-Caveat Lector- STRATFOR.COM Global Intelligence Update Weekly GIU August 23, 1999 Putin: Yeltsin's Madness or Silent Coup? Summary: The appointment of Vladimir Putin appears to be another of an endless round of random appointments by Boris Yeltsin. We think it is of greater, more lasting significance. Putin, a lifetime operative for the KGB, currently sits on top of Russia's intelligence apparatus. Unlike the other Yeltsin appointees, he has an institutional base with a distinct, sophisticated agenda. Given the converging crises inside of Russia and Yeltsin's inability to control the situation, we see the appointment of Putin as part of an attempt by the intelligence and defense communities to arrest and reverse the catastrophic slide of Russia into the abyss. Putin may or may not succeed. He has enormous opposition and problems. But his appointment is moving Russia to a different place. Analysis: On August 9, 1999, Boris Yeltsin fired Sergei Stepashin, his prime minister of a few short months, and replaced him with Vladimir Putin, head of the renamed KGB (the FSB) and of the State Security Council. Putin is the latest of a string of prime ministers appointed by Yeltsin, none of whom lasted more than a few months. The obvious question is whether this latest firing and appointment has any real significance or whether, in the words of Yuri Luzhkov, Moscow's mayor and contender for national power, this represented the "continuous, nonstop absurdity of those in power." Or, as Boris Nemtsov, a former deputy prime minister and power broker put it: "It is hard to explain madness." There are two competing explanations for what is going on in Moscow. One is that, in the words of Macbeth, "It is a tale told by an idiot, full of sound and fury signifying nothing." Yeltsin is an old, confused alcoholic, and nothing is happening but his random whims. Then there is the other explanation, which we subscribe to, that there is in fact meaning behind the political maneuverings: a struggle for the soul of Russia between two insufficiently defined factions, with a third, darker force waiting in the wings. This view is not in any way incompatible with the notion that Yeltsin is not in control of his faculties, although we very much doubt that this is true. Nor is it incompatible with the idea that there are many other more personal and private issues involved. History is rarely clear cut. Nevertheless, it is our view that the emergence of Vladimir Putin represents a breakpoint in recent Russian history and may well be a defining moment. Putin's appointment is not like the appointment of his predecessors. Putin is a different personality who comes directly from the intelligence community. He has his own bureaucratic power base, and that power base has its own agenda. We believe that agenda is increasingly divergent from Yeltsin's and his backers and followers. Indeed, it is our view that the appointment of Putin is not simply a new, random action by Yeltsin, as much as it is an attempt by the intelligence-defense community in Russia to gain control of a badly deteriorating situation. It is not clear to us, in fact, whether Yeltsin selected Putin or whether Putin was forced on Yeltsin. It is, of course, becoming increasingly difficult to figure out what is happening in the Kremlin. In the old days of communism, Kremlinologists, as they were called, worked with the merest scraps of information trying to figure out who was rising and falling in power. A politician missing from an official picture, a casual comment from an apparently drunken diplomat, the wording of a party proclamation - these were the bare indicators Kremlinologists worked with, trying to figure out who was in, who was out and why. It has not quite become that bad, but it has gone a long way in that direction. Over the past year or so, the Russian political system has been losing transparency. The constitutional arrangements have evolved in such a way that the Duma, for all its bellowing, ultimately rubber stamps Yeltsin's selections. Decisions on who rises and falls are announced by Yeltsin, but the fact is that a complex and extremely opaque political process has emerged behind the Russian presidency, involving a complex interplay of individuals, groups and social forces. We see the outcome of the struggles among these forces as officials rise and fall. We focus on Yeltsin since he is both the president and the announcer of the winners and losers. It can therefore appear that Yeltsin is simply and arbitrarily in control. We think this appearance is an optical illusion. Stepashin said in an interview a few days after he was fired that he thought that Yeltsin was forced to dismiss him, because he "refused to serve the interest of certain groups, which made them realize [he] wasn't pliable." He went on to say that Yeltsin was not alone in his office when he fired Stepashin, although he did not say who else was there. We are returning to the politics of conspiracy. The very difficulty of figuring out what is going on inside the Kremlin speaks volumes about the state of democracy in Russia. As we said, there are two factions competing for power inside the Kremlin, with another waiting outside the walls. The first