaments, the chamber is pre- Most of these aimed at increasing the control of sently composed of regional representatives of authorities over public life (political and econo- legislative and executive powers nominated by mic institutions, media, etc.). regional authorities (the governor and the parliament). Governors, upon leaving the Federa- 1. The most significant political tion Council, lost immunity and direct access to reforms the process of law making and lobbying on the highest level their own interests or the interests 1.1. The administrative-territorial reform of their regions. The heads of the Federation en- The main assumption of the administrative re- tities have been assembled in anewly appointed form was to strengthen the federal centre’s con- institution of an advisory nature – the State Co- trol over the Federation’s entities. uncil, whose rank is decidedly lower than that of the Federation Council. The Federation Council, The first stage of the reform was initiated just with the removal of governors, has also lost its after Vladimir Putin took over the presidency of former significance. the Russian Federation (RF). In May 2000, the President issued a decree concerning the divi- Another level of administrative reform was the sion of the Russian Federation into seven federal activation of the process of adapting regional le- districts (okrugs)4, in which the formation of re- gislature to federal legislature (a large part of gional departments of federal structures (public the legislative attainments of the re g i o n s , prosecutors’ offices and the Interior Ministry, which, under Yeltsin’s presidency, gained an ad- among others) was gradually initiated. In accor- vanced level of independence, was inconsistent dance with a subsequent decree, also issued in with federal legislature). In this process, a series May, each district was headed by an authorised of legislative acts of RF authorities were nullified representative of President Putin, who was to on the strength of the Constitutional Tribu- ensure that the President’s constitutional rights nal’s verdict and the decision of courts. Regional were exercised in the region5. The role of the Pre- supervision of the process of “standardising le- sident’s representatives was, de facto, to directly gal space” was taken over by the president’s au- inform the Kremlin of any significant processes thorised representatives in the regions. Howe- taking place in the region on the one hand, and ver, it has not yet been possible to complete this to influence regional politics so as to protect the process: a number of entities, in particular the interests of the centre on the other. most independent (Tatarstan, Bashkiria), conti- Subsequent clauses from the administrative re- nue to torpedo the process of adapting their le- form package introduced the possibility of the gislations, e.g. by leaving references in their re-

CES Studies gional constitutions to the sovereignty of the re- ry of their regions. This situation did not change publics7. with the introduction of a president’s authorised representative in the federal disctricts. With no The latest phase of the administrative reform serious financial instruments, the president’s re- carried out thus far is the already initiated local presentatives are currently almost solely carry- government reform (it has passed the first re- ing out supervisory functions. The Kremlin has ading in the Duma). Its purpose is to specify the been unable to break up regional politico-busi- scope of competences and the source of finan- ness clans; it is also rarely able to influence the cing for local governments (partly at the expen- election results in the respective entities of the se of regional authorities)8. These changes were RF. As a result, the Kremlin’s dependence on the negatively evaluated by regional authorities. At informal support of governors (e.g. during elec- present, during the pre-election period, federal tions) is still considerable. The series of actions authorities have decided to hold back the pace undertaken by Moscow proves its awareness of of the reform, as they need the support of the regional leaders’ potential so, in specific situ- governors during the elections. ations, the Kremlin chooses compromise solu- tions10. Such solutions inspired by the Kremlin Legal changes within the scope of the admini- include allowing governors to remain in power strative and budgetary reform have had the lar- for more than two terms of office11, postponing gest influence on the change in relations betwe- reforms of the local government or the power en the centre and the regions. However, Moscow engineering sector, which regional leaders are is supplementing this legislative advantage by against. affecting regional authorities through the use of informal methods. Mention should be made of 1.2. The reform of the party system the following informal instruments lying at the and electoral legislation Kremlin’s disposal: control over the General Pro- The reform of the party system began in 2001. In secutor’s Office (the ability to “blackmail” regio- July, parliament accepted the act “on political nal leaders by law enforcement agencies), secu- parties”. This act enabled only political parties rity services (access to compromising informa- or coalitions formed by them to participate in tion), the Accounts Chamber (the ability to mani- elections. Simultaneously, criteria according to pulate the region’s financial control results), the which parties operate in the RF were toughe- Central Election Committee (the ability to influ- ned12, which led to a considerable reduction in ence the election process in the regions), and al- the number of political parties (there are presen- so the ability to pressure business representati- tly around 50, five to six of which are of real im- ves active in the province. Such mechanisms ha- portance). The authors of these changes also (or ve been used in the case of authorities from re- maybe primarily) intended to increase the au- gions of key significance to the state, rich in na- thorities’ influence on the party scene – the pro- tural resources (e.g. Primorsk Krai, Irkutsk or cedure for registering parties and verifying their Krasnoyarsk Krai9), as well as in the case of fede- work in practice has already been used to place ral elections. pressure on opposition political organisations13.

When summarising the outcome of the changes The process of reforming electoral legislation in relations of the centre and the regions, one was initiated in 2002 by the passing of several should note the double nature of these proces- legislative acts in the Duma. These included, ses. On the one hand, with the help of legal among others: the Voting Rights Act (June 2002), changes and informal activities, Moscow was the act on the electoral systems of parliamenta- partly able to achieve the most important aim of ry elections (November 2002) and presidential the administrative reform: to stop disintegrative elections (December 2002) and the act on the tendencies in the Russian Federation and restrict computer system calculating the votes (January the regional elites’ influence on a federal level. 2003). On the other hand, however, the positions of go- The intention of the authors of the party and vernors remained very strong within the territo- election reform complies with the leading tho-

CES Studies ught behind other moves to restrict political plu- the expense of public prosecutors’ offices (trans- ralism: the elimination of smaller groups from ferring the decision concerning arrests and sear- the election game (by raising the electoral thre- ches from the competence of public prosecutors shold to 7 percent)14 and increasing Moscow’s in- to courts), granting public prosecutors the exclu- fluence on regional elections. Clauses of the re- sive right to initiate proceedings (other “power” form of the electoral legislation allow for the in- ministries were earlier authorised to this task as crease of the influence that the Central Election well), levelling the rights of the public prosecu- Committee has on regional committees (toge- tor and the barrister appointing juries in courts ther with the right to veto the verdict of the re- (this process is currently being realised) and gional committee). These clauses also introduce transferring economic disputes to courts of arbi- a ban on the existence of regional parties and tration16. Furthermore, in April 2003, the Duma the command to adapt regional majority electo- adopted in the first reading, amendments intro- ral systems to the mixed federal system (which duced by President Putin to the penal code, pro- in practice translates to the handing over of 50 viding for the mitigation of charges for petty cri- percent of seats in regional parliaments to fede- mes (or the exchange thereof for fines). ral parties). A concession made to the regions Changes have also been introduced within the was the lowering of the level of required voting judiciary reform that may be seen as restricting turnout to 20 percent in regional elections 15. the independence of the judicial branch of the government: the immunity of judges has been li- Clauses of the act on regional elections became mited through the stipulation of the procedure binding in July 2003, so it is too early to verify of judges’ penal and administrative responsibili- their effectiveness. On the other hand, the party ty (until now they enjoyed complete immunity). reform can already be considered a success of A principle of cadency has been introduced for the Kremlin: it was able to increase its control the presiding judges in courts and the Krem- over processes on the party scene whilst simul- lin’s level of participation in nominating such taneously maintaining the guise of pluralism. persons has been increased. Furthermore, the Non-party initiatives of citizens were in practice term of office of judges has been limited through deprived of the ability to participate in Rus- the establishment of a retirement age. sia’s political life. Generally, changes concerning the operation of political parties and election In conclusion it can be ascertained that the au- procedures are cementing the current arrange- thors of the judiciary reform had been aiming to ment on the political scene, dominated by the bring certain spheres of Russia’s justice admini- executive power with the marginal role of the stration closer to the norms binding in democra- political parties, often constituting an instru- tic states. The effect of these changes was a fall ment of the Kremlin. in the number of cases (by 20 percent) and the number of people on remand (by half)17. The pro- 1.3. Reforms of the judiciary system and cess of jury formation is also quite advanced – in the institution of the public prosecutor most regions (around 70 including Moscow) the- The package of draft bills reforming many sphe- se are already functioning. The chance for reali- res of justice was prepared by the President’s Ad- sing some clauses of the reform is additionally ministration and passed through parliament improved by the fact that funds for the judiciary with practically no amendments. reform were increased by 33 percent in the 2003 budget. Within the reform of the judiciary system and Simultaneously, however, the judiciary reform – public prosecutors’ office, the Russian parlia- similarly to other political reforms – assumed ment has adopted, among others, codes of arbi- the maintenance of the Kremlin’s informal con- tration procedure, civil procedure and penal pro- trol over judicature and public prosecutors. In cedure, as well as a number of acts concerning Russia we are constantly dealing with the consi- individual groups of professionals (lawyers, jud- derable “politicising” of courts and public prose- ges, etc.). The most significant changes to be in- cutors’ offices. Some clauses of the reform (e.g. troduced include the strengthening of courts at lowering the status of judges and restriction of

