CANADA, RUSSIA AND UKRAINE: BUILDING A NEW RELATIONSHIP

Report of the Standing Senate Committee on Foreign Affairs

Chairman : The Honourable Peter Stollery 
Deputy Chair : The Honourable Raynell Andreychuk

Sixteenth Report

June 2002


MEMBERS

The Honourable Peter Stollery, Chair
The Honourable Raynell Andreychuk, Deputy Chair

and

The Honourable Senators:

Jack Austin, P.C.
Roch Bolduc
Pat Carney, P.C.
*Sharon Carstairs, P.C. (or Fernand Robichaud, P.C.)
Eymard G. Corbin
Pierre De Bané, P.C.
Ethel Cochrane
Consiglio DiNino
Jerahmiel Grafstein
Alasdair Graham, P.C.
Rose-Marie Losier-Cool
*John Lynch-Staunton (or Noël Kinsella)
Raymond Setlakwe

* Ex officio members


In addition to the Senators indicated above, the Honourable Senators David Angus, Norman Atkins, Joseph Day, Sheila Finestone, P.C., Ross Fitzpatrick, George Furey, James Kelleher, P.C., Colin Kenny, Marie-P. Poulin (Charrette), Marcel Prud'homme, P.C., Douglas Roche, Terry Stratton, James Tunney, Nicholas Taylor, and the Very Reverend Lois Wilson were members of the Committee at different times during this study or participated therein during the Second Session of the Thirty-Sixth Parliament or the First Session of the Thirty-Seventh Parliament.


Staff from the Parliamentary Research Branch of the Library of Parliament:
Peter Berg, Research Officer
John Wright, Research Officer


Line Gravel
Clerk of the Committee


ORDER OF REFERENCE

Extract from the Journals of the Senate of Thursday, March 1, 2001: 

The Honourable Senator Stollery moved, seconded by the Honourable Senator Taylor: 

That the Standing Senate Committee on Foreign Affairs be authorized to examine and report on emerging political, social, economic and security developments in Russia and Ukraine; Canada's policy and interests in the region; and other related matters; 

That the papers and evidence received and taken on the subject and the work accomplished by the Senate Standing Committee on Foreign Affairs during the Second Session of the Thirty Sixth Parliament be referred to the Committee; 

That the Committee submit its final report no later than June 28, 2002, and that the Committee retain all powers necessary to publicize the findings of the Committee contained in the final report until July 31, 2002; and 

That the Committee be permitted, notwithstanding usual practices, to deposit its report with the Clerk of the Senate, if the Senate is not then sitting; and that the report be deemed to have been tabled in the Chamber. 

After debate,

The question being put on the motion, it was adopted. 



Paul Bélisle 
Clerk of the Senate 


TABLE OF CONTENTS

FOREWORD

PREFACE

PART 1 - RUSSIA

INTRODUCTION

RUSSIA TODAY
    A. Geography and People
    B. Culture and Identity
    C. Social Conditions
    D. Transparency 
    E. Education 
    F. Social Welfare
    G. Chechnya in Russian Domestic Politics


POLITICS AND THE PUTIN EFFECT
    A. Russian Culture and Democracy
    B. The Yeltsin Years
    C. Russian Electoral Politics
    D. The Regions 
    E. Human Rights 


THE RUSSIAN ECONOMY: CURRENT DEVELOPMENTS AND REFORM CHALLENGES
    A. The Existing Economic Situation
    B. Legislative Reform and the Challenge of Implementation

RUSSIAN SECURITY AND FOREIGN POLICY
    A. The Military Situation
    B. Military, Foreign and Security Policies
    C. Foreign Policy and Domestic Opinion
    D. General Foreign Policy Actions
    E. NATO
    F. Russian-American Relations and the Effects of September 11th

CANADIAN INVOLVEMENT IN RUSSIA
    A. Assisting With Reforms 
    B. Boosting the Canada-Russia Economic Relationship
    C. Security Issues
    D. Northern Development
    E. Immigration 

PART 2 - UKRAINE

INTRODUCTION

UKRAINE POLITICS
    A. Culture, History and Citizenship
    B. The Current Political Situation
    C. Postscript: March 2002 Elections to the Verkhovna Rada

UKRAINE'S ECONOMY: CURRENT SITUATION AND THE STRUGGLE WITH REFORM
    A. The Existing Economic Situation
    B. Implementing Reforms: Combating Policy Inertia

UKRAINE FOREIGN AND SECURITY POLICY
A. Ukraine-Russia Relations
B. Ukraine and the West: Security Perspectives
C. Ukraine's Other Option: GUUAM

CANADA'S FOREIGN POLICY OBJECTIVES
A. Aiding the Reform Effort
B. Canada-Ukraine Economic Links
C. Canada And Ukraine: The Special Relationship

APPENDIX A: MAPS OF RUSSIA AND UKRAINE

RUSSIA
UKRAINE

APPENDIX B: SECTIONS OF THE RUSSIAN CONSTITUTION PERTAINING TO FEDERAL-REGIONAL DIVISIONS OF POWERS AND THE POWERS OF THE RUSSIAN PRESIDENT

APPENDIX C: RUSSIAN PARLIAMENTARY ELECTION RESULTS, 1993-1999

APPENDIX D: RUSSIA - ECONOMIC STRUCTURE: ANNUAL INDICATORS

APPENDIX E: UKRAINE - ECONOMIC STRUCTURE: ANNUAL INDICATORS

APPENDIX F: WITNESSES


FOREWORD

This Senate Report is the first ever in depth study of Russia and Ukraine by a Canadian Parliamentary committee.

Canada has longstanding interests in Europe in trade and investment and defense. The Senate Foreign Affairs committee has closely followed these interests for some years. We have completed two reports on Canadian trade and investment relations with the European Union. We know about the eastward expansion problems of the EU and their potential impact on Canada.

Canada is a founding member of NATO and when the committee was asked to look at NATO and peacekeeping about which we reported in April 2000, our enquiries led us repeatedly to questions about what was happening in Russia and Ukraine. So this report is the result of years of work in which we saw European affairs moving further and further east and committee members' increasing concern about what that means for Canada.

The Senate formally referred the subject to the Foreign Affairs Committee and we started our main hearings in March 2001 with the intent of visiting Russia last October and completing our report early this year. Unfortunately the World Trade Centre disaster and the disruption that followed made it impossible to visit Russia and Ukraine. We will correct that in the future.

In the meantime, though we couldn't go to Russia, in a way, Russia came to us.

Important people took the time to meet, sometimes with all the committee members and sometimes, because that was impossible, with some senators. I have to say that Russian Ambassador Churkin went out of his way to ensure that if possible, committee members got to meet and question whoever came to Ottawa from Moscow. Of course, as we became more knowledgeable, our questions got better.

Some senators met privately with President Putin. We met with current Prime Minister, Mikhail Kasyanov; current Deputy Prime Minister, Victor Khristenko; former Prime Minister, Sergei Kiryenko; current Speaker of the Duma, Gennady Seleznyov. Conversations were free-ranging. In the case of President Putin, when protocol people told him he had another appointment, he waved them away, in favour of continuing the meeting saying, " We have good questions and I want to answer them properly".

Not only are these men some of the most prominent men in Russia today, impressive intellectually, but think of their ages. Duma Speaker Seleznyov is the oldest at 54. President Putin is 49. Prime Minister Kasyanov is 44 and so is Deputy Prime Minister Khristenko. Former Prime Minister Kiryenko, who is now Presidential Representative to the important Volga Region and Chairman of the Russian Chemical Disarmament Commission is 39 years old.

Russia is moving forward. There is no doubt about that. Probably the most immediate international impact is on the oil and gas business. Russia is now the world's second largest exporter of oil after Saudi Arabia. It is seen in Western Europe as the secure supply of natural gas that Canada is to the United States. As our report points out, the Caspian Basin represents the most significant gas and oil discovery in the past 30 years. There will be even more intense competition for pipeline routes. Azerbaijan, Iran, Turkmenistan, and Kazakstan share the Caspian with Russia.

Does Canada not have an interest in a successful Russia? I think we do because a successful Russia should be a more stable Russia, good for everyone. Our report describes the mostly dismal legacy of the Soviet regime but the democratically elected government seems determined to improve the standard of living of Russians.

In a world of bad news stories, I think Russia is a good news story.

I am sorry that we did not go to Ukraine. We had some good witnesses. There is great interest in Ukraine, by Canadians of Ukrainian descent. One of the numbers that stands out in my mind is that nearly 50,000 visas were issued last year by the Ukrainian Embassy for Canadians visiting Ukraine. But I will let our chapter on Ukraine speak for itself.

On behalf of the members of the Foreign Affairs Committee, I would like to thank our staff. They worked very hard. Ms. Line Gravel, our clerk, was a model of efficiency as she managed our administrative, budgetary and logistic operations. Together with her colleague, Mr. Till Heyde, she expedited our labours greatly.

Likewise we were supported by capable and diligent research staff. We could not have done our report without Peter Berg and John Wright of the Parliamentary Library and David Murphy from my office. 

Peter Stollery, Chair


PREFACE 

Russia and Ukraine have emerged from the collapse of the Soviet Union to present Canada and Canadians with opportunities as well as a complexity of issues generated by the two countries’ ongoing political and economic reforms. A comprehensive survey of the two states is not the purpose or intent of the Committee’s investigation.  Rather, the Committee has chosen to examine certain topics selectively.  These deal primarily with the relative newness of Canada’s emerging relationship with a new Russia and a new Ukraine.

This report is less about where Canada has been with regard to long-standing issues between our countries common bonds such as agriculture, climate, geography, custodianship of the North, family ties, and sports – for often those issues were subsumed under relations with the Soviet regime. Rather, this report focuses on the internal dynamics that shape reform in Russia and Ukraine, what those dynamics might entail for Canadian interests and, ultimately, how best we can offer assistance and advice.  Ultimately, the goal is to create a healthy, long-term relationship with two potentially important partners in international affairs.

The Committee heard a considerable amount of testimony.  There were 17 officially recorded meetings comprising 59 witnesses.  In addition, Committee members met with some of the most important and senior Russian officials, including President Putin himself,[1] former Prime Minister and current Presidential Representative Sergei Kiryenko, Deputy Prime Minister Viktor Khristenko, and Co-Chairman of the State Duma Gennady Selezney.  The Committee also travelled to Washington to hear testimony from Canadian and U.S. experts from research centres and government departments.  This trip comprised an additional six meetings with 20 further witnesses.  This report contains the Committee’s reflections on the priorities expressed by this wide collection of witnesses.

The Committee, after reflecting on the information, observations and analysis provided by the various witnesses who appeared before it, as well as by the materials that we have received, has arrived at a number of recommendations concerning Canada’s future relations with Russia and Ukraine.  We strongly believe that by implementing these recommendations, Canada can play an important role in working with the two countries toward building a solid, secure and mutually beneficial partnership for the future.


PART 1 – RUSSIA

INTRODUCTION

Soviet foreign policy and military capacity were historically of great concern to decision-makers and analysts throughout the world.  With the collapse of the Soviet Union, however, much attention has been paid as to what this might mean for Canadian foreign policy and for international politics.  The expansion of NATO (the North Atlantic Treaty Organization) in the light of Soviet collapse certainly brought post-war Western Europe – and North America – to the borders of Russia.  These new developments prompted the Standing Senate Committee on Foreign Affairs to undertake a review of NATO and Canada’s position within this Alliance.[2] 

As Russia continues with the difficult tasks of economic and political transformation, Canadian engagement with Russia should involve a more complex range of issues than the traditional military/security ones. For Canada and the world, Russia presents opportunities and challenges across a wide range of issues as diverse as trade, international finance, technical assistance, co-operation against criminal activity, international security, as well as difficult domestic issues (e.g., the growth and spread of multiple-drug resistant tuberculosis[3] and the link between economic growth and political stability) which may impact Canadians directly or indirectly.

During the course of its study, the Committee has become increasingly encouraged about Russia’s evolution and its contribution to the world.  For example, Russia is a source of dynamic, educated, skilled entrepreneurs and workers.  It is a key partner in the international space station, providing irreplaceable experience and skills.  It is a potential partner in stabilizing difficult international situations and remains crucial to managing multilateral security regimes.  Russia has demonstrated its importance in a positive manner, most recently through President Putin’s support in the “war against terrorism.”  There is also an opportunity to change Eurasian relations fundamentally for the first time since the inception of the modern state system and to bring Russia fully into the fold of what Boris Yeltsin described as the family of civilized states. Opportunities now exist, at multilateral and bilateral levels, to work with Russia as it attempts to integrate more fully into contemporary global society.

