Enigma variations A special report on Russia November 29th 2008

RRussiaCOV.inddussiaCOV.indd 1 118/11/088/11/08 15:48:4415:48:44 The Economist November 29th 2008 A special report on Russia 1

Enigma variations Also in this section The long arm of the state The †nancial crisis may lead to renational• isation by stealth. Page 3

Grease my palm Bribery and corruption have become endemic. Page 6

A matter of judgment Russia’s legal system is deeply ‡awed. Page 7

The incredible shrinking people Russians are dying out, with dire consequences. Page 8

The wild south Russia’s treatment of its republics in the Caucasus has turned them into tinderboxes. Page 10

Handle with care A cornered Russia could pose greater risks. Russia is not the Soviet Union, but what is it? A recovering world Page 13 power‹or a corrupt oligopoly with a market economy of sorts? Arkady Ostrovsky explains why it is both

N DECEMBER 25th 1991 the Soviet ‡ag lapse, crossed an internationally recog• Oabove the Kremlin was lowered for nised border and fought a short, victorious the last time and the last president of the war: with Georgia. Russia’s leaders said Soviet Union, Mikhail Gorbachev, made they were defending two breakaway terri• his resignation speech. ŒThe totalitarian tories, Abkhazia and South Ossetia, from Acknowledgments system has been eliminatedðfree elec• Georgia’s aggression. But at home they The author would like to thank all those quoted in this report, and also the many others who gave generously of tionsðfree press, freedom of worship, rep• also hinted that this was a proxy war with their time and knowledge; in particular, Natalia resentative legislatures and a multi•party America which had tried to muscle its way Abbakumova; Peter Aven of Alfa Bank; Magomed Bakarov; system have all become reality. into what Russia calls Œthe region of privi• Milly Bell; Zeljko Bogetic of the World Bank; Larisa Burakova; Larisa Dorogova; Mikhail Fridman of the Alfa A few hours later, America’s then presi• leged interest. It was a de†ning moment Group; Murray Feshbach of the Woodrow Wilson Center; dent, George Bush senior, declared victory for Vladimir Putin, Russia’s president until Yevsey Gurvich of the Economic Expert Group; Rebecca in the cold war. ŒFor over 40 years the Un• the election in March this year of Dmitry Hewitt; Valery Khatazhukov; Mark Kirsh of Linklaters; John Lloyd of the Reuters Institute of Journalism; Rory ited States led the West in the struggle Medvedev and still the man who, from his MacFarquhar of Goldman Sachs; Michael McFaul of against communism and the threat it new job as prime minister, holds the reins Stanford University; Natalia Orlova of Alfa Bank; Inna posed to our most precious valuesðThat of power. Solovyova of the Moscow Art Theatre School; Angela Stent of Georgetown University; Alexei Venediktov of Ekho confrontation is now over. The United To many, the con‡ict brought back Moskvy; Chris Weafer of Uralsib; Yevgeny Yasin of the States recognises and welcomes the emer• memories of the cold war and portrayed Higher School of Economics; Tatyana Yembulgayeva of the gence of a free, independent and demo• Russia as a Soviet Union mark two, trying EBRD; Nazim Efendiev of Uralmash; Yahia Yevloyev; Pavel Zolotarev of the Institute of the USA and Canada; and cratic Russia. to regain its former territories. All the signs Andrei Zorin of Oxford University. The collapse of the Soviet empire was appear to be in place: Russia is ruled by for• inevitable, rapid and largely bloodless. In mer KGB men like Mr Putin who see ene• A list of sources is at its aftermath the world watched, with a mies everywhere; its political opposition is www.economist.com/specialreports mixture of hope and despair, the emer• crushed; independent journalists occa• gence of a new country that turned out a sionally get killed; and the state media An audio interview with the author is at lot less free and democratic than adver• pump out anti•American propaganda. www.economist.com/audiovideo tised. Confrontation with America did not Once again military parades are being held disappear but took on a new meaning. in Red Square. And in his belligerent state• A country brie†ng on Russia is at In early August this year the Russian of•the•nation address on November 5th www.economist.com/russia army, for the †rst time since the Soviet col• Mr Medvedev threatened to station short• 1 2 A special report on Russia The Economist November 29th 2008

2 range missiles in the Kaliningrad region, aiming them at Europe, unless America backed o from its plan to put a missile•de• fence system into eastern Europe. But the parallels with the cold war are misleading. Russia is not the Soviet Union. It does not have a communist (or any oth• er) ideology, nor does it have much faith in central planning. It has private businesses, a free market of sorts and a great taste for consumption. Russian †rms are listed on foreign stock exchanges. Their managers ‡y business class to factories in the Urals, read †nancial newspapers and labour over spreadsheets on their laptops. Members of the country’s elite have many personal ties with the West: they own property in London, send their chil• dren to British and American universities and hold foreign bank accounts. But none of this stops the Kremlin from being anti• Mr Putin has positioned himself as the ly, like a rock. American and autocratic. symbol of a resurgent nation recovering Similarly, in reaction to the current eco• So far the state has not interfered in peo• from years of humiliation and weakness. nomic turmoil, Mr Putin declared the Rus• ple’s personal lives. It gives them freedom In fact, few Russians in the 1990s brooded sian economy to be a Œsafe haven for for• to make money, consume, travel abroad, on such feelings; most were too busy get• eign capital. On the other hand, Œthe trust drive foreign cars and listen to any music ting on with their lives. But there was one in America as the leader of the free world they like. They are even free to criticise the group that had good reason to be ag• and free economy is blown for ever. Kremlin on radio, in print and on the inter• grieved: members of the former KGB. net, though not on television. And al• When Mr Putin came to power in 2000, A love•hate relationship though Russia’s elections are stage•man• they projected their views onto the whole The paradox of Russia’s nationalism is that aged, the support for Mr Putin is genuine. country. America’s hawkishness towards its patriotic zeal closely follows the Ameri• During the war in Georgia it hit almost 90% Russia made their job easier. can model. One of the biggest pop hits in in opinion polls. The biased television cov• Mr Putin also accurately sensed and Russia a few years ago was a song called ŒI erage plays its part, but unlike Soviet pro• cleverly exploited nostalgia for Soviet cul• Was Made in the USSR, †rst performed in pagandists, who told people what to think, tural symbols. One of the †rst decrees of 2005 in the Kremlin, in front of Mr Putin. Russian propagandists tell people what his presidency in 2000 was to restore the ŒUkraine and Crimea, Belarus and Moldo• they want to hear, says Georgy Satarov, Soviet national anthem. Soviet icons were va‹it is my countryðKazakhstan and the who used to be an aide to a former presi• revived not because of their connection Caucasus as well as the Baltics‹it is my dent, Boris Yeltsin, and now runs INDEM, a with communism but as symbols of stabil• countryðI was born in the Soviet Union; think•tank. What people want to hear, es• ity, continuity and power. A TV show, ŒThe made in the USSR, its lyrics go. As the au• pecially as they are getting richer, is that Name of Russia, based on a British pro• dience rose to applaud, it was perhaps un• their country is Œrising from its knees, gramme, Œ100 Great Britons, lists Joseph aware that the tune was the same as Bruce sticking its ‡ag in the Arctic Circle, winning Stalin as one of the country’s †ve all•time Springsteen’s ŒBorn in the USA. football games and chasing the Americans greats. Most Russians associate him not Konstantin Ernst, the boss of Russia’s out of Georgia. with repression and terror but with the main TV channel, which churns out na• power and respect which their country tionalistic, anti•American propaganda, once commanded. worshipped Francis Ford Coppola, an Pride before the fall 1 ŒOur foreign policy is clear. It is a policy American †lm•maker. These days he pro• Russia’s GDP, % change on year earlier of preserving peace and strengthening duces American•style blockbusters on a trade relations with all countriesðThose Russian theme and sells distribution rights 12 who want peace and seek a business rela• in Hollywood. 10 tionship with us will always †nd our sup• The loudest anti•Americans in Russia 8 port. And those who try to attack our coun• are not the unreformed communists but 6 try will be dealt a deadly blow, to deter the well•dressed, English•speaking speech• 4 them from sticking their snouts into our writers from the perestroika era. The Krem• 2 + Soviet backyard. Stalin made this speech lin’s confrontation with the West is based 0 – in 1934, re‡ecting on a recent world eco• not on di erences of ideology or economic 2 nomic crisis which, as he explained, systems but on the conviction that Russia 4 Œspread to credits and liquidity, turning up• is no di erent from America and that the 6 side down †nancial and credit relation• West’s values are no stronger or better than 1997 99 2001 03 05 07 08* ships between countriesðAmidst this Russia’s. Any public criticism by Western Source: IMF *Estimate stormðthe Soviet Union stands separate• leaders of Russia’s behaviour is therefore 1 The Economist November 29th 2008 A special report on Russia 3

