Putin's Russia

Can the former KGB spymaster deliver on promises to fix the chaotic Russian economy?

Until a few months ago, he was virtually unknown even in his own Russia. Trained as a lawyer, he spent much of his working life as an economic spy in Germany, scooping up Western technology for the KGB, whose successor agency he eventually came to run. Now, at 47, Vladimir V. Putin has been catapulted into the Russian presidency by Boris N. Yeltsin's surprise resignation on Dec. 31. Unless he makes a horrible mistake, the former spymaster is almost certain to win a mandate to lead Russia for a four-year term when voters head to the polls for early elections on Mar. 26.

Will Putin's rise to power usher in a new era of stability in Russia? From Moscow to Washington to Tokyo, politicians and diplomats are debating whether Putin, who spent only four months as Prime Minister, will be his own man or a mere puppet of Yeltsin's entourage. Many note with alarm that Putin's first move as Acting President was to sign a decree immunizing Yeltsin from future prosecution on any corruption charges. "This is an attempt to consolidate an old regime," warns Moscow political scientist Boris Kagarlitsky. "Putin is a weak person with the image of a strong man."

RADICAL REFORM, NYET. But Putin may surprise his doubters. Even if he has lacked a political base before, he now has supreme institutional power as President. Three days before his appointment, he put out a sweeping manifesto on the Internet outlining his vision. It will be a "long and difficult journey," he says, but Russia will regain its former status as a "great power." Don't expect Putin to import American or European models, and radical reform is out. He calls for a gradual program based on "a new Russian idea" that emphasizes patriotism, social protections, and a strong state. "For Russians, a strong state is not an anomaly," Putin says online. "Quite the contrary, [Russians] see it as a source and guarantor of order" and the "main driving force of any change."

But Putin's philosophy of a strong state does not hark back to the Soviet era of central planning. In his years as an economic spy in Germany, Putin came to understand that Russia can only be a great power if it is economically as well as militarily strong. Putin's KGB experience "drove home to him that the old command economy was like a dinosaur," says Michael Steiner, foreign policy adviser to German Chancellor Gerhard Schroder. "He knows that Russia needs a fully functioning, well-regulated, private-sector economy to thrive."

Both Mikhail Gorbachev and Yeltsin tried, but failed, to strengthen Russia's economy. Now, Putin seems determined to build a stronger central government in Moscow and use it to tackle Russia's problems, from its struggling economy to its unruly regions. Putin is calling for an "active offensive" on crime, a stronger role for the judiciary, and the establishment of a civil-service meritocracy. On the economic front, he has created an advisory group that is looking into closing inefficient industrial enterprises such as truck-and-limo maker Zil. New social programs would cushion the blow to workers.

Already, Putin has shown he's not afraid to use the power of the state. He is using all-out force against rebels in Chechnya. Many fear that Putin's Russia could be more authoritarian than either Yeltsin's or Gorbachev's. It will certainly be less amenable to Western ideas. But so far, Putin claims that he will abandon neither market economics nor democracy--only "adapt" them to the "realities of Russia."

It will likely be months before Russians learn the exact nature of Putin's program. Right now, his most important aim is to win the election. A chief priority is avoiding heavy Russian casualties in Chechnya, where the rebels are putting up a tough fight. He also must decide how to deal with Yeltsin's former entourage. Voters are disgusted with the way tycoons such as Boris Berezovsky wielded power in the Kremlin. "Putin would send a very strong signal if he removed from his government those considered to be close to Mr. Berezovsky," says Michael A. McFaul, a Russia analyst at the Carnegie Endowment for International Peace in Washington.

But Berezovsky and other so-called oligarchs have the money and media outlets that could swing the election. Putin simply may not be able to distance himself from the elite until after the vote, though he can make a start. He recently visited the Federal Railways Ministry, headed by Berezovsky crony Nikolai Aksyonenko, and blasted its employees for corrupt practices. Putin has also dismissed from the Kremlin staff Yeltsin's daughter, Tatiana Dyachenko, a target of corruption allegations who is close to Berezovsky. Some Russia watchers think Putin may try to ease the oligarchs' grip by offering immunity in exchange for returning part of their ill-gotten assets.

But Putin may already be too compromised to make any such deals. After leaving the KGB in 1990, he went to work for then-Mayor Anatoly Sobchak in St. Petersburg. That's when he developed ties to Anatoly B. Chubais, later architect of Russia's much-criticized privatization program and now a political adviser to Putin. He also met emerging titans such as Vladimir Potanin, who is firmly backing the new President. Political opponents accused Putin of rigging privatization deals in favor of his buddies. Some Moscow sources predict that the only big change in Putin's Russia may be a reshuffling of the players, as a new crowd of Kremlin leeches replaces the old one.