faction, the faction that has dominated Russia since the fall of Gorbachev, is the Russia of the extreme reformists and Westernizers. Their intention was to transform Russia into a constitutional democracy with a functioning market economy. For them, the very existence of the Soviet Union was an encumbrance, forcing the more developed regions of Russia to stop and wait for the less developed ones. Intimately linked to Western academics and bankers, this revolutionary faction intended to transform Russia into a modern European state. The extreme reformists and Westernizers failed. Russia used to be poor but powerful. Today Russia is much poorer and much less powerful. At the heart of the reformist failure was Russia's deeply embedded inefficiency and the faction's own corruption. Money invested in Russia did not turn into capital. It did not generate more production, but was simply soaked up in consumption and corruption. In the face of Russia's resistance to effective structural change, the reformers turned into thieves. Vast amounts of Western investment and aid were stolen by leading reformers, moved out of Russia and invested in the West. The breathtaking extent of this thievery is only now being calculated with some precision, although the order of magnitude has been known for a long time. The second faction might be called Gorbachev's heirs, of whom Putin is a prime specimen. Putin has spent his career in the state security apparatus. He rose from a KGB field operative in Germany to the head of the renamed KGB. Contrary to the popular view of the KGB as mindlessly brutal, the KGB's cadre was probably the most educated, well-traveled and sophisticated social group in the old Soviet Union. By the very nature of their jobs, they were forced to confront the degree to which the Soviet Union was falling behind the West technologically and economically. As guarantors of the regime inside the Soviet Union, they knew better than anyone the levels of inefficiency, corruption and cynicism that had gripped the Soviet Union. Along with their counterparts in the upper reaches of the military, they understood how much trouble the Soviet Union was in long before Western experts got a sense of it. Gorbachev was very much their invention. Gorbachev's mission was to reform the Soviet Union, not dismantle it. Gorbachev understood that the old Stalinist model of central planning had to be replaced by market mechanisms. He also understood that intellectual liberalization was necessary in order to increase economic efficiency. Finally, Gorbachev understood that Western investment and technology transfer were essential if the Soviet Union was to become competitive. It followed from this that the Cold War had to be ended if the West was to be induced to invest in the Soviet Union. Gorbachev tried to negotiate an armistice that would leave the Soviet Union in a position of equality with the West. What Gorbachev never intended happened. Relieving pressure on the system meant that the centrifugal forces within the Soviet Union took over, shredding it along many lines. Soviet institutions were torn apart. The Gorbachevites tacked with the wind, attaching themselves to various reform factions. The key thrust of the Gorbachevites - the radical reform of the economy and Soviet society - was also the position of Yeltsin and the reformers, albeit with a Russian focus and an even more radical bent. This was not intolerable to the Gorbachevites. The subordination of Russian national interests to the West followed even from Gorbachev's own strategy of detente in exchange for investment. Men like Putin could live within the dynamics of Yeltsin's Russia. Indeed, they would have disappeared invisibly into a reformed Russia had everything not gone disastrously wrong. In all of this, one institution remained relatively intact: the KGB, now renamed the FSB in a purely cosmetic shift. The FSB was genuinely committed to reform because of its obsession with national security. The same impulse toward national security caused the FSB to maintain its old internal and external infrastructure. The FSB did not dismantle the KGB's infrastructure. It put parts of it on hold, parts of it in the deep freeze and continued operating other parts of it. But all of the structure continued to exist. The KGB, as the leading reformist faction within the Soviet Union, collaborated comfortably with the new reformers, both in their legitimate and illegitimate activities. But in the final analysis, while they shared much with the reformers, they differed in one fundamental way: they were Soviet men. They believed, if not in the ideology of the Soviet Union, then in its imperial mission. Their tentacles ran throughout the former Soviet Union and into Eastern Europe as well. So long as reform held out the promise of a greater Russia, they were prepared to give their loyalty to the reformers. But there were limits. Three limits were hit within a short period of time: 1. Kosovo: When Kiriyenko was fired and replaced by Primakov, another KGB man, Stratfor was able to predict the Kosovo crisis. It was our view that Primakov would take Russia on a more assertive course in relation to the West, and as a result, the Serbs would be encouraged to take greater risks than they had before. When Primakov was overthrown in the middle of the war, Serbia's geopolitical position collapsed. Russia essentially abandoned Serbia under Chernomyrdin's and Stepashin's hands, forcing Milosevic to capitulate. There was a major crisis at the time, including the Pristina airport affair. Stepashin survived, but the sense of humiliation ran deep in both the military and the FSB. Most important, it was not clear that Russia was receiving anything of value in return for its services in Kosovo. 