Transformation in Russia changed the world in 1814, in 1917 and again in 1991.  And yet transformation never fully took root.  Ten years after the collapse of the Soviet Union, the Committee is asking the most difficult question:  whether a fundamental transformation is occurring in Russia this time.  The bulk of this report, therefore, comprises observations made on the nature, direction and state of Russia, particularly under the new leadership of President Putin.

To traverse the entirety of Russian politics would be as difficult as to traverse the country itself.  This report is not intended to be encyclopaedic. As travellers do when they have limited time in such a huge country, the Committee has had to “fly over” large sections of Russia – either glimpsing them briefly from afar or noting their existence.  There are many aspects of Russia the Committee has not yet seen:  aspects that would merit a study in themselves.  Absent, as yet, is evidence on many important issues – the question of nationalities, the unique strains and varieties of Russian nationalism, Northern policy, indigenous peoples, Russia and the near abroad, the environment, labour relations, gender issues, arts, and cultural industries – to name but a few.  This report can but represent an interim stop on the journey of Canadian-Russian understanding.  Its focus is not limited to studying traditional ties and understandings built up through and beyond the Soviet era, but rather to explore the development of normalized relations with a new, emerging economic and political partner.

This report focuses on the major theme presented to the Committee by the witnesses, and the one question to which all issues in Russia tend to be subsumed: what President Putin’s presidency might mean for Russia, and therefore for Canada.  His proclaimed goal is to transform Russia into a liberal-democratic state with a viable, rules-based, market economy.  The assumption is that the world needs Russia to become more fully functional, viable, democratic, economically prosperous, and a keystone in the arch of a peaceful and prosperous world.  We would all be the better for it.



RUSSIA TODAY

 A. Geography and People

When the Committee met over the course of the study, there were salutary reminders of the complexities and contradictions involved in such an ambitious undertaking as the examination of Russian affairs.  The sheer size alone of Russia is impressive.  It spans 11 time zones from Poland to China, and extends as far north as the northern reaches of Canada and as far south as Turkey.

Yet this description of Russia’s size is, in some ways, misleading.  If maps were drawn to economic scale, Russia would be approximately the size of the Philippines and dwarfed by its neighbours in Western Europe.  Depending on which estimates are used, the Russian economy is a mere one-third to one-half of its 1991 level.[4]  Alternatively, if maps were produced to the scale of population, with its 146 million people Russia would be less than half the size of the United States and only 1½ times (and shrinking) the size of the now united Germany.

The Russian Federation comprises 89 regions, each with varying degrees of independence from the centre.  At one extreme is Chechnya, in open conflict with the federation.  At the other is Moscow, the centre of politics but a city that is often erroneously equated with Russia as a whole.  For some regions, what happens in Moscow is as remote today as it was 100 or 300 years ago.

Furthermore, Russia is officially a multinational state.  Although Russians themselves comprise slightly over 80% of the population, the Russian census recognizes more than 70 distinct nationalities across the country.  In all, there are over 100 languages spoken.  Officially, Russia has four state-approved religions.[5]  Orthodoxy comprises 75% of the population, Islam 19%, and other religions 6%.

 

B. Culture and Identity

Questions of culture and identity are addressed in greater detail later in this report.  To presage those sections, here it can be stated that whatever Russians feel themselves and Russia to be, there is a strong sense that Russia represents a unique culture that is neither Western nor Eastern.  Much of Russian identity has been shaped by its size and the ferocity of its history.  The Committee was told that Russians believe strongly their country should assume the role of a great power, with a natural sphere of influence from Eastern Europe through to Asia and with influence on the global stage.  This belief could provide a strong framework within which Russian politics might have to operate.

 

C. Social Conditions

The Committee heard considerable testimony on the challenges facing Russia and the resulting strains placed on Russia’s health care system, on Russian living conditions and on the Russian social safety net.

1. Health and Demography

The Committee heard evidence to indicate it would be no understatement to describe Russia’s socio-demographic condition as one in crisis.  Indeed, the declining quality of life for Soviet residents contributed to the collapse of the Soviet Union.  Since 1991, there has been little progress (apart from the definite progress on liberty) in reversing this downward trend.

Murray Feshbach (School of Foreign Service and the Centre for Political and Strategic Studies, Georgetown University) stated that by 2050 the Russian population was projected at best to fall by approximately one-third to about 100 million people.  Already, according to Larry Black (Professor, Institute of European and Russian Studies, Carleton University), Russia is drastically under-populated for the territory it must manage.  Moreover, the average lifespan for a Russian male now stands at a mere 58 years.  Keith Bush (Director, Russia and Eurasia Program, Centre for Strategic and International Studies, Washington, D.C.) indicated to the Committee that the absence of labour supply and consumer demand stimuli normally required for economic growth could soon become a critical, if not insurmountable, barrier to Russian economic development.

Mr. Feshbach informed the Committee of several serious diseases prevalent in Russia.  For example, AIDS is running unchecked, particularly in the prison population.  This epidemic often occurs in combination with multiple-drug resistant tuberculosis.  In Russia as a whole, it is projected that after 2005 10 million males between ages 15 and 29 will die from these two factors alone.  Other diseases causing concern owing to their prevalence include malaria, syphilis and other sexually transmitted diseases, and hepatitis C and B.

Stunting and wasting are becoming prevalent among Russian youth, with only some 10-15% of the under-15 population healthy according to leading Russian paediatricians.  The head of the Moscow military district indicated that 40% of draft-age men available to him were not sufficiently fit to serve.[6]  The age cohort of young women that traditionally provides the bulk of births in Russia (19-29) has suffered a dramatic drop in fertility owing to illness, poverty and sexual diseases.

Of concern to the Russians and other countries are transmission rates for many of these diseases, now that the opening of Russia to travel and emigration has increased contacts with the outside world.  Trafficking in women – the sex trade – is of particular concern.  Not only is sex slavery reprehensible in itself, it is also a vehicle for the spread of Russian organized crime[7] and it spreads many sexually transmitted diseases with it.

Russian resources to deal with the issue are limited in several ways.  One is an absolute shortage of money.  Of the 500,000 cases of AIDS last year, the government could afford to treat only 1,000, according to Murray Feshbach.  This problem might be remedied most directly by addressing improvements to the economy, by using more efficient revenue-gathering methods and, where relevant and welcome, by enlisting the resources and expertise that the international community could provide. 

The second limitation has to do with the delivery of services.  Most factors contributing to improved health (e.g., health care, waste management, municipal infrastructure, education) are in the hands of local government.  As John Young (Professor, University of Northern British Columbia) told the Committee, some of these functions need to be placed with regional or federal authorities.[8]  Other functions do not present jurisdictional problems but require additional resources.  In the context of the delivery of services, municipal organizations are particularly affected by an acute shortage of available resources.

Third, a demographic shortfall could be addressed by immigration.  This hope was expressed to the Committee by Deputy Prime Minister Khristenko, who indicated that Russia should have a new immigration policy within the year.  Should Russia achieve economic and political renewal, net immigration is not an unrealistic expectation over the long term.  It was noted that there are some 14 million Russians living outside Russia in post-Soviet regions, many with useful skills and the desire to return.  In the short term, however, net immigration continues to be low.

Migration might also raise other issues.  Certain Russian statements on immigration appear aimed predominantly at encouraging Russians to return home.  The non-Russian population of the country is growing whereas that of ethnic Russians is not.  There also exists in the Russian Far East a large population of illegal immigrants from China. 

2. Income

GDP/capita is estimated at US$1,700, a figure less than one-tenth the Canadian level.  Russia now has a considerable polarization of wealth.  A few Russians, the so-called “New Russians,” are wealthy beyond the scope of most people (Russian or Western), whereas many others live in poverty.  According to World Bank figures, approximately 30% of Russians actually live below the poverty line. 

Another point to consider is that whereas official unemployment for 2001 is a projected 10%, the real extent of unemployment may be hidden and unemployment benefits are meagre.  Andrea Chandler (Professor, Institute of European and Russian Studies, Carleton University) told the Committee that once unemployed, it is difficult for a Russian to break the cycle of unemployment.  Economic shrinkage and restructuring have different consequences for most Russians than they do for most Canadians.

A critical fact brought to the attention of the Committee was that the Russian middle class was approximately 10-15% of the population.  According to Stephen Grant (Chief, Russia, Ukraine and Commonwealth Branch, Office of Research, U.S. Department of State), this percentage would be insufficient in a Western country to sustain the core constituency necessary for a liberal democracy.  By comparison, socio-political elites as a whole comprise 4-20% of the population, depending on how the measurement is made.  Most estimates fall in the low end of that range.

 

D. Transparency

Many Russians look to Vladimir Putin to address their concerns about crime and corruption.  These issues comprise part of what Russians think of when they complain about the “anarchy” of the Yeltsin years.

The Committee received little evidence from witnesses on the prevalence of ordinary crime.  Indeed, statistics on crime and other issues are difficult to ascertain in Russia, because the resources to collect and report standardized data are inadequate and incentives to misreport may be prevalent.  Furthermore, Soviet social statistics are highly suspect, so comparative analysis is doubly difficult.  Nonetheless, it seems evident that crimes against property and crimes against people are of genuine concern.

We were also told that more resources and training are required for the Russian police.  As with many other basic functions of the state, the most important actions taken by the Putin government are those aimed at stabilizing and increasing revenue (i.e., tax reform).

On organized crime and corruption, the Committee heard that genuine organized crime emanating from Russia has established a global presence.  Angus Smith (Criminal Intelligence Directorate, Royal Canadian Mounted Police) told the Committee that the Soviet gulag system was the breeding and training ground for a large, criminal network with a close and strong criminal culture.  In this culture, crime represents survival for a people who have endured Stalin, Hitler and the gulag.

The necessity of breaking the law to get things done in the Soviet economic system augmented a criminal presence in Russian society.  With the collapse of the Soviet Union, these criminal gangs were well positioned and extremely capable.  As Angus Smith testified, Western agencies were initially unprepared for the speed, ruthlessness and violence with which Russian gangs entered the West.  “In its North American manifestation, Russian organized crime has come out of nowhere.  They have transformed themselves from faceless underworld thugs to major international criminals in less than a decade.  They have managed to avoid that process that we so often see with organized crime – Italian or Asian, outlawed motorcycle gangs – of gradual assimilation, entrenchment and multi-generational evolution.  This has meant that the learning curve for the police has been steep.  We have not had a chance to observe, adjust to them, get used to them and grow up with them, in effect.”

The close culture of Russian gangs has made them more difficult to penetrate and police agencies are playing catch-up, although not without success.  Angus Smith went on to describe how, in co-operation with American and Russian authorities, the RCMP completed an investigation that led to the deportation of Vyacheslav Sliva, an important figure in Russian organized crime, who was then a resident of Toronto.

E. Education

The legacy of the Soviet Union is one of a well-educated and literate society, although Murray Feshbach suggested to the Committee that from his personal experience, Soviet and Russian statistics may overstate literacy rates.  The Committee was apprised as to the difficulties such an evidently literate and scientifically able society seemed to be facing in translating these skills successfully to create a liberal-democratic state.

The Committee heard from Piotr Dutkiewicz (Director, Institute of European and Russian Studies, Carleton University), who has been an education consultant to the Russian government.  He indicated to the Committee that the current state of the Russian education system is suffering from the financial shortfalls that bedevil Russia as a whole.  As much as 65% of the Russian education budget is eaten up by maintenance costs, and while teachers are in general receiving salaries, large arrears have occurred.

With regard to the content of current education programs, the federal government effectively directs the current curriculum both through regulation and through control of resources.  Russians and the Russian state continue to see education as a vehicle for advancement.  However, Professor Dutkiewicz noted that there is an effort to inculcate “Russian values” (e.g., the values of collectivism, orthodox religion and traditional respect for the state and authority) through the curriculum.  This objective certainly seems to be in accordance with general sentiments within Russia as well as sentiments expressed by many Russian public officials.  The Russian education system seems to reflect the ambivalence of Russian society with regard to transition by promoting the (sometimes) contradictory messages of Westernisation and Russification at the same time.

