Publication: Prism Volume: 8 Issue: 2

By Aleksandr Tsipko

It has long been held that the Achilles heel of the Putin regime is the contradiction between his strong and effective policies and the weakness of the economy. Vladimir Putin has not been able to provide the necessary economic base for his power vertical and his great-power ambitions. This has been on the minds of many experts again in recent weeks.

He solved the problem of consolidating his personal authority with relative ease and speed. He has subordinated the Federation Council in its entirety and gained complete control of the Duma. He has at last put the regional elite–unbridled under Yeltsin–in its proper place, and reduced the centrifugal drift to nil. “The Putin party” today controls all the main state institutions and all the security structures. But its authority still does not extend to either the main mass media outlets or the main financial flows. Putin’s ability to take control of TV channels is greatly exaggerated in the West. But it’s no surprise that, yet again, the restoration of order and state discipline in Russia is tied up with the consolidation of a regime based on personal power.

Strictly speaking, in Russia, where there has never been any mechanism to allow for the democratic transfer of power, and where political forces and parties do not have a free hand, neither can there be any system of checks and balances. Yeltsin came to power in August 1991 as a result of a democratic revolution. Putin was merely nominated by Yeltsin as his successor, and his administrative resources and promotional talents proved sufficient for the unknown Vladimir Putin to win over the population and get himself elected. But a man who comes to power by means of a pact with some clan or other will clearly be obliged to create his own power base if he is to escape from the domination of those who appointed him. There is no other way: Either he remains a puppet in the hands of the Yeltsin clan, or he fights for his personal independence. Putin has chosen the latter path, and is therefore determined to strengthen his authority as much as he can. Clearly, the Family, to safeguard themselves and their wealth, must in turn constantly seek to limit Putin’s power. The very fact of this struggle between the Family and their nominee Putin is nudging the country towards authoritarianism, though none would claim that Putin has the qualities of a dictator or aspires to be another Stalin. Rumors of a danger of authoritarianism in Russia are, in this sense, greatly exaggerated.

The main danger for Russia lies neither in the struggle between the Yeltsin clan and Putin’s new St. Petersburg clan, nor in the struggle between the so-called old Kremliners and the new Kremliners, but in the weakness of the postcommunist economy. Putin has, in fact, no serious economic resources either for strengthening the Russian state or for strengthening democracy. As the experience of the last two years shows, with a budget of just US$50 billion–less than that of the average American state–it is impossible to tackle a single serious task. This is a truth that has become especially clear in recent days.

The continuing enrichment of the oligarchs, who acquired almost cost-free the tastiest morsels of the property previously owned by the Soviet Union–above all in the fuel and energy complex–has not been accompanied by any enrichment of the state or Russia as a whole. As has become apparent, Russia’s survival depends solely on the fuel and energy sector and on energy exports. But the problem is that the new post-communist state–and, by extension, Putin–is incapable of collecting taxes or getting hold of its legitimate natural income. Experts now hold that no more than 20 percent of this natural income, which is needed for the provision of social services, is actually being collected, while the bulk of it, like the bulk of the super-profits of the fuel and energy companies, is tucked away in off-shore zones or funding the super-consumption and further enrichment of the corporate management. As a result, the population’s spending power remains extremely low, which has a stalling effect on the development of all the other sectors of the economy.

In 2001, Putin tried to tackle this weak point in the economy by liberalizing it, and giving open incentives to big business by freeing up the export of capital and granting tax breaks. He judged that, given these incentives, big businesses would be prepared to share their spoils more generously with the government. Liberalization of the economy and the acceleration of market reforms, as Putin saw it, was the only real alternative to a return to direct government control and renationalization of the fuel and energy sector. And it must be admitted that at first, until the fall of 2001, this policy did bear some fruit. More taxes were collected, the economy picked up and there was a perceptible growth in production by the food and light industrial sectors, as well as in metallurgy and even machine-building. But by the fourth quarter of last year stagnation was setting into the economy. Big businesses were still in no hurry to share their superprofits with the state. A curious combination of circumstances enabled the largest and most successful oil companies to continue evading taxation. In January, the state of the Russian economy deteriorated. Last week, Goskomstat, the government’s committee on statistics, reported that national consumer prices had risen on average by 3.1 percent that month, while in a number of regions, including Moscow, the figure exceeded 5 percent. Actually, prices in Russia are rising faster than this, which has the greatest effect on the poorer sections of society. This is all the more surprising given that the country is seeing a marked overproduction in the energy sector, which might, in other circumstances, be the basis of an investment boom. But the ruble is maintaining its relative stability only at the expense of the currency reserve, and with the support of the Central Bank’s dollar investments. The people’s confidence in the ruble is fading. The government is trying to stave off rising inflation by capping the earnings of state-salaried workers, a policy already causing widespread discontent.

