Putin: the Bottom Line
by Boris Nemtsov
First Deputy Prime Minister of the Russian Federation, 1997-1998
and
Vladimir Milov
Deputy Minister of Energy, 2002
Translated from the Russian by Dave Essel
English PDF Version
Russian PDF Version
Introduction
The eight years of Putin’s rule are coming to an end and the time has come to take a look at the bottom line. Many placed great hopes in Putin’s presidency. Some results have been achieved: official propaganda like to make much of the fact that during the years of his rule (2000-2007), the country’s GNP has gone up by 70%, real incomes have, according to the statistics, have more than doubled and poverty has been reduced with the number of people with incomes below the official subsistence level down from 29% in 2000 to 16% in 2007. The budget has a surplus and the state’s financial prospects higher than ever: in January 2008 Russia’s gold and foreign currency reserves reached 480 billion dollars, third largest in the world after China (which has over 1.5 trillion) and Japan (980 billion). The Russian Stabilisation Fund has grown to 157 billion dollars.
All this is true. But it’s only the lesser part of the truth. There are other results of Putin’s rule which are not covered by the state media. And these are shockers. During the years of Putin’s rule, export prices of oil amounted to an average of $40 per barrel while recently they have been over $60. For comparison: the average prices of oil during the Yeltsin years stood at $16.70. The colossal opportunities opened up by high oil prices should have been used by Putin to modernise the country, carry out economic reforms, create a modern army, and establish public health and pension systems.
None of this was done. The army, the pension system, public health, secondary education, and the road system have all degraded. The economy is not doing well either: a stroke of luck was the main reason it was possible to bring relative order to the financial sphere but it also created bubbles in the share markets and in real estate while investments in the real parts of the economy have risen very cautiously while production capability has not been modernised during this time. The opportunities offered by the oil windfall have been missed. As under Brezhnev, super-income from the export of oil and gas have to a large extent been frittered away and necessary reforms left undone.
As a result, as we reach the end of Putin’s presidency, we once again find ourselves with the stable empty and the door open – without a social security system that works properly, facing a growing deficit in the pension fund, with an army straight out of the last century, with state companies in immense debt, and with a level of corruption completely unprecedented in all of Russia’s history. Furthermore, despite the fact that some oligarchs have been sent into exile or put into prison, the remainder continue to enrich themselves – Russia is looking to lead the world in number of billionaires. The increase in the wealth of some oligarchs – for example, Putin’s friends and Russia’s richest man Roman Abramovich – has come straight from government funds. But it all could have been otherwise.
It all could have been otherwise – Russia could have taken a different road. In the 1990s, we experience the collapse of the communist system, the results of which were far more serious than had been expected. Despite that, however, the economy began to grow before Putin came to the presidency: in 1999 GNP rose by 6.4% and industrial production by 11%.It proved possible to reduce crime in the second half of the 1990s (crime figures began dropping in 1996-1997), mortality rates and falling birth rates, all of whose roots went back to Soviet times (rising crime rates and falling birth rates were first noted in the second half of the 1980s; mortality began rising in the early 1970s).
In 1997, after overcoming the most serious consequences of the collapse of socialism and the completion of the semi-reforms of the early 1990s, the Russian government for the first time set out to make systemic reforms aimed at transforming the country into a modern democratic state with a competitive market economy. The loans-for-shares privatisations were stopped and the government began to take action against the influence of the oligarchs. Oligarchic pressuring and the collapse of the state share pyramids prevented these reforms from being completed.
However, many of the ideas from those days were included in Putin’s “first plan” – the programme for socio-economic reforms mooted in 2000 at the start of Putin’s first term. The main heading of this plan were: building of a law-abiding state and of civilised markets, the lowering of bureaucratic barriers, allowing private investments to contribute to the economy, the development of small and middle business, and the implementation of important social reforms. A number of important steps were taken back then, at the start of Vladimir Putin’s presidency – tax and land reform among them. The passing of the Law on Land Ownership put that issue into gear: land, one of the country’s main resources, ceased to belong to no-one and acquired a legal status and a value. The production of a whole series of systemic legal codes and laws brought us closer to having a law-governed state.
From the very beginning, however, Putin’s government distinguished itself by its authoritarianism in the political arena. Many were outraged by the return to the Soviet national anthem, the disbandment of the independent TV channels NTV, TV6, and TVS, and the virtual dissolution of the Federation Council as an independent organ of the state. On the other hand there were others believed that authoritarian modernisation was a possible way for the state to go and many were ready to forgive the state its authoritarian ways if only the country was put in order. But as Viktor Chernomyrdin’s famous phrase has it: “one had hoped for the best but the result was as always." Authoritarianism triumphed under Putin but no modernisation came about from it.
In 2003, when unprecedented pressure was first deployed against business and the decimation of YUKOS was begun, it became clear that we had taken the wrong track. The the further down it we went, the worse things got: falsified Duma and presidential elections carried out with the crudest of uses of administrative resources in 2003-2004; the unsuccessful interference in the Ukrainian elections; the passage of a whole range of laws restricting freedom of speech, assembly, and the activities of political parties and associations; aggressive foreign policies; and a gradual drawing of the country into confrontation with the rest of the world. Russia became ever more a police state. All the reforms of the early 2000s were made to fail and were replaced instead by greedy redistribution. Corruption became rampant. At the same time, state propaganda, as back in Brezhnev’s days, was endless used to brainwash people. “All is fine, life’s better now, life’s happier” says the propaganda from the Kremlin.
This brochure aims to be a sober and realistic analysis of how our live have changed during the years of Putin’s rule. Someone has already coined this phrase: “Life’s better now… but nastier”. We would like to open the eyes of our fellow-citizens to the sort of Russia that Putin and his successors are making for us.
We would like as many Russians as possible to look the truth in the eyes and recognise what is happening to our country. Let people think about these most serious problems lurking behind the icing of official propaganda and shameless dissimulation. Let them understand that these problems will not just go away: the only thing that’s going away is the time of our oil riches
And these issues will have to be resolved. We do have an alternative to propose. But in order to make this happen, we are going to have to take matters into our own hands. Putin’s and his band of men will not lend a hand: their eight years in power has been long enough to make that clear.
Chapter 1
Corruption is Corroding Russia
One of the worst and blackest results of Vladimir Putin’s presidency has been Russia’s dive into an unprecedented mire of corruption. We are officially one of the world’s top countries when it comes to theft by civil servants. Russia has dropped to 143rd place in the worldwide rating of perceived corruption issued by Transparency International, making our country one of the most corrupt on earth. Our neighbours on the list are Gambia, Indonesia, Togo, Angola, and Guinea-Bissau. We lag far below such countries as Zambia (123rd), Ukraine (118th), Egypt (105th), Georgia (79th), and South Africa (43rd). Back in 2000, we were rather ‘better” placed at 82nd but we have now reached nearly the bottom. According the the INDEM Foundation [TN: "Information Science for Democracy", Russian NGO founded in 1990] the volume of corrupt business conducted in Russia rose from under $40 billion in 2001 to $300 billion today.(!). [FN1] Bribes and racketeering by civil servants is ubiquitous.
Putin has proved even more cunning that the oligarchs and other disciples of corruption who parasited off the reforms of the 1990s. There was plenty of corruption in the 1990s, too, but it was open to view – the free press could report on incidents of corruption with hindrance. In 1997, some members of the government were fired for receiving an advance of $90K each for a book about privatisation. Today’s practitioners of corruption laugh at this pathetic sum.
Today theft by civil servants is measured in billions and is hidden from the eyes of the people: large share-owners cover for dozens of secret beneficiaries, “friends of president Putin”, hiding behind their backs. Information on who the real owners are is carefully protected by the secret services and the subject of corruption in the higher echelons of power is taboo for the Kremlin-controlled media.
Meanwhile, bribery and the convergence of the civil service with business has become the norm at all levels of the government – federal, regional, and local. Spouting phrases about the “revenge of the oligarchs”, Russia is witnessing the rapid enrichment of a new and more powerful Putin oligarch – at your expense and mine. Assets are being removed from state ownership and handed over to the control of private people, property is being purchased with state money back from the oligarchs at stunning prices, a friends-of-Putin oil export monopoly is being created, and a Kremlin “black safe” is being funded. This is a brief outline of the criminal system of government that has taken shape under Putin.
The Oscar-winner in the transfer of important assets into the hands of secret third parties is Gazprom. In just three years, without any kind of tender and by means of an opaque procedure, three important assets servicing the company’s cash flow have been transferred to third-party ownership. The first of these was the Gazprom insurance subsidiary Sogaz: in 2005 its ownership was transferred to divisions of Rossiya Bank in Petersburg. At the time of the transfer. Rossiya Bank’s assets were valued at approximately the same as Sogaz’ worth – $1 billion. However, Sogaz was not sold at open auction but simply transferred into the Petersburg bank’s ownership.
In 2006, Rossiya Bank was handed the management of the Gazfond pension funds which amounting to over $6 billion. In late 2006/early 2007, these funds were used to buy out 50% of the shares of Gazprombank, which by late 2007 was second in assets to Sberbank.[FN2]
According to the media, Rossiya Bank was set up in 1990 by inter alia the General Manager of the Leningrad District Office of the CPSU, now its chairman, Yuri Kovalchuk, an acquaintance of President Putin’s from his time working in Petersburg. The full list of the bank’s owners is unknown.
One of the largest deals done by Putin’s friends in the Rossiya Bank was the seizure of the giant Gazprom-Media holding, which includes the NTV, TNT, television channels and other media interests. Before Gazprombank fell into the hands of Kovalchuk & Co., in July 2005 Gazprom’s media interests (the Gazprom-Media group and shares in the NTV and TNT televisions channels) were transferred to the bank for a payment of just $166 million. [FN3] Two years later, in July 2007, vice premier Dmitri Medvedev estimated the value of Gazprom-Media’s assets as $7.5 billion. [FN1]. It would appear that Gazprom gave its assets to friends of president Putin for a fraction of their real worth! Compared to this deal, the loans for shares auctions look like exemplars of honesty and transparency.
“Russia – Land of Possibilities”, cynically proclaim Rossiya Bank’s billboards in central St. Petersburg on the Nevsky Prospekt and by St. Isaac’s Cathedral. Folded into the hands of Yuri Kovalchik, these media assets are not just business. They are a full-scale political resource to be used for mass influence of public opinion. In effect, Kuvalchuk controls a gigantic non-government media holding which todays own four television channels (NTV, TNT, REN TV, and Channel5 St. Petersburg), one of the country’s widest circulation newspapers (Komsomolskaya Pravda), and dozens of other small television and radio stations and newspapers.
This whole gigantic media empire – Putin-media – presents serious competition to the state television channels and other media. Its might is beyond comparison with that of the previous influence of Gusinsky and Berezovsky. It is difficult to imagine that this resource is not going to be used to further Putin’s political interests.
Yuri Kovalchuk’s brother Mikhail head the Kurchatov [Atomic Energy] Institute and recently became acting vice-president of the Russian Academy of Sciences. It is he who is to distribute the 130 billion roubles allocated to nanotechnology development. Yuri Kovalchuk’s son Boris, a former adviser to vice-premier Dmitri Medvedev, now head the Russian government’s department of ‘priority national projects”. This department oversees the funds allocated to “national projects”.
Gazprom is not the only structure to have been looted under Putin. In 2004, as a result of a supplementary share issue at SvyazBank, which was set up in the 1990s specially to serve state communications enterprises, over 50% of the shares ended up in the ownership of a company by the name of RTK-Leasing. Following this share issue, companies in the communications business which previously used the services of other banks began to move the accounts to SVyazBank. In early 2005, the Society for the Protection of Consumer Rights addressed a request to the Public Prosecutor’s Office, the Ministry of the Interior, and the Treasury that review be carried out. [FN6] However, nothing much was done.
The owner of RTK-Leasing is said to be Geoffrey Galmond. [FN6] His name is frequently linked with that of the Russian Minister of Information Technology and Communications, Leonid Reiman. But who are the real beneficiaries?
This is how under Putin massive assets are removed for state control and land up in the hands of private individuals.
Another historic deal was the buy-out in September 2005 of 75% of the shares of Sibneft from Putin’s friend oligarch Roman Abramovich for $13.7 billion. [FN7]
The state could easily not have bought Sibneft (at the time of the sale it was the smallest of Russia’s vertically integrated oil companies and had falling production). It could have paid considerably less for it – particularly if one bears in mind that Abramovich originally acquired control of the company for $100 million.
