Russia’s Long Road Toward Resurgence

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Russia in the 90’s

The modern day Russian Federation emerged after the collapse of the USSR in 1991. Not only did this change the fate and the standard of life for millions of Soviet people but it also changed the trajectory of development for all mankind. In the first few years of the newly created Russia, the “team of democrats”, with active support from Western countries began its shock economic reforms.

The declared goal of these reforms was to liberalize the Russian [centrally-planned] economy by transitioning it to a market economy. Meanwhile, many believes that the real goal was the seizure of former Soviet property by the “new power holders” and the dismantling of the Soviet industrial economy.

When USSR collapsed, a relatively small group of individuals acquired ownership of tens of trillions of dollars [through a rapid onset of privatization]. Losses suffered by the Soviet production complex as a result of its planned destruction were much higher.

Modern factories were dismantled and exported to scrap metal, machines and equipment were sold for a symbolic 3-5% of their real value, inventory was stolen and all of this was carried out under direct orders or control of the new ruling elite. The territories of the former USSR faced economic and social chaos. The World Bank estimates that only 1.5% of Russia’s population lived in poverty in 1988, but by the mid-1993 that number rose to 39% to 49%. In many regions, people came close to starvation. Wages were paid through goods not money. The resulting hyperinflation reached its peak in the fall of 1992, when retail prices for food and cigarettes increased daily, sometimes multiple times a day.

The main anti-inflationary measure was a further reduction of the monetary supply. This came at the cost of unpaid wages and pensions, unfulfilled government and private contracts. A significant number of enterprises started bartering services.

It is important to note that the goals and methods of economic policies employed by the authorities in the 1990s were formed strictly on the basis of instructions of international financial organizations, primarily the IMF.

Crime flourished. Banditry and racketeering were firmly embedded into everyday life of Russia in the 90’s. Criminal behavior became fashionable.  Law enforcement agencies were not able to deal with these new phenomena in any effective way. Various sects and criminal activity spread rapidly.

Another phenomenon that received direct support from external sources was aggressive separatism and nationalist extremism. By 1992, a bandit formation was formed on the territory of one of Russian regions, the Chechen Republic of Ichkeria. The actions of the federal center, before the First Chechen campaign in December 1994, demonstrate that this formation likely appeared with the consent and support from the new “liberal team” that established itself in Moscow.

The presence this black hole and territorial anarchy allowed for massive collusions and schemes throughout Russia. It gave rise to abductions and human trafficking, large-scale theft of petroleum products, drug trafficking, arms trade and much more.

Thus, in 1993-1994, more than 700 trains were attacked on the Grozny branch of the North Caucasian Railway with the total or partial looting of about 6,000 wagons and containers worth more than 22.5 billion rubles. Production of false remittance advices was an emerging new craft, which earned more than 4 trillion rubles. During this period of 1992-1994, about 1800 people were kidnapped and illegally detained in order to obtain ransom in Chechnya. Until 1994, Russian oil continued to flow to Chechnya, while it was not paid for and resold abroad. At the same time, the federal center continued to transfer money to Chechnya from its budget. In 1993, 11.5 billion rubles were allocated to Chechnya.

The change in the trajectory of Russia’s development

In mid and second half of the 1990s, negative events in Russia continued to develop in virtually all sectors of everyday life.

Significant percentage if not most of senior officials were incompetent or corrupt. IMF and the so called “macroeconomic policy and reform advisors” continued a very precise external destructive influence. Moscow was flooded with various “financiers and businessmen” from the United States, Israel and countries of Western Europe with questionable enterprises. The state debt kept growing, production was falling, imbalance in trade increased, monetization of the economy sharply reduced, and a financial pyramid of state treasury obligations emerged.

Background: At the beginning of the reforms in 1991, the monetary supply was 66.4% of GDP, which was consistent with global practice. As of June 1, 1998, the money supply was only 13.7% of GDP for 1997.

All of this lead to the most difficult time for Russia, the “Crisis of 1998”. The situation was further aggravated by the fall of raw material prices in the world and the economic crisis that occurred a year earlier in South-East Asia.

Oil prices (BRENT) fell almost 2-fold, from about 24 dollars per barrel in early 1997 to about 10.5 dollars per barrel by November-December 1998. By the way, it was the IMF who was accused at that time by the national governments in provoking the Asian crisis and the consequences for the global economy.

As a result, in August 1998, the situation in Russian economy became critical. The IMF and the World Bank refused to fulfill their earlier obligations and refused to extend any more loans. On August 17, 1998 the government declared a technical default. At the same time, it was announced that the ruble will not be stabilized against the dollar, the ruble immediately depreciated by a factor of 3.

In September 1998 there was a change of government. Primakov becomes the new Prime Minister of the Russian Federation. Primakov was a former diplomat and intelligence officer who negatively treated those whom he called “pseudo-liberals” and “persons dependent on certain banking structures.” Maslyukov, a former experienced Soviet executive manager, becomes the first deputy chairman. This new government takes extraordinary measures: economic policy changes, reduction of tariffs, value-added tax on food is reduced, and the default is overcome.

Background: By the time Primakov assumed government, the debt of enterprises and organizations to the budget was 50 billion rubles, and the budget debt to enterprises amounted to 150 billion rubles. Debts also accumulated between the enterprises themselves. Federal authorities demanded cash-only payments. Direct clearing settlements were banned in accordance with the recommendations of the IMF i.e. For one side to repay its debt to another, it had to use cash, as did the other side. However, recall that by this time the Russian economy was deliberately demonetized. The volume of monetary supply was reduced by 4-5 times below the average level of other governments of the world. This meant that there was no money and repayment of debt was practically impossible. This promoted a furtherance of debt with respect to wages, pensions, and taxes, lack of capital and other negative phenomena. All of this was done under direct control and through recommendations of the IMF and international advisers. Primakov’s government, contrary to recommendations of the IMF and prior practice, initiated mutual settlements between government and enterprises. At the outset, it allowed to liberate 50 billion rubles.

