Mr. Putin: Operative in the Kremlin, Part 8 of 14
Was Putin lucky or smart? More than with most leaders, it seems the answer is "both." That oil prices started rising just when he took power was a great stroke of luck. But also, there are many nations (Saudi Arabia or Nigeria, see our review of Sarah Chayes writing about corruption in Nigeria) that make a great deal of money from oil, yet they run a large trade deficit and they are deeply in debt. Having the discipline to make money from oil, but not waste the money, is a skill that we can attribute either to Putin or to the advisors around him, and if the latter, we can attribute to Putin the skill of picking talented advisors.
From the book:
Russia’s story over the decade since Putin’s Millennium Message in December 1999 is one of the most dramatic reversals of fate in recent economic history. Russia was essentially bankrupt and practically in receivership when Putin first stepped into his top leadership roles. Yet within five years after Putin took power, practically all of Russia’s foreign debt had been repaid and its foreign exchange reserves had been built back up. Putin made Russia’s debt to the International Monetary Fund a particular priority. It was paid off three–and–a–half years ahead of schedule. Equally important for Putin, Russia’s share of the world economy grew rapidly in his first two presidential terms. Measured in dollars at the market exchange rate, Russia grew between 1999 and 2008 from the twenty–third–largest economy to the ninth largest. Its growth rate over this period was twice that of China.
If performance alone were sufficient to gauge Putin’s understanding of economics, and his skill in management, he would deserve high marks. However, in the case of Russia it is very difficult to distinguish the results of Putin’s policies from the effects of another variable – the increase in oil prices that coincided with his term in office. As noted earlier, thanks to higher oil prices, the country’s wealth – the natural resource rent represented by Russia’s oil and gas – soared. Virtually all measures of Russia’s economic performance also moved in lockstep with oil prices during the Putin era, climbing steadily from 1999 to 2008, dropping sharply in mid–2008 with the global economic crisis, and then rebounding in 2010–2011 as oil prices recovered. This does not mean, however, that government economic policy in this period was inconsequential. It would have been extremely easy to squander this wealth and to forfeit the opportunity to make the most of the oil price windfall. To what extent, then, did Putin’s policies contribute to economic success from 1999 to 2008? And if they did contribute, what were the important elements of those policies and where did they originate? Was it Putin’s Survivalist identity that made the critical difference, including the lessons he learned over his career about basic self–reliance and the importance of ensuring that the Russian state had sufficient reserves to withstand any eventuality? Or did Putin draw upon some other deeper understanding of the fundamentals of a market economy in shaping government policy?
Putin seems comfortable running a society that is extremely hierarchical, such that for any industry he can get every industry leader around a small table and then talk to them until he is sure they will do what he wants them to do. Since his methods seem to have evolved towards the kind of blackmail that the KGB trained him to do, he probably finds it comfortable to have an industry controlled by a small group of people whom he can control. The counterfactual, which we should consider, would be a truly entrepreneurial society in which each industry is contested by thousands of small firms, each innovating in unique ways so as to gain an advantage against all of the other firms -- but Putin would lack power in a society such as that, as it would be impossible to blackmail thousands of entrepreneurs. For Putin, it is easier to govern a society where an industry is divided up among 3 or 4 oligarchs, for he can easily blackmail all of them. Working with small groups of people has been one of his best known methods, during the years that he has been in power. Perhaps for that reason, when he could have destroyed the oligarchs, he chose not to:
In contrast, however, to the perception of Mr. Putin as having flip–flopped from communist to capitalist, and then back again to advocate of state control, there has been a good deal of consistency in Putin’s general views on economics – at least during his tenure as head of state and leader of the Russian government. Putin has always preached an orthodox version of fiscal policies. For 12 years, he both empowered and protected one of the most fiscally conservative finance ministers in the world, his close colleague Alexei Kudrin. More important, in spite of having every opportunity to renationalize critical assets, Putin did not reverse the course of Russia’s 1990s privatization process. The most controversial and largest set of deals that transferred Russian state property into private hands – the so–called loans–for–shares agreements already mentioned – was overwhelmingly regarded by the Russian population as illegitimate. This arrangement, which effectively created the much–hated oligarchs, was concluded by the Yeltsin administration. Putin could have reaped huge political dividends by reversing this scheme.