CES Studies their immunity) strengthen the domination of act. However, it can be expected that the resi- executive powers over judicature. Therefore, one stance of bureaucracy itself will be a serious ob- should presume that the phenomenon of explo- stacle in the realisation of this reform. The pre- iting organs of justice in the political battle will sent state of affairs (i.e. the system of informal continue in the future18, and the independence personal relations, the exploitation of bureau- of the government’s judicial branch shall remain cratic control over many spheres of public life) only a formal clause in the Russian Constitution. enables officials to reap diverse benefits. This fact allows us to presume that the bureaucratic 1.4. Reform of the public service system reform will be one of the most complicated and The reform of the state administration appara- long-lasting reforms and that it will require sub- tus is currently at the legislative phase. The Du- stantial political will from the reformers. ma has adopted in three readings the presidential act “on the RF’s public service system”, 2. The most important which is a general outline of the reform and is to socio-economic reforms be supplemented by a package of detailed acts. This reform intends to introduce a division of 2.1. Budgetary-fiscal reform the state service into a federal civil service, fede- The tax reform has initiated the process of mo- ral military service and federal law enforcement dernising Russia’s economy. High Petroleum pri- service, as well as a regional civil service of RF ces, which have a significant influence on the entities. It assumes the introduction of a compe- amount of budgetary income, were conducive to titive principle when staffing positions, the the realisation of this reform. Changes to the fi- conclusion of agreements for the performance of scal system have been thorough, encompassing functions, the creation of a mechanism to verify practically every tax and fiscal payment. The the competences of officials, as well as conditio- first changes were carried out already in 2001 ning income on professional achievements. De- with the decision to introduce, among other spite these liberal ideas, the reform also provi- things, a 13-percent linear personal income tax des for the conditioning of promotions on the for individuals (PIT) and a regressive social tax number of years worked and creates opportuni- (social security contributions, etc. – initial rate ties for officials “with experience” leaving one of 35.6 percent). The most significant changes sector (e.g. military officials) to immediately oc- over the following years included, among oth- cupy high positions in another. ers, the reduction of corporate income tax (CIT) The need to reform the administration appara- to 24 percent, the almost complete resignation tus is enormous due to the overgrowth, lack of from turnover taxes and the replacement of na- effectiveness and conservatism of Russian bure- tural resources payments with one tax19. aucracy, as well as its degree of control over the The main assumption of these changes was to Russian economy (the private sector as well) and simplify the tax system, depart from taxes and politics. When evaluating the clauses of the fra- fiscal payments, which had been particularly dif- mework act, it should be noted that the intro- ficult to collect, lower tax burdens imposed on duction of fixed mechanisms for the verification the economy and, as a result, draw the largest of the competences of officials would undoubte- possible amount of money out of the “grey zo- dly improve the quality of work carried out by ne” (shadow economy). Tax rates were reduced, the burea u c r a c y . (Presently some of the delays in however, taxpayers were simultaneously depri- realising certain reforms result from faulty secon- ved of most tax reliefs, which, ultimately, did not da r y legislation created by bureaucracy at a me - always lower factual tax burdens. On the one dium and low level). On the other hand, the idea hand this type of activity resulted from the ratio- of increasing wages for better professional re- nalisation of reliefs offered by the state, on the sults could help decrease the level of corrup t i o n . other – it was a way of securing the state’s budgetary stability. It is still too early to evaluate the results of this reform; no concrete secondary legislation has The first stage, which Russia has already com- yet been prepared to supplement the framework pleted, was the creation of legal foundations for

CES Studies a new, more transparent tax system. In course of In 2002 a “second pillar” was formed, in which time, this system will be subject to further chan- the accumulative part of pension contributions ges leading to the factual decrease of tax bur- are stored21. Vneshekonombank has been entru- dens in Russia. The further lowering of taxes, ho- sted with accumulating these contributions, wever, depends on the budgetary reform, the ra- while private pension funds will be allowed to tionalisation and limiting of expenditure from invest these monies only as of 2004. It’s already the public coffer. These changes, however, are evident that, due to the lack of necessary secon- closely linked with the reform of budgetary rela- dary legislations, this process will be drawn out. tions of different levels, which have been taking According to estimates, around 90 percent of place since 2001. The main principle of these those insured will not select a pension fund and changes was the assignment of individual taxes their contributions will continue to be invested to a concrete budget: federal, regional or local, by Vneshekonombank. In accordance with the alongside the simultaneous clear division of pension reform act, the accumulative part of competences and financial responsibilities. pension contributions will be invested mainly in Russian securities. The tax reform, in spite of many problems and the The pension reform was a necessary step for en- manipulation of clauses during the legislation suring pension security, however, its success will pr ocess, has ren d e r ed Rus s i a ’ s fiscal system much largely depend on the situation of Russia’s finan- mo r e simple and transparent. Russian authorities cial market. Without effective banking and insu- state that the tax collection process has also beco- rance systems or an effective stock market, it me more effective. Moreo v e r , the improved bud- will not be possible to invest pension contribu- ge t a r y situation has allowed for the liquidation of tions in a manner ensuring a decent pension to ov e r due wages in the budgetary sphere (for the ti- those currently working22. me being this only includes federal budget debts) and the actual increase in wages in this sector. 2.3. Banking system reform The weak banking system is one of the factors Despite the changes in the fiscal system, it has slowing down the growth of the Russian econo- only been possible to lower the tax burdens to my. That is why the reform of this system is of the economy to a small degree. It is estimated key importance for economic modernisation. that in 1999–2000 the level of tax burdens in the The financial crisis of 1998 brought about an al- economy was around 32–34 percent in relation most complete destruction of this system in the to the GDP and, in 2003, there are plans to redu- RF. Its post-crisis reconstruction aimed at the re- ce these burdens to 30.7 percent of the GDP. The al engagement of the banking sector in rebuil- results of the realisation of the main goal of the ding the Russian economic structures by streng- changes – drawing the citizens’ income out of thening the role of banks as intermediaries be- the “grey zone” – are also limited. According to tween investors and those saving money. As an different calculations, around 60 percent of busi- effect of the changes carried out in the financial ness activities in Russia are conducted outside sphere, it was possible to reconstruct the ban- the legal framework20. king system and make it stronger in many ways as compared to the pre-crisis system, yet still too 2.2. Pension reform weak to take on the weight of these transforma- The need for a pension reform was proven by va- tions. rious analyses presenting unfavourable demographic tendencies (an ageing society, negative Russia’s banking sector is very small23 and it is natural growth). They testified that the hitherto dominated (as regards the asset amount and the pension system won’t be able to performl its ob- number of branches) by state potentates: Sber- ligations. Therefore, it was necessary to aban- bank24 and Vneshtorgbank. The state has majori- don the system in which pensions are financed ty interest in over twenty banks and minority in- from the contributions of those presently wor- terest in several hundred other banks. Most pri- king and move to a system where each employ- vate banks work almost exclusively for the need person saves money for their own pension. eds of their owners, i.e. large industrial-financial