Almost everything was done in direct contrast to the recommendations of the IMF. It is here, in this moment, that the history of Russia took a turn. The country persevered. Major structural changes in economics took place, there was a rise in economic efficiency of export, and industry began to show signs of recovery. The crisis turned out to be difficult, but short-lived. It is interesting that under Yevgeny Primakov, the thesis about the need to defend the national interests of Russia, became a constant theme in the speeches of both the minster and his subordinates.

It was in the spring and summer of 1998 that the young politician Vladimir Putin’s influence in Kremlin sharply increased. On May 25, 1998 he was appointed first deputy head of the presidential administration of the Russian Federation, responsible for working with the regions. After 2 months, on July 25, 1998, he became director of the Federal Security Service of the Russian Federation.

The 1998 crisis was the signal and the first wakeup call for the new Russian elites, whose interests were directly tied with the territory and potential of the Russian Federation as a state i.e. those who controlled mineral resources, the military-industrial complex, metallurgy and industry. For these elites, preservation of their newly acquired capital and effective influence was only possible in conditions of the preservation and development of the state as a system-forming factor.

Accordingly, they began a search for a “new leader”, one capable of changing the current situation and ensuring national interests of the state and this part of the elite. At the same time, the new leader had to emerge in Kremlin not as a revolutionary, but through a soft transfer of power with subsequent democratic legitimization. Accordingly, they were choosing the best candidate from those who surrounded president Yeltsin at that moment. Yeltsin’s deteriorating health contributed to this “soft” scenario but the president’s associates, the so called “family” opposed it.

Background: The “family” are relatives and the closest associate of President Yeltsin who controlled all of Yeltsin’s direct contacts with other statesmen and elites. Famous representatives of the family were: Yeltsin’s daughter, Berezovsky, Diatchenko, Voloshin, Korzhakov and others. Many members of the so-called “family” were connected with international financial capital.

The other part of the Russian elite that formed in the 90’s, was comprised, for the most part, of those who acquired speculative financial capital, having established strong ties with the “international financial community”.

They began to act as agents for international interests on the territory of the former USSR and perceived themselves as part of the world oligarchy. These elites sought to maintain the status quo in Russia through control and influence on Yeltsin’s family and his closest associates. They also understood that Yeltsin’s health was a matter of serious concern and actively engaged in the analysis of candidates for possible successors. For them, the main task that Yeltsin’s successor was supposed to provide – was their personal immunity and carte blanche for further operations on the territory of Russia.

There was a conflict between these two competing interests. At the same time, President Yeltsin, despite, to put it mildly, his ambiguous role in the history of Russia, was well aware of the threats and challenges, facing the government as well as the destructive role of a number of individuals in his environment.

Exactly one year after the 1998 crisis, the Second Chechen War began. On August 7, 1999, a large detachment of militants, supported by Al Qaida, invaded Dagestan (a constituent entity of the Russian Federation).  Two days later, on August 9, 1999 Vladimir Putin was appointed as an acting Prime Minister and lead the operation against the militants. In September, 1999 about 8,000 militants operated in Dagestan. However, as early as September 15, 1999 the entire territory of Dagestan was liberated from militants, and on September 30, 1999 federal troops were stationed on the territory of Chechnya. The second Chechen campaign begins.

By the new year of 2000, significant successes of the federal troops and local forces that supported Moscow were already evident. These successes were not only military but also political.

On December 31, 1999 Yeltsin announces his early resignation and the appointment of the young and popular prime minister Putin to the post of Acting President.

Against the backdrop of the chaos of the 1990s, the restoration of the territorial integrity of the state and the economic recovery that begins, bring Putin an unconditional victory in the March 2000 elections. He becomes the second president of Russia. In April 2000, the active phase of the campaign in Chechnya comes to an end.

It seems that Putin was perceived by Yeltsin not only as an energetic politician of a conditionally “patriotic bloc”, but also as a compromise figure for elite groups. At the same time, apparently, Yeltsin was confident that Putin would at least keep his promise to ensure personal immunity to Yeltsin and his family.

The Putin Era: Forming New Russia

Immediately after assuming office, the new president of the Russian Federation, Vladimir Putin faced many critical challenges, both to the Russian state and to himself personally, as an individual who sought to strengthen the “power vertical” and approach the problem of national development in a more systematic way.

Those with financial power sought to maintain their influence on the political decision-making processes. A significant part of the Russian oligarchy was conducive to the conditions of the 1990: a weak centralized authority, high level of corruption among official, legislative and judicial practices that ensured their personal interests.

At the same time, the Russian Federation had an enormous foreign debt. As of January 1, 2000, the external public debt of the Russian Federation was $158 billion, with the annual GDP (in current USD) of only $259 billion. Federal budget revenue in 2000 was 1,132 billion rubles, or only $40.48 billion USD.

The national tax system, while having nominally high tax rates, allowed big business to evade the tax burden through the use of offshores, legal loopholes, and a shadow economy. During this period there was no tax on extraction of natural resources by mining firms.

Excise taxes were set at a level of .7 to 2 dollars per ton of oil, depending on the enterprise, which was less than 1% of the market value of oil in the world at the time. Other mineral extraction fees were set even lower. The relatively high, income tax rate of 35% was easily bypassed by using a variety of schemes. For example, firms entered into contracts with their own subsidiaries registered in tax havens, and then sold oil at market prices using offshores, where all the profits were stored.

At the same time, the general level of taxation was overestimated. This was the reason for massive tax evasion by many companies.

