CIAO DATE: 2/99

Neither State nor Market: Cozy Reciprocity in Russian Capitalism

Lynnley Browning

The "Whither Russia" Project

Strengthening Democratic Institutions Project
John F. Kennedy School of Government

September 1998

Preface

This article is an offshoot of the series of publications produced by the "Whither Russia?" project of the Strengthening Democratic Institutions Project, based at the Belfer Center for Science and International Affairs (BCSIA) at Harvard University’s John F. Kennedy School of Government. Funding for the "Whither Russia?" project has been provided by Carnegie Corporation of New York.

Because none of the works published thus far in the "Whither Russia?" series deals explicitly with the question of Russia’s economic identity and future, we felt it would be helpful to present several complementary studies on the nature and scope of the Russian economic transformation. We asked Lynnley Browning, a business reporter covering financial services for The Boston Globe, and a former Reuters correspondent based in Moscow, to contribute an essay addressing the development of Russian capitalism. Ms. Browning earned her BA in Slavic Languages and Literatures at Princeton University in 1987, and lived and worked in Russia from 1992–1997. In this work, Ms. Browning challenges the conventional concept of the "oligarchs" in the Russian economy, and outlines a new framework for understanding the relationship between big business and the Russian government. We solicited this article expressly in the interest of uncovering new approaches to the problem of Russia’s economic future. We believe it makes an important contribution to the debate on the nature of Russian capitalism.

In our efforts to present Western scholars and policy makers with the broadest range of views within Russia, we have solicited a range of opinions on highly controversial topics. The opinions expressed in the monographs are those of the authors and do not represent the views of Harvard University, the Belfer Center for Science and International Affairs, the Strengthening Democratic Institutions Project, the Carnegie Corporation of New York, or the translators and editors.

Graham Allison, Director
Strengthening Democratic Institutions Project

Section I
Introduction

Since the collapse of the Soviet Union in 1991, a myriad of images has been used by everyone from Western scholars and journalists to Kremlin officials and international financiers to describe Russia’s business climate. At various moments in its transition from a centrally–controlled, planned economy toward a market–oriented system with some state controls, Russia has been described as the home of a new class of robber–barons; as a flawed but burgeoning market economy; as a lawless Wild West for entrepreneurs; as a crony capitalist state melding large banks, enterprises, and the government; and, most famously, as an oligarchy of privileged businessmen.

These conceptual categories have produced splashy headlines that have done much to mold popular conceptions of capitalism in Russia’s post–Soviet period. At the same time, the categories have consistently neglected a key feature of the post–communist life of some of Russia’s biggest export–oriented companies–the role of the government.

What is striking about the above–mentioned images is their shared assumption of where power lies in the weak Russian state. The most persistent of the conceptual categories–that Russia has been an oligarchy–has taken for granted the notion that private business actors are ultimately more powerful and influential than the government, and that senior businessmen and financiers are the most dominant force (re)shaping the country’s economy and business landscape. Within this category, the focus has been on individuals in the top ranks of the financial and industrial conglomerates that emerged in recent years as strong actors, or on those areas of the economy, such as securities exchanges, where until recently market activities had flourished.

To understand Russian capitalism, one must look not only at specific individuals and organizations but also at the relationship between private business actors and the government. It is the relationship between private sector and government that should be the core unit of analysis, and not just specific private actors or government officials per se. If we define the state broadly as a framework of rules and procedures, rigidly enforced, we correctly see Russia as a weak state. But states are not synonymous with governments. In Russia, the state may be weak, but the government is strong, by dint of the considerable decision–making power and authority its senior members wield over economic and financial life. The absence of a state with transparent, consistently enforced rules has afforded individual officials great discretionary power over private businessmen. While the composition of the government elite changes often, what is significant is the discretionary decision–making power that key positions, regardless of who occupies them, confer on their holders. Despite cadre changes, and despite changes in the content of the relationship, the structure of the government–business relationship has remained stable throughout this decade.

The combination of a strong government amid a generally weak state renders the Russian state a protean presence before private business actors. Much of the history of post–Soviet Russian capitalism has been about the ways in which the government has adapted to maintain its dominant role in order to establish the terms on which big business functions. Russia’s leading businessmen thus confront in the government a moving target with changing goals, strategies, and tactics to manage economic and financial life.

The existence of a business–state relationship may seem a patently obvious feature of the new Russia, where a new business class has emerged as owners or controllers of the most significant industrial and financial assets. There is nothing novel in simply asserting that Russia’s top business circles and government are closely intertwined. However, most ways of thinking about Russian capitalism assume that a group of wealthy and influential individuals has called most of the shots, pulling the strings and refashioning the business landscape–and ultimately the economy–as it wishes. As we will demonstrate, the reality has been different. It is the government which has largely created the new business elite and consistently dictated the terms on which that elite operates. It is the government which has largely determined who owns or manages what. Through tax collection procedures, export restrictions, special decrees on matters ranging from state supplies to restructuring, and other levers of control, the government affects the ability of the new conglomerates to do business, reap profits, and position themselves for the future. Russia may have cast off central planning, but the government has been a major presence in many matters of operational significance to companies throughout this decade. ₁

Big business in Russia needs government support and approval from the Kremlin, prime minister, or other officials on the federal, regional, and local levels in order to undertake most matters of significance, including acquisitions, mergers, corporate restructuring, new contracts, tax relief, and activities with foreign investors. As such, Russian capitalism has been less a product of the emergence of nascent markets or the "democratization" of everyday economic life and more a product of the government’s efforts to create a new business elite and shape the terms on which it operates. In an environment where markets have functioned poorly or not at all, even before the August 1998 financial collapse, deep structural problems, including effective bankruptcy in much of the private sector, inter–enterprise debt, and barter, have made the rationally–calculated contractual relationships that drive genuine market economies often impossible. What drives Russian capitalism instead is the government–business relationship that keeps private business actors in a constant search for government support.

A crucial feature of this relationship is that government support is never certain or consistent. Lobbying across multiple fronts, including the Kremlin, the cabinet of ministers, branch ministries, the State Duma, and various government agencies and commissions, becomes necessary when top businessmen never know who is going to be in a position to wield discretionary decision–making power. For example, prominent businessman Boris Berezovsky, who heads a corporate empire spanning oil, airlines, and auto distribution, courts a wide range of officials, including Krasnoyarsk governor and presidential contender Alexander Lebed, former prime minister and presidential candidate Victor Chernomyrdin, and President Boris Yeltsin and his inner family circle. Berezovsky even sang the praises of reformer Anatoly Chubais at an investment symposium in January 1998, barely half a year after attacking reformers who had sought to recast the government–business relationship along lines more beneficial to the state. Berezovsky’s own alliances, as well as the consistency and tenor of his comments, change as often as Yeltsin’s cabinet; what remains consistent is his courtship of government members across the spectrum.

The preceding comments are not to deny the influence of the private sector on government and state structures. Neither are they to minimize the achievements of reform. ₂ But it is a fact of post–Soviet Russia that private business actors seek ways in which to work with the government more often and more rigorously than the government searches for ways in which to work with them. For big business, the rewards of currying and winning political favor are greater than those which come from acting unilaterally outside the relationship with officialdom. Much competition among the capitalist elite occurs not in the marketplace, but in the corridors of official power.

It follows that the new Russia has never been "run" by a group of businessmen, as goes one of the most prevalent myths about the country. Despite the existence of a powerful group of private sector actors, Russia has never been a financial oligarchy. The business elite is too competitive within its own ranks, has too many disparate interests and agendas, and controls outright too few assets to qualify as such. While leading businessmen may help shape the rules of the game, they do not control or dictate the conditions in which they operate. Neither has Russia been fertile ground for the market mechanisms and market behavior that many neoclassical economists posit as the inevitable results of the creation of private property. In the absence of a framework of predictable, clear, enforced rules and procedures–a structure analogous to a traffic light–government officials–entities analogous to discretionary traffic policemen–have great and arbitrary power. ₃ When the rule of law is weak, due to a lack of institutions and organizations to enforce the standard, transparent procedures that characterize genuine market economies, individual officials become strong.

This is not to suggest that Russian capitalism lies in the Hobbesian state of nature indirectly but commonly alluded to in the popular press, both Western and Russian. Such an outlook sees Russia as little more than the locus of war–like competition among private businessmen and between the export–oriented private sector and the state. Instead, what is interesting about Russia is how and why alliances, cooperation, and symbiosis between major businessmen and the government take shape–at times far from smoothly–and how this general dynamic shapes business life. By mapping out the ways in which government policies ranging from collateral–based auctions under the privatization program to state intervention in the export arena have both created and defined big business, this paper seeks to demonstrate that the government has played and will continue to play a significant role in shaping Russian capitalism.

In short, the West has generally held two myths about post–Soviet Russian capitalism: that Russia is a deeply flawed but burgeoning and functioning market economy, in which market attributes shape how most companies and individuals operate; or that it is a private sector oligarchy, in which a narrow group of wealthy, influential "robber baron" businessmen control the government by setting agendas, staging cabinet reshuffles, and generally dictating economic policy. Both myths are flawed in a number of ways, all of which converge in the failure to identify and unpack the role of the government in the creation and workings of big business.

