Putin’s adviser Sergei Prikhodko insists it was just a ‘figure of speech’, but Robertson took it seriously.21 He patiently explained that this wasn’t how things were done. He recalled: ‘I said, “Well, Mr President, we don’t invite people to join NATO. You apply for membership. You then have to go through a process to show that you can be integrated within NATO, and then an invitation to membership is issued.” So he sort of shrugged and said something to the effect of “Russia is not going to stand in a queue with a lot of countries that don’t matter.” So I said, “Well in that case can we stop this diplomatic sword dance about membership and actually get down to building a practical relationship and let’s see where that takes us?” ’22
Undeterred, Putin continued to woo the West with conciliatory gestures. On his return from Brussels to Moscow he approved the closure of two Soviet-era military facilities abroad – a naval base at Cam Ranh Bay in Vietnam and a listening post at Lourdes in Cuba. In private, Russian officials admit that these had become expensive white elephants that they were glad to get rid of. But still they hoped they would be seen as goodwill signals that deserved to be reciprocated. Moscow was looking for accommodation on a number of longstanding concerns. An American Soviet-era law, known as the Jackson–Vanik amendment, was introduced in 1974 to restrict trade with the USSR until it lifted restrictions on Jewish emigration. The problem had long since vanished, but Jackson–Vanik was still on the statute books, despite Russian pleading (and American promises to repeal it). Russia also wanted to join the World Trade Organisation to facilitate the growth of its economy, but the US blocked its application and increased tariffs on Russian steel imports. Above all, Putin was still hoping that his good behaviour might earn a reprieve for the ABM treaty and even persuade the Americans not to go ahead with a missile shield.
Such hopes were soon to be dashed. George W. Bush had campaigned for the presidency on a promise to build an American national missile defence system, and the ABM treaty stood in his way.
The issue was top of the agenda when Putin made a state visit to the USA in November 2001. The Americans tried to convince the Russians that they had nothing to fear from a missile shield, since its aim was to protect the United States from missiles that might be developed in the future by ‘rogue states’ such as Iran, Iraq and North Korea (countries he would soon refer to as the ‘axis of evil’). As such the defence system would not destabilise the US–Russian strategic balance. Colin Powell recalls: ‘The president wanted to convey to President Putin that he, Bush, understood that the Cold War was over and that we had to avoid looking at the Russian Federation through the lens of the Cold War.’23
According to deputy national security adviser Stephen Hadley, Bush said, ‘My preference would be that we both agree to leave the ABM treaty and we announce cooperation on ballistic missile defence. If it’s better for you, Vladimir, for me just to go unilaterally, so that you’re not part of it – and maybe even criticise it a bit – that’s okay.’24
It was the Americans’ turn now to try to seduce Putin with some good mood music. He was invited to the Bush family ranch at Crawford, Texas. Putin felt rarely privileged. He explained that he had never been to the home of another world leader. The atmosphere was cosy. While a thunderstorm raged outside, a log fire burned inside. Van Cliburn – a hero in the Soviet Union, where he won the Tchaikovsky Piano Competition back in 1958 – played for the guests. Condoleezza Rice danced and Putin’s foreign minister, Igor Ivanov, chatted in Spanish with President Bush. He recalls: ‘I speak Spanish because I used to work in Spain, and when Bush found this out he always used to chat to me in Spanish. He called me “Iggy”. “Hey, Iggy,” he would say, “Como estas?” ’25
But nothing could remove the log-jam over the ABM treaty – and Putin certainly did not intend to provide a fig-leaf by agreeing to abandon it jointly with the Americans. The most that could be agreed was that Bush would not embarrass Putin by announcing the withdrawal while he was still in the States.
