Political and Economic Situation in Russia

Meeting report, Vol.3, No.15, May 22, 2001

On Tuesday, May 22, 2001, Anatoly Chubais discussed economic and the political situation in Russia. Anatoly Chubais is the Chief Executive Officer of United Energy Systems (UES) and co-chairman of the Union of the Rightist Forces (SPS). The discussion was moderated by Anders Åslund, senior associate at the Carnegie Endowment for International Peace.

Russia's "Real Revolution"

Ten years ago, the Russian economy was collapsing, the KGB was preparing a coup d'etat, and the newly elected President Yeltsin lacked power. It was a "great end" and a "great start," according to Anatoly Chubais, offering a comparatively optimistic vision of Russia's decade of transition. Many hopes were born, and although not all of them have come true, it is a mistake to consider Russia's experience a failure. On the contrary, Chubais asserted that the transformation in Russia was a "real revolution" and a great achievement that brought about important changes in the political, economic and social spheres. Chubais underlined Yeltsin's unique role in this revolution. Today Russia has real democratic and market institutions, and it is impossible to successfully propose and defend opposite values. Even the Communist Party, Chubais pointed out, no longer advocates re-nationalization of private property, since doing so would marginalize them on the Russian political scene.

The new values of capitalism and democracy however, are not yet "efficient" - that is, not fully protected or enforced. There is no adequate means of protecting private property, corruption undermines equal rights, and democracy and the freedom of speech are under pressure, Chubais stated. It is important to realize that the new democratic and market institutions can become more efficient or less efficient, but there is no possibility of reversing the transformations.

Assessing President Putin's regime, Chubais reiterated the impossibility of returning to the Soviet order. He said to be in agreement with Yegor Gaidar's description of the contemporary period as one of "post-revolutionary stabilization," with attempts to revitalize "some signs of pre-revolutionary life." Putin is not Yeltsin, Chubais claimed, but despite his decision to restore the Soviet anthem music, and the contemplated restoration of statues of Dzerzhinsky, Putin's regime is not a return to that pre-revolutionary past.

Future Prospects and Priorities

Chubais was most optimistic about the economic transformation. He was confident that the current positive economic trends will continue, and within the next ten years Russia will become a dynamic and modern economy. Aside from strong GDP and hard currency reserves growth, Chubais emphasized the redistribution of resources from the virtual economy to the market economy. Throughout Russia barter is shrinking, while taxes and wages are paid, so the balance sheets make sense for the first time. Those companies that follow the basic transparent business principles are growing much faster than those who do not. Three years ago, UES made only 20% of its transactions in cash, and 80% in barter, but today, barter is completely eliminated in the company. As consumers began paying UES in cash, UES paid its debts, wages and taxes likewise. This trend is transforming the Russian economy, Chubais said. The new behavior is made possible by the new generation of managers who really understand the market rules, replacing the Soviet-era directors.

Chubais's confidence in the economy was also buoyed by the steps of the new government. Chubais pointed to the adoption of tax reform and legalization of private land ownership through a chapter of the Civil Code, as well as proposed reforms of the pension system, the military, the legal system, and the labor code. This is exactly what the reformers wanted to accomplish in 1995 and 1997, but could not, and it is an impressive record for any government's first year.

Chubais's major concern was political development. Russia really needs to concentrate on human rights, civil society, democracy and freedom of speech. These political values form the program for the Union of Rightist Forces. Whether Putin will continue KGB-style policies is unclear, but the Union of Rightist Forces is restructuring and strengthening itself to defend democratic values and principles. However challenging, Chubais was optimistic that democratic freedoms would survive and develop.

Chechen War, SPS Prospects, and UES Restructuring

In view of his emphasis on human rights and democracy as the biggest priorities on the political front, Chubais was asked to comment on his previously expressed praise of the Russian Army, and his calling Yavlinsky a traitor for disapproving of the war. Chubais affirmed that he still adhered to this view. Whereas he had opposed the first Chechen war, the second conflict was initiated by the Chechens invading Dagestan, another Russian province. Any Russian politician could only respond militarily. A military response required a serious army, and at the outset of the second Chechen war Russia did not have such an army. A real Russian army was born only during the course of the fighting in Chechnya. Public opinion also approved a military solution, and in the December 1999 parliamentary elections Yavlinsky and his views were barely supported by 5% of the population. Yet, the Chechen conflict is a tragic situation, Chubais said, with no easy solutions. In view of the complexity of the situation, he supported President Putin's initial and "post-military" tactics in Chechnya.

When asked about the electoral prospects of SPS, Chubais expressed optimism for the next legislative election. In 1993, Democratic Choice of Russia, SPS's predecessor, won 9% of the vote, on an "emotional" basis; people simply voted for change that the new young team promised. In 1995 elections, DCR failed to clear the 5% threshold, because the emotional impetus was gone, and the advantages of a market economy were not yet apparent to many, the middle class being largely absent. In 1999 elections, SPS obtained almost 9% of the votes, as market economy generated benefits, especially to the growing middle class that shares the values championed by SPS. These trends combined with the internal restructuring of the party under a single leader should lead SPS to success in the next election.

Chubais's optimism also applied to the prospects of restructuring UES. Despite a plunge in share prices each time the restructuring plan was discussed and the opposition of some minority shareholders, Chubais was confident that in the long term, restructuring will increase market capitalization, attract domestic and foreign investment, and better serve the interests of all shareholders. The basic idea behind the restructuring plan is to separate the competitive part of the power sector -- generation and sales, from the natural monopoly - the grid and dispatching. The sector that can be competitive should be deregulated and brought into a normal market environment, where several generating companies can compete. Within the non-competitive sector, the role of the government and management needs to be redesigned, redistributing power in favor of the board of directors. Overall, it is vital that the Soviet-style management of the energy sector is liberalized.

Summary by Elina Treyger, Junior Fellow with the Russian and Eurasian Program.