That is why Vladimir Putin undertook to reform the tax system soon after his election as president in 2000. Overall, the tax reforms of 2000-2004 were successful. One of the most important events for Russia’s economy and its subsequent growth was the introduction of a mineral extraction tax (MET) on January 1, 2002.

Background: The tax rate for crude oil was set in absolute terms (in rubles per ton of extracted oil) and was applied using two coefficients calculated according to certain formulas. The first of these coefficients characterized the level of internasal world oil prices.  The second, introduced in 2007, characterized the degree of depletion of a specific oil deposit.

The introduction of MET and a highly progressive oil export tariff scale in 2002-2004 dramatically increased the fiscal efficiency of the tax system and led to a radical redistribution of revenues generated by the oil sector in favor of the state.

As the calculations on the total tax burden on the oil sector show, the share of taxes in the gross income of the oil sector increased from 28.1% in 2000 to 63.1% in 2008.

As a result of the reforms, by 2004 federal budget revenues increased 2.4 times compared to 2000, and by 2007 more than 6 times. Russia’s foreign debt, in contrast, fell to $121.7 billion by 2004, and by 2007 to $52 billion.

Background: In August 2006, Russia managed to fully pay off Soviet-era debts to the Paris Club member countries. This was preceded by several rounds of complex negotiations: not everyone wanted to lose out on income generated from interest on the loan. This meant that Russia had to pay a 1 billion euro fine. Nevertheless, these early pay offs allowed Russia to save $7.7 billion. Moreover, this allowed Russia to become a creditor instead of being a debtor state.

Putin’s actions to reform the economy, strengthen the vertical of power and the rule of law provoked active resistance from a significant part of the oligarchy, those who can be called the “supranational elites.” These oligarchs were supported by Western leaders and media. A struggle with them took place under the guise of traditional democratic and liberal slogans.

In February 2000, the first of these oligarchs, Gusinskiy, was arrested. A number of other oligarchs, as well as US president Bill Clinton and Israeli Politician Shimon Peres, immediately jumped to his defense. Gusinskiy was released from custody and hid in Spain.

In December 2000, another odious oligarch, Boris Berezovskiy emigrated to London without waiting for the results of the investigation into the “Aeroflot case”.

Background: The ‘Aeroflot case” was a criminal investigation and litigation concerning the embezzlement of funds owned by Aeroflot, and the appropriation of free foreign currency funds of the airline in the amount of 252 million dollars, by the Swiss firm Andava, the main shareholders of which were the top managers of Aeroflot and Boris Berezovsky.

Further, in the first half of 2002, a series of articles appeared in the European press incriminating the leaders of another Russian company, Yukos, of money laundering. These articles were provoked by the French tax police who discovered Swiss bank accounts through which hundreds of millions of dollars have passed. In Russia itself, YUKOS was accused of tax evasion, undervaluation of its taxable worth, and the sale of petroleum through phony intermediaries.

Against this background and in the run-up to the 2004 elections, Mr. Khodorkovsky, the main owner of the Yukos company, begins to oppose Putin, with direct support of the US and the Israeli establishment. Khodorkovskiy, with the help of former intelligence and security services officials, creates the Open Russia civic organization, attempts to seize information channels, conducts active and largely successful liberal propaganda campaigns aimed at the youth, with particular emphasis put on Russian regions, and finances opposition parties. However, Putin’s popularity is very high. He is backed by the majority of the national elites and by the “power ministries.” Everyone clearly remembers the chaos of the 1990s.

Khodorkovskiy commits strategic errors, demonstrates his lack of understanding of Russia’s society, and in the end demonstrates his inability to influence Russia’s political processes. During the March 2004 elections, Vladimir Putin scores an overwhelming victory with 71.31% of the vote.

In 2004, Russian-U.S. relations deteriorate. Earlier, in early 2003, Russia took a tough stance on US intervention in Iraq. At the end of 2004, the situation in the relationship is aggravated by the interference of the US and Western countries in the political crisis in Ukraine. In December 2004, Congressman Ron Paul stated that the US government sponsored the presidential campaign of the leader of the Ukrainian opposition.

After the statements of Ron Paul and L. Kraner, the head of the press service of the US President, Scott McClellan, officially confirmed that over the last two years the US spent about $ 65 million “on the development of democracy” in Ukraine.

Disgraced Russian oligarchs also actively participated in the financing of events in Ukraine. According to Forbes investigation, Berizovsky alone, spent more than $ 70 million to support the “orange revolution”.

With time, Russian-U.S. relation deteriorate further. On May 4, 2006, while in Vilnius, Vice-President Richard Cheney, delivered a speech that many now call “Vilnius”, following the example of Fulton’s Churchill speech. According to Cheney, the US is not satisfied with “the use of Russia’s mineral resources as a foreign policy weapon pressure, violation of human rights in Russia and the destructive actions of Russia in the international arena.” It is important to note that the turn of the US policy towards the Russian Federation took place long before the war in Libya in 2011 and the Crimean events of 2014.

Background: The US Vice President openly expressed his displeasure that many countries receive Russian mineral resources at prices well below market prices. For example, until 2005, Ukraine bought Russian gas for only $50 per thousand cubic meters. This was a price set out in the intergovernmental agreement meant to last until 2019. After the first “orange revolution” inspired by the West in Ukraine in 2005, the new Ukrainian government unilaterally broke this agreement, and started purchasing gas at market price. By 2009 the price of gas in Ukraine is $360 per thousand cubic meters. The profitability of the remaining industrial Ukrainian enterprises falls rapidly and tariffs for the population significantly increase.

Apparently, it was during this period that the American establishment and financial elites, who were interested in Russia’s natural resources, decide to pursue a strategy of uncompromising confrontation in order to change the political trajectory of Russia’s development, oust the post-soviet changes and balkanize the state. That is, they seek to complete the goal that did not work out in the late 90’s.