CES Studies groups. Of the 1,300 banks existing within the Despite intensive adaptation process and the in- RF in 2002, fewer than 250 had a capital exce- troduction of many changes to its law, Russia eding the minimum binding in the European has not yet been able to meet all the demands Union (Euro 5 million). At present, banks finance set by WTO member countries. Many controver- only around 5 percent of investments in Russia. sial issues remain concerning Russia’s member- They prefer offering loans to traditional export ship conditions (including the insurance sector branches; the term of repayment of 70 percent and subsidies for the agricultural sector). On the of these loans does not exceed one year25. other hand, Russia’s industrial lobby, which is not willing for Russia to open up to the world, is The banking sector’s reform programme, jointly trying to extend the accession process and nego- prepared by the government and the central tiate beneficial conditions for itself and is unwil- bank, is being realised at a very slow pace. It has ling to accept compromises during negotiations. been possible to remove the central bank from Time is against Russia – outside the WTO, Russia the group of Vneshtorgbank’s26 shareholders; ho- cannot influence the establishment of new inter- wever, the CBR still remains the owner of Sber- national trade principles during the curre n t bank or foreign Russian banks, such as Moscow WTO negotiation round in Doha28. National Bank (in London). Commercial banks in the Russian Federation are obligated, as of 1 Ja- 2.5. Land reform nuary 2004, to adopt international standards The introduction of land ownershipwas one of concerning accounting and financial reporting. the most important stipulations raised by Putin However, it has not yet been possible to accept regarding the guarantee of ownership titles in the act guaranteeing bank deposits (at present Russia. The Land Code adopted in September only Sberbank’s individual deposits are guarante- 2001 and the act on the transactions of agricul- ed by the state)27. tural land of June 2002, have introduced the sale of land. The ownership title to land (restricted 2.4. On the way to the World Trade for foreigners) was to stimulate the develop- O r g a n i s a t i o n ment of the real estate and mortgage-secured lo- One of the most important aims of Russia’s mo- ans market. However, in order for this right to dernisation process was the opening up to the be executed, it is necessary to adopt secondary world and intensification of foreign trade, as legislations mainly at the regional level. An ob- well as gaining equal status in international tra- stacle is the lack of regulations concerning the de and opportunities for influencing its rules. An cadastral register, as well as a shortage of mo- important stage in the realisation of this policy ney for geodesic measurements and for the regi- is membership in the World Trade Organisation stration of individual plots of land (this concerns (WTO), which would include Russia in the group agricultural land in particular). of over 140 countries deciding about the stages of trade liberalisation. The success of the land reform depends, to a large extent, on regional authorities. However, the- Russia declared its will to join the General Agre- se authorities, according to their needs, either ement on Tariffs and Trade (GATT – the try to create the appropriate conditions for land WTO’s predecessor) in 1993; however, the nego- transactions, or slow down the reform’s realisa- tiation process and the adaptation of Russian tion process. Some regions still lack the necessa- law to WTO standards only began in 2000. The ry secondary legislations, while other entities of g o v e r n m e n t ’ s subsequent decisions to lower the Russian Federation are legalising land trans- and unify customs rates for certain groups of go- actions (land trade already took place in the past ods, simplify trade agreement principles and, as in some of these areas, despite the lack of fede- a consequence, adopt the Customs Code by the ral regulations) and developing their real estate parliament in spring 2003, have liberalised Rus- markets. Additional problems have appeared in sian trade exchange and facilitated access to the the process of setting land prices. The admini- Russian market. strative fixing of land prices led to a great diffe-

CES Studies rentiation in prices between the regions as well 2.7. Power engineering reform as within one region. The reform of the energy monopoly United Ener- The decision to allow for land sales (both indu- gy Systems of Russia (RAO UES) and the liberali- strial and agricultural) is quite revolutionary for sation of Russia’s energy sector are of fundamen- the Russian situation. It enables the develop- tal importance for reforming Russia’s entire eco- ment of many branches of the economy, e.g. the nomy. The battle between supporters of this re- banking sector. However, difficulties in bringing form and its influential opponents, continuing this law into force limit these opportunities con- for over two years, finally ended on 21 February siderably and cast doubts on the further deve- 2003 when the Duma adopted a package of bills lopment of the real estate market, for example. on the restructurisation of RAO UES and the ope- In accordance with the data provided by the Mi- rating principles of the RF’s energy market. As nistry of Economic Development and Trade, in a result of disputes on the shape of this reform, 2002, once the Land Code came into force, 45 the legal basis for the restructurisation of Rus- thousand industrial land purchase transactions sia’s energy sector is a compromise. The effect of were registered in Russia (i.e. almost twice as this compromise between the reform’s suppor- much as for previous years). However, this result ters and its opponents is the maintenance of the is much lower than the government had been state’s full control over the regulation of energy expecting29. prices. A fundamental restructurisation shall encom- 2.6. The reduction of excessive pass RAO UES itself. The reform divides the mo- bureaucratic regulations nopoly into state-controlled spheres (energ y Acts reducing the dominating role of the state in transportation and power management), as well regulating economic life were adopted in July as spheres which will operate on the free market 2001. These concerned, among other things, and will become privatised – energy production a considerable restriction of the types of busi- (power plants) and energy sales. ness activities requiring licensing; the simplifi- The realisation of the actual reform will begin cation of the registration procedure for new with a several-year delay (its commencement companies; and also the protection of entrepre- was initially planned for the turn of 2001/2002). neurs’ rights (the number of state inspections Deadlines for the different stages of energy mar- carried out in companies have been reduced, ket liberalisation, which were precisely outlined and the inspection procedures have been made in the original text of the act, have been remo- less disturbing). However, as it turned out, some ved. This, in theory, should facilitate the intro- clauses in these acts were inconsistent with the duction of legal amendments before the subse- binding law, e.g. the police act (to which police- quent stages of the reform take place, yet it ac- men carrying out the inspections adhered). Fur- tually extends the timeframe of the liberalisa- thermore, clerical staff proved to be completely tion process31. unable to undertake their new roles of helpers, both in the psychological sense (it requires a dia- 2.8. Railway reform metrical reversal of the present clerk-citizen re- Russia is very dependent on railway transport, lationship), as well as the technical sense (a con- which carries out almost 85 percent of freight siderable increase in tasks along with the insuf- transport32. The legal basis for the reform of the ficient computerisation of offices). An attempt to Russian railways was accepted in December simplify company registration procedures has 2002. The changes that were agreed upon re- not lead to the reduction of queues or waiting ti- strict the state monopoly in railway transport me. On the contrary, it has increased the difficul- only to a small degree and, as a result, do not ties faced by entrepreneurs. This “de-bureaucra- provide much opportunity for introducing com- tisation” attempt has also failed to solve Rus- petition into the sector. sia’s corruption problems30. A joint stock company (RAO) Russian Railways (RR) is to be founded during the first stage of the changes (summer 2003), 100 percent of shares in

