March 29, 2000    
This Date's Issues: 4206 • 4207   4208

Johnson's Russia List
#4206
29 March 2000
davidjohnson@erols.com

[Note from David Johnson:
1. Interfax: POLL SHOWS MOST RUSSIANS WANT NEW ECONOMIC POLICY.
2. Segodnya: Yaroslavl Guys Have won Hollywood.
3. Robert Donaldson: Stratfor's Putin-phobia.
4. AP: Deborah Seward, Putin Seeks To Root Out Corruption.
5. The Russia Journal: Andrei Piontkovsky, Life with an idiot.
6. New York Review of Books: George Soros, Who Lost Russia?

*******

#1
POLL SHOWS MOST RUSSIANS WANT NEW ECONOMIC POLICY
Interfax 

Moscow, 28th March: Almost half of Russian citizens (49 per cent) say a 
completely new political course is needed now that the Yeltsin era is over. 
This is according to an opinion survey of 1,600 Russians conducted by the 
Regional Political Research Agency from 23rd to 25th March. 

Russia should have effective leadership while retaining the current policy, 
34 per cent of the respondents said. Some 17 per cent had difficulty 
responding. 

Russians need a firm-handed leader, according to 42 per cent of the 
respondents. Furthermore, 30 per cent want a single person to hold all the 
reins of power. Seventeen per cent of the respondents oppose such a 
concentration in on figure, and 11 per cent had difficulty answering the 
question. 

A mere 10 per cent said that reforms of the past ten years had proven 
beneficial, while 68 per cent hold the opposite view, and 22 per cent did not 
respond. 

*******

#2
Russia Today press summaries
Segodnya
March 28, 2000
Yaroslavl Guys Have won Hollywood
RUSSIAN CITIZEN ALAKSANDER PETROV HAS GOT OSCAR FOR THE BEST ANIMATION 
CARTOON FILM
Summary

The sensational news came to Yaroslavl from Hollywood – animated film 
director Aleksander Petrov from this city got Oscar for the best cartoon film 
"The Old Man and the Sea". Few Russians heard about Patrov or about his 
studio in Yaroslavl before this.

If we want to realize how could it happen that a person, unknown in his own 
country, got the highest cinema award, we should recall that Russian 
animation, that remains one of the best in the world, is generally neglected 
by the media.

Russian author's animation is very different from widespread cheap computer 
products. A hand-made ten minutes film takes an artist two years to produce. 
And the richness of author's technologies – sand on paper, pencil on tracing 
paper, plasticine and paraffin - cannot be imitated by any computer animation.

Aleksander Petrov’s technique is painting on glass. It creates sensitive 
fabric of a living screen, where everything is animated – the figures, the 
details and the background. But generally, this beauty is only seen by the 
small audience of many festivals. Unfortunately, the Russian film 
distribution system does not allow all of us to see good cartoon films.

This was the third Oscar nomination of Petrov. In 1990 he was nominated for 
the screen version of Platonov's story "The Cow" and in 1998 – for his 
"Mermaid" - a legend about an old monk and a young novice, charmed by a 
mermaid. This was the first film, produced at Petrov's own studio in 
Yaroslavl.

The next movie was made far from the artist's fatherland – in Canada. The 
sponsor conditioned his support with that the film is to be shot in a new 
format IMAX. The widest 70-mm film is used for this, and the movie theater 
has to be very high. The audience is placed inside the huge semi-sphere. "The 
Old Man and the Sea" became the first 22-minute cartoon film in the IMAX 
system.

No one can say, when the Russian audience will see the new work by Patrov. It 
is only possible in IMAX movie theaters, of which there is none in Russia. 
There are three copies of the film, transferred on 35-mm film, which was made 
specially for festival shows. And it looks good in this format as well.

******

#3
Date: Tue, 28 Mar 2000 
From: Robert Donaldson <robert-donaldson@utulsa.edu> 
Subject: Stratfor's Putin-phobia

Stratfor's latest assertion that Putin will follow a hostile policy toward
the United States (JRL 4204) rests on flimsy grounds, including a claim
that "Putin came of age in Germany during the 1970s and early 1980s, when
the deployment of American Pershing II missiles came to head." As I read
accounts of Putin's career, he was posted to Germany by his KGB employers
only in 1984. Am I missing something?

Putin's opposition to modification of the ABM treaty is consistent with his
predecessor's stance, and is shared by many others outside Russia. One
doesn't need to manufacture stories about Putin being face to face with the
Pershing II in order to understand why Russia would object to treaty
modification. Nor does one need to conclude on the basis of this issue that
Putin "needs hostility with the United States" in order to bolster his
political support. Calm down, Stratfor.

*******

#4
Putin Seeks To Root Out Corruption
March 28, 2000
By DEBORAH SEWARD

MOSCOW (AP) - It's an age-old problem in Russia, one that has defied the 
czars, the Communist bosses and the leaders of the country's young democracy: 
the corruption that snakes its way through every part of the state. 

Fighting corruption is now in Vladimir Putin's lap, and whether he can root 
it out will be a key measure of the success or failure of his presidency. 

Russia's new president says curbing the bribery, stealing and abuse of power 
that pervade all levels of government and breaking links between government 
officials and organized crime are top priorities. 

The task is vital. Experts say corruption costs Russia at least $20 billion a 
year in lost revenues, a sum that is about the equivalent of the entire 1999 
federal budget. It also undermines the trust of foreign investors and reduces 
the government's effectiveness. 

