By all indications, Russia today is about to enter a new stage in its post-Soviet development. Boris Yeltsin’s destructive stage, which put paid to the obsolescent system of coercive regulation of the economy, but at the same time involved rash disruption of a multitude of economic and business ties, along with accustomed social guarantees for the population, was superseded by a stage of stabilization that provided the substantive foundation for the first three years of Vladimir Putin’s presidency-in-fact. Today, however, the stabilizing factors start spending themselves. The proclaimed goals of restructuring the socio-political system and the administrative and political mechanism of decision-making are increasingly at variance with the principles of state governance that have been practised in reality in recent years and the ways these principles are materialized in the context of market relations. This contradiction leads to an emerging “crisis of stabilization.” Consequently, a new stage in development, a stage of modernization, becomes an urgent necessity.

Deceptive Non-Expectations

Vladimir Putin’s early days of presidency were marked by the question sacramental for the mysteries of Russian politics, “Who are you, Mr. Putin?” Political scientists both in Russia and in the West were analyzing the new leader's life and career, his statements and actions, attempting to forecast on this basis the further development and outcome of reforms in Russian society.

The new president’s heritage was difficult, yet not hopeless. The country was gradually recovering after the default of August 1998. On the whole, however, both the political and economic situation remained quite complicated. At any rate, there were few who believed that Vladimir Putin would manage to “consolidate society,” to “rally all those destined to renovate great Russia.” This required giant financial resources, power potential, loyalty and support by the political elite, and, on top of all, charisma of a public political leader. Yeltsin's successor possessed none of these assets. His position, unenviable as it was, as many then believed, was further aggravated by the fact that he was mostly perceived as an assignee of the extremely unpopular Yeltsin, as the puppet of the notorious “Family” which was intending with his help to carry on the course serving its own purposes but ruinous for the country.

The past three years have been largely taken up by urgent stabilization measures. On the whole, in the opinion of most Russian analysts, including even Putin’s opponents, the President, by resolute measures and, it should be noted, quite aptly identifying priorities, has managed to prevent the country's slide to catastrophe.

It would be fair to say that Putin the strategist has not only succeeded in beating the stereotype of Yeltsin’s unctuous stooge, but also established in the public consciousness the image of a thorough, circumspect and pragmatic politician who can talk on a par with a man in the street, a tycoon and members of the entire spectrum of power elite at federal, regional and international levels. Moreover, in this communication, he emphatically concentrates on practical matters, not on royal ambition, or populism, or showmanship so typical of Yeltsin. This was the way the reputation was built so formidable today even in the eyes of those politicians and businessmen who just three years ago did not view Putin as president of Russia. Their non-expectations have been grossly deceived.

Results in the economic sphere are not that spectacular, although here, too, the president’s rather mixed team has achieved certain progress, which, when compared to the state of Russia’s economy and finance in the Yeltsin period, looks quite significant. In the first place, the business climate in the country has become markedly better in recent years, with conditions for investments in the economy improved and the legislative basis developed very significantly in the right direction. On top of this, an important factor is political stability, coupled with President Putin’s predictability as a leader and his personal efforts in establishing and strengthening economic relations with other countries

In this respect, Russia’s GDP in 2002, according to the Government’s assessment, will grow by about 4 percent. Inflation in the earlier part of this year was on the whole contained within an annual projection of 12 to 14 percent, as had been planned by the Government.

Events of recent months, however, indicate that things might get worse. This is associated with a number of domestic and international developments. Among external factors are U.S. plans with regard to Iraq.

Today’s expectations of substantial changes in Russia’s political field portend a bitter political rivalry among various political groupings. The winners will be those who can master enough resources to make the president their banner. The question ever more significant today is, “Who are you with, Mr. Putin?”

How Sharp the Edges of Stabilization

What should be the hallmarks in the assessment of the present-day domestic political situation in Russia?