2. In the past few weeks, the crisis in the Caucasus has been coming unhinged. There was real fear of losing Dagestan. Giving up the Soviet Union was one thing. Allowing Russia itself to disintegrate was another. Stepashin clearly had no clear-cut idea about what to do with that crisis. Given Russia's economic problems, the inability to contain that crisis could have led to disintegration. 3. The West was about to find out just how much money had been stolen by Russian oligarchs under the reform regime. The revelation in the New York Times of the Bank of New York's role in money laundering in Russia was just the tip of the iceberg. The vast amounts of diverted money were now going to come to light. With that revelation, any hope of further investment, loans or aid to Russia had gone out the window. Paradoxically, the same people that the West liked to deal with, the reformers, were precisely the ones who would be shown to have been most deeply involved in the theft of the century. The justification for their presence - that men like Chernomyrdin were known and trusted by the West - was about to be turned on its head. The reformers were the last ones to be trusted by anyone. Putin, even more than Primakov, represents the return of the Gorbachevite - men interested in reform as a means to preservation of the state apparatus and the national interest. Putin struck quickly. The Swiss bank accounts of Berezovsky, a leading oligarch closely tied to Yeltsin, were frozen while criminal investigations moved forward. A massive military force was gathered around Dagestan, including air power. Significantly, Putin announced that these soldiers would be paid the same amount as troops in Kosovo: US$1,000 a month for privates, not the US$100 promised and frequently not paid. Russia began raising the specter of Russian troops not remaining under NATO command and instead collaborating with Serb forces in order to protect Kosovo Serbs from the KLA. Russia began building pressure on the Baltics. Russia condemned and threatened Latvia on human rights violations concerning Russian citizens in Latvia. Russia cut off energy supplies to Lithuania. On August 25, Boris Yeltsin will visit Beijing to hold a summit with Jiang Zemin. Topics to be discussed include military cooperation, Kosovo and other issues, according to ITAR-TASS. We remain more convinced than ever that an alliance between the two countries will eventually emerge. With Putin as prime minister we are further convinced of this fact, even though officially his portfolio only concerns domestic matters. The reason for our conviction is the third faction we alluded to earlier as the "darker force": Zhirinovsky and the Communists. The current situation in Russia is intolerable and cannot continue. The idea that somehow this will remain the permanent condition in Russia is absurd. Russia has its periodic flirtations with the West and Western culture and then invariably returns to its own course. The debate now is how far in the anti-Western direction Russia will swing. Putin represents a moderate anti-Western faction. He will assert the Russian national interest both within the former Soviet Union and globally. But he is a Gorbachevite. He understands the need for Western investment and technology. He will not simply impose blockade and conflict. But there are others outside the Kremlin walls who are far more anti-Western and are less interested in economic development. If Putin fails, the deluge nears. But Putin has strong cards. He owns the famous personal files on everyone. He knows where the money has gone, he knows who has taken it, and he even knows how to get some of it back. If Yeltsin decides to fire Putin, Putin may not be as willing to go as were Stepashin, Primakov or Kiriyenko. He has his own cards to play and they include some very high ones. He also has cards to play in the West. He remembers the old Soviet principle of linkage. If you threaten Cuba, we threaten Berlin. He is already orchestrating his Baltic card and his China card. But his best card is the money card. He knows where it went. Whether he tells or doesn't tell will effect individuals and countries. We can't be sure, of course, but Putin is a man who looks like he has staying power. A coup involves illegality. There was nothing illegal here. But we think something definitive has happened in Russia. Putin is not just another pretty face. The KGB is sitting in the prime minister's chair. To put it differently: having forced Primakov out of the chair, the shadow forces fighting the KGB in the Kremlin lost another round, and put the boss himself in charge. 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