Section II
Problems With Images Of Russian Capitalism: Unpacking The Role Of The Government

The market myth swelled in popularity from 1995 to late 1997, as Moscow’s reformist efforts produced an illusory veneer of impending macro–economic stability, industrial growth, and wholesale change in the direction of a market economy. Evidence that Russia was finally imbibing the liberal economic creed was found in a variety of sources, most of them statistical rather than cultural or institutional in nature. By 1996, Russia had put 80 percent of all state property in private hands and embarked on a new, collateral–based privatization scheme known as "loans for shares" to transfer assets to private entities that the reformist government envisioned both as a bulwark against any communist resurgence and as the foundation of the corporate giants of the future. Moscow’s emerging stock market produced dizzying returns of 140 percent in 1996 and 98 percent in 1997–among the best in the world. Borrowing on Eurobond and other capital markets by the federal government, regional administrations, and new companies took off, creating an image of Russia as not just woven into the fabric of international capital markets but as cut from the same cloth. By 1996, 96 percent of companies claimed to have open trading of their shares. ₄ Companies began opening their ledgers to Western accountants, who attempted to pierce through veils of non–market practices, notably barter payments, and Russian–style accounting procedures in an effort to establish assets and liabilities. The government began to make noises about launching crackdowns on tax debtors and abolished the system of non–cash tax payments, which had failed to fill federal budget coffers with the hard cash the state sorely needed to finance operations.

Studies such as Richard Layard’s and John Parker’s The Coming Russian Boom: A Guide to New Markets and Politics and Anders Aslund’s How Russia Became a Market Economy toted up the achievements of reform and pronounced the patient well on its way to a new life as a Western–style market economy. Oil firms signed joint–venture and production–sharing agreements with Western counterparts; LUKoil, Russia’s largest oil producer and one of the largest publicly–traded oil companies in the world in terms of reserves audited to international standards, was held up as a model of Western–friendly change when it sold an eight percent convertible bond stake to the Atlantic Richfield Company in 1995. The entire oil export system, a backbone of state revenues and one of the largest in the world, slowly opened up, as the government scrapped the old Soviet practice of special exporters.

Most optimistic of all were projections of growth. The International Monetary Fund–at that time pleased at least to some degree by Russia’s progress — tracked growth of 0.4 percent in 1997, Russia’s first growth in the post–Soviet period. It forecast growth rising to 1.0 percent in 1998 and 1.9 percent in 1999. ₅ For inflation, which had fallen from a staggering 1,353 percent in 1992 to 14.7 percent in 1997, the IMF predicted more progress, forecasting relatively modest price rises of 8.l percent in 1998 and 5.0 percent in 1999, the latter on par with many European countries. Since the August 1998 financial collapse, the Fund has substantially revised these numbers. ₆

Flush with hope and optimism, many economists, scholars, and journalists declared these numbers and the changes they suggested proof that Russia had become a market economy–a troubled market, but a market nonetheless. In 1997, Aslund, a Swedish economist, wrote, "Today, Russia has become a market economy, but a rather distorted market economy...(but) the basic rules of a market economy have been established.’’ ₇

Russia is, of course, no longer a planned economy in which the state allocates resources and controls all production, distribution, and prices. At the same time, if we define a functioning market economy as one in which private producers compete independently with each other to provide goods and services, creating an environment leading to competitive prices, balance in supply and demand, greater efficiency, and innovation, in which a lack of ability to pay for supplies or compete in general takes a player out of the game, it is evident that Russia has never been a market economy.

While Moscow has undoubtedly established some of the conditions needed for genuine market activities in some spheres, especially in small–trade "street capitalism" and, until recently, financial markets, none of the liberal market economy features itemized above exists in Russia on any broad level. Instead, one sees an economy running on barter and other forms of surrogate payments, a market–substitute system that ensures most non–competitive enterprises remain in the game. For example, Gazprom, the natural gas monopoly and Russia’s largest tax payer, collects less than 10 percent of its domestic payments in cash. Efforts by the State Duma, the lower house of parliament, to rationalize and reduce Russia’s numerous and excessively high taxes have been desultory. Chronic wage and salary arrears in the public sector further fuel a demonetized, non–market structure, in which neither cash–tellingly known within this "walking dead" system as "live money"–nor prices function as indicators of viability. Cultural factors shape the system as well. The reality of an entrenched unwillingness by government officials of all stripes to let supply and demand decide matters by casting millions of workers adrift reflects a major political and cultural constraint that is unlikely to be resolved via the creation of "incentives" for market–oriented activities.

Nonetheless, these structural features of the Russian economy, which are obviously crippling problems, are often viewed as distortions within a nascent, troubled market economy or as deviations from an ideal form that is slowly and inevitably taking shape, rather than as an expression of a culture of government–business relationships that substitutes for a free market. Throughout its troubled transition to putatively market–style practices, the Russian government, not the marketplace, has been a major allocator, serving as the unseen (but not invisible) hand that grants the ad hoc favors and privileges that can make (literally) or hamper (one cannot say "break," given Russia’s aversion to bankruptcy) a company.

The role of the government has been a defining feature of Russia’s lurch both toward and away from a putatively market–style economy throughout this decade and was evident long before the recent shift in economic tack toward a system with greater state controls. As we will see, within a system whose dysfunctional structural underpinnings have little to do with markets, burgeoning or collapsed, major Russian capitalists have had to seek ways to work with the government.

Governments are present in greatly varying degrees in all economies, whether of the market or planned variety. What is interesting about the Russian case is the extent to which private businessmen respond less to what liberal economists term rational economic incentives and more to the culture of the business–state relationship, as is evident in their extensive lobbying for favors and privileges. Such a culture involves a give–and–take reciprocity between the state and major private business actors–a reciprocity orchestrated by the government and over which the government ultimately has the upper hand. In this system, firms coordinate many essential activities, both market and non–market. They do so under the watch of a government that still casts a protective eye on regions and industries–and their inhabitants and workers–which by virtue of poor location and lack of competitiveness would not survive market conditions. Although not without antagonistic and conflictual elements, this system of reciprocity is functional and essentially symbiotic in nature: it has served to meet the basic supply and revenue needs of the economy as well as the reformist political goal earlier this decade of creating private business and allowing it to amass capital. Both reformers and major private businessmen have seen cozy reciprocity not as an impediment to market development but as a means to it. It is clear that Chubais, the architect of privatization, saw the government, not markets, as crucial to both of these political and economic goals. In a December 1997 interview with a Russian newspaper, Chubais noted, "Looking back at the recent past, one has to admit that the Russian state developed in such a way that at one time there was no business at all. And when it did begin to emerge, the state had no choice but to help it. Naturally, this led to their drawing closer together, especially since they waged a joint struggle against the communist alternative." ₈

Despite the non–market features of Russian capitalism, it is really only since the recent financial turmoil that questions over the extent to which Russia was ever really a burgeoning market economy in the first place have come to the fore. This is curious, given the welter of evidence suggesting that throughout that period when Moscow’s stock market was booming and companies were establishing equity and debt ties with the West, the government, not the market, was playing a significant role in the life of privatized big business. With its strong discretionary power to mold the structure of big business and thus the economy as a whole, the government was a great presence in Russian business long before the Primakov cabinet began to discuss a new economic program of greater state controls and significant anti–free market components. While good at tallying up change in fiscal, monetary, and policy practices–all of which are necessary but not sufficient factors in the formation and functioning of market economies–the liberal economic prism is less adept at assessing the socio–cultural practices–in this case, the system of reciprocity–that comprise economic institutions. Russia’s particular culture of state–business relationships, in which the government waves its guiding hand within its cozy relationship to the private sector, is at least as relevant to an assessment of Russian capitalism as formal economic models and theories. In any case, the role of the government has been overlooked.

Not all observers gravitated toward the idea of Russia as a burgeoning market. An alternative pole held that Russia was an oligarchy. Specifically, Russia was seen as a state governed by a small group of elite bankers and industrialists, popularly known as "oligarchs," who controlled the economy, the financial sector, and the government as a whole.

Though appealing to a great number of observers and resilient as an analytical category in the Western and Russian press, the oligarchy myth has also missed the mark. ₉ The label got its start in an interview Berezovsky gave to the Financial Times in October 1996. Berezovsky, flush with confidence and self–serving showmanship months after Russia’s leading businessmen had banded to together to provide financial support to President Boris Yeltsin’s 1996 reelection campaign, claimed blithely in the interview that seven bankers controlled half the Russian economy and the government as well. The Financial Times itself proclaimed the bankers and businessmen "Russia’s de facto government." ₁₀ Berezovsky’s claim was subsequently expropriated by most of the Western press (and by many Russian newspapers and commentators as well) as an analytical category to describe the new Russia. The government, Russian media would later conclude, had entered the era of "semibankirshchina," or the time of rule by seven bankers–a pun on boyarshchina, the clique of boyars who pulled the strings of Muscovy.

Berezovsky’s claim constituted a major misrepresentation of the government–business relationship. Popular puns on the Russian word for privatization not withstanding, Russian capitalists have not "grabbed’’ or expropriated assets this decade. ₁₁ Rather, they have been awarded assets by the government, which intentionally created the new business elite. The government was instrumental in allowing and aiding senior members of these groups to constitute their power, mostly by authorizing auctions in which elite businessmen were pre–selected as winners. Though the loans for shares scheme of 1995–1997 was hardly a model of free market competition, it is a mistake to view the process simply as corruption, as is often done. Rather, leading financial–industrial groups formed through this process were the result of a state initiative bearing two goals: to keep assets out of the hands of the communists and nationalists who could turn back reforms; and, in the absence of functioning markets, to put those assets in the hands of those whom the state considered best placed to become the country’s new corporate elite–all while gaining some much needed cash. To reformist officials, who generally wanted to see Russian property in Russian hands, there were only a limited number of senior businessmen outside the "Red Director" brigade of Soviet–era enterprise managers who were equipped to assume such a role.

