Detail from book cover.
Detail from book cover.

The Piratization of Russia: Russian Reform Goes Awry

Apr 30, 2003

How did a small group of Russian oligarchs manage to amass incredible fortunes in the short period following the end of the Cold War? Marshall Goldman explains the peculiarities of the post-Soviet economic and political space that opened the way for the rise of the oligarchs.


JOANNE MYERS: Good morning. On behalf of the Carnegie Council I would like to thank you for joining us as we welcome our guest, Marshall Goldman, who will be discussing his book, The Piratization of Russia.

Who wanted to be a millionaire? With the collapse of the Soviet Union in 1991, it seemed that everyone wanted to take advantage of the government’s efforts to privatize. Even so, it was only a small, but nonetheless influential, band of thirteen businessmen who were successful in seizing hundreds of millions of dollars worth of property that would make them multi-mega-millionaires in the new Russia.

Greed knew no limits for these oligarchs. Men like Boris Berezovsky, Vladimir Gusinsky, and Vladimir Potanin were able to loot their country as it moved toward a market economy. However, their actions, according to Professor Goldman, were not simply a case of privatization but, rather, a matter of piratization.

The plunder of Russia’s natural resources is a story of intrigue, adventure, and of the incestuous relationship between government leaders, corporate directors, and bankers. It is about insider deals, golden parachutes, corporate jets, villas in the south of France and Spain, and instant millionaire status for those who shrewdly played the game.

But just what were the economic, political, and social conditions of the Soviet Union prior to its collapse which led to the outrageous crimes that the reformers and their successors had to contend with?

To examine the context in which these events took place, it is necessary to go back in time, and that is exactly what Professor Goldman does in his new book, The Piratization of Russia. Given the Communist legacy of seventy years of central state planning and ownership, along with a weak market infrastructure, it was impossible for privatization to be an immediate success.

As Professor Goldman points out, “So much that is happening in the economic and business world in Russia today is an echo not only of the Communist era but of its czarist history as well. Therefore, we might all express a healthy degree of cynicism when asking whether the present leadership can offer the solution for putting Russia on the path to a more everlasting economic reform.”

As an internationally recognized authority on Russian economics and politics, Professor Goldman’s work and his outstanding study and analysis of the careers of Mikhael Gorbachev and Boris Yeltsin may be familiar to you. Our guest is also the author of over a dozen books on the former Soviet Union, including U.S.S.R. in Crisis: The Failure of an Economic System, Gorbachev’s Challenge: Economic Reform in the Age of High Technology, What Went Wrong with Perestroika?, The Rise and Fall of Mikhael Gorbachev, and a monograph titled Lost Opportunity: What Has Made Economic Reform So Difficult.

He is a consulting editor to the Journal of Current History and writes frequently for such publications as Foreign Affairs, The Harvard Business Review, The New Yorker, and The Atlantic Monthly. As his expertise is also sought by the media, you may have seen him on CNN, “Good Morning America,” “The Lehrer News Hour,” “Crossfire,” “Face the Nation,” “Today Show,” or “Nightline.”

Marshall Goldman is the Davis Professor of Russian Economics Emeritus at Wellesley College and has been a member of the Wellesley faculty since 1958. He is also Associate Director of the Davis Center for Russian and Eurasian Studies at Harvard University. As an educator, generations of students in Russia, Western Europe, Asia, and America have been listening to Professor Goldman for many years. Now it is our turn to do the same.

Please join me in giving a very warm welcome to our guest today, Professor Goldman.


MARSHALL GOLDMAN: Thank you very much. In 1991 a small group of Russians emerged from the collapse of the Soviet Union to claim ownership of some of the world’s most valuable petroleum, natural gas, and metal deposits. This resulted in one of the greatest transfers of wealth we have ever seen.

To give you some measure of that, in 1997 five of those individuals were on the Forbes magazine list of the world’s richest billionaires. That is quite an accomplishment given that in 1985, or thereabouts, they had no net worth—zero to over a billion. This year, 2003, there are seventeen on the Forbes list of the richest billionaires.

And if you saw The Wall Street Journal and The New York Times recently, two of those oligarchs tentatively agreed to merge their two petroleum companies, Yukos and Sibneft, which will create a company worth a capitalized value of about $35 billion. What is significant is that of that $35 billion capitalized value, there are only four or five individuals who own almost all of the stock, unlike Exxon where there are perhaps 100,000 stockholders.

