History of the Russian Federation
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Although the new Russian Federation was widely accepted as the Soviet Union's successor state in diplomatic affairs, postcommunist Russia did not have the military and political power the Soviet Union once had. Russia managed to make the other ex-soviet republics voluntarily disarm themselves of nuclear weapons, but the Russian army and fleet were in a nearly non-functional state by 1991. There was no way the government could pay the officers' salaries, and soldiers were deserting in droves. By massive reductions and scrapping of ships, airplanes and tanks, the army is slowly getting control over its spending and organization, but it is by no means as powerful as the Red Army once was. On January 2, 1991 Russia began to circulate new rubles to stem inflation and promote confidence. Then on March 26, 1996 the International Monetary Fund approved a $10.2 billion loan to Russia to be used for economic reform.
Postcommunist Russia's political culture
Democratization has been a difficult task in Russia, home to Tsarist "nationalism, autocracy, and Orthodoxy" and Stalin, with a political culture shaped by imperial monarchy from the late fifteenth to early twentieth century, which ruled over a highly centralized multi-national empire covering a vast, contiguous expanse. The Soviet Union was the heir to this tradition of autocracy and centralization. While nominally a federal state consisting of fifteen constituent parts dating from Stalin's invasion of the Baltic states until 1991, the real centralization of power in top organs of the party, state, and bureaucracy meant that the multi-national empire was essentially intact. In fact, it is possible to argue that Russia was the sole absolutist empire to survive the end of World War I intact, watching the collapse of the Ottoman, Hohenzollern, and Habsburg empires. This political culture survives in Russian super-presidentialism, created-- oddly enough-- as a reformist instrument for the Russian state president (Yeltsin) to bypass conservative elements and enact economic reforms by decree before the collapse of the union state.
Due to constitutional structures and sweeping, unchecked powers of executive decree in post-Communist Russia (derided as "super-presidentialism"), Russia has followed its own peculiar path of democratization.
Democratization and economic liberalization in the former Soviet Union is loaded with paradoxes and contradictions. Under Gorbachev, Democratization in the form of glasnost entailed the destruction of he union state, the breakdown of political order, and insecurity and uncertainty that would impede economic and political reform. However, this meant the destruction of the coercive apparatus that held the Soviet Union together, requiring even autocratic institutions such as the presidency to at least engage in open competition with its opponents, such as the opposition in the Duma, in contrast to the opaque political processes of the Soviet era.
In place of the Soviet system, the structures, institutions, and procedural requirements of liberal democracy (in the forms of the presidency, constitutional court, federal assembly, federalism, regular competitive elections, multi-party competition, and a free press) have emerged. In such a system, citizens entrust leaders with delegated political powers through free and competitive elections and are able to hold them accountable through the ballot box, but also through proper procedural checks and balances. These structures largely exist constitutionally, and Russia has made great progress in holding regular, competitive elections, despite the anarchic and patrimonial party structure.
Political scientists, however, have cited many obstacles to popular democracy, especially super-presidentialism and its lack of checks and balances, weak civil society, anarchic party structures, anti-reformist sentiment, and the phenomenon of Soviet-era elites modifying their operating rules, but surviving intact.
Economic reform
Russia pursued three major sets of reforms in the early 1990s, shock therapy, neoliberal macroeconomic stabilization, and privatization. Stabilization, also called structural adjustment, is a harsh austerity regime for the economy in which the government seeks to restore a macroeconomic balance between what the society spends and what it earns. Stabilization is supposed to give the currency real value, which eliminates chronic sources of inflation. Doing so requires draconian cuts in state welfare spending, increases in taxation, the end of price controls, and an open foreign trade regime so that foreign products can compete with domestic ones.
The rapid transition to the market economy began days following the dissolution of the Soviet Union, when on January 2, 1992, Yeltsin-- acting as his own premier-- decreed a liberalization of foreign trade, currency, and hard currency designed under the auspices of his deputy prime minister Yegor Gaidar, a 35-year old liberal economist inclined toward radical reform. By decree, Yeltsin would then cut subsidies to money-losing farms and industries, decontrol prices, and moved toward convertibility of the ruble.
These structural reforms immediately opened the doors to hyperinflation. Hyperinflation was only worsened when the Central Bank, an organ under the anti-reformist parliament, was short of revenue and was forced to print money to finance its debt. With inflation at double-digit rates per month as a result of instantaneous price liberalization, macroeconomic stabilization was enacted to curb this trend.
Obstacles to reform
The former Soviet Union was dealt a number of unique obstacles during the postcommunist transition, perhaps leaving Russia on a far worse footing than other former Communist nations to the west, especially Poland, Hungary, and the Czech Republic, which have fared better since the collapse of the Soviet bloc between 1989-1991.
