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Russia's Economy During Yeltsin Era

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Analyse the principle problems facing the Russian economy at the end of the Yeltsin era. How have these problems been tackled?

Abstract

The following dissertation will analyse the principle problems facing the Russian economy at the end of the Yeltsin era. In many respects these principle problems facing the Russian economy stemmed from the economic and political disintegration of the Soviet Union combined with how effectively or ineffectively the Yeltsin administration had attempted to deal with those problems. As will be discussed the principle economic problems that faced the Russian Federation in 1992 were daunting, and therefore it is not surprising that some of these problems remained unsolved and were bequeathed to the incoming Putin government after Yeltsin’s surprise resignation at the end of 1999. Yeltsin had seemed to be Russia’s political saviour in August 1991 when he led the resistance to the attempted coup of Soviet hard-liners against Gorbachev. The failure of that coup inevitably accelerated the demise of the Soviet Union. However, the Russian economy would prove much harder to tackle than desperate Soviet generals and KGB chiefs.[1] The principle problems of the Russian economy can be arguably traced back to the inefficiencies of the Soviet Union’s command economy and its massive military expenditure during the Cold War. These economic problems accelerated the demise of the Soviet Union itself and made it difficult to make the economic transition to capitalism without major economic implications.[2]

The Soviet Union for all its economic faults had at least provided a basic standard of living, which meant that none of its people starved or were in severe economic distress. This was despite a stagnant economy, although its economic stability crumbled with remarkable speed. For much of the Yeltsin era the Russian economy could not match the basic living standards of the old Soviet Union for many of its citizens.[3] It could be argued that the transition to capitalism contributed to the worsening of the principle problems outlined below, and that ill thought out economic policies since have made it more difficult for those problems to be effectively tackled during and after the Yeltsin era.

Among the main themes of this dissertation is that the Yeltsin government did not have a consistent set of economic and political policies to solve the principle problems of the Russian economy, which in turn hampered the effective tackling of those problems. The so called young reformers led by Yegor Gaider and Anatoly Chubais had the most thought out strategies for the Russian economy, yet they did not have a constant control over the government’s economic policy throughout the Yeltsin era.[4] Besides not all the economic strategies advocated by the young reformers proved to be effective once the Russian government put those strategies into practice. The ways in which all the principle problems of the Russian economy at the end of the Yeltsin era were all interconnected are arguably obvious and apparent. To a certain extent it will be argued that Boris Yeltsin himself did not help the Russian government to tackle the principle problems of the Russian economy. The link between principle problems in the Russian economy and political ones plus social factors will be discussed when and where appropriate.

This dissertation will seek to examine the reasons for the Russian economy taking over a decade to achieve real growth, despite following the policies that it was advised would promote stability, liberalised and privatised economy. This dissertation will attempt to analyse whether the economic transition achieved anything at all to justify an estimated 47 % decrease in living standards between 1991 and 2000. How many Russians believed that the detrimental effects of the principle problems of the Russian economy at the end of the Yeltsin era could have been averted or tackled earlier?[5]

When Boris Yeltsin assumed the presidency of the Russian Federation it was still part of the Soviet Union and not even a sovereign state in its own right also it did not have control over economic policy. Yeltsin presided over the dismantling of Communist control in Russia, yet he found it very difficult to construct capitalism from virtually non-existent foundations as any form of capitalist economic activity had been illegal for much of the previous 75 years after the Communist Revolution.[6] By the time Yeltsin left his presidential office, the Russian Federation was a fully independent state that nominally, if not completely become a liberal democracy with a capitalist market economy. However, the dual Russian transitions to liberal democracy and capitalism from an authoritarian Communist State proved difficult and many have argued that those transitions remain incomplete. The incompleteness of the transition to capitalism and the political and economic make up of the Russian federation had a strong influence upon the principle problems facing the Russian economy at the end of the Yeltsin era. Russia had been used to authoritarian government with state controlled central planning for the economy so the process of liberalisation had been uneven and had unwelcome social and economic consequences across Russia. The legacy of misguided Soviet economic planning took much effort and a great deal of suffering for the poorest sections of the Russian society to break, it seemed to help a minority of Russians make their fortunes, whilst leaving the rest to fend for themselves. In Russia the correlation between political and economic weaknesses arguably helped to make the post-communist economic and democratic situation imperfect and even corrupt.[7] The move to bring capitalism to Russia in less than a decade was as revolutionary as Stalin’s attempts to achieve industrialisation during collectivisation, yet the opposite aims of privatising the economy. The aim of the Yeltsin government to bring capitalism was a sensible notion, yet the ways that it was implemented caused controversy as well as arguably increasing the impact of the principle problems that afflicted the Russian economy at the end of the Yeltsin era.[8]

Decline and signs of recovery 1992 - 1998

The initial bout of economic shock therapy administered in 1992 brought about hyperinflation, the closure of many factories and enterprises, which led inevitably to mass unemployment. Gaider and the other young reformers in the Yeltsin government had to end state subsidies to factories and intoduce the lifting of price controls at one go rather than to introduce reforms gradually. It was harsh economic medicine for a country burdened with the consequences of communism’s profound economic and political failures, although Yeltsin did not have the political strength or motivation to carry out shock therapy as extensively as Gaider and the other ‘young reformers’ had originally intended. Through much of the 1990s the young reformers and the richest entrepreneurs known as the oligarchs competed for political influence and power, whilst contending to gain control of the Russian economy or a share of its greatest spoils. Neither the young reformers nor the oligarchs were popular with the majority of the Russian people, yet none of them particularly cared. They were not involved in popularity contests, they were arguing over power and riches. Sometimes they might do things that were good for the Russian economy, yet they were mainly interested in achieving their own agendas than serving the national interests of Russia.[9]

