Putin Rising: The Beginning of New Order

After the 1998 default, a new prime minister was brought in to restore some credibility to the country's image: a former Middle East career diplomat and spymaster, Yevgeny Primakov. He managed to stabilize the situation within a few months, but was abruptly dismissed by Yeltsin in the spring of 1999, when it was discovered that Primakov had formed an alliance with the powerful mayor of Moscow to run for parliamentary elections in opposition to Yeltsin's allies. Primakov was replaced for a few months by Sergei Stepashin, who was a transitional figure. Yeltsin and his family (his two daughters and a few loyal oligarchs) were quietly seeking a permanent replacement for the aging leader, and finally they settled on Vladimir Putin, who replaced Stepashin as the prime minister in August 1999. Vladimir Putin was, like his two predecessors, a KGB man; he was a career foreign intelligence officer who had spent 8 years supervising the recruiting of agents in East Germany. Unlike any Russian leader since Stalin, however, he never became a nomenklatura member. Many accounts of how and why Putin was introduced to Yeltsin as a possible successor have been given. The primary factor was probably Putin's demonstration of his loyalty to his former employer—the mayor of St. Petersburg, Anatoly Sobchak—in the fateful days of the August 1991 coup. Putin was the vice-mayor of St. Petersburg then and helped to protect Sobchak, who risked everything by firmly standing with Yeltsin against the coup leaders. Putin was also a complete unknown to the country at large, which had its advantages.

Putin came to power at a difficult time in the south, where an incursion of armed guerrillas from Chechnya under Shamil Basaev was beginning to destabilize volatile Dagestan. Less than a month after Putin's installation as prime minister, a series of apartment building explosions rocked Moscow, Volgodonsk, and Buynaksk, killing over 300 people. Chechen terrorists were promptly blamed. Within a few weeks Putin authorized a new major operation in Chechnya, reigniting hostilities there that had been dormant since 1996.

On December 31, 1999, Yeltsin made his final gift to the nation by announcing his unexpected resignation. He said that he trusted that people would like Putin enough to elect him as the new president. Putin easily won the March 2000 elections: After 8 years of having a sickly, frequently drunk leader, Russia finally had a young, energetic man in charge. The alternatives to Putin were mainly recycled from the 1996 elections: the Communist, Zyuganov; a bombastic maverick nationalist, Zhirinovsky; a mumbling pro-Western intellectual, Yavlinsky; and a handful of others, none of whom were a match for Putin. Clearly, the new century required a new leader, and Putin happened to be available at the right place and the right time.

The economic situation also began to improve in 1999. This had less to do with Putin than with the aftermath of the 1998 default. Although a lot of Western investors fled for a while when the ruble lost value, all Russia-made goods became very competitive on the world markets while the imports became too expensive, so Russian production picked up. Also, while some wealthier people lost their savings in rubles, most had few savings left, and usually those who did wisely kept them in dollars or some European currency. Thus the stock market crash and the GKO default had a minimal impact on the general population; they primarily hurt the rich and the “new Russians.” Also, and perhaps more significantly, privatization finally began producing real results. Production was finally up after years of decline. Some private owners managed to make investments in better equipment and revitalized their aging Soviet factories. Others started completely new companies from scratch (e.g., retail supermarket chains, book publishers, food-processing factories, computer and software retail and manufacturing, or furniture factories). Many changes began to appear in urban neighborhoods (Vignette 8.1).