CES Studies this company will be state-owned. The company The acts constituting the reform basically omit- will take over most of the Railway Mini- ted the issue of the performance of municipal stry’s present estate (from railway rolling stock companies, their effectiveness and investment plants to health clinics in the furthest corners of policy. The government hoped that, through the Russia), with the exception of land that is of stra- introduction of market prices for municipal se- tegic importance to the state, e.g. the land on rvices, competition would appear on the market which railway tracks are located. Together with and solve the problems with the companies’ the formation of the RR, private carriers are to debts to gas and electricity suppliers, and the be allowed onto the railway market on “non-di- lack of finances for investments. scriminatory terms”. However, these conditions Municipal infrastructure, the condition of which have not yet been precisely outlined and, accor- is worsening from year to year, has, to some ding to preliminary documents prepared by the extent, forced political approval for this unpopu- Railway Ministry, it is the RR’s management who lar reform in the pre-election year (parliament will decide who is allowed to use the railway ne- adopted the municipal reform act in April 2003). twork. In such circumstances it will be difficult The ruling party have safeguarded themselves, to speak of free competition between private h o w e v e r, by introducing a transition period carriers and the state monopoly. (which will end after the elections), during During the second phase of the reform (by 2006) which the rise in payments for selected social the RR is to assign daughter-companies to run groups is to be limited. Additionally, regional au- long-distance and suburban passenger trans- thorities will take on a large part of the respon- port, as well as the transport of goods. The aim sibility for the course of this reform. of this decision is also to depart from “cross financing”, i.e. financing deficits in passenger The reform of this sector has basically only resul- transport by higher tariffs on the transport of ted in the rise of prices, which did not match the goods. improvement in the quality of services provided. An obvious effect of this reform is the increase in Despite expectations, increases in rent and other transport tariffs whereas the condition of the ra- payments did not bring about the co-ordinated ilway rolling stock, the timeliness or quality of opposition of regional elites, only sporadic pro- the transport remains practically unchanged33. tests of the population. Still, the introduction of market principles into the municipal sector pro- 2.9. The municipal reform vides an opportunity for attracting investors to The need to carry out a municipal reform was the sector, because the sector requires the mo- demonstrated by the disastrous condition of in- dernisation of its entire infrastructure in order frastructure, not even capable of providing inha- to be able to operate effectively34. bitants with basic services such as water supply, electricity or heating. Subsequent winters, du- 3. Reform of the “power structures”35 ring which inhabitants froze in their apart- ments, showed the extent of problems in this Evidence of the great significance of “power sector. However, authorities delayed the reform structures” for Russia’s current authorities is, fearing afall in social support that would be bro- first of all, the amount of money dedicated for ught about by the inevitable rise in payments. this purpose. National protection and internal The government’s programme to change the si- security expenses will cover 25 percent of the fe- tuation in the municipal sector appeared in mid- deral budget in 2003 (i.e. 4.5 percent of the GDP). 2001 and concerned mainly the change in finan- In recent years, the amount of money assigned cing municipal services. The basic assumption of to the “power structures” continues to increase. this programme was to stop subsidising compa- In 2003, 2.6 percent of the GDP will be dedicated nies providing such services and transfer all co- to national protection while for most NATO sts to the citizens. At the same time, the state member countries this indicator does not exceed decided to create auxiliary mechanisms addres- 2 percent (the USA is an exception with expendi- sed directly to the poorest citizens. ture equal to over 3 percent of the GDP).

CES Studies 3.1. Military reform 3.2. Changes in the security services Presently the reform of the armed forces is basi- s e c t o r cally limited to the professionalisation of the ar- In early 2003, President Putin admitted that the my. A crucial argument for the need to professio- hitherto performance of the “power block” nalise the armed forces was most probably the couldn’t be considered effective enough or inter- collapse of the recruitment system inherited nally coherent. On 11 March 2003, Putin issued after the Soviet army and preserved almost wi- decrees on the strength of which the Federal Se- thout changes. A fall in the number of potential curity Service (FSS) was strengthened. These de- recruits has added to problems linked with the crees were approved by the Duma in June this declining morale of soldiers (crime and desertion year. At the beginning of July 2003, the process common in the Russian army) and the evasion of of consolidating the “power structures” was ini- mi l i t a r y service at the beginning of the pres e n t tiated. According to declarations, this will gu- decade. Russia has entered a demographic low arantee internal security in the country, help in for this age group, which is expected to hit the fight against crime, terrorism and drug traf- a “r ock bottom” low in 2010–2011. It wasn’t un t i l ficking. It should be noted, however, that the autumn 2001 that RF authorities made the deci- changes being introduced are in fact a return to sion to take professionalisation into account in solutions proven to be effective in the past. In its their plans to reform the armed force s . structure, the FSS will be a reminder of its predecessor, the KGB. The first stage of changes was the experiment in changing the system of completing army units, The main effect of changes in the “power struc- initiated in September 2002 at the 76th Pskov tures” is the increase in the FSS’s importance Pa r a t roop Division. The division’ s t r a n s i t i o n and influence. However, it is too early to judge from a conscription approach to contracting re- whether or not this will increase the effective- cruits was to form a basis for the future profes- ness of the system. It is not yet known how the sionalisation of the entire army. FSS will use its authority. The next stage of the reform began on 21 No- vember 2002, when the Russian government ac- 4. Non-legislative changes cepted the concept for professionalising the armed forces presented by the Defence Ministry. 4.1. Changes in the Duma According to Defence Minister Sergei Ivanov, and on the political scene units of the land forces, paratroops and marine The most important non-legislative change on infantry should change to the contract system Russia’s political scene was the gaining by the within four years (2004–2007). The professiona- Kremlin of a loyal majority in parliament, which lisation of the army would be accompanied by increased its control over the legislative process. a reduction in the basic military service so that, with the full completion of the armed forces Owing to the skilful use of the Kremlin’s political with contracted soldiers, military service would and administrative potential (including state be no longer than six months and would be re- media) in the parliamentary elections of 1999, stricted to basic reserve training. the pro-presidential party Unity achieved consi- An important stage of the military reform will derable success. Two years after the elections, be the final assent of the federal programme for influential Kremlin officials succeeded in actual- 2004–2007 concerning “the filling of military ly incorporating Unity’s most dangerous rival, posts of the non-commissioned officer and sol- Fatherland-All Russia into the party and turning dier ranks in the units of the Defence Ministry the two into a party loyal to the Kremlin – Uni- and other power structures, primarily, by milita- ted Russia. The Kremlin was also successful in ry men completing military service in the con- gaining the co-operation of other parties – Pe- tract system”. The president of the RF approved ople’s Deputy, Russian Regions, which, together this document in July 2003. with United Russia, form a stable, pro-Kremlin majority in the lower chamber of parliament36. Furthermore, in exceptional circumstances, the

CES Studies p resident and key officials from the Pre s i- ce Service officer, Federal Security Service head or dent’s Administration are able to mobilise a con- the RF’s Security Council secret a r y. The first years stitutional majority (i.e. a majority authorised to of his government became a period of a sp e c t a - carry out amendments to the Russian Constitu- cular expansion for the rep r esentatives of securi- tion) by way of bargaining with other parties – ty services, who flooded civil struc t u r es in the e.g. Russia’s Liberal Democratic Party or the Al- government, the Pres i d e n t ’ s Administration and liance of Right-Wing Forces. other centres of politico-economic life, e.g. the me d i a 39 . Acc o r ding to the estimates of analysts, In order to obtain political benefits, the executi- one in every four rep r esentatives of the most prove branch often used informal instruments of minent Russian elites has a mi l i t a r y education40 . pressure on the parties. Among such instru- “Militarised” elites include many rep re s e n t a t i v e s ments worth mentioning are the granting of po- of the security services – intelligence and counte- sitions and privileges to deputies, regulating ac- rintelligence forces of the former KGB. cess to popular state-owned media, control over public prosecutors, courts or security services This influential group has certain characteristic holding information about the activities and fi- features that often affect the policy they run. nancing of parties or the private lives of party The “chekist” elite, according to analysts, has lit- members. The authorities also applied the “divi- tle democratic or modernising potential, and the de et impera” principle, supporting schismatic activities undertaken or inspired by them have tendencies in opposition parties – e.g. in the often led to the restriction of pluralism in many Communist Party of the Russian Federation37. spheres of public life.

Therefore, at present, we are facing a considera- The potential of the “chekist” elite consists, ble increase in the Kremlin’s control over the among other aspects, in direct access to the pre- parliament. This enables the Kremlin, in many sident, a disciplined base, the ability to control cases, to pass acts aimed at reforming numerous other elites (by control over information concer- spheres of politics and the economy. It should be ning different spheres of public life, including noted, however, that by declaring loyalty to the compromising information). At the same time, president, some factions and individual deputies the weaknesses of this group include, among in the Duma are simultaneously representing other features, a lack of homogeneity, the lack of the interests of big business, regional leaders or qualified specialists in many areas (e.g. in the other groups of influence. Such a conflict of inte- economy) and staff deficiency plus, often, a lack rests sometimes reflects on the law (also with re- of political intuition. gard to reforms) and is harmful for the state38. Moreover, the Kremlin’s party and parliamenta- There are, de facto, two blocks of “chekists” – ry base (often constructed bycentralised admini- the Moscow “chekists” (having a financial base strative methods) is not a homogenous orga- at their disposal as well as close relations with nism; it is ephemeral and often blatantly incom- regional elites) and the St. Petersburg “chekists”, petent. The authorities are trying to improve the who have gained influence on politics with Pu- rather poor public performance of pro-Kremlin tin’s rise to power. The St. Petersburg “chekists” parties by way of mass propaganda in state- (although they play a much greater role in poli- owned media. tics) do not have extensive financial resources, as they did not participate in the privatisation of 4.2. The increased role of the security the 1990s. From the beginning of Putin’s presi- s e rvices in politics dency, this group has been attempting to accu- Together with Vladimir Put i n’ s rise to power, the mulate its own financial base. On the one hand sh a r e of the state security apparatus’s em p l o y e e s they took control over some of the state assets in the ruling elites also rose considerably. When (Gazprom, Rosneft). On the other, they keep try- building his team Putin, a former security servi- ing to force financial magnates to share their ce official, was basing, among others, on people fortunes by appealing for the revision of privati- with whom he had collaborated as an Intelligen- sation results.

