This Date's Issues: 4472 4473
Johnson's Russia List
24 August 2000
[Note from David Johnson:
1. Interfax: RUSSIA SAYS "NO-ONE DETAINED" IN MOSCOW SUBWAY BLAST
2. AFP: Broadcast shows Putin emerging from Soviet shadows.
3. AP: Russian Defense Heads Offer To Quit.
4. Itar-Tass: Commander Says Kursk May Be Lifted only next Spring.
5. PBS television program about Nikolai Bukharin's widow -- "Widow of the Revolution: The Anna Larina Story."
6. Amy Knight: re: Catherine Fitzpatrick/4467.
7. Interfax: 39% OF RUSSIANS CONSIDER KURSK SINKING TRAGIC COINCIDENCE - POLL.
8. Moscow Times: Andrei Zolotov Jr., Putin's Approval Ratings Stay
9. Reuters: Swiss press U.S. for documents in IMF Russia probe.
10. Foreign Affairs: José Piñera, A Chilean Model for Russia.
DJ: I think Richard will win.]
RUSSIA SAYS "NO-ONE DETAINED" IN MOSCOW SUBWAY BLAST PROBE
Moscow, 23rd August: No-one has been detained in connection with the
explosion that occurred in Moscow's Pushkin Square on 8th August, the
Prosecutor General's Office's information and public relations centre told
Interfax on Wednesday [23rd August].
Over 100 witnesses have been questioned so far, a representative from the
centre said. One hundred and two people were injured in the blast; 12 of
those were killed. Of those injured, sixty-nine have been questioned.
Twenty-two people are still in a grave condition and doctors have recommended
not involving them in any investigation measures yet. The Prosecutor
General's Office has stressed that investigators are currently working on
three possible versions of the tragedy: a terrorist act, an accidental
explosion and criminals settling accounts.
Broadcast shows Putin emerging from Soviet shadows
MOSCOW, Aug 23 (AFP) -
Russian President Vladimir Putin's dramatic claim Wednesday that he felt
responsibility and guilt for the Kursk tragedy provided stark evidence that
the former KGB spy has outgrown the Soviet cult of secrecy.
The Russian leader was fiercely criticised in the wake of the submarine
accident for his insensitive handling of the rescue operation, which evoked
bitter memories of Politburo indifference to human suffering in the Cold War
A shocked nation looked to Putin for solace and leadership but for four days
the president remained out of sight in his Black Sea holiday villa, seemingly
paralysed by the sheer unpredictability of events.
But since the rescue operation was formally abandoned Monday, and the 118
crew members officially given up for dead, Putin has striven to offer
Russians the kind of emotional leadership unknown in Russia but increasingly
common in the West.
"I bear a feeling of full responsibility and a feeling of guilt for this
tragedy," the sombre-looking Russian leader said on state television
The tone of his remarks -- more Third Way than Cold War -- suggests that
Putin has studied role models in Europe and the United States, politicians
such as Bill Clinton and Tony Blair who have finely honed skills of emoting
in front of the television cameras.
Yet the signs are that Putin's obvious skills as a communicator will be much
in demand in the future as the Kursk tragedy has seen the Russian media and
public questioning and challenging politicians to an unprecedented degree.
A telephone poll conducted by Moscow's TVTs station earlier this week showed
that nearly 30 times as many respondents thought that the government, rather
than the military, was to blame for the deaths of the Kursk's 118 crew.
In his broadcast remarks on Russian state television, Putin alluded to the
national change of mood wrought by the submarine catatstrophe, at times
sounding almost Churchillian in the face of adversity.
Speaking in a hushed tone, and flanked by the Russian flag, Putin said: "Our
country has surmounted other catastrophes. The events we are going through
today are very painful but I am absolutely convinced that events of this kind
do not divide society but unite it."
Putin acknowledged that an investigation would have to determine whether the
submarine sank on August 12 as a result of human error or tragic accident,
but unlike his Soviet predecessors he was not quick to apportion blame.
"If anybody is to blame," Putin said, "he will have to be punished, without
any doubt. But we must get a clear picture of the causes of this tragedy and
the manner in which the rescue operation was carried out."
A survey conducted just before it was announced that all aboard Kursk had
died showed Putin's approval rating had dropped to 65 percent, one of its
lowest points in his fledgling presidency.
How Putin responds to the unaccustomed criticism will be the ultimate test of
the ex-Soviet apparatchik's self-reinvention as the media-savvy politician
juggling the demands of substance and style.
Russian Defense Heads Offer To Quit
August 23, 2000
By ANGELA CHARLTON
MOSCOW (AP) - As Russians mourned in churches, on Web sites and at home, a
humble President Vladimir Putin said Wednesday he felt responsible and guilty
for a submarine disaster that killed 118 sailors and outraged the nation.
Russia's Defense Minister Igor Sergeyev and navy chief Adm. Vladimir
Kuroyedov submitted their resignations over the loss of the Kursk, one of
Russia's most advanced submarines before an explosion crumpled it Aug. 12,
but Putin said he would not accept them. Seeking scapegoats, he said, would
be ``the most mistaken response.''
``I take a full sense of responsibility and sense of blame for this
tragedy,'' he said in an interview with Russia's RTR television.