Almost all of these self-styled oligarchs have been accused of using guile, intimidation, and occasionally violence, to reap those rewards.

How did it all happen? Who was responsible? And what was the role of Western advisors?

Any transfer of this sort would bring problems. There is just too much wealth involved. But wasn’t there a less-calamitous way to proceed?

Viktor Chernomydrin, the Prime Minister, was one of the oligarchs, because he had been the Minister of the gas industry and privatized it into Gazprom, and then left it when he became the Prime Minister. But up until that point he was in charge of the largest gas company in the world, the richest resources in the world, supplying 40 percent of Germany’s natural gas, and 20 percent of Europe’s. He described the process in the following way: “We tried our best but ended up as we always do.”

I will quickly go through the main episodes, and then talk about some insights that have not appeared elsewhere, because some of the things I described I, or my uncle was involved in.

The Soviet Union collapsed December 25, 1991. You remember Gorbachev was out, Yeltsin comes in. Yeltsin brings with him a young economist by the name of Yegor Gaidar, a man whom nobody has accused of any crime of insider dealing, which you can’t say about almost everybody else in the country.

They were worried that the country might fall back into the hands of the Communists, who were a viable force. People are unsettled, the system has been destroyed, the Soviet Union no longer exists, Russia is no longer a superpower. It’s lucky that there was not the violence that everybody was predicting.

They decided that they had to move ahead with reforms very quickly, so they adopted what we called in the outside world “shock therapy.” Shock therapy meant introducing the reforms very quickly. It will be an electric shock, but once that shock takes place and everything falls into place, the economic system begins to function, after being severely curbed in the Soviet period.

Prices, for example, were held constant. That was one of the strengths of Communism, no inflation—“you have inflation in the West; we don’t have an inflation in the Soviet Union.” Absurd, because indeed costs were rising. So how could you avoid inflation? You provide massive subsidies.

So imagine you are a wily peasant. The grain procurement price is rising and the state is paying you a high price for grains with subsidies, so naturally you are inclined to sell the grain that you produce to the state.

But then how do you feed your livestock? If you use that grain, you will lose the advantage of the high price. So you sell the grain to the state, which bakes bread because the bread price is not fixed. Then how do you feed your livestock? You feed them with bread. So 15 percent of all the bread being baked in the country was being fed to the livestock, which was completely bizarre.

What does shock therapy say to do? It says let the prices rise. What will happen? The price will go up, people will stop using bread wastefully, and higher prices will attract higher profits, higher profits will lead to production. And so the system finds itself and does what a market system is supposed to do.

But you must do it all at once, because if you do it piecemeal you will get all kinds of bizarre results. So you have to let prices rise and also have to privatize.

They focused on the privatization of the state sector, especially the very large factories that Soviet planner insisted on building. They called it “gigantimania.” This made possible economies of scale. But this meant they had massive enterprises which they had to privatize. They were state monopolies.

What happens when you privatize a state monopoly? You get a private monopoly and it operates just the same, which leads to chaos.

From 1990 to about 1997 production drops a total of about 50 percent. That’s worse than our Great Depression. But that’s what you expect to happen when you’ve got chaos and also state monopolies that are now private cutting back production.

And at the same time, what do the monopolies do? They also raise prices, so that you had an inflation in 1992 alone of about 26-fold. That’s not only because of the monopolies, but everything falls apart.

What they failed to do was emphasize start-ups. They focused only on the privatization of these monstrous enterprises.

What happens in the process? There is a void, there is no market structure, because the ministries are destroyed. Gossnab, the wholesaling organization, is destroyed.

So Gaidar and Chubais, who is put in charge of privatization, decide to create stakeholders in this system, so that people will not strip the assets, tear the place apart. They will also fight off the Communists. So what do Gaidar and Chubais do?

First, they tell the factory directors and the workers that they can buy up to 51 percent of the stock in the companies that they have been running all these years. So that gives them and the workers ownership. “I’m going to be the owner” with the workers.

