When Capitalism and Democracy Collide in Transition ’s “Weak” State as an Impediment to Democratic Consolidation

Michael McFaul Stanford University September 1997

I. Introduction Russia appears to have made tremendous progress in becoming a democracy in recent years. In December 1995, Russian citizens voted in parliamentary elections. Then, in two rounds of voting in June and July of 1996, voters elected a president, the first time ever that Russian voters directly selected their head of state. Despite calls for delay and postponement, these two elections were held on time and under law—law drafted and approved through a democratic procedure by elected officials. Large majorities participated in both of these elections; sixty five percent of all eligible voters in 1995, and nearly seventy percent in both rounds of the presidential vote. While electoral violations tainted both elections, especially the presidential vote, all participants—winners and losers— accepted the election results. 1 After ’s inauguration, the

1 In the parliamentary elections, strong evidence of falsification was reported in Chechnya and Dagestan, but these infractions were not sufficient to warrant objection to the results by any major political actor. In the presidential elections, Yeltsin grossly

1 2 When Capitalism and Democracy Collide in Transition communist-dominated parliament approved Yeltsin’s candidate for prime minister—Viktor Chernomyrdin—by an overwhelming majority. This too was a first, as Russia’s elected parliament had never approved the executive’s choice for prime minister under the procedures outlined in a popularly ratified constitution. Finally, throughout the fall and spring of 1996, over fifty gubernatorial elections were held throughout Russia. While evidence of falsification tainted the results in some races, all major participants recognized the vast majority as free and fair. This series of democratic achievements is remarkable, especially when compared to other periods of Russia’s history—be it the confrontational and ultimately bloody politics of the first years of the new Russian state, the seventy years of totalitarian rule under the communists, or the hundreds of years of autocratic government under the tsars. Russia appears to meet Joseph Schumpeter’s minimalist definition of a democratic system—”the institutional arrangement for arriving at political decisions in which individuals acquire the power to decide by means of a competitive struggle for the people’s vote.”2 Yet no one in Russia seems impressed. On the contrary, elites, commentators, and the public at large have grown noticeably more disenchanted with their government and more pessimistic about Russia’s future since the conclusion of the presidential election in July 1996. The magnitude of the wage arrears problem, estimated by Labor Minister Melikyan to be 42 trillion rubles in unpaid wages in 1996, coupled with the government’s inability to collect taxes, and the lack of economic growth, has fueled speculation of impending social upheaval. 3 Beginning with walkouts by power workers in Primorskii Krai in August of 1996, wildcat strikes increased throughout the country in the winter and spring of 1997, culminating in a national one-day strike on March 27, 1997 in which millions of workers participated. Discontent within the military also appears to be growing as the armed forces have not been immune from the government’s inability to pay wages. In October 1996, General Boris Gromov, the former commander of Soviet armed forces in Afghanistan warned that the armed forces were on the brink of collapse. 4 violated the campaign finance limits, the media openly propagated Yeltsin’s cause, and counting irregularities again appeared in Chechnya and some other national republics but most agreed that these transgressions did not influence the outcome of the vote. 2 Joseph Schumpeter, Capitalism, Socialism, and Democracy (New York, Harper, 1947), second edition, p. 269. 3 On the wage arrears problem and taxation, see Gennady Melikyan, “Causes of Social Instability,” Executive and Legislative Newsletter, No. 45 (1996). In the first 10 months of 1996, Russia’s GDP six percent and industrial output fell by five percent compared to last year. From January through October, the volume of investment totaled 247 trillion rubles, 18 less than the same period in 1995. The number of unemployed also increased by eleven over last year. These figures come from ITAR-TASS as reported in OMRI Daily Digest, No. 222, Part I, November 15, 1996. 4 Speech by Gromov in the , reprinted in Sovetskaya Rossiya, October 31, 1996. Michael McFaul 3

Two weeks later, then–Defense Minister Igor Rodionov warned that the “extreme” economic and political instability may produce “unpredictable, catastrophic consequences” for the armed forces and the country as a whole. 5 Analysts and politicians alike, including General Alexander Lebed, have speculated that the Russian military is close to mutiny on a national scale. 6 As a sign of the level of discontent within the military, General Lev Rokhlin, the Russian commander in the Chechen war, has quit his parliamentary faction, Our Home Is Russia, and formed his own political organization dedicated to defending the interests of men in uniform. 7 Others have predicted renewed tension between the center and the subjects of the federation. The ten richest regions of Russia have expressed their unwillingness to subsidize the budgets of the other seventy oblasts, krais, and republics through the inefficient centralized system of transfer currently in place. Instead, the more outspoken leaders of these donor regions such as ’s mayor, Yurii Luzhkov, have called for a “new deal” between the federation subjects that would exclude the Russian federal government altogether.8 The federal government has countered by suggesting decreases in the number of taxes collected for regional budgets while at the same time increasing the purview of presidential representatives in oblasts and republics. 9 Because governors are now elected officials, the prospect of renewed tension between the center and the regions over these issues seems to be growing. 10 More generally, public opinion polls suggest that the same electorate that supported Yeltsin overwhelmingly in July of 1996 does not believe that he and his government can deal with these crises. In November of 1996, only ten percent of the Russian population trusted Yeltsin, down from twenty nine percent in June. 11 Similarly, polls conducted by Foundation for Public Opinion show that people have become much less optimistic about the future at the end of 1996 than they were just months

5 Quoted in Segodnya, November 13, 1996. 6 Lebed, interview on the Newshour with Jim Lehrer, November 23, 1996. See also Andrei Koliev, “The Army’s Patience Is Running Out,” Prism: A Monthly on the Post-Soviet States, Vol. II, Part I, November 1996. 7 In the 1995 parliamentary election, Rokhlin was the third name on the Our Home party list after Prime Minister Viktor Chernomyrdin and actor Nikita Mikhalkov. 8 The model here is the accord signed by the leaders of Russia, , and Belarus in December 1991 that effectively dissolved the USSR. 9 Previously, presidential representatives did not even exist in the republics. Regarding jurisdictional conflicts between governors and presidential representatives, the battles in Primorskii Krai have been most tense. See Mikhail Streblev, “I bez boya sdat’ Primorie,” Itogi, June 24, 1997, p. 27. 10 See Anna Paretskaya, “Russian Central Authorities Seek New Formula for Relations with the Regions,” OMRI Analytical Brief, 460, November 13, 1996. 11 This poll was conducted by All-Russia Opinion Research Center and reported by Associated Press, November 13, 1996. 4 When Capitalism and Democracy Collide in Transition earlier.12 When asked in November 1996 about the most optimal economic system, only 35 percent cited the market (compared to 45 percent in 1992), while 42 percent believed that a planned economy was best (compared to 27 percent in 1992).13 When asked under what regime they lived best, 60 percent cited the Brezhnev period, 13 percent said the Gorbachev regime, and only 10 percent identified the market reform years. 14 Taking into account these crises and public attitudes, many have concluded that the milestones of democracy mentioned above do not mean anything. For these analysts, Russian politics have not changed with the introduction of elections, but instead resemble the politics of old. The historical analogue of choice varies; for some, politics in Russia today look like the late Brezhnev period, for others the Stalinist period, and for still others, tsarist and pre-tsarist days. 15 But the basic premise remains the same—continuity is pronounced and change has been trivial. How can we explain this divergence between apparent achievements in the process of of the Russian political system and the real perceptions of the lack of progress? The heart of the answer is located in the nature of the Russian state. The Russian rulers that occupy the Russian state have neither the will nor capacity to meet the demands of their citizens. This is because the state does not represent the interests of society as a whole, but rather is deeply penetrated by Russia’s emergent capitalist class. In a sense, the state has been privatized by this nouveau riche and thereby operates in the interests of its new owners rather than society writ large. These small, well-organized, and powerful business groups have crowded out other claimants to the state, particularly with regard to the national executive branch. Equally important, the Russian state enjoys little autonomy from these interest groups. Consequently, elections and the rituals of a democratic polity more generally have only an ephemeral influence on state outputs. Yet, even if state rulers did respond to the interests of pluralist groups rather than merely the interests of corporate groups, the state still does not have the capacity to meet these demands. Just like the Soviet economy, the Soviet state also collapsed in the fall of 1991. Since this

12 Aleksandr Oslon, Konsensusy v obshchestvennom mnenii kak politicheskaya real’nost, No. 120, (Moscow: Fond “Obshchestvennoe mnenie,” February 27, 1997). 13 VTSIOM, Pyat’ Let Reform, (Moskva, 1996) p. 17. 14 Ibid. 15 See, for instance, Vladimir Brovkin “The Emperor’s New Clothes: Continuity of Soviet Political Culture in Contemporary Russia,” and Peter Stavrakis, “Russia After the Elections: Democracy or Parliamentary Byzantium?” in Problems of Post-, 43, 2, March–April 1996, pp. 13–28; Tim McDaniel, The Agony of the Russian Idea (Princeton: Princeton University Press, 1996), and Scott Bruckner and Lilia Shevstova, “Whither Post- Communist Russia: Toward Stability or Crisis?” Journal of Democracy, 8, 1, January 1997, pp. 12–26. Nancy Kollman’s Kinship and Politics: The Making of the Muscovite Political System: 1345–1547 also has received attention for its parallels to the present system. Michael McFaul 5 simultaneous collapse of state and economy, Russian reformers rightly have devoted energy and resources to transforming the economy from a command system to a market. A commensurate reform program, however, has not been initiated to create a market-friendly, democratic, or capacious state. State reform has lagged considerably behind market reform. This “bad” and “weak” state constitutes one of the greatest impediments to deepening both political and economic reform. 16 To develop this argument about the centrality of state weakness to Russia’s current impasse, this essay proceeds as follows. The next section defines the state and its attributes, focusing in particular on three properties: (1) internal state cohesion, (2) state-society relations, and (3) state capacity. The next two sections then discuss each of these characteristics in detail, first in the Soviet instance and then in the Russian context, demonstrating how the primacy of economic reform has allowed for the neglect of state reform. The final section concludes by offering suggestions as to how the current equilibrium might change.

II. What Is State Power? Defining Autonomy, Capacity, and State-Society Relations The state is the set of officials and government institutions that define and implement public policy. In post-communist Russia, these institutions have included the president’s office, the government (the prime minister, deputy prime ministers, ministers, etc.), the Supreme Soviet and Congress of Peoples’ Deputies and now the State Duma, the sub-national governments, and the administrative offices, ministries, and bureaucracies that act on behalf of these political bodies. This essay focuses on the national institutions of the Russia state, and only refers in passing to sub- national institutions and their relations to national institutions. Institutions, however, do not make policy, people do. 17 Consequently, the interests and actions of public officials, including elected leaders, appointed officials, and government bureaucrats, figure prominently in the analysis of state power. As conceptualized here, the set of individuals and institutions comprising the state intervenes between societal interests and state outputs. Different from liberal or marxist conceptions of the state, this essay starts with the assumption that the actors and institutions of the state can have a causally significant impact on the translation of societal

16 The state was neglected as a central variable in analyses of transitions to democracies in Southern Europe and Latin America. For a recent redress, see Juan Linz and Alfred Stepan, Problems of Democratic Transition and Consolidation: Southern Europe, South America, and Post-Communist Europe (Baltimore, Maryland: Johns Hopkins University, 1996). 17 This formulation of the state follows Eric Nordlinger, On the Autonomy of the Democratic State, (Cambridge, Mass.: Harvard University Press, 1981); and Margaret Levy, Of Rule and Revenue (Berkeley, Calif.: Berkeley University Press, 1988). 6 When Capitalism and Democracy Collide in Transition interests into public policy. 18 To what extent the state filters, shapes, and even creates societal inputs into state outputs varies. Three factors influence the intervening role of the state: (1) the relative internal cohesiveness of state, both in institutional and ideological terms, (2) the relative autonomy of the state from society, or the balance of power between state and society, and (3) the relative capacity of the state to deliver outputs and executive policy. 19 All of these components vary in time and across cases, suggesting that their “values” must be discovered empirically. The Soviet/Russian state has undergone a tremendous transformation over the last three decades regarding each of these factors, migrating from a very capacious and autonomous state representing the interests of leaders of the Communist Party of the to a state with little autonomy or capacity that represents the interests of big business. In several respects, the marxist conception of the state has greater explanatory power for understanding contemporary Russia than either liberal or statist formulations of state-society relations. 20 Rather than representing the sum of interests in society or acting as an autonomous agent, the Russian state functions to defend the interests of Russia’s small capitalist class. Soviet and Russian politicians selected a kind and sequence of reforms regarding both political and economic policies that have produced this particular kind of relationship between state and

18 Neither liberal nor Marxist theories of socioeconomic transformation treat the state as an independent variable influencing political and economic outcomes. According to Marxist theories, the state represents the interests of the dominant class. Structural marxists or neo-marxists do treat the state as autonomous, but only so that it can preserve the existing mode of production and not just the specific interests of individuals or collectivities from the dominant class. (See Nicos Poulantzas, Political Power and Social Classes [London: New Left Review, 1975]). For liberals, the state is the arena in which competing social groups vie for resource allocations. For reviews, see Gabriel Almond, “The Return to the State,” American Political Science Review, 82, 3, September 1988, pp. 853–884; and Theda Skocpol, “Bringing the State In: Strategies of Analysis in Current Research,” in Peter Evans, Dietrich Rueschmeyer, and Theda Skocpol, eds., Bringing the State Back In, (Cambridge, Mass.: Cambridge University Press, 1985), pp. 3–43. 19 On autonomy and capacity, see Nordlinger, On the Autonomy of the Democratic State; and Peter Katzenstein, “Introduction: Domestic and International Strategies of Foreign Economic Policy,” in Katzenstein, ed., Between Power and Plenty: Foreign Economic Policies of Advanced Industrial States (Madison, Wisc.: University of Wisconsin Press, 1978). On systems of interest mediation, see Philippe Schmitter, “The Consolidation of Democracy and Representation of Social Groups,” American Behavioral Scientist, 35, 4&5, March/June 1992, pp. 422–449. Other authors have called this second component more simply a government’s “agenda-setting” power. Strong governments have the ability to set agendas without amendment, while weak government’s do not. See, Gerald Roland, “Political Economy Issues of Ownership Transformation in Eastern Europe,” in Aoki and Kim, eds., Corporate Governance in Transitional Economies: Insider Control and the Role of Banks (Washington: EDI-World Bank, 1995), pp. 31–57. 20 For a review of all three formulations, see chapter one of Stephen Krasner, Defending the National Interest, (Princeton: Princeton University Press, 1978). Michael McFaul 7 society. To explain the interaction between these policy choices requires an understanding of the first efforts to alter state-society relations during the Gorbachev period. The following section traces this evolution.

