Russias transition to planned economics In a planned economy,
the __________ regulates or plans p_____________ and p________
Planned economies are also called _____________economies From the
late 19___s to 19___, the Soviet Union operated under a planned
economy The ideology of __________________ inspired the use of this
system encourages____________ownership of means of production
Slide 3
Conversion to a planned economy began after the end of the
___________________in ______________ The ________________ seized
control of Russia after this war __________________ (1870-1924) led
the Bolsheviks during the war The Soviet government
___________________ agriculture in the late 19____s and 19____s
Collectivization formed communities in which property is shared
Property was owned by the ______________, not individuals
______________(1878-1953) spearheaded collectivization succeeded
Lenin as leader of the Bolshevik Party The Bolshevik Party became
the _________________ Party of the Soviet Union
Slide 4
STALINS REFORMS Stalin aimed to transform Russia into a
__________ economy In this economy, ____________ and society
belonged collectively to all workers Stalin eliminated the class of
people who owned property without contributing ____________ This
class is referred to as the ____________ To achieve this goal, the
government attempted to __________________all private property This
included all factories and equipment, which were known as
_________
Slide 5
Russias transition to market-based economics Russia now
operates under a market-based economy Transitioning from a planned
to market-based economy took _______ years (19___-20___) Most of
the transformation occurred in the 1990s Russia no longer operates
under communism ECONOMIC GROWTH: Russia experienced rapid growth
from 19___ to 20__ Growth ended abruptly with the
________________________in 2008 Russia faces significant challenges
Several problems stall Russias development in the global
economy
Slide 6
Forms of Property Three forms of property comprise the
classical socialist system state-owned firms, budgetary
institutions, and cooperatives
Slide 7
Three Organization Types
Slide 8
State-owned firms There were both NATIONAL FIRMS REGIONAL
FIRMS
Slide 9
State-owned Firms National firms under the jurisdiction of
national-level ministries Regional firms under the jurisdiction of
provincial and local governments THE BIG BUT: Economist Janos
Kornai: categorizing firms as state-owned = meaningless because
subnational governments were controlled by the national government
All income from production contributed to STATE COFFERS Firms could
not be bought or sold
Slide 10
These firms provided employment and housing on a massive scale
The place of employment included all essential -- social services
Workers had access to apartments, daycare, schools, and other
social services This system gave rise to the communist
___________to________ system of social services
Slide 11
These firms provided employment and housing on a massive scale
State-owned firms encompassed most __ ________ ___industry auto
plants and defense factories The Soviet model emphasized economies
of scale in every industry Economies of scale describes the gains a
firm achieves from Expanding production Individual plants commonly
employed over 100,000 workers
Slide 12
Due to this living and working situation, laborers lacked
____________. In order to move, workers had to acquire a new job,
residence, and housing permit A housing permit was called a
_____________ The process of moving took years Low worker mobility
_____________the process of devising production plans Government
planners needed to keep track of labor at every individual firm
_____________________ of state-owned firms started in 1992
Slide 13
Budgetary institutions Budgetary institutions included
universities, research and educational institutions, Training
centers, trade schools, hospitals, and museums
____________or_______________________budgets funded budgetary
institutions Budgetary institutions had no obligation to make
____________cover___________________
Slide 14
Cooperatives Cooperatives operate similarly to state- owned
firms but were mostly located in _________________ The cooperative,
or collective farm, was called a _______________ Like state-owned
firms, cooperative farms operated on a ___________ scale Farms
included social services such as ___________ In the 1930s, Stalin
collectivized agriculture by stripping all citizens of
_______________ The state assumed ownership of all _________
Comrade, come join the KOLKHOZ!
