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Johnson's Russia List


January 20, 2000    
This Date's Issues: 4049 4050 4051 4052 4053

Johnson's Russia List
20 January 2000

[Note from David Johnson:
1. Itar-Tass: Authors of 1999 Apartment Blasts Exposed-FSB Spokesman.
2. Bloomberg: Putin May Delay Reforms to Win Communist Support.
3. Bloomberg: Carnegie's Rousso on Putin's Relations With Duma.
4. Segodnya: Yevgeny Yuryev, NO CHOICE. Third State Duma Starts Off with Grandiose Scandal.
5. APN: Russian political analysts about the «red-brown». (Igor BUNIN, Josef DISKIN, Sergei KURGINYAN, and Andranik MIGRANYAN)
6. Itar-Tass: Yeltsin to Write Book on Last Years of His Presidency.
7. Reuters: Primakov asked to seek Russia presidency.


Authors of 1999 Apartment Blasts Exposed-FSB Spokesman.

MOSCOW, January 19 (Itar-Tass) -- The Federal Security Service (FSB) has 
exposed persons involved in last year's apartment blasts in Moscow and 
southern Russian towns of Buinaksk and Volgodonsk, an official of the FSB 
public relations centre said on Wednesday. 

According to him, some of the terrorists are already arrested, the others are 
declared wanted. 

Last year, FSB agents released 240 hostages kept in Chechnya. In the course 
of the Whirlwind-Antiterror operation, over nine tons of explosives were 
seized in Moscow alone. 

The FSB also seized about 6,000 firearms, over 18 million cartridges, over 
5,000 grenades, 100 kilogrammes of toxic substances and over seven tons of 
drugs throughout Russia in 1999. 

Besides, its agents thwarted illegal exports of huge lots of palladium, gold, 
silver and metals of the platinum group. They seized 15 million dollars worth 
of raw diamonds. Thanks to their efforts, a considerable number of stolen 
antiques and pieces of art were returned to Russia. 


Putin May Delay Reforms to Win Communist Support

Moscow, Jan. 19 (Bloomberg)
-- Russian Acting President Vladimir Putin may put economic reform 
measures on hold until the March presidential election as he seeks to win 
support from all political parties, including the Communists, analysts said. 

The Unity party, endorsed by Putin, yesterday allied itself with the 
Communist Party in the lower house of parliament, the Duma, to reelect 
Communist Gennady Seleznyov as speaker. In exchange, Unity won posts in key 
Duma committees such as defense. 

Putin will ``will try to keep everyone's support before the elections and 
(only) then take more decisive action,'' said Peter Boone, director of 
research at Brunswick Warburg in Moscow. 

The new alignment of parties, which alienated minority free- market advocates 
such as the Union of Right Forces and Yabloko, casts doubt on the outlook for 
increased cooperation between the president and parliament to pass 
legislation needed to reach agreement with the International Monetary Fund, 
such as laws on restructuring banks and strengthening bankruptcy laws, at 
least until the election. 

Putin, who became acting president after Boris Yeltsin resigned Dec. 31, is 
the leading contender ahead of the March 26 presidential election, with an 
approval rating of more than 55 percent, according to a recent poll. Until 
the vote, Putin's main efforts in the Duma probably will focus on building 
bridges to the main parties, analysts said. 

``At this stage it looks as if Mr. Putin is trying to establish a close 
degree of cooperation with the Duma,'' said Alan Rousso, director of Carnegie 
Moscow Center. ``By backing Seleznyov he is sending a signal to Communists he 
has every intention on working with them.'' 

Crucial Vote 

Pleasing every party probably will be impossible. The Union of Right Forces, 
Fatherland-All Russia and Yabloko walked out of the Duma yesterday in 
disapproval over agreements reached between Unity and the Communists, notably 
concerning support for the Duma speaker and assignment of posts in key Duma 

Unity, Communists and three pro-government groups defied calls to delay votes 
on the posts and won chairmanships in 24 out of a total of 27 committees in 
the Duma. The positions are often crucial for the legislative process. 

Yevgeny Primakov, leader of Fatherland-All Russia in the Duma, criticized the 
move and said legislative process will be stalled. 

``Democracy should protect the rights of minorities in parliament,'' Primakov 
said. ``The country is waiting for laws.'' 

Grigory Yavlinsky, leader of Yabloko, blamed the events on Putin. 

``The responsibility for the Duma's inability to work and the serious 
parliamentary crisis lies in the hands of the acting president,'' Yavlinsky 

Minority parties are significant only in mustering 300 votes, or two-thirds 
of total votes, necessary to approve changes to the constitution and override 
vetoes from the president and upper house of parliament. 

With an IMF team visiting this month, Putin will try to show the outlook for 
cooperation with the Duma is good, though the government doesn't expect to 
receive any new money from the fund in the first quarter. The IMF suspended 
lending to Russia in September and has called for better bankruptcy 
legislation and other changes to the government's economic program. It has 
released only one $640 million payment last year out of a total package of 
$4.5 billion approved for Russia in 1999. 

As the government will be able to pay $3 billion in foreign debt payments in 
the first quarter from its own resources, it will be under less pressure to 
please the IMF before elections. Getting support domestically, including for 
the war in Chechnya, may be more important for Putin until March. 

