Transition to Market in Russia

by Anders Aslund 
Kristina Montgomery

by Ashish Vyas     
by Shaun Bean 
 by Aaron Reber


Social aspects of the transition to market capitalism

by Kristina Montgomery

The New and the Old Russians - From a Nation of Engineers to a Nation of Economists.

From Red Square to the statue of the poet Mayakovsky, the capital's main shopping street, Tverskaya, is awash in colour and advertising.  Supermodels cast flirtatious, over-the-shoulder glances from billboards, banners herald the new Versace collection and chic pedestrians hurry about their business into the open arms of waiting sales personnel in the Christian Dior store. While on the same street, elderly women are selling one cigarette a piece to sustain themselves through the winter and a man, wearing seven W.W.II medals on his coat,  is begging for money. This is the new Russia that emerged after the collapse of communism in 1991. The Russia of paupers and princes.1

While being a supposedly classless society, the Union of Soviet Socialist Republics had a very defined class system that fully emerged at the end of the Stalinist purges. On top were the "apparatchiki", various Communist  Party leaders and bureaucrats who had special stores filled with forbidden foreign goods and  their own apartment buildings. In the middle were scientists and academics, the intelligentsia of the Soviet Union. On the bottom, ironically enough,  were factory and farm workers, in other words- the 'cherished' proletariat.

 Nowhere is the division between the new and the old Russian more apparent then in what professions young people are choosing to pursue. During the Cold War race, more than two-thirds of students at the university were learning professions that the Soviet System glamorized-engineering, medicine, agriculture and many branches of pure and applied scientific research for civilian or, more often, military purposes. The macho daydream of Soviet science students was to become a cosmonaut. The fact that the Soviets were the first to put a human being into space was the 'piece de resistance' of the propaganda program in schools. Yuri Gagarin, the first man to circle the Earth on a space ship, had a school named after him in every Soviet city and a major avenue in Moscow. More realistically, the students could be confident that good exam results would land them prestigious, well-paid work in a huge state institution. In a nation whose self-image was of a giant, smoothly functioning communist machine, almost 50% of all university were future engineers.

 Then came the end of the Cold War, and a period of change. Polls from the end of the uncertain perestroika years and the transition years of 1991 to 1994 were showing that schoolchildren thought their best employment hope for the future was a career as a butcher, taxi driver, street trade or hard-currency prostitute. Now, when the first post-Soviet generation is graduating from high-school, they are choosing the new most prestigious university in Moscow, the Higher School of economics. In 1997, 14-year-old high school students in Moscow were polled by the Vtsiom opinion survey agency about career and study aspirations. A majority said they wanted to go into business: 21% as economists or accountants, 20% as lawyers, 18% as financiers and 14% as entrepreneurs. Less popular, with roughly 2% if children opting for each, were the jobs of politician, journalist, computer operator, doctor, diplomat, bank teller, model, car salesman, translator and hairdresser. Thankfully, only 2% opted for the dark side of new Russian life, saying they wanted to be Mafiosi or professional killers. And 1% wanted to become prostitutes ( when the borders were first opened, East Europe and Germany were flooded with "Natashas", Russian girls looking for dollars to support their families at home). 2

When the privatization reforms of 1991-1992 went into place and the public could now buy and own private property, the only people with enough capital were either the top-party bureaucrats or the Mafia representatives, who incidentally were the only ones who had any experience with any market system, having successfully ran the "black market" in the Soviet Union. In 1992, the life savings of most Russians were wiped out overnight when prices were freed and the ruble plunged to near-worthlessness.  The middle class was practically destroyed. A common practice was to go to Poland and buy various hygiene products for resale later on the streets of Moscow. Former doctors, physicists and mathematicians now made their living by selling soap , shampoo and toothpaste. While a new class of well-to-do Russians was emerging, the "nouveau riches". These were the people that lay claim to Communist party money, western business money , and cultural and natural resources that lay unprotected in the ruins of the Soviet system in the chaotic early 1990s. In the middle 1990s the 'new' Russians kept their prosperity while pensioners and factory workers were not being paid for

months on end, or they were paid using a barter system, with goods. For example, workers at a collective farm "Lenin's Ray of Light" in Ilyinskoe selo, southeast of Moscow, were allowed to keep a sack full of the crop for their days work. 3

