RUSSIA WATCH No.2, August 2000 Graham T

Home , Alfa Group, Anatoly Chubais, Boris Nemtsov, Interros, Kakha Bendukidze, Loans for shares scheme

RUSSIA WATCH No.2, August 2000 Graham T. Allison, Director Editor: Ben Dunlap Strengthening Democratic Institutions Project Production Director: Melissa C..Carr John F. Kennedy School of Government Researcher: Emily Van Buskirk Harvard University Production Assistant: Emily Goodhue

SPOTLIGHT ON RUSSIA’S OLIGARCHS On July 28 Russian President Vladimir Putin met with 21 of Russia’s most influential businessmen to “redefine the relationship between the state and big business.” At that meeting, Putin assured the tycoons that privatization results would remained unchallenged, but stopped far short of offering a general amnesty for crimes committed in that process. He opened the meeting by saying: “I only want to draw your attention straightaway to the fact that you have yourselves formed this very state, to a large extent through political and quasi-political structures under your control.”

Putin assured the oligarchs that recent investi- The Kremlin roundtable comes at a crucial time for the oligarchs. In the last gations were not part of a policy of attacking big business, but said he would not try to restrict two months, many of them have found themselves subjects of investigations prosecutors who launch such cases. by the General Prosecutor’s Office, Tax Police, and Federal Security Serv- ice. After years of cozying up to the government, buying up the state’s most valuable resources in noncompetitive bidding, receiving state-guaranteed loans with little accountability, and flouting the country’s tax laws with imp u- nity, the heads of some of Russia’s leading financial-industrial groups have been thrust under the spotlight. See page 6. Putin’s approval rating reaches 73% SEE INSIDE: PM Kasyanov gets 49% (VTsIOM Poll of 1600, July 20-25) * Crackdown on the oligarchs, p. 3, 6 * Origins of the oligarchs, p. 10 * Guide to the investigations, p. 4, 8 TOP NEWS OF JUNE-JULY * Harvard’s Kelly M. McMann on the need for economic pluralism, p. 9 · Prosecutors, tax police crack down on leading oligarchs. * Analysis by leading Russian experts: · Putin diagnoses ills, prescribes cure in State of the --The coming information war, by D. Dondurei, p. 11 Nation address. --Lessons from the Kremlin roundta- · Federation Council passes radical tax reform package. ble, by A. Kara-Murza , p. 13 · Russian senators vote themselves out of office. --It’s Over, Russia—Are You All Right?, by V. Boxer, p. 16 · Duma overrides veto; new law allows President to dis- * Putin’s State of the Nation address, p. 2 miss governors, mayors. * Economic news in brief, p. 4 * Russia’s radical new tax reform package, · Berezovsky quits Duma, promises to create new opposi- p. 2 tion party. * Senators’ vote to restructure Federation · Revised foreign policy doctrine calls for pragmatism, Council, p. 2 * Berezovsky quits Duma post, p. 3 economic integration and growth. * Russia’s new foreign policy, p. 2 · Chechen fighters escalate guerilla attacks on Russian * Putin, star of Okinawa, p. 2 troops. · Putin impresses G-8 leaders at Okinawa summit.

1 JUNE AND JULY IN RUSSIA calls for pragmatism in pursuing Russia’s national in- PUTIN SETS AMBITIOUS AGENDA IN STATE terests and identifies as its main priorities the im- OF THE NATION ADDRESS provement of Russia’s domestic economic situation, Putin delivered his first State the fight against international terrorism, and the quest of the Nation address to the for a multi-polar world. SDI’s Policy Memo No.2 on Russian legislature on July Russia’s new foreign concept is available at: 8. With characteristically http://ksgnotes1.harvard.edu/BCSIA/Library.nsf/pubs/ brutal honesty, he blamed PolicyMemoNo2. the state for having allowed a “dictatorship of the shadow PRESIDENT SECURES RIGHT TO FIRE economy,” “raging corruption,” and “massive outflow GOVERNORS of capital overseas.” He cautioned that recent economic On July 19 the Duma overrode the Federation Coun- growth is the result only of high commodity prices and cil’s earlier veto of the bill allowing Russia’s president the lingering effects of the ruble devaluation, warned to dismiss governors and disband local parliaments. that the economy is on the verge of collapse, and that According to the new law, Russia’s president can dis- Russia risks sliding into third-world status. When de- miss regional leaders, including both governors and scribing his cure for Russia’s ills, Putin fell back on a presidents of republics, for violating federal laws. A familiar mantra: strengthening the state. Only a strong court ruling and a letter from the General Prosecutor’s state, he argued, can stabilize the economy, defend office are required to confirm that a regional leader is Russia’s reputation abroad, and propel the country into facing criminal charges. the information age. SDI’s Policy Memo No. 1 on Putin’s State of the Nation address is available at: DEFYING PREDICTIONS, UPPER HOUSE http://ksgnotes1.harvard.edu/BCSIA/Library.nsf/pubs/ APPROVES RADICAL TAX REFORM PolicyMemoNo1. On July 26 the Federation Council, made up of Rus- sia’s governors and regional legislators, voted 128 to PUTIN WOWS WORLD LEADERS AT G-8 13 in favor of the tax reform package proposed by the DEBUT Putin government and already passed by the Duma. Putin stole the limelight at the G-8 Summit in Okinawa The new tax plan includes a 13 percent flat income tax on July 21-23, as he reported on his meeting with to replace the current 12 percent to 30 percent sliding North Korea’s Kim Jong-Il, discussed Russia’s eco- scale, and reduces the turnover tax, which is levied on nomic development, and advocated Russia’s full me m- all enterprises regardless of income, from 4 percent to bership in the WTO. Putin’s deft performance helped 1 percent. The Federa- boost his ratings at home and demonstrated his com- tion Council was not mitment to making Russia “an equal partner in global expected to approve the affairs.” The Russian president’s preparedness and tax plan, in part because active participation impressed the leaders of the it includes a controver- world’s richest industrialized nations. Canadian Prime sial measure to central- Minister Jean Chretien ize collection and distribution of tax revenues previ- called Putin’s com- ously left to the governors. Moscow Mayor Yuri mand of the issues Luzhkov (pictured) opposed the bill, saying: “The re- “very impressive,” and gions will now be forced to pass on most of their tax Germany Chancellor revenue to higher levels. Everyone will be confined to Gerhard Schroeder a stall, with the state proffering handfuls of hay.” pronounced Putin’s performance “brilliant.” Immediately following the RUSSIAN SENATORS VOTE THEMSELVES summit, Russia and Germany signed an agreement OUT OF OFFICE rescheduling Russia’s Paris Club debt. Also on July 26 the members of the upper house of parliament voted to approve a plan on restructuring the IVANOV PRESENTS “PRAGMATIC” FOREIGN Federation Council. According to the new plan, pro- POLICY CONCEPT posed by the Kremlin and worked over by a “concilia- On July 10, Russian Foreign Minister Igor Ivanov pre- tory commission” made up of Duma deputies and Fed- sented a new foreign policy concept that replaces an eration Council members, Russia’s regional leaders earlier version dating from 1993. The new blueprint will surrender their seats in the Federation Council on

2 December 31, 2001, giving up the perks of the office— take part in the collapse of Russia and the establis h- such as immunity from prosecution. Instead, the gover- ment of an authoritarian regime.” In his farewell nors will be allowed to appoint representatives to take speech he declared his intention to set up a “construc- their place, and regional legislatures, instead of being tive opposition” to President Putin and his policies, represented by their speakers, will elect delegates to hoping to draw on support serve in the Federation Council. from governors and busi- Despite bitter opposition to the bill nessmen alike. when it was first proposed, the senators offered little resistance on Russian observers reacted the day of the vote. As Altai Gover- with skepticism. Yuri nor Alexander Surikov (pictured) Skuratov, former prosecu- said, “The law will be in force, tor-general of Russia, questioned, “Can a person from whether we reject it or approve it.” the ‘Family’ head an opposition? I never heard anything funnier.” Igor Bunin, Director of the Center of BEREZOVSKY EXITS DUMA, VOWS TO Political Technologies: “Several hypotheses are possi- CREATE OPPOSITION PARTY ble. Let’s assume that he has reached a covert agree- On July 17 Boris Berezovsky announced that he was ment with the regime that he will personify construc- quitting his seat in the Duma in protest of the govern- tive opposition. He will try to consolidate the gover- ment’s moves “aimed at eliminating major independent nors and oligarchs, and at the same time, prevent this businesses in Russia.” Berezovsky said he “will not opposition from getting out of hand.”

