History of post-Soviet Russia
| Russian History series |
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Although the new Russian Federation was widely accepted as the Soviet Union's successor state in diplomatic affairs, post-Soviet Russia lacked the military and political power of the former USSR. Russia managed to make the other ex-soviet republics voluntarily disarm themselves of nuclear weapons and concentrated them under the command of the still effective rocket and space forces, but for the most part the Russian army and fleet were in near disarray by 1991.
As Russia was on the verge of independence, Boris Yeltsin announced that Russia would proceed with radical market-oriented reform along the lines of Poland's "big bang," also known as "shock therapy" in October 1991.
The conversion of the world's largest state-controlled economy into a market-oriented economy would have been extraordinarily difficult regardless of the policies chosen. (For backgrounding on state economic planning in the former Soviet Union, see Economy of the Soviet Union.) The policies chosen for this difficult transition were (1) liberalization, (2) stabilization, and (3) privatization, which were based on the neoliberal "Washington Consensus" of the IMF, World Bank, and U.S. Treasury Department.
The programs of liberalization and stabilization were widely known as "shock therapy." Shock therapy began days following the dissolution of the Soviet Union, when on January 2, 1992 Russian President Boris Yeltsin decreed the liberalization of foreign trade, currency, and hard currency designed under the auspices of his deputy prime minister Yegor Gaidar, a 35-year old liberal economist inclined toward radical reform. This series of decrees cut subsidies to state farms and industries, decontrolled prices, and moved toward convertibility of the ruble.
The process of liberalization would create winners and losers, depending on how particular industries, classes, age groups, ethnic groups, regions, and other sectors of Russian society were positioned. Some would benefit by the opening of competition; others would suffer. Liberalizing prices meant that the elderly and others on fixed incomes would suffer a severe drop in living standards and people would see a lifetime of savings wiped out.
Liberalization (lifting price controls) immediately opened the doors to hyperinflation. (Hyperinflation was only worsened when the Central Bank, an organ under parliament, which was skeptical of Yeltsin's reforms, was short of revenue and was forced to print money to finance its debt.) Thus, with inflation at double-digit rates per month as a result of instantaneous price liberalization, macroeconomic stabilization was enacted to curb this trend.
Stabilization, also called structural adjustment, is a harsh austerity regime for the economy in which the government seeks to control inflation. Under the stabilization program, the government let most prices float, raised interest rates to record highs, raised heavy new taxes, sharply cut back on government subsidies on industry and construction, and made massive cuts in state welfare spending. These policies caused widespread hardship as many state enterprises found themselves without orders or financing. A deep credit crunch shut down many industries and brought about a protracted depression.
The rationale of the program was to squeeze the built-in inflationary pressure out of the economy so that producers would begin making sensible decisions about production, pricing and investment instead of chronically overusing resources—a problem that resulted in shortages of consumer goods in the Soviet Union in the 1980s. By letting the market rather than central planers determine prices, product mixes, output levels, and the like, the reformers intended to create an incentive structure in the economy where efficiency and risk would be rewarded and waste and carelessness were punished. Removing the causes of chronic inflation, the reform architects argued, was a precondition for all other reforms: Hyperinflation would wreck both democracy and economic progress, they argued; they also argued that only by stabilizing the state budget could the government proceed to dismantle Soviet socialism and create a new capitalist Russia.
The relationship between the political and economic relationships of this transformation is complex. Thus, a major reason that Russia's transition has been so wrenching is that the country is remaking both its Soviet-era political and economic institutions at once in a "dual transition." In addition, Russia is also remaking itself as a new national state following the disintegration of the union.
The former Soviet Union was dealt a number of unique obstacles during the post-Soviet transition, perhaps leaving Russia on a far worse footing than other former Communist-led nations to the west also going through "dual transitions," especially Poland, Hungary, and the Czech Republic, which have fared better since the collapse of the Soviet bloc between 1989-1991.
First, a major problem facing Russia was the legacy of the Soviet Union's enormous commitment to the Cold War. In the late 1980s, the Soviet Union devoted a quarter of its gross economic output to the defense sector (at the time most Western analysts believed that this figure was 15 percent). 1 The military-industrial complex employed at least one of every five adults in the former Soviet Union. In some regions of Russia, at least half the workforce was employed in defense plants. (The comparable U.S. figures were roughly one-sixteenth of gross national product and about one of every sixteen in the workforce.) The end of the Cold War and the cutback in military spending hit such plants very hard, and it was often impossible for them to quickly retool equipment, retrain workers, and find new markets to adjust to the new post-Cold War and post-Soviet era. In the process of conversion an enormous body of experience, qualified specialists and know-how has been lost, as the plants were sometimes switching from producing hi-tech military equipment to making kitchen utensils.
