Russia's Economic and Political Situation between the Parliamentary and Presidential Elections

RUSSIA’S ECONOMIC AND POLITICAL SITUATION BETWEEN THE PARLIAMENTARY AND PRESIDENTIAL ELECTIONS.

Remarks by Dr. Yegor Gaidar, Institute for the Economy in Transition

Moderator: Anders Åslund, Director, Russian and Eurasian Program, Carnegie Endowment for International Peace

Carnegie Endowment for International Peace
Washington, D.C.
Tuesday, January 27, 2004
12:15 - 2:00 pm

Transcipt by:
Federal News Service
Washington, D.C.

MR. GAIDAR: (In progress.) -- and I tried to answer it, and before once again answering the Syrians, I will read what I was studying at the time to understand how wrong or how right I was.

Well, on the economic policy, my expectations were that Putin will be modern, that his economic team will be strong and he will be able to implement positive economic reforms. I will tell you, frankly, he was better than I expected in this field, with all the problems we still have in the economic field.

On the foreign policy, I thought that he will be pragmatic, modern and not anti-Western. He was better than I expected.

On democracy, I thought that I do not very much believe that he is a great supporter of a functioning democracy in Russia. And in this respect, from my point of view, he was much worse than I expected.

Economic situation in Russia now is quite stable, and we are in the sixth year of economic growth, fifth year of the budget profits -- reserves increased eight times. Foreign debt, which was 120 percent, now at the end of the year will be 25.

Of course, part of it was oil prices, but not only oil prices. It was recovery growth. And also this -- the year 2003, you have the signs of investment-led growth, very rapid increase of investment, production of the machine-building sector, import of the machinery production and so forth.

Of course, we cannot tell how sustained will be this growth and how it will be influenced by the political events. And, of course, we have a huge agenda of the things we need to do. But, to be frank, I would not like to speak today about economic problems. I would like to concentrate on the political developments.

And here I think that there were three important events which are critical for the future direction of Russia and that was the Yukos affair; that was, of course, the elections in the State Duma, the coming Presidential election, and the perspectives of the new Putin presidency.

Well, first of all, I will tell you that I have a very unscientific way of predicting political developments in Russia, but somehow it works. I am looking at what happens in Poland and trying, with a lag of two years, to understand what will happen in Russia.

When in 1989 my good friend Leszek Balcerowicz, after the victory of Solidarity, was nominated as a deputy prime minister in ministry of finance, I started to think that it could happen in Russia also.

When in 1993 Solidarity suffered defeat in the elections, I started to think that in 1995 we could have serious problems. When in 1997 Polish Democrats, my friends, were able to unite together to create Unia Wolnosci and together, with reborn Solidarity, win elections of 1997, I started to think that probably we have chances in '99.

When in 2001 Solidarity and Unia Wolnosci, practically were destroyed during the elections, I started to think that we have problems in the elections of 2003.

So now, I am very much trying to see what they we will have in the Polish elections in 2005.

But seriously speaking, Yukos affair, of course, had very serious implications for all of the developments in Russia, involving economic policy and in the political process.

I had a chance to meet many times this year with Mikhail Khodorkovsky and his closest partners and colleagues. And on the basis of these discussions, I had the impression that they really were unable to understand what happened, why all of this. They would tell me, "Well, you know very well that we are not revolutionaries. We are not fighters with the authorities. Of course, we are protecting our interests, but in a framework of more or less adopted rules. If they would just tell us directly what we should not do, it would not make a revolution."

So for them, really, the most unpleasant part of the story -- except the fact that a few of them are in jail -- was that they really would not understand what happened.

The story which Russian authorities are giving is very interesting. There are two stories: one story, that it is just implementation of the law and it is law enforcement, and political authorities just could not interfere with the law enforcement process. Well, you could defend this story, because during the previous years, probably it is possible to doubt that Yukos management was 100 percent loyal to this existing legislation.

There is another story which also is translated by the authorities. And the story is that it is a unique case. It will not be repeated to other businesses, and it is clearly connected with the fact that Yukos, being the oligarchy group, was interfering in the politics. You can defend this story. But the problem is that you cannot defend both of these stories. (Laughter.)

Well, my understanding of what happened: I worked in the previous parliament, and I was very much involved in the legislation process, especially in the field of tax and finances. I know very well how the parliament was structured and organized. And I have seen it very clearly.

Well, Yukos together with other oil companies, created by far the strongest lobby in the Russian Parliament, using various means, but very efficient lobby. And in some directions, from my point of view, this lobby was extremely helpful. It helped us to approach very difficult legislation connected with flat income tax. It would have been very difficult without their support.

They helped us, for instance, during the adaption of the land court and court on the turnover of the agricultural land; during the fight for the new labor court, pensionary court. But, of course, usually it was possible to negotiate with them and find some kind of agreement. But, of course, as any lobby, it has its own interests -- (inaudible) -- taxation of the oil industry; the regulation of the export tariffs; the regulation of the export tariffs on their products, et cetera. That's natural. That's why the lobbies are being formed.

