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History of post-communist Russia

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Disillusion of the Soviet Union


Gorbachev has accused Boris Yeltsin, his old rival and Russia’s first post-Soviet president, of tearing the country apart out of a desire to advance his own personal interests.

Although the new Russian Federation was widely accepted as the Soviet Union's successor state in diplomatic affairs, Russia simply did not have the military and political power the Soviet Union once had. Russia managed to make the other ex-soviet republics voluntarily disarm themselves of nuclear weapons, but the Russian army and fleet were in a nearly non-functional state by 1991. There was no way the government could pay the officers' salaries, and soldiers were deserting in droves. By massive reductions and scrapping of ships, airplanes and tanks[?], the army is slowly getting control over its spending and organization, but it is by no means as powerful as the Red Army once was. On January 2, 1991 Russia began to circulate new rubles[?] to stem inflation and promote confidence. Then on March 26, 1996 the International Monetary Fund approved a $10.2 billion loan to Russia to be used for economic reform.

Democratization and its Setbacks

Empire and its legacy

Democratization has been a difficult task in Russia, home to Czarist "nationalism, autocracy, and Orthodoxy" and Stalin, with a political culture shaped by centuries under imperial monarchy from the late fifteenth to early twentieth century, ruling over a highly centralized multi-national empire covering a vast, contiguous expanse. The Soviet Union was the heir to this tradition of autocracy and centralization. While nominally a federal state consisting of fifteen constituent parts from Stalin's invasion of the Baltic states to 1991, the real centralization of power in top organs of the party, state, and bureaucracy meant that the multi-national empire was essentially intact. In fact, it is possible to argue that Russia was the sole absolutist empire to survive the end of the Great War intact, which saw the collapse of the Ottoman and Habsburg empires as well. The political culture survives in Russian super-presidentialism, created—oddly enough—as a reformist instrument for the Russian state president to bypass conservative elements and enact economic reforms by decree before the collapse of the union state.

Aside from thus, due to constitutional structures and sweeping, unchecked powers of executive decree in post-Communist Russia (derided as "super-presidentialism"), Russia has followed its own peculiar path of democratization—a path that one could call "democracy with Russian characteristics" if he or she is partial to Chinese Communist political discourse.

Democratization and economic liberalization in the former Soviet Union is loaded with paradoxes and contradictions. Democratization under Gorbachev, in the form of glasnost, entailed the destruction of he union state, the breakdown of political order, and insecurity and uncertainty that would impede economic and political reform. However, this meant the destruction of the coercive apparatus that held the Soviet Union together, enabling even autocratic institutions to this day such as the presidency to at least engage in open competition with its opponents, such as the opposition in the Duma in contrast to the opaque political processes of the Soviet era.

In place of the Soviet system, the structures, institutions, and procedural requirements of liberal democracy, in the forms of the presidency, constitutional court, federal assembly, federalism, regular, competitive elections, multi-party competition, and a free press. In such as system, citizens entrust leaders with delegated political powers through free and competitive elections and are able to hold them accountable through the ballot box, but also through proper procedural checks and balances. These structures are largely there constitutionally, and Russia has especially made great progress in holding regular, competitive elections, despite the anarchic and patrimonial party structure.

Democratization and Liberalization: In Contradiction?

Political scientists have thus cited many obstacles to popular democracy, especially super-presidentialism and its lack of checks and balances, weak civic society, anarchic party structures, anti-reformist sentiment, and the phenomenon of Soviet-era elites modifying their operating rules, but surviving intact. Whether this system survives, however, depends on the progress of the Russian economy.