In the first place, it is obliteration of distinctions between internal and external factors that influence the country’s situation, its stability and well-being. The domestic situation, economy and social sphere of the country, as well as its foreign policy, increasingly depend on external factors, viz., relationships with the world’s leading powers, and the stance of international organizations, including international financial institutions (chief among them the IMF, WB and EBRD). We might add it also depends on the position of transnational companies, especially in extractive industries. On the one hand, this is a natural process that accompanies the country’s integration into the world community. But on the other, it is a sign that Russia is losing more and more the great power status and moving to a different rung in the implicit hierarchy of the world community. In this capacity, it becomes more dependent on external forces.

No doubt, Russia potentially remains one of the leaders of the world economy thanks to its human and natural resources. But this potential is yet to be realized. Meanwhile, the technological gap, especially that in advanced technologies, is widening between Russia and other developed countries. This subverts competitive strength of many of the Russian products on the world markets.

Secondly, the extremely high level of corruption that hit the country in the course of transition to market economy, penetration of politics by criminal elements, the spread of economic crime, the ever closer linkage of the criminal world with business and officialdom, and even incursions by crime into politics. This is one of the destructive consequences of the politics of 1992-1998. To be sure, Russia is not the only country suffering from this evil. There is not much consolation in this, however. For the Russian economy, at its present stage of serious market transformations and establishment of democratic institutions, corruption works as a strong impediment to development and may not only slow down any progress, but even cause back motion.

One of the manifestations of this disease is withdrawal of capital from the country abroad, including also through illicit channels. Assessments are that this capital drain runs into tens of billions of dollars annually, which entails significant losses for the federal and regional budgets.

It should be noted that there have been certain positive shifts recently in putting up barriers on the way of capital drain from Russia. According to IMF data for the fourth quarters of 2000 and 2001, the scale of the drain in per annum projection has reduced from over $25 billion to approximately $15 billion. Analysts also point to an increase in the capital influx (mostly Russian money) in the Russian markets. This is a result of structural reforms and greater political stability. But then again, there is no radical breakthrough in evidence.

Thirdly, the exceptionally high rating of President Vladimir Putin, which has stayed at a level so far unattainable for other Russian political leaders throughout all past years.

But the president’s high rating is not only his powerful political asset, it has also made him its hostage. In the period when stability was being restored and strengthened, the high rating served Vladimir Putin well in taking even unpopular decisions (which was especially evident in his measures to consolidate the power vertical). However, priority demands of the population at present are those of social character: adequate increase of wages and pensions and their regular payment, social protection of the poorer strata of the population, fight against abuses of power by officials, fight against street crime, etc. If the country is to move ahead along the way of market transformations it needs to carry out reforms that will be even harsher for most of the population. (A case in point is the restructuring of the housing and public utilities sector, to mention but one.) When implemented, these reforms will be a hard blow on many, and this is bound to tell on the president’s popularity. In essence, Putin is faced with a complicated choice. He may maintain his high prestige among the majority of the population (something that is fraught with a fast growth of adverse phenomena in the economy, leading, ultimately, to economic slump and further rifts in Russian society). Or else, relying on the socially active minority, he may undertake a series of far-reaching reforms which would facilitate forward movement and help to deal with the backlog of social problems. The choice is not easy for the president, the more so bearing in mind the forthcoming cycle of elections — to federal parliament, to regional governors’ offices, and the presidential electoral marathon that will last from December 2003 to March 2004.

Building Up Vertical Governance

On the whole, the political situation in Russia today may be described as quite stable, except for elements of unstable equilibrium in some respects. Vladimir Putin, now a full-fledged and independent politician at federal level, is apparently well aware of this specific trait in the country’s situation. Therefore, the president and the government are going to concentrate their efforts in 2003 chiefly on social aspects in domestic politics while simultaneously speeding up the most necessary political, economic and social reforms. This is clearly discernible in the draft federal budget for 2003, even though it is this year that Russia carries top burden in foreign debt repayments (up to $13 billion). (The figure was even greater originally, but the government has managed to have it reduced.)