The single most important thing that Putin did was that he found a method for collecting taxes. This is what saved Russia. Finding a way to use the power of the state to gain enough control over the corporations that he could begin the normal collection of taxes -- this and this alone saved Russia. Without taxes a government will collapse and the nation will dissolve into chaos. But with a steady revenue, and enough power to ensure the continuance of that revenue, a government buys itself the time to carry out all other necessary reforms. We can continue to argue over the question, was Putin lucky or smart. We touched on that question in a previous essay. But when it comes to tax collection, we can say clearly, Putin was smart.
The second explanation is that, as a dedicated gosudarstvennik (statist) with a pronounced survivalist perspective, Mr. Putin has been focused on protecting the Russian state. As an outsider to the prevailing system, he was able to slough off the burden of ideology and assess what worked and did not work. Vladimir Putin’s most successful economic policies have thus been based on what one might call intelligent pragmatism. Instead of adhering (or not adhering) to liberal or free–market economic principles, Putin has approached macroeconomic and fiscal discipline as the means to ensure state survival. The goals of building the state (with efficient tax collection) and protecting it (by reducing debt and building reserves) are not signs of economic liberalism. Perhaps the best support for this thesis is the fact that the most forceful advocate of similar macroeconomic policies in Russian history before Vladimir Putin was none other than Josef Stalin. In his report to the 14th Congress of the Bolshevik Party in December 1925, Stalin argued for the need to balance the budget, maintain a stable currency, keep inflation low, avoid dependence on Western loans, and build up financial reserves. In addition, the actual introduction of the flat rate tax that was part of Putin’s early tax reform package was far less important than the fact that Putin and only Putin, proved capable of actually collecting taxes. Putin’s 2001 innovation came after years of widespread tax evasion at all levels of the Russian economy and population. Putin also collected taxes using intimidation and force, including sending masked operatives armed with Kalashnikovs storming into the head offices of major corporations to seize their financial records.
Of course, for those of us who hope that someday Russia will become a democracy, the real question is whether the Russian government can find a way to collect taxes without having to rely on the personal blackmail of a small number of oligarchs. I think we can reasonably assume that Russia will never be democratic while its economy is dominated by a handful of oligarchs. But if Russia should become a truly entrepreneurial society, can it also develop the kind of honest bureaucracy needed to collect taxes, in a reasonable and law based manner, necessary to support the government of a democracy?
Oligarchy almost always gives rise to tyranny. Sometimes the oligarchs dominate the tyrant, and sometimes the tyrant dominates the oligarchs, but it is difficult to find examples of a society that is both a thriving democracy, while also being a deeply corrupt oligarchy (we have previously noted the Panama Exception, an interesting counterfactual that perhaps reveals the real way that democracy functions).
Given that Russia will continue to suffer the Resource Curse, where the easy money from oil makes oligarchy the natural default of the economy, the chances of establishing a real democracy in Russia remain slim. But still, there are methods that could give it a chance. Norway and Canada are both thriving democracies that lean heavily on oil revenue, it is clear that, given the right institutions, and the right "checks and balances", even a country rich in oil can be a democracy. The essential thing would be, after the death of Putin, when Russia next enjoys a moment of choice, its various groups and leaders should want to be a democracy. For this to happen, I think they themselves will have to feel that democracy is the best choice for Russia, the only choice that might save it from yet another cycle of totalitarianism, war, and international isolation.
But for Putin, governing through a small number of oligarchs was a very comfortable decision for him:
In his January 2012 interview with The Guardian, former Kremlin adviser Gleb Pavlovsky offered similar corroborating insight into Putin’s and other contemporaries’ views on capitalism and capitalists:
Putin is a Soviet person who understood the coming [prishestviye] of capitalism in a Soviet way. That is, we were all taught [that capitalism is]: a kingdom of demagogues, behind whom stands big money...capitalism is a game with money, behind which stands that military machine which aspires to control the whole world. It’s a very clear, simply picture and I think that Putin had [this] in his head – not as an official ideology, but as a form of common sense: that is, of course, we were idiots; we [in the USSR] tried to build a fair society when we should have been making money. And if we had made more money than the Western capitalists then we could have just bought them up. Or we could have created a weapon which they didn’t have yet. And that’s it. It’s a game and we lost, but we lost because we didn’t do several simple things: we didn’t create our [own] class of capitalism, we didn’t give the capitalist predators which were described to us a chance to appear and eat up their capitalist predators. These were Puton’s thoughts and I don’t think they’ve changed significantly since [the 1990s]....So Putin’s model is that you need to be bigger and better [umeliye] capitalists than the capitalists.
