All these intramural frictions make it impressive to a double degree that the young reformers, with a pat on the head from Yeltsin, put forward a program for reforming the Russian reforms and made a start on implementing it. The timing was auspicious in one regard: The decline in the country’s economic output had halted, and it experienced a boomlet of 0.8 percent growth in 1997. Its stock market was the best-performing in the world in percentage gains from the summer of 1996 through 1997. The benchmark RTS (Russian Trading System) index of publicly traded stocks, set at 100 on September 1, 1995, and having lost value in late 1995 and early 1996 in anticipation of a communist election victory (it reached a low point of 67 in March 1996), rose to 201 points by the end of 1996 and to a peak of 572 on October 6, 1997. In January 1998 the government redenominated the ruble, lopping three zeros off the old notes, in a sign of confidence that inflation had been conquered. It was understood on all sides that a new round of changes to build on these gains could not be accomplished by executive edict. After issuing a high of thirty-eight decrees per month in 1996, many of them election-related, Yeltsin lowered his monthly output to sixteen in 1997, eighteen in 1998, and twelve in 1999, well below the pace of his first term.89 The volume of legislation was up at that same time, and it was laws, adopted by the federal parliament and approved by the president, that Russia required to underpin its market economy.
The progress made was skimpy, for one simple political reason—lack of support in the legislature elected in December 1995. An attempt to tie old-age pensions to workers’ lifetime earnings rather than rely exclusively on the public purse, on the model of a number of Latin American countries, was debated by the Duma in 1997, then taken out of consideration by the government in July 1998, when it was apparent that it would not pass. A new tax code had been under discussion since 1995. It was with difficulty that Yeltsin got the leftist and nationalist majority to approve a first part, setting out general principles and duties, in July 1998; the remaining parts had to await a new president and a new Duma. Yeltsin was especially eager to get through the legislative pipeline a framework that would permit the commercial sale of rural land and knock down barriers to private farming. A conservative land code drafted by socialistic deputies from the Agrarian Party passed the two houses of parliament in 1997 but was blocked by a presidential veto that July. Yeltsin emceed a forum on the statute with lawmakers and interested parties in December. “Life itself” and the failures of collectivized agriculture had put the question on the agenda, he said, and he was prepared to accept restrictions on the resale of land and a ban on foreign ownership. 90 The compromise bill that emerged fell one vote short of the majority needed for adoption in the State Duma on July 16, 1998. This proposal, too, was in abeyance until 2000.91
In the first leg of Yeltsin’s second term, the most portentous event in Russia’s evolving political economy was, on the face of it, one of the more esoteric. On July 25, 1997, the government entertained bids for a 25 percent share in Svyazinvest, a company formed in 1994 to hold the assets of regional telecommunications firms. Chubais and Nemtsov organized the equity sale to revive the privatization process and to help with the budget deficit, and did it in such a way as to prevent the pitfalls of loans-for-shares. Bids were submitted to a state auctioneer (the property ministry), and they were sealed, making collusion difficult. Nemtsov wanted the new rules to signal a break with what he called “bandit capitalism”; although Chubais did not use this phrase, he agreed with the sentiment and with the criticism of the corruption bred by the loans-for-shares mechanism. Two groups entered bids, one led by Vladimir Gusinskii of NTV and one by Vladimir Potanin, now back in the private sector. Potanin, who partnered with American trader George Soros, was victorious with an offer of $1.87 billion; Gusinskii bid $116 million less and lost.
That would have been the end of it were it not for the refusal of Gusinskii, “blinded by greed and wounded pride,”92 to accept the result. He had not participated in loans-for-shares, unlike Potanin, and felt it was his turn at the trough; being in the media business, he saw Svyazinvest as a natural fit. Boris Berezovskii, whom Potanin had outmaneuvered to get control of Norilsk Nickel in 1995, was barred as an officeholder from formal involvement, yet took part informally as an impassioned ally of Gusinskii. Berezovskii and Gusinskii had their press and television outlets vilify Potanin, the auction, and the integrity of the public servants, chiefly Chubais, who stood by it.