First, a major problem facing Russia was the legacy of the Soviet Union's enormous commitment to the Cold War. In the late 1980s, the Soviet Union devoted a quarter of its gross economic output to the defense sector (at the time most Western analysts believed that this figure was 15 percent). 1 In some regions of Russia, at least half the workforce was employed in defense plants. The end of the Cold War and the cutback in military spending hit such plants very hard, and it was often impossible for them to quickly retool equipment, retrain workers, and find new markets to adjust to the new post-Cold War and post-Soviet era.
Secondly, partly related the sheer vastness and geographical diversity of the Russian landmass, the former Soviet Union saw the development of a sizable number of "monoindustrial" regional economies-- in other words regions dominated by a single industrial employer. The concentration of production in a relatively small number of big state enterprises meant that many local governments were entirely dependent on the economic health of a single employer; when the Soviet Union collapsed, roughly half of Russia's cities had only one industrial enterprise, and three fourths had no more than four. 2
Thirdly, postcommunist Russia did not inherit a functioning system of social security and welfare from the former USSR. Since Russian industrial firms were traditionally responsible for a broad range of social welfare functions-- building and maintaining housing for their workforces, and managing health, recreational, educational, and similar facilities-- such towns were left heavily dependent on these firms for the provision of basic social services and were the mainstay of employment. Thus, economic transformation created severe problems for maintaining social welfare since local governments were unable to assume financial responsibility for these functions.
Finally, there was the problem of "human capital." The problem was not that the Soviet population was uneducated. Literacy was nearly universal and the educational attainment level of the Soviet population was among the highest in the world. The former Soviet Union's state enterprise managers were indeed highly skilled at coping with the demands on them under the Soviet system of planned production targets. But the incentive system built into state and social institutions of the Soviet era encouraged skill in coping with an intensely hierarchical, state-centered economy, but discouraged the kinds of competitive risk-and-reward centered behavior of market capitalism.
For example, the directors of Soviet state firms were rewarded for meeting output targets under difficult conditions, such as uncertainty about whether needed inputs would be delivered in time and in the right assortment. As noted, they were also responsible for a broad array of social welfare functions for their employees, their families, and the population of the towns and regions where they were located. Profittability and efficiency were well down the list of priorities of Soviet managers. 3 Thus, almost no Soviet employees or managers had firsthand experience with decision-making in the conditions of a market economy.
Depression
Russia's economy sank into deep depression by the mid-1990s, was hit further by the financial crash of 1998, and then began to recover in 1999-2000. Russia's economic decline is far more severe and more protracted than was the Great Depression that nearly paralyzed world capitalism following 1929. It is about half as severe as the catastrophic drop borne out of the consequence of the First World War, the fall of Tsarism, and the Russian Civil War.
The most striking consequence of the economic reform has been the sharp increase in the rates of poverty and inequality. The depression has driven over 40 percent of the Russian population into poverty. 4 Both poverty and inequality have grown sharply since the end of the Soviet era. Careful estimates by the World Bank based on both macroeconomic data and surveys of household incomes and expenditures indicate that whereas 1.5 percent of the population were living in poverty (defined as income below the equivalent of $25 per month) in 1988, by mid-1993 between 39 percent and 49 percent of the population was living in poverty. Average per capita monthly income had fallen, in dollar terms, from $72 to $32. 5 Per capita incomes fell by another 15 percent in 1998, according to government figures.
Meanwhile, social inequality has risen sharply. Public health indicators show are shocking, corresponding decline. There are now roughly twice as many deaths as births per year in Russia. 6 In 1999, total population fell by about three-quarters of a million people.
Backlash against reform
Structural reform lowered the standard of living for most groups of the population. Thus, reform created powerful political opposition. Russian voters, now able to vote for opposition parties, have often rejected economic reforms and yearn for the stability and personal security of Communist times. These are the groups that had enjoyed the benefits of Soviet-era state-controlled wages and prices, high state spending to subsidize priority sectors of the economy, protection form competition from foreign industries, and welfare entitlement programs.
Often these groups were well-organized, voicing their opposition to reform through strong trade unions, associations of directors of state-owned firms, and political parties in the popularly elected Duma whose primary constituencies were among those vulnerable to reform. A constant theme of Russian history in the 1990s has been conflict between economic reformers and those hostile to the new capitalism.
Democratization opened the political channels for venting these frustrations, thus translating into votes for anti-reform candidates, especially those of the Communist Party of the Russian Federation and its allies in the duma.
Reform by decree
On January 2, 1992, Yeltsin-- acting as his own prime minister-- enacted the most wrenching components of economic reform by decree, thereby circumventing the Supreme Soviet and Congress of People's Deputies, which had been elected in June 1991 before the dissolution of the USSR. This spared Yeltsin from the prospects of parliamentary bargaining and wrangling. Moreover, these bodies contained sufficient numbers of hard-liners staunchly against these reforms.
It is worth noting also that no Soviet leader since Stalin, by use of tacit party protocol to avoid such an extreme centralization of power, served as both premier and party chief, the Soviet era's most comparable position to that of Russia's state executive (the Soviet-era state presidency was effectively a titular ceremonial post).