The way things worked, the workers were not organized, and so the factory directors gradually take over everything. You had one class of oligarchs already, the factory directors, who became the factory owners and began to threaten the workers: “You sell me your stock or you’ll be fired or I’ll shoot you.”

Most of the workers were happy to get rid of the stock—“What is this piece of paper?” For seventy years they have been told that such pieces of paper like this are worthless because it’s a capitalist delusion to think that stock is worth anything. And they’re happy to get rid of it for a bottle of vodka. They transfer it to the factory directors, and you have a class of oligarchs.

Then the remaining 49 percent of the stock—the other 51 percent has been given to the workers and to the directors—is to be given to the public at large by allowing them to obtain that stock in exchange for vouchers. Each individual in Russia was given a voucher. A hundred and forty-some million vouchers were distributed for a very small price.

The people asked, “What are these vouchers? What do they mean?” Some burned them, some exchanged them for vodka again. But some went around the country saying, “Potentially nobody knows what these things are. If I can gather a couple million of them, I can make out very nicely.”

Boris Jordan, who grew up in Long Island of Russian parentage, who worked for Credit Suisse First Boston, went back and gathered together 10 million of these vouchers and was thus able to gain control of some factories.

There were two main categories of oligarchs besides the factory directors. The first batch are those who were part of the Nomenklatura. These were the “big brothers” in the system. They were the ones who had been in the ministries, the ministers, senior party officials.

Vagit Alekperov was the Minister of Energy, and carved out three oil fields for himself from the petroleum sector, one beginning with L, one beginning with U, one beginning with K, called it LUKoil, put together some refineries, and he ran the largest oil petroleum company in Russia. He ultimately was able to buy up the stock. LUKoil has now purchased Getty Oil.

The man next to him, Rem Vyakhirev, put together Gazprom that he inherited from Chernomydrin. This is the world’s largest natural gas company, one of the country’s richest companies.

Do you know where Russia’s second-largest natural gas producer is headquartered? If you did, you’d ruin the story. It’s in Jacksonville, Florida. It’s called ITERA. ITERA is an offshoot of Gazprom. It is controlled by a trust, the owners of which are the children of the Gazprom people, Vyakhirev and Chernomydrin, their wives, their mistresses, and various hangers-on. They stripped Gossnab’s assets, over $1 billion a year, and ITERA is one of the by-products.

The third category of oligarchs is the most interesting. That’s almost all of the rest – Berezovsky, Gusinsky, Smolinski.

These guys were all ne’er-do-wells, they were not part of the establishment. For the most part, they were Jews, and the Jews generally were not allowed to rise up into the system. If you were ambitious and eager and energetic, you could not become part of the KGB, you could not become part of the Ministry of Foreign Affairs, you could not become part of the party hierarchy.

So these guys began to produce underground and to deal in the black market. Smolinski had been arrested for economic crimes and put in jail. Gusinsky drove a taxi. Friedman, God knows what he was doing on the side.

But in 1987 Gorbachev said, “You can have private business now,” and under Yeltsin it went full-blast. And suddenly what they were doing, which had been illegal, subject to arrest and death, became legal. They had an advantage over everybody else because they knew where to get hold of scarce goods.

In 1991, you remember those pictures of empty shelves. A man comes to Moscow, hasn’t been there for many years.

His wife says, “You’re going to Moscow, and when you come back and I ask you what you did, you’ll say, ‘I don’t remember.’ Why don’t you make a little diary? You go off on these trips and you can’t ever remember anything.”

So he goes off to Moscow with his pad of paper. He goes into a store and asks, “Any meat?” No meat at that time, so he writes down “no meat.” Next, “Any fish?” No fish, no chicken, no matches, no cigarettes, no toilet paper, no coffee. So he’s writing and writing.

Later on, a big guy with a leather overcoat comes up to him and says, “I’ve been watching you go around and conduct all these interviews. Whom do you work for?”

He said, “I think you’ve got it wrong. I’m not working for anybody. My wife says since I haven’t been to Moscow for 15 years I have to take notes.”

He said, “Fifteen years ago you’d be shot for this.”

“No bullets.”

So you’ve got these new Russians, who are fabulously wealthy, billions of dollars, and they’re flaunting their wealth. Each one tries to show off more than the other.

One of them hires an architect and says, “Build me what you see in Newport, fifty rooms, a bowling alley, and turrets, and moats, and I want three swimming pools.”

