<p> 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</p><p>SPOTLIGHT ON RUSSIA’S OLIGARCHS On July 28 Russian President Vladimir Putin met with 21 of Russia’s most influ- ential businessmen to “redefine the relationship between the state and big busi- ness.” 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 un- der your control.” Putin assured the oligarchs that recent investigations The Kremlin roundtable comes at a crucial time for the oligarchs. In the last were not part of a policy of attacking big business, two months, many of them have found themselves subjects of investigations but said he would not try to restrict prosecutors who launch such cases. by the General Prosecutor’s Office, Tax Police, and Federal Security Ser- vice. 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. 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 round-  Federation Council passes radical tax reform package. table, 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.</p><p>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 improve- OF THE NATION ADDRESS ment of Russia’s domestic economic situation, the fight Putin delivered his first State against international terrorism, and the quest for a mul- of the Nation address to the ti-polar world. SDI’s Policy Memo No.2 on Russia’s Russian legislature on July 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 GOV- economy,” “raging corruption,” and “massive outflow ERNORS 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 AP- http://ksgnotes1.harvard.edu/BCSIA/Library.nsf/pubs/ PROVES RADICAL TAX REFORM PolicyMemoNo1. On July 26 the Federation Council, made up of Russi- a’s governors and regional legislators, voted 128 to 13 PUTIN WOWS WORLD LEADERS AT G-8 DE- in favor of the tax reform package proposed by the BUT 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 mem- 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 ex- mitment to making Russia “an equal partner in global pected to approve the affairs.” The Russian president’s preparedness and ac- tax plan, in part because tive participation impressed the leaders of the world’s it includes a controver- richest industrialized nations. Canadian Prime Minister sial measure to central- Jean Chretien called ize collection and distribution of tax revenues previous- Putin’s command of the ly left to the governors. Moscow Mayor Yuri Luzhkov issues “very impres- (pictured) opposed the bill, saying: “The regions will sive,” and Germany now be forced to pass on most of their tax revenue to Chancellor Gerhard higher levels. Everyone will be confined to a stall, with Schroeder pronounced the state proffering handfuls of hay.” Putin’s performance “brilliant.” Immediately following the summit, Russia RUSSIAN SENATORS VOTE THEMSELVES and Germany signed an agreement rescheduling Russi- OUT OF OFFICE a’s Paris Club debt. Also on July 26 the members of the upper house of par- liament 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</p><p>2 December 31, 2001, giving up the perks of the office— take part in the collapse of Russia and the establish- 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. De- from governors and busi- spite bitter opposition to the bill nessmen alike. when it was first proposed, the sena- tors offered little resistance on the Russian observers reacted day of the vote. As Altai Governor with skepticism. Yuri Sku- Alexander Surikov (pictured) said, ratov, former prosecutor- “The law will be in force, whether general of Russia, questioned, “Can a person from the we reject it or approve it.” ‘Family’ head an opposition? I never heard anything funnier.” Igor Bunin, Director of the Center of Political BEREZOVSKY EXITS DUMA, VOWS TO CRE- Technologies: “Several hypotheses are possible. Let’s ATE OPPOSITION PARTY assume that he has reached a covert agreement with the On July 17 Boris Berezovsky announced that he was regime that he will personify constructive opposition. quitting his seat in the Duma in protest of the govern- He will try to consolidate the governors and oligarchs, ment’s moves “aimed at eliminating major independent and at the same time, prevent this opposition from get- businesses in Russia.” Berezovsky said he “will not ting out of hand.”</p><p>PUTIN GOVERNMENT APPLIES HEAT TO OLIGARCHS While campaigning for the presidency in February, the coziest niches in Putin’s inner circle—notably, Vladimir Putin promised to keep all oligarchs at arm’s Berezovsky and Sibneft magnate Roman Abramovich. length. His declaration was met with some skepticism, especially given the role that Boris Berezovsky, the in- In the last two weeks of July, however, Russian prose- fluential tycoon from Yeltsin’s inner circle, was then cutors stepped up cooperation with their Swiss counter- playing in orchestrating Putin’s PR campaign. parts in a fraud case against Berezovsky, and Abramovich’s Sibneft was targeted for possible tax In mid-May, it appeared that skeptics’ suspicions evasion. In his July 28 meeting with the business lead- would be confirmed when tax police raided the offices ers (minus oligarchs Gusinsky, Berezovsky, and of the Media-Most holding company headed by Abramovich), Putin even singled out Sibneft as a com- Vladimir Gusinsky, a staunch Putin opponent and own- pany with “surprisingly low tax payments, given their er of the NTV television network—one of the few that enormous earnings.” openly criticized the Kremlin. Raiding Media-Most and arresting Gusinsky himself a month later for alleged It appeared that Putin was following through on his fraud in a three-year-old privatization deal gave the im- promise to distance Russia’s plutocrats from power and pression that Putin and his deputies were interested in “ensuring an equal playing field for all businesses.” pursuing only political enemies. Perhaps betting that Putin was serious, Berezovsky quit his post in the State Duma in protest, announcing that When companies owned by Vladimir Potanin (pic- he could not work with an “authoritarian regime.” tured) and Vagit Alekperov were targeted in subse- quent investigations, the government’s actions began to Two recent developments have added grist to the Mos- resemble a campaign against oligarchs generally, in- cow rumor mill. First, Vladimir cluding those who presented no Gusinsky (pictured) was suddenly particular opposition to the cleared of all charges (with no expla- government. Still, critics nation) and allowed to leave the charged, conspicuously absent country. Second, both Gusinsky’s from the list of oligarchs NTV and the Berezovsky-controlled probed by prosecutors and tax ORT network were reportedly put up police were two who occupied for sale in the last days of July—af- ter Gusinsky’s departure and the</p><p>3 Kremlin roundtable with the oligarchs. Did Gusinsky favor? How did this all come about? A brief timeline trade NTV for freedom? Has Berezovsky fallen from follows.