In a country where a history of authoritarianism runs deep, Putin's comments
demonstrated a sensitivity to public opinion and eagerness to regain the
nation's confidence unprecedented for a Russian leader.
Russians assailed Putin and the government for their slow, contradictory
reaction to the disaster and the botched rescue operation, and many observers
expected Putin to respond by firing top brass - as his predecessor Boris
Yeltsin had often done.
Putin's interview came as Russia held a day of mourning for the victims, and
after he sat through a harrowing three-hour meeting with the sailors'
families late Tuesday night at the submarine's home base of Vidyayevo.
``The conversation was very heartfelt. He admitted his guilt and inactivity,
and he said the main thing is a lack of funds,'' said Oksana Dudko, whose
husband Sergei was the ship's deputy commander.
Speaking firmly and somberly in the television interview, Putin defended his
initial silence and the slow response to foreign rescue help, saying the navy
acted as quickly as they could given how little they knew about the
He also promised to restore the honor of the beleaguered military and the
``It grieves me, the theory lately that together with the Kursk the honor of
the navy also drowned, the honor of Russia,'' Putin said. ``Our country has
survived a lot.''
``We will overcome it all and restore it all, the military and the navy and
the state,'' he said.
The nation lowered flags to half staff and prayed in Orthodox churches
Wednesday. Television interrupted some programming, and Russia's most popular
web site, anekdot.ru, displayed an empty black screen throughout the day.
Stunned, heartbroken relatives refused to join in the mourning, demanding
that their sons and husbands be retrieved from the sea floor first.
Putin promised that the bodies would be recovered, and said the divers might
cut a hole in the ship or lift it to shallower waters. He said talks were
under way with Norwegian and Dutch divers.
But Mikhail Kuznetsov, commander of the Vidyayevo submarine garrison, said
the work couldn't begin until after next spring's thaw.
The Kremlin promised compensation to the families, who had relied on the
sailors' meager salaries for subsistence. The federal government promised a
one-time payment averaging $7,000 per family - equal to 10 years of pay for a
submarine officer, said Deputy Prime Minister Valentina Matviyenko.
Putin attacked interest groups that he said were trying to cash in on the
tragedy, an apparent shot at tycoon Boris Berezovsky, who is backing the main
fund collecting donations for the families. Berezovsky accused Putin of
The Norwegian divers who reached the wrecked ship said Wednesday their work
at the site was technically simple but emotionally demanding. They took over
from Russian teams had struggled for a week without success, and immediately
determined that the ship was flooded and all aboard were dead.
Concern has been growing about the ship's two nuclear reactors and other
weaponry. The Norwegian Nuclear Protection Authority said Wednesday it had
found no sign of a radiation leak.
The cause of the explosion that mangled the ship was unclear.
The Russian high command says the most likely reason was a collision with a
foreign submarine, though no concrete evidence has been provided. A likely
scenario was an internal malfunction and explosion in the Kursk's torpedo
Commander Says Kursk May Be Lifted only next Spring. .
MURMANSK, August 23 (Itar-Tass) - Rear Admiral Mikhail Kuznetsov, the
commander of the Vidyayevo submarine base, said there is little chance of
lifting the nuclear submarine Kursk from the bed of the Barents Sea this
He believes that this operation can be carried out next year at best. "I am
telling as a submariner and a specialist: the retrieval of the bodies is
hardly possible before that", he told the relatives of the seaman who died
aboard the Kursk.
Sailors in Vidyayevo do not share optimism about the lifting of the submarine
expressed by people who have little relation to the navy.
Experienced submariners say that neither Russia nor the West has the
necessary mechanisms for lifting the submarine lying at a depth of 108 metres
or at least for moving it to a shallower place.
It will take many months to create such mechanisms. Besides all work on the
sea can be done only in summer. Storms will begin on the Barents Sea in
September and last till next spring.
Kuznetsov believes that this work can begin in earnest not earlier than next
Date: Wed, 23 Aug 2000
From: Peggy Suttle <email@example.com>
Subject: Message from Stephen Cohen
JRL readers interested in Soviet history and/or the saga of a remarkable
woman may want to watch the documentary film Rosemarie Reed and I have made
about Nikolai Bukharin's widow -- "Widow of the Revolution: The Anna
The film will be broadcast nationally on the PBS network on Monday, August
28, at 10:30 pm, though viewers should check their local PBS schedule for
the exact hour.
Date: Wed, 23 Aug 2000
From: Aknight613@aol.com (Amy Knight)
Subject: re: Catherine Fitzpatrick/4467
Catherine Fitzpatrick is right on the mark in pointing out not only the
lingering cult of secrecy that prevails within the leadership but also the
callous disregard for human life--demonstrated so clearly in Putin's reaction
to the submarine tragedy. This indifference to human life, as she says, is
part of a long Soviet tradition, dating back to the Bolsheviks. It continued
under Gorbachev (Chernobyl, and the various troop crackdowns on ethnic groups
he sanctioned) and Yeltsin (the storming of the parliament in 1993 and the
war in Chechnia). I would say that it goes beyond the idea of the ends
justifying the means. It is also a reflection of the arrogance of those in
power--their assumption that they have the right to make life and death
decisions without any consideration for those affected by the decisions.
