Robert Skidelsky
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Russia under Putin –the Domestic Setting
Robert Skidelsky
Wiston House Weekend Conference | Friday, November 03, 2000

 
President Putin remains an enigma to the West. Yeltsin nominated him as his successor because of youth, ability, pragmatism, and strong character. His KGB background linked him to old Soviet elites; but youth would make him forward-looking. Yeltsin saw him as person best able to protect his legacy. But has turned out to be very different type of ruler, and much harder to fathom.
 
 
His agenda seems to be up for grabs. He has announced a competition of ideas and programmes. German Gref’s Centre for Strategic Studies is a clearing house for ideas from intellectuals and advisers. The Security Council, headed by Sergei Ivanov, has prepared a defence doctrine and a concept of national security. The President has appointed his seven representatives –mainly generals –to the newly formed Federal Districts and proposed sweeping reforms to the structure of the Federation. The battle for the control of policy rages between Putin’s KGB associates, remnants of Yeltin’s ‘family’, and the old liberal reformers.
 
The situation which Putin inherited is sure to shape the strategic goals of his Presidency. Two colossal defeats marked the end of the Yeltsin era: the collapse of the rouble in the autumn of 1998 and the Kosovan war of 1999. The first exposed Russia’s economic fragility, the second its political impotence. The humiliation and hurt pride engendered by these events, coming on top of the disintegration of the Soviet Union and collapse of Russia’s ‘empire’, will dictate the policy, perhaps even more the style, of any Russian government. To restore Russia as a Great Power will be Putin’s overriding aim. To do that he has to regenerate the Russian economy. And to do that he has to restore the Russian state.
 
A return to Communism is not an option. But the non-Communist option is not a set meal, but a menu of choice. In economics Putin can choose to go in a neo-liberal or a mercantilist direction; in politics, the evident choice is between authoritarianism and democracy. It must be emphasised, though, that to set up the choices this way is to simplify them, and to ignore the compromises available between the two sets of alternatives.
 
Putin’s domestic aims, as stated in his 8 July 2000 State of Nation address, which was largely drafted by the economist Illarionov, are impeccably liberal. At their heart is the notion of state rehabilitation. Only a strong state can guarantee basic social needs and economic and political rights and promote and underwrite an economy based on free enterprise. ‘Our key task’, Putin declared, ‘is to learn to use the instruments of the state for ensuring freedom…only a strong, effective –if someone doesn’t like the word ‘strong’ we will say that only an effective and democratic state can uphold civil, political, and economic freedoms’.
   
Putin says he wants to end the perception that the state has to do everything. Government was the problem, not solution (echoes of Reagan here). A greater role needs to be played by non-state institutions and individuals. A ‘strong’ state needs strong and legitimate institutions, parties, and other ‘power’ sources. This is to go together with a re-centralisation of state powers. The devolution of powers to the regions was a pragmatic response to dissolution of the Soviet Union. But over-decentralisation has increasingly broken up Russia as a single market, and broken down the rule of law.
 
A key principle of reform is the establishment of the rule of law. The state is to guarantee property rights, and maintain independent courts and effective law enforcement. Putin’s colourful phrase for this is ‘dictatorship of the law’.
 
There was a certain amount of economic substance in the address. Economic growth was being impeded by ‘sky-high’ taxes and these must be cut. State spending should be limited to what the state could afford. Putin has promised the unification of tariffs and their simplification. He has set out a policy of no special favours for special firms –no tax write-offs, no special fuel or energy tariffs, no debt bail-outs. The banking system must be transparent.
 
 
Russia’s Political Situation
 
Before taking up the question of what all of this might mean, a word about the political situation Putin inherited. For the first time in the post-Communist era, the President and Government have a majority in the Duma.. This is based on President’s party, ‘Unity’, and its non-Communist allies and partners. ‘The Union of Right Forces’, ‘People’s Deputy Bloc’, ‘Fatherland All Russia’, ‘Yabloko’. The broad coalition of non-Communist forces commands 280 votes, an impressive majority. But this is not a disciplined majority of the |British type, but more like a loose alliance, liable to disintegrate if Putin’s own popularity wanes.
 