Secondly, partly related the sheer vastness and geographical diversity of the Russian landmass, the former Soviet Union saw the development of a sizable number of "monoindustrial" regional economies—in other words regions dominated by a single industrial employer. The concentration of production in a relatively small number of big state enterprises meant that many local governments were entirely dependent on the economic health of a single employer; when the Soviet Union collapsed and the economic ties between Soviet republics and even regions were severed, the production in the whole country dropped more than 50% overall. As roughly half of Russia's cities had only one large industrial enterprise, and three fourths had no more than four.2 That meant tremendous unemployment and underemployment.
Thirdly, post-Soviet Russia did not inherit a functioning system of social security and welfare from the former USSR. Since Russian industrial firms were traditionally responsible for a broad range of social welfare functions—building and maintaining housing for their workforces, and managing health, recreational, educational, and similar facilities—such towns were left heavily dependent on these firms for the provision of basic social services and were the mainstay of employment. Thus, economic transformation created severe problems for maintaining social welfare since local governments were unable to assume financial responsibility for these functions.
Finally, there was the problem of human capital. The problem was not that the Soviet population was uneducated. Literacy was nearly universal and the educational attainment level of the Soviet population was among the highest in the world. The former Soviet Union's state enterprise managers were indeed highly skilled at coping with the demands on them under the Soviet system of planned production targets. But the incentive system built into state and social institutions of the Soviet era encouraged skill in coping with an intensely hierarchical, state-centered economy, but discouraged the kinds of competitive risk-and-reward centered behavior of market capitalism. For example, the directors of Soviet state firms were rewarded for meeting output targets under difficult conditions, such as uncertainty about whether needed inputs would be delivered in time and in the right assortment. As noted, they were also responsible for a broad array of social welfare functions for their employees, their families, and the population of the towns and regions where they were located. Profittability and efficiency were well down the list of priorities of Soviet managers. 3 Thus, almost no Soviet employees or managers had firsthand experience with decision-making in the conditions of a market economy.
In short, turning the Cold War-era Soviet economy into a market-based peacetime economy without wrenching problems was simply impossible.
Russia's economy sank into deep depression by the mid-1990s, was hit further by the financial crash of 1998, and then began to recover in 1999-2000. Russia's economic decline is far more severe and more protracted than was the Great Depression that nearly paralyzed world capitalism following 1929. [1] It is about half as severe as the catastrophic drop borne out of the consequence of the First World War, the fall of Tsarism, and the Russian Civil War.4
The most striking consequence of the economic reform has been the sharp increase in the rates of poverty and inequality. The depression has driven over 40 percent of the Russian population into poverty. 5 Both poverty and inequality have grown sharply since the end of the Soviet era. Careful estimates by the World Bank based on both macroeconomic data and surveys of household incomes and expenditures indicate that whereas 1.5 percent of the population were living in poverty (defined as income below the equivalent of $25 per month) in 1988, by mid-1993 between 39 percent and 49 percent of the population was living in poverty. Average per capita monthly income had fallen, in dollar terms, from $72 to $32. 6 Per capita incomes fell by another 15 percent in 1998, according to government figures.
Supply shortages of consumer goods and imports characteristic of the 1980s went away. However, this was because Russians on fixed incomes (the vast majority of the workforce) saw their purchasing power drastically reduced in the 1990s. While the stores might have been well stocked in the Yeltsin era, workers could now afford to buy little, if anything.
Public health indicators show a shocking, corresponding decline. In 1999, total population fell by about three-quarters of a million people. Meanwhile life expectancy dropped for men from sixty-four years in 1990 to fifty-seven years by 1994, while women's dropped from seventy-four to about seventy-one. Alcohol-related deaths skyrocketed 60 percent in the 1990s. Deaths from infectious and parasitic diseases shot up 100 percent, mainly because medicines were no longer affordable to the poor. There are now roughly twice as many deaths as births per year in Russia. 7
By 2004 the average income has risen to more than $100, emblematic of the mild recovery in recent years thanks to a large extent to high oil prices. But the growing income is not being evenly distributed. The social inequality has risen sharply during the 1990s with the Gini coefficient, for example, reaching 40%. [1] Russia's income disparities are now nearly as large as in Argentina and Brazil, which have long been among the world leaders in inequality, and the regional disparities in the level of poverty are still growing sharper.