In August 2008, a new round of confrontation between Russia and the United States was caused by invasion of the Georgian troops into South Ossetia. Russia cleared this “unrecognized” territory, which by that point was almost fully captured by the Georgian army. Afterwards, Russia officially recognized South Ossetia and Abkhazia as independent states.

In domestic politics, Putin’s second presidential term, from 2004 to 2008, is characterized by the continuation of reforms. In September 2005, the implementation of the “National Projects” was launched in Russia to resolve the most urgent social problems: health care, education, housing policy and agriculture. 6 billion dollars were allocated towards these programs.

Enforcement systems are also enhanced. In fact, during this period, organized crime stops being a factor that significantly influences Russian society.

At the same time, many measures were half-hearted. The level of corruption in the state apparatus remained high. The society expected radical changes that did not happen. On the one hand, the population experienced an increase in income, on the other hand, there is a growing stratification of society. It is impossible to form a new national idea and cultural strategy that the population can adopt. The new elite, including the supreme bureaucracy, grew and increased its power and influence on political decision making. The judicial system remained imperfect. Lawmaking was not effective enough and trailed behind the executive.

Same tendencies are seen during the presidential term of Dmitry Medvedev, from 2008-2012. During this period, Russia faced the problem of obsolescence of production capacities that remained from the Soviet era. Modernization of Russian economy became the main task of the new president.

It should be noted that despite numerous problems, high level of corruption and ineffectiveness of many initiatives, modernization and reindustrialization of the Russian economy has borne fruit.

The country managed to maintain its positions in traditionally strong sectors of the economy: in the military-industrial complex, mining, and science and technology sectors, even during the financial crisis of 2008 which took a hard hit at the economy.

Background: According to the World Bank, Russian crisis of 2008 “began as a crisis of the private sector, provoked by excessive borrowing in conditions of a major triple shock – terms of trade, capital outflows, and tight external borrowing.

However, by the second half of 2009, the country overcame its economic recession. In the third and fourth quarters of that year, Russia’s GDP growth, taking into account seasonality, was 1.1% and 1.9% respectively.

In 2012, during the next presidential election, Vladimir Putin wins again, gaining 63.6% of the vote. Putin and Medvedev switch roles, with the latter becoming prime minister.

Elections take place under difficult circumstances. Russia’s system of government is structured in such a way where all decision-making powers are tied to the president and his administration. Therefore, despite the fact that during Medvedev’s rule, Putin continued to remain unofficial leader, Putin, as a Prime Minister, had very few instruments of operational control compared to the president. Medvedev in turn, was a political figure that was more liberal, soft and subject to influence.  Many experts associate this personal characteristic of his with an insufficiently quick reaction during the South Ossetian conflict.

At the start of the conflict, Premier Putin was in Beijing at the 2008 Olympics and Russian troops began operations in South Ossetia only after his return to the country, that is, at least 2 days later than they could have.

In the political sphere, during Medvedev’s presidency, some liberalization is observed. Up to a point where pro-western opposition forces, which openly declared their goal of changing the country’s constitutional system, receive grants and subsidies from government sources. This could be the reason why various representatives of the opposition, supported by outside forces had decided that they had a chance to seize power. This was further facilitated by a recession in the economy, a decline in the power vertical and increasing confrontation with the U.S.

Opposition received generous support from varied pro-western foundations through the employees of the Georgian, Polish, and Baltic special services.

At the end of 2011 and the start of 2012, there are massive rallies of the opposition. Protests unite very different political movements that can be separated into two parts: Ultra right and ultra left radicals and liberals, including representatives of sexual minorities. The leaders of these protests took all possible measures and methods of “color revolutions”. Media distorted information, by multiplying the number of protestors, providing disinformation about the actions of authorities with respect to the protests, inciting hysteria and an atmosphere of fear. Western media ran fake news stories.

For instance, Fox News provided video coverage of protests in Moscow on December 7, 2011, by showing violent acts such as arson. This footage was actually taken in the Greek capital of Athens during nationwide protests in Greece.

The protests did not receive any widespread distribution or public support. Even in Moscow where the opposition sources were concentrated, the largest protests collected no more than 40 thousand people with a population of 12 million (0.3%). In other Russian cities, protests were much more modest ranging from a few hundred to 2 thousand people.

Meanwhile, public leaders of oppositions fully demonstrated their negative qualities both personally and professionally: extreme egoism, hypocrisy, cowardice, inability to consolidate or engage in mutual compromise. Segregation and discriminatory rhetoric became the norm for the leaders of the protests.

They divided the population into the “creative class” which was a small group of people that had liberal views. The rest were considered “cattle”, who were denied the ability to fully exercise their rights.

These events allowed Kremlin’s political advisers to adopt the idea that manifesting real shady faces of the Russian liberal opposition’ leaders is the best method of ensuring support for the ruling regime. The wave of protests was failing by the end of 2012.

Modern Russia

The electorate expected the new “old” president to focus on reforming the state apparatus, the process of elite formation, elimination of clans within the government, genuine battle against corruption, and economic development.

Protectionism and the merger between the new economic elite with the bureaucracy was visible at every level of society. It became a critical problem that delayed the country’s development. The courts were ineffective, many criminal cases concerning corruption, negligence, and abuse of authority never resulted in sentences, and those punishments that were meted our were remarkably mild.

In July 2012, the Krasnodar Kray in southern Russia experienced a flood that killed 172 people. The overall number of victims reached almost 35 thousand. These consequences were the result of incompetence and idleness of local and regional authorities. Planned measures to protect the territory against flood that should have been implemented in the previous decade were not implemented. No alert about the looming menace was issued.

Even more severe damage was avoided only thanks to a timely response by Russia’s EMERCOM, the participation of numerous volunteers in dealing with the flood, and the president’s personal involvement in the process. In spite of the impact on the public opinion and the evidence of negligence by officials, only a few local officials were ever convicted.