Putin of course is clearly in this mold. His arrogance has been visible for
all to see ever since he became prime minister. But, although he reached the
presidency in large part thanks to the machinations of Yeltsin and the
oligarchs, the people clearly wanted him as their president and have
continued to express their support for him. They should not be surprised by
his handling of the Kursk tragedy. Why would they expect anything different?
39% OF RUSSIANS CONSIDER KURSK SINKING TRAGIC COINCIDENCE - POLL
MOSCOW. Aug 23 (Interfax) - Some 39% of Russians account the
sinking of the nuclear submarine Kursk and the failure to rescue the
submariners to a tragic coincidence, while 23% believe that the tragedy
resulted from the unpreparedness or inability of the naval command to
organize necessary cooperation with ships and rescuers.
The figures were reported to Interfax by the All-Russian Public
Opinion Center on Wednesday after a representative poll of 1,574 Russian
citizens. More than one answer was possible.
In the same poll, 21% said the accident was due to the national
leadership's poor control over the situation in the Armed Forces and 23%
because of technical flaws in naval equipment such as the submarine
itself, means of communication and rescue systems. Another 16% placed
the entire blame on the naval command, which they said had made numerous
mistakes after the accident.
Only 14% supported the version that the catastrophe was the result
of hostile actions on the part of NATO armed forces and 11% were
August 24, 2000
Putin's Approval Ratings Stay Afloat
By Andrei Zolotov Jr.
Despite being subjected to a barrage of criticism from the public and press
over his handling of the Kursk submarine catastrophe, President Vladimir
Putin's approval ratings have suffered only slightly, a poll released
And since the poll was conducted, Putin has taken a number of steps to mend
the cracks in his "hero" image. He traveled to a Northern Fleet base Tuesday
to face the fury of the grieving families and went on television Wednesday
evening to tell the nation of his "great feeling of responsibility and
Putin's decision to keep his distance from what was soon seen as a botched
rescue operation, and continue his vacation at a Black Sea resort, was the
first reality check of sorts for a president who cultivated the campaign
image of a resolute man of action capable of saving the nation.
At the same time, the loss of 118 sailors appears to have opened a new page
in Putin's presidency, when people judge him by his actions rather than
project on him their often unrealistic expectations.
In the latest poll by the All-Russia Center for Public Opinion Research, or
VTsIOM, 65 percent of those asked said they approved of Putin's overall
performance. This was down from 73 percent at the peak of his popularity near
the end of July.
VTsIOM conducted the survey of 1,600 people across the country from Saturday
through Monday, as it was becoming clear that the crew was dead. The drop was
bigger, to 61 percent, among young and better-educated people, especially in
Moscow, said VTsIOM director Yury Levada.
"This is a substantial drop, but not as strong as one would have judged by
the media criticism," Levada said in a telephone interview. "It appears that
things don't filter down to the thick of the people right away, and
perceptions are different between Moscow and the rest of the country."
Levada predicted the ratings would continue to drop if people do not receive
answers to the questions weighing on their hearts and minds: Was everything
done that could have been done and, if not, what was most lacking: equipment,
coordination, funding or openness?
Putin's latest moves have addressed these questions. First, he went to the
naval base of Vidyayevo f the Kursk's home f where he allowed relatives to
pour out their rage and pain.
On Wednesday, he acknowledged his guilt for the tragedy and said those who
are found to be responsible would be punished. But he said to act hastily and
fire the defense minister and navy commander, who have submitted their
resignations, was not the answer.
Commenting on his meeting with the sailors' families, Putin said: "What can I
say here? Words are not enough, they are difficult to find. I want to wail."
Levada said the VTsIOM poll, the results of which were still being processed,
did not ask whether people were most upset by the way the rescue operation
was conducted or by Putin's failure to demonstrate his compassion. Future
polls will be more detailed, he said.
Another major pollster, Alexander Oslon of the Public Opinion Fund, said his
research has measured an even smaller change in the social temperature.
"Ordinary people are not as impressionable as journalists, and the mechanism
of their impression is different," Oslon said. "The moment journalists get an
impression, they start to formulate an interpretation that would please them,
their audience or their colleagues. Ordinary people are not inclined to draw
Yet another polling organization, ROMIR, reported that even in Moscow almost
60 percent of 500 respondents interviewed Sunday did not change their
attitude to Putin because of the Kursk. About 28 percent of Muscovites said
their opinion of Putin had gotten worse.
"The public attitude to Putin comes as a balance of pluses and minuses,"
Oslon said. "This is a serious minus, but it cannot upset the positive
Andrei Ryabov, political analyst with the Moscow Carnegie Center, said
Putin's actions or inactions last week are in complete contradiction to the
heroic image that brought him to power.
"For a year, the myth of a new, young, resolute and efficient leader was
created very professionally and efficiently," Ryabov said. "The submarine
story may undermine this myth."
Levada said Putin's unrealistically high ratings had to fall as the president
started to act. In coming weeks and months, he said, his ratings are likely
to drop farther and, in a way, this will present a healthier picture. During
the past year, he said, the ratings "were more connected not with real
actions, but with the imagination."
However, the damage to Putin's inflated reputation may limit his previously
extraordinary ability to mobilize public support, Ryabov said.