Structural reform lowered the standard of living for most groups of the population. Thus, reform created powerful political opposition. Russian voters, now able to vote for opposition parties, have often rejected economic reforms and yearn for the stability and personal security of the Soviet era. These are the groups that had enjoyed the benefits of Soviet-era state-controlled wages and prices, high state spending to subsidize priority sectors of the economy, protection form competition from foreign industries, and welfare entitlement programs.
Often these groups were well-organized, voicing their opposition to reform through strong trade unions, associations of directors of state-owned firms, and political parties in the popularly elected parliament whose primary constituencies were among those vulnerable to reform. A constant theme of Russian history in the 1990s has been conflict between economic reformers and those hostile to the new capitalism.
Democratization opened the political channels for venting these frustrations, thus translating into votes for anti-reform candidates, especially those of the Communist Party of the Russian Federation and its allies in the parliament.
On January 2, 1992, Yeltsin—acting as his own prime minister—enacted the most wrenching components of economic reform by decree, thereby circumventing the Supreme Soviet and Congress of People's Deputies, which had been elected in June 1991 before the dissolution of the USSR. While this spared Yeltsin from the prospects of parliamentary bargaining and wrangling, this has also destroyed the hopes for any meaningful discussion of the right course of action for the country. In retrospect, despite the great price paid by Russian people for these authoritative decisions, they did not help the country in the transition to market economy.
However, radical reform still faced some critical political barriers. The Soviet-era Central Bank was still subordinate to the conservative Supreme Soviet as opposed to the presidency. During the height of hyperinflation in 1992-1993, the Central Bank actually tried to derail reforms by actively printing money during a period of inflation. After all, the Russian government was short of revenue and was forced to print money to finance its debt. As a result, inflation exploded into hyperinflation, and the Russian economy continued in a serious slump.
Increasingly, the political confrontation between Yeltsin on the one side, and the opposition to radical economic reform on the other, became centered in the two branches of government.
Under the terms of the constitutional amendments passed in late 1991, Yeltsin's special powers of decree were set to expire by the end of 1992. Yeltsin, awaiting privatization, demanded that parliament reinstate his decree powers, but parliament was unwilling (only parliament had the authority to replace or amend the constitution). As Yeltsin threatened to unconstitutionally dissolve parliament, and as parliament threatened to impeach Yeltsin in March 1993, the fight climaxed in September, when no agreement could be reached on a new constitution.
On September 21, Yeltsin dissolved parliament, something he was not allowed to do by the then-functioning constitution. By illegal decree, he ordered new parliamentary elections and a referendum on a new constitution. The parliament then deemed Yeltsin's presidency unconstitutional.
In open rebellion of the Yeltsin regime, parliament, under the leadership of Speaker Ruslan Khasbulatov, appointed Aleksandr Rutskoy acting president on September 22. Tensions built quickly, and Khasbulatov and Rutskoy barricaded themselves in the parliament building, the "Russian White House." On October 2-October 3, bloody rioting broke out in the streets of Moscow, and soldiers supporting parliament attacked the TV center Ostankino on the night of October 3. Russia was on the brink of civil war.
After parliament barricaded itself for ten days in an attempt to defy Yeltsin, the Russian army seized the White House. On October 4, Yeltsin ordered the special forces to storm the Parliament, and CNN showed pictures of tanks lobbing shells at the White House. Rutskoy, Khasbulatov, and the other parliament supporters were arrested, but given a pardon on February 26, 1994. In the process, Russia saw the deadliest street fighting in Moscow since the Great October Socialist Revolution of 1917. On October 8, state police claimed that 187 had died and 437 had been wounded in what some began referring to as the "Second October Revolution," but other estimates were higher.
This crisis marked the end of Russia's first constitutional period, which was defined by the much-amended constitution adopted by the Russian SFSR in 1978. A new constitution, creating a strong presidency, was approved by referendum in December 1993.
In elections on December 12, 1993, held on Yeltsin's terms, the president succeeded in getting a mandate for the new constitution, which conferred much greater powers on the president than Yeltsin had enjoyed under the previous constitution. (For details on the constitution passed in 1993 see Constitution and government structure of Russia.) An uneasy truce prevailed during 1994 during 1994 between Yeltsin and the opposition, within the State Duma (the new lower house of parliament) and outside.
