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September 10, 1998   

This Date's Issues: 2360 2361 23622363



Johnson's Russia List
#2360
10 September 1998
davidjohnson@erols.com

********

Date: Fri, 04 Sep 1998 
From: Jamestown Foundation <brdcast@mx.jamestown.org> 
Subject: 4 September 1998 Prism - Vol.IV, No.17, Parts 2 and 3 (of 4)

THE JAMESTOWN FOUNDATION
PRISM
A BI-WEEKLY ON THE POST-SOVIET STATES

THE RISE OF THE RUSSIAN CRIMINAL STATE 
By David Satter (satter@jamestown.org)

David Satter, author of Age of Delirium: The Decline and Fall of the Soviet
Union (Knopf), is a senior fellow at the Hudson Institute and the Jamestown
Foundation and a visiting scholar at the Johns Hopkins University Nitze
School of Advanced International Studies (SAIS)

Seven years ago, Russia experienced a new dawn of freedom. The Communist
Party had been dissolved and Russia appeared ready to pursue a democratic
future. The literary critic Yuri Karyakin spoke for many when he said that,
"for the first time in this century, God has smiled on Russia."

Few at that time could have foreseen the outlines of what exists in Russia
today. Many former communist countries are witnessing a new dawn of
progress, but Russia is becoming a cesspool of poverty, intimidation and
crime.

The reason is that during the years 1992-1998, which witnessed a massive
attempt to remake Russian society and the Russian economy, Russia once again
fell victim to a false idea. 

The victory over communism was a moral one. Millions of people took to the
streets not because of shortages but in protest over communism's attempt to
falsify history and change human nature. As a new state began to be built,
however, all attention shifted to the building of capitalism and, in
particular, to the creation of a group of wealthy private owners whose
control over the means of production, it was assumed, would lead
automatically to an enriched society and an emerging law-based state. This
notion, dubious under the best of conditions, could not but be disastrous in
the case of Russia, because, in a country with a dogmatic tradition and the
experience of seventy-three years of sustained moral degradation under
communism, the creation of a market economy, like the building of communism
before it, came to be understood as an end in itself. 

THE "YOUNG REFORMERS"
The reform process was guided by a group of "young reformers" who were
graduates of ideological organizations like Pravda, the journal Kommunist
and the Institute of the USA and Canada. Denied the highest positions in the
Soviet system, they became radical free-marketers without abandoning either
their Marxist faith in the primacy of economic relations or their disrespect
for the rule of law. When they finally acceded to power, many of the
reformers took it for granted that they were morally superior, not because
of their fidelity to transcendent values, but because they favored private
ownership over socialism. The need to provide a legal and ethical framework
for the reform process was ignored.

The young reformers' lack of respect for law had two serious consequences.
First, it led them to implement the reforms as rapidly as possible, making
the destruction of the old system their first priority. At the same time,
their lack of respect led them to treat criminals as allies, assiduously
creating opportunities for them to enter the economic mainstream.

The speed of the reform process and its criminalization totally subverted
the purposes of democracy. The reformers believed that regardless of how the
first capitalists acquired their wealth, they would, once they had amassed
their capital, begin to behave like rational economic actors and demand the
protections of a state based on law. In practice, however, after seven years
of reforms carried out in an atmosphere of total lawlessness, Russia was
left with an economy which had no place for the rule of law because its
operating principle was not productivity but theft.

HYPERINFLATION
The reforms were dominated by three processes: hyperinflation, privatization
and criminalization. Their interaction was to facilitate the takeover of
Russia by a criminal oligarchy. 

The hyperinflation began on January 2, 1992, after the abrupt freeing of
prices, and it quickly divided the population into a minority of the very
rich and a majority of the grindingly poor. 