Putin's experience of democracy showed him the extent to which democracy is never an expression of the "will of the people." On this much we can agree, in the sense that Achen and Bartels explained in their book "Democracy For Realists" which we previously reviewed. That the democratic process is mostly just a contest among a few elite factions is a view of democracy that Achen and Bartels would largely agree with, and they would claim this is as true in the USA as it might be in Russia. But of course, Putin eventually wanted a system that he could control, so the random and unexpected element of democracy was something that, in his view, was altogether a flaw, to be fixed using KGB methods of blackmail. His one experience with a free democratic election left him embarrassed and angry, and so he never again participated in a truly free democratic election. He instead became someone who created the illusion of free elections that he controlled, and in fact, in the early 2000s, he might have been the worlds greatest innovator in creating the illusion of free elections. (It is also true that he was genuinely popular in 2000 and 2004, and so he probably would have won those elections if they had been entirely free.)
Yakovlev secured money as well as political support from Moscow. Sobchak’s campaign ran out of money two months before the election. The Sobchak camp was desperate. Alexander Rahr writes that “Putin became noticeably more nervous” as the campaign progressed. “In an agitated discussion with Sobchak, he promised his mentor: ‘I will force all the key businessmen in the city, who have profited from our support in the privatization of city property, to publicly declare their loyalty to us!’” Putin then summoned those businessmen to the city government’s official dacha, where he made his pitch for them to donate to Sobchak’s campaign. They declined. Having failed to bring in support from the St. Petersburg business elite, Putin turned to smaller fry. He scheduled a fundraiser with owners of small and medium–size businesses. Again, this ended in a fiasco when Sobchak forgot the time of the meeting and did not make it to the event at all.
Putin went on to suffer the humiliation of watching a well–known St. Petersburg mafioso succeed in fundraising for the mayor where he had failed. The mobster invited all the small businessmen to donate $2,000 each to his “Foundation for the Support of the Mayor.” They did not refuse the gangster's offer. The real Banditskiy Piterbrug prevailed over the KGB campaign chief and the mayor’s fixer. Perhaps Putin was so embarrassed by the Sobchak no–show that he did not dare to make any further pitches on the mayor’s behalf. Whatever the case may be, Putin ignored all of these dimensions to the story of the 1996 St. Petersburg election in his autobiographical interviews. The lesson from all of this, however, must have sunk in deeply. The next time that Putin sat down with a group of big businessmen, he would not simply depend on their good will for past favors. He would have leverage, significant, real leverage. He would be like that mafioso. They would not be able to refuse, and if they tried, there would be consequences.
...The key question is, what exactly was the mechanism Putin and Zubkov used to exert leverage? The various accounts suggest that it involved a degree of blackmail. To the extent that Putin and Zubkov collected financial data that clearly indicated non–payment of taxes and other misdeeds, they had an ideal weapon with which to enforce business deals between private companies and the city as defined by the mayor’s office. They had only to let the companies know that they were in possession of the incriminating information but that they had not turned it over to the law enforcement agencies and would not turn it over as long as the businessmen behaved properly. This was the type of classic “secret service method” that council member Belyaev was referring to. It was precisely the approach Putin would have been taught, and would have practiced, in the KGB.
Once Putin is gone, the question will be whether Russia can find some other path forward. Will it continue this way, with oligarchy and tyranny and war and isolation, or will it find some way to develop a multi-stakeholder society, a civil society full of active groups, ready to disagree with each other without resorting to violence? Can Russia ever reach a point where it has a genuinely independent judiciary? Will the Orthodox Church ever endorse a pluralistic society in Russia? Will secular movements ever have the strength to push back against the power of the Church? Will the Tartar and Muslim elements of society ever feel truly welcome in the bosom of Russia? And if not, what is the path forward for Russia? Can another tyrant establish themselves with enough power to hold Russia together? Or will Russia fracture into pieces, with the various ethnic and religious groups all demanding independence?
The above quotes are from this part of the book:
Mr. Putin: Operative in the Kremlin
Fiona Hill & Clifford G. Gaddy
Copyright © 2013 The Brookings Institution
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Page 133–134
RUSSIA’S ECONOMIC PERFORMANCE UNDER PUTIN
By most objective measures, the performance of the Russian economy during Vladimir Putin’s tenures as president and prime minister was outstanding – something Putin has frequently pointed out himself. In his report to the Russian parliament in April 2012, shortly before assuming the Russian presidency for the third time, Putin boasted about Russia’s economic condition almost four years after the outset of the global financial crisis. While the crisis “was a trial for us,” he noted, “we recovered much faster than many other countries. Today we have the highest economic growth rates in the G–8 (Group of Eight) and one of the highest among the world’s major economies. For comparison’s sake, the growth rate in the United States is 1.7 percent, in the Eurozone 1.5 percent, in India 7.4 percent, in China 9.2 percent and in Russia 4.3 percent. We are third among major economies.” Putin’s entire speech was replete with similar claims of success. Like any politician, Putin was, of course, selective in choosing which statistics to highlight. But his case was still a strong one.
