Air date: May 9, 2000

Return of the Czar

Written and Produced by Sherry Jones

ANNOUNCER: Two days ago, Vladimir Putin, a former KGB colonel, was sworn in as president of the world's second largest nuclear power.

ALEXANDER MINKIN, Investigative Journalist: [through translator] In 1991, if anyone in Russia or in the West had said the next president of Russia would be a KGB officer, everyone would have called this person a fool.

NARRATOR: But Russians, tired of the corruption and chaos of the last decade of U.S.-backed "reform," have turned their country over to a strong hand. What went wrong? Tonight on FRONTLINE, three former U.S. government officials reveal the inside story.

E. WAYNE MERRY, Chief Political Analyst, U.S. Embassy (1990-1994): We created a virtual open shop for thievery on a scale which I doubt has ever taken place in human history.

NARRATOR: Did the United States help prepare the way for The Return of the Czar? A FRONTLINE collaboration with National Public Radio.

On the streets outside the U.S. embassy on Novinsky Boulevard in Moscow, Russia's capital city has been transformed. But Russia at the beginning of the Putin era is not the country U.S. officials here, or in Washington, hoped for when the cold war ended eight years ago.

Some people have grown wealthy, gaudily so. But most Russians, free to get rich, are poorer. Moscow's neon-lit streets mask the reality of what Russia has become. Eight out of ten farms are going broke. Industrial production has plummeted by half. Health care and education are in decay.

SCHOOL DIRECTOR: [through translator] I feel trapped. When a teacher doesn't receive a paycheck for months, then you can say that the education system is collapsing.

NARRATOR: The death rate in Russia now exceeds the birth rate.

WOMAN: Maybe- I don't know, maybe this country is too sad.

NARRATOR: Drug abuse among the young is pandemic. An entire generation is threatened.

THOMAS GRAHAM, Chief Political Analyst, U.S. Embassy Moscow (1994-1997): I don't think that this administration or a lot of other Western commentators have focused sufficiently on the extent to which Russia has declined over the past decade, how deep the socioeconomic crisis has been and how difficult it is going to be for Russia to dig itself out.

NARRATOR: The decade that has ended in anguish had begun in triumph.

Monday, August 19th, 1991. Hard-line communists had launched a coup against the Soviet leader, Mikhail Gorbachev. Over the next two and a half days, Boris Yeltsin, the newly elected president of the Russian Federation, would emerge as the symbol of his country's determination to break with its past.

MAN IN CROWD: [through translator] Be careful, Boris Nikolayevich!

WOMAN IN CROWD: [through translator] Take care of yourself!

NARRATOR: It is one of history's enduring images.

BORIS YELTSIN, President of Russia: [standing on tank] [through translator] We do not doubt that the international community will objectively judge what is happening as a cynical, right-wing coup attempt.

NARRATOR: Yeltsin and his democratic allies would become a rallying point for the resistance. Outside the Russian White House, ordinary people built build barricades to protect those inside from attack.

FIRST MAN AT BARRICADE: [through translator] We are obligated, obligated to defend the government!

SECOND MAN AT BARRICADE: [through translator] Fascism won't succeed. Fascism won't succeed!

YEVGENIA ALBATS, Independent Journalist: My newspaper, The Moscow News, the frontline newspaper of the years of perestroika, was surrounded. We did expect to go to prison. We really believed there were very little chances to win because it was state who brought those tanks.

NARRATOR: The crowds outside were ready to die defending their fledgling democracy. Inside there was a scene none of them could have imagined.

PAVEL VOSCHANOV, Yeltsin Press Secretary (1991-1993): [through translator] Few people know what happened that night in the White House around 11:00 or 12:00 o'clock.

We went downstairs, floor after floor after floor. Suddenly, we found ourselves in a huge room. There was a table with lots of food on it, and cognac, vodka, whiskey- everything to drink. Three leaders of Russia's democracy sat themselves down. One of them is Russia's president, Boris Nikolayevich Yeltsin. The other two- I've never revealed their names, waiting and wondering if they will ever have the guts to talk about that time.

The dinner lasted till 5:00 in the morning, when it was clear that there would be no attack. Guards had to help them out of the room because they couldn't walk on their own.

Had there been an attack, those people outside the White House would have died, because they were there defending democracy, defending a new Russia. But those who were downstairs in the bunker drinking vodka, did not bother about the new Russia. They were thinking of themselves.