CES Studies Chekists’ assets comprise primarily state-owned communication between business and authori- companies – the battle for private assets has not ties have appeared44. yet yielded spectacular effects41. Therefore, the capital accumulated by this group is unstable as As a consequence of the changes cited above, it depends on the maintenance of their positions big business has lost its direct influence on the within the state administration. Kremlin’s political decisions, yet it has maintained rather extensive influence within the eco- An effect of the “chekist” expansion is also their nomic sphere. Despite the “equal distancing of access to decision making not only in politics, oligarchs” announced by President Putin, many but also in the economic or social spheres42. As of them have preserved a great potential of con- a result of this group gaining strength in Russia, nections and informal links with state structu- certain activities are coming back into use: the res. The phenomenon of exploiting private (or procedure of investigating denunciations by law semi-private) capital by authorities in their poli- enforcement agencies43 and restrictions to the tical interests still exists45. Big business, through freedom of speech. the use of civilised lobbying, as well as informal ties (which is much more common) is able to 4.3. A change in relations between successfully strive for beneficial legislative solu- authorities and private business tions46. Therefore, despite being politically we- During Boris Yeltsin’s presidency, close ties deve- akened, business still constitutes one of the loped between big business and authority in most powerful groups of influence that the au- Russia, which ensured the direct influence of bu- thorities must reckon with. siness on state politics. Vladimir Putin has initiated a series of processes in this sphere, which 4.4. An increase in the authorities’ have changed the nature of relations between control over companies with state-owned the state and big business: s h a r e s – the direct influence exerted by industrial and With Vladimir Putin’s rise to power, the new pre- financial magnates on state politics has been vi- sidential administration began the process of re- sibly reduced; gaining state control over companies with state- – representatives of big business have been for- owned shares. A crucial success of the Kremlin ced to demonstrate their loyalty to the Kremlin was the dismissal of Gazprom’s long-time presi- – meanwhile, disloyal individuals (Vladimir Gu- dent Rem Vyakhirev and his replacement by the sinsky, Boris Berezovsky) were subjected to eco- President’s man Aleksei Miller. The initial period nomic and political repression. Ostentatious ac- of his rule became a staff revolution in the com- tions against “disloyal” businessmen or those pany’s top authorities and the battle to increase presenting political ambitions have, to a large the monopoly’s transparency. There are presen- extent, resulted in the reduction of the oligarchs’ tly no members of Vyakhirev’s team left in Gaz- political aspirations; prom’s management. At the same time, the new – the dependence of central authorities on the team is trying to regain control over companies support of big business has decreased. This is that are dependent or in close collaboration a result of the state’s positive financial situation, with the concern (SIBUR). However, the declared among other reasons, attained through the high reform of the monopoly has not begun. This re- prices of raw materials on global markets and form provides for the division of Gazprom into the consequential stabilisation of the Russian mining, transport and commercial structures budget. In spite of this, business is still used to and allowing other gas producers to gain access finance various needs of the state or authorities to the gas pipeline network. The liberalisation of (the reconstruction of public buildings, charity the company’s share market is only at the prepa- activities and financing pro- K remlin political ratory stage (currently in Russia only Russian ci- parties); tizens or companies are permitted to trade Gaz- – alongside the existing, covert, corrupt lobby- prom’s shares; the price of shares in Russia is ing of big business interests in the state admini- half of those sold on London’s stock market). The stration, institutionalised and open forms of first stage of this process was the consolidation

CES Studies of the shares held by the state, owing to which 4.5. Changes to freedom of speech the RF’s government and Gazprom’s daughter- and freedom of the press companies hold over 51 percent of the gas Actions undertaken by Russian authorities over giant’s shares47. the past three years have led to an obvious restriction of the freedom of speech and informa- Another important stage in restoring the control tion pluralism. of the new authorities over state-owned proper- The authorities have inspired the liquidation of ty was the dismissal in January 2002 of Railway a number of opposition media (TV-6, TVS, Obsh- Minister Nikolay Aksionenko, strongly linke d chaya Gazeta) or the replacement of manage- with Yeltsin’s team. During Aksionenko’s term of ment with persons loyal to the Kremlin (NTV, office, the Russian railway system became other media belonging to the opposition holding a “state within a state”, working for the needs of Media-Most)53. State-owned media are both favo- its managers. The ministry had formed a paral- ured and supported by authorities (e.g. through lel structure, which provided services for the mi- the restructurisation of their debts, a beneficial nistry. This was a network of commercial (priva- form of selling advertisements or granting exc- te) companies headed by the Corporative Finan- lusive access to information). The authorities’ cial Technologies company. Its head was the mi- stance (lack of tolerance for criticism) does not nister’s son Ruslan Aksionenko48. The minister favour the media offering information that dif- was forced to resign due to abuse charges49. He fers from the official viewpoint. All this renders was replaced by Gennady Fadeyev, who had wor- such undertakings economically unprofitable. It ked for the Russian railways for many years and has also created a self-censorship phenomenon was not linked with Putin. The Kremlin’s influen- in the existing media: journalists and editors, fe- ce on the ministry was supposed to be secured aring sanctions, are imposing restrictions on by deputy ministers loyal to Putin. themselves when describing Russian authorities The strengthening of the Kremlin’s control is al- or events taking place in Russia. This is accom- so evident in other companies with state-owned panied by the society’s listlessness towards the s h a res: the energy monopoly RAO UES and actual existence of censorship in the media54. Transneft (the exclusive owner of oil pipelines and petroleum terminals within the RF). With Th r oughout Vladimir Put i n’ s pre s i d e n c y , several Putin’s rise to power, the Kremlin decided to let legal acts have also appeared, influencing the si- the chairmen of both companies keep their posi- tuation in the sphere of the freedom of speech (al- tions, as the presence of managers of RAO, though they were of less importance than infor- Anatoli Chubais50, and Transneft, Semyon Vayn- mal activities). In June 2000, the Security Council, shtok51, guaranteed the realisation of the Krem- dominated by rep r esentatives of the “power sec- lin’s policy. Chubais has prepared the reform of tor”, adopted the “Doctrine of information securi- the energy monopoly and forced it through the ty ”, postulating, among other issues, the battle parliament, whereas Vaynshtok did not obstruct against “the abuse of freedom of speech”. In Au- the use of Transneft as an instrument of state gust 2000, the government issued a disposition control over the petroleum sector or as a tool in regarding the installation of certain devices on Moscow’s foreign policy52. telecommunication interfaces for monitoring The regaining of control over state-owned com- the flow of information by the security services panies by the President’s Administration, on the (this enabled, for example, a precise monitoring one hand, enabled the “chekists” to accumulate of websites). However, the security serv i c e s their own financial base and, on the other – themselves remained uncontrolled. The authori- strengthened the Kremlin’s position in contacts ties attempted to amend the media law and re- with big business. strict the work of journalists in special [extraor- d i n a ry] circumstances. This amendment was eventually vetoed by President Putin. However, journalists themselves later voted on the co- nvention obliging them to self-restriction in re- lating special events. Finally, in March 2003, the

