Figure 1: Map of Russia
Introduction
The Soviet Union, and now Russia, occupied the largest area of land of any country in the world with one of the strongest military. As a world power, Russia should be one of the wealthiest nations with high living standards since its territory also abounds with a variety of natural resources; however, Russia is often not considered as economically prosperous. Even until now, the GDP per capita of Russia is only $11000 while the US has a $61,080.64 GDP per capita in 2021. In fact, people often perceive the Russian economy with upheavals, poverty, hyper-inflation, corruption, and oligarchs. Do the Russian economic instabilities have to do with its communist regime? In this report, I would focus on investigating the Russian economy from three essential questions:
1. How and why did the Russian economy fluctuate so dramatically in the 20th century?
2. Russian Oligarchs - How did the Oligarchs form? What are some impacts to Russian society?
3. How did the collapse of the USSR lead to the rise of Putin?
1. How did the Soviet & Russian Economy fluctuate in the 20th Century?
Brief history starting from WWI
Starting from March 1917 to June 1923, the Russian Revolution, as one of the most impactful political events in the 20th century led by leftist Lenin, truly marked a turning point in Russian history. Eventually, the Russian Revolution marked an end to 300 years of autocratic tsarist rule and began a new chapter of communist rule with the formation of the Soviet Union (The USSR).
Impacts of the Russian Revolution to the Economy
One of the most profound impacts brought by this revolution was a drastic change in the economic system, on the opposite of Capitalism of the free market system, the Soviet Union employed the command economy in which the market was solely controlled by the central government. The economy was based on state ownership of the means of production, collective agriculture and industrial manufacturing, eventually shifting to a socialist economy controlled by oligarchs in Russia after the disintegration of the USSR starting from Gorbachev’s reform. In my opinion, the Soviet Union's economy in the 20th century was not stable mainly because of the command economy that it had where the government or party leaders had complete power to control the economy. The Soviet economy could be divided into three stages: economic take-off under the five year plans of Joseph Stalin's shift heavy Industry, economic stagnation during the Cold War, and Gorbachev's perestroika.
Figure 2: Soviet Leaders in Order
The Stalin Era
When Joseph Stalin took power following Lenin's death in 1924, he became the highest leader for the Soviet Union in which he implemented a set of Five-Year Plans, aiming to concentrate the Soviet economy on developing heavy industry and collectivising agriculture. The first three Five Year Plans were significant and "successful" because it effectively shifted the Soviet Economy from a behindhand agrarian economy to an industrial power; however, it was often criticised for how the ordinary citizens sacrificed their lives with high poverty rate and political persecution. The impressive economic growth during the first three five-year Plans (1928-1940) were singular because during this time, almost all other capitalist countries were suffering from the Great Depression.
Figure 3: Soviet GDP 1928-1940: Economic Boom / 1964-1985: Stagnation
The Stagnation (1964-1985)
Nevertheless, as the modern Soviet economy became more complex, the command economy didn't seem to continue working when corruption, data fiddling and bureaucracy became common practices among central planning authorities. As a result, from 1964-1985, the Soviet Union experienced an era of stagnation. To make things worse, the Soviet government spent a large portion of their expenditures on military spending and arms race to combat the US during the Cold War. As a result, in the domestic, people lacked resources where some even had to spend hours waiting in the lines to get their daily rationing. In addition, due to the command economy, many businesses and firms lacked competition in the market, causing less and less economic advancements and innovations. Although Soviet GDP was growing slowly, it was still far behind that of the United States as shown in Image 2.
Gorbachev Era - Perestroika & Glasnost
When Nikita Gorbachev became the head of the Communist Party in 1985, his goal was clear: to bring the Soviet Union economically equal to the West. He launched a set of economic and political reform policies that aimed to restructure the Soviet economy with more capitalist influences. The set of policies were known as perestroika "restructuring" and glasnost "openness". The basic principle of Perestroika was to boost economic growth as well as increasing capital investment. Capital investments were made to improve the technological base of the Soviet economy. Nevertheless, Gorbachev's radical policies created more chaos in Soviet society, eventually leading to the disintegration in 1991.
Figure 4: Compare the Soviet economy with the US from 1964-1985, Era of Stagnation
Yeltsin & The Russian Free Market System
After the disintegration of the USSR, Boris Yeltsin became the first president of Russia. One of the main goals of Yeltsin was to recover the scattered Russian economy to stand up to the US. Influenced by Neoliberalism in the Western World and the Washington Consensus (Image 3), he took even more radical measures compared to Gorbachev and aimed to make Russia a free market system economy. Under the belief of Neoliberalism, it was believed in minimal government intervention in the economy with decreased government spending, market regulations, and control of interest rates.