Sibneft, however, was bought for the highest possible, artificially exaggerated [FN8] price and half of it, furthermore, was financed directly by the state. In June-July 2005 the state, through a company called RosNefteGaz which was specially set up for the purpose, paid Gazprom $7.2 billion and received 10.7% of Gazprom’s shares in exchange. [FN9] These were the same shares that 12 years previously by a decree of president Yeltsin in 1993 to Gazprom had been allocated for purchase by vouchers. [FN10] The state could have increased its share in Gazprom for absolutely nothing by using these shares.
Why pay Abramovich over $7 billion from state funds (the rest of the money came for Gazprom’s budget) to increase the state’s shareholding in Gazprom when the authorities to all intents and purposes controlled the company? What can this be called other than diversion of assets?
Why pay $13.7 billion for Sibneft when less could have been paid. And did the payment go to Abramovich? He is said to be the owner of Millhouse, which sold Sibneft to Gazprom. But no-one actually knows the names of the true owners of Millhouse. It is said that Abramovich has an influential partner, co-owner of Millhouse. Who is he?
In fact, why did Sibneft need to be nationalised at all? If it had been bought by private owners, its efficiency would almost certainly not have dropped as it did under Gazprom’s management and the state would not have had to pay all that money for it.
Incidentally, according to Gazprom’s accounts, the company’s and its subsidiaries capitalization in mid 2004 included 17.5% of Gazprom shares. By 30 June 2007 – 0.5%. [FN111] In 2005 the state bought back 10.7% of the shares. Where did the other 6.3% of Gazprom shares, today worth nearly $20 billion, go? Who owns them?
Why does Gazprom divvy up hundreds of millions of dollars of yearly profit from transit fees and re-export of Central Asian gas with the co-owners of the Swiss trader RosUkrEnergo? Who is behind this middleman?
All the above deals done by Gazprom were concluded during the time presidential successor to Putin Dmitri Medvedev was chairman of its board of directors. What role did he personally play in all these deals and is his selection as successor perhaps a result of them?
Yet another affair during Putin’s time is the rise and rise of the business of hitherto unknown Swiss oil trading house Gunvor through which about a third of Russia’s oil exports are effected (almost all of Surgutneftegaz’s production, a considerable proportion of Gaspromneft’s, Rosneft’s and others). This company controls oil exports to the tune of not less than $40 billion annually.
When Putin had only just come to power, a state monopoly on Russian oil exports was actively being discussed. This monopoly was to all intents and purposes introduced, but not as a state monopoly but rather a private one. Behind Gunvor stands Gennadi Timchenko, an old comrade of Putin’s from his St. Petersburg days. [FN12]
In a letter to the British paper The Guardian, another co-owner of Gunvor, Swede Thorburn Tornkvist admitted that the mighty oil trading house does have a “third co-owner”. Who that might be remains unknown.
It is also unclear who owns Surgutneftegaz, Gunvor’s main supplier. It is believed that the company is controlled via a chain of intermediary companies by its current CEO Vladimir Bogdanov. Another version, however, has currency: that back in 2002-2003 Bogdanov sold his shares on to persons unknown, representing the highest echelons of Russian power, that these included Timchenko and possibly also Putin. This still remains to be verified. Other private oil companies (Lukoil, Yukos, TNK-BP) disclosed the names of their true owners a few years ago, but the true structure of Surgutneftegaz’s ownership is still opaque. [FN13]
Catching Putin and his accomplices red-handed is difficult. They cover their tracks of their dirty business too professionally. Evidently they have learnt from dictator Saddam Hussein, documentary proof of whose corrupt activities the Americans were never able to find even though Saddam and his sons bathed in luxury and had to deny themselves nothing.
On the hand, the Russian authorities can sometimes be caught with their hand in the till. In may 2006, the Zurich Arbitration Court rued that the owners of the Bermudan IPOC Fund, which owns a controlling share of cellphone operator Megafon, plundered money in the interests of the fund’s real beneficiary, the unnamed “Witness #7”. The description of witness #7 fully matches that of Leonid Reiman, Minister of Communications, Petersburger, and long-time comrade of president Putin. [FN14] The nominal owner of IPOC is Danish lawyer Geoffrey Galmond, who also owns TelekomInvest, Interregion Tranzittelekom, and 50% of cellphone operator Sky Link. In November 2007, the British Virgin Islands authorities asked the US counterparts help investigate Reiman’s involvement in illegal activities. [FN15]
But Minister Reiman continues in the nest of health and remains at his post.
There remain too many other unpleasant questions to be asked of Putin and his entourage. Who is the real co-owner of Surgutneftegaz, Megafon, Sky Link, Roman Abramovich's Millhouse, and the powerful oil trader Gunvor? Can it really be that some Danish, Swedish, Finnish, and Chukotsk businessmen have come to own a good half of Russia without sharing with Putin? Where do the colossal sums earned from arms sales by Rosoboronexport’s (headed by Putin’s friend Sergei Chemezov) go? Is it true, as reported in the media, that there is a ‘black safe” in the Kremlin system for secretly moving cash from unknown sources which is then used to finance pre-election campaigns or other purposes? [FN 16]
It is hardly surprising that experts and political scientists compete in their attempts to estimate Putin’s personal fortune, putting it at $20, $30 billion. Some say even more.
The authoritarian-criminal régime that has taken shape during the years of Putin’s rule threatens our country’s very future. The authorities have everything to lose. If free media ever arise again in Russia together with competition in politics, the black dealings of today’s rulers in Russia will come to the surface. If that happens, they will at best lose their posts and along with that the way to earn billions on the side. In the worst case, they will lose their freedom. The diversion of state assets, firstly of course those of Gazprom, the use of foreign middlemen to purchase Russian oil at artificially lowered prices (which Mikhail Khodorkovsky is accused of and imprisoned for) has become a widespread and much larger-scale practice amongst the many “friends of Putin”.
We need to put a stop to all this. We need to turn over this shameful page in our history. We need people with clean hands to come to power, people without corruption scandals and unsavoury connections in their pasts. We need to radically reduce the powers of civil servants over the country, to limit their authority, in order to pull the rug out from under the feet of corrupt agents and thieves in positions of power. The state should be shorn of powers that it is unfit to hold over enterprises and and their cash flows. We need to see a rebirth of the practice of open and honest privatisation which began to take place in 1997-2002.
There should be limits on how long senior civil servants can stay in their posts – at all levels: federal, regional, and local. This is needed in oder to prevent people from growing into alliances with entrepreneurs and their successors should have the right to openly investigate their predecessors if needs be. There should be a universal principle: serve 8 years and no ‘extensions’, no sleights of hand to maintain your position (like moving on to become prime minister).
We need laws on lobbying, conflicts of interest, on forbidding civil servants and any connected with them to engage in business. We need to disqualify civil servants found to have engaged in corrupt practices so that they can never again in their lives occupy a civil service post.
We need to reinvigorate our law enforcement system and in particular the part of it investigating corrupt practices. Russia needs an independent Federal Investigation Service in which there is no place for any one affiliated with potential corrupt activities or found to be covering for those accused of serious crimes – for example, during the investigation of the suspects in the smuggling operation run by the Tri Kita furniture company, employees of the Procurator's office and of the Investigation Committee persecuted the investigators in this case.
We need strict public control of the activities of the authorities, a rebirth of freedom of speech, the abolition of censorship on federal television channels, and the establishment of fair conditions for political opposition. There should be open public discussion of such issues as corruption in the government and corrupt civil servants should be found criminally responsible. Journalists should be able to freely investigate corruption scandals.
Independent courts are a vital precondition for the battle against corruption. While the courts remain to all intents and purposes under the control of the executive, there is no way that corruption cases will be looked into objectively or that the guilty will be punished.
The only things that will stop the total looting of Russia are the democratisation of the country, the entry into power of responsible and honest politicians to replace the kleptocracy, the abandonment by Russia of life by the thieves’ code, and a return to the creation of the rule of law.
Chapter 2
The Army That Got Forgot
Putin really needed to use the country’s oil windfall to help meet the modernisation needs of the Russian Armed Forces.
This was the time to arm the army adequately. However actual arms deliveries and even plans for re-equipment have been scandalously low. According to data from the Council for National Strategy published in November 2007 published in a report entitled Results under Vladimir Putin: Crisis and Decay of the Russian Army, between 2000 and 2006, the Armed Forces received deliveries of only 27 ICBMs (27 warheads) while 294 (1779 warheads) were written off. In the penniless years 1992-1999, the army received 92 ICBMs (92 warheads). Since the year 2000, only 3 new aircraft have been delivered: one Tu-160 and two Su-34s. Around 100 aircraft were delivered during the 1990s. Since the year 2000, a little over 60 T90 tanks have been purchased while the total for the 1990s was 120. During the same decade, the Navy and seaborne frontier forces took delivery of over 50 surface and subsurface vessels. The figure for the current decade is less than ten [FN 1]. The state armaments programme for 2007-2015 plans to deliver a mere 60 aircraft to the armed forces in that time. This means that it will take … 80 years …. to renew our existing air fleet.
But the main blow has been against the most important element of Russia’s military potential, the support of the country’s sovereignty – the strategic nuclear forces. During the Putin years, Russia’s strategic nuclear forces have decayed at a frightening rate. More data from the Council for National Strategy’s report quoted above shows that between 2000 and 2007 the strategic nuclear forces wrote off 405 delivery units and 2498 warheads (as against 505 warheads only in the 1990s, during which time 60 new delivery units were bought while the army also took delivery of 1960 Tu-95 and Tu-160 strategic bombers). Under Putin, only 27 rockets have been produced – three times fewer than in the 1990s. So while Russia was overall able during the 1990s to maintain its nuclear potential at the level of that which it had inherited from the USSR, under Putin its reduction has become a serious threat to national security.
Furthermore, while the numbers of relatively invulnerable silo-based and RT-23 [FN 2] rail-mobile ICBMs (these latter look like standard refrigerated rail cars, which make them difficult to keep track of) were reduced, the armed forces continued to be given mobile Topol [FN 3] units that are highly vulnerable (these are 100-ton, 22-metre-long road-mobile units which can easily be found by optical, radar and infrared intelligence).
One hardly need say how important a country’s strategic nuclear force is to its sovereignty. One might even say that no SNF = no sovereignty. The rest of today’s armed forces are most unlikely to be able to resist large-scale attack by a strong aggressor. If Russia’s nuclear arsenal continues to be shrunk at current rates, by the middle of the next decade Russia’s SNF will have at its disposal no more that 300 ICBMs and 600 warheads. In that case, it is questionable if it will be able to perform its nuclear deterrence function: it becomes possible for an aggressor to make a disarming non-nuclear strike with high accuracy weapons to annihilate practically all of Russia’s nuclear strike power and take out the few rockets that the country does manage to launch with its anti-missile defence capability. China’s strategic nuclear force will equal that of Russia in the next 10 years or maybe even exceed it.
There’s no sensible response to the endless jabber about “sovereignty” as the main aim of Putin’s policies if in reality the main factor in that sovereignty – the strategic nuclear deterrent – has been undermined under Putin.
And while the army receives scandalously small amounts of armaments, most of what is produced goes for export. In the 1990s, Russian arms exports amount to an average of just over $1 billion a year. In 2007, income from arms exports amounted to $7 billion. We arm foreign armies, including those of potential opponents – China first and foremost. These foreign armies are supplied with many times more Russian armaments than our own. The arms export monopoly is run by Rosoboronexport, headed by yet another Peterburger and friend-of-Putin Sergei Chemizov. How the income from arms exports, which should be deliberately used to finance the modernisation of our Armed Forces, is actually used is kept totally opaque.
The efficiency of our military-industrial complex remains low and deployments of modern weapons to the armed forces are constantly delayed. Although the government promised that it would soon test a 5th generation fighter aircraft, no engine has yet been developed for it. The first samples of a new anti-aircraft/anti-missile weapon system designated the S-400 [FN 4] was finally deployed only in 2007 although they had initially been promised for 2000. Deployment of the Iskander [FN 5] theater quasi-ballistic missile, first promised for 2003, has still not taken place: trials have not yet been completed. Test of the naval Bulava [FN 6] missile should so far be considered unsuccessful. Three unfinished strategic submarines await it at the Severodvinsk shipyard; no one knows what will happen to them and who will be responsible for the money wasted on their production if the Bulava is never deployed.