Yegor Gaidar, first deputy prime minister and head of the government,
predicted that prices would increase three to five times and then begin to
fall. In the course of ten months, however, prices rose 300 to 400 times,
which led to the impoverishment of the population. Within three months, 99
percent of the money held by Russian citizens in savings accounts had
disappeared. Money that had been saved for decades to buy an apartment or a
car or to pay for a wedding or a decent funeral was lost, causing crises in
the lives of millions of people. When Gaidar was reminded that the Supreme
Soviet had voted the previous autumn to index the savings of Russian
citizens in the event of price liberalization, he replied that the
imbalances in the economy were the fault of the previous regime, not that of
the new reform government.

The wiping out of citizens' savings was followed by the appearance of
numerous commercial banks and investment funds, which were totally
unregulated. While spiraling inflation pushed ordinary citizens to seek ways
to conserve their savings, these investment funds and many commercial banks,
a large number of which had ties to high ranking officials, launched massive
advertising campaigns, promising rates of return on investment of up to 1200
percent. Most of these funds were pyramid schemes. When they collapsed, more
than 40 million people lost their savings a second time. 

While millions of ordinary Russians were losing their savings, however,
former Soviet government and party officials began to use their ties to
officialdom to accumulate vast wealth. The way, in fact, was well prepared.
During the perestroika period, the communist party apparatus had gone into
business. Commercial organizations organized under the aegis of the Komsomol
were freed from taxes for five years and allowed to engage in foreign trade.
Since there was otherwise a state monopoly of foreign trade, they were, in
effect, allowed to set their own terms in satisfying nearly unlimited
demand. The party, in the meantime, used party money, which at the time was
indistinguishable from government money, to create commercial banks. Factory
directors began to strip the assets of their factories. They did this by
setting up cooperatives, usually staffed with their relatives, which became
middlemen for factory business, charging exorbitant prices while performing
no real service. 

There were several ways of quickly acquiring vast unearned wealth. One was
to appropriate government credits. In 1992, inflation created a shortage of
turnover capital, which paralyzed production and prompted the issuance of
credits to Russian enterprises whose value reached nearly 30 percent of the
gross domestic product. With the inflation rate at 2500 percent, these
credits were offered at rates of from 10 to 25 percent. Instead of being
used to pay salaries and purchase supplies, however, they were deposited in
commercial banks at market rates with the difference split between bank
officials and the factory director.

A second means of acquiring great wealth was getting permission to export
raw materials. Having abandoned the Soviet-era monopoly on foreign trade,
the government began to allow anyone to export who could get a license.
Because Russian raw materials were bought for rubles at internal prices and
sold abroad for dollars, export licenses were akin to permission to print
money. In Moscow, they were issued by the Ministry of Foreign Economic Ties,
which functioned like a market, granting the licenses in return for bribes
with the fee for the license insignificant by comparison with the size of
the bribe. Export licenses for products other than oil and gas--iron, steel
and non-ferrous metals, for example--were usually given at the oblast level,
where officials became de facto business partners in the enterprises they
were supposedly regulating.

A third source of wealth was subsidized imports. Out of fear that there
would be famine in the country in the winter of 1991, the government sold
dollars for the importation of food products at 1 percent of their real
value with the difference subsidized with the help of Western commodity
credits. The products were sold, however, at normal market prices--with the
result that the attempt to relieve the country's anticipated food crisis led
to the enrichment of a small circle of Moscow traders. The value of import
subsidies in 1992 came to 15 percent of the gross domestic product.

In 1993, the impoverishment of the population and corruption of the reform
process spawned a power struggle between the Supreme Soviet, the Russian
parliament and the executive branch of government which ended with the
dispersal of the Supreme Soviet, October 4, 1993, and the creation of a new
political system which greatly accelerated the growth of the criminal
business oligarchy.

The abolition of the Supreme Soviet left only one center of decisionmaking
in the country, the presidential apparatus, and its members, convinced of
their impunity after the October events, became ever more susceptible to
bribery.

At the same time, the Russian revenue system was put under the control of
the president, and twelve banks which had supported Yeltsin in his
confrontation with the parliament were "empowered" to handle government
accounts. These banks, by delaying payments on government obligations and
using budgetary funds to give short term interbank credits at rates as high
as 400 percent, reaped gigantic profits on the state's money. They were soon
joined by both regional empowered banks and enterprise directors who also
acquired budgetary funds and began to lend it out at interest. In the
meantime, the nonpayment of salaries became a permanent feature of Russian
life.