NARRATOR: By dawn, all that the people on the streets know is that the coup has suddenly evaporated. And Boris Yeltsin will become the champion of Russia's democracy.

YEVGENIA ALBATS, Independent Journalist: I remember this very strong feeling that I lived through the best days of my life. Absolutely. There was such a great sense of community and this amazing feeling- you know, "We did it!"

NARRATOR: "In three days, we made the march of a decade," said a Russian who was there. "We had won," said another, "and we thought we would wake up the next day in the kingdom of freedom and democracy."

Boris Yeltsin, the only popularly elected president in all of Russia's history, would now look outward. By the time he came to the United States in early 1992, the Soviet Union had been declared dead. The cold war was over.

Pres. GEORGE BUSH: Mr. President and Mrs. Yeltsin, welcome to the United States of America.

NARRATOR: As Yeltsin looked to America for help in Russia's hour of need, he was hailed across Washington as a great democrat.

E. WAYNE MERRY, Chief Political Analyst, U.S. Embassy Moscow (1990-1994): We had prepared Yeltsin for the event. But afterwards, he said that there was one thing that we had not prepared him for, and it took him completely by surprise: to enter the chamber of the most important legislature in the world and be greeted by this really thundering, stupendous standing ovation. This demonstrated that he was now a chief of state.

NARRATOR: From the beginning, Yeltsin's revolution would be a precarious balancing act, nurturing Russia's fragile democracy while at the same time trying to create a Western-style economy out of the wreckage of a planned one.

MAN IN STORE LINE: [through translator] Old lady, they won't let us in. Why are you pushing? What are you doing?

BABUSHKA: [through translator] What am I supposed to do? I'm in the same position as everyone else.

BORIS FYODOROV, Finance Minister (1993-1994): It was a very dismal situation in the sense that Soviet economy definitely was collapsing. It was a situation where it was clear that the state was not functioning.

WOMAN IN STORE: [through translator] Boris Nikolayevich, look at the price of butter

Pres. BORIS YELTSIN: [through translator] Yes, but you get 400 grams for 20 rubles

BORIS FYODOROV: Yeltsin never understood anything about the economy.

WOMAN IN STORE: [through translator] Yes, but they never have the 20-ruble butter.

BORIS FYODOROV: And he never understood what has to be changed.

Pres. BORIS YELTSIN: [through translator] There are no cartels that will dictate price. That means this is the result of demand.

BORIS FYODOROV: Then Yeltsin looked around and tried to see whether there is anybody who is coming with any recipes for dealing with the crisis. And that's how Mr. Gaidar appeared, and that's why many other people, including myself, appeared in the government, not because Yeltsin understood us, or knew us or liked us.

NARRATOR: In April, 1993, the newly-elected U.S. president would meet Boris Yeltsin. It was Bill Clinton's first summit. At his side was Strobe Talbott, a Russia scholar and Oxford University classmate whom Clinton had named his special ambassador for the former Soviet Union.

STROBE TALBOTT, Deputy Secretary of State: President Clinton developed a fascination with him as a political animal, if I can put it that way. And President Clinton was very interested in the way in which somebody who came out of a communist and totalitarian system, and indeed had thrived in the old Soviet system- how he would make the adjustment to the workings of democracy.

PAVEL VOSCHANOV, Yeltsin Press Secretary (1991-1993): [through translator] For Yeltsin, the most important thing was to be liked, to become a member of the club. He honestly thought that after that, all of Russia's problems would be solved. Gold rain would pour down on us, the borders would open, foreign goods would pour in all because Yeltsin was on friendly terms with the other leaders.

NARRATOR: Candidate Clinton had extolled the virtues of American-style capitalism in helping to build democracy. President Clinton now wanted to make Russian reform his top foreign priority.

Pres. BILL CLINTON: Mr. President, our nation will not stand on the sidelines when it comes to democracy in Russia. We know where we stand.

THOMAS GRAHAM, Chief Political Analyst, U.S. Embassy Moscow (1994-1997): We weren't standing on the sidelines. The whole policy was conceived as- in one aspect, as a mutual effort aimed at the domestic transformation of Russia.

Pres. BILL CLINTON: We actively support reform and reformers and you.

STROBE TALBOTT: These are tough, tough issues. Most of all, they're tough issues for Russians. How do they take this giant country of theirs, with its immense natural resources, with its immense human resources, and its dreadful past, and its absence of political and economic culture that qualify it for the modern world, and make a modern country out of it?