2 seen as deeply hypocritical. until you start splitting the money. These The country is beset by chronic and dan• America looms much larger in Russia’s [Western] countries need to have access to gerous weaknesses. Its economy depends mind than Russia ever did in America’s. To oil and gas, and to get it they are prepared on natural resources and cheap credit, and compete with America, Mr Medvedev to use any means, including accusations its private business, which pulled the even scheduled his recent state•of•the•na• that Russia has a di erent system of values country out of the 1998 crisis, is constantly tion address to coincide with the Ameri• AllðRussia is doing is defending its inter• being harassed by the state. Corruption is can election. Russia wants to be like Ameri• ests. We want to live peacefully, but the so pervasive that it has become the rule. ca and follows in its footsteps. Unfortun• West cannot tolerate the idea that we are Russia’s population is shrinking by ately, says one American former oˆcial, an equal partner, that we are the same. 700,000 a year. And its neocolonial meth• Œthey followed our mistakes and not our Now there is no more time for niceties. ods of governance in the north Caucasus system of governance. Yet although the Russian elite has have created a tinderbox. Russia’s war in Georgia and its unilater• adopted a Western lifestyle, it rejects key The gap between rich and poor is grow• al recognition of South Ossetia and Abkha• principles of Western governance. Lilia ing. Moscow’s exclusive outskirts look like zia copied the West’s recognition of Kos• Shevtsova of the Carnegie Moscow Cen• American suburban shopping malls writ ovo in the Balkans, even though only a few tre, a think•tank, argues that Œhostility to• large, yet villages not far away lie aban• months earlier Mr Putin had said that uni• wards America and the West sustains the doned. The rich and powerful are steeped lateral recognition of Kosovo was Œimmor• authoritarian and corrupt rule of the rent• in luxury, yet the average Russian earns a al and illegitimate. Conversations with seeking elite which portrays its narrow mere $700 a month. Russia is building Russian oˆcials often end with the plain• corporate interests as the interests of the pipelines to Europe but much of its own tive question: ŒWhat have we done that nation. In Georgia, Russia was defending country has no gas or even plumbing. Rus• you haven’t done? not so much the separatists but its own rul• sia’s Œgreat leaps forward have rarely ben• Igor Shuvalov, the †rst deputy prime ing class and its value system. By imitating e†ted its own people, who have tradition• minister and Mr Putin’s right•hand man, and repelling America at the same time, ally been seen as a resource. Most Russians was in London (where his son studies) Russia tries to ward o a hostile value sys• grumble about their lives, but see Œinterna• when Georgia erupted. The war showed tem that includes democracy and the rule tional prestige as a consolation prize. that Russia and the West are now cement• of law. The Kremlin sees its relationship Russia has the potential to develop into ed together, he argues. ŒIt showed that all with the West as a zero•sum game: if it re• a strong and prosperous nation, but the our values are exactly the same. Russia is a surges, America will decline. Kremlin’s nationalism, hostility towards civilised country, we all want to live well, the West and authoritarianism make the like ordinary Americans, we want to pro• A long way to go task more diˆcult. A two•minute video tect ourselves from external threats like A few years ago Mr Putin said Russia’s na• made by a Russian soldier captured in you doðPerhaps we do not have such a tional idea was to be competitive. The Georgia (now on YouTube) illustrates the sophisticated democratic infrastructure, Kremlin asserts that Russia has regained its point. As they smash up neat Georgian but in essence American presidential elec• status of Œa mighty economic power. Its barracks, the Russians curse their own tions are no di erent from ours. goal is to achieve economic and social de• poverty and hail their victory in the same The confrontation between Russia and velopment which be†ts Œa leading world breath. ŒThey [the Georgians] had every• the West is not about di erent values, he power of the 21st century by 2020. thing, one Russian soldier says. ŒThey had says, but about di erent interests, †nancial This special report will draw attention nice barracks, good furniture, and we live and geopolitical. ŒFriends are only friends to the many things that stand in its way. like tramps. But they got screwed. 7 The long arm of the state

The †nancial crisis may lead to renationalisation by stealth

VEN to someone who has never been to of the mining and metal•bashing industry, precedented consumer boom. Real in• EYekaterinburg, a large industrial city in is a microcosm of Russia’s economy. Until comes have more than doubled since 1999 the Urals, the changes are obvious. Shiny recently it has been ‡ush with money, and the growth in retailing has averaged towers of metal and glass have shot up mostly from natural resources and cheap 12% a year. everywhere without order or design, credit, spent in sprawling supermarkets, In a country so long starved of good res• pushing aside historic buildings and mak• restaurants and car dealerships. Oil, gas taurants, hotels and shops, it was natural ing the Soviet•era apartment blocks look and metals make up around 80% of Rus• that consumers should take a lead role, even grimmer. At night cranes are lit up like sia’s exports, and until recently their prices says Andrei Illarionov, a former economic Christmas trees. At eight in the morning were rising fast. For the past †ve years the adviser to Vladimir Putin and now one of heavy traˆc, mostly of foreign•made cars, economy has been growing at about 7% a his †ercest critics. Besides, there is so much chokes streets that still bear Soviet names. year. Measured in dollars the rise has been uncertainty around that most people The city’s ultra•modern airport makes much faster. Some of this money has been would rather spend than save. Moscow’s look shabby. stashed away into a stabilisation fund, but But there has been plenty of capital in• Yekaterinburg, traditionally the centre a large portion has been fuelling an un• vestment too, though mostly in extractive 1 4 A special report on Russia The Economist November 29th 2008

topped 15% during the summer. Held back by red tape, the strong rouble and weak property rights, Russian industrial produc• tion grew by 5.4% in the †rst nine months of this year and imports in the same period shot up by 42%. Yekaterinburg is full of de• partment stores, but hardly anything that is sold in them is produced around there. What is made locally is tanks, exports of which did go up last year. Even as the Russian stockmarket went All quiet now in Yekaterinburg into a nosedive, Mr Putin insisted that Rus• sia had escaped the †nancial crisis. On 2 industries. Fixed investment last year rose kets. They lent money to state companies September 13th, in an interview with by a record 21% on the year before, al• such as Gazprom and Rosneft whose debts France’s Le Figaro, he gloated: ŒWe did not though it remains relatively low. were implicitly backed by the government. have a crisis of liquidity; we did not have a Private initiative, freed up by the market This uncontrolled corporate borrowing mortgage crisis [like America or Europe]. reforms of the 1990s, became the main undid the government’s success at repay• We did not have it, we escaped it. force behind Russia’s economic recovery ing state debt, building up foreign•ex• after the 1998 crisis. Growth was particular• change reserves and setting up a stabilisa• When the music stopped ly strong in sectors that were not weighed tion fund in which to accumulate some of But when the oil price started to fall, for• down by any Soviet legacy, such as mobile the oil revenues. At the end of June Russia’s eign banks stopped lending and money telecoms. But private ownership was also total external debt was $527 billion. Its total began to ‡ow out of Russia, it became clear transforming Soviet•era behemoths. reserves in November were $475 billion. that the economy was more vulnerable Mr Putin boasted that the net in‡ow of and more highly leveraged than many in• Proud to be private capital had reached $80 billion last year vestors had wanted to believe. The cranes One example is Uralelektromed, a large and total foreign investment had risen to in Yekaterinburg, and in many other Rus• copper producer in the Urals, which is 9% of Russia’s GDP. But only a quarter of sian cities, are now standing idle. Produc• partly owned by Andrei Kozitsyn. In the this was foreign direct investment; the rest tion lines have ground to a halt and metal past †ve years the company’s revenues came in the form of loans and portfolio in• companies and carmakers have begun to have tripled. It has used the money to in• vestments. As Kirill Rogov of the Institute sack workers. stall a new production line, along with the of Economy in Transition, a think•tank, ex• The fall in the stockmarket mattered be• latest American equipment. To add value, plains, this re‡ected the strength of Rus• cause Russian †rms had borrowed heavily it has begun to produce high•quality wire, sia’s reserves and the weakness of its in• against their shares and faced margin calls which it exports to Europe. ŒWe had to be vestment climate. Whereas other from their foreign creditors. Mr Illarionov competitive, otherwise we were meaning• emerging economies were †ghting tooth says this is a Œstandard credit and liquid• less, says Mr Kozitsyn. Having started as a and nail for direct investment, Russia was ity crisis rather than a budget crisis. Com• worker in the factory, he rose to the top be• borrowing cheaply instead, he says. pared with many other countries Russia cause he wanted to be in business. But When the world economy started to still has plenty of cash, even if its reserves these days, he says, young people prefer wobble, the government increased its are dwindling at a worrying rate. Leaving bureaucratic careers. spending by 40% to boost consumption, aside the recent spending spree, the coun• Tax revenues from his industry provide says Evgeny Gavrilenkov, chief economist try’s overall macroeconomic policy has about 40% of the Ural region’s budget. But at Troika Dialog, an investment bank. With been sensible. For the past eight years the the government has used the money to demand outpacing supply, the Russian government has been running budget and pay higher salaries to its employees, recruit economy started to overheat. In‡ation current•account surpluses. If growth were more of them and renovate oˆces rather to slow down to 3% next year, as some an• than build new roads and railway lines, alysts predict, that would still be more than which companies like Uralelektromed What everyone wants 2 in most countries. badly need. Russia’s production of: Igor Shuvalov, the †rst deputy prime Crucially, the government failed to use Natural gas, Crude oil, minister, puts a brave face on it: ŒHigh oil the good times to diversify the economy, terajoules, gross, m kilotonnes, m prices corrupted us, in‡ated our expendi• clean up its banking system, reform capital 25 500 ture and distorted our economy. If this cri• markets, strengthen property rights and es• 24 450 sis had not happened now, by 2011 the tablish the rule of law. As long as the oil quality of credit portfolios would have price was going up, nothing that Russia 23 400 been much worse. So it is a blessing. Now did‹from the overt expropriation of Yu• 22 350 we can start the real project, to develop do• kos, a giant Russian oil company, to forcing mestic industry and the †nancial sector. foreign oil companies out of production• 21 300 In essence Russia’s problems are politi• sharing agreements‹seemed to stop the 20 250 cal, not economic. ŒWe have come to this ‡ow of money into the Russian stockmark• crisis well prepared, says Yegor Gaidar, a et. The job of raising capital was out• 1998 2000 02 04 06 07* former prime minister and architect of Source: IEA *Estimate sourced to foreign banks and capital mar• Russia’s post•Soviet economy. ŒBut now 1 The Economist November 29th 2008 A special report on Russia 5

