OLIGARCHY OR DEMOCRACY?
Russia faces a watershed decision. The vital question for
Russia is whether it will become a quasi-democratic oligarchy
with corporatist, criminal characteristics or take the more
difficult, painful road to becoming a normal, Western-style
democracy with a market economy. Communism is no longer
an option. That was settled in the 1996 presidential election.
Russians will make this fateful choice and be its principal
victims or beneficiaries. But its consequences to Americans,
Europeans, and others who share this shrinking globe should
not be underestimated. Contrary to the widespread view
in the United States that Russia is essentially irrelevant
or of secondary concern, our continental country, stretching
from Eastern Europe to upper Asia, will be important in
the next century because of its location between east
and west, its possession of weapons of mass destruction,
its natural resources, and its potential as a consumer
Unlike previous choices in recent Russian history, the
decision will not be made on a single day by a coup or
an election. Rather, it will evolve through the many decisions
made by Russia's millions of people, leaders and ordinary
citizens alike, over the coming years. Even President
Boris Yeltsin's sacking of much of his cabinet in March,
while deeply disturbing, was one more bump along the road,
not the end of the journey. Nevertheless, the route chosen
will be no less important than the choices made earlier
in the decade in its effect on the society in which our
children and grandchildren live.
Corporatist states, marked by high-level criminality
but bearing the trappings of democracy, differ more than
is sometimes recognized from Western-style market democracies.
Their markets are driven by oligarchs whose highest goal
is increasing their personal wealth. Freedom of the press
and other civil liberties are suppressed. Laws are frequently
ignored or suspended and constitutions obeyed only when
convenient. Corruption is rife from the streets to the
halls of power. Personalities, contacts, and clans count
for more than institutions and laws. For examples, one
need only reflect on the unhappy experiences of many Latin
American countries in the 1970s and 1980s.
Alternatively, in Western-style democracies, markets
are driven by the consumer. Government economic policies
are intended to serve the nation, not those in power.
Through hard work, citizens can succeed. Personal freedom
is universally respected, including the right to express
opinions that differ from those of the government. Civilian
rule is unchallenged. Corruption is normally minimal and
its spread swiftly checked. Laws and constitutions are
respected by both government leaders and citizens. The
contrast with oligarchy is stark. Over the past year,
increasing numbers of Russians have come to appreciate
that their country stands at a fork in the road.
RUSSIA'S ROBBER BARONS
the russian economy today shows signs of evolution toward
Western-style capitalism on the one hand and the consolidation
of corporatist, criminal-style capitalism on the other.
Western conventional wisdom emphasizes the former and thus
sees a Russia moving steadily toward a market economy. Indeed,
Russia has managed to lower inflation and, within reasonable
limits, stabilize its currency. Moscow is a boomtown. Some
of the newly established and privatized corporations that
operate with international mentalities and ambitions are
making their way to the top. Certain regions of the country
have received favorable international credit ratings, and
a handful of Russian companies have held successful international
bond issues. Young people are now ready to adapt to the
new market system and steer clear of crime as the country
develops new rules. The International Monetary Fund, while
occasionally delaying tranches of its $10 billion loan because
of poor tax collection, always seems to reinstate them after
promises by senior Russian officials to do better. All this
seemingly points toward the path of a normalized Western
But while Russia has its economic success stories, many
aspects of the economy suggest that it is moving toward
a corporatist market in which corruption is rampant. The
most important of these trends is the rise of the Russian
oligarchs, who have created a form of robber-baron capitalism.
Far from creating an open market, Russia has consolidated
a semi-criminal oligarchy that was already largely in
place under the old Soviet system. After communisms collapse,
it merely changed its appearance, just as a snake sheds
The new ruling elite is neither democratic nor communist,
neither conservative nor liberal—merely rapaciously greedy.
In an interview published in the Financial Times in November
1996, one Russian tycoon claimed that the country's seven
largest bankers, who became the core of Yeltsin's reelection
campaign, controlled more than half the Russian economy.