Putin still has time to mend the damage, Ryabov stressed, if the right steps
are taken to restore public trust. He said Putin's trip to Vidyayevo and the
cancellation of plans to hold a memorial ceremony in the Barents Sea, which
was done at relatives' request, were "very positive" moves.
"It is hard to imagine any other [previous] Russian leader who would be able
to stand several hours of talks with a hostile audience," Ryabov said.
Oslon said the comments in some newspapers that Putin's and Russia's honor
have "sunk" together with the Kursk, were "hysterical." "These people [who
wrote these words] are built differently, their nature is different from the
nature of ordinary people," he said.
In a pattern seen across the spectrum of Russian and foreign media, Vremya MN
newspaper had this headline last week: "The reputation of the Russian
leadership is lying on the bottom of the Barents Sea."
Such statements must have been particularly painful to Putin, who had turned
raising Russians' morale into the cornerstone of his policy. He responded to
these accusations Wednesday.
"It grieves me, the theory lately that together with the Kursk the honor of
the navy also has drowned, the honor of Russia,'' Putin said. "Our country
has survived a lot.
"We will overcome it all and restore it all, the military and the navy and
the government,'' he said.
He also said his opponents were pumping up the criticism to gain political
capital and hinted that media magnates Boris Berezovsky and Vladimir Gusinsky
were the driving forces.
"In the first rows of the sailors' 'defenders' were those who over the past
years contributed to the destruction of the army, navy and the state. Some of
them even collected a million. þ They would do better to sell their villas on
the French Mediterranean coast or in Spain. But then they would have to
explain why they were bought in the name of other people or legal entities
and where they got the money."
Berezovsky, who contributed to a fund to help the sailors' families, has been
reported to spend much time in France, while Gusinsky and his family live in
Swiss press U.S. for documents in IMF Russia probe
By Elif Kaban
GENEVA, Aug 23 (Reuters) - A Swiss judge investigating whether billions of
dollars of IMF money for Russia was misused has formally asked the United
States to hand over details of bank transactions between the Fund and
Russia's central bank.
Laurent Kasper-Ansermet, who is probing possible Swiss links to a massive
Russian money laundering case involving the Bank of New York (<A
HREF="aol://4785:BK">BK.N</A>), told Reuters on Wednesday he formally
presented the Swiss demand in the United States last week.
The request followed Kasper-Ansermet's raids this month at two banks in the
Italian-speaking canton of Ticino, where he seized documents as part of his
probe into whether a $4.8 billion IMF credit to Russia was diverted via Swiss
The International Monetary Fund has repeatedly denied that any of the money
it lent to help shore up Russia's ailing rouble in 1998 was misappropriated
by the Russians.
Kasper-Ansermet, reminded of the IMF's denials, said: ``I am doing my job. I
am continuing my investigation.''
``I have formally asked the United States to provide me with detailed bank
documents concerning IMF funds transferred to Russia,'' the magistrate said.
``To be able to trace these IMF funds, I am particularly interested in bank
documents on the money credited to the Russian central bank's (IMF) account
at the U.S. Federal Reserve Bank of New York and how it was used.''
CASE COULD HAVE POLITICAL IMPACT
Suspicions that massive Western aid to Russia was diverted have been used by
the Republican Party to criticise the current administration, which is
particularly sensitive in the run-up to the U.S. presidential elections.
Kasper-Ansermet in January formally asked the United States for judicial help
with his own probe into the Bank of New York case, as part of which he froze
$20 million at a dozen banks.
But the judge said repeated Swiss requests to U.S. officials since January to
hand over the documents had so far gone unanswered.
In February, a former bank executive and her husband pleaded guilty in a U.S.
court to being involved in a $7 billion international money laundering scheme
involving the Bank of New York, described by Interpol as the biggest in
Kasper-Ansermet said he was so far able to obtain only part of the bank
documents he sought after his meetings at the U.S. Attorney's Office for the
Southern District of New York. ``I am still waiting for more documents,'' he
He said he also met officials of the U.S. Justice Department in Washington
and the Federal Bureau of Investigation.
``I asked the FBI to put in place an international police task force assigned
to the Bank of New York case because many countries are concerned by it.''
He said he had requested a meeting with officials of the IMF but had so far
received no reply.
In Washington, the IMF had no immediate comment on Kasper-Ansermet's request
for a meeting. But last month Fund media chief Thomas Dawson had said there
had been no request for a meeting and the IMF was baffled by the charges.
He said then: ``We will look at all accusations, take them seriously. But
thus far, in terms of specifics, names, dates, numbers that have been
mentioned,...it doesn't, quite frankly, seem to hold together.''
In New York on Wednesday a spokesman for Bank of New York declined to comment
on Kasper-Ansermet's investigation while no spokesman was immediately
available at the Federal Reserve Bank of New York.
[for personal use only]
A Chilean Model for Russia
By José Piñera
José Piñera is President of the International Center for Pension Reform and
Cochair of the Cato Institute's Project on Social Security Privatization. As
Chilean Minister of Labor and Social Security from 1978 to 1980 he was
responsible for the privatization of the Chilean pension system.
