By John C. Gannon, Deputy Directory for Intelligence
March 20, 1996


Speech before the World Affairs Council


Thank you for your kind introduction. It's a great honor to be here.

I should tell you that I accepted your invitation to speak here
before discovering that the World Affairs Council in San Francisco
hosted Vladimir Zhirinovskiy a little over a year ago. And I have to
admit that, when I was told about Zhirinovskiy's speech, I had some
second thoughts about coming here. Prior to his talk, Zhirinovskiy
had dominated the Duma elections of 1993, winning nearly a quarter
of the vote. His brand of strident nationalism was generally
regarded as a major political force within Russia. After meeting
with the World Affairs Council, his electoral support dropped by
more than 50%, and he's now thought of as yesterday's news. I can
only hope that my speech today doesn't have the same impact on my
career.

You haven't, by any chance, thought about inviting the Communist
leader Zyuganov [ZyooGAHnuff] to address you?

In my business--intelligence--we distinguish between "secrets" and
"mysteries." Secrets, at least theoretically, can be obtained in one
way or another. An example might be the specifications for a new
weapon system being developed by a foreign government. That
government might guard information about the weapon system as a
secret, but another government might be able to obtain the secret
information through clandestine means.

Mysteries, on the other hand, are unknown or unexplained phenomena.
"Will Boris Yel'tsin suffer another heart attack before Russia's
presidential elections in June?" "Will Russia evolve into a
democracy?" It's futile to try to steal the answers to these
questions. But with the collapse of the Soviet system, intelligence
analysts are being asked more and more to try to unravel such
mysteries.

This challenge--attempting to understand and explain Russia's
political and economic future--relates to much of my talk today. In
discussing the trends in Russia, I want to highlight three key
points:

1. Russia has made great strides toward democracy and a market
economy in a remarkably short period since the collapse of the
Soviet Union a little over four years ago.
2. No matter who wins the presidential election in June, the old
Soviet system we knew is unlikely to be reassembled.
3. Russia's transition will remain volatile for at least a decade or
two, whatever path of development the country takes.

Russia's Great Strides

I'll discuss first the great strides that Russia has made since it
gained independent statehood in 1991.

There's a joke about progress under Communism that was popular in
Moscow during the Soviet era. Stalin, Khrushchev, and Brezhnev are
on a train, and the train is stalled. Stalin, impatient with the
lack of movement, orders that the engineer be shot. Still, the train
fails to move. Khrushchev denounces this Stalinist crime and calls
instead for a campaign of the masses to propel the train forward.
Still, no movement. Finally, Brezhnev reaches to the window and
pulls down the shades. "Now," he announces, "the train is moving."
No one who has walked along the main street of downtown
Moscow--Tverskaya Street [tfairSKYah]--can deny that there has been
dramatic movement in Russia's economy since 1991. In the old days,
the street was called Gorkiy Street [GORkee], named after the
Communist writer, Maksim Gorkiy. Long lines of shoppers clogged the
sidewalks in front of empty gray state-run stores, and a handful of
Soviet-made Lada and Volga cars trickled down the street. Women
carried netted shopping bags in their purses that they nicknamed
"Just-in-Cases"--to be used "just in case" a store got a product in
worth buying. Everyone knew that they had to purchase it immediately
whether they needed it or not, because they might never get another
opportunity.

The Tverskaya Street of 1996 is clogged not by lines of shoppers,
but by Mercedes and Jeep Cherokees--Russia is now among the world's
fastest growing markets for Mercedes. Shoppers can choose from a
wide range of colorful stores bursting with products from all over
the world. New construction is proceeding at a pace that would
impress even the most efficient Western firms. Looming over the
building that once housed the State Planning Committee--the Mecca of
the Communist economy--is an enormous electronic advertising
billboard. And the old Manezh Square just outside the Kremlin is
today hardly recognizable as the place where Lenin once rallied
crowds. The square has been excavated to make way for a shopping
mall and business center complete with a parking garage.
Looking below the surface, it's clear that there have been
substantial structural changes in Russia's economy. The defense
budget has been slashed by roughly 50 percent in real terms since
1992. Entrepeneurs have started hundreds of thousands of new
businesses, which employ almost a third of Russian workers. More
than 20,000 large enterprises and 100,000 small ones have been
transferred from state ownership under Russia's ambitious
privatization program. As a result, the private sector now accounts
for more than 60 percent of Russia's gross domestic product.
Nearly all prices, once set by the state, have been freed. Russia
now has a functioning civil code to govern market transactions and
protect private property. The state monopoly on foreign trade has
been dismantled, and the great bulk of export and import
transactions are being carried out at exchange rates determined by
market forces. Inflation--which swelled to two-hundred fifty percent
per month shortly after the collapse of the Soviet Union--reached a
record low in February of 2.8 percent. That's still high by our
standards, but it's a significant achievement nonetheless.