III. Collapse of the Soviet State The Soviet regime consolidated by Stalin was one of the most cohesive, autonomous, and capacious states of the twentieth century—the paradigmatic definition of a totalitarian state. 21 By eliminating potential rivals and subordinating the Communist Party to his own personal control, Stalin established institutional clarity and ideological unity within the state in a way that only dictators can do. As Ken Jowitt proclaimed, “Stalin was the Soviet polity.”22 As the head of state, Stalin defined the creation of socialism (in one country) as the state’s primary objective and then used coercion, violence, and mass murder to accomplish this task. State policies were defined and implemented without reference to societal preferences. Instead, only the interests of Stalin and later, leaders of the Communist Party of the Soviet Union, were represented within the state to such an extent that the distinction between Party and state became meaningless. The Soviet state dominated society like no other regime in modern history. This omnipresent Party-state in turn blurred the lines between state and society as the Soviet regime penetrated virtually every sector and aspect of “private” life. 23 Effective institutions of interest intermediation between state and society did not exist. Rather, organizations connecting state and society functioned as transmission belts of Party/state policies. By 1991, this state no longer existed. While still totalitarian in design, the Soviet state had atrophied considerably throughout the Brezhnev years, so much so that some observers began to write about the growing importance of societal pressures in determining state policies. 24

21 On the definition of authoritarian and totalitarian states, see Carl Friedrich and Zbigniew Brzezinski, Totalitarian Dictatorship and Autocracy (Cambridge, Mass.: Harvard University Press, 1961); and Juan Linz, “Totalitarian and Authoritarian Regimes,” in Fred. Greenstein and Nelson Polsby, eds., Handbook of Political Science, 3 (Reading, Mass.: Addison-Wesley, 1975). 22 Ken Jowitt, New World Disorder: The Leninist Extinction (Berkeley, Calif.: University of California Press, 1992), p. 238. 23 On the blurring of civil and state elements, see Jowitt, The New World Disorder, pp. 121– 159. 24 H. Gordon Skilling, “Interest Groups and Communist Politics,” World Politics, 3, 1966, pp. 435–451. Following in Skilling’s tradition, some scholars even began to argue that the Soviet system was basically a pluralistic polity, differing only in degree from Western polities. See in particular, Jerry Hough, The Soviet Union and Social Science Theory (Cambridge, Mass.: Harvard University Press, 1977). For a recent reformulation, see Vladimir Lepekhin, “Gruppa Interesov v Sovremennoi Rossii,” in Sergei Markov and Michael McFaul, Politika i Obshchesto Perekhodnogo Perioda, (Moscow: Moscow Carnegie Center, 1997). 8 When Capitalism and Democracy Collide in Transition

Modernization, including urbanization, rising levels of education, and a more diversified economy, transformed Soviet society into a more formidable force that grew difficult to ignore. 25 At the same time, Khrushchev and Brezhnev increasingly were reluctant to employ terror against society as a means of preserving state autonomy and implementing state policy. 26 By the end of the Brezhnev era, the Soviet state was secure and stable, but less effective in achieving government objectives than under earlier leaders. 27 While perhaps more responsive to society and less effective at implementing state policy, the Soviet state in comparative perspective was still one of the most autonomous and capacious states in the world in 1985. , however, radically undermined both state autonomy and capacity, and eventually destroyed the Soviet state forever. Paradoxically, Gorbachev unleashed forces that ultimately precipitated state collapse in the pursuit of economic reform, specifically partial . After tinkering with marginal economic reforms that produced even more marginal results, Gorbachev became convinced that the Soviet Union must undergo truly radical economic reform, including decentralization, partial price liberalization, and even limited privatization. To implement this plan, however, Gorbachev decided that he had to reform the political system as well. 28 Beginning in 1988, he initiated a set of policy reforms that altered fundamentally the internal organization of the state, the relationship between state and society, and the overall capacity of the state to implement state policy.

A. Internal Cohesion Regarding the internal organization of Soviet state institutions, Gorbachev sought to extract the Party from the government and administration.29 In

25 Francis Fukuyama, “The Modernizing Imperative,” The National Interest, 31, 1993, pp 10–18; Moshe Lewin, The Gorbachev Phenomenon (Berkeley, University of California Press, 1988). 26 Though less than Stalin, their use of terror and oppression nonetheless was severe. See Vladimir Ponomarev, Obshchestvennie Volneniya v SSSR (Moskva: “Levii Povorot”, 1990); , To Build a Castle: My Life as a Dissenter (New York: Viking Press, 1978); Peter Reddaway, ed., Uncensored Russia: and Dissent in the Soviet Union (New York: American Heritage, 1972); and Ludmilla Alekseyeva, Soviet Dissent: Contemporary Movements for National, Religious, and Human Rights (Middletown, Connecticut: Wesleyan University Press, 1985). 27 Peter Hauslohner, “Politics Before Gorbachev: De-Stalinization and the Roots of Reform,”in Seweryn Bialar, ed., Politics, Society, and Nationality: Inside Gorbachev’s Russia (Boulder, Colo.: Westview Press, 1989), pp. 41–90. 28 Mikhail Gorbachev, Memoirs (New York: Doubleday, 1996), p. 236. 29 For comprehensive overviews of Gorbachev’s reforms, see Stephen White, Graeme Gill, and Darrel Slider, The Politics of Transition: Shaping a Post-Soviet Future (Cambridge: Cambridge University Press, 1993); Archie Brown, The Gorbachev Factor (Oxford: Oxford University Press, 1996); and Mikhail Gorbachev, Memoirs (New York: Doubleday, 1996). Michael McFaul 9 place of the Politburo, Central Committee, and Party Congress, Gorbachev tried to revive the soviets as the main legislative and governing bodies in the USSR. 30 As he stated, “I defined the essence of political reform as the implementation of the historic slogan, ‘Power to the Soviets.”31 Gorbachev did not want to undermine or eliminate the CPSU entirely. Rather, he aimed to remake it into a genuine political party. 32 To achieve this separation of Party and state, Gorbachev called for direct elections to the USSR Congress of People’s Deputies in the spring of 1989, followed by elections to republican, oblast, and city soviets in the spring of 1990. After the 1989 elections, Gorbachev pushed for the creation of a Soviet presidency to help fill the institutional vacuum within the state left by the weakening of the CPSU.33 In institutional terms, Gorbachev’s initiatives served to decrease internal state cohesion. The principle of democratic centralism that guided CPSU decision-making was superseded by a proliferation of state institutions with distinct, autonomous, and often competing claims to authority over policymaking. At the level of the national state, leaders in the Congress of People’s Deputies increasingly challenged the power of the president and the presidency. 34 More consequentially, subnational state leaders and institutions, buoyed by their electoral mandates in 1990, also began to challenge the sovereign power of national (USSR) institutions over public policymaking. By the summer of 1990, several republican state leaders including Russia declared sovereign authority over their own territories, creating a situation of “multiple sovereignty” within the Soviet state. 35 In Russia, however, these claims of sovereignty required a stretch of the imagination to comprehend as the historical metaphor of decolonization was not so obvious for Russians living in the Russian Federation. From whom were they gaining their independence? Those philosophically or religiously inclined may have been able to discern the abstract distinction between Soviet and Russian, but for most, the struggle for power that culminated in 1991 between the Russian Federation and the Soviet Union was not between colonized and colonizer, but rather between Russian versus Russian. Moreover, different from other republics, the Russian republic had never really had its own state.

30 Materialy XIX Vsesoyuznoi konferentsii KPSS: 28 yunya–1 yulya 1988, (Moskva: Polizdat, 1988); 31 Mikhail Gorbachev, Memoirs (New York: Doubleday, 1996) p. 293. 32 “Deputatskie mandaty partii,” Sovetskaya Rossiya, March 16, 1989, p. 1. 33 Izvestiia, March 15, 1990, p. 7. 34 See for instance the interview with Viktor Alksnis, in Michael McFaul and Sergei Markov, The Troubled Birth of Russian Democracy (Stanford, Calif.: Hoover Institution Press, 1993). 35 See Boris Yeltsin, speech to the Russian Federation Congress of People’s Deputies, Moscow, May 22, 1990, reprinted in Alexander Dallin and Gail Lapidus, eds., The Soviet System: From Crisis to Collapse (Boulder, Colo.: Westview Press, 1995) p. 410. 10 When Capitalism and Democracy Collide in Transition

Through the Communist Party structure, heads of autonomous republics, oblasts, and krais reported directly to the Politburo and Central Committee and not to an intermediary Russian administrative organ. After the 1990 elections, Yeltsin and his advisors literally invented the notion of a Russian state. In ideological terms, Gorbachev’s first years in power actually fostered internal unity within the state as Gorbachev quickly expunged potential ideological detractors from leadership positions within the Party. 36 Over time, however, Gorbachev’s stimulated resistance from conservative Party and state elites and impatience among the more radical reformers within the Soviet state. In Gorbachev’s own Politburo, Yegor Ligachev emerged as the leader of the reactive wing of the Party/state. By 1990, Prime Minister Ryzhkov and his government also grew weary of Gorbachev’s “reckless” reforms. 37 Politburo members Aleksandr Yakovlev and Eduard Shevardnadze represented the liberal wing of the Politburo, who both became increasingly isolated at the top echelons of power. Ideological conflict within the Soviet state was most polarized between different levels of the state as republican leaders and especially Russia’s leadership outpaced their Soviet counterparts in pushing both political and economic change. 38 As already outlined above, these ideological clashes were reinforced by the new institutional cleavages within the Soviet state. Such division within the Party-state made decisive action by the state increasingly difficult. B. The State-Society Balance On first coming to power, Gorbachev aimed to transform the CPSU into a vanguard for radical reform. 39 Once he realized the Party could not play this role, he stimulated the “liberation” of the state from the Party. To breathe new life into the state and reconfigure it a counterweight to the conservative Party behemoth required political liberalization of the Soviet polity more broadly. 40 Liberals from within the Party/state would unite with forces in support of reform in society through the institutional setting of the newly defined state to challenge conservative interests within the ancien regime.

36 Archie Brown, The Gorbachev Factor, (Oxford: Oxford University Press, 1996) p. 109. See also Jerry Hough, “Gorbachev’s Endgame,” World Policy Journal, (Fall 1990) pp. 639–672; and Graeme Gill, The Collapse of the Single-Party System (Cambridge: Cambridge University Press, 1994), chapter two. 37 Author’s interview with Ryzhkov, June 1992. See also Nikolai Ryzhkov, Ya iz Partii po imeni “Rossiya,” (Moskva: RAU-Korporatsiya, 1995). 38 Gorbachev, Yeltsin: 1500 Dnei Politicheskogo Protivovostoyaniya (Moskva: “Terra,” 1992). 39 Mikhail Gorbachev, Memoirs (New York: Doubleday, 1996), p. 175; and Anatolii Chernayev, Shest Let s Gorbachym (Moskva: Progess, 1993), p. 90. 40 Gorbachev, Perestroika, p. 29. Michael McFaul 11

To stimulate new allies for perestroika, Gorbachev first initiated sweeping reform measures aimed at liberalizing political society. 41 or openness allowed for publication and discussion of previously taboo subjects while changes in the Soviet criminal code no longer punished political assembly and demonstration. As already mentioned, Gorbachev’s boldest liberalizing move was the initiation of free and fair elections, a change in the political rules of the game that altered fundamentally the relationship between state and society in the USSR. The 1989 elections produced an unprecedented whirl of new political mobilization in Soviet society. 42 Media criticism exploded, electoral clubs sprouted, and non-communist pro-perestroika organizations convened. While “reformers” eventually elected to the USSR Congress of People’s Deputies still represented a very small minority and non-Party members to the legislative body constituted an even smaller fraction, the very event of elections and the subsequent live broadcast of the Congress’ proceedings stimulated significant non-Party mobilization for the first time in several decades. 43 Independent, mobilization from below grew even stronger during and immediately after the 1990 elections, when a newly organized opposition movement, Democratic Russia, won hundreds of seats to the Russian Congress of People’s Deputies and controlled majorities in the Moscow and Leningrad city soviets. 44 Boris Yeltsin, the leader of the democratic opposition, then won election as Chairman of the Russian Congress of People’s Deputies in the spring of 1990, giving the opposition an institutional base of significant stature and resources. Initially, these societal forces from below reinforced Gorbachev’s reform program, and served as the General Secretary’s allies against the conservative mid-level bureaucracy of the Communist Party. Quickly however, the kind and pace of change demanded from below soon overtook Gorbachev’s own reform agenda as societal actors bent on truly revolutionary change began to organize a coherent and cohesive opposition to the traditional ruling leaders and institutions of the Soviet