2 we need to stop nationalising companies called a Œstate corporation. and cut down on populism. You can make FullTo come of energy 3? One example is Russian Technologies, any argument for nationalisation, but Russian trade, $bn run by Sergei Chemezov, a former KGB oˆ• when Russia started to nationalise its oil cer and a friend of Mr Putin’s from the 350 industry production stopped growing. ExportsExports 1980s when the two served together in East Russia may also need to devalue the 300 Germany. Until last year Mr Chemezov rouble. The central bank recently allowed 250 was in charge of a state arms•trading mo • it to depreciate slightly against a basket nopoly, which did not stop him from tak• of currencies, but it still intervenes in the 200 ing over a successful private titanium busi• market to defend it. Politically a strong 150 ness and a car factory. This year his empire, rouble has become a proxy for a resurging 100 now under the umbrella of Russian Tech• Russia and devaluing it or letting it ‡oat ImportsImports nologies, has grown even further. State cor• 50 would hurt Mr Putin’s reputation. porations’ assets, Mr Chemezov once said, As Mr Rogov explains, it would do no 0 Œare neither state not private; they are harm if Russia’s highly leveraged oligarchs 1997 9999 20012001 0303 05 05 07 0708* Œstate commerce. Source: IMF *May were to hand over their stakes to foreign He has successfully lobbied for the in• creditors, but the Kremlin would not allow clusion in Russian Technologies of some this. The risk is that instead of clearing the jail), the man who destroyed his company. 420 mostly state•controlled companies, system and promoting the most eˆcient Next came electricity companies, car• some of which‹such as airlines or proper• †rms, the crisis is helping the least eˆcient. makers and anyone else who could think ty‹seem to have little to do with the corpo• The government is already introducing of a good reason to ask for help. As one ration’s declared aim of promoting tech • protectionist measures. Russian oligarch observed, a lot of people nology. Alexei Kudrin, Russia’s †nance ŒThe crisis itself is less grave than the in the Kremlin would like to take back the minister, noted that giving Russian Tech• potential consequences of the govern• companies that were privatised in the nologies all these assets would amount to ment’s actions in solving it, says Andrei 1990s. Back then the oligarchs lent money Œa covert privatisation and the loss of con• Sharonov, a former deputy economics to the cash•strapped state and got assets at trol over how the proceeds are spent. But minister who now works in the private knock•down prices in return. Now it is the his words fell on deaf ears. sector. The government has earmarked a companies that are in debt, whereas the Another state corporation is based on total of more than $200 billion for various state is cash•rich and can buy the assets Vneshekonombank ( VEB), which is meant rescue measures, which as a proportion of back cheaply. To make them even cheaper, to be bailing out Russian †rms that need to GDP is almost three times what the Ameri• government oˆcials publicly threaten re†nance their foreign debt. The commit • cans are spending. But in contrast to companies or dig out old charges against tee that decides on the bail•outs is chaired America, there is little public scrutiny of them, as Mr Sechin has recently done with by Mr Putin himself. VEB has recently lent what the money goes on. The †rst victims one of Russia’s largest fertiliser producers. $4.5 billion, well above its supposed limit, to be rescued by the government were two The crisis has also changed the behav • to Rusal, a company controlled by Oleg De• banks said to be closely linked to senior iour of private †rms. In the past the market ripaska, a Russian aluminium tycoon, so government oˆcials. pushed them to improve their governance, he could repay a foreign loan backed by To unblock the banking system, the but now they are encouraged to look to• 25% of Norilsk Nickel, the world’s largest government deposited $50 billion in three wards the state, says Roland Nash of Re • nickel producer. In return VEB will include banks, two of which are state•linked. The naissance Capital. government oˆcials in the company’s third used to be controlled by Gazprom Mr Shuvalov admits that some private management and board. But even before and is now owned mostly by private assets might end up in state hands, but he the crisis Norilsk Nickel’s controlling individuals. The idea was that the banks insists that the government does not in• shareholder, Vladimir Potanin, one of the would inject liquidity into the system, but tend to keep them. The question is how, most politically savvy oligarchs, had put a in the event they did not lend the money and to whom, these assets will be sold. Na• f o r m e r KGB oˆcer in charge of the com• on to other banks, so now the government tionalising businesses is risky in any coun• pany‹to be on the safe side. decides whom they should lend to. try, but in Russia, with its weak institutions The projection of KGB power in Rus• Another $50 billion of the rescue money and powerful Kremlin clans, it is almost sia’s politics and economy has been a guid• was earmarked for bailing out Œstrategic certain to lead to a redistribution of proper • ing principle of Mr Putin’s period in oˆce. companies. At the front of the queue were ty to the ruling elite, mainly past and pre• In the past the siloviki often had to rely on Russia’s largest oil and gas companies, in• sent members of the security services, col• tax inspectors or the Federal Security Ser • cluding the state•controlled Gaz•prom and lectively known as siloviki, or hard men. vice (FSB) to get hold of assets. Now the cri• Rosneft. Igor Sechin, the powerful deputy sis is creating new opportunities for what prime minister in charge of energy, seems Neither one thing nor the other Mr Illarionov calls the ŒKGB•isation of the to have promised $9 billion of government The new entities that could emerge from economy. The result, he explains, could money to energy companies. Half of it will the crisis may be neither state nor private, be a new, highly monopolistic system, go to Rosneft, which has a debt of $20 says Mr Rogov, but the worst of both based on a peculiar state•private partner• billion that goes back to its controversial worlds: opaque, quasi•state †rms run by ship in which the pro†ts are privatised by takeover of the Yukos oil company. Mr people aˆliated with the Kremlin. One Kremlin friends and debts are national• Sechin is also the chairman of Rosneft and, model for this form of ownership is a pri• ised. This will not take Russia back to a says Mikhail Khodorkov•sky, the former vately controlled subsidiary of a state•con • state•run economy, but it is likely to shift it boss of Yukos (and now in trolled company. Another is something further towards a corporatist state. 7 6 A special report on Russia The Economist November 29th 2008