</p><p>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 involv- ing 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 mo- nopoly 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 in- vestigate 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 con- nection 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 Administration confirms that the state is seeking to buy Berezovsky’s share of the ORT network.</p><p>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 mil - lion 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 implica- tions for the state of media independence in Russia. The state owns a 38% stake in Gazprom, and in April President Putin in- stalled a close ally as Chairman of the Board. </p><p>4 Investigators in Switzerland are looking into charges that $4.8 billion in IMF loans to Russia, issued in July 1998, was di- verted through Swiss banks to Kremlin cronies. A 1999 PriceWaterhouseCoopers audit cleared the Russian Central Bank of ECONOMICsimilar charges. NEWS The IMF IN BRIEFsays the loans were spent in Russia, defending the ruble. 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.</p><p>TREASURY SECRETARY LAWRENCE SUMMERS: RUSSIA’S ECONOMY IMPROVING Speaking on July 5, Treasury Secretary Lawrence Summers said, “There has been a substantial improvement in Rus- sian 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 enforce- ment and the general set of measures to go with the effective commercial system.”</p><p>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, ac- cording to Russian State Statistics Committee figures. Total foreign investment was $2.4 billion, of which $853 mil- lion 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.</p><p>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</p><p>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)</p><p>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 wait- ing 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.”</p><p>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 privati- zation 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.”</p><p>The oligarchs responded cautiously. “There’s no quick fix,” said Kakha Bendukidze, general director of the Ural- 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 gen- eral we businessmen were needed as a class.” </p><p>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-in- dustrial groups have been thrust under the spotlight. </p><p>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 un- wittingly broken the law.”</p><p>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 off- shore 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 reversed if laws were broken.</p><p>Western response to the crackdown reflects a distinct ambivalence. On the one hand, the Russian government is fi - nally 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 elimi- nate 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 authori- tarian dictatorship in which the law and the law enforcement agencies become tools in the hands of an all-powerful president. </p><p>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</p><p>6 class” a realistic goal for Russia’s new leaders? Must the oligarchs be eradicated in order for democracy to flourish in Russia?</p><p>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. </p><p>When the term “oligarch” was applied in the Russian context in 1996, many of Russia’s big businessmen were al- ready living up to the name. They had privatized the holdings, assets, and management of the country’s most valu- able 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. </p><p>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. </p><p>DEFINING THE PROBLEM It is normal for leaders of enterprises to seek to dominate their markets. Microsoft is not a Russian company. In ev- ery country, business leaders seek to influence government’s decisions. So what’s the problem?</p><p>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 ex- aggeration, the point was clear: economic power in Russia is concentrated in the hands of a tiny minority. </p><p>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 conse- quences of monopoly and government’s efforts to contain them.</p><p>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. </p><p>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.”*</p><p>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 to - day? 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</p><p>7 point forward, but prosecuting only certain kinds of past crimes—for instance, those involving sums over $100 mil- lion or infringing on the “interests of the state.”</p><p>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 mar- ketization and democratization. </p><p>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-Sovi- et 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 oli- garchs is somehow eradicated, who or what will replace them?</p><p>______* 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</p><p>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.</p><p>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.”