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Back to Subjects - Economics

Russian Economics

Russian Economics With the dissolution of the Soviet Union, the economy of Russia was left without the guidance on which it relied so heavily for more than seventy years. Control of the economy was thrust into the inexperienced hands of the general population, who had lived for three generations under a system in which they had no need to make decisions about their businesses. Capitalism is a difficult system to understand, even with training. To be thrust into it unprepared can be a prescription for disaster. Boris Yeltsin assumed the role of president when the Soviet Union officially broke apart on December 26, 1991, one day after Gorbachev's resignation from the leadership of the Communist party and the USSR. This began the process of rebuilding the Russian economy in a capitalist system. (Famighetti, 1996) During a meeting in July 1990, leaders of the Group of Seven industrial nations and the president of the European Community asked the International Monetary Fund (I.M.F.) and other United Nations economic agencies to study the Russian economy and propose a more effective method of reform. The study, titled "A Study of the Soviet Economy" and released in December 1990, made recommendations to both the international community and the Russian government itself. (Brendenkamp) The committee strongly suggested that the Russians immediately release price controls on almost all goods, instantly creating a free market in which the people could learn capitalism first-hand. An auction of all government- owned corporations was proposed, beginning with smaller, easier to value companies. Also, the commission emphasized the need to lift restrictions on foreign trade. (Brendenkamp) Russia's currency, the ruble, was thrown into a state of intense fluctuation by the transition. However, the general trend has been toward massive inflation. In 1989, one United States dollar was worth about 2/3 of a ruble (Hoffman); in 1993, it was close to one thousand (Famighetti, 1993); and at the end of 1996 it was over 5,000. That translates into an annual inflation rate of more than 350%. Many business owners were, and still are, unwilling to accept rubles, preferring the more stable American and European currencies. (Famighetti, 1996) The I.M.F. study also addressed the problem of Russia's deficit, suggesting cuts in price subsidies and low-priority expenditures, such as administration. The Russian government set a target deficit of 2 1/2 to 3 percent of the gross domestic product. (Brendenkamp) This level has not been reached yet (Famighetti, 1996), but progress is being made. (Brendenkamp) Research and development in technology are nearly nonexistent in most private corporations in Russia. Many entrepreneurs who are independent of the government but do not own the corporations are unwilling to risk their capital in product development. Such attitudes are making technological modernization nearly impossible. Many companies spend 50% or more of their gross income repairing worn or broken machinery. (Yavlinsky) Crime is another factor which is preventing many individuals from starting businesses. With the poor economic conditions in the Russian Federation, many people have turned to crime to support themselves. During some periods, the property crime rate has increased by 20% per week. In such an environment, many individuals are hesitant of investing in a company for fear it will be burglarized. (Yavlinsky) Russia began its transition with a definite, if vague, plan for reform. Government leaders proposed a liberalization of the economy and financial stabilization. (Yavlinsky) Also, the military industry of the Soviet Union is turning toward civilian production. (Nelan) Liberalization of the economy is the process of removing price controls and restrictions on private ownership. A tremendous gain has been registered in that field. (Yavlinsky) As of the 1996 election in Russia, more than 70% of businesses were controlled, at least in part, by the populous. Controls over production and distribution have been released in all industries except energy, communications, and transportation. (Nelan) However, there is still much work to be done. Many price controls are maintained to this day, especially in staple products such as food. (Yavlinsky) Despite the fact most Russians struggle just to get by, there has been some good news for the Russian people in the last few years. Per capita income is up from $3,000 (US equivalent) in 1989 (Hoffman) to over $4,800 (US equivalent) in 1996. The Russian Federation also has continued to post a trade surplus, reaching $12 billion in 1996. (Famighetti, 1996). Russia's condition is ever-improving, and as the immediate threat to the new government subsides, more progress can be made. An example is in the field of welfare. On 30 December 1995, First Deputy Prime Minister Oleg Soskovets stated that the government would begin taking action to aid those hurt by the transition to capitalism. "Some corrections will certainly be made strengthening the social direction of the government's economic policy," he said. ("Russia stays...") Despite widespread gains made by the Russian Federation during its short history, there is a great deal of work left to be done. Most of the goals set by the Russian government still have not been reached. It will be a long, slow process that brings the Russian Federation to become an economic power again. But it is a process which continues to this day, and it seems inevitable that, given time, the Russians will be a major player in the global economy. Economists and leaders not living within Russia's boundaries are also very interested in its reforming economy. The Soviet Union was a major player in international economics before its breakup. Outsiders are eager to see how the Russian people respond to the free market, and the impact the Russian Federation will have in the twenty-first century. Because of the size of the country, it will be impossible for any outside force to operate Russia's fledgling economy. The ultimate success or failure of the system will depend entirely on the Russian people. (Brendenkamp) One of the most important ways that Europe and the United States can help is by providing money