The political changes have been nearly as dramatic as those in the
economic sphere. In a country where religious activity was once all
but banned, and churches were dynamited by government authorities,
there is now a religious renaissance among both young and old.
Government officials waste few opportunities to be seen at
celebrations of religious holidays and at ground-breaking ceremonies
for the construction of new cathedrals, hoping to tap into the
powerful symbolism of the church. Even Communist Party head Gennadiy
Zyuganov has publicized his Christian faith.

The print media are diverse and free-wheeling, despite their
struggles to stay afloat financially without state subsidies.
Independent television stations have sprung up throughout the
country, and even the state-owned network has been surprisingly
critical of the Chechen war, juxtaposing graphic scenes of carnage
in the Chechen capital with shots of Yel'tsin toasting the new
year's celebration last year.

Direct access to information from outside Russia is also
flourishing. Millions of Russians can now tap into CNN. And, as
thousands of Russians do everyday, one can dial a modem to link up
with the Internet and chat with computer users across the globe.
Such contact with the outside world was unthinkable for Russians as
little as a decade ago.

Perhaps the most significant testimony to Russia's political
transformation is the fact that the election ballot--not military
power, and not state ideology--is becoming the ultimate arbiter of
political power. Russia has now held two elections to the state
legislature and two national referendums since gaining independent
statehood. Nearly 65 percent of eligible voters cast ballots in last
December's Duma election--well above US turnout rates--and 43
political parties took part. That's an impressive level of political
participation. And all indications are that there will be a
presidential election in June, which could potentially produce the
first electoral change of government in Russia's thousand-year
history.

I do not want to exaggerate the extent of change in Russia nor
underestimate the obtacles that remain in its path. Much remains
unchanged, particularly in regions far from Moscow and St.
Petersburg, and the institutions of civil society remain weak.
Inflation has yet to be licked, and a painful period high
unemployment may well occur, as unprofitable enterprises fail. One
need look no farther than the government's handling of the war in
Chechnya to note that Russia still has a lot to overcome. But my
point is that, in noting the great distances Russia must still
travel if it is to become a stable, market-oriented democracy, we
should not forget how far Russia has already come.

Return to the Past Difficult

Turning now to my second point, I'd like to talk a little bit about
the prospects for reversing the reforms that I've just discussed. I
should note here that the changes in Russia have come at a price.
The transformation to the market has wiped out the life savings of
millions of Russians, crippled the state-run social welfare system,
and fostered soaring rates of crime and corruption. Scientists and
university professors, who once sat near the top of the social and
economic ladder, have watched their real incomes plummet while con
men and corrupt bureaucrats have made fortunes. One could argue that
such byproducts of Russia's transition were unavoidable.
But--avoidable or not--material and pyschological hardships have
produced nostalgia for the past among many Russian voters and sapped
President Yel'tsin's popularity.

There's a joke making the rounds in Moscow today on the subject of
Yel'tsin's reelection prospects. Walking about at his country dacha
one day, Yel'tsin stumbles across an old oil lamp. Rubbing the lamp,
as you can guess, produces a genie, who announces that he is
prepared to grant Yel'tsin's fondest wish. Yel'tsin thinks a little
bit, and then he takes out a map and points to Bosnia and Chechnya.
"I can think of no greater good," he tells the genie, "than to bring
peace to these war-torn regions." The genie scratches his head,
wrings his hands, and finally responds that bringing peace to Bosnia
and Chechnya is beyond even his formidable powers; could Yel'tsin
come up with a second choice? Yel'tsin says fine, my second choice
would be to win reelection as President of Russia. The genie
scratches his head, wrings his hands, and then asks, "Could I take
another look at that map?"

It's far too early, of course, to rule out Yel'tsin winning the June
elections, or, indeed, to predict any winner. Ambassador Pickering,
in an excellent speech last month, said that "only the foolhardy
would venture now to predict the outcome of the Presidential
election." We agree with the Ambassador on this, because there are
simply too many factors at play--not because a foolhardy risk isn't
a kick for us analysts from time to time. Yel'tsin has been counted
out many times before, but he's made a career out of beating the
odds. He's betting that, if faced with a choice between returning to
horrors of the Soviet past, on the one hand, and staying on the
bumpy course toward economic and political freedom, on the other,
Russian voters will in the end choose to vote for him. He may be
right.