Noticeable achievements are in evidence in the socio-economic area: economic growth continues, new jobs are being created, with unemployment down by 700,000, and the citizens’ real incomes have somewhat (by 6 percent) gone up. The federal budget has chalked up positive balance for two years in a row. Some headway has been made in the development of market infrastructure and in stepping up guarantees for private property, all of which is primarily achieved through legislative improvements. The Russian companies’ summary capitalization has more than doubled. And Russia, after a 10-year period, has returned to its world’s second place in the volume of oil production and first place in sales of energy resources.

Economic reforms have been bolstered solidly in the legislative area. Thanks to its stable centrist majority, the State Duma, the main “law producer” in the Russian Federation, passed an important package of laws to improve the tax legislation. The Duma also passed the Land Code and the Labor Code (though these are not free of certain shortcomings), and legislation to support reforms of the pension system and the judiciary, to encourage small and medium-size business, and to remove part of bureaucratic fetters in the economy.

However, these and other important steps in the area of economic reforms have so far not yielded the desired results. Social expenditure has grown markedly, while tax revenues went down. Even given reduction in taxes, some businesses evade them in part or altogether, preferring to try and find loopholes, which are not so few in Russian legislation. On the whole, it should be admitted that the rather liberal economic laws, adopted recently, have not yet started operating full strength and the reforms drag out. The political stability and favorable economic situation of recent years have not been used to the full extent in order to improve the population’s quality of life and win a worthy place for Russia in the world economic system.

The reasons behind this are as follows: insufficient development of legislation; the reform of the judiciary yet to be completed; the weakness of the middle class (which was never a powerful social force in Russia, and actually disappeared following the default of 1998); and resistance put up by the officialdom which hates the prospect of losing controls over the economy.

Investments represent one more acute problem. Despite the economic growth of recent years the level of investments remains extremely low (an estimated 15 percent of the aggregate GDP) and in no way satisfies the requirements that grow from year to year. Investors are scared away by obsolete production facilities in use in most enterprises and, consequently, enormous financial outlays required for their modernization or renovation, and also corruption and the still unfinished process of reallocation of property.

It appears that an active phase of dismantling the political structure characteristic of Russia in recent year has started, with the “St. Petersburg Team” confronting the “Family.” The process of rapprochement along the president/prime minister lines brings about significant changes in the alignment of forces in the upper political echelon.

The most important achievement in these years has been consolidation of the vertical of state power (considerably loosened in the period of Yeltsin’s presidency) and the launching of structural political reforms. Putin has managed to find compromise between the business community, including the tycoons wary of reallocation of property, members of the officialdom alarmed by prospects of radical changes and considerable redundancies in the state power machinery, and most of the population fearing new social shake-ups.

Certainly, it is still a long way to any ideal political model. However, the main task has been resolved, that of improving governance and more or less consolidating power structures at various levels and the business community. Continuous cabinet reshuffles, once brought to absurdity, have stopped. Admittedly though, appointments and personnel policies today are far from perfection and do not rule out promotion to high positions of randomly chosen or professionally inept officials.

At the same time, establishment and consolidation of an efficient power vertical was not an aim in itself. The first move was to get rid of those elements that destabilized the situation in the country at large and in individual regions, that threatened with scattering of regions, loss of control and even separatist tendencies. Attention was mainly focused on the following tasks: reform of the “house of the regions” — the Federation Council, bringing legislation of the federal regions into accord with the federal Constitution and federal laws, and enhancing the role of federal authority in governing the regions (as a measure towards these ends seven federal districts were formed, with posts of presidential representatives instituted in them). All these steps were, in essence, directed towards restricting the powers of presidents of republics and governors of regions and territories, and of regional legislatures. More specifically, the aim was to counter the destructive consequences of the former leadershipregional policy epitomized in the populist call once addressed to regions: “Take as much sovereignty as you can carry.”

However, there are also side effects. In one development, the reform of the Federation Council (with regional governors and heads of legislatures replaced in them by their representatives) has, to all intents and purposes, turned this house of the Russian parliament into a mere decorative body with so far not much to decide.