The weakness of the Russian economy further weakened the position of the Russian government at the start of the Yeltsin era. These were political as well as economic weaknesses that still existed when Yeltsin left office. Yeltsin’s first term was undermined by political disputes with the Russian Supreme Soviet, which Yeltsin eventually closed down and replaced with a new parliament, the Duma. Yeltsin had to maintain his political position whilst attempting to prevent the Communists and nationalists making sufficient electoral gains to restrict his political room to manoeuvre. Yeltsin was able to maintain his hold on power, despite a strong challenge from the Communists after his re-election in 1996. Yeltsin’s second term in office highlighted his inability to find a Prime Minister that was politically reliable, could manage, or even reduce the weakness of the Russian economy and who did not want to assume the presidency as Yeltsin’s replacement before Yeltsin was due to leave office in June 2000. Yeltsin’s second term witnessed his problems with ill health worsen, which in turn meant that the Russian economy as well as the Russian government was not as effectively managed as they needed to be. When Yeltsin appointed the virtually unheard of Vladimir Putin as Prime Minister he believed that he had found a man that could fix the Russian economy and solve its political problems. Perhaps more importantly for Yeltsin and his family, Putin was unwilling to prosecute either him or his relatives for their links to the corruption and inefficiency of the Yeltsin era.[10]

The Russian economy did show signs of revival towards the end of Yeltsin’s first presidential term, yet in many respects such a revival was more apparent than real. The vast majority of Russians were economically worse off than they had been before the collapse of the Soviet Union. Declining inflation and unemployment rates did not benefit most of them, especially those that lost their jobs, their savings, and all hope with the shock therapy of 1992 which resulted in inflation rates of around 2,000%. The new Russian economy seemed to benefit former Communist party officials; bureaucrats, factory, and state farm managers that managed to gain control of former state owned enterprises. The other main beneficiaries were the handful of entrepreneurs, subsequently known as the oligarchs that had become very wealthy through their links with Yeltsin. The Russian economy for the first time also had millions of shareholders eager to show their capitalist credentials. The Russian government did not however, share in the beginning of the Russian economy during the middle of the 1990s, the strength and capabilities of the Yeltsin government to deal with economic problems was undermined by falling revenues. Government revenues had been reduced through the economic contraction of the early 1990s, higher spending on social security, lower global prices for Russian oil exports, plus extensive tax evasion. Not that anybody had to deliberately evade paying their taxes given the massive size of the tax arrears owed to the Russian government. The breakdown of the Soviet Union led to other problems such as lower exports to the other former Soviet republics and the inability of countries such as the Ukraine to pay for Russian gas and oil.[11]

The table below that shows the annual changes in Russia’s Gross Domestic Product (GDP) figures between 1992 to 1999 amply demonstrates the disastrous state of the Russian economy throughout much of the Yeltsin era.

1992

1993

1994

1995

1996

1997

1998

1999

-14.5

-8.7

-12.5

-4.1

-3.4

0.9

-4.9

3.5

[12]

Stock market crash and Government weakness

The perilous financial position of the Yeltsin government itself proved to undermine the revival of the Russian economy as it directly contributed to the collapse of the Russian stock market in 1998. The crash of 1998 ruined millions of small-scale shareholders in Russia and reduced the scale of foreign investment in the Russian economy. Russian investors were in effect made to suffer due to the ineptness of the Russian government in raising enough taxes to run the country and avoid bankruptcy.[13] Under Yeltsin the Russian State had lost out in terms of revenue and economic independence to the oligarchs, profits that should have lined the coffers of the Kremlin lined the pockets of Boris Berezovsky, Vladimir Potanin, and the other oligarchs. All of these factors combined to make the insolvency of the Russian State as principle problem of the Russian economy. Restoring the solvency of the government would increase its scope to solve the other principle problems of the Russian economy, as well as restore the political authority of the state.[14] When Vladimir Putin assumed power his government was faced not only with the task of restoring the solvency of the Russian state, he also had to restore the faith of Russians and foreigners that the government would not default on its loans. The crash of August 1998 had led to the Yeltsin government defaulting on $40 billion worth of foreign loans. The crisis in confidence also saw the rouble decline to a third of its pre-crash value.[15] The Russian economy was not helped by international bodies such as the International Monetary Fund (IMF) or foreign governments most notably the United States by the amounts of capital as the Russian government would have liked.[16]

As Prime Minister Vladimir Putin had already shown his commitment to restoring the solvency and the power of the Russian State. Putin’s strength of character plus his determination to succeed contributed to Yeltsin’s decision to resign and maximise Putin’s chances of retaining the presidency after the 2000 presidential election. Putin was elected president in 2000 and claimed the credit for Russia’s improving economy as well as apparent victory in the war against Chechen separatists. Putin put himself forward as the man capable of curing Russia’s profound economic, social, and political problems. If confidence alone was the sole key to solving the principle problems of the Russian economy at the end of the Yeltsin era, then Russia should have been a prosperous state the day Putin entered the Kremlin.[17]