PUTIN GOVERNMENT APPLIES HEAT TO OLIGARCHS While campaigning for the presidency in February, In the last two weeks of July, however, Russian prose- Vladimir Putin promised to keep all oligarchs at arm’s cutors stepped up cooperation with their Swiss coun- length. His declaration was met with some skepticism, terparts in a fraud case against Berezovsky, and especially given the role that Boris Berezovsky, the Abramovich’s Sibneft was targeted for possible tax influential tycoon from Yeltsin’s inner circle, was then evasion. In his July 28 meeting with the business lead- playing in orchestrating Putin’s PR campaign. ers (minus oligarchs Gusinsky, Berezovsky, and Abramovich), Putin even singled out Sibneft as a com- In mid-May, it appeared that skeptics’ suspicions pany with “surprisingly low tax payments, given their would be confirmed when tax police raided the offices enormous earnings.” of the Media-Most holding company headed by Vladi- mir Gusinsky, a staunch Putin opponent and owner of It appeared that Putin was following through on his the NTV television network—one of the few that promise to distance Russia’s plutocrats from power and openly criticized the Kremlin. Raiding Media-Most and “ensuring an equal playing field for all businesses.” arresting Gusinsky himself a month later for alleged Perhaps betting that Putin was serious, Berezovsky quit fraud in a three-year-old privatization deal gave the his post in the State Duma in protest, announcing that impression that Putin and his deputies were interested he could not work with an “authoritarian regime.” in pursuing only political enemies. Two recent developments have added grist to the Mos- When companies owned by Vladimir Potanin (pic- cow rumor mill. First, Vladimir Gusinsky (pictured) tured) and Vagit Alekperov were targeted in subse- was suddenly cleared of all charges quent investigations, the government’s actions began to (with no explanation) and allowed to resemble a campaign against oligarchs generally, in- leave the country. Second, both cluding those who presented no Gusinsky’s NTV and the Berezov- particular opposition to the sky-controlled ORT network were government. Still, critics reportedly put up for sale in the last charged, conspicuously absent days of July—after Gusinsky’s de- from the list of oligarchs parture and the Kremlin roundtable probed by prosecutors and tax with the oligarchs. Did Gusinsky trade NTV for free- police were two who occupied dom? Has Berezovsky fallen from favor? How did this the coziest niches in Putin’s inner circle—notably, all come about? A brief timeline follows. Berezovsky and Sibneft magnate Roman Abramovich.

3 PUTIN GOVERNMENT APPLIES HEAT TO OLIGARCHS—A BRIEF TIMELINE · May 11. Tax police, prosecutors, and Federal Security Service (FSB) agents raid Media-Most, searching for evidence of illegal surveillance and wiretapping by the company’s security force. · June 12. Vladimir Gusinsky is arrested and jailed on suspicion of $10 million fraud in the 1997 privatization of a St. Petersburg TV station. · June 20. The Moscow Prosecutor’s office files a lawsuit against Interros President Vladimir Potanin, charging that the privatization of his Norilsk Nickel holding (the world’s biggest producer of palladium) was illegal. A Moscow court later rules that the lawsuit is “unacceptable in its current form.” · June 29. Armed police raid the offices of Tyumen Oil Company (TNK), a subsidiary of the Alfa group owned by Pyotr Aven and Mikhail Fridman, in connection with an investigation into the 1997 sale of TNK shares to another Alfa group subsidiary. · July 11. Tax police announce that a criminal investigation against LUKoil President Vagit Alekperov will be opened on charges of massive tax evasion. · July 11. The General Prosecutor’s office sends Vladimir Potanin a letter, offering to drop the investigation into the Norilsk Nickel privatization in exchange for $140 million—the amount he “underpaid” for a 38% stake in the enterprise in 1997. · July 11. Prosecutors seize financial documents from Media-Most, NTV, and Gazprom. · July 12. Tax police raid car manufacturer Avtovaz , headed by Vladimir Kadannikov and long connected with Boris Berezovsky. Kadannikov is accused of massive tax evasion. · July 14. Russian prosecutors interview Boris Berezovsky in connection with a $715 million fraud case involving Aeroflot. Investigators are focusing on the channeling of foreign ticket revenues to two Swiss companies that Berezovsky controls. · July 14. The Audit Chamber of the State Duma announces it is investigating allegations that the electricity monopoly Unified Energy Systems (UES), headed by Anatoly Chubais, illegally sold an excessive share of the company to foreigners. · July 17. Boris Berezovsky announces that he is quitting his seat in the Duma in protest of the government’s moves “aimed at eliminating major independent businesses in Russia.” Berezovsky says he “will not take part in the collapse of Russia and the establishment of an authoritarian regime.” · July 26. The General Prosecutor’s office drops its fraud charges against Vladimir Gusinsky, but confirms that its investigation of the case will continue. Gusinsky immediately leaves for Spain. · July 26. Deputy Finance Minister Sergei Ignatiev submits a report recommending that the Finance Ministry investigate possible tax violations by Sibneft. A main stakeholder in Sibneft is Roman Abramovich, a Kremlin insider whom many thought untouchable. · July 26. The Swiss Federal Prosecutor’s office turns over 200 volumes of files to Russian prosecutors in connection with fraud charges involving Boris Berezovsky and Aeroflot. · July 28. At the request of Duma Deputy Boris Nemtsov, Putin calls a meeting of 21 business leaders in the Kremlin. Putin tells the businessmen that privatization results will not be reviewed, but gives no promise of general amnesty. He assures the group that the recent investigations are not part of a policy attacking business, but said he would not try to restrict prosecutors who launch such cases. · July 31. Russian newspapers speculate that NTV may soon be sold to Gazprom. A source in the Presidential Admin istration confirms that the state is seeking to buy Berezovsky’s share of the ORT network.

GAZPROM TO BUY GUSINSKY’S MEDIA-MOST? Investment bankers began valuing Vladimir Gusinsky’s media empire during the first week in August, prompting speculation that the Media-Most conglomerate may be sold to Gazprom, the gas monopoly with strong ties to the state. Gazprom already controls 14% of Media-Most, and a further 34% of the media company’s shares have been used as collateral against $212 million in loans from Gazprom. Gazprom also holds 30% of NTV, Media-Most’s flagship television network that has aired highly critical reports of the Putin government. Any deal between Gazprom and Media-Most would likely have important implications for the state of media independence in Russia. The state owns a 38% stake in Gazprom, and in April President Putin installed a close ally as Chairman of the Board.

Investigators in Switzerland are looking into charges that $4.8 billion in IMF loans to Russia, issued in July 1998, was d i- verted through Swiss banks to Kremlin cronies . A 1999 PriceWaterhouseCoopers audit cleared the Russian Central Bank of similar charges. The IMF says the loans were spent in Russia, defending the ruble.

4 ECONOMIC NEWS IN BRIEF RUSSIAN GOVERNMENT APPROVES ECONOMIC PROGRAM On June 28 the Russian government approved an 18-month economic reform plan of action that promises 5 percent a year GDP growth. The program calls for modernization of the banking system, protection of minority shareholder rights, restructuring of Russia’s gas and electricity monopolies, and reforms to the tax system. A more detailed “ten- year plan” will be adopted in the fall, following further discussion and debate.