Background: Only three local officials were sentenced to imprisonment in penal colonies. According to Russian law, such colonies have no guard force, only supervision by colony administration. They enjoy free movement throughout colony territory between the wake-up and reveille, and can leave the colony without supervision if the administration permits it. The convicts could be allowed to live together with their families not only on colony territory but outside it as well. They could have money on their person, wear ordinary clothing, etc.

During that same 2012, another corruption scandal broke out. Since 2007, the country’s defense minister was a civilian official with education in economics, Anatoliy Serdyukov, who was appointed to carry out “long overdue reforms within Russia’s MOD.” Russia’s military operations during the 2008 conflict with Georgia revealed a mass of problems related to troop command systems, obsolete weapons, equipment, and communications.

However, Serdyukov teams actions, particularly those related to the so-called “optimization” of MOD’s property holdings, the closure of military academies and the destruction of the military health care system, caused growing astonishment within the majority of experts and career soldiers. On top of that, Serdyukov deliberately replaced the top leadership of the MOD, appointing civilian specialists from the private sector in the place of career soldiers.

Background: By 2011, out of 10 Deputy Defense Ministers, only two were military, including the Chief of the General Staff.

In the fall of 2012, Russian investigative agencies discovered large-scale embezzlement at the MOD and the linked Oboronservis commercial entity. Financial losses were estimated at no less than $100 million, resulting in criminal cases launched against almost 20 individuals, many of whom were close to Serdyukov.

After many inspections and a lengthy investigation that lasted for over a year, Serdyukov was also formally charged with negligence. However, in February 2014 the Main Military Investigative Directorate of the Russian Investigative Committee decided to cease investigating Serdyukov since he was covered by the amnesty issued on the 20^th anniversary of the Constitution of the Russian Federation. Other key individuals named in the corruption scandal received insignificant prison terms.

Background: The main defendant in the corruption scandal, the former MOD Property Department head E. Vasilyeva was sentenced to 5 years in prison, but spent only 3 months there.

Nevertheless, the corruption scandal led to far-reaching changes, at least in the MOD. The new minister became Army General Sergey Shoygu, who earlier headed the EMERCOM. Shoygu’s appointment was greeted with enthusiasm by the Russian military. The previous leadership’s military reforms were reviewed and swiftly corrected.

Background: On May 22, 2013, Defense Minister Shoygu listed Serdyukov’s greatest errors. Among them was the closure of several academies and the reduction of the number of cadets at the remaining ones which caused a shortage of military specialists in troop units and in the navy, the elimination of military medicine system, the collapse of defense orders, belated signing of contracts with defense enterprises.

It is under Shoygu’s leadership that Russia’s continued and modified military reforms continued, thanks to which the Russian military assumed a “new look” within only a few years. At the same time, it has been argued that the success of recent reforms owes a great deal to the unpopular measures undertaken during the Serdyukov era.

In foreign policy, after Putin’s return to Kremlin, the state system stabilized which lead to a deterioration of relations with the United States and their satellites in Europe. US officials publicly called Putin’s victory “a loss of democracy,” in fact considering it a threat to the next phase of the US global expansion. The characteristic features behind the American establishment became quite obvious: they wanted an unstable state, an economy that is easily controlled by the world bank capital and MNC and degrading population, in effect a colony which would be sold as a “true democratic Russia”.

In any other case, Russia was a threat to “the whole civilized world”. However, in the information space, Western propaganda found nothing better than to resume the use of and to strengthen its traditional narratives.

However, the world was already different. There was disappointment with the consequences of the “Arab Spring” and there was an increasing amount of questions about the real role of the Western elites in world conflicts. It was during this period that the audience began to lose their confidence in the mainstream media (MSM).

Background: The western media’s coverage of the 2008-armed conflict in South Ossetia became one of the turning points in discrediting the MSM. During the conflict and immediately after its termination, MSM accused Russia of aggression and unprovoked invasion of a territory belonging to a sovereign state. The facts, testimonies, and eyewitness reports were hushed or deliberately distorted. The United States and its allies also accused Russia of aggression. However, as early as 2009, an international commission responsible for investigating the circumstances of the war of 2008 in the South Caucasus region, concluded, with irrefutable evidence that the armed conflict was provoked by Georgia. The West did not, in turn, consider it necessary to condemn the Georgian aggression.

The Kremlin immediately took advantage of this, both within the country and in the global information space. In late 2012, the well-known television channel, Russia Today expanded its capacity and moved to a new building. In 2013, state financing of this channel increased many times. It is interesting to note that in the broad strata of Russian society in the period 2012-2013, the words “liberal”, “universal values”, “the entire civilized world” received negative-abusive connotations.

2012-2014 became the period that determined the course of the world in subsequent years. The conflict in the Middle East became worse and ISIS appeared. At that time, instead of actively preventing terrorists from consolidating themselves on the territory of Syria and Iraq, the US and the EU tried to use that political moment to shift the legitimate government of Syria and to secure a geopolitical foothold in the region. In practice, they actually helped to strengthen terrorist quasi-state entities in the territory of Syria and Iraq. Similarly, the West began to operate in Ukraine, where in autumn of 2013 the political crisis began.

Background: The crisis in Ukraine (2013-2014) is a political crisis caused by the decision of the Ukrainian government to suspend the process of signing the Association Agreement with the European Union. This caused massive protests in Kiev and a number of other cities in Ukraine, which were supported and coordinated by the West. These protests grew into street riots and armed clashes with the forces of law and order.