In 1994 Yeltsin ordered 40,000 troops to prevent the separation of the southern oil-producing region of Chechnya from Russia. Living 1000 miles south of Moscow, the predominately Muslim Chechens for centuries had gloried in defying the Russians. Dzhokhar Dudayev, the Republic of Chechnya’s nationalist president, was driven to take his republic out of the Russian Federation, and had declared Chechnya's independence in 1991. Yeltsin was quickly submerged in a quagmire like that of the U.S. in the Vietnam War. Chechen insurgents seized thousands of Russian hostages, while inflicting humiliating losses on Yeltsin's demoralized and ill-equipped troops. Russian troops had not secured the Chechen capital of Grozny by year's end.
The Russians finally managed to gain control of Grozny in February 1995 after heavy fighting. In August 1996 Yeltsin agreed to a ceasefire with Chechen leaders, and a peace treaty was formally signed in May 1997. However, the conflict resumed in 1999, thus rendering the 1997 peace accord meaningless (see Second Chechen War). Chechen rebels continue to resist the Russian presence to this day.
The new capitalist opportunities presented by the opening of the Russian economy in the late 1980s and early 1990s affected many people's interests. As the Soviet system was being dismantled, well-placed bosses and technocrats in the Communist Party, the KGB, and the Komsomol (Soviet Youth League) were cashing in on their Soviet-era power and privileges. Some quietly liquidated the assets of their organization and secreted the proceeds in overseas accounts and investments.8 Others created banks and business in Russia, taking advantage of their insister positions to win exclusive government contracts and licenses and to acquire financial credits and supplies at artificially low, state-subsidized prices in order to transact business at high, market-value prices. Great fortunes were made almost overnight.
The privatization program was deeply corrupt from the beginning. Western advocates of "free market reforms" saw this a necessary and merely an unfortunate overhead for dismantling the planned economy. Some called this wave of plundering "nomenklatura capitalism." By the time the Yeltsin government launched radical reforms, the "nomenklatura capitalists" had already entrenched themselves as powerful players.
Privatization of state enterprises subsequently gave many who had gained wealth in the early 1990s an opportunity to convert it into shares of privatized enterprises. The Yeltsin government hoped to use privatization to spread ownership of shares in former state enterprises as widely as possible to create political support for his government and his reforms.
The government used a system of free vouchers as a way to give mass privatization a jump start. But it also allowed people to purchase shares of stock in privatized enterprises with cash. As the government ended the voucher privatization phase and launched cash privatization, it devised a program that it thought would simultaneously speed up privatization and yield the government a much-needed infusion of cash for its operating needs.
Under the scheme, which quickly became known in the West as "loans for shares," the Yeltsin regime auctioned off substantial packages of stock shares in some of its most desirable enterprises, such as energy, telecommunications, and metallurgical, firms, as collateral for bank loans.
In exchange for the loans, Yeltsin handed over assets worth many times as much. Under the terms of the deals, if the Yeltsin government did not replay the loans by September 1996, the lender acquired title to the stock and could then resell it or take and equity position in the enterprise. The first auctions were held in the fall of 1995. The auctions themselves were usually held in such a way so to limit the number of banks bidding for shares and thus to keep the auction prices extremely low. By summer 1996, major packages of shares in some of Russia's largest firms had been transferred to a small number of major banks, thus allowing a handful of powerful banks to acquire substantial ownership shares over major firms at shockingly low prices (sometimes as low as less than 1% of their real value). These deals were effectively giveaways of valuable state assets to a few powerful, well-connected, and wealthy financial groups.
The concentration of immense financial and industrial power, which loans for shares had assisted, extended to the mass media. One of the most prominent of the financial barons, Boris Berezovsky, who controlled major stakes in several banks and companies, exerted an extensive influence over state television programming for a while. Berezovsky and other ultra-wealthy, well-connected tycoons who controlled these great empires of finance, industry, energy telecommunications, and media became known as the "oligarchs." Mikhail Khodorkovsky, Roman Abramovich, Boris Berezovsky, Vladimir Potanin, Vladimir Bogdanov, Rem Viakhirev, Vagit Alekperov, Viktor Chernomyrdin, Victor Vekselberg, and Mikhail Fridman emerged as the most powerful and prominent oligarchs.
Corruption covered the entire span of social relations in the new Russia. Now at the bottom end are the drug-lords and the heads of organized crime. Between them is a small army of civil servants tuned petty extortionists that emerged from the ruins of the socialist system.