Principle Problems of the Russian Economy

The first principle problem facing the Russian economy at the end of the Yeltsin era was the incomplete nature of the transition to a capitalist market economy. The support of Boris Yeltsin for the measures needed for a full transition to a market economy was not consistent throughout his time in office. The economic reforms introduced in 1992 hit the Russian economy harder than the similar reforms introduced in former Communist states such as Poland and Hungary. Russia had a larger economy, more state enterprises and factories plus a much longer period under communist control than any of the former communist states Central and Eastern Europe had. The Yeltsin government received plenty of advice as to whether to introduce economic liberalisation all at once or gradually, although at that point there was no hard evidence as to which approach would be the most successful in the long run. In the short run economic contraction was expected before the Russian economy would show signs of improvement and growth.[18] However, the period of economic contraction was longer than many experts had predicted, although the sheer scale of the problems facing the Russian economy throughout the Yeltsin era were enormous. A healthy Boris Yeltsin, despite his lack of knowledge concerning capitalist economics, might have given the government more urgency in tackling those economic proms it could. However, during his second term as president Yeltsin suffered from the affects of heavy drinking and a severe heart condition. Given the prominence of presidential power in the Russian political system having an incapacitated president was detrimental to the tackling of Russia’s economic problems. Not only was Yeltsin frequently ill he would intervene in the government at some inopportune moments. Yeltsin had a tendency to appoint Prime Ministers and cabinets on a whim. If a Prime Minister proved incapable of tackling the country’s many social, economic, and political problems they would be removed. Paradoxically if a Prime Minister was too successful in resolving those problems or appeared to be more popular than Yeltsin they were also removed from office.[19]

A principle problem facing the Russian economy at the end of the Yeltsin era was that a proper banking system similar to those operating in more established capitalist economies had not been fully developed to aid the Russian economy’s transition in to a capitalist economy. There are various reasons why the lack of a fully developed banking system became a principle problem facing the Russian economy. The lack of such a properly developed and regulated system hindered and deterred foreign businesses from investing in the Russian economy, as potential investors could not be sure of where their money was going. The lack of foreign investment slowed down economic growth in the financial sector of the Russian economy. Growth in the financial sector was needed to compensate for the contractions in the industrial and agricultural sectors of the economy.[20] The lack of a properly regulated banking system also aided the money laundering of illegal profits from the organised crime gangs that seemed to proliferate after the Soviet Union collapsed. Organised crime gangs had been able to take advantage of the Russian government’s struggle to maintain full political and economic control of Russia. The unregulated nature of the Russian banking system did not help stem the flow of financial capital out of the Russian economy during the Yeltsin era. The Yeltsin government seemed unable or unwilling to take effective measures to stop the flow of capital that was so detrimental to the Russian economy. If the Russian government had been able to attract as much investment into the Russian economy as there was capital exported away from it then the economy would have achieved greater stability and growth. However, the IMF made economic aid and loans to the Russian government conditional upon the Russians on improving the Russian banking system to international standards of performance and regulation. The Russian government could in return claim that Russia’s economic problems would have decreased if the Russians had received all the international aid and investments that had been promised in the early 1990s. Whilst aid was slow in coming forward the foreign debts owed by Russia from $97 billion in 1992 to a burdensome $152 billion by 1998. During the same period the amount of GDP the Russian government had to use to service its foreign debts doubled to 60%. That was money that the Russian government could have spent in more productive ways such as increasing spending on non-military research or tackling the social and economic problems that were reducing the performance of the Russian economy.[21]

A principle problem facing the Russian economy at the end of the Yeltsin era was organised crime. Organised crime gangs, as previously noted, took advantage of the lack of political and economic control in Russia. The way in which the transition to a capital economy in Russia had been attempted had benefited organised crime gangs. Organised crime had existed in the Soviet Union due to the people wanting consumer goods as well as drugs that were not available through state enterprises. Under the Soviet economy system all private economic activity had been illegal. Organised crime gangs find post-Communist Russia an easy place to operate with little fear of being caught, rival gangs were more of a threat to each other than the Russian police were to them. If the gangs could not bribe the police they could frequently outfight them. The financial dire straits of the Russian government meant that there were not enough police or customs officials to deter, let alone catch organised crime gangs and their members. Poorly or infrequently paid police and customs officials had little motivation in stopping criminals, including those that resisted the temptation to take bribes.[22]

Another principle problem facing the Russian economy at the end of the Yeltsin era was the informal economy in which employers paid in cash, whilst neither they or their workers paid taxes on their earnings or profits. However, the informal economy had in many respects helped to maintain the Soviet economy, despite its in efficiencies and stagnation. The economic reforms introduced at the start of the Yeltsin era offered chances and opportunities to organised crime gangs and individual entrepreneurs to make their fortunes. Previous experience of working in the informal economy did prove advantageous to many Russians wanting to make their fortunes or faced with the more mundane task of surviving.[23] The Russians have a long tradition of people who know the right people within the bureaucracy being able to further their own position. Corruption, bribery, and the calling in of favours could make all the difference between success and failure during the Yeltsin era. The informal economy grew due to the greater economic freedom and the unregulated nature of the Russian economy once market liberalisation had occurred. For many Russians being part of the informal economy was the only way to make ends meet. The Russian government had drastically reduced the number of state owned enterprises, whilst cutting subsidies to the newly privatised enterprises. Private enterprises in Russia would frequently not pay their workers for months to try to stay in business as they found it very difficult to survive against foreign competitors. Not being paid for months or only been paid in kind prompted workers further into the informal economy. Due to the lack of money available to the Russian government public sector employees were not always paid either. Desperation forced many Russians into holding two or three jobs to make ends meet. Without the informal economy the social and economic problems facing Russia could have been worse. [24] When private and public sector workers were paid, the high inflation at the beginning of the Yeltsin era meant that most Russians had to find extra sources of income or face economic ruin. It is difficult to have an accurate idea of the informal economy within framework of the Russian economy in terms of its share of GDP and its actual size. Statistics from the Russian government were even in the 1990s domestically or internationally known for their accuracy. Given the lack of resources available to the Russian police, customs officials, and bureaucrats it is not surprising that few people were caught for their involvement within the informal economy or that Russian officials could be bribed to turn a blind eye. During the Yeltsin era, the Russian government estimated that 25% of Russia’s GDP was generated by the informal economy. Other sources such as the IMF and the Russian press put the figure as high as 80%.[25]