That's tough for them, but it's tough for us as we try to help them do it. [www.pbs.org: Read the full interview]

NARRATOR: The "radical reformers" Yeltsin had tapped to lead his revolution adopted a Western scheme to try to shock the Russian economy into sudden new behavior. In the first year, state factories were cut off from money and credit. Hyperinflation wiped out personal savings. Scientists and engineers, who had been open to change, were told to make it on their own.

1st MAN IN MARKET: [through translator] What's happening now in Russia is like what you had in the 1920s - the Great Depression.

2nd MAN IN MARKET: [through translator] He's right.

1st MAN IN MARKET: [through translator] Do you know how much we earn according to world standards? Two hundred dollars a month, max. That is what I make. What is $200? You can't live a week on that in your country.

2nd MAN IN MARKET: [through translator] And I make $60. I can't feed my family. I'm forced to stand here behind a counter. I never would have done this. He's a specialist, and he's a specialist, too. Necessity forces us to stand here behind a counter.

THOMAS GRAHAM: These were people who were dealing with a very difficult environment. They weren't dealing in theoretical models. What they were trying to figure out was how they survived in this environment.

NARRATOR: The reforms themselves were increasingly divisive. And though the first-ever Russian parliament had been elected with a mandate for change, after a year of shock therapy, it moved to impeach Yeltsin.

The crowd gathered to oppose the Russian President was dwarfed by those who rallied on the other side of Red Square to support him. But the opposition to "radical reform" was growing.

OPPOSITION RALLY SPEAKER: [through translator] Russia is at a crossroads. One road leads to enslavement by transnational American capital. The other is the long and glorious road of a great power!

BORIS FYODOROV, FINANCE MINISTER (1993-1994): The battle with the parliament was not really about specific even economic course. Obviously, people were saying that, "Well, these guys are for reform, these guys are against reform." But when you look at it carefully and analyze it, I think it was mostly "them and us." Whatever "they" do is always wrong. Whatever "we" do is always right. And clearly, it was the battle for power. And since the majority of parliament basically hated the guts of Mr. Yeltsin, there was the making of real, basically coup d'etat.

NARRATOR: Yeltsin would later say he had been itching to take on the parliament, to give it a "good horse-whipping.

Pres. BORIS YELTSIN: [through translator] The nationalists and the rest of the has-beens are of course using everything within their means to eliminate Yeltsin! [www.pbs.org: More on Yeltsin's thinking]

LILIA SHEVTSOVA, Author, "Yeltsin's Russia": [through translator] The West knew what was about to happen. They knew very well that Yeltsin wanted to strike parliament with a single blow. And the West supported this for two reasons: mostly for stability in a Russia teeming with nuclear weapons, but also, the West believed that Yeltsin's strong, autocratic rule would promote liberal reforms. It didn't matter if there was democracy or not.

NARRATOR: In the U.S. embassy a mile north of Red Square, career Russia specialists were increasingly alarmed. In their confidential cables, they would argue that Washington was ignoring the political consequences of the economic policy it was dictating.

THOMAS GRAHAM, Chief Political Analyst, U.S. Embassy Moscow (1994-1997): We tended to push aside some of those people who did not- or were not fully supportive of what was called "radical reform" at that time.

DONALD JENSEN, Second Secretary, U.S. Embassy Moscow (1993-1995): The choice was always black or white. The choice was always reform or going back to the Soviet past. And that, I think, was oversimplified, did not reflect what was going on in Russia. And it was something that we began to write about increasingly and were- of course, little attention was paid to it.

NARRATOR: Their cables would ignite a war in the embassy with the U.S. Treasury reps, who were in Moscow to push Washington's economic prescriptions. It was a fundamental conflict over the direction of U.S. policy.

E. WAYNE MERRY, Chief Political Analyst, U.S. Embassy Moscow (1990-1994): The U.S. government chose the economic over the political. We chose the freeing of prices, privatization of industry, and the creation of a really unfettered, unregulated capitalism, and essentially hoped that rule of law, civil society, and representative democracy would develop somehow automatically as a result of that.

NARRATOR: On September 21st, Yeltsin, acting more like a czar than a new democrat, will ignore the constitution.

Pres. BORIS YELTSIN: [television address] [television address] [through translator] The legislative and supervisory functions of the Congress of People's Deputies and the Supreme Soviet of the Russian Federation are suspended as of today. The Congress may no longer convene.