Russia's benchmark RTS Index plunged 5.6 percent to 183.63. 


Carnegie's Rousso on Putin's Relations With Duma: Comment

Moscow, Jan. 19 (Bloomberg)
-- Following are comments from Alan Rousso, director of the Carnegie 
Moscow Center, on the future relationship between Vladimir Putin's government 
and the newly elected lower house of parliament, the Duma. Rousso made the 
comments in an interview with Bloomberg. 

``I think it is too early to tell if this is the real shift in Putin's 
direction. . . I don't think he was ever committed either to the left or to 
the right. At this stage it looks as if Mr. Putin is trying to establish a 
close degree of cooperation with the Duma. By backing (Gennady) Seleznyov he 
is sending a signal to Communists that he has every intention to work with 
them. He recognizes over the past 10 years the inability of executives to 
work with the Duma has stalled Russia's reform effort. 

``After yesterday's opening session, (the Duma) got off to a rocky start. 
This is still going to be an extremely fluid situation. As a result of 
yesterday's session and fragmentation over the vote for speaker, I wouldn't 
rush to say that it will have the Duma divided between Communists, Unity and 
others. There will be a lot of cross-cutting coalitions depending on the 
issues. I think the permutations that are possible are almost infinite. We 
will not see obstructionism and gridlock. This is a Duma that is willing to 
cooperate more with the executive. . .'' 


January 19, 2000
[translation from RIA Novosti for personal use only]
Third State Duma Starts Off with Grandiose Scandal 
By Yevgeny YURYEV

The first working day of the new State Duma turned into an 
indefinite break-time (a total of over six hours) which the 
factions used for behind-the-scenes consultations. All the 
items of the agenda were handled outside the conference room, 
by way of negotiations between factions' and deputy groups' 
leaders who enthusiastically divided the available Duma 
portfolios. Meanwhile in the room, a well-rehearsed play was 
performed, with all the parts played to perfection and with the 
ending known well in advance: the indivisible bloc of 
communists and Unity appointed Gennady Seleznyov Duma speaker 
and divided the portfolios of the essential Duma committees in 
a "brotherly" fashion. 
Meanwhile in the lobby, the negotiations were speeding 
into a blind alley. The scheme practically agreed by the two 
most numerous factions, KPRF and Unity, who decided to divide 
the essential positions between themselves, was obviously not 
welcomed by the other participants in the bargaining. As 
Yevgeny Primakov put it, they were only offered the "refuse." 
By the end of the day, when it became clear that neither OVR, 
nor Yabloko and SPS would accept that scheme, the "senior 
partners" decided to continue their negotiations without 
"juniors." It took KPRF, Unity and their satellites but an hour 
to dot the "i's", distribute the portfolios and finally agree 
on the speaker's candidacy. Unity agreed to cede the key Duma 
post to KPRF. 
Seleznyov's endorsement was to be a mere formality. 
However, the parties to the deal failed to impart at least some 
noble appearance to the procedure. The offended factions 
spoiled the ceremonial ending. The offended candidates for 
speaker nominated by OVR, Yabloko and SPS - Yevgeny Primakov, 
Sergei Stepashin and Viktor Pokhmelkin - used their right to a 
five-minute "last word" to pronounce, one-by-one, their 
resolution not to take part "in the performance with the ending 
known in advance" and to withdraw their candidacies. After 
that, their factions left the room, as a protest against the 
"deal," having rejected even the modest positions offered to 
them. Left in the half-empty room, the winner coalition 
endorsed Seleznyov on a no-alternative basis.
Thus, the very first session of the new Duma revealed at 
least two trends. First, a powerful pro-Kremlin "overwhelming 
majority" formed in the Duma in an instant, meaning that the 
law-making process can well follow the so-called "Central-Asian 
democracies" model, where the parliament obediently endorses 
the will of the executive branch. And second, the people's 
elects just showed that two Dumas was far from enough for the 
development of a "Western-style" political culture in Russia.
Having boycotted the elections of the speaker and the struggle 
for the Duma portfolios, the offended factions in fact let down 
the interests of their voters. The simple human offence taken 
outweighed their political pragmatism. Well, we have no other 


19 January, 2000=
Russian political analysts about the «red-brown»

APN’s preface: 
During the election of the State Duma chairman the apportionment of 
political forces was unexpected. The «Bear» faction («the browns») went into 
an agreement with the Communist faction («the red») with Putin’s blessings. 
Fatherland - All Russia (FAR), Union of Right Forces (URF) and «Yabloko» 
factions were in opposition and expressed their protest. What influence will 
this incident have on the development of the political situation in Russia as 
a whole? On APN’s request well-known Russian political analysts Igor BUNIN, 
Josef DISKIN, Sergei KURGINYAN and Andranik MIGRANYAN comment on this issue.

After this kind of «bear` disservice» I’m not sure in Putin’s victory anymore

Igor BUNIN, general director of the «Center of Political Technologies» fund, 
doctor of political science: Putin made a grave mistake, he tripped on a 
plane surface. Forming of a right central presidential coalition ensured his 
easy victory at the elections. But the previous paradigm fell apart and now, 
I’m sure, the elections won’t be limited to just one round.