CES Studies Duma voted in the first reading, on the amend- the act is adopted in parliament and signed by ment to the media law, imposing additional re- the president. Many clauses of the adopted acts strictions on the media during the election cam- remain on paper, as Moscow lacks in the instru- paign. ments and possibilities to bring them into force – either the resistance or incompetence of bure- At present, viewpoints differing from the official aucrats give rise to problems connected with the ones can be found only in several low circulation secondary legislation to the acts, federal acts are papers or on the Internet. A large part of society torpedoed on the regional level, and various fi- obtains information on events in Russia and the nancial problems also appear. world through state-controlled media. This way, the authorities’ attempts of monopolising the The effects of the implemented changes transfer of information have been quite successful. This is particularly significant during the President Putin’s high level of social support fol- election campaign, which is already rolling, as lowing his election in 2000 has enabled the reali- the media are used to lead the political battle. sation of quite profound transformations within the political sphere. The implemented changes – legislative and informal – have resulted in the C o n c l u s i o n s centralisation of the state and the strengthening of the Kremlin’s control over all spheres of Rus- sian political life. They have also increased poli- The methodology of the reform tical stability and pushed away the threat of the process in Ru s s i a disintegration of the Russian Federation, which was very real under Boris Yeltsin’s government. The practice of holding broad consultations at As a result of informal activities, the Kremlin has the legislative phase is typical for the reform gained considerable control over the parliament process in Russia. Various lobbies (big business, and, in consequence, over the law-making pro- the “power” sector, regional elites) have access cess in Russia. It maintains a strong influence to this process and aim at securing their intere- over the judicial branch and has led to the con- sts in different spheres. As a result, these consul- siderable increase in control over the media. tations often distort the original liberal direction Owing to this, the presidential circle has a gu- of the reforms. aranteed smoke screen of propaganda for its ac- Consultations over the drafts of the reforms tions. Authorities have also been successful in with groups of influence begin already at the stopping big business re p resentatives (“oli- conceptual stage (this often alters the shape of garchs”) and regional elites from direct partici- these acts). The consultations are continued at pation in the making of strategic decisions. the stage of adopting the acts in the parliament. Thus, as compared to Boris Yeltsin’s presidency, This takes on the form of a “zero reading” – the the power has been significantly concentrated draft bill is worked on in parliamentary commit- in the hands of the Kremlin. In many cases this tees with the participation of deputies from dif- has been accompanied by a whole system of so- ferent factions, officials of the President’s Admi- lutions contradictory to the principles of a de- nistration and other influential groups involved moctatic state. All this has contributed to Rus- in the reform. In the case of controversial pro- sia’s political system resembling that of an au- jects, the process of reaching an agreement can thoritarian model. drag on even for years. The agreed upon project enters parliament and usually passes all re- The strengthening of the Kremlin’s authority adings with no major problems. A good example and the high level of income from gas and petro- of this is the power engineering reform. leum exports, securing Russia’s financial stabili- The aim of many reform projects is to purge dif- ty, have enabled the intensification of economic ferent spheres of politics and the economy, and reforms. These reforms have, to a large extent, to break up any shady deals. This triggers resi- constituted the continuation of transformations stance also during the realisation phase, after initiated in Russia in the early 1990s and based

CES Studies on those achievements (such as an advanced pri- entrepreneurs and citizens accept the new law vatisation process and strong private sector; the and recognise it as permanent, and the state ad- basis for a market economy system). Fiscal-bud- mnistration elaborates effective mechanisms for get, banking, pension and other reforms carried carrying out the adopted legal acts. out under Putin’s presidency have resulted in the improvement of Russia’s image on the inter- Perspectives for the continuation national arena. Despite the numerous economic of reforms within the scope problems still remaining to be solved, Russia has of the present system begun to be viewed as a politically and economically stable country (at least in the medium- By the end of President Putin’s first term of offi- term). Over the past year, the Russian economy ce, the future of reforms in Russia does not yet has been granted the status of a market econo- seem settled. Over the coming years we can my by the USA and the EU. Russia has been cros- expect both an acceleration and a slowdown in sed off the FATF’s blacklist (an international or- changes. The most probable scenario, however, ganisation battling against “dirty money laun- seems to be the maintenance of status quo – the dering”), and has even been accepted as a mem- progressing, but slow and inconsistent imple- ber of this organisation and, most importantly – mentation of reforms. Russia has become a rightful member of the G8 group55. The changes being implemented have A high level of support for Vladimir Putin in the also resulted in improved conditions for the run- 2004 elections may induce the acceleration of re- ning of business in Russia and the increased con- forms. If Putin is re-elected already in the first fidence of investors in the Russian economy. Ho- round, then his stronger social legitimacy may wever, at present this manifests itself mainly in favour a more dynamic and uncompromising im- the reduction of capital outflow from Russia and plementation of reform projects. The reform pro- not in the growth of direct foreign investments. cess may pick up pace under the condition that At the same time, Russia is seen as a credible the strong president decides to dedicate his se- debtor increasingly more often, which is evident cond term of office to the implementation of re- in the RF’s increased rating56 on the internatio- forms, builds a homogenous reform-oriented te- nal arena. am and skilfully manoeuvres existing groups of influence. Many economic problems continue to rem a i n unsolved. Attempts at activating small and me- The reforms may be brought to a stop if the pre- dium business, the battle against corruption and sident’s position is weakened, e.g. if he gains ex cessive bureaucracy have failed. Above all the a poor election result. The modernisation pro- slow pace of the structural reforms and the in- cess may also slow down if the priority of the se- consistency in introducing economic transforma- cond term of office is the issue of succession tions have made it impossible to reduce the eco- after Putin. This could become a cause of conflict no m y’ s dependency on the export of raw mate- around the division of properties within the RF. rials. This slow pace also contributes to slowing Representatives of the “power” sectors granted down the rate of economic growth and does not authority by Putin (the “siloviks”), despite large allow for a radical change in Rus s i a ’ s ec o n o m i c political influence, have not yet been able to model. As a consequence, Rus s i a ’ s de p e n d e n c y acquire a significant financial base. In the face of on raw products was even higher in 2002 than in President Put i n’ s imminent departure (in accor- pr evious years57 . Unsolved economic prob l e m s dance with the constitution, the 2004–2008 term mean that it is difficult to consider Rus s i a ’ s fre s h - of office should be his last), the “siloviks” may ly gained economic stability as permanent. intensify their efforts aimed at the takeover of some estates of post-Yeltsinite financial magna- It is currently difficult to evaluate the real effects tes. The series of investigations initiated against of the reforms conducted under Putin’s hitherto the Yukos oil company in July 2003 can be consi- presidency. Most of these can bring effects only dered a forecast of these actions. The continu- in a medium-term perspective, when investors, ation of this type of pressure on big business in

CES Studies Russia with the use of courts, public prosecutors product markets, mainly the petroleum market. and other state bodies will inevitably worsen If oil prices remain high, then – paradoxically – the RF’s image among investors, simultaneously the pace of changes may be slowed down. The undermining the effects of the liberal reforms country’s favourable financial situation may ad- carried out over recent years. Another potential vocate the postponement or mitigation of the factor slowing down the reform process can be unpopular consequences of economic reforms. the destabilisation of the situation in Russia, On the other hand, should oil prices fall drama- which could be caused, for example, by the esca- tically and permanently, the limited financial relation of the conflict in Chechnya or the battle sources may restrict the state’s reform possibili- between the groups of influence if it should eva- ties. The fall in oil prices to a level that does not de the Kremlin’s control. cause a crisis in Russia but forces a more rational management of budget resources may prove to The intermediate scenario (maintenance of sta- be the most mobilising factor for carrying out tus quo) assuming the slow and inconsistent im- these changes. This would induce authorities to plementation of reforms can be realised if ten- search out alternative sources of income and se- dencies observed during Putin’s first term of of- ek a policy aiming at making the Russian econo- fice are preserved, i.e. in the case of the joint ap- my less dependent on revenue generated by the pearance of factors supporting and restricting fuel and energy sector. the reform process: Jadwiga Rogo˝a, Iwona WiÊniewska The reforms could be advocated by: – the evident support of the president himself for selected liberal economic reforms; – the strong representation of liberally oriented officials in the presidential team; – the Kremlin’s considerable control over legislature. The reform process could be obstructed by: – the necessity to take into account the interests of powerful groups of influence surrounding the Kremlin (particularly the “power” sector and big business); – the deepening authoritarianism of the political system, which is leading to phenomena conflic- ting with the spirit of liberalism, including the partial politicalisation of the economy, the we- akening of democratic social institutions (media, NGOs, etc.) and, at the same time, the paralysis of social control mechanisms; – the often-present contradiction between the formal law and its practical execution by authorities. As a result, the recipients and potential beneficiaries of the reforms (e.g. foreign investors) approach the changes that are being implemented with distrust, aware of the fact that the new regulations don’t always have to be re- spected by authorities or officials.