NARRATOR: He orders new elections. Clinton calls Yeltsin to say he understands the "democratic spirit" of what he is doing. But the parliament refuses to disband and holes up in the White House.

BORIS FYODOROV: Yeltsin started acting, but he never prepared it perfectly well. He never informed even the full government. And the president didn't know what to do next. So it was real, real chaos. It was very, very bizarre.

NARRATOR: For 12 days, threats and accusations escalate. Yeltsin cuts the building's telephones and electricity. The crowd supporting the parliament swells. Yeltsin orders riot police to keep them pinned in.

On Sunday afternoon, October 3rd, after two days of violent skirmishes, all hell breaks loose. The crowd breaks through. For three hours, the anti-Yeltsin mob marches through Moscow.

REPORTER: [through translator] Where are you going?

MAN IN TRUCK: [through translator] To take the television station!

STROBE TALBOTT, Deputy Secretary of State: It wasn't pretty. It was ugly. It was sometimes bloody. But as long as the prevailing instinct was in the direction of reform and doing things differently and letting the people decide, it was something that the United States, in broad-brush terms, could support.

NARRATOR: Yeltsin will finally return to Moscow from his country house. In the Kremlin, there is panic; on the streets, the real fear of civil war. He will spend the night trying to convince a reluctant Russian military it must act. The president's tanks will bombard the same White House he had once stood on another tank to defend. By official count, 146 people were killed.

Bill Clinton will reaffirm his support for Boris Yeltsin. Yeltsin's government, he says, is on the right side of history.

YEVGENIA ALBATS, Independent Journalist: And the message was very clear. "As far as you continue the part of the market reforms, as far as you allow us not to worry too much about your nukes, do whatever you want. Kill. Kill. Violate the law. Go ahead and do this."

WOMAN AT PROTEST: [through translator] You're probably aware about how Yeltsin came to power. People supported him because he promised us democracy, but he shot up that democracy. Not only did he violate it, but he shot it up.

YEVGENIA ALBATS: One should remember that Russians are very inexperienced in the whole school of democracy. Therefore, for them, Parliament was their first experience of the democratic institution. After all, they voted those deputies into the Russian parliament. And then they saw that those deputies were shot by all this military force authorized by the president of the Russian Federation.

MAN AT PROTEST: [through translator] You're either ignorant people there, or you don't understand what's going on here. And if you understand that he is criminal and you're praising this criminal, supporting him, what do you call this? It's low, elementary meanness.

NARRATOR: Yeltsin pushes ahead with snap elections for a new parliament, certain that it will give the party of his "reformers" the advantage.

VLADIMIR ZHIRINOVSKY: [to protesters] [through translator] Then they say, "Let's build capitalism." And they built it for themselves. In two years, they've already become capitalists!

NARRATOR: Not included in the plan was that an unabashed neo-fascist named Vladimir Zhirinovsky would become a megaphone for peoples' frustration and fears. Diplomats in the Moscow embassy cabled Washington, "Watch for surprises. There is a dangerous misunderstanding that the October events have put all real political danger in the past."

E. WAYNE MERRY, Chief Political Analyst, U.S. Embassy Moscow (1990-1994): The embassy had warned Washington at the end of November that the election had the potential to be a disaster. I don't think Washington believed it. They certainly didn't want to believe it.

NARRATOR: Eleven P.M., Sunday, December 12th. At party headquarters of the U.S.-backed reformers, the results of the parliamentary voting have begun to be tabulated. By 2:00 A.M., the surprise is Zhirinovsky, whose party has taken the lead.

REFORMER: [through translator] Zhirinovsky? Of course, I'm concerned about it. Such democrats we are.

REPORTER: What about the West? What should they be thinking? What would you say to them?

ZHIRINOVSKY SUPPORTER: To the West?

REPORTER: Yeah.

ZHIRINOVSKY SUPPORTER: Watch and tremble. [laughter]

NARRATOR: Russia needs "less shock, more therapy" the Moscow embassy cabled Washington. It was a phrase that, for a moment, seemed to get some attention. But the administration quickly re-grouped.

STROBE TALBOTT: My use of that phrase, "less shock and more therapy," which, of course, was a play on the concept of "shock therapy," was a lesson that I probably ought to have learned sooner, that public officials speaking publicly should avoid wisecracks. It was a bit of a wisecrack.

However, in a democracy, you need to have what might be called a critical mass of voting citizens who support the policies of the government. When you don't have that kind of support, it's going to be a setback for the powers that be and their policies.

