Transition to a Market Economy

Boris Yeltsin was elected President of Russia in June, 1991, in the first direct presidential election in Russian history. In October, as Russia was about to become independent of the Soviet Union and the Soviet Union was about to break apart, Yeltsin announced that Russia would proceed with market-oriented reform similar to Poland's, known as "shock therapy."

From Russia's parliament, Yeltsin received one year of special powers: the ability to issue laws by decree for the purpose of remaking Russia's economy. Members of parliament felt close to Yeltsin for his having stood against the recent coup attempt by the Soviet Union's Communist Party hardliners -- Yeltsin remembered for having stood atop a tank in Moscow.

The method of remaking of Russia's economy has been described as "shock therapy," which refers to a sudden privatization of Russia 225,000 or so state-owned businesses, a sudden release of price and currency controls, withdrawal of state subsidies, and sudden trade liberalization. Yeltsin had assembled a team of economists devoted to free-market economics. They were admirers of the U.S. economist Milton Friedman and referred to in Moscow as the "Chicago Boys."

In his book, Superpower Illusions, the U.S. ambassador to the Soviet Union, Jack Matlock, writes that shock therapy "ignored the fact that there was no legitimate capital in the country." He describes the result: "Communist Party officials, senior military and KGB officer, and other privileged insiders join the criminals who had been running a black market steal what they could, as fast as they could." (Matlock, p. 111)

The Soviet Union was sailing into free enterprise without people who had a lot of experience with decision-making in a free market economy. Almost no Soviet employees or managers had such experience. Also, laws that fit a free enterprise system were not in place. It was to be described as like building a house with no plumbing.

A gradual approach might have been better, what Matlock describes as "first freeing up trade and small business, with generous loans available to entrepreneurs as well as arrest and prosecution of the criminals who preyed on small businesses. Heavy industry, rail and air transport, and communications could have remained temporarily under state ownership, as corporations required to compete with state-owned corporations." (Matlock, p. 111)

In her book The Shock Doctrine, Naomi Klein writes of the effect of the shock doctrine's disconnection with public opinion -- that lack of democracy resulting from Yeltsin's dictatorial powers. Klein writes.

Like the Polish supporters of Solidarity, 67 percent of Russians told pollsters in 1992 they believed workers' cooperatives were the most equitable way to privatize the assets of the Communist state, and 79 percent said they considered maintaining full employment to be a core function of government. (Klein, p. 224)

Yeltsin promised difficulty for approximately six months but that then recovery would come and Russia would become a great economic power -- the fourth largest in the world.

According to Klein, "After only one year, shock therapy had taken a devastating toll. Inflation had reduced the value of Russia's currency. "[M]illions of middle-class Russians had lost their life savings ...abrupt cuts to subsidies meant millions of workers had not been paid in months. The average Russian consumed 40 percent less in 1992 than in 1991. (Klein, pp. 224-25)

The government moved to control inflation through austerity. To fight inflation, interest rates were raised and massive cuts in state welfare spending were made.

By mid-1993 from 39 to 49 percent of the population was living in poverty. Buying dried up, and by the mid-1990s the economy was depressed. In 1998, Russia's economy suffered more with a financial crash, triggered by the financial crisis that began in Asia in 1997. According to statistics by Russia's government, the economic decline in terms of Gross Domestic Product was more severe than that suffered by the in the United States in the Great Depression of the 1930s.

According to Wikipedia, alcohol-related deaths in Russia increased 60 percent in the 1990s, and deaths from infectious and parasitic diseases increased 100 percent, "mainly because medicines were no longer affordable to the poor."