No one doubts that these nomenklatura capitalists have
had a profound impact on the Russian economy, but their
market of insider deals and political connections stands
in the way of an open economy that would benefit all Russian
citizens. The robber-baron market cannot tackle important
social and economic questions. It is primarily concerned
with issues that affect its masters' short-term power
At recent debates at Harvard University's U.S.-Russian
Investment Symposium and at the Davos World Economic Forum,
Western investors sharply criticized the robber-baron
mentality of many Russian business leaders and the process
of privatization under former Deputy Premier Anatoly Chubais.
As George Soros put it, first "the assets of the state
were stolen, and then when the state itself became valuable
as a source of legitimacy, it too was stolen."
Last summers auction by the state of the Svyazinvest
telecommunications giant is an example of how these tycoons
operate. This auction was to be the first where competitive
bids were held for a privatizing company. Unlike earlier
auctions, where the tycoons collaborated to gain huge
shares of industry for a fraction of their actual worth,
during the Svyazinvest auction the leaders of the rival
industrial syndicates could not agree on who would get
the company and were therefore forced to bid against each
other. The "bankers' war" that ensued was fought not with
bullets but through allegations of graft aired by their
media outlets. As a result, some of these tycoons were
removed from their government posts and corruption charges
were leveled against Chubais and his privatization team.
Such a fiasco hardly suggests a healthy capitalist system.
Worse, as of this writing, the same players are positioning
themselves for a second round in the war—the auction of
the Rosneft oil company.
There are many reasons why a country with nuclear, chemical,
and biological weapons should not be allowed to slip into
the chaos of rule by semi-criminal, corporate, oligarchic
robber barons. Unfortunately, those who believe that the
capitalism of the robber barons will eventually give way
to a market economy that benefits all in society, as occurred
in the United States at the turn of the century, are mistaken.
America had an established middle class with a work ethic
and a government that remained largely free of robber-baron
infiltration. The American tycoons were still investing
in their own country. Russia's robber barons are stifling
their homeland's economic growth by stealing from Russia
and investing abroad. In the late 1990s, Russia has no
emerging middle class, and the oligarchy, which is deeply
involved in the government, can alter policy for its private
In the meantime, while the big boys—they are all men—fight
over an ever larger piece of the Russian economic pie,
the government has been unable to create economic conditions
in which the majority of Russians can thrive. The problem
is not only that the majority of Russians remain worse
off than before the economic transition began, but that
they cannot become better off. The economy is stagnating
at half its 1989 level. Real incomes have fallen by a
third, and living standards in most regions have deteriorated
to levels not seen in decades. Government attempts to
curb inflation resulted not only in tremendous wage and
pension arrears, but also in the government's inability
to pay its bills for the goods and services it consumed.
This led to total disarray in payments, with up to 75
percent of goods and services either paid in kind, or
by promissory notes that cannot be cashed, or transacted
through illegal channels to dodge taxes entirely. In real
terms, government pensions and wages were cut to 4.0 percent
or less of their original value, and the government still
cannot collect enough taxes to cover these expenses. Tax
receipts have fallen to less than 20 percent of the country's
GDP. Meanwhile, external debt has skyrocketed, and domestic
debt, which was next to nothing just a decade ago, has
reached almost 15 percent of GDP. Servicing these debts,
paid out to local bankers and foreign speculators at exorbitant
interest rates, will take no less than 25 percent of total
government expenditure in 1998. The current Russian market
economy has created a handful of super-wealthy individuals
while leaving the rest behind to struggle. It is no wonder
that these economic policies resulted in some 250 communists
and 50 ultranationalist Zhirinovskyites being elected
to the 450-seat State Duma in 1995.
Furthermore, Russia is bedeviled by a corruption problem
reminiscent of Latin America's in the 1970s and 1980s.
The European Bank for Reconstruction and Development ranks
Russia as the most corrupt major economy in the world.