And they were very efficient in doing this. They adopted -- they, I think studied especially the American lobbying practice -- (inaudible). And they adjusted a quite sophisticated mechanism. Usually -- (inaudible). The government or the president needs some law. It needs it so much that it can not veto this law. For instance, each year we have to adopt the amendment to the tax code connected with the indexation, for instance, on the basis of which budget is being calibrated. So you need it, by the end of June, anyway.

And then, at last moment, for instance, in the second reading, just from nowhere appears amendment which has nothing to do with this legislation directly but which is very comfortable to the oil companies -- for instance, the limitation of the export tariff on the oil products. And then the government is in a very uncomfortable position because they cannot veto the law. And then they get in the legislation something which it is not very easy for them to leave there.

And it happened many times. And the most serious battle I do remember was exactly in June 2003. The key vote was on the 21st of June, 2003, if I do remember it correctly. And I spent previous 72 hours trying to find some kind of compromise which would be satisfactory vote for the government, minister of finance, and possible to push through the Parliament.

Well, it is normal situation. It's how democracies do work. You have to deal with this. You have to try to fight it. You have to mobilize your own sources of support, to mobilize your majority. Well, American Presidential administration is doing it more or less everyday.

But you can just tell, well, who is the boss? Who is the boss? They are the bosses or I am the boss, and use quite Russian ways of addressing the problem. That's from my point of view, because it was practicable -- 21st of June, very tense relationship; then in July, the arrest of Platon Lebedev. So, my perception -- of course, I do not know. But my perception of the situation was that it was the reaction to the lobbying activity of the Yukos connected not with the essence of the problem. To Putin personally, it was not important will the export duties on the oil products be regulated or not, and whether the tax on the extraction of oil will be 347 rubles, as was the Yukos position, or 357 rubles, as was the ministry of finance position.

But the problem was to show who is the boss. That's at least my understanding. And I don't think that he really understood the serious consequences of what happened. He really thought that, "Well, it is a unique case. I told the oligarchs, 'Do not interfere in politics.' They did not get the message. So I will show them."

But the problem with this type of solution is that it has very serious and long-term consequences. Well, all of the privatizations, I don't know, in the post-socialist countries, were not perfect and were not popular.

I personally think that, for instance Hungarian privatization was very good -- I would try to see this variant in Russia. When I am discussing it with my friends in Hungary, they usually are extremely dissatisfied with their privatization. And that is a natural source of dissatisfaction, even with -- (inaudible).

The thing that makes property legitimate is tradition. And where you will get this tradition in the post-socialist countries, when in 40- or 75-year period, there was no private property. So however you distribute it, it will be regarded by very significant part of the society as something unjust.

The only thing that may create the possibility that the relationship will be stable is time -- time, improvement of the rule of law, functioning markets, and then it could be more or less stable with time. And what happened really put a big question mark on the problem of the stability of the property relationships in Russia.

We just in 2003 started to get the signs that the property relation is as stable to allow the long-term investment. BP deal, of course, was a very good sign. Months before Khodorkovsky arrest, I met with some high-ranking employees of Exxon, and they were absolutely sure that the deal will be made and that the only problem is the price, and that they got green light from Kremlin during Putin’s visit to New York.

So, business does not like unpredictability. It is not so much interested in democracy, usually. It's usually pragmatic, not very much interested in democracy. China is evidently not a democracy, and attracts enormous amount of foreign investment. But because the situation is regarded by the investment community, as a predictable (one); it was so a year ago and it will be so next year.

We tried all the time to make Russia a predictable country. What happened to Yukos, of course, is the signal that Russia is once again unpredictable, and the economic consequences are not clear.

Second point: of course, the authorities in Moscow, the President himself, are trying to tell that that is a unique case, that it will not be repeated. And I really think that he would prefer it to be. But the problem is that Russia is a big country with a big bureaucracy, and bureaucracies, in, for instance, Tambov or Ryazan are not reacting to what is said in Moscow. They're reacting to what is done in Moscow. And if in Moscow, you put -- because of a political disagreement -- put the richest person of the country in jail, then why in Tambov I could not invite my relatively rich entrepreneur and tell him that either he will contribute to my election fund and support me politically, or he will follow the path of Khodorkovsky.

And, of course, I do not have -- it is impossible to investigate, to prove, -- but I have a lot of anecdotal evidence that it's exactly what started to happen in Russia on a massive scale after Khodorkovsky.

Elections. Well, first of all, the extremely disappointing results of vote for democratic parties. One of the basic, of course, problems was that we were unable to create a joined bloc. I would not tell you that because of lack of trying, but it was difficult and we were unable to resolve this.

