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Vladimir Putin. Photo: Joachim Steinhöfel

On 31 December 1999, Russian President Boris Yeltsin delivered his traditional annual address on television. Many saw the 1990's as a "lost decade" for Russia, which was characterized by a deep industrial downturn, mass impoverishment, resurgent separatism, rampant criminality, the growing weakness of the state and the rise of powerful business interests. In what came as a surprise to most Russians, Yeltsin announced his resignation, saying that he decided to make way "for a new generation – the generation of those who can do more and do it better."[97] The then-Prime Minister Vladimir Putin became acting president of Russia. Several months later, in the presidential elections of March 2000, Putin emerged as a clear winner with 52.94 percent of the popular vote.[98]

Putin, who had already become known for his hardline stance on Chechen separatists, set out to strengthen the power of the federal centre. One of his first steps was to take on the oligarchs who had grown increasingly powerful and politically influential during the Yeltsin era. In July 2000, Putin invited some twenty of Russia's top oligarchs, including Bendukidze, to the Kremlin for a meeting. Putin's liberal advisors, led by Andrei Illarionov, emphasised the need to improve the business climate in Russia and attract foreign investment. The oligarchs themselves were fearing a possible revision of privatization results which were widely viewed as illegitimate by the Russian population.[99] Bendukidze used the opportunity to voice his own views on taxation, saying "Until the tax rates are lowered, every businessman is a criminal."[100]

Putin opened the meeting in an assertive tone, telling the oligarchs that they had no business criticising the state, since they themselves had created the system.[101] The results of the meeting were ambiguous. On the one hand, Putin promised that there would be no "deprivatization." On the other hand, he clearly communicated to the oligarchs that, should they refuse to play by the rules set by the state, they would be punished. Olga Kryshtanovskaya summarised the outcome as follows: "The essence of the agreement was mutual non-interference: Putin would not interfere in the oligarchs' businesses on the condition that the oligarchs would not interfere in politics."[102]

The most important stage in Bendukidze's political activities began in 2000, the beginning of the Putin era, when he became an active member of the Russian Union of Industrialists and Entrepreneurs (RSPP).[103] Bendukidze headed the Working Group on Tax and Currency Regulations Reform. According to Russian analyst Pyotr Kaznacheev, Bendukidze "was for a long time the informal leader of the liberal wing of the RSPP, always bringing his radical reform proposals into this rather eclectic structure", much to the chagrin of the older industrial managers.[104] He continually insisted that, given the presence of the large "grey" (shadow) sector in the Russian economy, the only way to provide incentives for business to enter the legal sphere was through sizeable tax reductions.[105] Bendukidze's advocacy during this time focused on tax reform and resisting government intervention in the economy.[106]

In 2007, Vladimir Putin was Time Magazine's Person of the Year
In 2007, Vladimir Putin was Time Magazine's Person of the Year.
Photo: Time Inc.

In a speech in April 2001, Putin outlined a programme of liberal market reforms as necessary to stimulate Russia's modernisation and development. Lilia Shevtsova, a renowned Russian scholar, noted that at the time "People close to the Kremlin were talking about a combination of mild authoritarianism and market liberalism as a remedy for Russian problems." Putin's speech, she wrote, meant "that the ruling team had declared its direction and the use Putin planned to make of his omnipotence: He would modernize the economy." [107]

The reforms announced by Putin in 2001 in Russia bear a striking resemblance to the reforms later carried out in Georgia under Mikheil Saakashvili. Shevtsova wrote that Putin

"gave the Duma a package of draft laws that encompassed judicial reform, a land code, pension reform, changes in tax legislation and the regulation of business, and a new labour code. What he did in the spring 2001 looked like a revolution."[108]

The simplification of licensing requirements for businesses was another example of a deregulatory measure intended to reduce corruption – at least at the petty level. In Shevtsova's words, the Russian reformers

