Russia’s Economic Woes

Russia’s Economic Woes

Sheng Zhou

Period 6

In a dramatic and memorable end to the reign of the Soviet Union, the so-called worker’s paradise, on December 25th, 1991, the Soviet flag was mournfully lowered from the Kremlin walls for the last time. Finally the reforms and decentralization of the Soviet state that had started in 1980’s had met its climax with the destruction of the state itself. The last president of the Soviet Union, Mikhail Gorbachev, declared on national TV the formal end of the Union and handed over full powers of the Russian Federation to Russian president Boris Yeltsin. Within a day, the Supreme Soviet also disbanded itself and Soviet institutions gradually faded out or became transformed into democratic institutions. From this political downfall arose the new democratic Russian Federation, followed by the first democratic governmental institutions since 1917.

In order to expedite the transition from a communist to a capitalist society, Yeltsin implemented his policy of “shock-therapy” with the intent of making the market economy work almost overnight by suddenly releasing state control of prices and currency controls. This sudden lack of government control backfired and caused massive turmoil in terms of unemployment and hyperinflation as the Central Bank just kept on printing rubles without discretion. Despite these general economic downturns, winners did emerge from the system. Among the winners was the new class of entrepreneurs and black marketers that had thrived when Gorbachev instituted perestroika in the 80s. Most of these people, known as the Oligarchs, obtained massive influences within the government and eventually practically dictated policy. These liberal policies, however, meant that the elderly and others on fixed incomes would suffer a severe drop in living standards, and people would see a lifetime of savings wiped out overnight. Twenty five percent of the population went into poverty, corruption was rampart, and segments of the economy had gone "underground" to escape backbreaking taxes and bureaucratic regulation. To help alleviate the growing problems, the government began to step in and started to raise interest rates and taxes, while cutting back social and industrial subsidies. These policies only furthered widespread hardship as many former state-owned businesses were forced to shut down and brought about a prolonged depression. The mass unemployment and hyperinflation signaled the rise of the Communist Party of the Russian Federation, who expressed the frustration the people had with the growing income disparity and economic turmoil as a result of the Yeltsin reforms. Russia never fully recovered from the first depression in 1992 and the consequent political and economic crises when Russia’s recovering economy collapsed completely in 1998. Even the prosperous oil and natural gas industries, who account for 80% of Russian exports, were crippled by the collapse in 1998. Foreign investors fled the country as inflation and interest rates spiraled out of control. Russia managed to bounce back by 1999 due to rising world oil prices, but Yeltsin was soon forced to resign and Vladimir Putin took his place as President. Under Putin, there has been relative economic stability in Russia, with Putin’s crackdown on the Oligarchs and his attempts to alleviate the income disparity in the country.

Nonetheless, current conditions in are still far from being fully stable and normal. Since the fall of the Soviet Union, GDP has contracted by 43% and industrial production down by 55%. Unemployment is relatively low compared to the recent years, but it is still considered high at nine percent. Inflation is on the rise again with predicted estimate going up to 13% this year and growth being cut down to 5.8%. Oil prices, even at $60 a barrel, are no longer able to compensate for Russia’s growth. After climbing for nearly five years, oil production began to stagnate last autumn. Present oil reserves are being depleted and companies must now look beyond the easy-to-tap oil reserves of western Siberia for new fields in the East. This is addition with the loss of confidence after the government's assault on oil giant Yukos, has greatly shaken the oil industry. Without the vital oil industry that had kept Russia out of total depression, the Russian economy can only stagnate or decline in growth.

In addition to the pure numbers of growth and inflation, infrastructure, small businesses, and income disparities, are worse than ever. Investment in infrastructure as a percent of GDP in Russia is at an all time low with roads, power stations, and oil reserves,