Still, it's not too early to start asking questions about how
realistic a return to the Soviet past might be. Communist leader
Gennadiy Zyuganov is leading in the polls. He almost certainly can't
get the 50% of votes needed to win the presidential election
outright in the first round, but he's a solid bet to make it into a
runoff race against the other top vote-getter. Surveys conducted by
Russian polling organizations of potential runoff races suggest that
Zyuganov could beat Yel'tsin, despite the fact that Zyuganov is not
particularly charismatic and not even that popular within his own
party.

Should Zyuganov win the presidency, there's a significant chance
that his government would try to reverse many of the changes that
have occurred in Russia over the past several years. Unlike some of
the Communist parties in Central and Eastern Europe, the Communist
Party of Russia has not transformed itself into a social democratic
party. Most of its members remain true believers in Communism. And
the party's agenda certainly gives cause for concern. It calls for,
among other things:

· Renationalizing private firms in the energy, transportation, and
agricultural sectors.
· Reestablishing a state monopoly over foreign trade in natural
resources.
· Reimposing state regulations on the prices of basic necessities,
energy, and transportation.
· Restoring the former system of soviets--or local councils--which
were once beholden to the Communist Party.
· Reintegrating the now independent states of the former Soviet
Union on a "voluntary" basis.

These policy goals suggest, at a minimum, that we wouldn't see much
more progress toward democracy and the market under a Communist
regime. There would be a significant risk of an inflationary
spending spree. And the reintroduction of price controls would only
make matters worse, leading to the reappearance of shortages,
queues, and black markets.

These dangers are not hard to foresee. But the tougher question is
how successful the Communists might be in turning back the clock and
restoring key elements of the old Soviet system.

Here, we have some reason for doubting that the Communists--or any
other hardline regime--would be able to undo very much of what's
already been accomplished. That is not to say that reform in Russia
is wholly irreversible. But I do think we can say that it has gone
far enough that a reversal would be so difficult as to be unlikely.
We can probably rule out the most ominous of the Communists' policy
goals--rebuilding a union among the independent states of the former
USSR. Doing this on a "voluntary" basis, as the Communists say they
favor, is really a dead end. With few exceptions, these independent
states simply do not want to return to a union with Russia. Most of
them remember very well, and not very fondly I might add, what life
was like for them under Moscow's rule.

The prospects for forceful reintegration of these states are even
bleaker, at least for the foreseeable future. Russia's military is a
mere shadow of the Soviet Union's once powerful armed forces.
Resources for defense have fallen so sharply for so long that some
units now survive only on wartime reserves of food and fuel.
Officers and enlisted men alike sometimes go for months without
being paid. Warships are occasionally stranded in port for long
periods because the Navy cannot pay for repairs.

The readiness and modernization of equipment has also suffered. Some
observers estimate that seventy-five percent of Russia's land force
divisions are not combat ready, and that over half of the 2,500
fighter aircraft that Russia inherited from the USSR are inoperable.

It's not surprising that this deterioration has hurt morale. Sailors
have refused to sail. Soldiers--including officers--have refused to
go to Chechnya. And corruption is rife throughout the ranks.
Lower-level personnel are involved in drug trafficking, stealing
fuel, and selling weapons and munitions on the black market. Even
some generals are alleged to be involved in corrupt and criminal
activities. This is not a military that is in any condition to
invade or even to intimidate Russia's neighbors, nor will it be in
such a state of readiness any time soon.

So in all likelihood, the Communists won't be able to regain the old
empire, at least not over the course of the next four-year
presidential term. What about restoring some of the other aspects of
the old system?

Well, reestablishing state control of key sectors of the economy and
rebuilding the old network of local soviets, (or "councils") are
probably more realistic goals. Even these would be difficult to
achieve, though, for a number of reasons.