A tiny clique who used their connections built up during the last days of the Soviet years to plunder Russia's boundless resources during the free-for-all privatizations of the Yeltsin years, the oligarchs emerged as the most hated men in nation. In Russia today, the oligarchs control up to 85 percent of the value of the country's leading private companies. [1]
Early in the campaign it had been thought that Yeltsin, who was in uncertain health (after recuperating from a series of heart attacks) and whose behavior was sometimes erratic, had little chance for reelection. When campaigning opened at the beginning of 1996, Yeltsin's popularity was close to zero. [1] Meanwhile, the opposition Communist Party of the Russian Federation had already gained ground in parliamentary voting on December 17, 1995, and its candidate, Gennady Zyuganov, had a strong grass roots organization, especially in the rural areas and small towns, and appealed effectively to memories of the old days of Soviet prestige on the international stage and the socialist domestic order. [1]
Panic struck the Yeltsin team when opinion polls suggested that the ailing president could not win; members of his entourage urged him to cancel presidential elections and effectively rule as dictator from then on. Instead, Yeltsin changed his campaign team, assigning a key role to his daughter, Tatyana Dyachenko, and appointing Anatoly Chubais campaign manager. [1] Chubais, who was not just Yeltsin's campaign manager but also the architect of Russia's privatization program, set out to use his control of the privatization program as the key instrument of Yeltsin's reelection campaign.
The president's inner circle assumed that it had only a short time in which to act on privatization; they therefore needed to take steps that would have a large and immediate impact, making the reversal of reform prohibitively costly for their opponents. Chubais' solution was to co-opt potentially powerful interests, including enterprise directors and regional officials, in order to ensure Yeltsin's reelection.
The position of the enterprise directors to the program was essential to maintaining economic and social stability in the country. The managers represented one of the most powerful collective interests in the country; it was the enterprise managers who could ensure that labor did not erupt in a massive wave of strikes. The government, therefore, did not strenuously resist the tendency for voucher privatization to turn into "insider privatization," as it was termed, in which senior enterprise officials acquired the largest proportion of shares in privatized firms. Thus, Chubais allowed well-connected employees to acquire majority stakes in the enterprises, and proved to be the most widely used form of privatization in Russia. Three-quarters of privatized enterprises opted for this method, most often using vouchers. Real control thus wound up in the hands of the managers.9
Support from the oligarchs was also crucial to Yeltsin's reelection campaign. The "loans for shares" giveaway took place in the run-up to the 1996 presidential election—at a point when it had appeared that Yeltsin might be defeated by Zyuganov. Yeltsin and his entourage gave the oligarchs a royal opportunity to scoop up some of Russia's most desirable assets in return for their help in his reelection effort. The oligarchs, in turn, reciprocated the favor. [1]
In the spring of 1996, with Yeltsin's popularity at a low ebb, Chubais and Yeltsin recruited a team of six leading Russian financiers and media barons (all oligarchs) who bankrolled the Yeltsin campaign to the tune of $3 million and guaranteed coverage on television and in leading newspapers directly serving the president's campaign strategy. The media pained a picture of a fateful choice for Russia, between Yeltsin and a "return to totalitarianism." The oligarchs even played up the threat of "civil war" if a Communist were elected president.
In the outlying regions of the country, the Yeltsin campaign relied on its ties to other allies—the patron-client ties of the local governors, most of whom had been appointed by the president.
The Zyuganov campaign had a strong grass-roots organization, but it was simply no match to the financial resources and access to patronage that the Yeltsin campaign could marshal.
The ailing, alcoholic Yeltsin mustered enough energy to campaign, exploiting all the advantages of clientage and incumbency to maintain a high media profile. To assuage voters' discontent, he made the claim that he would abandon some unpopular economic reforms and boost welfare spending, end the war in Chechnya, pay wage and pension arrears, and abolish the military draft program (he did not live up to even one of these promises after the election). Yeltsin's campaign also got a boost with the help of a timely $10 billion loan from the International Monetary Fund. [1]
Grigory Yavlinsky was the liberal alternative to Yeltsin and Zyuganov. He appealed to a well-educated middle class that saw Yeltsin as a drunken scoundrel and Zyuganov as a Soviet-era throwback. Seeing Yavlinsky as a threat, Yeltsin's inner circle of supporters worked to bifurcate political discourse, thus excluding a middle ground—and convince voters that only Yeltsin could defeat the Communist "menace." The election became a two-man race, and Zyuganov, who lacked Yeltsin's resources and financial backing, watched haplessly as his strong initial lead was whittled away.