Economic Policy
 
Economic recovery was well advanced by the time Putin took over, based on a falling rouble and a rising oil price. At the end of the Yeltsin era, tax collection remained remarkably weak, while government spending failed to contract proportionately. Now a tax reform has been passed into law, based on a flat-rate income tax of 13 per cent. This aims to broaden the tax base and reclaim a part of the illegal economy. A balanced budget has been approved by the Duma, which looks more credible than previous projections. A small surplus is projected for this year.
 
Despite Gerashchenko’s continued rule at the Central Bank (Jeffrey Sachs called him the ‘worst central banker in history’), Russia remains committed to a low inflation policy, and though inflation is still higher than in much of Eastern Europe, the commitment to low inflation is becoming more credible. This has enabled Central Bank top reduce the overnight rate from 40% in January to 25% today. Annual inflation in 2000 will probably about 20%.
 
At long last the decline of output has been reversed, and Russia’s new capitalist economy is showing signs of economic growth, with the energy and retail sectors leading the way. GDP figures: 1995 –4.2%, 1996 –3.5%, 1997 0.9%, 1998 –4.9%, 1999 3.2%, 2000 (est. 4%) For first time, profits are not being exported, but starting to be invested at home.
 
Strengthening the State
 
Three sets of initiatives are worth reporting. First, seven federal districts have been formed from existing regions or oblasts, based on military districts, each under the supervision of a Presidential plenipotentiary. This reorganisation has been accompanied by the imposition of seven sets of directorates, which are branches of central agencies like the Prosecutor’s Office, the Justice Ministry, the Tax Service, etc. The new structure has been created entirely by Presidential decree.
 
One of Putin’s most controversial programmes has been his vigorous attack on ‘oligarchs’, notably Gusinsky and Berezhovsky. Additional attacks on oligarchs have included raids on LUKoil and AvtoVaz. There has been a crack down on tax evasion. But there are some disturbing implications for media freedom, since the two main oligarchs are also media proprietors. Putin remarked: ‘there is a saying about trying to fish in muddy waters. There are fishermen with a huge catch who want to keep the status quo for as long as possible. I don’t think that is acceptable to the Russian people or to our partners abroad’.
 
The Kursk disaster and the strain placed on Russian military forces by the Chechnya war has made military reform a priority. Russia can’t return defence spending to Soviet levels because the Russian economy has shrunk to the size of Holland’s. Russia now simply underfunds its conventional forces (which have been reduced from 4m. to 1.3m.) while maintaining a well-funded missile force. Putin is due to chair a session of Security Council to make the final decision on the scale and deadlines of army reductions. According to military sources, over 380 generals’ posts are to be axed, and the strength of the armed forces to be diminished by 365,000 servicemen over period 2001-3, 240,000 of them officers. The aim is to fit the Russian military for the tasks it will face. Analysts talk about the emergence of a ‘national security state’ to deal with medium to low intensity conflicts on its southern border, difficult relations with West, and the repatriation of state powers.
 
 
Choices Ahead
 
The Economy: Neo-Liberalism or Mercantilism?
 
Much of this discussion concerns the question of where Russia’s comparative advantage lies –in raw materials and heavy metals or in human capital intensive sectors. This partly turns on whether one is talking about static or dynamic comparative advantage.
 
 
The neo-liberal analysis of Russia’s economic collapse starts from the massive misallocation of resources, and low productivity, under Soviet central planning. Its recipe for Russia’s recovery is based on exploiting its static comparative advantages. To this end the neo-liberal economists advocate the swiftest possible integration of Russia into the world market, based on sound ‘fundamentals’ ( tight fiscal policies, sound monetary policy, financial transparency, flexible labour and product markets) and free trade.
 
The mercantilist alternative starts from the premise that Russia’s economic decline was caused by the collapse of the military-industrial sector, in turn caused by a huge decline in defence spending. Economic recovery needs to be sustained and enhanced by large state investments in this sector. . The defence complex, with its vast R&D potential, should be transformed into a factory of new products and technologies, exploiting Russia’s advantage (over Third World countries) in scientific and technical human capital. Economic recovery, that is, should be spearheaded by defence-related spending. This requires not just increased spending, but a redistribution of spending from military personnel to hardware. Because it presumes a more relaxed attitude to fiscal deficits this approach can be seen as ‘left-wing Keynesianism’.
 