What is interesting is the degree to which the government saw collateral–based auctions as reflecting not a "tainted" version of Western market procedures but rather a clear framework for what needed to be accomplished. Even Yegor Gaidar, the shock therapist who was Russia’s chief economic strategist in the early years of reform, recognized the extent to which markets could not simply "unfold" in Russia and the degree to which conceptual notions about what needed to be done drove change. "Our first task," he began hopefully in a 1997 newspaper interview, "was to create a working market economy. The second task, in 1996 [when loans for shares auctions were first held], was to prevent the communists from undoing what was achieved in the first stage. To ensure these goals, we went into a very broad coalition with people who did not share our perspectives for the longer–term goals." ₁₂ As distasteful to free market practitioners as the idea of a pre–selected business elite sounds, it made sense to reformers who wanted a private sector that was immediately powerful, rather than one that would emerge "naturally" through market competition and take shape over time. As such, reformers selected as the new business elite those individuals who had amassed wealth or considerable private–sector experience in the post–Soviet economy as well as those who headed monopolies or major companies that were not going to be broken up or put under a larger corporate umbrella. There were few other suitable candidates. As Pavel Bunich, chairman of the State Duma’s property and privatization committee, and Yabloko leader and opposition member Grigory Yavlinsky said in September 1997, "state property will be a deadweight if [Russian] bankers are forbidden to buy it. Except for the banks, nobody else [in Russia] can afford to buy it..." ₁₃

Because this transfer of property carried with it an old structure requiring state favors and close government ties in order to function, loans for shares was not a transfer of power. Lacking capital and in need of tax breaks and various privileges for their industrial holdings, bankers and industrialists have had to play politics and curry Kremlin favors to keep their businesses running. In the early stages of reform, power bred wealth in Russia, and not the reverse.

It is only with regard to their media holdings, which span major newspapers and television stations, that Russia’s top businessmen could be described as an oligarchy. In a political culture where the word has long been accorded a special status as a unique space where ideological polemics are waged, and where, as Alexander Solzhenitsyn once suggested, literature can function as an alternative form of government, this power should not be underestimated. But neither should one underestimate the extent to which Berezovsky, or any other businessmen, are little more than savvy manipulators of the media outlets they control. ₁₄ Berezovsky’s own assertion of his powerful role is hardly an impartial assessment to be taken at face value.

One of the inconsistencies in the oligarchy myth is its use to explain events whose logic contradicts similar events with different outcomes. In the realm of political cadres, for example, the "oligarchy" has been spotted behind the sacking of Chernomyrdin, the Soviet–era industrialist, in March 1998, but also behind the attempt to reinstate him six months later. Clearly, when the same explanation is used to describe both a phenomenon and its polar opposite, the explanation is flawed. ₁₅ One minute Russian bankers are seen to have ministers at their beck and call; the next minute they face a new cabinet composed of ministers of different leanings. Second– and third–hand reports of Berezovsky lurking about the Kremlin on the eve of each cabinet shakeup and other murky innuendo hardly constitute evidence, convincing or otherwise, of a complex set of political and economic phenomena. ₁₆ The fact is that Yeltsin sacks ministers with extraordinary frequency and the reasons in each case are often complex or unclear.

With the recent appointment of former spymaster Yevgeny Primakov as prime minister and his subsequent appointment of Soviet–era officials sympathetic to the idea of some state–controlled property, many commentators have rushed to declare the "oligarchy" to be simply "out of favor" with Yeltsin and the government. This view may also be misleading. Those who thought of Russia as an oligarchy were correct in identifying the special relationship between government and business in post–Soviet Russia. However, they mischaracterized the relationship as one in which government was reduced to little more than a puppet controlled by a business elite, and failed to see the reciprocal relationship in which government actually has the upper hand. In presenting the recent changes as the "end of oligarchy," we are in danger of accepting a misreading of the past as well as failing to appreciate the continuity of the cozy relationship between government and business into the present. The oligarchy was not "overthrown," because no such oligarchy existed; furthermore, it quite likely that the Primakov government will continue to work within a reciprocal relationship with business in which government will almost always have the upper hand. The change in government may reflect not so much the creation of a new political–economic system in Russia as much as the continuity of a pre–existing system that went simply unrecognized by Western observers. Throughout the government’s various incarnations this decade, the structure of the government–business relationship has remained intact. Its content and players may change–but private businessmen and government officials have generally turned to each other to solve major tasks in a way that has substituted for a market.

Along these lines, the Russian Central Bank’s efforts during the recent financial crisis to support major commercial banks while simultaneously undertaking moves that hurt those banks exemplify continuity in the government’s give–and–take relationship with big business. The Primakov government’s unfolding program to aid domestic industry while restricting some profit–making activities, printing money, and eliminating some of the market–like elements of the past represents a similar relationship. Private businessmen profited under the bank’s practices of printing money and channeling state credits through banks earlier this decade; the arrangement typified a close business–government relationship. So did the reformers’ loans for shares scheme, even as it established the reciprocal relationship on new terms. The point is that the government–business relationship remains intact, regardless of who is in the cabinet.

Comparisons of Russian capitalists to the so–called "robber–barons" of the United States in the nineteenth century has produced another misleading analogy that also fails to assess the role of the government. Whereas the American oil, railway, and steel barons were largely free to create assets and build corporations by dint of a laissez–faire environment in which the state sat on the sidelines, Russian capitalists have needed government assistance with or approval of most of their key transactions and operations. Whereas the United States of the so–called "robber baron" era had a small state sphere with few rules, modern Russia has a weak but large state sector with a myriad of rules selectively interpreted and applied by the government. Capitalists such as Carnegie and Rockefeller created entire industries where before none existed; Russian businessmen have inherited existing industries, created nothing, and introduced few changes to their Soviet–era practices. The American industrialists were production– and growth–oriented and heavy re–investors in their assets. By contrast, Russia’s businessmen generally lack the modern management skills, financial resources, and long–term investment strategies and capabilities needed to restructure their assets and make them perform efficiently and profitably.

Comparisons between modern Russia and the American robber–baron era are valid with regard to the weak legal and capital markets systems of both periods. There is no doubt that the stock manipulation, shareholder rights violations, and outright fraud that figured prominently in late 19th century America are also present in 1990s Russia. In one of the earliest cases, Komineft, a small, independent oil producer, conducted a secret share issue in 1994 that diluted existing shareholdings by around one half and upset foreign shareholders. ₁₇ A more recent example is Rossiisky Kredit’s long battle to translate its equity stake in the Lebedinsky mining and enriching complex, Russia’s largest iron ore producer, into seats on the company’s board. The board had planned to thwart the legitimate move by illegally issuing more shares. ₁₈ These and other similar episodes are features of an entrepreneurial environment without fixed rule of law; of a weak state lacking a framework of rules and regulations.

In general, leading Russian businessmen, whose banking, trading, and industrial interests are formal monopolies or groups under single corporate roofs, are too fractured among themselves to form a coherent, unified group, and too weak individually to exert much force. The so–called banker/industrialist lobby is deeply divided and competitive within its own ranks, with individual businessmen jockeying with each other for government favors to ripen the fruits of their entrepreneurial endeavors. Though individually wealthy and undoubtedly influential, they are not a monolith with uniform interests. In an environment where rules are applied individually, this heterogeneity of composition both requires and produces a heterogeneity of government–sponsored support systems. As Chubais, who oversaw the creation of these interests, correctly noted in March 1998, "...[B]ankers are not all the same, and different groups have different interests, sometimes even diametrically opposed interests." ₁₉

With industrial assets in the oil, gas, non–ferrous metals, and telecommunications industries, as well as commercial and investment banks and trading houses that deal in everything from crude oil and Cuban raw sugar to consumer goods and foodstuffs, the groups require individual acts of government support to keep their activities going and are affected in different ways by government policy. A devalued ruble, for example, in principle helps oil companies facing rising production and transport costs by affording them more rubles when they convert a portion of their hard currency receipts from exports–especially if the ruble falls faster than inflation rises. But the same devalued ruble is decidedly less advantageous to a bank with hard currency–denominated debt on which it must make interest payments. The result of corporate heterogeneity, which exists within as well as between individual conglomerates, is an intense jockeying for limited government resources, favors, and audiences. The establishment by bankers of an "Economic Cooperation Council" in June 1998 to "help" the government with what was then an economic anti–crisis plan is the most recent organizational evidence of the dynamic by which business seeks channels of influence. For the bankers, the council was to be a coveted channel of communication with decision makers. For the government, it was to be a means of keeping tabs on the ability of companies to pay taxes on time.

Of course, there are many examples of effective collective lobbying of the government by the new capitalist class. This is not, however, an example of the private sector dictating financial policy. Rather, it points to the degree to which the reformist government viewed its own interests as part and parcel of those in the private sector and worked with big business to further those interests. A government that has put major industrial assets in the hands of banks, used those banks for state financing, and counted on those banks to serve as a bulwark against the communists and a future springboard for industry has little interest in seeing those banks fail. The Primakov government has clearly shared this sentiment.

Neither the presence of individuals managing wealth and assets nor the drive by officials to secure income from those assets in the form of taxes for the state budget make Russian capitalism unique. What is unusual about Russia is the system by which both sides work together–at times far from harmoniously–in the absence of a market. Before we spell out some of the ways in which Russia–far from ever having been a business oligarchy–is a state in which government exercises considerable control over big business within its close relationship to the private sector, we must conduct a closer examination of the process by major corporate entities were created.

