Like other former communist countries, Russia undertook a series of dramatic reforms in the 1990s to privatize state assets and free up market forces. Looking to the lessons of Poland and acting on the advice of Western economic advisers, Russia opted for a course of shock therapy, rapidly dismantling central planning and freeing up prices with the hope that these actions would stimulate competition and the creation of new businesses. The immediate result was a wave of hyperinflation: in 1992 alone, the inflation rate was over 2,000 percent. Savings were wiped out, the economy sank into recession, and tensions between President Boris Yeltsin and the parliament deepened, helping to foster the violent clash between the two branches of government in 1993. The gross domestic product (GDP) contracted dramatically; only in the late 1990s did it begin to grow again.
During the late 1990s, Russia began the process of privatization, which was equally problematic. A small number of new businessmen quickly emerged from various ranks of society. Taking advantage of the economic environment to start new businesses and buy old ones, they amassed an enormous amount of wealth in the process. These businessmen, who came to be known as the oligarchs, were noted for their control of large amounts of the Russian economy (including the media), their close ties to the Yeltsin administration, and the accusations of corruption surrounding their rise to power.
The problem of the oligarchs was compounded in 1996, when the government instituted the loans-for-shares program. Strapped for cash (and fearful of a Communist Party victory in the 1996 presidential election), the Yeltsin administration chose to borrow funds from the oligarchs in return for shares in those businesses that had not yet been sold off by the state—in particular, the lucrative natural resources industry and the energy sector.
Labor Force by Occupation
A pie chart titled Labor Force by Occupation split in 3 sections: Services 63 percent, Industry 28 percent, and Agriculture 9 percent.
To be fair, Russia’s ongoing economic problems are not simply the result of the economic reform policies of the 1990s. Many of these problems are a function and legacy of a Soviet order that had reached a crisis stage, a condition that any set of policies would have had difficulty confronting. Still, the economic reforms of the 1990s left Russia in a tough situation as Putin came to power. The government faced high rates of poverty, a great deal of inequality, the disproportionate power of the oligarchs, widespread corruption and organized crime, and an inefficient state. During the 1990s, the country’s GDP declined by around 40 percent.
What has changed in the Russian economy since the 1990s? One of Putin’s first steps was to act against the oligarchs and divest them of power. Using a variety of tools, he stripped many of the most powerful oligarchs of their assets, many of which they had gained under the loans-for-shares scheme. A number of the most prominent oligarchs left the country to avoid imprisonment; others wound up in jail under dubious charges. But those oligarchs who agreed to toe the line were able to hold on to their assets and became reliable supporters for Putin.
The cowing of the oligarchs was extremely popular among the Russian public, but their elimination did not lead to greater economic transparency. Many assets were renationalized and brought under state control, but in other cases, ownership is murky. A large portion of state firms has been partly or entirely redistributed among the siloviki who are close to Putin, forming a new economic elite around the security services. The economic system can be viewed as dominated by a set of factions composed of siloviki and other elites who support Putin while competing with one another. If anything, the Russian political economy has become highly patrimonial, and Putin uses his position to provide economic access to his inner circle in return for their loyalty.
When Putin returned to the presidency following his earlier terms as president and his stint as prime minister, he could point to a number of economic successes. The country enjoyed several years of economic growth after many years of stagnation. As per capita GDP rose sharply and poverty declined, Russia also saw the emergence of a new middle and upper class. Its per capita income at purchasing power parity (PPP) began to approach that of several European Union member states, such as Greece.
However, we should be clear about the sources of this economic progress: most of the country’s exports are oil, gas, and metal, all of which benefited from a dramatic growth in the international markets. These resources have provided the overwhelming majority of the country’s GDP and government revenues. Many investors, foreign and Russian, have been deterred by the high degree of corruption and political intervention in many areas of the economy and driven out by the war against Ukraine and subsequent international sanctions. Since 2014 the GDP has fallen by a quarter. Finally, the prominence of the siloviki in the economy has led to increasing inequality. Russia boasts 112 billionaires, which is particularly striking given the relatively small size of the GDP, both total and per capita. One result of the concentration of wealth and limited opportunities has been a marked emigration of the well-educated. It is estimated that somewhere between 4 and 5 million Russians have left the country over the past 20 years since Putin first came to power. This does not include another half million or more who have fled because of their opposition to the war or fear of mobilization. Most of these emigrants are well-educated members of the middle class, exactly the kind of population that the country needs to retain in order to prosper.20
Russia appears to be in the grip of a “resource curse” economy like those found in Iran and Saudi Arabia. The argument is that where natural resources are a major part of the economy and owned by the state, they run the risk of giving the state and government too much economic power while stifling other forms of economic development.21 Declining natural resources or declining demand for those resources, whether through sanctions or technological changes, could eventually undermine Russia’s economic progress. In recent years, a drop in prices for oil and other natural resources, combined with international sanctions, has reversed the country’s steady economic rise during Putin’s time in power. Restrictions on imports and exports have led to a shrinking economy. These developments, together with the steep cost of the war, have restricted government spending and reduced the public’s standard of living. This, in turn, appears to have increased rivalries among the siloviki, who are fighting over a shrinking pie and uncertain what may occur when Putin finally leaves power.
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Source: Zach Bikus and Julie Ray, “Economic Woes Add to Russians’ Frustrations in the Pandemic,” Gallup, February 24, 2021, https://news.gallup.com/poll/330005/economic-woes-add-russians-frustrations-pandemic.aspx (accessed 2/18/23).