In political terms, a revived military sector could cement the strategic partnerships Russia is keen on forging with India, China, and others of its old clients. At present its feeble defence sector can’t fulfil the orders India and China are anxious to place. Russia has agreed to sell aircraft it doesn’t have, aircraft carriers without vertical take- off. (Russian pilots are still given medals for taking off and landing, as it’s so risky.) According to a column in the Moscow Times of 12 October:
 
‘Our defence industry cannot equip its own armed forces with modern weapons. Our designers can still build prototypes of new weapons, but serial production is becoming impossible. The subcontractor components industry has disintegrated… Russia sells ‘hot air for hard cash’’.
 
Thus the debate has a clear political economy dimension: Russia’s future as a great power is incompatible with it being simply a raw material reserve.
 
Energy
 
The argument between the two approaches has crystallised into a debate over how best to exploit the energy sector, which has been boosted by the recent rise in the price of oil.
 
On the one side, energy development can be seen as an important aspect of Russia’s integration into the world market. The theme of an East-West ‘energy space’ or ‘energy corridor’ has been much trumpeted as a way of linking Russia to the EU, and reducing EU’s dependence on OPEC. EU Energy Commissioner Erika Likened says ‘The EU wants to diversify its base of oil, electricity and gas supplies’.
 
Part of a market-based based strategy for expanding Russia’s energy exports is to allow domestic energy prices, now heavily controlled in the interests of the domestic consumer, to rise to market levels. This will encourage investment in new fields.
 
Russia has the biggest gas reserves in the world, and is the 3rd biggest petroleum producer. Taman Pechora in Arctic has 126bn. barrels of reserves, enough to supply the whole world for 4 years. But huge foreign investment is needed in new fields, pipelines, processing plants, electricity grid. At present Russian pipeline network can move only 1/3rd of the 315m. Tons of crude produced annually. The Kremlin finds it hard to finance new lines. Foreigners have been reluctant to invest because of shifting tax laws, violation of contracts, and default on debts.
 
Production sharing agreements are essential for new foreign investment. Pass are contracts between the state and oil & gas companies that fix tariffs and other production costs (including taxes) in advance of extraction. Without such agreements foreign firms won’t shell out the billions of dollars needed to build new pipes or develop new fields. Russia now has only 4 pass in place. The best-known is Lucile’s partnership with Gasport and Conoco, a US company, to tap the Russian arctic.
 
This export-oriented energy strategy is challenged by Left. They argue that energy prices fluctuate – they are expected to come down from present high of $35. Per barrel of crude. National energy needs should take priority in Russia’s long winters. Low domestic energy prices keep down costs to households and businesses. Also there is fear of a premature loss of reserves if Russia is drawn into the position of a commodity reservoir for EU. Thus Aleksander Gavrin, Russian oil Minister, said recently: ‘We don’t intend to send our crude to the foreign markets at the expense of the internal market’.
 
Russia’s oil policy will have profound implications not only for its type of economic development, but also for its relationships with its ‘near abroad’, the EU and the OPEC countries.
 
 
Centre and Regions: Presidential Dictatorship or Dictatorship of the Law?
 
Under Yeltsin, there was a reversion to feudalism. The formal federalist structure was largely supplanted by a regime of personal deals between the Kremlin and the regional bosses. The regional leaders supported the Kremlin and ensured the desired election results in their areas. The Kremlin, in exchange, turned a blind eye to the fact that many of its nominal fiefs were criminal organisations. It must also be noted that Russian federalism was not a product of a constitutional settlement, but of a largely arbitrary redistribution of powers and state property between the central and regional nomenklaturas. The main advantage of the system was that it allowed reform ‘from below’ when nation-wide laws were blocked by the Duma. Boris Nemtsov in Nijni-Novgorod is an example. Thus some oblasts established private property in land in the advance of land reform from the centre (which is promised, but hasn’t yet been enacted).
 