Russia’s story over the decade since Putin’s Millennium Message in December 1999 is one of the most dramatic reversals of fate in recent economic history. Russia was essentially bankrupt and practically in receivership when Putin first stepped into his top leadership roles. Yet within five years after Putin took power, practically all of Russia’s foreign debt had been repaid and its foreign exchange reserves had been built back up. Putin made Russia’s debt to the International Monetary Fund a particular priority. It was paid off three–and–a–half years ahead of schedule. Equally important for Putin, Russia’s share of the world economy grew rapidly in his first two presidential terms. Measured in dollars at the market exchange rate, Russia grew between 1999 and 2008 from the twenty–third–largest economy to the ninth largest. Its growth rate over this period was twice that of China.
If performance alone were sufficient to gauge Putin’s understanding of economics, and his skill in management, he would deserve high marks. However, in the case of Russia it is very difficult to distinguish the results of Putin’s policies from the effects of another variable – the increase in oil prices that coincided with his term in office. As noted earlier, thanks to higher oil prices, the country’s wealth – the natural resource rent represented by Russia’s oil and gas – soared. Virtually all measures of Russia’s economic performance also moved in lockstep with oil prices during the Putin era, climbing steadily from 1999 to 2008, dropping sharply in mid–2008 with the global economic crisis, and then rebounding in 2010–2011 as oil prices recovered. This does not mean, however, that government economic policy in this period was inconsequential. It would have been extremely easy to squander this wealth and to forfeit the opportunity to make the most of the oil price windfall. To what extent, then, did Putin’s policies contribute to economic success from 1999 to 2008? And if they did contribute, what were the important elements of those policies and where did they originate? Was it Putin’s Survivalist identity that made the critical difference, including the lessons he learned over his career about basic self–reliance and the importance of ensuring that the Russian state had sufficient reserves to withstand any eventuality? Or did Putin draw upon some other deeper understanding of the fundamentals of a market economy in shaping government policy?
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Page 135
In the early days of Putin’s first presidency, the Russian government also adopted a number of reforms that were widely described as progressive. Russia's flat tax reform in 2001, for example, was even lauded as a model for the world by U.S. free market champions at the Heritage Foundation. These reforms created a narrative of an early, “liberal” Putin, who was then somehow replaced by a crypto–communist Putin when further reforms did not materialize. This image shifted again after the global financial crisis. Observers could not help but notice that Putin took the tone of the lecturer, with a provocative “I–told–you–so” attitude, when making public pronouncements on the crisis. In writing of Putin’s appearance in early 2009 at the Davos conference of world economic leaders, Washington Post columnist David Ignatius described a Putin who “talked like a born–again capitalist, saying that Russia had seen the damage caused by too much government control of the economy and that it would never go back to the policies of the Soviet Union.” “The former communist,” Ignatius said, was “now a true believer in free market discipline.”
In contrast, however, to the perception of Mr. Putin as having flip–flopped from communist to capitalist, and then back again to advocate of state control, there has been a good deal of consistency in Putin’s general views on economics – at least during his tenure as head of state and leader of the Russian government. Putin has always preached an orthodox version of fiscal policies. For 12 years, he both empowered and protected one of the most fiscally conservative finance ministers in the world, his close colleague Alexei Kudrin. More important, in spite of having every opportunity to renationalize critical assets, Putin did not reverse the course of Russia’s 1990s privatization process. The most controversial and largest set of deals that transferred Russian state property into private hands – the so–called loans–for–shares agreements already mentioned – was overwhelmingly regarded by the Russian population as illegitimate. This arrangement, which effectively created the much–hated oligarchs, was concluded by the Yeltsin administration. Putin could have reaped huge political dividends by reversing this scheme.
