Quotes of the Day

For much of the past decade, Andrei Illarionov has played a unique role in Russia: that of a liberal economist who helped shape policy while at the same time openly criticizing the government. He called for a devaluation of the ruble before the August 1998 financial crisis; he is credited as one of the architects of Russia's flat income tax; and from the outset of the first term of President Vladimir Putin, who appointed him economic adviser in 2000, he has been outspoken in his efforts to curb state interference in the economy, especially in the all-important energy sector. "He's one of the smartest people in Russia," says William Browder, founder of a Moscow-based investment fund.

But last week Illarionov, 44, abruptly resigned. "When I took the job, we spoke about pursuing a liberal economic policy," he explained. "Now, the state has evolved in quite the opposite direction." In an interview with Time, he implied that he had been under pressure to stop speaking out. "My job assumed the ability to hold free public discussion of ongoing processes," he said. "My willing suspension of this ability would have been a gross dereliction of official and professional duties on my part. I chose to resign instead."

Illarionov's resignation coincides with Russia's assumption of the G-8 group leadership this year. Putin is expected to use the forum to stress how Russia today shares key Western values and ideals. Illarionov's departure is thus awkwardly timed for Putin, but it is also a sign that, under his presidency, Russia is a very different place from the free-market economy and pluralistic democracy that many Western and Russian reformers once hoped it would become. During Putin's tenure, the Kremlin has taken steps to regain control of the nation's oil and gas resources — including breaking up and renationalizing most of Yukos, once Russia's biggest and most successful private oil producer. It has curtailed political freedoms, among them the ability of philanthropic and nongovernmental organizations to operate in Russia. And in the last days of December, Russian officials were playing hardball with Ukraine over natural gas prices, even as they were finalizing a deal with Belarus to take control of the pipeline that crosses its territory into Western Europe. The tough negotiations with Ukraine are widely seen as an attempt to weaken the party of Ukrainian President Viktor Yushchenko in advance of March's parliamentary elections. In an echo of Soviet-era threats, on Russian television last week industry officials enthusiastically demonstrated how they would cut off all gas supplies to Ukraine if it refused to agree to the new price — $230 per 1,000 cu m, more than four times the $50 it currently pays. "This [price] war was the final straw in my decision to resign," Illarionov told Time on Saturday. "I was invited to take part in it to explain why the price hike, and everything else in our bilateral relations, are liberal economic policies. But the factors that led to this decision have nothing in common with liberal economic policies."

The increasingly authoritarian style of Putin's leadership poses a dilemma for the West. European governments are anxious to purchase Russian natural gas and oil (roughly half of the European Union's gas supplies currently come from Russia), and the U.S. and Japan want to expand business there. So far, political unease hasn't affected growing commercial ties, although that situation could change if Putin's agenda comes into more direct conflict with the West's.

If the prospect of Russia using its energy policy to pursue geopolitical goals scares the West, nobody in authority is saying so very loudly. In Washington, the State Department urged both Moscow and Kiev to reach a compromise in the gas-price talks. Spokesman Adam Ereli allowed only that the dispute "is a question of energy supply that we and the Europeans are all following closely." Indeed, Putin seems eager to secure Western political influence at high levels: last month, he persuaded former German Chancellor Gerhard Schröder to become chairman of a company building a new gas pipeline from Russia to Western Europe that will bypass Ukraine by going under the Baltic Sea. Putin also offered a top job at a Russian state-owned oil company to former U.S. Commerce Secretary Donald Evans; Evans declined the position.

Putin insists that he is merely pursuing his nation's best interests. And he can claim some success: growth is a robust 6%; foreign debt has been slashed to one-tenth of what it was (as a percentage of the total Russian economy) six years ago; and, like Norway, the nation has been stashing away a part of its oil revenues in a "stabilization fund" that can be tapped in the future if oil prices drop sharply, causing a shortfall in the state budget. Putin also argues that, as the world's top natural-gas exporter and a leading oil producer, Russia needs to keep tight control on energy to ensure security of supply. "Russia must aspire to claim world leadership in the realm of energy," he told his Security Council late last month. Russia even justifies the Ukrainian gas price increases by saying that it is simply demanding a long-overdue market rate.

Moreover, Putin is taking steps to ensure that Russia remains in favor with international investors. On Dec. 23, he signed a law that allows foreigners to acquire up to 49% of state-controlled gas and oil company Gazprom. And Rosneft, the Russian firm that acquired the key assets of Yukos, is currently planning a public offering of up to 30% of its stock in 2006, a move that could raise as much as $20 billion. Rosneft is expected to seek a listing on the London Stock Exchange in the process.

But critics, including Illarionov, say that Russia's economy is actually underperforming. Given the windfall profits it has been receiving from high oil prices, Russia's growth rate should be more like 15% than 6%, says Illarionov. Furthermore, Russia runs a clear risk by pegging so much of its economy to the energy sector. Illarionov describes Russia as evolving into "a new corporatist model" — one in which the economy is dominated by monopolistic quasi–state controlled corporations. In addition to Russia's renationalization of the oil industry, in November the country's weapons-trade monopoly, Rosoboronexport, announced it was taking control of Russia's largest auto manufacturer, the formerly privatized AvtoVAZ.

The combination of such reassertion of state control and the opening up of a portion of state firms to private investors enables Putin to argue that he is introducing market reforms into the economy even as he tightens his grip elsewhere. The media has long been muzzled, the judiciary controlled; regional governors are now appointed by Putin rather than elected; and the activities of political parties have been harshly curtailed. "The trends that have been long accumulating," Illarionov says, "found their completion and finally shaped up in 2005." Lilia Shevtsova, senior analyst at the Moscow Carnegie Center in Moscow, laments that Putin has "abandoned even halfhearted attempts at deregulating the economy, pursuing administrative reform or curbing corruption." Instead, she says, "Russia is completing the creation of a post-Soviet state, which continues the Russian tradition of authority raised high above society."

All of this clearly disturbs Illarionov. "I wish Russia would be a G-8 member as a developed, free and democratic country. I worked to that end," he told Time. Putin will be taking a different message to the G-8. The question is, Who will the other seven believe?

• PETER GUMBEL
• The resignation of a top Putin economic adviser has reawakened concerns about the Kremlin's management of the economy