The drastic growth-depression of the 1990s brought on by stabilization is where the sad contradictions between liberalization and democratization are evident. In Russia the number of the early-losers of the reform process far exceed the early-winners. If this is the case, then the self-interested voter and citizen has ample incentives to organize into parties, trade unions, and non-government organizations to slow the reform process. The dislocations of reform, after all, are quite obvious. All Soviets with savings have seen their Soviet-era savings (quite high considering the supply-shortages) liquidated over night due to structural reforms. Fixed-income wage—the majority of the workforce—enjoyed the well-stocked shelves of the Yeltsin era, but could afford to buy little, if anything. In fact, consumption has plummeted. Workers in state owned industries (SOEs), once propped up by high-Soviet era subsides, are often out of work or subject to wage arrears. Workers and their families who earned their livelihoods by working for inefficient Soviet industries decimated by trade liberalization and opening to domestic competition were highly vulnerable.

Without a doubt, the most wrenching parts of economic reform in Russia and other post-Communist states has been stabilization. Stabilization is a harsh austerity regime that seeks to counteract the inflation opened up by the structural reforms by drastic cuts in government expenditures, increasing taxes, extremely high interest rates (going from 20, 30, 40, to 250 percent), cutting subsidies, and opening the market to foreign trade so that foreign products can compete with domestic ones.

Days following the disillusion of the Soviet Union in on January 2, 1992, Yeltsin—acting as his own premier—decreed a liberalization of foreign trade, currency, and hard currency designed under the auspices of his deputy prime minister Yegor Gaidar[?], a 35-year old liberal economist inclined toward radical reform. By decree, Yeltsin would then cut subsidies to money-losing farms and industries, decontrol prices, and moved toward convertibility of the ruble.

In the former Soviet Union, these efforts to restore macro-economic balance, that is to end the distortions between what a society produces and what it spends. In the late Soviet era, the failures of the Soviet centrally planned economy (CPE) took the form of money overhang, supply shortages, and rationing. Thus, these structural reforms immediately opened the doors to hyperinflation or perhaps more aptly put the hidden inflation of the Soviet years. And hyperinflation was only worsened when the Central Bank, an organ under the anti-reformist parliament, was short of revenue and was forced to print money to finance its debt. With inflation at double-digit rates per month as a result of instantaneous price liberalization, macroeconomic stabilization was enacted to curb this trend.

Over the past decade the growth-depression brought about by the stabilization regime has been far more severe and protracted than the Great Depression in the United States following 1929, and about half as severe as the catastrophic depression caused by the effects of World War I, the collapse of the Czarist regime, the Russian Civil War, and the implementation of "War Communism". Roughly half the population is now impoverished; GDP has roughly halved.

Russia finds itself in such a perilous state due to a complex array of reasons aside from policy mistakes, corruption, having to remake both political and economic systems at the same time, and the collapse of the interdependent union state. The Soviet Union, in particular, was, by in means, in an advantageous condition before restructuring, a state perhaps far worse than other former Communist nations. First, demilitarization (due to the end of the Cold War), of an economy in which the military sector accounted for roughly a quarter of the GDP had a strong impact. This was especially the case in some regions of the federation in which well over half the work force was employed by defense plants. Second, mono-industrial development in certain regions is a key problem. Perhaps due to its sheer vastness and geographical diversity, the Soviet Union developed a sizable number of mono-industrial regions with a single employer that perhaps could have been wiped out by the growth depression. And under the socialist system, state employers often served welfare functions (explaining the lack of a need-based system of in-kind welfare payments in Russia to this day), responsible for health, recreational activities, educational facilities, and housing, this would render the reform process more wrenching in certain federal regions and economic sectors than others.