41 Jerry Hough, Democratization and Revolution in the USSR: 1985–1991 (Washington, DC: Brookings Institution Press, 1997), chapter five. 42 Michael Urban, All Power to the Soviets: The Democratic Revolution in the USSR (Aldershot, Hampshire: Edward Elgar, 1990); and V.A. Kolosov, N.V. Petrov, and L.V. Smirnyagin, eds., Vesna 89: Geographiya, Parliamentskikh Vyborov (Moskva: Progess, 1990). 43 Steven Fish, Democracy from Scratch: Opposition and Regime in the New Russian Revolution (Princeton: Princeton University Press, 1995); Boris Kagarlitsky, Farewell to Perestroika (London: Verso, 1990); and Neformal’naya Rossiya (Moskva: Molodaya Gvardiya, 1990). 44 Timothy Colton, “The Politics of Democratization: The Moscow Elections of 1990,” Soviet Economy, 6, 4, October–December 1990), pp. 285–344; Yitzhak Brudny, “The Dynamics of “Democratic Russia,” 1990–1993,” Post-Soviet Affairs, 9, 2, April–June 1993, pp. 141–170; and McFaul and Markov, The Troubled Birth of Russian Democracy, chapter eight. 12 When Capitalism and Democracy Collide in Transition state. 45 The causal arrow between state and society was reversed, as societal leaders and organizations assumed center stage for the first time in Soviet history. Baltic social movements organized first to pressure the state and then later to overthrow it. Beginning in the fall of 1990, Boris Yeltsin and Democratic Russia followed the Baltic lead and mobilized to challenge directly the sovereign authority of the Soviet state on Russian territory. 46 This revolutionary challenge from society eventually undermined the power and autonomy of the Soviet state, as Gorbachev and his government were compelled to respond to societal demands, be they demands for increased wages for miners, calls for the creation of Russian presidency, demonstrations to rescind Article Six from the constitution guaranteeing the primacy of the Communist Party, or pressures to grant republics greater control over their territories. 47 In all of these situations, Soviet state leaders and institutions were reacting to societal demands rather than shaping societal preferences or actions. Eventually, societal pressures, especially demands for self determination from the republics, undermined the Soviet state entirely. The absolute failure of the August 1991 coup attempt starkly exposed how weak this state had become. During this drama, most pluralist institutions of interest intermediation did not stick. Initially, elections represented a novel way of articulating societal preferences within the state. As politics became increasingly polarized, elections were convoked to serve as instruments of revolutionary struggle rather than to institutionalize pluralist connections between state and society. 48 In the absence of established channels of interest intermediation between state and society, mobilized social movements influenced state leaders directly through mass street demonstrations, strikes, or (less frequently) direct elections, creating in essence a plebiscitarian democracy. In this context, the emergence of a charismatic, populist leader like Yeltsin should have been expected. Other forms of interest articulation and mediation were marginal at this stage.

45 Stephen Hanson, “Gorbachev: The Last True Leninist Believer?” in Daniel Chirot, The Crisis of Leninism and the Decline of the Left: The (Seattle: University of Washington Press, 1991). 46 John Dunlop, The Rise of Russia and the Fall of the (Princeton: Princeton University Press, 1993). 47 See Ron Suny, The Revenge of the Past: Nationalism, Revolution, and the Collapse of the Soviet Union, (Stanford, Calif.: Stanford University Press, 1993). 48 See Michael McFaul and Nikolai Petrov, “Old Wine Into New Bottles: The Changing Function of Elections in Russia, 1989–1996,” in Anders Aslund and Martha Olcott, eds., Russia after Communism (Washington, DC: Carnegie Endowment for International Peace, 1997). Michael McFaul 13

C. State Capacity Gorbachev’s reforms also undermined the state’s capacity to define and implement public policy. 49 Institutional ambiguity and ideological divides at the top of the Soviet state created opportunities for state agents at lower levels to pursue their own interests at the expense of the state’s integrity. 50 Once state bureaucrats understood that the state was near collapse, they quickly grabbed assets and defected, paralyzing the state even further.51 Likewise, sub-national governments made claims on assets and institutions of the Soviet state, thereby weakening the capacity of national leaders to implement policies. By 1991, even the most mundane executive orders issued from the Kremlin were not enforced. New institutions such as the Soviet Congress also lacked any executive capacity as lines of authority between the Congress, President and Party remained ambiguous. Finally, societal mobilization challenged the state’s ability to execute unpopular policies. While social forces had little ability to enact policy, they proved quite capable of resisting unpopular policies. Society’s stance against the coup attempt in August 1991 was a dramatic illustration of the state’s impotency. By the end of Gorbachev’s reign, the once mighty and autonomous Soviet state literally disappeared. Internal divides both between leaders and institutions within the state impeded effective policy definition. Political liberalization placed the power of agency in society’s control. For the first time in several decades, the Russian state looked to be liberal and pluralist, responding to societal pressures. However, the channels of intermediation between state and society were poorly defined, making mass collective action the most effective means of influencing state behavior, a situation which relegated other channels—such as parties or interest groups—to a secondary status. Finally, the Soviet state lost its capacity to implement any state policy, no matter in whose interest. The combination of these three factors eventually produced an implosion of the Soviet state altogether.

IV. Emergence of the Russian State The Soviet Union formally dissolved in December 1991, several months after the putsch attempt in August by those who aspired to preserve the Soviet state. During this transitionary period, Yeltsin assumed control of the remnants of the Soviet/Russian state. 52 As the recently elected

49 Don Van Atta, “The USSR as a “Weak State”: Agrarian Origins of Resistance to Perestroika,” World Politics, 42, October 1989. 50 Steven Solnick, Stealing the State: Control and Collapse in Soviet Institutions (Cambridge, Mass.: Harvard University Press, forthcoming). 51 Michael McFaul, “State Power, Institutional Change, and the Politics of Privatization in Russia,” World Politics, Vol. 47, No. 2, (January 1995), pp. 210–243. 52 Between August and December 1991, the distinctions between Soviet and Russian state institutions were blurred. When Yeltsin moved into the Kremlin in December, most 14 When Capitalism and Democracy Collide in Transition president of Russia, Yeltsin occupied what seemed like the most powerful state office. At the same time, Yeltsin’s dramatic stand against the putsch endowed his Russian government with more authority than any other group or institution in the Soviet Union. He used this sudden profusion of political power to undermine many key components of the Soviet state. He banned the CPSU, assumed control of several Soviet institutions and subordinated them to the authority of the Russian state, and then abolished political institutions that competed with existing Russian institutions, including first and foremost the Soviet Congress of People’s Deputies and the Soviet presidency. Finally, in December 1991, Yeltsin signed an agreement with his counterparts in Ukraine and Belarus that dismantled the Soviet state altogether. At this critical juncture, Yeltsin had considerable leeway to construct a new state order and reconfigure the relationship between state and society. 53 Not constrained by a negotiated transition, nor obliged to maintain Soviet political institutions, Yeltsin and his team were presented with a window of opportunity for state transformation.54 Like many other revolutionary leaders who inherit imploding states and emboldened societies, Yeltsin could have sought to fill the power vacuum by establishing an authoritarian regime, that is disbanding all political institutions not subordinate to the president’s office, suspending individual political liberties, and deploying coercive police units to enforce executive policies. 55 On the other hand, Yeltsin could have taken steps to consolidate a democratic polity by disbanding old Soviet government institutions, adopting a new constitution codifying the division of power between executive, legislative, and judiciary as well as

formal Soviet institutions in operation on Russian territory were either abolished or subsumed by the Russian state. 53 On the importance of such political transformations for successful revolutionary outcomes, see Theda Skocpol, “Social Revolutions and Mass Military Mobilization,” World Politics, 40, 2, January 1988, pp. 147–168. 54 See Liliya Shevstova, “Yeltsin’s Russia: Challenges and Constraints,” ms, 1997, p. 1. 55 Most analysts of Russia’s “transition” have dismissed comparisons to other revolutions because of the alleged lack of popular mobilization from below. Much of the theoretical literature on revolutions, however, addresses not only societal mobilization from below, but state collapse from above. Although state collapses are rare in transitions to democracy, they are a central event in most revolutions. See Theda Skocpol, States and Social Revolutions: A Comparative Analysis of France, Russia, and China (Cambridge: Cambridge University Press, 1979) and Samuel Huntington, Political Order and Changing Societies (New Haven, Connecticut: Yale University Press, 1968). On the application of theories of revolution to the Soviet collapse, see Michael McFaul, “Revolutionary Transformations in Comparative Perspective: Defining a Post-Communist Research Agenda,” in David Holloway and Norman Naimark, eds., Reexamining the Soviet Experience: Essays in Honor of Alexander Dallin (Boulder, Colo.: Westview Press, 1996), pp. 167–196; and Jack Goldstone, “Theories of Revolution and the Collapse of the USSR.,” ms, (May 1996). Michael McFaul 15 federal and regional bodies, and calling new elections to stimulate the development of a multi-party system. Yeltsin did neither. He and his advisors chose not to undertake fundamental political reforms and instead opted to rely on Yeltsin’s own personal charisma and authority to sustain the state in carrying out its program of economic transformation. He did not push to adopt a new constitution, although a first draft of a new fundamental law produced by the Supreme Soviet Constitutional Commission (chaired by Yeltsin) had been circulated as early as October 1990.56 Yeltsin and his new government also did little to institutionalize their popular support in society. Yeltsin did not establish a political party and did not call for elections to stimulate party development. Despite repeated pleas from Democratic Russia, Yeltsin refused to call new elections in the fall of 1991, and postponed regional elections slated for the winter. Yeltsin also did not dismantle many Soviet-era governmental institutions, including most importantly, the Supreme Soviet and the Congress of People’s Deputies. At the same time, Yeltsin did not insulate the state from societal pressures by erecting an authoritarian regime. 57 Eager to avoid Gorbachev’s alleged mistake of getting bogged down in politics to the neglect of economics, Yeltsin’s team instead concentrated their energies on transforming the economy. “It’s the economy stupid” became the mantra in both Washington and Moscow. Like their advisors from the West, the Russian team of economic technocrats saw state reform as a nuisance and distraction to the more important task of creating a market economy. The state, in fact, was the enemy of neoliberal reform. 58 According to this school of thought, states use their power to intervene, distort, and prey upon the market.59 If the state can be extricated from the economy, these theorists held, markets will work: competition will occur, prices will adjust, and resources will be rationally allocated. Thus, the neoliberals in power at the time favored a minimalist state, but did little

56 The author received a copy of this draft in October 1990 from Oleg Rumyantsev, the Secretary of the Constitutional Commission at the time. 57 Many at the time called for such a move, believing that economic and political reform had to be sequenced, with economic reform coming first. See especially the contributions by Adranik Migranyan and Igor Klyamkin in Sotsializm i Demokratiya: Diskussionaya Tribuna (Moskva: Institut Ekonomiki Mirovoi Sotsialisticheskoi Sistemi, 1990); and Vladimir Mau, Ekonomiki i Vlast’ (Moskva: Delo, 1995). This argument follows in the tradition of Moore who argues that countries much experience socioeconomic capitalist revolutions to create conditions for democracy. See Barrington Moore, Social Origins of Dictatorship and Democracy (Boston: Beacon Press, 1966). 58 For a brief, historical outline of the so-called “Washington consensus,” see Miles Kahler, “Orthodoxy and Its Alternatives: Explaining Approaches to Stabilization and Adjustment,” in Joan Nelson, ed., Economic Crisis and Policy Choice (Princeton: Princeton University Press, 1990), pp. 33–62. 59 Deepak Lal, The Poverty of “Development Economics” (London: Institute of Economic Affairs, 1984). 16 When Capitalism and Democracy Collide in Transition pro-actively to make such as a new state. The consequences of this neglect were dire.