</p><p>Company What They Do “Oligarch” Reason for Probe</p><p>Media-Most Media holding company Vladimir Gusinsky Alleged fraud in 1997 privatization scheme</p><p>Norilsk Nickel Producer of nickel and Vladimir Potanin Alleged fraud in privatization of Norilsk palladium Nickel</p><p>LUKoil Producer of oil Vagit Alekperov Alleged tax evasion</p><p>Gazprom Producer of natural gas Rem Vyakhirev Connection to Media-Most</p><p>Tyumen Oil Producer of oil Mikhail Fridman Alleged violations in privatization of Company companies that became TNK subsidiaries (TNK)</p><p>Avtovaz Car manufacturer Vladimir Kadannikov Alleged tax evasion</p><p>Unified Energy Electricity monopoly Anatoly Chubais Possible violation of law on foreign own- Systems (UES) ership</p><p>Aeroflot Airline Boris Berezovsky Alleged fraud</p><p>Sibneft Producer of oil Roman Abramovich Possible tax evasion</p><p>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 Mc- Mann 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.” </p><p>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 citi- cording to the evidence, the form alchemists” in the post-Soviet zens economic hardship and the in- rhetoric, and the policy prescrip- sphere may miss a critical element troduction of democracy have been tions. The evidence shows that that links the two. What does the conflated, reducing support for the democratic countries have relatively evidence from the Soviet successor latter. Furthermore, the privatiza- free markets—instead of the cen- states, particularly Russia, suggest tion of state property has not created trally planned, command economies so far? a large constituency for reform be- we came to know in the East Bloc. cause the gains have gone to only a This reality has been swept up into Looking at the numbers alone, those minuscule cross-section of society, the oratory of the Second World postcommunist countries that have and the winners prefer the status War, the Cold War, and the contem- undertaken the most extensive quo to additional reforms.3 porary “Who Lost Russia?” democratic reforms have also car- ried out the most market reforms, Nonetheless, the response to this suggesting that the relationship be- bleak picture should not be to slow Democracy requires one tween 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 econom- long-term activism, peo- that political liberty requires eco- ic pain has stymied anti-reform ple will not bite the nomic freedom. With the crum- protest, by hindering collective ac- bling of communism, Russia’s “re- tion.2 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 parlia- spections of private businesses to beneficial coexistence? The risk is ment as much as to the communists’ effectively sanction behavior that that no one fully understands the changing views. In terms of the challenges government authority. democracy-capitalism synergy in public’s attitudes, economic reform Of course, there will always be a the West. Is it middle class atti- 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 be- free flow of information, for exam- hoped. Economic improvement can liefs, and during an acute crisis, 9 such as the 1991 coup, people may economic pluralism can exist for a tocracy”—also poses risks for be willing to suffer economic sanc- variety of reasons. In a region like democracy. Yet, Russian oligarchs tions and even greater threats to join Ulyanovsk where the governor and are clearly the lesser of the two evils the bandwagon and speak out. But his friends and family have created as their competing interests ensure on a daily basis and for long-term a political-economic monopoly, pri- greater economic pluralism than activism, like the operation of an vate firms and entrepreneurship are would exist under a state-controlled opposition newspaper, people will limited. In other post-Soviet prov- economy. not bite the hand that feeds them. inces, such as Naryn, Kyrgyzstan, geography may act as a barrier to How can these findings guide the Take, for example, the director of a developing a trading business, one work of the reform alchemists? state institution in Ulyanovsk who of the most common forms of en- They suggest that national political lost his job three times between trepreneurship in the post-Soviet leaders need to create economic plu- 1991 and 1997 because of his role sphere. ralism so that potential activists can as leader of a now defunct political bring to life the democratic institu- party. Pressure from the regional, The idea of economic pluralism res- tions that exist on paper. Likewise, county, and city governments forced onates with the reform experiences foreign supporters of democracy other members to leave, and the par- of Western Europe and the United may first need to promote economic ty disbanded. States; however, what is critical in independence, through programs to the post-Soviet context is that actual provide credit and attract foreign in- Economic independence is also and potential activists in this part of vestment, for instance. Otherwise, meaningful at the regional level: in the world need to acquire economic their enthusiastic words will fall on provinces where people cannot easi- independence not from the aristoc- deaf ears in regions where people ly find a job in the private sector, racy or large landowners, but from remain under the economic thumb start their own business, or earn in- the state. The comparison with the of the state. come beyond the borders of their re- West also reminds us that the influ- gion, activism is weak. The lack of ence of oligarchs—Russia’s “aris-</p><p>1 See M. Steven Fish, “Democratization’s Requisites: The Postcommunist Experience,” Post-Soviet Affairs, 14, 3 (1998), 212-47. </p><p>2 See Joel S. Hellman, “Winners Take All: The Politics of Partial Reform in Postcommunist Transitions,” World Politics, 50 (January 1998), 203-234. </p><p>3Ibid.</p><p>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.”*</p><p>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).</p><p>*Chrystia Freeland, “To Russia With Love,” New Statesman, June 19, 2000.