However, since the collapse of the ruble in late August, early September of 1998, all levels of Russian society are in danger. The nearly seven years of market reforms have failed to transform agriculture and industry, and the devaluation of the ruble has made imports of food and goods much more expensive, further straining Russians' budgets.  Just like the miners in Siberia are having their

strikes, so did the 'new' Russians who in September held a rally in the red Square with slogans such as "Bankers are people too". 4

A man goes into a bank and says,

                - 'I want to open an account. Who should I talk to?

            The answer: ---A psychiatrist.5


 1. MacKenzie, Jean. "Hit by Collapse" Newsday ( New York, NY) September 20, 1998

 2. Bennett, Vanora. "Workers Go Back to Class" Los Angeles Times. May 7, 1998

 3.MacKenzie, Jean. "Hit by Collapse" Newsday ( New York, NY) September 20, 1998

 4. Weekly Column. "What on earth?" The Washington Post. November 14, 1998

 5. MacKenzie, Jean. "Hit by Collapse" Newsday ( New York, NY) September 20, 1998




Russia in transition

by Ashish Vyas


Imagine you are a high school student just about to graduate. You are about to leave your parents, who have directed your actions for your entire life. However, you have never had to make your own decisions, and are having trouble handling your new situation.   Now imagine that on a larger scale. An entire nation released from the control of its "parents" with no idea how to use its newfound freedom.   

Using his new prestige, Yeltsin championed a treaty which would strengthen the ties between Russia and the fourteen other republics within the U.S.S.R. (Johnson, "Russia")  His influence was not strong enough. Georgia and Lithuania had declared their independence in 1990, although they were  not yet recognized as separate nations. (Lubin) Immediately following the second coup attempt, the two other Soviet republics which bordered on the Baltic Sea, Latvia and Estonia, declared their independence. (Parming) Later that month, the remaining ten republics declared their independence from the U.S.S.R. (Lubin)  The Soviet Union at first fought to keep the republics as part of its territory, killing 14 Lithuanians and wounding 700 others (Vardys, "Lithuania"). However, their effort was unsuccessful and unpopular, and in September 1991 the U.S.S.R. acknowledged the independence of the republics. (Vardys, "Latvia")  

 On 21 December 1991, Russia and ten of the former Soviet republics signed an accord forming an economic and political alliance between them. (Johnson, "Russia") Georgia, Estonia, Latvia, and Lithuania, the first four independent republics, did not join the Commonwealth. (Lubin)     With the dissolution of the Soviet Union, the economy of Russia was left without the guidance on which it relied so heavily for more than seventy years. Control of the economy was thrust into the inexperienced hands of the general population, who had lived for three generations under a system in which they had no need to make decisions about their businesses.

 Capitalism is a difficult system to understand, even with training. To be thrust into it unprepared can be a prescription for disaster.  A Newborn Economy  Yeltsin assumed the role of president when the Soviet Union officially broke apart on 26 December 1991 (below), one day after Gorbachev's resignation from the leadership of the Communist party and the U.S.S.R. This began the process of rebuilding the Russian economy in a capitalist system. (Famighetti, 1996)   

During a meeting in July 1990, leaders of the Group of Seven industrial nations and the president of the European Community asked the International Monetary Fund (I.M.F.) and other United Nations economic agencies to study the Russian economy and propose a more effective method of reform. The study, titled "A Study of the Soviet Economy" and released in December 1990, made recommendations to both the international community and the Russian government itself. (Brendenkamp)

 The committee strongly suggested that the Russians immediately release price controls on almost all goods, instantly creating a free market in which the people could learn capitalism first-hand. An auction of all government- owned corporations was proposed, beginning with smaller, easier to value companies. Also, the commission emphasized the need to lift restrictions on foreign trade. (Brendenkamp) 

