One month after his appointment as prime minister, Putin moved immediately to tighten control. He ordered government troops to return to Chechnia to reassert Russia’s authority there. This was done in response to the bombing of some Russian apartment houses by what appeared to be Chechen terrorists as well as the incursion into the adjoining province of Dagestan by a Chechen group led by the Chechen leader Shamil Basayev. Who actually bombed the apartment building remains in dispute. Some, such as the one-time oligarch Boris Berezovsky now in exile in London, insist that the available evidence implicates the FSB, not the Chechens. Whoever the actual bombers were, Putin used the apartment bombing, as well as the Dagestan invasion, to justify stronger measures from the Kremlin. By doing so, he put an end to dreams of any other secessionist malcontents in the regions who might have entertained similar notions of establishing an independent country.
THE ECONOMY RECOVERS
Putin’s determination to reestablish Moscow’s dominance over some of Russia’s restless regions was enhanced by the fact that five months before his appointment the economy began to improve. As Table 5.1 shows, in September 1998, industrial production was 15 percent below production of September 1997, but by March 1999 it once again began to grow.
By August 1999, when Yeltsin made Putin prime minister, industrial production was already roaring along. In May 1999, for example, industrial output exceeded that of the previous May by 6 percent. Fortunately for Putin, he took office just as the Russian economy began to benefit from the recovery in Southeast Asia, the region that had triggered the economic downturn the year before. In all fairness, if anyone deserves the credit for the economic upturn, it should be Primakov because the improvement began in early spring 1998 when he was prime minister. But more than the actions of any one prime minister or Kremlin official, the best explanation for the recovery is that the recovery in commodity prices, particularly petroleum prices, made the difference.
Because of the increase in oil prices, Russia’s rebounding economy would make whoever was in office at the time look like an economic genius. To his credit, Putin did nothing to hamper economic growth. On the contrary, he brought in some of his talented associates from St. Petersburg, such as German Gref and Alexei Kudrin, and put them in charge of reviving the economy. They had previously worked with Putin on economic and financial matters in the St. Petersburg governor’s office and were regarded as competent technocrats. (We can include them as “FOP,” Friends of Putin.) Following their advice, Putin introduced a flat 13 percent income tax and proposed a series of other initiatives, including a program to simplify and reduce the bureaucratic maze that entrepreneurs had to fight through before they could open a new business.
While the benefit of a flat tax as a stimulus to economic growth is hotly debated in the United States, it appears to have done little damage when it was introduced in Russia; to the contrary, based on the way Russian GDP grew, it seems to have had a positive impact. Previous to its passage, the maximum tax rate was set at 30 percent. Few Russians were paying any tax, much less their required share. Clearly, a low tax was better than no tax. With the rate at only 13 percent, Russians had less incentive to cheat.
In a departure from the propaganda of the Soviet era, Putin also insisted on acknowledging the seriousness of the country’s economic condition. While Russia may have thought of itself as an economic superpower in the Soviet era, by 2000, Russia’s per capita income was actually lower than Portugal’s, then the poorest member of the European Union. Putin acknowledged that if Russia were ever to catch up, it would have to double its GDP in ten years. It could do this, however, only if it increased its GDP by at least 7 percent a year, a goal that he set for the country. Except in 2001 and 2002, Russia did come close to this although its growth was consistently due to high world energy prices more than a revitalized manufacturing sector (see Table 4.1).
The improvement in Russian GDP certainly added to Putin’s popularity. Yet the GDP is still not large enough to provide for a superpower’s military force, at least not one that would measure up to previous Soviet standards. Nonetheless, Putin has substantially increased the size of Russia’s military budget, by 27 percent in 2005 and 22 percent in 2006. But unless he severely curbs consumption, Russia will not be able to afford the large funds needed to support its superpower military ambitions.
A ROAD MAP TO SUPERPOWER STATUS
Putin’s concern for Russia’s struggling economic and lost superpower status long predates his appointment as prime minister. In a dissertation submitted in June 1997 to the St. Petersburg Mining Institute and in a subsequent article “Mineral’no-syr’evye resursy v strategi razvitiia Rossiiskoi ekonomiki,” published in Zapiski Gornogo Instituta in 1999 and translated by Harley Balzer in Problems of Post-Communism in January 2006, Putin outlined a plan, a sort of “owner’s manual” for Russia’s recovery and return to economic and political influence. The thesis itself was probably written just before and after his boss Anatoly Sobchak, governor of St. Petersburg, lost his reelection in 1996. Since Putin worked for Sobchak, this loss meant that Putin was also without a job.
In his dissertation Putin called on the Russian government to reassert its control over the country’s abundant natural resources and raw materials. “The process of restructuring the national economy must have the goal of creating the most effective and competitive companies on both the domestic and world markets.” He viewed this as probably the best way to reestablish Russia’s status as a superpower, an energy superpower. Instead of allowing the country’s oligarch-controlled corporations to focus exclusively on making a profit, Putin proposed that they should be used instead to advance the country’s national interests. To reclaim some of the assets spun off to private interests under Yeltsin, Russia should commandeer these companies and once again integrate them vertically into industrial conglomerates so they could compete better with Western multinational corporations such as Exxon-Mobil and Shell. In Putin’s words, “Regardless of who is the legal owner of the country’s natural resources and in particular the mineral resources, the state has the right to regulate the process of their development and use. The state should act in the interests of society as a whole and of individual property owners, when their interests come into conflict with each other and when they need the help of state organs of power to reach compromises when their interests conflict.”1
In Putin’s thesis, he acknowledged that Russia would have a hard time becoming a competitive manufacturer. In a subsequent article, he also warned that if Russia’s economy continued to be isolated too long from world markets, its technology would never be competitive.2 Even in 1997, when the economy seemed to be booming, it needed large injections of capital to help develop those resources. To attract that capital, he proposed that Russia open its heretofore closed doors to foreign direct investment. Russia should welcome the infusion of foreign capital investments, but those investors must understand that Russia would retain operating control, investment or no investment. He stressed, however, that no matter who legally came to own Russia’s commodity-producing companies, whether private parties or foreign corporations, the state should coordinate and regulate their activities. As he saw it, if left on their own, private owners become too absorbed in pursuing their own interests and are more interested in damaging their competitors than helping the state. They become so self-centered they ignore legitimate state interests. He insisted that it is a mistake to rely on the private owners and markets alone.3 When Russia did that in 1991, the country’s production suffered badly. Moreover, private monopolists obstruct innovation.4 By redeclaring control if not ownership, particularly of these resource-based companies, Russia, he argued, has the potential to emerge “from its deep crisis” and restore “its former might.”5