Unifying theme of Russian economy over the past century:
Leaders tried to improve the economy with barely any lasting success.
Think of the textbook anecdote: A Russian bureaucrat travels to London and observes that traffic there is less chaotic than in Moscow. He decides that Russia should make like Britain and drive on the left side of the road. Traffic officials in Moscow like the idea, but they fear public outrage. So they order only professional drivers (trucks and buses) to switch. Ordinary drivers need “time to adapt.”
BAD IDEA!
And reforming the economy of such a large country as Russia is a lot harder than regulating traffic. We cannot discuss Russian economy without preparing ourselves for a slew of bad ideas from Russian men who tried so hard to alleviate the economy…but ultimately failed. Today, Russia is still in the midst of an economic dilemma.
I. Pre-Soviet Era: Up to 1917.
A. Patrimonial state – state that not only rules the country but owns the land as well.
1. Tsars were autocratic heads.
B. Economic and agricultural policy: serfdom.
1. Peasants were majority of population and tied to land of nobles
2. Tsar of 1861 emancipated peasants, but mir (traditional communal peasant organization) still tied peasants together.
3. Individual peasant farming never developed.
C. Lack of Western-style bourgeoisie – an entrepreneurial class never developed.
1. Sources of momentum for industrialization.
a. State
b. Foreign capital, especially French, English, German, and Belgian joint-stock companies
c. Foreign debt of tsars
2. Sources of worker discontent.
a. Large factories alongside small private workshops
b. Trade unions illegal until 1906, but unions still highly controlled afterwards
c. Widespread strikes and rural uprisings beginning in 1905
E. Collapse of Tsarist regime in 1917.
II. Soviet System: 1917 to 1991 (still a Patrimonial state – state that not only rules the country but owns the land as well.)
A. Structural aspects of Communist command economy.
1. Powerful state ministries in charge of economic sectors.
a. Sectors included machine-building, light industry, agriculture.
b. Ministries were hierarchical and bureaucratic, with firms at the bottom.
2. Gosplan.
a. State planning committee.
b. Responsible for working out one-year and five-year plans for ministries.
c. Plans often too ambitious.
2. Attempts to integrate remaining peasants into large-scale agricultural production.
B. Production and distribution.
1. All land and factories under state ownership.
2. Produce and goods sent to a central location; then equally distributed to cities and
villages throughout USSR.
3. Manufacturing enterprises only required to meet state-set production targets; little
motivation to increase quality of goods or fulfill needs of citizens.
a. “We pretend to work, they pretend to pay us.”
4. Stable, state-set prices to thwart supply-and-demand price fluctuation – in contrast
to turbulent market economy.
5. Miscalculations of supply-and-demand lead to surplus of unwanted goods and
shortage of needed goods.
6. Citizens must wait in line for basic items, as exhibited in simulation.
C. Treatment of peasantry.
1. Individual, free-standing farms deemed inefficient.
a. Collectivisation of agriculture began in 1929; numerous relatively prosperous peasants, or Kulaks, killed.
b. Millions of peasant households eliminated and their property confiscated.
2. Attempts to integrate remaining peasants into ambitious large-scale agricultural
production.
D. Top policy and industrial priorities.
1. Military.
2. Heavy industry (such as construction, chemicals, steel).
3. What were they thinking???
a. Marxist-Leninist view: “Technology is capable of MASTERING NATURE
and counteracting ANY negative effects.”
b. Large nature-transforming projects, such as hydroelectric dams, huge factories, glorified as symbols of Soviet power. Ouch. Really bad for the
environment. (Think: the Chernobyl nuclear accident in 1986.)
4. Consequences: The Soviet leaders tried to develop northern Siberia (brrr!) to permit exploitation of valuable deposits of oil and other natural resources. Unfortunately, development in Siberia was expensive and complicated; ironically, the government did not have the adequate technology to succeed.
5. Please note a common misconception: The Soviet Union collapsed eventually but intensive planning did lead to RAPID ECONOMIC DEVELOPMENT and IMPRESSIVE ECONOMIC GAIN.
E. Soviet social safety nets: Sounds like the good life, but the system deteriorated rapidly.
1. Free health care of dubious quality
2. Massive public education: guaranteed primary and secondary schooling.
a. Private schools abolished.
b. Private tutoring permitted.
3. Secure jobs assigned, based on society’s needs.
a. Many people employed in jobs below their skill levels.
b. Other people stuck in positions that do not correspond to their formal training.
4. Partially paid maternity leave
5. Modest pensions
F. Attempts at economic reform: Mikhail Gorbachev’s perestroika (restructuring)
1. Efforts were halting and contradictory
a. Gorbachev reluctant to give up the state’s role in assuring full employment.
b. Economic priorities entangled with political ones.
2. Gorbachev’s goal: To reform the central planning system, not disband it. (Remember, he was the last leader of the Communist party.)
a. Decentralization
b. Rearrange economy to make it easier for firms to increase efficiency and
take initiative.