Graft permeates the country, from street crime to mafia
hits to illegal book deals in Kremlin corridors to rigged
bids for stakes of privatized companies. Recent polls
by the Public Opinion Foundation show that Russians believe
the best way to get ahead is through contacts and corruption.
When asked to select criteria needed to become wealthy
in today's Russia, 88 percent picked connections and 76
percent chose dishonesty. Only 39 percent said hard work.
Anyone who attempts to start a small business in Russia
will encounter extortion demands from the mafia, so there
is no incentive for entrepreneurship. Better to stay home
and grow potatoes at your dacha. A crime-ridden market
cannot be effective. With no certainty about the future,
with or without inflation, nobody will invest. Such a
market can support the current level of consumption—which
for the majority of the population means semi-pauperhood—for
some time, but it does not and cannot provide any progress.
With such problems, despite the good news about the Russian
economy over the last year, it is clear that the Russian
market is still veering toward the corporatist, criminalist,
AN UNFINISHED DEMOCRACY
Russia's current democratic institutions also deserve a
mixed review. Certainly there are reasons for optimism.
Russians are freer than at any time in their history. They
can now read what they like, travel, talk, worship, and
assemble. Russia's citizens have quickly grown accustomed
to these liberties. Technological advances such as the Internet,
fax machines, and mobile phones will make it impossible
for any one source ever to monopolize information in Russia
again. Through this continuous contact with the world, with
each passing day, Russia becomes a more normalized society.
Perhaps the most often cited examples of successful Russian
democracy are the Russian elections. Over the past three
years, elections have become an accepted part of Russian
life. This was hardly always the case. A mere three years
ago, debate raged in Russia as to whether the ruling authorities
would even allow elections to occur. But from the December
1995 Duma elections to the June 1996 presidential race
to the subsequent gubernatorial and regional legislature
elections, again and again elections have been successfully
held in the Russian Federation. In many of those contests,
notably the Duma election and some regional gubernatorial
races, opposition candidates from the communist and other
parties have won and taken office. With minor exceptions,
voting and ballot counting have been peaceful and relatively
free, while voter turnout has been higher than that of
the United States.
Although the recent elections are a positive development
in the creation of Russian democratic institutions, some
disturbing trends point to trouble in the future. While
international observers have cited Russian balloting as
free and fair, Russian campaigns— most notably the 1996
presidential election—have been notoriously unfair. Spending
limits are routinely ignored. While no actual figures
have been disclosed, the 1996 Yeltsin presidential campaign
is estimated to have cost at least $500 million. Some
put it at an even $1 billion. (By comparison, Bill Clinton's
primary and general election campaigns that year together
cost $113 million.) Officially, Russian presidential campaigns
could spend only $2.9 million, but Yeltsin's overspending
neither elicited a major outcry nor started judicial proceedings.
Perhaps even more disturbing is the often cited European
Institute on the Media survey that documents the media's
flagrant pro-Yeltsin bias. According to the EIM, Yeltsin
enjoyed 53 percent of all media coverage, while his closest
competitor, Gennady Zyuganov of the Communist Party, received
only 18 percent. Yeltsin appeared on television more than
all the other candidates combined. Moreover, election
coverage was extremely slanted in the presidents favor.
Giving candidates a point for each positive story and
subtracting a point for each negative one, Yeltsin scored
+492 before the first round of the election; Zyuganov
earned -313. In the second round, Yeltsin had +247 to
Zyuganov's -240, despite the fact that Yeltsin disappeared
from the public eye a week before the election.
Electoral politics, like much else in Russia, are also
at a fork in the road. As Russian political consultants
learn more tricks of the trade, the danger increases that
they might join with the robber barons to try to turn
future Russian elections into nothing but window dressing
for irremovable oligarchic rule—as was the case in the
Soviet Union, where results were predetermined and the
people were an afterthought.
Russia's democratic institutions have not developed as
fully as its elections. As the recent cabinet firings
show, the system of checks and balances is underdeveloped,
leaving the country prone to the whims of a mercurial
chief executive. The rule of law is often not respected.
