Russia – How Did it Come to This?

by | March 2, 2022

Back in 2009 and on an unseasonably warm autumn evening in Moscow, I was walking to dinner with a banker friend with a shared interest in history. At the time, we were both advising a large Russian bank which had recently listed its stock in London, and I was irked to see its share price had been hit in line with its Western competitors, despite a booming Russian economy and its having no exposure to the American sub-prime mortgage market.   

As we crossed Mayakovsky Square, I blurted out almost without thinking; “You know the last time we had a financial crisis like this one, it ended up in a war.” Germany, we agreed, no longer posed a threat.  But here we were in the capital of a former imperial power, that had been humiliated, and partially dismembered, experienced financial collapse, mass unemployment and hyperinflation, and was now in the hands of a dynamic new leader who was centralizing power around himself.

I remembered that conversation this past week, as Russian tanks rolled into Ukraine. Much of the commentary that surrounds these appalling events has criticised the West’s “end of history” triumphalism that followed the Soviet Union’s collapse, that displayed a gaping lack of sensitivity towards Russian insecurity.

What has been overlooked, however, is the nature of the transition of the Russian economy from communism to capitalism and whether that was possibly a more decisive cause of the unleashing of the demons of militaristic authoritarianism that have captured Russia under Putin.  

In the heady days that followed the victory of Boris Yeltsin in the 1991 putsch, free market idealists swept into power convinced that shock therapy was the way to turn Russia into a successful market economy. Those were the days of the 500 Day Plan of academic economists Grigory Yavlinsky and Stanislav Shatalin, for rapidly dismantling the communist leviathan and replacing it by a fully working market system.  In five hundred days Russia would manage, by will alone, to achieve what had taken most Western countries centuries of effort.  

Egged on by Western economists and following the success of the Czech voucher privatisation—that had had gifted the state industrial complex to its citizens almost overnight—Russia bravely followed suit.

Unfortunately, Russians were not Czechs. For a country, which until the communist takeover in 1948, had run one of the world’s most successful industrial economies, the transition was deceptively easy. 

But Russians had no first-hand experience of a market economy. For 70 years they had been force-fed cartoon images of rapacious capitalists in top hats feasting on the blood and sweat of oppressed workers. So, perhaps we should not be surprised that Russia’s experiment with ‘shock therapy’ failed.

Without a properly worked out institutional framework, nor any concept of the rule of law, much less a welfare state to support those displaced by the transition, chaos ensued. While the smart, ambitious and ruthless fought, in some cases literally with guns, for control of the commanding heights of the economy, the majority raised in a system which had guaranteed a job for life, found themselves out in the cold. Awful as life has been in hollowed out rust-belt towns of America, imagine being stuck in the equivalent of a company town in far off Siberia, when the sole industry or mine that provided not just employment, but a full range of health and social services, collapses. 

Anyone who has read Gogol and Dostoyevsky will recognize an irrational tendency in the Russian psyche to push ideas to illogical extremes. Having tested Marx’s theories to destruction,  the Russian intelligentsia turned to the doctrines of  Popper, Hayek and Friedman with no less zeal.

By the mid-90s,  Moscow, St Petersburg and a few other cities boomed on the back of buoyant oil and commodity prices, and inflows of opportunistic foreign cash. But life elsewhere was grim. The mortality rate in the Russian Federation rose from 10.7 per 1000 in 1991 to 18 in 2005 as rampant alcoholism, HIV and heroin addiction took hold. That’s twice the (pre-Covid) rate seen in the US or UK. In Russia, deaths of despair have been a reality for decades. 

Meanwhile, the best and the brightest, many of them products of a Soviet education system that rivalled anything in the West, fled for Wall Street, Silicon Valley and Tel Aviv, where—unlike Russia—they understood that what is in people’s heads, not under their feet, is the genuine source of wealth.

After Russia defaulted in 1998, eventually sealing Yeltsin’s fate, Putin was initially welcomed as a breath of fresh air, an opportunity to rein in the excesses of “the Wild East” and put Russian capitalism on a more stable and sustainable footing. However, Putin was also a product of his upbringing and education. Ultimately, wresting political control from the oligarchs allowed him and his clique to consolidate power and control over Russia’s wealth.  For the many ordinary Russians with worthless pensions and dead-end jobs, the promise to make Russia great again was understandably appealing.

There is an old Russian saying that he who goes to war should prepare two graves, one for the enemy and one for himself. Many in Russia, as in the West, will be hoping that by launching an unprovoked war against Russia’s Ukrainian neighbours, the Russian President will have dug his own grave.

But – hard as it may be to imagine today – it remains to be seen if whatever, or whoever, comes after Putin will be better equipped to salvage the wreckage that remains of Russia’s botched transition from communism to a pluralist market economy. 

Filed Under: Economics . Featured . Politics

About the Author

Andrew Garfield is a financial communications consultant and commentator on finance, media and social and economic affairs. After a 13 year spell in journalism where he wrote about finance, economics and European affairs for the Independent, Evening Standard, and the Scotsman, he joined Brunswick Group, a leading global communications agency, where he advised a number of leading global financial institutions during the 2008-2010 financial crisis. He was a partner there for more than 15 years, before leaving to set up his own firm, Garfield Advisory Ltd, three years ago. His commentaries have appeared recently in a number of leading publications including The Article, the Spectator, and Les Echos.

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