Soon, the leading Moscow banks became the core of financial political
groups, each of which was tied to one or another leading political figure.
As their power and wealth increased, the banks began to behave like states
within a state, acquiring media outlets and establishing their own security
services capable of spying on economic and political rivals as well as
tapping the phones of thousands of ordinary Russians. The struggle for power
between the financial political groups became the principal determinant of
Russian government policies. 

PRIVATIZATION
The second process contributing to the creation of Russia's criminal
business oligarchy was privatization. This both predated and survived the
period of hyperinflation. The privatization which took place first is
euphemistically described as "unofficial" privatization and consisted of the
uncontrolled and illegal seizure of the economic infrastructure of the
country. "Official" privatization took place in two stages; voucher
privatization, from October, 1992 to July, 1994, and money privatization,
which began in August 1994 and is still continuing.

Unofficial privatization began during the perestroika period as soon as
government organizations were given permission to engage in commercial
activity. Government officials, secretly and without any legal basis, began
to take over their agencies and reorganize them as private enterprises. In
place of ministries, they organized "concerns." In place of the state
distribution system, they created commodity exchanges. In place of the state
banks with their regional branches, they organized commercial banks. The new
commercial enterprises used the same suppliers, the same buildings and the
same personnel. Only the name of the organization changed. The assets of the
organization, however, became the property of its new "owners."

Wild privatization was followed by voucher privatization, which began in
October 1992. Each Russian was entitled to a voucher with a face value of
10,000 rubles (the salary of an auto worker), which was redeemable for a
share of Russian industry. The vouchers were of little help to most
Russians, who were rarely paid dividends on them and had no say in
management even when they invested their voucher in their own factory.

The vouchers were very useful, however, to those who could accumulate them
in great numbers. This led criminal and commercial structures to buy them up
as quickly as possible. In some cases, agents bought vouchers on the street
from indigents and alcoholics, often for a bottle of vodka. In other cases,
these groups organized voucher funds which advertised on television,
promising high dividends, and then either did not pay the dividends or
simply disappeared. In this way, criminal and commercial structures
accumulated huge blocks of vouchers which they used to buy up the most
desirable factories, often at giveaway prices. 

In the last days of voucher privatization, the federal property fund put
more than a hundred of Russia's most valuable enterprises on sale at once,
causing a sharp fall in the value of shares which were scooped up by the
voucher funds.

When voucher privatization was succeeded by money privatization in the
latter part of 1994, the population was already divided into a handful of
organizations which could participate and the vast majority of the
population which could not. The pressure to put property into private hands
as quickly as possible, however, did not relent and led to the selling off
of many of the country's remaining industrial enterprises, including the
most desirable, at absurdly reduced prices.

The first step was to set a price for the concerned enterprise. Generally,
the factory director and officials of the relevant ministry decided on the
price based on an estimate of the cost of the buildings and equipment. These
figures could be artificially lowered by using one- or two-year old prices
and writing off usable equipment. To discourage outside investors, they
could also be artificially raised. Once a price was established, it needed
to be approved by the local state property committee, which usually offered
no objections.

If a powerful group was interested in the factory, the next step was to
eliminate real or potential competition. Since the auction was organized by
the local property fund which was subordinated to the governor, the party
with influence in the region was in a position to manipulate the auction by
falsifying documents or gaining information about the competing offer. In
fact, many of the auctions took place only on paper. In cases where auctions
were actually held, competing bids often came from firms which worked for
the victor. Only rarely did true competitive bidding took place and, if a
powerful group was outbid by an insistent competitor, the successful bidder
could easily pay for his tenacity with his life.