The military-industrial complex’s technology lag behind other countries is increasing. The Su-34 fighter and the T-90 tank are both mere modifications of earlier series. No clear R&D programme for future weapons and equipment has been developed. Furthermore, in the absence of a clear military doctrine, it is impossible to define a proper strategy for supplying the armed forces with weapons and equipment: we do not properly understand who are our friends and who our potential enemies, our generals still go on preparing for a large-scale war with the USA while Russia remains unprepared and without defence against real threats, in particular from China (of which more below).
In the absence of effective public oversight of military defence expenditure, corruption flourishes and the cost of government orders are grossly inflated. “The amount by which we fail to meet government defence orders increases yearly and the percentage by which we fail to meet the demand increases in direct proportion to the increased budget allocated to the defence orders,” said Federal Minister and Deputy Head of the Military-Industrial Commission V. Putilin in Yekaterinburg on 19 April 2007. In 2006 the price of a T-90 tank made by the Uralvagonzavod works was 42 million rubles. By early 2007 the price was 58 million. In the 11 years it took to make the strategic nuclear submarine Yuri Dolgoruky, its development costs rose by a factor of seven.
Dubious initiatives by Putin to create industrial defence “holdings” run by his Petersburg friends have not helped matters. The monopolisation of armaments R&D and production is a dead-end route. Even in Soviet times competition between R&D bureaus and military-industrial plants was maintained in order to ensure competitivity. It is now being proposed to create monopolies not only in R&D and arms production but also to have a monopoly supplier to the armed forces (a sole purchasing agency called Rossiiskie Tekhnologii) to be headed yet again by presidential friend Chemizov. The state corporations are multiplying, Putin’s friends are getting richer, and the army remains without the arms and equipment it needs.
There are still over 157 thousand families of servicemen without housing. Of these over 70 thousand do not have permanent accommodation [FN 7] In 1997, one of the authors of this document, when in the government, first managed to get something serious done about this problem: a Presidential Ukaz #1062 of 30 September 1997 “On Improving Housing Availability for Service Personnel and Certain Other Categories” was promulgated. Back then, the country’s income from exports was tiny but somehow or other we still managed to house about one hundred thousand servicemen’s families under the programme.
A lot could have been done while oil prices were high but the number of homeless servicemen has not dropped. In 2006, Putin announced the start of the new “presidential” 15+15 programme for the provision of housing to servicemen yet that year only 6500 new flats were made ready. Another 12000 were planned for 2007. Something is being done but why delay for so long?
All attempts to reform the manning of the Armed Forces have failed. The transition to a call-up of only one year was not properly thought through and has only made matters worse. By 2009, the Ministry of Defence will come up against an inevitable army manpower crisis: due to a call-up of only one year, the army will need to enroll 700,000 young men each year but by 2009 only 843,000 such people will be reaching the age of eighteen. The authorities will have to cancel all deferments and this will put the whole existing education system into disarray.
In addition, the quality of the contingent which is called up does not meet the needs of armies formed in this way. In January 2008, the Deputy Chief of the General Staff, General Smirnov told journalists that 30% of the total number of young men called up in the autumn round were found to be unsuitable for military service and over 50% had health problems preventing their deployment to specialised forces. [FN 8] In other words, this means that we simply do not have the population with which to maintain a called-up army and any talk about its being unacceptable to do away with military service is just cheap demagoguery.
Instead of developing a system for the reserve mobilisation of citizens in case of potential emergencies, the Ministry of Defence is continuing with its policy of filling barracks with called-up youths. Meanwhile, the dedovshchina problem [FN 9] is not going away. It is important to understand that dedovshchina is not just “something that happens” in some units, but a deliberately cultivated and condoned system providing a criminal way of managing the troops by allowing seniors to abuse juniors. A stop must be put to this criminal practice and the Russian Army must complement itself by becoming a contract force.
Abolishing the general call-up will not be easy but is absolutely necessary. It is nowadays fashionable to talk of the development of Russia’s “human potential” as one of the main aims of government policy. However, it is difficult to imagine a greater blow to the Russian nation’s human potential than calling up its young in the flower of youth to forced slavery.
Putin’s way of turning the army into a professional force looks like either nonsense or sabotage: professional recruits are paid a pittance – in 2007, salaries in Russia averaged 12,000 rubles while the average pay of contract soldiers does not exceed 6-8,000 rubles. [FN 10] Forgotten, poorly equipped, badly paid, homeless, recruits unfit to fight, dedovshchina – that is what Armed Forces look like if one looks behind the curtain of Putin’s management. Russia needs a massive reform of its military.
The point of this reform shoul not be just a change in recruitment policy. A contract army is not a synonym for a professional one. The point is that Russia needs to be clear on its long-term plans for the military and needs to develop a radically new, modern and effective force.
Such an army will need a régime of greater openness. Greater public oversight over the financing and pricing of new equipment will also be required. The old opaque and corrupt arms purchasing system must be abolished – no more monopolies. The military budget must be open for all to see except for such things as the development of new weaponry and other secret design work. The army’s purchasing budget should be published on the Internet (as the American military do) and competition rules established.
We need to go over to a contract army as soon as possible, first in the high-tech units and later in the rest. This change of recruitment principle should be used as much as possible for the formation of new units placed parallel to existing ones in order to keep the new units clean of the burden of the old negative traditions of corruption and poor treatment of men. The pay of contract soldiers should be sharply increased to a level corresponding to their skills. Army pay should be approximately 20% higher than average pay in Russia as this will make the army competitive on the labour market. Contract soldiers should be able to get mortgages for their housing and after 10 years service be allocated housing free.
We must without delay begin a full-scale reform of the military in order to make it transparent, to ensure public oversight, to re-equip it, and to turn it into a professional army. The state’s present financial position means that it is possible to do this. Putin already had one chance of doing this but essentially forgot about the military in this highly favourable period of our history. We need new politicians in power if we want to be reliably defended.
Chapter 3
Oh Dear, the Roads
Bad roads are an eternal issue in Russia. Recently, however, with oil money rolling in, the country has at last had an opportunity to modernise its road system. But the opportunity has been missed.
Under Putin’s rule, the road system has degraded at a fantastic rate. During his presidency, the overall length of hard roads has fallen by about 50,000 kilometres, from 750,000 to 700,000 kilometres. This has happened in the main as a result of wear and tear to roads that were officially counted as hard-surfaced – for example graveled – but which are subject to quick wear. More than a third of Russia’s roads are of this kind; if they are not regularly maintained, the only thing left of their hard surface is the designation.
That the length of hard-surfaced roads has fallen should be a matter of shame to a country with pretensions of being a “great power”; even some African countries have better roads than ours. Russia’s backwardness in the matter of roads is quite shocking. The total length of surfaced roads in Russia is 60% of France’s, half that of Japan, and a tenth of USA’s. Only about 35,000 kms of highway meet the standard for high-quality road (width greater than 7 metres and able to accommodate speeds of over 100 kph, i.e roads of no less than 2 lanes with a normal road surface). Finland has more surfaced roads of normal width than the whole of Russia does!
Only 40% of federal highways meet the standard for surface quality, width, and other parameters. Many of the federal highways have a capacity of not more than 40-50,000 vehicles per day, while real traffic amounts to 100,000+ vehicles per day. The drive from Moscow to the country’s main port – Novorossiisk – takes almost 48 hours; it would take only about 15 hours on a normal European motorway.
The road network provides poor links between cities and regions and many highways suddenly come to an end on reaching the frontier of the RF’s regions.
This is a problem which absolutely must be solved: without an effective road network, Russia remains broken up by region and its territorial unity is thus more phrase than fact. The poorly integrated transport system makes it difficult to balance the economies of the regions and makes them more depressed than they need be.
The Russian road network is in urgent need of modernisation yet the system for financing road repairs and building has to all intents and purposes collapsed under Putin. New roads opened have fallen from 6,600 kms in 2000 to a mere 2,400 kms in 2006. The proportion of worn-out roads in the network has risen from 26% in 2000 to 46% in 2005 – this while funding of the road system has actually increased: the 2000 consolidated budget for the road system was 60 billion rubles in 2000; in 2006 it was more that 220 billion [FN1]. It is easy to work out from this that the cost of opening one kilometre of new road has risen tenfold (or fivefold if one corrects for inflation). The scale of embezzlement in the road industry can thus be see to have increased fivefold.
Government money, of which there is much more thanks to oil exports, is being swallowed up by corruption. The much advertised Investfond [FN2], which the government hyped as the future main mover in the development of the country’s infrastructure, has been spent in the strangest of ways: of the $7 billion it released for use in 2007, $4 billion were paid out as contribution to commercial projects undertaken by large financial/industrial groups in Eastern Siberia and the construction of a petrochemical plant in Tatarstan. These are surely commercial projects that have no need of state financing. Furthermore, they can in no way be said to have anything to do with infrastructure developments of national importance. As far as road projects are concerned, practically all the money directed towards such matters –$2.5 billion – will go to projects connected with St. Petersburg: the Western High-Speed Link and the Orlov tunnel as well as a motorway linking Petersburg and Moscow.
St. Petersburg does of course need to modernise its infrastructure. But so too does the rest of the country. Investfond money could have been used to build decent highways linking the main towns of Central Russia – Moscow, Samara, Nizhny Novgorod, Perm, and Voronezh. But the money went to oligarchs and Petersburg regional projects instead.
It is much more efficient to attract private capital to road financing. However, under Putin, private business involved in infrastructure works has been decimated and long-term contracts with investors have been ‘reviewed’. One recalls in this connection the story of Domodedovo airport. This was modernised by Ist Lain, making it Russia’s first up-to-date and spacious airport. Following this modernisation, Putin’s civil servants managed to have the terms of the contract with Ist Lain reviewed in the government’s favour. This case (not to mention that of Yukos and other occasions when the government has revised its obligations to, and taken back assets from, investors) has seriously affected the mood of private investors. They now worry that the government will break its long-term contracts as soon as projects are completed and start to bring in income. One should therefore not hope too seriously for private investment in the road sector. This sector is financed solely from budget monies which are then for the most part embezzled.
We need to revive and develop our road system. The Soviet road network cannot meet the needs of a modern economy. We need a modern transport system that provides passengers and freight with high mobility, integrates Russia as an genuine economic whole, and put puts an end to the conditions leading to regional inequality. To do this, we need to improvem the quality of government development planning for the country’s transport system, put a stop to corruption in the allocation of funds to finance the road system, and be more active in attracting private investment in the transportation infrastructure. This will require of the government iron-disciplined observance of the law and contractual obligations. This cannot be achieved without a genuinely independent judiciary.
Russia will have to go living with bad roads while Putin’s team remains in power.
Chapter 4
Russia is Dying Out
We are told that
– as a result of “efforts” by the government – the birth rate is rising in Russia. In fact,
Russia is continuing to die out under Putin: for example, about one and half million Russians were born in 2006 but 2,166,000 died. The Russian birth rate in 2006 was 10.4 per 1000 but the death rate was 15.2/1000! The population of Russia is falling nearly twice as fast as in the 1990s. Between 1992 and 2000, the total population fell by 2 million.
Between 2000 and 2006 – by 3.5 million.
The key reason for this is a catastrophic mortality rate and Putin has not even tried to do anything about it.
The mortality rate in Russia began to rise in the 1970s and continued to do so up to the mid-1990s. Russia’s ranks 22nd in the world in mortality, ahead of Equatorial Guinea, Rwanda, and Burkina Faso, and 157th in life expectancy. Average life expectancy in Russia is a smidgen over 65 years, on a level with the world’s least developed countries (average life expectancy in the developed Western countries is 78+ and 74-76 in Eastern Europe). Most striking is the average life expectancy for males: while Russian women can expect to live to the age of 72, men can expect less than 59 years of life! This is on a par with life expectancy in underdeveloped African countries.
Reasons for this high mortality include the high illness rates to be found in the population, brought about by alcohol abuse, smoking and unhealthy living. Meanwhile, under Putin people are drinking and smoking still more. In 2000, alcohol sales amounted to 8 litres of spirits equivalent per person per year. Now, at the end of his rule, the figure is nearly 10 litres. This is more than in the 1990s. According to Rospotrebnadzor [FN 1], the real figure is closer to 15 litres per year [FN1]. For the record, the World Health Organisation considers alcohol consumption of over 8 litres per person per year to be critical as mortality begins to increase sharply when that amount is exceeded. Over forty thousand people die of alcohol poisoning every year and Rospotrebnazor estimates the number of alcoholics in the country at 2.5 million.