E. WAYNE MERRY: Unfortunately, the choice was to ignore popular will and to press on with the policy. And I think there was a huge cost on the long-term development of rule of law and constitutional government in Russia from making that choice.

NARRATOR: The Clinton administration had been so confident of the victory of its favored reformers that the president had planned to address Russia's new "pro-reform" parliament in January, 1994. That appearance would be scrapped. Clinton would meet with Yeltsin and his "reformers" not in the parliament, but inside the Kremlin.

THOMAS GRAHAM: The United States missed an opportunity in part because they didn't realize that what this Duma election suggested was that there were great doubts within the public about the value of both democratic and economic reform and that the appropriate approach was not to give more support to the so-called reformers. It was to try to address those concerns, to ease the doubts about reform and, in a sense, make reformers out of those who were skeptical about where the country was headed.

NARRATOR: Instead, the familiar team would receive a new infusion of loans to bolster the attempt to impose capitalism by decree. That worried Russian democrats, who wanted the rule of law, not rule by a czar.

LILIA SHEVTSOVA, Author, "Yeltsin's Russia": [through translator] The West has always viewed Russia with a double standard. When we used to say that democracy in Russia is weak, that Yeltsin behaves like an autocrat, like a monarch, our Western colleagues would ask what we wanted, that this was our history and we could only hope to move so fast. They justified Yeltsin and this decrepit democracy.

NARRATOR: They would agree to push ahead with fast-track privatization. The wealth of Russia was at stake: one third of the world's natural gas reserves, major shares of the world's oil, 20 per cent of its nickel. Details like who acquired control, and for what price, seemed less important than speed.

JANINE WEDEL, Author, "Collision and Collusion": The United States played an intimate role in helping to design and implement and sell privatization policies. And privatization was a key part of- a key instrument in shaping the Russian landscape, economic landscape. Who got what?

NARRATOR: Key decisions involving who got what - assets worth billions of dollars - would be decided by Yeltsin's decrees. Some were even drafted by U.S. contractors themselves.

1st WORKER: [through translator] They're dismantling our machines and selling them off anywhere they can. Who knows what's happening? No one asks us.

JANINE WEDEL: I remember talking with the consultants who had been involved in these public education campaigns. And I remember one of them telling me that the people that she was interviewing didn't even know the factory had been privatized.

2nd WORKER: [through translator] I don't know if the factory's been privatized or not. Let them privatize it. But who will do it? It'll just be the same management, not us, not the workers. We don't know anything at all.

NARRATOR: Factory directors would cheat workers out of the vouchers they'd been given to buy shares in their companies or loot the enterprises of materials and machinery. It became a free-for-all.

OLD WOMAN IN FACTORY: [through translator] All this was all filled with goods. Now there's nothing.

JANINE WEDEL: The way in which privatization was conducted was more about wealth confiscation than wealth creation, giving advantages to a very small group of power brokers in Russia.

DONALD JENSEN, Second Secretary, U.S. Embassy Moscow (1993-1995): I can remember going to a meeting with a very prominent ministerial-level person with a prominent embassy official. And after the meeting, after being sweet-talked, frankly, about how things were going well, turning to this embassy official and asking- saying, "Sir, don't you realize this man is reportedly, by a lot of sources, on the take and very, very corrupt?" And he turned to me and said, "Don, it's not my problem."

MATT BIVENS, Editor, "The Moscow Times": Vouchers became sort of a farce the moment they took all the companies of any value out of it. And they said, "You split up, so you can all have shares in all the useless," you know, "Arctic Circle brick factories, and other things that aren't going anywhere economically. Anything of any real value, we'll split up separately." And then they did so.

NARRATOR: The government would sell off the crown jewels of Russian industry for a fraction of their real worth to bankers and businessmen who had already corralled much of the state's money.

ALEXANDER MINKIN, Investigative Journalist: [through translator] This is how it worked. The Minister of Finance of Russia and a banker - let's call him Vasya - are sitting in a restaurant. And Vasya says, "Listen, your Ministry of Finance has money. Why would you sit on it? Deposit it in my bank." The minister agrees. The next day an account is opened in Vasya's name, and the Minister of Finance deposits state money into this private bank, $100 million dollars.

NARRATOR: The Kremlin-connected bankers were then poised to exploit a self-serving scheme, called "loans for shares," that one of them had devised.