In December Secretary of State Powell flew to Moscow to bury the treaty. In three days’ time, he told Putin, President Bush would publicly announce America’s unilateral withdrawal from the ABM. He described the curious reaction he got from Putin. ‘Putin looked at me with those steely eyes of his and started to complain: “This is terrible, you are kicking out the legs from under the strategic stability, and we will criticise you for this.” I said, “I fully understand that, Mr President.” And then he broke into a smile, and he leaned forward to me and he said: “Good! Now we won’t have to talk about this any more. Now you and Igor [Ivanov] get busy on a new strategic framework.” And I said. “Yes, sir.” ’26
Within five months a new strategic arms limitation treaty had been cobbled together. It was rather less imposing than its predecessors, the SALT treaties of the Cold War era and the START treaties signed by Gorbachev and Yeltsin with George Bush Senior. Covering just a couple of sides of A4, it was pretty thin, and though it reduced each side’s nuclear arsenals, it lacked any verification provisions or even any obligation to destroy arsenals permanently. But both Bush and Putin needed it for its symbolism. These two leaders were getting on like a house on fire, and they needed a treaty to prove it.
After the signing, Putin and his wife showed George and Laura Bush around the Kremlin, and then took them home to their dacha, where they did some fishing in a pond. Putin was repaying the Crawford experience. The next day they flew to Putin’s home town, St Petersburg, where they visited the city’s massive war memorial, the Hermitage gallery and the university. Putin then snuck off to attend a judo competition. And in the evening the presidential couples, with ministers and advisers in tow, went to a performance of the Nutcracker ballet at the celebrated Mariinsky Theatre.
Here something curious happened. Condoleezza Rice and Sergei Ivanov had struck up a great friendship. And while both were lovers of ballet, neither of them wanted to sit through three hours of the Nutcracker. When the lights went down, Ivanov leaned over to Rice and said: ‘Condi, do you really want to watch the Nutcracker?’
‘What do you have in mind?’
‘I have an alternative. Have you heard of the Eifman ballet?’
Rice had heard of it. Boris Eifman was an avant-garde choreographer, much more to her taste. ‘Let’s go,’ she said.
Ivanov and Rice slipped out of the Mariinsky and headed for Eifman’s studio. They sat side by side in the rehearsal studio, transfixed, sole viewers of a thrilling performance (apart from a somewhat disgruntled looking Vladimir Rushailo, the national security adviser, who had been sent as a chaperone).
‘I could see she loved it,’ Ivanov recalled later. ‘You can’t fake that sort of thing.’27
They got back to the Mariinsky just before the lights went up, just in time to join the official delegations for a midnight canal trip around St Petersburg.
‘Personal relationships do matter,’ Rice confided in an interview. ‘I came to trust that Sergei Ivanov was someone who was going to deliver on what he said he would do, and I think he believed the same about me.’28
It truly seemed like the dawn of a new era. Who could have imagined that it would all soon begin to disintegrate?
3
THE BATTLE FOR ECONOMIC REFORM
Putting a new team together
It wasn’t just Putin’s foreign policies that impressed the West. At home, he launched a raft of economic reforms that won plaudits abroad, as they appeared to be aimed at stimulating the economy, entrenching the free market and consigning the last vestiges of communism to the dustbin.
While still prime minister – before he was even acting president – Putin recruited a new team of Western-oriented reformers to draw up a programme. Some, like German Gref and Alexei Kudrin, he knew from his St Petersburg days. Andrei Illarionov was an outspoken liberal economist and Arkady Dvorkovich, a young whizz-kid, was just back from studies at Duke University. Putin himself was still an economic novice, willing to listen and learn, and c
onvinced that things had to change. Kudrin described him in an interview as ‘a man of the next generation, who understood modern demands’.1
Under Yeltsin major projects had been carried out that had already transformed the economy, particularly mass privatisation and the liberalisation of prices. But the country did not enjoy sustainable economic growth, inflation was high and the new private sector worked inefficiently. Above all, the country’s industrial base remained almost entirely focused on the extraction and sale of raw materials – oil, gas, aluminium, timber – while there was scarcely any modern manufacturing.