The architect says, “Three swimming pools? Why do you want three swimming pools?”

He said, “I want one with hot water.”

“Okay, that’s makes sense.”

“I want one with cold water.”

“Okay. What’s the third one for?”

“No water.”

He says, “No water? Who wants a swimming pool with no water?”

He says, “Some of my friends don’t swim.”

These guys move up into the chain where there is no competition, no state system. There’s infrastructure, and so once you know how to get hold of scarce goods at a time when goods are in terribly short supply, your wealth multiplies.

How did these people learn such sophisticated techniques?I met with the head of the Central Bank, Gosbank, during the Soviet period. I had discovered that the Soviets had a network of banks—the Moscow Narodny Bank in London, the Eurobank in Paris, Luxembourg, Zurich, Frankfort. I asked him, “How do you train people to operate in an environment with billions of dollars, selling oil, etc.?”

He said, “It’s very simple. I tell them to do the opposite of what they would do at home.” Well, that’s not too good. You’ve got to know something more than that.

I happened to have a chance to find out. One of my uncles ran a company, called ARA, that used to win the contracts to cater to all the Olympics. Comes 1980, he wanted to win the Moscow contract for the Olympics. He asked me to help. I couldn’t do a thing; I was completely useless. He kept pursuing it. Finally, he was invited to a dinner with the head of the Russian Olympics.

He said, “Okay,” knowing that he wanted this contract, “You can have the contract, but you have to pay me a 20 percent kickback, and the money that you’re going to give as the kickback you’ll pay to his man named Karr who’s sitting next to you.” It turns out that Karr is the funnel through which the Soviets supported the French Communist Party. So there was sophisticated money laundering going on.

The second story is that the Director of the Central Bank, Viktor Gerashchenko, until he was fired a few months ago, was guilty of some of the most egregious money-laundering diversions. Gerashchenko had been the head of Gosbank subsequent to the man I spoke to, and then he was brought in as head of the Russian Central Bank. There were all kinds of accusations. Jeff Sachs called him “the world’s worst central banker.”

In the early 1990s, when all of this bartering was going on, one of my friends who was working for a Swiss trader called to ask, “Could you help us out? We had a barter arrangement. We were going to take Russian oil and give the Russians consumer goods in exchange The barter balance is out of order and we’re owed $250 million. What should we do?”

I said, “Very simple. Seize Russian assets.”

He said, “We can’t go to Moscow and seize Russian assets.”

I said, “You don’t have to. You can go to those banks (that I just mentioned) in London, Paris, Luxembourg.”

Ten days later they get an arrest order to seize the assets of the Luxembourg bank, which they had not known about until then. I had to write them a letter, which they gave to the judge who seized it.

Just a few days before that, the International Monetary Fund had given the proceeds of a billion dollar loan to Moscow to the Ministry of Finance, which gave it to the Central Bank, which sent it off to the Eurobank in Paris to invest so that they could be earning interest until the money was disbursed. Suddenly, the Russians got nervous. If they’re going to seize the assets in the Luxembourg bank, the cover is blown, people are now becoming aware that we do have assets that are sizeable. They might go out after the Paris bank with $1 billion.

So they moved it deep cover into an entity they had established in the Channel Islands, called FIMACO. They saw it was so secret, it worked so well that they ultimately transferred several billion dollars into that.

What did they do with the proceeds? They hid them from the IMF, they hid them from the Paris Club and the London Club of creditors, and used the proceeds to boost up their salaries, so that Gerashchenko’s salary was higher than Greenspan’s.

Putin has a very thin skin. As long as you praise him, it’s okay. If you criticize him, you’re gone. Business practices are very similar to those in the czarist time, when you had to have a patron on top. The Russians today call it krisha, a roof. As long as you’ve got a patron, you’re okay.

Gusinsky and Berezovsky, who were thrown out, made the mistake of criticizing Putin. They could do that to Yeltsin who didn’t seem to mind, but in the case of Putin, the minute you did that, he had to get rid of you.

The problem with getting rid of Gusinsky, who set up an independent television network, was that he had become an identifying Jew and created the Russian Jewish Congress on his own.