The prices for which these enterprises were sold stunned Russian society;
324 factories were sold at an average price of less than $4 million each.
"Uralmash," the giant machine building plant in Sverdlovsk was sold for
$3.73 million, the Chelyabinsk Metallurgical Combine went for $3.73 million,
and the Kovrovsky Mechanical Factory, which supplied the Russian army, the
Ministry of Internal Affairs and the security services with firearms, was
sold for $2.7 million. Telephone companies were sold for $116.62 per line
compared to rates of $637 per line in North America and $2083 in Hungary.
The "United Energy Systems" power generating company was sold for $200
million. In Central Europe, a company with similar kilowatt production would
be worth $30 billion, and in the United States, $49 billion.

Russian oil companies sold tested oil wells for $.04 per realized barrel
compared to the North American price of $7.06 per barrel. The Murmansk
Trawler Fleet, which consisted of 100 ships, each of which was less than ten
years old and was worth $20 million when released, was sold for $3 million.
The North Sea Steamship Company was also sold for $3 million.

"LOANS FOR SHARES"
In late 1994, the Russian government, in response to pressure from the World
Bank to cut inflation to 1 percent a month and balance the budget, ceased
printing money to meet current expenses, including the payment of salaries.

The situation became increasingly untenable. To meet its obligations, the
government began to borrow money from commercial banks in return for shares
in desirable, nonprivatized industries.

In theory, the "loans for shares" program provided for competition for the
blocks of shares with the winner determined by who could offer the largest
credit to the government. In practice, however, the winner was the bank with
the closest "informal" ties to the government, and the scheme, though it
facilitated the handover of the most profitable Russian enterprises to the
country's oligarchs, provided very little in badly needed revenue to the
government. In 1995, for example, the total revenue from the mortgage
auctions of twenty-one of Russia's most profitable enterprises was $691.4
million and 400 billion rubles.

Once an enterprise had been "mortgaged," the proprietary bank was free to
exploit it. When the government failed to pay back the bank loans, which,
given the state's revenue shortage, was always the case, it was up to the
bank holding the mortgage to organize the final sale of the concerned
enterprise. Not surprisingly, the enterprises, in all cases, became the
property of the banks providing the original loans. 

In 1995, Oneximbank won control of 38 percent of Norilsk Nickel, the giant
nonferrous metals producer, in exchange for a $170 million loan to the
government. Two years later, in August, 1997, it paid $250 million to retain
the stake. After its repayment of the loan was deducted, the government had
gained a mere $80 million for a major share in the plant that produces 90
percent of Russia's nickel, 90 percent of its cobalt, and all of its
platinum. 

In the meantime, Oneximbank was free to exploit the giant combine as it saw
fit. Norilsk Nickel was one of Russia's leading earners of hard currency,
but by the spring of 1997, it owed its workers 1.2 trillion rubles in back
wages. It was common for workers to faint from hunger. In 1997, for the
first time in decades, the children of Norilsk were not sent out of the
Polar city for the summer. This raised the question of what Oneximbank was
doing with the money it earned from the combine. According to Obshchaya
gazeta, Norilsk Nickel was not paying workers their salaries because the
bank was involved in highly profitable projects that required enormous
amounts of cash. One such project was paying early on promissory notes from
the federal government to the regional administrations in return for 20 to
30 percent of the note's face value. Insofar as the government has a debt of
more than 50 trillion rubles to employees in the budget sphere, it was often
unable to pay on these notes itself. Commercial banks used the income
generated by their enterprises to buy these notes instead of using it, for
example, to pay their workers.

In fact, the empowered banks, which now control roughly 50 percent of the
economy of the country, began to feed continually off the state budget. They
collected interest on budgetary funds, used the money to acquire the most
valuable Russian enterprises, and then used the revenue from the enterprises
to make superprofits by, in effect, lending money back to the government.

The loans-for-shares scheme changed the relationship between major financial
institutions and the government. The banks had long enjoyed the protection
of patrons in government. For the first time, however, the banks were in a
position to put pressure on the government. Officials now had to go to the
banks to discuss such questions as changes in interest rates and the size of
the government's indebtedness. Having created powerful banks by entrusting
them with the government's money, the government became dependent on them. 