Putin’s advisors did him a «bear’s disservice». Instead of public right 
central coalition politics they suggested the tactics of lobby agreements. 
Probably they tried to weaken the Communist Party of the RF (CPRF) this way, 
make the State Duma chairman Gennady Seleznyov manageable and turn him into a 
Troyan horse in the Communist surroundings, but they got carried away and 
this strategy turned into its opposite. Those who felt that they are being 
squeezed out, reacted in a correct way: they made the lobby union public.

Putin practically repeated Soskovets’ mistake, who made Yeltsin do tactical 
gestures towards Zyuganov and his electorate before the 1996 presidential 
elections. In the two-round election system this policy is absolutely 
counter-productive. Why would Putin compromise with Zyuganov if they are to 
be rivals in the second round?

The main thing in the election system of that kind is to consolidate one’s 
potential electorate, for which the utmost bipolarity is necessary. Putin 
won’t be able to get the Communist electorate, but he might loose his 
potential voters.

Now if the three political forces, which were left out of the elite agreement 
(FAR, URF and Yabloko) will be able to put single candidate, alternative to 
Putin, I wouldn’t be so sure in the victory of the current acting president 
even in the second round. The problem is that their chances to come to an 
agreement are practically zero.

The acting president faces a principal dilemma

Josef DISKIN, deputy head of the Institute of Population of the Russian 
Academy of Science, doctor of economics, professor: What had happened will 
have the most negative consequences in regard to forming of Putin’s image in 
the West. It is for sure that most of the commentators in the West will say 
the acting president of Russia preferred to rely on the forces which share 
imperial and nationalistic moods.

This will also scare away from Putin most of Russian businessmen, who were 
already worried by Geraschenko’s statement regarding 100 % sales of the hard 
currency income. And also it gives a certain signal to the governors who have 
anti-market moods.

But Putin still has a chance to turn the situation backwards, to neutralize 
all these negative consequences of his choice. He faces a principal dilemma, 
and this is a positive result.

It is not a conflict by sense, but a corporative conflict

Sergei KURGINYAN, president of the «Experimental Creative Center»: What 
happened in Duma when the Speaker was being elected is not anything new. 
Something of the kind happened when the Moscow region governor was being 
elected: Putin supported Seleznyov, and Luzhkov and Chubais - to spite him - 
supported Gromov.

I think it is that not as much of an ideology conflict, but a corporative 
conflict. There are strong lobbying clans clash: Gusinsky and Chubais - from 
one side, Berezovsky, who seems to be behind the «bears» and Communists 
alliance - from the other side.

That is not somebody`s fight against Putin but lobbists` fight for influence 
on Putin. At any rate, Putin keeps his balance between these two clans.

It`s quite another matter, that participants in this fight are resolved and 
energetic persons. That means that the way to the March 26 elections will be 

Historical victory of democrats done

Andranik MIGRANYAN, vice-president of the «Reforma» fund, professor: 
Democracy means government of the majority but taking into account position 
of the minority. Therefore, what happened in the Duma is absolutely correct 
from the viewpoint of democracy. The majority of deputies agreed upon 
speaker`s candidature. The minority foreseeing their defeat fleed. That`s all.

This is right from the viewpoint of politics. In my opinion, historical 
victory of democracy lies in the fact that the Communists – anti-system 
opposition – have been involved into power and urged to take on 
responsibility. I can compare these events with the situation in Italy when 
the Communist party was drawn to participation in coalition government, where 
christian democrats were also represented. In this way the present democratic 
market society was set up in Italy.

By the way, it was as far back as during Chernomyrdin being premier that he 
came to understanding with the Communists but he did it secretly. Putin has 
done it openly. Well, thank goodness! Premier Primakov relied on the Duma 
majority and it was regarded as his merit. Why Putin is blamed for the same 

I suppose that those to writhe in hysterics now are lost politicians which 
are threatened with marginalization. Their protest is unlikely to have 
serious consequences. Union of Right Forces might correct its position 
because they owe a lot to Putin and, I think, they would not have come to the 
Duma without his support. As to Yabloko and Fatherland – All Russia it seems 
to be their swan-song.


Yeltsin to Write Book on Last Years of His Presidency
By Vyacheslav Bantin 

MOSCOW, January 19 (Itar-Tass) - Former President Boris Yeltsin may soon 
start writing a book about the events of the last years, his aide said. 

Former head of the Kremlin's protocol Vladimir Shevchenko broke the news 
after a presentation of a book called "Protocol of the Russian Federation" 
which was written under his general direction. 

Shevchenko said Yeltsin is in "good mood and gets up early in the morning as 

In the morning, the former chief of state gets a lot of telephone calls and 
he maintains constant contact with Kremlin administration officials. 

The presentation was attended by Foreign Minister Igor Ivanov, presidential 
chief of staff Alexander Voloshin and his deputy Sergei Prikhodko, the acting 
president's spokesman Alexei Gromov. 

Ivanov said the book, which he described as "a protocol manual", is valuable 
because it "sums up the experience of the protocol service that built piece 
by piece over nine years". 

He noted that during all these years the presidential protocol service had 
been invariably headed by Vladimir Shevchenko. 

