World Savvy Monitor

When Boris Yeltsin renounced his Communist Party affiliation and consolidated control over a foundering independent Russia, the financial crisis was pronounced. Yeltsin extended Gorbachev’s reforms and attempted to maneuver the economy through a rapid capitalist transition. This transition from a centrally-planned economy to a free market economy is difficult, and nearly always results in short-term hardship. There is an inevitable lag time between state control of basic economic transactions and free market control. In Russia’s case, price controls and government subsidies were removed and production moved into the private sector as part of a transition process that came to be known as “shock therapy.”

This process was overseen, in part, by advisors from the West. International financial institutions such as the World Bank and IMF made loans to facilitate the transition. Technical assistance and funds poured in from the West, and some thought they were witnessing the “end of history,” or a fundamental uniting of East and West after 1000 years of conflict. Communism was dead; capitalism appeared triumphant. Russia would be integrated into the global free market, and its economic integration would ensure its political and social transformation into a Western-style country. All the West had to do was help see Russia through the transition.

The hardships of the transition were worse than predicted, and took an enormous toll on the Russian people. Goods became scarce, prices soared (rising by 26 times their previous levels, by some estimations), and the ruble became nearly worthless. The Russian people were faced with poverty, without the “cradle to grave” state-sponsored welfare benefits of Communism.

The Yeltsin Oligarchs

A small group of entrepreneurs found themselves well-positioned to take advantage of the virtual fire sale of state-owned assets. Privatization caused assets to be concentrated in very few hands, and an oligarchy was born. The “family” of Yeltsin (consisting of blood relatives and favored elites) benefitted while most Russians suffered, and the very nascent middle class disappeared. It has been estimated that the majority of previously-state owned assets ended up in private/public conglomerates belonging to just eight people.

The Crisis Deepens

Throughout the 1990s, the price of oil and gas exports remained low and the economic crisis worsened. The concentration of wealth among the oligarchs and their influence on the Yeltsin administration brought more corruption. Democracy faltered. Overall quality of life declined further. In 1998, the financial system came crashing down. Yeltsin’s health became more erratic. The oligarchs gained unprecedented power, essentially running the state for their own profit.

Putin was hand-picked by Yeltsin to succeed him when he unexpectedly stepped down on December 31, 1999, before elections in March 2000. Putin went on to handily win as an incumbent. He inherited an economy in shambles and a corrupt government, beholden to unelected elites. The country blamed the chaos and hardship not only Yeltsin, but also on the West and its economic advisors. Many Russians equated capitalism with democracy, and both were discredited. The time was ripe for a new approach.

Next:  Inside Modern Russia:  The Russian Economy:  The Putin Years - Recovery and Resurgence