With the approach of the presidential elections, it became clear that the
government not only would not be able to repay the loans it had taken. It
would, in fact, need new loans--which led to plans to put some of the
country's most valuable properties. An example of these is the Perm Motor
Factory, which produces aircraft engines, Aeroflot and Svyazinvest, the
telecommunications holding company, up for auction, with the banks that had
received shares in the enterprises dictating the conditions.

The banks, for their part, acted to support the government that had enriched
them, contributing a minimum of $170 million--and probably a great deal
more--to Yeltsin's re-election campaign. The legal spending limit was $1.7
million. In this way, they helped assure Yeltsin's victory.

CRIMINALIZATION
The third process which gave rise to Russia's criminal business oligarchy,
and the one which left its stamp on the other two, was the process of
criminalization. 

As was the case with privatization, the modern stage of criminalization in
Russia began during perestroika. The Gorbachev era reforms started with the
legalization of "cooperatives," which became the only privately run
businesses in the Soviet Union. The cooperatives quickly prospered but,
viewed as ideologically illegitimate, they were left without police
protection at a time when it was illegal to hire private guards. They
therefore became tempting targets for coercion. Gangs began to be formed all
over the country to extort money from them.

By 1992, nearly every small business or street kiosk in Russia was paying
protection money to gangsters. As a source of wealth, however, shops and
kiosks could not compare to the state budget. When, after the beginning of
the Gaidar reforms, criminal gangs saw that former Soviet officials were
using their connections to acquire vast, unearned wealth, they began to use
terror to take over the enterprises that the former officials had
established. One sign of the gangsters' activities was the growing number of
bankers and businessmen who fell victim to contract murders.

The criminal terror against well-connected Russian businessmen, however, was
short-lived. Soon, gangsters, businessmen and corrupt officials began to
work together. The gangsters needed the businessmen because they required
places to invest their capital but, in most cases, lacked the skills to run
large enterprises. Businessmen needed the gangsters to force clients to
honor their obligations. Before long, nearly every significant bank and
commercial organization in Russia was using gangsters for debt collection. 

The bandits' methods were simple. The debtor was contacted and informed that
the gang knew his address and all his movements and if he did not pay his
debt by a certain date, he and his family would be killed. Usually, this was
enough to induce payment, in which case 50 percent of the money went to the
gang. In cases where the debtor was unable to make good the debt, he was
usually murdered.

The partnership between business and crime did not stop with debt
collection. It rapidly became clear that gangsters could be used for many
purposes, from eliminating unwanted competitors to "persuading" potential
business partners to soften their terms in contract negotiations. The most
successful bankers and entrepreneurs became those with the closest ties to
criminal structures.

Soon, Russian commercial organizations consisted of businessmen, whose
principal skill was a talent for connections, corrupt officials who approved
their projects in return for bribes, and gangsters who collected debts and
eliminated competition. Increasingly, it became impossible to tell the
difference between businessmen and gangsters. An unsuspecting Russian
entrepreneur could easily find that in the event of a failure to agree on
terms with a seemingly respectable businessman, his "partner" was ready to
threaten his life.

RUSSIA'S NEW CAPITALISTS
By 1997, a ruling criminal business oligarchy was in place. A small group of
bankers and businessmen, all previously unknown, had gained control of the
majority of the Russian economy.

Many have compared Russia's new capitalists with the nineteenth century
"robber barons" in the United States. The comparison, however, is
misleading. Instead of creating industries and investing in them, Russia's
new capitalists have divided up the property of the former Soviet Union and
sent the proceeds out of the country, preparing for the day, in many cases,
when they will follow their capital to the West. 

If profitability in the real economy is about 5 percent, gaining control of
former state monopolies or access to the state budget can produce profit
margins of several hundred percent. The new capitalists thus directed their
efforts not at developing their enterprises, but at bribing high ranking
officials--creating an economy where crucial business decisions were based
not on economic considerations but on the influence of corrupt ties.

The result for Russia has been social ruin and political instability.