At the end of 1999 Putin put Gref, a 35-year-old lawyer-turned-businessman, in charge of a new Centre for Strategic Research, which became the engine room of the reforms. Gref, a bustling man with a pointed beard like Trotsky’s, was no economist, but few doubted he was the right man for the task. Deputy finance minister Kudrin described him as ‘bright and brave ... he was a tank, an engine, and totally committed to the reforms’.
Gref’s Centre was a kind of brains trust. He recalled in an interview later: ‘You know, what we were trying to do was to have consensus in society. We wanted to shape the programme with maximum input from intellectuals, academics, researchers, managers, economists. Part of the reason why we wanted public consultation was so nobody would think that it came from nowhere, so everybody would help to implement it. So the first task was to involve as many people as possible.’2
Not all the ideas that came flooding in were exactly what he had in mind. Gref smiled wryly as he recalled one contribution. ‘We received all sorts of ideas, and some of them were pretty exotic, to be honest. One of the institutes of the Academy of Sciences offered us a set of measures which in effect would have brought back socialism. I remember their idea was to create a national fund for the payment of all salaries and then to standardise them all.’
Over the next six months the team held scores of briefings and brainstorming sessions, gradually sifting through all the proposals and pulling together a plan. Putin would occasionally attend, mainly listening and asking questions, often raising the question of how the reforms would impact upon social welfare. He also had his own economics guru, Andrei Illarionov, whom he used as a sounding board, and in some regards as a counterbalance to the Gref team.
Gref had invited Illarionov, the director of the Institute of Economic Analysis, to join the Centre, but according to Illarionov it was ‘too Keynesian’ for his liking, so he declined. Illarionov was, and remains, something of an oddball, a maverick who likes to challenge conventional wisdoms. Today he is a leading climate-change sceptic. In the late 1990s he had been fiercely critical of the policies that led to the country’s financial crisis and default in August 1998. Perhaps it was his willingness to speak out that attracted Putin’s attention (though some years later it would cost him his job). On 28 February 2000 the acting president called him and asked him to come out to his dacha at Novo-Ogaryovo, just outside Moscow, to ‘chat’.
The two men spent all evening discussing the economy – or rather, economics. ‘He didn’t just want to know about interest rates and so on,’ Illarionov said in an interview. ‘He wanted to get a general understanding of economic reforms, what kind of economy we needed, what should be done, and how it should be put together. He was clearly learning a lot in a very narrow area that was not his speciality.’3
At one point they were interrupted by an officer who handed Putin a piece of paper. The acting president was delighted: it was news that the rebel-held town of Shatoy in Chechnya had just been retaken by Russian forces. Illarionov was quick to pour cold water on Putin’s celebration. A longstanding opponent of Russia’s intervention in Chechnya, he told him bluntly that what was going on there was ‘a crime’. Illarionov says he argued that Chechnya should be allowed to become independent, that it could never be crushed militarily and that the response would be an upsurge in terrorism which would backfire on the Russian people.
They had a furious argument. Putin insisted the rebels had to be annihilated. ‘His voice even changed,’ said Illarionov, ‘from the normal one he’d used when discussing economics. Suddenly some sort of iron, or ice, came across. It was a kind of transformation of the personality in front of your eyes – like seeing a completely different person. It seemed we could fall apart at any moment, without any possibility of reconciliation.’
After about half an hour, when it was clear there could be no meeting of minds, Putin suddenly announced: ‘OK, that’s enough. We will not talk any more about Chechnya.’ Illarionov recalled: ‘He just stopped this conversation, and for the rest of our meetings and relations over the next six years, he never mentioned Chechnya in my presence or discussed it with me. And after this, we resumed talking about economic reforms.’
By 10.30 it was time for Illarionov to leave, and after their spat over Chechnya he assumed it would be their last meeting. But Putin asked him to come back again the following day. Their economics tutorials became a regular occurrence, and on 12 April Putin officially appointed Illarionov as his chief economics adviser and later as his ‘sherpa’, or representative, to the G8 group of leading industrial nations.