However, capitalist reforms still faced some critical political barriers. The Soviet-era Central Bank, subordinate to the Supreme Soviet as opposed to the presidency, was not ready to fill a role comparable to that of its counterparts in the advanced market economies. During the height of hyperinflation in 1992-1993, the Central Bank actually tried to derail reforms by actively printing money during a period of inflation. After all, the Russian government was short of revenue and was forced to print money to finance its debt. As a result, inflation exploded into hyperinflation, and the Russian economy continued in a serious slump.
The 1993 constitutional crisis
Main article: Russian constitutional crisis of 1993
Under the terms of the constitutional amendments passed in late 1991, the special powers of decree were set to expire by the end of 1992. Yeltsin, of course, awaiting privatization, demanded that parliament reinstate his decree powers, but parliament was unwilling (only parliament had the authority to replace or amend the constitution). As Yeltsin threatened to unconstitutionally dissolve parliament, and as parliament threatened to impeach Yeltsin in March 1993, the fight climaxed in September, when no agreement could be reached on a new constitution.
On September 21, Yeltsin dissolved parliament, something he was not allowed to do by the then-functioning constitution. By illegal decree, he ordered new parliamentary elections and a referendum on a new constitution. The parliament then deemed Yeltsin's presidency unconstitutional.
In open rebellion of the Yeltsin regime, parliament on September 22 appointed its own acting president. Tensions built quickly, and the rebellious representatives barricaded themselves in the parliament building, the "Russian White House". On October 2-October 3, bloody rioting broke out in the streets of Moscow, and soldiers supporting parliament attacked the TV center Ostakino on the night of October 3. Russia was on the brink of civil war.
After parliament barricaded itself for ten days in an attempt to defy Yeltsin, the Russian army seized the White House. In the process, hundreds died and Russia witnessed the deadliest street fighting in Moscow since the civil war. On October 4, Yeltsin ordered the special forces to storm the Parliament, and CNN showed pictures of tanks lobbing shells at the White House. Official records reported 146 people killed in the October violence. Rutskoy, Khasbulatov, and the other rebel leaders were arrested, but given a pardon on February 26, 1994.
A new parliament, although still Communist-dominated, was elected soon after. This brutal episode served to prove that Russia is not a parliamentary democracy, but rather a presidential regime, with substantial power in the president's hands.
"Super-presidentialism"
Despite considerable opposition taking very democratic forms (opposition parties in parliament, popular interest groups, and grass-roots non-government organizations), the sweeping powers of the Russian presidency allowed Yeltsin to enact the most wrenching aspects of reform by decree. Under such a strong executive presidency, the need for democratic discourse with elements interested in the state and society interested in stalling or even stopping the reforms was curbed significantly.
Considering the sweeping powers of decree of both the 1991 and 1993 constitutions, perhaps more power has been left centralized in the hands of a single man in postcommunist Russia than in the Soviet Union under its last four CPSU party chiefs: Leonid Brezhnev, Yuri Andropov, Konstantin Chernenko, and Mikhail Gorbachev.
Privatization
Privatization, the transfer of legal title to state enterprises to private owners, was the third pillar of the reform process following structural adjustment (characterized by decontrolling prices) and stabilization. Like the first two pillars, it was carried out by Yeltsin by decree.
Yet, following the collapse of the Soviet Union, privatization was initially a broadly popular program. Unlike shock therapy (cutting subsidies to money-losing farms and industries, decontrolling prices, and moving toward convertibility of the ruble), which led to a period of hyperinflation, and thus in turn eroded the purchasing power of fixed-income wages and wiped out the savings of ordinary Russians accumulated during the Soviet years, privatization enjoyed significant political support in the beginning. Privatization, at least at first, was able to offset the unpopularity of stabilization.
Complications
According to most International Monetary Fund (IMF), World Bank, and U.S. Treasury Department economists at the time (See "Washington Consensus"), private ownership would not only propel the strengthening of social, organizational and legal infrastructures and institutions, but is intrinsically more efficient than state ownership because in a competitive environment owners have the incentives to maximize productivity.
However, many conditions can interfere with the application of this theory to the real world. With emphasis on just transferring ownership to private hands in order to create a lobby for private enterprise in order to prevent a communist comeback and push for creation of institutions to govern the market instead of competition, price controls were lifted without dismantling key Soviet-era monopolies. Prices thus were not able to properly equilibrate according to natural levels dictated by supply and demand, as private profit-seeking monopolies lacked the incentives provided by competition to lower prices.
On the whole, however, while democratization was a complicating factor for radical reformers, Russia's peculiar "super-presidential" system was sufficiently autocratic to enact privatization by decree, to the consternation of many elements within Russia that would have fought them through electoral means.