ECONOMIC COLLAPSE
The decline of Russian society has many aspects. In the first place, Russia,
with the richest natural resources in the world, is on the verge of economic
collapse. In the period since 1992, the country's gross domestic product
fell by half. This did not happen even under German occupation. Russia now
resembles a classic third world country, selling its raw materials--oil, gas
and precious metals--in order to import consumer goods.

The value of investment in Russia has fallen every year for the last eight
years and is now roughly 20 percent of what it was in 1991. For lack of
adequate investment, many sectors of Russian industry--including the food
industry, the textile industry and microelectronics--have nearly disappeared.

Russia's newly rich do not invest in Russia because, having, for the most
part, acquired their money illegally, they fear that a future government
will subject their wealth to confiscation. 

At the same time, money is being moved out of the country in enormous
quantities. The Ministry of Internal Affairs estimates that in recent years,
$350 billion has been exported illegally from Russia. This money is taken
out of the country in suitcases past the customs at Sheremetevo-2 airport,
transferred abroad in sums of less than $10,000, or sent as payments to
dummy firms controlled by the sender for services that were never rendered.

Without the broad-based creation of wealth, the government is deprived of
the possibility to finance itself through the collection of taxes. The cash
strapped government promulgates draconian tax legislation that only inspires
ever more sophisticated ways of avoiding payment. Of Russia's 2.6 million
enterprises and organizations at the end of 1996, nearly one percent
(one-third) paid no taxes at all, another 1.7 million paid their taxes only
in part and only 16.5 percent of all enterprises in the country paid their
taxes in full.

DEMOGRAPHIC CATASTROPHE
The economic disaster has been accompanied by a demographic catastrophe.
Between 1990 and 1994, male life expectancy fell by more than six years. It
is now 57, the lowest in the industrial world. Of those Russian boys who
reach the age of 16 this year, only fifty-four out of every 100 have the
statistical possibility of living to celebrate their sixtieth birthday. A
hundred years ago, fifty-six out of every 100 sixteen-year-old boys in the
provinces of European Russia could expect to live to be sixty.

Over two million people in Russia are now thought to be infected with
tuberculosis. The number of cases of active tuberculosis officially
registered doubled from 50,000 in 1991 to almost 100,000 in 1996. The number
of new cases of syphilis has increased fifty-seven times in seven years,
from 8,000 in 1990 to 450,000 in 1997. Other medical threats posed by the
breakdown of society and the system of public hygiene are polio, cholera and
even plague.

Many Russians are living under conditions of acute stress. The delay in
paying salaries in Russia as a result of profiteering at all levels of the
economy is now from three to eight months. To avoid starvation, many
Russians are forced to grow their own food. At the present time, 40 percent
of all food consumed in Russia is raised on private plots.

The growing desperation which the economic situation inspires has
contributed to suicides and accidents and a sharp increase in the rate of
violent crime.

MORAL CRISIS
Perhaps most serious for the long run, however, is the fact that pervasive
lawlessness has led to an inversion of social morality. If under communism,
normal standards of right and wrong were denied in favor of the supposed
"class values" of communism, people in Russia today are losing the ability
to distinguish between legal and criminal activity.

The markets in every Russian city are controlled by bandits who collect a
share of the proceeds from each vendor. This system is so well established
that the gangsters calculate the share owed to them based on an examination
of the vendors' receipts. They may even agree to defer payments in light of
special circumstances, creating, through force of habit, the impression that
they are actually performing a needed function.

Other businessmen hire private security agencies or even sign contracts with
police agencies, like the Ministry of Internal Affairs or the Federal
Security Bureau (FSB,) which, in an eerie perversion of the meaning of law
enforcement, provide guard services to businessmen for a price.

The breakdown of moral standards in Russia is also reflected in the
appearance of a market for hired killers. Any Russian can now order a murder
simply by contacting the criminal gang that is "protecting" him. The cost of
killing someone in Russia depends on the level of the intended victim's
security. The better he is protected, the more it will cost to kill him. But
because the breakup of the security services has created a pool of
unemployed cutthroats with weapons experience, and contract killers are
almost never caught and so assume no risk, the cost of a professional murder
in Russia, in general, is very low.