The harsh economic realities of life in Yeltsin’s Russia meant that corruption and unregulated economic activity increased dramatically. Organised crime gangs were able to gain from people’s misery and desperation in terms of increased levels of drug taking and prostitution. The collapse of Soviet authority and the difficulty of Russia and its neighbours had in securing their mutual borders had given the organised crime gangs the opportunity to expand their activities as well as their profits.[26] These increases in gang activities lead to higher levels of crime, as people had to resort to desperate measures to feed drug habits and gangs fought each other. Although the outbreaks of gang warfare witnessed in cities such as St Petersburg can mainly be regarded as a law and order issue, such events did have an economic impact during the Yeltsin era. Economic hardship, drug taking, and prostitution have heavily contributed to declining life expectancy rates. Many of the people that should be the most economically active in Russia are either working informally and therefore not paying taxes or they have died prematurely. Drug taking and prostitution have increased the spread of AIDS so that Russia has one of the highest infection rates in the world. The demographic decline in Russia, if left unchecked could have major implications for the Russian economy as well as disastrous effects on its society. Organised crime may help many Russians survive from day to day, yet it makes some gang members very wealthy whilst depriving the Russian government of much needed revenue and leaving the cost of sorting out serious law and order as well as health problems. Organised gangs were also able to take advantage of the Russian governments wars in Chechnya during the Yeltsin era by selling drugs and weapons to both Russian troops and Chechen rebel fighters.[27] Overall the effect on the population of the Russian Federation was an average annual decrease in the population of around 750,000 people throughout the entire 1999s.[28]

At the end of the Yeltsin era another principle problem facing the Russian economy was the uncompetitiveness of many industries and businesses. Again the legacy of the economic system of the Soviet Union plays its part in the weaknesses of the Russian economy. The Soviet system had not produced words that Russian consumers or potential foreign consumers had wanted. Instead the Soviet economic planners had determined production levels and the types of goods produced. Once state subsidies were removed all factories and enterprises and the Russian economy was open to unrestricted foreign imports. Russian enterprises were forced to close, drastically cut their workforces, or not pay their workers for long periods. Some businesses resorted to not paying their taxes as part of their efforts to stay operative.[29] One of the leading oligarchs, Mikhail Khodorkovsky estimated that upwards of a million Russian enterprises should have been declared bankrupt. In 1996 the Yeltsin government stated that around 35% of Russian factories and businesses were on the verge of bankruptcy. The Russian government estimated that 80% of Russian factories and businesses were in financial dire straits.[30] The instability of the rouble and a lack of foreign currencies and investment also made it difficult for Russian enterprises to remain competitive. De-valuations of the rouble would briefly aid competitiveness, yet did not offer a long-term solution. Lack of foreign investment and profits made it more difficult for Russian factories to replace obsolete equipment or the latest training for their workers. The standard of education in Russia tended to be high, although there was a lack of people trained in Information Technology and more advanced industrial procedures, especially outside of the military research establishment.[31] The Yeltsin government and the young reformers had hoped that large-scale foreign investment would revive even the most outdated enterprises in the Russian economy. Although, not all of the potential foreign investors were put of by the lack of market regulation, the less than welcoming reception received from officials, Russian businesses, and the Russian public deterred many investors from investing in Russia.[32]

The young reformers had hoped that their policies would only lead to a short-term contraction of the Russian economy, with a more competitive and modernised Russia emerging from shock therapy. They and Yeltsin were caught by surprise when the affect of shock therapy lasted throughout the Yeltsin era. A sharp contraction in the production levels of Russian heavy industries was expected and indeed occurred. However, the biggest falls in production witnessed during the Yeltsin era was in the production of consumer goods rather than in the more traditional heavy industries. Whilst production in those heavy industries of coal, steel, oil and gas declined by 45% during the 1990s that was not as bad as the decline in production of consumer goods. The move to a capitalist market economy had been anticipated to provide stimulation for increases in the production of Russian made consumer goods such as colour television sets, personal computers, and video recorders. Instead production of these consumer items declined dramatically, by 80% for television sets, 60% for personal computers, and 99% for video recorders. A section of the Russian economy that the government had believed would promote economic growth and provide jobs for those that lost their jobs in other sectors of the economy ceased to exist to any meaningful extent. There are two fairly straightforward explanations for the slump in the production of consumer goods. Those Russians that could afford television sets, personal computers, and video recorders brought more reliable and fashionable imported foreign brands. Through the liberalisation of the Russian economy and the efforts of the informal economy such goods became more widely available if not affordable throughout the Yeltsin era. For the poorest sections of Russian society that had their savings wiped out by inflation and their prospects diminished by unemployment or underemployment throughout the Yeltsin era there were little prospects of them buying the essentials to live let alone Russian or non-Russian consumer goods. The poor could not even afford the low quality and cheaper Russian made goods.[33]

