Ben Judah - Fragile Empire - How Russia Fell in and Out of Love With Vladimir Putin

That Kasyanov should not have resigned or challenged this authoritarian drift is unsurprising. He felt he had been given the power he asked for. Kasyanov says Putin stuck to their 2000 deal – with Putin taking high politics, security and foreign policy, and Kasyanov focusing on reform until the second half of 2003. ‘He did not interfere in 90 per cent of what I was working on. The 10 per cent he did interfere in was the gas sector. He repeatedly told me not to initiate any reforms in the gas sector and anything related to Gazprom. This was his key intrusion.’ Traumatized by the default, Kasyanov felt that economically, the situation was as fraught as in the Caucasus:

‘The treasury was empty, the price of oil almost reached $20 per barrel. There was still a high level of private capital outflows. Many experts also believed [that] in the absence of access to external sources of funding we would require a new devaluation of the Ruble. All of these problems needed to be urgently addressed. And most importantly – it was obvious that the socio-economic mechanism of Russia was hopelessly out-dated and needed a major upgrade.’ 16

Putin asked Kasyanov to push the reform agenda in close cooperation with Alexander Voloshin, his chief of staff who had held the same job under Yeltsin, and appointed his St Petersburg associate German Gref as Minister of Economic Development to head an expert group on reforms. Gref, as the head of the Centre for Strategic Development, a think-tank specially created in the run-up to the 2000 election, had drafted a 200-page report as the basis for the policy agenda. It was an ambitious, if in places vague roadmap. Together with the economist Alexey Kudrin, with whom Putin had shared an office in Sobchak’s town hall, these men formed the kernel of the reformist group in government. ‘We must pay tribute to Putin,’ Kasyanov said: ‘I could contact him at any time. If I had something to clarify or inform the President about, I never had a problem; we could discuss everything in person or by telephone.’

After Yeltsin’s hangovers and disappearances, Putin’s work ethic overjoyed the bureaucracy. Beyond it both the government’s policy vectors appealed to different parts of society – the campaign for order in the Caucasus calmed a frightened country. Putin’s ‘tough measures’ won respect with working families craving an end to ‘chaos’, whilst his reforms appealed to big business and the tiny middle class. Those Russians who had started businesses – big or small, from shopkeepers to oligarchs – were struggling in a half-reformed business environment. The changes that Putin’s government brought in were far-reaching and some immediately beneficial.

Putin’s first term saw an impressive roll call of results. ‘What we really wanted to do was to implement the policies we had not been able to implement under Yeltsin,’ explains Kasyanov. They mostly succeeded. In 2001 the maximum social security tax was cut from 35 per cent to 26 per cent. In 2002, the corporate profits tax was cut from 35 per cent to 24 per cent. The government was especially pleased that it had scrapped the 35 per cent top-rate progressive incomes tax for a flat tax of 13 per cent. Calculated at a rate that Russians would actually pay, it increased revenues and stimulated the economy. The long-stalled Land Privatization Bill was finally put on statute. In 2004, a stabilization fund was created and VAT was shaved from 20 per cent to 18 per cent. All the while, business-friendly legal changes were ushered in. After decades of imports, improvements in agriculture even saw the country become a net exporter of grain.

This won Putin the establishment’s confidence – as a man who got things done. This dovetailed with the positive economic legacy of the default. The devalued ruble made exports both cheaper and more competitive. There was finally recovery and growth: now the worst was over. The government was no longer forced to spend up to one-quarter of its budget servicing its debt. ‘Most people now believe that the default had a positive impact,’ admits Kasyanov. The clearest indicator of a return to solvency was that Russia started to run balanced budgets. A return to confidence could be measured in high GDP growth, which was sustained at over 7 per cent a year until 2008.

Consequently, the inflation rate declined and the rate of foreign and domestic investment rose. Overall this enabled the government to return to financing regular public services – wages, pensions and funding from the state was now on time. Salaries no longer went unpaid for months at a time. This was the single most important factor undergirding Putin’s legitimacy.

Yet alongside liberal economics came the muzzling of TV. Kasyanov claims that he did not see what was coming. Sitting with him I wondered how great his share of historical blame actually was. No fool, he was prime minister from 2000 to 2004 – as the decrees creating an authoritarian state were issued. He did little to stop this progression as he prioritized order and reform, power and growth, over the rights of Russians. No, I thought, it would be wrong to signal out Kasyanov. His mistakes and misconceptions were those of the elite as a whole. At the time, both rich and poor saw Putin as behind them. A fragile consensus had been established. It was unclear where it might lead.

TV had undone Putin’s predecessors. Every night the Soviet evening news had framed Brezhnev in senile degeneration. It had built up Gorbachev as a charismatic saviour only to expose him as a confused failure when he couldn’t compete with a rambunctious, then sober Yeltsin. It destroyed the reputation of this ‘great democrat’ with a hundreds clips of his slurring and shaking, demeaning peasant alcoholism. The power of TV turned Yeltsin into nothing better than the drunken Brezhnev of a failed democracy. This is why within weeks of his inauguration Putin began to build a ‘videocracy’ – his autocracy over the airwaves to the masses that mattered.

The oligarchs who controlled TV knew how powerful they were – powerful enough to extort the state. Especially Vladimir Gusinsky, a failed theatre director and the emotional owner of NTV, a channel that had more than 100 million viewers and reached nearly every corner of Russia. It could make or break election campaigns. Its ‘pundits’ and ‘commentators’ were screeching guard dogs for their master’s interests, hounding politicians into concessions. They were not impartial journalists; Gusinsky thought he could do the same to Putin, shouting to his inner circle, ‘I’ll destroy him.’ 17In October 1999 he arrived at the terse new prime minister’s office for lunch. He was angry that the government had just handed over $100 million to Berezovsky’s TV channel, ORT, in order to tide it through an advertising slump. Gusinsky thought he was powerful enough to deserve the same. According to the Kremlin and his own associates, he said at lunch:

‘I understand you have very little chance of becoming president, but if we work with you and you do what we say, we’ll try to make you win. And we need $100 million in credit.’ 18

Gusinsky denies this version of events, but has admitted he asked for ‘funding’ at the same level as ORT from Putin at a subsequent meeting. 19He may have asked for what looked like a bribe to support the out-of-focus successor, because this is how he had done business with Yeltsin. That tawdry Kremlin had been so desperate to get the ‘media oligarchs’ on side to win the 1996 elections that it had effectively subsidized their empires. The sums were enormous for a bankrupt country. Gusinsky alone had been given more than $1.5 billion in state support over the years. 20In the months before the 1996 election, Gazprom had started buying shares in his Media-Most company. This was the beginning of the state company making a series of economically senseless loans to Gusinsky worth over $1 billion. It ended up owning 30 per cent of Media-Most. To prop up the regime, the state-controlled gas giant seemed to be investing in everything apart from its own pipelines and reserves. It was being used like a giant government slush fund and not a natural resource company. It was feeding the oligarchs when it should have been saving the collapsing mining cities of the north.