And then there are two different stories. I am not speaking about technical details, where the campaign was wrong. Yabloko was losing approximately 1 percent of the votes, between .05 and 1 percent, during all of the previous elections starting from '93. And they had better campaigns, worse campaigns -- this campaign of Yabloko, I really think was good. But they were still -- there was a general tendency that they're losing approximately 0.5 to 1 percent. So it was the problem whether they will have 5.1 or 4.9.

And it is not something coincidental. There is a general -- (inaudible.) Yabloko is a party of Soviet intelligentsia, which is generally pro-democratic, so not pro-Communist, but for which it was difficult to adjust to the new market realities. It was a stable electorate, but it is not an increasing electorate; it is a decreasing electorate. So it was more or less continuation of the existing tendency.

Our situation is quite different -- we had a huge fluctuation. And our electorate, for instance, of '99, if we are not going into detail, is a combination of two electorates. One is more or less core for Yeltsin, democratic electorate, that was mobilized into the politics during 1991, and that was left from democratic Russia. And another is new business, young entrepreneurs, young middle class, who are quite different, in a sense, who have different priorities, who are usually very pragmatic, who usually would not like to be in a conflict with the authorities. Yukos affair made us make a choice. Well, of course, we could say everything is okay and probably we would win the elections. But it wasn't possible, on the moral grounds, at least.

And then, when we started to be extremely critical to what the President and the government are doing in this field, we had to understand that 70 percent of our electorate is pro-Putin and they would not like to be in the position; they would not like to be -- (inaudible). So, practically, all of these affairs split our electorate in two parts. And one part, which is left, was not enough to plus 5 percent per year.

Well, this defeat, from my point of view, of course, should result in a very serious restructuring of the democratic part of the political spectrum in Russia. But I hope that this task will be resolved. But to tell you frankly, I think that the most important result of these elections is not the defeat of Yabloko and SPS. It's unpleasant for us, but I don't think it is the most important. And I don't think that even the fact that Unity now controls the majority of the Duma is the most important result of these elections.

The most important result and the most dangerous result is the very strong showing of the parties which are competing with each other -- who will be more anti-Semitic, who will be more blaming non-Russians for all the Russian problems, who will be more anti-American, who will be more inclined to try to resolve all of the problems by dividing the money that belongs to the people of non-Russian nationality?

This sort of ideas, of course, is extremely easy to sell in many societies, not only in Russia. It is very efficient political weapon, and it's, to some degree, a nuclear bomb. It is simple, it is easy to explain and, at least in the young democracies and the democracies with a rather uneasy history, previous history, it is a quite dangerous vehicle. And when, during the debates, Zhirinovsky, Rogosin, Zyuganov were trying to show who is better at this kind of politics, it started to be very unpleasant.

To some degree, it is opening the Pandora Box. Why these vehicle are not used in many countries all the time? From my point of view, because usually the people know that it is a very strong equipment, strong vehicle, but also that those who are using this vehicle usually are finishing in a not very pleasant way. From Mussolini to Hitler and Milosevic -- and Milosevic is the nicest, because of the nice European -- the nice Hague tribunal. So that is some kind of a limitation.

But when it is on the political table, it starts to be very difficult not to use it in the political competition. I don't think it will have short-term consequences for Russian politics. Putin controls Duma -- of course, he will win presidential elections. More than this, even if -- I don't think that presidential elections will be fair and free, but if, starting from tomorrow, we will believe that everything will be fair and free, he will easily win presidential elections because he's popular. And Khodorkovsky story made him more popular, of course.

So he will win presidential elections and he will try to show that nothing happened. And he's trying to do it, and I think, sincerely. So I do not expect some radical changes in directions of the Russian development during short-term and middle-term perspective. I think that foreign policy will be approximately as it was during the previous period. I think that the policy in the CIS countries will be approximately like it was. I think that we will not have anything connected with serious movement in the establishment of democratic procedure, practically functioning.

I had a chance to look at a draft of the economic priorities program for the next presidency, prepared for Putin, which has not yet been approved. And it is sensible, it will really address quite important priorities. So nothing drastic will happen in Russia as a result of these elections in short-term and middle-term perspective.

More than this, it will be easier for the government to promote sensible economic legislation, including a lot of things connected with tax privileges, et cetera. And they started to do it immediately after this anti-Yukos campaign. And a lot of things they are pushing are absolutely sensible. I tried to push it through the Parliament during the years; I was unable to do it. So, no short-term serious dangers.

Of course, in the CIS, I think it will be a continuation of the more or less same policy. Russia thinks that, as many other big countries, it has its own interest in countries which are close to it. And to tell you frankly, I, being the person who had a chance to write Malaveskiy-Pushe (ph) agreement, would not dispute that Russia, as any big country, has its own interests. I think that we should protect these interests by legal means, not interfering in the politics of other countries. And I think -- mostly, if Russia will not be provoked very much, it will be the practical line, except some explosions of stupidity, like all of this Tuzla incident, which is unbelievable.