``It doesn't matter who is president. Fighting corruption is necessary,'' 
said Viktor Luneyev, director of the Transnational Crime and Corruption 
Center research group. ``Without it, there can be no economic development.'' 

Nikolai Karamzin, an 18th-century Russian historian, once wrote that bribes 
are the only Russian constitution. A few decades later, writer Nikolai Gogol 
ridiculed the world of the swindling Russia civil servant. 

Corruption continued after the 1917 Bolshevik Revolution and exploded after 
the 1991 Soviet collapse when the old system of tight Communist Party, KGB 
and police controls fell apart. 

Public servants in Russia are poorly paid and working for the government 
historically has been seen as an opportunity to get rich at the state's 
expense through bribery or stealing. 

Former President Boris Yeltsin set up several commissions on fighting crime, 
but their efforts went nowhere. Corruption flourished, tainting Yeltsin's 
family and his administration. Great wealth was concentrated in the hands of 
the so-called ``oligarchs,'' super-rich businessmen suspected of wielding 
great political influence in the Kremlin. 

In contrast, Putin comes across as honest and sincere. No evidence has 
emerged indicating the former KGB agent has enriched himself personally like 
many prominent officials and politicians. 

It is this uprightness that appealed to millions of Russians and helped Putin 
win the presidential elections. His experience as head of the security 
services is perceived as an advantage in removing grubby officials from 
government. 

``Fighting corruption is not an easy task, but Putin has the possibility and 
the resources,'' said Georgy Satarov, a former Yeltsin aide who now heads a 
political think-tank in Moscow. 

There is a wide belief that Putin must start by cleaning up the top levels of 
government to win public credibility and show he is not for sale. 

``Putin knows how much and who stole,'' said Luneyev. ``Nothing will happen 
unless the ruling elite is cleaned up and that is where one must start.'' 

``The problem is with the parliament and the executive branches,'' he said. 

While Putin should be able to identify corrupt officials and politicians, 
they also wield power and few analysts expect to see quick progress from any 
anti-corruption campaign. 

``There may be serious resistance because the current situation in which one 
can steal suits many people,'' said Satarov. 

Many corruption cases never reach the courts for lack of evidence or because 
witnesses are frightened to testify. Investigators are overworked, and often 
the accused simply managed to bribe their way out of a tight spot. 

``We don't have enough force to solve all the cases,'' said Col. Gen. Sergei 
Novosyolov, of the investigation department of the Interior Ministry. ``And 
the number is increasing.'' 

Russia's anti-corruption legislation is full of loopholes. Many forms of 
corruption are not covered by the criminal code, and lawmakers enjoy 
wide-ranging parliamentary immunity making it hard to take them to court. 
Experts say a complete reform of government service as well as new laws are 
needed. 

``You have to do this in an evolutionary and not a revolutionary way. ``Putin 
needs a base, he needs to be strong,'' said Luneyev. ``The higher-ups have to 
know they can't get away with it.'' 

******

#5
The Russia Journal
March 28, 2000
Life with an idiot
By ANDREI PIONTKOVSKY

Most biographical research into the life of Russia’s second president usually 
puts the emphasis on his period working in the KGB. But I would say that 
"Putin the chekist" is the deepest and most authentic Putin. Putin is at his 
most authentic when something different, very personal and emotional breaks 
through the model KGB officer’s mask.

Many have observed that "fenya" – the slang of the criminal world – is 
seeping more and more into the Russian political elite’s official language. 
But none of the politicians resort to this underworld jargon as abundantly 
and naturally as Putin. "Wipe out in the shit house," "a control shot in the 
head," "whoever offends us won’t live 3 days," – this is clearly not the work 
of image-makers, but something very personal and rooted in experience.

This kind of language isn’t typical for the KGB, and even less for its 
foreign intelligence officers who always stood out for their polished 
education and well-schooled manners. 

The St. Petersburg courtyard where the boy from a poor family living in a 
communal apartment spent all his time was his real school of life. It was a 
typical courtyard of the ’50s and ’60s with its ruthless fights, power of 
young delinquents and the cult of force. To survive in that environment, puny 
little Vovochka had to become wily, tough, good at following the law of the 
strongest and never prey to moral doubts or pangs of conscience.

The little wolf cub grew up into a strong and ruthless wolf who never forgot 
the blows of the past and always wanted passionately to jump higher, so as to 
make it over the humiliating wall of inequality he was up against since 
childhood.

When British Prime Minister Tony Blair, who came to Petersburg to express his 
respect for the future ruler of Russia ahead of time, timidly reproached 
Putin for annihilating Grozny, Putin replied sincerely and with conviction. 
His lips even trembled in indignation.

It turns out that one of the Chechen rebels called him a "kozyol" – something 
close to "bastard." In the St. Petersburg courtyard of his childhood, such 
insults were never forgiven. Turning Grozny into Dresden or Hiroshima is, in 
Putin’s understanding, a perfectly suitable response to being called a 
bastard. 

Tony Blair will never understand exactly what Putin was trying to say. It’s 
not a translation problem, either, it’s just that Blair hasn’t had the 
experience of living in the same world that shaped the young Putin’s 
character.

In his book "Conversations with Putin," the president also comes across as 
very natural. This is clearly not "Discussions with Socrates." Putin the 
Christian, for example, with a cross "blessed on the Lord’s Tomb" hanging 
round his neck, explains why he didn’t just have Andrei Babitsky killed. 
"Firstly, it’s against internal regulations, secondly, it would have been 
senseless to shoot him, whereas getting five of our soldiers for him seems 
perfectly acceptable to me."