ALEXANDER MINKIN: [through translator] Some time later, the state announces the loans-for-shares auctions, and says, "Here's an oil field. Whoever lends us money for it will get the oil field loaned to them." Vasya comes and says, "Here's 100 million dollars. Give me the oil field." We know where Vasya got the money.

MATT BIVENS: They would hold an auction for something huge, the second biggest oil company in the country, Yukos. And they would for some reason ask a private bank to organize that auction. So Menatep, Bank Menatep, organizes the auction for Yukos. It's accepting a- you know, bids. It's evaluating bids behind closed doors. And it comes out and says, "Well, we've been looking at it, and we've decided we've won."

ALEXANDER MINKIN: [through translator] Got it? Genius idea! When I learned about all this, I was amazed. This is a brilliant scheme. The oil field became Vasya's, and he didn't spend a penny on it.

NARRATOR: Unlike America's robber barons, these new oligarchs created no wealth. Instead of investing in their newly-won enterprises, they looted them. To ordinary Russians, they were the face of capitalism.

DONALD JENSEN, Second Secretary, U.S. Embassy Moscow (1993-1995): By this time, it had been clear that many of these oligarchs really were not real businessmen, as the Treasury Department or the U.S. economic establishment thought they were. These were people who had traded on their close proximity to the government and practice of activities which in the United States might land them in a federal penitentiary.

NARRATOR: Donald Jensen wrote a 10-page cable that named names. But the U.S. Treasury Department's man in the embassy argued that if the memo were sent to Washington, it could be leaked to the press, and that would undermine U.S. policy.

DONALD JENSEN: It caused an explosion of resistance in the embassy, especially from the Treasury representative at the time. and other people, as well. So they refused to clear it.

NARRATOR: The cable was never sent.

DONALD JENSEN: Because it was bad news, and we were intent on making our policies work. And if corruption was shown to exist in any significant degree, that was criticism of the policy because we had argued for a number of years that these things- these policies were for the good of Russia, and that if you now say that the government's completely corrupt, that it's linked directly or indirectly with organized crime, you're essentially saying the policy the U.S. government has followed over the past few years was wrong.

NARRATOR: Within a month, Jensen would leave active service in the U.S. government.

BORIS FYODOROV, Finance Minister (1993-1994): When some people are surprised by this Bank of New York's crisis or Swiss accounts and so on and so on- wait a minute. All this money, money of oligarchs, is dirty money. All the houses, the holidays trips, the skiing, happens in the West. It doesn't happen in Mongolia or in China. Everything is in the West. And if the West doesn't like such practices, I wonder why nobody ever did anything about it.

All these accounts are in the Western banks because nobody keeps an account in North Korean Bank, among Russian oligarchs. Somehow they don't trust these North Korean communists. The West never acted upon a single real criminal in a serious way, and we know perfectly well that dozens of billions of dollars are at stake.

MATT BIVENS, Editor, "The Moscow Times: People in Russia know what happened to the oil companies and the nickel companies. They're all sitting around- they've been sitting- many of them have been sitting around for years without getting paid their salaries. It's a situation that I don't think Americans can even comprehend.

They work every day at, you know, these enormous combines and oil plants, and they don't get their salaries. And they're all sitting around listening to Bill Clinton go on TV and say, you know- you know, "Hang in there." You know, "It's tough when you're reforming the country."

NARRATOR: Capitalism had become capital flight. Whole regions of Russia had been impoverished.

STROBE TALBOTT, Deputy Secretary of State: There's no recipe book of how you help a country make the transition from communism to democracy and market economics. We're making this up as we go along, in a very real sense, and we're going to make some mistakes. And Lord knows that the people we are trying to help are going to make some mistakes, or worse.

NARRATOR: Boris Yeltsin became increasingly remote, a tired-looking figure who rarely appeared in public. "We need a small, victorious war," his national security chief told a legislator, "to raise the president's ratings." His defense minister boasted that Russian forces could take out the president of the breakaway region of Chechnya in two hours.

On New Year's Eve, 1994, Russia launched its assault. The madness would kill tens of thousands of civilians.

LILIA SHEVTSOVA, Author, "Yeltsin's Russia: [through translator] The West was silent. The West did not protest. They called Chechnya an internal Russian matter. One hundred thousand people killed, but it was an internal matter. The West was silent.

NARRATOR: With each passing crisis, the number of Russian democrats who became disillusioned with American policy grew.