Events in Ukraine moved rapidly from organized protests to unrest. As a result of political deception that took place under the guise of Western “intermediaries” who acted as guarantors on the part of the opposition, the president of Ukraine made concessions and fulfilled the basic demands of the protesters. However, the opposition, using the withdrawal of law enforcement forces as an opportunity, seized government buildings, and an unconstitutional coup took place.

Background: Putin commented on the events of the winter of 2014: “We were approached by our American partners, they asked us to do everything, almost literally a direct request that Yanukovych avoid using the army, so that the opposition can clear the plazas and administrative buildings and move on to implement the agreements that were reached to normalize the situation”. The President noted that the Russian Federation agreed to help the US, but a day later a coup d’état was carried out in Kiev. “They should have said something. There is a term “excess of actions”, we did not want the coup to happen, but this is how the events developed. We did everything to normalize the situation. There was not one word against those who committed a coup d’etait, on the contrary, they had full support.

The West, once again, bet on the radical nationalists and the oligarchic circles, who seized power in Ukraine. A routine practice of using “unknown snipers” and creating sacred sacrifices, named by the Ukrainian media as the Heavenly Hundred, was also used. That situation caused a backlash in the south and east of the country, where a wave of protests, under federalist and pro-Russian slogans, arose against the actions of the ultra-right nationalist organizations and in defence of the status of the Russian language. The new Kiev government began to actively apply force. They sent armed nationalists to the various regions, providing them with complete freedom of actions without any consequence from law enforcement agencies.

Background: On February 20, 2014, in the Cherkassy region of Ukraine, eight buses filled with Crimeans, who participated in rallies against the coup, were attacked. The busses were stopped by groups of armed supporters of Maidan, four buses were burned, people were beaten, and sustained fractures, burns, craniocerebral injuries and were subjected to mockery. About 30 Crimean residents went missing and at least 7 were killed.

During this time, nationalists from the western regions of Ukraine began to infiltrate the territory of Crimea in order to consolidate the anti-Russian forces and provoke a civil conflict.

There were murders, abductions of dissenters, seizure of administrative buildings. With this in mind, local authorities in the Crimea changed the executive bodies of power. The new Crimean authorities refused to recognize the legitimacy of the coup and turned to Russia for support.

Background: On February 27, Russia moved to active operations in Crimea. Over the next few weeks, independence of Crimea was proclaimed, a referendum was held on its status and Crimea was annexed by the Russian Federation. In the east of Ukraine, where Russia has not moved to active action, civil confrontation gradually developed to an armed conflict, and the slogans of the federalization of Ukraine have been replaced by the requirements of the independence of the regions. To suppress anti-government speeches, the Ukrainian leadership announced the beginning of a military operation in mid-April. Civil war broke out.

Events in Ukraine, the annexation of the Crimea and the civil conflict in the east of the country caused further confrontation between the West and Russia. The sanction war began. Both Russia and the West rendered direct support to opposing sides.

In fact, relations between the Russian Federation and the West began deteriorating to the state of the “cold war”. At the same time, the Kremlin does not take any active measures as it did with Crimea. It does not provide direct support to the pro-Russian population in Eastern and Southern regions on Ukraine, as it was done for residents of the Donetsk and Lugansk regions. As a result, the new Kiev regime is given a carte blance for actions in other dissenting regions like Kharkov, Odessa and Kherson. Ultra-nationalist formations are introduced into these regions and law enforcement personnel are replaced by people from the west and centre of the country.

Political repressions and mass arrets begin. Total control over information space is established. These measures prove to be effective. Moscow loses its avenues of influence within Ukraine.

At the same time, the situation on Russia’s southern borders is growing more complex. ISIS successes in Iraq and Syria have spread radical ideas among the population of Central Asia and some southern regions of Russia. During the summer of 2015, ISIS included no fewer than 3,000 militants with Russian citizenship and another 2,500 citizens of Central Asian states. The leadership and command staff of ISIS special services and subunits consisted mainly of emigres from Northern Caucasus. Starting in 2015, having a command system and well developed propaganda outlets, ISIS intensified its recruitment on the territory of former USSR. Russian intelligence noted an upsurge of extremist activities on the country’s territory. This, and the prospect of loss of influence in Syria, the last place with Russian presence on the Mediterranean, led Russia’s leadership to provide military assistance to the government of Syria.

Background: On August 26, 2015, Russia and Syria entered into an Agreement on Stationing a Russian Armed Forces Aviation Group on Syrian Territory. Slightly later, in late September 2015, the land portion of Russia’s military operation in Syria began, which included special operations troops, artillery, combat engineers, and also an enlarged complement of instructors and advisors. According to some report, Russian military advisors were present in the ranks of SAA units operating on the most difficult sectors of the front already in the spring of 2015.

The Russian group of forces in Syria demonstrated its high effectiveness. Battlefield situation dramatically changed already in the first months.

In 2016, SAA went on the offensive on every key sector of the front. In the rear areas, Russian advisors and instructors facilitated the regrouping, rearmament, and training of Syrian forces. In late 2016, Syria’s second largest city, the strategically important Aleppo, returned under the control of government forces. By the end of 2017, government controlled the majority of Syria’s territory including Homs, Palmyra, Deir-es-Zor, and the outskirts of Aleppo. ISIS has ceased to exist as a quasi-state terrorist formation.

Since the start of operations in Syria, Russia encountered the opposition of the US and its allies, which from the start actively supported the armed opposition. Josh Earnest, the White House press secretary in the Obama Administration, said that Russia aim was not fighting extremists but supporting the “Assad regime,” “while the rest of the world community…is cooperating with the US within the ranks of the anti-ISIS coalition in Syria which also fights against other extremists.” The US official’s term “world community” was an apparent reference to the 60-some countries in the Global Coalition to Counter the Islamic State of Iraq and the Levant (ISIL). However, during the previous two years, the US and the “world community” have failed to reconquer a single square meter from ISIS, not to mention “other extremists”. And they were also unable to achieve their main goal, the toppling of Assad.