"Without strict protocol it is hard to speak of serious foreign policy 
activities," the minister added. 

Ivanov recalled that sometimes serious political problems were caused by the 
protocol service. 

"Vladimir Shevchenko is a unique person who happened to be at the right 
place," he said. 

The minister thanked Shevchenko on behalf of all Russian diplomats and 
stressed that the new book "will make it possible to carry out Russia's 
policy even more efficiently". 


Primakov asked to seek Russia presidency
By Peter Henderson

MOSCOW, Jan 19 (Reuters) - Russian Prime Minister Yevgeny Primakov, one of 
the leaders of an anti-Kremlin parliamentary boycott, was nominated on 
Wednesday to take on Vladimir Putin in a presidential election, but he gave 
no formal response. 

``I cannot say now, but I won't rule out anything,'' Itar-Tass news agency 
quoted him as saying after the request by his supporters, a move needed to 
launch a campaign. 

Acting President Putin is heavily favoured in the early election, called 
after Boris Yeltsin's surprise resignation on New Year's Eve. Communist Party 
leader Gennady Zyuganov is so far seen as his only serious rival. 

Primakov, credited with maintaining stability in Russia during the disastrous 
economic crisis of 1998, had announced last year he would run. 

But the poor performance of his Fatherland-All Russia bloc in December's 
general election had cast doubt on his plans. 

Primakov was one of a number of centrists and reformists who stormed out of 
the State Duma lower house on Tuesday in protest against what they saw as a 
backroom deal to deny them top parliamentary jobs. 

Communist incumbent Gennady Seleznyov kept his job as speaker after 
communists forged a tactical alliance with the pro-government Unity party. 
Fatherland-All Russia and two other parties refused to take the few jobs 
offered to them and stayed away from Tuesday's Duma session. 

Also nominated for the presidential election was Konstantin Titov, liberal 
governor of Samara region on the Volga River. 

``Today we know the administration was only clothing itself in democracy,'' 
Titov said after accepting his supporters' request to take part. 

Titov will promote a record of economic reforms in his industrial region. He 
said Putin had so far failed to show his credentials as a liberal. 

``I don't see any reforms, so far,'' he said. 

Grigory Yavlinsky, leader of the liberal Yabloko party and another leader of 
the parliamentary revolt, has also announced plans to run for president. 
Supporters officially sought his approval on Wednesday. 


Date: Wed, 19 Jan 2000 
From: "Fritz W. Ermarth" <> 

By Fritz W. Ermarth
20 January 200

[This essay aims to draw some lessons for future policy toward Russian
internal development from the past year's events in Russia, debates about
economic reform, and revelations about corruption and Western involvement
in it. The author is a retired CIA officer who served as Chairman of the
National Intelligence Council and served two tours on the NSC Staff.
Source notes are bracketed in the text.]

The next American president will face no more pressing challenge than
crafting durable policy toward Russia based on realities rather than
sentimentalities. Reinvention of Russia policy will not occur earlier,
owing to our intensifying presidential campaign and the uncertainties in
Russia as it moves through its presidential election now accelerated to
March 2000.

The new US administration will face difficult security issues with Russia:
a complex arms control agenda involving strategic force reductions, the ABM
Treaty, Russian arms sales, and the security of Russia's weapons of mass
destruction; and manifold regional security concerns arising from the need
to influence stability in what the Russians consider their geopolitical
space. NATO enlargement is but one of the latter.

At the core of our relationship remains the direction of Russia's internal
political and economic development. As put in the recent report of the
Carnegie Endowment for International Peace, "Indeed, there is no other case
in the history of American foreign policy where a strategic interest of the
United States was so intimately bound up with the internal development of
another country, where the range of long-term uncertainties about that
development was so broad - with quite good and also quite bad outcomes
possible - and where the capacity of the United States to influence
developments was large enough to do both harm and good, but too small to be
decisive." [ US-Russian Relations: Report of a Working Group of the
Carnegie Endowment of International Peace, Washington and Moscow, January
2000] Most now recognize that American management of this aspect our
relations with Russia over the past decade was less than optimal; many
critics label it genuinely perverse. Getting it right in the years ahead
could be even more taxing unless things go so badly there that we no longer
can nor care to engage.

The crash of Russia's financial markets in August 1998 signified a crisis
in Russian politics and economic reforms that spurred reflection among
American politicians and mass media about Russian realities. Attention
intensified when possible Russian money laundering through US banks was
revealed. Mainstream media and Congressional testimony gave a more balanced
picture of post-communist Russia. 

Three elements of that picture will be vital to developing sound policy
toward Russia's internal development: First, the hybrid nature of the
Russian system. Second, the demise of the so-called Washington Consensus
that has shaped our policies toward Russian economic reforms. And third,
the significance of massive capital flight from Russia to the West, not
only retarding Russia's economic development, but possibly posing threats
to our politics and financial institutions.

Hybrid Russia

This label, given by one of Russia's foremost political scientists, Lilia
Shevtsova, to the political system that has grown up in the post-communist
period, also may be fairly applied to the economic order. [Lilia
Shevtsova, Yeltsin's Russia: Myths and Realities, Carnegie Endowment for
International Peace, Washington, 1999] Qualities of democracy and
capitalism in Russia intermingle with qualities that are quite antithetical
to normal democracy and capitalism.