"significantly reduced the number of licences that businesses had been required to obtain, and therefore the opportunity for bureaucrats to extract bribes and interfere with the market. The proposed legislation, however, seemed to deal mostly with corruption among minor clerks; as observers joked, bribery was put under the control of higher administration."[109]

All of these measures would later be tried in Georgia after Bendukidze's arrival. In Russia at the time, Bendukidze coordinated the RSPP's campaign for free movement of capital. In 2001, enterprises earning revenue abroad were obliged by law to repatriate 75 percent to Russia. In what proved a significant lobbying victory for Bendukidze,[110] Vladimir Putin eventually agreed to lowering the threshold from 75 to 50 percent.[111] This was one crucial step toward more extensive capital liberalisation a few years later.

Duma in Moscow
Duma (Russian Parliament) in Moscow. Photo: Wikipedia Commons

One of the best-known liberal reforms in Russia was the introduction of the 13 percent flat tax on personal income in 2001. The reform was described by IMF economists as "extraordinarily influential" and "arguably the most important tax reform of the last decade."[112] In 2002, revenues from personal income tax increased by about 26 percent in real terms[113] in what has been described by some as an economic miracle.[114] Commenting on the flat income tax rate, Bendukidze praised it as the only truly positive element in the entire tax reform in Russia:

"Liberalization happened only in one area – namely, the introduction of a flat 13 percent rate of income tax. In this regard, I think, the tax system of Russia is one of the most liberal in the world, is better than the tax system in any European country or in the USA. In all other regards, there has been no liberalization."[115]

Bendukidze would later push for a similar reform in Georgia, going one percent better with a 12 percent income tax rate.

As a key figure in the RSPP tax reform campaign, Bendukidze was frequently consulted by high-level government officials. For instance, in January 2003 Russian business daily Vedomosti reported:

"Two days prior to introducing their own tax reform proposals, the Minister of Finance Aleksei Kudrin and Minister of Economic Development German Gref decided to discuss their proposals with Kakha Bendukidze, the head of the Tax Division of the Russian Union of Industrialists and Entrepreneurs. The tax ideas pushed through by the oligarchs are still too liberal not only for Kudrin, but also for Gref … "[116]

Bendukidze argued that if tax cuts were combined with the fight against illegality, the state budget would actually benefit from such measures. [117]

Bendukidze became recognized in Russia as a leading libertarian, consistently advocating deregulation and promoting free market principles. Rossiiskaya Gazeta columnist Tretyakov described Bendukidze as "one of the most consistent proponents of liberal economics among Russian businessmen."[118] Bendukidze's interests were in economic freedoms, and he had little to say in public about the development of democracy in Russia. This explains why he was able to embrace Putin's approach in the beginning.

Vladimir Putin speaking in the Duma
Vladimir Putin speaking in the Duma on 8 May 2008. Photo: Wikipedia Commons

In his April 2001 address to the Federal Assembly, Vladimir Putin not only stressed the importance of modernisation but also made a strong case for a recentralisation of political power. He underlined that "we need a consolidated and effective state power system in order to act on urgent social and economic problems and security issues."[119] In November 2003, Kommersant characterized Putin's liberalism as follows:

"Vladimir Putin's liberalism has a rather one-sided nature. The President acts as a liberal only in the economic sphere, whereas he is less interested in political liberal values (his project of building the strong "vertical of power" serves as proof of this disinterest)."[120]

Later, in a 2009 interview, Bendukidze expressed the view that a strong executive government was much more suitable for a developing, modernizing country like Georgia than "a weak parliamentary republic where the government does not have the support of the parliament."[121] By that time the effort to combine mild authoritarianism and economic liberalism had moved to Tbilisi.


[97] "The Statement of Boris Yeltsin" (in Russian), Moscow, Kremlin, 31 December 1999.

[98] OSCE/ODIHR, Russian Federation. Presidential Election, 26 March 2000. Final Report, Warsaw, 19 May 2000, p. 32.

