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Failure Of Economic Reform In Russia Essay, Research Paper

Formerly the preeminent republic of the Union of Soviet Socialist Republics, Russia has

been an independent nation since the dissolution of the Soviet Union in 1991. Because of

its great size, its natural resources, and its political domination, the Russian Federation

played a leading role in the economy of the Soviet Union. In the years preceding the

disintegration of the union in 1991, the economy of Russia and the union as a whole was

in decline. In 1992, immediately after the separation, the Russian government

implemented a series of radical reforms. Price controls were abolished as the beginning

of a transition from a centrally controlled economy to a market economy. An immediate

series of sharp price increases caused extreme hardships for the Russian people.1

Inventor of the fictional five-year plan,2 the fake harvest, Russia introduced

another novel economic concept in 1996. It was a society modeled after the capitalist

society. High expectations of economic growth even with ?shock therapy?–

unemployment, social discontent and opportunities for corruption;3 influence of western

politicians and the U.S. policy; and failing to completely reform the communistic system

were some factors to why some became rich but led many to misery and an early death.

Despite the huge infusions of Western money, millions of ordinary Russians struggled to

survive in an economy neither capitalist nor communist, but something brand new and

strange which ultimately led to the failure of economic reform in Russia.4In the Fall of 1996, Boris Yeltsin won the presidential election in Russia. He wasviewed as the ?personification of reform in Russia….who had vanquished the Communistdragon during the hard-line coup attempt of August 1991 — and the leader best placed tointroduce democratic, market-oriented reforms.?5 In the same year Yeltsin became the

President of Russia, the U.S. ambassador to Russia, Thomas R. Pickering, predicted by

the fall of 1999, Russia would be one of America?s top trading partners. But in fact, three

years after Pickering addressed his farewell speech to the American Chamber of

commerce in Moscow, Russia ranked thirtieth in the list of American trading partners. In

1998, Russia?s gross national product plummeted by nearly fifty percent over the last

decade. More than sixty million Russians, which is nearly half of the population, lived

below a very low official poverty line. A steep fall in prices of their natural resources –

oil, gas and gold consequently led to reducing both the export revenues and tax collection

in Russia. Almost an article of faith for Russian reformers and their Western supporters,

an assumption made was that Russia’s salvation lay in tight monetary discipline, rapid

economic liberalization and a massive privatization program.6 According to Richard E.

Rawles, head of the Russian Psychology Research Unit, in University College London,

western financial institutions were unaware of ?the cultural traditions of Russia and

complicated interactions of pyschologies and mentalities with social structures?7 that had

been largely ignored.

E. Wayne Merry, who was head of the political section from 1991 to 1994, sent a

telegram early 1994 which criticized America’s “evangelical attempt”8 to remold Russian

society in its own image. Just as Rawles had argued that Russia was physcologically and

culturally unprepared for a free market so suddenly, Merry argued that such efforts would

almost certainly fail because Russia — unlike Eastern European countries such as Poland

and the Czech Republic — had little tradition of free markets or the rule of law. The

United States, in Merry’s view, would end up getting blamed for the failure of ?shock

therapy?. Reformers were well aware of the risks — unemployment, social discontent,

and opportunities for corruption. Nevertheless, foreign investors disregarded these

handicaps and invested in the Russian stock market to unprecedented heights. It was

believed these problems would resolve themselves if the economic medicine were

applied with sufficient vigor.9 In actuality, they played a role in the failed reformation.

Since western investment was involved, it was inevitable that western politicians

were also factors in the unsuccessful attempt to bring capitalism into the Russian

economy. There were reports of massive Russian money laundering through the Bank of

New York, which raised new questions about the logic of pouring international loans into

a country spending an estimated ten billion to fifteen billion a year in capital flight.

Billions of dollars loaned by the IMF was going into the Russian economy but there was

no evidence of progress. Foreign policy advisers to George W. Bush, the leading

Republican presidential candidate, attempted to link Vice President Gore to the failure of

economic reform in Russia because of his much exaggerated relationship with former

prime minister Viktor Chernomyrdin. For their part, the Democrats accused the

Republicans of throwing away the best chance of influencing future events in Russia

during the period of 1991-92, in the immediate aftermath of the collapse of

communism.10 With a country of two opposing views, how did they expect to

successfully aid Russia in the reformation if they were unable to agree on what went


That the attempt to shift to a more Westernized capitalist economy failed in

Russia was immensely due the structure of the economy. Analysts called it a ?virtual

economy.? It was a false economy because Russia failed to reform the communist

economic system. According to the Washington Post in June 2, 1998, Russia took strong

measures to initiate transition from communism to a free-market, but in many instances it

was not followed through. Land was not fully privatized and the tax code had not been

updated. Although most companies were privatized in name, judicial and legal reforms

necessary to force them to behave like truly private corporations were not forthcoming.11

It quickly became apparent that such words as privatization and economic reform

and even democracy meant entirely different things in the Russian context than in the

American context. Russian privatization has come to mean the wholesale transfer of

valuable state assets to a small group of tycoons known as oligarchs who are more

interested in shipping anything of value out of the country than in investing their profits

in domestic production. Moreover, inefficient factories were handed over to their

Soviet-era managers, who bitterly resisted the necessary downsizing and restructuring.12

In the fall of 1998, Russian Prime Minister Yevgeny Primakov wanted to gear

Russia sharply away from the free-market approach that had shaped it?s economic policy

since 1991. According to Wellington?s Evening Post dated November 9, 1998,

Primakov, with assistance of his First Deputy for the Economy, a communist Yuri

Maslyukov, presided over a programme to step up State intervention in the economy.

They were aware that it may have jeopardized the International Monetary Fund assistance

but the attempt at capitalist society was not successful.13 To the beleaguered people of

Russia, certainties of old-style communism seemed attractive. A joke on the streets of

Moscow, according to World Bank staffer John Nellis, was: “Everything the Communists

told us about communism was a complete and utter lie. Unfortunately, everything the

Communists told us about capitalism turned out to be true.”14 The establishment of a

free-market may require decades to accomplish since this quick attempt was not


The economy of Russia did not improve as speculated. Due to years of practicing

communism, the Russian people experienced ?therapy shock? when a free-market was in

action. Another explanation was: because of constant U.S. influence, Russia was never at

a state where they decided on the major decisions until the end. And finally, capitalism

never worked in Russia because they did not fully let go of communism. After

experiencing many hardships, the Russian people are confused as to what will work in

their country full of resources yet lack of economic stability. Maybe the answer is a

return to state controlled industries.

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