Published: December 17 2004
Gleb Pavlovsky, a political adviser to the Kremlin, was lording it in the offices of Leonid Kuchma, the president of Ukraine, where he had been sent to mastermind the election campaign of Viktor Yanukovich, the prime minister. A senior aide to Mr Kuchma recalls how Mr Pavlovsky and his Moscow colleagues were "reclining on the divans and brutally forcing themselves into the state life of Ukraine".
Not any more, they're not. Mr Pavlovsky's efforts to influence the outcome of last month's polls in favour of the pro-Russia Mr Yanukovich have backfired spectacularly. After protests from opposition party supporters, often waving the party's orange flags and scarves, the elections have been cancelled and Viktor Yushchenko, the western-oriented opposition leader, is the likely winner of a re-run on December 26.
The Kremlin had hoped to use the Ukrainian elections to display its influence in the biggest part of the former Tsarist and Soviet empires. Vladimir Putin, Russia's president, saw it as an opportunity to show the political and economic power of the new Russia.
Instead, the policy has been a fiasco. Mr Pavlovsky and his associates alienated even those on Mr Kuchma's staff with whom they were supposed to co-operate. Mr Putin, who travelled twice to Ukraine during the election campaign to support Mr Yanukovich, has been publicly humiliated.
The consequences could be far- reaching, especially as Mr Putin already faces many difficulties. At home, the Yukos affair, which comes to a head in the next few days with the government's planned sale of the bankrupt oil group's assets, has undermined confidence in the investment climate and the rule of law in Russia (see below). The Beslan school siege, in which more than 300 people, mostly children, died in September has exposed weaknesses in the security services. In Georgia, the Kremlin has been embarrassed by the success of the Rose Revolution, which brought the pro-west Mikhail Saakashvili to powerlate last year. Meanwhile, relations with the US, which the Kremlin values as an indicator of Russia's standing in the world, are cooling as President George W. Bush starts his second term.
Mr Putin might blame some of these problems on the course of events, notably the terrorists' actions at Beslan. However, at the root of the president's troubles lies his political strategy: the desire to build a strong Russia by creating an authoritarian state.
Mr Putin believes Russia needs a dominant, centralised state, with a powerful security apparatus and a key role for people, who, like himself, come from the former Soviet security services. His officials also think such a state needs to win respect by flexing its muscles, especially in the countries that were part of the Soviet Union.
Russia's liberals have no issue with the president's hopes for a strong nation. But they argue that Russia, like other European states, can only succeed if it develops into a free market democracy built on the rule of law with co-operative ties with its neighbours.
Some liberals now hope that the collapse of the Kremlin's strategy in Ukraine will prompt a change of direction. Yegor Gaidar, the architect of Russia's economic reforms, this week said in the Financial Times: "This is the first stone thrown at the edifice of Russia's managed democracy."
The danger is that Mr Putin will respond with more authoritarianism. Lilia Shevtsova, a liberal political scientist, says: "There are two possible options: to tighten the screws or to try a compromise with the opposition. I think a further toughening of the bureaucratic, autocratic regime is to be expected."
While events in Ukraine have shocked the Russian elite, there is little public pressure on Mr Putin to become liberal. Vyacheslav Nikonov, the pro- Putin head of Politika, a think-tank, argues that Russians want a strong state. "The experience of the past few years shows that, in Russia, people rarely elect the reformers or the liberals. Putin today is more liberal and reform-minded than 95 per cent of the population."
Even liberals concede some restoration of central authority was necessary after the chaotic rule of Boris Yeltsin, Mr Putin's predecessor, when business oligarchs dominated the Kremlin, many regional governors were a law unto themselves and corruption was widespread. Mr Putin began cautiously, balancing the influence of siloviki - present and former security services officers - with that of liberal reformers and business-minded officials.
But as the president has tried to consolidate his authority, he has come to rely increasingly on the siloviki. Having brought under his wing the federation council, the upper house of parliament, Mr Putin is now pushing ahead with plans to increase Kremlin control of the Duma, the more powerful lower house. Elected regional governors are to be replaced by Kremlin appointees. The state already controls the three main television channels and is now increasing its influence over the print media. It is also taking a bigger role in appointing judges.
Mr Putin has also re-established the Kremlin's control of the economy, especially over energy resources. He has appointed allies to senior positions at Gazprom, the gas monopoly, and is increasing the state's shareholding to a majority. His nominees, often siloviki like himself, have taken up top positions in government ministries, agencies and state-run companies.
For Mr Putin's supporters, the political advantages of authoritarianism have been self-evident. The president's United Russia party dominates politics. After comfortably winning re-election this year, Mr Putin remains popular, with approval ratings of about 70 per cent. Voters are unconcerned about his crackdown on the media and revel in the discomfort of the oligarchs.