Mechanisms are available for the state to exert pressure on individual educators, mainly through the requirement for regular re-accreditation.  Overt censorship does not seem to be the issue it was in the Soviet era. Rather, the requirement to build a whole and functional Russian society can cast challenging questions that are uncomfortable for many Russians and that are perhaps difficult to deal with.  Therefore, the possibility arises that educators will be less interested in questioning authority than in accomplishing their educational goals.

Finally, it should be noted that the majority of educators in the system are products of the Soviet era.  Younger teachers coming into the system are more flexible and energetic in their approach.  This intergenerational tension manifests itself in a struggle between flexibility and rigidity in pedagogy.  The challenge for Russia is to overcome conservative elements within the educational system that resist new techniques and material.  The Committee recognizes that this is not an issue or a mindset unique to Russia, but it does bear noting that current educators in Russia who have more than 12 years’ experience were previously teaching in the Soviet Union.

 

F. Social Welfare

While the Committee did not gather full evidence on the details of social welfare programs, a broad picture has started to unfold.  Andrea Chandler presented pension reform to the Committee as one example of the difficulties involved in social welfare reform.

These difficulties can be summed up as follows.  First, little money has been injected and the problem of pension arrears has, only recently, been addressed.  Inflation, made worse by the sudden devaluation of the rouble in 1998, has also eaten away at fixed incomes.  Pensions were separated from the general budget in 1991 in order to insulate them from general budget problems.  However, this has made them vulnerable in that they are now expected to be self-financing.

Second, social welfare reform is strongly contested in Russian politics.  Several witnesses informed the Committee that Russians see a legacy from the cradle-to-grave system promulgated, if not fully delivered, under the Soviet system.  Many Russians view attempts to reform the system with suspicion as World Bank and IMF impositions.

Third, whereas the Soviet system was an integrated whole in the planning and delivery of services, the same institutions became dysfunctional with the removal of central planning.  Services are now spread across three levels of government with their concomitant regional variations.  The capacity to develop effective programs and the accountability to deliver responsible ones has been severely diminished.  In short, “the government administrative apparatus has too many entities, performs many functions that could be considered for devolution to the private sector, and is over-staffed with poorly remunerated and disciplined employees.”[9]

 

G. Chechnya in Russian Domestic Politics[10]

The issue of relations with the Chechen peoples has been a part of Russian politics since the time of Catherine the Great.  Politics in the Caucasus, with its overlapping national conflicts, has always tended to be complex.  Soviet policy furthered this complexity by creating awkwardly drawn boundaries that aggravate irredentism within Russia and across the Caucasus as a whole.  Chechnya presents an almost intractable problem for Russia and for President Putin.

In Russia, Chechnya is viewed as a matter that is internal to the Russian Federation.  Foreign policy toward Russia has raised issues of human rights, a general lack of transparency, and the exclusion of observers from the region.  However, Russia’s stated position is that no state would tolerate problems of lawlessness or instability within and across its borders.  The Committee was informed that Russia justified the second Chechen conflict by citing NATO out-of-area operations.

There is also the issue of oil.  Chechnya is important to Russia’s plans to export Caspian Sea oil through Russia to the West.  Chechnya abuts a crucial section of pipeline leading to the oil terminal at Novorossisk.  As Bohdan Klid (Professor, Canadian Institute of Ukrainian Studies, University of Alberta) informed the Committee, “Part of the reason for the war in Chechnya is that the Chechens wanted a cut and the Russians claimed it all for themselves.  That is a simplification of the matter.”

The current situation remains unresolved.  Meanwhile, as Fiona Hill told the Committee, Chechnya is harming Russian politics.  First, the cost of dealing with the conflict in Chechnya is virtually equal to what Russia earns in hard currency through arms sales.

Second, Chechnya has complicated the status of Russian democracy and the credibility of the state.  The involvement of the security forces in Russia and in Chechnya is of concern, as has been the government’s handling of the media regarding Chechen issues. Third, there have been human rights abuses in Chechnya, although Russia has recently launched a few high-profile trials against alleged abusers.

Fourth, Chechnya has created problems for the Russian military.  According to Fiona Hill, there are morale issues and conscription problems, compounded by recruitment procedures that disproportionately affect only certain Russian regions.

Finally, the Chechen issue could become a problem for Vladimir Putin.  While the main military campaign is over, the longer Chechnya remains mired in conflict the greater the potential for his support to decline.  At the same time, however, the political solution will require compromise.  Any attempt at moderation by Putin that is seen to accommodate Chechen separatists or to damage Russian prestige will be punished in the polls, argued Clifford Gaddy.


POLITICS AND THE PUTIN EFFECT

  A. Russian Culture and Democracy

On the surface, re-establishing “the politics of order” or “reclaiming the state,” however it may be put, has echoes from Russia’s past.  As Russians themselves observe, Russia has had 1000 years of authoritarianism and only 10 years of democracy.  Witnesses before the Committee disagreed on the extent to which the Tsarist and/or Soviet heritage had led Russia or Russians towards autocracy.  However, the inference from most of the testimony to the Committee on this subject is how ancient and recent historical experience have combined to invest the authority of the Russian President in the person rather than in the office of President.  The role and character of the President of Russia should not be readily discounted.

When questioned, all witnesses indicated that Russian culture was somewhat different from that of the West, and that this difference did have an effect on how Russians went about their daily lives and how they practised their politics.  However, even expert testimony had difficulty expressing clearly or adequately the exact nature of these differences, which signals to the Committee how careful one needs to be when introducing the deeper elements of cultural behaviour into the equation.  Nonetheless, a sketch of the cultural picture emerged.

Historically, Russians have valued the state for providing order.  Russia exists in “a rough neighbourhood,” as Sergei Plekhanov (Professor, Centre for International and Security Studies, York University) said.  Therefore, the Tsarist state created security from outside at the expense of the protection of the individual from the state itself.  In Russia, the costs of both security and development have been historically very high.  In the words of Sergei Plekhanov, this reality made it absolutely inevitable that the Russian state that emerged had to be extraordinarily strong, especially at the expense of society.

Furthermore, the Committee was told that Russian legal and social traditions have come in part from the Orthodox Church. Western Christian and Russian Orthodox traditions have developed differently over the past one thousand years, in particular since the Renaissance and Reformation.  According to Dr. Magosci, this difference has resulted in differences in the way that people of these religious traditions have historically thought and acted. The Orthodox Church never competed with the secular forces for political power. Rather, the Orthodox Church was integrated into the state. This removed an element of independent civil society and of legal training that existed in Western Christian traditions. Larry Black pointed out also that one of the basic props of our society is Roman contract law, which was transmitted to us through the Catholic Church but which did not come to Russia through Byzantium.

Later in Russian history, serfdom was a fact and the state was a remote, poorly conceptualized, and distant entity to most Russians.  When thought of, the state was personally embodied in the Tsar.[11]  According to Margaret Paxon (Visiting Scholar, Kennan Institute for Advanced Russian Studies and Researcher, Department of Anthropology, University of Montreal), local and personal matters were (and maybe still are) handled through the village, the family and the community, not through the state.  Therefore, Russians have historically come to expect little from involving the state in their personal affairs, and their relationship with the state has been as applicant not citizen.  Authoritarianism as an instinct pervades the system, according to John Young. 

However, according to Blair Ruble (Director, Kennan Institute for Advanced Russian Studies), individual Russians responded much as their Western counterparts did to pollsters on how they value certain indicators of democracy, such as freedom from state interference, freedom of expression, and freedom to pursue economic and leisure activities. 

There is also the issue of the legacy of the Soviet Union.  The Soviet period was one of intense modernization, urbanization and collectivization.  The Committee was told that many traditions were lost and, in some cases, there was a complete break with history, with virtually all of Russians’ present-day intuitive preferences and work habits being shaped by 70 years of being governed by the political bureaucracy of the Communist Party of the Soviet Union.

Other witnesses differed in their view.  John Young suggested that much of Russia outside the major cities retained some links with traditional rural life.  Margaret Paxon informed the Committee that one of the current stabilizing strengths of Russia was that large sectors of the economy remained outside modern Russia and that much of the country was therefore self-supporting in both the economic and the communal-spiritual meaning of the term.  Old practices continue and remain relevant in everyday life.  Other witnesses cautioned against simplistic urban-rural/modern-traditional classifications.  Many Russians, even in large towns, kept one foot in the country and one in the city.  Moreover, livestock was a regular feature of urban life.

Joan Debardeleben (Professor, Institute of European and Russian Studies, Carleton University), who has conducted extensive polling in Russia, was perhaps best able to place these general characteristics back into the context of political-cultural behaviour.  First, there is the expectation that the state should have a broad scope and be a patrimonial state.  Second, there is an emphasis on collectivism over individual achievement.  Third, there is a strong spiritual element to Russian life that tempers notions of material comfort and personal gain.  It also gives Russians a sense of human solidarity that brings with it a tremendous capacity for endurance.  All of this adds up to political choices that may privilege equality and solidarity over greater wealth and individual disparity.[12]

Professor Debardeleben was also quick to point out that this could change as Russia transforms.  In some sense, the revolution may be yet to come.

Another aspect of Russian culture and democracy concerns the idea of what democracy actually means in practice to Russians.  The answer has two parts.  First, many Russians identify democracy with their current situation, not with an abstract notion. Their experience with democracy has not been the same as ours.  For these Russians, therefore, democracy is associated with the collapse of the state and of community, and with poverty.  They link it with crime, lawlessness, corruption, and with wealthy oligarchs and powerful regional bosses.  They also associate it with crumbling social services and public infrastructure, with heating shortages and housing crises, and with the advancement of a few individuals’ well being at the expense of social decency.[13]  Second, there might be a generational aspect to how democracy is viewed. Younger Russians could be less likely to compare current conditions with Soviet ones and may perhaps be more engaged with what current Russian politics has to offer.  In short, however, reminding Russians that contemporary Russia is democratic may not necessarily the best advertisement for democracy.

This is not to say that most Russians wish to return to Soviet Communism for most do not, despite the evident existence of a hazy nostalgia for the Brezhnev era when “we pretended to work and they pretended to pay us.”  The Committee was told that Russian history and culture have provided Russians with great resilience.  Recent polling indicates that 50% of Russians say they and their family have adapted to current conditions.  Fifty-three percent of respondents said life was difficult but bearable.  By contrast, 20% said life was unbearable.  Moreover, Russians feel cautiously optimistic about the future:  a majority felt that Russia would be a “normal” society within 6-10 years.[14]

Witnesses before the Committee were less clear as to whether traditional Russian endurance and fatalism represent a sufficient commitment to, or condition for, democracy, should crises erupt.  As previously mentioned, Margaret Paxon informed the Committee that many rural Russians are insulated from the failures of transition by being completely outside the economy – existing in a “natural economy.”[15]  This may be good for stability and personal well being, but it is hardly a ringing endorsement that Russians are actively participating in, or have a stake in, formal political and economic life.

Perhaps of some significance for the future shape of Russian democracy, the Russian description of a normal society placed heavy emphasis on the importance of economic stability and basic material comfort over purer notions of democratic rights.  Polls indicate strong support for the ideas that people should be able to retire with economic security, that they should be able to find work if they want it, that their wages should not be eaten away by inflation, and that the streets should be safe.  Over 70% of Russians feel that government should be strong.  Only 58% are of the view that freedom from government or fair treatment by government was important.[16]  Then there is the tricky issue of “Westernization.”  This issue resonates with an age-old question of whether Russians are, or believe themselves to be, European or of the West.  Although the Committee cannot play Solomon on this issue, certain observations are possible and, indeed, were made during testimony.

For many Russians, contemporary democracy is linked to Western policy.  Emil Payin (Director, Centre for Ethnopolitical and Regional Studies, INDEM Foundation, Moscow) informed the Committee that democracy for some is considered a Western (i.e., alien) concept that is overly harsh, chaotic and destructive to Russian ideals.  It was Western economic advisors who helped craft privatization and Western-based multilateral institutions that set, and continue to set, the structural conditions of Russian fiscal and monetary policy.  Some Russians see these institutions and policies as actively attempting to destroy Russia, to make it weak and subservient to the West.  According to Joan Debardeleben, this opinion is particularly popular among supporters of the Communists and the Liberal Democratic Party of Russia led by Vladimir Zhirinovsky’s party (the two parties from the so-called Red-Brown coalition of Russian nationalism).