Putin is in a much stronger position than was Yeltsin to reassert the centre’s control over the regions. He is not beholden to the regional elites for his election; for the time being he controls the Duma. His aim has been described as the creation of a ‘Presidential-vertical power structure’. (Russia on Russia, vol.3, ch.4) The question is: are Putin’s reforms part of a necessary rebalancing of powers necessary to create his ‘dictatorship of law’ or are they part of a drive to establish Presidential dictatorship?
 
Civil Society
 
Putin has vowed that strengthening the state goes hand in hand with limiting the state. This implies strengthening civil society. The weakness of Russia’s civil society is amply attested. The party system is very weak: the CPRF is the only organised party; the others are vehicles for the President or well-known leaders, with little grass roots organisation. A political elite, or governing class, in the Western sense, has yet to emerge. This has given the media a dominating voice in the new Russia.
 
What do surveys of Russian attitudes show? (The following paras. are based on Yuri Levada, Russia on Russia, vol. 3, ch.10). Asked to comment on the statement: ‘A strong leader can give the country more than the best of laws’, 66% of Russians agreed in 1995. In 1999 it was 76%.
 
Opinion surveys reveal:
 
(a) universal discontent with living standards, the performance of the government, and the situation in the country –but, as Levada says, it hardly ever leads to active protest.
(b) People are prepared to settle for little and adjust to worsening living conditions.
(c) Public sentiments are marked by traditional Soviet slyness. In the Soviet era, people under-reported labour achievements in order to meet plan targets; now they under-report them in order to evade taxes.
 
These are all aspects of the notorious Russian ‘patience’, which gives Russians an unrivalled ability to survive adversity, the other side of which is an equally famous passivity.
 
The weakness of civil society has revived the perennial debate about whether Russia is Western or Eastern. The ‘Westerners’, represented mainly by ‘The Union of Right Forces’ and ‘Yabloko’ face an upsurge of ‘Slavophilism’ which stresses Russia’s ‘exceptionalism’.
 
Levada writes: ‘Slavophilism, which exerts considerable influence on public opinion, is a desire to combine Western technology with our ‘innate’ aversion to business, work and punctuality. It is a desire to combine Western stands of consumption with ‘Russian’ levels of industry. It is a desire to erect a façade of Western civilisation over our ‘innate’ qualities of slavishness and cunning’.
 
He argues that the Putin regime, far from strengthening civil society, might well see a return to the half-forgotten technique of ‘mobilisation politics’ under the slogan of ‘putting our house in order’ –the main features of which would be one-man rule shading off into dictatorship, close control of the media, and a subservience to authoritarian rule. He sees early signs of this technique in the circumstances of Putin’s rise, first in Dagestan, then in Chechnya. Real or manufactured crises, involving either domestic or external enemies, will be used to rally support for the leader.
 
The Verdict
 
The jury on Putin is still out. The economy is stronger than at any time since the fall of Communism, but prosperity is still very patchy, and unduly dependent on a small number of sectors, artificially stimulated by international events. The most important economic reform so far is the new tax code, but land privatisation has not happened. There are still huge gaps in the legal system (especially on the enforcement side), and large scale investments still depend on contracts which embody specific tax and legal provisions not guaranteed by the general ‘rule of law’. The purge of criminal regional elites is still in the future; so is a competent and honest central administration. A new strategic doctrine based on the notion of ‘pluralism’ has been formulated, but it is not clear what effect in practice it will have on Russia’s foreign policy. We have only the dimmest indications of how the project of rehabilitating the state, and strengthening civil society will work out –whether it will produce the ‘dictatorship of the law’ Putin talks about, or lead to personal dictatorship.
 
Democracy in some form will almost certainly survive. Putin will not turn out to be a Pinochet; but neither will Russia rapidly become a democracy as the West understands it. Historically, democracy usually comes as the culmination of a long socio-economic development: it is the reward, so to speak, for having already overcome the most serious challenges which countries face - those affecting their security and their means of livelihood. Russia is far from having overcome these. Constitutional dictatorship is the best that we can expect; perhaps it is what Russia needs now to get it over the hump.
 
 
 
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