Privatization programs are very politically sensitive, raising many legitimate political debates. Who decide how to set values on state enterprises? Does the state accept cash or for government-provided coupons? Should the state allow the workers or managers of the enterprise to gain control over their own workplace? Should the state allow foreigners to buy privatized enterprises, thereby which an outside investor would invest the capital needed upgrade and modernize the firm, bringing it up to international standards? Which levels of government can privatize which assets?
"Cash privatization" versus "voucher privatization"
After parliament gave Yeltsin and his government the authority to enact privatization by decree, Russia responded to the debate between those favoring a form of "cash privatization" and those favoring a "mass privatization," combining two strategies of privatization implemented earlier in Eastern Europe, striving for both equity and efficiency.
For the sake of equity, fairness, and the interests of social stability the state could have simply given assets to the public, which quickly turns the entire population into property holders and gives them a stake in the reform process.
For the sake of efficiency, another method is to require auctions in which bidders compete to offer the state the highest price, which creates real value that can be used as investment capital, which creates real value that can be used as investment capital. Although this strategy would have allowed influential corrupt cliques to capture control of state enterprises, the kinds of conspiratorial cliques that flourished under the command economy, this strategy would have fostered a viable capital market, which is the mechanism for bringing private savings into investment in Russian companies.
The growing appeal of the Communist opposition in 1992 brought an end to "cash privatization" (1991-1992), under which bidders used cash to compete to offer the state the highest price in auctions. Such a process of privatization created real value that can be used as investment capital. But this exasperated the gap between rich and power and allowed corrupt cliques to capture control of state enterprises as popular opposition to the reforms increasingly appealed to many workers deprived of their wages and seemingly robbed of their savings.
Yeltsin then changed course and decreed that a program of vouchers would begin that combined the ideas of both forms of privatization. In response to popular anger, Yeltsin changed course and decreed that a program of vouchers would begin that combined the ideas of both forms of privatization.
Russia combined two strategies of privatization, one emphasizing equity and the other emphasizing efficiency. Russia concocted a new method of privatization, distributing free state-issued vouchers to all citizens in the forth quarter of 1992, who were had the opportunity to bid for shares of privatized firms at special auctions with these vouchers with a face value of 10,000 rubles. But vouchers were not inflationary because they could not be used as legal tender for other transactions.
But neither were they forms of productive capital, as stocks and bonds are in countries with established financial markets. So the vouchers did not expand the pool of resources enterprises could use to increase productivity and efficiency.
1996 presidential elections and the "loans for shares" scheme
When campaigning opened at the beginning of 1996, Yeltsin's popularity was close to zero. He himself did not at first want to run, since he had spent several months in 1995 recuperating after a couple of heart attacks. Panic struck the Yeltsin team when opinion polls suggested that the ailing president could not win; members of his entourage urged him to conjure up a pretext to cancel presidential elections and effectively rule as dictator from then on.
Instead, Yeltsin changed his campaign team, assigning a key role to his daughter, Tatyana Dyachenko, and appointing Anatoly Chubais campaign manager. Chubais, who was not only Yeltsin's campaign manager but also architect of Yeltsin's privatization policies, set out to use his control of the privatization program as an instrument of Yeltsin's reelection campaign.
The president's inner circle assumed that it had only a short time in which to act on privatization; they therefore needed to take steps that would have a large and immediate impact, making the reversal of reform prohibitively costly for their opponents. Chubais' solution was to co-opting potentially powerful interests, including enterprise directors and regional officials, in order to ensure Yeltsin's reelection.
The position of the enterprise directors to the program was essential to maintaining economic and social stability in the country. The managers could ensure that labor did not erupt in a massive wave of strikes. The government, therefore, did not strenuously resist the tendency for voucher privatization to turn into "insider privatization," as it was termed, in which senior enterprise officials acquired the largest proportion of shares in privatized firms.
Thus, Chubais allowed well-connected employees to acquire majority stakes in the enterprises, and proved to be the most widely used form of privatization in Russia. Three-quarters of privatized enterprises opted for this method, most often using vouchers.
But Yeltsin could not rely on the enterprise directors alone. Chubais and Yeltsin also recruited a team of six leading Russian financiers and media barons (the "oligarchs"), who bankrolled the campaign to the tune of $3 million and guaranteed staunchly pro-Yeltsin and hysterically anticommunist coverage on television and in leading newspapers. Yeltsin was allowing these "oligarchs" to grab state enterprises at a time when he needed their support for is 1996 presidential elections. This allowed a handful of powerful banks to acquire substantial ownership shares over major energy, metallurgy, and telecommunications firms at shockingly low prices.
In the outlying regions of the country, the Yeltsin campaign relied on the patron-client ties of the local governors, most of whom had been appointed by the president.
The campaign of Gennady Zyuganov, the candidate of the Communist Party of the Russian Federation, had a strong grass roots organization, especially in the rural areas and small towns, but it lacked anything comparing to the financial resources and access to patronage that the Yeltsin campaign could marshal.