Figure 5: Some proposals of Washington consensus, the framework of neoliberalism economic system
Yeltsin & Shock Therapy
Nevertheless, the newly formed Russia was heavily influenced by Soviet communism, instead of taking gradual reform measures of the economy, shockingly Yeltsin used shock therapy to move Russia from one planned economy to the other extreme - a very laissez-faire capitalist market economy. (According to investopedia.com, Shock therapy is an economic theory that says that sudden, dramatic changes in national economic policy can turn a state-controlled economy into a free-market economy. Shock therapy is intended to boost economic production, increase the rate of employment, and improve living conditions.) Yeltsin's drastic economic reform was certainly not successful, eventually leading to a short-term hyperinflation in 1992 in the first year of reform, later on, unemployment rate and poverty rate continued to increase. According to Wikipedia, retail prices in Russia increased by a staggering 2,520%. Some economists suggested that a major cause of the increase was the deregulation of most of the prices in January 1992, a step that prompted an average price increase of 245% in that month alone. However, from a certain point of view, a radical reform would be expected to lead to short-term economic fluctuations. The true failure of Yeltsin's economic reform lay in the privatisation of state-owned enterprises, eventually leading to the emergence of oligarchs, even to the current Russian society.
Figure 6: Hyperinflation in 1992
Conclusion To The First Inquiry Question
In conclusion to the first inquiry question, the Soviet Union Russian economy fluctuated with economic crises and radical reforms to a great extent. From my perspective, economic uncertainty is primarily due to the command economic system where every aspect of the economy was controlled by a single leader instead of the supply-demand (the invisible hand); as a result, if a new leader takes power and has completely different measures than his predecessors, to great extent would it lead to economic instabilities and upheavals.
2. What is the Russian oligarchy - its history and impact to Russian economy
The Origin of the Russian Oligarchy
The origin of the Russian oligarchy could be dated to Yeltsin's privatisation of state owned enterprises as well as his second term campaign. As mentioned earlier in the first inquiry question, Yeltsin preferred an extremely free market economy, and one of his policies to achieve this goal was to sell the previously state-owned enterprises to the private sector. Even though it seemed like a fair policy where the public could now invest in those enterprises; however, the real result was that the large state-owned enterprises of the former Soviet Union went into the hands of an extremely exclusive number of people at a very low price, and that wealth was rapidly accumulated in the hands of a very small number of people. Furthermore, in 1996, Yeltsin was running for re-election. At that time, due to the First Chechen War as well as the failure in economic reform, several polls put him in fourth and fifth place. To save the day, he secretly gathered seven of Russian bankers (Semibankirschina) and made a secret deal called the Letter of Thirteen (alternatively named Come Out of the Dead End!), which said that if they worked together to reelect Yeltsin, they would be rewarded with the power to control the political and economical life of Russia in the future. A few months later, Yeltsin was indeed re-elected, and the seven bankers became the seven oligarchs who completely controlled the Russian economy such as banks, natural gas, oil and media industries.
Figure 7: The urrent Russian oligarchs (name from top left to bottom right)
Roman Abramovich, Oleg Deripaska, Alisher Usmanov,
Vladimir Potanin, Mikhail Prokhorov, Gennady Timchenko
Vagit Alekperov, Petr Aven, Arkady Rotenberg
Impacts of Oligarchs to Russian Society
The oligarchic capitalism in Russia, also known as Crony Capitalism, had continued to the current-day Russian society in Putin's administration, bringing numerous flagrant impacts to society. When Putin came to power in 2000, although Russia's economy boomed on the back of the rise of global oil prices, Putin did not “open up” the economy with more democratic measures. On the contrary of Yeltsin's reform, he nationalised some enterprises and reorganised his own spheres with new oligarchs, such as Roman Abramovich, who is a newly-risen oligarch under Putin's regime. As one of the most notable impacts, the monopolies controlled by the oligarchs would restrain competition in the market. In a capitalist market economy, different enterprises are constantly in competition with each other, and this is beneficial because it encourages innovations and supervisions among businesses with lower prices to customers. Nevertheless, the main goal of oligarchs was not to win over others to encourage more customers to buy from them because they are already the monopolies, instead, they spent huge amounts of resources both legally and illegally to consolidate their power in the market. Due to the collusion between government and business, these oligarchs completely ignored the police and the law, they would use black means such as bribery, kidnapping, and even murder to achieve their goals. Even in current Russian society, a Russian term called "Krysha" was commonly used. In Russian, krysha literally means “roof,” but the word took on a second meaning in its market where private businesses have to hire "muscles'' or the "gangdom" to protect themselves from violent sabotage from their competitors when laws and order are clearly not in place. The "Krysha" service is often offered by gangs, including a broad array of support services such as assistance in navigating the fiendish state bureaucracy, dispute resolution, contract enforcement, loans, and the creation of problems for rival businesses using all kinds of violent means. Last but not least, another impact of Oligarchs was a huge gap between the rich and poor. Because almost all of these industries in Russia are monopolised by just a few oligarchic families, it is impossible for the majority of people to make money by running their own businesses or competing with each other fairly, resulting in a great amount of income inequality.