This issue of democracy arises also with regard to foreign policy.[17]  Russian identity is bound up with an image of Russia as a Great Power.  For example, Victory Day (9 May) celebrating the defeat of Germany in The Great Patriotic War (WWII) remains perhaps the single most important national celebration in Russia, and the symbolism of this celebration should not be underestimated. 

While some Russians link democracy and Russian weakness negatively, a majority of Russians consider the West more indifferently.  According to Stephen Grant, most Russians perceive the West to be neither friend nor foe.  Rather, it is a place with which Russian interests can be negotiated.  There is potential for ties to grow based on areas of mutual interest.

Therefore, domestic policy, foreign policy, democracy, and Russian identity are inextricably linked by Russia’s declared goal of transformation into an economically strong, liberal-democratic country.  The question of whether Russians under President Putin’s leadership can remake a Russian identity that somehow includes the West is vital but remained unanswerable to the Committee’s witnesses.  As noted above, public opinion findings compared with Putin’s actions show him to be only slightly and cautiously in the lead of the average Russian regarding movement in this direction.

There is one other question concerning Russian culture and identity on which the Committee has heard little evidence:  the role of the Russian Diaspora.  For the first time in Russian history, there are significant Russian communities living outside of Russia.  Russians in the former Soviet republics form a numerous and significant polity.  There are growing Russian communities in Canadian cities such as Toronto and Ottawa, and. Brighton Beach in New York is a well-established centre for the Russian Diaspora. Russian appeals to this community, particularly with regard to the question of return, indicate that there may be developing an attenuated idea of Russian-ness outside and independent of the boundaries of the Russian state.  For example, Paul Magosci (Chair of Ukrainian Studies, University of Toronto) and David Marples (Professor, Canadian Institute of Ukrainian Studies, University of Alberta) informed the Committee that ethnic Russians in Ukraine identified themselves as Russians in ethnicity and Ukrainian in citizenship.

 

B. The Yeltsin Years

Boris Yeltsin’s primary concern was the prevention of a return to Soviet Communism or the rise of right-wing authoritarianism.  In particular, he manipulated the political system to prevent a return to power of the Communist Party through the ballot box.  Central power was divested to the regions, in part to seek political allies, but also in part because the centre had no resources to deal with regional issues in the face of an unravelling federation.  The legislature was dissolved by force and a new constitution put in place to give the Presidency a prime position of authority.

To prevent a return to power by the Communist Party,[18] the largest political grouping in Russia, Boris Yeltsin created, co-opted and discarded allies and competitors with considerable frequency.[19]  As was evident during Boris Yeltsin’s long stretches of incapacity, the personal authority of the President was crucial to the proper functioning of the Russian state.  The economy was privatized quickly and in a manner that favoured the development of oligarchic monopolies rather than competitive industries and sectors.  At the time, the importance of the state in transforming the economy was underestimated.  Crucially, the sequence of economic liberalization and privatization initiated by Mikhail Gorbachev and completed by Boris Yeltsin favoured the existing apparatchiki, allowing for development of the large, sectoral monopolies[20] and oligarch-controlled financial-industrial groups still present in the Russian economy of today.  The oligarchs, in turn, became involved in politics to protect their interests.

Political and economic life in the 1990s was dominated by networks of influence and personal access based on the old mentoring and patronage relationships of the Communist Party of the Soviet Union.  These are referred to colloquially as “clans,” “tribes” or even “mafias.”[21]  Russians refer to this patronage network as krysha, the roof under which one presumably takes shelter.[22]  In talking to a Russian official or businessman,[23] it could (and still can) be more important to know with whom he is connected than what his formal title or function is.

The one legacy Yeltsin did give Russia was a lasting framework for free elections and the relative freedom of expression.  The constitution, perhaps questionable in the legitimacy of its origins, has held to become a commonly observed set of rules.  Elections, although structurally biased in favour of the government with regard to money and access to the media, have been free and fair.  Ironically, Russia has yet to have a change of government through the ballot box.  Such an election will be a critical test of democracy.

President Yeltsin was reluctant to name a successor until he was certain that reversion to Communism was impossible.  The Committee heard evidence that this certainty is now apparent.  To quote Patrick Armstrong (Directorate of Strategic Analysis, Department of National Defence):[24]  “The toothpaste cannot be put back in the tube.”  Too many levers of power have disappeared from the Russian state for these to be reassembled.

Important to the Committee’s consideration of President Putin’s regime, the instrument Boris Yeltsin left for the task of democracy and transition is a powerful, top-down presidency that operates as much through personal authority as it does through institutional mechanisms.  The task for Vladimir Putin is to reassemble enough levers to govern effectively, while retaining and building on those positive developments from the Yeltsin era.  The challenge is an age-old Russian one. 

Do President Putin’s attempts to reinvest central authority into the Russian state represent either the attempt or the inadvertent capability to re-create an authoritarian regime in Russia?  This question lies at the core of the Committee’s initial phase of investigations.  The answers must be discerned, as far as possible, from evidence the Committee heard in the following areas.

 

C. Russian Electoral Politics

The Russian political spectrum is more kaleidoscope than spectrum.  Most political parties are not parties in the Western sense.  There is little permanent organization or professional party activity at a constituency level.[25]  As a result, there has been little coherence, consistent issue linkage or priorization in Russian politics amongst either the electorate or the elected. The public face of Russia’s democracy is hyper-kinetic and fractious.

Although President Putin’s efforts to improve the standard of living in Russia appear to be positive, the long-term verdict on the President’s political reforms is unclear.  Certainly, many of his policies attempt to correct difficulties introduced by transformation in Russia since 1991.  On the other hand, some would argue that President Putin’s methods and chosen instruments, especially his reliance on the security services and on personal authority, do little to display an understanding of the state being based on the law rather than the law being based on the state.  President Putin’s effectiveness appears to rest on his personal authority and popularity.  As long as a large degree of presidential discretion remains and it appears unclear that habits of law-based democratic governance have been fully instilled, the future of economic reforms and democratic values will continue to be uncertain.

This analysis is troubling for some observers.  Witnesses noted that set in the context of Russian history, a number of the Russian government’s recent actions could appear to cast a negative light on hoped-for democratization.  John Young stated, “When you combine some of these changes with Mr. Putin’s war on the media, the Kursk scenario and the imbroglio of spies with the United States, there is a fair amount of discussion as to whether or not President Putin is reforging an autocratic system and Russia is headed backwards”.  He did, however, add that, on balance, this was not in fact the case.

1. Free Elections

Most witnesses were of the view that, for the most part, Russian elections are reasonably free and fair.  Indeed, Patrick Armstrong was an observer of elections in the 1990s and he noted that he had no problems with the technical veracity of the results.  It is less clear, he went on to elaborate, whether those results match our interpretation of them.  Russians, the Committee was told, like to know whom they are supposed to vote for.  Only one election resulted in strategic voting.

In regional and local elections, it seemed clear that people knew whom they were to vote for.  By inference, Russians like a strong, authoritative figure.  They also like to vote for parties and people that represent connected elites, namely people in positions of influence.  Russians call this preference the search for a “party of power.”  This echoes what the Committee heard from other witnesses about Russians’ cultural interpretations of democracy.

2. Electoral Support for President Putin and the Duma

Vladimir Putin is the most popular politician in Russia.[26]  Set against the legacy of Boris Yeltsin, he is seen by many Russians as a “law and order” President and a “moral values” President.  He came to prominence and power through his handling of the Chechen brief, first as President Yeltsin’s Special Envoy to the region and then later on an electoral campaign promising to get tough with Chechen terrorism.[27]  His image embodies a mixture of personal discipline and a commitment to public values and service to the state.  In policy terms, this aspect of his image translates into anti-corruption strategies and the rule of law, a strengthening of the capacity of the state, and the instilling of values in public life.

However, as Clifford Gaddy (Fellow, Economic Studies and Foreign Policy Studies, The Brookings Institution) and Fiona Hill (Fellow, Foreign Policy Studies, The Brookings Institution) informed the Committee regarding the Chechnya issue, this platform constrains President Putin as well as supports him.  Where he has attempted to move away from his core message he has found his flexibility circumscribed.  Fergal O’Reilly (Export Development Corporation) noted that President Putin has been extremely cautious in order not to move from positions that could damage his popularity.  These observations could not be overestimated:  several witnesses indicated that much of President Putin’s policy-making has been based on maintaining his popular support.[28]

Compared to the Presidency, political parties and Duma politicians do not fare well in popularity.  Many Russians see them as largely irrelevant and ineffective.  Forty percent of all Russians identify with none of the political parties on offer.  The largest faction in the Duma – the Communists – captured 24.3% of the 1999 vote.  The two centrist parties, Unity and Fatherland–All Russia, garnered 23.3% support and 13.3% respectively.[29]

A key factor in these results is the institutional balance between the Presidency and the legislature.  In the wake of the 1993-armed showdown between the legislature and the President, Boris Yeltsin crafted a constitution providing overwhelming powers to the President.  The Duma’s role is consequently a more consultative one.  It can defeat the government, it can block the appointment of ministers, it must approve the budget and it can impeach the President.  However, some of these actions, if taken, would also invoke the Duma’s own dissolution.  Most deputies must also consider whether they would wish to face the Russian electorate in such circumstances.  Finally, it is the President who appoints the government, and to date the Cabinet and the Prime Minister have never represented the largest party – the Communists.

The electoral system has also contributed to a somewhat dysfunctional domestic political situation.  It is a 50-50 party list and individual candidates system, which has distorted representation.  Many parties failed to make the 5% (of the popular vote) threshold required to gain a seat in the Duma.  Therefore, a significant section of the electorate saw its vote come to nothing.  Several parties over the 5% threshold have been over represented (or underrepresented) through the list combination.  This development, together with the weakness of parties in the parliament and the introduction of many new politicians, has resulted in Duma politics having been less effectively policy-oriented than it might otherwise have been.  Party and party-platform development have suffered somewhat.  New legislation on political parties was passed in the fall of 2001, but its impact remains unclear.[30]

The Committee heard that the weakened Duma is important to how Russians view democracy.  As Joan Debardeleben noted, Russian citizens are disillusioned with party democracy as it currently functions, in part because they do not see a connection between whom they vote for and what kind of government they get.  By contrast, the Presidency under Putin is seen as active, vibrant and effective.

The Committee was also informed that the association Russians make between democracy, the West and their current condition compounds this problem for the Duma parties.  Democracy and democratic parties have been affected by the failures of the Yeltsin regime as much as they have by their own ineffectiveness.  In short, as Professor Debardeleben indicated, the condition of peoples’ lives has left little patience or support for politicians who advocate Western democracy by name.

However, other witnesses informed the Committee that Russians do support many of the elements associated with liberal democracy.  They value freedom of expression, for example, and believe that the removal of the command economy is irreversible.  There was little evidence for, and much evidence against, the capacity of the state to “turn back the clock” to Soviet-style communism.  Rather, what people react most strongly against are the perceived cruelties of a system based on individual gain at the expense of the weaker members of the community.  The values of collectivism run deep and currently appear hostile to the fortunes of those who advocate Western, liberal, economic policies.

3. Presidential–Duma Relations

The Committee was made aware that co-operation between the Presidency and the Duma has been a hallmark of the Putin period.  Many witnesses commented that President Putin has enjoyed co-operation where President Yeltsin did not.  This has enabled President Putin to lay the groundwork slowly and effectively for major reforms, such as the ambitious package of legislation (i.e., land reform, tax reform, deregulation and transportation infrastructure) that was put to the Duma in May 2001 and successfully passed.[31]  Fergal O’Reilly described what he termed an 18-month period of laying the groundwork, culminating in the crystallization of policy.  The Committee was also informed that any one of these aforementioned bills would constitute the major work of a government’s electoral cycle.

This heightened level of co-operation can be attributed to three factors.  One is President Putin’s popularity in combination with the clarity of his overall message.  The second is the establishment, for the first time, of an effective pro-presidential party in the Duma – Unity.  The third is a maturation of party politics.  The most recent Duma has seen a reduction in the number of parties and the establishment of a political centre consisting of Unity combined with the other centrist party Fatherland–All Russia.  Between them they represent the major factions of those aligned with Russia’s political and economic elites and are, in essence, the “party of power” many Russians want.[32]

In opposition, the Democrats have consolidated into two factions – Yabloko and the Union of Right Forces.  The Union of Right Forces is generally pro-administration.  Yabloko, while retaining its independent position as an opposition party to the Government, will support moves to reform the economy and politics in a liberal direction.