The ailing, alcoholic Yeltsin mustered enough energy to campaign, exploiting all the advantages of clientage and incumbency to maintain a high media profile. To assuage voters' discontent, he made the claim that he would abandon some unpopular economic reforms and boost welfare spending, end the war in Chechnya, pay wage and pension arrears, and abolish the military draft program (he did not live up to even one of these promises after the election). His media backers' advertising campaign was rabidly anticommunist, playing up the threat of "civil war" if a Communist were elected president.
Grigory Yavlinsky was the liberal alternative to Yeltsin and the Communist Zyuganov, appealing to a well-educated middle class that saw Yeltsin as a drunken scoundrel and Zyuganov as a Soviet-era throwback. Seeing Yavlinsky as a threat, Yeltsin's inner circle of supporters worked to bifurcate political discourse, thus excluding a middle ground—and convince voters that only Yeltsin could defeat the Communist "menace." The election became a two-man race, and Zyuganov, who lacked Yeltsin's resources and financial backing, watched haplessly as his strong intial lead was whittled away.
Voter turnout in the first round of the polling was 69.8%. Yeltsin won 35.3% of the vote; Zyuganov won 32%; Aleksandr Lebed, a populist ex-general, a surprisingly high 14.5%; liberal candidate Grigory Yavlinsky 7.3%; far-right nationalist Vladimir Zhirinovsky 5.7%; and former Soviet president Mikhail Gorbachev 0.5%. With no candidate securing an absolute majority, Yeltsin and Zyuganov went into a second round of voting. In the meantime, Yeltsin co-opted a large segment of the electorate by appointing Lebed to the posts of national security adviser and secretary of the Security Council.
His election tactics paid off. In the second round of July 3, with a turn out of 68.9%, Yeltsin won 53.8% of the vote and Zyuganov 40.3%. Moscow and St. Petersburg (formerly Leningrad) together provided over half of the incumbent president's support, but he also did well in large cities in the Urals and in the north and northeast. Yeltsin lost the Communist stronghold in the southern stretch of the country known as the "red belt."
Although Yeltsin promised that he would abandoned his hated neoliberal austerity policies and increase public spending to help those suffering from the pain of capitalist reforms, within a month of his election, Yeltsin issued a decree canceling almost all these promises, thus paying off his financial backers while ignoring his voters.
1996 presidential elections and the "loans for shares" scheme
When campaigning opened at the beginning of 1996, Yeltsin's popularity was close to zero. He himself did not at first want to run, since he had spent several months in 1995 recuperating after a couple of heart attacks. Panic struck the Yeltsin team when opinion polls suggested that the ailing president could not win; members of his entourage urged him to conjure up a pretext to cancel presidential elections and effectively rule as dictator from then on.
Instead, Yeltsin changed his campaign team, assigning a key role to his daughter, Tatyana Dyachenko, and appointing Anatoly Chubais campaign manager. Chubais, who was not just Yeltsin's campaign manager but also the architect of Russia's privatization program, set out to use his control of the privatization program as an instrument of Yeltsin's reelection campaign.
The president's inner circle assumed that it had only a short time in which to act on privatization; they therefore needed to take steps that would have a large and immediate impact, making the reversal of reform prohibitively costly for their opponents. Chubais' solution was to co-opting potentially powerful interests, including enterprise directors and regional officials, in order to ensure Yeltsin's reelection.
The position of the enterprise directors to the program was essential to maintaining economic and social stability in the country. The managers could ensure that labor did not erupt in a massive wave of strikes. The government, therefore, did not strenuously resist the tendency for voucher privatization to turn into "insider privatization," as it was termed, in which senior enterprise officials acquired the largest proportion of shares in privatized firms.
Thus, Chubais allowed well-connected employees to acquire majority stakes in the enterprises, and proved to be the most widely used form of privatization in Russia. Three-quarters of privatized enterprises opted for this method, most often using vouchers.
But Yeltsin could not rely on the enterprise directors alone. Chubais and Yeltsin also recruited a team of six leading Russian financiers and media barons (the "oligarchs"), who bankrolled the campaign to the tune of $3 million and guaranteed staunchly pro-Yeltsin and hysterically anticommunist coverage on television and in leading newspapers. Yeltsin was allowing these "oligarchs" to grab state enterprises at a time when he needed their support for is 1996 presidential elections. This allowed a handful of powerful banks to acquire substantial ownership shares over major energy, metallurgy, and telecommunications firms at shockingly low prices.
In the outlying regions of the country, the Yeltsin campaign relied on the patron-client ties of the local governors, most of whom had been appointed by the president.
The campaign of Gennady Zyuganov, the candidate of the Communist Party of the Russian Federation, had a strong grass roots organization, especially in the rural areas and small towns, but it lacked anything comparing to the financial resources and access to patronage that the Yeltsin campaign could marshal.
