From 1988 onwards Gorbachev followed much more radical and disruptive policies, which constituted a fundamental restructuring away from communism and toward private property and market-based solutions; it was from this period onwards that GDP peaked before starting an accelerating absolute decline. This can be seen as Gorbachev’s attempt to out manoeuvre the inertial elements within the Party, but unfortunately many members of the nomenklatura that resisted reform were also best placed to take advantage of a dismantling that provided them with the opportunity to transform their positions within the hierarchy into private wealth. No substantive attempt was made to purge the nomenklatura to reduce the power of vested interests, nor was there any attempt to drive through necessary but painful reforms such as limited price liberalization backed up with repression (as Deng ordered in 1989). The possibility of a coup in response to such actions, as had happened to Khrushchev, was always a possibility:
These [defense, industry and energy] lobbies were interested in preserving the status quo. Even an omnipotent General Secretary of the Communist Party could not have crushed them. Miller … cites a conversation between Gorbachev and Gosplan’s head … showing their understanding that curbing the military budget would result in their “dismissal”. (Guriev 2019, p. 129)
In the face of reduced revenues due to lower oil prices and alcohol prohibition (a Gorbachev own goal), the state utilized international borrowing to support social expenditures, increased military expenditures and industrial subsidies. At the same time consumer prices were kept low in “order to pacify the general public” (Guriev 2019, p. 126). The state became severely weakened through increased indebtedness, with the monetization of those debts when combined with price controls creating a repressed inflation waiting for any freeing of prices. The 1988 laws on cooperatives and leases allowed for the de facto creation of private enterprises able to hold private property; possibilities that the more powerful shadow economy elements were best placed to take advantage of. The liberalization of trade also facilitated easy profits for those with the right connections, as goods could be bought at the low domestic prices (or stripped from state enterprises) and sold at much higher international prices for hard currency. Gorbachev’s decision to keep domestic prices low aided the process of looting, as black markets flourished and created shortages at the official prices. The result was an increasingly powerful and diverse group, including many state actors, that had become wealthy through simple arbitrage and asset stripping (and significant violence) rather than through the creation of real wealth.
Caught between a rapidly diminishing and indebted state apparatus, and a “private” sector heavily focused on extracting rather than creating wealth, the economy faltered and the black-market inflation accelerated. At the same time, the opening of the media to direct criticisms of the state and Party, Glasnost, helped undermine the legitimacy of both (Remnick 1993); especially from 1987 onwards as the press became increasingly pro-market and anti-communist (Keeran & Kenny 2010). This further reduced the capacity of an already heavily disillusioned and corrupt state apparatus to enforce rules and commit to future plans – helping to stymie any possibility of any social bargain based on the redistribution of the future benefits of reforms. The period from 1989 to 1991 represented a period of accelerating collapse, with the dysfunction of the weakened, delegitimized and increasingly corrupt state sector added to by the profiteering of many in the legal and illegal private sector. The economy was neither capitalist nor communist, but a highly dysfunctional and corrupt combination of the two.
Adding to this were political changes that disrupted economic policymaking and coordination; such as wholesale constitutional changes, increasing nationalism (especially in the Yeltsin led Russian Republic) and the independence of an increasing number of Eastern European communist-bloc nations; facilitated by Gorbachev’s stated policy of non-intervention and accelerated by the cessation of subsidized imports from the USSR. The removal of the previous Brezhnev Doctrine of Soviet military intervention to defeat any challenge to Eastern European communist regimes may have been a gambit to galvanize such regimes into reformist efforts, but it backfired spectacularly as it facilitated the collapse of those regimes. The resulting disintegration of the Soviet Bloc then helped legitimize the possibility of the disintegration of the multinational Soviet Union while demoralizing the Soviet leadership – especially the unification of Germany on Western terms. As Gorbachev would later write,
I would be less than sincere if I said that I had foreseen the course of events and the problems that the German question would eventually create. (Gorbachev quoted in Kotkin 2009, p. 218).