The Communist Party of the Russian Federation (KPRF), while still the largest single faction, has occasionally sought the role of constructive opposition in order to retain electoral viability for its leader, Gennady Zyuganov.   The Liberal Democratic Party of Russia (LDPR) remains as the sole and minor presence of the Russian extreme right.

Several witnesses expressed a note of caution about the current formulation of Russian politics.  For these witnesses, President Putin’s solution to the Duma, namely Unity, is another example of a top-down management approach.  As Joan Debardeleben noted to the Committee, “these kinds of elite coalitions that you are talking about may give Putin some tools with which to pass some of his initiatives, which may be a good thing, but that power may not reflect the ability of Russian citizens to see the Parliament as any kind of vehicle for representation.  It is a double-edged sword.”

After the Committee heard testimony on this issue, political parties gathered in January 2002 to bring their structure and documentation in conformity with the law “on the parties.”  More effort is being placed by the major parties on establishing a broad presence across the regions.  The opposition parties have expressed concerns about a new term or understanding:  “managed democracy.”  According to the opposition, in managed democracy the government and the law serve the state, the media is subject to too much control, the centre has too much influence over candidates and elections at the expense of the regions, and too much power has been transferred to the Kremlin.

 

D. The Regions

According to testimony, President Putin has been largely effective in the short-term in achieving his policy of reclaiming federal authority and rebuilding the capacity of the state.

1. Centre-Periphery Relations:  the Restoration of Power at the Centre

The Committee was told that when Vladimir Putin became President, the authority of Moscow, specifically that of the Kremlin, could not always be said to extend widely or deeply into the country.  The reality of post-Soviet Russia was that fundamental elements of economic and political transformation were in the hands of the regional and local authorities.  For an average Russian, the experiences of transition could be shaped primarily by local circumstances.

There are 89 “regions” of the Russian Federation.  These range from the largest cities (Moscow and St. Petersburg) to autonomous regions, which are based on a nominal ethnicity, to administrative regions larger in area than most countries (see map in Appendix A).  These jurisdictions are legacies of internal Soviet divisions, often drawn up to meet Soviet criteria.  They have differing powers and responsibilities, with republics and autonomous jurisdictions nominally possessing greater powers (including their own constitutions and presidencies) and independence than do most regions (i.e., oblasts).

As many witnesses informed the Committee, under President Yeltsin the regions were encouraged to “bite off as much (power) as they could swallow.”  Indeed, some regions came under the control of powerful governors.  In the case of Primorsky Krai in the Far East, corruption and mismanagement reached the level of a national scandal.

More significantly, Russian federalism was fractured, with each region using its leverage (usually a natural resource and tax base) to negotiate separate powers with the centre. Tax and duty collection has been problematic, enforcement of federal laws haphazard and standardization an issue.

For investors, this uncertainty is telling.  Not only does one have to deal with central authorities, but one also has to deal separately with regional authorities.  Mr. Ivany (Executive Vice President, Kinross Gold) outlined the importance of understanding local (regional) workings in ensuring the success of the company’s operations.  Almost all of the facilitation on the ground came ultimately from the local level.

It is against this backdrop, the Committee was told repeatedly, that President Putin has attempted to work with the regions by “restoring the power vertical.”  He has created seven “super-governors” or Presidential Representatives, each with jurisdiction over all federal laws in their region.  Specifically targeted were those areas crucial to the provision of political and economic means of renewal to the federal Russian state, such as tax inspection, treasury officials, federal prosecutors, and the security forces.  Ideally, these seven representatives were to become a consistent voice for Moscow in the regions and to insulate the financial, judicial and security arms of the Kremlin from powerful local governors.

To discuss these (and other) issues, members of the Committee met with Presidential Representative to the Volga Region and Russia’s representative on the Chemical  Weapons Convention Sergei Kiriyenko.  He described his regional role as one of persuasion, coordination and ensuring the standardization of federal jurisdiction across his region. He refuted the notion that the Presidential Representatives were plenipotentiaries or “super-governors.

These Presidential Representatives are recent innovations and it remains too soon for witnesses to assess whether, in the long-term, President Putin may have created another tier of government to little effect. In the short-term, they appear to have been an energetic addition to federal-regional relations.

President Putin has also ordered that all republic and regional laws be brought into line with federal laws in cases where the former are deemed to be unconstitutional.  Many regional laws were aimed directly at negating a federal presence in the region.  For example: Mr. Kiriyenko related how important oil- and gas-rich Yakutia (Republic of Sakha) passed a law declaring only Yakuts and English as official languages.

This attempt to harmonize existing laws has exceeded all others before it.  Apart from symbolic importance, this initiative helps clarify the jurisdiction and the administration of federal bureaucracy, notably law enforcement, across the country.  Administratively, Putin has created a State Council, comprising all the regional governors, which meets quarterly.  The Russian leader has also concentrated revenues in the centre when, according to John Young, one-half of these should be returned to the regions.  The President has also obtained the power to dismiss regional governors, though in practice such action would be politically difficult and time-consuming.

President Putin has also adjusted the role of regional governors in the central government.  Under President Yeltsin, regional governors were invested in the Federation Council (the upper house of the Russian Parliament, with the lower house being the Duma), in order to strengthen Yeltsin’s hand.  Over the course of 2002, representatives from the regions chosen at the regional level will replace governors through a process of gradual rotation.  This switch both defuses the potential leverage that regional governors may hold against the Kremlin and tempers the role that they may play on the national stage.  It also removes what might possibly be less effective ex officio members from the council (i.e., those regional governors who might rarely be able to make time to come and sit) and replaces them with full-time representatives.

Witnesses informed the Committee that one emerging pattern of President Putin’s approach was that he has promoted solutions that centralize problems in the federal system, rather than encourage the sort of co-operative, intergovernmental relationships that tend to be associated with an effective federal system.  Under President Putin, the process has been consultative, but there is no guarantee of the same under a different leader.  As some witnesses noted, while rules and mechanisms have been put in place, the authority continues to remain with Putin.  A change of Presidency could lead to the regions re-asserting their independence.

 

2. Local Politics:  Neglect of the Third Tier

If little attention has traditionally been paid to regional politics in Russia, even less has been paid to local government.  Yet since it is local governments that deliver state services, this level of government maintains a strong potential to greatly shape many Russian citizens’ experience of transition.  Recent pronouncements by President Putin indicate that he has recognized the need to bring the municipal tier into some effective order to further reforms.  The social welfare of Russians, in the end, is somewhat dependent on the local delivery of services.

Local government is more a transmission belt for federal services than the model of local self-government as we know it in Canada.  Witnesses explained that the average Russian considers that local governments cannot be relied upon to provide even the most basic services.  However, this is the level of government that is supposed to deliver such services as housing, education, health, social services, and transportation, among others.  The problem is that the federal and regional governments have no vested interest in reallocating funds to balance fiscal problems, with the result that there tends to be a 30-40% shortfall in funds.  According to John Young, one way to get around this dilemma is to relocate several services (e.g., health care) from the tertiary tier to the regional or federal one.

As a result, many rural and municipal conditions can be extremely trying outside the large urban centres.  As an example, Murray Feshbach estimated that simply repairing the water pipes of Russia, many of which currently comprise unlined lead tubing, would cost in the hundreds of billions of dollars.  Roads outside the major cities can be impassable, the Committee was also told.

Certain municipalities, many of which serve as company towns with factories that defy economic logic in a market economy, are simply not viable.  Eastern and northern towns are especially negative inputs in the economy, according to Clifford Gaddy.  To help deal with this situation, the International Monetary Fund (IMF) and Russia have introduced a US$80 million pilot project to shut down three northern towns by providing housing vouchers for those who wish to move.

On the positive side, other municipalities have demonstrated how they can use the powers granted to them to promote investment and growth where there is cooperation between the secondary and the tertiary tier levels of government.  The Committee was told of the town of Novgorod Veliky, which possesses clear lines of authority and a clear division of powers.  That clarity (and stability) in evidence there brought a fair amount of investment to the city, particularly through 1994-1997.  According to John Young, a Cadbury chocolate plant was built by the municipal government in partnership with Cadbury and with the regional backing of the oblast.  This confirms the emphatic statement of Hans-Martin Boehmer (Country Program Coordinator for the Russian Federation, World Bank) that the crucial factor for investment in Russia is “transparency, transparency, transparency.”

In some cases, local vulnerabilities create problems for municipal administrators and legislators.  For example, a lack of resources may leave them vulnerable to the regional governors.  John Young gave the example of the Komi Republic:  “The President of the Komi Republic comes to the city council and he says, here is my nominee for mayor, and the city councillors ratify [the choice of mayor].  I know of two cases where city councillors said they didn’t agree.  In response the president of the republic strong-armed the men and withheld revenues until they complied.  (And) in some cases, there is still this local elite connected to this apparatus within the republic.  In those cases, it is not just a question of money.”

It should also be noted that Canadian municipalities fund services from property taxes, and local boards and council administer those funds.  To do so in Russia would first require wholesale property reform.  Some legislation has only just been passed and implementation remains to be accomplished.  For the foreseeable future, Russian municipalities will be wholly reliant on the other two tiers of government.

The combination of poor resources, little ability to develop local self-government, electoral apathy and a potential for corruption or mismanagement makes reform of local government critical to the eventual success of Russia’s transformation.  Municipal successes such as Novgorod Veliky, Samara and Nizhny Novgorod highlight this point.

 

E. Human Rights

Considerable time was spent by the Committee on a series of issues that fall under the broad rubric of democracy and human rights.

1. Curbing the Media and the Oligarchs

The Committee heard testimony that journalists and newspapers faced difficult times.  Aurel Braun (Professor, Centre for Russian and East European Studies, University of Toronto) indicated that his journalists in Russia were feeling a chill.  Another witness, Larry Black, referred to the situation as more of a voluntary self-censorship by the media, not a stifling of the freedom of the press.

It should also be noted that scrutiny by even the most casual observer would reveal a vibrant, irreverent press representative of a literate and politically aware society.  Censorship of the Soviet style seems relegated to the past.  Andrea Chandler told the Committee, “There have been several dramatic changes.  Speaking anecdotally from my own experiences, they are very open to free ideas.  They are avid readers, and they are very critical of what they read.  They are more outspoken politically than they used to be.  They are probably much more aware of politics and events in their own country than many Canadians.  These are very positive signs.  I have not seen any deterioration.”

In contrast to the Soviet era, freedom of expression is flourishing.  However, the Committee was frequently made aware of an important area of concern.  Under President Putin, who has shown little appreciation of the role of “loyal opposition” or the fourth estate,[33] Russia has moved strongly against elements of the independent media. 

The state retains interest in two major television channels, namely ORT (Russian Public Television) and a majority share in RTR (All Russian State TV and Radio Company).  Other media sources are typically controlled by the country’s oligarchs.  Attempts by the media to criticize the Kremlin over Chechnya in 1999 led to vigorous criticisms of the media by the state. 

The most high-profile case is that of Vladimir Guzinsky, owner of Media-MOST and its subsidiary NTV.  NTV offices have been raided, and Guzinsky arrested and then released on bail.  He now sits in de facto exile in Spain with charges of corruption pending should he ever return to Russia.  As for the company, NTV was to be turned over to the huge federally controlled gas company Gazprom but a Russian court forced NTV into liquidation earlier this year.  Guzinsky’s oligarchic counterpart, Boris Berezovsky, is also under investigation while in exile in London.

The Committee was informed that the above actions, together with threatened arrests of the owner of the nickel giant Norilsk and other enterprises, are part of President Putin’s attempts to undermine the position of the oligarchs in the economy and in politics.  It is against this background that witnesses told the Committee that the oligarch-based media empires should not necessarily be thought of as defenders of freedom and democracy, nor Putin’s campaign to be one against the media.  In principle, removing the influence of oligarchs and media giants that have close personal or economic ties to the state could be interpreted as progress towards normalizing the economy. 

There remains the possibility that the oligarchs who work with the President and for his programs are left untouched.  According to Stephen Grant, many Russians have read the situation in such a manner and therefore remain little concerned over the fate of the media.  While current developments in the world of media should not be seen as a silencing of the press per se, they may represent the side effect of Putin’s campaign against the oligarchs. 

