Volume 9 Numbers 1/2

Winter/Spring 2000

Feature

Putin's Russia
     Can Putin Strenghten the State While Attacking Corrupt Officials?
     Shadows on the Wall: Putin's Law-and Order Dilemma
     Stephen Hendelman

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"For Russians a strong state is not an anomaly that should be gotten rid of. Quite the contrary, they see it as a source and guarantor of order, and the initiator and main driving force of any change. . . . I am not calling for totalitarianism. . . . A strong state power in Russia is a democratic, law-based, workable federative state." Vladimir Putin, "Russia on the Threshold of the Millennium," December 1999.

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Vladimir Putin's end-of-century vision of a "democratic, law-based" Russia, as spelled out in his preelection manifesto last December, is intended to be reassuring. It is, almost. Yet wherever Putin turns in his self-described mission to restore the Russian government's domestic and international authority through "strong state power," he will be confronted with a paradox: the most significant obstacle to Russia's democratic transition since 1991 has been the state itself-specifically, the corruption and criminality fostered, and in some cases abetted, by the regime he inherited from Boris Yeltsin. In order to make any headway at all, Putin must first eliminate the networks of cronyism and government patronage that were in part responsible for his own unexpected rise to power. That could force him to choose between preserving his own legitimacy and pursuing an aggres-sive housecleaning that may, at least initially, weaken the state even further. This paradox is at the heart of Putin's dilemma. And it is impossible to sidestep. The president's ambi-tious plans to overhaul economic policies, strengthen the military, and give ordinary citizens a long-awaited benefit from Russia's emerging market economy hinge on how well he handles the issue of law and order. Whether he likes it or not, Putin will be judged on whether he ends the systematic criminalization of politics and the economy that has eroded Russians' faith in postcommunist democracy. Putin seems to understand the stakes. Taking the same high tone as former president Yeltsin, who once described crime as the state's principal "national security threat," Putin has made clear that he regards Russia's law-and-order problem as a political and moral challenge as much as a legal and juridical one. During the election campaign, he defined a law-based state as one marked by the "uniform application of rules" and where there would be "no preferences or privileges for any individuals, groups, or firms." When he was still prime minister last November, Putin announced that the Ministry of Internal Affairs would lead a consortium of law-enforcement agencies in a three-pronged "highly moral" battle to reduce the shadow economy, end capital flight, and prevent criminal groups from pene-trating the government. Putin later went on to promise that the only dictatorship his administration would countenance was the "dictatorship of the law." All fine words. Nevertheless, skeptics are right to wonder whether it represents any serious change from the anticrime rhetoric of most of the last decade. The New Year's deal that provided legal immunity to Yeltsin, the slap-on-the-hand treatment accorded Yeltsin apparatchiki like Pavel Borodin (who first brought Putin into the Kremlin precincts and is accused by Swiss prosecutors of money laundering), and the continued tolerance of monopolistic behavior by the oligarch clans raise questions about Putin's independence. Moreover, some Russian critics main-tain Putin was chosen in the first place because, unlike rivals such as former prime minister Yevgeny Primakov and Moscow mayor Yuri Luzhkov, he posed no threat to the free-for-all privatization poli-cies that led to the plundering of the Russian economy. "Putinism is the highest state of robber capitalism," punned one Russian writer. According to former procurator general Yuri Skuratov, Putin's anointment shows "there is still no political will at the top to fight corruption." On the other hand, those Shadows on the Wall: Putin's Law-and-Order Dilemma Stephen Handelman Can Putin strengthen the state while attacking corrupt officials? who take Putin at his word are just as concerned. The new president's decision to enlist a large number of his former KGB colleagues to battle crime, as well as to form his inner circle of advisers, has already evoked fears of a return to the selective anticorruption crusades of the 1980s. Under the leadership of then- KGB chairman and later Communist Party General Secretary Yuri Andropov, the state used its police apparatus to go after politically correct enemies such as the party bosses of Central Asia and associates of Leonid Brezhnev, while closing its eyes to the antics of others. Beset with doubts about his legitimacy, his motives, and his ability, it was perhaps no coincidence that Putin launched his first war on crime in far-off Chechnya. That is, if you believe the president. According to Putin, the battle against Chechen sepa-ratists is an indirect message to Russia's own mafiya bosses. "Unless we crush the criminal community there [in Chechnya], we will have absolutely no chance to challenge crime on the whole