Publication: Prism Volume: 1 Issue: 5

Mayor Luzhkov wants money more than power

by Victor Yasmann

Last week, Boris Yeltsin called Moscow’s Yuri Luzhkov "thebest mayor in Russia." The Russian president added that Muscovitesmust feel lucky to have such a leader, and he congratulated Luzhkovon his success in transforming the Russian capital into a moderncity– "not without the assistance of Viktor Chernomyrdinand me," Yeltsin quickly added. The following day, Luzhkovreturned the compliment, but also asked the Russian presidentto give the capital more money for its interior ministry forcesand to drop plans to impose tariffs on food imports–a step thatwill increase prices for urban consumers.

What was behind this exchange of compliments? Is the mayor planningto challenge Yeltsin in the presidential race? On the face ofit, the answer to the second question would seem to be yes. Luzhkovover the past year has generally been listed as the third mostinfluential–albeit, not the most popular–national politician,right behind Yeltsin and Prime Minister Chernomyrdin. And theMoscow mayor always heads the rating lists among regional officials.But the real answer to this most important question is almostcertainly no. To understand why, we must look at the history ofthe relationship of the two men, a history that explains why theyexchanged compliments last week, and why they are unlikely tobe competitors for the presidency in the future.

Tensions began between the two men began in November 1994 whenthe government newspaper Rossiiskaya gazeta charged that the "Moscowfinancial group" was seeking to destabilize the Yeltsin-Chernomyrdinregime. According to the paper, several commercial banks and theleaders of the mass media had plotted to replace Yeltsin and Chernomyrdinwith Luzhkov and Grigory Yavlinsky, the leader of the reformistYabloko faction. The paper added that one of the prime moversin this campaign was the president of the "Most" Bank,Vladimir Gusinsky. Gusinsky has been both a private banker tothe Moscow city government, and the owner of several major Russianmedia outlets. The Rossiiskaya gazeta story led to a harsh exchangein the press between the small number of pro-government journalistsand the much larger number of those controlled by the Moscow banks–includingGusinsky’s.

Luzhkov himself tried to avoid any open confrontation with theKremlin and cast himself as one of Yeltsin’s biggest boosters.

He obviously owes Yeltsin a lot. Luzhkov came to power in 1992not via elections but rather by a Yeltsin decree after the firstelected mayor of the city, Gavriil Popov, was forced out followinga series of financial scandals. And Yeltsin has helped Luzhkovfinancially and politically since that time.

An able administrator and an energetic populist leader, Luzhkovquickly built an independent base of support through the carefuldistribution of privatized assets to the city’s commercial banks,construction companies, and real estate agents. All of these groupsnow maintain close ties with the city government in general, andwith Luzhkov in particular. One of the reasons for Luzhkov’s successin this regard was that after August 1991, the Moscow city governmenttook control of much of the enormously valuable real estate inthe city of the capital. Another reason is that Moscow is nowhome to 827 national and foreign banks which control 70 percentof the country’s financial capital.

Not surprisingly, Luzhkov frequently has been accused of beingcorrupt. As early as 1993, an expose in Literaturnaya gazeta chargedthat the Moscow city government and the Moscow interior ministryoffice regularly abused their authority and were massively corrupt.Shortly thereafter, Mikhail Gorbachev publicly called Luzhkov"corrupt." Luzhkov brought a libel action, and Gorbachevlost. In 1995, Gorbachev repeated his accusations against oneof Luzhkov’s closest associates, Moscow’s construction king, VladimirResin. Again in court, Gorbachev lost.

For most of this period, Yeltsin ignored the charges againstLuzhkov and his people because of the political importance theRussian president attached to an alliance with the powerful capitalcity mayor. Obviously, the loyalty of the city’s officials couldplay a crucial role in any serious struggle for power. That iswhy Yeltsin initially took Luzhkov’s side when the latter clashedwith federal privatization chief Anatoli Chubais on the structureof the second phase of privatization. But in November 1994, Yeltsinswitched sides for both economic and even more political reasons

First, Yeltsin sided with Chubais on the privatization question.Then Yeltsin’s newly appointed economics minister, Yevgeny Yasin,said on Ostankino television November 21, 1994, that Moscow’snew austerity budget required the center to reduce governmentspending, cutting "unnecessary, second-priority projects."He gave as an example of the latter the ambitious plans to rebuildthe Church of Christ Our Saviour, which had been demolished byStalin in 1931. This mammoth project with a price tag of some$2.5 billion had been the dream of Luzhkov. Moreover, Luzhkovand his deputy Vladimir Resin control the prime contractors forthis project. And these construction companies are one of hismain financial and political supports. Were the project to bedropped, Luzhkov would lose both financially and politically.