The direction in which Russia is making a very serious mistake in the CIS is its policy toward Ukraine. It is by far our most important neighbor. Good relationship with Ukraine is, from my point of view, one of the top priorities for Russia. I cannot disagree that dealing with our Ukrainian friends is not always easy. But we should be realistic, and, as we accepted the fact that Ukraine is an independent country, we have to build normal relationship. So why Putin allowed to persuade himself that Yuschenko -- one of the candidates, probably one of the most serious candidates for the presidency of Ukraine, who's clever, not corrupt, absolutely not anti-Russian, pragmatic person whom I have known for more than 10 years, whom I've personally tried to persuade to enter politics and to fight for the presidency, I think, eight, nine year ago -- that he's some radical nationalist and anti-Russian, and why should we try to use all of our possibilities to prevent his election, with the possible outcome that he will be elected, and then we will have to deal with a person whom Russian authorities tried to stop. That's very strange.

But that happens. That happens. And I think it is a mistake, but a mistake that is possible to correct.

What, from my point of view, what is the thing that worries me most? Well, during last few years, we lost ideological war in Russia, which, from my point of view, was extremely important factor that predetermined the results of these elections. If you, for instance, would look at the content of the Russian TV -- the films that have been shown, the serials -- not the news programs, but the things that are -- you would look at the popular books that are being published, you will see that in the vast majority of everything that an ordinary Russian is writing, it is an American enemy, a Western enemy, an American plot, a good Russian fighting against bad Americans. Our empire isn't Germany; we are not defeated in the field, we are stabbed in the back. Dissolution of the Soviet Union was an American plot. We had a splendid great empire and now we are left to doubt it; the sense of national humiliation that should be revenged. It is not all the time in the words. It is in the context.

So in the fight between the idea that the priorities are human rights, stable development, democracy, rule of law, and the idea that priorities are to rebuild an empire, to revenge for the dissolution of the Soviet Union, that everybody is an enemy of Russia. That relationship was for instance one to five. And that by itself, together with the fact that it continues -- together with the fact that during these elections all of these ideas got political voice and started to be publicly debated -- create very unpleasant long-term perspectives.

I lived in the Soviet Union, and nobody expected that the Soviet Union will disappear, for instance in '85. And I myself have seen how this big great pro-democratic, anti-Communist ideological wave was starting. And then it started to be the force that even the Communist authorities were unable to stop. Now I am very much afraid that we could see a similar -- this time radical nationalistic way -- with consequences, that are difficult to predict in a period not in the next two years. No, not -- but in the perspective of the next four years or later.

And that means that -- it doesn't mean that America should radically change its policy towards Russia, I don't think so. I think that the policy should be quite pragmatic, and I think that the ideas that Russia should be expelled from the G-8 are extremely counterproductive from the point of view of defending democracy in Russia. Because it is extremely important -- it's one of the important ways of influencing the Russian authorities when they do not have the system of checks and balances, and they would very much like to be members of the club. And it is possible to influence them exactly when they are members of the club.

But the thing that is important to understand is that with the unpleasant developments of the political situation in Russia, Russia could start to be once again a rather dangerous place, from the point of view not only of Russia, but from the point of view of the global security. And I think that to prevent these kinds of developments, of course, first of all is the job of Russians to try to do it. But it should be the global concern.

Thank you, dear friends. (Applause.)

MR. ÅSLUND: Thank you very much. That was a pretty somber note that you have struck here. But I guess that really we're not very surprised to hear that.

Questions, please?

Cathy Kavalec, State Department.

Q Thank you very much, Mr. Gaidar. It was a very interesting presentation. I was just curious on the election and SPS and the Yabloko not passing the barrier. Zyuganov and the Communists have made some claims that election fraud was involved in the fact that either one or both of the parties did not pass the barrier. Do you agree with that assessment?

MR. GAIDAR: Well, I have seen their materials. They are showing that Yabloko got 5.21, and we got 5.11. I don't think that the Communists this time are lying in our favor. I do not understand why it would be good for them. And they had, of course, by far the best ability and the best mechanism to control the elections. So I think that's true.

But the problem is that in the present Russia to win the elections you don't need to get 5.11. You need to get at least 7.0.

MR. ÅSLUND: Carl Gershman, the National Endowment for Democracy

Q Thank you. I understood you to say it would be counterproductive to expel Russia from the G-8. But what should the United States do? Should we seek in some way to try to increase the identification with and the support of independent democratic forces in Russia? Are such forces -- do they need support right now, and should we try to help them more than in the past? Because what you've described is a kind of an anti-democratic wave that is not just the government but is also in the population. Presumably there are alternative forces that could be helped. Are we hurting them by helping them, or should we try to help them?