You can’t arrest the head of the Russian Jewish Congress, particularly when you are trying to bond with people in the West, President Bush. What kind of counterpart could you create?

There was another smaller movement of Jews, under the jurisdiction of the Chabad movement here in Brooklyn, the Lubavitch movement.

Rabbi Berel Lazar, an American citizen, went over to Moscow. On May 26, 2000, he was made a Russian in a ceremony in which seventeen other people were naturalized.

Putin then calls Lazar in to the Kremlin on June 12th, three weeks later. The next day on June 13th, they convene a meeting of forty-five rabbis of the Chabad movement who come in from all over Russia. Five hours later, Gusinsky is arrested, because these rabbis declare the new Chief Rabbi, and now Putin doesn’t have to worry about arresting the head of the Russian Jewish Congress because there is an alternative group. That’s some of the intrigue that goes into the system.

The role of bureaucracy endures, but there is also discontinuity. The private sector is now becoming unusually strong—four of these companies generate more revenue than the state national budget. Putin is beginning to worry that these people will they become stronger than he is.

The Communists are gone, but they are still there. This is an election year and Putin is very worried that there is anger about what has been happening. There is anger about Putin’s policy of supporting the U.S. in Iraq. Putin clearly is now identifying himself with the disgruntlement. Ninety percent of the Russian public opposed what we have been doing in Iraq, and anti-Americanism is 45-50 percent.

Some of these oligarchs are talking about creating a new party and even challenging Putin. Khodarkovsky, the man who has an acknowledged net worth of $7.8 billion, has offered $100 million to some of the reformers if they will unite to challenge Putin more effectively.

I will end with one last story.

God is being interviewed by Bush, Chirac, and Putin. Bush says to him, “Tell me, God, do you think we’ll ever have peace and quiet in Iraq or in Afghanistan? Do you think I’ll be able to restore the American economy to growth? And do you think, God, that people will ever come to believe that I really won in Florida?”

God goes through the books, and He says, “Yes, President Bush, but I’m afraid it’s going to take twenty-five years and you won’t be around to see it.”

Then it’s Chirac’s turn. He says, “Tell me, God, do you think that the Americans will ever come to forgive us for what we did in Iraq, do you think the French empire is going to grow again, and do you think that Americans will ever eat French fries again?”

God goes through his book. He says, “Yes, President Chirac, but it will take fifty years. I’m afraid you won’t be around to see it.”

So then it’s Putin’s turn. He says, “Tell me, God, do you think these oligarchs will ever start paying all their taxes, that indeed we’ll begin to develop a middle class, that small business will be something more than 10 percent, and that indeed corruption will disappear from Russia?”

God goes through the books, and He says, “Yes, President Putin, but I’m afraid I won’t be around to see it.”

JOANNE MYERS: Thank you very much for that lively presentation.

Question & Answer

QUESTION: Corruption and the power of oligarchs is not new to Russia. It existed in the Soviet Union under the generic name of blat [favoritism, which can include a bribe].

How do you explain that the present Russian GDP is now close to 7%? How do you explain that the merging of the various oil empires in Russia itself has attracted outside capital, American companies in particular?

I see a dichotomy. The economy is growing, yes. In ten years you can’t expect a market system to be installed in a country that never had it, not under the czars and not under the Soviets. The Gosplan under the Soviets was a means of capitalistic control, and the banks that the Soviets set up were a means to acquire foreign exchange, for example. So could you explain this dichotomy?

MARSHALL GOLDMAN: What is the source of growth right now? The source of growth is the high price of oil.

What explains the growth we are seeing? Oil production is starting to increase. It almost fell by half from what it was in the Soviet period because they were stripping assets.

What made them suddenly decide not to strip assets and bring the capital back inside the country from Cyprus, from the United States, from Nauru? An increase in the price of oil from $10 a barrel, which it was in 1997, to $30-$35 a barrel. They decided they could make more money this way, and so it comes flooding in.

What explains the growth? That three-fold increase in the price of oil.

What explains the investment, why BP wants to put $6.7 billion into a company they had been suing two years ago? The high price of oil.

A second factor is the devaluation of the ruble, which took place in 1998 after its collapse. On August 1, 1998, you could buy a dollar for six rubles. October 1st, it took twenty-four rubles to buy a dollar. That meant that imports suddenly became prohibitive, and domestic manufacturers didn’t have to worry.