But the culminating step in this dispute between the mayor andthe president was a government raid by members of Yeltsin’s securityentourage on the offices of the "Most" bank just onthe eve of Moscow’s military intervention in Chechnya. These officesjust happened to be in the Moscow government’s central building. Luzhkov’s public reaction to the raid was subdued, and publiclyhe did not defend the bank or its chief Gusinsky. Shortly afterthe raid, Gusinsky quietly left Moscow for London, while Luzhkovquietly sought some compromise with the president’s men. In mid-December1994, a group of Moscow bankers met with Yeltsin, who assuredthem that his government had no plans to restrict their operations.Yeltsin had his own reasons for being careful: he needed a quietMoscow in case the Chechen war should spark a challenge to hispower.

In this situation, Luzhkov enjoyed certain advantages over thepresident. He and his city administration controlled much of themost important real estate in the capital, had a firm hand onthe distribution of city services, and therefore important influenceon banks and the political elite. In the first instance, thisinfluence is especially strong over the military and securityelites in the capital. Officers of these units depend on the cityand hence on Luzhkov and his people, and the mayor knew how touse his power in this regard. On the eve of Yeltsin’s crushingof parliamentary resistance in October 1993, Luzhkov offered 500officers in the elite Taman and Kantemir divisions vouchers forhousing in the capital.

A reconciliation of sorts between the mayor and the president’smen took place on January 7, 1995. On that date, Luzhkov andPrime Minister Chernomyrdin participated in the laying of a cornerstone for the reconstruction of the Church of Christ Our Savior.During the televised ceremony, both the premier and the mayorcomplimented the other. The Russian patriarch praised both men.But no one mentioned why the federal government provided fundsfor a project which only a few weeks earlier it had dubbed "anexotic waste of money." The reason clearly was revealed whenLuzhkov announced shortly thereafter that the Moscow city accountswere being shifted from six commercial banks to a newly-establishedMoscow City Bank. In practical terms, that arrangement means thatLuzhkov has allowed money under his control to be used by theChernomyrdin government, a government desperately in search ofcash.

The deal between the mayor and the federal authorities was sealedin February 1995 when Luzhkov was invited to a special and restrictedcelebration in the Kremlin of Yeltsin’s 64th birthday. Five dayslater, Yeltsin issued a decree codifying the city of Moscow’s"special approach" to privatization, thus giving Luzhkova way to continue to make money in exchange for the mayor’s willingnessto allow the government access to it.

To hold the Moscow mayor on a short lease, Yeltsin and his securityservices have replaced all the key security service chiefs inMoscow who have personal ties to Luzhkov. The ostensible groundsfor this was the murder of popular television producer and anchormanVlad Listyev in March. Yeltsin labeled Moscow the "criminalcapital of the country" and dismissed city prosecutor GennadyPonomarev and interior ministry chief Vladimir Panbkratov. Atthe same time, the federal interior ministry took control of thebudget and funds of the Moscow interior ministry. In taking overthese offices, the federal interior ministry did not upset existingcity government stratagems for extracting money from the population,but simply adopted them for itself.

Luzhkov and his people now appear to have accepted Yeltsin’spolitical supremacy, as long as they can continue to enrich themselves–somethingthe Russian president does not seem to oppose. Russian papersreport that Luzhkov-controlled construction companies will evenhave first crack at the lucrative contracts for rebuilding infrastructurein the Chechen republic. And Moscow’s banks are already receivingpayments for their role in helping to fund the war. Consequently,the struggle between the two men is not as political as many wouldhave it. As Kommersant-Daily put it recently, "Russia willstay with Yeltsin; Moscow with Luzhkov."

Victor Yasmann is a Senior Analyst at the Jamestown Foundation