The secret services’ "internal regulations" are Putin’s sermon on the mount 
upon which he will base his "dictatorship of the law." If he decides it makes 
more political sense to free Babitsky, he will free him and have the interior 
minister send his personal plane for him. If he decides it makes more sense 
to beat him to death with sticks, then he will beaten with pleasure, perhaps 
even by the interior minister personally.

Psychiatry recognizes a condition known as "moral idiocy." Every time he 
opens his mouth in public, Putin confirms this diagnosis for himself. Do you 
want to know what life will be like in Russia over the next 8 or maybe 14 
years? Go to the B. Pokrovsky theater to see Alfred Schnitke’s opera "Life 
with an idiot." Geniuses are able to tell the future without even realizing 
it. 

(Andrei Piontkovsky is director of the Center of Strategic Research in 
Moscow.)

******

#6
New York Review of Books
April 13, 2000
[for personal use only]
Who Lost Russia? 
By GEORGE SOROS 
GEORGE SOROS, Chairman of Soros Fund Management LLC and the Open Society 
Institute, is the author of The Crisis of Global Capitalism, a new edition of 
which will appear later this year.

[DJ: There is a Russian translation at
http://www.rusmysl.ru/2000I/4306/4306index-hot.html]

1.

The collapse of the Soviet empire in 1989 and the Soviet Union in 1991 
offered a historic opportunity to transform that part of the world into open 
societies; but the Western democracies failed to rise to the occasion and the 
entire world has to suffer the consequences. The Soviet Union and later 
Russia needed outside help because an open society is a more sophisticated 
form of social organization than a closed society. In a closed society there 
is only one concept of how society should be organized, the authorized 
version, which is imposed by force. In an open society citizens are not only 
allowed but required to think for themselves, and there are institutional 
arrangements that allow people with different interests, different 
backgrounds, and different opinions to live together in peace. 

The Soviet system was probably the most comprehensive form of closed society 
ever invented by man. It penetrated into practically all aspects of 
existence: not only the political and military but also the economic and the 
intellectual. At its most aggressive, it even tried to invade natural 
science—as the case of Lysenko showed. To make the transition to an open 
society required a revolutionary change in regime which could not be 
accomplished without outside help. It was this insight that prompted me to 
rush in and establish open society foundations in one country after another 
in the former Soviet empire. 

But the open societies of the West lacked this insight. After the end of the 
Second World War, the United States launched the Marshall Plan; after the 
collapse of the Soviet system the idea of a similar initiative was 
unthinkable. I proposed something like it at a conference in the spring of 
1989 in Potsdam, which was then still in East Germany, and I was literally 
laughed at. The laughter was led by William Waldegrave, a minister in 
Margaret Thatcher's foreign office. Margaret Thatcher was a staunch defender 
of freedom—when she visited Communist countries she insisted on meeting with 
dissidents—but the idea that an open society needs to be constructed and that 
the construction may require—and deserve—outside help was apparently beyond 
her understanding. As a market fundamentalist, she did not believe in 
government intervention. In fact, the formerly Communist countries were left 
largely to fend for themselves. Some made the grade; others did not. 

There is much soul-searching and finger-pointing going on with regard to 
Russia. Articles are being written asking, Who lost Russia? I am convinced 
that we, the Western democracies, are largely responsible, and that the sins 
of omission were committed by the Bush and Thatcher administrations. The 
record of Chancellor Kohl's Germany is more mixed. Both in extending credits 
and in making grants, Germany was the largest financial contributor to the 
Soviet Union and later to Russia, but Kohl was motivated more by the desire 
to buy Russian acquiescence in German reunification than to help transform 
Russia. 

I contend that if the Western democracies had really engaged themselves, 
Russia could have been firmly established on the road toward a market economy 
and an open society. I realize that my contention runs counter to prevailing 
views. It is counterfactual because, in fact, the economic reform efforts 
were dismal failures. One would have to believe in the efficacy of foreign 
aid to argue that the outcome could have been different; but foreign aid has 
a bad record and the idea that governmental intervention could actually help 
an economy goes against the prevailing market fundamentalist bias. So 
attention is concentrated on who did what that went wrong. But it is exactly 
the market fundamentalist bias that must be held responsible for the outcome. 
It militated against a genuine engagement to help the Soviet Union and later 
Russia. 

People felt a lot of sympathy, but it was inchoate. The open societies of the 
West did not believe in open society as a desirable goal whose pursuit would 
justify considerable effort. This was my greatest disappointment and 
misjudgment. I was misled by the rhetoric of the cold war. The West was 
willing to support the transition with words but not with money, and whatever 
aid and advice was given was misguided by a market fundamentalist bias. The 
Soviets and later the Russians were very eager for and receptive to outside 
advice. They realized that their own system was rotten and they tended to 
idolize the West. They made the same mistake as I did: they thought the West 
was genuinely concerned. 

I had set up a foundation in the Soviet Union as early as 1987. When 
Gorbachev phoned Andrei Sakharov in his exile in Gorky and asked him to 
"resume his patriotic activities in Moscow," I realized that a revolutionary 
change was in the making. I have described my experiences elsewhere.1 What is 
relevant here is that in 1988 I proposed setting up an international task 
force to study the creation of an "open sector" in the Soviet economy, and 
somewhat to my surprise—I was then an obscure fund manager—my proposal was 
accepted by officials in the USSR. 