Grease my palm

Bribery and corruption have become endemic

USSIA may not have democratic elec• The reason for the persistent corruption sham trial sent to jail where he has spent Rtions or the rule of law, but it does have is not that the Russian people are genetical• the past †ve years. Yukos was broken into one long•standing institution that works: ly programmed to pay bribes, but that the bits and, after an opaque auction, passed corruption. This has penetrated the politi• state still sees them as its vassals rather to Rosneft, a state oil company chaired by cal, economic, judicial and social systems than its masters. The job of Russian law en• Igor Sechin, the ideologue of the siloviki. so thoroughly that is has ceased to be a de• forcers is to protect the interests of the state, viation from the norm and become the personi†ed by their particular boss, Tricks of the trade norm itself. A corruption index compiled against the people. This psychology is par• Mr Khodorkovsky was accused, among by Transparency International gives Rus• ticularly developed among former (and other things, of selling Yukos’s oil through sia 2.1 points out of ten, its worst perfor• not so former) KGB members who have o shore trading companies to minimise mance for eight years and on a par with gained huge political and economic power taxation. So now Rosneft sells the bulk of Kenya and Bangladesh. Ordinary Russians in the country since Mr Putin came to of• its oil through a Dutch•registered trading are well aware of this, with three•quarters †ce. Indeed, the top ranks in the Federal Se• †rm, Gunvor, whose ownership structure of them describing the level of corruption curity Service (FSB) describe themselves as looks like a Chinese puzzle. The rise in in their country as Œhigh or Œvery high. the country’s new nobility‹a class of peo• Gunvor’s fortunes coincided with the fall The size of the corruption market is esti• ple personally loyal to the monarch and of Yukos. A little•known company before mated to be close to $300 billion, equiva• entitled to an estate with people to serve 2003, Gunvor has grown into the world’s lent to 20% of Russia’s GDP. INDEM, a them. As Russia’s former prosecutor•gen• third•largest oil trader, which ships a third think•tank that monitors and analyses cor• eral, who is now the Kremlin’s representa• of Russia’s seaborne oil exports and has es• ruption, says 80% of all Russian businesses tive in the north Caucasus, said in front of timated revenues of $70 billion a year. pay bribes. In the past eight years the size Mr Putin: ŒWe are the people of the sover• One of Gunvor’s founders is Gennady of the average business bribe has gone up eign. Thus they do not see a redistribution Timchenko, who sponsored a judo club of from $10,000 to $130,000, which is enough of property from private hands into their which Mr Putin was honorary president to buy a small ‡at in Moscow. own as theft but as their right. and worked in an oil company that was A businessman who was stopped by The precedent was set by the destruc• given a large export quota as part of a con• the traˆc police in Moscow recently was tion of the Yukos oil company in 2003•04. troversial oil•for•food scheme set up by Mr shown a piece of paper with Œ30,000 rou• Mr Khodorkovsky, its then owner, was ar• Putin during his time in St Petersburg. Mr bles written on it. He refused to pay and rested at gunpoint in Siberia and after a Timchenko says he was not involved in the asked the policeman why he was being deal and his success is not built on favours. asked so much for a minor o ence. ŒThe The Yukos case changed the logic of answer was that the policeman had corruption. As INDEM’s Mr Satarov ex• bought a ‡at for his mother in Bulgaria and plains, before 2003 oˆcials simply took a he now needed money to do it up, the cut of businesses’ pro†ts. After Yukos they businessmen said. Far from being a taboo started to take the businesses themselves. subject, corruption is discussed openly by These days businessmen pay bribes as politicians, people and even the media‹ much to be left alone as to get something but it makes no di erence. done. They call it a Œbribe of survival. Corruption has become so endemic This new form of corruption is chang• that it is perceived as normal. Opinion ing the structure of the Russian economy. polls show that the majority of Russians, ŒYeltsin•era corruption ended in a privati• particularly the young, do not consider sation auction, even if it was a fake one. bribery a crime. The Russian language dis• The new corruption ends in the national• tinguishes between Œo ering a reward to isation of business, says Yulia Latynina, a a bureaucrat for making life easier for you, writer. Nationalisation is not quite the and the brazen (and sometimes violent) right word, however, because sometimes extraction of a bribe by a bureaucrat. state property is quietly transferred into Small and medium•sized businesses private bank accounts. And even where a su er the most. Dmitry Golovin, who business is formally controlled by the state, owns a tool•leasing company in Yekaterin• the pro†ts or proceeds from share sales burg, explains: ŒYou go to the local admin• may never reach its co ers. istration to get permission for something When Mr Medvedev was chairman of and they send you to a private †rm that Gazprom, a state•controlled gas giant, one will sort out the paperwork for you, which of his †rst jobs was to oversee the return of happens to be owned by their relatives. What are we going to do about this? assets which had been siphoned o under 1 The Economist November 29th 2008 A special report on Russia 7

2 the previous management. But as Boris spouse and under•age children‹but not Nemtsov and Vladimir Milov, two opposi• Reliably awful 4 siblings, parents or grown•up children. ŒIt tion politicians, explain in a recent book, Corruption-perception index, 2008 is as if the government is telling everyone ŒPutin and Gazprom, in the past few years Least corrupt=10 which accounts they should transfer the Rank Gazprom’s control over its multi•billion• money into, says Elena Pan†lova, head of dollar insurance company and part of its 0 2 4 6 8 Transparency International Russia. pension funds has passed to a private bank Germany 14 The trouble is that corruption in Russia called Rossiya, controlled by Yury Koval• Japan 18 has become a system of management rath• chuk, who is thought to be a friend of Mr United States 18 er than an ailment that can be treated, ex• Putin’s. The bank advertises itself as ŒRos• plains Ms Latynina. Central to this system France 23 siya: the country of opportunities. is the notion of kompromat, or compromis• Turkey 58 ing material. ŒIt is easier to control some• A necessary evil? China 72 one if you have kompromat on them, so Both Mr Medvedev and Mr Putin con• Brazil 80 that is how a boss often chooses his subor• demn corruption in public. In a recent India 85 dinates, she says. speech Mr Putin grumbled: ŒAnywhere Russia 147 The only way to †ght corruption, ex• you go, you have to go with a bribe: †re in• plains Ms Pan†lova, is through political Somalia 180 spection, ecologists, gynaecologists‹ competition, independent courts, free me• everywhere. What a horror! Mr Medve• Source: Transparency International dia and a strong civil society. Those things dev’s †rst presidential promise was to †ght may not get rid of it, but at least they would corruption for the Russian public, and re• they have accumulated in the previous †ve establish uncorrupt norms. Yet †ghting cently he thundered: ŒWe have to do some• years‹hence all this talk about building a corruption from within the Kremlin would thing. Enough of waiting! Corruption has legal system. require the skills of a Baron Münchhausen, become a systemic problem and we have As a former lawyer, Mr Medvedev has who famously escaped from a swamp by to give it a systemic answer. Soon after• started with legislation. A new draft law re• pulling himself up by his own hair. As Mr wards he appointed himself head of a new quires bureaucrats to declare their own Khodorkovsky said in a recent interview: anti•corruption committee. and their family’s income and assets. But ŒThe †ght against corruption is a †ght for Mr Satarov says this may be more than there are a couple of loopholes. First, the democracy. The interview cost Mr Kho• just populism. ŒThey feel that the system information about their income is con†• dorkovsky 12 days in solitary con†nement. has become unmanageable. They also dential and available only to other bureau• But the cost to Russia of allowing corrup• need to protect and legalise the wealth crats. Second, the family is de†ned as tion to ‡ourish is a lot higher. 7

Russia’s legal system is A matter of judgment deeply ‡awed

ESPITE Mr Putin’s promise to estab• though judges are appointed for life, their Yet when evidence of torture is presented, Dlish a Œdictatorship of the law, the ju• careers (and perks) are in the hands of the juries have to leave the room. Second, a diciary in Russia is far from just. At least chairman of their particular court, who is jury can be dismissed if it includes some• that is the view of Sergei Pashin, a former appointed for a six•year term, renewable one linked to the police or security ser• judge and now a law professor. He should once. To get that second term he has to vices, so prosecutors often plant such peo• know: in 2000 he was dismissed after prove his loyalty, Mr Pashin explains. ple in juries so that the verdict can be supporting a young man who had politi• The criteria for assessing a court’s overturned if it is inconvenient. cal objections to serving in the army. Mr work are the number of cases it processes Things are not much better in cor• Pashin was later restored to oˆce, but the and the number of successful appeals porate disputes. Large companies rarely young man he helped to free died in mys• against its decisions. To avoid too many trust in a judge’s unprompted decision. In terious circumstances. appeals, a trial judge often seeks informal commercial courts a judge often takes a The trouble starts with the selection of advice from a judge in a higher court. As• bribe for reaching a speedy conclusion. judges, says Mr Pashin. The process looks tonishingly, fewer than 1% of criminal All this helps to explain why the European reasonable on paper, but it leaves scope cases tried by a judge end in acquittals. But Court of Human Rights is overwhelmed for interference. Judges are appointed ei• in jury trials, which were introduced in all with Russian cases, and why large Russian ther directly by the president or on his rec• Russian regions except Chechnya in 2002, companies seek justice in London. The Yu• ommendation by the upper chamber of the acquittal rate is about 20%. kos case showed that the courts have be• parliament. But most of them are †rst However, prosecutors quickly found a come part of the Kremlin machinery. The screened by a Kremlin commission which way round the new system. For a start, problem, says one Moscow lawyer, is that includes the deputy heads of the security most cases coming before a jury involve a Œthe law in Russia is often trumped by services and the interior ministry. And al• confession, often obtained under duress. money and always by high•level power. 8 A special report on Russia The Economist November 29th 2008