MR. GAIDAR: I would put another priority. What is extremely important is to support development and preservations of the elements of the civil society that emerged in Russia during the previous 12 years.

Well, I had two discussions with one very famous businessman who spent a lot of money supporting the civil society in Russia. I will not quote him, because we have not agreed about it. And he asked me two times at the beginning of last year whether he understands correctly that now he can think that his mission is more or less completed. And now when we have the Russian businessmen starting to invest their own resources, money, in the same project of the support of the independent media, various independent non-government organizations, that he could stop to do what he is doing. And I told him of course it's your choice, but I think that you absolutely have the moral right to do it. And that was the time when for instance Yukos opened the Russia Foundation, which was having more or less the same priorities, et cetera.

Now the message that was sent very clearly to the Russian big business is: Do not interfere in any activity connected with the civil society without a direct consultation with the authorities. And they got the message.

So I think that a lot of people would like very much to have once again a situation when any kind of a public activity -- press activity, thinking activity, educational activity -- could exist only with the direct support of the authorities. And that is extremely counterproductive, and that is extremely dangerous. So I don't think that direct political support would permit financial support of the political process -- of the political parties in Russia would be productive. I think it would be extremely counterproductive. But very serious attention to civil society, yes, it's important.

MR. ÅSLUND: Angela Stent, National Intelligence Council.

Q Thank you. You didn't mention Chechnya at all, and I wondered how you think that situation will develop in the second Putin administration. Do you think it will be the status quo? Can you see changes?

MR. GAIDAR: I'm afraid that we will see more or less status quo. I have not mentioned this not because it's not important, but because I do not expect a lot of changes. So low-scale guerrilla warfare, a rather corrupt administration, a high level of corruption in the forces -- may be some slow improvement with the economic progress -- creation of a new working place, et cetera -- but slow. So I do not expect a lot of changes here.

MR. ÅSLUND: Wayne Merry, American Foreign Policy Council.

Q Dr. Gaidar, for the time being, the nationalists, whether that's Rogozin, Glazyev or even Zhirinovsky, are in something of a tactical political alliance with the Kremlin. They see it as in their interests to be pro-Putin. What circumstances and over what timeframe would you see that as being likely to change, where the nationalists would feel it no longer in their interests, or necessary, to be pro-Putin? Would these be economic circumstances, would they be political or foreign affairs circumstances? In what time frame do you think that would be likely to happen?

MR. GAIDAR: The most important problem that will be discussed in Russia during the next few years will be, first of all, whether Putin will change the constitution, and if he would not like to change the constitution, who would be his successor? Of course nobody knows.

My guess, on the basis of what I have heard from him both publicly and privately, is that he would not like to change the constitution. But of course he would like to influence the succession problem. And the closer we will be to the succession problem, that's less loyal this type of people would be to the present authorities.

(Brief audio break.)

Q Thank you. And thank you very much for the talk. I had wanted perhaps just to ask you to expand a little bit more on the point made by my colleague. If these anti-democratic tendencies in society are reflected in government policy, at some point U.S. policy will have to respond. I know that's a very speculative question, but I don't think it can just kind of keep on going, because at a certain point we'll have to decide.

MR. GAIDAR: Of course.

Q And I guess it's more of a comment than a question. But anything you might say? Thank you.

MR. ÅSLUND: Okay. Dan Yergin, Cambridge Energy Research Associates.

Q Dr. Gaidar, thank you. Could you -- a two-part question, an economic question but with a political connotation. Could you say something about how you see a little more about the evolution of the economy itself? And, secondly, does the increasing integration of Russia with the world economy, does that have offsetting political benefits to counteract some of the trends that you're talking about? Thank you.

MR. GAIDAR: Well, generally economic dynamics is really positive, and it is not everything connected with oil prices. A lot of very positive reforms, very impressive results of the tax reform. Flat income tax worked in Russia better than anybody, including ourselves who elaborated it for Russia, expected. We never promised that it would immediately deliver significant increase of the budget revenue. Now it's the most rapidly increasing source of revenue.

Monetary policy is sensible. We have a sensible leadership of the Central Bank, of the Ministry of Finance. The most difficult problem for the current management of the economic policy is how to prevent excessive inflow of short-term capital and excessive nominal and real appreciation of the ruble. Of course it's a difficult problem, as those who are involved know, but these are to some degree more pleasant problems than those that we had to resolve in, for instance, '98. The oil industry expands very rapidly. Investments are high. The very good signs -- of course last year was a very impressive increase of the general investment level and the production of the machine-building industry. Also supported by the data about the import of the machine-building production, which usually goes together with the investment-led growth.

So in a short term, I'm not worried. Whether we will see a continuation of these processes in the new environment, I am not sure.