[99] Konstantin Smirnov, "The President's Tough Embrace" (in Russian), Kommersant – Dengi, no. 30 (283), 02 August 2000.

[100] Sabrina Tavernise, "Putin, Exerting His Authority, Meets with Russia's Tycoons," New York Times, 29 July 2000.

[101] "'Resetting' the Oligarchs in the Kremlin" (in Russian), Kommersant, no. 138 (2023), 29 July 2000.

[102] Olga Kryshtanovskaya, "An Exhausted Resource," Russia in Global Affairs, no. 3, July - September 2009,

[103] Guriev and Rachinsky, "Oligarchs: The Past or the Future of Russian Capitalism?" July 2004.

[104] Petr Kaznacheev, "Liberalism at the DJ Console," Dec. 24, 2006.

[105] Elena Lashkina, "A Business Plan for the Government" (in Russian), Rossiiskaya Gazeta, no. 3451, Apr. 9, 2004.

[106] Olga Proskurnina, Denis Malkin, "Bendukidze, Homeless and Unemployed" (in Russian), Vedomosti, 23 (no. 2293), Feb. 10, 2009.

[107] Lilia Shevtsova, Putin's Russia, Carnegie Endowment for International Peace, 2003, p. 189.

[108] Lilia Shevtsova, Putin's Russia, Carnegie Endowment for International Peace, 2003, p. 188.

[109] Lilia Shevtsova, Putin's Russia, Carnegie Endowment for International Peace, 2003, p. 189.

[110] Dmitry Simakov, "The Company of the Week: And Still, It's a Chaebol" (in Russian), Vedomosti, Mar. 25, 2003.

[111] "Not Just Old Wives' Tales" (in Russian), Vedomosti, 114 (no. 437), Jul. 2, 2001.

[112] Anna Ivanova, Michael Keen, and Alexander Klemm, "The Russian Flat Tax Reform," IMF Working Paper WP/05/16, January 2005, p. 4.

[113] Anna Ivanova, Michael Keen, and Alexander Klemm, "The Russian Flat Tax Reform," IMF Working Paper WP/05/16, January 2005, p. 4.

[114] Yuriy Gorodnichenko, Jorge Martinez-Vazquez, Klara Sabirianova Peter, "Myth and Reality of Flat Tax Reform: Micro Estimates of Tax Evasion Response and Welfare Effects in Russia." Journal of Political Economy, June 2009.

[115] Yuri Kuznetsov, "Interview with Kakha Bendukidze: Taxes in Exchange for Services. Read the List!" (in Russian), Otechestvennye Zapiski, no. 4-5 (5), 2002.

[116] Natalya Neymysheva, "The Oligarchs Want Too Much from the Tax Reform" (in Russian), Vedomosti 13 (no. 813), Jan. 29, 2003.

[117] Natalya Neymysheva, "The Oligarchs Want Too Much from the Tax Reform" (in Russian), Vedomosti 13 (no. 813), Jan. 29, 2003.

[118] Vitaliy Tretyakov, "Bendukidze's Mission" (in Russian), Rossiiskaya Gazeta (Federal issue), no. 3492, Jun. 3, 2004.

[119] Vladimir Putin, "Annual Address to the Federal Assembly of the Russian Federation," Moscow, Kremlin, 3 April 2001.

[120] "The Deck of the Russian Federation" (in Russian), Kommersant- Vlast, no. 46 (549), 24 November 2003.

[121] Discussion with Bendukidze (in Russian), March 2009, published on empedocl's Livejournal blog.

Suggested readings

An excellent introduction is Lilia Shevtsova's Putin's Russia (excerpts are available on the website of the Carnegie Endowment).