Formation of the seven federal districts also had varying consequences. The powers of presidential representatives and resources that they have at their disposal are obviously insufficient if the Kremlin leaders are to make recalcitrant governors finally and firmly pursue the policy of the federal center in the regions.

The other house of the Russian parliament, the State Duma, has also undergone significant internal restructuring. The “taming” of the Duma by the Kremlin has led to the situation where its potential for opposition (both in the left and the right parts of its political spectrum) is considerably weakened. The Duma has turned into a relatively obedient legislative instrument in the hands of the executive branch, with the centrist parties and groups loyal to the president setting the tone in it. This has increased the speed and efficiency of the Duma’s legislative work.

A Party out of Power and the Opposition

As a result of the Duma’s submissiveness, all responsibility for fundamental political and economic decisions goes to the president and the government. In addition, parliamentary control over the executive power has weakened, and this increases the possibility of subjective and altogether mistaken decisions.

Therefore, a highly important challenge is formation of a civilized party system in the country. The new Law on Political Parties, no doubt, facilitates the process. But here, too, a number of shortcomings are in evidence, and some of them were manifest during the formation of the “power party,” United Russia. This party, intended to serve as a reliable political bulwark for the president, has failed to cope with the main function of the ruling party, that of rallying support from below for the president’s initiatives and reforms. Even worse, the party itself depends on the president’s authority for its sheer existence. Besides, it has no serious political opponents, which is another hindrance on the way for it to become a solid political force supporting the president and the government. An especially alarming fact is that there is no non-communist opposition today, following its virtual rout in the election campaigns of 1999 and 2000.

On the other hand, it has become obvious that the Kremlin is intent on creating a strong government party, United Russia. This may be viewed as orientation by the men in the Kremlin towards a modernized “Chinese” version of reforms in the country and the economy, which implies reliance on a single party.

Another problem in the construction of a new political system is that Vladimir Putin personally has no serious political rivals. The former presidential candidates, Gennady Zyuganov (Communist Party), Grigory Yavlinsky (Yabloko) and Vladimir Zhirinovsky (LDPR), should in essence be counted out. Consequently, ensuring continuity of power after a change of president or, more precisely, preparing an efficient successor to the incumbent president is an important challenge for Russia, especially what with the exceptionally wide powers that the president is endowed with by the Constitution.

In essence, Putin so far has no coherent consolidating ideology. His high “indiscriminate” popularity may play a bad joke on him. Already now, Putin’s personal responsibility for the solution of major national issues in domestic and foreign policies and for the country’s further course overall has grown immeasurably. This considerably reduces his scope for maneuver in domestic politics.

Putin, in the opinion of many observers, has, in actual fact, become a hostage of his own complete and impressive victory over his political opponents. Owing to his high personal qualities as a national leader, this has not so far caused any tangible damage to the development of the state structure. However, this course of development creates a system of governance adapted to a certain leader. In this situation, a change of leader (something that is bound to happen not later than the year 2008) may lead to certain shake-ups.

One of the urgent problems is administrative reform. Bureaucracy is all but the most serious handicap on the way to further market transformations.

It should be admitted that in the area of administrative reforms Putin has probably scored the least results. The numbers of officials feeding on civil service have not decreased, but, on the contrary, have grown. For instance, formation of the seven federal districts required creation of rather numerous offices of presidential representatives who already call for expansion of their staff (which, it seems, they will finally achieve). Apart from that, many federal ministries and departments set up their special offices in the federal districts.

One of the reasons behind the failure to restructure the administrative mechanism is the fact that the work to develop a concept of reforms is assigned to officials themselves, not to independent expert groups.

And, of course, Chechnya

The Chechen conflict has for ten years already been producing a profound impact both on the situation inside the country and on its international position. And the so-called second Chechen war that started in 1999 is linked directly to the name of Vladimir Putin. After 1996, when the Khasav-Yurt accords were signed giving the republic de facto full independence, the Chechen territory was actually turned into a criminal terrorist enclave within the boundaries of the Russian Federation. International terrorist organizations (al-Quaeda, for one) set up their bases there.