Section III
The Role Of The Government In Creating Big Business Players

The organizational forms in which Russia’s major export–oriented capitalists operate–generally, large conglomerates or monopolies–are the product not of markets or economic efficiency but of the constraints of a non–market, dysfunctional economy. In such an economy, the largest companies have the best chances of functioning because they are the most likely to receive state aid and privileges. The government is more likely to assist a large, export–oriented enterprise than a small enterprise whose markets are domestic, simply because the state needs revenue streams in the form of tax payments. The system of reciprocity, in which government aids big business and big business generally works with the government to support state activities, swelled with the government’s formation of a new group of asset owners from private sector businessmen.

Despite squabbles over how Russia’s most valuable industrial assets would be divided up, the general goal of both the government and nascent capitalists–the creation of a class of private business owners–broadly coincided in the early years of reform. The "raw materials" Moscow initially used were the private bankers, businessmen, and former officials turned corporate managers who emerged amid the collapse of the foreign trade and central financing systems in 1991.

Some senior bankers, politically well connected, came out of the Ministry of Foreign Economic Relations, growing rich on exports carried out via special licenses and quotas procured from ministry contacts, on imports conducted via special subsidies, and on the processing of government credits. The latter procedure, which involved banks receiving government budget money and speculating in foreign currency and domestic bond markets, yielded lucrative returns when the difference between low interest rates and high inflation was calculated. Lacking the institution and organization of a treasury, the government used major "authorized" banks to carry out its business, a mutually beneficial and functional arrangement that afforded high returns to the private end and enabled the government to carry out necessary fiscal matters. Some of the most prominent banks, notably Uneximbank, Menatep, and Alfa Bank, were founded amid this loosening of trade controls, making their initial fortunes in this inflationary and opportunistic environment by arbitraging the differences between domestic and world prices for commodities, including oil, non–ferrous metals (aluminum, copper, and nickel), and timber. Banks also did a thriving trade in privatization vouchers over late–1992 to mid–1994, acquiring certificates via "investment funds" that bought the paper from citizens who preferred cash to stock. In the earliest days of post–Soviet Russian capitalism, few major entrepreneurial opportunities could be leveraged without government contacts or assistance. Not just anyone could export oil or become an "authorized" bank. Cozy reciprocity between the state and private sector existed from the moment the latter was born after the Soviet collapse.

It was this "starter–capital," meager by Western standards, that the government married with major export–oriented industrial enterprises in the loans for shares scheme. Voucher privatization had put much state property, mostly small businesses, into private hands, and given citizens a small stake in the transformation. Subsequent investment tenders and cash auctions had proceeded haltingly, bringing little cash to the state. Neither process had done enough in the eyes of reformers to create a bulwark against a possible communist rollback or establish a base from which enterprises could eventually be overhauled for the post–planned economy era.

In the non–ferrous metals, textile, and chemical sectors that were hard hit by the collapse in central planning, conglomerates had taken shape amid government legislation "authorizing" the corporate form and a flurry of positive official talk about its potential to remake industry. Such industry–led financial–industrial groups (FIGs), as Juliet Johnson has called them, grouped together individual plants that had been part of a single production complex, and were the organizational form that resulted from the breakdown of the old supply linkages of the planned economy. ₂₀ By contrast, FIGs constructed through the loans for shares scheme had less of a functional quality–putting a nickel smelter and an oil company under one corporate umbrella did little to ensure production supplies or to clarify the different types of restructuring needed by two different industries–especially when the bank at the head of the group had neither the cash nor the expertise needed for restructuring. Instead, the so–called bank–led FIGs took shape as a result of political goals, rather than of everyday operational needs, and exemplified a cozy relationship between government and business.

Loans for shares quickly came to be seen by reformers as an opportunity to raise fast cash, stave off any return to the communist past, and mold the corporate organizational forms that stood the best chance of remaking a system unprepared for life beyond central planning. In awarding assets to a narrow clique, the process exemplified the coziness that had swelled through the government’s practice of channeling state credits through banks and, later, of raising financing by issuing high–yielding short–term Treasury bills (GKOs) that banks eagerly purchased to use as collateral against Western loans. Often viewed as simply a give–away, loans for shares was mutually beneficial: senior private businessmen gained control over major assets, while the government got short term cash flow and increased the size of the private sector in a very short space of time. The scheme also reflected the government’s hope that private banks would one day replace the state in providing capital investments to enterprises.

Under the well–known terms of the program, Chubais enthusiastically took a private sector proposal to lend the cash–starved government around $2 billion in exchange for management rights over state stakes in key companies and turned it into a government–run program administered by Alfred Kokh, a Chubais ally who was chairman of the State Property Committee. The idea originated with Uneximbank head Potanin, who had informally set up a consortium grouping Alfa bank, Vozrozhdeniye, Bank–Imperial, Inkombank, International Financial Company (MFK, Potanin’s own bank), Menatep, Uneximbank, Rossiisky Kredit, and Stolichny bank. The proposal went through many permutations, with the government making many changes to the scheme before it formally began. The consortium, whose original variant notably did not include Berezovsky or any of his affiliates, was ultimately scrapped in favor of ad hoc deals between individual banks and the government, a fact which reflected the government’s autonomous decision–making power over the entire process. The list of companies whose shares were up for management rights changed repeatedly, with state–owned Gazprom using its leverage as Russia’s highest earning and highest tax paying monopoly to convince the government that diverse equity ownership of the company was akin to a diverse domestic gas industry with multiple players–a move the government, headed by former gas ministry head Chernomyrdin–did not view as expedient or desirable. Gazprom shares were not included in the program. What is worth noting is that the government shaped the terms of the scheme from the outset, shaping a mutually beneficial program that emerged out of and further strengthened the system of cozy reciprocity.

According to the deal, if Moscow should opt not to repay the loans, banks holding the shares in trust would offer them up in public tenders. The government never moved to repay the loans. Subsequent auctions, organized and run by the very companies that held the shares in trust, resulted in winners closely allied with the company running the sales–an outcome that created the unmistakable impression of pre–arranged winners. The stakes were nearly always priced at a fraction of their estimated market values, reflecting both the relatively cash–poor status of Russia’s banks and the government’s determination nonetheless to see those banks become owners. Foreign bidders were shut out via a variety of mechanisms, including the rapid speed with which tenders were announced and held (which prevented cobbling together financing) and, more than once, terms that required bidders to meet unusual conditions that only a company allied with the seller of the stake (and arranger of the auction) could meet.

Winning top–dollar money for crown jewel assets was never the government’s objective in loans for shares; otherwise, foreign bids in consortium with Russian entities would have been allowed and the auctions would have had much higher minimum starting bids. That the highest bidder did not win an auction for a major stake in Norilsk Nickel in 1997 was obvious evidence of the logic behind the scheme. That foreigners were de facto excluded is evidence less of Russian xenophobic fear that the country’s most valuable assets would fall into foreign hands and more of the reformist government’s desire to keep assets out of the hands of Communists, who would likely have pushed for the overturn of foreign and perhaps all private ownership. As Chubais, who had long worried about a possible roll–back in reforms, noted in 1998, "In 1995, all forces were against money–based privatization...everyone wanted to retain control of state property just a little longer...so at the time, the choice was between having at least some kind of privatization, and no privatization at all." ₂₁

The most significant loans for shares auctions over 1996 and 1997 resulted in the creation of four major groups. The Interros holding company, anchored by Uneximbank, acquired the Sidanko oil company, Norilsk Nickel, and Novolipetsk iron metallurgical combine; Menatep Bank acquired the YUKOS oil company; Berezovsky–led LogoVAZ teamed with SBS–Agro, the largest private bank by deposits, to acquire the Sibneft oil company; Alfa Group, headed by Mikhail Fridman, acquired the Tyumen Oil Company. Other major corporate groups existed prior to loans for shares or were formed outside the scheme; they include Gazprom and LUKoil. Vladimir Gusinsky’s Most Bank, often included in the new capitalist class, has no major industrial assets.

Throughout privatization, business players had sparred with each other over procedures and outcomes. In the 1997 loans for shares auction of the Sibneft oil company, for example, Uneximbank unsuccessfully went head to head with LogoVAZ in bidding for a 51 percent stake in the company held in trust by LogoVAZ. That it lost but later went on to win other major auctions suggests that competition for control over state–owned assets reflected jockeying within the general system of cozy reciprocity with the government, and not a fundamental ideological disagreement with that system.

Capitalist competition had a particularly Russian flavor–one that reflected an economic culture in which size, not nimbleness, was the goal. The desire by many businessmen to bring disparate assets under one corporate roof, regardless of efficiency or fit, reflected a focus on size, and not on selective exploitation of carefully considered opportunities. The establishment of gigantic holding companies with radically varied assets, headed by individuals who knew virtually nothing about the energy and metals industries and little about running large enterprises in general, was thus an exercise in political strategy, not market–oriented nimbleness. In part, the logic behind this particular brand of capitalism reflected a conviction on the part of both the reformist government and private sector businessmen that size and mass were effective organizational features. The form major private Russian businesses have taken this decade is testimony less to market and entrepreneurial forces and more to the role played by a political culture that intertwines business and the government. ₂₂ The government, not markets, decided what form these new holding companies would take. As Mikhail Khodorkovsky, the head of Rosprom, the financial industrial group that includes the YUKOS oil company and Bank Menatep, said in September 1997, "I have dreamt all my life of being the head of a major industrial enterprise. Today I am the head of a major industrial enterprise and I am aware that this was done by decision of the president, by decision of the government. Without this support I could never hold the position I am holding...we understand that we are part of this state and depend on the state and that the state depends on us, and that we can attain our goals only through joint work." ₂₃ Khodorkovsky’s mention of "joint work" is a reference to the system of reciprocity we have described.