</p><p>10 INSIDER INFORMATION Analysis of Russian politics by leading Russian specialists</p><p>COMING THIS FALL: THE THIRD INFORMATION WAR WHY RUSSIA’S “FEUDAL LORDS” WILL JOIN AN ANTI-PUTIN COALITION</p><p>By Daniil B. Dondurei Daniil Dondurei is a political commentator and the Editor-in-Chief of the journal Iskusstvo Kino. He re- ceived 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. </p><p>The Russian oligarchs realized weak government; barriers to the just how immense their political free flow of capital; corrupt gov- lords” will join a clout in Russia is after the 1996 ernment officials; collusion of broad anti-Putin Davos summit, where they en- business and government; un- coalition headed by listed Anatoly Chubais on a most equal conditions for businesses; important mission: keeping the a nonfunctioning judicial system; Berezovsky and Communists out of power. It was arbitrary local authorities; the Gusinsky. at that time that a strategy was privatization of taxes by firms; designed which enabled the ail- etc. ing Yeltsin (whose popularity On the one hand, the oligarchs rating was a mere 2%) to win the This integral economic and polit- cultivated a national depression presidential election. ical system, which had taken by propagating the conviction shape by late 1996, could not that Russia has no future. On the possibly exist all by itself in Rus- other hand, they tried to instill in The oligarchs culti- sia, a country so sensitive to most Russians a firm belief that vated a national de- ideas and ideology. The system such radical reformers as Chubais and Gaidar have done pression by propagat- was supported by a powerful ide- ological doctrine and system of the greatest damage to Russia. ing the conviction that values—the importance and po- Russia has no future. tency of which are yet to be rec- It was precisely this ideological ognized by the intellectual elite. program that enabled the “new Russian feudal lords” (i.e. finan- Convinced that the electorate At that time the oligarchs, with cial and industrial oligarchs who was open to all sorts of manipu- the help of the media under their behave like barons, and gover- lation, the big Russian capitalists control, succeeded in inculcating nors who think of themselves al- began to fine-tune the socioeco- in the public mind the following most as princes), to maintain and nomic system that later became ideas: that the market is insepara- control “the Market, Russian known as “contractual capital- ble from criminality, that liberal style.” That is why at times when ism” or “crony capitalism.” reforms in Russia are responsible the Russian economy was in dan- for producing an unjust society, ger of transforming into a West- In my opinion this system is bet- and that defamation of and oppo- ern-style market—as was the ter described as “the Market, sition to the government are nat- case in fall of 1997—the oli- Russian-style.” Its ingredients ural for every thinking person. garchs waged their first success- are: a disproportionately large ful information war against Ana- shadow economy (barter, dirty toly Chubais. However, they lost money, fictitious contracts, etc.); In the coming months their second information war in lack of transparency in account- all the “new feudal 1999, against Putin. ing; a very large, expensive, and</p><p>11 Finally, he has disarmed the find a path to a more open soci- They had at their disposal all the Communists politically by break- ety governed by universal, liber- necessary resources to mount ing their monopoly on patrio- ally-oriented rules. They would these ideological attacks. Firstly, tism. like very much to go back to bar- their financial resources allowed gaining with the government— them to play successfully on the The fused economic something they grew accustomed GKO market (short-term treasury to under Yeltsin—when any ben- bills), while foreign businessmen and political system efits could be bargained for, and in Russia were intimidated by was supported by a in the Kremlin’s very corridors. gloomy Russian predictions. powerful ideological The basis for an opposition coali- Secondly, the oligarchs con- doctrine. tion will be cooperation of re- trolled the media, which they had gional political leaders and oli- garchs. With this in mind, Bere- bought back in 1995. As is well Naturally, the oligarchs, who known, they now control four of zovsky’s words that “the internal previously allied themselves with political configuration of the the six national TV channels: the Communists, do not intend to Berezovsky controls ORT and Duma will soon change” deserve give in to Putin’s mercy easily. attention. Thus, a new anti-Putin TV-6; Gusinsky controls NTV; In the coming months all the and Luzhkov – TV Center. opposition will acquire a power- “new feudal lords” will join a ful information resource—the broad anti-Putin coalition headed oligarchs who control the media Thirdly, useful in solving the oli- by Berezovsky and Gusinsky, garchs’ problems stands the Rus- and are uniform in their inten- who are ostensibly quarrelling tions to preserve a system conve- sian intelligentsia, which still be- now. lieves that by lamenting their nient for them. hardships they support the ill-fat- The point here is not the role This is exactly why the third in- ed Russian masses instead of in- Berezovsky may play in creating creasing the oligarch’s wealth. formation war will inevitably be- this powerful opposition front. gin this fall. All the oligarchs had to do was The idea of a “constructive oppo- play on Russians’ socialist con- sition” is appealing to the Rus- victions. However, the Kremlin is watch- sian “feudal lords” and, first and ful. It has delivered blows time foremost, to the most important and again to oligarchs who are However, the Kremlin, which the class of the intellectual elite. government opposition began in used to working out differences 1998 to call “the Family” grew with the government individually weary of being held hostage to Berezovsky’s words and are not very cooperative with relations between several oli- that “the internal po- each other. garchic clans. litical configuration of It is not clear whether the oli- Vladimir Putin was brought out the Duma will soon garchs will be able to use the me- dia effectively to forge an al- into the political arena and has change” deserve at- accomplished a great deal in less liance with the governors against than a year. He persuaded Rus- tention. the Kremlin. Their only hope lies sians to accept the inevitability in Putin’s administration making blunders, as has often been the of radical liberal economic re- Just as in the Middle Ages the case (e.g. Gusinsky’s arrest or form, the necessity of a unified new barons will come together to the Norilsk Nickel saga). Only in Russia, a vertically integrated oppose the Kremlin’s claims of response to the government’s government power, a second total control over Russian society miscalculations like those de- wave of privatization (which is and the Kremlin’s intention—al- scribed above will they be able about to begin), and the impor- beit by authoritarian means—to tance of social transformation. to start the third information war.