Putin's administration has kept its promise of tax reform, creating a tax system comparable to that of other advanced, market economies, while bringing tax relief to a great number of citizens. Part One of the Tax Code, implemented in 1999 dealt largely with administrative issues. Part Two came into effect in January 2001 and included a value-added tax, excise duties, and modified the personal income tax, among others. The personal income tax was reduced from rates as high as 30% to a flat rate of 13%. Putin's strategy in the tax drop was to increase compliance with tax payments. Since most Russians were unable to pay the higher rates, they simply paid nothing. After the drop, personal income tax collections in the first half of 2001 exceeded expectations. As well, the tax on corporate profits was dropped from 35% to 24%, one of the lowest rates in Europe, and payroll taxes were cut by 4%.
As the second major step in reforming Russia's economy, Putin's administration has focused efforts on reforming the three big natural monopolies: the railroad system, the gas utility Gazprom, and the national electric utility Unified Energy Systems. Under the electricity and railway restructuring plans, the government will retain control of these networks while creating competition by opening access to them on an equal basis to competitors (independent rail operators or electricity generators) in return for an access fee.
President Putin has made judicial and other legal reforms one of his top priorities, and proposed legislative changes to the Duma. Implementation of these changes will have the potential to improve the business climate as well as the protection of citizens' rights but will be a complicated process that will take several years at minimum.
There are major humanitarian and economic costs and unintended consequences of the Chechnya conflict, which erupted again in 1999 and intensified in 2002. Civilian and military casualties may well be higher than in the 1994–1996 Chechnya campaign, when 80,000–100,000 died, and military costs appear to rival the us $12–15 billion estimated for the earlier conflict. Infrastructure damage too may match or exceed that of the earlier conflict. Most Chechens are displaced and their homes damaged or destroyed. The military's indiscriminate bombing, tacit support for looting, and inadequate investigation of alleged atrocities undermine democratization, human rights, and the rule of law, according to many observers. Putin's statements about the conflict also have raised concerns about his commitment to human rights and law, including the presumption of innocence. Putin long rejected allowing the Organization for Security and Cooperation in Europe (OSCE) into Chechnya, except "where and when we say, where we permit it and deem it expedient," despite Russia's assurances at the November 1999 OSCE Summit to cooperate in resolving the conflict.
In October 2002, Chechen separatist rebels seized a theater in Moscow and held some 800 people hostage. Putin responded by ordering a raid on the theater, using a powerful opiate to incapacitate the rebels. As a result of the gas, 117 hostages and 50 captors died in the rescue operation. Putin proclaimed the operation was an unprecedented success, but many questioned the effectiveness of the action due to the number of hostages who were killed. In December, Chechen suicide bombers attacked the headquarters of the pro-Moscow Chechen administration in Grozny, an attack Putin called "inhuman." The situation in Chechnya is also complicated by the fact that the United States, following the 11 September 2001 attacks on the World Trade Center and the Pentagon, announced it would pursue terrorists in the Pankisi Gorge region of Georgia, where Putin maintains Chechen rebels are fighting alongside al-Qaeda operatives. The United States. has stated its unequivocal opposition to any unilateral military action Russia might take in Georgia.