Slide 15
COLLECTIVIZATION ECONOMIC MOTIVES: steady supply of grain
for________ The state believed larger farms would produce more
________________ than smaller farms POLITICAL MOTIVES: bureaucratic
control of farmers prevented them from fighting back Farmers could
not become a social, political, or economic force They fit
seamlessly into the body of the Soviet system They could not leave
the farm or outsource labor Essentially, farmers always remained
members of the collective
Slide 16
Summary of socialism Socialism replaces __________ownership
with __________ ownership The state owns all property Capitalists
could no longer __________workers All members of society
collectively worked and owned property Public ownership of
production transferred the responsibility of allocating resources
from __________mechanisms to ________________ economic
planning
Slide 17
CENTRAL PLANNING SYSTEM
Slide 18
The Planning System: The role of bureaucracy The bureaucracy
planned all economic activity top-down fashion Fulfilling plans was
compulsory planned economy sought to eliminate the anarchy of the
market state would organize the economy on a national scale
bureaucracy, not the market forces, controlled the vitality of a
firm Bureaucratic planning sought to distribute goods more
equitably goal followed the ideals of Marxism
Slide 19
Five-year plans dictated the Soviet economy Each five year plan
was split into annual plans Five-year plans functioned as
statements of policy intent rather than specific plans The first
plan: 1928 The last plan: deteriorated in the late 1980s
Slide 20
CENTRAL PLANNING Planning involved determining inputs and
estimating outputs for each individual factory This task was
enormous, especially since the Soviet Union spanned 13 time zones
Flawed estimations often resulted in shortages A lack of inputs
caused a lack of outputs
Slide 21
CENTRAL PLANNING Plans determined each firms level of technical
development, capital investment, and trade
Slide 22
CENTRAL PLANNING A system of bureaucracy-controlled price lists
designated prices of all goods Gosplan manually calculated every
aspect of the entire Soviet economy For most of this period,
planners lacked access to computers
Slide 23
BUREAUCRATIC RESPPONSIBILITIES
Slide 24
The role of managers and labor Plans required coordination of
the Communist Party, State ministries, and individual firms
Slide 25
The role of managers and labor Gosplan strategies to break
these systems down into manageable parts Planners disaggregated the
plan in a downward flow of information Higher levels sent
directions to lower levels State plans did not recommend or suggest
actions The term command economy derives from this process Planners
received an upward flow of information While drafting a plan,
planners received information from lower levels Lower levels
contributed nonbinding recommendations about target output
levels
Slide 26
The role of managers and labor The bureaucracy chose managers
at every level of the economy Each manager held a specific and
mandatory role in each plan Plans specified the amount of labor
allocated to each sector and factory
Slide 27
Incentives and attitudes Plans required firms to produce
exactly the amount stated in the plan managers lacked motivation to
innovate No reward for producing a surplus But the state punished
managers for failing to meet plan targets Managers could be removed
from office, sent to a labor camp, or accused of sabotage An
accusation of sabotage could lead to a death sentence
Slide 28
Central Planning and Central Management Motivation: intrinsic
ideological sense of duty to the Communist Party Motivation:
extrinsic - bonuses for good work awards and privileges In
addition, political power and prestige provided sources of
motivation For some, material benefit and fear were motivators
Slide 29
Central Planning and Central Management BIG BUT: the penalties
of taking risks outweighed the potential rewards Without ownership,
managers lacked incentive to exceed the bare minimum Janos Kornai
states Among managers, SERVILITY and a HEADS DOWN MENTALITY
prevailed.