Voter turnout in the first round of the polling on June 16 was 69.8%. According to returns announced on June 17, Yeltsin won 35% of the vote; Zyuganov won 32%; Aleksandr Lebed, a populist ex-general, a surprisingly high 14.5%; liberal candidate Grigory Yavlinsky 7.4%; far-right nationalist Vladimir Zhirinovsky 5.8%; and former Soviet president Mikhail Gorbachev 0.5%. [1] With no candidate securing an absolute majority, Yeltsin and Zyuganov went into a second round of voting. In the meantime, Yeltsin co-opted a large segment of the electorate by appointing Lebed to the posts of national security adviser and secretary of the Security Council.
In the end Yeltsin's election tactics paid off. In the run-off on July 3, with a turn out of 68.9%, Yeltsin won 53.8% of the vote and Zyuganov 40.3%, with the rest voting "against all." [1] Moscow and St. Petersburg (formerly Leningrad) together provided over half of the incumbent president's support, but he also did well in large cities in the Urals and in the north and northeast. Yeltsin lost to Zyuganov in Russia's southern industrial heartland. The southern stretch of the country became known as the "red belt," underscoring the resilience of the Communist Party in elections since the breakup of the Soviet Union. [1]
Although Yeltsin promised that he would abandoned his unpopular neoliberal austerity policies and increase public spending to help those suffering from the pain of capitalist reforms, within a month of his election, Yeltsin issued a decree canceling almost all these promises.
Right after the election, Yeltsin's physical health and mental stability were increasingly precarious. Many of Yeltsin's executive functions thus devolved upon a cabal of advisers (most of whom had close links with the oligarchs) that resembled a Tsarist palace court.
As a result of the global recession that spread in 1998, which started with the Asian financial crisis, Russia's economic crisis deepened throughout the year. Given the ensuing decline in world commodity prices, countries heavily dependent on the export of raw materials such as oil were among those most severely hit. (Oil, natural gas, metals, and timber account for more than 80% of Russian exports, leaving the country vulnerable to swings in world prices. Oil is also a major source of government tax revenue. [1]) The sharp decline in the price of oil had severe consequences in Russia in 1998.
The pressures on the ruble, reflecting the weakness of the economy, resulted in a disastrous fall in the value of the currency. Massive tax evasion also continued, and the government found itself unable to service the massive loans it had received or, worse yet, pay its employees. The government stopped making timely payment of wages, pensions, and debts to suppliers; and when workers were paid, it was often with bartered goods rather than rubles. [1] Coal miners were hard hit; for several weeks in the summer, they blocked sections of the Trans-Siberian railroad, effectively cutting the country in two. As time wore on, they added calls for the resignation of Yeltsin and his government to their wage demands.
A political crisis came to a head in March when Yeltsin suddenly dismissed Prime Minister Viktor Chernomyrdin and his entire cabinet on March 23. [1] Yeltsin named a virtually unknown technocrat, Energy Minister Sergei Kiriyenko, aged 35, as acting prime minister. Russian observers expressed doubts about Kiriyenko's youth and inexperience. The Duma rejected his nomination twice. Only after a month-long standoff, during which Yeltsin threatened to dissolve the legislature, did the Duma confirm Kiriyenko on a third vote on April 24. [1] [1]
Kiriyenko appointed a new cabinet strongly committed to stemming the fall in value of Russia's currency. The oligarchs strongly supported Kiriyenko's efforts to maintain the exchange rate. A high exchange rate meant that they needed fewer rubles to buy imported goods, especially luxury items. [1]
In an effort to prop up the currency and stem the flight of capital, Kiriyenko hiked interest rates to a whopping 150% to attract buyers for its bonds. But concerns about the financial crisis in Asia and the slump in world oil prices were already prompting investors to withdraw from Russia. By mid-1998, it was clear Russia would need IMF help to maintain its exchange rate.
The Russian crisis caused alarm in the West. Pouring more money into the Russian economy would not be a long-term solution, but the U.S. in particular feared that Yeltsin's government would not survive a looming financial crisis without IMF help. U.S. President Bill Clinton's treasury secretary, Robert Rubin, also feared that a Russian collapse could create a panic on world money markets (and indeed did help bring down one major U.S. fund). [1] The IMF approved a $22.6 billion emergency loan on July 13. [1] [1]
Despite the bailout, Russia's monthly interest payments still well exceeded its monthly tax revenues. Realizing that this situation was unsustainable, investors continued to flee Russia despite the IMF bailout. Weeks later the financial crisis resumed as and the value of the ruble resumed its fall, and the government fell into an unsustainable trap. To pay off the interest on the loans it had taken, it needed to raise still more cash, which it did through foreign borrowing. As lenders became increasingly certain that the government could not make good on its obligations, they demanded ever higher interest rates, deepening the trap. Ultimately the bubble burst.