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Page 136–137
The fact that Vladimir Putin did not reverse the fundamental pro–market reforms of the 1990s is, for many people, a genuine puzzle. There are several explanations for why he did not, each of which derives from the Putin identities we have discussed so far in the book. First, as a student of Russian and Soviet history, Putin saw that the Soviet system of economic management had failed. During his time in the KGB in the 1980s, even before the collapse of the USSR, Putin understood that this put the Soviet Union at a huge disadvantage. At various points, including during his exchange with the Communist Party deputies in the Russian Duma in April 2012, Putin has acknowledged that there may have been a historical rationale for the Stalin–era system of industrialization, which began in the late 1920s and laid the foundation for the modern Soviet Union. But he has also underscored – including in the same exchange – that history showed the reform of that system to be long overdue.
The second explanation is that, as a dedicated gosudarstvennik (statist) with a pronounced survivalist perspective, Mr. Putin has been focused on protecting the Russian state. As an outsider to the prevailing system, he was able to slough off the burden of ideology and assess what worked and did not work. Vladimir Putin’s most successful economic policies have thus been based on what one might call intelligent pragmatism. Instead of adhering (or not adhering) to liberal or free–market economic principles, Putin has approached macroeconomic and fiscal discipline as the means to ensure state survival. The goals of building the state (with efficient tax collection) and protecting it (by reducing debt and building reserves) are not signs of economic liberalism. Perhaps the best support for this thesis is the fact that the most forceful advocate of similar macroeconomic policies in Russian history before Vladimir Putin was none other than Josef Stalin. In his report to the 14th Congress of the Bolshevik Party in December 1925, Stalin argued for the need to balance the budget, maintain a stable currency, keep inflation low, avoid dependence on Western loans, and build up financial reserves. In addition, the actual introduction of the flat rate tax that was part of Putin’s early tax reform package was far less important than the fact that Putin and only Putin, proved capable of actually collecting taxes. Putin’s 2001 innovation came after years of widespread tax evasion at all levels of the Russian economy and population. Putin also collected taxes using intimidation and force, including sending masked operatives armed with Kalashnikovs storming into the head offices of major corporations to seize their financial records.
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Page 149–151
THE COMING OF CAPITALISM: WHEELING AND DEALING
One of Putin’s most important licensing deals in this early period was in fact the food scandal that developed in late 1991. As mentioned in chapter 5, Putin selected a number of private firms, gave them access to minerals and commodities of various kinds, and licensed them to barter these goods abroad for food for the city. This episode nearly resulted in Putin’s dismissal from office as the result of an inquiry launched by a group of politicians led by Marina Salye on the city council. Whatever impact the experience may have had on Putin’s attitude toward politicians in general and elected legislators in particular, it shaped his view of capitalism. Capitalism, in Putin’s understanding, is not production, management, and marketing. It is wheeling and dealing. It is not about workers and customers. It is about personal connections with regulators. It is finding and using loopholes in the law, or creating loopholes. That view, of course, is not entirely wrong. It is simply very one–sided and limited.
~~
In his January 2012 interview with The Guardian, former Kremlin adviser Gleb Pavlovsky offered similar corroborating insight into Putin’s and other contemporaries’ views on capitalism and capitalists:
Putin is a Soviet person who understood the coming [prishestviye] of capitalism in a Soviet way. That is, we were all taught [that capitalism is]: a kingdom of demagogues, behind whom stands big money...capitalism is a game with money, behind which stands that military machine which aspires to control the whole world. It’s a very clear, simply picture and I think that Putin had [this] in his head – not as an official ideology, but as a form of common sense: that is, of course, we were idiots; we [in the USSR] tried to build a fair society when we should have been making money. And if we had made more money than the Western capitalists then we could have just bought them up. Or we could have created a weapon which they didn’t have yet. And that’s it. It’s a game and we lost, but we lost because we didn’t do several simple things: we didn’t create our [own] class of capitalism, we didn’t give the capitalist predators which were described to us a chance to appear and eat up their capitalist predators. These were Puton’s thoughts and I don’t think they’ve changed significantly since [the 1990s]....So Putin’s model is that you need to be bigger and better [umeliye] capitalists than the capitalists.
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Page 152
The people who brought Vladimir Putin from St. Petersburg to Moscow never cared about his credentials as a specialist in developing business. For them he was an expert in controlling business. All the time Putin worked in St. Petersburg, he played an official role as deputy mayor and chairman of the Committee for External Relations, but behind the scenes, Mr. Putin operated in his most important identity – the Case Officer. In St. Petersburg, Vladimir Putin was an “operative.” Businessmen were not partners but targets. Once he came to Moscow, Putin eventually began to target another set of businessmen, the Russian oligarchs. His goal was to make sure that Russia’s own new class of capitalists did not predate on each other and on the Russian state. He was to try to harness them to be “bigger and better” and make more money in the service of Russia – not just for themselves.