Slide 30
Economic distortions A chronic shortage economy emerged in
almost every sector The planning system misestimated the supply and
demand for goods In a free market economy, changes in price
eliminate excess demand and supply This shortage condition affected
consumer goods
Slide 31
Managers had built-in incentives to underreport production:
Ensured that plan targets for the next year would not exceed the
firms capabilities A firm that could produce 150% of the target
plan might produce only 101% This signaled improvement but not
enough to cause expectations of it to increase Managers hid extra
output and sold it on the black market
Slide 32
Outputs differed in proportion to inputs Target plans only
specified that firms meet a goal, not fully utilize the allocated
inputs As a result, excess inputs existed in some sectors while
shortage existed in others This caused poor allocation of resources
and waste
Slide 33
STATE PRIORITIES: Socialism overemphasized rapid growth
Quantity of production took precedence over quality Inferior
quality of goods still impedes Russias ability to compete in world
markets The state prioritized industrial production over consumer
production
Slide 34
SUMMARY of PROBLEMS:
Slide 35
SHADOW ECONOMY / BLACK MARKET RESPONSE to the chronic shortage
state A black market is called a shadow economy economic activity
that lacks official state approval In the socialist system, private
property and private means of production do not exist Black market
participants circumvented price lists and other restrictions of the
system Some analysts believed the black market kept the system
alive The black market remedied some of the failures of the
planning system It also fueled corruption at every level of the
economy Russia still feels the effects of the black market
today
Slide 36
MIKHAIL GORBACHEV: VITAL STATS Born: 1931 Became General
Secretary of the Communist Party: March 1985 Ousted from office:
1991
Slide 37
Problems facing Gorbachev upon entering office Soviet Russias
stagnating economy was the greatest challenge planning system
lacked flexibility complexity of calculating economic needs
exceeded the capabilities Tim COLTON believed planners could not
anticipate the need for computerization As the economys size and
complexity increased, so did planning failures Values and
motivation suffered under the overbearing state Morris and Anna
Feldberg Professor of Government and Russian Studies and the Chair
of the Department of Government at Harvard University TIM
COLTON
Slide 38
Reform and reconstruction Gorbachev immediately recognized a
need for an overhaul of the economy This goal = perestroika,
literally translating to reconstruction did not intend to establish
a market-based liberal system sought to reform the existing
communist system
Slide 39
Criticism Many critics argued that Gorbachev ignored the Soviet
economy They compared his actions to Chinese leader Deng Xiaopings
actions in the 1980s They accused him of sequencing reform This
practice involves favoring easier political reforms In contrast,
Gorbachev began his reforms with the economic challenge Gorbachevs
economic policies between 1985 and 1991 Followed 4 phases
Slide 40
Phase 1: 1985-86 Recovering Worker Productivity and
Infrastructure
Slide 41
Anti-alcohol campaign First, Gorbachev tackled worker
absenteeism and low labor productivity He initiated an anti-alcohol
campaign to reduce chronic alcoholism among workers The campaign
closed down some alcohol factories Some Russians resorted to
producing bootleg liquor This created the unintended sugar shortage
The consumption of bootleg liquor also meant that productivity
remained low
Slide 42
Uskorenie Gorbachev attempted to invest in old infrastructure
launched an uskorenie, literally meaning acceleration acceleration
of investment in old plants and factories The Soviet Union lagged
behind the Wests technological progress Poor infrastructure impeded
labor productivity
Slide 43
The two programs were fundamentally incompatible, because one
reduced government revenue and the other demanded more government
spending.
Slide 44
Failure of both reforms Both initiatives failed socially
economically The anti-alcohol campaign worked against the
investment project Closed alcohol factories reduced state revenue
Decreased revenue hindered increases in investment Neither
initiative improved worker discipline, economic productivity, or
infrastructure Workers still consumed bootleg liquor The budget
deficit increased
Slide 45
Phase II: 1987-88: Glasnost and Demokratizatsiia
Slide 46
Glasnost A policy that allowed greater public discussion
Gorbachev initiated it at the in 1987 Central Committee of the
Communist Party PLENUM A plenum is a planning meeting allowed
citizens to openly discuss the merits of the communist and market
systems The Soviet Union had never allowed this level of free
speech Glasnost enabled the Soviet media and politicians to discuss
issues freely Politicians of this time comprised a new super
parliament in 1989 jumpstarted discussion on private property The
subject had always remained taboo
Slide 47
Demokratizatsiia introduced limited accountability into Soviet
politics The term demokratizatsiia translates to democratization It
enabled greater participation of interest groups in the political
process
Slide 48
Introduction of private property rights Cooperative enterprises
introduced quasi-property rights These firms operated in the
commercial and service sectors Cooperative enterprises lacked clear
governance or ownership structure They offered business initiative
among a small group of entrepreneurs Gorbachev granted managers
more autonomy on what to produce Managers still had limited
opportunities to explore new markets Gorbachev maintained the
collective farming system He refused to reinstate private farming
Intermittent food shortages persisted
Slide 49
MANAGERS JUST WANT TO HAVE FUN Gorbachev gave managers more
freedom from bureaucratic control. As a result, managers privatized
firms behind planners backs increased activity on the black market
acquired money that they later used to participate in privatization
HALF-MEASURES These partial reforms worsened the economic
situation. Gorbachev passed up his chance to implement sweeping
reforms before the onset of stagflation in 1989.