[Summary: Russia does not need a Pinochet, but it does need the Chilean
model. For Russia to grow at self-sustaining annual rates of seven to ten
percent for a decade or two -- the only way it can pull itself out of poverty
-- it needs much more economic liberalization. Four reforms inspired by
Chile's dramatic turnaround can help Russia out of its doldrums: pension
privatization, tax reform, radical deregulation of coddled industries, and
the replacement of the ruble with the euro. The indispensable element is not
a strong four-star general but a team of determined economic policymakers who
know that freedom works.]
FREE MARKETS, FREE PEOPLE
What Russia needed at the beginning of the twentieth century was not a
Bolshevik Revolution but an American one. The tragedy of that great nation
was that it got a Lenin instead of a Jefferson. Today, nearly ten years after
the collapse of the Soviet Union, Russia's new president, Vladimir Putin, has
the historic opportunity to start the freedom revolution that his country
missed last century.
I had the opportunity to assess Russia's situation at the end of April, when
I traveled to Moscow at the invitation of President Putin's newly appointed
economic adviser, Andrei Illarionov. As a member of the team of economists
that entered the Pinochet government in Chile in the 1970s to produce a
free-market economic revolution and a return to democratic rule, I was
inevitably asked whether Russia "needed a Pinochet" and whether the country
should introduce a "Chilean economic model." My unequivocal answer was no to
the first question and yes to the second.
President Putin and his government must not identify the core of the Chilean
experience with its historically specific interruption of political
liberties. Such a break has happened in many other nations, and in almost all
cases, their generals-turned-presidents have not only been a disaster for
their countries but have also left a legacy of more state intervention and
corruption. I told my Russian audiences that the replicable aspect of the
Chilean model is the radical, comprehensive, and sustained move toward free
That model not only doubled Chile's historic rate of economic growth (to an
average of 7 percent a year from 1984 to 1998) and reduced the proportion of
people living in poverty from 45 percent in 1987 to 22.2 percent in 1998. It
also unleashed the forces that brought liberal democracy and the rule of law.
Those who argue that a nonelected legislature was necessary to accomplish
those beneficial free-market reforms are not only factually wrong but also
weaken the case for democracy by implying that correct public policies cannot
be understood by the people and their elected representatives. Having helped
"export" Chilean pension reform to ten very different countries, I can attest
that the indispensable element common to these reforms was not a strong
four-star general but a team of determined policymakers who knew that freedom
works -- and that the people would understand that concept if it were well
If President Putin is convinced, as he has said he is, that economic freedom
is the road to high growth, he can find such a team in Russia to implement
the reforms necessary for the transition to a modern free economy and to
achieve an economic and political status consistent with the nation's
cultural achievements. Indeed, with a GDP smaller than Spain's (a country of
39 million people), Russia is performing far below its potential. Both the
president and his 146 million compatriots are painfully aware of this.
Russia is like a giant in chains. Aleksandr Solzhenitsyn expressed it best
when he recently said, "The creative strengths of the people, which were
repressed under the communists and still are today, could get everything
moving. Millions of Russians are blocked by a wall of administrative and
bureaucratic arbitrariness. They have no one to complain to, no court to
protect their rights." Their enormous potential needs only to be unlocked.
The 1998 fall of the ruble and the subsequent financial crisis prompted many
to ask, "Who lost Russia?" Market reforms were often blamed for the country's
turmoil. George Soros, for instance, recently claimed that "the economic
reform efforts were dismal failures. ... It is exactly the market
fundamentalist bias that must be held responsible for the outcome." But that
diagnosis of the Russian crisis is wrong and ignores the progress that the
country has made in significant areas.
True, according to official figures, Russia's economy has shrunk an average
of 5.4 percent per year since 1991. But Russia does not have a market
economy. In terms of economic freedom, Russia ranks 93rd out of 123 countries
surveyed, between Zambia and Bangladesh, in the latest Economic Freedom of
the World report. There is no rule of law; private landowner property rights
are virtually nonexistent; many businesses receive government protection; key
enterprises are still largely owned by the state; minority shareholder rights
are regularly violated and corporate governance rules are extremely weak; the
ruble is unstable; tax rates are confiscatory; government spending is high;
and Moscow's bureaucracy is larger than it was even during Soviet times. The
1998 crisis was the predictable culmination of an inconsistent mix of market
and interventionist policies, some or all of which were also present in the
Latin American and Asian countries that experienced crises in the 1990s.
Clearly, Russia's disappointing economic performance must be attributed
mainly to the lack of a coherent process of market reforms, not strict
adherence to free-market policies.
The country's difficulties are also, to an important extent, due to its 70
years of communism, a much longer and more pervasive totalitarian episode
than that experienced by Eastern Europe. Despite the weight of Soviet
history, the changes have been profound, and Russia today is a dramatically
different country than it was in 1991. It has achieved a peaceful transition
from a totalitarian state to a democracy, however imperfect -- an immensely
difficult task in itself, for which former President Boris Yeltsin deserves
more credit than he generally receives. Russia's important advances --
admittedly incomplete or flawed in execution -- also include widespread
privatization, price liberalization, and the opening of the economy to
investment and trade. (Critics of the reformers often forget the
extraordinary challenge in taking charge of an economy when the budget
deficit was approaching 30 percent of the GNP, as was the case in Russia at
the end of 1991.) And of course, on May 7, 2000, Russia went through the
first democratic transfer of power in its 1,100-year history.
