Economy

   With the exception of a brief period of entrepreneurial experimentation under Vladimir Lenin’s “New Economic Policy” (NEP) from 1921 to 1928, the Soviet economy was historically dominated by the state. Joseph Stalin’s centrally planned economic policies, as well as the collectivization of agriculture, ensured that the Communist Party of the Soviet Union exercised almost total authority over farming, manufacturing, foreign trade, and natural resource exploitation. The production, pricing, distribution, and availability of nearly all goods and services were thus within the dominion of the state.

   During the Brezhnev era, the high price of hydrocarbons buoyed the Soviet economy; however, the 1980s saw a dramatic downturn in the country’s fortune as oil prices plummeted. This was exacerbated by expenses incurred during the Soviet-Afghan War and the arms race with the United States. By this point, preference for spending on the military and heavy industry over light industry and consumer goods had produced a “shortage economy” in the Union of Soviet Socialist Republics (USSR), contrasting sharply with the consumerand information-based economies of Japan, Western Europe, and North America.

   Hoping to bring about economic “acceleration” (uskoreniie>), the new premier Mikhail Gorbachev instituted a “restructuring” (perestroika) of the economy in the mid-1980s, focusing on technological advancement and liberalization of the centrally planned economy in an effort to “keep up” with the West. The new environment allowed for the proliferation of new cooperatives and the marketization of certain firms, which could produce badly needed goods and engage in profit taking (colloquially referred to as “self-financing”), something that had been anathema to the system for generations. Entrepreneurial individuals with well-developed networks (blat), particularly among the nomenklatura>, were able to increase their fortunes quickly.

   However, reduced tax income due to Gorbachev’s anti-alcoholism campaign, increasing unemployment, food rationing, and the lessening of subsidies on necessary goods produced a combined effect that lowered standards of living. Hoping to lessen the pain of transition by speeding up the shift to a market economy, the most liberal members of the government advocated a 500 Days Program to overhaul the economy, attract foreign investment, and establish a functioning banking system. However, this was watered down and produced few results before the dissolution of the Soviet Union in late 1991. After the dissolution of the Soviet Union, Boris Yeltsin undertook serious reforms, including the marketization of prices and the opening of the country to foreign investment. Banking and commercial regulation, however, were only half-heartedly implemented during his first administration. The failure of the rule of law to take root during these years allowed the mafia to exert substantial control over the economy, a fact that was admitted by the president himself on more than one occasion. During the transitional period, the need for state protection of these budding commercial ventures produced an environment conducive to clientelism and widespread corruption. During the 1990s, these relationships led to the “insider privatization” of many formerly state-owned enterprises to joint-stock companies, thus transferring massive amounts of property from the “people” to a small number of oligarchs. This process was abetted by the distribution in 1992 of state-issued privatization vouchers worth 10,000 rubles toward the purchase of state assets; wealthy speculators purchased and consolidated these transferable vouchers to acquire mining, oil, steel, and other companies. Concurrently, the end of the Cold War and the opening of Russia to economic globalization resulted in the closure of a significant percentage of the country’s factories, throwing many out of work. Wage arrears also emerged as a major issue for many regional and federal government employees. Transfer of wealth from the periphery to the country’s two principal cities—Moscow and St. Petersburg—also accompanied the transition process, and certain federal subjects (e.g., Khantiya-Mansiya, Tatarstan, and Tyumen) enjoyed the benefits of economic liberalization while others (Kalmykiya and portions of the Far North and the North Caucasus, in particular) saw their regional economies ruined.

   Application of shock therapy to the Russian economy ultimately produced mixed results: while production was rationalized, inflation was rampant during the early 1990s as the amount of currency in circulation was doubled several times. Many Russians moved into the “shadow economy” during this time, engaging in nontaxable forms of work. During Yeltsin’s second term, the Asian economic “flu” spread to Russia, resulting in the 1998 ruble crisis that destroyed much of the population’s savings. However, Yeltsin’s resolve not to return to state control of the economy won him support outside Russia, ultimately resulting in a spot for the country within the Group of Eight (G8) advanced economies.

   Under Vladimir Putin, Russia’s economic fortunes improved greatly, due mostly to a rise in oil and natural gas prices. However, growth in arms exports, manufacturing, foreign trade, agricultural output, the financial industry, and the services sector (particularly outsourcing) also occurred during the Putin era. The national gross domestic product increased sixfold on his watch, though inflation is a perennial problem in Russia. The 2008–2009 global economic crisis severely affected the Russian economy. Adding to the problem, capital flight—a major issue during the 1990s—reemerged in the wake of the 2008 South Ossetian War as skittish investors and wealthy individuals quit Russia for more stable countries. However, the country’s stabilization fund, implemented to mitigate the effects of a drop in hydrocarbon prices, allowed the Kremlin to partially stabilize the situation, while buying up a number of former state assets that had fallen into the hands of the oligarchs during the Yeltsin era. Regardless, the Russian economy plummeted by more than 10 percent in the first half of 2009, the first drop since the early 1990s.