</p><p>12 THE RETURN OF THE OLIGARCHS? (LESSONS FROM THE MEETING AT THE KREMLIN)</p><p>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.</p><p>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 business- Vladimir Putin pronounced a a conversation that was sup- men to Putin: among the invit- phrase that was later singled out posed to be about the impossi- ed, nobody was even consider- by all analysts: bility of a redistribution of pri- ing political opposition to Putin. vate property into the conversa- “When today you demand polit- tion about the impossibility of On the contrary, many of those ical guarantees for yourselves redistribution of His Power. present control serious political and your businesses from the and information resources government, I want to draw It was possible to predict that (about 10 of them are among your attention to the fact that such would be the meeting’s the 100 leading politicians in you built this state yourself, to a outcome. It was clear in ad- the country) and long ago great degree through the politi- vance that the “oligarchs” who placed these resources in the cal or quasi-political structures were not invited to the meeting service of the new President. It under your control. So there is were those who displayed their is unlikely that Putin intended no point in blaming the reflec- political disloyalty (or incom- to object to such a “collusion of tion in the mirror.” plete loyalty) to Putin during business and politics.” the recent elections. But then the following ques- Putin turned a con- This concerns, first of all, tions arise: What is the meaning versation that was Vladimir Gusinsky, the head of of the Kremlin meeting? What supposed to be about the dissident information hold- signal has been sent to society ing “Media-Most”, which open- as a whole and to the Russian the impossibility of a ly aligned with Grigory Yavlin- business community in particu- redistribution of pri- sky, and previously supported lar? anti-Putin forces (Yabloko and vate property into Fatherland) during the parlia- I think there are two groups of the conversation mentary elections in December. factors: those factors that are about the impossibili- This also pertains, though to a obvious and implicit on the one lesser extent, to Vladimir hand, and those that are contro- ty of redistribution of Kadannikov, the head of “Vol- versial, multi-meaning, and His Power. ga Auto Plant” (Avtovaz), who probable on the other. This remained loyal to Putin’s com- clear division has a special petitor Konstantin Titov, Gov- meaning, because in Russia (but Directly citing the Russian say- ernor of Samara, during the not exclusively in Russia) ing “Don’t blame the mirror if presidential elections. groundless hopes, illusions, your face is ugly,” a proverb dreams, or, on the contrary, in- that is the always offensive to Boris Berezovsky, who has re- creased fears and phobias often the addressee, Putin forcefully cently undertaken his own polit- overshadow the gist of obvious took the initiative of the meet- ical counter-game, directed matters. And from them often ing into his own hands. He more against his competitors in come plunges from euphoria to would not, as the businessmen Putin’s team than against Putin panic. expected, answer the questions himself, was not invited either. of the anxious oligarchs (many I start with the obvious matters, of whom have lately experi- in my opinion, which are easy enced pressure from govern-</p><p>13 to “touch” (so to speak) and to zovsky, Kadannikov, and oth- Who are they – these new “Pu- prove empirically. ers) from the elite circle of the tinian oligarchs”? “chosen ones.” The first signal was given to First, the number of oligarchs broader public opinion—to It is also obvious that Putin sig- has grown, and this too is a sign those millions of “old naled (and this signal was un- that the authorities need to at- Russians,” who to a large ex- derstood by the business elite tract new forces and names, and tent, ensured Putin’s convincing exactly in this way) that the at the same time it signals an victory. It is obvious that the new President needs, just as opportunity for some of the cur- President and his team consider Boris Yeltsin needed in his rent outsiders to be included all actions (including putting time, his own, reliable “pillars into the “selected circle.” pressure on large businesses of the business community.” forming demonstrative peace Second, among Putin’s oli- with them) from the point of Putin clearly formulated his cri- garchs there are fewer bankers view of maintaining and in- teria for selection into the “loy- and more manufacturers. creasing Putin’s most important al group”: unconditional per- resource – his popularity in sonal loyalty and direct support Finally, third, the majority of general public opinion. – financial, political, and using new oligarchs are, to use an ac- the mass media. It was not cepted saying, “nationally-ori- The meeting in the Kremlin (as without reason that several in- ented” businessmen; their “cor- reported in the mass media) vited persons announced after rected” ethnic-national compo- demonstrated to the population the meeting: “I feel relaxed, as I sition is also a sign – there are that the power plays against the understand now the new rules more Russians, and fewer Jews; hated oligarchs achieved their of the game.” Putin’s favorite there are single representatives aim – the oligarchs quieted role, that of the “good investi- of ethnic minorities as well. down. And the “tamed” oli- gator,” worked well this time garchs can be left alone for a too. while. The television set Is the Kremlin taking showed a picture to the public Finally, while criticizing the a step towards the where neither Gusinsky, Bere- shadow deals between business- democratization? zovsky, Chubais, nor men and corrupt state bureau- Abramovich was there beside crats, the Kremlin side directly Putin. It is another question named those persons in the Everything mentioned above is which of them have really been President’s circle who will con- the crux of what is evident. All banished, which have been tem- trol the business elite (the heads the rest pertains mostly to the porarily removed, and which of Administration – Voloshin, realm of probability: the evolu- ones are purposefully hidden