On August 17, Kiriyenko's government and the central bank were forced to suspend payment on Russia's foreign debt for 90 days, restructure the nation's entire debt, and devalue the ruble. The ruble went into free fall as Russians sought frantically to buy dollars. Western creditors lost heavily, and a large part of Russia's fledgling banking sector was destroyed, since many banks had substantial dollar borrowings. Foreign investment rushed out of the country, and financial crisis triggered an unprecedented flight of capital from Russia. [1]
Yeltsin, who began to lose his hold as his health deteriorated, wanted Chernomyrdin back, but the legislature refused to give its approval. After the Duma rejected Chernomyrdin's candidacy twice, Yeltsin, his power clearly on the wane, backed down. Instead, he nominated Foreign Minister Yevgeny Primakov, who on September 11 was overwhelmingly approved by the Duma.
Primakov's appointment restored political stability because he was seen as a compromise candidate able to heal the rifts between Russia's quarreling interest groups. There was popular enthusiasm for Primakov as well. Primakov promised to make the payment of wage and pension arrears his government’s first priority. Primakov invited members of the leading parliamentary factions into his Cabinet.
Communists and trade unionists staged a nationwide strike on October 7, and called on President Yeltsin to resign. Russia, which was also suffering form a bad harvest, appealed, October 9, for international humanitarian aid, including food.
Russia bounced back from the August 1998 financial crash with surprising speed. Much of the reason for the recovery is that world oil prices rapidly rose during 1999-2000 (just as falling energy prices on the world market helped to deepen Russia's financial troubles), so that Russia ran a large trade surplus in 1999 and 2000. Another reason is that domestic industries such as food processing have benefited from the devaluation, which meant a steep increase in the prices of imported goods. [1] [1] Also, since Russia's economy was operating to such a large extent on barter and other non-monetary instruments of exchange, the financial collapse had far less of an impact on many producers than it would had the economy been dependent on a banking system. Finally, the economy has been helped by an infusion of cash; as enterprises were able to pay off arrears in back wages and taxes, it in turn allowed consumer demand for the goods and services of Russian industry to rise. For the first time in many years, unemployment in 2000 fell as enterprises added workers.
Nevertheless, the political and social equilibrium of the country remains tenuous to this day, and power remains a highly personalized commodity. The economy remains vulnerable to downturn if, for instance, world oil prices fall at a dramatic pace.
Yevgeny Primakov did not remain in his post long. Yeltsin grew suspicious that Primakov was gaining in strength and popularity and dismissed him in May 1999, after only eight months in office. [1] Yeltsin then named Sergei Stepashin, who had formerly been head of the FSB (the successor agency to the KGB) and later been Interior Minister, to replace him. The Duma confirmed his appointment on the first ballot by a wide margin.
Stephashin's tenure was even shorter than Primakov's. In August 1999, Yeltsin once again abruptly dismissed the government, and named Vladimir Putin as his candidate to head the new government. Like Stephashin, Putin had a background in the secret police, having made his career in the foreign intelligence service and later as head as the FSB. Yeltsin went so far as to declare that he saw Putin as his successor as president. The Duma narrowly voted to confirm Putin, and Putin quickly established himself both in public opinion and in Yeltsin's estimation as a trusted head of government. After the success of political forces close to Putin in the December 1999 parliamentary elections, Yeltsin evidentially felt confident enough in Putin that he resigned from the presidency on December 31, six months before his term was due to expire. This made Putin acting president and gave Putin ample opportunity to position himself as frontrunner for the presidential election held in on March 26, 2000, which Putin won.
In August, 2000, an explosion aboard the Soviet submarine Kursk caused the submarine to sink in the Barents Sea. Rescue offers from Britain and other NATO powers were declined. All sailors aboard the Kursk died. President Putin was criticized for his slow reaction to offers of aid.
In October 23, 2002, Chechen rebels took over a Moscow theater. Over 700 people inside were taken hostage in what has been called the Moscow Theatre Siege. The rebels demanded the immediate withdrawal of Russian forces from Chechnya, and threatened to blow up the building if authorities attempted to enter. Three days later, Russian commandos stormed the building after the hostages had been subdued with a sleeping gas, also shooting the unconscious militiants. The gas, which Russian officials refused to identify to doctors treating the hostages, was implicated as the cause of death for over 115 hostages.