The judicial branch of government remains overly influenced
by the executive branch. The lower house of parliament
has made some headway in becoming more than a mere talking
chamber in which the occasional fistfight breaks out,
and the executive branch now has to lobby the Duma to
pass the budget, the start II treaty, and other crucial
matters. But Yeltsin and his team still reserve the option
of bypassing the Duma altogether—thereby ignoring the
constitution—if the Duma disagrees with an executive initiative
or is unwilling to be co-opted by promises of some new
monthly leadership meeting with the president and prime
minister. This strategy is routinely applied to the budget,
where compromises are made to ensure passage and are then
ignored throughout the year. Another example is the persistent
rumor that Yeltsin will seek an unconstitutional third
term as president.
No successful democracy functions without some kind of
political party system, but attempts to develop such a
system in Russia have been an unambiguous disappointment.
Although political factions boasting varying degrees of
regional activity exist within the Duma, a true functioning
political party system in Russia has yet to develop, for
a number of reasons. First, after 70 years of "party rule",
Russians are understandably skeptical of political parties.
Second, President Yeltsins actions have actively undermined
the development of a political party system. By rejecting
any party affiliation, the president acts as if parties
and party development are an afterthought in the consolidation
of Russian democracy. Yeltsin accepts the assistance of
like-minded parties when it is politically convenient
and distances himself from them when it is not. So no
party is the true party of the government, and Yeltsin
cannot be held accountable to the people short of a general
election. Third, for political reasons, Yeltsin sought
in the past to limit the development of parties by trying
to abolish the "party list" system that elects half the
Duma, seating only parties that win over five percent
of the popular vote. In 1995 only four parties did so,
and over half of the Duma seats went to parties opposed
to the Yeltsin administration. The list system ensures
that parties will exist in some part of Russian society,
but in 1998, Yeltsin renewed his call to change it. To
better control the Duma, he advocates having the entire
chamber elected from regional districts, similar to the
system used in the U.S. House of Representatives. With
more control over local leaders, Yeltsin believes he can
influence who wins these Duma seats. In reality, however,
organized crime would buy many of the seats. If Yeltsin
succeeds in abolishing the party-list system, he will
destroy the only arena in Russian society where parties
currently exist without minimizing a major source of opposition.
Such a strategy would hurt Yeltsin politically, but even
worse, it would damage Russian democracy, which needs
a functioning party system to allow people to express
their views to the government.
The Russian media also earns a mixed review. On the one
hand, Russians have a variety of new sources from which
to choose. Opposition newspapers exist, and journalists
are free to do investigative reporting and write their
own opinions. The November book payment scandal, where
senior members of Yeltsins economic team were revealed
to have accepted $500.000 for writing a book on privatization,
first broke in the Russian media. Political leaders appear
on programs like Hero of the Day and Itogi to explain
their views to the people. Even so, in the past two years
the media has become entirely controlled by the oligarchs,
who are part of the government and use their editorial
boards and programmers to promote their own selfish agendas.
Nowhere was this more evident than in the Svyazinvest
bid last summer, where the resulting "bankers' war" was
played out in the media. By reading a certain paper or
watching a certain television station, a Russian citizen
got either one or another robber barons version of the
truth. Depressingly, the Russian service of Radio Free
Europe/Radio Liberty remains Russia's primary supplier
of impartial news, just as it was in Soviet times.
In sum, Russian democracy still has a long way to go.
True, elections are held, freedoms are respected, parties
exist, and the media express divergent views, but such
minimum democratic institutions exist in both Latin American
and Western democracies. Russia is better off with its
imperfect institutions than without them, but they do
not yet properly reflect the people's needs and will.
