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29 March 2000
[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?
POLL SHOWS MOST RUSSIANS WANT NEW ECONOMIC POLICY
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
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
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
Russia Today press summaries
March 28, 2000
Yaroslavl Guys Have won Hollywood
RUSSIAN CITIZEN ALAKSANDER PETROV HAS GOT OSCAR FOR THE BEST ANIMATION
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
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
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.
Date: Tue, 28 Mar 2000
From: Robert Donaldson <email@example.com>
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.
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
``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
``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
``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.''
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
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
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
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
(Andrei Piontkovsky is director of the Center of Strategic Research in
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
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
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
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
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
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.
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
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
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.
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
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
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
"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).