A. Internal Cohesion Most immediately, this approach to market emergence and state reform proved costly to state cohesion. Decisions, or the lack thereof, taken by the Yeltsin government after the coup precipitated an even further weakening of an already feeble state. Institutionally, fractures within the Russian state unfolded both between different levels of government and between different branches of the central government, dramatically undermining the autonomy of the state as an independent actor.60 With no constitutional delineation of rights and responsibilities between central and local authorities, regional governments seized the moment of Soviet collapse to assume greater political and economic autonomy. In March 1992, two autonomous republics, Tatarstan and the Chechnya, declared their independence from the Russian Federation. Others soon followed. Negotiations over a Federal Treaty dragged on without resolution into the summer of 1993, prompting several Russian oblasts to make their own declarations of independence. The Russian central state, only just constituted months before, had little capacity to counter these assertions of sub-national authority. The stalemate between different branches of the central government precipitated an even greater state crisis. Soon after the beginning of economic reform in January 1992, the Russian Supreme Soviet and the Russian Congress of People’s Deputies began a campaign to reassert their authority again as the “highest state organs.”61 Even after Yeltsin’s referendum victory in April 1993, the Congress continued to impede executive initiatives, constrain ministerial power, and pass laws contradicting Yeltsin’s decrees. With no formal or even informal institutions to structure relations between the president and the Congress, the state virtually ceased to function. Yeltsin’s dramatic actions in September 1993 reflected the degree to which Russia’s government had stopped governing. As Yeltsin explained during his address announcing the dissolution of the Congress of Peoples Deputies, In the last few months Russia has been going through a deep crisis of statehood. All political institutions and politicians have been involved in a futile and senseless struggle aimed at destruction. A direct effect of this is

60 Dietrich Rueschemeyer and Peter Evans, “The State and Economic Transformation: Toward and Analysis of Conditions Underlying Effective Intervention” in Peter Evans, Dietrich Rueschemeyer, and Theda Skocpol. eds., Bringing the State Back In (New York: Cambridge University Press, 1985). 61 The Russian Congress amended the Russian Constitution (the amended Soviet Constitution of 1977) to include this phrase, thereby de jure subordinating the office of the president to the Congress. Michael McFaul 17 the loss of authority of state power as a whole...[I]n these conditions...it is impossible to carry out complex reforms... In his decree dissolving the Congress of People’s Deputies, Yeltsin also called for immediate elections for a new parliament and a referendum to adopt a new constitution. This new basic law was ratified by the people in the December 1993 vote. After years of ambiguity, Russia had a new set of formal rules for organizing politics accepted both by the majority of the population and by all strategic political actors. 62 Yeltsin’s decree also called for elections to a new parliament, thereby establishing elections as the mechanism for empowering leaders. Subsequently, as mentioned above, Russian citizens voted in parliamentary elections both in 1993 and again 1995, in presidential elections in the summer of 1996, and in gubernatorial elections throughout the fall of 1996.63 Throughout all of these elections, strategic actors committed to a set of rules about political competition, before they knew the results that these rules would produce. The institutionalization of elections as a form of selecting government officials also has crowded out alternative, non-democratic models for determining who governs. This new institutional coherency within the Russian state in turn served to generate greater ideological homogeneity among key state actors. The new constitution empowered the executive branch with central policymaking authority, especially with respect to economic policy. Although the Duma housed neo-nationalists, communists, and liberals, the president and his government remained relatively autonomous from the legislative branch in defining and administering public policies. Under the sustained stewardship of Prime Minister Viktor Chernomyrdin, sharp ideological divides within the Russian government faded. Government officials in Chernomyrdin’s cabinet lacked the will and vigor to push market reforms, but they were more united in this “muddle through” approach than the previous government under . As Anders Aslund has concluded regarding the Chernomyrdin government, “They are neither for nor against reform but just for the status quo.”64 The government acquired even greater ideological coherency after the government reshuffle in March 1997 discussed in detail below. Clarity regarding the powers and functions of the state’s institutions combined with greater ideological concord between those running these institutions has produced a more rational and predictable Russian state.

62 Officially, the Russian Communist Party continued to assert that the constitution was not legitimate as the method of drafting the document was not democratic and the results of the referendum were falsified. In practice, however, CPRF leaders have abided by the new constitution and have participated in all major elections since its adoption, according the new political system de facto legitimacy. 63 The best review of Russia’s electoral history is Stephen White, Richard Rose, and Ian McAllister, How Russia Votes (Chatham, New Jersey: Chatham House Publishers, 1996). 64 Anders Aslund, “Governing by Default,” The Moscow Times, November 10, 1996. 18 When Capitalism and Democracy Collide in Transition

The tremendous uncertainty regarding authority and command within the state that lingered from 1991 to 1993 no longer haunts Russian politics. However, this heightened coherency within the state has not translated into a more responsive state. On the contrary, a small, well-organized economic elite have captured most channels of influence that penetrate the Russian state. As discussed in the next section, this particular kind of state-society balance is unstable and dangerous to democracy.

B. The State-Society Balance Yeltsin’s series of decisions or nondecisions regarding the construction of a new Russian polity and a market economy after the collapse of the Soviet Union greatly influenced the reorganization of societal interest groups. His government’s actions to stimulate a market economy based on private property stimulated the emergence of a whole new set of economic interest groups while at the same time challenged economic groups from the old order. In parallel, the economic hardship that followed from reform initiatives and the absence of new elections combined to demobilize mass-based political groups. The power and organization of particular kind of “economic society” grew at the same time that the influence and privilege of “political society” and “civil society” waned.65

1. Economic Society Yeltsin’s economic reform plan launched in January 1992 stimulated the reorganization of post-Soviet economic interests groups. 66 Through this transition, the oil and gas sector has sustained its dominant role within the Russian economy. Of all economic entities from the Soviet era, Gazprom has weathered the transition to the “market” least unscathed. Protected by Prime Minister Chernomyrdin, the former chairman of the Gazprom, the company has managed to preserve its monopolistic control over the transport and distribution system of all of Russia’s natural gas, making it the most profitable conglomeration in the country. Gazprom’s management also acquired a controlling share of ownership in the company to insure against hostile, outside takeover bids. 67 Unlike Gazprom, the oil ministry did not maintain vertical integration and control of all oil production enterprises. Nonetheless, each of Russia’s

65 The distinctions drawn here between political, economic, and civil societies is borrowed from Larry Diamond, “Toward Democratic Consolidation,” Journal of Democracy, 5, 3, July 1994, pp. 4–17. 66 For an overview of all groups, see Vladimir Lepekhin, “Gruppa Interesov v Sovremennoi Rossii,” in Sergei Markov and Michael McFaul, Politika i Obshchesto Perekhodnogo Perioda (Moscow: Moscow Carnegie Center, 1997). 67 Western market analysts based in Russia are sure that the company is poorly run and undervalued, suggesting that it would be bought immediately if outsiders had the opportunity. Michael McFaul 19 dozen major oil companies rank in the top twenty of the most lucrative companies in the new Russian economy. 68 Likewise, banks that have formed around the oil and gas sector such as Gazprombank, Imperial, and National Reserve Bank rank as some of Russia’s largest financial institutions. Other natural monopolies such as electricity, communications, transportation (both air and rail), and precious metal extractors also have fared well in the new market order and have emerged as the core of blue-chip companies on Russia’s stock exchange. Natural resources were not the only endowments from the Soviet era that could be easily translated into financial assets in the post-Soviet order. Human capital, including first and foremost relations with key Communist Party apparachiks (during the Soviet period) and then state officials (during the post-Soviet period) also could be used to make money. Small trading companies run by Komsomol leaders, spawned by Gorbachev’s joint-venture and cooperative initiatives, were most aggressive in taking advantage of the new opportunities of a liberalizing economy. Obviously, these first forms of private enterprise had to be closely tied to the Soviet state as there did not exist a “private” sector. Allegedly, the first joint venture (SP) ever registered in the Soviet Union had Lubyanka, the headquarters of the KGB, as its official address. Inflation, ruble devaluation, and state budgetary transfers provided opportunities for newly-privatized economic actors to amass wealth. New banks such as Russian National Credit, Alpha Bank, Menatep, and Inkombank developed close ties to the Russian national government to take advantage of these new opportunities, while Most Bank under Vladimir Gusinsky emerged as the Moscow city government’s central depository. 69 Banks and ministries from the Soviet era such Agroprombank, Promstroibank, and Zhilsotsbank or Gosnab (Tokobank), and Ministry of Foreign Economic Relations (Alpha Bank) also splintered from the state to become quasi-private financial entities.

Russia’s Fifteen Largest Banks (November 1, 1996)70 Place Bank Capital (thousands of rubles) 1 Sberbank 20,776,923,692 2 Vneshtorgbank 5,708,155,620 3 National Reserve Bank 3,349,175,352

68 For an overview of their value, see Harvey Sawikin, “Oil Stock Heaven,” The Russian, July–August 1997, pp. 34–36. 69 For a time, this divide between the federal banks and Moscow banks constituted a real economic and political rivalry. The rivalry ended when Gusinsky agreed to back president Yeltsin in the 1996 election. Gusinsky’s chief economic motivation for siding with the president was complete control of channel four for his NTV television network. This was awarded to NTV soon after Yeltsin’s electoral victory. 70 From Profil’, 3, January 1997, p. 34. 20 When Capitalism and Democracy Collide in Transition

4 Oneksimbank 1,983,850,230 5 MFK 1,953,082,754 6 Inkombank 1,672,995,376 7 Tokobank 1,598,953,063 8 Imperial 1,581,109,862 9 Avtobank 1,353,504,005 10 Stolichnyi (SBS) 1,234,213,340 11 Bashkreditbank 1,069,525,134 12 Russian Credit 1,047,883,543 13 Menatep 919,835,167 14 MIB 792,545,923 15 Promstroibank 761,235,098

Partial liberalization of Russian trade also created new opportunities for importers. For instance, multi-millionaire Boris Berezovsky, head of Logovaz, made his fortune by importing cars. Privatization constituted the second major set of state policies that kindled the formation and reformation of economic interest groups in Russia. Housing privatization launched an explosive real estate market in Russia’s major cities. The new economic groups from this market were usually tied closely to local government officials. In Moscow, the richest real estate market of all, Mayor Yurii Luzhkov de facto has created his own financial-industrial group from profits generated in large part through property. 71 The first round of privatization of large enterprises (1992-1994) had an ambiguous effect on the reorganization of Russia’s economic society. Because insiders won majority control in roughly three-quarters of all enterprises privatized, the first round in general simply ratified the property rights claims of old economic interest groups, including first and foremost the enterprise directors. 72 The second “cash phase” of privatization, however, created new opportunities for Russia’s small but aggressive financiers. Using their close contacts with the Russian executive branch (which by 1994 controlled economic policy), several banks offered the Russian government loans in return for shares in some of Russia’s most valuable enterprises, a process in which Russia’s “new” banks began to acquire control of “old” profit centers. 73

71 For an overview, see Mark Whitehouse, “Luzhkov: The Biggest (Business) Man in Moscow,” St. Petersburg Times, September 15–21, 1997; and David Hoffman, “The Man Who Rebuilt Moscow,” Washington Post, February 24, 1997, p. 1. 72 See Michael McFaul, “State Power, Institutional Change, and the Politics of Privatization in Russia,” World Politics, 47, 2, 1995, pp. 210–243. 73 “Banks in High-Stakes Clash Over Oil Ownership,” The Current Digest, XLVII, 49, (1995), pp. 8–11. Michael McFaul 21

Oneksimbank, under the guise of its umbrella industrial organization, Interros group, acquired a controlling interest in Norilsk Nickel, the largest nickel exporter in the world. Capitalizing on its close ties to the state, Oneksimbank also emerged as the sweepstakes winner in the acquisitions of oil companies, seizing a majority share control in Sidanko—a vertically integrated oil company that controls five giant oil- producing Russian companies and is considered Russia’s fourth largest company—as well as a strategic partnership with Surgeneftgas, Russia’s third largest company. 74 Western experts estimate that Interros now controls approximately 28 percent of all crude oil production in Russia!75 Under more competitive conditions in 1997, Oneksimbank also bought a controlling share in Svyazinvest, Russia’s largest telecommunications company. Menatep also fared well in the loans for shares fire sale, when its industrial arm, Rosprom, acquired control of over eighty percent of Yukos oil company—considered the second largest company in Russia after Gazprom—which accounted for 11.2 percent of Russia’s total oil production in 1996.76 While the company’s projected earnings is calculated in the billions of dollars, the state received a paltry $700,000 from the deal. 77 Menatep’s second largest acquisition was Apatit, a large phosphorous mine which is the third largest producer of phosphorous in the world. Though focused initially on obtaining positions in industries such as television (ORT) and airlines (Aeroflot), Berezovsky’s Logovaz eventfully landed its own oil company, Sibneft. Likewise, Alfa Bank eventually acquired a significant interest in Tyumen Oil to complement its cement empire. Shut out of the scramble for oil companies, Russian Credit and Inkombank moved to acquire stakes in the murkier world of metallurgy companies, an economic sector previously controlled by Oleg Soskovets with alleged ties to mafia organizations. 78

74 See Vadim Arsen’iev and Yurii Katsman, “Banki b’utstya ob zaklad,” Kommersant’, 37, October 1, 1997, pp. 44–45; and the interview with Sidanko chief Zia Bazhayev in Business in Russia, No. 79, July 1997, pp. 23–25. 75 Sector Capital, “Who Rules the Russian Economy?” ms, December 9, 1996, p. 9. 76 Sector Capital, “Who Rules the Russian Economy?” ms, December 9, 1996, p. 11. According Deutsche Morgan Grenfell, Menatep controls 86 percent of Yukos stock. See their Russian Daily Report, February 20, 1997, p. 2. 77 Andrew Palmer, “Darkness rising,” Business Russia (The Economist Intelligence Unit) February 1997, p. 5. 78 After the ouster of Aleksandr Korzhakov and Oleg Soskovets from the government in June 1996, the Russian government has attempted to regain control of several metallurgy enterprises, claiming that they were improperly privatized. These renationalization efforts has threatened the ownership claims of foreign investors, including the British based Trans-World Metals. While still unresolved at the time of this writing, the case illustrates how fuzzy the line remains between state and private power. For an overview, 22 When Capitalism and Democracy Collide in Transition