In Russia and for the most part all week market economies going through stabilization regimes, especially elsewhere in Eastern Europe and Latin America, the victims of these dislocations channeled their frustrations in well-organized movements attempting to slow or even derail the reform process. In Belarus they were successful and the economy there to this day is a living memorial to the Soviet Union's Administrative Command System; critics have charged that Belarus is an autocratic relic, but poverty there is a much less wrenching for the population. In Russia, the opposition has taken the form of trade unions, associations of directors of state-owned firms, political parties, and even the popularly elected Duma. Thus, a constant theme of Russian history in the 1990s has been conflict between economic reformers and those hostile to the new capitalism

It is thus no coincidence that today a majority of Russia's regional governorships in 2003 are controlled by the main opposition party, the Communist Party of the Russian Federation[?] (KPRF). Those impoverished by these dislocations, along with the customarily hard to adjust fixed-income wage earners, pensioners, and the elderly thus form the social-base of the opposition to reform. And in a democratized society political channels are ideally opened for these frustrations to be vent or for Russians to vote in anti-reformist candidates, especially of the Communist and Agrarian Parties.

Impoverished and marginalized, ordinary Russians, especially elderly pensioners and fixed income laborers, have grown increasingly disillusioned with economic reforms, contributing to growing nostalgia for the Soviet Union and its strong social safety nets and the electoral strength of the Communist Party.

Thus, democratization and liberalization have been acting in contraction. Voters, now able to vote for opposition parties, have often rejected economic reforms and yearn for the stability and personal security of Communist times.

Super-presidentialism and radical economic reform

The most wrenching aspects of reform, after all, have been implemented by decree under Russia's very undemocratic super-presidential system. Thus, there was no need for much democratic discourse with even well-organized elements interest in stalling or even stopping the reforms under a strong executive presidency. Due to the strong powers of decree of both the 1991 and 1993 constitutions, the strong delegated, but under-specified powers of Russian executives, and Yeltsin's own paternalistic leadership-style, super-presidentialism in Russia has in practice perhaps been a more authoritarian leadership-style than those of the Soviet Union's last party chiefs: Brezhnev, Andropov[?], Cherenenko[?], and Gorbachev.

On on January 2, 1992, Yeltsin, acting as his own prime minister, enacted the toughest components of structural adjustment by decree, circumventing the Supreme Soviet and Congress of People's Deputies[?], which had been elected in June 1991 before the disillusion of the USSR. For one, it spared Yeltsin from the prospects of parliamentary bargaining and wrangling. Moreover, these bodies contained a sufficient numbers of hard-liners staunchly against these reforms. It is worth noting also that no Soviet leader since Stalin, by virtue of tacit party protocol to avoid such an extreme centralization of power, served as both premier and party chief (the Soviet-era most comparable to Russia’s state executive, as the state presidency was effectively a titular ceremonial post). But Yeltsin did.

However, under the terms of the constitutional amendments passed in late 1991, the special powers of decree were set to expire by the end of 1992. Yeltsin, of course, awaiting privatization, demanded that they stay and parliament was unwilling. As Yeltsin threatened to unconstitutionally dissolve parliament—and as parliament threatened to impeach Yeltsin in March 1993, the fight between parliament and Yeltsin climaxed in September when no agreement could be reached on a new constitution, as only parliament had the right to replace or amend the constitution.

Super-presidentialism, Radical Reform, and the constitutional crisis of 1993

On September 21, Yeltsin dissolved parliament, something he was not allowed to do by the then-functioning constitution; decreed new parliamentary elections; and decreed a referendum on a new constitution. The Parliament deemed Yeltsin's presidency unconstitutional, and on September 22nd appointed Rutskoy as Acting President. Tension built quickly, and the rebellious representatives barricaded themself in the Parliament building, "the White House". On October 2nd and 3rd, there were rioting in the streets of Moscow, and soldiers supporting the Parliament attacked the TV center Ostakino on the night of October 3rd. Russia was on the brink of civil war.

After parliament barricaded itself for ten days in an attempt to defy Yeltsin, the Russian army seized the Russian White House. In the process, Russia witnessed the deadliest street fighting in Moscow since the civil war. On October 4th, Yeltsin ordered the special forces to storm the Parliament, and CNN showed pictures of tanks lobbing shells at the White House. Official records reported 146 people killed in the October violence. Rutskoy, Khasbulatov, and the other rebel leaders were arrested, but given a pardon on February 26, 1994.