3. Results: Declining economic performance, increasing regionalism, precarious economic environment.
III. Post-Soviet Russia: 1991 to the Present
A. Boris Yeltsin’s shock therapy: Theory
1. Radical market reform: A turn away from the Patrimonial state! Finally.
2. Basic notions
a. Free prices from state control.
b. Place economic assets in private hands.
3. No more state subsidies to enterprises; they are now responsible for their own
success or failure.
4. Key sectors remaining under state control:
a. Transport, defense
b. Health care, education, research
c. Culture, communications
5. Shock therapy expected to fail initially, but succeed ultimately. The final goal of shock therapy was Western-style market economy, integrated into the global system and capable of producing domestic prosperity.
B. Shock therapy: Reality.
1. January 1992: Yeltsin loosened or lifted price controls on goods.
The immediate result: 1300% inflation!
2. Inflation rampant throughout 1990s: Central Bank of Russia printed too much money.
3. Other immediate problems
a. Rotting infrastructure: Difficult to transport goods.
b. Drop in consumer purchasing power due to inflation: Consumer items are too
expensive for most people.
c. Interenterprise debt – firm – overdue tax payments mess.
4. Frequent occurrence of capital flight: Process by which money is removed from the country and deposited in foreign accounts or assets.
5. Ubiquitous mafia.
a. Consists of government officials, police, and operators abroad.
b. Tries to avoid taxes and pull a profit from the remaining state-owned entities. Very corrupt and widespread.
C. The 1998 financial crisis and devaluation of the ruble.
1. Rising action.
a. Pyramid debt – the Russian government successively took on new loans at progressively higher rates of interest in order to pay off existing debts.
b. GKOs – in 1993, the government issued short-term obligations (GKOs) to generate revenue to pay its creditors. GKOs did very little because they paid
interest on debt, leaving no usable profit for the government.
c. 1997 – The Ministry of Finance failed to meet obligations to both domestic
and international lenders.
2. Climax: August 1998 – The Russian government had to radically devalue the
Russian ruble.
a. Precrisis value: 6 rubles equals 1 dollar.
b. January 1999 value: 22 rubles equals 1 dollar.
3. Consequences.
a. Imported foods and goods now dramatically more expensive.
b. Banks limited withdrawals and deposits, forcing many businesses to close.
c. Foreigners now reluctant to invest in Russian companies – declined trust in
the ruble.
d. More regionalism: Regions rich in natural resources less willing to share with
other regions.
D. Privatization.
1. Spontaneous privatization
a. Began in late 1980s and 1990s – legal framework created in 1992.
b. Resulted in the formation of joint-stock companies, in which the owners are shareholders (individuals, Russian or foreign businesses, or other
organizations).
2. Privatizations vouchers.
a. Issued to all Russian citizens (including children) in November 1992.
b. Value: 10,000 rubles (10 U.S. dollars at the time).
c. People were expected to use the vouchers to buy shares of stock; many
were confused about how to use the vouchers and viewed them as symbols.
3. Insider privatization.
a. When workers at an enterprise own most of the enterprise shares.
b. Somewhat inhibiting – manager has to please his workers for their support.
4. Money-based privatization.
a. Began in 1994.
b. Firms allowed to sell remaining shares for cash.
c. State-owned shares in privatized companies could be sold to generate revenue for the state.
d. Progress slower than expected.
E. Agriculture: Down, down, down…
1. Farms were also privatized.
a. Like in industry, privatization made farms inefficient.
b. Foreign food imports outcompeted Russian produce
c. 1998 devalue of ruble made foreign foods more expensive…this might help Russian agriculture, but for the most part, agricultural production has
declined since Soviet years.
2. Technical problems hindering agricultural development.
a. Poor infrastructure: poor roads, transport, storage.
b. Overuse of chemical fertilizers and pesticides.
c. Outdated equipment.
F. Social implications of the Communist to capitalist transition.
1. Fewer social welfare benefits.
a. Weakened pensions.
b. Growing homelessness and poverty that the government cannot handle
adequately.
c. Tuition for postsecondary education.
d. Payment for quality healthcare.
e. Reduced benefits in workplace – many companies close to bankruptcy; also, pressure on companies to reduce costs and increase productivity.
2. Rising unemployment rate.
3. Frequent strikes and protests.
4. Labor distribution
a. Services comprise the highest percentage.
b. Individuals in banking, finance, accounting, and foreign relations have highest wages.
c. Wages of public servants (such as educators and transport workers) have
declined dramatically.
5. Status of women in the context of Russian economy.
a. Pressure to carry out traditional domestic responsibilities as well as work outside the home to make ends meet.
b. Partially paid three-year maternity leave.
c. Declining birthrate – in 1992, the death rate exceeded the birthrate.
d. Dependence on abortion as a primary means of birth control.
IV. Russian political culture, economic change, and the international economy.
1. Cultural inhibitions on market-driven economy.
a. Weak tradition of individual entrepreneurship,
b. Widespread commitment to idealistic equality.
c. Reliance on trust instead of legal contracts.
2. Russia needs to get its domestic economy together before entangling herself in foreign
economic obligations.