Aside from internal factors, external factors will also be of great significance for the reform process, particularly the pace of global economy development, especially the situation on the raw

CES Studies 1 Osnovnye napravleniya sotsyalno-ekonomitcheskoy poli- 8 Three levels of authority formally exist in Russia – the fe- tiky na dolgosrotchnuyu perspektivu, 2000, the Russian Fe- deral authority (nationwide), regional authorities (within deration’s Ministry of Economic Development and Trade, the Federation’s entities) and local governments. Local go- http://www.economy.gov.ru/merit/79.htm; a description of vernments, according to the Russian constitution, are not Putin’s programme declarations in: Jadwiga Rogo˝a, Vladi- state bodies, however, they are to a large extent dependent mir Putin – pre-election demands, Tydzieƒ na Wschodzie on regional authorities (especially financially). It should be 173, CES 2000; and Marek Menkiszak, President Putin’sspe- noted that in numerous entities of the RF local govern- ech to the Federal Assembly, Tydzieƒ na Wschodzie 221, ments de facto don’t exist. CES 2001, Jadwiga Rogo˝a, Bureaucracy reform first of all: 9 The choice of the governor for Yakutia, a region rich in President VladimirPutin’s speech to the Federal Assembly, diamonds, was the subject of Moscow’s bargaining with Tydzieƒ na Wschodzie 266, CES 2002, Bartosz Cichocki, Rus- potential candidates for this post – eventually, under the sia – pre-election speech, Tydzieƒ na Wschodzie 311, CES pressure of the Kremlin, the ruling governor Mikhail Niko- 2003. layev backed out of the election race and the compromise 2 Marek Menkiszak, Who formulates the strategy for Rus- candidate Vyacheslav Shtyrov ran in the election. An exam- sian reforms?, Tydzieƒ na Wschodzie 194, CES 2000. ple of the interference of the Central Election Committee 3 More information: Pekka Suleta, The Lure of The Authori- were the elections of a governor for Krasnoyarsk Krai in Ja- tarian Temptation, Russian Economy The Month in Review nuary 2003. As a result of informal settlements with Mo- – July 2000, Bank of Finland Institute for Economies in scow, the governor of Primorsk Krai, Yevgeny Nazdratenko Transition; or Anna Wawrzycka, Iwona WiÊniewska, Vladi- (more information in footnote 33) and St. Petersburg’s go- mir Putin’s economic programme, Tydzieƒ na Wschodzie vernor Vladimir Yakovlev also withdrew. 189, CES 2000. 10 This refers in particular to the pre-election period, as go- 4 The decree has set up seven federal districts (FD): the Cen- vernors have the ability to influence election results (parlia- tral FD (with its capital in Moscow), the North-western FD mentary as well as presidential) on the territory of the en- (St. Petersburg), the North Caucasus FD, later renamed the tity they govern. South FD (Rostov-on-Don), The Volga FD (Nizhny Novgo- 11 This was made possible by the interpretation of the rod), the Ural FD (Yekaterinburg), the Siberian FD (Novosi- RF’s Constitutional Tribunal (9 July 2002); it is commonly birsk) and the Far East FD (Khabarovsk). The districts do not believed that the Kremlin has commanded this decree. form a constitutional element of the state’s government 12 Jadwiga Rogo˝a, Summing up of the changes which oc- system, only an administrative level for dividing the coun- curred in the second year of Putin’s rule, Tydzieƒ na Wscho- try. In accordance with the RF Constitution (art. 65), Russia dzie 261, CES 2002. is a federal state comprised of 89 entities, including 21 re- 13 The opposition party “Liberal Russia” financed by the publics, 6 krais, 49 oblasts, one autonomous oblast, ten au- Kremlin’s enemy, the magnate Boris Berezovsky, had pro- tonomous okrugs and two cities of federal importance – blems while registering itself. This happened despite the Moscow and St. Petersburg. All these entities are politically fact that, according to experts, the party’s statute questio- independent and possess equal political rights, but the au- ned by the Ministry of Justice was almost identical to that tonomous okrugs are simultaneously included in the finan- of the pro-Kremlin “United Russia” party. “Liberal Russia” cial structure of the krais and oblasts in which they are lo- obtained its registration soon after Berezovsky was dismis- cated – e.g. the Taimyr Autonomous Okrug located in Kra- sed from his position as party leader. snoyarsk Krai sends part of its tax income to the budget of 14 This clause, however, will not be binding in the nearest Krasnoyarsk Krai. elections but only from the 2007 parliamentary elections. 5 It is worth noting that at the time five out of seven of the Simultaneously, the above-cited act also contains a clause president’s authorised representatives in the federal di- regarding the “four-party system” – at least four groups are stricts previously held positions in the security services and to be in the Duma; if fewer than four parties cross the elec- the army. These authorised representatives automatically tion threshold, the first four parties on the list of election became members of the RF’s Security Council. results will be granted seats. 6 The president may dismiss the head of a region only if the 15 In the elections to the State Duma minimum voting tur- given federal entity adopts acts that breach human rights nout is 25 percent. in aserious manner, threaten the territorial integrity of the 16 Marek Menkiszak, Acceleration of reforms in Russia, Ty- state and national security. In such situation the president dzieƒ na Wschodzie 233, CES 2001, Jadwiga Rogo˝a, Sum- directs the case to a court and the court decides on the di- ming up of the changes which occurred in the second year smissal of the representatives of regional authorities. of Putin’s rule, Tydzieƒ na Wschodzie 261, CES 2002. 7 The respective stages of the administrative reform were 17 Grigory Okhotin, Razgruzka tyurem: rezultaty khoro- more extensively described in the CES’sanalyses, including: shye, perspektivy plachevnye, www.polit.ru, 21.10.2002. Bartosz Cichocki, What federation?, Tydzieƒ na Wschodzie 18 One of the latest examples of this phenomenon is the ca- 174, CES 2000; Bartosz Cichocki, The Kremlin strengthens se of the Yukos oil company. Following the manifestation in its control over the Russian regions, Tydzieƒ na Wschodzie April 2003 of political ambitions by Yukos’ chairman, Mi- 183, CES 2000, Bartosz Cichocki, Vladimir Putin has subor- khail Khodorkovsky (the richest man in Russia with a per- dinated the regions, Tydzieƒ na Wschodzie 191, CES 2000. sonal estate worth around US$ 8 billion) and Yukos’sactive sponsoring of parties not loyal to the Kremlin (SPS, Yabloko,

