Russian Economy in the Aftermath of the Collapse of the Soviet Union

By Marshall Poland

President Boris Yeltsin had no strong survival plan in 1991 after communism fell in Russia and the USSR was split into fifteen separate republics. Yeltsin understood that capitalization and westernization were the only ways to maintain an adequate economy, but the transition would be a detrimental process. The recent arrest of Mikhail Khodorkovsky, a valuable Russian businessman, implies that Russia has still yet to completely adopt the capitalist form of business that he represents. With shards of communism still embedded in the country's government, Russia has been unable to sufficiently make the transition it has been focused on completing for the past decade. Russia's struggle to westernize and capitalize after the collapse of the USSR and under the leadership of President Boris Yeltsin was unsuccessful, and today the country cannot compete with the rest of the world until it has completely shed its communist past.

Fall of the USSR and Immediate Aftermath

    In 1991 the Democratic Party and its leader, Boris Yeltsin, was left in control of Russia after replacing the communist party. The democrats had a major problem on their hands: in order to completely get rid of communism, they would have to do a great deal of damage to everything communism had sustained in the country. This included Russia's economy and political structure. The democrats had not expected to come into power as suddenly as they had, and as a result President Yeltsin had no clear plans regarding the transition that had to be made (Leone 189). When little was done in the first month of Yeltsin's rule to ameliorate the crisis facing the nation, the Russian people began to panic as they realized how severe an effect the removal of communism would have on both the economy and their everyday life.

Privatization Under Yeltsin

    On October 28, 1991 Yeltsin finally announced several drastic changes that would begin the transition. Prices of common products, which had been controlled by the government up until now, would be set free by the end of the year, and privatization would begin. This plan was known as "shock therapy." Privatization was the individual purchase of almost everything that had once been controlled by the state, including land, retail stores, and factories. The "shock therapy" plan also opened Russia to foreign investments (Leone 191-192). The Russian people were not ready for this sudden economic freedom, and a number of problems arose. Inflation caused prices to go up three hundred percent in the first month, and 2,591 percent by the end of 1992 (Freeze 414). This resulted in the devalue of savings, salaries and pensions, and left the economy in a terrible state. While the prices of most products were made independent of the government, the costs of energy and transportation were still set, and both were made about four times as expensive (Leone 191).

    Many factories were forced to shut down because the government no longer supported them financially in return for their goods. It was during this period of rapid privatization that Russia's "oligarchs" gained much of their wealth. Oligarchs are the handful of Russian tycoons who own everything from sports teams to major oil companies. A substantial portion of Russia's wealth today is owned by fifteen or so oligarchs (Karon). While these few businessmen benefited enormously from privatization, by 1992 about fifty percent of the Russian population lived below the poverty line.

A Slow Path to Recovery

    Yeltsin was able to privatize the enterprises responsible for seventy percent of Russia's gross domestic product by the end of his presidency. However, the GDP had dropped each year, and went down by close to forty percent from 1991 to 1996. This was even worse than the Great Depression in comparison to the United States. Since the GDP in other countries in the world continued to increase during this time, Russia fell far behind. Due to instability in the privatization system for farms, Russia was forced to import over one third of its food products by 1997 (Freeze 415).

The Arrest of Mikhail Khodorkovsky

    A recent example of the problems that still exist in the Russian economy is that of the arrest of Mikhail Khodorkovsky.  Khodorkovsky is the owner of Yukos Oil Co., one of the world's major oil suppliers.  On October fifth, 2003, he was arrested in a Siberian airport after being charged with several counts of fraud by Vladimir Putin, the current president of Russia. Khodorkovsky is not only Russia's wealthiest man, but a financial supporter of opposition parties to Putin and a potential candidate himself.  Because of these factors, many believe the arrest may have be politically motivated, and that Putin only attacked Khodorkovsky in order to remove him from the political race and increase his own chances of being reelected as president (Gumbel 68-69).  The arrest of such a major economic figurehead caused the Russian market to plunge and raised questions about the progress Russia has made economically and politically since the 1991 Soviet Union collapse.

    The issue may have more serious implications than the presence of political corruption in Russia. Given the position of Khodorkovsky as one of the most promising businessmen in the country, the arrest was especially counterproductive and detrimental to the Russian economy and goal of westernization. Khodorkovsky has a personal value of eight billion dollars, and Yukos Oil Company has been described as the "most western-like company in Russia" (Gumbel 68). The arrest comes at a time when Yukos is just beginning to establish itself as a player in the American oil market. The Russian stock market immediately fell an astounding ten percent after news of the arrest. Major disruptions also occurred in the government: Putin's chief of staff resigned, and the Prime Minister voiced disapproval of the president's decision (Gumbel 68-69)

    This is not the first time an oligarch has been threatened by Putin for getting involved in political affairs. Boris Berezovsky and Vladimir Gusinsky, when each was faced with similar situations to Khodorkovsky's, chose exile over risking arrest by Putin. Vladimir Putin, who used to work for the KGB, wants to keep oligarchs out of politics (Gumbel 69). This may be because he feels threatened by them, but some argue that it could also be a result of anti-capitalism. Regardless of the cause, Putin's actions have dealt a blow to the progression of westernization in Russia and shaken the confidence of foreign investors in the country.

Future of Russia's Role in the World Economics

    Foreign investors have enough to worry about; Russia has a weak banking system, a bad business climate in general, and "widespread lack of trust in institutions" (CIA).  Today, oil, natural gas, metals, and timber make up 80% of Russia's exports (CIA).  These products, like cash crops, force the country to rely heavily on steady demand for them, so that changes in world prices can cause a great deal of damage to the economy.  25% of the population is under the poverty line, and the inflation rate was estimated at 15% in 2002 (CIA).

    During the reign of Communism, the Party controlled all facets of Russian civilization, including the economy.  Now that Russia has made the transition to a democratic government, the state needs to refrain from intervention in the economy in order to promote the free market system that has prevailed in western countries.  If this happens, Russia will eventually regain its status as a major power in the world market.



Primary Sources

Leone, Bruno, ed. The Collapse of the Soviet Union. San Diego: Greenhaven Press, Inc., 1999.

  *A collection of essays, speeches, excerpts from Russian legal codes, and other primary source documents that illustrate the fall of the USSR and its aftermath.

Thompson, Clifford, ed. Russia and Eastern Europe. New York: The H.W. Wilson Company, 1998.

  *Excerpts from books, reprints of articles, and studies done by professors at various universities involving the current (1998) Russian state.


Secondary Sources

Central Intelligence Agency. The World Factbook: Russia. 1 Aug. 2003. (24 Apr. 2003).

  *Provides up-to-date background information on Russia and short economical and political histories of the country.

Freeze, Gregory L., ed. Russia: a history. New York: Oxford University Press, 1997.

  *Written by a team of professors and historians from the US, Russia, and other countries. Provides in-depth information on the direct aftermath of the collapse of the USSR, and Russia's privatization.

Gumbel, Peter. "Putin vs. the Tycoon." Time. 10 Nov. 2003: 68-69.

  *Gives background information on the battle between Mikhail Khodorkovsky and Vladmir Putin, and compares the arguments for and against each of them.

Karon, Tony. "Putin Reveals His Weakness." Time. 6 Nov. 2003. (24 Apr. 2003).

  *An interview with TIME's former Moscow consultant about how the arrest of Khodorkovsky relates to the economic and political struggle Russia has been engaged in over the last decade.

Picture Credits: "Shock Therapy" compilation