Cigarette sales to the population have risen in both absolute terms (400 billion compared to 355 billion in 2000) and consumption terms (2700 per per person per year as against 2400 in 2000). This is considerably more than in the 1990s when average consumption was 1500 cigarettes per person per year (for a total of over 200 billion). Smoking is Russia’s most common harmful habit: according to Rospotrebnadzor 65% of men and 30% of women smoke; of these 80% and 50% correspondingly began smoking in their teens. Smoking is the cause of 27% of male deaths from cardiovascular diseases, 90% of deaths from lung cancer, 75% of deaths from respiratory diseases, and 25% of deaths from heart disease. About 25% of smokers die prematurely: smoking reduces life span by 10-15 years[FN1].
The most frequent cause of death in Russia – in nearly 60% of cases – is circulatory disease. About 1,3 million people die of circulatory disease every year – 200 thousand more per year than in the 1990s.
What has Putin done to reverse this trend or to engage in a real fight and smoking and alcoholism? Nothing. Russians continue to die from unhealthy lifestyles.
The mad attempts to combat alcoholism by prohibition under Gorbachev or in Tsarist Russia are not a method and all failed. This is because alcohol consumption is, on the one hand, a social thing, and on the other a way of life. Research has shown that there exists a U-shaped dependency between quantity of alcohol consumed and income: both the poor drink more (drowning sorrows) and the wealthy (living the high life). Moderate use of alcohol and a healthy lifestyle in general is the way of the middle class. We therefore believe that, besides spreading the word about the need for a healthy lifestyle, we should also stimulate and support the middle class. This means changing the nature of the country’s economic policies (see Chapter 10 – Deepening Inequality Chapter 11 – The Economic Bubble). Regarding smoking and combating it, there’s no need for originality: we simply need to borrow from the many years of experience of the USA and Western Europe.
Another important reason for our high mortality is the low quality of health services (already mentioned in the chapter on national projects) and the high number of people who die of illnesses. Circulatory problems are not all that Russians suffer from: under Putin mortality has not gone down for infectious diseases and cancer (330,000 deaths per year) and there has been a sharp rise in deaths from disease of the digestive tract (up from 65 thousand to 100 thousand deaths p.a.). The only drop in the death rate has been for respiratory problems – from over 100 thousand in 2000 to just over 80 thousand in 2006. This is a direct result of the move to natural gas for electric heat and power generation since this results in a reduction of harmful emissions (although the authorities, at Gazprom’s urging, are looking at reversing this positive move and force the energy generation industry to go back to ecologically dirty coal).
It is not just of diseases that people die in Russia. We hold one of the leading places worldwide for deaths by external causes. Over 300 thousand people die annually from external causes, a rate of 200 per 100 thousand of population. This is twice as high as in China or Brazil and 4-5 times higher than in Western countries. Russia is far from being a physically safe place in which to reside. We are among the world’s leaders in murders at 20 per 100 thousand population per year. This has moved us since the 1980s into the top 10 of the world for murder, joining a list that includes Columbia, Jamaica, Honduras, South Africa, and Brazil. In developed democratic countries, the murder rate is in the range of 2 to 4 per hundred thousand population per year.
Crime rates in general, which had been going down in the second half of the 1990s, are on the rise again. There are about 30 thousand murders every year, as many as in the the worst years (1994-95) of the decade. The murder rate went down in 1996-98. We have already mentioned the sharp rise in spending on security and law enforcement under Putin. This has risen from $4 billion in 2000 to a planned $39 billion in 2008. This, however, has had the opposite to the intended effect since serious crime numbers have constantly risen under Putin. The rise in crimes against the person has been especially striking: in 2006, according to Rosstat, these rose by 170% from a year 2000 base, with cases of GBH up by 50%, and robbery by 30%. Not a very pretty picture for the ‘happy 2000s’.
Many people die in road accidents: 285 thousand people were injured or killed in traffic accidents in 2006 (a 60% rise against 2000). On average, 33 thousand people were killed each year on the roads in the year 2000-2006. Recently, Putin’s “successor” Dmitri Medvedev said of the scale of the death and trauma rates on the roads that it bore comparison to military attrition. Something could have been done to combat this but the atrocious quality of the roads as a result of the embezzlement of funds for their maintenance, the flourishing corruption in road policing, poor and slow emergency services, and low standards of maintenance of vehicles are all leading only to a worsening of the situation.
The problem is not just one of high mortality but also of low replacement rates. The modest rise in the birth rate in recent years is mostly to do with the post-war demographic curve and it is evident that steps taken by the authorities will not actually influence the birth rate to any great extent: this is a problem of traditions, customs, and the effects of urbanisation. Television drives to encourage people to have more children are just a con: on average, the birth rate under Putin has remained the same as in the 1990s at about 1.4 million live births per year. The authorities boast of “measures” taken in this field although they are of doubtful use. Who is going to be encouraged to have a child because of a “maternal grant” of 250 thousand rubles? Obviously, only the very poor, “lumpenised” members of society. How far does such a sum – about $10 thousand – go? That is the price of 2.5 square metres of housing in Moscow, five in the provinces.
Russia does not need to increase the numbers of its lumpen-proletarians. It needs to stimulate births in the active sections of society, in the middle class, and it needs to do this by somewhat cleverer means – for example, by writing down mortgage debt at government expense when children are born: 15% for a 1st child, 30% for a second. 50% for a third. This would simultaneously help resolve housing problems for those wishing to have children and stimulate the birth rate mainly amongst the well-to-do, since they, unlike lumpen-proletarians, are the ones who are able to get mortgages in the first place.
People are physically undefended in Russia and this lack of protection has only got worse under President Putin. We lack protection from illness, we are seriously at risk during and after road accidents, we are victims of crime. Hand-outs from the authorities stimulate births among the lumpen-proletariat while no one is doing anything to increase the birth rate in the country as a whole. So Russia goes on dying out.
Chapter 5
The Pension Crisis
One of the most depressing results of Putin’s presidency is the collapse of the pensions system. A modern pensions system able to cope with the less than simple demographic situation in the country really needed to be created when external events were favourable.
But the pensions reform was a total failure. The government these days only remembers pensioners just before elections by indexing pensions a little. Before the State Duma elections of 2007, Putin as usual gave the government a ticking off and ordered that the princely sum of 300 rubles [$12] be added to pensions before end 2007.
What else the authorities can offer, besides a little indexation, is unclear. The pensions system is going deeper and deeper into deficit. The population is aging and the proportion of workers to pensioners is only going to get worse. As a result, the pension fund is going into ever deeper deficit: the subsidy to cover the Russian Pension Fund’s deficit in 2007 was 88.2 billion rubles. This will rise to 251.4 billion in 2009 (over $10 billion). According to Mr. Batanov,who heads the RPF, up to 1 trillion rubles will be needed by 2015!
Meanwhile, pensions are laughably small, amounting on average today across Russia to less than 4000 rubles [$162] per month. Over the period the Putin-Zurabov pension scheme has been in operation, the ratio between average pension and average salary has decreased from 33% in 2000 to 24% today. By 2018, the average pension will amount to just 20% of the average salary , and by 2027 this will go down to 15-18%. In European countries, pensions amount to 40% and more of average salary.
In a distributory pensions system such as the one we have in Russia, the employed pay contributions to the Pension Fund which then go to pensioners. Such a system can only provide a decent level of pensions if the ratio of employed to pensioners stands at approximately 3:1. Today, this ratio in Russia stands at 1.7:1 and by 2020-2030 demographers believe that it may drop as low as 1:1. Ratios such as these mean that the only way to provide pensioners with a reasonable pension is to have an investment-based pension system. If we continue with the distributive system, pensions will be miserably small.
But the creation of an investment-based pensions system has failed. Payments from it will start no earlier than 2022. At the same time it is likely that a considerable proportion of the invested fund will be lost: the profitability of the invested funds has so far been to all intents and purposes negative. In 2006, the pension fund managed by Vneshekonombank achieved a return of 5.7% while inflation ran at 9% during the same period. Private fund management companies have been achieving returns of 20% per annum but 97% of people did not express a choice and specifically ask for their money to be managed privately and so remain in the default scheme managed by Vneshekonombank.
People simply do not have the information needed to decide how best to have their money managed, do not know anything about how the various management companies work, and cannot make a sensible choice for themselves. Furthermore, it is not always easy, even if one wants to, to transfer one’s money to a private management company. Those who try do so generally have to face opposition in their local Pension Fund office.
If an effective investment-based pension system were to be set up, it would solve other problems as well: capital assets would exist which could be used to invest in projects for the long-term modernisation of the country such as the electricity and power infrastructure and upgrading housing. Competition for investment from the pension fund would lead to more attractive investment offers.
But the reforms went only half way: Vneshekonombank and the Pension Fund were given a monopoly and the civil servants in charge are barely making an effort (by mistake or perhaps deliberately). As a result, the move to an investment-based pensions systems has not been successful.
In February 2007, former minister Zurabov proposed in a letter to the government that the pension reform be cancelled, that the savings-based system be liquidated and the individual savings of citizens be (compulsorily) used to finance the pension fund deficit. As a matter of interest, after his retirement in October 2007, Zurabov was secretly appointed an adviser to president Putin and now has an office on Old Square and receives a salary from the Presidential Administration. Putin must have been afraid to let the public know that he had found a sinecure for the unpopular ex-minister: the ukase appointing Zurabov was not posted on the presidential website.
Russia has thus missed its chance to modernise the pension system during good times and it is steadily moving towards total collapse. The pension fund deficit is growing larger at a time when there is a serious possibility that world oil prices will fall. The investment-based system is out of commission.
There are ways out. It would be possible, as Yegor Gaidar proposes, to follow Norway’s example and create a unitary pensionfund of about a trillion dollars by paying into it the windfall income from a tax on oil exports, from the income on the shares of state-owned companies, and income from large-scale privatisation of state assets. (What the government actually did was mainly to spend billions of dollars buying back assets from Abramovich and other oligarchs.) The Pension Fund should not have to be continually topped up with injections from central funds. Instead a system should be created which actually brings in income itself. If this fund was of, say, a trillion dollars, it would be possible to double the size of pensions even in the fund’s returns were quite moderate.
We need to take more decisive steps towards an investment-based pension system. The Russian pension system cannot be allowed to limp forward to its collapse in 2015-2020. Putin will have gone by that time and it is all of us who will have to rue the consequences.
Chapter 6
The Basman Courts
The Putin era has led people to lose all faith in justice and legal protection and to the collapse of the idea of the supremacy of the law. “We insist on just one dictatorship – the dictatorship of the law,” said Putin in his first speech to the Federal Assembly in 2000.
“Dictatorship of lawlessness” are the words for the situation at the end of his presidency. Russia has become the world champion in selective application of the law to serve the interests of the authorities. Judges are totally subordinated to the executive and wholesale infraction of civil rights is the order of the day in any court case. Russia has earned the dubious rank of first place in the number of applications by its citizens to the European Court of Human Rights in Strasbourg. Over one fifth all applications to this court emanate from Russia and in over 90% of such cases, the state has lost. Unfortunately, Strasbourg cannot oblige our judges to review their decisions; it can only oblige the state to pay compensation to citizens. Our legal authorities therefore feel quite secure in their positions.
The Yukos affair crowned the victory of lawlessness in Russia: the courts were used as a tool for the removal of private property in favour of Putin’s inner circle. During this affair, Russia developed a type of judicial procedure that has come to be called Basman justice “in honour” of the Basman District Court which heard the case, working wonders of lawlessness and displaying total servility to the executive in rendering its decision against Yukos, Mikhail Khodorkovsky, and Platon Lebedev.
As soon as Yukos’ assets had changed owners, the judges immediately reviewed their previous rulings that Yukos owed taxes which it had to pay. After Yukos' main asset – Yuganskneftegaz – passed into the control of Rosneft, the tax claims against it evaporated and the judges “miraculously” began to drop tax claims against the company. In February 2005, the Federal Arbitration Court of the Moscow Assize annulled its previous ruling that over 9 billion rubles of back taxes from 1999 were owed by Yuganskneftegaz. Prior to this, while it was still a Yukos subsidiary, Yuganskneftegaz had lost its case twice. In October 2005, the Moscow Arbitration Court ruled that the Federal Tax Service’s claim for extra tax for the period 1999-20001 amounting to 5.6 billion rubles was unlawful .