The ailing, alcoholic Yeltsin mustered enough energy to campaign, exploiting all the advantages of clientage and incumbency to maintain a high media profile. To assuage voters' discontent, he made the claim that he would abandon some unpopular economic reforms and boost welfare spending, end the war in Chechnya, pay wage and pension arrears, and abolish the military draft program (he did not live up to even one of these promises after the election). His media backers' advertising campaign was rabidly anticommunist, playing up the threat of "civil war" if a Communist were elected president.
Grigory Yavlinsky was the liberal alternative to Yeltsin and the Communist Zyuganov, appealing to a well-educated middle class that saw Yeltsin as a drunken scoundrel and Zyuganov as a Soviet-era throwback. Seeing Yavlinsky as a threat, Yeltsin's inner circle of supporters worked to bifurcate political discourse, thus excluding a middle ground—and convince voters that only Yeltsin could defeat the Communist "menace." The election became a two-man race, and Zyuganov, who lacked Yeltsin's resources and financial backing, watched haplessly as his strong intial lead was whittled away.
Voter turnout in the first round of the polling was 69.8%. Yeltsin won 35.3% of the vote; Zyuganov won 32%; Aleksandr Lebed, a populist ex-general, a surprisingly high 14.5%; liberal candidate Grigory Yavlinsky 7.3%; far-right nationalist Vladimir Zhirinovsky 5.7%; and former Soviet president Mikhail Gorbachev 0.5%. With no candidate securing an absolute majority, Yeltsin and Zyuganov went into a second round of voting. In the meantime, Yeltsin co-opted a large segment of the electorate by appointing Lebed to the posts of national security adviser and secretary of the Security Council.
His election tactics paid off. In the second round of July 3, with a turn out of 68.9%, Yeltsin won 53.8% of the vote and Zyuganov 40.3%. Moscow and St. Petersburg (formerly Leningrad) together provided over half of the incumbent president's support, but he also did well in large cities in the Urals and in the north and northeast. Yeltsin lost the Communist stronghold in the southern stretch of the country known as the "red belt."
Although Yeltsin promised that he would abandoned his hated neoliberal austerity policies and increase public spending to help those suffering from the pain of capitalist reforms, within a month of his election, Yeltsin issued a decree canceling almost all these promises, thus paying off his financial backers while ignoring his voters.
A Virtual Economy?
In hindsight, prominent Sovietologist Marshall Goldman has argued that Yeltsin should have extending property ownership to land, facilitated the formation of up-start businesses, reformed the currency, decontrolled prices, scrapped taxes on wages, brought fiscal policy under control, and moved toward convertibility of the ruble before implementing the process of privatization.
Marshall Goldman, Joseph Stiglitz (the winner of the 2001 Nobel Prize in economics), and other critics of Russia's implementation of privatization generally argue that "insider buyout," which allowed state managers to usually wound up with the controlling share of the stock, argue that it further accounted for Russia's poor implementation of economic restructuring.
The "insider buyout" supposedly induced 'employee dominant ownership', inevitably leading to the tendency for the stockholders, who are managers or employees themselves, to vote for increased wages, reduced investments, and fewer layoffs, which all disfavor the growth of market economy.
In Russia a far higher share of state-owned assets were sold to managers and workers, or "insiders," compared to the former Czechoslovakia, Hungary, and Poland. In this sense, it is more precise to describe Russia's privatization as "insider privatization" (the first stage) and "oligarch privatization", and thus distinct from the general pattern of privatization in other, more successful countries in Eastern Europe.
Many have therefore argued that it would be more accurate to say that real economic reform was never tried, given that it was quickly subverted by actors outside the government's control, such as the Central Bank, ministries, regional governments, and industrial managers.
Aside from the distortions associated with the lack of competition, employee ownership in general keeps wages and employment at levels that were too high. The impact of "insider buyout" in Russia can be seen from the abnormally low unemployment rates and very high underemployment levels in privatized industries. Generally speaking, large-scale privatization of moribund, money-losing state owned enterprises should increase unemployment. Soviet industries, after all, were often not even value adding, with cost of inputs exceeding the cost of outputs. Sixteen percent of the workforce became unemployed in both the former East Germany and Poland.
As a point in comparision, even in Communist China, where organized, large-scale privatization has not been carried out, the unemployment rate in 1998 was conservatively counted at 8 to 9%. But in Russia, in the most radical stage of privatization, 1994, only 6.3% of the economically active population was unemployed (a far larger share of the population is underemployed).
According to major surveys of Russian enterprise directions about whether they would be willing to sell a majority of the shares of their enterprise to an outside investor who would bring in the capital needed to invest in modernizing the firm, two-thirds said they would not be willing. In other words, they would rather remain majority owners of an unprofitable enterprise than minority owners of a much more profitable one. Very few firms have experienced much management turnover.