The conflict in Syria in any event made the US-Russia relations even more complex. As part of its anti-Russia strategy, the West opted to continue and expand sanctions war that started in 2014 under the pretext of events in Ukraine. These measures had their results.

In particular, the limitations on access to world finance and international credit instruments were painful. Sanctions and the fall of energy prices were one of the causes of ruble devaluation in 2014. In August-October 2017, the ruble was the most rapidly falling currency out of 170.

Background: Sanctions were one of the reasons for the large-scale outflow of capital from Russia, which in the first 10 months of 2014 reached 110 billion dollars. On April 27, 2015, Vladimir Putin noted during e legislative council meeting that sanctions cost the Russian economy $160 billion.

2015 and the first half of 2016 were the most difficult for Russia’s economy. However, the West and its sanctions unwittingly helped drain the Russian bureaucratic swamp. Both the state apparatus and major corporations were forced to act. The food embargo was introduced as an answer to the sanctions already in 2014. The embargo had its greatest effect on the economy of Ukraine and Baltic States.

Background: The embargo was introduced in 3 phases: in 2014 on the EU, US, Australia, Canada, and Norway, in 2015 on Iceland, Liechtenstein, Albania, and Montenegro, in 2016 on Ukraine.

Positive consequences of the embargo in Russia include the significant increase in agricultural production and food processing. Negative ones include retail price increases of goods that fell under the embargo. In the first phase, food prices increased by 10%-25%. However, the annual 2016 food price inflation stood at 4.6%, and in 2017 it dropped to 1.1%.

Assessing the results of the sanctions war on various sectors of Russia’s economy as of early 2018, one could say that the embargo and sanctions overall had positive consequences, if not for the whole of the economy then at least for its manufacturing component. The national manufacturing sector finally experienced long-awaited and necessary changes which were not implemented since the break-up of USSR. One could also identify positive institutional changes in the military and space industries.

Background: Roskosmos head Oleg Ostapenko stated that “overall one can discern a positive impact of sanctions on our branch.” He added that new technological solutions are being implemented more rapidly, and likewise standardization measures are also carried out more swiftly.

The introduction of sanctions accelerated the process of import substitution in the space industry, which was already ongoing for several years. The Russian financial sector was forced to remember the lessons of late 1990s, in other words, how to operate under the conditions of an unfriendly international financial environment.

On the other hand, a number of Russian corporations, particularly in the fuel and energy sector, attempted to (and succeeded) to recoup their losses induced by sanctions and drop in energy prices using the budget and national reserve funds.

In the meantime, the Russian government continued to seek ways to reduce tensions. The victory of Donald Trump in presidential elections in November 2016 gave rise to hopes in Russia that bilateral relations would improve.

Background: On November 14, 2016, in the first phone conversation between President Putin and President-Elect Trump, the two speakers agreed that “the state of Russia-US relations is extremely unsatisfactory, and spoke in favor of active efforts to improve them and to work on constructive cooperation on a widest range of issues”.

Nevertheless, there has not occurred a single genuine summit meeting between the two countries in the first year after the election. Moreover, right after the election highly placed members of the Washington establishment accused Russia of meddling in the election and swaying its outcome.

Background: According to this version of events, “Russian secret services” organized a cyberattack on DNC servers and published email messages embarrassing to Hillary Clinton, and also used social media to manipulate US public opinion.

Limited Russian successes in propagating alternative points of view on international events using RT, Sputnik, and other instruments allowed the Washington establishment, with the help of mainstream media, to paint a picture of so-called “Russian propaganda” and to accuse Russia of unleashing a “hybrid war”.

Russia’s successes in this area were greatly exaggerated, as was the influence of Russian state media on the world audience, in order to increase budgets for “combating propaganda” and stepping up censorship of alternative media both in the US and the world at large. By 2018 this campaign acquired the character of mass hysteria.

Thus on January 10, 2018, Democratic senators published a 200 page report titled Putin’s Asymmetric Assault on Democracy in Russia and Europe: Implications for US National Security, in an effort to push Trump toward harsher sanctions. The report called for creating a new global front against the “Russian threat”, including European allies.

Background: In the 2 years of investigating the so-called “Russian meddling”, not a single convincing fact or piece of evidence has been presented.

US-Russian relations are at their lowest point since Russian independence. On December 28, 2017, US Secretary of State Rex Tillerson announced in a New York Times editorial:

“On Russia, we have no illusions about the regime we are dealing with. The United States today has a poor relationship with a resurgent Russia that has invaded its neighbors Georgia and Ukraine in the last decade and undermined the sovereignty of Western nations by meddling in our election and others’.” One should particularly note the use of the phrase “resurgent Russia”. Apparently the phenomenon of a “resurgent” Russia as a center of world power is behind the observed actions by the Capitol Hill establishment.

On March 13, 2018 the Secretary of State Tillerson who was not known for his love for Russia was replaced with a more aggressive individual, the CIA Director Mike Pompeo. His nomination was enthusiastically received by both the Democrats and the more hawkish Republicans.

Backgorund: “We hope Mr. Pompeo will turn a new leaf and strengthen our anti-Putin and anti-Russia policies,” said the Senate Minority Leader, Democrat Chuck Schumer. For his part, the well-known GOP hawk Lindsey Graham emphasized that “one couldn’t pick a better person.”

Presidential Election 2018

By the time of its March 2018 presidential elections, Russia found itself in a complex situation. In spite of certain successes in overcoming crises and challenges posed by the sanctions war, Russia’s economy is continuing to experience difficulties.

Background: In the fourth quarter of 2017, Russia’s GDP growth dropped to an annualized rate of 1%, and during the entire 2017 Russia’s economy grew by about 1.5-1.6%, which is considerably lower than the Ministry of Economic Development September 2017 forecast of 2.1%.