However, Mr Putin's Russia stands on vulnerable foundations. Recent rapid economic growth owes much to high oil and gas prices, which generate taxes that make up almost 40 per cent of government revenues. Without the dramatic gains in the value of oil, Mr Putin's Russia might look more like Mr Yeltsin's near-bankrupt country.
The push for a centralised state may itself be undermining the strong Russia that the president wants to create. Attacks on media freedoms have reduced the flow of independent information, including reports reaching the Kremlin. Authoritarianism has brought greater government interference in the economy, more bureaucratic obstruction and increased corruption. The legal attack on Yukos oil group and Mikhail Khodorkovsky,its founder, who has been under arrest for over a year on fraud charges, has frightened investors.
The postponement of market- oriented reforms and the increase in state intervention is already curbing economic growth. Andrei Illarionov, Mr Putin's economic adviser, argues that gross domestic product would be falling were it not for higher commodity prices. Last year, for example, external factors should have boosted GDP by 9.2 per cent but it actually rose by only 7.3 per cent. Almost two percentage points of growth were lost due to internal factors, mainly poor economic management, says Mr Illarionov. The government has cut its growth forecast from 6.3 per cent to 5.8 per cent next year. Mr Putin's aim of doubling GDP by 2010 now seems unachievable. Business people have been unsettled by the arbitrary exercise of authority, highlighted by the spiralling attacks on Yukos. Oleg Vyugin, the head of Federal Service for Financial Markets - the government agency - and a former finance minister, told the FT this week: "The war against businesses is not a good idea. It is very difficult to wage a war against all businesses without damaging the whole economy."
Many executives say corruption has increased. Senior bureaucrats, who watched enviously as business people became rich in the 1990s, are now taking a share of the spoils. Junior officials are following suit.
Foreign investors are not immune. Ikea, the Swedish furniture company, was forced to delay the opening of its $350m store in Moscow because it refused to pay bribes to city planning authorities.
As long as oil prices stay high, Russia may be able to cope with the inefficiencies generated by corruption. But some observers are not sure. A senior Russian financier, who declined to be named, says: "The market economy cannot develop within the constraints of this political system. Either the system will correct itself or it will turn into a nationalist dictatorship."
Complicating the outlook are the challenges raised by domestic security threats, especially Chechen terrorism. The president, who rose to power on the back of the war he launched in 1999 as prime minister, has backed the ruthless suppression of the separatist fighters. Mr Putin has largely crushed serious armed resistance in Chechnya but the rebels are lashing out in neighbouring republics and beyond, for example, with recent bomb attacks on a Moscow metro station and two civilian jets, and the Beslan school siege. Mr Putin's refusal to negotiate with moderate Chechen separatists has helped radicalise the rebels. The Russian authorities say the separatists are building close ties with international Islamic terrorist organisations, although such links are hard to confirm. More significant may be contacts with criminal gangs across the northern Caucasus, where poverty, not religion, is the main recruiting sergeant.
Meanwhile, the insurgency has highlighted inefficiency and corruption in the security apparatus. More than 30 heavily armed hostage-takers crossed the tightly-controlled internal frontiers between Ingushetia and North Ossetia with impunity on their way to Beslan.
During the siege, some of Mr Putin's closest former KGB allies were not visible, while their teams seemed unable to co-ordinate the chaotic rescue operation.
The strong man in the Kremlin looked weak on the ground, but nobody at a senior level has been brought to account. The lesson Mr Putin has drawn from Beslan seems to be that he needs still more centralised control.
In foreign policy, Mr Putin started by trying to restore Russia's reputation from the damage done under Mr Yeltsin, when Moscow was seen as weak and inconsistent. After improving relations with the EU, he made a dramatic bid for better ties with the US when he responded to the September 11 2001 terrorist attacks by committing himself to the global war against terrorism.
However, as oil prices rose, boosting the economy and Russia's confidence, Mr Putin came under growing pressure from Moscow's hawks to develop a more assertive role, especially in the former Soviet Union countries.
Kremlin officials complained about the eastward expansion of the North Atlantic Treaty Organisation and the EU, especially into the ex-Soviet Baltic states. Moscow developed the United Economic Space, a common market with Ukraine, Belarus and Kazakhstan. And it encouraged big Russian companies to invest in the former Soviet Union.
Officials indulged in aggressive rhetoric, for example over the rights of ethnic Russians in Latvia and Estonia. But generally Mr Putin remained cautious. In Georgia nearly a year ago, he ignored hawkish calls for intervention in the Rose Revolution, in which Mr Saakashvili overthrew Eduard Shevardnadze, Georgia's president.
However, Mr Putin took a different course over Ukraine. Perhaps, he feared that another popular revolt would disturb the political balance elsewhere in the former Soviet Union, even in Russia. Almost certainly, he saw Ukraine as a special case, given its large size, its 47m Slav population, its industrial wealth, and economic and historical ties to Russia.
Mr Putin clearly decided that Mr Yushchenko, the opposition leader, was a threat because he might increase ties with the west and encourage anti-Russian Ukrainian nationalism. The Russian president may also have felt more confident about trying to influence the outcome of the elections at a time when the US was bogged down in the Iraq war,oil prices were high and the economy strong.