My idea was to create a market sector within the command economy, selecting 
an industry like food processing which would sell its products to consumers 
at market rather than command prices (with an appropriate system for transfer 
from command prices to market prices). This "open sector" could then be 
gradually enlarged. It soon became evident that the idea was impractical 
because the command economy was too diseased to nurture the embryo of a 
market economy. That is, the problem of transfer pricing could not be solved. 
But even such a harebrained idea from an insignificant source was supported 
at the highest level. Prime Minister Vladimir Ryzhkov ordered the heads of 
the major institutions—Gosplan, Gosnab, and so on—to participate. It is true 
that I was able to attract Western economists like Wassily Leontief and 
Romano Prodi to participate from the Western side. 1 Underwriting Democracy 
(Free Press, 1991). 

Later on I put together a group of Western experts who provided advice to 
different groups of Russian economists preparing competing economic reform 
programs. Then I arranged for the authors of the principal Russian proposal 
for economic reform, the so-called Shatalin Plan, led by Grigory Yavlinsky, 
to be invited to the 1990 International Monetary Fund/World Bank meeting in 
Washington. Gorbachev wavered over the plan and finally decided against it. 
He balked at two issues: the privatization of land, and the simultaneous 
dissolution of the Soviet Union along with the formation of an economic 
union. I still think the Shatalin Plan would have provided for a more orderly 
transition than did the actual course of events. 

Soon afterward, Gorbachev fell from power, the Soviet Union disintegrated, 
and Boris Yeltsin became president of Russia. He entrusted the economy to 
Yegor Gaidar, the head of an economic research institute who had studied 
macroeconomic theory from the standard textbook of Rudi Dornbusch and Stan 
Fischer. He tried to apply monetary policy to an economy that did not obey 
monetary signals. State-owned enterprises were continuing to produce 
according to plan even if they were not getting paid for it. I remember 
calling Gaidar in April 1992 to point out that debt between companies was 
rising at a rate which was equal to one third of the GNP. He acknowledged the 
problem but carried on regardless. 

When Gaidar failed, an uneasy balancing act followed and eventually Anatoly 
Chubais, the head of another research institute, emerged as deputy prime 
minister in charge of the economy. He gave priority to the transfer of 
property from state to private hands. He believed that once state property 
had private owners, the owners would start protecting their property and the 
process of disintegration would be arrested. 

That is not how it worked out. A scheme for distributing vouchers which 
citizens could use to purchase state-owned companies became a free-for-all 
aimed at expropriating the assets of the state. Managements took control of 
the companies by cheating the workers out of their vouchers or buying up 
shares on the cheap. They continued to siphon off earnings and often assets 
into holding companies based in Cyprus, partly to avoid taxes, partly to pay 
for the shares they acquired, and partly to build up their assets abroad 
because they had no confidence in what was going on at home. Fortunes were 
made overnight, while there was also an extreme shortage of money and credit, 
both in rubles and in dollars. 

Out of these chaotic conditions, the rudiments of a new economic order began 
to emerge. It was a form of capitalism but it was a very peculiar one and it 
came into existence in a different sequence from what could have been 
expected under normal conditions. The first privatization was the 
privatization of public safety, and in some ways it was the most successful. 
Various private armies and mafias were set up and, where they could, they 
took charge. The managements of state-owned enterprises formed private 
companies, mainly in Cyprus, which entered into contracts with the state 
enterprises. The factories themselves ran at a loss, did not pay taxes, and 
fell into arrears in paying wages and settling debts between companies. The 
cash flow was siphoned off to Cyprus. New banks were formed, partly by 
state-owned companies and state-owned banks, partly by newly emerging trading 
groups. Some banks made fortunes by handling the accounts of various state 
agencies, including the Treasury. 

Then, in connection with the scheme for privatizing state companies by the 
distribution of vouchers, a market for stocks was born before the mechanisms 
for registering stocks and efficiently settling transactions were properly in 
place, and long before the enterprises whose stocks were traded started to 
behave like companies. A culture of lawbreaking became ingrained long before 
the appropriate laws and regulations could be enacted. The proceeds from the 
voucher privatization scheme did not accrue either to the state or to the 
companies themselves. At first, the managers had to consolidate their control 
and service the debts they had incurred in the process of acquiring control; 
only afterward could they start generating earnings within the companies. 
Even then, it was more advantageous to hide the earnings than to report them 
unless they could hope to raise capital by selling shares. But only a few 
companies reached this stage. 

These arrangements could be justly described as robber capitalism, because 
the most effective way to accumulate private capital if one had hardly 
anything to start with was to appropriate the assets of the state. There 
were, of course, some exceptions. In an economy starved of services, it was 
possible to make money more or less legitimately by providing them, for 
example repair work or running hotels and restaurants. 

Foreign aid was left largely to two international financial institutions, the 
International Monetary Fund and the World Bank, because Western countries 
were unwilling to put up money from their own budgets. I was opposed to this 
arrangement on the grounds that the International Monetary Fund is 
institutionally ill-suited for the job. It operates by getting governments to 
sign a letter of intent to adhere to conditions governing stability of 
currency and central budget, among other requirements, and it suspends 
payments if a government fails to meet the conditions. When a country does 
not have an effective government, this method practically guarantees that the 
program will fail. That is what happened in Russia. The central government 
was unable to collect taxes and the only way it could meet the money supply 
targets was by refusing to meet budgetary obligations. Wage arrears and debts 
between companies built up to unmanageable levels. I argued that a more 
direct, intrusive approach was needed, and it would have been eagerly 
accepted at the time. But that would have meant putting up real money, and 
the Western democracies balked at the prospect. 