The incredible shrinking people

Russians are dying out, with dire consequences

OU do not need to travel far to †nd evi• cities with a population over 100,000 and bought by a businesswoman from Mos• Ydence of Russia’s demographic pro• their number is dropping. The average dis• cow. Most other collective farms in this dis• blems. Just 250km west of Moscow, in the tance between large cities is 185km. Accord• trict are dead. Smolensk region, it is glaringly obvious. ing to Ms Nefedova, this means that a Russia’s demography be†ts a country at Turn o the main road in the village of stretch of 100km between them is a social war. The population of 142m is shrinking Semlevo and you will see rusting gates and and economic desert. In villages closer to by 700,000 people a year. By 2050 it could derelict buildings. Continue for a short dis• large cities, especially Moscow and St Pet• be down to 100m. The death rate is double tance on what just about resembles a road ersburg, or in the south of the country, the average for developed countries. The and you will see a new cowshed. things are better. life expectancy of Russian males, at just 60 A third of the people working here are But for Mr Pertsev, the idea that Russia is years, is one of the lowest in the world. from Tajikistan. Marina, a 38•year old Rus• Œrising from its knees seems like a bad Only half of Russian boys now aged 16 can sian milkmaid, is married to one of them. joke. Two years ago he lost his son, who expect to live to 60, much the same as at Talib, she says, may be strict, but he does was in the army. The young man was killed the end of the 19th century. not drink or beat her up. She prefers him to by a drunk driver who crashed into a col• her †rst, Russian, husband who drank him• umn of soldiers in the dark. ŒThe only peo• No babies to kiss self to death at the age of 47, leaving her ple who live well in this country are those ŒIf this trend continues, the survival of the with three children. Her 19•year old son is who make decisions, sit on an [oil] pipe or nation will be under threat, Mr Putin said unemployed and drinks heavily. those who guard it, says Mr Pertsev. in his †rst state•of•the•nation address in Talib came to Russia so that he can feed The sorry state of villages like Semlevo 2000. Six years later he o ered an increase his other family in Tajikistan, and Marina is the result of Œnegative social selection, in child support and a bonus for second ba• does not mind Talib having another wife. says Ms Nefedova: the most active and bies. Since then the birth rate has started to But local residents resent the Tajik and Uz• able people have migrated to large towns. climb, the number of deaths has declined bek migrants because Œthey are prepared Few people have stayed behind, and most and life expectancy has edged up a little to work for a pittance and take our jobs. of those are unable to work. In Semlevo (see chart 5, next page). Mr Putin rejoiced: Yet †nding sober local working men in the there is only one farmer who keeps his ŒWe have overcome the trend of rising village is diˆcult, says Sergei Pertsev, the own sheep and chickens. Most houses deaths and falling birthsðIn the next three farm manager. ŒHere, everyone has fallen there have no running water, plumbing or to four years we can stabilise the popula• ill with alcohol. To make sure the farm gas heating. Still, Semlevo’s old collective tion †gures. functions properly Mr Pertsev keeps peo• farm is considered lucky: it was recently But demographers say there are few 1 ple in reserve, to †ll in for those who go on a binge. It used to be mainly men who drank, but now women do too. Semlevo’s collective farm was built in 1962. Since then the village’s population has dropped to a third of its former level. Thirty years ago the village school had 500 pupils. This year only one girl entered the †rst grade. Some people have left the vil• lage, others have died of drink. Those who remain drink heavily. Still, by local stan• dards, Semlevo, with its 900 residents, is a thriving metropolis. Some nearby villages have just two or three people left. Tatyana Nefedova, a geographer and specialist on Russian agriculture, calls these deserted areas ŒRussia’s black hole. In the European part of the country alone they account for one•third of the land mass. Urbanisation has drawn people from villages into larger cities and to the vast industrial building sites in the east and north of the country. Active life is concen• trated in a radius of 35•40km from the cen• tre of these large cities. Russia has only 168 Rare and precious The Economist November 29th 2008 A special report on Russia 9

2 grounds for optimism, and Russia’s goal of the other half often have to forgo neces• increasing the population to 145m is unat• Drooping 5 sary treatment. tainable. Anatoly Vishnevsky, Russia’s Population, m Boosting the country’s health•care leading demographer, says an increase in spending was one of the Œnational pro• the number of births in a single year does 150 jects Mr Medvedev was in charge of be• not reverse a trend. People may respond to fore becoming president. Last year its fund• †nancial incentives by changing their tim• 140 ing doubled to 143 billion roubles ($5.8 ing rather than having more babies overall. billion). That is still below Western stan• An extra $100 a month is helpful to people 130 dards, but the main problem is that it is not with low incomes and rural or Muslim well spent. For example, the government families, who have more children anyway, 120 more than doubled general practitioners’ but is unlikely to persuade middle•class pay. But as Sergei Shishkin of the Indepen• families to produce more babies. 1960 70 80 90 2000 08 dent Institute for Social Policy argues, the The main reason for the recent rise is Life expectancy and birth rate pay increase was not linked to perfor• that there was an uptick in the birth rate in Births per Life expectancy mance and created a sense of injustice the 1980s and the people born during that 1,000 population at birth, years among specialists. period are now having children them• 25 70 selves. But the next generation to reach The curse of the bottle child•bearing age is much smaller. ŒWhat 20 68 Russian history, particularly in the 20th we are going to see over the next few years century, has encouraged the view that life 15 66 is a rapid decline in the number of births, is cheap. But there is also a strong self•de• says Mr Vishnevsky. At the same time the 10 64 structive streak in the national character. death rate is likely to go up, not because Drinking yourself to death is one of the people will die any earlier but because the 5 62 most widely used methods of suicide. generation which is getting to the end of its Alexander Nemtsov, a senior research• life now is larger than the one born during 1962 70 80 90 2000 08 er at the Institute of Psychiatry, points to a the war. Source: United Nations clear correlation between the death rate Russia’s demographic crisis is one of and the consumption of alcohol in Russia. the main constraints on the country’s for men was 65.1 years, only slightly lower A short anti•alcohol campaign conducted economy. Although Russia’s population than in the West. But by 1980 the gap with by Mikhail Gorbachev in the late 1980s ex• has been ageing, over the past decade the the West had widened to more than eight tended life expectancy by three years. Mr country has enjoyed a Œdemographic divi• years and is now 15 years. Nemtsov estimates that nearly 30% of all dend because the age structure was in its Russia’s health problems, says Mr Vish• male deaths and 17% of female deaths are favour. This dividend has now been ex• nevsky, were partly a legacy of the cold directly or indirectly caused by excess alco• hausted and the population of working war. By the middle of the 20th century the hol consumption and that over 400,000 age will decline by about 1m a year, in• developed world had learnt to control in• people a year die needlessly from drink•re• creasing the social burden on those that re• fections that killed large numbers of peo• lated causes, ranging from heart disease to main. Over the next seven years Russia’s ple. The next targets were illnesses caused accidents, suicides and murders. labour force will shrink by 8m, and by 2025 by lifestyle, such as heart attacks, pollution The average Russian gets through 15.2 li• it may be 18m•19m down on the present †g• and respiratory diseases. But whereas the tres of pure alcohol a year, twice as much ure of 90m. West invested heavily in health•care sys• as is thought to be compatible with good What makes a shrinking population tems and better lifestyles, Russia was put• health. The problem lies not just with how dangerous for a country that has always ting its †nancial and human capital into much but also with what is drunk: moon• de†ned itself by its external borders is the the arms race and industrialisation. shine and Œdual•purpose liquids, such as loss of energy it entails, Mr Vishnevsky ar• If life expectancy in Russia had im• perfume and windscreen wash, make up a gues. The Soviet Union did not just try to proved at the same pace as in the West, the signi†cant proportion of alcohol con• exploit the resources of its vast and inhos• country would have had an extra 14.2m sumption, according to Russia’s chief phys• pitable land, it tried to populate it. Now people between 1966 and 2000, adding ician, Gennady Onishchenko. Tens of large swathes of land in Siberia and the far 10% to the population. The Soviet Union’s thousands a year die of alcohol poisoning, east are emptying out as people move to spending on health care was less than a against a few hundred in America. In large central Russia. The population density in quarter of the American †gure. The Com• cities the fear of losing a job, and growing the country’s far east is 1.1 people per munist Party elite was well looked after, car ownership, is keeping people soberer. square kilometre. On the other side of the but ordinary people were less fortunate. The most obvious reason why Russians border with China it is nearly 140 times Crucially, the paternalistic Soviet sys• drink so much is the low price and easy that †gure. tem, which survives in today’s Russia, was availability of alcohol. Consumption in• The decline in Russia’s population is of• geared towards †ghting epidemics and in• creased dramatically in the 1960s when the ten linked to the collapse of the Soviet Un• fections rather than to empowering people state hugely boosted production. People ion. In fact, the pattern was set back in the to look after their own health. Even now started drinking not just on special occa• mid•1960s when the number of births fell Russian doctors treat patients and their rel• sions but during the week and at work too. below replacement level and life expectan• atives like imbeciles. Oˆcially the state Vodka is one of a very few Russian pro• cy started to shrink. In 1964, after several guarantees free care for all, but half the pa• ducts that seem relatively immune to in‡a• years of post•Stalin thaw, life expectancy tients o er gifts and money to doctors and tion. Between 1990 and 2005, for example, 1 10 A special report on Russia The Economist November 29th 2008