Events in Ukraine bring serious international consequences for Russia. First, if Mr Yushchenko wins the new poll, Moscow will have to deal with a new leader with every reason to be suspicious of the Kremlin's motives.
The differences between Kiev and Moscow would not be insurmountable, given the depth of mutual ties and Mr Yushchenko's stated commitment to good relations. But relations may be tense.Mr Yushchenko's supporters worry that Moscow will focus its political attentions on the Russian-speaking east and possibly encourage separatism. Moscow is concerned about where Mr Yushchenko's western-oriented strategies could lead. EU membership - a long-term aim - is not seen as a serious threat. But Nato membership would be a critical challenge, especially as the Russian Black Sea fleet is still based in the leased Ukrainian port of Sevastapol.
Second, the attempt to intervene in Ukraine's affairs has reinforced concerns about Russian imperialism in its other western neighbours, notably Poland and the Baltic countries. As new EU members, they are likely to redouble efforts to push the EU into a more cautious policy towards Russia.
The big EU states will try to restrain any anti-Russian sentiments. They see Russia as an essential energy supplier. But the US could be a different matter. Events in Ukraine have crystallised fears about Russian expansionism. Having emphasised the strengths of American-Russian ties only six weeks ago, White House officials have recently quietly expressed their reservations to the Kremlin.
Mr Putin is unlikely to react to the Ukrainian embarrassment by launching quickly into similar adventures elsewhere. The fear of failure will be too great. However, Mr Putin continues to reassert himself at home.The government yesterday debated the issue of internet content, raising fears among liberals of possible future controls.
Meanwhile, Sergei Markov, a Kremlin political adviser who worked in Kiev with Mr Pavlovsky, says the sight of protests in Ukraine "orchestrated by some western institutions" could lead to a clampdown on international non-governmental organisations - such as pro-democracy groups-in Russia. The last thing the Kremlin wants are orange scarves in Red Square.
Ominous noises from the economic jungle
Shortly before the arrest last year of shareholders in Yukos, Russia’s besieged oil company, Kompromat.ru - a gossipy Russian website that offers compromising material about Russian officials - published the transcripts of intercepted telephone conversations involving Sergei Bogdanchikov, at that time the president of Rosneft, the state oil company, writes Arkady Ostrovsky.
In the first, Igor Sechin, deputy head of the Kremlin administration, tells Mr Bogdanchikov about the need to consolidate resources and secure political backing for the attack on Yukos. In the second Mr Bogdanchikov tells a Kremlin spin-doctor: “We are working on it. You understand I can have them done through my channels. [They will be lying] face down against the floor . . . Three days in Butyrka [prison] and they will realise who is the chief in the jungle.”
It is impossible to say whether the transcripts were genuine. But they convey the atmosphere of crudeness surrounding the case against Yukos.
Mikhail Khodorkovsky, its chief executive, is in prison. His company is being broken up by the Russian authorities: its main production asset is set to be sold forcibly at auction on December 19. And Rosneft, headed by Mr Bogdanchikov, has been merged with Gazprom, the state-backed gas monopoly, and is set to take control over Yukos’s assets.
This week Yukos, which has been crippled by $25bn in tax charges, filed for bankruptcy protection in a US court. But whatever decision the court takes it is unlikely to change the Kremlin’s decision to dismantle Yukos.
The fight over what was once Russia’s largest private oil company has clearly demonstrated who is the “chief in the jungle”. Yet it also undermines many of Russia’s economic achievements over the past five years. Yevgeny Yasin, a former economics minister, said the Yukos affair was starting to affect the economy. Capital flight has resumed and domestic investment has fallen.
The Yukos affair has shown that the “commanding heights” of the economy - particularly the oil and gas sector - are firmly in the hands of the state. Many businessmen feel scared to make decisions. Sarah Carey, a partner with Squire, Sanders Dempsey, a US law firm, who resigned this week from Yukos’s board of independent directors, said: “The independent directors felt they could no longer perform their functions. The Russian government was doing the strategic planning for the company, not its board.”
When Mr Khodorkovsky was arrested on charges of fraud and tax evasion last October, most investors argued that he had become a victim of his own political activity. He had poured money into opposition parties and spoken privately of the need for Russia to move from presidential rule towards a parliamentary republic. Investors believed, however, that the move against Mr Khodorkovsky would not impair the company.
They have been proved wrong, and the question high in the minds of many is whether Yukos is an isolated case or part of a wider trend of redistribution of property in Russia. The Russian government provided a clue when tax authorities brought a $160m tax claim against Vimpelcom, a telecommunications operator widely viewed as one of the most transparent, New-York listed Russian companies. Other companies are also being investigated. “The first time a wolf eats a sheep, he always promises not to do it again,” says Mr Yasin. “But then he gets hungry again.”