territory of the Russian Federation," the president said in a February interview. Again, the rhetoric belies a noto-rious fact of the postcommunist crime scene: most Russian organized-crime bosses consider the Chechen groups their sworn enemies, both because of the chal-lenge they have posed to mafiya control of key Russian cities like Moscow and to their financial interests abroad; the government's efforts to eliminate them are therefore welcome. "Winning" the war in Chechnya could have the contrary effect of providing a clearer field for the mafiya at home. Not that they really need the help. According to police figures, organized crime controls as much as 40 percent of the Russian economy based on its take from protection rackets, market manipulation, and partnership schemes-a number largely unchanged since the mid-1990s. Ironically, Russia is in better shape economically and politically at the start of the twenty-first century than it had a right to expect. Having weathered the economic crisis of 1998, the Russian economy has shown new signs of growth. Foreign investment has revived. Healthy coalition-building early in the year appears to have tamed the obstructionist Duma, at least for the moment. And despite the continuing erosion of their living stan- dards, Russians seem increasingly optimistic about their future. Yet Russia remains a violent and uncer-tain place to do business. The crime rate was up 28 percent in the first eight months of 1999, compared to a similar period the previous year, despite several years of police claims that the problem was well in hand. In the first half of 1999, the number of contract killings doubled to 567. The victims of organized-crime assaults are precisely those Russians who have benefited the most from the new economy: entrepreneurs, bankers, politicians, even sports stars. The insecurity that accompanies success in Russia remains the greatest single threat to the further devel-opment of a market democracy. That insecurity is directly connected to the financial scandals that have multiplied like mush-rooms in the forest over the past several years. The most egregious cases, such as FIMACO, involving alleged speculation by Russia's central bank, and the Bank of New York money-laundering case, have been linked by the press in Russia and abroad to high-level government corruption and organized crime. But the massive, usually illicit, flow of money overseas also reflects the fears of the Russian business and entrepreneurial elite: few dare keep their assets at home in an environment of high taxation, perva-sive racketeering, and government venality. Last year, in a nationwide survey conducted by the Obshchestvennoye Mnenie Foundation, more than 80 percent of the respondents answered that author-ities in their regions were corrupt or abused their office in some way. The perception is often close to reality. In the first half of 1999, Moscow city police investigated 17 percent more cases of bribery among municipal officials than in the previous year. Yet despite the grim odds, the Putin govern-ment may still have the best chance any Russian administration will ever have of changing the picture-if it can seize the opportunity. A combina-tion of external and domestic factors has made a real war on crime feasible. The most important factor is the change in the structure of Russian capitalism, brought about by the 1998 financial crisis. The ruble collapse hit the oligarchs first and fore-most. Many of the most prominent banks and investment houses were bankrupted, casting the so- called Financial Investment Groups (FIGs) into turmoil. Some financial barons managed to spirit profits abroad to prevent further loss, thanks to sweet-heart deals with the government, but the huge influence they once enjoyed has eroded. The recent attempts by Boris Berezovsky and Roman Abramovich-two of the most important oligarchs- to gain control of Russian aluminum smelters has been seen as an effort to prop up their shaky financial posi-tions and, in the process, persuade Putin's men they were still forces to be reckoned with. It offers a perfect opportunity for Putin, whose relations with Berezovsky remain unclear, to cut the oligarchs down to size. In the Russian crime slang he appears to favor, the president is poised to act as the "boss of bosses." Unlike Yeltsin, who chose to ignore much of what was going on around him, Putin could assert the vast powers he already has to make the oligarchs work for him, rather than the other way around. But that would only be the beginning of the battle. Wresting control of the Russian state from the robber barons means more than anything else finding- and then repatriating-the vast sums they have exported abroad. Capital flight out of Russia last year, according to the finance ministry, amounted to more than $23 billion. As pointed out above, a large amount of that money has been driven out by high taxes and the insecurity of wealth at home, but a government crackdown on the skimming of profits by corrupt offi-cials and businessmen might generate enough confidence to reverse the capital-flight phenomenon. There are signs that the Putin administration, the central bank, and the Duma recognize the opportu-nity. Kremlin officials have talked about raising the requirement to sell a proportion of hard-currency export earnings on the ruble exchange