2 the food•price index increased almost four In the past couple of years the rules times faster than the alcohol•price index. A have become more accommodating and cheap bottle of vodka in Russia costs the migrant workers can now apply for their same as two cans of beer or two litres of own work permits and sign contracts with milk. The easiest way to curb consumption their employers. But for tax reasons only a would be to make hard spirits much more quarter of immigrants do so. The new law expensive and less accessible, as many has increased the number of legal mi• Nordic countries have done. But as with grants to more than 2m, but the real †gure many other things in Russia, corruption is thought to be †ve times that. gets in the way: two•thirds of hard liquor is Many migrants are scared to venture produced illegally and sold untaxed. outside on their own for fear of running Occasionally the government raises the into police or skinheads. Employers much alarm about alcohol poisoning, but it does prefer illegal immigrants to local workers little to curb drinking. Instead it has de• because they are cheaper and will put up clared war on Georgian wine and mineral with worse conditions. But a xenophobic water, which it claims is not †t for con• public habitually vents its anger on the im• sumption. But life expectancy in Georgia A cheap way to oblivion migrants, even though they are estimated remains 12 years higher than in Russia. to generate 8% of Russia’s GDP. Unlike drinking, AIDS is a relatively 24,000 people died of the disease, almost Support for extremist organisations new problem for Russia. The †rst case of 40 times as many as in America, not least such as the Movement Against Illegal Im• HIV was recorded in 1987, but it took a long because most TB hospitals are crumbling migration has risen sharply in the past few time for the country to take notice. By 1997 and some lack sewerage or running water. years. More than half the population sup• the number of cases had grown to 7,000. The only solution to Russia’s demo• ports the slogan ŒRussia for the Russians Now the oˆcial †gure is over 430,000, the graphic problems appears to be immigra• and almost 40% feel Œirritation, discomfort largest in Europe. The real number could tion, as in the village of Semlevo, but the or fear towards migrants from Central be double that, according to the World Russian public is hostile to it. Asia and Azerbaijan. Hate crimes are on Health Organisation. Most victims are un• the rise. SOVA, a body that monitors rac• der the age of 30. Some two•thirds are Wanted but not welcomed ism, last year counted 667 racists attacks, drug•takers, but the epidemic is now Most low•skilled migrant workers in Rus• including 86 racially motivated murders. spreading to the general public. sia come from Central Asia. In the east of At a recent pep talk with the editors of The government seems to have woken the country they are mainly Chinese. The Russia’s leading media, Mr Putin urged up to the danger and has increased spend• precise †gures are impossible to pin down them to guard against xenophobia. Rus• ing. But Vadim Pokrovsky, head of the fed• because the vast majority of immigrants sia’s new day of unity is traditionally eral AIDS centre, says Russia still lacks ade• over the past decade have been illegal. Un• marked by ultra•nationalist marches, and quate prevention measures. til recently they were treated much like the youth wing of Mr Putin’s own United About 28,000 people have already died serfs. They could not apply for work per• Russia party campaigns against immi• of AIDS•related illnesses, but the real num• mits but had to rely on their employers, grants. Dmitry Rogozin, a nationalist politi• ber could be masked by a co•infection of who would often impound their passports cian who built his campaign for parlia• HIV and tuberculosis which kills people and refuse to pay them for their work. ment in 2003 on anti•immigrant rhetoric, is after two or three months. The incidence Thousands of corrupt police oˆcers grew now Russia’s ambassador to NATO. On his of TB is the highest in Europe. Last year fat on the proceeds. oˆce wall hangs a portrait of Stalin. 7 The wild south

Russia’s treatment of its republics in the Caucasus has turned them into tinderboxes

DESIRE that the terror of my name cidal. In the late Soviet period his statue in demanded complete independence from ŒIshould guard our frontiers more po• Chechnya was regularly blown up until it Russia. Boris Yeltsin waged brutal war with tently than chains or fortresses, that my was eventually thrown into the river. it in 1994•96, with disastrous results. Vladi• word should be for the natives a law more On October 4th a new, giant statue of mir Putin, trying to bring Chechnya to heel inevitable than death, wrote Alexei Yer• Yermolov on a red granite pedestal was un• once and for all, resumed hostilities in an molov, Russia’s legendary general who veiled in the ethnically Russian region of even more brutal form in 1999, with waged total war during his conquest of the Stavropol that faces the north Caucasus, knock•on e ects in the entire region. Nine north Caucasus in the early 19th century. A marking an unseen line of separation be• years later the Caucasus still feels like a tin• hero of the Napoleonic wars revered by tween Russia and the †ve Muslim repub• derbox. The Georgian war and Russia’s Russian romantics, Yermolov is still uni• lics on its southern border. unilateral recognition of South Ossetia versally hated by Œthe natives who think When the Soviet Union collapsed, and Abkhazia have added even more com• of him as brutal, contemptuous and geno• Chechnya, the most rebellious of the †ve, bustible material. 1 The Economist November 29th 2008 A special report on Russia 11

2 But the main cause of instability is Rus• Ingushetia, a Muslim republic with a appoint a tough military commando in• sia’s colonial methods in the Caucasus, population of just 500,000, has turned stead. As the Ingush celebrated Mr Zyazi• which have altered little since Yermolov’s into the region’s new ‡ashpoint. Reports kov’s departure, his oˆcials were clearing time. The di erence is that he was con• of killings, explosions and kidnappings anything of value from the administrative quering new territory, whereas Russia is have been coming in daily. In the past year buildings. dealing with people who are, at least on the number of attacks on police by Islamist At a recent protest rally demonstrators paper, its own citizens. militants, both Chechen and Ingush, has threatened to call a referendum on inde• almost doubled. In return, the Russian se• pendence for Ingushetia unless the gov• A peace of sorts curity and military services have terror• ernment in Moscow treated them as Rus• Chechnya is now relatively quiet under ised the local population, using much the sian citizens. The cause of the rally (and the thumb of a former rebel, Ramzan Ka• same methods as the militants. probably of Mr Zyazikov’s removal) was dyrov, who was installed as president by the brazen murder of Magomed Yevloyev, Mr Putin last year. Grozny, its capital, Sliding into anarchy the editor of an opposition website that which was razed to the ground by the Rus• On a recent visit, cars with tinted windows publicised human•rights abuses. He had sians, has been rebuilt. On October 5th Mr and no licence plates raced around Nazran, irritated Mr Zyazikov by running an ŒI did Kadyrov reopened the city’s main thor• Ingushetia’s grim capital. Traˆc policemen not vote campaign, collecting 90,000 sig• oughfare, now lined with trees. It used to left their posts as soon as the sun set, in fear natures to counter the oˆcial claim that be called Victory Prospect, but Mr Kadyrov for their lives. ŒWe don’t know who is 98% of Ingushetia’s 164,000 voters cast has renamed it Putin Avenue. †ghting with whom, but every day moth• their ballot for the Kremlin’s party in last In recent local elections Mr Kadyrov, ers cry over their children, said Zarema, year’s parliamentary election. who is †ercely loyal to Mr Putin, promised who was selling Chinese clothes in a mar• On August 31st Mr Yevloyev arrived in that the turnout of voters for his hero’s Un• ket. ŒIf I am a Russian citizen, why are they Nazran on the same ‡ight as Mr Zyazikov. ited Russia party would be Œ100% or even not protecting me? The word most often When they landed, Mr Zyazikov was more. But it is not clear that his loyalty ex• heard in Nazran is bespredel, or anarchy. whisked o in a limousine and Mr Yev• tends to Russia as a whole. As he himself Almost everyone curses Murat Zyazi• loyev was arrested and driven away in an has said: ŒI am not anyone’s president, I am kov, an ine ectual former KGB general in• armoured car. Minutes later he was dead, not a man of the FSB or GRU [Russian secu• stalled by Vladimir Putin as the republic’s Œaccidentally shot in the temple by one of rity services]. I am Putin’s manðPutin is president in 2002. Under his watch 600 the guards in the car. His body was God’s gift, he gave us freedom. people died and 150 disappeared without a dumped in front of a hospital. When Mr And Chechnya is indeed much freer of trace, says Bamatgiri Mankiev, a former Yunus•Bek Yevkurov took over from Mr Russian control than it was eight years ago. member of parliament and now one of the Zyazikov, he immediately o ered his con• Mr Kadyrov has his own armed forces, opposition leaders. Yet Mr Zyazikov could dolences to Mr Yevloyev’s family. makes women wear headscarves, levies not be voted out because in 2004 Mr Putin Over the past 60 years Ingushetia has his own tax on businesses and sets his abolished regional elections across Russia. seen little kindness from Russia. In 1944 own rules. The day after the unveiling of Only when the situation came to resemble Stalin deported the entire Ingush and Che• the new•look Putin Avenue the occupants a civil war did the Russian government re• chen populations in cattle trains to Kaz• of the ground•‡oor oˆces, cafés and shops move Mr Zyazikov on October 30th and akhstan. When the survivors returned in found their premises sealed o . Before 1957 they found their houses occupied by they could start trading again they had to the mainly Christian North Ossetians. In pay a Œfee of 200,000•500,000 roubles to 1991Boris Yeltsin signed a law restoring the some agency. territorial rights of the Ingush. But the Recently Mr Kadyrov asked for Grozny mechanism for this Œterritorial rehabilita• airport, which is federal property, to be tion was never established and soon a bit• made over to Chechnya and given interna• ter con‡ict broke out between the Ingush tional status. It would also be nice for and the North Ossetians. Chechnya to have its own customs service, Russia took the Ossetians’ side, allow• he said. As for the Russian troops still sta• ing them to push 60,000 Ingush out of the tioned in his republic, he thinks their main Prigorodny district. Some 18,000 refugees job should be to guard Russia’s interna• are still unable to return home. The oˆcial tional borders, not to meddle in Chech• explanation is that Œtheir neighbours are nya’s a airs. not prepared to live next to them. Yulia Latynina, a Russian journalist and Russia’s war in Georgia and its backing writer, says that Œthe war between Russia of the South Ossetians in‡amed feelings and Chechnya was won by Mr Kadyrov. of injustice and anger in Ingushetia. Many But although military resistance in Chech• Ingush identify with Georgia more than nya itself has subsided, violence has with Russia. And Russia’s recognition of spread to neighbouring republics, notably South Ossetia and Abkhazia has created Ingushetia and Dagestan. It is transmitted new precedents for the North Caucasus. by state•sponsored repression, corruption Ruslan Aushev, Ingushetia’s †rst post• and lawlessness that alienates and radical• Soviet president, feels strongly about the ises the population and drives young men issue: ŒRussia fought two wars in Chech• into the hands of Islamist militants. Kadyrov is Putin’s man nya, which cost a lot of lives, blood, sweat 1 12 A special report on Russia The Economist November 29th 2008

