The economy of Russia and of other countries of the former Soviet Union used the economic model of central planning for almost sixty years. That meant the state controlling practically all production means as well as investment, production and consumption in the country’s economy. The policy-makers in the field of economy used the principles of communist theory (Marx, Engels, Lenin), and this theory covered both social and economic activities. In its transition to a market economy, Russia must deal with many legacies remaining after the central planning system.
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The era of perestroika (restructuring) in the Soviet Union began with the regime of Mikhail Gorbachev (in office 1985-91). He was younger than his predecessors were and he had some new ideas about the way of development of Russian economy. The communication and exchange of experience with the Western world pushed forward some economic reforms. Gorbachev made the first steps towards the transition from centrally planned economy towards market economy. He tried to encourage cooperative societies and self-sustained (self-financing) organizations – the first models of market economy. However, the bureaucratic routine did not allow this reform to proliferate. The attempts and failures of reforms during the era of perestroika and Gorbachev proved the difficulty of the challenge.
Russia became officially independent from the Soviet Union in December 1991. The Soviet Union disappeared and the Russian Federation emerged. The new Russian Federation came into existence as a much poorer country comparing to the experience of Soviet Union: its economy was in ruin, its political life was instable, the society was deprived of many social benefits it had in the Soviet Union times (pensions, free medical service and education). Russia’s international influence now was just a small fraction of what it used to be in Soviet times. Gorbachev's two reform policies of perestroika and glasnost had proved the weaknesses and failings of the Soviet regime. No hope was offered for the real reconstruction and the formation of a transparent political system. The Soviet Union was basically bankrupt by the late 1980s. The stagnation of economy had been continuing since the 1960s, and Russia had accumulated a tremendous external debt. Although many Russian people are convinced that the CIA and western imperialists plotted collapse of the Soviet Union, the truth is quite evident - the system and the state it supported collapsed under its own weight.
As the EBRD Transition Report for 2001 states, between 1993 and 1999, agricultural output decreased by an average of 5.6% annually, and industrial output decreased an average 5.4% per year. Between 1992 and 1998, investments stood at an average of only 20.7% of GDP. (EBRD Transition Report 2001).
The same tendency is supported by the Economist Intelligence Unit in the Country Report Russia:
According to balance-of-payment statistics, cumulative foreign direct investment (FDI) in Russia in the 1990s amounted to about US $20 billion. Cumulative FDI per head at the end of 2000 was only around US $160, compared with US $2,130 in Hungary, US $1,950 in the Czech Republic and US $1,060 in Poland. In the year 2001 alone, capital flight was US $21.6 billion. (According to the Russian Ministry of Economic Development and Trade, an estimated $300 billion was taken out of Russia between 1991 and 2001). (The Economist Intelligence Unit, Country Report Russia, March 2002).
Since 1991, the Russian Federation has made big efforts toward implementing a market model of economy by building the main principles such as market-determined prices under the leadership of Boris N. Yeltsin. Privatization of state enterprises and extensive foreign investment were considered critical elements, and they happened in the first few years of the post-Soviet period. However, other necessary parts of the economic infrastructure, such as commercial banking and commercial laws, were absent or only partly in place by 1996. The return to Soviet-era central planning seemed unlikely by the mid-1990s. Nevertheless, the structure of the post-transition economy remained unpredictable.
Democratic reforms of Boris Yeltsin did not show any success in the economy field. In the 1990s, the inflation wiped out any savings and accumulated capital remaining from the Soviet Union period. The national industrial enterprises were privatized very quickly and this privatization became a platform for accumulation of huge capitals for the Russian oligarchs, with little regard or concern for the ability of the population to survive in the new economic conditions. No control over prices (their liberalization) made inflation increase up to unbelievable levels. The situation was created when store shelves were full but very few people could afford to pay for the goods.
What is even more important, this wasted ten years of Boris Yeltsin’s rule eliminated practically all hope among Russian people that their country could transit quickly towards a liberal market economy. Many Russians thought that market economy and free market are not suitable for their country. They still remembered relatively good life in the era of the Soviet Union, when everything was inexpensive and affordable. The older generation of Russians could not forget the benefits of the former social system and the younger generation became increasingly disillusioned – they did not see advantages of the new system and could not use its benefits.
President Vladimir Putin returned Russia its lost economic power and international respect. Russian people felt his strong rule and this created hope that the new president can return Russia to the state of prosperity. Indeed, Putin’s first year in power was prominent in terms of its impressive economic growth. Russia’s economy recovered and grew 3.2 percent in 1999, after the financial collapse in 1998. This tendency of growth was followed by a growth of 7.7 percent in 2000 –industrial production growth was close to 12 percent.
High commodity prices on international markets (especially oil and gas) account for the most of this spectacular growth – but there has also been strong productivity growth in the Russian economy. The rise in oil prices made a third of the 7.7 percent economic growth last year. Oil and gas account for 50 percent of exports and 22 percent of GNP.
The era of Putin is illustrative of how quickly Russia could return its former economic and political power. The free market and the strong hand of the government now blend in Russia’s economic policy. That policy shows positive results and it is ideal for Russia’s situation. However, the excessive use of natural resources cannot be the answer for all economic questions, at least not forever. The Russian economy still is in the process of transition to free market economy from centrally planned economy and direct control by regional government still has not been formed. If Russia continues to draw all power and money to the center, it is unlikely to happen in the nearest future. There are many perspectives for the development of free market economy in Russia. For this purpose, the necessary infrastructure needs to be formed. The new generation of uncorrupted officials should
replace the highly corrupted bureaucracy to implement the necessary changes.
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