Events and problems very personally experienced by a Vladimir Putin stationed in East Germany. Gorbachev lost control of the process that he had begun, and his own popularity among the Russian populace plummeted. The coup de grace was delivered by the failed communist counter-revolutionary coup (the August Coup of 1991), and the resulting dissolution of the Soviet Union that resulted from the power struggle between Gorbachev and Yeltsin. The suddenness of the dissolution severed complex supply chains and payment processes that straddled newly independent states and produced an unprepared Russian state that at its inception lacked such basic functions as tax collection and effective control over local power structures. Kennan’s warning over four decades earlier was shown to be prescient:
If … anything is ever to occur to disrupt the unity and efficacy of the Party as a political instrument, Soviet Russia might be changed overnight from one of the strongest to one of the weakest and most pitiable of national societies. (“Mr. X” [George Kennan] 1947, quoted in Grossman 1998, p. 24)
Communism was only victorious in China in 1949, prior to which the economy has been predominantly market and private property based. With market relations still being tolerated by the CCP until the mid 1950’s, the period of non-market relations lasted for only two and a half decades before Deng’s reforms. In addition, China benefitted from capitalist enclaves such as Hong Kong, linkages with the capitalist Taiwan and a large entrepreneurial Chinese diaspora. It also had a substantially simpler political economy due to its significantly lower level of economic development, and under Deng the CCP had a highly competent and legitimate state bureaucracy with enforced staff rotations to reduce stasis and undermine the creation of interest groups. The East European Soviet-bloc nations had been mixed capitalist economies prior to their incorporation into the Soviet sphere of influence, with full collectivization not being implemented for many until the 1950’s. The economy of Hungary, the richest of the East European nations, had never been fully collectivized or centrally planned and the state had “been experimenting with marketization since 1968” and “had already taken substantial steps down the path to capitalism” (Klaudt 1995). In addition, a significant Hungarian diaspora existed. East Germany was integrated directly into West Germany, with massive amounts of federal financial transfers to aid the transition period. Czechoslovakia had also started a process of limited liberalization in the mid 1960’s, prior to the Soviet invasion and the reinstatement of the Soviet economic model; this liberalization was restarted in the 1980’s.
From an Institutionalist perspective, of all the communist nations, Russia was perhaps one of the least prepared for a move to market relations, private property and democracy. This position was made worse by the disintegration of the Soviet Union, as the production and financial linkages of the previous central planning system that crossed republican borders fell apart resulting in a collapse in trade between the newly independent nations. The new Russian state was extremely weak as at inception it “lacked many of the attributes conventionally associated with statehood. It had neither its own currency nor its own armed forces, it did not control its borders, and it was unable to perform such basic functions as tax collection” (Tompson 2002, p. 15).
Given the massive economic and social destabilization of the 1988-1991 period, exacerbated by the breakup of the Soviet Union and centrifugal forces within Russia itself, a period of consolidation and stabilization may have been sought. Instead of following the gradualist approach followed by China, and to some extent Hungary (Hall & Elliott 1999) a “shock therapy” of rapid change was prescribed by Western elites and advisors and adopted by the Russian state. It may have been the case that things had deteriorated to such an extent that only a final move to capitalism was possible. A continuance of the status quo of a dysfunctional and deteriorating mix of a failing and corrupt state sector and a heavily crony and exploitative private sector was itself a recipe for ongoing collapse. What is without doubt is that the shock therapy accelerated the collapse.
The first case of shock therapy in Chile had been carried out by a strong effective state within a mixed capitalist economy – and even that had to be substantially reversed within less than a decade. The result of rapid deregulation, marketization, and privatization within a country with no history of predominant market relations and institutionalized private property rights, a heavy dependency upon a weakened and corrupted central planning system, and a crony and extractive capitalist sector, should have been predictable, “initial conditions matter much more than economists in Russia and the West who urged rapid reform believed” (Millar 1997, p. 360) and “market elements and private sector were far too poorly developed when economic reforms were introduced in contrast to Poland or Hungary, which have made the economic transition much more difficult and painful” (Gidadhubli 1994, p. 1179). Many of the changes were carried out virtually overnight.
