On the Threshold of Modernization
No. 1 2002 December

Alexei Denisov  — Deputy Director of the Institute for
Strategic Assessment and Analysis.

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social guarantees for the population, was superseded by a stage of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

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

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

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

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

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

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

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

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

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

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.