2 and money, defending the principle of its North Ossetia, where they were tortured in the Caucasus and we see attempts to own territorial integrity. Now it has recog• and made to confess. They were then destabilise the situation there. Maksharip nised two small republics and added two brought back to Ingushetia for trial and Aushev, an opposition leader in Ingushetia new hotspots to its existing problems. This sent to jail. However, jury trials in Ingushe• (no relation to the former president), spoke does not bode well for Russia. The biggest tia stopped relying on such Œconfessions for many when he said: ŒUntil then I could mistake the Kremlin made in the Cauca• and started to acquit suspects. Mr Akiev have bet that Putin did not know what was sus, he says, was to use force. says that from then on people started to going on here, that the money is stolen, The irony is that despite the many his• disappear or were shot during arrest even that unemployment is almost 80%, that toric injustices it su ered, Ingushetia has if they showed no resistance. Sometimes people get abducted. But it is now clear traditionally been loyal to Moscow. The the dead bodies were †tted up with weap• that we have to do something ourselves. problems in Ingushetia, says Ekaterina So• ons or grenades. Until last year Mr Aushev ran a success• kiryanskaya of Memorial, a human•rights What eventually sparked public prot• ful marble•trading business and had little group, are of Russia’s own making. Most of ests in Ingushetia was the killing of a six• interest in politics. But in September last them stem from indiscriminate violence in year•old boy. Early in the morning of No• year his son and his nephew were abduct• the second Chechen war which spilt over vember 9th 2007 three armoured person• ed by the security services. He launched into Ingushetia. nel carriers, several minivans and a his own search and forced the local prose• Until 2001 Mr Aushev, a charismatic military truck, all without number plates, cutors to investigate what turned out to be military commander who had served in drove into a small Ingush village as part of a secret prison in Chechnya where Ingush Afghanistan, managed to keep Ingushetia a Œspecial operation to capture an alleged residents were being taken for torture and relatively stable. He resisted attempts by execution. Mr Aushev later learnt that his the government in Moscow to drag the re• son and nephew were taken to the moun• public into the Chechen war and did not tains to be executed with snickers (explo• allow it to be used as a military base for the sives tied to their bodies) but at the last mi• Russian army. Keeping Ingushetia neutral nute they were let go. was no mean achievement, given its close Unable to convey their anger through ethnic ties with Chechnya. When Russian the ballot box and unwilling to take up forces carpet•bombed the Chechen capital, arms, Mr Aushev and several others have Mr Aushev ignored Russian orders to cut set up an alternative parliament elected by o all escape routes from Chechnya and family clans. They have agreed to co•oper• allowed 300,000 Chechen refugees into ate with Yunus•Bek Yevkurov, Mr Zyazi• Ingushetia. kov’s replacement, who had previously But in 2002 Mr Aushev was replaced by commanded Russian troops in Kosovo and the much more co•operative Mr Zyazikov. taken part in special operations in Chech• The †rst bout of violence in Ingushetia was nya. His †rst steps were encouraging, but to directed at Chechen refugees. Alleged re• stop the violence he will have to †ght both bels and their sympathisers were kid• terrorist. After throwing a smoke bomb the militants and the federal forces who napped and often tortured, both by Mr Ka• through the window of a house, a group of have got out of control. Unless Russia stops dyrov’s forces and by their Russian armed men burst in and opened †re. But treating this region as enemy territory and backers. An Ingush oˆcial who tried to in• all they found was a family of †ve. One of begins to observe its own laws here, vio• vestigate the Russian security services’ be• the bullets had killed the youngest child. lence will escalate. haviour was himself kidnapped by the When the soldiers realised what they FSB. Mr Zyazikov did nothing. had done, they made it look as though they More devolution please had been attacked, throwing grenades at What happens in the Caucasus will de†ne Tit for tat the empty house, moving the child’s body the future of federalism and of territorial The violence soon engulfed the republic and putting a machine gun next to it. The integrity in the whole of Russia. The cen• and in 2004 Nazran was attacked by Ingush authorities took three days to react tral government’s policy failures in the armed rebels. ŒAt the time, says Ms Soki• to the murder. Mr Zyazikov promised per• Caucasus are particularly clear when com• ryanskaya, who spent †ve years in Ingush• sonally to supervise the investigation. So pared with the far more successful policy etia, Œeveryone was shocked by how many far no one has been arrested. being pursued in Tatarstan, the largest Ingush took part in the attack. Today no When people took to the streets, they Muslim republic, which was integrated one is surprised that Ingushetia has its were dispersed by the police in brutal fash• into the Russian empire in the 16th century own armed underground. According to a ion. A group of TV journalists who had ar• and has been at peace ever since. In the ear• survey carried out by Ms Sokiryanskaya rived from Moscow to cover the murder ly 1990s oil•rich Tatarstan became a sym• with a North Ossetian think•tank, the and the protest were kidnapped from their bol of decentralisation in Russia. It was main reason young people join the armed hotel, beaten and Œdeported from Ingush• here that Yeltsin famously said: ŒTake as rebels are personal revenge, the violence etia as if it were a separate state. much sovereignty as you can swallow. of the security services, unemployment Two months later people came out in Under Mr Putin this phrase came to sym• and propaganda by religious extremists. protest again, carrying pro•Putin banners bolise the weakness of Mr Yeltsin’s regime. Timur Akiev, who heads the Nazran of• and pleading with him to protect them In fact it was its strength. It is the centralisa• †ce of Memorial, says the tactics of the from state lawlessness. Mr Putin dismissed tion of power and the colonial methods of Russian security services changed after the protests with the words: ŒSomeone suppression of dissent that are the biggest 2005. Until then suspects were taken to had decided that Ingushetia is a weak link threat to that territorial integrity. 7 The Economist November 29th 2008 A special report on Russia 13

