Russia in Global Affairs

FOUR CRISES

Russia’s transition from Communism to a market democracy was not
an easy task. It still is and will continue to be a subject for
difficult and energetic debate – political, theoretical and
ideological. A tortuous and contradictory journey gave rise to
acrimonious debate about the very nature of the reform. This debate
focuses upon the effectiveness and appropriateness of the reform,
and whether there were alternative ways of meeting the challenges
then confronting Russia.

One of the key points of the debate considers several questions,
such as: To what extent were Russia’s problems unique to the
country? Were they inherent in the historical experience, as well
as the national and cultural features of Russia’s development? And,
accordingly, to what extent were universal approaches and the
experience of other countries applicable in developing and
implementing a programme of post-Communist restructuring? This is
all the more important because an answer to these questions makes
it possible to summarize the results of the first post-communist
decade, as well as formulate some important problems concerning
Russia’s further progress toward the free market and
democracy. 

At the end of the 1980s, Russia (or rather the Soviet Union)
encountered formidable challenges associated with four different
transformational processes. It was those processes that determined
the country’s development throughout the 1990s. While not
necessarily interrelated per se, they proved to be intertwined in
Russia, substantially affecting each other, not to mention the
economic and political development of the whole country.

First, Russia faced the challenges of the post-industrial epoch.
Transition from an industrial to a post-industrial society was
accompanied by severe structural and macroeconomic crises, such as
those the Western countries experienced from the 1970s onwards. The
Soviet Union was able to delay its structural adjustment to the new
challenges thanks to the favorable conditions of the world markets.
One of these was the oil crises, which sharply increased the prices
for important Soviet exports. But the price of that delay made the
adjustment all the more painful when there was no longer any
escaping it. The structural crisis of the Soviet economic system,
which climaxed in the drastic decline of Russia’s present market
economy, resulted from the same processes which, with reference to
Western countries in the 1970s, were described as
“stagflation.”

Intense discussions about the nature of the structural
transformation continued throughout the 1990s. Some authors
described the decline in output as de-industrialization, although a
more in-depth analysis of the ongoing processes allows the nucleus
of a new, post-industrial structure to be discerned in the
structural change that is currently in progress (see Table
1).  Telecommunications and electronics industries were
booming (since 1998, the latter has been growing by as much as
one-third annually). Modifications to more advanced products were
constantly taking place in the chemical and metallurgical
industries. The number of educational institutions was increasing
markedly, as were the numbers of undergraduate and postgraduate
students. Of course, this trend is not absolutely predominant, and
whether it will be sustained or not will greatly depend on the
efficiency of economic policy, as well as on the government’s
ability to promote favorable change.

Table 1. Some indicators of social and economic
development  in the 1990s  (1991 = 100 unless stated
otherwise)

Second, post-communist transformation was occurring throughout
Russian society. This was a truly unique experiment. Never before
in history (including the history of economics) has there been a
transition from a totally state-controlled system to a market
economy. Of course, the most difficult part involved the
transformation of property rights, i.e. privatization on a national
scale. However, this sort of transition was not peculiar to Russia.
Post-communist change was simultaneously occurring in about 25
countries. What is more, Russia was not a pioneer in this respect:
a number of countries had embarked on such a transition two or
three years earlier, which provided the post-Soviet republics with
some experience, albeit very limited in nature.  

Third, Russia was faced with a full-blown macroeconomic crisis
resulting from its populist economic policies (beginning in the
second half of the 1980s), which led to the breakdown of the fiscal
and monetary systems, extremely high inflation and an industrial
output decline. However, the phenomenon of macroeconomic crisis,
together with the various ways of handling it, had been thoroughly
studied by the end of the twentieth century. In the post-war
period, many European, Asian and Latin American countries had to
grapple with similar problems. Moreover, Russia had a similar
experience of pulling itself out of a severe macroeconomic crisis
in 1922-23.

Fourth and last, the political, macroeconomic and structural
changes that Russia faced at the turn of the 1990s were accompanied
by a full-scale social revolution. A systemic transformation, which
radically changed the social set-up of the country, was being
initiated inside of a weak state, which in fact is one of the
defining characteristics of a revolution. By the time the
post-communist changes had begun, practically every institution of
the state had been all but destroyed, and their restoration was
essentially the central political objective of the first
post-communist decade. Moreover, economic reform advanced only to
the extent that the institutions of the state were restored, which
made the pace of reform much slower than in most other
post-communist countries. Among the countries undergoing
post-communist transition, the revolutionary transformation
affecting Russia was a unique feature, although not entirely new to
European history.

The interconnection of these crises determined not only the
uniqueness, but also the peculiar complexity, of the reforms.
Whereas in all known cases the policy of financial stabilization
could be based on existing institutions of a market economy (not
always effective but at least existing), in Russia stabilization
and formation of market institutions went on almost concurrently.
Naturally, this considerably complicated and prolonged the reforms.
And the absence of a real state (political institutions, including
a system of legal order, law enforcement and so on) that is
characteristic of a revolutionary epoch meant that the
implementation of these liberalization measures could not be
delayed.