Oligarchs During Putin’s Administration
Meanwhile, with the uncertainty brought by the 2008 financial crisis and the recent political turmoil in Putin's administration, the outflow of oligarchs' assets has become another big problem in the Russian economy. Beside from their trusts and investments abroad, Russia's oligarchs also bought property in the world's most expensive metropolises.You may recall the Russian oligarch's luxury mansions in London, nicknamed "Londongrad" that made headlines when the Russia-Ukraine war broke out in February as well as the Mega Penthousesnear Central Park skyline in New York. Starting from the Crimea crisis in 2014 and the current Russia-Ukraine War, many western countries posed heavy sanctions on Russia. Just in February, the West decided to remove Russian banks from the SWIFT global trading system, boycotting Russian goods, and freezing oligarchs' assets abroad.
Figure 8: Squatters "liberating" mansions owned by Russian oligarchs in London when Russia invaded Ukraine in 2022
Figure 9: $88m NYC penthouse sold to Russian billionaire oligarch’s daughter
3. How did the collapse of the USSR lead to the rise of Putin?
Putin's Goal
During the Cold War, the Soviet Union was undoubtedly the world's leading power; however, after the disintegration in 1991, Russia found it losing relevance in the globe both economically and politically, not even being considered as the first-tier countries. The sudden loss of status made young patriotic Putin who was working in the KGB (Committee for State Security) determined to regain the importance in the world the Soviet Union used to hold.
The Humiliating Incident & Putin's Personal Trauma
Immediately after the fall of the Berlin Wall that signified the end of Soviet East German rule, when angry crowds stormed the city’s huge Stasi compound in December 1989, 37 year-old KGB lieutenant colonel Putin was clueless and desperate to protect the employees and sensitive files inside when Moscow offered no help. Putin felt devasted when he was watching one of the largest and most powerful empires dissapear in the most humiliating way. “I had the feeling that the country was no more,” he recalled later in a series of interviews published in 2000. “It had disappeared.”
"Superhero" Style Ruling
Being extremely different from his predecessors Yeltsin who sought to work with or even "please" the West, Putin was eager to restore Russian pride during his administration. He tried to make his character be perceived as a "superhero" who doesn't fear anything. To achieve this, he built his own circle/team of security services background that prided loyalty to him above anything else.
When Strobe Talbott, Bill Clinton's point man on Russia, first met Mr. Putin in the late 1990s, he found that Mr. Putin's style was entirely different from the predecessors such as Yeltsin and other Russian officials. According to History.com: Talbott was struck by Putin’s “ability to convey self-control and confidence in a low-key, soft-spoken manner.” The future president also used a number of tricks from his KGB background to show he was in control, making sure to name-drop poets Talbott had studied at university to show he had read Talbott’s file. “I could imagine him debriefing a captured spy who’d already been softened up by the rougher types,” Talbott recalled in his memoirs.
Reflection & My Prediction
In conclusion to the entire inquiry project on the Russian economy, I learnt that the Russian economy is a highly complex topic considering all factors such as its history, political ideologies, culture, and analysis of economic performance through various indexes. To answer the big question posed in the intro - "Do the Russian economic instabilities have to do with its communist regime?" I believe that, to a great extent, the communist political influence played a crucial role in the Russian economic instabilities from the 20th century to the current Putin administration. Particularly, many of the instabilities were the direct result of the command economy, where the supply-demand model was not in place to adjust the economy; instead, leaders had complete control and often were very different in their economic doctrines and measures, thus creating so many socio-economic instabilities. In addition, the oligarchy or crony capitalism in current Russian society was a direct precipitation of the drastic privatisation without proper supervision; where despite the Russian economy being more capitalist, it still lacked transparency, governmental intervention and democracy for the mass population. Unfortunately, even if the sanctions were put in place, from my perspective, I predict that the Russian economy could not improve or change much. Like other communist countries, Russia's economy is heavily controlled by official-business collusion, so no matter how turbulent or destructive the economy is, the oligarchs will always benefit while working with the politicians to preserve their interests. At the same time, the people always suffer the actual pain. Take socialist China as an example, which is severely impacted by the Pandemic and heavy criticisms posed by western countries on human rights violations. The Chinese economy is in decline; however, this only resulted in an even more significant wealth gap where the rich controlling large enterprises only got more affluent, and the poor got poorer. I would argue that Russia's economy may not become more transparent through passive means such as sanctions or boycotts, as crony capitalism gives politicians and oligarchs too much power to oppress the population. The real change should happen in the people's ideology, along with protests and reforms to the current economic system; however, this is certainly harder than any of the other solutions, and Russia still has a long way to go to achieve economic prosperity for the majority of the population.
Sources Cited
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