Medvedev, Surkov). In the lan- tion of Putin’s rule may just as from public view by Putin’s guage of business people, it’s easily continue in one direction team itself. always meant an invitation to as in completely the opposite “work directly”. direction. The main question, for example, remains open-end- Forget about the What is the end result? First of ed: is the Kremlin taking a step “end of the oli- all, one should dismiss all the towards the democratization of garchs.” talk about the “end of the oli- business in Russia, its introduc- garchs.” If one follows the old tion into a law-protected frame- definition that “oligarchs” are work, or, on the contrary, a step The effect of the Kremlin con- “business people who enjoy es- toward factual nationalization versation about oligarchs is ob- pecially confidential relation- of large business? vious too. The “confidential” ships with the authorities,” then (according to their own words) the special invitation to the My version of what happened is talk with the President estab- Kremlin of twenty one select this: strategically, nothing has lished not so much a guarantee businessmen is nothing other changed yet, including popular of their own safety (no absolute than the continuation, and even Russian business. Undoubtedly, guarantees have been granted so restoration of oligarchy: its “re- a Russian businessman—either far), as the fact of expelling the naissance.” a small or a large one—regards “disloyal” (Gusinsky, Bere-</p><p>14 the oligarchs as a kind of indi- yesterday the special services on unclear charges, or the fact cator. came to oligarch P. or oligarch that he was suddenly allowed to X., then tomorrow they will go to Spain? come to me. But this reasoning The special invitation has another side: if P. or X. The trips of “elite businessmen” to the Kremlin of 21 went to Kremlin and agreed on to the Kremlin do not guarantee select businessmen is something, it does not at all and cannot guarantee the safety guarantee my safety. And, by of honest Russian business re- nothing other than the way, it is not clear what gardless of whether these trips the “renaissance” of more strongly traumatizes the are “individual- secretive,” as it psyche of the ordinary Russian was at the end of Yeltsin power, the oligarchs. businessman and stresses the or “collective-public,” which is lack of his legal protection: the what we have had the pleasure On one hand, this businessman fact that Gusinsky was arrested of observing recently. reasons in the following way: if</p><p>BACK ISSUES OF RUSSIAN ELECTION WATCH AND RUSSIA WATCH CAN BE FOUND AT: www.ksg.harvard.edu/bcsia/sdi</p><p>15 IT’S OVER. RUSSIA, ARE YOU ALL RIGHT? THE OLIGARCHS HAVE LOST AN IMPORTANT BATTLE</p><p>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 in- cludes co-chairing the winning national election campaign of “Democratic Russia” in 1990 and directing political advertising for Yeltsin’s presidential campaign in 1991. </p><p>On the twenty-sixth of July, the garchs and regional barons on the nomic, geopolitical, and social sta- epoch of oligarchic quasi-feudal- other hand would have it out. This bility. ism in contemporary Russia de- holds true regardless of who was facto came to an end. to become the president and re- Did the clan leaders realize that gardless of relations between dif- their time was up? The answer is The importance of this fact for ferent oligarchs and regional lead- yes and no. On the one hand, the Russia’s future development com- ers. oligarchs, consumed by constant pares only to the 18th of Brumaire, infighting over power and re- 1799 when Napoleon Bonaparte sources could not see the larger moved to consolidate all power in It was inevitable that picture of what was going on. Very France. any president after often they had to concern them- Yeltsin would “have it selves not only with expansion of Yet, unlike the glorious Corsican, their financial influence but almost Putin attained his goal within the out” with the oligarchs with their very survival in the framework of the Russian constitu- and regional barons. nearest future. Therefore, averting tion. That bastion of feudalism— immediate danger became more the Federation Council—was be- important than forming a long- sieged by battalions of public opin- It is no accident that former Prime term strategy. The warrant for ion, not soldiers. Or maybe just by Minister Primakov, who advocated Berezovsky’s arrest early in 1999 the impression that this public a partial, conservative restoration, serves as a good example. opinion existed, as a kind of social came up with plans to reform the demand. This impression is even framework of federative relations more important. that was far more radical than The oligarchs and re- Putin’s. However, just like the pre- gional leaders tried to ceding young reformers in the gov- The oligarchs as involuntary tacti- construct an “insur- cal allies of the feudal governors ernment, Primakov was unsuccess- failed for the first time to beat the ful in reining in the oligarchs. ance policy.” federal government in the virtual It is also no accident that the re- arena that they used to consider On the other hand, the oligarchs their home turf. Meanwhile, a forms in government currently un- derway were a necessary condition and regional leaders tried to set up myth was destroyed—the myth an “insurance policy” of checks that the media can sell Russians for Gref’s liberal program. In the context of an oligarchic-feudal and and balances in advance to coun- anything, even when it runs teract the potentially too-powerful counter to their fundamental val- absolutely corrupt system in Rus- sia, it was simply impossible to presidential candidates they sup- ues and conceptions of good and ported. This is exactly what they evil. move either to reforms or restora- tion. This system itself could only did to Yeltsin in 1996. Along with certain economic preferences, the How and why did this happen? exist in an unstable environment. However, by late 1990s both soci- kinds of checks and balances con- sisted of control over the influen- It was inevitable that Yeltsin’s suc- ety and the federal government were demanding, above all, eco- tial media, control over some cessor on the one hand and the oli- groups in the Duma and the Feder-</p><p>16 ation Council, and