When the International Monetary Fund extended a $15 billion loan to Russia, 
I argued in an article published in The Wall Street Journal on November 11, 
1992, that the money should be earmarked for the payment of social security 
benefits and that the disbursement of the funds should be closely monitored. 
Because of the undervaluation of the ruble, pension payments were only $8 a 
month, so the money would have been sufficient to pay all the pensions. My 
proposal was not given serious consideration because it did not fit into the 
International Monetary Fund's mode of operation. So I set out to show that 
foreign aid could be made to work. 

I set up the International Science Foundation with $100 million (the eventual 
disbursements reached $140 million). Our first act was to distribute $500 
each to some 40,000 of the best scientists in the hope that this would 
encourage them to stay in Russia and continue with scientific work. This took 
only $20 million, and it allowed these scientists to survive for a year. The 
criteria for selecting the scientists were open, transparent, and objective: 
three mentions in the leading scientific publications. The distribution was 
accomplished in a few months, with an expense ratio of less than 10 percent, 
and the scheme assured payments in dollars to each recipient throughout the 
former Soviet Union. This served to prove that my proposal for controlling 
the disbursement of funds was practical. 

The rest of the money was spent to support research on the basis of an 
internationally organized peer review process in which the most famous 
scientists of the world participated. (Boris Berezovsky contributed $1.5 
million for travel grants for reasons of his own. This was the only Russian 
contribution.) All the funds were committed in less than two years. 

My reasons for supporting scientists were complex. I wanted to demonstrate 
that foreign aid could be successful, and I selected science as the field of 
demonstration because I could count on the support of the members of the 
international scientific community, who were willing to donate their time and 
energy for evaluating the research projects. But the mechanics of the 
emergency aid distribution could have been made to work for pensioners as 
well as scientists. 

There were other arguments in favor of helping scientists. During the Soviet 
regime many of the best brains had joined research institutes where 
independent thinking was more tolerated than in the rest of Soviet society, 
and they produced science which was at the cutting edge of human 
accomplishments. It was a somewhat different strain from Western science, 
more speculative, less advanced technically except in a few priority areas. 
Scientists were also in the forefront of political reform. Andrei Sakharov 
was particularly well known and admired, but there were many others. In 
addition, there was now a danger that nuclear scientists might be enticed 
away by rogue states. 

The entire undertaking was a resounding success and gave my foundation an 
unassailable reputation. There were many attacks against us because we 
engaged in many controversial programs. For instance, we ran a competition 
for new textbooks free of Marxist-Leninist ideology and were accused of 
poisoning the minds of students. On one occasion the Duma conducted hearings 
on charges that we were acquiring scientific secrets on the cheap, but the 
entire scientific community rose in our support and the Duma ended up passing 
a vote of thanks. When I say that history would have taken a different course 
if the Western democracies had come to the aid of Russia after the collapse 
of the Soviet system, I can therefore rely on much supporting evidence. 
Imagine how differently Russians would feel about the West today if the 
International Monetary Fund had paid their pensions when they were starving! 

I abstained from personally investing in Russia, partly to avoid any conflict 
of interest but mainly because I did not like what I saw. I did not 
interfere, however, with my fund managers who wanted to invest, and I also 
approved their participation in a Russian-run investment fund on equal terms 
with other Western investors. 

I attended the World Economic Forum in Davos in January 1996, where the 
Communist presidential candidate, Gennadi Zyuganov, was well received by the 
business community. I met with Boris Berezovsky, and said to him that if 
Zyuganov was elected he would not be safe in Russia. I wanted him to support 
Grigory Yavlinsky, whom I considered the only honest reformer among the 
candidates, but I was naive. I did not realize to what extent Berezovsky was 
involved in dirty dealings with Yeltsin's family. According to his own public 
statements, my warning about his safety concentrated his mind. He got 
together with the other leading Russian businessmen who were attending the 
Davos conference and they formed a syndicate to work for Yeltsin's 
reelection. 

That is how they became the oligarchs. It was a remarkable piece of political 
engineering: Yeltsin started with an approval rating of lower than 10 percent 
and they succeeded in getting him reelected. The campaign was managed by 
Anatoly Chubais. I do not know the details, but I can use my imagination. 
When one of Chubais's aides was caught leaving the Russian White House—the 
headquarters of the prime minister and his government—with some $200,000 in a 
suitcase, I am sure it was not play money. The oligarchs extorted a heavy 
price for their support of Yeltsin. They received shares in the most valuable 
state-owned companies as security against loans they made to the state budget 
in an infamous "loans for shares" scheme. After Yeltsin won the election, 
these companies were put up for auction and the oligarchs divided them up 
among themselves. 

I know Chubais well. In my opinion he is a genuine reformer who sold his soul 
to the devil in order to fight what he called the red-brown menace—a 
combination of nationalism and socialism—which he believed would come to 
dominate Russia unless he did something to prevent it. After Yel-tsin's 
reelection he again took charge of the economy, but he had difficulty 
controlling the oligarchs. I was greatly encouraged when Yeltsin brought 
Boris Nemtsov, the reformist governor of Nizhny-Novgorod, into the government 
and treated him as his adopted son. Chubais was tainted by the elections but 
Nemtsov was clean: he could stand firm where Chubais could not. I took this 
as a signal that the Yeltsin regime under the leadership of Chubais genuinely 
wanted to move away from robber capitalism toward legitimate capitalism. The 
budget deficit and money supply were kept within bounds and back taxes began 
to be collected. Inflation and interest rates declined. Shareholder rights 
were better respected and the stock market boomed. Foreign money poured into 
both stocks and debt instruments. Russian borrowers could obtain five-year 
loans at only 250 basis points above the London interbank rate. 