In the period following loans for shares, the general system of cozy reciprocity remained intact, but its tenor and workings changed. The system seemed less functional to reformers, especially to Boris Nemstov, whose conceptions of what needed to be done for reforms and for the economy as a whole appeared to change. As the government paid increasing attention to IMF exhortations to raise tax collection levels and trim spending, it increasingly turned to the conglomerates it had created and to companies it had kept as monopolies, notably Gazprom. Ultimately, the government was to recast the terms of the system, but not, in the absence of full–fledged markets, to cast off the system itself. Before we examine this recasting and its implications for the government–business relationship, we will outline some of the workings of that relationship.

Section IV
Cozy Reciprocity And The Government’S Exercise Of Control Over Big Business

Given the role of the government in creating Russia’s private business sector, and of the presence of the Soviet state in economic, financial, and, under Gorbachev, nascent semi–private business spheres, it is not surprising to look at post–Soviet Russia’s economic space and find the hand of the government everywhere. Yet in popular examinations of Russian capitalism, the role of government has been neglected. Regardless of its composition at any particular moment, the government has at its disposal a variety of ways of exerting power and authority over big business. In the weak Russian state, where the presidency holds extraordinary powers and government officials have broad discretionary powers, it is not unreasonable to characterize economic matters as a sphere in which the government giveth, and the government taketh away. The Kremlin and ministries have consistently been able to affect the balance sheets of companies in both positive and negative ways through a variety of measures, including export controls, approvals of and restrictions on commercial contracts, decrees on personnel changes at major corporations, and–the prize for Russia’s new businessmen–decrees on debt forgiveness, rescheduling of tax arrears, and funding for major initiatives. These measures are applied on an ad hoc basis to individual companies as well as broadly across individual industrial sectors. While businessmen often seek the same broad types of government support for their activities through the same general structures–for example, presidential decrees on tax breaks or government resolutions lowering export duties–the actual content of each item of assistance doled out by the government is usually particular to each individual business. Government favors, even those with a reformist bent, are not the building blocks of a system with standard rules.

Government regulations and informal rules still require or encourage privatized oil and electricity companies to provide minimum volumes to high–cost, often non–paying regions that would freeze if left to the market for supplies. Such enterprises also continue to bear most of the enormous costs of supporting the vast social infrastructure surrounding their operations. (By some estimates, only 20 percent of Russian oil companies’ domestic sales occur on a market). ₂₄ In exchange, the companies engage in fairly unrestricted exports, an arrangement that exemplifies the reciprocity cycle by providing hard currency receipts for the federal budget and cash earnings for the companies. ₂₅ Gazprom, the natural gas monopoly that is the world’s biggest gas company and Russia’s biggest revenue earner, accounting for one quarter of total annual budget receipts, provides "the employees of [its] gas enterprises in the Northern Areas [of Russia] with all of life’s necessities." ₂₆ Norilsk Nickel, the giant mining and metallurgical complex that accounts for one fifth of the world’s nickel output and nearly two thirds of its palladium production, scrambles every summer to procure and haul goods up the Yenisei River to its giant company town 200 miles north of the Arctic Circle; the company says it spends a stunning 40 percent of its revenues on housing for workers, pensions, and Soviet–era benefits such as kindergartens, hospitals and other cradle–to–grave services. ₂₇

Engaging in such activities is not economically "rational," in the sense of profit–maximizing–yet not engaging would spark a severe clash with the paternalistic government and likely lead to a diminishment or loss of control over export activities. Among oil industry executives, who have watched the entire privatization of their industry proceed by Yeltsin decrees, and whose export activities are still heavily influenced by the government, it is no wonder that public officials are viewed as key allies in operational and strategic matters. ₂₈

Throughout this decade, the government has forced oil companies to supply certain minimum volumes of crude and refined oil to domestic plants and enterprises before exporting the remainder. In winter of 1994–1995, the government banned hard–currency earning exports of heavy fuel oil, known as mazut, to ensure adequate supplies for energy–guzzling domestic power plants. In the 1996–1997 winter season, it scrapped a ban in favor of an export tariff on each ton sold abroad. Both of these moves ensured that private and quasi–private oil producers and traders met the needs of areas that the market would likely have left high and dry due to differences between domestic and world energy prices. "Regular" oil exports are also subject to non–market forces. Each month, Transneft, the state–owned oil pipeline monopoly, composes a loading schedule allotting export space to producers; the schedules vary monthly, depending not just on production levels but also on ad hoc government decisions awarding or revoking space within an infrastructure stretched to capacity. An increase for one player is a decrease for others, given the limited capacity.

A 1996 government decree allowed giant producer Surgutneftegaz to export extra volumes (at the expense of other oil companies’ pipeline space) to raise money to build a major port near St. Petersburg. In August 1998, the government said it would provide export "guarantees"–i.e. guaranteed access to pipelines–to LUKoil to help it get an international syndicated loan of up to $4.0 billion. ₂₉ A government decree expanded the export capacity of state–owned oil firm Rosneft by 200,000 tons in September 1998, presumably to improve the company’s finances on the eve of an international tender, now canceled. And in a move that demonstrated its considerable power to prevent oil companies from being locked out of international capital markets for years, the government said in September 1998 that it would not cut export volumes of oil companies holding export–backed loans from Western banks. ₃₀ In short, the government doles out favors as much as it rescinds them.

Other government and presidential approvals serve to constitute or torpedo corporate deals. In 1995, in a unique deal, the government secretly approved Bank Menatep’s behind–the–scenes acquisition of small packets of state–owned shares in five oil firms (SIDANKO, the Tyumen Oil Company, KomiTEK, the Orenburg Oil Company (Onako), and the Eastern Oil Company) and the Ust–Ilimsk paper mill. ₃₁ It vetoed a proposal by MMT, the Moscow international and intercity telephone network, to merge with Rostelekom, the national long distance and international carrier. It torpedoed former Fuel and Energy Minister Yuri Shafranik’s ill–starred, long–secret bid to form Russia’s largest oil company by combining the Tyumen Oil Company, the Orenburg Oil Company, the Eastern Oil Company, and Slavneft (the latter a Russian–Belarussian joint venture). It forced LUKoil out of a lucrative, privately–negotiated offshore production deal with the Central Asian state of Turkmenistan after the Turkmen president objected that the deal violated Turkemenistan’s definition of territorial waters–a definition with which Moscow does not technically agree. Yet the government approved LUKoil’s 1995 sale of $250 million in convertible bonds to the Atlantic Richfield Co.–bonds that when purchased were convertible into shares held by the state.

On the corporate personnel side, the government has considerable power to decide who runs major exporting companies in which the state still holds an equity stake. An April 1996 Chernomyrdin decree sacked Anatoly Filatov from his post as chief executive at Norilsk Nickel amid unpaid wages. Tax inspectorate chief Boris Fyodorov threatened to sack Onako’s leadership over tax arrears. A Kiriyenko decree removed Rosneft’s chief figures from their posts in May 1998 after the company failed to attract bidders for a $2.1 billion, 75 percent stake. (That the failed auction took place during considerable global financial turmoil and a depressed Russian stock market did not make a difference to the government).

Government decrees rescheduling a company’s corporate tax debt or transferring "social costs," such as financial support of schools and hospitals, to the regions are highly coveted. Norilsk Nickel sought and won a presidential decree in August 1996 granting the company $1 billion in tax breaks and assorted privileges. In 1996, under IMF pressure, the government agreed to shut down Gazprom’s tax–free "stabilization fund," essentially a secret slush account where the monopoly had stashed billions in hard currency earnings, putatively for reinvestment. Subsequent crackdowns on tax arrears at Russia’s most powerful company took place. The moves demonstrated the extent to which the government, even in the hands of Chernomyrdin, the former head of the gas ministry that became Gazprom, was ultimately in charge of the show.

Other state organizations, such as the Russian Central Bank, have also played a role. Despite its formal status as an independent body, the Central Bank (whose head is appointed by the president) has long been a major official player capable of influencing the composition and fortunes of leading banks and enterprises. Its moves during Russia’s recent financial crisis underscore the degree to which the government, not private sector bankers, have been calling the shots and shaping the fate of business. The decisions the Central Bank has taken in recent months have improved the lot of private businessmen in some ways and worsened it in others.

In a move that recalls the government’s steps under loans for shares to constitute new entities, the Central Bank recently ordered six leading banks–SBS–Agro, Most Bank, Inkombank, Promstroibank, Mosbiznesbank, and Bank Menatep–to combine their assets. Only two weeks earlier, Most Bank, Uneximbank, and Menatep–bitter rivals in recent privatization sales–said they would effectively merge by pooling their resources to better weather the country’s financial crisis. The Central Bank’s order regarding the six banks would appear to override the three banks’ own initiative; it suggests the power of officialdom to decide who exists and how, at least among financial institutions. The Central Bank also revoked the operating license of Bank Imperial, a medium–sized bank owned by Gazprom and LUKoil, and took over Inkombank, Russia’s third largest bank by assets.

But the Central Bank also lent a helping hand to private banks. To stem hard currency outflows, it imposed a 90–day moratorium on repayment of most foreign loans held by all banks; it also promised to help the 12 largest banks with cash injections and extended emergency aid to SBS–Agro and Inkombank. It moved to restructure GKO Treasury bills and OFZ bonds held by domestic and foreign banks, with a view to helping domestic banks first. A one–day rollercoaster ride by the ruble in mid–September, when leading, cash–strapped Russian banks rushed to buy dollars to meet forward contracts with Western financial institutions before the ruble plunged 40 percent at the end of the day, may have been a sign of the Central Bank’s interventionist efforts to help banks buy enough hard currency to meet contract obligations. ₃₂

In a move affecting the balance sheets of oil companies, the Central Bank said in September that it would require oil exporters to exchange at least 50 percent of their hard currency export earnings for rubles on the interbank market. Previously, oil companies could carry out the transaction on the "free" market, where rates are often more advantageous.