According to Stiglitz, the key economic mistakes of the transition were the emphasis on privatization over competition and the emphasis on restructuring existing enterprises over creation of new jobs and enterprises. With emphasis on just transferring ownership to private hands in order to create a lobby for private enterprise in order to prevent a communist comeback and push for creation of institutions to govern the market instead of competition, price controls were lifted without dismantling key Soviet-era monopolies. Prices thus were not able to properly equilibrate according to levels dictated by supply and demand since private profit-seeking monopolies lacked the incentives provided by competition to lower prices.
To this day, due partly to the lack of competition, enterprises do not have enough working capital to pay their wages and taxes on time, and trade with one another using barter. Not able to pay wages, upgrading and modernizing their facilities is out of the question.
Asset stripping and barter
According to the "Washington Consensus," privatization would lead to incentives to improve productivity of Soviet-era state enterprises. However, privatized enterprises would be difficult to revitalize, given the high interest rates and lack of financial institutions to provide capital.
Shortage of cash With inflation at double-digit rates per month as a result of instantaneous price liberalization, the macroeconomic stabilization program enacted to curb this trend entailed the tightening the money supply and raising interest rates. The focus on macrostabilization led to interest rates of 20, 30, 40, 250 percent. With interest rates so high, "non-insiders" were left largely incapable of borrowing the capital to invest in Russian enterprises, a major factor leaving privatized industries starved of cash. In addition, shock therapy had wiped out the savings of most Russians, leaving ordinary Russians largely incapable of investing in enterprises left up for auction.
Privatized enterprises, now accounting for the vast majority of output, often do not have enough working capital to pay their wages and taxes on time, and thus trade with one another using barter. Not able to pay wages, upgrading and modernizing their facilities is out of the question.
Barter The high interest rates and shortage of financial capital forced some industries to barter, leading to a new system of distorted prices (barter creates unreal values). By 1998, at least half of enterprise output was being "sold" through barter or trade. The federal government has effectively allowed them to avoid paying much of their federal taxes in return for keeping key customers, such as military bases and major industrial enterprises, supplied with energy and power.
Institutional problems Existing institutions were abandoned before the legal structures of a market economy that govern private property, oversee the financial market, and enforce taxation were functional.
Yet, the two major components of a macroeconomy are banking system and the state budgetary system. Complicated markets require strong contract enforcement, accepted customs and practices, and financial and regulatory institutions account for the bulk of economic output. Instead, Russia was left with Soviet-era institutions with organization. Privatized enterprises would thus be difficult to revitalize, given the lack of financial institutions to provide capital.
Capital flight "Insider privatization," accompanied by the opening of the capital markets, led to incentives for capital flight in addition to barter, leading to movements $2 billion to $3 billion of capital per month. According to Stiglitz, "Anyone smart enough to be a winner in the privatization sweepstakes would be smart enough to put their money in the booming U.S. stock market, or into the safe haven of secretive offshore bank accounts. It was not even a close call; and not surprisingly, billions poured out of the country." [1]
Social costs
After over a decade in transition, roughly half the population in Russia is now impoverished in a country where poverty had been largely non-existent, life expectancy has dropped, and GDP has roughly halved. In stark contrast to their aims, Russia's economic decline is far more severe and more protracted than the Great Depression following 1929, and half as severe as the catastrophic depression caused by the effects of World War I, the collapse of the Tsarist regime and the Russian Civil War. Hopes for recovery hinge on foreign investment, lower interest rates and inflation (difficult to achieve together), high oil prices, and reigning in organized crime and corruption in order to transparently govern an advanced market economy.
Events in the Putin Administration
Yeltsin continued as President of Russia until December 31, 1999, and was succeeded by his prime minister, Vladimir Putin. A KGB officer from 1975 to 1991 and head of the FSB (the KGB's successor) from July 1998 to August 1999, Putin was Prime Minister in Boris Yeltsin's government from August 1999. On December 31, 1999, Yeltsin resigned, and made Putin the second (acting) President of the Russian Federation. Presidential elections were held on March 26, 2000, which Putin won.
In August, 2000, an explosion aboard the Soviet submarine Kursk caused the submarine to sink in the Barents Sea. Rescue offers from Britain and other NATO powers were declined. All sailors aboard the Kursk died. President Putin was criticized for his slow reaction to offers of aid.
In October 23, 2002, Chechen rebels took over a Moscow theater. Over 700 people inside were taken hostage in what has been called the Moscow Theatre Siege. The rebels demanded the immediate withdraw of Russian forces from Chechnya, and threatened to blow up the building if authorities attempted to enter. Three days later, Russian commandos stormed the building after the hostages had been subdued with a sleeping gas, also shooting the unconscious militiants. The gas, which Russian officials refused to identify to doctors treating the hostages, was implicated as the cause of death for over 115 hostages.