Russia's currency, the ruble, was thrown into a state of intense fluctuation by the transition. However, the general trend has been toward massive inflation. In 1989, one United States dollar was worth about 2/3 of a ruble (Hoffman); in 1993, it was close to one thousand (Famighetti, 1993); and at the end of 1996 it was over 5,000. That translates into an annual inflation rate of more than 350%. Many business owners were, and still are, unwilling to accept rubles, preferring the more stable American and European currencies. (Famighetti, 1996) 

  The I.M.F. study also addressed the problem of Russia's deficit, suggesting cuts in price subsidies and low-priority expenditures, such as administration. The Russian government set a target deficit of 2 1/2 to 3 percent of the gross domestic product. (Brendenkamp) This level has not been reached yet (Famighetti, 1996), but progress is being made. (Brendenkamp) 

  Research and development in technology are nearly nonexistent in most private corporations in Russia. Many entrepreneurs who are independent of the government but do not own the corporations are unwilling to risk their capital in product development. Such attitudes are making technological modernization nearly impossible. Many companies spend 50% or more of their gross income repairing worn or broken machinery. (Yavlinsky)  

Crime is another factor which is preventing many individuals from starting businesses. With the poor economic conditions in the Russian Federation, many people have turned to crime to support themselves. During some periods, the property crime rate has increased by 20% per week. In such an environment, many individuals are hesitant of investing in a company for fear it will be burglarized. (Yavlinsky)

Five Years' Progress  Russia began its transition with a definite, if vague, plan for reform. Government leaders proposed a liberalization of the economy and financial stabilization. (Yavlinsky) Also, the military industry of the Soviet Union is turning toward civilian production. (Nelan) 

Liberalization of the economy is the process of removing price controls and restrictions on private ownership. A tremendous gain has been registered in that field. (Yavlinsky) As of the 1996 election in Russia, more than 70% of businesses were controlled, at least in part, by the populous. Controls over production and distribution have been released in all industries except energy, communications, and transportation. (Nelan)

  However, there is still much work to be done. Many price controls are maintained to this day, especially in staple products such as food. (Yavlinsky)  Despite the fact most Russians struggle just to get by, there has been some good news for the Russian people in the last few years. Per capita income is up from $3,000 (US equivalent) in 1989 (Hoffman) to over $4,800 (US equivalent) in 1996. The Russian Federation also has continued to post a trade surplus, reaching $12 billion in 1996. (Famighetti, 1996).  

Russia's condition is ever-improving, and as the immediate threat to the new government subsides, more progress can be made. An example is in the field of welfare. On 30 December 1995, First Deputy Prime Minister Oleg Soskovets stated that the government would begin taking action to aid those hurt by the transition to capitalism. "Some corrections will certainly be made strengthening the social direction of the government's economic policy," he said. ("Russia stays...")   

Solutions for the Future  Despite widespread gains made by the Russian Federation during its short history, there is a great deal of work left to be done. Most of the goals set by the Russian government still have not been reached. It will be a long, slow process that brings the Russian Federation to become an economic power again. But it is a process which continues to this day, and it seems inevitable that, given time, the Russians will be a major player in the global economy.  

Western Intervention  Economists and leaders not living within Russia's boundaries are also very interested in its reforming economy. The Soviet Union was a major player in international economics before its breakup. Outsiders are eager to see how the Russian people respond to the free market, and the impact the Russian Federation will have in the twenty-first century.  Because of the size of the country, it will be impossible for any outside force to operate Russia's fledgling economy. The ultimate success or failure of the system will depend entirely on the Russian people. (Brendenkamp) 

One of the most important ways that Europe and the United States can help is by providing money directly to the Russian government. This view is most popular within Russia because it would ease the transition, but many Westerners fear it would be misused by government officials. Aid in the form of food for the 30 million living under the poverty line is more universally supported. (Brendenkamp)  

One of the most important factors missing from the Russian Federation is a widespread knowledge of capitalism. Experts from Europe and the United States could be brought in to educate Russian economists, who could then teach the populous about the operation of a free-market economy. They would also be able to advise top officials as to the best way to improve conditions within the nation. (Brendenkamp)  