CES Studies the Communist Party of the Russian Federation), the public 34 Gritsenko Grigorii, Otkuda berutsa ubytki zhylkomkho- prosecutor’s office conducted a mass attack on the leading za?, www.polit.ru 12.03.2003; Okhotin Grigorii, Reforma employees of the company (the renewal of former criminal nye reforma, ZhKKh nye ZhKKh, www.polit.ru 13.03.2003. cases, arrests, etc.). This caused the consortium measurable 35 The “power structures” in Russia are the ministries, sta- damages (financial as well as to its image in Russia and te agencies, commissions and committees that execute all abroad) and became a serious warning for business circles types of “power” tasks and maintain the armed forces (ar- against an excessive involvement in politics. my, guarding troops etc.). The power structures in Russia 19 More information: Jadwiga Rogo˝a, Summing up of the include the secutiry services (the Federal Security Service changes which occurred in the second year of Putin’s rule, and other structures), the Interior Ministry, the Defence Mi- Tydzieƒ na Wschodzie 261, CES 2002; or Tax Reform in Rus- nistry etc. sia – Update, Russian Economic Trends, August 2000, Rus- 36 Unity and Fatherland-All Russia have maintained separa- sian-European Centre for Economic Policy (RECEP); or Rus- te factions in the lower chamber of the parliament. Toge- sian VAT Reform: A Move Towards The EU Framework?, ther with Russian Regions and People’s Deputy they have Russian Economic Trends, September 2000, RECEP. 235 votes in the Duma (the usual majority is 226). In com- 20 Kakha Bendukidze, Aleksei Kudrin, Vladimir Serbakov, parison, the Kremlin’s presently most dangerous opponent, Nalogovaya reforma: Standart 2003, mart 2003, Ekonomika the Communist Party, together with its sympathising agro- Rossii XXI vyeka, www.ruseconomy.ru/nomer11_200303/ industrial faction holds 126 mandates (www.duma.gov.ru). ec07.html. 37 One of the Communist Party of the Russian Federa- 21 Employers pay 28 percent of every employee’s wages in- tion’smost important politicians and chairman of the State to the pension system. Half of this amount reaches the fe- Duma Gennady Seleznyov was removed from the CPRF deral budget as a social tax, and is then transferred to the (after he refused the CPRF’s demand to resign from the po- State Pension Fund (SPF) for the financing of the “basic pen- sition of Duma’s chairman) and founded the Party of Rus- sion” (everyone who has worked for no less than five years sia’s Rebirth, commonly judged to be a party inspired by is entitled to it). The amount of this pension is identical for the Kremlin to form an alternative to the communists. everyone and is approved each year by the legislator. The 38 An example of this is the preservation in the Customs Co- other half of the contribution goes directly to the SPF, whe- de of the “tolling” procedures enabling, for example, com- re it is entered into the taxpayers’ individual accounts. Ho- panies from the aluminium sector to avoid paying taxes wever, only part of this money may be invested. Depending and customs duties. Aluminoscilicate necessary for the pro- on the age of the taxpayer in 2002 this was 2–3 percentage duction of aluminium, which is imported and processed on points of the contribution. Russian territory, remains the property of companies that 22 Pension Reform in Russia, Economic Studies, November are not registered in the RF – Russian companies only pro- 2002, World Bank; or Russia 2002 – A report of the transfor- vide labour, therefore, they do not pay import duties for the mation, edited by Andrey Neshchadin, Warsaw 2002, The imported aluminoscilicate or taxes from the revenue gene- Eastern Institute, p.32-34. rated from the sale of aluminium. 23 All assets from this sector are valued at around 35 per- 39 Presently, the Federal Security Service also informally cent of the GDP and the total sum of deposits – 19 percent controls the electronic system for calculating votes during of the GDP. elections. They also monitor the flow of information (e-ma- 24 Sberbank is the only bank operating in around one-third ils and telephone conversations) by a special device instal- of Russia’s regions. led on telecommunication interfaces. Finally, the “chekists” 25 A report of the transformation ..., p. 35–37. have influence on the media (e.g. on the state media hol- 26 In autumn 2002 the Central Bank of Russia (CBR) sold its ding VGTRK). shares in Vneshtorgbank to the Russian government. 40 The survey carried out by the Elite Research Institute at 27 Chowdhury Abdur, Banking reform in Russia: Winds of the Russian Academy of Sciences shows that, in comparison change?, BoFIT online May 2003, Bank of Finland Institute to the Yeltsin period, the share of people with a military for Economic in Transition; Russia – Development Policy Re- background in the elites has increased by 20 percentage po- view (Discussion Draft), March 2003, World Bank, p. 17-19. ints over Putin’s presidency (from 6.7 percent to 26.6 per- 28 More in: Rossiya na puti v WTO – Informatsionny bule- cent). Elites are considered to be Security Council members, ten, the RF’s Ministry of Economic Development and Trade, parliamentarians, government officials, and the heads of http://www.wto.ru/bulletin.asp?f=bulletin_m. federal districts. (Olga Krishtanovskaya, Ryezhym Putina: li- 29 More in: Svetlana Ivanova, Sbylas mechta Luzhkova, beralnaya militokratiya? in: Pro et Contra, vol. 7, no. 4, Vedomosti, 26.06.2003 or Aleksandr Bekker, Kupitye zemlu – 2002, p. 158). sovetuyet Minimushchestvo predprinimatelyam, Vedomo- 41 During the recent privatisation of the Slavneft oil compa- sti, 4.06.2003; or Dmitrii Simakov, Zemla podesheveyet, ny, claimants associated with the security services (Mezh- Vedomosti, 10.07.2003. prombank) lost to the representative of a Yeltsinite oligar- 30 Russian Economic Report, October 2002, The World Bank. chic clan (“the Family”) – Roman Abramovich. 31 Ewa Paszyc, Russia’s energy sector will be reformed, Ty- 42 The “chekists” have formulated strategies and reports dzieƒ na Wschodzie 300, CES 2003. concerning the economy, information security, the threat of 32 Op.cit. Russia Development Policy..., p. 21. religious extremism and a more general vision of Rus- 33 Ibid., p. 21–22. sia’s development. These reports considered “untraditio-

CES Studies nal” phenomena a threat to Russia’s stability and security 53 In some cases (e.g. during a search at the Media-Most (these phenomena included: religions other than Orthodox holding belonging to Vladimir Gusinsky) brutal actions of in the case of the report on religious extremism; the “abu- masked functionaries from security service units took pla- se of the freedom of speech” and the influence of the West ce. These actions were undoubtedly inspired by the autho- in the case of the information security strategy, etc.). Apro- rities and aimed at scaring other independent media. posed solution was the restriction of the development of 54 In 2001, 57 percent of Russians recognised the need for such phenomena within the RF or fighting against it. the existence of censorship in the media while 33 percent 43 In April 2001, the RF’sSupreme Court stated that the pro- opposed censorship (survey by the “Obshchestvennoye cedure of examining citizens’ anonymous denunciations by Mneniye” Foundation, 22.03.2001). Other surveys carried the Federal Security Service does not constitute a violation out at the time showed similar results. of the law. The Supreme Court dismissed the charges of the 55 The seven most highly industrialised countries of the “Human Rights Defence” group, which demanded that the world: France, Japan, Canada, Germany, the USA, Great Bri- FSS’s directive providing the initiation of investigations on tain, Italy plus Russia. the basis of anonymous signals, be cancelled (The Facts, 56 At present major rating agencies continue to place Rus- CES, 24.04.2001). sian debt securities in the “speculative” range – 1–2 levels 44 The so-called “white lobbying” (open, lawful means of lower than the investment level. defending business interests) is carried out, among others, 57 Op. cit., Russian Economic Report, October 2002, p. 4. by the Russian Union of Manufacturers and Entrepreneurs, uniting the most important big business representatives. The Union’s members participate in the process of prepa- ring draft bills, they organise conferences regarinng some of the reforms and take part in discussions on government projects. 45 Gazprom, a partly state-owned company, helped the authorities to take over of the powerful opposition media holding Media-Most in 2001. Another example is the private petroleum company LUKoil, with whose help the Kremlin was able to “neutralise” TV-6 – an opposition television sta- tion. 46 Due to the big business (especially Yukos) lobbing in the Duma, it was not possible to pass the bills on natural resources and on charges for the use of such resources. Both acts were inconsistent with the interests of oil companies. 47 Ewa Paszyc, Two years of Aleksei Miller, Tydzieƒ na Wschodzie 316, CES 2003. 48 Sergei Mikheyev, Gdye tonko, tam i rvyotsa, www.polit- com.ru, 4.01.2002. 49 The public prosecutor’s office charged him with abusing his powers and subjecting the Ministry to damages in the amount of around RUB 11 billion. 50 Anatolii Chubais, chairman of RAO UES from 1998, a member of Yegor Gaydar’s reform team. 51 Semyon Vaynshtok, engineer, working in the petroleum sector since 1982, associated with LUKoil. 52 Transnieft has declared that further oil supplies to the Ventspils terminal in Latvia will depend on Transnieft’s ob- taining the terminal’s majority share package (more information, in: Ewa Paszyc, Withholding supplies to the Vent- spils terminal – a competition or a privatisation “offer”?, Tydzieƒ na wschodzie 294, CES 2003). The company also de- nied its approval for the construction of a trans-shipping port in Murmansk by Russian private oil companies (more information in: Ewa Paszyc, The “antimonopoly” project of petroleum companies, Tydzieƒ na Wschodzie 290, CES 2003).

CES Studies