By May the Centre’s reform plan was almost ready, and it turned out to be, in Gref’s words, ‘ultra-liberal’. ‘If we set the private sector free, we could see good growth,’ said Kudrin. As the work neared fruition they produced a thick volume – far too dense to be presented to the acting president. As they had no experience in producing slide presentations they brought in a top consultancy, McKinsey, to help them. ‘We spent a week at their Moscow office,’ says Gref, ‘putting together a short version for public presentation and a more professional version to show to ministries and departments explaining what they would have to do.’
On 5 May, two days before Putin’s inauguration, the team went to his Sochi residence to give him a ‘full immersion’ in the project. The young reformers were buzzing with excitement. ‘I was euphoric then,’ said Kudrin, ‘because it was all going according to plan.’ From morning till night they held sessions, interspersed with meals and walks in the warm sunshine. The economists talked through every point with Putin, who requested more work to be done here and there but approved the general thrust. It became known as the ‘Gref Plan’. Implementing it was to prove even harder than writing it.
Privatising the people’s land
Over the coming years the Gref Plan transformed many aspects of economic life. Personal income tax was reduced from as much as 30 per cent to a flat rate of just 13 per cent. Corporate tax went down from 35 to 24 per cent. A new land code made it possible to buy and sell commercial and residential land – for the first time since the communist revolution of 1917. There was a new legal code, measures to curb money laundering, and an attempt to break up some of the great state monopolies: electricity production was split off from the supply network, for example.
The income tax reform was needed because millions of Russians, whose wages were already miserly, simply avoided paying, as the rates were crippling. The same was true of company taxation: some 80 per cent of businesses were avoiding paying taxes. Gref’s proposal of a single, low income tax rate for everyone, and a much-reduced company tax, was audacious. The idea was to lower the rates but increase collection. But if people continued not to pay, the state could find itself with an even bigger hole in its budget. The point was not lost on Putin. Gref recalls a particular meeting that he and Kudrin had with him.
‘The president asked us: “Are you sure that our total tax revenue isn’t going to decrease if we lower taxes?”
‘We said: “Yes.”
‘He asked: “What if you are wrong?”
‘I said: “Then I will resign.”
‘“I’m sorry,” said Putin, “but I am not going to approve your plan on that basis! You haven’t thought this through. What makes you think your resignation is somehow going to make up for all the money we are going to lose from the budget? Politically, the one doesn’t compensate f
or the other.” ’4
Gref and Kudrin went away, did their sums once more and re-presented their plan to Putin. This time he agreed.
The International Monetary Fund was less happy. ‘At that time we were still working closely with the IMF mission here, and they refused to approve our plans,’ says Gref. ‘We had difficult meetings in the residency outside Moscow. Then we said to the IMF, “Thank you very much for your advice, but we are still going to lower taxes.” ’ The IMF subsequently left the country. But Gref describes the reform as ‘the key, correct decision, which allowed our economic growth to take off’.
The proposed land reform was even more contentious – this time because it affronted millions of communists and others who believed that land ought to belong to ‘the people’. Yeltsin had never dared to oppose them. As Gref prepared to present his Land Bill to the State Duma thousands took to the streets with red banners and anti-capitalist slogans.
At the last minute the government made a few concessions, tightening the regulations regarding the sale of agricultural land, but it made no difference. There was an uproar in the Duma as Gref was asked by the Speaker to take the floor, to present his bill. Deputies from the Communist Party (who had a quarter of the seats) swarmed around him to prevent him from leaving the government benches and reaching the podium. Some of them tried to grab him physically. The din was so loud that the Speaker could not make himself heard, so he called Gref on his phone and told him just to present his bill from where he was. ‘No one can hear you anyway,’ he said, ‘but you’ve got to do it, otherwise we can’t hold the vote.’
So Gref made his speech, as quickly as he could, while communist deputies hammered their fists on their desks and drowned him out with their chants. The vote was held, the law was passed ... and the chamber instantly turned into a battlefield. Opposing deputies punched, kicked and head-butted each other.
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