In the aftermath of the theatre siege, Putin began renewed efforts to eliminate the Chechen insurrection and to further consolidate government control over Russian media outlets owned by the oligarchs, who attained large stakes of state assets, largely illegally, during the privatization process. The government cancelled scheduled troop withdrawals, surrounded Chechen refugee camps with soldiers, and increased the frequency of assaults on rebel positions. The Chechens responded in kind, stepping up guerrilla operations and rocket attacks on federal helicopters.
Putin's, popularity, which stems from his reputation as a strong, effective leader, stands in contrast to the unpopularity of his predecessor, but it hinges on a continuation of economic recovery. Putin, after all, is credited with the recovery by many, but he really came into office at an ideal time: after the devaluation of the ruble in 1998, which boosted demand for domestic goods, and rising world oil prices, but his ability to withstand a sudden economic downturn has been unchecked. Putin won the 2004 election without any significant competition.
Most Russians today have come to regret the dissolution of the Soviet Union in 1991. On repeated occasions, even Vladimir Putin—Boris Yeltsin's handpicked successor—stated that the fall of Soviet rule had led to few gains and many problems for most Russian citizens. In a campaign speech in February 2004, for example, Putin called the dismantlement of the Soviet Union a "national tragedy on an enormous scale," from which "only the elites and nationalists of the republics gained." He added, "I think that ordinary citizens of the former Soviet Union and the post-Soviet space gained nothing from this. On the contrary, people have faced a huge number of problems." [1]
1 Anders ÃÂ
slund, "How small is the Soviet National Income?" in Henry S. Rowen and Charles Wolf, Jr., eds., ''The Impoverished Superpower: Perestroika and the Soviet Military Burden (San Francisco: Institute for Contemporary Studies, 1990), p. 49.
Dismantling socialism
Shock therapy
Main article: Russian economic reform in the 1990s
Obstacles to capitalist development in Russia
Economic depression and social decay
Backlash against reform
Reform by decree
Clashes of power, 1993-96
The 1993 constitutional crisis
Main article: Russian constitutional crisis of 1993
The First Chechen War
Main article: First Chechen WarThe "loans for shares" scheme and the rise of the "oligarchs"
The 1996 presidential election
Campaigns
Elections
The crises of 1998
The financial collapse produced a political crisis, as Yeltsin, with his domestic support evaporating, had to contend with an emboldened opposition in the parliament. A week later, on August 23, Yeltsin fired Kiryenko and declared his intention of returning Chernomyrdin to office as the country slipped deeper into economic turmoil. [1] Powerful business interests, fearing another round of reforms that might causing leading concerns to fail, welcomed Kiriyenko's fall, as did the Communists. Recovery
Succession crises, 1999-2000
The Putin administration, 2000-present
Notes
2 For example, see the discussion of this point in Anders ÃÂ
slund, How Russia Became a Market Economy (Washington D.C.: Brookings Institution, 1995), p. 154.
3 For example, see Sheila M. Puffer, ed., The Russian Management Revolution: Perparing Managers for the Market Economy (Armonk, NY: M.E. Sharpe, 1992).
4 It is still hotly debated among Western economists, social scientists, and policymakers as to whether or not the IMF-, World Bank-, and U.S. Treasury Department-backed reform policies adopted in Russia, often called "shock therapy," were responsible for Russia's poor record of economic performance in the 1990s. A similar reform program had been adopted in Poland in January 1990, with generally favorable results. However, Western critics of Yeltsin's reform, most notably Marshall Goldman, Stephen Cohen, and Joseph Stiglitz (who would have favored a more "gradual" transition to market capitalism), consider policies adopted in Poland ill-suited for Russia, given that the impact of communism on the Polish economy and political culture was far less indelible. [1]
5 The poverty line in 1993 was set at the equivalent of $25 per month. The difference in estimates is due to the difference in methodology. The higher poverty rate is based on a calculation of household incomes. The lower rate is based on household consumption, since households tend not to report some portion on the monthly income.
6 Branko Milanovic, Income, Inequality, and Poverty During the Transformation from Planned to Market Economy (Washington DC: The World Bank, 1998), pp.186-90.
7 Russian State Statistics Committee figures reported by the Russian news service, Interfax
8 The purported suicide of Nikolai Kruchina, who managed the Communist Party's financial affairs, following the collapse of the August 1991 coup attempt, deprived future researchers of the opportunity to discover where many of the party's assets disappeared.
9 See, e.g., Pekka Sutela, "Insider Privatization in Russia: Speculations on Systemic Changes," Europe-Asia Studies 46:3 (1994), p. 420-21.
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