Pres. BILL CLINTON: There are some who say that we should have been more openly critical. I would remind you that we once had a civil war in our country over the proposition that Abraham Lincoln gave his life for, that no state had a right to withdraw from our union.

NARRATOR: The brutal war raged on. Russia's economy - and Yeltsin's health - continued to waste away. His popularity ratings fell to single digits. The communists were ascendant. By January, 1996, with a presidential election looming, Yeltsin appeared doomed. And that threatened the financial barons, who knew that a communist victory could mean not only the loss of their fortunes but possible imprisonment. They put their millions behind saving Yeltsin and themselves.

BORIS FYODOROV: Ninety-nine point nine percent of all political money in Russia is obtained via deals, deals which are very, very simple. "We help you, you help us. We give you a government order for this type of," I don't know, "goods. We allow the bank accounts of this government body to be in your bank. We close the eyes that you are not paying taxes," and so on and so on and so on.

So for instance, if the worth of a certain privilege is $100 million, who would be so stupid as to not give $20 million out of it for political purposes? Because it's business. So most of it was business, and it was very, very ugly.

NARRATOR: In the middle of the campaign, two top Yeltsin aides were caught leaving the Russian White House with a box filled with $500,000 in $100 bills. The incident would soon be forgotten, as was the law that limited what a presidential candidate could spend to $3 million. The tycoons would spend more than thirty times that much to keep Boris Yeltsin in the Kremlin. And Yeltsin would rise to the occasion.

The headlines would say "Communism is defeated again by the forces of freedom and democracy." But even though they voted for Yeltsin, that is not how it looked to most Russians.

These men had been responsible for a remarkable piece of political engineering. Their leader would announce that he and six other oligarchs now controlled half of Russia's economy and, from now on, they would dictate Kremlin appointments and policies. They had covered up the fact that Yeltsin suffered a heart attack during the campaign. Now, they had captured him and Russia.

"After communism," one Russian said, "we returned to czarism."

LILIA SHEVTSOVA: [through translator] The monarch is old and depressed. He was constantly falling into depressions. He was a man who lost contact with reality. He stopped watching the news. He heard about the world through his family and closest advisers. He began to form his own mythical regime. Everything in the regime was mythical, a glass house. Everything about it was fantasy.

It was political nonsense. This regime couldn't exist, but it existed. He couldn't rule, so he delegated power to his family, to the bodyguards, to the cook, to the doctors, to his favorites. Then he started to change favorites.

When people came to visit him in the Kremlin, he sat at his desk looking at blank paper. He sat there and did nothing. He would sit like this for hours. He knew he was in Russia, but nothing else. Nothing interested him. He went to Sweden, but thought he was in Finland. He re-targeted the missiles. He talked utter nonsense.

He didn't know who he was, but he knew he was a leader. This was the only thing he cared about. He knew he had power, and he was clinging to it like an animal.

NARRATOR: In August, 1998, the glass house came crashing down. The government devalued the ruble and defaulted on $40 billion of debt. And Washington's "reforms" would collapse along with Russia's ruble.

THOMAS GRAHAM, Chief Political Analyst, U.S. Embassy Moscow (1994-1997): The collapse of August, 1998, put an end to hopes that this transformation was going to be rapid and successful. And people began- politically began to question the types of- the type of advice that the West was passing on. And many of them drew the conclusion that, in fact, the West had achieved what it wanted, which was the weakening of the Russian state.

Pres. BILL CLINTON: The Russian people have met tremendous challenges in the past. You can do it here. You can build a prosperous future. You can build opportunity and jobs for all the people of this land who are willing to work for them if you stand strong and complete - not run from, but complete - the transformation you began seven years ago.

E. WAYNE MERRY, Chief Political Analyst, U.S. Embassy Moscow (1990-1994): In the early '90s, I think the most poignant slogan that you saw in Russia during the demonstrations was "No more experiments." The people were terribly tired of being treated like laboratory rats. This effort to build the new socialist man had left people feeling completely alienated.

What they got in the 1990s was another series of experiments, where many of the scientists were not even Russians, but were people sitting in offices in Washington. And I think much of the disillusion with the West, much of the hostility that Russians now feel, particularly towards the United States, is a reaction to what they feel was another series of failed experiments.

NARRATOR: The Kremlin's back-room players and oligarchs, now known collectively as the "family," were increasingly plagued by allegations of corruption. As they began to look for ways to escape prosecution, Yeltsin would audition prime ministers, hiring and firing them one after another.

