According to Putin, this war was not just about Chechnya – but about Russia, about ending an epoch: ‘What’s the situation in Northern Caucasus and in Chechnya today? It’s a continuation of the collapse of the USSR.’13 This time the army was not bogged down and defeated. Russian forces recaptured Grozny by February 2000 and direct rule from Moscow was re-established by May. The last towns and villages held by Chechen insurgents were brought under Russian control by the following winter. Chechen fighters retreated to the mountains to begin a long guerrilla war – but by the time a rigged ‘referendum’ in 2003 installed Akhmad Kadyrov as Moscow’s Chechen in Grozny, it looked like Putin had succeeded where Yeltsin had failed. He had stopped Russia falling apart.
The Putin Consensus
In their first few months in office Putin and Kasyanov were waging a two-front war for legitimacy: one a battle for Chechnya and the other a struggle to push through economic reforms that had stalled in the late 1990s. Their work was Putin’s first ‘tandem’ and their quick victories on these two fronts secured the new regime’s legitimacy amongst the elite. Putin was no longer seen as a ‘man from nowhere’ but as a man with achievements. Kasyanov recalls:
‘The consensus was based on two things: order and reforms. We felt that Putin was the man strong enough, that he was the solution that could bring order to the country. The other element was reform – to implement reforms that had been blocked. Putin really did capture hopes then – hope for order and hope for reform.’
Kasyanov himself was troubled by Putin, but not troubled enough to quit. In conversation he is coy about why he remained in government, but admits he was unnerved by the moves against the media. He says, ‘at times I could have done more’. Perhaps he did not heed the signs. Kasyanov says he first felt real unease at a 1999 banquet hosted in the FSB headquarters, the notorious Lubyanka. Putin proposed a toast with ‘great enthusiasm’, before solemnly declaring: ‘Dear Comrades, I would like to announce to you that the group of FSB agents that you sent to work undercover in the government has accomplished the first part of its mission.’14
The hall exploded in cheers. Kasyanov recalls, ‘There, at the banquet, I took it as a not too successful joke in a traditional style for the audience. But, later that day, the thought flashed through my mind: ‘But what if in the words of the President, perhaps, lay a deeper meaning?’15
That Kasyanov should not have resigned or challenged this authoritarian drift is unsurprising. He felt he had been given the power he asked for. Kasyanov says Putin stuck to their 2000 deal – with Putin taking high politics, security and foreign policy, and Kasyanov focusing on reform until the second half of 2003. ‘He did not interfere in 90 per cent of what I was working on. The 10 per cent he did interfere in was the gas sector. He repeatedly told me not to initiate any reforms in the gas sector and anything related to Gazprom. This was his key intrusion.’ Traumatized by the default, Kasyanov felt that economically, the situation was as fraught as in the Caucasus:
‘The treasury was empty, the price of oil almost reached $20 per barrel. There was still a high level of private capital outflows. Many experts also believed [that] in the absence of access to external sources of funding we would require a new devaluation of the Ruble. All of these problems needed to be urgently addressed. And most importantly – it was obvious that the socio-economic mechanism of Russia was hopelessly out-dated and needed a major upgrade.’16
Putin asked Kasyanov to push the reform agenda in close cooperation with Alexander Voloshin, his chief of staff who had held the same job under Yeltsin, and appointed his St Petersburg associate German Gref as Minister of Economic Development to head an expert group on reforms. Gref, as the head of the Centre for Strategic Development, a think-tank specially created in the run-up to the 2000 election, had drafted a 200-page report as the basis for the policy agenda. It was an ambitious, if in places vague roadmap. Together with the economist Alexey Kudrin, with whom Putin had shared an office in Sobchak’s town hall, these men formed the kernel of the reformist group in government. ‘We must pay tribute to Putin,’ Kasyanov said: ‘I could contact him at any time. If I had something to clarify or inform the President about, I never had a problem; we could discuss everything in person or by telephone.’
After Yeltsin’s hangovers and disappearances, Putin’s work ethic overjoyed the bureaucracy. Beyond it both the government’s policy vectors appealed to different parts of society – the campaign for order in the Caucasus calmed a frightened country. Putin’s ‘tough measures’ won respect with working families craving an end to ‘chaos’, whilst his reforms appealed to big business and the tiny middle class. Those Russians who had started businesses – big or small, from shopkeepers to oligarchs – were struggling in a half-reformed business environment. The changes that Putin’s government brought in were far-reaching and some immediately beneficial.
Putin’s first term saw an impressive roll call of results. ‘What we really wanted to do was to implement the policies we had not been able to implement under Yeltsin,’ explains Kasyanov. They mostly succeeded. In 2001 the maximum social security tax was cut from 35 per cent to 26 per cent. In 2002, the corporate profits tax was cut from 35 per cent to 24 per cent. The government was especially pleased that it had scrapped the 35 per cent top-rate progressive incomes tax for a flat tax of 13 per cent. Calculated at a rate that Russians would actually pay, it increased revenues and stimulated the economy. The long-stalled Land Privatization Bill was finally put on statute. In 2004, a stabilization fund was created and VAT was shaved from 20 per cent to 18 per cent. All the while, business-friendly legal changes were ushered in. After decades of imports, improvements in agriculture even saw the country become a net exporter of grain.
This won Putin the establishment’s confidence – as a man who got things done. This dovetailed with the positive economic legacy of the default. The devalued ruble made exports both cheaper and more competitive. There was finally recovery and growth: now the worst was over. The government was no longer forced to spend up to one-quarter of its budget servicing its debt. ‘Most people now believe that the default had a positive impact,’ admits Kasyanov. The clearest indicator of a return to solvency was that Russia started to run balanced budgets. A return to confidence could be measured in high GDP growth, which was sustained at over 7 per cent a year until 2008.
Consequently, the inflation rate declined and the rate of foreign and domestic investment rose. Overall this enabled the government to return to financing regular public services – wages, pensions and funding from the state was now on time. Salaries no longer went unpaid for months at a time. This was the single most important factor undergirding Putin’s legitimacy.
Yet alongside liberal economics came the muzzling of TV. Kasyanov claims that he did not see what was coming. Sitting with him I wondered how great his share of historical blame actually was. No fool, he was prime minister from 2000 to 2004 – as the decrees creating an authoritarian state were issued. He did little to stop this progression as he prioritized order and reform, power and growth, over the rights of Russians. No, I thought, it would be wrong to signal out Kasyanov. His mistakes and misconceptions were those of the elite as a whole. At the time, both rich and poor saw Putin as behind them. A fragile consensus had been established. It was unclear where it might lead.