Handle with care

A cornered Russia could pose greater risks

HE magic word during Vladimir Pu• of successful young urban people showed bankrupt and weak, so businesses were Ttin’s eight years as president was Œsta• that many of them contemplate emigrat• left to deal with the crisis in their own way. bility. The social contract between the ing. For now, most people have even less Now the government is sitting on massive Kremlin and the people was based on ris• appetite for protests than they did in 1998, cash reserves which have already become ing incomes and private freedoms. Most when rouble devaluation and debt default the object of factional †ghting. The Krem• people happily signed up to this. Accord• caused millions to lose their savings. lin is by no means a homogenous entity. ing to Boris Dubin, a leading sociologist, Most Russians are deeply cynical about Indeed, the main reason for making Mr three•quarters of the Russian people feel their government: 60% say its members are Medvedev president under Mr Putin’s su• they have no in‡uence on political and Œonly concerned with their own wealth pervision was that it would preserve the economic life in their country, and the vast and careers and just 9% say they are hon• status quo. But now there may not be majority of them show little interest in pol• est. After the 1998 crisis businessmen who enough money to keep the large band of itics anyway. had lost everything picked themselves o Kremlin friends happy. It was this contract, backed by high oil the ‡oor and started again, and the same Russian experts, whatever their di er• prices and cheap credits, that kept Mr Pu• thing may happen this time, although state ences, all agree on one thing: these are un• tin’s ratings up and allowed him to hold on interference in business has increased. But stable, unpredictable and dangerous to power as prime minister after his pro• the popularity of Mr Putin and Mr Medve• times. As Mr Satarov of the INDEM think• tégé, Dmitry Medvedev, was installed as dev, who are seen as promoting stability, is tank observes, the biggest advantage of de• president in March this year. When a for• likely to su er. After the 1998 crisis Yeltsin’s mocracy is that it allows political systems eign journalist asked Mr Putin shortly be• approval ratings, already in the dumps, to adapt to changing economic and politi• fore the election why Mr Medvedev was plummeted from 15% to 1%. cal circumstances. That luxury is not avail• not campaigning, the answer was candid: Yet there are important di erences be• able to Russia. Instead, Mr Medvedev has ŒSalaries in Russia are growing by 16% a tween then and now. First, people have proposed extending the presidential term yearðpeople want this trend to continue more to lose. Over the past decade GDP per from four to six years. This was Mr Putin’s and they see Dmitry Medvedev as a guar• person has almost doubled, to almost idea, and he may be the one to bene†t from antor of this trend. $12,000 at purchasing•power parity. Sec• it. The change, which has been rushed The rise in earnings, albeit from a low ond, Russia’s rigid political system no lon• through parliament, would give him the base, has also masked discontent about ger allows much room for manoeuvre. prospect of 12 years as president when Mr the appalling state of the health system When the 1998 crisis struck, Mr Yeltsin de• Medvedev’s term expires in 2012. Some say and the corrupt and ine ective police. fused the situation by sacking the prime Mr Putin might return earlier. Most people say both have been getting minister and the entire government. Until worse in recent years, but they generally last year Mr Putin too had this option. Whatever next? deal with them by making private arrange• When things went wrong people blamed The most optimistic (but unfortunately ments with their local doctor and †nding the government, not the president. But least likely) scenario is that the crisis will friends among the police. Seventy years of now that Mr Putin himself is in the prime concentrate minds in the Kremlin and living in the Soviet Union have made them ministerial seat it may be harder for him to make it improve the country’s investment inventive and adaptable. †nd scapegoats. climate, build proper institutions and tame The lives of ordinary Russians have got Third, in 1998 the government was anti•American rhetoric. Mr Gavrilenkov of better, but not that much better. Half of Troika Dialog argues that Russia’s attitude them say they have enough money for to America is closely correlated with its food and clothes but struggle to buy dura• So-so 6 balance of payments. When that is strong, ble goods. Most simply hoped things How would you assess your family’s present Russia turns anti•American; when it is would not get worse. Now, with an eco• material condition?, % of respondents weak, Russia becomes a friendlier place. nomic downturn under way, things are There are some signs that the crisis has 100 getting worse, especially in big cities strengthened the hand of economic ex• Bad where the improvements had been most 80 perts in the Kremlin, such as the †nance noticeable. Private †rms are starting to lay minister, Alexei Kudrin. One of Mr Ku• o sta and cut pay. For now the govern• 60 drin’s deputies, Sergei Storchak, who was ment is trying to soothe people’s fears. 40 arrested a year ago in a power struggle be• Journalists have been told not to link the In-between tween di erent factions, has suddenly words Œcrisis and ŒRussia, so the state 20 been allowed out of prison. But as long as media consistently talk only about a world Good the oil price remains relatively high and crisis and Russia’s Œanti•crisis measures. 0 economic growth in the rest of the world is Yet if the economy deteriorates, that 1998 2000 02 04 06 08 weak, businesses will rely more on the Source: Levada Centre/RussiaVotes.org will no longer be enough. A recent survey government than on foreign investors. 1 14 A special report on Russia The Economist November 29th 2008

2 Still, a recent survey of various Russian South Ossetia and Abkhazia has made elites, including business and media peo• things worse. Pavel Felgenhauer, a Russian ple, lawyers and doctors, showed that military analyst who accurately predicted some 45% disagree with the current au• the Georgian war in August, says a new thoritarian system. Worryingly, the same and possibly bigger military con‡ict is only survey found that the group which feels too likely. most alienated and unhappy about the sta• Since Russia’s nationalism de†nes itself tus quo is the armed forces. in relation to America and the West, much The chances that Russia will indeed will depend on American diplomacy. Mr turn more liberal are minimal. The mood is Gaidar argues that o ering NATO mem• against it, and liberal parties cannot even bership to Ukraine or Georgia would be a muster the support of the signi†cant liber• gift to Russian nationalists. ŒThis is not a re• al minority that does exist. The Kremlin turn to the cold war. It is much more dan• has launched its own Œdemocratic clone gerous. With the Soviet Union everything parties to gather up these votes. According was more or less clear and predictable. to one modern Russian writer, Zakhar Pri• Both sides got used to each other and lepin, ideological opposition to the Krem• found a way of talking to each other. Both lin is impossible because the elite has no sides won in the second world war and ideology: it is capable of agreeing with were con†dent and not hysterical. Now both the extreme right and the extreme left Some things have got better we are dealing with a country that has suf• of the political spectrum. Its only ideology fered a collapse of empire. And a signi†• is to stay in power. recognition of Kosovo, says Mr Gaidar. cant part of the Russian elite feels the time A more likely‹and alarming‹scenario Yet America acted as a catalyst, not the has come to †ght back. is that the current regime will harden its primary cause. The process that led to the The biggest challenge for the West will stance and tighten the screws or be re• war in Georgia had its own domestic logic be to †nd a policy that neither appeases placed by an even more nationalistic and inseparable from Mr Putin’s authoritarian Russia nor ignores it. Given the country’s militant one. That is the direction in which system. That system, says Lilia Shevtsova nuclear potential, its nationalism and its Russia has been moving for the past eight of the Carnegie Moscow Centre, relies on high levels of corruption, the risks are high. years. In his book, ŒThe Death of the Em• images of Russia as a Œbesieged fortress. In the past Russia kept its nuclear technol• pire, Mr Gaidar, the former prime minis• ogy out of reach of America’s sworn ene• ter, points to the dangers of post•imperial More dangerous than the cold war mies, but a power shift inside the country nostalgia in Russia and draws parallels The Russian leadership can, and does, could change that. with the dying days of Germany’s Weimar blame the current †nancial crisis on Amer• Historically, Russia has often demon• Republic. The war in Georgia made those ica. It is doing its best to mobilise Russians strated an ability to take unexpected turns, parallels more obvious. It has moved against the West and the Westernisers and whether for good or ill. Few people fore• nationalist ideologues from the margins of is becoming more confrontational. That saw the collapse of the Soviet empire. Rus• political discourse to the centre. might conceivably lead to another war in sia today has a glass•like quality to it: rigid According to Andrei Zorin, a cultural the Caucasus or to an attack on Ukraine, and fragile at the same time, and liable to historian and professor of Russian at Ox• vulnerable because of the ethnically Rus• develop cracks in unforeseen places. The ford University, periods of restoration that sian Crimea. Georgia remains a particular• danger lies in its unpredictability. Yet that follow revolutions do not bring back the ly explosive place. Russia’s recognition of may also be a reason for hope. 7 old order but often introduce new threats and instability. ŒRussia may yet emerge as O er to readers Future special reports a nation state, but in the process it could Reprints of this special report are available at a Countries and regions also turn ugly and nationalistic, he says. price of £3.50 plus postage and packing. India December 13th 2008 In such a multi•ethnic country that would A minimum order of †ve copies is required. be a recipe for further disintegration. Business, †nance, economics and ideas Corporate o er The sea January 3rd 2009 Many Russian liberals argue that West• Customisation options on corporate orders of 100 The future of †nance Jan 31st 2009 ern policy towards Russia has helped to or more are available. Please contact us to discuss Growth in emerging markets February 14th 2009 make the country more nationalistic. your requirements. Waste February 28th 2009 America’s triumphalism after the cold war Entrepreneurship March 14th 2009 Send all orders to: caused the same sort of resentment in Rus• sia as the settlement of the †rst world war The Rights and Syndication Department did in Germany. America’s unilateral with• 26 Red Lion Square WC1R 4HQ drawal from the Anti•Ballistic Missile London Tel +44 (0)20 7576 8148 Treaty in 2001, its plan to put a missile•de• Fax +44 (0)20 7576 8492 fence system close to the Russian border e•mail: [email protected] and NATO’s expansion played into the hands of Russian hardliners, as did the For more information and to order special reports Previous special reports and a list of West’s recognition of Kosovo. ŒYou can and reprints online, please visit our website forthcoming ones can be found online only imagine how much champagne was www.economist.com/rights www.economist.com/specialreports drunk in Russia’s hardline circles after the