2. Other Media Concerns

Other Committee evidence suggests that more regular concerns exist for the media.  For example, the Russian media has to deal with market forces.  Media outlets, particularly those outside Moscow and St. Petersburg, are experiencing financial difficulties.  There is little money to spend on advertising and distribution networks are uneven at best, especially in the countryside.  Moreover, the costs of inputs have risen to reflect real-world pricing, and necessary inputs such as newsprint or ink are sometimes hard to come by.  Many people cannot afford to buy magazines and newspapers at true market costs.

There have also been reports of journalists and newspapers being targeted by local authorities.  More subtle pressures have been used to silence unwelcome scrutiny as well.  Licenses, fire regulations, building codes and building designation (zoning) are all tools local authorities can use to disrupt local media outlets.

The cumulative effect of all of these issues has been a shrinking of local media outlets, rendering the significance of national media issues such as the Media-MOST/NTV affair that much greater.  Most Russians receive their news from national, state-owned television and radio.  The potential for state-owned media to affect Russian attitudes was evident during the NATO campaigns in Kosovo, where Russian state-run media coverage was heavily slanted towards portraying NATO’s actions as those of the aggressor. The Committee recognizes the value of the media to a functioning democracy and expressed its concern when testimony on the media was presented.

 

3. The Role of the Security Forces

The Committee heard evidence calling into question the extent and role the security forces have in Russia.  There are several security agencies in the country, with the one of primary concern being the FSB (Federal Security Service).

Witnesses raised two general types of concern.  The first of these was the connection of Vladimir Putin, an ex-KGB and FSB agent, to the security forces.  Amy Knight (Adjunct Professor, Department of Political Science, Carleton University) drew attention to President Putin’s career path and to the fact that he tends to appoint former colleagues from the KGB and the FSB, whom apparently he trusts.  Five of the seven Presidential Representatives to the regions are former FSB personnel.  Sergei Ivanov, ex-Chief of the Security Council and current Minister of Defence, worked with and for President Putin in the FSB in St. Petersburg.  Professor Knight expressed concern that a security-first mentality would colour the operations of government and signal a return to some form of a security state.

The second issue of concern mentioned by witnesses is a perceived reliance on the security forces to implement policy, in combination with the sometimes heavy-handedness of their actions.  Perhaps most troubling is the case of Igor Sutyagin, a researcher for the Russian Academy of Science’s Institute of Canada-USA Studies who was charged with treason in light of his co-operation with Canadian (Carleton University) and British colleagues.  The FSB objected to Sutyagin’s analyzing and comparing open-source (publicly available) material on civil–military relations, claiming that analysis  “creates” state secrets.[34]  This experience was similar to that of environmentalist Alexander Nikitin, whose case was eventually dismissed but only after a considerable period of imprisonment and appeal.

Civil society groups are generally treated with suspicion by the state.[35]  Human rights groups and other NGOs must register with the government in order to be active.  Those who do not are vulnerable to prosecution.  Patrick Armstrong indicated to the Committee that these actions undermine President Putin’s goals.  In his opinion, such actions reflect a poor understanding of the law and legality by security organizations, rather than reflecting official Russian policy.

 

4. Judicial Reform[36]

Most of the evidence on judicial reform before the Committee concerned economic matters, and will be dealt with in the section of the report on the Russian economy. 

However, some information was provided on issues regarding human rights and the independence of the courts.  Perhaps the single most important statement heard was that the defendants won the majority of human rights cases ending up in front of the courts.  Peter Solomon (Professor, Centre for Russian and East European Studies, University of Toronto) placed the success rate of a citizen against a public official at around 80%.

He also emphasized that there is a credibility lag between public perceptions and the proposition that individuals can receive a fair trial.  This lag has led to what can be termed an insufficient demand for law.  The courts are not turned to because they are seen, incorrectly in many cases, as not being fair or effective.  This issue needs to be recognized and addressed.


THE RUSSIAN ECONOMY:  CURRENT DEVELOPMENTS AND REFORM CHALLENGES

A The Existing Economic Situation

For the most part, the economic record of the post-Soviet period in Russia can be categorized as disappointing.  Output declined by 40% in real terms between 1989 and 1998, inflation rose significantly and the country had to endure several economic crises. 

Recent Russian economic indicators have been considerably more favourable, however.  The economy registered strong year-over-year growth in 2001 (5.2%) and the central government expects the country’s GDP to rise by 4.3% in 2002.  Although this growth is below the 8% rate of growth Russian President Vladimir Putin believes is required over a 15-year period to catch up to the current economic status of certain European Union countries (e.g., Spain, Portugal), it is still a considerable improvement over the economy’s performance of the 1990s. 

Russia is also one of the few countries displaying strong growth during the current global economic downturn.  One could add to this achievement that a fiscal surplus has existed recently at the national level,[37] that the trade ledger continues to be in a surplus position of approximately US$50 billion,[38] that gold reserves are at extremely high levels, that personal income has now recovered to the pre-1998 level, and that inflation has fallen to 18.6%. 

Many of the witnesses appearing before the Committee stressed that Russia’s favourable economic performance could be primarily attributed to a number of temporary factors.  First and foremost, the August 1998 financial crisis led to a drastic and uncontrolled devaluation of the Russian rouble.  The value of the currency dropped by roughly 70% of its previous exchange rate, making the cost of imports much higher and providing domestic manufacturers with an opportunity to compete with imported products.  Domestic demand thus rebounded at the expense of imports.[39] 

The second contributing factor was the existence of high commodity prices, especially oil, caused by the success of the Organization of Petroleum Exporting Countries (OPEC) in restricting oil production.  Oil and gas exports, accounting for 70-80% of total exports, are a major source of foreign exchange earnings.  As Roger Ebel (Energy Director, Centre for Strategic and International Studies, Washington) informed the Committee, Russia is a major and reliable supplier that does not play games with oil – for the most part, it sells as much oil as it can.  It is the number two exporter after Saudi Arabia, and the Caspian Sea represents the most significant find in the past thirty years.

The experience of successful transition economies demonstrates that the attainment of structural reforms typically comprises the single largest contribution to economic growth.  It is considered by many unfortunate that Russia did not use the breathing room accorded to it by devaluation and high oil prices to put in place more quickly the necessary economic reforms.  The appreciation of the rouble’s real exchange rate and the decline in international oil prices following the events of September 11th have already resulted in an easing of economic growth.

Until recently, analysts had given less credit to the structural reform efforts currently under way in Russia for the economic recovery that the country is now experiencing.  However, the recovery is presently on a more sustained footing now that it is being driven by domestic demand (i.e., household consumption) rather than external demand.  Moreover, the positive economic impacts of the government’s tax reform (easing) are starting to take effect. 

Russia’s eventual entry into the World Trade Organization (WTO) should be another factor exerting a positive impact on Russia’s economic growth, exports and on the country’s living standards.  Russia plans to have all of the legislation required for the WTO accession passed by the Duma by the fall of 2002, paving the way for accession in 2003.  Once the legislation is in place, efforts will turn to implementing and enforcing the new laws.  This process is expected to be finalized by mid-2003, which coincides with the expected completion of the tasks of the WTO working party on Russia.

A key issue facing the country is the WTO requirement that average import tariffs decline below the 10% acceptable threshold.  The Russian government has asked the WTO for a seven-year transition period to reach this objective and claims that its long-term goal is to lower tariffs to the 3-4% levels found in the United States and European Union.

When asked by a Senator to identify the key Canada–Russia issue, Deputy Prime Minister Sergei Kiriyenko stated that it was accession to the WTO.  It appears that efforts to assist the country in this process have intensified as a result of Russia’s co-operation in the current war on terrorism.  However, Mr. Kiriyenko noted that Russia was not requesting privileged status, and that it would want to join in the same way as other countries do.  The Committee wholeheartedly supports Russia’s speedy accession to the WTO.

Achieving sustainable economic growth will depend largely on the extent to which domestic citizens, and to some extent foreign residents, invest in the country.  While Russia has undergone a short-term investment revival, most of this investment was financed out of companies’ retained earnings and thus was heavily dependent on continued positive corporate profit results.  The reality is that the country has experienced a marked slowdown in the level of investment.  Enhancing the investment climate in Russia remains a key challenge for the economy and for the country’s policy-makers. 

It should be no surprise that Russia’s investment figures have been less than optimal, given the need for an accommodating business climate.  Many Russian producers, lenders and borrowers have traditionally not had the desired level of confidence in the economy and specifically in the protection of their investments. 

The fact is that there have historically existed too many regulations in the country and not enough enforcement of the rule of law.  Few Russians have risked starting new businesses as long as they have had to contend with a corrupt bureaucracy, unenforceable contracts and restrictions on owning land.[40]  Taxation and bureaucratic inefficiencies have been other challenges facing investors, although reform is under way to deal with these impediments.  Crime and corruption have been widespread,[41] with foreign investors sometimes subject to extortion or seizure of assets.  Angus Smith referred to estimates suggesting that up to 85% of Russia’s commercial banks and up to 40% of its private companies were under either direct or indirect criminal control. 

Mr. Kiriyenko indicated to the Committee that the level of domestic investment was insufficient to sustain economic growth and that foreign investment was valued by the Russian government.  He outlined a number of steps that the government had taken or was taking to attract more of this investment:[42]

·                    bringing regional legislation into conformity with the Constitution;

·                    reforming the domestic taxation system to lower tax rates, resulting in the most liberal tax system in the G8;

·                    privatizing ownership of non-agricultural land; and

·                    undertaking reform of Russia’s judicial system.

A key obstacle to economic development has been the lack of a nascent small business sector of the magnitude experienced by more successful countries.  Hans-Martin Boehmer noted that employment from small businesses in Russia totalled only 20%, whereas it would optimally be up around the 50% mark.  His evaluation of the growth in the small business sector was not encouraging.

Another symptom of a weak business climate is that Russian individuals and companies have been exporting capital at a rate of approximately US$2 billion per month.  Root causes of capital flight from Russia have typically included the presence of an unsettled political environment (not a factor any more), macroeconomic instability, relatively high and unevenly enforced tax rates (these have been reduced), an insolvent banking system, and weak protection of property rights.  To this mix can be added the ability of Russia’s large natural resource monopolies and other large industrial firms to force their will on smaller enterprises.  As Angus Smith told the Committee, there is also a substantial criminal (organized crime) element to this diversion of funds.  The outflow of capital imposes a significant economic cost, given that it redirects investment funds away from productive uses within Russia itself. 

There is general agreement that capital flight needs to be halted and reversed, but, according to Keith Bush, such a reversal will take years.  The Russian authorities have been attempting to limit capital flight through an economic reform program as well as, albeit unsuccessfully, through the use of capital controls.

Finally, government debt represents a significant drag on the economy.  Larry Black brought to the Committee’s attention what has been coined the Year 2003 problem.  According to Professor Black, this is the date by which some $17-$18 billion[43] in debt repayment will have to be made[44] without additional rescheduling, a demographic crisis will appear,[45] and the ongoing decay of the country’s infrastructure will be most widely felt.  He saw an important role for Canada to play in facilitating the rescheduling of Russia’s debt.  Keith Bush echoed this view, noting that repayment of debt was hampering important domestic spending initiatives such as the much-needed revitalization of the country’s infrastructure.  On the positive side, a thawing of Russia’s relations with the United States, accentuated by Russian security co-operation in the wake of the terrorist attacks of September 11th, augurs well for any necessary future debt rescheduling.

 

B. Legislative Reform and the Challenge of Implementation

Over the years, Russia has made progress in eliminating central planning and establishing a market system, liberalizing prices and privatizing the bulk of the government’s assets.  These are all typically important elements of a successful transition to a market economy.