Russian reformers were frequently criticized for their
preoccupation with financial (or stabilization) policy at the
expense of institutional reforms. This seems to be a bit unfair,
since institutional reforms were receiving considerable attention
from the very beginning of the post-communist transformation. It
was simply that the institutions which had to be created in Russia
were perceived by Western analysts as something given. Meanwhile,
over the course of the 1990s in Russia, the fundamental
institutions – without which a market economy cannot exist –were
created: a democratic constitutional system, the institution of
private property, free price setting, an environment of
competition, financial markets, a banking sector, labor market and
much else. Of course, the functioning of these institutions, their
effectiveness and reliability, can and do evoke sharp criticism,
particularly from detached observers. However, the problem is that
all these institutions previously did not exist—and not only in
practice but also in the historical memory of the people. This is
different from, say, the situation in the Central and Eastern
European countries, where the Communist regime had existed for only
forty years, that is, less than the life of one generation.

As the new institutions were formed, other economic tasks, above
all stabilization, could be solved methodically. From this
viewpoint the internal logic of macroeconomic stabilization can be
seen. As is well known, in Russia this task took approximately nine
years (1991-1999) and went through several stages. In 1992, the
liberalization of prices was carried out, which allowed inflation
to be converted from concealed (total shortage of goods) to open
form, and thereby the initial precondition for stabilization to be
created. This action required no institutions other than a
reforming mood on the part of the government, as well as the
readiness of society to pay a definite price for overcoming the
‘goods famine.’ But the attempt at macroeconomic stabilization in
1992 failed – neither the social nor the political conditions were
in place in Russia. There followed monetary stabilization (1995),
for which the adoption of a new Constitution was required, breaking
the link between the Central Bank and the populist body of
deputies. The independence of the monetary authorities, combined
with a stabilization course on the part of the government, allowed
the ruble to be stabilized. This too, however, was not
stabilization. A continual conflict between the executive and the
legislative branches of power prevented the balancing of the
budget. At the same time, the rise of the institution of state debt
allowed stability of the ruble to be ensured for some time despite
the weak budget. Only the gradual overcoming of the revolutionary
political crisis, together with the formation of a government
majority in the Duma, allowed the task of macroeconomic
stabilization to be fully solved.

The sharpest criticism of the economic reforms has been directed
at the privatization program that was carried out in Russia in the
first half of the 1990s. Nevertheless, it is difficult to dispute
the exceptionally important role the creation and strengthening of
the institution of private property also played in solving the task
of financial and political stabilization. 

RESULTS

First of all, macroeconomic stabilization was achieved. The
crisis was quite protracted (lasting about ten years) but not
unprecedented in economic history. Stabilization was brought about
through an array of standard measures (liberalization, fiscal and
monetary restraint), and its success paved the way for the
resumption of economic growth. Of course, stabilization was not
achieved once and for all.  An economic system is never
guaranteed from mistakes by the authorities, against unsound and
populist decisions.

The process of revolutionary transformation was practically
completed. The restoration of the state is very much in evidence.
Macroeconomic stabilization has gone in step with political
stabilization. In 1999, analysis of political parties’ pre-election
programs showed the reference points of the main political groups
to be converging, however important the differences between them. A
common system of fundamental political values, which are above
political dispute, is emerging. Specifically, no one calls into
question the importance of private property as the basis of
economic and political life (although appraisal of the outcome of
privatization still arouses controversy); no one calls for an end
to tight monetary and fiscal policies (until quite recently
inflationary financing of the budget deficit was widely thought to
be acceptable); all groups (even on the left) support the policy of
alleviating the tax burden, while everyone accepts the need to
shift the emphasis of policy implementation to profound
institutional reform. Of course, the practical recommendations of
particular political groups still widely differ, but those
differences are no longer so pronounced as to constitute a threat
to political stability. The ability of the authorities to secure
basic macroeconomic stability is the most important
characteristics, thus suggesting that the crisis has been
overcome.

Putin’s first presidency (2000-2004) brought new elements to the
pattern of post-revolutionary political and economic stabilization.
A steady pro-government majority was being formed in the Lower
House – the Duma. Practically every new bill sponsored by the
government could now rely on parliamentary support, which was very
important for the political regime to further advance its
initiatives. On the one hand, there was less political haggling
over each specific bill, and hence more consistent pursuit of the
government’s chosen course. On the other hand, the system of
relations between the government (relying on its parliamentary
majority) and the opposition (the parliamentary minority) was
assuming the form typical of stable democratic
societies.  

It could be persuasively argued that the goals of the
post-communist transformation have been successfully accomplished.
This conclusion tends to provoke especially strong objections and
therefore needs to be clarified. The Communist system was
distinguished by three main political characteristics: a
totalitarian political regime, absolute domination of state
ownership in the economy, and shortage of goods as a basic
constituent of economic and political life. By the end of the
1990s, the three main features of Communism had been eliminated in
Russia. This certainly does not mean that Russia has fully overcome
the crisis. However, severe structural problems which Russia is
still facing and which make it vulnerable to external shocks are
not, strictly speaking, a legacy of the Communist system. They
reflect rather the development and crisis of the industrial system,
and it is no accident that practically all countries which have had
to cope with the transition from an industrial to a post-industrial
society have faced similar problems and challenges.
 
To sum up, the dominant socio-economic problems confronting Russia
today are the crisis of the industrial system and the establishment
of the socio-economic foundation of a post-industrial society. This
process defines the main challenges that the country will need to
meet in the coming decade. Apart from these challenges, which
influence Russia ‘from the future,’ so to speak, and form the
objective of its development, it is necessary to see another factor
which also will contribute to the overall picture of modern Russia.
Revolution has a long-lasting impact on society above and beyond
its influence on the current development of the revolutionary
nation.