infiltration into —except for in an election year— tations in public opinion appeared the top political management of the Russian people would figure during Primakov’s tenure. At that the candidate whom the oligarchs into those political games only to time the media campaign against supported. the extent that by manipulating in- Primakov had no effect on either terpretations of public opinion public opinion or the elite. Pri- In Putin’s case, while he was act- polls the oligarchs could influence makov was sacked because he was ing president, the oligarchs tried to target elite groups or the president. growing stronger, not weaker, get their people appointed to exec- Thus, the strategy of the oligarchs’ which presented a direct threat to utive positions in the presidential PR in a non-campaign year was Yeltsin. administration and the Cabinet. designed as Byzantine PR aimed at influencing first and foremost the Elected with an unambiguous vot- top echelon of the ruling elite. er mandate to establish order (re- Only a month after be- gardless of how different groups of ing elected, Putin The design combined an old-fash- voters view “order”), Putin is even sought to change the ioned palace intrigue with PR more popular than Primakov was. blackmail. It would start with an But the main point is that, by defi- configuration of politi- information attack on the presi- nition, the newly elected president cal power. dent/government/rival group. This presents no danger to the current would create the impression president, and nobody can fire among the elite that the victims of him. It is clear that certain clans who the attack were political goners. were betting on Putin succeeding Then a shift in balance among the The only things that oligarchs and in doing all that. Their opponents elite would come—a latent ultima- their allies could possibly use to who bet on Luzhkov or Primakov tum to the president delivered by blackmail him are: rejection by the would have obtained similar pref- the oligarchs’ people in the admin- West and an institutional blocking erences and benefits had the elec- istration. Finally, the president of his reforms by three mecha- tion turned out differently. None- would make some concessions, nisms: 1) the Duma 2) the gover- theless, only a month after being mostly on issues of personnel. nor-controlled Federation Council, elected President, Putin sought to and 3) the regions, by governors change the configuration of politi- who maintain absolute power and cal power in the country. Both the Gusinsky-con- arbitrary rule there, and who could trolled media and the have disregarded any federal law Neither the oligarchs nor the gov- media of his main com- because of their immunity from le- ernors were happy about reforms gal prosecution. that undermined their might. How- petitors interpreted ever, it turned out that the above Gusinsky’s run-ins All this determined the direction of mentioned checks and balances PR and palace efforts of different would not constrain the new Presi- with the prosecutor’s oligarchic groups and regional dent. office in the same way. barons (though these efforts were uncoordinated from the start). The The problem was that before the end results these efforts sought to oligarchs could exert their influ- A proper ideological shape for do- mestic or international public opin- achieve were: a) Putin’s rejection ence because Yeltsin was growing (or a cold welcome, at the very weaker and less popular and had ion was a Byzantine necessary condition of such campaigns. The least) by Western leaders at the no political or corporate groups or Okinawa summit, and b) the Fed- structures of his own that he could ideological slogans ranged from fighting corruption to fighting “un- eral Council’s blocking of Putin’s lean on. Besides, Yeltsin had to reforms in such a way, so that take into consideration a more or just” privatization or Chubais’ “bolshevism” to protecting the in- there would not be enough Duma less oppositional and patently anti- supporters to surmount the veto. reformist majority in the Duma at dependent media (under the oli- garchs’ control). all times. Under these circum- These two aims were connected to stances, a fragile equilibrium was each other not only in timeframe. maintained by sustaining a balance The first signs that these tactics would fail in a fight against a Putin’s defeat in the foreign policy between various groups of elites arena would not add to his authori- which included regional barons strong leader with growing popu- larity and supported by real expec- ty among the cautious governors, and oligarchic clans. At any time who were wavering before the vote</p><p>17 on July 26. Besides, such a defeat ers, turned out to be powerless, as on July 28th they agreed with the could lead to the change in the for- one should have expected, as a President that the oligarchs should eign rhetoric of the Russian au- means of urgent justification in the be equidistant from power. The thorities in an isolationist direc- public eye of the whole oligarch problem, however, is that perhaps tion, and due to this change, could system and oligarchs as a corpora- Putin would like to stress a differ- undermine the pro-Putin positions tion. It is possible to convince ent part of the word “equi-distant” of the liberal Duma factions of most Russians that Chubais is evil, than oligarchs. SPS and Yabloko. Without their but not even (popular newscaster) guaranteed support, any veto of the Sergei Dorenko can inspire them It needs to be stressed that Putin’s Federal Council would be insur- to think Berezovsky is an angel. victory over oligarchs and regional mountable. barons, while important, is still just The Okinawa success and the fias- institutional. By depriving the gov- This explains the remarkably simi- co (obvious even to the elite) of ernors of direct legislative power lar interpretation—by the Gusin- the first anti-Putin oligarch PR at- and of their opportunities to break sky-controlled media and the me- tack influenced the conformist ma- federal laws, Putin critically under- dia of his main competitors alike— jority of the Federal Council, and mined the foundation of oli- of the history of Gusinsky’s rela- Putin, thus, received the institu- garchic-feudal system. It is un- tionship with the prosecutor’s