In the aftermath of the theatre siege, Putin began renewed efforts to eliminate the Chechen insurrection and to further consolidate government control over Russian media outlets owned by the oligarchs, who attained large stakes of state assets, largely illegally, during the privatization process. The government cancelled scheduled troop withdrawals, surrounded Chechen refugee camps with soldiers, and increased the frequency of assaults on rebel positions. The Chechens responded in kind, stepping up guerrilla operations and rocket attacks on federal helicopters.
Uncertain fate of Russia's transition
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The outcome of Russia's transition has been a new system of distorted prices, a demonetized economy utilizing barter, incentives for asset stripping-- not wealth creation-- and the lack of market competition. In short, the outcome was a new hybrid economy-- a "virtual economy" too reminiscent of the Soviet-era planned economy but lacking the benefits of that system, namely the universal unemployment, low rates of poverty, and social welfare. The real outcome of Russia's transition still hangs in the balance, depending on whether Russia's weak market economy can survive another crisis and prove stable enough to attract the much touted aspirations for foreign investment. Since privatization has yet to bring a viable capital market into being, Russia's vulnerability was highlighted in 1998, when it fell into an insurmountable debt crisis, not able to pay off the interest on the loans it had taken.
Since privatization has yet to bring a viable capital market into being, the government by 1998 fell into an insurmountable debt crisis, not able to pay off the interest on the loans it had taken. Before 1998, the government raised cash through foreign borrowing, high interest domestic bonds, privatization, and especially oil revenues. But due to falling world oil demand as a result of the East Asian crisis and having exhausted the potential of raising cash by selling off state enterprises, by August 1998 the state could not meet its debt obligations, declaring a moratorium on its debts. Now longer able to prop up the value of the ruble at an artificially high exchange rate, the ruble's value collapsed against the dollar, losing two-thirds its value overnight. The economy, however, has rebounded since then due to the devaluation, which greatly reduced the costs of production in Russia, but is still in a precarious state, propped up largely by high oil prices for the time being. Following the devaluation of the grossly overvalued exchange rate, Russia has been experiencing positive GDP growth, especially due to the great increase in net exports; imports plummeted by nearly 50% in the year after devaluation, as consumers were forced to buy Russian-made food and goods.
But another crisis, like the East Asian meltdown, could lead to the collapse of the economy. Putin's, popularity, which stems from his reputation as a strong, effective leader, stands in contrast to that of his alcoholic predecessor, but it hinges on a continuation of economic recovery. Putin, after all, is credited with the recovery by many, but he really came into office at an ideal time: after the devaluation, which boosted demand for domestic goods, and rising world oil prices, but his ability to withstand a sudden economic downturn has been unchecked.
Notes
1Anders Åslund, "How small is the Soviet National Income?" in Henry S. Rowen and Charles Wolf, Jr., eds., The Impoverished Superpower: Perestroika and the Soviet Military Burden (San Francisco: Institute for Contemporary Studies, 1990), p. 49.
2 For example, see the discussion of this point in Anders Åslund, How Russia Became a Market Economy (Washington D.C.: Brookings Institution, 1995), p. 154.
3 For example, see Sheila M. Puffer, ed., The Russian Management Revolution: Perparing Managers for the Market Economy (Armonk, NY: M.E. Sharpe, 1992).
4 The poverty line in 1993 was set at the equivalent of $25 per month. The difference in estimates is due to the difference in methodology. The higher poverty rate is based on a calculation of household incomes. The lower rate is based on household consumption, since households tend not to report some portion on the monthly income.
5 Branko Milanovic, Income, Inequality, and Poverty During the Transformation from Planned to Market Economy (Washington DC: The World Bank, 1998), pp.186-90.
6 Russian State Statistics Committee figures reported by the Russian news service, Interfax
External links
- Russia's Fall, China's Rise? - Comparing Transitions of Russia and China (Part I) (Published by the Overseas Young Chinese Forum)
- Russia's Fall, China's Rise? Comparing Transitions of Russia and China (Part II) (Published by the Overseas Young Chinese Forum)
- "Lessons and Challenges in Transition" Seminar (analysis from Nobel Prize winning economist Joseph Stiglitz)
- Up for Debate: Shock Therapy: Bolivia, Poland, Russia. Same Policies-Different Results From the PBS series "Commanding Heights"
- Joseph Stiglitz (Stiglitz interview with the Progressive)
- Whence Reform? a Critique of the Stiglitz Perspective.
- The Insider: What I Learned at the World Economic Crisis (The New Republic, April 17, 2000)
- Capitalist Collapse. How can Russia Recover? by David M. Kotz (Dollars and Sense magazine, November/December 1998)
- THAT SUBSIDING RUSSIAN ECONOMIC GROWTH (Natalia RAISKAYA, Yakov SERGIYENKO and Alexander FRENKEL, Economics Institute, Russian Academy of Sciences, from Johnson's Russia List, December 2002)
- Excerpts from Globalization and Its Discontents By Joseph Stiglitz (from the World Bank Transition Newsletter)
- Russian people paid the price for shock therapy By Joseph Stiglitz (Times Online June 22, 2002)