Russia has significant elections but money and media manipulation beyond
the control of law and public opinion are all too significant in their
outcomes. The Duma is lively but with relatively little or very uneven
impact on the nation's public policy under a constitution that grants the
president powers to decree and appoint far beyond that of any truly
democratic system. The media convey vigorous commentary on politics and
business life, but are now explicitly aligned with factional political and
business interests. Party formation has been very weak. Other than the
aging Communists, most parties are either marginal or contrived platforms
for individual or factional campaigns that appear and disappear with the
ebb and flow of clan politics.

Phony crony capitalism characterizes the economic order of Russia. It is
crony capitalism because corrupt dealings between government and business
characterize the acquisition and management of wealth. Most of the
privatization of Russia's economy during the early to mid-1990s was a
virtual give-away of state assets to favorites. The instigators believed
they had to privatize very rapidly in order to destroy the political base
of the old Soviet order (which, ironically, they did not fully achieve),
and this precluded a more fair, transparent, and regulated process. They
believed a powerful capitalist class would be created that would proceed to
institutionalize capitalism, i.e., reallocate resources for efficient
growth and promote the legal environment for markets. Here they were
definitely mistaken. The "new" class of owners (many, indeed, sprang from
the communist nomeklatura) proved to be phony capitalists at best. Instead
of investing in and managing their enterprises, they generally stripped
assets out and sent their wealth abroad in what is surely the most massive
flight of capital in history. Real investment in the Russian economy
plummeted along with production and consumption. Absence of even minimal
shareholder rights, abysmal corporate governance, and the widespread
intrusion of organized crime became the norm.

Little of this should have been surprising because of the absence of rule
of law. True rule of law, with viable courts, honest enforcement
institutions, and popular respect could not be rapidly created and did not,
contrary to prevailing dogmas of reform, show a natural tendency to take
root and grow on their own.

Hybrid Russia Reelected

The Chechen war, the Duma elections, and Yeltsin's resignation in favor of
his chosen successor have reinforced the hybrid character of the Russian
system in many respects. In fact, the Kremlin is orchestrating a
deliberate political scenario with war and electoral trappings to do just
that. But important questions remain open, questions which may start
getting answers by the time this article is read. 

The outcome of the Duma elections was hardly the unalloyed victory for
"pro-reform, pro-Western, moderate" forces that uncritical commentary
observed. The foremost victor was Yeltsin's Kremlin establishment which
managed to win approximately a quarter of the vote for its fabricated party
(Unity) and another 6% for an allied party of the right (Union of Right
Forces), supported by its newly fabricated strongman successor candidate
(Prime Minister Putin). It saw the communists confined to their 25%
reservation for the aging. The powerhouse of four months ago, OVR of
Primakov and Luzhkov, garnered only 13%. Notably the powerhouse of some
years ago, Chernomyrdin's Our Home Russia, disappeared as a Duma party.
Several fragment parties allied with the communists in the previous Duma
lost their voters and places to the Kremlin groups.

What won was as important as who won. The "pro-reformers" who won were
mainly representative of politicians, like Chubais, who brought phony crony
capitalism in the 1990s. The "pro-Western" sentiments detected by some
observers are harbored by politicians who lost no opportunity to applaud
the pulverization of Chechnya. Seemingly, the perverted reforms that
impoverished many of them were forgiven and the pugnacious nationalism that
is devastating one of their provinces were endorsed by Russian voters. The
power ministries, i.e., the military and security services, found the
outcome gratifying. The former's muscle flexing in Chechnya is credited
with bringing votes to the Kremlin side, while the latter are taking pride
in somewhat more subtle flexing of their own, especially in arresting
alleged spies and intensifying electronic monitoring.

Another victor was the manipulation of "democratic technology," i.e.,
reliance on highly biased media coverage and financial subventions via the
provinces to swing votes. And there have been rumors of vote fraud of the
kind alleged to have occurred in 1996, that is, that the electronic
machinery between the polling stations and the national count (under
control of FAPSI, the federal communications and surveillance arm) managed
to distort the outcome enough in favor of the Kremlin parties to assure its
victory [These rumors have reached the author via personal conversations,
but have so far not been documented in the press.]

Yet another winner was the super-presidency. Before the Kremlin campaign
got actively underway, a broad consensus was emerging among Russian elites
that the constitution should be altered to give more powers to the Duma,
make the government more accountable to the Duma, and restrict some of the
President's power. But Yeltsin and then Putin clearly debunked that idea;
it is not part of the Kremlin scenario. 

What does this array of "victories" mean for the rule of Russia? Financial
magnate Boris Berezovskiy, one of the architects of the Kremlin strategy,
has proclaimed that it is a step to the creation of "consolidated power."
[Interfax, 22 December 1999] In other words, the elites that have
dominated Russian politics in the past decade are consolidating their grip
on the state. Two questions arise: Will this scenario unfold as they
expect? And if so, what will they do with their grip when they have
consolidated it?