First, Russia is a state in which powerful and diverse business
interests have emerged. Among these groups I would list new
entrepeneurs, enterprise directors, stockholders, bankers, corrupt
government officials, and organized crime groups. Much of the old
Soviet elite now has too significant a financial stake in the new
market economy to want to go back to the old system. Not all of
these people, obviously, are Jeffersonian democrats or disciples of
Adam Smith. But they share a common desire to hold on to the wealth,
perqs, and property they've acquired, and they have the clout to
resist any efforts by the government to take them away. The
Communists would have a fight on their hands if they were to try to
renationalize Russia's hugely profitable energy sector or steal the
cash cow of foreign trade from private importers and exporters.
Second, one must recognize the fact that, over the past several
years, a great deal of power has devolved from the central
government in Moscow to regional governments in Russia's 89
territorial units. Not all of these regions are reform-minded. Some
of them, quite frankly, are run by old-line Communists. But most of
these regional governments share a common interest in one thing, and
that is protecting their ability to call the shots in their
territory by resisting central control from Moscow.

Yel'tsin's government has supported this devolution of power, which
might be called the growth of federalism. But I'm sure that it's
also been a frustrating thing for Yel'tsin. The President issues a
decree; the regional governments ignore it. Yel'tsin demands,
cajoles, and pleads, yet the governors do their own thing. It's
reached the point where Yel'tsin recently fired a few of these
governors for failing to disburse federal funds as Moscow had
directed.

Despite these firings, regional autonomy is only going to grow
stronger over the next year. Why? Well, until recently, most of
Russia's regional governors have been appointed by the President.
But a new law requires that all of them be elected officials by the
end of this year. That means they'll be even less beholden to Moscow
than they are now, and more focused on the demands of their region's
constituents. And that suggests that the Communists would have a
hard time reinstituting the old Soviet system of top-down,
centralized government.

Finally, in addition to the emergence of business interests and the
growth of regional autonomy, I would note that the
telecommunications revolution will provide Russians with greater and
greater access to the outside world in the coming years. This will
continue to diminish the prospects for a future authoritarian regime
relying on the levers of propaganda to sustain its rule.

Again, I don't want to exaggerate the barriers to revanchism in
Russia. The historic parallels to Weimar Germany are too close to be
ignored when studying contemporary Russia. But the obstacles to a
return to the past are significant enough that we should not
automatically assume the worst if the Communists win June's
presidential elections.

The Long and Bumpy Road Ahead

Let me now turn to my final point.

A man that once held my job, and later went on to become the
Director of Central Intelligence--Robert Gates--was fond of saying
that when most people smell flowers, they look for a garden. But
when an intelligence officer smells flowers, he or she looks for a
funeral. We're not morbid by nature. It's simply our job to warn of
the dangers that confront the United States in the world.
Russians sometimes seem to share this boundless capacity for
pessimism. In Moscow, they say that a pessimist is someone who
believes things can't possibly get any worse. An optimist thinks
that of course they can.

Tonight, in examining the trends in Russia, I've tried to temper
this penchant for pessimism with an appreciation of all that has
changed and a sober look at the obstacles to turning back the clock
to Soviet times. But I would be remiss if I failed to note the long
list of dangers that still exist in Russia. It's not hard to be
pessimistic about a country with almost no democratic tradition, an
economy ravaged by some seventy years of Communism, an alarming rate
of crime, a nuclear arsenal that still numbers in the thousands, and
dozens of potential environmental disasters in the making.
It will be decades--and perhaps even generations--before Russia's
transformation is complete. In fact, Russia is a country in which
three revolutions are occurring simultaneously. The old centrally
planned economic system is being dismantled and replaced by a system
based on market principles. The old Communist system of centralized
government is being replaced by an inchoate system based upon free
elections. And the old Soviet Empire has been broken into its
constituent parts, forcing Russia to struggle to redefine its place
in the world. Any one of these revolutionary transformations would
be taxing for a country. To imagine that all three could be
completed in a short period is folly.

There are certainly no guarantees that Russia will be a democracy
with a free-market economy when this transformation ends. If history
is any guide, however, we can be sure that any movement toward these
Western models will be cyclical, with periods of active reform
followed by periods of consolidation or even some steps backward.
And during this long period of change, any number of things could go
wrong. A high level of vigilance from the intelligence community
throughout this transition will be essential.