Edward Lucas, a correspondent for The Economist, describes the origins of what he calls "The New Cold War" in Russia under Putin (2008). Lucas argues that Putin's Russia poses once again a direct menace, not only to its own citizens but also to outsiders. He challenges the idea that Russia is "steadily becoming a normal country." He argues that due to Putin's decisions Russia "now stands little chance of avoiding long-term decline."

Lucas' core explanation can be summed up in one sentence: "When oil was at 10 USD a barrel, Russia was pitifully weak. At 75 USD, it swaggers like a superpower." This is embedded in a rich argument, however. In the 1990s Russia was ridiculed as the sick man of Europe, Lucas notes: "by the time of the 1998 financial crisis, the multi-party system and the market economy, along with Yeltsin's personal reputation, were deeply discredited" (p. 44). Like Shevtsova, Lucas points to the initial reformist attitude of Putin in 2001:

"Putin came out strongly for economic reform, saying that he wanted Russia to reach Portuguese standards of prosperity in a decade. His government pushed through a 13 percent flat tax in 2001; as in other countries were this was tried, the results were impressive. His ministers talked of setting up a 'one-stop shop' for registering small businesses, replacing the baffling and expensive trek between different state institutions … " (p. 48)

The contrast to the pre-1999 period explains the popularity of the new regime:

"after the calamitous financial crash of August 1998, when Russia defaulted on a large chunk of its debts and devalued the rouble, the sense of failure surrounding the Yeltsin clique and its tycoon-friendly rule was absolute." (p. 9)

By 2008, as Lucas writes,

"More than ever before Russians can plan their lives: they can save, educate themselves, travel and bring up their children as they like; they can buy anything they can afford; own property at home or abroad; worship (mostly) as they wish; read almost anything they like … never in Russian history have so many Russians lived so well and so freely. That is a proud boast, and one that even those who dislike Russia's current path most honestly acknowledge … Private cars used to be a luxury in the Soviet Union. In 1993 there were fifty-nine per thousand people. That figure has risen fivefold. Around 15 percent of all Russians have been abroad at least once – something unimaginable in Soviet times." (p. 54)

Another useful read is Andrew Meier's Black Earth: Russia after the Fall (2004). Meier relates a striking moment in the presidency of Boris Yeltsin, the effort to define an official new national ideology:

"Only days after winning his second term, Yeltsin summoned campaign aides to the Kremlin. The time, he said, had come to find a new national idea. In the twentieth century alone, he told those assembled, Russia had gone from monarchy to totalitarianism to perestroika, before embarking on the democratic path. 'Each epoch had its own ideology,' he thundered, 'Now we don't have one - and this is bad.' … Historians, political scientists, and pollsters were enlisted. They were to rack their brains, search the "Civilised World" for historical models, and not return empty handed."

One option then considered, and rejected, came from Georgi Satarov: to emulate West Germany and combine economic growth with "the idea of national penitence". But, as Meier wryly notes, the notion of "making contrition the corner stone of the new ideology for the new Russia did not grab many on the presidential panel." (p. 338)

The book paints a gripping, detailed portrait of Russia in the 1990s and during the early Putin period.

"During his brief tenure as FSB chief Putin had hung a portrait of Peter the Great in his Lubyanka office. In his first months as prime minister, his aides liked to assure foreign reporters that Peter, the tsar who opened Russia to the West, was Putin's model. Yet Peter had also begun his career with an onslaught against the heathens in the south, conquering the port of Azov in 1696 from the Ottoman Turks, gaining access, after a failed attempt the previous year, to the Black Sea." (p. 93)

Putin's Labyrinth: Spies, Murders and the Dark Heart of the New Russia (2009) is a critical account of Putin's rule and the elimination of Putin's perceived enemies. The book is written by journalist Steve LeVine, the author of The oil and the glory.

On debates in Russia about cooperation with the EU and NATO, please see the collection of Chatham House Papers compiled by Roy Allison, Margot Light and Stephen White in Putin's Russia and the Enlarged Europe (2006).

April 2010

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