The Kremlin scenario now has such momentum that it seems sure to succeed at
least in electing Putin president. The Primakov-Luzhkov challenge has been
virtually eliminated. Since it wasn't based on much beyond a desire to be
rid of Yeltsin's group, many of its regional adherents are gravitating to
the Kremlin side. But uncertainties abound. The Chechen war could go badly
in terms of casualties, an ambiguous outcome, and a politically costly
foreign revulsion against it. Although contemptuous of foreign criticism
of its Chechnya policy, Moscow has given evidence of genuine concern about
isolation. The actual political structure of the Duma and its behavior have
yet to shape up. Signs of an economic upturn are very shaky at best, and a
currency crisis looms. Putin, supposedly the coolest of hands, is an
unknown quantity in the superheated environment he faces. The manipulative
skills that brought him to the top may not be enough to make him an
effective ruler or even candidate. As to what policies Putin pursues, the
enigmatic brew of reformist, statist, and nationalist pronouncements he has
made, against the background of his mysterious career, provide scant basis
for prediction, even less for expectations of liberalism. [ V. V. Putin,
Russia at the Beginning of the Millenium, Russian Government, Moscow,
December 1999; Moscow Mayak Radio "Putin Answers Listeners' Questions," 18
December 1999 (FBIS-SOV-1999-1218)] The most important unknown ought to
be answered early: Putin's ability to break free from or build an unusual
new consensus with the political interests that manufactured him as a
president, i.e., the Kremlin establishment and the key oligarchs. For
either his reformist or state-building aims to be pursued, those interests
must be suppressed or must act in a totally new way. 

Unless Russian politics blow up, the twin elections of December and March
will represent a consolidation and stabilization of power among the Russian
elite in some form. So the more interesting question is what they will do
with "consolidated power". One possibility is more of the same; hybrid
Russia continues in stagnation and corruption, with Putin something of a
band leader. A second is a new fragmentation of the elite with
reescalation of struggle among them down the road, for and against Putin.
A third possibility is that "consolidated power" will be used to improve
governance and especially the economic life of the country, with Putin
either leading a consensus or imposing a line. In the latter case, much of
the appropriate policy agenda is clear and would enjoy popular and Western
approval if pursued by democratic means: fight corruption, enhance the
rule of law, reform and make workable the tax code, regularize property
rights. These will be difficult enough for a class of politicians that has
had this agenda before it for some years. Even more difficult will be
coming up with a macro-economic development strategy that revives growth
and a scheme for the return of flight capital needed to finance it.

Nonetheless, there is a chance that Russian elections could produce
political arrangements that have some prospect of advancing the cause of
democracy and real capitalism. It will be a more statist, corporatist,
corrupt, authoritarian, and nationalistic Russia than we would like. But
we shall retain an interest in engagement with its internal development.
On what terms?

"Washington Consensus" Adieu…So Now What?

It is an historic irony that Soviet communism collapsed at a time when
Western economic thought and official policy have been dominated by a
fairly narrow set of dogmas emphasizing monetarism, deregulation, and
privatization, while neglecting the legal, institutional, and social
context required for productive capitalism. From Adam Smith to Keynes, the
great economists appreciated the necessity of this context, and especially
the degree to which it had to arise from outside the market, from politics,
from social values, even from religion. But the success of Western
capitalism after World War II and the rise of econometric approaches to
understanding and managing it eroded this appreciation. The consequences
for the less advanced countries of East Europe and the CIS, especially
Russia, have been dire, if not calamitous.

The reigning orthodoxy, widely called the Washington Consensus, stipulated
that economies troubled by excessive state control and profligacy (such as
communist ones) could be rescued by policies that reduced inflation and
stabilized currencies through fiscal and monetary austerity, removed
government from economic regulation (especially prices and trade) as much
as possible, and privatized enterprises as rapidly as possible. This
formula arose from the efforts of the IMF, the US Treasury, and other
institutions of Western capitalism to aid troubled economies in countries
which already had developed markets and market-oriented political systems.
It was not designed for the hard transition cases of the developing world
and, especially, the post-communist world.

But it was applied there in several ways, generally under the label of
Shock Therapy. This was certainly the case in Russia. First, the young
reformist economists, like Yegor Gaidar and Anatoliy Chubais, developed
their ideas under the influence of the Western orthodoxy. Second,
manifesting what came later to be called neobolshevism, they distilled that
orthodoxy's neglect of social context into a positive disdain for political
persuasion and consensus. In true Leninist-Stalinist fashion they would
decree the new capitalism and appoint the new capitalists. Anatoliy
Chubais became the tribune of this approach. Third, scores of Western
advisors rushed in to support, more to advertise, and some to profit from
the proceedings. Finally, Western governments lent their political and
financial support through international financial institutions, along with
direct government and private lending. The result was Hybrid Russia.