QUESTION: Could you shed any light on the indebtedness that the Soviet Union is trying to protect in Iraq and what are the political aspects of that?

MARSHALL GOLDMAN: In the Soviet period the Soviet Ministry of Petroleum did indeed engage in a lot of activity in Iraq—technology, contracts to help them develop. And also now, more recently, when these companies have taken over what used to be the Ministry of Petroleum, LUKoil has a contract to sell the oil that Iraq is allowed to produce under the UN mandate for food and emergency purposes.

LUKoil began to worry about the United States coming in, and so they came to the U.S. and asked, “Can we continue to have this contract?” The Iraqis found out about it and said, “Okay, you’ve lost your contract.” LUKoil says, “Under the contract, we still have the right to do that.”

The Russians are owed overall about $7.8 billion, not only for oil contracts but for the sale of military equipment. Iraq was one of their major customers. There are many other contracts that are running around.

The Russians sent three former generals just a few days before we invaded, and gave the Iraqi military advice that was perhaps good for us: “wait for the winter.”

QUESTION: Jeff Sachs was one of the principal advisors. Would you comment on this action on the part of the American advisors, and whether you put blame on them?

If the economy is somewhat better than it has been, do you see a middle class evolving or arising despite the situation with the oligarchs? What do you see for future?

MARSHALL GOLDMAN: Jeff Sachs and I have been good friends. I disagreed 100 percent with what he was advising in 1991. We had big arguments about it. He got very angry at one point. I tried to fix him up with my daughter, so I have enormous respect for him. He subsequently said, “Marshall, why didn’t you tell me about this before?”

Jeff Sachs was given the contract, and then Andrei Shleifer came in to do the privatization. It is he who is now facing a federal court case. Why? Because Shleifer has been charged with insider trading. Shleifer’s wife was running a hedge fund and he was giving her advice about which bonds to buy.

To go back to your question about corruption. They were supposed to introduce the whole notion of corporate governance. Who would have thought the corporate governance they were trying to introduce was from Enron?

I have a picture of Bush and Putin together. Putin is pointing his finger and Bush is saying, “Oh, yeah?” They are discussing corporate governance. Putin is telling Bush what to do in Texas.

QUESTION: What about the middle class now and in the future?

MARSHALL GOLDMAN: The middle class is the big problem. You must have a patron. The big guys can afford a patron. A small guy can’t do it. Only 10 percent of the Russian GNP comes from the small business sector. In this country it is 50-60 percent. That is the source of innovation.

To his credit, Putin recognizes this. He is trying to reduce the number of companies that must be registered before they can open up. They tried to bring it down to 500. It turns out Yeltsin had the same numbers and tried to bring it down. It went back up to 4,000.

It will take a very long time before you have a completely independent middle class.

QUESTION: You may have a clue to the treatment of President Bush in May from Putin’s treatment of our Prime Minister yesterday.

The country that you remind me of from your description of the privatization is closer to home, the U.S. at the end of the nineteenth century. Same story of robber baron capitalism. And the resolution to that period of piratization was Teddy Roosevelt and serious antitrust legislation. In the ongoing debate within Russia about the oligarchs, is there yet a serious debate about the role of antitrust legislation?

MARSHALL GOLDMAN: First, yesterday President Putin told Tony Blair, “You went in there to find the weapons of mass destruction—where are they? You went in to find Saddam Hussein—where is he? Is he hiding out with them in a closet someplace and going to release them?” It was not what Tony Blair expected to hear, nor what President Bush would be expecting to hear.

The whole question is whether it will evolve into something more—the Russians use the word “civilized”—but more competitive—where “the rule of law is more important than the rule of in-laws.” It’s possible. With time, these things do change, after all, and I will give you some examples.

How did we get rid of or reduce the role of the mafia? We never got rid of it. How did we reduce the role of the mafia in Chicago during the Prohibition? We opened up and legalized the sale of alcohol, and there were so many outlets they couldn’t control them.

I am big fan of the middle class. If you get enough of them out there, then there are just too many for the bureaucrats to handle. That’s one of the things that the Poles did. In Poland they encouraged startups. Russia didn’t do that, and that was one of their most serious mistakes in the privatization

QUESTION: Please specify a little more: if they had been operating in the U.S., how many of these eight oligarchs would be under indictment now? And does that suggest that they are any further along in Russia towards getting an SEC-type of regulatory system that would enhance the whole law enforcement operation there?

