Yeltsin/Putin, the oligarchs, what happened in the 1990s economic collapse of the Russian Federation, history lesson 101

After the collapse of the Soviet Union in 1991 and collapse of Russia’s controlled economy, a new Russian Federation was created under Boris Yeltsin in 1991. The Russian Federation had multiple economic reforms, including privatization and market and trade liberalization, due to collapse of communism.


Quick lesson on how the oligarchs got rich, some got exiled, as the Russia Federation went broke and Yeltsin sold it to the lowest not highest bidders and later when that didn’t work Putin put one oligarch – the richest of all of them on trial- the others saw the writing on the wall. Some went into exile the others said to Putin what do I need to do to not be next and he told them how much money he wanted and also the reforms they would have to accept.

“Despite Yeltsin’s reforms, the economy performed horribly through much of the 1990s. From about 1991 to 1998 Russia lost nearly 30% of its real gross domestic product (GDP), suffered numerous bouts of inflation that decimated the savings of Russian citizens. Russians also saw their disposable incomes rapidly decline. Further, capital was leaving the country en masse, with close to $150 billion worth flowing out between 1992 and 1999.”

But the system of oligarchs before or after the reforms is still broken. Oh Putin put some reforms through yes but there were still people who were homeless and hungry. That could not afford to live on the pensions from the state, the inflation made that impossible.

Part of the problem was mismanagement after the changeover from one type of economy to the other. Trying to do it too quickly Yeltsin caused a lot of unnecessary problems like inflation and making the old manufacturing and  market system which was inefficiently run by highly subsidizing them instead of reforming them to make them more efficient and to market products that would more likely sell abroad. For the home market to keep making things like their state car that was often joked about as crappy but it was easy to fix and all of them were the same so it was an efficient system in that respect.

What was inefficient was things like car parts, I recall stories of people taking their windshield wipers with them when they left their cars because they’d be stolen otherwise. They were in such short supply there. So instead of subsidizing the inefficient industries the money should have been spent on producing products the peopplereally needed.  Also if the quality of the product was high enough it could be sold outside the country depending on the industry. That again is the reason for the reforms, to make the industries more efficient, make a higher quality product that could be sold abroad for foreign currency the country badly needed. There were also often shortages of simple things like toilet paper. I mean a country  that can’t calculate how much of that it will sell in a month, that is pretty inefficient. lol

Yeltsin should never have privatized industries so soon. Selling them off not only meant they were out of state control in terms of ie energy companies the prices they would charge customers.  Until price controls were put into place these oligarchs that had control of major industries and railroads, energy, media, internet, mines, metal factories and other sectors charged whatever they liked and people had to pay and they became billionaires in no time. These industries were sold at a fraction of their real value so that is another thing that was wrong,  if Yeltsin had forced them to pay their true value so that over time the government would have received that money back at least that wouldn’t have been as bad. But politically people were angry that some things were sold off that should never have been and I agree. Especially at first the energy sector should have been kept nationalized so the prices were controlled by government as well as regulation of them as to how they were run. And at least one TV station radio station, newspaper and the internet should havve been under the control of thee government

I’m not a communist by any means but in those early days of reforms it was important that the government be able to communicate with its people and not everyone had computer access or even radio/TV if you were homeless but a tossed away newspaper you could still get the news a few days late.

For us in the west we just didn’t grasp what it meant to the people of Russia when the Soviet Union fell. I mean for us it was a happy thing, we were relieved an old enemy was gone it couldn’t pose the threat to the west anymore though of course it stil had a huge number of nuclear devices pointed at us that we were going to have to deal with but at least they were no longer this big monolithic power anymore. But for them the collapse was an economic and social disaster.

“The Immediate Post-Soviet Period

The first seven years of Russia’s transition from the Soviet central planned economy (1991-1998) were not easy. This [period, which coincided with most of the regime of President Boris Yeltsin were, by most accounts, a time of economic chaos, if not near collapse and failure.
During the period, Russia lost close to 30% of its real gross domestic product (GDP), a decline reminiscent of the Great Depression of the 1930s in the United States.
Russia also suffered very high rates of inflation– over 2,000% in 1992 and over 800% in 1993– before it declined to more tolerable, but still high, levels of around 20% by the end of the 1990s. The inflation robbed Russian citizens of their savings as the value of the ruble collapsed, eventually forcing the Russian government to sharply devalue the ruble on January 1, 1998, with 1 new ruble equaling 1,000 old rubles. As a hedge against inflation, some residents, who were in a position to do so, invested in hard assets such as art works, foreign currencies, and real estate. But the greater portion of the population saw their savings evaporate. The disposable income (income available after taxes) of the average Russian declined 25% in real terms between 1993 and 1999.
The quality of life of the average Russian deteriorated in other terms. In 1991, the life expectancy of the average Russian male was 64 years and for the average Russian woman it was 74 years. By 1999, the life expectancy had declined to 59 years for males and 72 for females.