 Yeltsin already has plans to continue with the destructuring of the socialists' price and distribution controls. Among other things, the Russian Federation will be applying for entry into the European Economic Community. Although they are likely to be turned down, it will send a signal to the western world that the Russians do intend to carry their reforms until they have a functioning capitalist society, only slightly different (if at all) from the rest of the world. (Kramer)  

Russia continues to rely on other capitalist nations for help, and recently, a $10.2 million (US equivalent) loan from the I.M.F. was given to Russia to aid in the restructuring of the economy. Plans had not been made for the money by the Russian government in anticipation of the election. (Kramer)  

The one primary roadblock Yeltsin faces in his task is the Parliament. The legislative body of the Russian Federation is controlled by Communists, making it difficult for any pro-capitalism initiatives to be passed. This has been a concern for Yeltsin supporters since the Duma election. Although no strategy as to how to pass controversial reforms have been released, Yeltsin's past successes indicate that he will make some progress, even if not able to pass all of his measures. (Kramer)

Works Cited


 Berki, R. N. "Socialism". The New Grolier Multimedia Encyclopedia. Release 6. The Software Toolworks Inc. 1993.

 Brendenkamp, Hugh. "Reforming the Soviet Economy". Finance & Development. June 1991. pp. 18-21.

 Christopher, Andrew. "K.G.B.". The New Grolier Multimedia Encyclopedia. Release 6. The Software Toolworks, Inc.1993.

 Daniels, Robert V. "Why Communism Failed in the U.S.S.R.". The World Book Year Book 1992. Chicago: WorldBook, Inc. 1991. pp. 441-446.

 Famighetti, Robert, editor. "Russia". The World Almanac and Book of Facts 1997. Manwah, NJ: Funk & Wagnalls.1996. pp. 811-812.

 Famigheti, Robert, editor. "Russia". The World Almanac and Book of Facts 1994. Manwah, NJ: Funk & Wagnalls.1993. pp. 802-804.

 Fry, David K. "The Conquest of Socialism at the Invisible Hands of the Free and Black Markets" [online] Available: 1996.

 Hoffman, Mark S., editor. "U.S.S.R.". The World Almanac and Book of Facts 1990. Manwah, NJ: Funk & Wagnalls.1989. pp. 761-763.

 Horowitz, David. "Socialism: Guilty As Charged". Commentary. December 1990. pp. 17-24.

 Johnson, Otto, editor. "Germany". 1995 Information Please Almanac. Boston: Houghton-Mifflin Company. 1994. pp.191-195.

 Johnson, Otto, editor. "Russia". 1995 Information Please Almanac. Boston: Houghton-Mifflin Company. 1994. pp.251-254.

 Kramer, Michael. "Rescuing Boris". Time. July 15, 1996. pp. 28-37.   Lih, Lars T. "Union of Soviet Socialist Republics". The New Grolier Multimedia Encyclopedia. Release 6. The Software Toolworks, Inc. 1993.

 Lubin, Nancy. "Commonwealth of Independent States". The World Book Year Book 1993. Chicago: World Book, Inc. 1992. p. 497.

 Marx, Karl and Engels, Frederik. "The Communist Manifesto". Translated by Moore, Samuel. [online] Available: 1848.

 Nelan, Bruce W. "Unreformable Reform". Time. March 4, 1996. pp. 40-42.   Parming, Tonu. "Estonia". The World Book Year Book 1992. Chicago: World Book, Inc. 1991. pp. 483-485.

 Rogers, Jay. "Breaking Up the Eastern Bloc". [online] Available: 1990.

 Ropp, Theodore. "World War II". The World Book Encyclopedia. Volume 21. Chicago: World Book, Inc. 1982. pp. 380-413.

 Rosenberg, William G. "Russian Revolutions of 1917". The New Grolier Multimedia Encyclopedia. Release 6. The Software Toolworks, Inc. 1993.

 "Russia stays firm on economy but aims to help poor". [online] Available: 1995. No author given.

 Vardys, V. Stanley. "Latvia". The World Book Year Book 1992. Chicago: World Book, Inc. 1991. pp. 500-502.