However, institutional roadblocks to development remain.  The Committee heard that the country will have to make important progress in its reform efforts to improve its legal/judiciary system, its excessive and stifling bureaucracy, its non-market-based agricultural sector, its financial system, corporate governance,[46] and other key institutional elements.  Renewed determination has now succeeded in pushing a number of important reforms through legislative channels.  The government has produced a wide-ranging package of structural reforms, the most concentrated reform effort since the process began in 1991.  The Duma’s spring 2001 session resulted in the adoption of over 150 laws touching on virtually every aspect of day-to-day life.  These included several important reforms involving a second tax reform, a land code affecting urban land owners,[47] currency liberalization measures, and a number of measures designed to lighten the regulatory burden on business and reduce bureaucracy.[48]

Ambitious additional reform plans were put in place for the autumn session of 2001 encompassing a number of more contentious reforms.  Such initiatives included changes to the judicial system, a reform of the banking sector, agricultural land reform, reform of the natural monopolies (e.g., power and electricity), corporate governance and competition policy, the revamping of production-sharing legislation for foreign investors,[49] a new pension scheme, and a new customs code. 

This year, more liberal laws on licensing and a curtailment of state inspections and audits entered into force in January.  The new labour code, which entered into force in February, allows greater flexibility for companies to dismiss employees. It also increases worker protection regarding collective bargaining rights and increases the minimum wage.  The newly passed draft of the customs code should also enter the statute books in 2002.

Compared to these big headline reforms, the agenda for 2002 is narrower and more technical, but nevertheless important. The focus is on areas such as bankruptcy legislation, the law on standardization and certification, small business taxation, and electricity sector reform.  Little has yet been broached about reforming the civil service, although President Putin has established a working group on the issue.

On the negative side, these reforms could encounter significant opposition and be even more difficult to implement than President Putin’s first round of reforms, given the relatively weak administrative capacity in place.  With legislation for many reforms now in place, the focus is clearly shifting toward their implementation and enforcement.  The problem is that without real implementation by Russia’s bureaucracy, the passage of the legislation will have been for naught.  To put these reforms in place, and then to enforce them effectively, will take a bureaucracy able to cope with the government’s ambitious agenda.  Finally, the Committee asked several witnesses whether Russian economic reform would perhaps benefit from a more authoritarian government to provide stability.  The answers were almost all universally negative.  Russians would not accept a return to heavy government interference and any attempts to do so would upset domestic reform expectations, as well as the expectations of the international community.

Aurel Braun informed the Committee that given Russia’s past and its current institutional arrangements, a Pinochet-style government would be inappropriate.  Joan Debardeleben noted that the question was moot since Russia was not China and the sequence of reforms could not be reversed.  Vladimir Popov told the Committee that institutional strength, not the form of government, is the key.  He noted that there were relative economic successes among both democratic and authoritarian post-Soviet states, with the criteria for success being the ability to regulate effectively.  John Young emphasized the importance of having clear rules when discussing investment at the local level.  Hans-Martin Boehmer stressed the importance of rule of law and transparency.

1. Reforming the Legal System

The Committee heard from witnesses that Russia’s legal system remains in a state of transition.  The list of challenges that the system faces is long:  major areas of law are incomplete; there is a need to streamline the legal system and to complete the task of harmonizing the often conflicting laws that exist between the different levels of government; the judiciary lacks independence and specialization; and the state needs to protect property rights through the clarification of contract law and the enforcement of business contracts.  According to Peter Solomon, Russian courts lack the critical funding mechanisms required to enforce decisions, a gap that renders them much less effective than they should be.  “To be sure, the full realization of these achievements has been hampered by the underfunding of the courts by the federal government, which has allowed regional and local governments, and even private firms, to become unofficial sponsors of the courts, potentially threatening their new-found independence.”

Moreover, as Aurel Braun informed the Committee, judges are “generally poorly trained, badly paid and have a rather low social status.  They continue to exhibit the old Soviet reflection of looking for political direction and guidance for judicial decisions.  Consequently, the general population has little faith in the probity and effectiveness of the judicial system, and the business community even less so.” 

Organized crime may remain a large factor in doing business in Russia, although the evidence tends to be anecdotal.  Stories of Russian or Western investors being forced out by violence or threat of violence are common, but largely undocumented.  What can be stated is that there are many murders in Russia, including an unusually high proportion of bankers.  Many of these murders are alleged to be part of organized crime.  However, the Committee heard no evidence of concrete or documented cases.

Notwithstanding the above, there is a need to deal with organized crime, a problem that has often rendered property rights meaningless.  One solution would be to have the police actually provide protection from physical threats.  Without adequate protection, investment will likely suffer and the desired economic efficiency not be attained. 

The issue of corruption arose frequently during the Committee’s deliberations.  Corruption itself is an awkward concept in the Russian context.  A decade ago, the Soviet economy was characterized by apparently contradictory elements, capitalism and a market economy were illegal, and individuals used access to public resources as coin.  ”Blat” approximately translated as influence or exchange or favours, was important and remains so today.  The line between what is and is not corrupt practice remains blurred.

Under Yeltsin, privatization (privitatsia) was known as prikhvitatsia (“grabbing”).  Yeltsin’s economic advisors, led by Anatoly Chubais, encouraged state managers and entrepreneurs (of whom some became oligarchs) to grab what they could.  The thinking was that rapid privatization of the economy would create a class with a stake in maintaining a capitalist economy.  However, the new capitalists also appear to have maintained the close, Soviet-based, connection of state officials and economic interests whereby trading influence was perhaps more important than trading goods.  Once they had secured Russia’s most valuable assets, capital flight became more prevalent than investment and growth as assets were transferred to more stable, Western environments.

At lower levels, the over-bureaucratization of the state, in combination with low wage levels and in some cases wage arrears, provided ample opportunity and incentive for corruption.[50]

Increasing the salaries of police officers and other officials is one option that has been suggested to reduce bureaucratic corruption.  Another approach would involve other countries, such as Canada, clearly demonstrating that no business can be conducted in an environment where corruption is rife.  One Committee member remarked that the Netherlands had already made its foreign aid conditional on minimal levels of corruption within aid-recipient countries.  However, a senior DFAIT official suggested that real progress in combating corruption would have to come from within.

Undoubtedly, changing the performance of judges and more generally enhancing the implementation and enforcement of laws will require considerable investment by the Russian government.  Many witnesses who appeared before the Committee argued that there is an urgent need to establish and strengthen the rule of law,[51] and in this way promote the elimination of corruption. 

Peter Solomon outlined some of the steps that Russia has taken toward establishing an independent judiciary in Russia.  One such step was taken in 1991, when an appointment to the bench was deemed an appointment for life.  Judges felt that this marked an important stage in granting them the necessary independence from the state that is required for a truly independent judiciary.  However, many judges started their careers as police officials or procurators.  They have a conditioned interest to see the courts as a place where criminals are prosecuted, rather than where citizens are tried.  Also, as elsewhere in Russia, career paths and political networks connect many in the judiciary with political figures, and judges see those figures as important sources of support.  Many judges receive much of their compensation in the form of perks or extras. The Putin government has also made strengthening the accountability of judges a key objective, even though, as Peter Solomon argued, “there is a lag of public perceptions behind changes in reality.”

Janet Keeping felt that some progress had, in fact, been made with respect to both “substantive legal change” and “reform of the judiciary.”  She informed the Committee of an important development involving new production-sharing legislation, designed to provide a special Western-style legal framework for foreign investors in mining, oil, gas and other industries requiring large-scale, long-term investments.  Professor Keeping also mentioned the provision of funds and other resources by the Russian government to support and augment the independence of the judiciary.

Finally, the Committee was informed about problems with the laws of Russia themselves.  They remain confusing and contradictory, particularly in cases when federal and regional laws conflict.  John Young cited a case of a jurisdictional dispute between a municipality and a governor concerning whether or not the mayor should be elected or appointed.  The court was forced to rule that both laws were valid.[52]

Professionalism and legal interpretation remain at issue.  Police and security forces have not always shown a proper appreciation of the statutes to be enforced.  It is to be hoped that as the state loses more cases better application of the laws will follow.[53]

 

2. Reforming Regulation and Reducing the Size of Government

Business in Russia has long been stifled by the existence of outdated and often inefficient and counterproductive rules and regulations.  For example, over 80% of Russian retail products and services must be certified by the government and, as Keith Bush informed the Committee in Washington, the number of licenses required of business remains high.  Regulatory requirements need to be simplified.  Reducing the regulatory burden could also help bring criminal activity under control and reduce bureaucratic corruption.

The government’s current de-bureaucratization initiative aims to reduce the involvement of the bureaucracy in the economy.  It is hoped that this regulatory and administrative reform will reduce the potential for official corruption and encourage the development of entrepreneurial activity, as the administrative barriers that hinder domestic firms from investing in the Russian market are removed.  Foreign investment should also increase as entry into the Russian market is simplified.  On the negative side, the government’s initiative has encountered stiff opposition in the Duma, with the result that the original set of new laws restricting the need for government licences has already been watered down. 

 

3. Streamlining the Tax System

President Putin has pushed through a liberal tax reform that is a noticeable improvement over the previous regime.  Russia has made a bold move to a flat tax system, in which the rate of tax levied on individuals’ income has been lowered to 13% from the previous range of 12-30%.  The rate of corporate taxation has been dropped from 34% to 24%, and from 40% to 24% for tax on profits.  The authorities are also contemplating a reduction in the value-added tax (VAT), perhaps down from 20% to the 17% mark.  These and other measures to reduce and simplify the tax system were intended to help attract investment, reduce capital flight and sustain economic growth. 

The new tax regime was also designed to prompt the return of millions of tax-evaders from the country’s underground economy.  Historically, the Russian tax system has imposed a severe burden on business and contained serious distortions emanating from individual tax preferences, varying tax rates, and an uneven application of tax laws.  Full compliance with all elements of the system entailed an extremely onerous tax burden on firms.  Therefore, it is no wonder that companies had been evading taxes in increasingly sophisticated ways.  Many smaller firms were simply not paying the required taxes, and larger businesses frequently falsified their returns.

Finally, imprecise drafting of Russian tax laws combined with ill-defined terminology and publicly unavailable tax provisions had, over the years, provided tax inspectors with a large margin of discretion.  The Committee believes that this discretionary power has to be lessened for Russians to display more confidence in their tax system.

 

4. Revitalizing and Restructuring Industry

With regard to real gains in productivity and output, it is evident that Russian manufacturing is having great difficulty transforming itself into a competitive producer.  According to Keith Bush, Russia’s manufacturing strengths are concentrated within the arms, space and science industries.  Many of the problems faced by manufacturers are rooted at the local level:  owners, managers and workers are faced with disincentives to change; difficulties abound in acquiring and maintaining needed inputs; and one is often faced with local political or elite interference.  The newly adopted labour code may help alleviate some of these rigidities, particularly in enabling managers to dismiss workers for the purposes of restructuring.

The average age of Russian manufacturing plants and equipment is three times higher than the OECD average, and 70% of it is more than 10 years old.  To update or replace it will take hundreds of billions of dollars.  It is not yet clear where the necessary capital will come from.  Without a sustained increase in the rate and volume of investment, the recent growth rate in GDP cannot be maintained.  Exports are also likely to falter.

Sizeable restructuring of the dominant firms in Russia’s industrial sector has not yet been done.  Reform of the country’s “natural” monopolies (e.g., electricity, gas, railroads), which are all key elements of Russia’s economy, has not yet occurred, although a proposal for the restructuring of Gazprom continues to be floated.[54]

Deterioration of the physical assets of these three industries has been a direct result of this failure to restructure.  There remains considerable potential for abuse of market power, not only in Russia’s utility infrastructure sector but also in the manufacturing sector.  However, any decision to reform these monopolies would be politically unpopular owing to the likelihood of a significant rise in the cost of basic requirements such as electricity.

 

5. Strengthening the Domestic Financial System

Keith Bush informed the Committee that the Russian banking system was in dire need of reform.  The country’s 1,300 banks do not undertake the usual role in a market economy of providing firms and individuals with the necessary liquidity that they may require.  As Ron Denom (Senior Vice President, SNC Lavalin International) mentioned, savings do not tend to accumulate within the Russian banking system since individuals no longer have confidence in it.  Instead, most Russian banks are in-house vehicles used by large firms to channel money, often out of the country.  The Committee was informed that while the larger state banks are doing a better job of getting into the savings and loan business, their guaranteed loans are crowding out the private banks. 

Without a reliable and stronger banking sector, many individual Russians will continue to hide away their “mattress money.”  Structural and regulatory reforms are needed to give confidence to both domestic and foreign investors. 