POLITICAL INSTABILITY
Russia is also menaced by growing political instability. A poll conducted by
the All-Union Center for Public Research before the beginning of the recent
financial crisis showed that 68 percent of Russians felt that the country
was headed in the wrong direction or toward a dead end. The result of
another poll, this one conducted by the Ministry of Internal Affairs, showed
that 37 percent of the population believed that mass disorders are possible
and 23 percent were ready to take up arms themselves. 

This level of dissatisfaction raises the possibility of serious social
unrest. For the moment, Russians are showing remarkable patience in bearing
nearly intolerable conditions. The readiness to submit to authority in
Russia, however, is traditionally linked to a lack of internal standards
which could lead to widespread violence if disturbances ever get out of hand.

Even if there is no social explosion, mass discontent could lead to the
imposition of a dictatorship, either by bringing to power a demagogic
opposition leader or, if the victory of such a leader becomes likely, by
provoking the imposition of a dictatorship by the "democrats."

The most likely candidate for the role of demagogic opposition leader is
General Aleksandr Lebed, governor of Krasnoyarsk Krai and a certain
candidate for president. During his brief tenure as secretary of the Russian
Security Council, Lebed asked his staff to study the creation of a
militarized division of the Security Council with the code name, "Russian
Legion," that would consist of intelligence and security professionals
capable of fighting Russian criminals "with their methods." Lebed soon lost
his post but the idea of creating a private army capable of meting out
summary justice to gangsters and corrupt officials--a certain prelude to the
beginning of a terroristic dictatorship -- hangs in the air.

At the same time, a new dictatorship might be imposed by the "democrats." It
has never been clear that the democrats are prepared to surrender power
peacefully. In October 1993, Yeltsin used the army to settle a political
conflict with parliament. During the 1996 presidential elections, Aleksandr
Korzhakov, the head of Yeltsin's security service, called for a
"postponement" of the elections when it appeared that Yeltsin could not win. 

Faced with the possible accession to power of someone determined to crack
down on crime, the present political leadership could once and for all
openly unite with criminal elements and resort to terror in order to defend
its money, property and power.

CONCLUSION
Since the dawn of the industrial age, the realm of society and its concerns
has expanded. This has come at the expense of the private realm and the
properly political--to the point that the whole purpose of politics is now
understood as the defense of economic and class interests, rather than as
the establishment of a moral and legal framework for the life of the nation.

It was this condition that gave birth to communism, which absolutized the
interests of a single class, the proletariat, which was supposedly served by
the abolition of private property. Unfortunately, communism was identified
ever after exclusively with the system of state ownership while its essence,
the propagation of "class values" and denial of Judeo-Christian morality,
was ignored.

When the Soviet Union fell, this superficial understanding of communism led
the Russian reformers to concentrate on economic transformation, whose needs
they consistently put ahead of any moral considerations. 

The result was a criminal takeover in Russia and the creation of a society
which is dangerously shorn of the potential for self-regeneration. 

The society which exists in Russia today is run by and for criminals. The
Russian government operates like a business in which every license, contract
or permission must be paid for. Businesses adopt the methods of gangsters,
criminals pretend to respectability and ordinary citizens live in fear,
convinced that they cannot count on the slightest protection of the law.

It was widely hoped that Russia's gangster capitalists, having amassed their
capital, would seek to protect it and give their support to the rule of law.
This, however, has not taken place. One reason is that Russia's successful

businessmen have prospered in a system in which it is easier to eliminate a
rival than to compete with him and so accepting a system of fair competition
does not come naturally. Another reason is that persons who moderate their
criminal behavior risk their own lives because they may stand in the way of
new and ruthless operators who are entering the world of business for the
first time.

The collapse of the Russian stock market and the devaluation of the ruble
have now injected a note of sobriety into the discussion of Russia's future
and the value of the reform policies. 