Therefore, to ask who lost Russia is inappropriate. Russia is not lost; it
has taken many years and a financial crisis to achieve the preconditions --
both political and economic -- for further reforms. The challenge for Putin
now is to introduce such reforms in a country where much of the population
has developed a cynical view of capitalism -- a perception resulting from the
slow pace of change, the crash of the ruble, the reforms' flaws, and the
consequent rise of the so-called oligarchs. Russians can be forgiven for that
cynicism. They heard from many Russian and Western financial officials that
their country was moving swiftly and successfully to the free market. But the
reformers never did explain to the public the logic and implications of the
policy changes, something essential for successful free-market reforms. In
the minds of many Russians, the post-Soviet experience has only confirmed the
Marxist textbook version of capitalism. A critical task for the Putin
administration will be to communicate clearly and regularly with the Russian
people about the purpose and importance of market reforms.
FOUR REFORMS FOR HIGH GROWTH
In the first quarter of 2000, Russia experienced an official growth rate of
eight percent. But such rapid growth will be short-lived. After a yearlong
recession, the country is merely experiencing a bounce-back effect produced
by the devaluation of the ruble and helped by high oil prices. For Russia to
grow at self-sustaining rates of seven to ten percent for one or two decades
-- the only way that it can pull itself out of poverty and address its many
problems -- it must significantly increase its economic freedom. Putin made a
striking statement along those lines on a recent visit to the declining
industrial city of Ivanovo: "The higher the degree of economic freedom of
economic entities, the higher the level of the development of the state."
Russia can achieve high growth by implementing four top-priority reforms:
pension privatization, tax reform, radical deregulation, and the replacement
of the ruble with the euro. The guiding concept, applied rigorously in both
Chile and New Zealand during those countries' reform periods, is to eliminate
the system of state-sanctioned privileges, which prevails throughout the
Russian economy. In addition, to be effective, the reforms must be carried
out as part of a single initiative.
A NATION OF CAPITALISTS
Letting working Russians keep their own retirement savings instead of giving
them to the government would be wildly popular in Russia, as I saw at a
two-hour press conference attended by some 70 journalists at the Interfax
News Agency and at a meeting headed by former Deputy Prime Minister Boris
Nemtsov with leading legislators at the Duma (Russia's lower house of
parliament). At the end of my day at the Duma, Nemtsov appeared on national
television explaining to workers the benefits of holding their old-age
savings in private property accounts. By the evening of the next day, my
press conference had been broadcast on all the major national television
stations; the following morning, it was covered in the country's newspapers.
Like those of all countries with pay-as-you-go social-security schemes,
Russia's system is going broke and will have to be reformed sooner or later.
Indeed, inflation has eaten away at the real value of pensioners' benefits
over the years. The inadequate benefits are accompanied by social-security
payroll taxes of 29 percent. This high rate raises the costs of labor and
encourages unemployment, putting further pressure on the public pension
program. Expenditures on social security already constitute much of the
government's budget outlays. In short, the high costs and low benefits of the
public pension system rob people of security in their old age and discourage
overall economic growth. The longer the country postpones reform, the more
difficult it will be to make the transition to a fully funded system.
The Russian government should follow the principles applied in Chile: workers
should be allowed to place their retirement savings in their own accounts to
be privately managed by competing firms, which would invest that money in
capital markets over the working lifetimes of their clients. Giving ordinary
Russians the choice of remaining in the state-run system or moving into the
private system makes it more difficult for politicians to obstruct reform.
(When workers were given that choice in Chile in 1981, 25 percent chose the
new system within the first month alone; now 94 percent are in the private
system.) New entrants to the labor force, however, should go directly into
the private pension system. That will permit Russia eventually to close the
door on the state-run system that politicians -- as has been the case in all
countries -- have abused for political purposes, and it will protect the
private system from being undermined by a publicly managed, unfunded system.
Finally, the benefits of current retirees and of those people remaining in
the old system should not be altered. Such a measure is both fair and
politically prudent since it, too, removes potential opposition to
Russian pension reform needs to be fitted to Russian conditions.
Unfortunately, because of the 1998 crisis, the most salient feature of
Russia's economic situation is a justifiable lack of trust in the nation's
financial sector, which essentially no longer functions. A functioning
banking sector and capital market, moreover, are hindered by the presence of
a large barter economy and a lack of transparency in business transactions.
Thus the primary feature of the first stage of Russian pension reform should
be a strong emphasis on investments abroad in competing global index funds.
Under current conditions, that would be the only way to safeguard workers'
savings. Workers should also be given the choice of investing their savings
in Russia, thus helping to create -- with prudent gradualism -- a domestic
Gaining the most from pension privatization would not only require other
reforms; it would drive them. A reform that allows Russians to invest their
pension savings abroad sends a powerful signal about the openness of the
country's economy and about the Russian government's view that capital will
be permitted to flow both ways, something that would itself encourage greater
foreign investment in Russia. But the most important impact of pension reform
is the paradigm shift it produces by creating a country of property-owning
workers who favor free-market economic policies. Put simply, the rise of
worker capitalism would turn Marx on his head. Done properly and accompanied
by other reforms, pension reform can stimulate a virtuous cycle in which
workers invest their savings in capital markets, and markets increasingly
invest in Russia as both the financial and the corporate sectors develop.