2.

It was against this background that I decided in 1997 to participate in the 
auction of Svyazinvest, the state telephone holding company. I agonized over 
the decision. I was aware of the pervasive corruption in Russia. It would 
have been easier to keep my hands clean by sticking to philanthropy, but I 
felt that Russia needed foreign investment even more than philanthropy. If 
Russia could not make the transition from robber capitalism to legitimate 
capitalism, all my philanthropy was in vain. So I decided to participate in a 
competing bid for Svyazinvest that turned out to be the winning one. This was 
the first genuine auction in which the state was not shortchanged. Although 
we paid a fair price, just under $2 billion, of which my funds put up nearly 
half, I calculated that it would prove to be a very rewarding investment if 
the transition to legitimate capitalism came to pass. 

Unfortunately that is not what happened. The auction precipitated a 
knockdown, drag-out fight among the oligarchs, a falling-out among thieves. 
Some of the oligarchs were eager to make the transition to legitimacy while 
others resisted it because they were incapable of working in a legitimate 
manner. The main opponent of the auction and its outcome was Boris 
Berezovsky. After his allies lost the auction, he vowed to destroy Chubais. I 
had a number of heart-to-heart talks with him but I did not manage to 
dissuade him. I told him that he was a rich man, worth billions on paper. His 
major asset was Sibneft, one of the largest oil companies in the world. All 
he needed to do was to consolidate his position. If he could not do it 
himself, he could engage an investment banker. He told me I did not 
understand. It was not a question of how rich he was but how he measured up 
against Chubais and against the other oligarchs. They had made a deal, they 
must stick to it. He must destroy or be destroyed. 

I came to witness at close quarters an astonishing historical spectacle in 
which powerful oligarchs tried to reverse the results not only of the auction 
but of the entire effort of the government to control the oligarchs. I was 
watching people fighting in a boat while the boat itself was drifting toward 
a waterfall. As part of a campaign of charges and countercharges, Berezovsky 
revealed that Chubais had received $90,000 from a phony book contract, which 
was in fact the other oligarchs' payment for his services as Yeltsin's 
campaign manager. Chubais was weakened and distracted by the constant need to 
defend himself. Tax collections required his personal intervention if they 
were to go forward, and tax revenues fell. There was a dangerous drift 
downward in the economy just as the Asian crisis of 1998 began to make its 
effects felt. It culminated in Russia defaulting on its internal debt in 
August 1998, which shook the international financial markets. 

The effect on the Russian economy was less devastating than was expected at 
the time. The default on treasury bills brought relief to the budget; the 
recovery in oil prices helped both the fiscal and the trade balance; and the 
devaluation announced by Yeltsin in the summer of 1998 led to increased 
demand for domestic products. After the initial shock caused by the collapse 
of the banking system, the economy hit bottom and began to recover. The banks 
and the oligarchs suffered serious losses, but within a year the Russian GNP 
was higher than it had been before the financial crisis. Even the foreign 
creditors were offered settlements which they found advantageous to accept. 

Russia's political and social evolution has been far less satisfactory. 
Yeltsin's family, under the guidance of Boris Berezovsky, have been looking 
for a successor to Yeltsin who would protect them against prosecution after 
the presidential election. They finally found one in the person of Vladimir 
Putin, the director of the Federal Security Service (FSB). In the summer of 
1999 he was made prime minister and selected as Yeltsin's candidate for the 
presidency. There was a flare-up in Chechen terrorist activity. When Shamil 
Basayev, one of the Chechen terrorist commanders, invaded neighboring 
Dagestan, Putin reacted vigorously. The security forces attacked the 
terrorists and Putin issued an ultimatum, announcing that Dagestan would be 
cleansed of terrorists by August 25. The target date was met. The Russian 
population responded to Putin's handling of the situation enthusiastically 
and his popularity skyrocketed. 

Then there was a series of mysterious explosions in Moscow in which entire 
apartment houses were blown up and some three hundred people killed while 
they slept. In the panic that followed, fear and anger were directed against 
the Chechens, assisted by a carefully orchestrated campaign in the press and 
television. Putin invaded Chechnya and the Duma elections were held in an 
atmosphere of war hysteria. Very few candidates dared to oppose the invasion. 

Grigory Yavlinsky was among the few. He supported the antiterrorist campaign 
in Dagestan but he drew the line at invading Chechnya itself. The popularity 
of his party, Yabloko, dropped precipitously and it barely squeezed past the 
threshold of 5 percent of the vote required for representation in the Duma. A 
hastily concocted government party, Unity, without any coherent program, came 
in second to the Communists, with 23 percent. The Union of Rightist Forces, 
led by Chubais, Sergei Kiriyenko, and other reformers, embraced Putin and 
scored quite well with 8.6 percent. Yevgeni Primakov, who, with the backing 
of Moscow's mayor, Yuri Luzhkov, had been considered the favorite candidate 
for the presidency, was decisively defeated; their party got only 13 percent. 
Using the momentum generated by the victory in the parliamentary elections, 
Yeltsin announced his resignation on New Year's Eve, virtually assuring the 
election of Putin as his successor. Primakov withdrew from the contest. 