TREASURY SECRETARY LAWRENCE SUMMERS: RUSSIA’S ECONOMY IMPROVING Speaking on July 5, Treasury Secretary Lawrence Summers said, “There has been a substantial improvement in Russian economic performance in recent months and that has been manifested in part in a significant improvement in Russia’s budget situation and in an augmentation of Russia’s reserves. What will be the most important is successful implementation of the rule of law so there can be reliance on secure property rights, confidence in contract enforcement and the general set of measures to go with the effective commercial system.”

FOREIGN INVESTMENT UP DURING 1st QUARTER Foreign investment in Russia grew 57.2% in the first quarter of this year, compared to the same period last year, according to Russian State Statistics Committee figures. Total foreign investment was $2.4 billion, of which $853 million came in direct investments, mostly in the transport, food and the energy industry. The largest investors were Germany, the United States, France, Britain, Italy and Cyprus.

For more economic news, see the US-Russian Investment Symposium web page: http://www.ksg.harvard.edu/USRIS/ The 4th Annual US-Russian Investment Symposium will take place this October 5-7 at Harvard University in Cambridge, MA. For general Symposium information, contact [email protected] or call 1-617-495-0741. For registration information visit the Financial Times Conferences web site at: http://www.ftconferences.com/dynamic/conferences/usrusssypm00.htm

Putin on the Oligarchs · “It is crucial for us to create equal conditions for all, so that nobody can attach himself to the authorities and use these advantages for himself…not a single clan, not a single oligarch…all should be equally distanced from power.” (February 2000) · “You know we have a saying about catching fish in muddy waters. Here there are fishermen who have already caught a lot and want to keep the situation as it is for a long-term historical period…I don’t think this is acceptable for the Russian people or for our partners abroad.” (July 2000)

The Oligarchs in their Own Words Boris Berezovsky: · “Anyone who hasn’t just slept through the last decade has deliberately or unwittingly broken the law. If an amnesty isn’t declared, the consequences for Russia will be grave and society won’t be stable.” Vladimir Potanin: · “The government clearly aims to threaten the businessmen and soften them like clay. This clay is not ready to be used for sculpting something new. Many oligarchs are tired of the lack of well-defined rules and are waiting for the Kremlin to define the guidelines.” Kakha Bendukidze: · “Political power in the economy must be minimized and that will reduce opportunities for businessmen to be close to power. Meanwhile, the fear remains. Unless the state calls off its tax inspectors—any businessman is a potential criminal.”

Prime Minister Mikhail Kasyanov: · “I know a lot of businessmen and well-known entrepreneurs, but I don’t have any concrete ties to any particular financial-industrial group.” · “Today, oligarchs have no immunity, and that’s why law enforcement bodies are doing their regular job concerning their companies. Maybe before, this process did not touch the oligarchs. That is why we can now see splashes of emotion.”

5 Russia Watch Special: SPOTLIGHT ON THE OLIGARCHS On July 28 Russian President Vladimir Putin met with 21 of Russia’s most influential businessmen to “redefine the relationship between the state and big business.” At that meeting, Putin assured the “oligarchs” that Russia’s privatization results would remain unchallenged, but stopped far short of offering a general amnesty for crimes committed in that process. In opening the meeting, he said: “I want to draw your attention straightaway to the fact that you have yourselves formed this very state, to a large extent through political and quasi-political structures under your control. So there is no point in blaming the reflection in the mirror.”

The oligarchs responded cautiously. “There’s no quick fix,” said Kakha Bendukidze, general director of the Ura l- mash engineering plant. “Political power in the economy must be minimized and that will reduce opportunities for businessmen to be close to power. Meanwhile, the fear remains. Unless the state calls off its tax inspectors—any businessman is a potential criminal,” he said. Vladimir Potanin, whose industrial holding, Norilsk Nickel, is under investigation, said: “It is not that I have lost my fear of the authorities after this meeting. I was uncertain and worried about the development of the situation. The main uncertainty was whether we were being heard and whether in general we businessmen were needed as a class.”

The Kremlin roundtable, organized by liberal lawmaker Boris Nemtsov, could not have come at a more important time for the oligarchs. In the last two months, many of them have found themselves subjects of investigations by the General Prosecutor’s Office, Tax Police, and Federal Security Service. After years of cozying up to the government, buying up the state’s most valuable resources in noncompetitive bidding, receiving state-guaranteed loans with little accountability, and flouting the country’s tax laws with impunity, the heads of some of Russia’s leading financial- industrial groups have been thrust under the spotlight.

Now that the oligarchs are being scrutinized for crimes committed during their rise to power, it is worth noting the ambiguous legal conditions that allowed them to flourish. In the period following 1991, when the Communist Party lost its monopoly on power, the economic rules of the game in Russia became exceedingly unclear. The transition from a communist system, in which private ownership was criminal and normal buying and selling was denounced as “speculation,” to a market-based system, which requires its own elaborate legal infrastructure, created a legal labyrinth for emerging businesses. In the gray void between discredited Soviet institutions and yet-to-be-formed market structures, there were many opportunities to amass power and wealth. Savvy entrepreneurs exploited them all. As Boris Berezovsky said recently: “Anyone who hasn’t just slept through the last decade has deliberately or unwittingly broken the law.”

Russian citizens have little sympathy for the tycoons, whom they hold responsible for “corruption and obstruction in the decisionmaking sphere; creaming off profits from the nation’s natural resources and then smuggling them to offshore havens, falsifying the election process, and corruption of the media, legislature, and judiciary,” among other dark deeds. A recent poll by the Public Opinion Foundation found that some 75% of Russians favor prosecuting those who illegally privatized state enterprises, and 63% believe that the results of privatization should be re- versed if laws were broken.

Western response to the crackdown reflects a distinct ambivalence. On the one hand, the Russian government is finally doing what Western advisors and governments have advocated for years: getting serious about collecting taxes from the country’s biggest tax evaders, enforcing the economic rules of the game, and threatening, at least, to eliminate once and for all the system of crony capitalism that flourished under Putin’s predecessor. On the other hand, Putin’s get-tough measures are difficult to distinguish from actions that would signify the beginnings of an authoritarian dictatorship in which the law and the law enforcement agencies become tools in the hands of an all- powerful president.

Enforcing the law and forcing everyone to play by the same rules on a level playing field is a major step in rebuild- ing the economy and creating a peaceful, democratic, and prosperous Russia. But is “elimination of oligarchs as a class” a realistic goal for Russia’s new leaders? Must the oligarchs be eradicated in order for democracy to flourish in Russia?

6 In the original Greek sense, of course, oligarchy (rule by the few) is incompatible with democracy (rule by the many). Both Plato and Aristotle discussed the propensity of oligarchs to rule in their own interest and accumulate special powers and privileges denied to ordinary people. Furthermore, they proposed that the prevailing tendency of oligarchy is towards plutocracy, in which power and privileges are based on wealth.

When the term “oligarch” was applied in the Russian context in 1996, many of Russia’s big businessmen were already living up to the name. They had privatized the holdings, assets, and management of the country’s most valuable enterprises. They had built impressive empires combining industrial plants, oil companies, banks, and media outlets. In less than a decade, many had amassed great fortunes, becoming multi-millionaires and even billionaires. They had bought, and in many cases even owned officials at the highest levels of government.

Unlike the Rockefellers, Morgans, and Carnegies, Russia’s robber barons have re-invested remarkably little of their wealth into the Russian industries they control, or even their own enterprises. Instead, they often stripped assets, milked resource-extracting companies as cash cows, and deposited the profits in offshore accounts and foreign real estate. DEFINING THE PROBLEM It is normal for leaders of enterprises to seek to dominate their markets. Microsoft is not a Russian company. In every country, business leaders seek to influence government’s decisions. So what’s the problem?