When the reforms began, it was hoped that they would break the tragic cycle
of Russian history in which relaxation of repression is followed by chaos
and, then, by renewed and even crueler repression. But it is now clear that
seven years of reforms carried out with criminal methods and a Marxist
psychology did not represent a new departure for Russia. 

With the overthrow of communism, Russia experienced change at the economic
level--but not at the more basic level of ethics and morality. Without this
latter type of change, there can be no justice for the average Russian and
no prosperity, because economic progress requires innovation and dynamism
that will not come from a people believing themselves, if not actually,
exploited and betrayed. 

Under the present circumstances, it is debatable whether Russia has
experienced a transition from communism at all. Not only is the former
nomenklatura still in charge, albeit allied with gangsters and in a new
guise, but the Soviet tradition of resolving all conflicts through force has
been preserved and, in some respects, reinforced. 

In fact, the real hope for Russia does not lie in the economic sphere at
all, but in renewed respect for the individual within the context of a state
based on law.

The creation of a such a state is not as far-fetched as it seems. There are
persons in Russia--journalists, independent trade union leaders, law
enforcement officers and others--who are seeking to fight the criminal
takeover. Although diverse and few, they enjoy a reservoir of potential
support in the population. Any democratic, political figure who emerged from
this group could quickly become a serious contender for power.

At the same time, all the documentation necessary to begin a massive and
legal crackdown on corrupt businessmen and officials and organized crime is
sitting in the government's own files.

For Russians to take the steps necessary to save their foundering society,
however, they need the informed help of well-intentioned persons abroad.

Although guiding the transition in Russia has been a critical task of
American foreign policy for the last six years, from the very beginning,
there were signs that there was something wrong with our approach to
building democracy in Russia. The core of our policy was a concentration on
Yeltsin as the "personification of democracy," whom it was our obligation to
support. This approach, in addition to being uninformed, had the effect of
depriving us of influence over the Yeltsin government's behavior while
associating us, in the eyes of the Russian population, with its crimes.

The abjuration of moral judgment on the part of the United States was all
the more tragic because the situation in Russia poses the type of
intellectual challenge that will be increasingly common in the post Cold War
era. Keeping the world safe is no longer a matter of balancing the power of
a superarmed but, to some extent, predictable adversary. Rather, it is a
question of affecting the international moral climate to make it less likely
that the technological breakthroughs transforming the world will be used for
destructive purposes. Our policy toward Russia has had the opposite effect.

In this situation, there are a number of steps the West can take. First, the
United States must recognize that there is a problem. Continuing to treat
Russia as if it were a thriving young democracy instead of a criminal
oligarchy only misleads American opinion and frustrates the formation of the
democratic culture in Russia that is the country's only hope for the future. 

Second, the United States should, to the greatest extent possible, pressure
the Russian government to crack down on criminal activity. Export credits
and IMF stabilization loans should be tied to crime-fighting efforts. Such
"linkage," in the tradition of the largely successful effort to link trade
benefits for the Soviet Union to human rights concessions, is in the West's
best interests, because it is Russia's criminality which is making Western
aid efforts so ineffective.

Russia's leaders may protest but, like the Soviet Union before it, Russia,
because of its moral weakness, actually depends on the West to set the
limits of acceptable behavior. And, in the long run, the articulate, moral
influence of the West can only serve Russia's interests just as Western
ineptitude has helped to contribute to the country's present decline.

By treating Russia not as we wish it to be but as it is, we have a chance of
helping Russia to become better than it has been. Russia is enfeebled, but
not so weak that it cannot still wreak havoc in the world. It is this that
we must prevent. The task is not easy, but if the twentieth century has
taught us anything, it is that we cannot afford to underestimate the
importance of universal values, particularly as they affect Russia. A
commitment to morality and law would give Russia a way out of its present
crisis and thus would safeguard the peace of the world. Russia will not
cease to be a danger to others until it ceases to be a danger to itself. 

(The author would like to thank Svetlana Glinkina for her help in the
preparation of this article.)

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