Several important pieces of legislation were approved in 2000–2001 that paved the way toward greater stability and slightly greater transparency in business transactions. The tax code was streamlined. A flat personal income tax of 13% was introduced, to encourage people to pay taxes legally. Although a progressive tax would have been a better long-term strategy, the flat rate did help bring billions of black-market rubles into the “white zone.” Salaries were raised for some categories of state workers, especially soldiers, police officers, physicians, and teachers. Pensions for state workers were also increased and actually began to be disbursed on time, which had rarely happened under Yeltsin. A few corrupt regional officials (some at very high levels) were tracked down, sacked, fined for bribes, or even imprisoned on corruption charges. The oligarchs Berezovsky and Gusinsky fled Russia to avoid prosecution for tax evasion, money laundering, and fraud. It is widely believed that the real reason for their departure was the need for Putin to control the private media empires that they had built, including the all-important NTV and ORT television channels and a number of newspapers. Khodorkovsky, the main owner of Yukos (an oil company) and MENATEP (a bank), was offered the same chance to flee the country, but he courageously refused. He was arrested, tried, and sentenced to 8 years in prison for tax evasion and fraud, in a case widely believed to be politically motivated. Khodorkovsky had refused to give the Kremlin a share in a planned merger between Yukos and Sibneft; he had also spent a lot of money on supporting Putin's political opponents; and he had even publicly questioned the involvement of personal friends of Putin in murky privatizations (Baker & Glasser, 2005; Aslund, 2007).

Several other pieces of important federal legislation were passed in 2002–2003, including a new penal code, a civil code, a labor code, a forest code, a water code, and a land code. As the rules became better known and observed, farther economic growth followed. The ruble strengthened, and Russia's stock market doubled in value in less than 2 years. Little improvement, however, was achieved in some of the most persistent problem areas: crime, corruption, and inflation. Although rates of crime (particularly the most violent types) dropped slightly in the early 2000s because of improved policing and prosecution, they still remained at much higher levels than those common during the Soviet period. For example, homicides went down from 35,000 per year in 2001 to 29,000 in 2005; the Soviet level, however, was about 30% lower.

When Putin came into office, addressing state corruption was ostensibly one of his top priorities, but he quickly announced that little could be done: The situation was too pervasive, too entrenched. All public officials' salaries were greatly increased under Putin, without a corresponding drop in bribe taking or an increase of quality of life for the masses. Virtually anything one needs from the state in Russia today requires an “incentive” or a kickback—ranging from a few dollars for a traffic cop to avoid receiving a ticket, to a few thousand for an army official to dodge the draft, to millions for members of the top administration to receive a particularly lucrative federal contract. In fact, corruption in the government today is estimated to be unprecedented (Aslund, 2007). There are dozens of articles on the issue in any Russian newspaper. Although the state macroeconomy has somewhat improved, and the official budget has been running solidly in the black (given the exorbitant revenues from petroleum sales and tight monetary policies), very little has been done to abate inflation (which has held steady at 10–12% a year), to help small business owners and regular citizens to make ends meet, or to improve people's personal safety. In fact, billions of state surplus money has been stashed away in foreign bank accounts in “stabilization funds” for some hypothetical time in the future, instead of being invested right now in the decaying infrastructure or used to stimulate industrial growth.

A few political changes during Putin's early administration received a generally negative response in the Western press. These included abolition of democratic elections for governors in the regions; rebuilding of the vertical structure of federal power through the creation of seven presidential envoys; an increase in the number of votes needed to secure a presence in the Duma, which led to the elimination of most parties; abolition of non-party-affiliated independent candidates; greater pressure on the courts; and restoration of the Soviet anthem music and the Red Army symbols on banners.

Geographically, the most significant change was the introduction of seven federal districts nationwide, into which the 83 units of the Russian Federation are now grouped (Vignette 8.2): Central, Volga, Northwest, South, Urals, Siberia, and Far East. These districts are important units to know, because many government economic statistics are reported by districts now, as well as by the individual units. The old Soviet system had 11 economic regions, some of which are now merged in the present system (e.g., North and Northwest are now simply called Northwest). At the same time, other old regions are split between new districts: For instance, the Povolzhye (Lower Volga) region is now partially included in the Volga district and partially in the South district, which also now includes the northern Caucasus. In addition, the oil-rich Tyumen Oblast in western Siberia is now included in the Urals, not in Siberia, as one would expect. When I discuss economics in Part IV, I refer to both the new and the old units when necessary, but I generally emphasize the new federal districts. Each such district has an appointed presidential envoy representing the Kremlin administration's interests. In 2007, five of these seven envoys had strong ties to the former KGB.

Early in 2010, President Medvedev announced that a new eighth federal district would be created in the Russian North Caucasus region to strengthen the political and economic control of Moscow over this volatile territory.