The January 1992 reforms freed 90% of retail prices overnight; most remaining prices followed in the ensuing months. Directives and legislation rapidly liberalized trade and exchange rates, cut the state budget (reducing defense expenditures by 68%), curtailed subsidies, and established provisions for enterprise bankruptcy. (Gerber & Hout 1998, p. 4)
The results were made worse by the previously suppressed inflation and loose monetary policy that helped turn inflation into hyperinflation, together with a lack of financial support from other nations. Russia was very significantly de-industrialized, mass unemployment and impoverishment was produced, and through extensive illicit primitive accumulation the major productive assets were concentrated within a few “oligarchic” hands, many of which were the previous “ruling elite in pursuit of its own perceived interests” (Kotz & Weir 1997). This was “insider privatization” that allowed the “large-scale conversion of state property into private property by … the former managers of state enterprises in connivance with the higher echelons of the bureaucrats and former party apparatchiks known as the 'nomenklatura’” (Gidadhubli & Mohanty 2002, p. 5000). Cohen (2001, p. 101) supports this view, noting “when ‘privatization’ of large-scale property began in 1993-1994, members of the former Soviet elite, the nomenklatura, were its main beneficiaries”. This process was greatly aided by ill-defined property rights that facilitated insider looting and the extremely rapid privatization of large swathes of the economy to the benefit of those with the right connections and financial resources.
The plan to transfer ownership and governance of economic enterprises from the state into private hands was designed in 1992 and mostly implemented by June 1994. By that time over 75% of small-scale enterprises were privatized through direct competitive bidding or lease buyouts. Another 49,000 medium- and large-scale enterprises, forming 60% of industrial assets, had completed or were undergoing ‘mass’ privatization. (Ibid., p. 5).
The process “was completed by the scandalous loans-for-shares deals of the mid-1990s” (Tompson 2002, p. 18). This was very different to the Chinese approach where rather “than undertaking the massive, centralized privatization of State-owned enterprises (SOEs), the Chinese government permitted a variety of ownership forms, including firms collectively owned by local governments, foreign-invested firms and new private start-ups” (Buck et. al. 2000, p. 381) and kept ownership of the SOEs that it considered to be in strategic economic sectors such as energy and weapons production, together with the banking system. Russian GDP collapsed by 18% in 1992, followed by 12% and 15% in the next two years, plus another 4% in 1995 (Ibid.). As Millar noted in 1997 (p. 360):
The main annual macroeconomic indicators, including GDP, industrial production, agricultural production and capital investment have been falling in Russia since 1989, and the best forecasts suggest that they will continue to fall at least through 1997, although perhaps at a slower rate. Inflation continues too, although at lower rates recently … The main sectors of the economy are mired in debt: the enterprises to each other, their employees and the budget, and the government owes enterprises and their employees substantial sums too. Some 33.6 million persons are living below the official poverty line, many more than in 1989. Plus those living on the verge of poverty, the total may consist of one-half of the total population at a minimum. Life expectancy at birth has declined from 62 years for men and 74 for women in 1992 to 58 and 72, respectively, in 1996.
The halving of international oil prices between 1996 and 1998 further worsened the economic position, and the state defaulted on its foreign debts in August of the latter year.