First, economists raise concerns about excessive concentration of economic power. Oligopolies lead to inefficiencies in market performance as oligopolists exploit their dominant position in the market to squeeze out competitors; col- lusive practices tend to drive up prices and stifle innovation. Boris Berezovsky once boasted—before the August 1998 financial crash—that seven men controlled fifty percent of the Russian economy. While that was surely an exaggeration, the point was clear: economic power in Russia is concentrated in the hands of a tiny minority.

But how uncommon is this phenomenon? Concentration of economic power is difficult to compare among countries, but as a start, consider Japan’s financial-industrial groups, the chaebol in South Korea, or the clan-based business structures in Indonesia. In fact, oligopolies, and government battles against them, are an old story in the United States. John Kenneth Galbraith noted over twenty years ago that the heads of the firms that together produce more than half the economic output of the US would not fill a university auditorium. Concentration of economic power in America has likely increased since then. The anti-trust suit against Microsoft illustrates both the negative consequences of monopoly and government’s efforts to contain them.

Second, the enrichment of Russia’s oligarchs has been accompanied by profound corruption of the government. During Yeltsin’s reign, the oligarchs managed to “privatize” government to an unprecedented extent—from the “purchase” of ministries to the infiltration of the President’s own entourage. Sale of parliamentary votes, sale of presidential decrees, sale of court decisions—such actions are indisputably bad for government.

Corruption is also bad for the economy. As a recent World Bank study finds, in “capture economies” like Russia’s, powerful firms have been able to “capture the state” by bribing public officials, in order to gain business advantages over competitors and increase the personal wealth of the owners. The researchers conclude that “the gains to captor firms come at a substantial social cost, both in terms of the performance of all other firms in the capture economy and the extent of uncertainty of property and contract rights.”*

WHAT IS TO BE DONE? It is much easier to criticize the Putin government’s actions or to identify legitimate worries than to identify what specifically should be done. What course of action should Russia’s President take, given the realities of Russia today? Among the options, consider: offering oligarchs amnesty for past crimes, but strictly enforcing laws from this point forward; pursuing selective prosecution for past crimes to “make an example” out of a few law-breakers; let- ting the appropriate agencies prosecute past crimes and enforce laws as they choose; or enforcing all laws from this point forward, but prosecuting only certain kinds of past crimes—for instance, those involving sums over $100 million or infringing on the “interests of the state.”

7 If by cracking down on oligarchs who have broken the law, Putin is “leveling the playing field,” as he promised to do in his recent State of the Nation address to the parliament, he may succeed in taking a major step in Russia’s marketization and democratization.

Putin seems to be taking his task seriously. Less than three months after his inauguration, he has defied predictions by curbing the power of Russia’s regional governors and oligarchs—including those considered protected by the Kremlin entourage, and pushing through perhaps the most significant tax reform package in the country’s post- Soviet history. Wary observers warn that Putin’s success in taming his opponents could lead to abuse of the significant power he now holds. And looking at Putin’s own inner circle, made up of members of the security services, as well as influential holdovers from the Yeltsin era, the question arises: in the event that the class of criminally wealthy oligarchs is somehow eradicated, who or what will replace them?

______* Joel Hellman, Geraint Jones, and Daniel Kaufmann, “Seize the State, Seize the Day: State Capture, Corruption and Influence in Transition,” Paper prepared for the World Development Report 2001 Workshop, Washington, DC, 17-19 July 2000. Available on the World Bank web site: http://www.worldbank.org/wbi/governance

REACTIONS TO THE ROUNDTABLE Boris Nemtsov, the politician who organized the roundtable, gave an upbeat assessment of the results. Kakha Bendukidze, Director of the Uralmash engineering plant, offered a more sanguine view.

Boris Nemtsov: “Today’s meeting draws a line under 10 years of the initial accumulation of capital. The era of oligarchs is over.” Kakha Bendukidze : “I do not think this meeting draws any line. The president asked us whether we were prepared to abstain from installing our people into the government structures, and then he answered himself—no, you are not ready.” Boris Nemtsov: “The oligarchs are fed up with being oligarchs. They just want to be businessmen and pay their taxes.” Kakha Bendukidze : “Until tax rates are lowered, every businessman is a criminal.”

Company What They Do “Oligarch” Reason for Probe

Media-Most Media holding company Vladimir Gusinsky Alleged fraud in 1997 privatization scheme

Norilsk Nickel Producer of nickel and Vladimir Potanin Alleged fraud in privatization of Norilsk palladium Nickel

LUKoil Producer of oil Vagit Alekperov Alleged tax evasion

Gazprom Producer of natural gas Rem Vyakhirev Connection to Media-Most

Tyumen Oil Producer of oil Mikhail Fridman Alleged violations in privatization of Company companies that became TNK subsidiaries (TNK)

Avtovaz Car manufacturer Vladimir Kadannikov Alleged tax evasion

Unified Energy Electricity monopoly Anatoly Chubais Possible violation of law on foreign Systems (UES) ownership

Aeroflot Airline Boris Berezovsky Alleged fraud

Sibneft Producer of oil Roman Abramovich Possible tax evasion

8 The Putin government’s recent assault on Russia’s leading businessmen has raised questions about the links between political and economic freedoms, on one hand, and political and economic power, on the other. It seems likely that there are some legal (not to say moral) grounds for cracking down on Russia’s “oligarchs.” But the full implications of strong-arm police regulation of private business are unclear. Can Russia have democracy without independent bases of economic power? Kelly McMann has looked at the evidence.—ed. THE CASE FOR ECONOMIC PLURALISM By Kelly M. McMann, Ph.D. Kelly M. McMann is an associate at Harvard University’s Davis Center for Russian Studies. In the course of her research on democracy in post-Soviet provinces, she conducted two surveys, 252 in-depth interviews, and observational studies in Russia and Kyrgyzstan. Her doctoral dissertation is entitled “Symbiotic Transitions: Democratic Development and Economic Independence in Post-Soviet Provinces.”