The phenomenal rise of Putin out of nowhere had an eerie resemblance to the 
feat of political engineering which got Yeltsin reelected in 1996. From long 
experience with Berezovsky, I see his hand in both operations. I first met 
him in connection with his $1.5 million contribution to the International 
Science Foundation when the executive director of the foundation, Alex 
Goldfarb, introduced him to me. I have described our by now well-known 
conversation at Davos. Subsequently Berezovsky claimed that it was this 
conversation that induced him to form a syndicate for the reelection of 
Yeltsin. During 1996, we had a number of very frank discussions about the 
election campaign. I got to know how he operates. 

Then we became adversaries in the Svyazinvest auction but we continued to 
talk to each other. I tried to convert him from robber capitalist to 
legitimate capitalist. He tried to use me in his campaign for the 
chairmanship of Gazprom—by far the most powerful commercial entity in Russia. 
In June 1997 he invited me to Sochi to visit Viktor Chernomyrdin, who had 
been chairman of Gazprom before he became prime minister, and subsequently 
flew me back to Moscow in his private plane. He told me that both Chubais and 
Nemtsov supported his candidacy. I did not believe him, so I asked Nemtsov. 
That was the first he had heard about it. "Over my dead body" was his 
reaction. 

Afterward I had lunch with Berezovsky at his "club," which was decorated, 
deliberately or not, in the way Hollywood would present a mafia hangout. I 
was the only guest. I did not tell him what Nemtsov said, but I did tell him 
that I had asked Nemtsov and that he had claimed that he did not know about 
Berezovsky's quest for the chairmanship of Gazprom. This made Berezovsky very 
angry and his anger gave me the chills. I literally felt that he could kill 
me. He did not say so, but he made me feel that I had betrayed him. It was a 
turning point in our relationship. We continued to talk to each other—on one 
occasion Berezovsky flew to New York just to see me—but from then on I tried 
to keep my distance from him. 

As I have said, the falling-out among the oligarchs, and the conflict between 
Berezovsky and Chubais in particular, was a bizarre episode, although not as 
bizarre as the promotion of Putin as Yeltsin's successor. Berezovsky saw the 
world through the prism of his personal interests. He had no difficulty in 
subordinating the fate of Russia to his own. He genuinely believed that he 
and the oligarchs had bought the government by paying for Yeltsin's 
reelection, and that the government had reneged on the bargain by allowing a 
genuine auction for Svyazinvest. He was determined to bring down Chubais for 
betraying him. When I warned him that he was pulling down the tent around 
him, he answered that he had no choice; if he showed any weakness he could 
not survive. 

I could not understand this at the time, but in retrospect it makes perfect 
sense. Berezovsky could not make the transition to legitimacy; his only 
chance of survival was to keep people entangled in the web of illegitimate 
relationships that he had established. He had a hold on Yeltsin because of 
the illegitimate favors he had arranged for Yeltsin's family. For instance, 
he had made Yeltsin's son-in-law a manager of Aeroflot, whose hard-currency 
revenues were diverted to a Swiss company called Forus, which, it was 
explained to me, meant "for us." This gave him power over Yeltsin that none 
of the other oligarchs had. Berezovsky also had a hold on Chubais, and when 
the chips were down he did not hesitate to use it. The $90,000 Chubais 
received in the form of a phony book contract caused his temporary downfall. 

3.

This is the perspective I bring to bear on the current situation. Berezovsky 
and Yeltsin's family were looking for a way to perpetuate the immunity they 
enjoyed under Yeltsin's presidency. They tried a variety of ways, some quite 
farcical. At one point, at Berezovsky's instigation, Yeltsin informed the 
president of the Duma that he was going to nominate Nikolay Aksyonenko as 
prime minister, but Chubais intervened and the official document sent to the 
Duma nominated Sergei Stepashin. Subsequently Stepashin was pushed out of 
office. Berezovsky's situation became desperate when the scandal over the 
laundering of Russian illegal money in US banks broke in 1999 and he realized 
that he could not find refuge in the West. One way or another he had to find 
a successor to Yeltsin who would protect him. That is when the plan to 
promote Putin's candidacy was hatched. 

On the flight from Sochi to Moscow in 1997, Berezovsky had told me stories 
about how he had paid off the anti-Russian military commanders in Chechnya 
and Abkhazia. So when the Chechen leader Shamil Basayev invaded Dagestan, I 
smelled a rat. I set up a test: Would Basayev withdraw by the deadline set by 
Putin? He did. Even so, I could not quite believe that the explosions in the 
Moscow apartment buildings could be part of a plan to justify war. It was 
just too diabolical. It would not be unique—Russian history is replete with 
crimes committed by agents provocateurs, from Azev the spy during the tsarist 
period to Kirov's murder, which was used to justify Stalin's purges—but it 
would nevertheless be in a class by itself. 

Still, I could not rule it out. From Berezovsky's point of view the bombing 
made perfect sense. Not only would such attacks help to elect a president who 
would provide immunity to Yeltsin and his family but it would also give him, 
Berezovsky, a hold over Putin. So far, no evidence has surfaced which would 
contradict this theory. 