The Yukos affair untied hands for the start of the “tax terror” – massive arbitrary tax claims against enterprises at the whim of the tax inspectorate. Enterprises were forced to pay to the government not how much they owed in law but how much the authorities thought right. In most cases, the courts sided with the tax authorities. The presumption that the taxpayer has correctly calculated his taxes, which is enshrined in the Tax Law Code, was to all intents and purposes replaced by a presumption of guilt. It became practically impossible to carry on business in Russia without making unlawful payments of tax. Tax terrorism is used ubiquitously as a stick for the removal of property from “outsiders” for redistribution to “insiders”. This happens at all levels – federal, regional, and local.
This system holds back the development of enterprise in the country, its worst effects being felt by small and medium-scale business which cannot afford to pay bribes to civil servants and judges. This is leading the country to the total triumph of monopolism, a monopolistic alliance between criminal business and corrupt civil servants. How the “state racket” operates to snatch property from entrepreneurs and gift it to organisation linked to the civil service was described in an interview with Kommersant in November 2007 by Oleg Shvartzman, an entrepreneur who had himself taken part in some of the Kremlin’s business projects. Putin’s system was actually devised by Shvartzman. Not just Yukos’ assets are feeling the pressure of the state racket system via the administration, the courts. Others include: Sakhalin-2, Russneft, Nortgaz, Tambeineftegaz, the Kovykta gasfield, United Machine-Tool Factories, Domodedovo airport. The list could be continued.
Legal reform supposed to underpin the Constitutional guarantee of the independence of the judiciary has had the very opposite effect. Independence has turned into dependance. Putin re-appointed the majority of Russian judges and in 2000 successfully maneuvered to have presidential appointees included in the Qualification Colleges which are supposed to be organs of oversight and control and have the right to dismiss judges from their posts. The wording of the laws On the Status of Judges in the Russian Federation and On the Organs of Judicial Organisation in the Russian Federation do not provide clear criteria for what “disciplinary offenses” of judges warrant removal from their posts. On the other hand, however, this lack of clarity makes it easy to get rid of judges who make difficulties and to blackmail the remaining ones. One former judge on the Novosibirsk District Court was removed from her post by the Qualification College, for quote “repeated requests to the authorities in defence of her rights and interests”.
It will come as no surprise that judges strive to make rulings that suit the authorities.
The dependence of the courts on the authorities is yet another reason for the lack of protection of Russia’s citizens. Corporate solidarity with the government – of investigators and prosecutors – inclines the courts towards guilty verdicts and in fact, in many cases, judges simply rubber stamp the indictment documents. In one area, however, the inclination towards guilty verdicts is not to be found – in cases to do with the civil servants involved in the redistribution of assets, and others who by dubious means have amassed billions thanks to their links with Putin. People such as these are in a privileged position.
At the other end of the scale, an ordinary Russian can land himself in prison for stealing a piece of sausage. The world was quite shocked in early 2008 by a case which reached the ECHR: Olga Gavrilova of Nizhny Novgorod, a registered invalid and at the time also seriously ill, was kept for several months in pre-trial detention, accused of such a theft.
The legal system needs to be radically changed in order for Russians to get the guaranteed right to judicial protection and to a fair and just examination of their cases. The country needs to implement the principle of the independence of the judiciary enshrined in the Constitution. This will take not just political will on the part of the executive: to achieve this we will also need an independent parliament, public oversight of the authorities, and, as we have several times said already, freedom of the press and of political activities.
In addition to guaranteed independence of the judiciary, we also need clearer legal definitions of the misdemeanours for which the Qualification Colleges have the right to discipline judges and in the case of the most serious offences – above all corruption and indulging the interests of the executive – a legal basis from removing such judges from their posts. When appointing new judges, it will be important to keep in mind the need to form a new judicial generation that has not experienced collaboration with the law enforcement authorities and which is not bound by corporate solidarity with the authorities. This is the only way in which we will be able to get rid of the judiciary's patently open inclination to convict.
Until these conditions are met, there is not much hope of getting unprejudiced justice in Russia.
Chapter 7
Flouting the Constitution
By refraining from putting himself up for a third term as president, Putin is pretending that he is keen to observe the Russian Constitution. In reality, however, its main provisions were all trampled into the dust long ago. The Russian Constitution has to all intents and purposes ceased to mean anything.
First and foremost, Russia is no longer either a democratic, or a federative, or a law-governed state as per Article 1 of the document.
Russia is no longer a democracy. Putin has deprived Russians of freedom of speech and free access to information. We are talking here of the imposition of censorship on practically all politically significant media – federal television channels, wide circulation newspapers, and the most visited internet sites. Article 29 of the Constitution guarantees every citizen freedom of thought and speech, the right freely to seek, get, transfer, produce and disseminate information by any lawful means. However, the state has seized control of the influential mass media, closed down the independent television channels, introduced shameful blacklists of people who are not deemed suitable and thus not allowed to appear on television, and made it impossible for citizens to get hold of truthful information about what is happening in the country and in the world. People are engulfed from morning until night by a wave of lying propaganda and panegyrics to the authorities that has already caused a gross warping of public opinion. Many seriously believe that without “our dear master Putin” the country will come to an end, even though just nine years ago no one had ever heard of the man. People support “Putin’s plan” although they have no idea what it consists of. Confrontational thinking and hatred of heterodoxy and of “enemies” are being promoted.
Throughout all this, no one is telling the people that their real enemies are those who, during what could have been prosperous years for the country, have made social and economic reforms fail and not used the shower of gold deriving from oil to create a workable army and build roads, have spoilt relations with the rest of the world, and handed over Russian territory to China. Censorship thrives in all the main media although Article 29 of the Constitution totally unambiguously states that censorship shall be prohibited.
Most frightening of all is that the murder of journalists in Russia ( and not one of these crimes has been resolved), first and foremost that of Anna Politkovskaya, has led to self-censorship among journalists as they fear to write about serious problems or to criticise the authorities. It could get them killed. Notwithstanding the upsurge in spending on security and law enforcement between 2000 and 2007 not a single major murder case, of which there were no fewer than in the 1990s, has been resolved.
These are all things that the opposition would have talked about. Putin, however, has put it under a tight political lid. Although Article 13 of the Constitution guaranties ideological and political plurality and a multi-party system and Article 30 promises freedom of to form and participate in opposition unions, such unions are to all intents and purposes forbidden. It is made impossible for independent parties that do not agree with the Kremlin’s policies to register themselves and take part in elections. Anyone who criticises the government can, thanks to a new police law on extremism, be declared an extremist and find himself behind bars.
Article 30 of the Constitution guarantees citizens the right to hold gatherings, meetings, and demonstrations and to march and picket. However, this right is practically impossible to implement in practice. Opposition meetings are banned and violently dispersed by the OMON armed riot police. It has become the norm for people at peaceful demonstrations to be beaten and arrested.
The abolition of the election of governors and also to the State Duma from single-mandate districts struck a decisive blow against the right of Russians to elect and be elected. Previously, Russian could directly elect civil servants at all levels of government – governors, State Duma representatives, and regional Legislatures. Now, practically the only election left is the presidential election. The lists for State Duma representatives and regional parliaments are drawn up in the Kremlin and there is a new fashion for the “locomotives” – well-known people who are put at the top of the party lists – to decline to take up their mandates, allowing others, people who were not known to or voted for by the electorate, to become representatives.
The people, who according to Chapter 1 of the Constitution are the vehicle of sovereignty and the only source of power in the Russian Federation, have been shoved aside and stopped from electing their government by direct vote.
Russia is no longer a federation. The exclusion of governors from the Federation Council, the abolition of elections for governors so that they are appointed instead from amongst candidates proposed by the president, the redistribution of budget income in favour of the centre – these are all innovations introduced during Putin’s rule in order by design to destroy the foundations of federalism in the country. As a result, the regions have been left lacking adequate financial resources for resolving their pressing development problems.
The abolition of the election of governors is a direct flouting of the Constitution. By a decree of 16 January 1996 regarding the organs of power in the Altai Republic, Russia’s Constitutional Court recognised that governors must be elected by direct popular vote. This decree has force of law. Putin, however, has broken this principle, basely using the opportunity afforded by the Russian public’s state of depression following the Beslan tragedy. But what, you may ask, is the link between Chechen terrorists and the election of leaders in Yakutia or Penza District?
By a decision dated 21 December 2005, the Constitutional Court ruled that Putin’s actions, with reference to the “developing socio-historical context”, were lawful. Can it be that “context” is of greater import than legal norms and that the Constitution in Russia is to be interpreted each time anew, depending on the “context”?
That the Constitutional Court should bend over for the executive comes as no surprise. During Putin’s rule, the central principle of the Constitution, that of the separation of powers, has been totally done away with. The principle of independence from each other of the legislature, the executive, and the judiciary enshrined in Article 10 of the Constitution is there because it is vital that no one branch of government should be able to usurp power in the country.
But this principle has been trampled upon. Parliament has been turned into the “legislative department of the Presidential Administration”; its members are appointed by the Kremlin and vote according to the Kremlin’s wishes. The courts are totally dependent on the executive even though Article 120 states that judges shall be independent and shall obey only the Constitution of the Russian Federation and the federal law. Basman justice is dispensed throughout the land. Russia is no longer a law-governed state.
Although point 4 of the Constitution's third article states that no one may arrogate to himself power in the Russian Federation, Putin’s inner circle has to all intents and purposes seized it. Putin has twice broken his presidential oath to obey the Russian Constitution. The Constitution is still formally in place but in fact its main points have been broken. It is precisely because the Constitution has been turned into a worthless scrap of paper that Putin has kept his word that he would not make changes to it.
We need to restore the power of the Constitution in Russia. Restore freedom of speech, of the press, of assembly, of political parties and of an opposition to operate. Restore the right of the people to elect their government, to elect governors, and to elect representatives to the State Duma in single-mandate districts. Restore the independence of justice.
Chapter 8
The Collapse of the "National Projects"
“National Projects” were invented by the government to counterbalance the failure of their reforms in the social sphere. Compulsory health insurance, social security, and education reforms were all discussed back in 2000. They failed to materialise and it was decided to camouflage this failure with noise about “national projects”.
In and of themselves, these national projects are quite sensible. It’s good that the government should allocate at least some money to developing medicine, education, housing, and agriculture. But if one looks at what could really have been done by the government, the pittance allocated is mere crumbs off the table. In 2006, just $6 billion were made available. This rose to $10 billion in 2007 with $12 billion planned for 2008. Sibneft was bought from Abramovich for more than the yearly allocation to all the “national projects”.
Despite all the noise made about the “national projects”, the proportion of the budget going to health, education, and the social services has actually been falling in recent years. In 2007, expenditure planned for public health and education amounted to 9% of the federal budget. For 2008, the three-year budget for 2008-2010 is allocating 8% of the federal budget and this will go down to just 7.5% in 2009.
On the other hand, the government is planning to direct 16% of the federal budget to state management and security. Under Putin, we have seen an explosive growth in the money spent on the bureaucracy and the special services: in 2000, these cost the country $4 billion but $39 billion will go to them in 2008 – 3 times more than will be spent on all the “national projects”!
The special services and Abramovich are Putin’s real “national projects”.
In essence the “national projects” represent the replacement of systematic reform by random, one-off, modest injections of cash which do not really solve anything. For example, only a quarter of the funds allocated to the “Health” national project will be used to purchase diagnostic equipment for municipal polyclinics and the building of new high-tech medical centres (of which only 15 are planned for the whole country); the rest is to be spent on general expenses. It is good that doctors should get salary increases and that new equipment be bought for medical institutions. But it was only the salaries of general practitioners and junior medical personnel that were raised, not those of the specialists who actually do the most when it comes to curing people. The purchasing of medical equipment is being carried out in a random and selective manner. Instead of creating a working medical insurance system and defining the compulsory minimum levels of medical care that citizens can expect, the government wants to fob the people off with quick little cash injections.
It will come as no surprise that the “national projects” have disappointed.
The “Health” national projectDespite the fact that the lion’s share of the money allocated to all the “national projects’ has been to this one ($5 billion of the $10 billion total for 2007), the quality of health care in Russia has not improved. Data collected by the Levada-Centre shows that only 14% of Russians are satisfied with the health care they receive while 72% think that the quality of health care in Russia has either remained static or deteriorated. There are figures to confirm this: according to data from Rosstat, sickness rates per 1000 of population have been on the increase since the year 2000. This predicates the persisting high death rate (see the chapter on Russia dying out). The system for financing cheap prescriptions is bankrupt and medicine prices continue to rise. Medical care in Russia is a choice between atrociously low quality or extremely expensive.