Well, of course a lot of things are not being done. For instance, we have achieved a lot of very impressive results in the tax reform, but we have done more or less nothing -- well, not nothing, but not enough at all in everything connected to the budget expenditures, from the amount of the budget expenditure to the structure of the budget expenditures. We are still spending money -- not because we know what services we are buying for this money either for the state or for the society, but because we chose to spend money this way last year and the year before last, and the year before that, et cetera. So restructuring of all connected to the budgetary expenditures is an evident priority, and I think it will be the priority.

Of course, in the nature of monopolies we started to get something serious in energy systems. But what happens in Gazprom is beyond any calm comments.

Of course a lot of tasks connected to the banking reform, and I think it will slowly go in the right direction. So to tell you frankly, I am not so much worried about the economy at present stage.

Whether the integration helps -- of course integration helps. Integration helps inevitably because more people are traveling abroad. They are having more exposure to the real world. They are more integrated into the global society. It's very difficult to persuade them that everybody is not an enemy of Russia. So of course it is -- I don't think that this trend that we are having is reversible. To some degree of course it is a result of the trauma of revolution and disappearance of the empire, et cetera, of the '90s. I hope very much that it could be reversed. I just think that we should care, and that it's dangerous.

MR. ÅSLUND: Nikolai Zimin, Itogi Magazine.

Q (In Russian.)

MR. GAIDAR: Nyet, nyet.

MR. ÅSLUND: The question was whether the party of the Union of Rightist Forces will perish as a party.

MR. GAIDAR: No. First of all, for me it's easier to comment because I have seen a lot of defeats and victories. In '95 the Democratic Choice of Russia lost elections with exactly the same result as now, as past. And then we were able to reorganize ourselves and to win the next elections. So the panic is the worst way to fight. No battle was won by using these methods, no, no.

Well, I would remind you that during the year 2000 elections Khakamada and Nemtsov supported Yavlinsky, and we supported Putin at that time. And it cannot result in any serious political organizational problems. We are working together and prepared to work together further. I, to tell you frankly, would prefer to limit the amount of my public policy activities. I think that as a person who was longer than any other leaders of the SPS, I could concentrate on my research projects. It's really my position, and I think on the experience of the post-socialist politics that with time people start to be bored with the same faces they are seeing all the time. And as I am the longest here, I think that it is time for me to step down and to engage in the educational or NGO research activities.

But my colleagues will stay in the leadership, and of course we need serious reorganization. We need some regrouping. But as DVR was the basis for the creation of the SPS, and SPS was impossible to create without DVR. So now I think it will be the same, similar process.

MR. ÅSLUND: Fred Hiatt, Washington Post.

Q Thank you. Dr. Gaidar, I remember I think when you expressed the hope that economic growth and the growth of private business would increase support for politically liberal parties. Now, as you say, there has been six or seven years of economic growth. Why is nationalist sentiment growing? Who in society is supporting these parties, and what connection if any is there to the economy?

MR. GAIDAR: To tell you frankly, I think that this was one of my important strategic mistakes. Usually nobody likes to accept that he makes serious strategic mistakes, but I have to accept that it was one of my strategic mistakes. I really hoped very much that with the economic growth evident, growth of the real incomes, stabilization of the economy, decline of the poverty, we will have the decline of the support of the Communists and other radicals, and the increase of the support of the usual middle-class-oriented parties. It was much more complicated than this.

Of course we have seen the decline of the support for the Communist Party and it's real. Of course it was partly the result of how -- of the way in which elections were organized. But it's absolutely evident that the support for the Communists really is going down with the economic growth and improvement of economic plan. But a significant part of the electorate is not passing to the usual middle-class parties, but they are passing to the support of the radical nationalists.

Well, we should of course remember that the fascist party in Nazi Germany was supported by the entire middle class -- petit bourgeois in the terms of the time. And maybe I can see the mechanism of this now -- I am not sure. We need a lot of political and sociologist research to understand this now.

Well, when it's extremely difficult -- one example: I do not remember a single person from the security agencies of Russia who wanted to be responsible for the Russian economy in autumn '91 when we had grain reserves until February, and hard currency reserves were around $200 million. And when the hard currency reserves are $80 billion and economic functions are growing, it's a long, long line of people who would like to tell what to do with these reverses -- how to run them. The same to some degree with the public when it is very difficult and evident that we are speaking about whether it will be hunger in Russia, whether we'll somehow survive -- whether we will have this minimal level of incomes. Usually you are not thinking about the imperial might and the splendid imperial past.

But when the revenues are good enough -- not splendid, but good enough -- your needs will be met. Everything is more or less normal and the economy is growing. And you know that your revenues probably will be growing. Why not sit by the TV and discuss the point of how great the Soviet Union was, the realities of which they either do not know or have easily forgot, and know them from the Soviet films. And how splendid it will be if we reestablish our imperial might. And of course the humiliation of the '90s is very important breeding source of distribution of these sentiments.

MR. ÅSLUND: General Odom, Hudson Institute.

