Failure of Economic Reform in Russia

Formerly the preeminent republic of the Union of Soviet Socialist Republics, Russia has
been an independent nation since the dissolution of the Soviet Union in 1991. Because of
its great size, its natural resources, and its political domination, the Russian Federation
played a leading role in the economy of the Soviet Union. In the years preceding the
disintegration of the union in 1991, the economy of Russia and the union as a whole was
in decline. In 1992, immediately after the separation, the Russian government
implemented a series of radical reforms. Price controls were abolished as the beginning
of a transition from a centrally controlled economy to a market economy. An immediate
series of sharp price increases caused extreme hardships for the Russian people.1

Inventor of the fictional five-year plan,2 the fake harvest, Russia introduced
another novel economic concept in 1996. It was a society modeled after the capitalist
society. High expectations of economic growth even with "shock therapy"--
unemployment, social discontent and opportunities for corruption;3 influence of western
politicians and the U.S. policy; and failing to completely reform the communistic system
were some factors to why some became rich but led many to misery and an early death.

Despite the huge infusions of Western money, millions of ordinary Russians struggled to
survive in an economy neither capitalist nor communist, but something brand new and
strange which ultimately led to the failure of economic reform in Russia.4

In the Fall of 1996, Boris Yeltsin won the presidential election in Russia. He was
viewed as the "personification of reform in Russia....who had vanquished the Communist
dragon during the hard-line coup attempt of August 1991 -- and the leader best placed to
introduce democratic, market-oriented reforms."5 In the same year Yeltsin became the

President of Russia, the U.S. ambassador to Russia, Thomas R. Pickering, predicted by
the fall of 1999, Russia would be one of America’s top trading partners. But in fact, three
years after Pickering addressed his farewell speech to the American Chamber of
commerce in Moscow, Russia ranked thirtieth in the list of American trading partners. In

1998, Russia’s gross national product plummeted by nearly fifty percent over the last
decade. More than sixty million Russians, which is nearly half of the population, lived
below a very low official poverty line. A steep fall in prices of their natural resources --
oil, gas and gold consequently led to reducing both the export revenues and tax collection
in Russia. Almost an article of faith for Russian reformers and their Western supporters,
an assumption made was that Russia\'s salvation lay in tight monetary discipline, rapid
economic liberalization and a massive privatization program.6 According to Richard E.

Rawles, head of the Russian Psychology Research Unit, in University College London,
western financial institutions were unaware of "the cultural traditions of Russia and
complicated interactions of pyschologies and mentalities with social structures"7 that had
been largely ignored.

E. Wayne Merry, who was head of the political section from 1991 to 1994, sent a
telegram early 1994 which criticized America\'s "evangelical attempt"8 to remold Russian
society in its own image. Just as Rawles had argued that Russia was physcologically and
culturally unprepared for a free market so suddenly, Merry argued that such efforts would
almost certainly fail because Russia -- unlike Eastern European countries such as Poland
and the Czech Republic -- had little tradition of free markets or the rule of law. The

United States, in Merry\'s view, would end up getting blamed for the failure of "shock
therapy". Reformers were well aware of the risks -- unemployment, social discontent,
and opportunities for corruption. Nevertheless, foreign investors disregarded these
handicaps and invested in the Russian stock market to unprecedented heights. It was
believed these problems would resolve themselves if the economic medicine were
applied with sufficient vigor.9 In actuality, they played a role in the failed reformation.

Since western investment was involved, it was inevitable that western politicians
were also factors in the unsuccessful attempt to bring capitalism into the Russian
economy. There were reports of massive Russian money laundering through the Bank of

New York, which raised new questions about the logic of pouring international loans into
a country spending an estimated ten billion to fifteen billion a year in capital flight.

Billions of dollars loaned by the IMF was going into the Russian economy but there was
no evidence of progress. Foreign policy advisers to George W. Bush, the leading

Republican presidential candidate, attempted to link Vice President Gore to the failure of
economic reform in Russia because of his much exaggerated relationship with former
prime minister Viktor Chernomyrdin.