The “Affordable Housing” national projectHousing has become less and less affordable during the runtime of this project. Back in summer 2005, the cost of a standard 54m2 flat equivalated to 4.3 years’ average income of a family of three . Now it’s 5.3 years. The project should be renamed the “unaffordable housing project”. According to Rosstat data, the average price of a square metre of housing on the resale market has more than doubled during the existence of this national project, from 21 thousand to 45 thousand rubles from summer of 2005 to today!
The reason for rising house prices is not because the government has allocated too little money to construction or that the president did not give the civil servants a needed shove at the right time. It is simply that the government has not been able to implement an effective strategy to combat the Dutch disease of money flowing into the country. The avalanche of petrodollars has led to a bubble in the real estate and share markets Flats are being bought by investors and prices are being driven up. The monopoly of the civil service mafia in the construction and land markets prevent new investors from entering it, slows construction, and artificially drives prices in an upward spiral. The lack of clear rules for the allocation of building plots and the fact that this area is dominated by municipal mafia clans acts as an important restraining factor in the house-building industry. Even though the rate of new housing construction has, according to Rosstat data, reached 10-14% per year, this is in fact a very modest result: were the housing market more open, decriminalised, and competitive, the rate of new housing construction could have reached 25-30%.
Another area in which monopolies dominate is that of building materials production, in particular of cement. The monopolisation of the building materials market has led to a price explosion: Rosstat figures show that the price of cement rose by 35% a year between 2003 and 2007 and in 2007 alone by 67%. This situation is yet another result of the government’s lack of any competition policies.
The situation in public housing is particularly bad. The reform of public housing management failed: competition was to have been introduced but instead became another civil service mafia monopoly. As a result, utilities and services prices continue to rise and no improvements have been made to tired and worn-out buildings, not to mention services. Between 2000 and 2007, utilities and services prices were raised by a total of 850%, over 33% per year. The proportion of their income spent by those who live in public housing has risen from 4.6% in 2000 to nearly 9% (Rosstat’s figures).
The “Education” national projectEducation reform has consisted of a series of failures. The introduction of the Single State Exam needed to eradicate corruption in the form of “supplementary private tuition” when applying to enter prestigious institutions of higher education has been to all intents and purposes a failure. Corruption in higher education is flourishing: the average bribe to get into into a Moscow college is now anywhere between $5 and $10 thousand. UNESCO has estimated that the total amount paid in bribes for entry into Russian higher education exceeds $500 million per year. Our colleges and universities have still not managed to find an effective system for producing the specialists needed by the labour market to replace the old Soviet system whereby one was assigned to a job on graduation. Graduates are now frequently unable to find employment.
Education policy has all these years devoted too much attention to the problems of higher education while the troubles of pre-school, primary, and secondary education have been all but forgotten. Our kindergartens are nothing to boast about either: there is a shortage of about 1 million kindergarten places. This leads to corruption: the bribe for a place in a municipal kindergarten in, say, Moscow, can reach several thousand dollars! The quality of school education has dropped sharply. Recent specialist studies have concluded that the real average mark of school leavers in such subjects as Russian language, maths, and history should not be more than a mere “Pass” and certainly not “Good” or “Excellent”. Secondary polytechnic education is in a state of near total prostration.
The “Agro-Industrial” national projectNot much was allocated to the development of the agro-industrial complex, just $1 billion per year, and most of this has been frittered away in subsidising credit interest for agricultural producers.
This particular measure was a good one, but only needed the once. It would have been far better for the government to devote its efforts to improving the infrastructure in the countryside, building roads and improving energy supplies (and not at Gazprom’s usurious prices – rural consumers are forced to pay 100-200 thousand rubles to have gas pipes run to them – but for an affordable price). Monopolism needs to be combated and a competitive market for agricultural produce created. There should be support for developing exports. Our agrarian sector, including processing, should be made attractive to foreign investors. Access to finance should be made easier for agricultural producers by means of a special infrastructure for farm credits. Help should be available for leasing equipment and for going over to more modern means of agricultural production.
The vital task of creating a competitive environment for the sale of agricultural produce has not even been broached. As a result small-scale producers and farmers cannot influence prices paid to them and do not have proper information on the market situation: big traders and agroproduce processors have a buyers’ monopoly and are able to trade unfairly.
Because the agro-industrial complex has been accorded no systematic attention, the growth rates for Russia’s agriculture are the lowest in the CIS at just 2%. Forty-five percent of Russia’s food is imported although even as recently as 2004 the volume of imports stood at 20%. The situation is still worse in larger cities where up to 70% of foodstuff is imported.
Putin’s “national projects” have resulted in no miraclesA sad fate awaits the “national projects” once the oil money has all gone. What Russia really needed instead of “national projects” was to concentrate on real social reforms, to start spending money on public health, education, the army, and the infrastructure – instead of on the special services and Abramovich. And instead of producing some weird “successor” out of a hat – to elect as leaders responsible politicians unsullied by corruption, ready to take action against the monopolies, and prepared to carry out properly thought out policies instead of indulging in slapdash monetary handouts.
Chapter 9
Surrounded by Enemies (but not China)
Under Putin, Russia has managed to quarrel or get on bad terms for no good reason with most of the countries around it. It has no friends or allies left. We are moving at an ever faster pace towards being one of those countries that is excluded from the taking of international decisions.
Russia’s relations with all the Western countries have deteriorated for no good reason at all. The West is our natural partner and is open to the idea of cooperation with Russia. No matter how hard the opponents of integration with the West try to turn us into an Asian country, Russia remains an organic part of European civilisation. The Western path of open democratic society and market economy is the only good way for us to develop along as it ensures a high standard of living for the people (the oil-rich Arab kingdoms with the tiny populations do not count). The Western democracies are what threaten Russia the least. Those countries have never attacked any other democratic country. The government believes that our main opponent is the USA although that country has never attacked Russia and has been our ally in every one of our wars. The governments of the West are playing the lead part in the establishment of the new world order which has been taking shape since the end of World War II. The Marshall Plan’s restoration of war-ruined Western Europe, which turned it into flourishing example for the rest of the world, was the fruit of the transatlantic alliance between Europe and the USA. Russia’s strategic plan should be to be to join this alliance.
Not everything is as simple in our relations with the West. There is much to complain about in their actions – for example, how in the 1990s they forced a starving Russia to take upon itself the Soviet debt of over $90 billion, and how in recent times we have seen the War in Iraq and the deployment of American anti-missile missiles in Europe.
President Putin, however, has completely forgotten how to use the instruments of civilised dialogue and gone over to pure confrontationism and provocations. For example, the USA announced back in 2001 that it would withdraw from the Anti Ballistic Missile Treaty but from that time on no move has been made to enter into negotiations and sign a new one. Ever stubborn old Soviet leaders like Brezhnev and Gromyko would have done that. Putin just allowed things to slide. Now the hands of the USA are untied and it us who have to deal with the consequences of the deployment of American anti-missile missiles in Europe, the opportunity to have reached and agreement with the American in 2002-2005 having been missed.
Putin has tried to cover up his diplomatic failures by making use of provocations: energy blackmail, provocative bomber flights up to NATO’s frontiers (as if it would have been impossible to carry out training flights over international waters), hysterical anti-Western propaganda. Around the world, it is becoming normal to fear Russia, to look for ways to protect against ‘the Russian threat”.
Why do we need this confrontation? No one in the West is looking to go to war with Russia and we cannot afford one anyway. An arms race will ruin Russia, a country accounting for 2% of world GDP, when the USA’s GDP accounts for 27% [1](America’s economy is over 10 times the size of Russia’s). A new state of confrontation can only be maintained at the cost of reduced pensions, smaller salaries for teachers and doctors, and the introduction of ruinous taxes on businesses.
Cooling relations and Russia’s slow slide into isolation reduces opportunities for Russians to travel freely abroad. It is harder for our citizens than those of any other European country to obtain, for example, a Schengen visa. Meanwhile, the citizens of democratic countries travel to and from each others’ countries without any visas at all. Incidentally, our leaders’ anti-Western rhetoric does not stop their families from living and studying in the “enemy” states. For example, the daughter of Minister of Foreign Affairs Lavrov, who has distinguished himself in the field of aggressive anti-Western declarations and been a major contributor to the worsening of relations with the United Kingdom, does not study in Russia but at the London School of Economics [2].
The current confrontation with the West is the sorry result of non-professionals with Soviet instincts who do not know how to start a reasonable dialogue coming to power in the country, of the degradation of our diplomacy. Putin quite fails to understand the nature of the world’s current feelings about Russia. Official propaganda spreads the idea that Russia is no longer respected these days. That is not so. We have ceased to be respected and are feared instead, as people fear the psychologically unbalanced. We have stopped being considered thoughtful, reasonable and sober partners. Who knows what tricks Putin will get up to next – another energy embargo, more bomber flights? This is not authority, this is just fear. Russia does not need this kind of “popularity”.
Russia has quarreled with all its CIS neighbours. Putin has to all intents and purposes destroyed the Commonwealth. Gross interference in the Ukrainian elections, the embargoes against Georgia and Moldavia, energy blackmail in Ukraine, Belarus, and the Baltic countries, blocking Central Asian oil and gas from access to international markets. We have been in one conflict or other with all the post-Soviet countries. Russian influence in the post-Soviet sphere has fallen sharply. Given our colonial attitudes, it is not surprising that many of our former socialist-camp neighbours have looked to the West for aid and support.
Putin’s “integration projects” have not been successful: nothing has come of the Single Economic Area or of the Customs’ Union. One after the other, the post-Soviet countries have overtaken us and joined the WTO. Russia’s best friend, Kazakhstan’s President Nazarbayev travels to Washington, Brussels, Peking, with promises of cooperation. Azerbaidzhan has declined to buy Russian gas and to use our pipelines to transport its oil. It is also preparing to join NATO. Relations have cooled even with Armenia, for whom we raised gas prices and which cannot but suffer too from Putin’s transport blockade of Georgia.
Yet an alternative strategy for Russia exists. We need to become the guarantor of the spread of freedom and democracy in the post-Soviet arena, to be setting the standards for democracy for other post-Soviet countries to follow, to refrain from colonial policies, to build our relationships with our partners principled equality and not by trying to engulf the whole territory of the former USSR in a Gazprom monopoly. Only in this way can Russia become not only the greatest authority in the CIS but an effective defender of the rights of of the Russian-speaking minorities in those countries.
For now, however, our neighbours are busy building barriers against us.
Back in 2000, Russia was on reasonable terms with nearly all the world’s countries. Today we are ringed by enemies. The only exception to this is China.
Putin’s policies towards China should rightly be called “capitulatory”. Under Putin, Russia’s military-industrial complex has mostly worked to arm the Chinese. Russia has become the top supplier to China’s armed forces as they rapidly grow in might. We have sold minesweepers, aircraft, submarines, air-to-air and ground-to-air missiles to China. Putin has even allowed Chinese military units into Russia to carry out military exercises: 1600 Chinese servicemen entered Chelyabinsk district in 2007 for this purpose. With Putin’s connivance, China has hastened to extend its influence in Central Asia, leaving Russia sidelined. The Central Asia countries are building new oil and gas pipelines to China, developing transport links, and getting massive financial assistance from the Chinese government. As for Russia, “higher” geopolitical considerations prompt us to sign loss-leading contracts for the sale of oil and gas to China at prices several times lower than world prices.
Putin has made major territorial concessions to China. Russian territory has been ceded to another country for the first time since Nikita Khrushchev. By a 2004 treaty, China was given two large Russian islands on our borders, Bolshoi Ussuriisky Island and Tarabarova Island. The area ceded is nearly 340 square kilometres. A massive building project for a town of 2½ million inhabitants is today underway on Bolshoi Ussuriisky Island. Khabarovsk can clearly be seen from the island, which is now set to become an outpost of the Chinese economy and cultural expansion in the Far East.
China represents a real threat to our country. Unlike the countries of the West, China does lay open and unconcealed claims to Russian territory. At the very time when former US Secretary of State Madeleine Albright was being falsely reported as having said that “Russia doe not rightly own Siberia” (a Russian general admitted in an interview with Rossiiskaya Gazeta in 2006 that the quote had been invented), Chinese politicians were openly commenting that Eastern Siberia and the Russian Far East had been “unfairly seized” by Tsarist Russia. Chinese history and geography schoolbooks teach children to think in this way. Maps with our Eastern territories coloured in the same colour as China are on free sale in the country.