Democracy and capitalism go hand ple, that make free market democra- build enthusiasm for democracy, but in hand throughout the world, ac- cies successful? And thus, the “re- instead, in the minds of Russian cording to the evidence, the rheto- form alchemists” in the post-Soviet citizens economic hardship and the ric, and the policy prescriptions. sphere may miss a critical element introduction of democracy have The evidence shows that democratic that links the two. What does the been conflated, reducing support for countries have relatively free mar- evidence from the Soviet successor the latter. Furthermore, the privati- kets—instead of the centrally states, particularly Russia, suggest zation of state property has not cre- planned, command economies we so far? ated a large constituency for reform came to know in the East Bloc. because the gains have gone to only This reality has been swept up into Looking at the numbers alone, those a minuscule cross-section of soci- the oratory of the Second World postcommunist countries that have ety, and the winners prefer the War, the Cold War, and the con- undertaken the most extensive status quo to additional reforms.3 temporary “Who Lost Russia?” democratic reforms have also car- ried out the most market reforms, Nonetheless, the response to this suggesting that the relationship bleak picture should not be to slow Democracy requires one between democracy and capitalism or reverse reforms, because even in key feature of capital- holds in the east as well.1 The most Russia democracy and capitalism ism—economic plural- radical economic reforms have not are compatible in the long-term. In resulted in sharp economic declines, fact, democracy requires one key ism. so reform-oriented incumbents have feature of capitalism—economic been at minimal risk of losing their pluralism. debate, beginning perhaps with the posts. When electoral reversals Noble-prize winning economist have occurred, reforms have not On a daily basis and for Friedrich Hayek’s warning to the been discarded by the victors, and British, and the world, in the 1940s the dispersed nature of the eco- long-term activism, that political liberty requires economic pain has stymied anti-reform people will not bite the nomic freedom. With the cru m- protest, by hindering collective ac- 2 bling of communism, Russia’s “re- tion. hand that feeds them. formers” have put this rhetoric to the test—not sitting back to watch In Russia, with its electoral (but not In order for democratic institutions, the institutions of democracy and liberal) democracy and unregulated including elections, free press, and capitalism develop as they did in the capitalism, we see a mixed relation- civic groups, to operate effectively, West but instead trying to build ship between economic and political citizens must be able to find em- them. reforms. Electoral backlash, such as ployment outside the state sector or the communists’ success in the 1995 outside their province. Otherwise, But will democracy and capitalism State Duma elections, did not re- local officials can use threats of job po planu (or “by the plan,” as the verse reform, although this can be loss, firings, and repeated state in- Soviets would say) also enjoy a attributed to the weakness of par- spections of private businesses to beneficial coexistence? The risk is liament as much as to the commu- effectively sanction behavior that that no one fully understands the nists’ changing views. In terms of challenges government authority. democracy-capitalism synergy in the public’s attitudes, economic Of course, there will always be a the West. Is it middle class atti- reform has not increased support for few brave souls prepared to risk tudes, voters’ pocketbooks, or the democracy, as reform architects had their economic security for their free flow of information, for exa m- hoped. Economic improvement can beliefs, and during an acute crisis, 9 such as the 1991 coup, people may of economic pluralism can exist for garchs—Russia’s “aristocracy”— be willing to suffer economic sanc- a variety of reasons. In a region like also poses risks for democracy. tions and even greater threats to join Ulyanovsk where the governor and Yet, Russian oligarchs are clearly the bandwagon and speak out. But his friends and family have created the lesser of the two evils as their on a daily basis and for long-term a political-economic monopoly, competing interests ensure greater activism, like the operation of an private firms and entrepreneurship economic pluralism than would opposition newspaper, people will are limited. In other post-Soviet exist under a state-controlled not bite the hand that feeds them. provinces, such as Naryn, economy. Kyrgyzstan, geography may act as a Take, for example, the director of a barrier to developing a trading busi- How can these findings guide the state institution in Ulyanovsk who ness, one of the most common work of the reform alchemists? lost his job three times between forms of entrepreneurship in the They suggest that national political 1991 and 1997 because of his role post-Soviet sphere. leaders need to create economic as leader of a now defunct political pluralism so that potential activists party. Pressure from the regional, The idea of economic pluralism can bring to life the democratic in- county, and city governments forced resonates with the reform experi- stitutions that exist on paper. Like- other members to leave, and the ences of Western Europe and the wise, foreign supporters of demo c- party disbanded. United States; however, what is racy may first need to promote eco- critical in the post-Soviet context is nomic independence, through pro- Economic independence is also that actual and potential activists in grams to provide credit and attract meaningful at the regional level: in this part of the world need to ac- foreign investment, for instance. provinces where people cannot eas- quire economic independence not Otherwise, their enthusiastic words ily find a job in the private sector, from the aristocracy or large land- will fall on deaf ears in regions start their own business, or earn owners, but from the state. The where people remain under the eco- income beyond the borders of their comparison with the West also re- nomic thumb of the state. region, activism is weak. The lack minds us that the influence of oli-

1 See M. Steven Fish, “Democratization’s Requisites: The Postcommunist Experience,” Post-Soviet Affairs, 14, 3 (1998), 212-47.

2 See Joel S. Hellman, “Winners Take All: The Politics of Partial Reform in Postcommunist Transitions,” World Politics, 50 (January 1998), 203-234.

3Ibid.

ORIGINS OF THE OLIGARCHS: LOANS-FOR-SHARES Chrystia Freeland, Deputy Editor of the Globe and Mail on the loans-for-shares scheme and creation of Russia’s oligarchs: “In 1995, on the eve of presidential elections, which the communists seemed almost certain to win, Yeltsin and his liberal allies agree to an audacious privatization deal known as loans-for- shares. The scheme was so brazen and so Byzantine that it was months, if not years, before the rest of the world woke up to it. At heart, loans-for-shares was a crude trade of property for political support. In exchange for some of Russia’s most valuable companies (including several oil firms and the world’s largest nickel mine), a group of businessmen—the oligarchs—threw their political and financial muscle behind the Kremlin. At first, it seemed to be a good deal for both sides. Yeltsin gave the oligarchs their economic empires, making them the founding fathers of Russian capitalism; the oligarchs gave Yeltsin his second term, securing his place as the founding father of the new Russia’s political order. But, ultimately, loans-for-shares turned out to be a Faustian bargain. Once the oligarchs had discov- ered how to extract instant fortunes from the state, they were reluctant to learn more tedious ways of doing business. Once Yeltsin and his liberal allies had traded state property for political favors, they could never again be pure.”*

For more on the loans-for-shares auctions, see Chrystia Freeland’s new book, The Sale of the Century: The Inside Story of the Second Russian Revolution (New York: Little, Brown, 2000).

*Chrystia Freeland, “To Russia With Love,” New Statesman, June 19, 2000.

10 INSIDER INFORMATION Analysis of Russian politics by leading Russian specialists

COMING THIS FALL: THE THIRD INFORMATION WAR WHY RUSSIA’S “FEUDAL LORDS” WILL JOIN AN ANTI-PUTIN COALITION

By Daniil B. Dondurei Daniil Dondurei is a political commentator and the Editor-in-Chief of the journal Iskusstvo Kino. He received his Ph.D. in Philosophy from the Institute of Sociology at the Russian Academy of Sciences. He is a specialist in analysis of “mass ideology” and interdisciplinary research of film and television in Russia, and a consultant to the Russian Government on the film industry.

The Russian oligarchs realized lack of transparency in account- just how immense their political ing; a very large, expensive, and clout in Russia is after the 1996 weak government; barriers to the In the coming months Davos summit, where they en- free flow of capital; corrupt gov- all the “new feudal listed Anatoly Chubais on a most ernment officials; collusion of lords” will join a important mission: keeping the business and government; une- Communists out of power. It was qual conditions for businesses; a broad anti-Putin coa- at that time that a strategy was nonfunctioning judicial system; lition headed by Bere- designed which enabled the ail- arbitrary local authorities; the ing Yeltsin (whose popularity privatization of taxes by firms; zovsky and Gusinsky. rating was a mere 2%) to win the etc. presidential election. On the one hand, the oligarchs This integral economic and po- cultivated a national depression litical system, which had taken by propagating the conviction The oligarchs culti- shape by late 1996, could not that Russia has no future. On the vated a national de- possibly exist all by itself in other hand, they tried to instill in pression by propa- Russia, a country so sensitive to most Russians a firm belief that ideas and ideology. The system such radical reformers as Chu- gating the conviction was supported by a powerful bais and Gaidar have done the that Russia has no fu- ideological doctrine and system greatest damage to Russia. of values—the importance and ture. potency of which are yet to be It was precisely this ideological recognized by the intellectual program that enabled the “new Convinced that the electorate elite. Russian feudal lords” (i.e. finan- was open to all sorts of manipu- cial and industrial oligarchs who lation, the big Russian capitalists At that time the oligarchs, with behave like barons, and gover- began to fine-tune the socioeco- the help of the media under their nors who think of themselves nomic system that later became control, succeeded in inculcating almost as princes), to maintain known as “contractual capital- in the public mind the following and control “the Market, Russian ism” or “crony capitalism.” ideas: that the market is insepa- style.” That is why at times when rable from criminality, that lib- the Russian economy was in In my opinion this system is eral reforms in Russia are re- danger of transforming into a better described as “the Market, sponsible for producing an unjust Western-style market—as was Russian-style.” Its ingredients society, and that defamation of the case in fall of 1997—the oli- are: a disproportionately large and opposition to the govern- garchs waged their first success- shadow economy (barter, dirty ment are natural for every ful information war against money, fictitious contracts, etc.); thinking person. Anatoly Chubais. However, they