Still, if Putin could take on the tycoons, his popularity among ordinary Russians would soar. Russians are fed up--with greedy oligarchs, Mafia gangs, Chechen rebels, and shady banks that can't be trusted with savings. "People are thirsty for a strong leader," says Yuri Levada, a sociologist at Moscow's National Public Opinion Research Institute. "They are afraid of general disorder."

DISASTROUS EFFECTS. The worst disorder is in the economy. It's still a mess, even though gross domestic product grew 1.5% in 1999, the best performance since the Soviet Union's breakup in 1991. Higher oil prices are helping Russia. But thousands of Russian companies barely function. They don't have the cash to buy materials or pay their workers, and they stay afloat by barter. Millions of Russians survive by growing their own food and working in the black market, estimated at 40% of GDP. And all through the Yeltsin years, the government failed to collect taxes efficiently, with disastrous effects on the country's medical and education system. It's a vicious circle that won't be broken until Russia reforms its tax and bankruptcy laws.

Putin aims to use his "stronger state" to do that. For starters, he has charged a group of Western-minded liberal economists with crafting a new tax system. Putin wants to cut rates on businesses and individuals and simplify the Byzantine tax code. A likely target is the payroll tax, now a huge 40% of workers' wages. And while others before him have failed, Putin is likely to take a tougher line on tax cheats. About half of Russia's tax bill goes uncollected.

Another key plank in Putin's plan is a government-run "industrial policy." Putin thinks the way to get growth is to encourage state, private, and foreign investment in high-tech industries such as aerospace. Defense enterprises, such as tank builders, are also expected to benefit from fresh subsidies or tax preferences. At the same time, Putin's advisory commission is examining an overhaul of the bankruptcy code to speed up the closure of unprofitable factories.

Meanwhile, exporters to Russia should take note: If the Russian economy continues its recovery and the ruble strengthens, Putin may erect barriers to imports of such big-ticket items as cars and refrigerators. The new President also hopes to boost Russia's exports--not only of raw materials like oil but of manufactured goods, too. He'll create an agency that will offer exporters government guarantees for commercial loans. And he'll eventually push for Russian membership in the World Trade Organization.

So far, Russian businesspeople and markets are reacting favorably to Putin. Shares of Gazprom and other companies have jumped. "He's the best choice of all available," says Alexei Krivenkov, co-founder of Port.Ru, a Russian-language Internet portal company based in New York and Moscow. "Give Putin the benefit of the doubt," adds Josef A. Bakaleynik, chief financial officer at Tyumen Oil Co. He is hopeful that the new President will slash the bureaucracy, then raise the remaining bureaucrats' salaries--so they will demand fewer bribes.

BIG LAG. Still, it could take a generation for Russia to fix its economic problems. Putin seems to realize that. Even if Russia grows at the phenomenal rate of 8% a year, he says, it will take the country 15 years to reach the per capita GDP level of today's Portugal or Spain. Russia's per capita GDP of $1,800 is now about one-sixth that of Portugal and one-eighth that of Spain. Its paltry GDP of $190 billion is just one-fifth as big as China's and about one-fiftieth the size of America's.

The long road ahead may be one reason he is appealing to Russians' patriotism. For now, at least, the Chechen war is playing into his hands. Even though the assault on Chechnya has been waged brutally, most Russians back the war. Indeed, the threat to the integrity of Russia from Chechnya is quite real. The current conflict began last August when Chechen-based rebels tried to declare an Islamic republic in next-door Dagestan, against the will of the Dagestanis.

"ABSOLUTELY CYNICAL." If the war drags on, however, even the most patriotic Russians will grow weary. That's why Putin may have to reach a political agreement with the Chechens. He may turn out to be the only person in Russia with the credibility to cut a deal--just as general-turned-statesman Charles De Gaulle extracted France from Algeria, or retired Russian General Alexander Lebed ended the first Chechen war in 1996. "I don't exclude the possibility that a President Putin will grant Chechnya independence," says Andrei Piontkovsky, director of the Moscow-based Center for Strategic Studies. "He is an absolutely cynical man."

Is Putin dangerous for the West? In the short term, probably not. But the longer term could be rockier, particularly if NATO angers Russia by inviting the Baltic states to become members. "Things are on a fine edge right now," says Robert Legvold, a Russia specialist at Columbia University. "You don't want to push the Russians too hard."

Russia has drifted and suffered under the rule of the aging and ailing Yeltsin. Now it has a young and healthy leader, and millions of Russians are relieved. But they will be watching closely to see if Vladimir Vladimirovich is a nation-builder, a dictator--or both.

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