A principle problem of the Russian economy closely related to its uncompetitiveness was the increasing shortages of workers, skilled ones in particular. At the start of the Yeltsin era the severe contraction of the Russian economy meant that unemployment had increased. It was not only capital that left the Russian economy once the country moved to a market economic system. Some of the brightest and most capable people working in the Russian economy left the country for better pay and prospects abroad. Of course, not everybody was able to take the opportunity to earn his or her future in exile. In some respects the most harm done to the Russian economy was by the calibre of academics and technicians that left the country. The Yeltsin government could not do as much to halt the brain drain as it had to cut spending on higher education, health services and most notably on defence projects and research. Cuts in defence spending could be justified, as a war with the United States and its NATO allies seemed impossible. The shortage of skilled workers was worsened by the reduction in life expectancy, especially amongst men. The effects of lower life expectancy were multiplied by the continuing decline in the Russian birth rates. Unemployment or underemployment in Russia could be fatal in its consequences during the Yeltsin era. The harshness of Russian life often drove people to desperate means to survive or just to find a way to make their existence bearable. The harshness of life for many Russians can explain the reasons for increased crime, prostitution, drug, and alcohol abuse.[34] At the end of the Yeltsin era it seemed that the Russian economy was structured in such a way as to be unable to support the Russian population at its 1992 levels. The Russian economy could not even match the economic performance of the Soviet Union in 1989 when it was entering its period of terminal political and economic decline.[35]

The over reliance of the sale of natural resources, particularly oil and gas was another principle weakness of the Russian economy at the end of the Yeltsin era. This was a principle problem for the Russian economy as to the sale of these resources was crucial to the strength of the economy as a whole and tax revenues from such sales can be the difference between the Russian government being solvent or running out of money. At the end of the Yeltsin era the inefficiency of much of the Russian industry was apparent, which meant resources were wasted and profits were reduced. In the Soviet era all the gas and oil enterprises had been state owned with all revenues going to the Soviet government. However, the Yeltsin era had witnessed the privatisation of the majority of these enterprises often for amounts well below the actual value of the enterprises and their assets. The main beneficiaries of the privatisations at knock down prices were the oligarchs and foreign oil companies. The acquisition of Russia’s greatest economic assets transformed the oligarchs from millionaires to billionaires via the loans for shares programme.[36] The loans entitled the oligarchs to gain control of Russia’s most productive factories such as the Norilsk Complex, which Potanin obtained for the bargain price of $170 million.[37] However, the nature of the sell off further weakened the financial position of the Russian government. Russia had not tried to diversify its exports or seriously attempt to develop alternative forms of energy. Oil and gas revenues are vital for the Russian economy, when prices are high the Russian economy is strong. However, if oil and gas prices are lower then the Russian economy is weaker. The Russians are lucky in terms of the natural resources that are available to be used in their country, which if consumed sensibly and effectively gives the Russian economy great potential for sustainable growth over the long-term.[38]

The continuing failure of the agricultural sector to produce enough food to support the population was yet another principle weakness of the Russian economy. The inability to produce enough food had been a long term problem since the Soviet Union collectivised agriculture in the 1930s .In the Yeltsin era the problems related to agriculture increased whilst Russia underwent the transition to a market economy. Russian agriculture was notoriously inefficient, a situation that did not significantly improve by the end of the Yeltsin era. Food shortages meant that the Russian government had to import grain during a period in which its reserves of foreign currency were already heavily depleted. Due to the end of price controls and the high inflation of the early 1990s were considerably higher by the end of the Yeltsin era. The impact of poor harvests was compounded by poor organisation that led to crops being left in the fields to rot. Less food had the knock on effect of making the high inflation levels at the start of the Yeltsin era even higher. More expensive food made it more difficult for the poorer sections of Russian society to survive, further contributing to the declining levels of life expectancy. Paradoxically by the end of the Yeltsin era shops had more food, although people could not always afford to buy it. Higher food prices did provide incentives for farmers to produce more food, as did the emergence of markets to sell products more directly to people. These markets were also used by Russians to grow their own produce on their own allotments to supplement their incomes. Although the market economy has set food prices rather than the Russian State, virtually all the farms in Russia remain on state owned land.[39]

The financial and human costs of the wars in Chechnya were another principle problem for the Russian economy at the end of the Yeltsin era. The Russian Federation is made up of numerous small republics; some of these republics would like to be given independence if they could. Chechnya used the disintegration of the Soviet Union as an opportunity to claim independence. From an economic perspective the Yeltsin government could not afford the wars against Chechen separatists. From a political perspective the Yeltsin government was desperate to keep Chechnya taking steps towards independence. Though, on a smaller scale to the Soviet invasion of Afghanistan, the Chechen war placed extra economic strains upon the Russian economy. The cost of the war did not help the Russian’s government’s debt problem or help efforts to keep it solvent. The war also contributed to worsening other principle problems within the Russian economy. The brutality and frequent ineptness of the Russian military gave the Yeltsin government bad publication abroad. The war had also shown that the Yeltsin government had been unable to defeat organised crime or eradicate corruption from the military. From a political perspective the Chechen wars and the belief that the Russians were on the verge of winning helped not only Yeltsin’s re-election in 1996, it contributed to Putin’s election victory in 2000. Principle problems in the Russian economy are not always seen as urgent problems that need fixing, unless they have major political implications. Yeltsin and Putin are men that believed in putting their own personal position ahead of that of the Russian economy or its people. The principle problems of the Russian economy are tackled or the government appears to make the attempt to do so because it is in the political self-interest of the Russian government or at least its presidents to gain re-election. The Russian constitution gives great power to the president to wage war or divide the economic assets of the Russian economy as they feel to be appropriate.[40]

The reduced living standards of many Russians at the end of the Yeltsin era could be regarded as a principle problem of the Russian economy. Again it is a principle problem which was closely linked to other principle problems within the Russian economy such as inflation, unemployment or underemployment plus the reduction in the actual value of welfare benefits. During the Yeltsin era there were no policies or programmes to halt let alone reverse the large increases in the scale of poverty and deprivation. Aside from there being no support within the Yeltsin government to launch such policies there were simply no resources available to fund any programmes to counter poverty. The Russian government during the end of the Yeltsin era. as already noted, had been forced to borrow money from the oligarchs through loans for shares programme and the IMF. It was therefore not in any position to tackle the increased poverty caused by the dismantling of the unsustainable Soviet economic system. All the Yeltsin government could do was hope that the limited welfare programmes on offer, plus high economic growth would keep enough of its citizens surviving upon very low incomes. For a country with the natural resources and the literate, hardworking and adaptable citizens, Russia’s standard of living levels remain for the majority of its population that have been unable to get rich were and remain lamentable.[41]

