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CHAPTER2 Reforging the Russian State “Dear citizens of Russia!” declared President Vladimir Putin in his first address to the Federal Assembly on July 8, 2000. It was Russia’s equivalent of the State of the Union, a chance to set priorities and explain his goals to Russians, who knew little about him. Putin began his address not with grand claims or promises of prosperity, but with tax policy. From income tax rates todeductions,fromthetotaltaxburdentoitseffectontheshadoweconomy. It was a technocratic start to a speech that, many expected, would be used to set out broader goals. Putin could see no greater priority. The tax issue, he explained, was the country’s most pressing problem. The introduction of tax reforms, he promised , “will become a reference point of a new era in building the state, and in the rules of behavior in the economy.” The entire state and social structure dependedonanewsetofeconomicrules,whichwouldbringinmorerevenue and stabilize the country’s budget. “We must ensure that all of us—entrepreneurs ,authorities,citizens—stronglyfeelourresponsibilitytothecountry,so that strict fulfillment of the law becomes the deliberate choice of all citizens ofRussia.Policiesbuiltonopenandhonestrelationsofthestatewithsociety will protect us from repeating past mistakes. They are the basic conditions of a new social contract.” The key to economic stabilization, he asserted, was a stronger, functioning, capable government. Putin promised that stronger government finances would boost the economy. The word Putin used most frequently in his address, however, was not economy but state.1 Strong State, Strong Economy AmericanpoliticalscientistMancurOlsonfamouslyarguedthatgovernment by bandits is tolerable only if the bandits stay in one place. Roving bandits Reforging the Russian State | 23 simply seek to pillage, Olson explained. After seizing resources from one town, they pillage the town down the road. Stationary bandits, however, face different incentives. Thuggish though they may be, such bandits can even act responsibly, enacting policies that foster economic growth. The reason, Olsonexplained,isthatratherthankillingchickens,stationarybanditsprefer to take eggs. A smart stationary bandit will encourage economic growth, to pillage (tax) even more in the future. In the end, Olson believed, the policies adopted by a stationary bandit could improve the lives of bandit and populace alike.2 After the corruption and violence of the 1990s, few Russians at the turn of the millennium would have objected to describing their political leaders as bandits. More often they used cruder language. Olson’s notion—that rule by a single strong power was better than diffuse local mafias—made sense to many Russians. The idea that Russia needed a stronger central government was embraced by both market liberals and statist conservatives alike. Market liberals saw a stronger state, which would effectively collect taxes, enforce the rule of law, and defend property rights, as crucial to economic growth.Statistconservativesappreciatedthefocusonlawandorder.Russia’s new president understood the logic. The link between rebuilding state authorityandeconomicgrowthwasacentralplankinVladimirPutin ’spolitical campaigns. It let Putin assemble a new coalition between business and security elites that continues to undergird his power today. Russia’s oligarchs and its business class backed Putin’s efforts to strengthen state authority because they believed this would facilitate economic growth. Conservative, law-andorder nationalists cheered the restoration of centralized power and found Putin’s orderly capitalism far more appealing than the chaotic capitalism of the Yeltsin era. Influential Russian economists argued that “macroeconomic stabilization hinges on a strengthening of political institutions.”3 Reforging Russia’s state and rebuilding its economy were two sides of the same coin, many believed. In many countries, business leaders want less governmentintrusion.Afterthechaotic1990s,Russia’sbusinessclassesgenerally believed that the key to stability was a stronger state. This provided the basis for a sturdy coalition between business and security services, whom Putin satisfied both by strengthening the government and providing stable macroeconomic management. 24 | Reforging the Russian State Power Vertical Thefirststeptowardrebuildingthegovernment’sauthority,Putinconcluded, wastostrengthenMoscow’spowerovertheprovinces.AftermovingtoMoscow , Vladimir Putin had initially served as first deputy to the chief of staff of Yeltsin’s presidential administration. He was put in charge of supervising contacts with the governors of Russia’s far-flung regions, a job he says was themostinterestingworkheeverhad.4ManagingrelationsbetweenMoscow and the regions was key to resolving many of Russia’s problems: the Kremlin clashedrepeatedlywithregionalelites.AftertheSovietUnioncollapsed,Russia became a federation, with each province granted its own elected leader and tax system. Yeltsin famously told regional elites in 1990 to “take as much sovereigntyasyoucanswallow.”Theyhappilyobliged.Thecollapseofcentral authority during the final months of the Soviet Union gave regional powerbrokers a chance to seize power. The Kremlin decided there was little point in trying to control everything in the provinces given how little authority the government exercised even...


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