A new Parliament, although still Communist-dominated, was elected soon after. This brutal episode served to prove that Russia is not a parliamentary[?] democracy, but rather a presidential republic. (Much like the USA, but with substantially more power in the President's hands.)

Three Stages of Privatization

Privatization, the third pillar of the reform process following structural adjustment (characterized by decontrolling prices) and stabilization was thus carried out by Yeltsin by decree.

After parliament gave Yeltsin and his government the authority to enact privatization by decree, Russia responded to the debate between those favoring a form of "cash privatization" and those favoring a "mass privatization", combining two strategies of privatization implemented earlier in Eastern Europe, striving for both equity and efficiency.

This isn't to say that anti-reform elements were completely ineffectual due to the system of presidential decrees. For instance, the growing appeal of the Communist opposition in 1992 brought an end to the first stage of privatization used in 1991 and the first half of 1992, under which bidders used cash to compete to offer the state the highest price in auctions. Such a process of privatization created real value that can be used as investment capital, which creates real value that can be used as investment capital. But this exasperated the gap between rich and power and allowed corrupt cliques to capture control of state enterprises as popular opposition to the reforms increasingly appealed to many workers deprived of their wages and seemingly robbed of their savings, Yeltsin changed course and decreed that a program of vouchers would begin that combined the ideas of both forms of privatization. In response to popular anger, Yeltsin changed course and decreed that a program of vouchers would begin that combined the ideas of both forms of privatization.

On the whole, however, while democratization was a complicating factor for radical reformers, Russia's peculiar super-presidential democracy was sufficiently autocratic to enact privatization by decree, to the consternation of many elements within Russia that would have fought them through electoral means.

According to most International Monetary Fund (IMF), World Bank, and US Treasury Department economists, however, private ownership would not only propel the strengthening of social, organizational and legal infrastructures and institutions, but is intrinsically more efficient than state ownership because in a competitive environment owners have the incentives to maximize productivity. While this theory is generally valid, many conditions can interfere with the application of this theory to the real world. With emphasis on just transferring ownership to private hands in order to create a lobby for private enterprise in order to prevent a communist comeback and push for creation of institutions to govern the market instead of competition, price controls were lifted without dismantling key Soviet-era monopolies. Prices thus were not able to properly equilibrate according to natural levels dictated by supply and demand since private profit-seeking monopolies lacked the incentives provided by competition to lower prices.

However, reformers faced critical barriers. The Communist-era Central Bank under the Supreme Soviet leading did not fill a role comparable to that of its counterparts in the advanced market economies. Instead, during the height of hyperinflation in 1992-1993, it actually tried to derail reforms by actively printing money during a period of inflation. After all, the Russian government was short of revenue and was forced to print money to finance its debt. As a result, inflation blew up into hyperinflation, and the Russian economy continued in a serious slump.

Following the collapse of the Soviet Union, privatization was initially a broadly popular program. Since structural adjustment or shock therapy—cutting subsidies to money-losing farms and industries, decontrolling prices, and moving toward convertibility of the ruble—led to a period of hyperinflation that eroded the purchasing power of fixed-income wages and wiped out the savings of ordinary Russians accumulated during the Soviet years (as a result of monetary overhang), these reforms were considerably unpopular. Privatization, the transfer of legal title to state enterprises to private owners, however, at least at first, offset the unpopularity of stabilization.

However, privatization programs are very politically sensitive, raising many legitimate political debates. Who decide how to set values on state enterprises? Does the state accept cash or for government-provided coupons? Should the state allow the workers or managers of the enterprise to gain control over their own workplace? Should the state allow foreigners to buy privatized enterprises, thereby which an outside investor would invest the capital needed upgrade and modernize the firm, bringing it up to international standards? Which levels of government can privatize which assets?