The federal authorities have managed to achieve certain success in the past three war years. All major formations of militants were routed, which lifted the danger of attack on the neighboring areas of the country.

However, the operation in Chechnya has obviously been dragged out and is turning into a great problem for the nation (and for Putin, in anticipation of the forthcoming election). Even though, as Defense Minister Sergei Ivanov emphatically put it, “the spine was broken” of Chechen armed formations and the war phase was declared (once again) finished. The channels through which separatists and terrorists obtain men, money, arms and various equipment have not been fully closed. This, incidentally, has to do with Russian, as well as foreign supply channels for militants. The seizure of hostages in a Moscow theater on October 23 is additional evidence that the terrorist infrastructure built up in the past years in Chechnya and entangling many regions of Russia is by far not destroyed. And it cannot be destroyed either by large-scale army operations or by the so-called mopping-up operations in Chechen villages.

In addition, some Western countries also play a destructive role with regard to ending the conflict. They render political support to Aslan Maskhadov, even though he is compromised by his ties with terrorists, and seek to bring him to negotiation table with the Russian president. It is indicative, for example, that the terrorists who seized the Moscow theater were in several Western media called “rebels.”

But the main thing probably is that there is still no legitimate power in the republic, which would be supported by the majority of population. No democratic elections have been possible up to now.

One more problem associated with Chechnya is the condition of the army and other power structures. The protracted combat actions (going on since 1994, with a relative lull from August 1996 to August 1999) with no impressive success but involving deaths of thousands of servicemen, inadequate supplies and logistics, lack of proper training of the men, and hostile attitudes by the local population, all have an adverse effect on the army’s fighting efficiency and morale.

Nor did Russia’s leadership succeed in its attempt to integrate the operation in Chechnya in the context of the anti-terrorist operation launched by the international coalition in Afghanistan. Moreover, the pressure brought to bear on the Russian government by the West, except for the U.S.A., over the Chechen operation was even stepped up. But it is also clear that if not for the political and financial support coming from outside, the environment fueling the terrorists would have been subverted and resistance of militant formations in Chechnya would have long been broken altogether.

On the whole, the protracted Chechen crisis is becoming a serious complicating factor for Putin and the “power party” on the eve of the next election cycle. It is necessary to try and find a political solution to the crisis, since all military options are nearly exhausted. And one of the main challenges today is to form a legitimate and effective government of the Chechen Republic, to conduct democratic elections, and to bring the republic back into the legal space of the Russian Federation.

Integrated Modernization Project

Thus, by this time, on the eve of the year 2003, Russia has painfully charted its way towards modernization. There is a heavy backlog of problems that have got to be tackled urgently and without any excessive reverence for legal, political or economic anachronisms of not only the Soviet, but also the post-Soviet era.

In the political sphere, these problems include insufficient flexibility and efficiency of the political system, especially when it comes to tackling complicated tasks of restructuring the country, its economy and social sphere. Priority place among them goes to formation of a civilized mechanism of succession in office; creation of a mechanism by which society could exercise control over the state, its executive branch, armed forces and law enforcement structures; exercise of the division of powers principle (this, above all, concerns the judiciary); development of a more efficient mechanism for interaction of the federal center with regional authorities; and formation of an effective and financially sufficient system of local self-government.

In the economy, the task is to increase labor productivity and efficiency of production, replace outdated technologies and worn-out equipment in many sectors of the economy, reduce the country’s dependence on raw materials exports, and extricate all businesses from the “shadow sector.”

In the social sphere, an ever greater danger comes from the widening gap between “the upper 10 percent” of the wealthy and the bulk of the citizens, and also from the obsolete system of social support of the poor and needy strata of the population, a system that is in fact at variance with the new conditions in the country.

The methods and speed of solution of these and associated problems may well become the basic content of an integrated project of modernization. It is clear that a project of this kind may also serve as a solid basis for the presidential election campaign in the course of which the incumbent president of Russia will no doubt try to justify expectations of those who see no alternative to him as president-2004.