Bank acquisition of resource extraction enterprises marked a new phase in the organization of Russia’s economic society as a very small handful of actors acquired phenomenal proportions of Russia’s productive assets. These new financial actors formed financial-industrial groups (FIG), a vertically integrated corporate structure in which a large financial institution with close ties to the state anchors an array of trading companies and industrial enterprises. The creation of these holding companies eliminates competitive pricing within the FIG. Once a critical size has been reached, these conglomerates have the capacity to grow exponentially as recently acquired properties are leveraged for acquisition of new properties. Until all state assets have been transferred to the “private” sector, the name of the game is expansion and acquisition, not profit maximization. Bank acquisitions in the oil and gas sector and oil and gas investments in these financial empires (such as Gazprom’s minority stake in NTV, Most Bank’s television network) have begun to obfuscate the earlier political rivalries between these two sectors. 79 In two short years, these FIGs have captured a significant proportion of Russia’s productive assets. By the end of 1996, the thirty-one FIG’s officially registered with the State Committee on Industry accounted for ten percent of Russia’s GDP. 80 Unofficially, experts estimated that Russia’s eight largest FIG’s control between 25–30 percent of Russia’s GNP. 81 Boris Berezovsky has estimated the a handful of individuals own fifty percent of the Russian economy. 82 Falling inflation and the ruble’s stabilization in 1995 also served to narrow the number of large financial groups as dozens of smaller banks as well as banks such as Tveruniversal, Unikom, and Russian National Credit could not survive in these new market conditions. Fast privatization is not always good privatization. In fact, this rapid acquisition of Russia’s most productive assets by a handful of financial- industrial groups has served to blur rather than clarify the line between public and private property. In 1996, the Yukos oil company swallowed up over 1.4 trillion rubles from the federal budget, making it the third largest recipient of state funds after Gazprom and Avtovaz. Is this a private company or parastatal? A similar relationship with the state is true for all of these major companies. At the same time, a reverse flow of capital also has begun regarding private investment in public projects. In

see Phil Reeves, “Trade feels jagged edge of Russia’s metals market,” The Independent, March 15, 1997. 79 In political terms, metallurgy enterprises still remain in opposition to these new FIGs as Oleg Soskovets—former first deputy prime minister and the “baron” of Russia’s metallurgy industry—still is considered an enemy of these financial interest groups. 80 Sector Capital, “Who Rules the Russian Economy?” ms, December 9, 1996, p. 6. 81 Ibid. 82 Chrystia Freeland, John Thornhill, and Andrew Gowers, “Moscow’s Group of Seven,” Financial Times, November 1, 1996, p. 15. Michael McFaul 23 place of loans to the government, Russia’s largest financial industrial groups have begun to provide direct investment into public projects in return for state properties. 83 This new form of cooperation between the public and private sector has been especially pronounced at the regional level as local governments have little hard cash to pay outstanding wages. 84 Local banks and entrepreneurs have expressed the fear that this “imperial” spread of Moscow banks eventually will stifle competition and increase the dependence of regional governments on central authorities. 85 a. Privatizing the State The emergence of this particular kind of capitalism in Russia has shaped interest articulation within the Russian state. First, capital is concentrated sectorally. Dynamic economic activity is located in trade and services, banking, and the export of raw materials, particularly oil and gas. Production of manufactured goods of any sort has decreased first dramatically in 1990 and 1991 and steadily since. Small enterprise development, after a boom in the late Gorbachev era, has steadily decreased as a percentage share of GNP. 86 Second, capital is concentrated geographically, with an estimated seventy percent of Russia’s capital assets located in Moscow. Third, capital is closely tied to the state. Through the financing of state transfers, privatization, and the loans-for- shares program, Russian banks have grown as dependents on the state for inside information, state assets, and money. The intimate relationship between the state and the private sector is even more apparent in sectors exporting raw materials as the state retains large equity stakes in all of these enterprises and a majority share in many, and yet does not tax these corporations. This relationship between the public and private spheres sustains rent-seeking, not profit-seeking behavior.87 The extent of state transfers to these economic entities coupled with continued high levels of state ownership in Russia’s productive enterprises raises serious

83 “ROSPORM pomozhet ukrepit’ promyshlennyi potentsial Vladimirskoi oblasti,” Segodnya, May 15, 1997. p. 2. 84 See, for instance, Inkombank’s relationship with Tomsk Oblast as discussed in Maksim Perevedentsev, “Torgov yeshche net, no pokopatel’ uzhe izvesten,” Nezavisimaya Gazeta, July 8, 1997, p. 4. 85 See for instance the reaction of St. Petersburg businessmen to the growing influence of Moscow banks in St’ Petersburg that followed after Yakovlev’s mayor electoral victory there, in Igor’ Arkhipov, “Novaya Metla Metet gorod po-novomu,” Delovye Lyudi, No. 70 (October 1996) pp. 76–79. For an overview, see Aleksei Zemtsov and Boris Solov’iev, “Doroga v regiony vymochshena blagimi namererniyama,” Delovye Lyudi, No. 70 (October 1996) pp. 68–69. 86 On the barriers to market entry in Russia, see Timothy Frye and Andrei Shleifer, “The Invisible Hand and the Grabbing Hand,” ms, September 1996. 87 Anders Aslund, “Reform vs. ‘Rent-Seeking’ in Russia’s Economic Transformation,” Transition, January 26, 1996, pp. 12–16. On the distorted incentives structure created by partial reform in the post-communist world, see the excellent article by Joel Hellman, “Winners Take All: The Politics of Partial Reform,” ms, (Harvard, November 1996). 24 When Capitalism and Democracy Collide in Transition theoretical questions about how “private” Russia’s private sector really is. 88 A concentrated, centralized capitalist class intimately if not parasitically tied to the state has left its mark on state-society relations. 89 Interest articulation and intermediation are dominated by big business that crowds out other interest groups in lobbying the state. 90 As the line between the public and private economy has been increasingly blurred, the distinction between public and private actors also has become fuzzy. This group’s dominance over government leaders and the state run was demonstrated most dramatically during the 1996 presidential election. They failed to achieve the first option, the postponement of elections altogether.91 Once reconciled to abide by the electoral rules of the game, this economic group rallied behind one candidate, Boris Yeltsin.92 While divided in the past over both political issues and markets, Russia’s corporate bosses united during the presidential campaign to provide Boris Yeltsin’s campaign with virtually unlimited resources. 93 During the campaign, these plutocrats also waged a successful effort to dismiss Yeltsin’s original campaign team headed by former first deputy prime minister Oleg Soskovets and replace them with “their” campaign team under the direction of Anatolii Chubais. 94 In return for this support, this small, well-organized interest group has enjoyed tremendous “representation” within the Russian state since the election. The most direct and obvious method of state control is through

88 Although the method of calculation escapes this author, economist Andrei Illarionov, in an interview with author (May 1997) has asserted that the state’s share of GNP is actually higher today than it was 10 years ago. 89 Business groups always constitute the most organized sector of society in capitalist democracies (See Terry Moe, The Organization of Interests [Chicago: University of Chicago Press, 1980], pp. 191–192.). The argument here is that the particular kind of concentrated capitalism emerging in Russia has had a commensurate concentrated political impact on state-society relations. 90 Liliya Shevtsova, Postkommunisticheskaya Rossiya: logika razvitiya i perskepti (Moscow: Moscow Carnegie Center, 1995). More generally, see Schmitter, “The Consolidation of Democracy and Representation of Social Groups,” pp. 436-437. 91 “Bolshoi vos’merke’ vybory ne nuzhny,” Kommersant’ Daily, March 14, 1995, p. 3. 92 See Aleksei Zudin, “Biznes i politika v prezidentskoi kampanii 1996 goda,” Pro et Contra, No. 1 (Moscow: Moscow Carnegie Center, Fall 1996), pp. 46–60. 93 The most important new alliance formed during the presidential election was between Vladimir Gusinsky, owner of Most Bank and the NTV television network (channel four) and Boris Berezovsky, head of Logovaz and Chairman of the Board of the ORT television network (channel one). Before these elections, the consortium of banks and businesses allied with Berezovsky, the so-called Big Eight, had been at odds with Gusinsky. The former was deeply tied the national state while Gusinsky dominated the Luzhkov’s Moscow government. These distinction between “All-Russian” businesses and “Moscow” groups have become more blurred since July. 94 See Michael McFaul, Russia’s 1996 Presidential Elections: The End of Polarized Politics (Stanford, Calif.: Hoover Institution Press, 1997). Michael McFaul 25 appointments. Russia’s Prime Minister, Viktor Chernomyrdin, is the former chairman of Gazprom, Russia’s largest company. With Chernomyrdin at the helm of government, the state has rarely acted against the interests of the oil and gas sector. Russian bankers are also well-represented in the current government. Their most powerful ally and representative is Anatolii Chubais, appointed Yeltsin’s chief of staff after the 1996 election and then reappointed first deputy prime minister in the new government in March 1997. As the former head of the State Privatization Committee, Chubais has been closely tied to Russia’s new financiers from the beginning. Allegedly as a condition of their financial support during the campaign, Russia’s banking tycoons demanded that Chubais become chief of staff after the election.95 Some of these funders of Yeltsin’s campaign were not content to have their representatives in government, but wanted themselves to try their hand in the “public” sector. Vladimir Potanin, the head of the powerful financial group, Oneksimbank, became first deputy prime minister, and Boris Berezovsky, the head of Logovaz, was given the position of deputy chairman of the Security Council. In March 1997, Yeltsin radically reorganized this first, post-election government, strengthening even further the hand of Russia’s new capitalist class within the state. 96 While Vladimir Potanin returned to Oneksimbank, his exit was more than compensated for by the mix of new personnel and portfolios in the top echelons of the government. Most importantly, Anatolii Chubais moved back to the government to become both first deputy prime minister and finance minister. In essence, he and his allies were given complete control of economic policy. Yeltsin also appointed former Nizhny Novgorod governor, Boris Nemtsov, as first deputy prime minister in charge of social policy, housing reform, and anti-monopoly issues. Though not considered a direct representative of Moscow’s financial circles, Nemtsov has been firmly identified with the “reformers” during his reign in Nizhny Novgorod. Though less noticed, perhaps the most important cabinet reshuffle concerned the Economics Ministry. Yeltsin not only appointed a Chubais ally, Yakob Urinson, to run this ministry, but also approved the subordination of the Industrial Committee and the Committee on Defense Industries to this ministry, a move that effectively eliminated two of the most important government agencies for the military industrial complex. Additionally, another Chubais protege, Alfred Kokh, was promoted to deputy prime minister while still retaining his position as head of the Committee on State Property (GKI).97 When the dust settled, the cabinet reshuffled signaled a

95 Freeland, Thornhill, and Gowers, “Moscow’s Group of Seven.” 96 For a typical reaction from Russia’s banking sector to the new government, see the interview with Stolichnyi Bank Chairman, Aleksandr Smolenskii in Moskovskie Novosti, 11, March 16–23, 1997, p. 4. 97 Kokh resigned in August but was replaced by a Chubais protege, Maksim Boiko. 26 When Capitalism and Democracy Collide in Transition real weakening of industrial interests, especially military industrial interests, a partial weakening of oil and gas interests as Chernomyrdin’s position was undermined considerably, and a strengthening of the bankers’ hand in governmental affairs. 98 The new composition of the Russian government eventually may stimulate an open struggle between the two big winners of Russia’s partial economic reform—the bankers versus the oil and gas barons. Soon after taking office, first deputy prime minister pledged to seek greater government control over Gazprom both from within by exercising the government’s ownership stakes within the company and from without by adopting a more comprehensive regulatory framework to modify the company’s activities. 99 Rem Vakhirev, the head of Gazprom, retaliated by calling Nemtsov’s moves “anti-Russian,” claiming that policies aimed at dissolving or even weakening the gas monopoly violated Russian national interests. Ironically, communist leaders in the Duma rallied to Gazprom’s cause. While the outcome of these battles remain uncertain, they must be understood as intra-elite struggles within an executive branch dominated by business interests that do not (yet) represent a pluralization of state penetration by other economic or political actors. Like other presidential systems, Russia’s superpresidentialism privileges big business lobbies and disadvantages mass-based organizations that are better equipped to lobby legislatures than executives. 100 The Duma, however, is not immune from the influence of Russia’s business lobbies. A well-established system of bribe-taking has been formalized within the Duma in which business lobbies in the Duma pay cash directly to Duma deputies in return for votes. 101 Strikingly, the opposition parties in the Duma have rarely acted like genuine opposition parties, even though they control a majority of votes. Despite continual falling growth rates, the war in Chechnya, and a partial economic reform strategy that has benefitted only a few and caused considerable pain to many, the Communist Party and its allies in the Duma has approved every budget proposed by Yeltsin’s government since 1994. In four years, Duma deputies have threatened a vote of no confidence only once in response to the hostage situation in Budennovsk in the summer of 1995. This persistent passivity exemplified by Communist Party leaders has