Numerous authoritative voices were raised quite early to warn that things
were not on track. One was Jeffrey Sachs who, although an enthusiast for
shock therapy, left his advisory post in Moscow in 1994 to protest that
reforms were being hijacked by kelptocrats. [For a critical view of Sach's
role in Poland and Russia, see Janine Wedel, Collision and Collusion, St.
Martins Press, 1998; for Sach's more critical views see "Betrayal" The New
Republic, 31 January 1994, "Dismal Decade" Los Angeles Times, 22 November
1998] Another, Grzegorz Kolodko, the former Finance Minister of Poland,
has described how Poland's success derived from ignoring the prescriptions
of shock therapy and especially from diligently cultivating public support
for reforms. [Grzegorz Kolodko, "Economics of Transition…in Poland"
Preventing a New East-West Divide…, edited by Clesse and Tokes, Nomos
Verlagsgesellschaft, 1992; also Ten Years of Postsocialist Transition:
Lessons for Policy Reform, Policy Research Working Paper 2095, World Bank,
Washington, April 1999]

During the past year, this critique has been elaborated authoritatively by
two voices seemingly from the heart of the orthodox camp, by Joseph
Stiglitz, the (now former) chief economist of the World Bank, and by the
European Bank for Reconstruction and Development. [Joseph Stiglitz,
Whither Reform, World Bank, Washington, April 1999; EBRD Transition Report
1999, EBRD website.]

The essence of their critique is really a return to the appreciation of
traditional political economics of the importance of social, legal, and
institutional contexts for successful capitalism. These take time and
deliberate political action to build. They require the development of
political consensus through open political competition. Democracy is
especially important to prevent the "capture" of the state by insiders;
capitalism will not work if the state is for sale. Speed of reform is not
intrinsically at fault for the perversions of reform. But it will be if it
prevents transparency and economic fairness in privatization, or
deregulates prices and foreign trade regimes under monopolistic conditions.

The emergence of this critique is about five years late. It has two
additional problems. First, it has not yet seized the commanding heights
of Western institutions where policy toward the transition states is made.
Second, it does not offer a successor doctrine to the Washington Consensus.
At best it offers some pointers, especially about the primacy of building
a viable and democratically controlled state, the need to develop social
consensus, and the centrality of law. Because it is backward looking, it
is particularly mute on how to overcome the perversions of reform that have
already created new and more formidable obstacles to reform, such as new
vested interests in corrupt arrangements, and to exploit more favorable
conditions that have emerged, such as new generations not habituated to
reliance on the government.

The challenge on this front now is to assess the transition histories of
the 1990s and the critique of misfired policies to construct a new doctrine
or strategy of transition. The aim is not another package to sell old or
new reformers in Russia. They will assuredly not be buying and will go
their own way. The aim is rather to construct some sort of a template or
set of standards against which to judge how, when, and where we offer
support should prospects for real economic reform reopen, in what will at
best be highly ambiguous political and economic conditions, with the
Kremlin pursuing more statist policies than we would have favored in the
past. It would be highly desirable if competent minds and authorities
exploited the next year of policy stasis in Washington and Moscow for this

Follow the Money

Hard-headed policy aimed at supporting Russian reforms will have to guard
against entanglement of private interests on our side that threaten
perverse results. The danger that Janine Wedel calls transactorship, i.e.,
cabalistic relations among reformers and foreign supporters, may nor may
not reappear. Another danger of this sort has already appeared, however,
and threatens to grow more serious if it is not made more transparent and
subject, where appropriate, to political and legal controls. This danger
lies in the influence on our politics, our policies, our financial
institutions and our business environment of the huge outflow of wealth
from Russia that has already occurred and seems likely to continue,
especially under the more positive political scenarios. 

Taking into account the money machinations of the KGB and the CPSU going
back into Gorbachev's time, total capital outflows to the West amount to
$200-300 billion at a conservative estimate, with $400-500 billion not
outlandishly high. The nature of the phenomenon, ranging from laundering
of criminal money to mere tax avoidance, precludes an accurate accounting.
The origins and impact of all this money has finally become a matter of
concern in the United States as a result of the Bank of New York
investigation. But the concern appears to cut two ways. Some would like
to see as much exposure of this phenomenon as possible, in part for
partisan reasons perhaps, but as much to clean up our Russia policy and to
protect our financial institutions. Others would prefer this story fade
away, for fear of embarrassment or legal liability. 

No doubt some capital flight from Russia is criminal. But most of it
derives from asset stripping, rent extraction, and other forms of business
considered normal in Hybrid Russia and, until recently, accepted as new
capitalism in the West. Although it may move through offshore havens, much
of it has come to the most secure, accessible, and productive economy in
the capitalist world, the United States. Here it buys real estate,
businesses, asset portfolios, and political influence through
contributions. Little of this need necessarily be illegal. Foreign money
has the right to come into the US and buy assets, unless it is deliberately
laundered or from strictly criminal origins. American partners of Russian
money interests have every right to make political contributions. But the
origins and impacts of such money are of public concern because of their
potential significance in our affairs.

The general point is that money on this scale makes friends and the
friendships can influence many things, include the content of our policy
toward Russia. One case in point is the grand money saga that took place
surrounding the Russian GKO (short-term government bond) market and IMF
lending leading up to the crash of August 1998. This story is cursorily
related here in the spirit of probable cause, suspicions aroused, but not
confirmed…although they should be by further investigation. [In addition to
conversations and correspondence with analysts, sources for this discussion
include: "Conclusion" of the Provisional Commission of the Federation
Council of Russia on the causes of the crisis of August 1998 (in Russian);
Leonid Grigoriev et al., Survey of Economic Policy in Russia in 1998,
Bureau of Economic Analysis, Moscow, 1999 (in Russian); Bulat Stolyarov,
"Default Means Self Above Service" Novaya Gazeta, Moscow, 27 September-7
October 1999 (in Russian); Nikolai Gonchar, interview by Giulietto Chiesa
in Moscow, La Stampa, 8 October 1999 (internet version in Italian)] .