Economic recovery and the tackling of the principle problems of the Russian economy since 2000

Various factors have allowed Putin to restore both the solvency and the power of the Russian State compared to the weakness of both during the Yeltsin era. Putin may lack the charisma and oratory skills that Yeltsin held in his prime, yet Putin is effective, driven, and authoritative. Such qualities have put him in a better position as he has attempted to address Russia’s principle economic problems as well as providing firm political leadership. Putin’s main concern is restoring Russia’s international position as well as its economic viability.[42] Yeltsin may have justly been criticised for not wielding enough presidential authority to counter the principle problems of the Russian economy, others have complained that Putin has taken too much of an authoritarian approach to running the Russian economy and governing the country as a whole. A mixture of tax reforms and far more effective financial management of government expenditure when combined proved effective in largely restoring the solvency of the Russian State. Putin had reversed the policy of the selling off of state assets and attempted to reduce the influence of the oligarchs on the Russian economy.[43]

At first glance the Russian economy has shown signs of making good progress and had grown strongly since the end of the Yeltsin era. However, strong economic growth does not mean that the principle problems facing the Russian economy at the end of the Yeltsin era have been resolved since 2000. Putin will always have the legacy of being the one man who did the most to dismantle the Soviet Union with the hope of creating a capitalist liberal democracy in the Russian Federation. To a large extent Yeltsin succeeded in that aim although capitalism and liberal democracy in Russia can be regarded as being well established and fully functioning. Arguably, both the Russian economy and the Russian political system have gained more stability during the Putin era. Stability and economic growth may have outwardly reduced the principle problems of the Russian economy, yet it would be premature to believe that those problems were solved on a long-term basis. It could be argued that whilst some of the improvements in the Russian economy have been accomplished by virtue of policies and reforms introduced since 2000, other improvements have resulted from improved economic circumstances.

A principle problem with the Russian economy that seems to have abated since the end of the Yeltsin era is the lack of strong Russian government having an influence upon economic policies. At the end of the Yeltsin era the Russian government had been affected by its apparent lack of strength and direction, Putin befits the former head of the FSB (the successors of the KGB) as a well developed sense of order, authority and is a stronger organiser than Yeltsin was. Putin is more authoritarian in nature than Yeltsin and is both fitter and stronger than Yeltsin. Therefore, he has more time to deal with government business and intervene to direct economic policies or react to events in a proactive manner. The force of Putin’s personality alone has given people greater confidence in how the Russian economy is progressing as well as a sense that there is longer a political vacuum at the heart of the Russian government. Putin tends to emphasise that Russia is a proud and strong country, which will have the economy to support not only its population but also its status as a great nation.[44]

A principle economic problem that the Russian government has tried to reduce since the end of the Yeltsin era was the lack of a fully developed banking system. To a greater extent the Putin government has succeeded in achieving those aims. Such measures have contributed to international investors regaining confidence in the Russian economy since the crash of August 1998. Leading global financial and banking organisations believe that Russia is a safer country to invest or conduct business in than during the Yeltsin era. That greater confidence is due to the belief that the Putin government would protect investors from corruption and fraud. Putin has shown willingness to tackle corruption, although it seems to be a highly selective process as to whom is investigated and prosecuted and who is left to get away with their crimes.[45]

A principle problem of the Russian economy at the end of the Yeltsin era that has been solved is the Russian government’s lack of revenue. The Putin government has succeeded in restoring its finances through a mixture of tax reforms (a flat rate of 13% to encourage businesses and discourage tax evasion), effective administration and moves to decrease corruption.[46] Tax revenues were raised by more effective tax gathering methods. The Russian government has started the basic task of raising revenue more effectively, although it would have been difficult to find governments with less effective tax gathering methods than Russia during the 1990s. The strong recovery of the Russian economy in 1999-2004 can be readily connected to the restrictions placed on the movement of capitalism and the limited reversal of privatisation that put extra revenue into the Kremlin’s coffers as well as promoting growth. Bernstam and Rabushka contend that the restrictions on capitalist movement and privatisations were of greater importance to the Russian economy than oil prices.[47] During the Yeltsin era the Russian government had tried to clear up the back- log of taxes that had remained unpaid. The Russian government had tried to fine or seize the assets of individuals and businesses that had previously evaded taxes. However, it chose to tax those it could on regular basis. Due to the unprofitably of many Russian businesses if the government made them pay taxes they would not pay other businesses which in turn meant that other businesses could not pay their taxes. The government was unable to enforce tax payments for fear of closing millions of businesses. However, once the Russian Central Bank repatriated export revenues it meant that many more enterprises could clear their tax arrears.[48]

Between the end of 1998 and 2005 the repatriation of export revenues turned the exhausted foreign currency reserves of the Central Bank to a surplus of $170 billion. Inadvertently that single measure has proved to be the catalyst for the easing many of the principle problems of the Russian economy even if it has not allowed those problems to be tackled completely.[49]

The decline in unemployment rates helped the government’s position as it received more tax revenues and had to spend less on social security payments. However, it was the sharp demographic decline that did most to reduce unemployment rates from 12.5% at the end of the Yeltsin era in 1999 to 1.4% in 2001 rather any government strategy to tackle unemployment.[50]