 Vardys, V. Stanley. "Lithuania". The World Book Year Book 1992. Chicago: World Book, Inc. 1991. pp. 503-505.

 Yavlinsk, Grigory and others. "Spring '92 Reforms in Russia". Moscow News. May 20, 1992. pp. 6-7.






Russia in Transition

by Shaun Bean 

Way back in the 1920’s, Ludwig Von Mises predicted that the Soviet economic system would not be the best one for Eastern Europe’s long-term growth. Despite his warning, the Stalinest system was implemented after the second World War and lasted until the 1990’s. In that decade, the system collapsed incredibly quickly. The combination of politics, external influences, and inefficiencies inherent in the system forced its destruction. The level of growth was steadily declining while labor and capital’s productivity was very low. Output per worker was decreasing very quickly from the 1960’s to the ‘90s. A major problem was that technical progress was introduced too slowly in the USSR, lagging behind their western counterparts. Although investment to the agricultural sector was increasing, there was much mismanagement that led to the lack of food self-sufficiency.

As far as foreign factors are concerned, oil shocks dealt a damaging blow to Eastern Europe. Foreign trade deficits and debt that was growing exponentially created the need for change. Recessions in Western markets made access to those markets difficult to attain. There were very tight restrictions on technology exports. Western economists insisted that military buildup was absorbing a large part of the GNP, where CIA estimates put it in the range of 16 per cent in the 1980’s (Lavigne 92). This prevented any significant increase in consumption. 

It is necessary to explore the inefficient use of investment. One common theory proposed by contemporary economists is that the Soviets suffered from the inability to substitute capital for labor. Therefore, while capital was growing, labor force per unit of capital was not declining. This meant that the rate of return to new investment was forced to decline to near zero by the mid 1970s. 

 Besides a purely economic explanation, there were also political and social reasons behind the collapse. Communism made a transition from an alternate style of government to something that represented amorality. There evolved a ruling class that was corrupted and therefore it was hated. People who would have used their knowledge for the greater good, instead made concerted efforts only to help themselves. 

Western influence also gave the Soviet people something to aspire to. They had formed an image of another world where the grass was greener. Increased exposure to this world through TV, tourism, and radio created an anti-communist sentiment throughout Eastern Europe. (Lavigne 94). 

Over the last few years, there has been an implementation of stabilization policies aimed at reform. The first measure is price liberalization by means of reducing subsidies to consumer and producer prices. Next is balancing the government budget by increasing taxes, especially on nominal wages so that inflation can be reduced simultaneously. Restrictive monetary policy has also been introduced to restore a positive real interest rate. Stopping a vicious cycle of inflation has been the target of incomes policy that allows unions and employers to determine desirable levels of decreases in real wages. The final measure would be foreign trade liberalization by removing export and import licenses and giving permission to all enterprises to engage in foreign trade on their own while state foreign trade organizations are dismantled (Lavigne 114).

The major problem now is whether to adopt transition theories that favor swift changes or slow, calculated maneuvers. This debate is known as “big bang versus gradualism.” Big bang programs are commited to monetarist visions of breaking away from the past and avoiding any type of market socialism. On the other hand, gradualism favors complex theses that would deal with microeconomic developments as opposed to macroeconomic policies

Works Cited

Lavigne, Marie. The economics of Transition. New York: St. Martin’s Press, 1995.




Shock Therapy

Aaron Reber,  May 2000

On December 25, 1991 the flag of the Soviet Union was lowered, raised in its place was the white, red and blue of the Russian flag, a sight not seen in almost a century.  It was a time for renewal; Russia had emerged from the cloud of communism and was now on a road to economic freedom under capitalism.  Easier said than done.  To the west, communist regimes had already fallen and most governments had initiated liberal economic reforms with much success.  One of best examples of this was Poland and Russia would institute a similar kind of reform called shock therapy.  However, Russia was no Poland.  The success they had in Poland was due to the fact that at one point Poland had a market economy.  Russia never had a market economy they went from a feudal society to a command economy.  Free enterprise was a new concept to the people, and what little market there was under the czars, happened 74 years ago.  This was a Russia that knew only the planned economy, what was produced was what they were told to.  Inefficiency was rampant in the factories and the former party elite controlled virtually every part of society.  Russia now set out to liberalize and privatize an economy and moreover a society that for the most part would be hostile to it. 