One of the most extreme dangers is that political polarization could
result in violence and instability. The Intelligence Community must
carefully monitor possible indicators of a coup in Russia. President
Yel'tsin is warning that a Communist victory in the June elections
could increase the chances for civil war within Russia, and there
has been talk in recent days about the possibility of postponing
these elections. Part of this is campaign hyperbole. But we can't be
complacent about such possibilities. Few people appreciate how close
the putchists in the Russian parliament came to seizing power in
October, 1993, when President Yel'tsin had to rely on military force
to retain control. The center of the political spectrum is very weak
in Russia, and wide ideological and political gaps exist between
old-line Communists and Russia's democrats, who represent a
significant slice of the electorate. There are signs of similar
divisions within the disgruntled military. This could prove to be a
volatile mix, particularly if a hardline regime were to press too
hard in trying to take away the property and freedoms that Russians
now enjoy, or if the present government were to attempt to remain in
power through force. In the face of such threats, it is vital that
fair elections and constitutional processes remain the vehicles for
determining who is in power and settling policy disputes.
A second danger is the potential for a terrorist campaign arising
from the war in Chechnya. Since fighting began late in 1994, Russian
forces have occupied all major population, transportation, and
economic centers in the region, but they have been unable to end the
fighting in the mountains and countryside--or even fully secure the
places they occupy. Chechnya has become a classic guerilla warfare
situation, and the threat of terrorism is increasing. Several
instances of hostage-taking have already occurred, with one of them
spilling over Russia's borders into Turkey, and another into Central
Europe. Even more ominously, some Chechen rebels have warned that
they will target Russian nuclear facilities. In an event that was
widely publicized in Russia but received little attention in the
West, Chechen militants buried a small amount of cesium in a Moscow
park last year to demonstrate their ability to carry out a terrorist
act in the heart of Russian territory.

Third, although the nuclear threat from Russia is far reduced from
what it was during the height of the Cold War, Russia retains tens
of thousands of nuclear weapons. It is incumbent upon the
intelligence community to continue careful monitoring of these
weapons and to remain alert to the possibility that they could fall
illegally into unresponsible hands.

Finally, the rapid growth of criminal activity in Russia presents
the intelligence community with a formidable challenge. There are
now over 8,000 organized crime groups in Russia, according to the
Russian Ministry of Internal Affairs. Of this number, about 200 are
large, sophisticated criminal organizations with operations
throughout the former Soviet Union and abroad. Many Russians believe
that organized crime is now the dominant power in Russia, with its
reach extending throughout the government. If Russian authorities
are unable to check the growth of organized crime, the impact on
reform and on Western interests could be profound.

Conclusion

Well, as serious as these dangers are, it somehow seems
inappropriate, being in sunny Southern California, to end on a note
of gloom and doom. I've already described the dramatic changes that
have taken place in the lives of ordinary Russians. But I'd also
like to mention how profoundly the threat from Moscow has changed
from the point of view of American presidents. Presidents Eisenhower
and Kennedy, as you'll recall, presided during the height of the
Cold War, when nearly every aspect of US foreign policy was geared
toward coping with the Soviet Union and international Communism.
These presidents lived with the very real threat of strategic
nuclear war with the Soviet Union--a threat that almost became a
reality during the Cuban missile crisis. American school children
had to participate regularly in air-raid drills. Suburbanites built
bomb shelters. The existence of a supposed "missile gap" with the
Soviets was a key issue in the 1960 presidential campaign.

Under presidents Nixon, Ford, and Carter, detente and arms control
eased the danger of nuclear war, but Soviet activities in the Third
World increased dramatically, and each of these presidents had to
contend with the possibility that Third World instability could
spill over into direct conflict between the superpowers. In several
of the Arab-Israeli wars, and in Afghanistan, tensions between
Washington and Moscow nearly reached the breaking point.

Presidents Reagan, Bush, and Clinton have presided over a period of
truly revolutionary change in superpower relations. Berlin--once a
focal point of East-West tensions--is again the capital of a united
Germany. The Warsaw Pact no longer exists, democracy and free
markets are thriving in Eastern and Central Europe, and enormous
cuts in Russian and American nuclear arsenals have become possible.
Cooperation between the United States and Russia has made possible
progress that was once unthinkable in resolving the Arab-Israeli
conflict. And President Clinton is awaiting the results of a free
and fair election in Russia--not the latest lineup atop the Lenin
Mausoleum--to tell him who his counterpart in the Kremlin will be.
I'd like to thank you for this opportunity to share my views. I'm
sure that you have thoughts of your own on the challenging subject
of Russia's future, and I'd be happy to respond to questions and
comments. There are, however, a few important provisos:

1. First, I was told that there would be no math questions.

2. Second, I should warn you that I'm not at liberty to reveal the
Agency's prediction on the results of the NCAA basketball
tournament. That information is still classified.

3. Finally, the boxers versus briefs question is definitely out of
bounds.