Q Thank you very much for your analysis. I was trying to put together what seems to me be a piece of it that you haven't really dealt with. The short-term outlook for the economy, as I understand it, is quite good. New legislation -- the outlook for institutional changes for financial and tax and other management looks reasonably good. This ought to facilitate and keep the growth up. But then when you start talking about these other political developments, it would seem to me they eventually will have to dampen the economic development, because they will interfere with these institutional changes. Have I understood that right? That's the first question.

The second is you talked about continuity in the CIS policy. Continuity would seem to me to mean increasing tensions between Russia and the U.S. and Russia and the West, particularly in the Caucasus and in Central Asia. And I wonder if you would amplify a bit the implications, the dynamic implications of continuity in that policy.

MR. GAIDAR: Well, first of all, on the first question, yes, you are absolutely right, I think that it could in time -- not immediately, but in time, create problems also for economic development.

On the second question, I think Putin does not like to be anti-American and would like to keep good relationship with the States. That's my strong position. Also, he would like Russia to play a role in the CIS. So it is all the time the problem of the way of finding a balance of the interests and a balance of these factors. We were able to do it previously. I hope we will be able to do it during the next period of time.

What is especially bad is various types of provocations, when some countries are trying to play a card of the different positions between Russia and the United States -- I don't think that Russia needs it. I don't think the States really need it.

Q You didn't talk at all about the media, the press. Is that just a reflection of what's happening in terms of the crackdown by Putin? Or do you see the press as some possible catalyst for change in the future?

MR. GAIDAR: Well, I think that the authorities' position is that the press, is that big national TV channels are important and should be strictly controlled, with various level of control, for instance, where they are resembling Pravda of the Soviet period, and for instance, when they are resembling Literaturnaya Gazeta, literary newspaper of the Soviet period. (Laughter.) So but they should be under strict control.

In addition, the big radio channels with national coverage should be more or less controlled. Newspapers with a huge coverage should be controlled. But if we are speaking about newspapers with a circulation of 200,000 copies, or TV or radio channels with coverage of 800,000 people, you can do more or less everything you would like to.

Of course it's not a Soviet system, because in a Soviet system even in Kolhoznaya Gazeta you could not publish anything had not gone through the government. But it is different. It is a different situation. And I think that to keep it still is extremely important, because when people do see that on the TV channels, they are seeing something which is very different from the reality, and all the time. The same joke of the Soviet period, when a person turns on the TV, looks at the General Secretary who is making his presentation; switches to another channel, looks at the General Secretary who is making a presentation, switches to the third channel, sees the General Secretary who is making a presentation, switches to the fourth channel and sees the Chairman of the KGB who is saying, "I’ll show you to switch channels!" (Laughter.) So in this type of situation inevitably they are all -- the Internet, various means which is difficult to control. Newspapers and journals with smaller circulation in the intellectual lives start to be much greater. And I think that this tendency is more or less inevitable.

Q Alexandru Colosivschi, Moldovan Embassy. Dr. Gaidar, could you tell me, please, why SPS doesn't want to support Irina Khakamada as a candidate for presidency? Is there any -- do you have any plans for 2008, or is it just some personal animosities?

And the second question is: What was the role of the Yukos ambition to build some -- to launch some project, in building some private pipelines that interfered with the legal procedures, again this company? And what are the prospects for private pipelines in Russia after the Yukos affair? Thank you.

MR. GAIDAR: I will start with the second part of the question. Of course there was a disagreement connected with the Yukos idea about the private pipeline to Murmansk. But to tell you frankly, I don't think that it had any influence on what happened. Just the mechanism was structured in a way -- their discussion was a one-time discussion on tax legislation, another time on the start of the campaign. So nobody knows. But my guess is not.

Of course without Yukos support, a lot of oil companies will at least ask the same question. I think that the prospectives of the private pipelines are much less positive than they were a year ago. A year ago I was practically sure the private project at Murmansk will be done. Now I don't know.

Irina Khakamada -- we had intensive discussion about this at the conference, and we have the vote and both of these proposals were voted, and with a slight majority proposal to allow the free vote was adopted.

I personally supported this. Why? We were in a similar situation in '96, before the presidential elections. And we decided not to support Yeltsin at the beginning. Then Yeltsin made a few important steps in our direction, including the change of his Chechnya policy, which was extremely important. And then the Congress, with the majority everybody, except two delegates, supported Yeltsin. And we were absolutely sure, all sociologists were telling them that those who are supporting the Democratic Russian Choice are the core Yeltsin electorate. They are dissatisfied with him. They do not like a lot of things he's doing, but they are his supporters.

Now, we were trying to build the coalition with Yabloko, to present a single democratic candidate. We even proposed to Yabloko the choice of two of Yabloko leaders on the position of this candidate -- just not being Mr. Yavlinksy. It was Mr. Lukin and Mr. Zatov. They would not accept. So in this situation, for us to present now our candidate was a little bit strange. It could look like as if all the time we were playing the game, and preparing the ground for the nomination of Irina Khakamada. Irina Khakamada herself presented her nomination.