Disposable incomes are not growing. Small and medium business is still hidebound by excessive bureaucracy. Conditions necessary for their development still do not exist. Financial sanctions, tight monetary and credit policy, low demand, and negative expectations have led to a shortage of private sector investments.

On the other hand, while two years ago the ruble exchange rate was tightly linked to world oil prices, that dependence has greatly decreased.

In 2015, the ruble-oil correlation was around 80%, by 2017 it dropped to about 30%. The record low inflation rate of 2.5% in 2017 stopped the rise in prices. In spite of the expanding sanctions, Russian assets such as the Russian state obligations, Eurobonds, and the ruble, continue to appreciate.

The state is stimulating the economy through investment in global infrastructure projects such as the Crimea Bridge, and the Power of Siberia gas pipeline.

Overall, the Russian economy is displaying a variety of trends, and the likelihood of a dramatic worsening is extremely low. The situation is more complicated when it comes to social relations.

During the entire period of existence of new Russia, the question of fighting corruption and clannishness has always remained a tool of political warfare. However, there were no systemic measures until 2016. Only in 2017 did the ruling team start to take systemic measures.

Background: In 2017, Russia adopted a range of measures to combat the growth of corruption. In December 2017, State Duma adopted after the third reading the law on a registry of officials who lost public trust and were discharged for bribery.

Several highly placed officials had criminal cases launched against them. The total sum of bribes uncovered in 2016 reach about $41 million, or about $18 million more than a year earlier. In 2017, that sum reached $120 million. This increase was not the result of its growth in corruption bur rather due to different approaches to combating it and heightened attention by law enforcement.

It is remarkable that in 2017 the number of launched corruption cases decreased by 11.2% by comparison in 2016, while the sum of bribes increased by almost a factor of 3. It indicates that the attention of law enforcement shifted from “petty” corruption to combating bribery among top officials.

Background: The sums mentioned refer only to cases concerning Article 290 of Russian Federation Criminal Code, Receiving Bribes.

Thus in 2016-17, individuals charged with bribery and arrested included the Minister of Economic Development Ulyukayev, several current and former regions heads, dozens of highly placed officials and managers of state enterprises.

At the same time, a significant portion of Russia’s population is skeptical, and believes that the law enforcement are using corruption for political and electoral reasons and are not touching people close to ruling clans.

This public perception was formed over the course of the last 2 decades and it obviously can’t be changed in a year or two. This has been effectively used by opposition figures. Opposition also has been using quite correct, given Russian realities, slogans of budget inefficiency, absence of social mobility among youth, problems in health care and education systems.

Nevertheless, due both to Vladimir Putin’s actual successes and to opposition composition and their views, it has not been able to select a competitive candidate for 2018 elections or propose a rational alternative development plan for Russia, acceptable to any sizable portion of the population. One also ought to distinguish the so-called “liberals” from among the opposition as a whole.

Background: Liberal oppositionists include mainly representatives of humanist and creative intelligentsia, some small and medium businessmen (mostly in retail, financial), IT and service sectors, a proportion of college students, and office workers in big cities, mainly Moscow, St. Petersburg, Ekaterinburg, and Novosibirsk. Their electoral base does not exceed 5% of the population.

Rank and file oppositionists’ aspirations include positive changes in daily life, such as less bureaucracy, more entrepreneurship, an open society, in other words, creating a European model of democracy from the 1990s. Therefore, and traditionally, contemporary West is idealized. This has been effectively used by that part of Russia’s elite whose interests are tied to global financial capital and establishment and who see Russia as, at best, West’s raw materials base.

These individuals who call themselves leaders of protest opposition understand they lack broad popular support and can’t directly compete with Putin.

Background: All early March polls suggest Putin will win a decisive victory in the first round.

At the same time 2018 elections are perceived as a chance to change the direction of the country’s development and to use external forces to topple the “Putin regime”, up to and including a coup d’etat. Therefore they have chosen the tactic of attempting to discredit the elections as such. Already several weeks prior to the elections, the liberal media and the social media have launched a large-scale campaign promoting non-participation in the elections and, at the same time, accusing the government of planning mass forgeries.

The aim is to create the necessary image for MSM and “the entire world community” in order to continue the campaign to declare the elections illegitimate, with the support of external forces.

Background: For the last several years, media resources of “liberal opposition” have been focusing on youth aged 12-20 years. Most of that audience cannot yet take part in presidential elections, since the voting age is 18. This fact demonstrates that the opposition is not seeking to come to power using the existing elections process, but through discrediting the system and implementing a scenario resembling in some ways the Kiev Euro-Maidan or Arab Spring.

Moreover, the combination of “international support” and “illegitimate” elections results could be used both to launch street protests which would draw large numbers of 14-16 year old youths, in the hopes of creating images of “the bloody Putin regime beating children.”

Nevertheless, protests alone, even protests involving tens of thousands of participants will not be able to destabilize the existing Russian Federation state institutions. They would require assistance in the form of pressure by international crises, escalating instability close to Russian borders, or even a new theater of military confrontation or the threat of global war.

International crisis pressure would have to be based on several unrelated but major charges against Russia’s leaders. The British provocation in the form of “the Skripal poisoning” fits into this scenario perfectly, as does the alleged preparations by the Syrian government to use chemical weapons in Eastern Ghouta, as do the provocations in eastern Ukraine. It is entirely possible that the world will see, during the 2-3 weeks immediately after the elections, several other improbably brazen anti-Russian provocations.

Even if they fail to damage Russia’s statehood, they will serve as an excuse to strengthen Russian sanctions in 2018, expand efforts against the so-called Russian propaganda and, most importantly, to significantly increase US defense spending as well as defense spending of several other NATO countries.

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