98 Chernomyrdin was retained in order to avoid an approval process in the State Duma. The Russian constitution states that the prime minister must be approved by the Duma, but other government positions do not need parliamentary ratification. 99 A similar move was initiated against United Energy Systems (UES). 100 Arend Lijphart, “Presidentialism and Majoritarian Democracy,” in Juan Linz, ed., The Failure of Presidential Democracy, Vol. 1 (Baltimore, Maryland: Johns Hopkins University Press, 1994) pp. 91–105. 101 Author’s interviews with numerous Duma deputies and lobby representatives who, not surprisingly, asked not to be identified (March 1997). Michael McFaul 27 mobilized more radical back-benchers to call for the removal of party leader Gennadii Zyuganov. Big business lobbies also have acquired tremendous influence over parliamentary factions by financing campaigns in the 1995 elections. In several cases, individual businessmen bought their positions on a party list. Zhirinovsky’s Liberal Democratic Party was most open about offering Duma seats for money, but such transactions also occurred regarding the and Our Home Is Russia lists. b. Losers of “Reform” Other economic actors are dwarfed by both the wealth and political organization of bankers, oil and gas exporters, and their allies. Enterprise directors of formerly state-owned enterprises, once a relatively unified lobby, have now fractured into several sectoral and regional industrial organizations. Civic Union, the electoral bloc most firmly identified with this economic group, garnered only 1.9 percent of the popular vote in 1993, prompting many factory managers to gravitate back to the “party of power” (Chernomyrdin’s bloc and Yeltsin’s campaign) as the only political organization worth investment. Paradoxically, then, enterprise directors throughout a wide variety of industrial sectors have had a confluence of political interests in the short run with both old money from raw material exporters and new money from Russia’s financiers and bankers. Some successful new companies that have emerged from the military industrial complex such as Vympelcom are firm backers of the Yeltsin government.102 Rosvooruzhenie—Russia’s state corporation for the export and imports of armaments and military equipment—also has succeeded in securing markets for a handful of Russian arms makers. 103 In 1996, hard currency earnings for these companies totalled $ 3.5 billion. As Rosvooruzhenie reports directly to the Presidential Administration, companies benefitting from the corporation’s recent success have no interest in opposing the current regime. 104 The less successful enterprises of the military industrial complex have formed alliances with opposition parties CPRF and Congress of Russian Communities and created lobbies such as the Union of Manufacturers and the League of Defense Enterprises, but none of these groups have been very effective over the last four years. Even the CPRF, the largest political party in the Duma, rarely has acted on behalf of these constituents. Agricultural lobbies have fared somewhat better. Through the Agrarian Party in parliament and the conservative Ministry of Agriculture

102 Maksim Puchkov, “Netelefnyi Razgovor,” Profil’, No. 3 (January 1997), pp. 18–20. Yegor Gaidar sits on the board of this company. 103 See the supplement on arms exports in Business in Russia, No. 75, March 1997, pp. 65– 95. 104 On the corporation’s success under the guidance of Aleksandr Kotelkin, see Business in Russia, No. 75 (March 1997) pp. 68–69. Kotelkin has since been removed. 28 When Capitalism and Democracy Collide in Transition within the government, state farm and kolkhoz directors have succeeded in blocking plans for land privatization while also maintaining state subsidies. 105 Yet, most consider these temporary victories that will soon be overturned once Russian capitalists are ready to venture into this sector of the economy. Today, financial-industrial groups want to acquire oil companies, not collective farms. Once the government has sold off all its blue-chips companies, however, land privatization will receive increased attention by Russia’s financial-industrial groups. Stolichnii Bank’s acquisition of Agroprombank in November 1996 may signal the beginning of this trend. 106 The economic group most stifled by the kind of capitalism emerging in Russia have been small businesses and start-up companies. 107 While Poland, a country with a less than a fourth the population of Russia, boasts more than two million private enterprises excluding agriculture, Russia has roughly 900,000.108 Exorbitant taxes, inflation, the lack of liberalization at the local level, the mafia, and the consolidation of these large financial groups occupying monopoly control over many markets have combined to create a very unfriendly environment for the small business person. Consequently, this economic interest group, the backbone of many consolidated democracies, is weak, disorganized, and depoliticized in Russia. Labor is also disoriented and disorganized in the midst of Russia’s economic transformation. Old Soviet trade unions, once a tool of control for the Soviet Communist Party, have been slow to reorganize to meet the new challenges of capitalism. The Federation of Independent Free Trade Unions (FNPR), a consortium of sectorally-based unions claiming over fifty million members, still in most cases identifies with the interests of directors rather than workers. As the interests of management and labor diverge, the FNPR has gradually lost its credibility with both groups, making it a politically inconsequential group. In the 1996 presidential elections, the FNPR did not endorse a candidate. Nor have truly independent trade unions filled the void. 109 The Independent Union of Miners, the coalition of strike committees that brought the Soviet government to its knees in 1991, lost it independence and credibility by consistently siding with the Yeltsin government over the last five years. Wildcat strikes persist, particularly in coal regions and the Far East,

105 Nikolai Obushenkov, “State Duma to Consider “Communist” Land Code,” Izvestiia, July 14, 1995, p. 1, in What the Papers Say, July 14, 1995, p. 3; and Leonid Bershidsky, “‘95 Budget Passes Key Hurdle in State Duma,” Moscow Times, 29 Feb. 1995, p. 1. 106 Aleksei Zemtsov and Boris Solovyov, “Alesandr Smolensky’s SBS Rescues Agroprombank,” Business in Russia, No. 74, February 1997, pp. 42-44. 107 For a comprehensive overview, see Anders Aslund, “Observations on the Development of Small Private Enterprises in Russia,” Post-Soviet Geography and Economy, Vol. 28, No. 4 (April 1997), pp. 191–205. 108Frye and Shleifer, “The Invisible Hand and the Grabbing Hand.” 109 Leonid Gordon, Oblast’ Vozmozhnogo (Moskva: “Mirt,” 1995). Michael McFaul 29 raising some speculation that Russian labor finally has started to remobilize, but the lack of national organization suggests that these strikes will remain isolated instances.

2. Political Society Big business enjoys hegemonic control over the Russian state in part because of the relative weakness of countervailing interest groups in society. Most importantly, Russia’s party system remains extremely weak. In pluralist democracies, parties traditionally serve as the principal institution mediating societal interests within the state. In Russia, however, parties play only a marginal role in interest intermediation. While elections since 1993 have produced positive signs of consolidation, the legacies of Russia’s first failed transition still linger regarding the development of a party system in Russia. As planned, the proportional representation side of Russia’s mixed electoral system helped to stimulate new party formation in the parliamentary elections in 1993 and again in 1995.110 Despite these gains, Russia’s party system still remains fragmented and not deeply rooted in either society or the state. Russia still has too many ineffective parties and too few effective parties. In 1993, thirteen parties competed for seats on the PR list; in 1995, forty three parties made the ballot. The 1995 parliamentary vote may have induced consolidation as only four of these forty three parties crossed the five percent threshold. Yet, all of these parliamentary parties have uncertain futures and poor records of representation. Vladimir Zhirinovsky’s Liberal Democratic Party of Russia (LDPR) has created from scratch an extensive network of regional offices and local organizers with a presence in most cities throughout Russia. It remains unclear, however, whether this organization is a cultist movement or a political party, as the organization would collapse almost instantaneously without Zhirinovsky. Our Home Is Russia, the political group founded by Prime Minister Viktor Chernomyrdin, is endowed with significant financial resources, government support, and modest regional organization, but easily could follow the fate of earlier “parties of power” in Russia and disintegrate. 111

110 On the relationship between proportional representation and multiparty systems, see Matthew Shugart and John Carey, Presidents and Assemblies (Cambridge: Cambridge University Press, 1992); and Giovanni Sartori, Comparative Constitutional Engineering (New York: New York University Press, 1994). On Duma factions, see Thomas Remington and Steven Smith, “The Development of Parliamentary Parties in Russia,” Legislative Studies Quarterly, 20, 1995, pp. 457–489. 111 Since the presidential elections, tensions have arisen between Chernomyrdin, the formal leader of the organization, and Our Home’s parliamentary leader Sergei Belyaev. While Belyaev wants to push ahead with the transformation of Our Home into a real 30 When Capitalism and Democracy Collide in Transition

Soon after the 1996 election, a rift within the party emerged between government leaders in the party and their counterparts in the Duma. Duma faction leader Sergei Belyaev complained that Chernomyrdin never consulted with his party members on policy issues nor used his parliamentary faction effectively to promote liberal causes within the Duma. On the contrary, Belyaev accused Chernomyrdin of drifting toward a new alliance with his former comrades from the CPSU who now represented the moderate wing of the CPRF. In August, Belyaev finally quit Our Home and vowed to form a new liberal coalition with Yegor Gaidar’s Democratic Choice of Russia.112 General Lev Rokhlin also generated internal division within Our Home by lambasting the government’s policy regarding military reform and calling for the formation of a new political organization of military officers. Our Home’s misfortunes have stimulated the activities of other party of power hopefuls. Former Federal Council chair Vladimir Shumeiko and his Reforms-New Course played an active role in the 1996–1997 gubernatorial elections. Shumeiko backed both incumbents and challengers to establish his own political base independent of the Kremlin. As mentioned above, Yeltsin’s former chief of staff, Sergei Filatov, maintained the general organizational structures put in place during the Yeltsin campaign to form the All-Russian Coordinating Council (OKS), a coalition of two dozen reformist parties and organizations. OKS initially played an active role in supporting pro-Yeltsin gubernatorial candidates. After several critical losses, the activity of OKS subsided. Gaidar’s Democratic Choice of Russia (DCR) also has maintained a skeletal party organization throughout the country and is particularly strong in Moscow. The reformation of the national government in March 1997 gave DCR a political boost (and accorded Gaidar a primary advisory role in the new government) as Chubais, a DCR member, proclaimed that the new government was following the political philosophy and economic blueprint of DCR. To date, however, all three of these groups lack a leader, a national organization, and a well-defined electoral base. Crossing the five percent threshold in the next parliamentary elections represents a major challenge for each of them. Grigorii Yavlinsky’s Yabloko, the one reformist party not connected to the government that won seats through the proportional system in both 1993 and 1995, most closely resembles a proto-party, complete with a parliamentary faction, grassroots regional organizations, and internal democratic procedures. However, Yabloko’s small faction in the parliament and near lack of penetration of government bodies outside of Moscow will assign the nascent party a marginal role in Russian politics in

political party, Chernomyrdin and his government aides prefer to see the organization continue to function as the government’s faction in the Duma and nothing more. 112 Aleksandr Shokhin has replaced Belyaev as the Our Home head in the Duma. Michael McFaul 31 the near future. 113 The recent elevation of Boris Nemtsov also creates electoral problems for Yavlinsky as the two politicians are very similar both in ideas, age, and even appearances. Some leaders within Yabloko have even suggested that their party should reach out to Nemtsov as a way to survive. Only the Communist Party of the Russian Federation (CPRF) looks like a real, national party with a well articulated social base that will outlive its current leaders. Strikingly, as already noted, the Communist Party has not demonstrated a proclivity for legislating on behalf of its constituents as the Duma’s largest faction. Since losing the presidential election in the summer of 1996, the CPRF has grown increasingly cooperative with the government, signalling a real rapprochement between old and new political elites that both originated from the Communist Party of the Soviet Union. A split between radicals and moderates might be in the offing before the next round of elections. Outside of the Duma, parties play virtually no role at all in aggregating, articulating, or representing societal interests. Yeltsin is an “independent,” while his executive administration is insulated from party influence. As in all presidential systems, Russia’s strong executive system has downgraded the importance of political parties. 114 Likewise, few executive leaders at the oblast, krai and republic level have open party affiliations. During the cascade of elections of regional executives in the fall of 1996 in which 52 leaders were chosen, political parties played only a marginal role in selecting and endorsing candidates. 115 Several newly elected governors, including such prominent partisans as Aleksandr Rutskoi, renounced their party credentials after winning election. Most of the regional legislatures are dominated by local “parties of power” with no ideological affiliation and strong ties to local executive heads. 116 More generally, the limited number of elected offices and the low frequency of elections to these offices at the sub-national level of government have provided few opportunities for parties to play their organizing function during elections. 117 A nascent party system has emerged in Russia, stimulated primarily by the PR component of the

113 Yabloko has a significant presence in St. Petersburg, but only scattered support elsewhere. Significantly, in the 50 gubernatorial elections conducted during the fall of 1996, Yabloko ran only an handful of candidates and won only one race. 114 Juan Linz, “Presidential or Parliamentary Democracy: Does It Make a Difference?” in Juan Linz and Arturo Valenzuela, eds., The Failure of Presidential Democracy: Comparative Perspectives, Vol. I (Baltimore, Maryland: Johns Hopkins University Press, 1994). 115 The Communist Party and its bloc ally, the National Patriotic Union of Russia, publicly endorsed only 11 out of 52 candidates. Our Home Is Russia also supported several candidates, but only a few were “party” members. No other party ran serious candidates but instead endorsed already competing independents. 116 Darrell Slider, “Elections to Russia’s Regional Assemblies,” Post-Soviet Affairs, 12, 1996, pp. 1–21. 117 Peter Ordeshook, “Federal Stability, Political Parties, and Russia,” ms, (February 1996). 32 When Capitalism and Democracy Collide in Transition parliamentary electoral system, but this system is still fragmented, Moscow-centric, and thereby peripheral to the organization and articulation of interests in Russia’s political system.