In 1993, Russia’s fledgling democracy had been “dealt a wounding, possibly fatal, blow” as President Yeltsin carried out a military-backed coup (including the shelling of the Russian parliament building shown above) that terminated “Parliament and all other elements of rule-of-law government in Moscow” (Cohen 2001, p. 125); actions approved of by the US President, who stated “approvingly that ‘if such a thing happened in the United States’ he too would have taken ‘tough actions’” (Ibid.). The increasingly heavy influence of the oligarchs over the Russian state apparatus added to the diminution of democracy. An excellent documentary on the early 1990s in Russia:
Democracy was further subverted in 1996, with Yeltsin only just beating the Communist Party for the Presidency through the extensive intervention of the oligarchs, a US-supplied political strategy team (Jones 2017) and a suspiciously timely IMF loan that “will help Mr. Yeltsin carry through on commitments to increase social spending and to pay back wages, both of which will be helpful to him in winning votes” as the New York Times (1996) noted at the time. The above was wholeheartedly supported by the US President, as he “and his top aides [went] far beyond the norm of international relations, becoming the cheerleader, accomplice, and spin doctor, and thus implicating America [sic] in some of [Yeltsin’s] most ill-advised and even wicked deeds” (Cohen 2001, p. 139). The US election meddling was very overt:
The Clinton administration went out of its way, certainly well beyond propriety, to help Yeltsin win. It arranged a booster-summit meeting in Moscow and a $10 billion IMF loan shortly before the election, justified the ongoing Chechen war by comparing it to the American [sic] Civil War and Yeltsin to Lincoln, and sent U.S. campaign experts to serve as his advisors. The American [sic] ambassador in Moscow … even tried to pressure Grigory Yavlinsky [Yeltsin’s main rival for the Presidency] to withdraw from the first round in favor of Yelstin. (Ibid., p. 150)
This period was a social and economic catastrophe greater than that visited upon the United States in the depths of the 1930’s depression. “Russia would need decades to regain what it has lost in the nineties, and nothing can retrieve the millions of lives already cut short by the ‘transition’” (Cohen 2001, p. 169). The level of personal destruction was pointed to by the fact that in 2001 “real wages were 48 percent of their 1991 value” (Ibid., p. 194) and that “According to official statistics [in 2001], about 40 percent of the people live in poverty, but the actual figure is at least 50 percent, and several reliable Moscow newspapers report that it could be 85 to 90 percent … In a national survey, only 14 percent … said they could afford necessary medical treatment” (Ibid., pp. 194-195); in the Soviet Union healthcare had been free and real poverty only afflicted a small percentage of the population. The legacy of Stalin’s industrialization had also been destroyed, with a smaller Russia being returned to the backwardness the Tsars that the communists had tried to overcome.
The result [of Boris Yeltsin’s “shock therapy” program] was the worst economic and social catastrophe ever suffered by a major nation in peacetime. Russia sank into a corrosive economic depression greater than that of the American 1930s. Investment plunged by 60%, GDP by almost 50%; some two thirds of Russians were impoverished; the life expectancy of men fell below 59 years; and the population began to decline annually by almost a million people. In 1998, with nothing left to sustain it, the Russian financial system collapsed. State and private banks defaulted on their domestic and foreign obligations, causing still more poverty and widespread misery. (Cohen 2011, p. 26)
Perhaps the most lasting industrial catastrophe of the Russian crisis … is the demise of advanced electronics manufacturing. (Castells 1998, p. 70)
The effects of the memories of this period upon the general Russian population, and state policy makers, should not be underestimated. The impoverishment of the highly educated middle class that Russia inherited from the Soviet Union, including the destruction of their savings through inflation twice in one decade, represents a significant restraint upon economic and technological development. Strong leadership, social and economic stability, and a resurrection of national pride should all have a heightened attraction to a population that endured this catastrophic period. The generations that came of age and grew up during this period could be likened to the US Greatest and Silent generations that were the most active generations of the immediate US post-WW2 period, but having endured a more searing experience. For these Russian generations, and the older ones whose savings and pensions were destroyed during the collapse, it could be very easy to see Putin as a saviour who rescued their nation and their own personal situations. The perceived complicity of the Western powers in the looting and collapse of the Soviet Union and then Russia adds to the historical memories of the Cold War and the repeated Western military invasions; Napoleon in 1812, Britain and France in 1852, Germany in WW1 and WW2, and the European and US involvement in the Civil War of 1918-22 (Foglesong 1995).
Thank you, Roger.
Very interesting - most appreciated.