Gref had invited Illarionov, the director of the Institute of Economic Analysis, to join the Centre, but according to Illarionov it was ‘too Keynesian’ for his liking, so he declined. Illarionov was, and remains, something of an oddball, a maverick who likes to challenge conventional wisdoms. Today he is a leading climate-change sceptic. In the late 1990s he had been fiercely critical of the policies that led to the country’s financial crisis and default in August 1998. Perhaps it was his willingness to speak out that attracted Putin’s attention (though some years later it would cost him his job). On 28 February 2000 the acting president called him and asked him to come out to his dacha at Novo-Ogaryovo, just outside Moscow, to ‘chat’.
The two men spent all evening discussing the economy – or rather, economics. ‘He didn’t just want to know about interest rates and so on,’ Illarionov said in an interview. ‘He wanted to get a general understanding of economic reforms, what kind of economy we needed, what should be done, and how it should be put together. He was clearly learning a lot in a very narrow area that was not his speciality.’3
At one point they were interrupted by an officer who handed Putin a piece of paper. The acting president was delighted: it was news that the rebel-held town of Shatoy in Chechnya had just been retaken by Russian forces. Illarionov was quick to pour cold water on Putin’s celebration. A longstanding opponent of Russia’s intervention in Chechnya, he told him bluntly that what was going on there was ‘a crime’. Illarionov says he argued that Chechnya should be allowed to become independent, that it could never be crushed militarily and that the response would be an upsurge in terrorism which would backfire on the Russian people.
They had a furious argument. Putin insisted the rebels had to be annihilated. ‘His voice even changed,’ said Illarionov, ‘from the normal one he’d used when discussing economics. Suddenly some sort of iron, or ice, came across. It was a kind of transformation of the personality in front of your eyes – like seeing a completely different person. It seemed we could fall apart at any moment, without any possibility of reconciliation.’
After about half an hour, when it was clear there could be no meeting of minds, Putin suddenly announced: ‘OK, that’s enough. We will not talk any more about Chechnya.’ Illarionov recalled: ‘He just stopped this conversation, and for the rest of our meetings and relations over the next six years, he never mentioned Chechnya in my presence or discussed it with me. And after this, we resumed talking about economic reforms.’
By 10.30 it was time for Illarionov to leave, and after their spat over Chechnya he assumed it would be their last meeting. But Putin asked him to come back again the following day. Their economics tutorials became a regular occurrence, and on 12 April Putin officially appointed Illarionov as his chief economics adviser and later as his ‘sherpa’, or representative, to the G8 group of leading industrial nations.
By May the Centre’s reform plan was almost ready, and it turned out to be, in Gref’s words, ‘ultra-liberal’. ‘If we set the private sector free, we could see good growth,’ said Kudrin. As the work neared fruition they produced a thick volume – far too dense to be presented to the acting president. As they had no experience in producing slide presentations they brought in a top consultancy, McKinsey, to help them. ‘We spent a week at their Moscow office,’ says Gref, ‘putting together a short version for public presentation and a more professional version to show to ministries and departments explaining what they would have to do.’
On 5 May, two days before Putin’s inauguration, the team went to his Sochi residence to give him a ‘full immersion’ in the project. The young reformers were buzzing with excitement. ‘I was euphoric then,’ said Kudrin, ‘because it was all going according to plan.’ From morning till night they held sessions, interspersed with meals and walks in the warm sunshine. The economists talked through every point with Putin, who requested more work to be done here and there but approved the general thrust. It became known as the ‘Gref Plan’. Implementing it was to prove even harder than writing it.
Privatising the people’s land
Over the coming years the Gref Plan transformed many aspects of economic life. Personal income tax was reduced from as much as 30 per cent to a flat rate of just 13 per cent. Corporate tax went down from 35 to 24 per cent. A new land code made it possible to buy and sell commercial and residential land – for the first time since the communist revolution of 1917. There was a new legal code, measures to curb money laundering, and an attempt to break up some of the great state monopolies: electricity production was split off from the supply network, for example.
The income tax reform was needed because millions of Russians, whose wages were already miserly, simply avoided paying, as the rates were crippling. The same was true of company taxation: some 80 per cent of businesses were avoiding paying taxes. Gref’s proposal of a single, low income tax rate for everyone, and a much-reduced company tax, was audacious. The idea was to lower the rates but increase collection. But if people continued not to pay, the state could find itself with an even bigger hole in its budget. The point was not lost on Putin. Gref recalls a particular meeting that he and Kudrin had with him.
‘The president asked us: “Are you sure that our total tax revenue isn’t going to decrease if we lower taxes?”
‘We said: “Yes.”
‘He asked: “What if you are wrong?”
‘I said: “Then I will resign.”
‘“I’m sorry,” said Putin, “but I am not going to approve your plan on that basis! You haven’t thought this through. What makes you think your resignation is somehow going to make up for all the money we are going to lose from the budget? Politically, the one doesn’t compensate for the other.”’4
Gref and Kudrin went away, did their sums once more and re-presented their plan to Putin. This time he agreed.
The International Monetary Fund was less happy. ‘At that time we were still working closely with the IMF mission here, and they refused to approve our plans,’ says Gref. ‘We had difficult meetings in the residency outside Moscow. Then we said to the IMF, “Thank you very much for your advice, but we are still going to lower taxes.”’ The IMF subsequently left the country. But Gref describes the reform as ‘the key, correct decision, which allowed our economic growth to take off’.
The proposed land reform was even more contentious – this time because it affronted millions of communists and others who believed that land ought to belong to ‘the people’. Yeltsin had never dared to oppose them. As Gref prepared to present his Land Bill to the State Duma thousands took to the streets with red banners and anti-capitalist slogans.
At the last minute the government made a few concessions, tightening the regulations regarding the sale of agricultural land, but it made no difference. There was an uproar in the Duma as Gref was asked by the Speaker to take the floor, to present his bill. Deputies from the Communist Party (who had a quarter of the seats) swarmed around him to prevent him from leaving the government benches and reaching the podium. Some of them tried to grab him physically. The din was so loud that the Speaker could not make himself heard, so he called Gref on his phone and told him just to present his bill from where he was. ‘No one can hear you anyway,’ he said, ‘but you’ve got to do it, otherwise we can’t hold the vote.’