But if you would ask the majority of our party active, and the majority of our electorate, they are not decided on the issue. It is not the '96 case. Some of them will not go to vote. Some of them, they will vote against all of the candidates. Some of them will support Khakamada. Some of them will support Putin. And for them our solution now will not mean a lot. For instance, I personally do not know how I will vote, whether I will go to vote at all, for instance. And whatever the Congress would today -- two days ago resolve, it will not change my position. I will decide it before the elections, basing my decision on what will happen in the country and how the campaign will be managed.

MR. ÅSLUND: Thank you. Down there, please. Please show if I miss somebody down in the room.

Q Tammy Lynch from the National Democratic Institute. I just wanted to follow up on that quickly. Irina Khakamada was here yesterday and spoke, and she said -- she suggested that without a new liberal force, some type of movement or party in Russia within the next four years to fight against what she called the administration's authoritarian tendencies, then democracy could be lost in the next four years. I wonder if you agree, and if you think it's possible to create this force that she was talking about.

MR. GAIDAR: Well, as I have mentioned, of course we need a serious reorganization in our part of the political spectrum. And it's an important task. How to do it, I am not prepared to discuss at the present stage, because I do not know. It is all the time with this technology. It is technologies, negotiations, it is attempts to involve new people, to find new norms, et cetera. We have done it in '99. I hope it will be possible to do it now.

MR. ÅSLUND: Andrey Sitov, Itar-Tass.

Q Thank you. Mr. Gaidar, I wanted to -- I don't know if you talked to the administration officials during your visit, but we are witnessing sort of an upswing in Russia-bashing, in the American media especially. Do you feel this is a regular phenomenon which happens before every election -- we distinctly remember the same thing happening in the last year of the Clinton administration. Or is it something different this time, and is it a signal that the policy, the approach of the administration, of the current administration, to Russia is changing?

MR. GAIDAR: I just had my first meeting at the State Department -- I will have meetings in various other agencies, including the Presidential administration. So it will be easier for me to answer this question at the end of my visit.

My guess is that it is not connected directly with the elections, and that is quite a different story from what we have seen in for instance in '99 or early 2000. But really I would prefer to answer this question later.

MR. ÅSLUND: Yes, please, it was somebody -- Cathy Kavalec, yeah.

Q One issue that you didn't mention today was corruption in Russia. And I remember maybe back '92/93, I remember hearing you once talk about Russia having a choice between evolving as a liberal democracy or as a Latin American-style oligarchy. And I wonder how much of a problem and a factor corruption you see continuing to be in Russia, or have you seen any improvement?

MR. GAIDAR: It is a serious problem, and I do not see a significant amount of improvement. Well, there is a good news and a bad news. The good news is that we to some degree were able to understand that the corruption is a long-term phenomenon in Russia. Of course you have to fight it, but it's a long-term phenomenon. So we are trying to adjust our institutions to minimize the harm from corruption.

I would give you just one example of it, spend two or three minutes. Last year -- the year before last -- we had the reform of the natural resource taxation, and we had previously a complicated system with a lot of individual solutions, et cetera. And we had enormous debate of how to restructure it. And there were ideas that it should become very perfect, very sophisticated -- we should include information about each oil deposit, et cetera. I persuaded my friends in the government, and then we pushed it through the parliament, that we have in our case, in Russia -- not in Norway, but in Russia -- to adopt very simple but extremely non-corrupt system. And the system -- well, your tax obligations are dependent only on the two parameters that you can't manipulate. That's oil production and the world oil prices, period. We had an enormous increase of the oil revenues, the revenues from this tax. They increased more than two times, and no problems of corruption. But now I see the battle in various ministries how to reform this form of taxation: how to contribute to various types of the coefficients the state employees will determine from which the obligations of the oil companies will vary at times.

On the good point is that the Ministry of Finance, the Ministry of the Economy, Ministry of Natural Resources and Ministry of Energy all would like them to define these coefficients, so if they do not agree somehow on trying to defend this simple system. So simple solutions really work. Well, for instance, when we introduced the flat income tax, one of the reasons was it is the tax adjusted to the not very strong administration.

The bad news is of course that democracy is not the universal means, the universal way of fighting corruption, but it's more or less the only way that works in long term. So of course when you are undermining the functioning democracy, creating the system which I call closed democracy, of course the U.S. and any countries which used to live during the period of the closed democracy, are confronted with the problem that the corruption will be a very long-term phenomenon.

MR. ÅSLUND: Thank you very much, Yegor Timurovich. You have really provided us with a splendid presentation of the situation in Russia, and I think that we are all much wiser. I only wish we were a bit happier also. Thank you. (Applause.)

(END OF EVENT.)