While we may never find out the truth about the Moscow explosions, there can 
be no doubt that it was the war in Chechnya that has propelled Putin to 
victory. I find this distressing. Between 1994 and 1996, during the previous 
Chechen war, the Russian population was upset when it saw the devastation and 
suffering caused by the invasion of Chechnya. The protests by the mothers of 
enlisted soldiers and by human rights activists like Sergei Kovalev helped to 
bring about a negotiated settlement. This time the reaction of the Russian 
population strongly contrasts with its attitude five years ago. Admittedly, 
the Chechen terrorists must bear a large share of the blame. They captured 
aid workers and journalists, held them for ransom, and often killed them. 
Fred Cuny, the hero of Sarajevo, perished in this way. There is hardly 
anybody left who dares to get involved with helping Chechens or with 
publicizing the atrocities they have suffered. There has been a masterful 
manipulation of public sentiment against them. The fact remains that the 
attitude of the Russian population is very different from what it was a few 
years ago. 

At the beginning of the post-Gorbachev years, Russians had a positive 
aversion to violence. In fact, very little blood was spilled in the early 
days and on the rare occasions when people were killed—in Tblisi, in 
Lithuania, and later in the siege of the Duma in October 1993—public opinion 
turned against those who used force. Not anymore. By electing Putin president 
in March, the Russians will become more implicated than ever in the bloodshed 
in Chechnya. 

There is a theory that a victim who has been sufficiently brutalized can 
become himself drawn to violence. The pattern seems to fit many violent 
criminals and it also seems to apply to ethnic violence.2 The Serbs have long 
considered themselves victims, and Milosevic could exploit this sentiment in 
pursuing a policy of ethnic cleansing. Something similar seems to have 
happened in Russia. 

Putin will try to reestablish a strong state and he may well succeed. In many 
ways that would be a desirable development. As the Russian experience has 
taught us, a weak state can be a threat to liberty. It is indispensable for 
the functioning of a market economy that there be an authority that can 
enforce the rules. By accomplishing the transition from robber capitalism to 
legitimate capitalism Putin may well preside over an economic recovery; my 
investments in Russia—including the one in Svyazinvest—may finally pay off. 

But Putin's state is unlikely to be built on the principles of an open 
society; it is more likely to be based on the demoralization, humiliation, 
and frustration of the Russian people. It will likely continue to exploit the 
sense of terror that people felt when the apartment buildings blew up, and 
seek to establish the authority of the state at home and the glory of Russia 
in the world. Exact predictions are impossible, but it seems likely that the 
new government will be authoritarian and nationalistic. It is telling that 
one of Putin's first moves was to reject alliances in the Duma with the 
parties of Yavlinsky, Gaidar, and Chubais, and make a deal for the support of 
the Communists. One thing is clear to me: we are facing a prospect that could 
have been avoided if the open societies of the West had been more firmly 
committed to the principles of open society themselves. 

In his farewell speech, Yeltsin asked for the forgiveness of the Russian 
people: 

"For the fact that many of our hopes did not materialize. For things which to 
us seemed simple but turned out arduous. I want to ask forgiveness for the 
fact that I was not able to justify the hopes of some people who believed 
that we would be able to move forward in one swoop from a gray totalitarian 
and stagnant past to a bright, rich and civilized future. I believed it 
myself. But it did not work out like that. In some way I was too naive."
What Yeltsin did not say is that he and many others put their faith in the 
West but the West did not live up to their admittedly exaggerated 
expectations. I can speak only for myself. At first I thought that Western 
statesmen simply did not understand what was happening. That Gorbachev was 
willing to change the system was too good to be true, so they wanted to test 
it. They set hurdles, and when Gorbachev jumped over them, they set higher 
hurdles. Eventually they had to admit that the change was for real, but in 
the meantime they lost all respect for Russia as a superpower. They started 
treating Russians like beggars. They found money in the Nunn-Lugar Act to 
help them with nuclear disarmament, but not much for anything else. I 
remember a Russian economist telling me that he spent five hours with 
Secretary of State James Baker on a plane to Seattle in 1990 begging for 
assistance, to no avail. 

I also remember Alexander Yakovlev, the main driving force behind Gorbachev, 
telling me, much later, how humiliated he felt in his dealings with the 
Americans. With regret I had to conclude that the West did not care very much 
for the open society as a universal concept. Had it done so, the process of 
transition would still have been very painful for Russia, with many 
dislocations and disappointments, but at least it would have moved in the 
right direction. Russia could have become a true democracy and a true friend 
of the United States, just as Germany did after the Second World War and the 
Marshall Plan. That is not the prospect facing us today. 

My foundation remains very active in Russia and it is receiving strong 
support from Russian society. We established thirty-two computer centers in 
the Russian provincial universities. This has helped to develop the Internet 
in Russia; and online information is emerging there as an alternative to the 
increasingly timid press. In most of our recent programs we insist on 
matching funds from the local authorities. For instance, we are supplying 
books to five thousand local libraries and we are asking for 25 percent of 
the cost in the first year, 50 percent in the second and 75 percent in the 
third, and we are actually receiving it. When we wanted to introduce an 
educational reform program in six oblasts, fifteen of them offered to put up 
the matching funds. I remain committed to supporting the work of the 
foundation as long as it receives the support of Russian society and is 
allowed to function. The quest for an open society is a flame that could not 
be extinguished even by Stalin's terror. I am sure it will stay alive in 
Russia whatever its future. 

2 See Richard Rhodes, Why They Kill: The 
Discoveries of a Maverick Criminologist (Knopf, 1999). 

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