Russia’s economic problems came to a head in the financial crisis of August 1998. The crisis proved to be a pivotal event in Russia’s transition to a market economy. It exposed many of the weaknesses of Russian economic policies and the need for economic reform.
The crisis culminated in August 1998, when the government abandoned its defense of a strong ruble. It also defaulted on official domestic debt, forcing its restructuring and imposed a 90-day moratorium on commercial external debt payments. The crisis led to the demise of many Russian banks, owned by “oligarchs,” which had held government debt.
Russia did not perform much better in the foreign sector. Foreign direct investments (FDI) flows
were meager given the size and needs of the Russian economy. Furthermore, Russia was incurring serious capital flight– some $150 billion worth between 1992 and 1999 by one estimate.
Russian foreign debt soared in part because Russia had taken on the foreign debts of
the entire former Soviet Union in an arrangement made with the other former Soviet states.
However, Russia had also incurred its own foreign obligations since the collapse of the Soviet Union.
The economic problems were in part a continuation of economic collapse that was a factor in the demise of the Soviet government. The problems were also in part the result of the rapid
disintegration of an economic system in which the state, guided by the communist party,
maintained complete control and market forces were an anathema. It was a system in which the government emphasized heavy industry production regardless of cost and to the detriment of other sectors, including agriculture, services, and consumer industries. The central planned economy also operated huge production facilities that proved to be inefficient, not very adaptable to change, often producing products of poor quality, and not competitive in world markets.
However, the problems were also the product of poorly executed, if not poorly conceived, economic policies of the Yeltsin regime. The regime failed to rein in government spending as it tried to deal with the Soviet legacy of massive subsidies for industry and the population.
During the period, the Russian government ran up large budget deficits that reached as high as 9.8% of GDP, forcing the government to finance debt at very high interest rates. The Yeltsin regime was
also criticized for employing “shock therapy,” or radical macroeconomic measures, as part of its economic reform program, largely attributed to then-Prime Minister Yegor Gaidar. Critics claimed that the measures unnecessarily created inflation and destabilized the economy because market prices were introduced too early in the reform process. The most controversial aspect of the early post-Soviet economic transition was the effort to privatize state-owned and operated production facilities, in particular, the so-called loans for shares program.
In 1995, the government auctioned off to local banks shares in 29 of the most
potentially lucrative firms, including major oil companies and mineral producers (Yukos, Lukoil, Sufgutneftegas, and Novolietsk Iron and Steel).
The banks held the shares as collateral against which they issued loans to the government to finance its ballooning deficits. The auctions were controlled by individuals with close ties to the Yeltsin regime and whose banks won the bids. They obtained the shares at a fraction of their market value and were able to keep them when the government failed to pay back the loans. The government did not challenge their control of these assets because their owners, who became known as“oligarchs,” financed Yeltsin’s reelection as president in 1996. They used their new wealth to gain control over other interests such as the media. The privatization program also resulted in small and medium-sized firms owned by those who managed them during the Soviet period–the “red directors.”

Period of Rapid Growth (1999-2008)

While the 1998 financial crisis had immediate negative effects and severely damaged Russia’s financial credibility, some argue that it was a “blessing in disguise” as it created conditions that allowed Russia to achieve rapid economic expansion throughout most of the next decade. A significantly depreciated ruble helped stimulate domestic production leading to a spurt of economic growth over the next few years with real GDP growth reaching 8.3% in 2000 and approximately 5% in 2001.

The coincidence of Putin’s succession to power in 1999 with the reversal of economic fortunes gained the new president significant popularity, and he made it his goal to avoid the economic chaos of the previous decade and move the country towards long-term growth and stability. Between 2000 and the end of 2002, Putin enacted a number of economic reforms including simplifying the tax system and reducing a number of tax rates. He also brought about the simplification of business registration and licensing requirements, and the privatization of agricultural land.



Leave a Reply

Fill in your details below or click an icon to log in: Logo

You are commenting using your account. Log Out /  Change )

Google+ photo

You are commenting using your Google+ account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )


Connecting to %s