A critical factor in the breakdown of the central government was its inability to collect taxes from citizens and enterprises. Thus, between 1989 and 1997 state revenues fell by nearly 45 per cent, partly because the regions reduced the transfer of revenues, partly because individuals and enterprises simply refused to pay taxes (in 1997, only 16 per cent of the taxpayers paid in full and on time, 50 per cent partially and belatedly, and 34 per cent nothing at all). When the government proposed tax reform for small businesses, petty entrepreneurs were aghast: ‘Don’t do anything: it is fine as it is! We evade all taxes, from the profit tax to the value-added tax. We’ve learned how to circumvent all the assessments for social services.’ Yeltsin had partly ‘legalized’ the tax evasion by making special deals with influential companies; others simply refused to pay (the top eighty enterprises accounted for 40 per cent of the tax arrears). Other factors behind the decline in tax revenues included the breakdown of the state apparatus for tax collection, the proliferation of a ‘shadow economy’ unrecorded in accounting books, and corruption vigorously promoted by organized crime. Tax collection came to resemble civil war: in 1996 twenty-six tax officials were murdered and eighteen tax offices subjected to bombings and armed assault. In October 1997 Yeltsin conceded the magnitude of the peril and established an ‘extraordinary commission’ (invoking the same Russian initials as the first Soviet secret police, VChK) to collect taxes. A desperate government imposed a plethora of new taxes (more than 200 separate taxes were on the books in 1997), but these were riddled with special-interest concessions and open to arbitrary interpretation and manipulation. By the late 1990s, government revenues amounted to a mere 16 billion dollars—equivalent to 1 per cent of the revenues flowing into the US Treasury.
A poor state is a corrupt state: underpaid civil servants, from ministers to militiamen, openly demanded bribes. Venality permeated the highest ranks of the government; the most sensational case involved accusations by Swiss investigators that Pavel Borodin (a Kremlin official in charge of presidential properties and patron of the future president Vladimir Putin) had accepted 65 million dollars in kickbacks from two Swiss firms for contracts to renovate Kremlin properties. Corruption also created opportunities to appropriate state assets at a nominal price. One oligarch observed in 1997 that politics was the most lucrative business in Russia—a candid allusion to insider deals, special privileges, and ‘fire-sale’ prices on state property for those with the right political connections.
As tax revenues plummeted, the state had to cut back on basic services—from law enforcement and national defence to education and public health. Although the number of state employees increased (especially those in the ‘Presidential Administration’), the government steadily reduced its allocations for essential services. The budget for law enforcement, for example, fell by 17 per cent; the inevitable result was a personnel flight that hobbled not only the Interior Ministry but even the fearsome KGB (now the FSB, the Russian abbreviation for ‘Federal Security Service’). This breakdown led to a privatization of violence, as private security firms—non-existent in 1992—swelled to 10,804 firms with 156,000 employees in 1998 (of whom 23 per cent came from the Interior Ministry and 8 per cent from the FSB).
Still more striking was the decline in national defence: the budget dropped to one-seventh of Soviet levels, with devastating consequences for the military-industrial complex and the armed forces themselves. The government channelled its few resources into maintaining the strategic nuclear forces in a state of readiness, but had to make drastic cuts in research and development, suspend the acquisition of new weapons, delay payment of paltry wages, and reduce operational funds (to the point where ships stayed in dock and warplanes on the ground). By the end of the 1990s, Russia’s air force and navy were perilously under-maintained and obsolescent; the fleet of nuclear submarines, for example, shrank from 247 to 67 (some of which were not in service). Penury bred corruption and theft, most sensationally in the disappearance of fissionable materials—including, as the chief of the Security Council admitted in 1996, over half of the country’s ‘portable nuclear devices’. Morale plummeted; dearth and