Since the Republican presidential candidate, George W. Bush, has recently
announced his desire to reform Social Security by introducing private
retirement accounts, a new "pension reform race" between the United States
and Russia -- a more benign kind of race than in the past -- has broken out.
And in this race, Russia has a chance of "beating" the United States.
Throughout Moscow appear posters of the city's founder, Yuri Dolgoruky (whose
nickname was the "Long-Armed" for his accumulation of land and property),
extending his hand with a caption urging Russians to pay their taxes. But
Russians are paying him no heed. Russian taxes are complex, high, full of
exceptions, and uncollectible. Total payroll taxes reach about 39 percent,
while the marginal income-tax rate for those of modest earnings is about 20
percent. In the 1999 tax year, only 3.8 million Russians filed income-tax
declarations. Compliance with all the tax laws would result in an effective
average tax rate of about 50 percent. Boris Federov, a former finance
minister and chief tax official, explains that there is no logic or theory to
the nation's tax code. The high and multiple rates discourage growth and
encourage the spread of the barter economy and the informal sector, estimated
to be at least 25 percent of GDP.
Russia needs a radical overhaul of its tax policy. The payroll tax could be
cut in half without affecting revenues significantly. The personal income
tax, which provides only 3.9 percent of the state's revenues, should be
eliminated entirely. In place of those taxes, Russia should maintain only its
value-added tax and apply it at a flat rate with no exceptions whatsoever.
Those measures will encourage job creation, investment, and a more
transparent business sector as firms find compliance more reasonable than
cheating. With more firms operating in the open as a result of the reduced
tax burden, foreign and domestic banks will be better able to extend credit
based on reliable assessments of firms' financial conditions. The simplicity
of the flat value-added tax structure would go a long way toward ending the
discriminatory treatment that many productive firms face, making it more
difficult and less necessary for politically powerful but inefficient
industries to negotiate special tax arrangements with the authorities. Those
reforms should be accompanied by focusing government spending strictly and
more efficiently on the poor and vulnerable, thus creating an effective
safety net. In short, Moscow must move away from its "long-arm" tactics of
tax collection and toward a simple but modern approach consistent with high
SMASHING THE MONOPOLIES
The Russian economy is still dominated by state-sanctioned monopolies in
energy and uncompetitive industries that receive various forms of state
protection. According to Yevgeni Yassin of the Higher School of Economics,
some 40 percent of all Russian businesses actually lose money. Largely
because the gas and electricity monopolies are forced by the government to
provide low-cost services to unproductive firms, many such firms stay in
business, undermining more-productive companies that do not enjoy the same
support. Local governments, which have created local monopolies out of power
stations and networks, have protected their industrial sector by providing
this sort of subsidy.
Combined with high tax rates, the implicit subsidies create a lack of
transparency in accounting practices and entail high social costs. In
addition to sustaining an inefficient arrangement in which businesses largely
pay each other and the government in kind rather than in cash, the Russian
system breeds corruption and uneven enforcement of tax laws, since most large
firms negotiate their dues to the state.
Widespread deregulation, including free entry by Russian and foreign firms
into all segments of the energy sector, would help create the competitive
conditions that Russia lacks. Greater competition among firms would change
not only the "hard" infrastructure of the economy but also its "soft"
infrastructure -- accounting standards, legal practices, and even cultural
attitudes. Were those changes to come about, of course, the financial system
could operate properly by channeling savings to productive investments.
Allowing firms to go bankrupt and generating incentives for competition --
through, for one thing, more-transparent and less-costly transactions -- is
necessary to achieve a more efficient allocation of resources.
GOOD RIDDANCE TO BAD RUBLE
Neither Russia's financial system nor its business sector will develop to its
full potential unless fundamental monetary reform is introduced. The record
of the Russian central bank has been disastrous: periods of high inflation, a
75 percent devaluation of the ruble since 1998, and the collapse of the
country's financial system after the central bank spent $10 billion in a
failed attempt to prop up the ruble in 1998. In the 1990s, the central bank
confiscated the wealth of Russians in five separate episodes of inflationary
bouts, defaults, or currency control. Former Acting Prime Minister Yegor
Gaidar provides an insightful explanation of that sorry record:
The most important impetus for currency emission was the state's inability to
conduct its business in such a way that expenditures were always covered by
revenues and market borrowings. ... This is the simplest and most effective
of all existing taxes. ... No tax police are needed to collect it ... but it
is also terribly destructive for the economy. Sooner or later it is bound to
throw the nation's currency -- that most important component in a delicate
market mechanism -- into turmoil.
Russians are understandably distrustful of the ruble and sensitive to the
tremendous uncertainty created by their central bank. Already, citizens seem
to have chosen to use the dollar and other foreign currencies, rather than
the ruble, whenever they can.
Why not take the next logical step? For the reforms to work better, Russia
should officially replace the ruble with the euro. The choice of the euro
rather than the dollar makes sense, given that Russia more closely identifies
with Europe than with the United States and given its closer trade ties to
the continent. Better yet, the euro is not associated with any single country
-- most importantly not Russia's superpower rival -- but is the currency of a
collection of countries.