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Page 161–162
By all accounts, including his own, Sobchak seemed set on retaining the mayor’s office. He appointed Vladimir Putin head of his reelection committee. According to Alexander Rahr, it was Putin who came up with the idea of holding the election four weeks earlier than originally scheduled, on the basis that this would reduce the time for opponents to organize. Putin got Moscow’s approval to shift the election date and, with much greater effort, persuaded local St. Petersburg politicians to agree. In the end, however, Putin bungled the campaign. He thought the main threat to Sobchak would come from “radical” democrats like Yury Boldyrev – the former Russian deputy auditor who had investigated the St. Petersburg food scandal before helping to create the Yabloko party. Boldyrev was presenting himself as an anticorruption candidate in the St. Petersburg election. It would clearly have been particularly damaging for Putin personally if Boldyrev, who had inside knowledge of the food scandal, succeeded Anatoly Sobchak and decided to clean house. Whatever the primary motivation was, Putin focused the Sobchak campaign’s efforts against Boldyrev. He ignored the candidate who eventually won: former first deputy mayor of St. Petersburg Vladimir Yakovlev.
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Page 163–164
Yakovlev secured money as well as political support from Moscow. Sobchak’s campaign ran out of money two months before the election. The Sobchak camp was desperate. Alexander Rahr writes that “Putin became noticeably more nervous” as the campaign progressed. “In an agitated discussion with Sobchak, he promised his mentor: ‘I will force all the key businessmen in the city, who have profited from our support in the privatization of city property, to publicly declare their loyalty to us!’” Putin then summoned those businessmen to the city government’s official dacha, where he made his pitch for them to donate to Sobchak’s campaign. They declined. Having failed to bring in support from the St. Petersburg business elite, Putin turned to smaller fry. He scheduled a fundraiser with owners of small and medium–size businesses. Again, this ended in a fiasco when Sobchak forgot the time of the meeting and did not make it to the event at all.
Putin went on to suffer the humiliation of watching a well–known St. Petersburg mafioso succeed in fundraising for the mayor where he had failed. The mobster invited all the small businessmen to donate $2,000 each to his “Foundation for the Support of the Mayor.” They did not refuse the gangster's offer. The real Banditskiy Piterbrug prevailed over the KGB campaign chief and the mayor’s fixer. Perhaps Putin was so embarrassed by the Sobchak no–show that he did not dare to make any further pitches on the mayor’s behalf. Whatever the case may be, Putin ignored all of these dimensions to the story of the 1996 St. Petersburg election in his autobiographical interviews. The lesson from all of this, however, must have sunk in deeply. The next time that Putin sat down with a group of big businessmen, he would not simply depend on their good will for past favors. He would have leverage, significant, real leverage. He would be like that mafioso. They would not be able to refuse, and if they tried, there would be consequences.
THE “ZUBKOV SCHEME”
What is puzzling about this episode is that Putin actually did have leverage against the leading St. Petersburg businessmen. After the food scandal, Putin had set up a system that would give him the means to enforce future deals with private businessmen and even to exert control over them. This method was to gather information about firms’ and individual businessmen’s financial and tax transactions and to guard that information very closely. In his capacity as deputy mayor, Putin ordered all enterprises in the city to register directly with the Committee for External Relations, and “with the assistance of the local tax inspectorate, headed by his former deputy [Victor] Zubkov,” Putin then officially checked out the companies’ finances. To what extent Putin and Zubkov tried to conceal their scheme is not clear, but it did not go unnoticed. St. Petersburg City Council member Alexander Belyaev is on the record as accusing Putin of using “secret service methods” to control the city’s businesses.
The key question is, what exactly was the mechanism Putin and Zubkov used to exert leverage? The various accounts suggest that it involved a degree of blackmail. To the extent that Putin and Zubkov collected financial data that clearly indicated non–payment of taxes and other misdeeds, they had an ideal weapon with which to enforce business deals between private companies and the city as defined by the mayor’s office. They had only to let the companies know that they were in possession of the incriminating information but that they had not turned it over to the law enforcement agencies and would not turn it over as long as the businessmen behaved properly. This was the type of classic “secret service method” that council member Belyaev was referring to. It was precisely the approach Putin would have been taught, and would have practiced, in the KGB.