Putin and other representatives of the pro-Chinese lobby try to sweet-talk us with statements that “China does not present a danger” to Russia. These assertions are without substance. On the contrary, any analysis of the real situation can only conclude that while the Communists remain in power in China, that country will be a direct threat to our security. We have a real armed conflict behind us already – in 1969, one resulted from Chinese claims to the Daman Island. China’s armed forces are already outnumber ours and they out-arm us in all forms of weaponry except strategic. China today has about 700 tactical rockets with a range of 300-600kms which can easily be transported to our border and used to strike Khabarovsk, Komsomolsk-on-Amur, Vladivostok, Chita… And we cannot begin to compete with China in numbers of men we can mobilise in the event of a military conflict.
In 2006, the Chinese army carried out large-scale exercises in the Peking and Shenyang military districts to try out a strategic advance operation in which troops were to advance over 1000 kilometres overland in large numbers. Against whom could China be considering such an operation? Clearly not against Taiwan, Japan or the USA: maritime landings would be needed for such operations. Military specialists could only see in such an exercise preparation for a land operation on Russian territory.
Putin has signed an agreement creating a 200-kilometre troop-free zone along the frontier that is only to China’s advantage: in Eastern Siberia and the Far East all our infrastructure and communications are located along the border with China and this leaves them undefended. Our armed forces are not prepared for an armed conflict with China. The Ministry of Defence’s main scenario for the Far East theatre, which our army does train for, is one in which a maritime descent force (from the US or Japan) is repulsed. We are simply not prepared to handle a large-scale land operation by Chinese forces using air and rocket support.
Russia’s armed forces are as unready to repulse possible aggression from the Southeast as it was unready to deal with aggression from the West in 1941.
One would like to hope that there will not be any confrontation between Russia and China at any time in the future. But who knows what the Chinese Communists have in their minds. “Conceal your true intentions”, Deng Xiaoping used to teach. We need to be reliably defended from a potential Chinese threat. Under Putin, however, all we have seen are some very one-sided concessions to China that a very much not to our advantage.
In a recent interview he gave to American journalists, Putin accused the Russian opposition of playing into the hands of foreign powers. However, his own actions and the fact that he has permitted the abandonment of Russian interests unprecedented in the last 50 years or so make him look like he is a Chinese agent of influence in Russia.
We gained nothing from our unilateral concessions to China. Our government’s aggressive and unconstructive behaviour is leading to Russia’s exclusion from the processes whereby vital decisions are reached by a wide circle of countries worldwide. We have quarreled with the West but we are not welcome in the East.
This is the consequence of stupid and unprofessional foreign policies. While defending its interests, Russia should not forget that one still needs to cooperate, to support good-neighbourly relations with other countries, and to work jointly with others to resolve global problems. The confrontation with the West that has been forced upon us, neocolonialism, and capricious foreign policy lines must be abandoned in favour of a wise and balanced approach to foreign affairs, of a sober evaluation of the real threats facing Russia, and a review of the policy of backing down to China. It is only if we act in this way that Russia will truly be respected.
Chapter 10
Worsening Inequality
Russia is a country of the most massive inequality. This can be seen everywhere and in many different things. And this inequality – between the regions and between people – is only getting worse.
The average nominal monthly wage in Moscow is 20 thousand rubles. In places rich in natural resources, for example the Khanti-Mansiisk, Yamal-Nenets, Chukotsk regions and the Nenets autonomous district, it is 25-30 thousand. Real incomes in Moscow are of course considerably greater than that. At the same time, the average wage in Dagestan is 4500 rubles and a bit more – 6-8 thousand rubles – in the Central Black Earth region. In fewer than a third of the Russian regions is the average over or equal to the average wage for the whole of Russia (11 thousand rubles per month); in all the rest of the country it is lower.
At the same time as in 4-5 regions of Russia people are now living no worse than in developed Western countries, in the rest of the country they are living on a par with Mexico. One of the reasons for this differentiation is Putin’s policy of budgetary colonialism. Back in 2000, government expenditure was divided 50/50 between the centre and the regions. Now it is 65/35. Another reason is state monopoly capitalism, the model whereby the country’s natural resources are exploited, that has taken shape in Russia. Smaller businesses and those not involved in raw materials in areas without such resources are unable to develop – because of the high barriers to market entry maintained by officialdom and the monopolies they have links with, because of the government’s tax terror policies, because of the risk of losing what they own, and because of the poorly developed infrastructure.
To overcome this differentiation, it is vital that support be given to economic activities by the people, to developing small businesses, to involving as wide a circle of people as possible in entrepreneurial activities. This is the only way to make a meaningful number of Russians if not rich, then at least well-off.
During Putin’s presidency, however, the number of small enterprises has practically not risen in Russia. There are about one million of these today. That is less than 7 companies per 1000 population. This should be compared to the EC average of 45 per thousand, 50 per thousand in Japan, and 75 per thousand in the USA! In Western countries, about 50% of the working population is to be found in such enterprises and in Japan nearly 80%. Only 9 million Russians – 12% of the working population – work in small businesses. And these small businesses make a proportionate contribution to our GDP. This may be compared again to the USA, where the contribution by small businesses to the GDP is 50% and to the Eurozone where it is 60%. It should come as no surprise that people live more richly and in those countries and that they have a large middle class, which is not the case in Russia.
As a result, the people who get rich in Russia are those who are close to where the earnings from natural resources are to be found. Some crumbs do fall off the table. And while plain people’s incomes have risen, they have not risen in anything like the way the wealth of the oligarchs has. The average wage in Russia has risen from $80 per month in 2000 to over $400 today. Over the same period, however, Putin’s Russia has beaten all records in growing numbers of billionaires. In 1999-200, Forbes List carried not a single Russian. By 2007 there were 53 and their total wealth amount to $282 billion.
First place went by rights to Roman Abramovich with $18.7 billion. We now rank third in the world for number of billionaires after the USA and Germany.
There’s “Combat the Oligarchs” for you! Under Putin, they have only become richer. And those who were able to build a tight relationship with Putin, to successfully sell Sibneft to him, have become richest of all. Bear in mind also that the wealth of top officials and those close to them – secret owners of property, of Swiss oil and gas trading companies, beneficiaries of a myriad offshore trusts, of ties with Putin & Co. – are beyond the scope of Forbes List and remain invisible.
This is not a call to arms against the billionaires. Russia needs billionaires. It is a sign that a market economy has taken shape and that large national companies have been created. However, the explosion in their numbers and their wealth in comparison to the modest enrichment of the rest of the country is more a sign that all is very much not well with Putin’s Russia and that the widely advertised battle against the oligarchs is just a propaganda slogan to cover up the government’s support for certain oligarchs.
We also think that a very different set of economic policies could create far more opportunities for many more Russians to get richer. A climate favourable to enterprise, open and free competition, reasonable conditions for business development, especially small and medium enterprises, independent courts of law, guarantees for property rights – these are the things which would help enterprises to develop in a big way and, just as importantly, help the middle class to develop. In Russia too many assets are concentrated in the hands of big business and a wider range of the population is unable to start up because of the high barriers to market entry – fruit of the alliance between the monopolies and corrupt officialdom.
The recipes for solving these problems exist. However, in order to be successful in this, the criminal-monopolistic economic system that has taken shape under Putin must be dismantled.
Chapter 11
The Economic Bubble
We are all supposed to be over the moon at the success of the economy under Putin. In reality, however, it is not doing that well. Given today’s oil prices, our GDP growth has actually been remarkably modest. With the windfall from oil that our economy has been enjoying, we should have been seeing growth rates of 10-15% percent like our oil-exporting neighbours Kazakhstan or Azerbaidzhan. Even oil-importing countries such as China and India, who pay today’s sky-high world prices for their fuel, have been growing at 8-10% a year. Our 6-7% looks modest against this background. Oil-rich Russia’s GDP growth rate is one of the lowest in the CIS. Back in 2000, our GDP growth rate was the second fastest in the CIS. By 2007, we ranked eighth.
Putin has not brought about even this GDP growth. Russia’s economy began to grow in 1997 and continued to do so after the crisis of 1998. In 1999, the growth rate was 6.4%, the same as the average growth rate under Putin. It would be weird indeed if we were unable to make our economy grow at such a rate at a time when oil prices are so high. It is notable that it is mainly the private sector of the economy which has seen any growth; the state companies have shown very modest results indeed.
For the economy to have developed faster would have needed structural reforms, the establishment of a climate favourable to investments in new projects, and a modernisation of the economy. We have furthermore failed to convert what we have achieved into a real economic modernisation of the country and revival of production capability. Instead of modernising, the Putin régime has devoted its attention to dividing the spoils, thus missing this favourable reform opportunity. We may not get another such chance again. We will evidently be forced to make painful social transformations (for example the pension reform we have already mentioned) when oil prices have fallen again.
Investment in production has slowed down as a result of the tough way private business is dealt with. Instead of creating new assets, companies have preferred to invest in real estate. A two-room flat built in Soviet times on the outskirts of Moscow now chnages hands for $200 thousand – a price inflation caused by investors buying up properties as capital investments. Gazprom’s capitalisation rose from less than $10 billion in 2001 to $350 billion today, despite the fact that its gas production has not increased while its costs and debt have risen threefold as it prefers to buy assets rather to to bring new deposits on line. What is this if not a bubble, a bubble that may burst with a very big bang?
Debt accumulated by corporations for the purchase of assets instead of investing in production now exceeds $400 billion and is nearly equal to the state’s financial reserves. The major borrowers are Gazprom, Rosneft, and the state banks. Should any of these corporations default, it is going to be the Russian public which will have to pay the cost as state reserves will be rapidly frittered away on keeping the inefficient state companies afloat.
Government expenditure, first and foremost for the benefit of the growing state apparatus and special services, has of course risen faster than GDP growth. Planned government spending on its own management, national security, and law enforcement for 2008 stands at $39 billion (compared to $4 billion in 2000). This is three times as much as has been allocated to the “national projects”. There are now over 600,000 civil servants. Government efficiency has nonetheless not improved; crime rates remain high and are in fact higher than in the 1990s.
The government policy favouring the mass creation of state enterprises has only increased the appetites of the recipients of government money. These corporations cannot compete on the open market without state aid. Pouring government money into the economy has already resulted in a burst of inflation which has hurt plain people (inflation is no abstract economic phenomenon). Consumer inflation of up to 15% and more means that prices are rising painfully fast. The monopolisation of the economy under Putin – the inevitable result of civil servants protecting “their” companies and hindering competition – has only poured oil on the flames. World Bank experts have tried to estimate how concentrated ownership has become in Russia and concluded that state companies and the 22 largest private financial and industrial groups control nearly two-thirds of industrial turnover. Over half the banking system’s assets are controlled by banks affiliated with the state or powerful officials. Of these, about 45% are controlled by just 4 banks: Sberbank, Gazprombank, VTB, and the Bank of Moscow.
And this is what they call the Putin “economic miracle”?
We need another kind of economy. We need a competitive economy with low barriers to investment, low levels of government involvement in corporate management and spending. We need alongside that a strong and effective state regulatory system, above all to control monopolies, aimed not at sheltering friendly businesses and dividing the spoils but at ensuring all the players in the market abide by civilised rules and compete fairly.
It is vitally important that small businesses develop in Russia. This was covered in greater detail in the chapter on worsening inequality. But small businesses are prevented from developing in Russia by administrative barriers, corruption, and the monopolism of commercial organisations with protection from officialdom. The barriers hindering the development of small businesses should be dismantled. Of the many things that could be done to help them, the most important is to combat corruption at all levels of the government and to de-monopolise the economy.
Government money should be used not to help state corporations and to inflate expenditure on the government apparatus and special services but on public health, education and the army. There should be the strictest of oversights over government spending. We need to sharply reduce state involvement in the economy and go back to arranging honest privatisations in the way we began to practise in 1997-2000. Businesses need guaranteed property rights, working laws, and independent courts of law.
It is entirely within our power to build such an economy. But to do so, we must refrain from making use of the services of Putin and his circle.
Chapter 12
Conclusion: The Alternative
The picture we have painted of developments in Russia today is a fairly gloomy one. Sadly, it presents the truth. This can be seen by anyone who does not allow “hip-hip-hurrah” patriotic incantations about “reborn” Russia “rising from its knees” and “gaining strength” to taint a sober analysis of current events.
