The Lost Decade

To understand where Vladimir Vladimirovich Putin is taking Russia, you need to go back to the country's lost decade, the years after the collapse of the Soviet Union in 1989. If you were an average Josef Vodka caught up in the chaos that followed the demise of communism, it was a time of hardship, dislocation, and frightening uncertainty. If you were a Westerner, it was a time of prosperity and of self-congratulation for having won the Cold War. If you were Vladimir Putin, it was a time of anger and hardening—and preparing. (See Figure 1.1.)

Given the country's stunning rise since the 1990s, it's easy to forget how bad things were. (See Figure 1.2.)

It was 10 dismal years of lawlessness presided over by politicians who had been left bewildered by the task of bringing their country into

Commonwealth of Independent States (CIS)

Figure 1.1 Commonwealth of Independent States (CIS)

Source: World Atlas.

Russian Gross Domestic Product (Producer Price Parity) since the Fall of the Soviet Union

Figure 1.2 Russian Gross Domestic Product (Producer Price Parity) since the Fall of the Soviet Union

Source: International Monetary Fund. © Casey Research 2014.

the modern world. The sad decade was marked by the ascent of wildly profitable criminal syndicates and a coterie of oligarchs who fed on the government's naive plans for turning state enterprises into private ones. Operating as barely legal businessmen, they became billionaires almost overnight.

While the few celebrated, morale among ordinary Russians sank. They had just suffered through a long war in Afghanistan and its humiliating end. Then came the implosion of the Soviet Union, the grand empire they'd been told had been built for the ages. National pride had become a painful memory.

When the communist economy ground to a halt, no one in the government of the newborn Russian Federation knew what to do. Free markets were just beginning to emerge. Sizable and mature private businesses didn't exist. There were no banks competent to judge credit risks. Almost no one understood stocks, bonds, commodities, or any kind of market other than the black one that had long flourished—and continued to do so. Property rights were a slogan with uncertain application. The ruble was worthless outside the country while internally inflation ran wild. Jobs disappeared, leaving millions unemployed. Infrastructure was crumbling. Millions of Russians fell into destitution.

It was the very definition of hard times. People's prospects were so bleak that many clamored for a return to communism, a regime under which they at least knew where they stood ("We pretend to work; they pretend to pay us," as the Soviet-era joke went). And the problems weren't just with the economy.

There was, in particular, Chechnya. A secessionist movement of Islamic Chechens were reading the disorganization in Moscow as an invitation to press their bid for independence. They accepted the invitation, and in late 1994 the First Chechen War began.

Putin's predecessor, Boris Yeltsin, was still in office at the time. Despite Moscow's superior manpower, weaponry, and air support, by December 1995 Chechen guerrillas had fought Yeltsin's mighty Russian army to a bloody, embarrassing stalemate.

The Chechens' military success was largely a dividend from their long-running success at crime. Even during the Soviet era, Chechen mafiyas had controlled much of the Russian criminal underworld, so the lawlessness of the 1990s played to the insurgents' advantage. Need sophisticated weapons to fight the Russian army? No problem. The rebels knew which Russian army officers were willing and able to deliver the weapons in exchange for a bag of dollars or a deposit to an account in Zurich. The cash was readily available to the rebels from the Chechen crime syndicates operating throughout Russia.

By the end of 1995, Russian forces were utterly demoralized. That, along with a Russian public still smarting from the Afghanistan disaster and deeply opposed to the conflict, led Yeltsin's government to declare a ceasefire at the end of the following year.

It had been a vicious conflict, with atrocities committed by both sides. The official figure for Russian military deaths was 5,500; the truth may be twice that. For Chechen fighters, the death toll neared 15,000. Civilian casualties, which are more difficult to tally, numbered 30,000 to 100,000 killed and multiples of that injured. More than 500,000 people were displaced, and cities and villages across Chechnya were in ruins. But for Moscow, the suffering and loss weren't the price of victory; they were an advertisement of failure.

Putin was watching the debacle from afar, and it ground away at him.

During most of the conflict, he was just another minor political figure in St. Petersburg, serving as an adviser to the mayor on international affairs and far removed from Kremlin politics. But he was filled with ambition and had already set his sights on higher office. To that end, he had begun gathering a circle of confidants. These "St. Petersburg boys," intensely loyal to Putin, were the only people he trusted.

This inner circle would benefit enormously. Dmitry Medvedev, for example, would eventually inherit the presidency from Putin when the latter was barred by law from a third consecutive term. Medvedev would keep Putin close by appointing him prime minister. Then, after serving a single term, Medvedev would step down, allow Putin to be reelected, and accept his own appointment as prime minister in return—a revolving door that could be kept turning for decades.

Other loyalists, like Igor Sechin, Putin's right-hand man in St. Petersburg, were rewarded with control of vast stretches of the economy, particularly in the energy industry.

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