This is not an exhaustive list, but it does point to some of the ways in ways in which the government is heavily involved in the financial and economic life of the private sector. Amid such measures, it is difficult to view Russia’s business elite as an "oligarchy" that "controls" the government and the economy.

That the Russian government has at times brought a few prominent businessmen into its ranks is often cited as evidence not just of the influence the private sector has in government corridors of power but more broadly of the private sector’s ability to "control" both the government and the economy. While it is understandable why Russian observers–steeped in a Marxist tradition that has historically equated power with wealth and that is inclined to analyze all political activity in terms of individuals–take this tack, such an approach is less interesting in the hands of Western observers with a larger kit of analytical tools. Governments around the world routinely turn to the private sector to staff their ranks. Influence and prominence, and even occasional instances of corruption, should not be conflated with outright power or control. As Chubais noted in May 1998, "You may be surprised to hear this from me, but I believe that the oligarchs should always have their channels of influence. To deprive them of these channels would be to deprive the government of feedback, i.e. of the opportunity to monitor their reaction to the decisions it makes." ₃₃

The major businessmen who held key government positions–Berezovsky and Potanin–did so for relatively short periods of time or have served in figurehead posts with relatively little decision–making power. Among Russia’s business elite, only Berezovsky appears to seek outright government positions. Appointed by Yeltsin as deputy secretary to the policy–making Security Council in 1996 but removed a year later, Berezovsky left little mark there. Appointed later that year as executive secretary of the Commonwealth of Independent States, he now occupies a figure–head position that mainly involves arranging meetings among the CIS heads of state. While such positions provide access to high level decision makers, they do little to promote Berezovsky’s direct business interests and provide little, if any, decision–making power to Berezovsky himself. His appointments suggest the degree to which Russian big business courts favor in political corridors, not the degree to which big business "runs" the economy.

Unlike Berezovsky, Potanin occupied a significant decision–making position. Trained in international economics, he began his career at the Ministry for Foreign Economic Relations in the late 1980s, leaving in 1993 to found Uneximbank with the aid of contacts in Vneshtorgbank, the powerful Soviet era trade financing bank. In August 1996 Potanin was appointed by Yeltsin as first deputy prime minister in charge of the economy, a portfolio that included privatization and anti–monopoly work. The appointment came days after Yeltsin granted Norilsk Nickel, which Uneximbank owns, a giant $1 billion in tax breaks and other privileges. There is strong evidence that Chernomyrdin and Yeltsin thought that Potanin could achieve the functional task of straightening out the Russian economy; that the author of the loans for shares scheme, one of a few major businessmen not out of the "Red Director" mold, could have similarly innovative ideas for the economy as a whole. For this reason Potanin was given a policy–making, not nominal, position. ₃₄

Tax breaks were awarded to Norilsk because of the company’s importance to state coffers as a producer of billions of dollars worth of precious metals each year, and Potanin’s appointment came after the tax break decree so that he could concentrate on trying to fix the economy. The government, wanting to build up the depleted state precious metals reserves but worried that strikes at Norilsk over unpaid wages could dent that plan, moved to erase some of Norilsk’s overdue taxes in order to ensure future revenues. ₃₅

Potanin’s eight–month–long assignment ended in the April 1997 cabinet reshuffle in which Yeltsin once again swept the playing board clean. For a private sector businessman deemed to have been in control of the government, he did not last very long.

If Berezovsky, big business, or any other private entity were "controlling" the government, we would expect to see one or the other in major positions over the long term and consistently able to appoint officials with views consistently amenable to the business agenda. The revolving door of the Russian government shows that this is not the case. It is hard to imagine businessmen installing Yuri Maslyukov, the former chief of Gosplan, the state planning commission, and an advocate of some renationalization of property, as Primakov’s first deputy prime minister in charge of the economy. It is not hard, however, to imagine businessmen continuing to seek ways to work with the government.

Section V
Recasting The Bargain: The Svyazinvest Auction

The unprecedented public feuding that broke out between prominent businessmen and the government over the result of the July 1997 sale of the Svyazinvest telecommunications company is often cited as evidence of the power and influence of a clique of bankers over the government and the economy. In fact, the episode is evidence of a change in thinking by reformers, who had come to regard the system of reciprocity as no longer useful, and of the government’s authority and power to put that change into action. Svyazinvest reflects what we have described all along as the government’s power to set up the rules of the capitalist game. This time, the rules embodied the government’s move to recast the system of reciprocity as a new, more market–oriented relationship between state and private sectors.

The auction of Svyazinvest, a holding company with major stakes in regional telecoms firms, represented a break with loans for shares in that it involved a market–value price, Western participants, and what appeared to be a transparent bidding procedure. The sale was commonly read as evidence that Russian reformers were "finally" working to implement a free and fair system for acquiring assets as they had always "tried" but "failed" to do, due to the "control" of privatization by the business "oligarchy." But as discussed in the loans for shares section, Russia’s reformers had the discretionary power and authority to award assets as they wished; major enterprises were not "grabbed" but instead were transferred to a new, government–supported and government–approved business elite. The Svyazinvest auction reflected reformers’ conception of what needed to be done in the future. Reformers came to see the system of reciprocity–in which the government awarded major assets to conglomerates that it hoped would serve as a bulwark against communism and produce adequate revenues for the budget–as having outlived its usefulness amid severe tax arrears. As Chubais said in a description of Russian capitalism’s changes, "...one set of problems gets replaced by another, but the price changes too." ₃₆ The costs of the system had become too high; regardless of the difficulties companies had in getting paid on time or at all in their domestic operations, the state simply needed more tax revenues in cash from these companies than it was receiving. From now on, reformers declared, auctions of state property were to be free and fair, with the highest bidder winning. In December 1997, Chubais described his new policy as one in which he had told business, "Listen, guys, I have one simple condition–the rules of the game are the same for everyone...whoever offers to pay the most buys what’s up for sale, and that’s that." ₃₇ Against the backdrop of a dysfunctional economy in which barter, rather than markets, and inefficient practices, rather than restructuring, reigned, cozy reciprocity came to be seen by reformers less as a standby functional arrangement and more as an impediment to economic functionality. The hands–off policy toward tax debtors–a staple of the system of cozy reciprocity–was not only no longer in the state’s interests; the policy threatened to weaken the government’s ability to function because it did not provide enough resources. It was against this backdrop that Chubais said in December 1997, "...now that business has gotten on its feet and become a real and powerful force, under no circumstances should the state become its servant." ₃₈

A quick review of the Svyazinvest episode serves to underscore the role of the auction in reshaping Russian capitalism.

A previous attempt to sell off part of Svyazinvest failed in 1995 when STET, the state–owned Italian carrier, backed out of a deal, claiming that the Russian government was not meeting the terms of the agreement. In a second round, two groups, both anchored by prominent but relatively cash–poor Russian banks that had linked up with Western financial institutions to secure financing, placed bids for the 25 percent stake once again on offer. The winning consortium, led by Potanin and George Soros, included Deutsche Morgan Grenfell, International Company for Finance and Investment (an Uneximbank unit), and Renaissance Capital, a Moscow investment bank closely allied with Uneximbank. The group’s $1.88 billion bid was well above the minimum starting price of $1.18 billion. A losing bid of $1.70 billion came from a consortium grouping Berezovsky (though he always denied having participated in the tender), Alfa Bank, Gusinsky’s Most Group, Spanish telecoms firm Telefonica, and Credit Suisse First Boston.

Immediately after the winner was declared, media outlets controlled by Berezovsky and Gusinsky launched an unprecedented tirade of invective against the reformist government and Potanin, complaining of the results and warning of "problems" for senior officials. Outlets controlled by Gusinsky–the NTV television network and Segodnya daily newspaper–slammed Nemtsov, whom Yeltsin had brought into the government four months earlier to try to clean up the economy and restructure monopolies. Media outlets controlled by Berezovsky–ORT television and Nezavisimaya Gazeta–also joined in the fray, heaping contumely upon officials and warning ominously of dark days ahead. Nemtsov hit back in an interview in Komsomolskaya Pravda, the daily newspaper controlled by Potanin’s Uneximbank, expressing fears that the losing bankers could seek to ally with communists and nationalists.

The entire episode unnerved both Russian and Western observers, who speculated about a possible government collapse and, in its wake, the march of a powerful group of businessmen to the decision–making throne. Yet what Svyazinvest illustrated was the competitive, divisive nature of private sector capitalists who had been viewed as a monolithic interest. Such behavior is hardly indicative of an "oligarchy". Furthermore, the issue for the losers in the auction, specifically for Berezovsky, was less the outcome of the sale and more the threat of a government–initiated change to the system of cozy reciprocity. There had always been grumbling among bankers in previous years over the outcomes of individual privatization cases, but never calls from senior businessmen for an end to the system of reciprocity that produced those outcomes. Svyazinvest was qualitatively different in that it reflected an attempt to shift from one system to another: from the personal, private, and opaque (cozy reciprocity) to the impersonal, transparent, and open (a market). The Svyazinvest aftermath points not to the influence and control of elite businessmen over the government but rather to the government’s influence and control over privatization and economic policy as a whole. Berezovsky’s diatribe revealed his panic at the prospect of a changing system in which personal contacts would count for less. (This would explain why the person who protested the Svyazinvest outcome most vociferously is also, as mentioned earlier, the businessmen who seeks the most political alliances.)