After parliament gave Yeltsin and his government the authority to enact privatization by decree in 1991, Russia combined two strategies of privatization, one emphasizing equity and the other emphasizing efficiency. For the sake of equity, fairness, and the interests of social stability the state could have simply given assets to the public, which quickly turns the entire population into property holders and gives them a stake in the reform process . For the sake of efficiency, another method is to require auctions in which bidders compete to offer the state the highest price, which creates real value that can be used as investment capital, which creates real value that can be used as investment capital. Although this strategy would have allowed influential corrupt cliques to capture control of state enterprises, the kinds of conspiratorial cliques that flourished under the command economy, this strategy would have fostered a viable capital market, which is the mechanism for bringing private savings into investment in Russian companies.

Initially, in the first stage of privatization used in 1991 and the first half of 1992, buyers used cash rather than vouchers. But this exasperated the gap between rich and power as Communist (KPRF) opposition to the stabilization increasingly appealed to workers, Yeltsin changed course and decreed that a program of vouchers would begin that combined the ideas of both forms of privatization. Russia concocted a new method of privatization, distributing free state-issued vouchers to all citizens in the forth quarter of 1992, who were had the opportunity to bid for shares of privatized firms at special auctions with these vouchers with a face value of 10,000 rubles. But vouchers were not inflationary because they could not be used as legal tender for other transactions. But neither were they forms of productive capital, as stocks and bonds are in countries with established financial markets. So the vouchers did not expand the pool of resources enterprises could use to increase productivity and efficiency.

A Virtual Economy?

In Russia these political disputes would interfere with the application of privatization, leading to a new system of distorted prices, incentives for asset stripping, not wealth creation, the distortions associated with the lack of competition due to the lack of prior restructuring, and employee ownership, which in general keeps wages and employment at levels that were too high. Anticipating a backlash against reform, Yeltsin's government assumed that they had only a short time in which to act; they therefore needed to take steps that would have a large and immediate impact, making the reversal of reform prohibitively costly for their opponents.

Anatolii Chubais[?], the architect of Yeltsin's privatization policies just as Gaidar was the architect of structural adjustment in 1993, was a pragmatist who sought to co-opt benefit powerful interests, including enterprise directors and regional officials. In the short run, at least, the consent of the directors to the program was essential to maintaining economic and social stability in the country. The managers could ensure that labor did not erupt in a massive wave of strikes. The government, therefore, did not strenuously resist the tendency for voucher privatization to turn into "insider privatization", as it was termed, in which senior enterprise officials acquired the largest proportion of shares in privatized firms. Of the three options, the second, under which employees could acquire majority stakes in the enterprises, proved to be the most widely used. Three-quarters of privatized enterprises opted for this method, most often using vouchers.

After Yeltsin had dissolved parliament and a new parliament was elected, by the summer of 1994, the new parliament still failed to agree to the terms under which the next phase of enterprise privatization would proceed. Thus, Yeltsin put the program into effect by decree instead, allowing him to implement the third phase of privatization—the infamous loans for shares scheme, which allowed a handful of powerful banks to acquire substantial ownership shares over major energy, metallurgy, and telecommunications firms at shockingly low prices. Many have since charged that Yeltsin was allowing the oligarchs to grab state enterprises at a time when he needed their support for is 1996 presidential elections, which appeared to be heading toward a Communist (KPRF) insurgency.

The corruption of the third phase of privatization (loans for shares) can be linked to the failure to establish proper institutional infrastructure. As mentioned, radical restructuring occurred before property rights, regulatory institutions, institutions for built-in macroeconomic stabilization (such as government programs or policies that will counteract the business cycle with new government action), institutions for social insurance, and institutions for conflict management. Aside from that, protection of property rights not only requires legal guarantees, but the customs and culture of the market. Proponents of shock therapy, however, argued that privatization would itself propel the establishment of strengthening of social, organizational and legal infrastructures and institutions that are essential for an effective market economy.