THE WEST'S STAKE
In October 1996, Vladimir Nechai, the director of a nuclear
complex near the Ural city of Chelyabinsk, killed himself
because he lacked the money to pay his employees and could
no longer ensure the safety of his plants operations. His
suicide underscored the most serious threat to all players
in the post-Cold War world: loss of control of the Soviet
arsenal of nuclear, biological, and chemical weapons. The
increasing risks of chaos in a nuclear power are also evident
in the rumors of nuclear smuggling. Russia has thousands
of tons of nuclear, chemical, and biological material. Under
the rule of a corrupt oligarchy, uranium and anthrax could
become black market commodities available to the highest
bidder. The control of Russia's weapons of mass destruction
is an issue of world safety that cannot be ignored by Russia
or the West.
Russia and the West face other common challenges. Russia
borders some of the most unstable regions in the world.
For centuries, it has acted as a buffer between those
instabilities and Europe. Today this wall is of no less
importance as drug trafficking, terrorism, and arms smuggling
are becoming rampant. A Russian wall with holes would
be dangerous for Europe.
Furthermore, Russia and the West share a desire for stability
in order to promote economic development. In recent months,
the West has focused on developing the Caspian Sea regions
oil resources. Russia is a key player in the area, and
finding a peaceful resolution to the Chechen issue will
play a large role in determining how oil leaves the region.
Moreover, Russia is arguably the greatest untapped economic
market in the world. Stability makes possible the development
of Russia's economy and presents a great opportunity for
Western companies and economies.
A Western-style democracy in Russia would be a partner
with the West in confronting the challenges of the 21st
century. Russia and the West would work together better
to maintain control over weapons of mass destruction and
would be more likely to cooperate in containing regional
conflict in explosive areas like the Caucasus and Middle
East. Finally, the rule of law would govern business relations
and allow for economic development and growth beneficial
for both societies.
A corporatist Russian government would be more challenging
and less stable. Realists may argue that a corporatist
Russian government would value stability above all and
therefore cooperate with the West to ensure the status
quo. But such a system, although stable on the surface,
would be built on false foundations, much like today's
Indonesia, where any change of leadership could undermine
the entire order. Nor would it necessarily be a status
quo power. Another scenario has such a government becoming
contentious and suspicious of Western actions and goals.
Cooperation on important global issues would be less forthcoming,
and rules and laws would change to fit personalities,
hindering economic development.
Russia's choice will be heavily influenced by the West.
Unfortunately, up to this point, the West has not always
promoted the correct path. Nowhere is this more evident
than in the debate over nato expansion. If a military
alliance moves closer to a country's borders without incorporating
that country, it means that the country's foreign policy
has dismally failed. Talk that this is a different nato,
a nato that is no longer a military alliance, is ridiculous.
It is like saying that the hulking thing advancing toward
your garden is not a tank because it is painted pink,
carries flowers, and plays cheerful music. It does not
matter how you dress it up; a pink tank is still a tank.
The most important message of NATO expansion for Russians,
however, is that the political leaders of Western Europe
and the United States do not believe that Russia can become
a real Western-style democracy within the next decade
or so. In their eyes, Russia, because of its history,
is a second-class democracy. Perhaps this is understandable.
The combination of Chechnya (an arbitrary war in which
Russia unnecessarily killed 100.000 people), the collapse
of the Russian army, failed economic reforms, a semi-criminal
government, and Yeltsins unpredictability has given the
West enough justification to conclude that Russia, for
the time being, cannot be a dependable partner and that
nato expansion should therefore continue.
Ironically, if the United States explained its push for
nato expansion in these terms to the Russian people, they
would at least understand why the alliance is expanding
and respect the West for its honesty. But when the West
says to Russians: "Russian democracy is fine, Russian
markets are fine, Russia's relationship with the West
is fine, and therefore nato is expanding to Russia's borders,"
the logic does not work, leaving the Russian people and
their leaders bewildered and bitter. This resentment will
only be exacerbated if the West continues its two-faced
Finally, the West's insistence on promoting personalities
rather than institutions also binders Russia from choosing
the right path. The West plays favorites, and I recognize
that I am one of them, even though I am not in power.