The stronger financial position of the Russian government has allowed Putin to reassert greater influence upon the regulation if not the running of the Russian economy. Putin has used greater revenues to take back control of state enterprises that had been lost to the loans for shares programme. For those Russians that resented the wealth of the oligarchs the Putin era has been good for the Russian economy as he reduced the power and influence of the oligarchs. Mikhail Khodorkovsky has been jailed; Boris Berezovsky and Roman Abramovich have gone into exile although Abramovich has tried to maintain good relations with the Putin government. The regaining of assets from the oligarchs, if high oil and gas prices continue to be high, will prove lucrative to the Russian government. The reliance of the Russian government upon oil revenues is obvious and ongoing. Conservative estimates are that every time the price per oil barrel increases or decreases by a dollar that $ 1 billion is either added or removed from the budget of the Russian government. It is no wonder that Putin government seems to be more effective than the Yeltsin government, it actually has enough money to spend without having to get loans from the oligarchs and the IMF. However, foreign investment in the Russian economy still lingers behind that of countries such as Poland. For instance, during 2001 the Russians only received a quarter of the foreign investment than Poland. A gap that looks set to widen now that Poland is a member of the European Union and can receive regional development funding and money from the Common Agricultural Policy.[51]

Another principle problem of the Russian economy at the end of the Yeltsin era that has been partially dealt with by the Putin government is the outward flow of capital abroad. Capital flight during the Yeltsin era as previously mentioned considerably outweighed the levels of investments and loans into the Russian economy. The Putin government has attempted to stem the capital flight from the Russian economy by increasing restrictions on the movement of capital to make the loss of such funds harder to achieve. The Putin government has also changed financial laws and regulations so that it has been able to repatriate Russian capital back into the country and reverse the loss of capital experienced throughout the out the Yeltsin era. From the Russian governments perspective such measures are a sensible step in ensuring that the Russian economy has enough capital invested within its industries and businesses to drive economic growth, higher profits and higher employment rates. The Russian Central Bank had set the rate for the mandatory repatriation of export earnings at 75% before the end of the Yeltsin era. This policy can be regarded as contributing to the kick starting of the Russian economy after the disastrous crash of August 1998. Perhaps it was one of the most effective single measures that the Russian government could have introduced to solve its own previously low revenues and start to make effective interventions to tackle the other principle problems of the Russian economy. In fact the Russian government was so confident that its future revenues were secure that it lowered the rate of repatriation of export earnings to 50%, although it could not doubt return to the higher rate should economic circumstances become less favourable.[52]

The lack of economic growth that had been a principle problem at the end of the Yeltsin era for the Russians has improved markedly since 1999. However, Russia needs to sustain high growth rates for several years to reverse the steep economic contractions of the 1990s. It is sensible not to be carried away by large annual rises in GDP. In 2000 the annual growth rate in GDP was an impressive 7.5%, growth stimulated by higher oil prices and the effects of the devaluation of the rouble after the crash of 1998. It is a paradox that although currency devaluation can harm a country’s prestige, it can stimulate economic growth as exports becomes cheaper. Devaluation can have an inflationary affect though, as imports become more expensive.[53] The Russian economy has continued to grow throughout the Putin era, for instance GDP increased by 6.8% during 2004. Although GDP per capita had increased to $4,000 it was still low by international standards and lower than should be expected for a country that has much resources as Russia.[54] Although such rises are a sign that economic problems have decreased in the harmful effects they have on the Russian economy it does not mean that all the principle problems have been successfully challenged. Russia’s growth rates certainly look impressive in comparison to more established capitalist economies, yet those economies are richer than Russia’s and provided other people’s a higher standard of living. Despite these notes of caution, the growth rate of the Putin era has been impressive when it is considered that many other economies in the world have had economic downturns and declining growth rates. Western economies have found conditions harder due to increased oil prices caused by uncertainties in the Middle East with the United States involvement in Iraq. Although, Putin had opposed American involvement in Iraq, his earlier support for American operations against the Taliban regime stood in good stead in political if not economic terms. It certainly made the United States more willing to the Russian economy than it had been during the Yeltsin when it had needed the help more.[55]

A principle problem of the Russian economy at the end of the Yeltsin era that the Russians have tried to solve is the country’s uncompetitiveness compared to other capitalist economies. Aside from trying to attract further foreign investment to fund industrial modernisation, the Putin government has concentrated an improving education. Putin even boasted that for the first time ever under the Putin government the Russian government was spending more of the national budget on education and peacefully oriented research than on defence. However, that is more an indication of reduced security threats to Russia as a result of the end of the Cold War than much greater investment in education. The Russian government still employs millions of people either directly or indirectly in the arms industry. The war in Chechnya and the threat of terrorists are used to justify no more cuts in military spending. Beside heavy cuts in defence spending could be as damaging to the Russian economy as overspending on the military budget was to the Soviet economy.[56]

The Russian government during the Putin era has certainly achieved strong economic growth as outlined above. Putin has declared that the Russian government intends to double the country’s GDP in real terms by 2013. Such an increase in GDP would be a remarkable achievement given the principle problems facing the Russian economy at the end of the Yeltsin era. The World Bank for instance, believes that the transition of the Russian economy to being a fully integrated part of the global system is still ongoing.[57]

Strong doubts remain as to whether the Russian economy has diversified enough to still grow when its natural resources are fetching lower prices in the global economy, or when these natural resources are exhausted.[58] The sale of Russia’s natural resources has assisted the economic revival after 1998 and is highly important to the economy and the government. The World Banks claims that receipts from oil and gas sales represents 37% of the revenue used for the federal budget in average years.[59]