from 50 percent to as much as 100 percent. There is also discussion about limiting the number of commercial banks permitted to trade currency abroad and proposals for new laws giving banks the power to suspend for up to five days suspicious foreign-exchange deals. Finally, tax reform appears imminent. Slashing current tax rates and improving revenue collection (as well as strictly enforcing anticorruption measures in the tax inspectors' service) would restore domestic confidence and investment. Putin has willing allies for his anticorruption campaign in the US and other Western governments, as well as in international institutions like the IMF and World Bank, who have felt the sting of Russian finan-cial chicanery. But he will have to meet them more than halfway, with agreements on joint crime-fighting and prosecutions. Russian representatives at the UN conference on crime prevention in Vienna this year, which was dedicated to fighting "transnational crime," pledged greater cooperation. But the delega-tion was led by a relatively low-level bureaucrat, the first deputy justice minister (more than 80 countries sent justice ministers or attorneys general to the conference), and Russian law enforcement officials retain a Cold War reluctance to share financial and security data with the West. On a more basic level, Putin needs the tools to do the job, namely a well-paid, well-trained, and cred-ible police force, government investigators that will be allowed to follow trails wherever they lead, and an independent judiciary. Yeltsin added 1,000 new judges in one of his last decrees, but the legal system was straining under a caseload of some 5 million civil cases and 1.2 million criminal cases last year. As Putin has said, Russia's law books already contain effective instruments for crime-fighting and corruption. The trick is enforcing those laws. One of the toughest challenges Putin faces will be to extend his "law-based society" into every corner of Russia. Beyond Moscow and Saint Petersburg, regional power brokers have developed fiefdoms largely independent of central control. Sometimes allying themselves with local crime bosses or cloaking themselves in the rhetoric of regional autonomy, many governors and municipal leaders have created private "offshore" havens in which commercial and criminal law are whatever they say it is. One quite infamous example is the so-called "Kaliningrad transit system," which spirited Russian crude oil to Lithuanian middlemen under the cover of shipments to nonexistent processing companies in the Kaliningrad region. The system depended on the cooperation of Kaliningrad authorities. And it is far from being the only example. According to a report prepared by the Federal Security Service Directorate of Economic Counterintelligence, "many executive officials at subfederal levels come directly from busi-ness ventures, lobbies, and criminal networks and preserve those occupations and ties while in office." Putin has made curbing the power of such regional authorities one of his priorities. Yet even if he manages to combat regional graft, break the power of the oligarchs, and cripple organized crime, Putin will still face another daunting task: changing the value systems of the Russian entrepreneurial and political elite, whose willful disregard of law and government regulation has trickled down to the Russian popula-tion at large. This is perhaps the most delicate of his challenges. How exactly do you rein in profiteering without curbing profits in a society that has had limited experience with (and historically distrusts) the legal and commercial restraints of capitalism? Putin's KGB advisers and his own secret-police background might tempt him into expanding government control and scrutiny over economic life, a move that would be welcomed by many sectors of the Russian population who are resentful of the millionaires in their midst. There are already some worrying moves in that direction, such as the establishment of a special internet-monitoring unit called SORM2 under the intelligence service's control. The government now requires all Russian internet providers to make avail-able a connection at their own expense that will allow police to keep track of electronic traffic. The high cost of the required equipment could drive many small providers out of business. (Cynics say that is one reason the larger providers have quietly gone along.) Other moves by Putin to reestablish "discipline" in Russian society through a revival of mandatory military training in schools show the same zealous instinct to counter the perceived collapse in social values that contributed to the breakdown in law and order. There are healthier alternatives: Putin could encourage the growth of new local and regional trade associations, such as the 2015 Club in Moscow, which offer a rallying point for small businesses battling corruption and crime networks. But whatever the merit of "disciplinary" measures, they will be hollow unless the example is first set at the top. Only by giving Russia a clean, transparent, law-based government can Putin end the crippling cynicism of a nation in which crime has paid-and paid well-for the past eight years.

Stephen Handelman is the author of Comrade Criminal: Russia's New Mafiya (Yale University Press, 1997).

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