11 lost their second information war Finally, he has disarmed the ally-oriented rules. They would in 1999, against Putin. Communists politically by like very much to go back to breaking their monopoly on pa- bargaining with the govern- They had at their disposal all the triotism. ment—something they grew ac- necessary resources to mount customed to under Yeltsin— these ideological attacks. Firstly, The fused economic when any benefits could be bar- their financial resources allowed gained for, and in the Kremlin’s them to play successfully on the and political system very corridors. GKO market (short-term treasury was supported by a The basis for an opposition coa- bills), while foreign businessmen powerful ideological in Russia were intimidated by lition will be cooperation of re- gloomy Russian predictions. doctrine. gional political leaders and oligarchs. With this in mind, Bere- zovsky’s words that “the internal Secondly, the oligarchs con- Naturally, the oligarchs, who trolled the media, which they had political configuration of the previously allied themselves with Duma will soon change” deserve bought back in 1995. As is well the Communists, do not intend to known, they now control four of attention. Thus, a new anti-Putin give in to Putin’s mercy easily. opposition will acquire a power- the six national TV channels: In the coming months all the Berezovsky controls ORT and ful information resource—the “new feudal lords” will join a oligarchs who control the media TV-6; Gusinsky controls NTV; broad anti-Putin coalition headed and Luzhkov – TV Center. and are uniform in their inten- by Berezovsky and Gusinsky, tions to preserve a system con- who are ostensibly quarrelling venient for them. Thirdly, useful in solving the now. oligarchs’ problems stands the This is exactly why the third Russian intelligentsia, which still The point here is not the role believes that by lamenting their information war will inevitably Berezovsky may play in creating begin this fall. hardships they support the ill- this powerful opposition front. fated Russian masses instead of The idea of a “constructive op- However, the Kremlin is watch- increasing the oligarch’s wealth. position” is appealing to the Rus- All the oligarchs had to do was ful. It has delivered blows time sian “feudal lords” and, first and and again to oligarchs who are play on Russians’ socialist con- foremost, to the most important victions. used to working out differences class of the intellectual elite. with the government individually However, the Kremlin, which the and are not very cooperative with government opposition began in Berezovsky’s words each other. 1998 to call “the Family” grew that “the internal po- weary of being held hostage to It is not clear whether the oli- relations between several oligar- litical configuration of garchs will be able to use the chic clans. media effectively to forge an the Duma will soon alliance with the governors Vladimir Putin was brought out change” deserve at- against the Kremlin. Their only into the political arena and has tention. hope lies in Putin’s administra- accomplished a great deal in less tion making blunders, as has often been the case (e.g. Gusin- than a year. He persuaded Rus- Just as in the Middle Ages the sians to accept the inevitability sky’s arrest or the Norilsk Nickel new barons will come together to saga). Only in response to the of radical liberal economic re- oppose the Kremlin’s claims of form, the necessity of a unified government’s miscalculations total control over Russian society like those described above will Russia, a vertically integrated and the Kremlin’s intention— government power, a second they be able to start the third albeit by authoritarian means—to information war. wave of privatization (which is find a path to a more open soci- about to begin), and the impor- ety governed by universal, liber- tance of social transformation.

12 THE RETURN OF THE OLIGARCHS? (LESSONS FROM THE MEETING AT THE KREMLIN)

By Alexei A. Kara-Murza Alexei Kara-Murza is a Professor of Political Studies of Moscow University and Director of the Political Philosophy Department at the Institute of Philosophy of Russian Academy of Sciences.

On July 28th, in a meeting at the ment structures), but in fact he Therefore, the meeting in the Kremlin with prominent Rus- would demand a vow of loyalty Kremlin demonstrated the ex- sian businessmen, President from those invited. Putin turned cessive loyalty of the busines s- Vladimir Putin pronounced a a conversation that was sup- men to Putin: among the in- phrase that was later singled out posed to be about the impossi- vited, nobody was even consid- by all analysts: bility of a redistribution of pri- ering political opposition to vate property into the convers a- Putin. “When today you demand po- tion about the impossibility of litical guarantees for yourselves redistribution of His Power. On the contrary, many of those and your businesses from the present control serious political government, I want to draw It was possible to predict that and information resources your attention to the fact that such would be the meeting’s (about 10 of them are among you built this state yourself, to a outcome. It was clear in ad- the 100 leading politicians in great degree through the politi- vance that the “oligarchs” who the country) and long ago cal or quasi-political structures were not invited to the meeting placed these resources in the under your control. So there is were those who displayed their service of the new President. It no point in blaming the reflec- political disloyalty (or incom- is unlikely that Putin intended tion in the mirror.” plete loyalty) to Putin during to object to such a “collusion of the recent elections. business and politics.”

Putin turned a con- This concerns, first of all, Vla- But then the following ques- versation that was dimir Gusinsky, the head of the tions arise: What is the meaning supposed to be about dissident information holding of the Kremlin meeting? What “Media-Most”, which openly signal has been sent to society the impossibility of a aligned with Grigory Yavlin- as a whole and to the Russian redistribution of pri- sky, and previously supported business community in par- anti-Putin forces (Yabloko and ticular? vate property into Fatherland) during the parlia- the conversation mentary elections in December. I think there are two groups of about the impossibil- This also pertains, though to a factors: those factors that are lesser extent, to Vladimir Ka- obvious and implicit on the one ity of redistribution dannikov, the head of “Volga hand, and those that are contro- of His Power. Auto Plant” (Avtovaz), who versial, multi-meaning, and remained loyal to Putin’s com- probable on the other. This petitor Konstantin Titov, Go v- clear division has a special Directly citing the Russian ernor of Samara, during the meaning, because in Russia (but saying “Don’t blame the mirror presidential elections. not exclusively in Russia) if your face is ugly,” a proverb groundless hopes, illusions, that is the always offensive to Boris Berezovsky, who has dreams, or, on the contrary, the addressee, Putin forcefully recently undertaken his own increased fears and phobias took the initiative of the meet- political counter-game, directed often overshadow the gist of ing into his own hands. He more against his competitors in obvious matters. And from would not, as the businessmen Putin’s team than against Putin them often come plunges from expected, answer the questions himself, was not invited either. euphoria to panic. of the anxious oligarchs (many of whom have lately experi- enced pressure from govern-

13 I start with the obvious matters, “disloyal” (Gusinsky, Berezov- Who are they – these new in my opinion, which are easy sky, Kadannikov, and others) “Putinian oligarchs”? to “touch” (so to speak) and to from the elite circle of the “cho- prove empirically. sen ones.” First, the number of oligarchs has grown, and this too is a sign The first signal was given to It is also obvious that Putin that the authorities need to at- broader public opinion—to signaled (and this signal was tract new forces and names, and those millions of “old Rus- understood by the business elite at the same time it signals an sians,” who to a large extent, exactly in this way) that the opportunity for some of the ensured Putin’s convincing new President needs, just as current outsiders to be included victory. It is obvious that the Boris Yeltsin needed in his into the “selected circle.” President and his team consider time, his own, reliable “pillars all actions (including putting of the business community.” Second, among Putin’s oli- pressure on large businesses garchs there are fewer bankers forming demonstrative peace Putin clearly formulated his and more manufacturers. with them) from the point of criteria for selection into the view of maintaining and in- “loyal group”: unconditional Finally, third, the majority of creasing Putin’s most important personal loyalty and direct sup- new oligarchs are, to use an resource – his popularity in port – financial, political, and accepted saying, “nationally- general public opinion. using the mass media. It was oriented” businessmen; their not without reason that several “corrected” ethnic-national The meeting in the Kremlin (as invited persons announced after composition is also a sign – reported in the mass media) the meeting: “I feel relaxed, as I there are more Russians, and demonstrated to the population understand now the new rules fewer Jews; there are single that the power plays against the of the game.” Putin’s favorite representatives of ethnic mi- hated oligarchs achieved their role, that of the “good investi- norities as well. aim – the oligarchs quieted gator,” worked well this time down. And the “tamed” oli- too. garchs can be left alone for a Is the Kremlin taking while. The television set Finally, while criticizing the a step towards the showed a picture to the public shadow deals between busi- democratization? where neither Gusinsky, Bere- nessmen and corrupt state bu- zovsky, Chubais, nor Abramo- reaucrats, the Kremlin side di- vich was there beside Putin. It rectly named those persons in Everything mentioned above is is another question which of the President’s circle who will the crux of what is evident. All them have really been banished, control the business elite (the the rest pertains mostly to the which have been temporarily heads of Administration – Vo- realm of probability: the evolu- removed, and which ones are loshin, Medvedev, Surkov). In tion of Putin’s rule may just as purposefully hidden from pub- the language of business peo- easily continue in one direction lic view by Putin’s team itself. ple, it’s always meant an invi- as in completely the opposite tation to “work directly”. direction. The main question, for example, remains open-