Economic hardship is beginning once gain to provoke public dissatisfaction. Some pessimists are already writing openly about “Russia’s deepening systemic crisis.” They maintain that last December’s squeeze on the ruble supply available for the wages of state-salaried workers, doctors, teachers and government employees led to an explosive growth in January of “deviant” dissenting behavior. The army is losing more men to desertion, and these are taking their weapons with them. In the prisons, both break-outs and suicides are on the increase. One can see a growth in the already dangerous criminalization of society, with rising numbers of senseless crimes committed on social grounds, against victims who are often well-known figures, including famous academics. The network of crime and murder extends to every layer of society. In response to this, a group of professors from Moscow State University has sent a collective letter to Putin, requesting him to lift the moratorium on the use of capital punishment and to toughen up on the punishment of murderers.

In Chechnya, military helicopters are continually going missing or crashing for uncertain reasons. A sort of spontaneous, elemental disorganization seems to be affecting every aspect of social life. The public has reacted very badly to the shutting off of electricity supplies even at top secret space defense installations.

The Left has wasted no time in exploiting popular disenchantment with Putin’s liberal course. They have won the support of the “siloviki” (former KGB and Army men) most of whom take a negative view of their President’s pro-Western, liberal agenda. A tacit alliance has been formed between the Left and the siloviki, and together they have launched a war against the liberals, especially the group headed by Anatoly Chubais.

On February 6, the Communist faction of the Duma, having reached an understanding with ‘patriotically inclined ex-special servicemen’, set about collecting the signatures of lawmakers for a petition to the Audit Chamber, requesting a detailed investigation into the activities of EES Russia, Chubais’s giant energy corporation. They very soon had more than the ninety signatures needed, which means that, depending on how events turn out, the Chubais team may not survive long enough to see the start of the real reforms planned for EES.

Last week, the Chamber of Commerce and Industry, which has been a bastion of conservatism since Evgeny Primakov’s arrival, published a new proposal for Russia’s entry into the World Trade Organization, demanding a marked expansion of the list of sectors which should be placed under state protection. Experts take the view that the Primakov proposal is designed in effect to torpedo the whole notion of joining the WTO in the foreseeable future.

On January 9, the Deputy Commander of the Tula Airborne Landing Division and “Hero of Russia” Valentin Polyansky gave a joint press conference with Viktor Anpilov, in which he made an ardent declaration of his support for Anpilov’s Trudovaya Rossiya (Workers’ Russia) party. This was significant, in the first place, because Polyansky would surely not have taken this step without the approval of his immediate superior, and secondly because, even in their most difficult days under Yeltsin, such high-ranking officers have never before allowed themselves to speak out in this way. And then suddenly, to everyone’s surprise, the notorious Pavel Borodin announces that he still belongs to the Communist Party, and is even a member of the Yakutsk party organization.

In the capital Moscow, the number of “technical faults” (electrical power cuts, breakdowns in heating and water supplies and so on) reported in the period from November to January was several times higher than in the same period the previous winter. There are plenty of similar examples. But the main message is that these and many more instances show how Russia’s systemic crisis has risen to a qualitatively new level.

What is Putin’s reaction to this new and essentially dangerous situation? This is the chief question to which Russia’s political elite and the expert community are awaiting an answer today. Only now has it become clear how difficult is the burden that Putin has inherited. He is not being precipitate; he is steering clear of radical conceptual resolutions. And he’s probably right. There is simply no easy way out of the cul-de-sac in which Russia finds itself, due above all to the ill-conceived and crumbling reforms of the past. Putin is not talking about reinforcing “statism” in the economy. He is not changing his team, and there’s an equilibrium in the Kremlin between the old Kremliners and the new. The key positions in his administration are still held by proteges of the Family, who maintain close links with the liberals.

But Putin has nevertheless put his liberal reforms on hold, in particular the planned break-up of the natural monopolies. To continue pursuing a liberal course in a moral and political situation of such complexity would quite simply be dangerous. Poverty-stricken Russia is not ready for the inevitable costs of major structural reforms. Putin has had to drop his plans for a substantial hike in the tariffs charged for services provided by the natural monopolies, and the reform of the Ministry of Railways has been postponed indefinitely. The restructuring of Gazprom has been put on hold for ideological reasons. Even Chubais cannot realistically do anything to commercialize his EES utility. Against this background, Putin has no choice but to use administrative measures to supplement his budget. There has been a tightening of control over the financial flows. The prosecutor’s office is exploiting the oligarchs’ fears of imprisonment to extract their super-profits from them. It is not what you’d call a civilized method, but Putin probably has no alternative. In order to recover the billions of dollars embezzled by the Sibur president, Goldovsky, it was necessary to arrest him and remand him in custody. Such is the reality of Russia’s new capitalism. Yet it is clear that the Russian economy cannot be turned around by enlisting the help of the public prosecutor’s office. Already, Yukos chief Khodorkovsky has quietly begun to move his company’s assets overseas.

Thus Putin faces some difficult decisions, and he cannot afford to put them off.

Aleksandr Tsipko is a senior associate at the Russian Academy of Sciences’ Institute for International Economic and Political Research and a columnist for Literaturnaya Gazeta.