The potent anesthetic of 100-dollar oil will wear off and the serious illnesses from which our country continues to suffer will make themselves felt again. We will then come to understand that the corrupt state-monopoly capitalism à la Latin America built up by Putin has enabled only the oligarchs close to Putin to flourish and driven the rest of us into the third world. Being intoxicated, Russian society does not comprehend. But once the rush has passed, only this banal truth will be left.
Might we not try to avoid the pains of going cold turkey and make a start now at building a free and democratic Russia in which citizens will feel secure and have real freedom to live and build their lives? A Russia standing on foundations of law and order and not of Putinite “quiet agreements” and corruption? A modern and efficient economy instead of a bubble full of petrodollars?
Maybe it’s time to wake up and get on with things?
Of course there is an alternative to Putin’s winter sleep. First and foremost, we need to understand what sort of Russia we need and want. We deserve to have a very different country – modern, with a stable economy, well-developed infrastructure, and well-off entrepreneurial citizens engaged for the most part in small and midsize businesses. We need to have rich folk in Russia but not just billionaires with ties to the seats of power. We need as many people as possible to be well off. We would like all those who want to work and make money to be able to do so with let or hindrance.
We need a healthy Russia whose citizens have the right to a healthy lifestyle and quality medical care. We need an educated Russia whose children have the right to a decent education and to apply for places in any college without paying bribes and without being dunned for sub-rosa fees in the form of “private tuition”. We need a safe Russia where we do not live in fear, where the odds are low that we we die at the hands of a killer or in a car crash. We need decent roads. We need a decent government which doesn’t rule the people but serves them. These things have already been achieved in dozens of countries that have chosen the liberal democratic path – Europe, for example. Russia needs at last to become what it has the right to be: a successful European country in which its people have decent lives.
How one goes about building a society of this kind is perfectly clear. First and foremost, the police state has to be dismantled and human dignity returned to the people. We need to bring back into our lives the rule of law, freedom of speech, and the genuine right to elect and be elected. Russia needs an independent judiciary in order to provide the law’s protection to all, both ordinary members of the public and entrepreneurs. We need to restore federalism by returning to the regions political power in the form of governors elected by direct suffrage and allowing them the funds they need to implement social programmes and to improve their infrastructures. Doing this will change the atmosphere in the country, take away the apathy and the fear, and lead the people to take civic and business initiatives.
We to to breathe new life into the reforms started in 1997, some of which continued until 2000. These – macro-economic stabilisation, resolution of the debt problem, tax reduction, revitalisation of the law – were the reforms which would have normalised life in the country. But catastrophically little was done and the small amount which was positive was discredited by the crushing of democracy, of the law, of the independence of the judiciary following after which further damage was done when the reforms were halted, when the “state rackets” took hold on a large scale, and when entrepreneurs were deprived of their property.
These reforms need to be taken to the end. We need to do this fast, while we have the money to do so. The prospect that there will be a world recession means that we have very little time in which to carry out reforms during a favourable period. Most importantly, we must spend more – while the state’s financial situation is still healthy – not on the government apparatus, the special services, and payments to Abramovich, as Putin has been doing, but on public health, education, the army, and the roads. We can reduce spending on officialdom and commercial projects to double the funding for public health and education. The whole structure of state spending needs to be reviewed and reorganised.
One must, however, spend sensibly: we do not want the systematic embezzlement of state funding to continue. Furthermore, we should spend not so much on current needs but rather on the long-term infrastructure for the future and on profound transformations. We need to reform the military and the public health system (above all by the creation of an efficient compulsory medical health insurance system to provide the people with a basic standard of quality health care).
Reforming the pension system is also urgent and vital. This will mean cleaning out stables of Aegean proportions left to us by Putin. First and foremost, we need to set up a universal pension fund and allocate to it the state’s shareholdings in major companies and the surplus income from oil exports and the privatisation of state property. Investment income from these funds will then be used to pay pensions. The next stage will be to go over decisively to a competitive pensions savings schemes. These measures will enable Russia to create an effective pensions system which will provide people with a decent pension of around 40% of their average wage.
Russia needs a modern, compact, action-ready, and well-equipped army. We have already listed what needs to be done if that is to come about – dismantle the corrupt and opaque arms and equipment purchasing system and replace it with a new, efficient, competitive one. We need to buy arms and equipment for our own army first, not sell to other countries. Russia’s military-industrial complex must be made to pull itself together. We need to man our army with contract soldiers. They should be paid a decent wage and officers with families should be provided with housing.
Russia needs a modern economy built, on the one hand, by private enterprise and private investment, and on the other by efficient government involvement in the provision of government regulation, particularly with regard to controlling monopolies and preventing them from cornering markets. In short, we need capitalism and capitalist competition. As yet, the Russian people have not had the opportunity to experience for themselves one of the main benefits that capitalism has to offer – competition. There have been a few examples: for instance, in the early 2000s, we were all able to reap the benefits of the vicious competition between the various cellphone operators when prices fell rapidly and service quality rose.
The same could be happening in all sorts of others areas. However, competition levels in the Russian economy remain unacceptably low because large monopolistic companies (with, as a rule, links to the government and/or particular officials) dominate everywhere. The state should get out of business and leave it to the private sector. The latter has already proved that it knows how to invest and make the economy grow: between 1999 and 2007 over 90% of economic growth derived from private companies.
The state should provide business with reasonable conditions in which to operate by protecting property rights and reducing bureaucratic and monopolistic barriers to market entry. Business should be provided with a set of operable and predictable laws that can be fairly defended in independent courts of law.
We need to create the conditions needed for small and midsize businesses to grow and create more jobs, making as many people as possible active. The right of each and every person to work to enrich himself and his near ones must be made real. We do not need a poor and unequal Russia but a rich one so that we can at last have a middle class, a large swathe of the population earning a decent living.
The non-market sector of the economy that is still left over from the post-Soviet years and continues to be a burden on the economy should be brought into order on market principles. This refers in the first instance to such infrastructural monopolies as energy supply, gas, and the railways which all get billions in subsidies from the state. Public housing is another sector. Together, they are acting as the main brake to a faster-growing economy. It is time the unholy alliance between these monopolies and corrupt officialdom was terminated.
Privatisation must be made honest and transparent.
The income from privatisation should in the main be allocated to the universal pension fund. Assets recently embezzled from the state (Gazprombank, Gazprom-Media, Sogaz, Gazprom shares) should be recovered through the courts and returned to state ownership.
We do not want to speculate about “resource dependency”, an issue that began to be raised as far back as when there still was a CPSU. Too much talk on this issue has created the false impression that natural resources are a curse when in fact their careful exploitation can lead to a flourishing economy – as may be seen from the examples of Australia, Canada and Norway.
The problem is not that the natural resources sector is too developed in Russia. It’s all to the good that it is there and that it works. The problem is that other sectors of the economy are not developing enough. We are not referring so much here to the processing industries (we need to change our outlook and think about a post-industrial economy) but rather to technological and other white-collar industries. Russia needs to put a stop to its brain drain if these sectors are to develop. Pouring money into nanotechnologies is not the answer. We need talented people to stay in Russia, not go off to become nerdy billionaires somewhere in the West. And for that to happen, it must become safe to live it Russia. In a country where one can buy databases of personal incomes from vendors on street corners and where these databases can and do get into the hands of criminals, capable people will of course prefer to leave the country.
We need to keep good brains in the country if we want to build a white-collar economy in Russia. To stop the brain drain, the government must turn to the people and become nicer.
Russia needs a reform of its bureaucracy. And not just another ministerial reshuffle but a real qualitative transformation: the motivation of civil servants must change (the standard must be results), and a massive change of staff – new people without links to business and not infected with the virus of the previous bureaucratic mentality must take over. We need to conquer corruption once and for all (and have described above how to set about this). It is vital that the deals done under Putin should be fully investigated and that those guilty of this unprecedented looting of the state should be punished.
We need to resume normal relations with the rest of the world. A return to policies of cooperation instead of confrontation and aggression will be massively to our country’s advantage. Fields in which Russia will be able to exert its influence will increase greatly. Barriers will cease to be erected against us. Russians will be able to travel freely around the world.
The world needs to see another Russia: not an aggressive and underdeveloped country but the clever and modern one it has every right to be. And we can do this. The government could have done a lot of what was needed for this between 2000 and 2007. It is precisely for having missed these favourable opportunities that we condemn the Putin régime.
The situation can be put right. But the government we have in Russia today – irresponsible, unprofessional, dishonest – is not the one to do it. The current state of affairs in Russia will change under only one condition – if Russians take the fate of their country into their own hands. If, as in Viktor Tsoi’s lyrics, “we do it ourselves from now”.
About the Authors
Boris Nemtsov is one of Russia’s best-known democratic politicians. Fame, however, is not the point: Boris is rightly considered one of the most sincere and concerned politicians in our country and someone who is not afraid to opine openly about what is happening in Russia.
Before taking up politics, Boris, who graduated from the radio-physics faculty of the Lobachevsky State University in Gorky, worked in the field of theoretical physics and astrophysics, studying the physics of plasma and investigating acoustics and hydrodynamics. He began his active political career in the 1980s when he campaigned against the plan to build a nuclear power station in Nizhny Novgorod. He was elected to the Supreme Soviet of the RSFSR in 1990.
Boris Nemtsov has a unique grounding in government and public politics. In the 1990s he was an effective governor with proven public support; he was re-elected four times by a considerable majority of votes. In 1997-98, he was made deputy prime-minister and minister of fuel and energy. It was then that he began his important systemic reforms of the economy, in particular of the infrastructural monopolies and of public housing management. He was the author of important legislation regarding state purchasing and programmes on housing for service personnel and management training in foreign countries. He proposed many reforms to transform Russia into a modern democratic state with an efficient economy. These were later, in 2000, to form the basis of the country’ssocioeconomic reform programme, the implementation of which was later derailed by president Putin.
In 1997 Nemtsov defended Gazprom from incursions by Vyakhirev and Berezovsky and prevented it from being privatised for a pittance. His other achievements also include: drawing up (jointly with Irina Khakamada) a simplified tax code for small business and the establishment of rules for equal access to Gazprom’s pipelines by independent gas producers.
In 2000 - 2003, Nemtsov headed the Union of Right Forces democratic party and fraction of the same name in the State Duma. He left politics in 2004, after not having become a member of the Duma, but made a noisy return in 2007 as one of the leaders of the pre-electoral lists of the Union of Right Forces. The true things that he was able to say on state television’s long-stifled channels about the current situation in Putin’s Russia came as a breath of fresh air for many of the more concerned citizens of our country.
Vladimir Milov is a representative of the new generation of Russian liberal politicians. At just 35 years of age, he has already had serious experience of government. Between 1997-2002, he worked in the federal executive starting as a senior specialist in the Federal Commission for Energy although he was rapidly promoted to Deputy Minister of Energy. V. Milov was one of the main authors of the Russian energy reforms aimed at increasing efficiency in that field.
In 2002, V. Milov authored the conception for the reform of Gazprom, the aim of which was to overcome the growing gas deficit and put a stop to spiraling prices for Russian consumers. This conception was rejected out of hand by president Putin with the result that these shortages are getting rapidly worse and prices are rocketing ever closer to European levels. Milov was also lead author of the 2003 parcel of legislation on Russian electric energy which for the first time created a legal basis for the development and reform Russia electricity industry.
After he left government voluntarily in late 2002, he became one of Russia’s leading independent experts in the energetics fields and is widely known abroad. More recently, V. Milov has become known as a political author. His sharply critical articles in such Russian publications as Vedomosti, Gazeta.ru, and The New Times have earned him the reputation of a brave, honest, and well-qualified politician.
The authors’ paths have frequently intersected in the course of their work. Both came to work in the federal government in 1997 when the new stage of Russia’s reforms – the move away from chaotic change to systematic ones – was beginning. Both have been professionally involved in the energy field, a key one for a resources-rich country: in 1997 B. Nemtsov was minister of fuel and energy; in 2002 V. Milov was promoted to the rank of deputy minister. Both are responsible politicians with no links to corruption. Both actively fought against it during the time in government service.
Internet:
www.nemtsov.ru
www.milov.info
[FN 16] Source: The New Times, Issue 44, 10 December 2007 – The Kremlin’s Black Safe
[FN 3] TN: SS-25 Sickle on NATO parlance
[FN 9] TN: sadistic hazing of new recruits by seniors condoned and ubiquitously practised in the Russian army.
CHAPTER THREE
[FN 1] TN: Federal Service for Oversight of Consumer Protection Rights and Welfare
[FN 3] Source: Rospotrebnazor
[FN 2] Source:
The Guardian,
15 January 2008.
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