September, 1999, a dawn explosion ripped through a nine-story apartment building in Moscow. Within a week there would be more terrorist blasts, all directed at buildings where people lived, all in the middle of the night. Almost three hundred people died as they slept.

YEVGENIA ALBATS, Independent Journalist: It brought a lot of fear to many Russians, me included. It was this sort of very simple fear. All of a sudden, it appeared that all these discussions about democracy, oligarchs- nothing compared to this fear to die inside your own apartment.

NARRATOR: After so many years of unremitting loss, humiliation and chaos, Russians now yearned for someone who would restore order.

Prime Minister VLADIMIR PUTIN: [through translator] You can't call those who did this human. You can't even call them animals.

NARRATOR: Although there was no evidence and no proof, Yeltsin's newest prime minister, Vladimir Putin, blamed Chechens for the carnage. The former KGB colonel promised that he would bury them "in their own crap."

On September 30th, for the second time in five years, Russian troops stormed into Chechnya. With the Kremlin-controlled media fanning the public's fear, few Russians opposed the slaughter.

LILIA SHEVTSOVA, Author, "Yeltsin's Russia": [through translator] How we have changed during these years! How angry and limited we have become. How afraid we are of the future. And again we want to build a country based on force. We want to be feared. Not loved, feared. But every time we return to the past, we pay a price.

NARRATOR: Before the war could lose its popular support, Boris Yeltsin would suddenly resign. And his anointed successor, Vladimir Putin, was handed the suitcase containing Russia's nuclear button. It was the final act in the months-long drama scripted by the Kremlin "family" as they searched for a successor who would protect their interests. Putin, Russian newspapers wrote, was the "czar's gift." And his first decree would grant the old czar immunity from criminal prosecution.

Putin had been lifted to the Kremlin - seemingly from nowhere - by demolishing Chechnya. Few knew much about him, only that he had spent 17 years in the KGB. [www.pbs.org: Who is Vladimir Putin?]

YEVGENIA ALBATS, Independent Journalist: The mentality of the KGB officer is such that they were taught to be- in Russian language, it sounds "derzhavnik." Those who believe in their greatness, Russian greatness. Everything else - democratic institutions, personal liberties, personal freedoms, individuality, human rights - everything else is after this.

NARRATOR: History, one Russian said, has a sinister sense of humor. After almost a decade of "strategic engagement" with Russian reform, the U.S. must now deal with Boris Yeltsin's political heir, a former spy.

Pres. BILL Clinton: [CNN interview] Based on what I have seen so far, I think that the United States can do business with this man. He has strong views. We don't agree with him on everything, but what I have seen of him so far-

NARRATOR: Those who have been the staunchest defenders of Russia's democracy, human rights and free press fear Putin and say they have cause. The former editor of Moscow News told us he had never seen a time "as hopeless as now."

STROBE TALBOTT, Deputy Secretary Of State: I understand why people who live in Russia, and who depend on what happens there for their own personal happiness and safety, have a lot of apprehensions about what's going on there. That said, it strikes me as hard to understand how anybody could say that now is a more hopeless time for Russia than what existed there as recently as a decade or a little more ago.

YEVGENIA ALBATS: I do think that the great epoch of great hopes and great illusions is over. Probably, it will take another generation, probably the generation of my daughter, or her kids, to take another stand for creating, you know, some civilized and democratic society in Russia.

PAVEL VOSCHANOV, Yeltsin Press Secretary (1991-1993): [through translator] It's a very sad time now. We've ended up back where we started. And yet look at the hard years we have survived. When I think we might have to walk this same path one more time, it depresses me. Will people want to go through this again?

A FRONTLINE coproduction with

Washington Media Associates

Copyright 2000

WGBH EDUCATIONAL FOUNDATION

ALL RIGHTS RESERVED

ANNOUNCER: This report continues on FRONTLINE's Web site, where you'll find more of the interviews with Russia experts and observers, statistics on Russia's social and economic problems during the '90s, assessments by analysts who hold a variety of views on Yeltsin and U.S. policy-making. Bookmark FRONTLINE on line at pbs.org or America On Line keyword PBS.

Next time on FRONTLINE:

JUDY WOODRUFF, CNN: It has happened again, death by gunfire at another school in the United States.

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JUDY WOODRUFF: His name is Kipland Kinkel and-

TELEVISION ANCHOR: -and might have also killed his parents.

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