By itself, that relatively simple measure would provide a tremendous boost to
the economy. In one stroke, Russia would adopt a serious currency, reduce
interest rates, and give millions of foreign and domestic investors security
in their business transactions. The move would also give people the ability
to make financial plans for the future and would stimulate the creation of
long-term credit markets, including mortgages, which are virtually
Adopting the euro should not imply joining the European Union or adhering to
EU policy standards, even though a free-trade treaty would be consistent with
the larger goal of anchoring Russia in Europe (as was the case with Germany
after World War II). Problems of lost seigniorage (the profit a country makes
from printing its own currency) can be easily dealt with; indeed, the U.S.
Congress is already considering a bill to reimburse "dollarizing" countries
for reductions in seigniorage. The EU could adopt a similar measure. The
lender-of-last-resort function currently performed by the central bank would
not disappear; it would merely be taken over by private-sector lenders of
last resort who would certainly be more effective at monitoring financial
institutions than the Russian central bank has been. Finally, the increase in
security and growth produced by the use of the euro would give the economy a
greater ability to weather outside shocks, which in any event would be
smaller than those produced by the central bank.
Use of the euro, a liberalized banking sector integrated into the
international financial system, and greater domestic competition will finally
enable Russians to use the world's and their own savings for productive
IT CAN BE DONE
Russia's task is awesome and daunting, but it is possible. In Chile we also
faced seemingly insurmountable barriers to what turned out to be a
breakthrough for the country. But from the beginning of the reform period,
the objective was the transformation of a society based on state
interventionism to one based on individual liberty and free markets. The
obstacles to such radical reform can be overcome in countries in turbulent
transition. Structural reform is actually much harder in more rigid societies
such as those of continental Europe (where the "transition" to a fully common
economic area may be the opportunity and catalyst for much-needed radical
change in such overregulated areas as labor and social welfare).
Even though prevailing world economic policies and the ideology of the 1970s
did not favor free-market ideas, Chile had a team of economists, trained at
the University of Chicago and other top U.S. universities, who agreed on the
need to end the country's state-dominated development approach and, even
before entering government, began an educational and communications effort to
spread their ideas around the country. Today, there is an international
consensus on free-market policies, and Russia can introduce reform and
benefit from an increasingly liberal world economy in a way that Chile
initially could not.
The main obstacle to reform that Chile faced -- and that Russia now faces --
was the opposition from special interests whose privileges would end under
the proposed new policies. Thus business leaders opposed free trade, and
unions opposed a more flexible labor market. Overcoming those obstacles
required a coherent economic program and direct appeals to the people. By
clearly communicating the purposes, costs, and benefits of the reforms -- and
by emphasizing that the reforms aimed to eliminate state-sanctioned
privileges not for one group but for all equally -- the government rested its
credibility on achieving those goals in a fair and independent way. This, in
turn, made it more difficult for special interests to impose their
preferences. Once the heretofore opaque process of policymaking is exposed to
the daylight clarity of media and debate, it becomes obscene for entrenched
interests to demand monopolies, protection, and subsidies from the state.
Although the path Putin will take is still unclear, I am cautiously
optimistic about the prospects for reform. Putin was elected with more than
50 percent of the vote; he remains popular and has the political support of
much of the Duma. He has appointed some experienced free-market economists as
advisers and appears aware of the need for economic freedom and high growth.
Information-age technological advances continue to expose Russian society to
new ideas, products, and innovations, making central control of the economy
increasingly difficult. And the country will benefit from its immense
resource wealth and well-educated population once the proper policies and
institutions are in place. Those, of course, include the rule of law, freedom
of expression, and the protection of other civil liberties.
In drawing lessons from Chile, the Putin administration must follow the basic
thrust of the Chilean model, which was to devolve power to society rather
than to centralize it. That unique and perhaps unexpected approach also
distinguished Chile as an economic success story on a continent suffering
through the "lost decade" of the 1980s. And as in present-day Mexico,
economic liberalization also led to political liberalization. Moreover, the
reduction of privileges, the transformation of every worker into an owner of
financial capital, and the rise of economic opportunities created a wide
middle-class constituency that has defended the country's free-market model
under various popularly elected center-left administrations.
Change in Russia is only a matter of time. As Richard Pipes of Harvard
observed a few years ago, Russians under thirty react very differently to the
new conditions than their frightened and bewildered elders. They like the
changes: they are quickly learning to swim in the turbulent waters of a free
economy and looking confidently to the future that will assure them of
financial independence. They display the sense of competence and
self-assurance that possession and, it seems, even the anticipation of
possession have been observed to bring about. And they are the Russia of
tomorrow; for as Coleridge once wrote, there is "but one infallible source of
political prophecy," and that is the knowledge of the principles and opinions
that guide men between the ages of twenty and thirty. If this is true, there
are grounds for believing that when the inevitable time comes for Russia's
young to take charge, a different and much better Russia will emerge.
The future will weigh more heavily than the past. Putin can begin creating
that future by removing artificial obstacles to high growth and thereby
drawing on the energies of all Russians. If he moves in that direction, he
will do nothing less than spark a revolution. If he does not, Russia will
have to wait for the new generation to take over.
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