Earlier, in August 1991, a clique of Soviet hardliners tried to prevent the demise of the communist regime. I was in Moscow at that time and spent most of the three days of the failed coup-attempt at the Russian Parliament building with thousands of Russians who were rallied by Boris Yeltsin, standing atop a tank, to defend their emerging democracy.

The day after the coup collapsed tens of thousands of Muscovites celebrated in a large square behind the Parliament building. As the Soviet flag was lowered and the traditional Russian colors of red, white and blue were raised on the building, the crowd chanted in unison: “Swaboda, Swaboda, Swaboda” – “Freedom, Freedom, Freedom.”

How long ago those days now seem, as Russia has fallen back into its historical tradition of a centralized and authoritarian government, a regulated and manipulated economy, and suspicion and hostility toward “the West.”

Russia’s ability to throw its political and military weight around heavily depends upon the state of the Russian economy and how much “fat” can be sliced off to feed the purposes of those in power.

The first post-communist years were frantic and unstable. Part of this was inevitable when a society of that size had to “transition” out of 75 years of inefficient and counter-productive socialist central planning.  

But this was worsened by a near hyperinflation that at one point was equal to a 2000 percent annualized rate. At the same time, the poorly constructed voucher system for privatization of state industry was delayed and mishandled. The corrupted members of the former communist hierarchy used their influence to seize as much of the country's assets as was worth grabbing.

Then numerous marauding mafia gangs began threatening and extorting huge sums from both domestic and foreign businesses. Finally a financial collapse in 1998 greatly weakened an already weak economy and wiped out the savings of millions of Russians already hard hit by the earlier inflation.

When Vladimir Putin became president in 1999 following Yeltsin’s resignation, the country was ready for change. At first it appeared that Putin might move Russia in a significantly more free-market direction with his appointment of Andrei Illarionov as his senior economic advisor.

Illarionov persuaded Putin to dramatically lower business taxes, introduce a 13 percent flat income tax, reduce bureaucratic regulations and controls over private enterprises, and use export revenues to pay off Russia’s foreign debt to reestablish the country’s financial good name and credit-worthiness.

But Putin’s support for these policies did not represent his endorsement of the principles and ideals of an open society and competitive capitalism. While Putin may have left behind the Marxist ideology that he parroted and may have believed in for the many years when he was an operative in the KGB, he had not become a liberal or a democrat.

His vision has been and is for the restoration of a strong Russia that is a “great power” player on the international stage. Military force is seen by him as a crucial means to gain international respect – and if not respect then at least fear and deference from those that Russia may wish to influence and possibly control.

His acceptance and implementation of any market-oriented reforms was the use of pragmatic economic means to his political end: Allow a certain amount of private enterprise to rebuild the Russian economy so the wealth and production will be available for the government to reassert Russia’s “rightful” place in the sun.

Putin also shares the mindset that dominated Russian political thinking for hundreds of years under the Czars: Maintaining Russia’s territorial integrity requires a strong centralized political authority in Moscow. Toward this end, Putin transformed the Duma (the Russian Parliament) into a rubber stamp by virtually destroying the ability for opposition parties to win seats in the lower house and personally determining who will hold office in the upper house of the parliament.

To the extent to which a market economy was allowed to function, members in the private sector began to earn profits and accumulate wealth. Many of them certainly succeeded in doing so through political connections and corruption since no business could (or can) become “big” in Russia without “friends” in high places. But this wealth meant that there were now emerging centers of social power outside the direct control of the state.

When some of these businessmen, especially in the resource and raw materials markets, used their influence against or in contradiction to Putin’s policies, the full authority of the government was used to intimidate, imprison or exile them. Their companies were de facto renationalized or reconstituted as “fronts” for the state in different private hands.

In addition, Putin used Russia’s military to reconquer the breakaway Chechen Republic in the Caucasus region of southern Russia (not far from Georgia) through the virtual destruction of the capital city of Grozny, and the slaughter of thousands.

(Andrei Illarionov resigned as Putin’s economic advisor in January 2005 when he could no longer support the shift back towards a state-controlled economy and Putin’s brutal war to firmly reestablish Russian sovereignty over Chechnya.) 

The rise in commodity prices, especially oil prices, over the last few years has served as the hard-currency horn of plenty to feed this attempted restoration of Russia’s greatness. It has provided the tax revenue and international influence that has covered over many of the fundamental and serious weaknesses in the Russian economy. And it is a major factor enabling Putin’s push to reassert Russian power in former Soviet republics like Georgia.

In his new role of prime minister, Putin clearly continues to “call the shots” in spite of Dmitry Medvedev assuming the office of Russian president earlier this year. And the goal remains the same: Russia as a  great power and dominant counter-weight to America on the global stage. 

In part 2, we will look more closely at the facts of Russia’s economic reality and what they mean for the Russian people and the rest of the world.

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