The danger comes when the West, while promoting the rhetoric
of democracy and capitalism, backs Boris Yeltsin, Anatoly
Chubais, Viktor Chernomyrdin, Boris Nemtsov, and Yegor
Gaidar even when they embark on actions that do not promote
democracy or markets. When Yeltsin ordered tanks to fire
at the Russian parliament, the West supported him, as
it did—at least publicly—when he ordered the army to start
the war in Chechnya. That led most Russians to believe
that had Yeltsin canceled the presidential election in
1096, the West would have backed his choice, despite the
fact that the decision would have ended Russias nascent
WHAT IS TO BE DONE?
A Russia that works for its citizens and plays a constructive
role in world politics will be a Russia that has chosen
well. To achieve such an outcome, a new set of rules must
be established. The most important step is to separate business
from political power in order to fight corruption. There
must be a decisive break with the legacy of the past, when
administrative power stood above the law. Individual businesses
should be regulated by legislation, not by government officials
or local barons who are often not easily distinguishable
from gang leaders. The power of oil and gas tycoons, who
generate huge profits using the country's natural resources,
must be curtailed. They should be made accountable to parliament,
and their activities should be made transparent and subject
to public control.
The present system of economic management, where most
large enterprises are run by insiders who disregard the
owners' rights, must be radically reformed. "Collective"
enterprises, whose management styles and responsibilities
smack of the Soviet era, should be eliminated. In their
place, the government must encourage responsible management
based on a conception of private property that ensures
and protects the owners rights. Bankruptcy laws should
be fully enforced to help eliminate incompetent managers,
crooks, and Soviet-style directors who are unable to adapt
to market realities. Enterprises that hold on to workers
and produce nothing but debts should be closed or sold.
Open accounting that meets international standards is
a prerequisite to controlling corruption. Also required
is a strong, independent, and incorruptible judiciary
that will hold crooked officials accountable. For easier
oversight, senior government officials should sign a declaration
of income, property, and expenses for themselves and their
families twice a year for review by the independent judiciary.
The law making Duma members immune from prosecution should
be immediately repealed. The large number of criminals
running for Duma seats to gain immunity is repulsive.
How can a legislature fight corruption when its members
have their own deals on the side?
Free competition must be promoted by encouraging small
and medium-sized businesses and by removing the red tape
and excessive regulation that stands in their way. Former
Soviet monopolies should be destroyed to eliminate domination
by a small group of large companies that account for half
the country's GDP while employing only three percent of
its labor force. Land reform is also essential, since
there can be no stable development in the agricultural
sector until the major part of the country's land is taken
from hands of the oligarchic landlords who "inherited"
it from the Soviet state. Finally, both power and financial
resources must be decentralized. Russia will be doomed
to instability and underdevelopment as long as 8^ percent
of the nations money remains concentrated in Moscow. Local
initiatives and entrepreneur-ship should be encouraged
if the fruits of economic growth are to be shared among
Russia's numerous regional, social, and ethnic groups.
To ensure that an established middle class emerges, an
open market economy must appear based on private property
and competition. Unregulated prices, low inflation rates,
and a stable currency are absolutely necessary. In Russia,
however, these are not sufficient conditions for a competitive
economy. Lower and simpler taxes, fiscal controls on oligarchs'
incomes from the use of natural resources, incentives
for entrepreneurship, a trustworthy news service, an independent
judiciary, and fully developed political parties are also
For its part, the West should hold those in power in
Russia accountable for undemocratic deeds, in much the
same way as it is willing to criticize its allies. Western
leaders should apply to Russia the same criteria for evaluating
the health of its democracy and the strength of its market
economy that they apply to themselves. The West should
not give Russia advice it is not willing to take itself.
This is especially important because, in the 2ist century,
competition will occur between civilizations and not countries.
Although Russia and the West have different histories,
they belong to the same civilization. The old rivalries
need not endure—if Russia chooses wisely.