The feuding over Svyazinvest had come barely a year after leading businessmen had worked in concert to provide major financing for Yeltsin’s 1996 reelection campaign, which Chubais had coordinated. The assumption among the Svyazinvest losers was that this arrangement of cozy reciprocity would continue unchanged. But Chubais, an ideologue who was desperate to garner as much cash as possible for Yeltsin’s campaign war chest amid fears the Communists could win, sought and won money from business circles in the same way he sought and won money from the IMF–by using them in a functional arrangement.

Echoing Chubais’s change in thinking, Yeltsin summoned six leading businessmen to the Kremlin in September 1997 to referee the post–Svyazinvest fighting and to formally declare what he termed the government’s new, non–favoritist position. ₃₉

Many observers rushed to declare the meeting evidence of the government’s defensive, besieged stance and accorded banking circles ever increasing degrees of power and control. But the government was the power base here, not the private sector. More importantly, a change in ideology and conception, rather than any change in the position of influence of individual elites, was what shaped the event.

Why Russian reformers came at this particular moment–mid 1997–to see the system of reciprocity as less tenable is an interesting question–especially since such a change in thinking was by no means inevitable, then or at any other time. I argue that the change in reformers’ thinking was the hybrid result of the confluence of the IMF’s stepped–up monetarist rhetoric about tax collection and the Soviet/Russian notion that capitalist development occurs in stages. For its part, the IMF had increasingly preached the necessity of bolstering tax collection from major enterprises and intensified its talk about breaking up monopolies, such as Gazprom, to create open and competitive markets. For their part, reformers, who had acted as Bolsheviks in the early stages of privatization, seeking to remake an entire economy and economic culture in stages, perceived themselves by mid–1997 to be at a new "stage," in which major economic problems (wage and pension arrears, inter–enterprise debt) had swelled within the old system of cozy arrangements.

This "stage" had a grounding in a material as well as conceptual reality–tax collection shortfalls, and thus wage and pension arrears, were chronic. The result of these twin factors was a change in thinking among reformers about the next "stage" of Russian capitalism and a declaration of a policy of open auctions at fair–market values.

This recasting of the system of cozy reciprocity had immediate effects in other areas. After Svyazinvest, the government decided to stop servicing lucrative State Customs Committee accounts through Uneximbank from December 1997. Cash became a priority for the government, and cracking down on tax debtors became the means. Since energy firms–oil companies, Gazprom, and Unified Energy System, the national utility–account for around half of Russia’s total tax revenues, the energy sector became the target. In July 1998, the then–reformist government agreed to an IMF request to step up tax collection on oil companies as a condition of its most recent aid package–an agreement that came about not just due to a new receptivity to IMF pressure to implement change, but also due to a sense of sheer economic desperation arising out of a Marxist–based notion of change as occurring in stages.

Boris Fyodorov, then head of the State Tax Inspectorate, and Kiriyenko made no secret of the fact that they intended to crack down upon debtors in the oil industry–a recasting of the system of cozy reciprocity that evoked wails of protest from its target. Their calls for a 20 percent value–added tax to be paid to government coffers when goods are shipped, rather than when they are paid for, would have hit hard some of the very companies said to have "controlled" the government.

Nonetheless, the crackdown proceeded. Government decrees in August 1998 limited crude oil exports from two major oil producers over delinquent tax payments to the federal budget. Sidanko, Russia’s fifth–largest producer, found its export volumes cut 223,000 tons for the month, while the Orenburg Oil Company was cut 37,000 tons for the second month in a row. The government also docked both companies those amounts in September 1998. When Rosneft, the last state–owned oil company slated for privatization, fell behind in its tax payments early in 1998, the government did not hit it up out of fear of scaring away future investors on the eve of its planned sell–off.

One cannot know now, of course, how Kiriyenko’s crackdown on tax debtors and reformers’ vow to sell state property openly and fairly would have fared over time, since the collapse of the ruble cut short the recasting of the bargain. Sales of state stakes in Rosneft and Gazprom as well as a second tender for Svyazinvest–all of which were to have been test cases of the government’s willingness to alter the system of cozy reciprocity–were delayed or canceled. In any case, the government–business relationship has endured after the collapse of the reformist government. It is interesting to note how recent evidence suggests that the driver of Kiriyenko’s demise was not businessmen dissatisfied with the reformist government’s crackdown on tax debtors. Nemtsov, who initially blamed his ouster on "the oligarchs," later admitted in a September 1998 interview that Yeltsin had sacked the Kiriyenko government because of personal embarrassment stemming from the currency devaluation and the threat to Yeltsin’s authority that such embarrassment posed. According to Nemtsov, Kiriyenko had urged Yeltsin to state publicly that devaluation would not be necessary. Shortly thereafter, the ruble could no longer be maintained, and Russia was forced to effectively default on some of its debt. The firing of Kiriyenko reflected Yeltsin’s sense that his own authority had been undermined by the bad judgment of his prime minister. ₄₀

Section VI
Conclusion

Since the Soviet collapse, one finds in Russia a strong government astride a weak and protean state. The state is weak in that it lacks an impersonal framework of rules and procedures that would provide for the independent functioning of an autonomous, competitive private sector. The state is protean in that government changes have resulted in continual shakeups in the rules of the game for major private businesses.

Within these changes, however, one sees a significant degree of continuity in the preservation of government’s significant role vis–a–vis big, export–oriented companies. Russia’s weak and protean state is one that the private sector will continue to court, since public officials have so much discretionary power in Russia’s market–substitute economy. In recent years, the government created private big businesses but did not or could not (for political or cultural reasons) create an autonomous private sector following fixed sets of rules. Without the latter, the Russian government, regardless of its composition, will continue to be involved to a high degree in the creation and functioning of major private businesses. The individual rules of the game may shift–but in the absence of a working market, and in the presence of both a long history of government participation in the economy and a persistent conception of markets as dangerous and disorderly, the reciprocal government–business relationship persists.

The implication of the weak and protean character of the Russian state is that recent reforms–both as government policy and as private sector activity–are far from irreversible. In any case, most Russian officials generally reject capitalism as a system of competition involving genuine winners and losers, with survival of the fittest. The majority of Russians, official or otherwise, do not seem to view market competition as capable of creating a greater or common good.

Within Russia, one finds a plethora of notions about what the government–business relationship should look like. Berezovsky made no secret of his (failed) goal to see the state wholly serve big business. Gazprom has made it clear that the state and the monopoly rely on each other. Chubais saw the government–business relationship as one that should serve the economic and political goals of the government. Judging by his ad hoc decrees, Yeltsin appears to approve of a case–by–case, not systematic and impersonal, approach to big business. Populist reformer Nemtsov proclaimed the need for business and government to disentangle themselves to allow what he nebulously called "people’s capitalism," centered on a new middle class, to develop. Communists and nationalists want renationalized property in varying degrees.

The general Western model of free–market capitalism requires a strong state–in the sense of neutral, enforceable, transparent rules and procedures–and a "weak" government, in the sense of officials who lack discretionary power that could impinge upon established procedures, or who could selectively create and apply the rules of the game. Russia has the reverse: a weak state, and a strong government structure with much leeway to shape policy. This is not to suggest that the type of strong state Russia needs is one in which strength takes a personal, rather than institutional, form. The "Pinochet variant" would only be a return to Russia’s bloody past. For many reasons, including ones unique to her particular history, Russia needs to be guided by impersonal economic institutions, not a single powerful person.

As the sociologist Karl Polanyi concluded in his analysis of the unfolding of market economy in 18th and 19th century England, any move toward markets requires a powerful state apparatus to create and maintain a competitive mechanism. Competition does not emerge naturally, and Polanyi would not have been surprised to see that entrepreneurship did not just spring up between the cracks of the fallen Soviet state. "The road to the free market," he wrote, "was opened and kept open by an enormous increase in continuous, centrally–organized and controlled interventionism. Even free trade and competition required intervention to be workable." ₄₁ But whereas England had an interventionist state that secured rules for the creation of competition and intervened to maintain those rules, Russia simply has government officials applying rules as they wish. In the absence of state and market, Russia is left with a cozy reciprocity between government and business.

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Endnotes

Note 1: As Liliya Shevtsova writes, "The administrative tendencies of Russia’s new ruling elite indicate just how strongly traditional beliefs that democracy and marketization must somehow be "constructed" are embedded in the Russian political culture Back.

Note 2: As Liliya Shevtsova writes, "The administrative tendencies of Russia’s new ruling elite indicate just how strongly traditional beliefs that democracy and marketization must somehow be "constructed" are embedded in the Russian political culture." See Liliya Shevtsova, "Russia’s Post–Communist Politics," in Gail W. Lapidus, ed., The New Russia: Troubled Transformation (Boulder, CO: Westview Press, 1995), 31. Back.

Note 3: Commenting on the fact that the state has in many ways exited the private sector, Joseph Blasi, Marina Kroumova, and Douglas Kruse note that "governance has replaced government in many corporations." Jospeh Blasi et al., Kremlin Capitalism: Privatizing the Russian Economy (Ithaca, NY: Cornell University Press, 1997), 169. Our focus is on the big–business private sector, and not the private sector of small shop owners. Back.

Note 4: I am indebted to Keith Darden, Ph.D candidate in political science at the University of California–Berkeley, for this observation1 Blasi et al., 200. Back.