Forget about the What is the end result? First of ended: is the Kremlin taking a “end of the oli- all, one should dismiss all the step towards the democratiza- garchs.” talk about the “end of the oli- tion of business in Russia, its garchs.” If one follows the old introduction into a law- definition that “oligarchs” are protected framework, or, on the The effect of the Kremlin con- “business people who enjoy contrary, a step toward factual versation about oligarchs is especially confidential relation- nationalization of large busi- obvious too. The “confidential” ships with the authorities,” then ness? (according to their own words) the special invitation to the talk with the President estab- Kremlin of twenty one select My version of what happened is lished not so much a guarantee businessmen is nothing other this: strategically, nothing has of their own safety (no absolute than the continuation, and even changed yet, including popular guarantees have been granted so restoration of oligarchy: its Russian business. Undoubtedly, far), as the fact of expelling the “renaissance.” a Russian businessman—either

14 a small or a large one—regards On one hand, this businessman fact that Gusinsky was arrested the oligarchs as a kind of indi- reasons in the following way: if on unclear charges, or the fact cator. yesterday the special services that he was suddenly allowed to came to oligarch P. or oligarch go to Spain? X., then tomorrow they will The special invitation come to me. But this reasoning The trips of “elite businessmen” to the Kremlin of 21 has another side: if P. or X. to the Kremlin do not guarantee select businessmen is went to Kremlin and agreed on and cannot guarantee the safety something, it does not at all of honest Russian business re- nothing other than guarantee my safety. And, by gardless of whether these trips the “renaissance” of the way, it is not clear what are “individual- secretive,” as it more strongly traumatizes the was at the end of Yeltsin power, the oligarchs. psyche of the ordinary Russian or “collective-public,” which is businessman and stresses the what we have had the pleasure lack of his legal protection: the of observing recently.

BACK ISSUES OF RUSSIAN ELECTION WATCH AND RUSSIA WATCH CAN BE FOUND AT: www.ksg.harvard.edu/bcsia/sdi

15 IT’S OVER. RUSSIA, ARE YOU ALL RIGHT? THE OLIGARCHS HAVE LOST AN IMPORTANT BATTLE

By Vladimir Boxer Vladimir Boxer is a Fellow at SDI, where he has been pursuing research on democratization and elections in Russia since 1997. He first became active in the Russian pro-democratic movement in 1988. His political experience includes co-chairing the winning national election campaign of “Democratic Russia” in 1990 and directing political advertising for Yeltsin’s presidential campaign in 1991.

On the twenty-sixth of July, the the other hand would have it out. nomic, geopolitical, and social epoch of oligarchic quasi- This holds true regardless of who stability. feudalism in contemporary Russia was to become the president and de-facto came to an end. regardless of relations between Did the clan leaders realize that different oligarchs and regional their time was up? The answer is The importance of this fact for leaders. yes and no. On the one hand, the Russia’s future development com- oligarchs, consumed by constant pares only to the 18th of Brumaire, infighting over power and re- 1799 when Napoleon Bonaparte It was inevitable that sources could not see the larger moved to consolidate all power in any president after picture of what was going on. Very France. Yeltsin would “have it often they had to concern themselves not only with expansion of Yet, unlike the glorious Corsican, out” with the oligarchs their financial influence but almost Putin attained his goal within the and regional barons. with their very survival in the framework of the Russian consti- nearest future. Therefore, averting tution. That bastion of feudalism— immediate danger became more the Federation Council—was be- It is no accident that former Prime important than forming a long- sieged by battalions of public Minister Primakov, who advocated term strategy. The warrant for opinion, not soldiers. Or maybe a partial, conservative restoration, Berezovsky’s arrest early in 1999 just by the impression that this came up with plans to reform the serves as a good example. public opinion existed, as a kind of framework of federative relations social demand. This impression is that was far more radical than even more important. Putin’s. However, just like the The oligarchs and re- preceding young reformers in the gional leaders tried to government, Primakov was unsuc- The oligarchs as involuntary tacti- construct an “insur- cal allies of the feudal governors cessful in reining in the oligarchs. failed for the first time to beat the ance policy.” federal government in the virtual It is also no accident that the reforms in government currently arena that they used to consider On the other hand, the oligarchs underway were a necessary condi- their home turf. Meanwhile, a and regional leaders tried to set up myth was destroyed—the myth tion for Gref’s liberal program. In the context of an oligarchic-feudal an “insurance policy” of checks that the media can sell Russians and balances in advance to coun- anything, even when it runs coun- and absolutely corrupt system in Russia, it was simply impossible to teract the potentially too-powerful ter to their fundamental values and presidential candidates they sup- conceptions of good and evil. move either to reforms or restoration. This system itself could only ported. This is exactly what they did to Yeltsin in 1996. Along with How and why did this happen? exist in an unstable environment. However, by late 1990s both soci- certain economic preferences, the kinds of checks and balances con- It was inevitable that Yeltsin’s ety and the federal government were demanding, above all, eco- sisted of control over the influen- successor on the one hand and the tial media, control over some oligarchs and regional barons on groups in the Duma and the Fed-

16 eration Council, and infiltration time—except for in an election The first signs that these tactics into the top political management year— the Russian people would would fail in a fight against a of the candidate whom the oli- figure into those political games strong leader with growing popu- garchs supported. only to the extent that by manipu- larity and supported by real ex- lating interpretations of public pectations in public opinion ap- In Putin’s case, while he was act- opinion polls the oligarchs could peared during Primakov’s tenure. ing president, the oligarchs tried to influence target elite groups or the At that time the media campaign get their people appointed to ex- president. Thus, the strategy of the against Primakov had no effect on ecutive positions in the presiden- oligarchs’ PR in a non-campaign either public opinion or the elite. tial administration and the Cabinet. year was designed as Byzantine Primakov was sacked because he PR aimed at influencing first and was growing stronger, not weaker, foremost the top echelon of the which presented a direct threat to Only a month after ruling elite. Yeltsin. being elected, Putin sought to change the The design combined an old- Elected with an unambiguous fashioned palace intrigue with PR voter mandate to establish order configuration of politi- blackmail. It would start with an (regardless of how different groups cal power. information attack on the presi- of voters view “order”), Putin is dent/government/rival group. This even more popular than Primakov would create the impression was. But the main point is that, by It is clear that certain clans who among the elite that the victims of definition, the newly elected presi- were betting on Putin succeeding the attack were political goners. dent presents no danger to the cur- in doing all that. Their opponents Then a shift in balance among the rent president, and nobody can fire who bet on Luzhkov or Primakov elite would come—a latent ulti- him. would have obtained similar pref- matum to the president delivered erences and benefits had the elec- by the oligarchs’ people in the The only things that oligarchs and tion turned out differently. None- administration. Finally, the presi- their allies could possibly use to theless, only a month after being dent would make some conces- blackmail him are: rejection by the elected President, Putin sought to sions, mostly on issues of person- West and an institutional blocking change the configuration of polit i- nel. of his reforms by three mecha- cal power in the country. nisms: 1) the Duma 2) the gover- nor-controlled Federation Council, Neither the oligarchs nor the gov- Both the Gusinsky- and 3) the regions, by governors ernors were happy about reforms controlled media and who maintain absolute power and that undermined their might. How- the media of his main arbitrary rule there, and who could ever, it turned out that the above have disregarded any federal law mentioned checks and balances competitors inter- because of their immunity from would not constrain the new Presi- legal prosecution. dent. preted Gusinsky’s run- ins with the prosecu- All this determined the direction of The problem was that before the tor’s office in the same PR and palace efforts of different oligarchs could exert their influ- way. oligarchic groups and regional ence because Yeltsin was growing barons (though these efforts were weaker and less popular and had uncoordinated from the start). The no political or corporate groups or A proper ideological shape for end results these efforts sought to structures of his own that he could domestic or international public achieve were: a) Putin’s rejection lean on. Besides, Yeltsin had to opinion was a Byzantine necessary (or a cold welcome, at the very take into consideration a more or condition of such campaigns. The least) by Western leaders at the less oppositional and patently anti- ideological slogans ranged from Okinawa summit, and b) the Fed- reformist majority in the Duma at fighting corruption to fighting eral Council’s blocking of Putin’s all times. Under these circum- “unjust” privatization or Chubais’ reforms in such a way, so that stances, a fragile equilibrium was “bolshevism” to protecting the there would not be enough Duma maintained by sustaining a balance independent media (under the oli- supporters to surmount the veto. between various groups of elites garchs’ control). which included regional barons These two aims were connected to and oligarchic clans. At any each other not only in timeframe.