In hindsight, prominent Soviet specialist Marshall Goldman[?] has argued that Yeltsin should have extending property ownership to land, facilitated the formation of up-start businesses, reformed the currency, decontrolled prices, scraped taxes on wages, brought fiscal policy under control, and moved toward convertibility of the ruble before implementing the process of privatization.

Marshall Goldman[?], Joseph Stiglitz, the winner of the 2001 Nobel Prize in economics, and other critics of Russia's implementation of privatization generally argue that "insider buyout," which allowed state managers to usually wound up with the controlling share of the stock, argue that it further accounted for Russia's poor implementation of economic restructuring. In Russia a far higher share of state-owned assets were sold to managers and workers, or "insiders," compared to the former Czechoslovakia, Hungary, and Poland. In this sense, it is more precise to describe Russia's privatization as "insider privatization" (the first stage) and "oligarch privatization" and distinct from the general pattern of privatization in other, more successful countries in Eastern Europe. Many have thus argued that it would be more accurate to say that real economic reform was never tried since it was quickly subverted by actors outside the government's control, such as the Central Bank, ministries, regional governments, and industrial managers.

The reasoning behind this claim is that the "insider buyout" induced 'employee dominant ownership', inevitably leading to the tendency for the stockholders, who are managers or employees themselves, to vote for increased wages, reduced investments, and fewer layoffs, which all disfavor the growth of market economy. Aside from the distortions associated with the lack of competition, employee ownership in general keeps wages and employment at levels that were too high. The impact of "insider buyout" in Russia can be seen from the abnormally low unemployment rates and very high underemployment levels in privatized industries. Generally speaking, large-scale privatization of moribund, money-losing state owned enterprises should increase unemployment. Soviet industries, after all, were often not even value adding, with cost of inputs exceeding the cost of outputs. Sixteen percent of the workforce became unemployed in both the former East Germany and Poland. Even in China where organized, large-scale privatization has not been carried out (although it is said that spontaneous privatization has been under way), the unemployment rate in 1998 was, conservatively counted at 8 to 9%. But in Russia, in the most radical stage of privatization, 1994, only 6.3% of the economically active population was unemployed.

Thus, these industries still lacked incentives to increase productivity or expand even after the transition to market capitalism. According to major surveys of enterprise directions whether they would be willing to sell a majority of the shares of their enterprise to an outside investor who would bring in the capital needed to invest in modernizing the firm, two-thirds said they would not be willing. In other words, they would rather remain majority owners of an unprofitable enterprise than minority owners of a much more profitable one. Very few firms have experienced much management turnover.

According to Stiglitz, the key economic mistakes of the transition were the emphasis on privatization over competition and the emphasis on restructuring existing enterprises over creation of new jobs and enterprises. With emphasis on just transferring ownership to private hands in order to create a lobby for private enterprise in order to prevent a communist comeback and push for creation of institutions to govern the market instead of competition, price controls were lifted without dismantling key Soviet-era monopolies. Prices thus were not able to properly equilibrate according to natural levels dictated by supply and demand since private profit-seeking monopolies lacked the incentives provided by competition to lower prices.

To this day, due to the lack of competition, enterprises do not have enough working capital to pay their wages and taxes on time, and trade with one another using barter. Not able to pay wages, upgrading and modernizing their facilities is out of the question. Ironically, the very goals of privatization were that privatize ownership would lead to incentives to improve productivity of Soviet-era value-losing state enterprises. By 1998, at least half of enterprise output was being "sold" through barter or trade. Barter creates unreal values. The federal government has effectively allowed them to avoid paying much of their federal taxes in return for keeping key customers, such as military bases and major industrial enterprises, supplied with energy and power.