3. Civil Society The void of representation left by Russia’s weak parties has not been filled by other mass-based groups. 118 Participation in overt political activity by civic groups peaked as early as 1990 as part of the nationwide anti- communist movement.119 Since then, independent civic groups have played less and less a role in the organization and conduct of state policy for several reasons. First, the ability of civic groups to articulate and lobby for their interests vis-á-vis the state in Russia’s post-communist era has been impeded by the same factors retarding party development more generally —structural changes in the economy and society, delayed development of pluralist institutions, especially the weakness of representative institutions, and the commensurate ascendancy of executive power. Second, Russia’s economic revolution hit hardest against the Soviet-era emergent civil society. As with the labor movement, Russia’s new market-embedded society has not sufficiently consolidated to develop market-embedded social organizations. Additionally, post- communist grass-roots organizations have no financial resources, as the “middle class”—the financier of most civic groups in the West—is only slowly emerging in Russia. Third, famous anti-communist civic groups such as (a nationwide grassroots organization dedicated to commemorating the victims of Stalinism) lost their raison d’être in the post-communist era. The Chechen war briefly mobilized human rights leaders and organizations, but the low level of mass participation in their protest acts underscored the fact that post-communist Russian society in 1994 had developed a new set of concerns and interests different from Soviet society in 1991.120 The development of a vibrant post-communist civil society is further hampered by the sequence and kind of consolidation of Russia’s political institutions. The suspension of party development in 1991–1993 served to keep civic groups out of state politics. If the party system is underdeveloped, then the ability of civic organizations to influence the state is also impaired. By the time parties began to play a more substantial

118 This substitution appears to be happening in many established democracies as well as many other new democracies. See Philippe Schmitter, “Intermediaries in the Consolidation of Neo-Democracies: The Role of Parties, Associations, and Movements,” ms, September 1997. 119 See Mark Beissinger, “Protest Mobilization in the Former Soviet Union: Issues and Event Analysis,” ms, June 1995; and William Reisinger, Arthur Miller, and Vicki Hesli, “Political Behavior and Political Change in Post-Soviet States,” Journal of Politics, 57, 4, November 1995, pp. 941–970. 120 Marcia Weigle and Jim Butterfield, “Civil Society in Reforming Communist Regimes,” Comparative Politics, 25, 1, October 1992, pp. 1–23. Michael McFaul 33 role in politics after the 1993 parliamentary elections, the disconnect between political society and civic society was nearly total as civic organizations saw no benefit from participating in the electoral process while political parties discerned no electoral benefit from catering to allegedly small and ineffective civic groups. Instead of a civil society concerned with influencing the state, Russia has developed an “a-civil” society concerned with insulating itself from the state. Growing executive power at all levels of the Russian state constitutes a final negative influence on Russian state-society relations. Mass-based civic groups are much more successful at working with parliaments than executives. Yeltsin as well as several governors and mayors have created “social chambers” allegedly as a way to compensate for weak representative bodies and bridge the gap between Russian civic groups and executive power. With few exceptions, however, these advisory councils camouflage, rather than attend to the growing state-civil society divide, while at the same time undermine the legitimacy of legislative bodies. This alarming disengagement of society from the state does not mean that a Russian, post-communist civil society has withered away entirely. Civic groups of all stripes still exist while the number of nongovernmental organizations has grown to over forty thousand in post-communist Russia—a situation in itself that is a revolutionary improvement over the Soviet era. Rather, the danger is that civic groups and organizations, however active in their own atomized sphere of work, will involve a smaller and smaller percentage of the population while civic groups themselves will become increasingly disinterested in and disconnected from the state as a whole, seeking instead to pursue narrow agendas in the private sphere alone. 121

4. The Weakness of the Rule of Law Historically in the evolution of other democracies, well-organized, business interests also have assumed disproportionate influence over the state during periods of rapid industrialization or capital accumulation.122 Mass-based interest groups typically gained access to the state much later.123 In the , excluded mass-based groups—be they minorities, women, or labor groups—fought for enfranchisement through the independent courts system. This key set of independent institutions

121 On decreasing levels of participation in political and civic activities as a whole, see Politicheskii Protsess v Rossii v 1994 g: Sotsial’nyi Kontekst i Problemy Politichekogo Uchastiya, Russian Independent Institute for Social and National Problems, 1995). 122 The period of rapid industrialization in the United States at the end of the nineteenth century and the beginning of the twentieth looks like an apt analogue. 123 Robert Dahl, Polyarchy: Participation and Opposition (New Haven, Connecticut: Yale University Press, 1971); Dietrich Rueschemeyer, Evelyne Huber Stevens and John D. Stephens, Capitalist Development and Democracy (Chicago: Chicago University Press, 1992). 34 When Capitalism and Democracy Collide in Transition does not yet exist in Russia. The Soviet legacy, of course, has impeded the development of rule of law as the Soviet Communist regime accorded the courts no autonomy whatsoever. Since 1991, the idea of an independent judiciary has been supported in theory by virtually every major political force in Russia, but only a few positive steps have been made. Russia’s first Constitutional Court relinquished its authority as arbitrator between the president and parliament in 1993 when the head of the Court, Valerii Zorkin, unequivocally sided with White House defenders during the October 1993 crisis. For a year thereafter, the Court ceased to function and convened again only after Yeltsin had expanded the number of justices to dilute the voice of his opponents. Since reconvening, the Court has made few important decisions. At lower levels, courts are only revamping slowly to deal with the new challenges of a market economy and a democratic polity. Institutionalization of a legal system to protect property rights, govern bankruptcy procedures, enforce contracts, and insure competition only has just begun. The adoption of the Civil Code (hailed as Russia’s “economic constitution”) by parliament in 1995 constituted a first step toward creating these institutions, but only a first step. 124 In the corporate legal context, laws on disclosure are weak and not enforced, general accounting procedures have not been codified, procedures for shareholder and proxy voting are ambiguous, and institutions governing the payment of dividends do not exist.125 Consequently, stockholders have little access to information about enterprises in which they have invested. “Rule of law” also has become weaker regarding criminal and civil matters. The combination of a weak state and incompetent judicial system has produced a sense of anarchy in Russia, a situation alien and frightening to a population accustomed to a powerful authoritarian state. Popular cries for law and order, in turn, threaten to undermine individual liberties and human rights.

5. The “Fourth Estate:” The Russian Press Once the beacon of democratic pluralism in Russia, the Russian press also has been neutralized or marginalized as an independent force with the rise of Russia’s oligarchies. Competition or pluralism between Russian national television networks effectively ended during Russia’s presidential elections, when Vladimir Gusinsky’s NTV (channel four) joined forces with ORT (channel one) and RTR (channel two) to back Yeltsin. While NTV spearheaded the criticism of the Yeltsin government during the war, this same network has evolved into the most loyal, pro-

124 On the importance of the civil code, see David Hoffman, “Russia Gets New Laws for Free Market,” Washington Post, March 1, 1996, p. 1. 125 Karen Halverson, “Resolving Economic Disputes in Russia’s Market Economy,” Michigan Journal of International Law, Vol. 18, No. 1 (Fall 1996), pp. 59–113. Michael McFaul 35

Yeltsin media outlet since the 1996 vote. ORT, the nation’s largest television network, is still partially owned and fully controlled by a handful of Russia’s largest banks and Gazprom, while RTR—the state owned national television network—has changed its leadership, but not orientation. The new general director, Nikolai Svanidze, is considered to be an independent journalist, but he also has intimate ties to both state and private officials representing the status quo. Under Yurii Luzhkov’s impetus, the Moscow network has been reorganized and renamed TV- Center and is to have a national reach and a critical edge, allegedly in preparation for his presidential bid. Whether this network develops a truly independent orientation or becomes just a propaganda arm for the mayor remains to be seen. Regional and cable networks have not been subsumed by these handful of economic actors, but plans are underway. Newspapers also have been gobbled up by Russia’s small group of financial houses and oil and gas companies. Lukhoil purchased forty percent of Izvestiya and, together with Oneksimbank, removed the paper’s liberal editor-in-chief, Igor Golembevsky. Gazprom together with Oneksimbank controls Komsomolskaya , and has stakes in Trud and Rabochaya Tribuna; Logovaz sponsors Nezavisimaya Gazeta and Ogonek; Stolichnii (renamed SBS-Agro after its merger with Agroprombank) has subsidized Kommersant’; Moscow Municipal Bank allegedly has acquired Vechernaya Moskva; and Menatep holds major stakes in the Moscow Times, the editions of Playboy, Cosmopolitan, and Good Housekeeping, and is planning to launch its own national newspaper, Delo. 126 Gusinsky’s new political allegiance to the present government also has effected his newspaper, Segodnya, as many of his most talented journalists have recently left the organization. Of the major newspapers, only Moskovskii Komsomolets and the much smaller opposition paper, Zavtra, enjoy financial independence from big business. Regional newspapers still remain independent from Moscow capital, but tied closely to local governments. C. State Outputs and State Capacity The strength of big business, the weakness of political parties, labor, civil organizations, and an independent press, and the virtual absence of rule of law have combined to allow the Russian state to act in the interests of Russia’s richest. The rationalization of the internal institutions of the state and the ideological unity of key actors who occupy key state offices has not enhanced state autonomy. On the contrary, the Russian state today enjoys little autonomy from societal interests, but instead looks like “simply the resolution of a vector of forces emanating from a variety of

126 For an excellent overview, see Oleg Medvedev and Sergei Sinchenko, “The Fourth Estate--Chained to Banks,” Business in Russia, No. 78, June 1997, pp. 38–43. 36 When Capitalism and Democracy Collide in Transition different groups.”127 Not all societal interest groups, however, are represented equally as Russia’s state is deeply penetrated and controlled by the interests of big business. Generally, smaller groups with narrow purposes are more likely to effectively organize than large groups with broader agendas. 128 Consequently, the full spectrum of interest groups in economic, political and civil society will not be represented equally. 129 Capitalist groups tend to be small in number and focused in their demands, making cooperation easier to organize than workers or consumers who face greater barriers to collective action because of their large number and inability to coordinate and communicate their preferences. The imbalance in Russia, however, is especially acute. This configuration has impeded not only democratic consolidation regarding political transformation, but also blocked a deepening of economic reform. Most importantly, this small group of financiers and resource exporters has used its dominance over the state to discourage direct foreign investment, block tax collection, impede the creation of an effective welfare transfer system, and further consolidate their monopoly over the control of state transfers. 130 Regarding foreign investment, Russia’s new financial captains want to insure that new inflows of capital flow through their organizations. While powerful vis-á-vis the Russian state and significant when compared to other economic interest groups in Russia, Russia’s financial conglomerates still cannot compete with their larger counterparts in the West.131 Capital in Russia is still scarce, prompting Russian bankers to seek protection of their local markets from foreign competitors. 132 Recent consequences of this protectionist impulse have included limited foreign participation from the first privatization stage (1992-1994), foreign exclusion from the loans-for-shares program, and limited foreign involvement in the Russian GKO market.133 These rent-producing policies, coupled with high interest rates, have limited direct foreign investment in Russia. The vast majority

127 Stephen Krasner, “Approaches to the State,” Comparative Politics, (1984) p. 225. This is the classic definition of a pluralist state. 128 Mancur Olsen, The Logic of Collective Action (Cambridge, Mass.: Harvard University Press, 1965). 129 E.E. Schattschneider, The Semisovereign People (Hindsdale, Illinois: Dryden, 1975). 130 The relationship between Russian and foreign capital is often misunderstood in the West. Russia’s banks and resource exporters welcome foreign investment in their businesses operations, provided that it never approaches a controlling share. They do not want to create circumstances, however, in which foreign capital can enter Russian markets independently and compete with Russian enterprises. 131 For the comparison, see Andrew Warner, “An Economic Analysis of Russian Banks,” ms, Harvard Institute for International Development, September 1996. 132 We should expect this response from owners of a scarce factor such a capital in the Russian case. See Ronald Rogowski, Commerce and Coalitions (Princeton, New Jersey: Princeton University Press, 1989). 133 Most recently, as a condition of IMF loans, the GKO market has been liberalized and is set to be fully accessible to foreign traders by July 1997. Michael McFaul 37 of foreign investment has gone either to resource extraction industries (estimated to be seventy percent of all foreign investment in 1996) or has entered Russia through the stock market.134 Likewise, these groups have succeeded in avoiding paying taxes. During the 1996 electoral season, Yeltsin’s team allowed financial supporters of their campaign to delay paying taxes. If the communist challenger, Gennadii Zyuganov, won, they wanted him to inherit a bankrupt state. After the elections, however, Yeltsin’s government proved incapable of making the largest corporations and banks pay. Anatolii Chubais, Yeltsin’s new chief of staff, created a special commission to address the tax arrears crisis, but his initiative has achieved limited results. As a sign of the severity of the crisis, tax collection emerged as the most important issue in Russia’s negotiations with the International Monetary Fund in summer and fall of 1996. Moreover, the structure of the Russian tax code reflects the interests of Russia’s financial groups as industrial enterprises, according to Anders Aslund, contribute “no less than 65 percent of all Russia’s taxes, although it accounts for only 44 percent of GDP.”135 Perhaps most amazingly, this economic clique that refuses to pay taxes and avoids competition in turn has forced the costs of stabilization on Russian workers. Where else in the world is inflation controlled by simply not paying wages for months at a time?136 More generally, Russia’s current state leaders have done little to restructure welfare transfers, meaning that overall expenditures are still too high by West European standards, but that the neediest in society are still not targeted. 137 Heat, transport, and vacations to the are still subsidized for everyone, while pensioners scrape out a living below the poverty line. As Russian economist Oleg Vitte explained, In Western countries it is considered more or less acceptable if 50–60 percent of the aid to the needy reaches those for whom it is intended. In our country, according to expert evaluations, social assistance is distributed in the proportions: 19 percent goes to those who need it and 81 percent goes to others. This means that in order to give a ruble to the poor, we must give 4 rubles to the rich.138 Finally, the circle of those with access to state assets has narrowed, not widened. Before departing the government in March 1997, first deputy