Note 5: International Monetary Fund, World Economic Outlook, May 1998 (Washington: International Monetary Fund, 1998), 145. Back.

Note 6: It is interesting to note that on the heels of criticism stemming from its failure to predict and prevent Asia’s financial crisis, the IMF was more worried about Russia than perhaps was popularly perceived . Note pp. 74–75 in its May 1998 outlook, where it says that Russia would appear to have all four kinds of crises identified by the IMF as red flags – currency, banking, systemic financial, and foreign debt. Back.

Note 7: Anders Aslund, epilogue in Anders Aslund, ed., Russia’s Economic Transformation in the 1990s (London and Washington: Pinter, 1997), 188. Back.

Note 8: Interview with Anatoly Chubais in Moskovsky Komsomolets, Dec. 29, 1997; translated and reprinted in Current Digest of the Post–Soviet Press, vol. xlix, no. 51. Back.

Note 9: According to Anders Aslund, this relative lack of concentration of wealth and power is evidence that Russia is not an oligarchy. See his "The Myth of Oligarchy," The Moscow Times, Jan. 29, 1998, reprinted by ISI Emerging Markets/Internet Securities, Inc. Back.

Note 10: Chrystia Freeland, John Thornhill, and Andrew Gowers, "Wealthy clique emerges from Kremlin doom," Financial Times (London), Oct. 31, 1996; and, by the same authors, "Moscow’s Group of Seven," Financial Times (London), Nov. 1, 1996. Back.

Note 11: Prikhvatizatsiya, the root of which is "to grab," is a pun on privatizatsiya, the Russian word for privatization. Back.

Note 12: Chrystia Freeland and John Thornhill, "Russia’s cowboy capitalists," Financial Times (London), Sept. 26, 1997. Back.

Note 13: Grigory Yavlinsky and Pavel Bunich, "Which Governs Russia: Money or Law?" Argumenty i fakty, no. 39, no date given; translated and reprinted in Russian Press Digest, published by Russica Information Inc. on Sept. 26, 1997. Back.

Note 14: Berezovsky has used Ronald Reagan’s former media consultant and also actively courts foreign diplomats, who pass along on his comments to Western policy making circles; see Paul Quinn–Judge, "Battle of the Bankers: In Russia, the Spoils go to the Well Connected," Time, Oct. 20, 1997. Back.

Note 15: Keith Darden, personal communication. Back.

Note 16: Alexander Lebed, the governor of Krasnoyarsk region and an on–again, off–again ally of Berezovsky, said in September 1998, "There was a time in Russia when everything that happened was said to be down to Trotsky. This role has now been taken on by Berezovsky. No matter what happens in the country, everybody sees "the hand of Berezovsky" behind it." (emphasis added). Argumenty i fakty, interview with Alexander Lebed, Sept. 8, 1998; translated and reprinted by BBC Summary of World Broadcasts, Sept. 10, 1998. Back.

Note 17: See Lynnley Browning, "Komineft Scandal Remains Unsettled’’, Reuters, Sept. 15, 1995, reprinted in The Moscow Tribune, Sept. 16, 1995. Back.

Note 18: See Valery Volkov, "Owner–Investor Conflict Leads to Attachment [sic] of Shares," Moscow News, Jan. 26, 1996. Back.

Note 19: "Anatoly Chubais Defends his Record," interview with Yevgenia Albats, Kommersant Daily, March 5, 1998; translated and reprinted in Current Digest of the Post Soviet Press, April 15, 1998. Back.

Note 20: Juliet Johnson, "Russia’s Emerging Financial–Industrial Groups," Post–Soviet Affairs, 1997, 13:4. Back.

Note 21: See Chubais interview with Yevgenia Albats, Kommersant Daily, March 5, 1998; translated and reprinted in Current Digest of the Post Soviet Press, April 15, 1998. Back.

Note 22: "In the case of the bank–led FIGs, the bankers have relied on the state to help them acquire and wield control over the most valuable Russian enterprises without going broke in the process." Johnson, "Russia’s Emerging Financial–Industrial Groups," 361. Back.

Note 23: NTV interview with Mikhail Khodorkovsky, Sept. 16, 1997; transcript from Official Kremlin International News Broadcast, Federal Information Systems Corp. Back.

Note 24: Deutsche Morgan Grenfell note of June 4, 1997, "Oil Taxes: The Situation Improves," p. 2. Eugene M. Khartukovprovides a fascinating analysis of how liberalization of Russia’s oil sector has created the illusion of a market economy in this industry. See his "Low oil prices, economic woes threaten Russia oil exports," Oil and Gas Journal, June 8, 1998. Back.

Note 25: In their description of Russia as a "virtual" economy dominated by barter and non–payments – a description formulated before Russia’s financial collapse in August 1998 – Clifford Gaddy and Barry Ickes accuse the West of having aided and abetted this disaster by providing $70 billion in funding that did nothing to restructure the system. See their "Russia’s Virtual Economy," Foreign Affairs, Sept./Oct.1998. Back.

Note 26: RAO Gazprom, Annual Report, 1996. Back.

Note 27: Lynnley Browning, "Norilsk Nickel Fights to Junk Soviet Past," Reuters, May 7, 1997. Back.

Note 28: The Deutsche Morgan Grenfell note comments that "there is no single authority for a[n oil] company to lobby ... the sheer number of taxes and variety of tax dollar destinations works against coherency as well as profitability." Back.

Note 29: Aleksandras Budrys, "Russia uses carrot and stick to collect tax," Reuters, Aug. 7, 1998. Back.

Note30: BC–BANKS/RUSSIA–EXPORT, Dow Jones, Aug. 18. 1998. The wire quoted a Western analyst as saying that "even the best structured secured export deal has a chance of being compromised by a very determined government." Back.

Note 31: Lynnley Browning, "State Swapped Shares for Menatep Stake," Reuters, Jan. 30, 1996. Back.

Note 32: Steven Mufson and David Hoffman, "Ruble Maneuver Saves Billions on Bank Deals," The Washington Post, Sept. 16, 1998. Back.

Note 33: "Chubais: An aggravated political situation isn’t too high a price for economic growth," interview in Novoye Vremya, No. 17, May 1998. Translated and reprinted by Russian Business Monitor, East European Press Service. Back.

Note 34: In a television interview transcript, Chubais said, "I think that Potanin was one of the most efficient first vice premiers in the previous government both in terms of his day–to–day work and how he effectively rescued the coal loan, and I know what it is because I started on it in 1995 and it was about to be derailed and it was saved through the efforts of Vladimir Olegovich." See "Interview with First Vice Premier Anatoly Chubais," translated and reprinted by Official Kremlin International News Broadcast, Federal Information Systems Corp., March 18, 1997. Back.

Note 35: For details, see Lynnley Browning, "Russia Sold Metals, Gems, But Gold Stays Home," Reuters, Jan. 31, 1997. Back.

Note 36: "Chubais Blasts Nezavisimaya; Tretyakov Returns Fire," interview in Nezavisimaya Gazeta, March 7, 1998, translated and reprinted by Current Digest of the Post–Soviet Press, Vol. 50, No. 10, April 8, 1998. Back.

Note 37: Chubais interview with Albats, op. cit. Back.

Note 38: "Chubais mounts media offensive of his own," interview with Anatoly Chubais in Moskovsky Komsomolets, Dec. 19, 1997, translated and reprinted in Current Digest of the Post–Soviet Press, vol. xlix, no. 51. Back.

Note 39: Yeltsin was quoted as saying: "The government is laying down clear and equal rules of economic behavior. The state will not put up with any attempt at pressure from the representatives of business and banks...We are determined stop any attempts by officials of any rank to set up their own rules of the game." Freeland and Thornhill, "Russia’s cowboy capitalists." Back.

Note 40: See David Hoffman, "The Reformer Out in the Cold," The Washington Post, Sept. 29, 1998. Back.

Note 41: Karl Polanyi, The Great Transformation. The Political and Economic Origins of Our Time (Boston: Beacon Press, 1957), 140, 150. Back.

The "Whither Russia?" Project

The goal of the "Whither Russia?" project is to illuminate for the international community the ongoing debate in Russia about the country’s identity, security, and interests. Our central question is: what will emerge as the dominant conception of Russian identity, Russian security, and Russian greatness? More specifically, we hope this project can help clarify: competing images of Russia across the political spectrum; how these competing images are reflected in policy; the shape of the debate in specific arenas; the views of the political elite and the public about the debate; differences between views in the regions and those at the center; common threads in the competing images of Russia; and, based on the conclusions drawn, Russia’s fundamental geopolitical and national interests.

As part of the project, we are publishing important works by leading Russian policymakers and academics addressing a set of three broad questions:

1. Who are the Russians? Authors are examining competing ideas and components of the Russian nation, Russian nationalism, and Russian national identity.
2. What is the nature of the Russian state? Monographs are analyzing competing images of the state, Russia’s status as a "Great Power," Russia’s national interests, and conceptions of Russia’s friends and enemies.
3. What is Russia’s Mission? Looking at Russia’s relations with the outside world: specifically with the Newly Independent States, the coalition of the Commonwealth of Independent States, and the West, and its orientation toward action, including its stated foreign policy and general international conduct.

In our efforts to present Western scholars and policy makers with the broadest range of views within Russia, we have solicited a range of opinions on highly controversial topics. The opinions expressed in the monographs are those of the authors and do not represent the views of Harvard University, the Belfer Center for Science and International Affairs, the Strengthening Democratic Institutions Project, the Carnegie Corporation of New York, or the translators and editors.

Graham Allison, Director
Strengthening Democratic Institutions Project