Aside from the lack of growth, the conditions induced by the stabilization package provided incentives for huge waves of capital flight, not the foreign investment promised to set Russia on the path to prosperity. Following capital market liberalization, the strategy of privatization, combined with the absence of institutional infrastructure, led to incentives for asset stripping. With inflation at double-digit rates per month as a result of instantaneous price liberalization, macroeconomic stabilization was enacted to curb this trend. This entailed tightening the money supply and raising interest rates. In Russia, privatization paradoxically forced industries to barter, leading to a new system of distorted prices, and led to incentives for asset stripping, not wealth creation.

Criticism of the Post-Communist Transition Economic Transition

Structural Adjustment Reforms and Macroeconomic Stabilization

However, many economists, especially Joseph Stiglitz, winner of the 2001 Nobel Prize for economics and Marshall Goldman[?], the respected Soviet and Russian specialist, argue that existing institutions were abandoned before the legal structures of a market economy that govern private property, oversee the financial market, and enforce taxation were functional, although the two major components of a macroeconomy are banking system and the state budgetary system.

These economists point out that complicated markets require strong contract enforcement, accepted customs and practices, and financial and regulatory institutions account for the bulk of economic output. Instead, Russia was left with Soviet-era institutions with organization. In the post-Communist years, Russia's process of privatization, combined with capital market liberalization, and failure to establish institutional infrastructure, led to incentives for capital flight, contributing to post-communist economic contraction in Russia.

Stabilization, Capital Market Liberalization, and Capital Flight

The dismantling of the administrative command system (ACS) in Russia was supposed to raise GDP and living standards by allocating resources more efficiently. It was supposed to create a movement outward towards the production possibilities curve by eliminating central planning, substituting it with a decentralized market system, eliminating huge distortions through liberalization, and providing incentives through privatization.

However, according to Marshall Goldman[?], the focus on macrostabilization, which was necessary to counteract the hyperinflation induced by shock therapy, led to interest rates of 20, 30, 40, 250 percent. Then, the focus on macro-stabilization, which wiped out the savings of most Russians, left non-insiders largely incapable of buying the enterprises. More over, privatized enterprises would be difficult to revitalize, given the high interest rates and lack of financial institutions to provide capital. In this sense, he argues that privatization accompanied by the opening of the capital markets, led not to wealth creation but to asset stripping. Stiglitz contends that insider privatization, under these conditions, provided incentives for asset-stripping and not growth, leading to movements $2 billion to $3 billion of capital per month. According to Stiglitz, "Anyone smart enough to be a winner in the privatization sweepstakes would be smart enough to put their money in the booming US stock market, or into the safe haven of secretive offshore bank accounts. It was not even a close call; and not surprisingly, billions poured out of the country".

After over a decade in transition, roughly half the population in Russia is now impoverished in a country where poverty had been largely non-existent, life expectancy has dropped, and GDP has roughly halved. In stark contrast to these aims, Russia's economic decline is far more severe and more protracted than the Great Depression following 1929, and half as severe as the catastrophic depression caused by the effects of World War I, the collapse of the Czarist regime, the Russian Civil War, and the implementation of "War Communism". Hopes for recovery hinge on foreign investment, lower interest rates and inflation (difficult to acheive together), high oil prices, and reigning in organized crime and corruption in order to transparently govern an advanced market economy.

Events in the Putin Administration

Right: Boris Yeltsin with his hand-picked successor, Vladimir Putin

Yeltsin continued as President of Russia until December 31, 1999, and was succeeded by his prime minister, Vladimir Putin. A a KGB officer from 1975 to 1991 and head of the FSB (the KGB's successor} from July 1998 to August 1999, Putin was Prime Minister in Boris Yeltsin's government from August 1999. On December 31, 1999, Yeltsin resigned, and made Putin the second (acting) President of the Russian Federation. Presidential elections were held on March 26, 2000, which Putin won.

In August, 2000, an explosion aboard the Soviet submarine Kursk caused the submarine to sink in the Barents Sea. Rescue offers from Britain and other NATO powers were declined. All sailors aboard the Kursk died. President Putin was criticized for his slow reaction to offers of aid.

