Few years in Russian history were as eventful as the last year of the 20th century. A young and active president launched half a dozen reforms, routed separatists in the Caucasus and declared deregulation of the economy. The impressions of Putin the reformer outweighed the aftertaste of Putin who was building a vertical power structure and distancing himself from the oligarchs.
"CORRECTION AFTER RAPID GROWTH"
This time the polling day coincided with the switch to summertime, a significant and even symbolic coincidence. "We are putting the clock forward. The old times have come to an end", Prime Minister Vladimir Putin told his fellow citizens on the eve of the 2000 presidential election.
On March 26, 2000, 52.94% voted for Putin although in January 2000 the Acting President's approval rating reached 67%. The President of the Public Opinion Fund, Alexander Oslon, recalls that the rating dropped a month ahead of the election: "Looks like a market correction after rapid growth". "That is a normal phenomenon. He has turned from a fairy-tale hero into an acting politician," mused the chief of the President's Staff, Alexander Voloshin, on the night after the election at Alexander House where Putin had his campaign headquarters.
The name of the winner became known in the small hours when the number of processed ballots which had his name ticked off approached 50%. Until that time his campaign staff did not rule out that elections would go to the second round. Their fears were not ungrounded: his closest rival, KPRF leader Gennady Zyuganov, got 29.2% of the votes, followed by Grigory Yavlinsky, the Yabloko leader with a mere 5.8%.
The cost of victory was not high. "Of the 25 million roubles raised by the campaign fund we have spent about 60%, and we have 10 million roubles left", the chief of Putin's campaign staff, Dmitry Medvedev, told Vedomosti on that night.
The 1999-2000 election campaign, funded by 15-20 major companies, was unusually cheap, says a former leader of Unity's staff: "It took far less than $100 million. And yet in the 1996 presidential election billions sloshed around. As it turned out, if elections are not seen as a way of getting rich quick, it is not such a costly exercise".
THE VERTICAL PRESIDENT
If any one had any lingering questions about the new President's style they must have dropped off within a week after his inauguration. On May 13 Vladimir Putin signed a decree creating seven Federal Districts which practically coincided with the military districts, and on May 18 he appointed their heads.
The President's first envoys were picked mainly from amongst generals, only two were civilians, ex-premier Sergei Kiriyenko and diplomat Leonid Drachevsky.
A day earlier the President went on television to announce that he was introducing at the State Duma three draft laws which would continue the "line for strengthening the unity of the state": on the new procedure that made it possible for regional governors and mayors to be dismissed, but most importantly on changing the way the Federation Council was formed. Under that law governors had no right to sit in the senate.
The governing party, Unity, formed a bloc with the KPRF in the State Duma in early 2000. "The main efforts of Unity and its Kremlin supporters were aimed at neutralising the influence of Fatherland-All Russia led by Primakov and Luzhkov", says former LDPR leader at the Duma Alexei Mitrofanov. "Everything was geared to one goal, to weaken the gubernatorial lobby which set itself up in opposition to the Yeltsin team in 1999", one of the former Unity leaders recalls (in 2001 that party absorbed Fatherland-All-Russia and was renamed United Russia).
Chechnya was a separate issue. In the very first month of his tenure Vladimir Putin appointed Mufti Ahmat Kadyrov as acting chief of the Chechen Administration. By that time Grozny had been liberated from militants and fighting had moved to mountainous areas, Colonel-General Valery Baranov, former commander of the Russian troops in Chechnya and currently deputy commander in chief of the Interior Ministry's troops, recalls. "Initially there were many in and outside the Republic who opposed Kadyrov's appointment, they did not believe he could become a secular leader, the general says. But gradually Kadyrov managed to strengthen his grip on power, as early as 2000 he appointed the heads of districts and communities and began to gain authority as a spiritual and secular leader". (Kadyrov won the 2001 presidential election in the Republic, three years later he died as a result of a terrorist attack in Grozny).
THE LIBERAL ELEMENT
In the economy, unlike in politics, Vladimir Putin seemed to be a 100% liberal in his first year as President. As soon as he assumed office, he launched several reforms at once. Two days after inauguration the President submitted to the State Duma draft amendments to Part 2 of the Tax Code thus kick-starting the long-awaited tax reform. It codified the taxes that are critical for business and for ordinary citizens: profit tax, the Unified Social Tax, income tax, VAT and also excise and road user tax. Most additions came into effect as of January 1, 2001 and the chapter on the profit tax in August 2001 (the Government initially wanted to keep the 30% tax, but lowered it to 24% after discussions with the business community).
"If the Government had been slow in adopting the key chapters of the Tax Code an opposition could have been formed in parliament to block the reform. Nobody had expected events to develop so swiftly," says Yegor Gaidar, Director of the Institute for the Economy in Transition. Cutting the income tax to 13% and introducing a flat rate instead of the progressive one was accompanied by the lifting of tax breaks for judges, servicemen, police, and special services, he recalls. "Tax dodging became more difficult because taxation at source was introduced (under the former system taxes were declared). For those who did not pay taxes reform was an extra burden," adds Mr Gaidar. He believes that the tax reform was one of the major successes of 2000: "Tax collection and budget revenues shot up as early as 2001".
One of the Young Reformers, Boris Nemtsov (First Deputy Prime Minister in 1996-1997) is now an opponent of Putin's, but he approves of the 2000 tax reform: "This was Putin's real achievement, we do not deny that."