 

6. Reforming the Agricultural Sector

Patrick Armstrong presented the current state of affairs in Russian agriculture when he said to the Committee that during the past 10 years, “nothing has happened in agriculture.  No one has any idea of what to do. Unfortunately Russian agriculture has reached a level where there is no solution to the problem.”  Equally graphic was the statement from Senator Jim Tunney that Russia, while having 39 million dairy cows versus Canada’s three-quarters of a million, generates only one-half of our milk production.  He also informed the Committee that the Russian government “has no interest in agriculture.”  On a more positive note, the Committee was told that both Russia and Ukraine have enormous, albeit yet unrealised, potential “to feed the world”.

How might Russia be able to strengthen its agricultural sector?  According to Senator Tunney, it is evident that a significant degree of investment in the sector is required for its modernization. Another possibility is to establish private land ownership, although Patrick Armstrong expressed doubts that privatization was the appropriate policy action to take.  A proper rural land code, outlining everything from mortgage rights to rules on land use, has not yet been fully implemented, and strong and vested interests remain opposed to such a code.[55] 

 

7. Modernizing Russia’s Infrastructure

After almost a decade of free enterprise and democracy, Russia remains encumbered with an economic infrastructure that continues to decay.  According to John Young, infrastructure development, especially roads and railways, is “in desperate need of attention throughout Russia.”  Larry Black was even more specific, pointing to a dearth of public investment in roads, railway rolling stock and switching equipment, bridges, housing, the electrical power grid, oil and gas pipelines,[56] the water supply, health care and agricultural equipment.  He told the Committee that a mere 5-8% of Russian businesses possess what we consider to be modern technology and that, according to the Russian Minister of Emergencies, Russia risks having to deal with a series of technological disasters.  Senator Tunney described the state of infrastructure in the Russian oil and gas industry as well below standard, noting that “refineries are broken down, their fuel is not properly refined, pipelines are broken and sometimes they are pumping raw oil through a six-inch pipe.”  Finally, Ron Denom used IMF data to point out that Russia will require over $2 trillion of investment over the next 20 years to modernize its production facilities, infrastructure and workforce.

 

8. Other Reforms

The Committee was made aware, in passing, of other reforms that could prove useful in Russia’s efforts towards reform.  These include:  patent reform; the lowering of barriers to trade; and the establishment of a central business and land title registry.


[1]              This meeting was held in camera.

[2]              The New NATO and the Evolution of Peacekeeping:  Implications for Canada, 7th Report of the Standing Senate Committee on Foreign Affairs, 2nd Session, 36th Parliament, April 2000. 

[3]                Tuberculosis is reasserting itself as a public health issue in Canada.  See, for example, “Efforts Against Tuberculosis Not Good Enough,” Globe and Mail, 24 April 2002.

[4]              Russian GDP stood at $US 310 billion in 2001.

[5]              The four are Orthodox Christianity, Islam, Buddhism, and Judaism.

[6]              This statistic potentially outlines a class division in the health of Russians.  Fully one half of Moscow draft-age males are university students and also ineligible for the draft.  In essence, 80% of the remaining are not fit enough to serve.

[7]              See the section on crime and corruption for more details on the nature of Russian organized crime.

[8]              See the section on local government for the full context of these remarks.

[9]                Memorandum:  The President of the International Bank for Reconstruction and Development and the International Finance Corporation to the Executive Directors on a Country Assistance Strategy of the World Bank Group for the Russian Federation (http://www.worldbank.org.ru/eng/group/strategy/strategy5.htm).

[10]            The Chechen issue is handled here with respect primarily to its Russian domestic policy implications. For the impact of Chechnya on Russia’s relations with the West, see the sections on Russian foreign policy and the Post September 11th situation.

[11]            Boris Yeltsin echoed this notion when he first came to power in 1991.  He refused the offer of the democratic factions to lead them, claiming that the President should sit above politics in order to unite Russia.  In reality, this decision furthered the alienation of the Presidency from party politics, in particular weakening democrats and potential, allied, coalition-building in the legislature, culminating in the armed confrontation of 1993.  Arguably, Russian party-building has yet to recover from the effects of this development.

[12]                Professor Debardeleben’s exact words are worth quoting:

First is an expectation that the state should have a broad scope, what Richard Pipes calls the “patrimonial state,” with the state as owner as well as governor.  That strong neo-liberalism concept of getting the state out of everything is not familiar to the Russian mentality.

Second, the same importance is not placed on individual achievement, action and profit gain, and a much stronger collective identification exists which goes against the market idea of people seeing their own personal economic gain as the primary goal of their lives.  This collectivism is very strong, even among younger Russians, although weakening to some degree, especially among some of the economically successful younger people.

Third, what I would call a very strong spiritual element to Russian life, the Russian soul, is very much there. … The love of poetry, art, culture, is related to the spiritual. … This runs in concert with the collectivism, but somewhat in contradiction to the notion of individuals as rational economic actors.  I do not think Russians view themselves that way, that that is their primary motivation in life.  They like to live comfortably, but they do not have that same kind of view of personal economic gain as the primary goal of life, … They can put up with a lot because they have a very strong sense of a different meaning, a different level of meaning, a level of human solidarity which enables them to endure a lot of suffering.

This point is more or less the one that I am trying to get at.  There is an element in Russian culture that does not look at it quite that way.  Other values are at play here that relate to solidarity and to collective identification.  If one asks the classic question, would you rather have both you and your neighbour being poor, or both of you better off but your neighbour significantly richer than you, the Russian inclination is to choose equality and solidarity rather than large differentials, even though they might be a bit better off than they were.  The cultural predisposition is different, and it is not all considered in terms of the rational economic actor.

[13]            That many of these problems were chronic by the latter years of the Soviet Union and were critical in forcing Gorbachev’s reform attempts is for some Russians less relevant than the record of the past 10 years.

[14]            New Russian Barometer, VIII, 19-29 January 2000.  Russia Votes:  www.russiavotes.org.

[15]            Until recently, many Russians had limited confidence in the formal, monetized economy (i.e., in the exchange of money).

[16]            New Russian Barometer, VIII, 19-29 January 2000.

[17]            See also the section on foreign policy.

[18]            The successor to the Communist party of the Soviet Union was the Communist Party of the Russian Federation (KPRF), headed by Gennady Zyuganov.  Several smaller Communist factions are also aligned with the KPRF.  The KPRF consistently attracts around 25% of the popular vote.  Its core of support is firm, but its capacity to grow may be limited.  Yeltsin spent considerable effort ensuring that he would face Zyuganov in a two-person Presidential race:  Communist supporters were sure to vote for Zyuganov, thus ensuring victory for whoever ran against the Communist leader.  Yeltsin’s fear was to face a non-Communist candidate who could build a coalition – perhaps of Russian nationalists – of Communist and non-Communist supporters. 

[19]            For example:  Boris Yeltsin had as Prime Ministers Viktor Chernomyrdin (1993-1997), Sergei Kiriyenko (1997-1998), Yevgeny Primakov (1998-1999), Sergei Stepashin (1999) and Vladimir Putin (1999-2000).  Other well-known politicians, including Anatoly Chubais, Yegor Gaidar and General Alexander Lebed, rotated in and out of Yeltsin’s cabinet or the Kremlin.

[20]            Gazprom and Lukoil in the energy sector are two examples.

[21]            The latter term should not be confused with the “real” mafia of Russian organized crime. (See the section on organized crime.)

[22]            In the 1995 Duma elections a poster of then Prime Minister Viktor Chernomyrdin was circulated showing him in a position of thought, with his hands joined together at the fingertips in a triangle in front of him.  Intentional or not, most Russians read this as the “roof” sign:  indicating that he had real power and authority under his roof.

[23]            Russian political and economic elites, with very rare exceptions, are almost exclusively male.

[24]            Patrick Armstrong appeared as an individual, not a representative of his department.

[25]            The exception would be the Communist Party of the Russian Federation (KPRF), which inherited the bulk of the Communist Party of the Soviet Union’s (CPSU) assets.  Another exception, though more thinly spread, is Yabloko, Griegory Yavlinsky’s liberal-democratic party.  For a list of Russian political parties and their representation in the Duma, see Appendix C.

[26]                President Putin’s popularity has consistently polled above 70% for the duration of his Presidency (since 1999).  Latest polling puts him at a 75% approval rating, according to nationwide VCIOM polling as reported by Russia Votes:  www.russiavotes.org.

[27]            This rise in status occurred in the wake of bombing attacks in Moscow in 1999 that Russian authorities claimed were carried out by Chechen rebel groups.

[28]            This reality has implications for Putin’s support of the United States in the wake of the September 11th World Trade Centre attacks.  See section on post-September 11th events.

[29]            Russia Votes.

[30]                President Putin has since addressed the issue of party building as part of his reform package of legislation.  A new law on political parties will effectively eliminate smaller party organizations. 

[31]            See the section on the Russian economy for more detail on these issues.

[32]            This faction is now constituted as the political party United Russia.

[33]            During his election campaign Putin refused to release his policy platform because he said it would only be attacked by the media.

[34]            On 21 March 2002, the Supreme Court of Russia rejected an appeal to release Igor Sutyagin while he waits for the FSB to reinvestigate his case.  Sutyagin’s lawyer plans to complain to the European Court of Human Rights.

[35]                President Putin is on record as claiming environmental NGOs were agents of foreign intelligence agencies.

36      Since 1991 Canada has taken a lead role in supporting legal reform in Russia – see section on Canadian Involvement in Russia.

[37]                Contributing factors include higher oil prices and corporate tax revenues.

[38]            The trade surplus was projected to fall to US$40 billion in 2001, owing to somewhat lower oil prices, growth in imports and the effects of the current global economic downturn on export demand.

[39]            Vladimir Popov (Professor, Institute of European and Russian Studies, Carleton University) questioned the usefulness of this orientation toward import substitution, preferring a policy to stimulate exports.

[40]            The issue of private, urban land ownership has recently been addressed through legislation.

[41]            DFAIT officials told the Committee that Russia placed a very poor 83rd out of 91 countries on Transparency International’s corruption index (Year 2000 Index). Russia now ranks 79th in the Year 2001 index.

[42]            See the section on legislative reform and the challenge of implementation for more details.

[43]                According to Viktor Khristenko, Russia’s first Deputy Prime Minister, the figure could actually be as high as $19 billion.  However, DFAIT has noted that the expected 2003 debt crunch may have been reduced (by $3-$5 billion) through a repurchasing of Ministry of Finance and IMF debt by the Russian government.

[44]            A number of large IMF loans come due at this point.

[45]            It is expected that there will be too few Russian workers to support the country’s pensioners.

[46]                According to James Gillies (Professor, Schulich School of Business, York University), Russia’s lack of reliable corporate governance makes investors “loath to continue to put money into Russian firms or to make other relationships for joint ventures with Russian companies.”  Moreover, the rule of law is “fundamental to the existence of any form of real governance and certainly to corporate governance.  Until the judicial system is firmly in place it will be difficult to see good governance in the corporations in Russia.”  A common problem is the lack of respect given to minority shareholders.

[47]            While this code covers only 3% of the land area of the country, it does account for a full 75% of industrial production.

[48]            While this measure has already been partially successful in reducing the number of licences required by business, more reform is still required.

[49]            In this context, one should note the recent announcement by U.S.-based ExxonMobil of the formal launch of the $12-billion Sakhalin-1 investment project, the country’s largest foreign investment.

[50]            Before Putin’s aforementioned reforms of 2001, over one thousand different forms of licensing were required for small businesses.  One was almost guaranteed to be in violation of something.

[51]            As Janet Keeping (Director of Russia Programs, Canadian Institute of Resources Law, University of Calgary) informed the Committee, Russia lacks the tradition of rule of law, a tradition respecting the importance of the individual.  Instead, there has been more of an emphasis on the collective.

[52]            John Young also noted that this decision was not as “crazy” as it first seemed.  The court sent the issue back to the political authorities where it belonged.

[53]            See Peter Solomon’s comments in the section on judicial reform.

[54]            A new management team was installed at Gazprom November 2001, under Chief Executive Alexei Miller.  According to Michael Lelyveld, “So far Putin and Miller have made little difference from their predecessors in altering relations between Gazprom and the government” and Gazprom’s ability to resist an erosion of its power remains “a mystery.”  It may simply be too big or too strong.  “New Hope for Gazprom reform?”  RFE/RL, 21 February 2002.

[55]            The new land code applies only to urban and commercial land.

[56]            Gazprom cannot accumulate capital for this task since Russia holds domestic natural gas prices below world prices.


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