In October, 2002, Chechen rebels took over a Moscow theater. Over 700 people inside were taken hostage. The rebels demanded the immediate withdraw of Russian forces from Chechnya, and threatened to blow up the building if authorities attempted to enter. Three days later, Russian commandos stormed the building after the hostages had been subdued with a sleeping gas. The gas, which Russian officials refused to identify to doctors treating the hostages, was implicated as the cause of death for over 115 hostages. (See Moscow theatre siege for details.)

Conclusions: the uncertain fate of Russia's transition

In the aftermath of the theatre siege, Putin began renewed efforts to eliminate the Chechen insurrection and to further consolidate government control over Russian media outlets owned by the oligarchs, who attained large stakes of state assests, largely illegally, during the privitization[?] process.

The outcome of Russia's transition has been a new system of distorted prices, a demonetized economy utilizing barter, incentives for asset stripping—not wealth creation, and the lack of market competition. In short, the outcome was a new hybrid economy—a "virtual economy" too reminiscent of the Soviet ACS but lacking the benefits of that system, namely the universal employment, low rates of poverty, and social welfare. The real outcome of Russia's transition still hangs in the balance, depending on whether Russia's weak market economy can survive another crisis and prove stable enough to attract the much touted aspirations for foreign investment. Since privatization has yet to bring a viable capital market into being, Russia's vulnerability was highlighted in 1998, when it fell into an insurmountable debt crisis, not able to pay off the interest on the loans it had taken.

Since privatization has yet to bring a viable capital market into being, the government by 1998 fell into an insurmountable debt crisis, not able to pay off the interest on the loans it had taken. Before 1998, the government raised cash through foreign borrowing, high interest domestic bonds, privatization, and especially oil revenues. But due to falling world oil demand as a result of the East Asian crisis and having exhausted the potential of raising cash by selling off state enterprises, by August 1998 the state could not meet its debt obligations, declaring a moratorium on its debts. Now longer able to prop up the value of the ruble at an artificially high exchange rate, the ruble's value collapsed against the dollar, losing two-thirds its value overnight. The economy, however, has rebounded since then due to the devaluation, which greatly reduced the costs of production in Russia, but is still in a precarious state, propped up largely by high oil prices for the time being. Following the devaluation of the grossly overvalued exchange rate, Russia has been experiencing positive GDP growth, especially due to the great increase in net exports; imports plummeted by nearly 50% in the year after devaluation, as consumers were forced to buy Russian-made food and goods.

A demonstrator carries a portrait of Gennady Zyuganov[?], head of the Communist Party of the Russian Federation[?], the chief opposition party and still the largest, best organized, political party in Russia with a majority of the country's 89 regional governorships and the largest voting bloc in parliament in these 2003 demonstrations against the Putin government.

But another crisis, like the East Asian meltdown, could lead to the collapse of the economy. Putin's, popularity, which stems from his reputation as a strong, effective leader, stands in contrast to that of his alcoholic predecessor, but it hinges on a continuation of economic recovery. Putin, after all, is credited with the recovery by many, but he really came into office at an ideal time: after the devaluation, which boosted demand for domestic goods, and rising world oil prices, but another collapse could open the door to the comeback of the Communist Party within Russia’s new parliamentary and federal framework. The KPRF, after all, is still the best organized and largest political party in Russia, still clinging onto the largest voting bloc of a single party in parliament and the majority of the country's 89 regional governorships. It has also gone through a synthesis with Russian nationalism, once an enemy of Russian Communism, perhaps enabling it to someday strike a chord with a nationalistic backlash against reforms associated with the West. Looking East as the party did beginning with Lenin, KPRF leader Gennady Zyuganov[?] states that he is pro-market, and an admirer of Deng Xiaoping, seeking to popularize the divergence of China and Russia over the past decade for the sake of Russia's Communists. Putin meanwhile looks West, toward integration with Europe and the West, but the fate of this trend remains uncertain.

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