directly to the Russian government. This view is most popular within Russia because it would ease the transition, but many Westerners fear it would be misused by government officials. Aid in the form of food for the 30 million living under the poverty line is more universally supported. (Brendenkamp) One of the most important factors missing from the Russian Federation is a widespread knowledge of capitalism. Experts from Europe and the United States could be brought in to educate Russian economists, who could then teach the populous about the operation of a free-market economy. They would also be able to advise top officials as to the best way to improve conditions within the nation. (Brendenkamp) On December 17, 1995, the Duma, the lower house of Russia's parliament, was elected. Members of the weakened Communist party posted the largest gains, maintaining control of the legislative body. (Kramer) However, on July 10, 1996, Boris Yeltsin was re-elected by a margin of 13 percentage points over his nearest rival, Communist Gennadi Zyuganov. On 9 August 1996, he was inaugurated for his second term as Russia's first president. (Kramer) Yeltsin was elected on a heavily anti-Communist message. His advertisements showed the horrors of the Soviet past and portrayed him as a reformer prepared to lead Russia out of that dark era. (Kramer) Voters within the nation awarded him a second term, and with it, a license to carry out his reforms. Yeltsin already has plans to continue with the destructuring of the socialists' price and distribution controls. Among other things, the Russian Federation will be applying for entry into the European Economic Community. Although they are likely to be turned down, it will send a signal to the western world that the Russians do intend to carry their reforms until they have a functioning capitalist society, only slightly different (if at all) from the rest of the world. (Kramer) Russia continues to rely on other capitalist nations for help, and recently, a $10.2 million (US equivalent) loan from the I.M.F. was given to Russia to aid in the restructuring of the economy. Plans had not been made for the money by the Russian government in anticipation of the election. (Kramer) The one primary roadblock Yeltsin faces in his task is the Parliament. The legislative body of the Russian Federation is controlled by Communists, making it difficult for any pro-capitalism initiatives to be passed. This has been a concern for Yeltsin supporters since the Duma election. Although no strategy as to how to pass controversial reforms have been released, Yeltsin's past successes indicate that he will make some progress, even if not able to pass all of his measures. (Kramer) The economy of Russia is weak at best. Many reforms necessary for the success of a free market have not yet been implemented, and those which are in place have not had the desired effect. However, there is good news, and the nation's economy is showing signs that a turnaround will occur in the near future. Almost all teenagers do, in fact, learn to survive outside of the confines of their own home. Even without the guidance of their parents, they learn how to support themselves, and eventually prosper. The economy of the Russian Federation is similar in this respect as well. In time, it will be a self-sufficient, thriving capitalist country, and may eventually become the power that its mother nation, the USSR, was. Bibliography: Berki, R. N. "Socialism". The New Grolier Multimedia Encyclopedia. Release 6. The Software Toolworks Inc. 1993. Brendenkamp, Hugh. "Reforming the Soviet Economy". Finance & Development. June 1991. pp. 18-21. Christopher, Andrew. "K.G.B.". The New Grolier Multimedia Encyclopedia. Release 6. The Software Toolworks, Inc. 1993. Daniels, Robert V. "Why Communism Failed in the U.S.S.R.". The World Book Year Book 1992. Chicago: World Book, Inc. 1991. pp. 441-446. Famighetti, Robert, editor. "Russia.". The World Almanac and Book of Facts 1997. Manwah, NJ: Funk & Wagnalls. 1996. pp. 811-812. Famighetti, Robert, editor. "Russia". The World Almanac and Book of Facts 1994. Manwah, NJ: Funk & Wagnalls. 1993. pp. 802-804. Fry, David K. "The Conquest of Socialism at the Invisible Hands of the Free and Black Markets" [online] Available: http://rhf.bradley.edu/~liberty/capsoc.html. 1996. Hoffman, Mark S., editor. "U.S.S.R.". The World Almanac and Book of Facts 1990. Manwah, NJ: Funk & Wagnalls. 1989. pp. 761-763. Horowitz, David. "Socialism: Guilty As Charged". Commentary. December 1990. pp. 17-24. Johnson, Otto, editor. "Germany". 1995 Information Please Almanac. Boston: Houghton-Mifflin Company. 1994. pp. 191-195. Johnson, Otto, editor. "Russia". 1995 Information Please Almanac. Boston: Houghton-Mifflin Company. 1994. pp. 251-254. Kramer, Michael. "Rescuing Boris". Time. July 15, 1996. pp. 28-37. Lih, Lars T. "Union of Soviet Socialist Republics". The New Grolier Multimedia Encyclopedia. Release 6. The Software Toolworks, Inc. 1993. Lubin, Nancy. "Commonwealth of Independent States". The World Book Year Book 1993. Chicago: World Book, Inc. 1992. p. 497. Marx, Karl and Engels, Frederik. "The Communist Manifesto". Translated by Moore, Samuel. [online] Available: http://csf.colorado.edu/psn/marx/archive/1848-cm/. 1848. Nelan, Bruce W. "Unreformable Reform". Time. March 4, 1996. pp. 40-42. Parming, Tonu. "Estonia". The World Book Year Book 1992. Chicago: World Book, Inc. 1991. pp. 483-485. Rogers, Jay. "Breaking Up the Eastern Bloc". [online] Available: http://www.forerunner.com/forerunner/x0805_breaking_up_eastern.html. 1990. Ropp, Theodore. "World War II". The World Book Encyclopedia. Volume 21. Chicago: World Book, Inc. 1982. pp. 380-413. Rosenberg, William G. "Russian Revolutions of 1917". The New Grolier Multimedia Encyclopedia. Release 6. The Software Toolworks, Inc. 1993. "Russia stays firm on economy but aims to help poor". [online] Available: http://pele.nando.net/nt/econ. 1995. No author given. Vardys, V. Stanley. "Latvia". The World Book Year Book 1992. Chicago: World Book, Inc. 1991. pp. 500-502. Vardys, V. Stanley. "Lithuania". The World Book Year Book 1992. Chicago: World Book, Inc. 1991. pp. 503-505. Yavlinsky, Grigory and others. "Spring '92 Reforms in Russia". Moscow News. May 20, 1992. pp. 6-7.

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