Conclusions

To conclude there were several principle problems facing the Russian economy at the end of the Yeltsin as outlined above. The majority of these problems that challenged the Russian economy could be traced back to the end of the Soviet Union plus the political, social, and economic consequences of its demise upon the Russian Federation. The many weaknesses of the Soviet economic system had played an instrumental part in the dissolution of the Soviet Union itself. These problems formed part of the Soviet legacy and contributed to the principle problems that faced the Russian economy throughout the Yeltsin era. Potentially given its abundance of natural resources such as precious metals, oil, and gas when combined with the large amount of land available for agriculture besides the skills and education of its population, Russia should have a strong economy. The Soviets had industrialised Russia, yet those industries had been geared towards producing the military infrastructure needed to rival the United States during the cold war. When he became President, Yeltsin intended to lead the Russian Federation to liberal democracy and a capitalist economy by dismantling the remnants of communism. The shock therapy linked with the liberalisation of the Russian economy demonstrated that the economy needed substantial overhauling to become successful. The effects of shock therapy led to hyperinflation, high unemployment, severe economic contraction, and the shutting down of factories and enterprises. Many Russians were worse off as a result, yet millions believed that they could live the capitalist dream. High unemployment and higher rates of underemployment had devastating social consequences and repercussions for the Russian economy. Unemployment and inflation put many millions of Russians into dire straits and increased their participation in the informal economy or raised their chances of dying earlier. Poverty also contributed to higher crime levels and resulted in higher levels of alcoholism or drug abuse.

It was the combination of the principle problems of the Russian economy at the end of the Yeltsin era that seemed to make the task of tackling those problems more difficult. The uncompetitive nature of many Russian businesses meant the risk of large bankruptcies seemed ever present. More businesses would have closed but kept afloat by not paying their taxes, not paying their workers and paying their debts. Tax evasion and the need for tax reforms were linked to principle problems. Tax evasion meant that the Russian government lost revenues. The unreformed tax system was hard to administer effectively and relatively easier for individuals or enterprises to successfully evade. There is also the neo-liberal argument that lower taxes provide the incentives for businesses to employ more people and for individuals to work harder or at least pay their taxes. The Putin government has achieved two things to tackle problems relating to tax evasion and tax reform. It has made tax administration more effective and it has introduced tax reforms most notably the flat rate of income tax of 13%.

The apparent insolvency of the Russian government that had contributed to the crash of 1998 was a principle problem at the end of the Yeltsin era that has been tackled successfully by the Putin government.

The severe shortage of revenue and high rates of foreign debts had strongly restricted the Russian government during the Yeltsin era. It had been forced into taking loans from the World Bank, the World Bank plus money from oligarchs via the controversial loans for shares programme. The situation under Putin has changed for the better. More effective administration, higher gas and oil prices have strengthened the Russian government’s financial position. Having a solvent government that can act independently is more attractive to foreign investors than one which is virtually bankrupt and is vulnerable to internal and external controls. The rise in oil prices had been very important to the successes of the Putin government. If they were to fall back to previous levels it would make the Russian economy more susceptible to its remaining principle problems. Amongst the other principle problems from the end of the Yeltsin era, the Putin government claims to have fully regulated banking system to increase efficiency and to deter crime. Under Putin the Russian government had taken steps to prevent substantial capital flows out of the Russian economy and has repatriated as much of the capital that went abroad during the Yeltsin era as possible. Putin has increased spending on education to increase the skills of Russians joining the workforce in an attempt to counter Russian backwardness in Information Technology and to make the country’s businesses more competitive. The benefits of such a policy may take a few years to become noticeable.

However, there are some principle problems that remain difficult to tackle or which the Russian has made no attempt to tackle since the end of the Yeltsin era. The Putin government has not made any substantial attempts to diversify the Russian economy away from its dependency upon the sale of its natural resources. Perhaps, it sees no need to do so given the high prices of oil and gas. Like the majority of further developed capitalist countries Russia has not used alternative energy sources. The Putin government has not been able to reverse the slump in the Russian population levels or tackle the fall in life expectancy. It has taken steps to reduce drug taking and even started campaigns to stop the spreads of AIDS. Given the high number of infections amongst the youth of Russia the spread of AIDS could have dire consequences for the Russian economy. Organised crime remains a problem that Putin has been unable to tackle completely, whilst the informed economy remains stronger and helps many Russians survive. Putin has been successful in curbing the influence of the oligarchs. How the Russian economy and the country responds to the end of the Putin era could heavily influence Russia’s future prospects. The economic recovery that has taken place since the of the Yeltsin era has been marked, yet it was the result of repatriating export revenues that allowed many thousands of more Russian businesses to pay their considerable tax arrears to the Russian government. That payment of tax arrears helped to transform the financial stability of the Russian government. Bibliography

Aron L, (2000) Boris Yeltsin – a Revolutionary Life, Harper Collins Publishers, London

Bannock, Baxter & Davis, (2003) The Penguin Dictionary of Economics, Penguin, London

Bernstam M S & Rabushka A, Russia has no real banks, September 21 2000,Hoover Institution Public Policy Inquiry

Bernstam M S & Rabushka A, Is Russia on the road to recovery? January 11 2001,Hoover Institution Public Policy Inquiry

Bernstam M S & Rabushka A, The IMF, Oil and Russian economic policy, May 1, 2001, Hoover Institution Public Policy Inquiry

Bernstam M S & Rabushka A, Towards a new understanding of the Russian economy November 14, 2001, Hoover Institution Public Policy Inquiry

Bernstam M S & Rabushka A, (2004) Free & Not So Free to Change: The Pendulum of Russia’s Economy, 1992-2004).

Bernstam M S & Rabushka A, (2005) An Accidental Illiberal Recovery: Russia

Freeland, C. Sale of the Century – The Inside Story of the Second Russian Revolution


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