 Shock therapy as it is called was an idea, advocated by many western economists and was highly touted by Jeffery Sachs, an advisor to the Polish and Bolivian governments who had implemented this economic policy and had achieved good results.  The concept behind this “therapy” was that in countries that had had command economies, the large bureaucracies and state ownership’s need to be shocked into market reforms.  It was an all out assault on the stagnate economies, prices were to be rapidly liberalized, state subsidies were to be removed as well as cuts in government spending and the money supply. Then shortly after these steps are taken, property and state owned companies were to be privatized and law’s governing economic activity liberalized.  These reforms would then, reduce production leading to high unemployment rates and prices no longer fixed would rise tremendously.  In turn, producers would begin to make more and the economy would find its equilibrium, stabilizing prices.  This would cause the economy to rise from recession (Sakwa pp. 233-234).  The effects of this program when successful resemble a roller coaster, a sharp decline that stabilizes and eventually begins to rise.

            The man behind shock therapy in Russia was Yegor Gaidar, who Boris Yeltsin (the president of Russia), had appointed to be in charge of economic reforms.  He had a three-year plan to reforming the economy laid out like this:

 “First, the deficit would be eliminated, queues eliminated, and the  rouble made convertible; in the second, price rises would be halted and the currency strengthened; and in the third economic growth could be anticipated from private savings and investment.” (Sakwa p. 234)

This was the type of plan that was followed in countries such as Poland, in the Baltics states and in the Czech Republic in these cases production rose steadily.  However, in the case of Russia, this policy was not followed for the three years as prescribed (Sakwa pp. 234-235). 

There were a number of reasons why it wasn’t fully applied. Gaidar only lasted 11 months in the government (first as deputy Prime Minister than as Prime Minister), there was strong political opposition to shock therapy and the central bank was run by Viktor Gerashchenko (who was not pro-shock therapy) who continued to give loans out that kept inefficient businesses afloat.  This was because many feared that since businesses in Russia were so intertwined (a result of the command economy) that if one business went under it would set off a chain reaction bringing down other businesses that could have stayed afloat (Dawisha, Parrott pp. 166-167).    Another reason why Gaidar's reforms never took hold was he never was able to cut state expenditure and inflation rose steadily instead of stabilizing.  In addition, Gaidar’s backing by the Congress of People Deputies (CPD) which was the main legislative body was revoked in December 1992.   This was because the CPD was made up of old party and industrial bosses who had their constituencies’ interests to protect. Making them adverse to radical reform. This caused them to reject plans to cut government subsidies to inefficient state-owned industries that it controlled, in turn in order to fund these subsidies they ordered the printing of new money (Dawisha, Parrot p. 165).

Shock therapy never ran its full course, soon after Gaidar’s dismissal, more moderate yet still liberal reforms were taken in transforming the economy.  Russia now, almost 8 years later is still in economic disarray.  Currently it is emerging from a financial collapse that occurred in August of 1998, which many believe was caused by shock therapy (Aslund p. 64).  It still needs to make many adjustments to it’s economy, capital flight is rampant, organized crime still account for much of it’s GDP, and the Duma is still controlled by people that are not inclined towards too much reform.  It could be that Russia is still too much attached to its Soviet economic roots and that liberal economics may never take hold.  Putin the recently elected President has promised continued reform but has yet to offer any sort of concrete policy. What could help though is the economy is getting stronger thanks to increased oil prices and he has in the last few weeks proven that he has the support to get presidential initiatives passed in the Duma, whether this will help the reform cause is yet to be seen.


 Aslund, Anders. (1999 September/October). Russia's Collapse. Foreign Affairs,              64-77

 Dawisha, K &  Parrott, B.  (1994). Russia and the New States of Eurasia,  The Politics of Upheaval.  New York, NY: Cambridge Univeristy Press

 Sakwa, Richard. (1996).  (1996). Russian Politics and Society. (2nd ed.)             New York, NY: Routledge.





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