134 On the biggest direct investment deals of 1996, see Business Russia (The Economist Intelligence Unit) January 1997, p. 3. 135 Anders Aslund, “Unique Russia: A Myth,” Moscow Times, February 27, 1997, p. 8. 136 On this crisis, see Mikhail Delyagin, Ekonomika Neplatezhei: Kak a Pochemu My Budem Zhit’s Zavtra (Moscow, February 1997). 137 Mikhail Dmitriev, “Pension System in Russia: Alternative Scenarios,” (Moscow: Moscow Carnegie Center, September 1996); and Anders Aslund and Mikhail Dmitriev, Sotsial’naya Politika V Period Perekhoda k Pynku (Moscow: Moscow Carnegie Center, 1996). 138 Interview with Vitte in Literaturnaya Gazeta, July 16, 1997. 38 When Capitalism and Democracy Collide in Transition prime minister Vladimir Potanin reduced the list of registered financial agents for the federal government from several dozen to thirteen.139 By crediting these thirteen as the state’s bankers, this move effectively assured these banks of stable financial flows and greatly compounded the financial woes of those that did not make the list.140 The preferences of mass-based interest groups find little voice in Russia’s contemporary state configuration. Instead, state outputs reflect the overwhelming influence of Russia’s small economic elite over the state. However, even if these mass-based interest groups were articulate, organized, and influential, Russia’s contemporary state still would have little capacity to act upon their interests. This observation seems counter- intuitive as state transfers in Russia are still greater and more extensive than most states in developed capitalist democracies. 141 “Big,” however, is not a synonym of “effective.” These figures tell little about the state’s capacity to actually execute policy decisions. Neither parliamentary laws nor presidential decrees are enforced as the state has little coercive capability against or legitimacy within society. For similar reasons, the state also has been very unsuccessful at collecting taxes. If state actors cannot extract revenue from society, then the state is effectively withering away. 142 Moreover, the most respected and capacious state institutions in Russia are located at the lowest levels of government, providing another impediment to state action at the federal level. Finally, the agency problems that haunted the operations of the old Soviet state have grown worse in the post-communist era. State bureaucrats ultimately serve neither in the interests of either economic lobbies or mass-based groups, but act first and foremost on behalf of themselves. 143 Consequently, corruption within the state remains rampant.

139 “Potanin sostavlyet spisok Shindlera,” Profil’, No 3 (January 1997), p, 13. The list includes Sberbank, Vneshtorgbank, Oneksimbank, Inkombank, National Reserve Bank, International Financial Company (affiliated with Oneksimbank), Avtobank, Imperial, International Moscow Bank, Russian Credit, Stolichnyi, Menatep, and Mosbizbank. 140 The government has threatened to eliminate this form of financial transfers through commercial banks and instead use Sberbank and Central Bank branches, but this change has not yet been implemented. 141 See World Bank, From Plan to Market: World Development Report 1996 (Oxford: Oxford University Press, 1996), pp. 110–122; Dmitriev, “Pension System in Russia,” and Gilles Alfandari, Qimiao Fan, an Lev Freinkman, “Government Financial Transfers to Industrial Enterprises and Restructuring,” in Simon Commander, Qimiao Fan, and Mark Schaffer, Enterprise Restructuring and Economic Policy in Russia (Washington, DC: World Bank, 1996), pp. 166–198. 142 Levi argues that rulers should be thought of as revenue maximizers. The converse, then, should be equally true; rulers that cannot or choose not to maximize revenue can no longer be considered autonomous state actors. See Levi, Of Rule and Revenue, especially chapter one. 143 Vladimir Pastukhov, “Paradoksal’nie zametki o sovremennom politicheskom rezhime,” Pro et Contra, No. 1 (Moscow: Moscow Carnegie Center, Fall 1996), pp. 6–21. On the Soviet era, see Solnick, Stealing the State. Michael McFaul 39

The consequences of this declining state capacity in Russia have been dramatic. Basic services traditionally provided by the Soviet/Russian state such as security, welfare, and education are no longer public goods. 144 Employees of the state must negotiate and strike just to be paid for work already completed. Contractual arrangements must be self-enforcing to succeed. Mafias, security firms, and private armies have assumed major responsibilities for providing security, challenging in essence the state’s monopoly on the use of force. As Yeltsin eloquently summed, “The state interferes in the economy where it shouldn’t, while where it should it does nothing.”145

V. Conclusions The rulers and institutions constituting the Russian state have neither the will nor ability to act upon citizen preferences writ large. To the extent that it does act, Russia’s state serves primarily the interests of a small group of business elites ensconced in Moscow—corporatism but without the workers and without an informal contractual agreement between the state and these peak associations. 146 Pluralist institutions of interest intermediation are weak, mass-based interest groups are marginal, and institutions that could help to redress this imbalance—such as a strong parliament, an effective party system, or an independent judiciary—do not exist. Elections may have become the only game in town—an important achievement considering the long authoritarian shadow of Russian history. In consolidated democracies, however, elections are only one of many channels of interest mediation between state and society. In other words, Russia has become an “electoral democracy” but not a “liberal democracy.”147 In these conditions, elections can appear ritualistic and decorative, bearing little impact on conduct or operation of the state. During a brief campaign period, candidates may seem responsive to popular interests, but once in office a different set of preferences—the

144 It must be remembered that seventy years of Soviet communism has created greater expectations of the state in Russia than in developed capitalist societies. 145 Quoted in New York Times, March 7, 1997, p. 6. 146 On the corporatist model referenced here, see Philippe Schmitter, “Still the Century of Corporatism?” Review of Politics, Vol. 36, No. 1, pp. 85–131. Ironically, the instrumentalist Marxist conception of the state provides an even closer approximation of the current Russian situation than corporatist, pluralist, or statist models. See Nicos Poulantzas, Political Power and Social Classes (London: New Left Review Books, 1973). 147 These terms come from Larry Diamond, “Is the Third Wave Over?” Journal of Democracy, Vol. 7, No. 3 (July 1996), pp. 20–37. See also Terry Lynn Karl, “Imposing Consent? Electoralism versus Demokratization in El Salvador,” in Paul Drake and Eduardo Silva, eds., Elections and Democratization in Latin America, 1980–1985 (San Diego, Calif.: Center for Iberian and Latin American Studies, 1986), pp. 9–36. 40 When Capitalism and Democracy Collide in Transition preferences of big business—takes precedence. 148 Consequently, it should not be surprising that opinion polls demonstrate a strong distrust in the government and a lack of optimism about the future. Even as the state has consolidated both institutionally and ideologically from within, the disconnect between mass preferences and state actions has become more acute. To argue that the state has neither the will nor capacity to meet the expectations of its citizens does not mean that the situation is inherently unstable or that crisis, breakdown, or revolution is inevitable. Weak states dominated by small, well-organized economic interest groups and insulated from mass-based societal pressures have existed for decades in other countries. Russia might be no different. Historically, however, growing gaps between state and society in Russia have produced on occasion revolutionary explosions. Three factors can alter state-society relations. First, leaders currently in control of the state could turn against those that helped bring them to power and instead begin to attend to the interests of mass-based groups. Yeltsin is the one political actor in the current state that has the capability to carry out a painful and destabilizing reform of the state from within. Perhaps thinking about his place in history, Yeltsin could initiate such a radical reform from within. Yeltsin’s bold dismissal of everyone in his government except Viktor Chernomyrdin and the appointment of Anatolii Chubais and Boris Nemtsov as first deputy prime ministers in March 1997 suggests that it is still too early to dismiss Yeltsin as a force for change from within. Intermittently, both Chubais and Nemtsov have demonstrated that they have the desire to challenge and reform Russia’s current kind of capitalism. Second, an exogenous shock could come from society, forcing the state to change. For instance, sustained strikes in strategic industries could have crippling consequences for the current government as they did for the Soviet regime in 1991.149 The national one-day strike held on March 27, 1997 in which millions of workers participated demonstrates both the widespread level of discontent in society and potential for organized action to respond to this discontent. Weak states have little capacity to absorb even relatively minor crises. If faced with mass societal upheaval, the leaders of Russia’s national state have few good options available. Because institutions mediating mass interests between the state and society are weak or absent, societal unrest will not be channeled and organized. State officials seeking to quell unrest will find it difficult to find societal interlocutors that “represent”

148 This relationship between elections and interests closely approximates O’Donnell’s “delegative democracy.” See Guillermo O’Donnell, “Delegative Democracy,” Journal of Democracy, Vol. 5, No.1 (January 1994), pp. 55–69. 149 Gorbachev, Memoirs, p. 590. Michael McFaul 41 society. 150 Nor can they rely on coercive instruments of the state to assist them in quelling unrest, as most people in these institutions, including first and foremost the Russian army, have similar preferences and attitudes (i.e., antipathy toward the state) as society more generally. If workers take to the streets now, soldiers are unlikely to shoot. Weak states can be overthrown by weak societies. While the conditions for societal unrest are permissive, the probabilities of change through this mechanism still remain low. After 10 years of revolutionary upheaval, Russians have grown weary of street politics and open resistance to the existing rules of the game. Especially after 1993, liberal, communist, and nationalist groups alike have found it increasingly difficult to mobilize mass events. Third, new elections might bring to power new leaders of mass-based groups not beholden to big business with the will to use the state to serve the interests of a wider segment of the population.151 Currently, Alexander Lebed has positioned himself as the person most likely to initiate state reform on behalf of those “outside” the current order. These outsiders include not only the general public disgusted with the current government, but also second-tier economic actors who have been denied state access and consequently complain of the lack of real competition in Russia’s markets. 152 A similar group of economic outsiders has congregated behind Moscow mayor Yurii Luzhkov. While Luzhkov has dubious democratic credentials, the mere changing of the guard, complete with a new set of economic winners and losers, may be positive for the development of pluralist institutions connecting state and society. Growing divisions between economic elites may open the door for increased political competition in the next national elections. 153 Even Boris

150 For this very reason, Russian government officials recently have been very involved in courting trade union officials from the former Soviet structures, including first and foremost the FNPR. This strategy, however, is flawed in that the FNPR enjoys little real legitimacy among workers in Russia. 151 The historical analogue in the history of the United States is the election of Theodore Roosevelt. 152 The most open supporter of Lebed, both financially and publicly, has been Inkombank. Lebed advisors actually have asked Inkombank head Vladimir Vinogradov to refrain from public endorsements of the general for fear that such praise might damage Lebed populist reputation. (Author’s interview with Konstantin Otulin, economic advisor to Lebed, March 1997). Inkombank also backed Rutskoi in his successful gubernatorial election in Kursk Oblast. See Maksim Perevedentsev, “Torgov yeshche net, no pokopatel’ uzhe izvesten,” Nezavisimaya Gazeta, July 8, 1997, p. 4. On Inkombank’s dissatisfaction with the current government, see the interview with Vinogradov in Business in Russia, No. 79, July 1997, pp. 20–22. 153 Auctions of shares in some of Russia’s last blue-chip companies to be privatized precipitated new divides between bankers and politicians. In the spring of 1997, a consortium of investors headed by Oneksimbank won a bid to acquire a controlling share of Svyazinvest, Russia’s largest telecommunications company. The loser’s in this auction, a group of investors headed by Vladimir Gusinsky and Boris Berezovsky cried foul, claiming that Chubais and Nemtsov had rigged the auction in favor of Oneksimbank and its head Vladimir Potanin. Chernomyrdin eventually rallied to their cause and attempted 42 When Capitalism and Democracy Collide in Transition

Nemtsov has attempted to position himself within the current government as the warrior against monopolies and the defender of the “middle class,” suggesting that the current government leadership may also be divided by the next national electoral cycle. Ultimately, the current equilibrium will change only when the state can be deployed to destroy monopolies, tax profit-makers, and provide a more favorable environment for market competition. While a slow process, this change can only happen peacefully through the ballot box. That no one seems ready to challenge the existing rules of the electoral game is therefore a positive sign for the future democratization of Russian politics. When understood in this longer time framework, the elections of 1995 and 1996 may have more far-reaching consequences than were immediately obvious. By helping to establish elections as the only the game in town, this precedent-setting milestone may provide the means for democratic renewal in Russia in the future. Over the long run, changing the relationship between state and society in the direction of more pluralistic institutions of interest intermediation also may enhance state capacity. States with more legitimacy have more capacity to govern. In the post-communist world, states that exhibit the most pluralistic polities are also the most successful economic reformers. The attempt to sequence economic and political reform in Russia may have been counterproductive. Paradoxically, policies aimed at pluralizing Russia’s polity may actually enhance the capacity of Russian state leaders to implement further economic reforms. Though the kind of capitalism that has emerged in Russia today has served to impede democratic development so far, a renewed effort to further democratize could actually facilitate the development of a more competitive, equitable and liberal market economy.

to postpone the next major auction of Norilsk shares until an investigation could be completed. In this standoff, however, Chubais and Nemstov prevailed, the Norilsk auction proceeded according to schedule, and Oneksimbank won this tender as well. Disagreements surrounding these scandals eroded the formerly close relations between Gusinsky, Berezovsky, Chubais and Nemtsov, and also forged a new political alliance, however temporary, between Chernomyrdin and Gusinsky and Berezovsky.