In the early 1990s, having given away its major revenue sources and being
unable to collect sufficient taxes, the Russian government began to help
finance itself by issuing short-term bonds at interest rates that ranged
from 30% to 240% over the history of the affair. Ruble denominated and
initially for Russian investors only, these bonds were hugely profitable
because the high ruble earnings could be converted to dollars at the IMF
supported rate and the profits exported. From the start foreign
speculators sought to participate by essentially lending Russian commercial
banks dollars with which to buy the bonds, with profits shared. In 1996 the
IMF urged more openness to foreigners, ostensibly to bring down interest
rates. By 1997-98, foreigners represented almost a third of the market.
[Grigoriev, Survey…, p. 69] Profits were huge, and a great part of the
Russian portfolio boom of the mid-1990s.

The East Asian crisis of 1997 and the ensuing drop in Russian oil revenues
shook this market; speculators began pulling out. The Russian government
and Central Bank properly considered "soft landings", e.g., by swapping
GKOs for Eurobonds of longer maturity. But they did not systematically
pursue such strategies. Rather they reinflated the market with new
issuances at the highest rates. The crisis deepened in the spring and
summer of 1998. On the order of 35-45% of federal budget outlays were
going to service debt. [Grigoriev, Survey…, Chart 6, p. 107] This bubble
was waiting to burst because the budget was servicing the debt market more
than the reverse. In summer 1998, after Chubais held meetings with the
right USG and IMF officials in Washington, the IMF came to the rescue with
a pledge of some $22 billion and an immediate release of $4.6B. But the
crash came anyway when, on 17 August, the Russian government substantially
devalued the ruble and defaulted on the GKOs.

Right after the crash, a high USG official explained US support for the IMF
loan as a well-intentioned, if naďve and unsuccessful, effort to help a
desperate Russian government support its financial markets.
[Undersecretary of Treasury for International Affairs Dr. David Lipton, in
testimony to the Subcommittee on General Oversight and Investigations of
the Committee on Banking and Financial Services, US House of
Representatives, 10 September 1998] In September, Chubais permitted
himself to say "we conned" the IMF. In subsequent months, parliamentary
inquiries, the Russian general prosecutor, and journalistic exposes went
further. They charged that the last nine months of the GKO market was
likely a deliberate plundering of the Russian budget on behalf of
speculators, foreign and domestic, including many Russian officials, and,
further, that the last IMF loan was really a device to keep the bubble up
for a final profit taking and to arrange the timing of the crash for the
benefit of a few foreign and Russian insiders. It was the movement of
elephantine profits out of the country, among other things, that triggered
the Bank of New York investigation in the fall of 1998.

When I recently queried several Russian economics journalists as to whether
I understood this story correctly, they said I did; it had become
conventional wisdom, except in one interesting respect. The remaining open
question was what did Washington know and think when this plundering was
going on.

For the US, the saga of the GKO and IMF money of 1998 was either one of the
most expensive blunders in recent memory or something more complicit. In
any case, it is hard to escape the suspicion that the mammoth stake of
American investment houses played a role in US government and IMF behavior.
It may also help explain the almost universal official silence in
Washington about what really went on during this critical period. If the
suspicions arising from this episode are valid, they suggest a pattern of
business and government misbehavior that could well be repeated in the
future unless safeguards are emplaced.


Despite the grim realities of Russia's development and of current
US-Russian relations, with a little luck, there is a chance that the next
administration will face a Russia with whose internal economic and
political development we shall continue to want to be engaged in various
forms. A sharp rise in authoritarianism at home and escalation of Russian
pressure on neighboring countries, rising out of the Chechen war and the
militant nationalism it has inspired, are the main threats to this prognosis.

In any case, Washington will have to face the realities of Hybrid Russia,
recognizing and dealing explicitly with the dark sides of corruption,
criminality, and manipulative politics along with more promising prospects
of Russian democracy and capitalism.

If there is a new chance for Russian reforms, Washington will need a new
doctrine of transition - a new Washington Consensus - to inform our
decisionmaking on what to support and what, if asked, to advise. The old
orthodoxies about fiscal and monetary discipline may or may not be wrong,
but they must be placed much more emphatically in the context of
institutional, legal, and structural reform as a condition of assistance.

We need to examine whether and what safeguards are needed to protect the
integrity of policymaking and politics from influences that can arise from
the huge stakes involved in business and economic interactions with Russia
that could deflect our dealings with it from serving our national interest
and real reform in Russia.

These concerns will have to be woven together in our dealings with Russia
on the major security issues much more coherently and explicitly than in
the past. This will involve a more disciplined and analytical policy
process than we seem to have had of late.

Arguments about Russia policy that have been stimulated by the "who lost
Russia" and the money laundering debates have advanced the cause of
rethinking…but only a bit. The coming campaign year will not be a time for
decision. But let it by all means be a time for more thought and analysis.


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