of- tional opportunities for his re- likely that the proponents of that fice. The situation, when investiga- forms. Notably, to achieve this tar- system will accept their complete tions into the activities of the mag- get, the very same oligarch emis- defeat. Yet, to launch a counterat- nate, who on top of many other saries who were introduced into tack they have to broaden their things, happens to conduct media the management of the Putin ad- coalition, and, accordingly, devel- business, was interpreted exclu- ministration as the proponents of op a new ideological base. sively as an attack on the indepen- oligarch interests were rather ef- dent media. Moreover, the oli- fectively used. The main directions of their orga- garchic PR-men, adroitly using nizational and ideological activi- their channels of influence over the ties are quite obvious. The political Western media and public opinion, Russians can be con- and economic interests of the oli- succeeded in presenting this inter- vinced that Chubais is garchs and their allies will be (and pretation as the dominant one in evil, but even Dorenko already are) deliberately mixed up the West as well. This placed with those of big business as such, Putin’s G-8 debut in danger. himself cannot make and even with those of the entire them think that business community. Oligarchic- Subsequently the Putin team un- controlled media will be (and al- dertook the only right step: inspec- Berezovsky is an angel. ready are) described as the only tions began (or the threat of their free and independent ones. Sup- actualization) of practically all oli- Aiming to weaken their competi- pression of the robber and regional garch groups in regard to abuses in tors in business, the emissaries did barons’ checks and balances to the taxes and finances. not even notice (and possibly still presidential power will be ex- haven’t noticed) that their partial plained as a danger to civil society, Surely, the oligarchic PR immedi- efforts are funneled into quite a and as a decisive step toward au- ately tried to pass it off as a war different strategy, geared toward thoritarianism. with all big business, with any weakening the influence of all the business, with the irreversibility of oligarchs as such. According to The broad business and media privatization. But that did not this strategy, some of the current communities, as well as pro- sound very convincing: not for groups of elites are positioning democratic and human rights ad- Western leaders, who for over a each other into a certain line, the vocacy organizations, will be invit- year have been calling upon the direction of which is not yet ed to join that oligarchic- led coali- Russian authorities to curb the known to them. They are yet to tion. Robber Barons, and especially not grasp that this line, as a matter of for Russian audiences. fact, leads to an exit from the elite. What is interesting is that there is At least from its very top echelon. indeed a very real threat of certain The PR manipulations, sufficient levels of authoritarianism as a re- to reverse the arrows of responsi- And so far they are only asking for sult of the suppression of oli- bility for poor economic condi- explanations. They got one. And garchic-feudal political influence. tions from certain players to oth- This is true since, in fact, only the</p><p>18 oligarchic-feudal checks and bal- Or perhaps, as a third option, the strengthening his personal power, ances to the presidential power oligarchs will manage to combine is it reasonable for Russians to mattered in the contemporary Rus- their attack on Putin from both choose Putin’s side in his battle sia. Similarly, the only strong sides: both “liberal” and “leftist” with the oligarchs? checks and balances to presidential so that different oligarchic groups power in recent Colombia were would be the sponsors of different Imagine a girl is walking in a dark those provided by the Medellin directions. forest and falls into a swamp. and Cali cartels. Yet, what do the There is no one around. As she Medellin and Cali cartels have to sinks into the bog, a little-known do with civil society? The only strong checks man appears and offers her a hand. and balances to presi- She has heard rumors about this dential power in man, it seems, somewhere, some- In Russia the only how—some are good, some not. checks and balances Colombia were those Either he was with some guys who were those produced provided by the tried to take advantage of a wom- an, or just the opposite, he protect- by the oligarchs and re- Medellin and Cali car- ed a woman from some guys’ un- gional barons. tels. Yet, what do these wanted advances. She had also cartels have in common heard from somebody that he was connected to a “bad family.” Oth- Alternately, the oligarchs and their with civil society? ers called this nothing but slander. allies might make motions to the God only knows what his inten- communists, agrarians, and trade- tions might be in giving a hand to unions. In that case, the main slo- How should Russian society react to such proposals? Keeping in a girl alone in the woods. But, per- gan will be to stop “liberal reforms haps it’s better to accept the hand that go against the people.” mind that almost nobody knows for certain how far Putin will go in than to drown in the swamp.</p><p>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. </p><p>Special thanks to John Reppert and to translators Nina Bejanishvili and Roman Ilto</p><p>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.</p><p>The Strengthening Democratic Institutions Project works to catalyze support for three great transformations un- derway 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 trans- formations, identify strategies for advancing Western interests, and encourage initiatives that increase the likeli- hood of success. It provides targeted intellectual and technical assistance to governments, international agencies, private institutions, and individuals seeking to facilitate these three great transformations. </p><p>SDI PROJECT, BELFER CENTER FOR SCIENCE AND INTERNATIONAL AFFAIRS JFK SCHOOL OF GOVERNMENT, HARVARD UNIVERSITY 79 JFK STREET CAMBRIDGE, MA 02138 Phone: (617) 496-1565 Fax: (617) 496-8779 Web site: http://www.ksg.harvard.edu/bcsia/sdi Email: [email protected]</p><p>19</p>