MARSHALL GOLDMAN: Yes, they would all be in jail. Berezovsky has acknowledged that there is no way to operate legally in Russia, so you have to cut corners. For example, the laws are designed purposely that way to give the bureaucrats more of a hand in a bribe.

Is there an SEC? Actually there is, and they have had a lot of consultations. They have set up a code of corporate governance behavior. Initially, everybody said, “Don’t bother me with it,” but now there is more and more of an effort to comply, again because it affects the stock and the public holding. There is much manipulation in the stock market, but it is moving in that direction.

QUESTION: There are two parts to the subtitle of your book: “Russian Reform Goes Awry,” and “Is Putin the Solution?” The subtitle of David Satter’s new book, Darkness at Dawn, is “The Rise of the Russian Criminal State”—so not the criminal class, but criminal state. Would you comment?

The second, “Is Putin the Solution?”—Elena Bonner has just said no, that she does not want to cooperate with any effort to memorialize Sakharov, because (1) she says Putin is KGB and (2) he is trying to re-establish a KGB-oriented state. So are we establishing a criminal state; are we establishing a police state of the KGB variety?

MARSHALL GOLDMAN: There are many forces operating at once, every one that you are talking about. But there is also the one that says, “Maybe these oligarchs now are saying, ‘I want to lead an upright life and I’ve got mine, let’s raise the gates.’”

Certainly in my mind, Putin is not all good news, because he gives the outside appearance that he is certainly an improvement over Yeltsin. In some ways he is—he is law and order. But Putin began by saying he would have a dictatorship of the law. If somebody said that, okay. You have to be careful when a former KGB says “dictatorship of the law.”

We organized a conference last February, and we’re trying to reconvene another one, on freedom of the press in Russia. You criticize Putin, that’s it, you’re just closed down, one way or another, and he gets at you. You don’t see his fingerprints, but you’re gone. So that to me is terribly disturbing. At the same time, the newspapers are still vibrant.

The security forces, the KGB and the military, are still very strong. One of the most disillusioning things I have heard is that the military is still fighting the Cold War. Some of our people are too, but in the Russian case almost all.

Our military embarked on a program with almost all military groups in the world, including China and the Ukraine, to bring them here to send them to the War College for a year, so that we can interact against terrorism.

In the Ukraine, if you come, that’s a star on your record and you advance very rapidly. In Russia, if you spend a year at the Army War College or the Naval War College, that’s the end of your career.

So it’s a struggle. And what do you do? You hope that they will interact. The debate goes on between the Slavophiles, “let’s look inside,” and the Westernizers. This is a struggle that goes back to Fathers and Sons by Turgenev, and before that, and it continues with Sakharov and Solzhenitsyn—Sakharov interacts; Solzhenitsyn, “No, I don’t want to interact.”

QUESTION: The multi-billion-dollar Oil for Food program had been conducted largely through Russian corporations. Is that the reason why Putin (a) was opposed to the Iraq war and (b) is opposed to having UN sanctions removed?

MARSHALL GOLDMAN: The sanctions question is strange, because some of them wanted to have the sanctions lifted earlier and now they want the sanctions maintained.

It was LUKoil that was doing this, and Putin is clearly interested in having that supported. But why is Putin doing this when he knows it will strain his relationship with Bush? It’s an election year. As I said, 90 percent of the Russian public is very opposed to what took place, and Putin has been going against his military and his Ministry of Foreign Affairs in being so supportive.

They’re saying to him, “You got nothing from Bush. Bush said he was going to do away with Jackson-Vanik. Jackson-Vanik is still there. That’s humiliating. NATO expansion is still going on. National missile defense is still going on, and you just sit there.”

That’s why he is worried that there will be more votes going to the Communist Party, so that in the Duma Putin’s party will be weakened. If that happens, he will be obstructed from pushing through reforms in the Duma.Yeltsin’s problem was that the Communists were too strong, and they obstructed his efforts at reform, and Putin is worried about a resurgence of that now.

JOANNE MYERS: Thank you very much.

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