17 Putin’s defeat in the foreign policy The PR manipulations, sufficient arena would not add to his author- to reverse the arrows of responsi- And so far they are only asking for ity among the cautious governors, bility for poor economic condi- explanations. They got one. And who were wavering before the vote tions from certain players to oth- on July 28th they agreed with the on July 26. Besides, such a defeat ers, turned out to be powerless, as President that the oligarchs should could lead to the change in the one should have expected, as a be equidistant from power. The foreign rhetoric of the Russian means of urgent justification in the problem, however, is that perhaps authorities in an isolationist direc- public eye of the whole oligarch Putin would like to stress a differ- tion, and due to this change, could system and oligarchs as a corpora- ent part of the word “equi-distant” undermine the pro-Putin positions tion. It is possible to convince than oligarchs. of the liberal Duma factions of most Russians that Chubais is evil, SPS and Yabloko. Without their but not even (popular newscaster) It needs to be stressed that Putin’s guaranteed support, any veto of the Sergei Dorenko can inspire them victory over oligarchs and regional Federal Council would be insur- to think Berezovsky is an angel. barons, while important, is still just mountable. institutional. By depriving the The Okinawa success and the fi- governors of direct legislative This explains the remarkably asco (obvious even to the elite) of power and of their opportunities to similar interpretation—by the the first anti-Putin oligarch PR break federal laws, Putin critically Gusinsky-controlled media and the attack influenced the conformist undermined the foundation of oli- media of his main competitors majority of the Federal Council, garchic-feudal system. It is un- alike—of the history of Gusinsky’s and Putin, thus, received the insti- likely that the proponents of that relationship with the prosecutor’s tutional opportunities for his re- system will accept their complete office. The situation, when inves- forms. Notably, to achieve this defeat. Yet, to launch a counter- tigations into the activities of the target, the very same oligarch em- attack they have to broaden their magnate, who on top of many issaries who were introduced into coalition, and, accordingly, de- other things, happens to conduct the management of the Putin ad- velop a new ideological base. media business, was interpreted ministration as the proponents of exclusively as an attack on the oligarch interests were rather ef- The main directions of their or- independent media. Moreover, the fectively used. ganizational and ideological ac- oligarchic PR-men, adroitly using tivities are quite obvious. The po- their channels of influence over the litical and economic interests of Western media and public opinion, Russians can be con- the oligarchs and their allies will succeeded in presenting this inter- vinced that Chubais is be (and already are) deliberately pretation as the dominant one in mixed up with those of big busi- evil, but even Dorenko the West as well. This placed ness as such, and even with those Putin’s G-8 debut in danger. himself cannot make of the entire business community. them think that Oligarchic-controlled media will Subsequently the Putin team un- be (and already are) described as dertook the only right step: in- Berezovsky is an angel. the only free and independent spections began (or the threat of ones. Suppression of the robber their actualization) of practically Aiming to weaken their competi- and regional barons’ checks and all oligarch groups in regard to tors in business, the emissaries did balances to the presidential power abuses in taxes and finances. not even notice (and possibly still will be explained as a danger to haven’t noticed) that their partial civil society, and as a decisive step Surely, the oligarchic PR immedi- efforts are funneled into quite a toward authoritarianism. ately tried to pass it off as a war different strategy, geared toward with all big business, with any weakening the influence of all the The broad business and media business, with the irreversibility of oligarchs as such. According to communities, as well as pro- privatization. But that did not this strategy, some of the current democratic and human rights ad- sound very convincing: not for groups of elites are positioning vocacy organizations, will be ni - Western leaders, who for over a each other into a certain line, the vited to join that oligarchic- led year have been calling upon the direction of which is not yet coalition. Russian authorities to curb the known to them. They are yet to Robber Barons, and especially not grasp that this line, as a matter of What is interesting is that there is for Russian audiences. fact, leads to an exit from the elite. indeed a very real threat of certain At least from its very top echelon. levels of authoritarianism as a re-

18 sult of the suppression of oligar- choose Putin’s side in his battle chic-feudal political influence. Or perhaps, as a third option, the with the oligarchs? This is true since, in fact, only the oligarchs will manage to combine oligarchic-feudal checks and bal- their attack on Putin from both Imagine a girl is walking in a dark ances to the presidential power sides: both “liberal” and “leftist” forest and falls into a swamp. mattered in the contemporary Rus- so that different oligarchic groups There is no one around. As she sia. Similarly, the only strong would be the sponsors of different sinks into the bog, a little-known checks and balances to presidential directions. man appears and offers her a hand. power in recent Colombia were She has heard rumors about this those provided by the Medellin man, it seems, somewhere, some- and Cali cartels. Yet, what do the The only strong checks how—some are good, some not. Medellin and Cali cartels have to and balances to presi- Either he was with some guys who do with civil society? dential power in Co- tried to take advantage of a woman, or just the opposite, he lombia were those pro- In Russia the only protected a woman from some vided by the Medellin guys’ unwanted advances. She had checks and balances and Cali cartels. Yet, also heard from somebody that he were those produced was connected to a “bad family.” what do these cartels Others called this nothing but by the oligarchs and have in common with slander. God only knows what his regional barons. intentions might be in giving a civil society? hand to a girl alone in the woods. But, perhaps it’s better to accept Alternately, the oligarchs and their How should Russian society react the hand than to drown in the allies might make motions to the swamp. communists, agrarians, and trade- to such proposals? Keeping in unions. In that case, the main slo- mind that almost nobody knows for certain how far Putin will go in gan will be to stop “liberal reforms that go against the people.” strengthening his personal power, is it reasonable for Russians to

The views expressed by commentators in Russia Watch are not necessarily the views of the Strengthening Demo- cratic Institutions Project, the Belfer Center for Science and International Affairs, the John F. Kennedy School of Government, or Harvard University.

Special thanks to John Reppert and to translators Nina Bejanishvili and Roman Ilto

Sources of images for August issue (in order of appearance): lenta.ru, 7/28; ortv.ru, 7/8; vesti.ru, 7/24; lenta.ru, 6/10; ortv.ru, 7/12; lenta.ru, 7/17; ortv.ru, 6/29; bbc.co.uk, 7/13.

The Strengthening Democratic Institutions Project works to catalyze support for three great transformations underway in Russia and other countries of the former Soviet Union: to sustainable democracies, free market economies, and cooperative international relations. The Project seeks to understand Western stakes in these transformations, identify strategies for advancing Western interests, and encourage initiatives that increase the likelihood of success. It provides targeted intellectual and technical assistance to governments, international agencies, private institutions, and individuals seeking to facilitate these three great transformations.

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