2000 saw the start not of one but of a whole bunch of liberal reforms. In June the Government approved a programme of Russia's social and economic development to the year 2010 prepared by the Ministry of Economic Development. The plan, a brainchild of the then Minister German Gref, in addition to the tax reform included all that the Young Reformers of the Yeltsin era had failed to do: restructuring of the natural monopolies (RAO UES Russia, Gazprom and the Railway Ministry), the pension and administrative reforms. One of the key principles of the plan was a balanced budget (the principle was first used in drafting the 2001 budget law). At the time the programme envisaged an annual GDP growth of 5% and a doubling of real incomes by 2010.
REFORMS AS A LEGACY
The important decisions made in record-short time were not exactly improvised. The reform of the Federation Council and establishment of federal districts had been discussed in advance by the future President within his narrow circle which included Alexander Voloshin, Igor Sechin, Vladislav Surkov, Dmitry Medvedev, Sergei Ivanov, Dmitry Kozak and Larissa Brycheva, writes political scientist Vitaly Ivanov in his book "Putin's Federalism". Vladimir Putin was lucky with his economic reforms. By the time he became Prime Minister a well-considered set of reform ideas (some already translated into draft laws), including the tax reform, was already in place.
"The 2000 reforms were developed in 1996-1997 at Government Retreat No.2 in Volynskoye. The head of the group was the current President of the Central Bank, Sergei Ignatyev, then the President's economic adviser," Yegor Gaidar remembers. The principles of these reforms worked out by the so-called Young Reformers were unveiled by Boris Yeltsin in his address in 1997. But the Communist-dominated parliament rejected them. Then the drafters decided that the documents on economic reforms should contain no political elements (the 1997 package envisaged many compromises). The work on these documents continued at our institute [Institute for the Economy in Transition] and was completed in 1999. That portfolio of bills was passed on to Gref's team which finalised it. "A very unusual situation in world economic history: a window of opportunity opens for the new head of state and a complete reform programme is already there," Mr Gaidar comments.
"TO PAY ALL THE DEBTS"
After the presidential election the jokes about an "exodus from St Petersburg to Moscow" quickly ceased to be funny: the key posts in the country's top leadership were successively filled by the former KGB colleagues or St Petersburg fellow citizens of the new head of state, people he knew well personally or at least through his close acquaintances. However, the new Prime Minister became Mikhail Kasyanov, a Muscovite whom the President had only recently met, earlier Finance Minister and First Deputy Prime Minister in the Putin Government.
An article reporting Kasyanov's promotion as candidate for Prime Minister in the newspaper Frankfurter Rundschau was entitled "2% Misha" (in reference to the standard "kick-backs" he allegedly demanded); the only confirmation of the claim made in the title was a reference to Novaya Gazeta.
Anyway, in February 2000 Kasyanov made his mark as a strong negotiator after he persuaded the London Club of Creditors to reschedule Soviet debt arrears ($32 billion) on terms that favoured Russia: one third of the debt was written off at once and the remainder was to be paid over the next 30 years. "Negotiations with the banks were complicated because standing behind the old creditors of the Soviet times were hedge funds and investment banks which had lost money in the 1998 crisis and were anxious to get the money back or at least get liquid assets", Oleg Buklemishev, Kasyanov's adviser at the time, recalls.
The new Prime Minister was determined to negotiate a debt write-off and deferment with the Paris Club of Creditors. The total debt to the Paris Club amounted to $42 billion, of which $3 billion had to be paid in 2001. Oil prices had taken a threatening dip to $19 per barrel by the end of the year. With the average annual price at $21 per barrel, the federal budget would have been unable to service these debts.
But negotiations with the Paris Club stalled because of a surprise move by Andrei Illarionov, the President's economic adviser. "Debts must be paid fully and without deferments", he proclaimed. "Our initial surplus is a little over 5% of the GDP and we pay 3.5% of the GDP on our debts."
"This is the most that can be done given the situation in Russia. Any tilt one way or the other is fraught with social and political tensions," Kasyanov moaned in an interview to Vedomosti. However, Illarionov's line prevailed: in the years that followed the Government had to give up the idea of rescheduling its debts to the Paris Club and paid in hard cash, first under the original schedule and then ahead of schedule.
Mr Buklemishev admits that by the end of 2000 it had become harder to convince the creditors that Russian finances were weak. Thanks to the growing oil prices budget revenue had doubled from 615.5 billion roubles in 1999 to 1.13 trillion roubles (the expenditure stood at 666.93 billion and 1.014 trillion respectively). Anyway, the decision to get rid of the debt burden as quickly as possible while the situation was propitious, appears to have been correct, especially if one looks at the current economic situation," Mr Buklemishev concludes.
This article was prepared by Alexei Nikolsky and Maxim Glikin
* * *
Popular reform
*IN FAVOUR OF THE PEOPLE
Part 2 of the Tax Code eased the tax burden on people whose incomes were legal: before the reform the maximum income tax rate was 30%, and after the new Tax Code was introduced it became 13%. The state introduced annual tax rebates of 25,000 roubles for medical care and education for tax payers and their children. The income tax break when buying housing increased by almost 1.5 times (from 417,450 roubles to 600,000 roubles) and almost doubled when selling housing (from 417,450 roubles to 1 million roubles).
*IN FAVOUR OF BUSINESS
Instead of deductions to three Government off-budget funds (the Pension Fund, the Mandatory Medical Insurance Fund and the Social Insurance Fund) employers were to pay the Unified Social Tax. As the annual income increased the rate of the Unified Social Tax diminished from 35.6% to 5% (prior to the reform the total deductions to the off-budget funds amounted to 39.5%). All this combined to induce the gainfully employed Russians to come out of the shadow sector.
Olga Proskurnina