Slide 50
No sweeping economic reform Gorbachev tended to compromise with
conservative members of his Politburo The Politburo consisted of a
cabinet of elite communist party officials Compromising stalled
implementing far-reaching economic reforms He missed the chance to
initiate reforms before the onset of stagflation Stagflation
describes inflation with zero or negative economic growth This
presents the worst possible situation for an economy Normally high
growth accompanies inflation This concern still plagues Chinas
economy Gorbachev may have lacked the means to initiate widespread
economic reform may have lacked enough control within the Communist
Party may have lacked desire for change He believed in the
communist system, not liberal capitalism
Slide 51
Phase III: 1989: Stagflation and the Fall of Communism in
Eastern Europe Stagflation the Fall of Communism in Eastern
Europe
Slide 52
Phase III: 1989 Collapse of communism in Eastern Europe
Gorbachevs reforms met a receptive audience in Eastern Europe The
Berlin Wall fell in November 1989
Slide 53
ECE Satellite Governments Fell Several satellite communist
governments in Eastern Europe followed suit The collapse destroyed
guaranteed markets for inferior Soviet goods This loss further
damaged the Soviet economy
Slide 54
Gorbachevs indecision Gorbachev attempted to please both
radical reformers and conservatives As a result, his inconsistent
policies deepened the economic crisis Reform efforts created larger
budget deficits Sustained subsidies to industry drained the states
funds Inflation plagued the economy even as growth declined The
economy experienced stagflation Too much currency was circulating
High wages also caused inflation
Slide 55
PROBLEMS The state lacked a mechanism to collect taxes
Restrictions on the development of cooperative movements prevailed
The practice of barter grew Barter involves trade without currency
Agriculture experienced limited reform The Soviet Union faced
widespread food shortages This problem had not plagued Russia since
World War II The economy experienced negative growth rates
Production fell by about 10% per year until 1991 The Soviet Union
collapsed in 1991
Slide 56
SUMMARY
Slide 57
Phase IV: 1990-91: Boris Yeltsin and Reform Alternatives
Slide 58
The Five Hundred Day Plan summer of 1990 a group of young
Russian economists devised a plan dubbed it the Five Hundred Day
Plan
Slide 59
The Five Hundred Day Plan Gorbachev adviser and economist
Stanislav Shatalin led the project Economist Grigori Yavlinsky also
helped produce the plan
Slide 60
SHOCK THERAPY sought to imitate successful example of economic
shock therapy Borrowed idea from Poland
Slide 61
The 500 Day Plan
Slide 62
GORBYS RESPONSE He rejected the 500 Day Plan by the fall of
1990 favored a slower and more conservative approach to change
wanted to retain price controls for another two to three years
Gorbachev appointed a likeminded conservative prime minister
Slide 63
Elections across the Soviet Union The Soviet Union began to
lose legitimacy as an economic and political union Its 15
constituent republics, including Russia, started electing new
leaders Gorbachev authorized these elections
Slide 64
Boris Yeltsin (1931-2007) June 1991: became Russias first
popularly elected president Gave Yeltsin greater political
legitimacy than Gorbachev Gorbachev remained the unelected
President of the Soviet Union the unelected General Secretary of
the Communist Party
Slide 65
YELTSIN held various positions before becoming president Member
of the Politburo Provincial Communist Party boss Elected speaker of
a new Russian parliament in 1990 Yeltsin disagreed with Gorbachevs
lagging rate of reform He initiated much more rapid reform, leaving
Gorbachev behind
Slide 66
Gorbys Last Days Yeltsins popularity and power rivaled
Gorbachevs challenge pressured Gorbachev to pursue radical market
solutionsbut it was too late Gorbachevs Politburo attempted a coup
in August 1991 effectively removed Gorbachev from office
Slide 67
Gorbys Last Days By December 1991, the Soviet Union completely
collapsed The union dissolved into 15 new and separate countries
Russia was the largest of these new countries It adopted the title
of the Russian Federation
Slide 68
Gorbachevs Legacy Gorbachevs half-measures and indecisive
reforms deepened the Soviet Unions economic crisis By the end of
1990, political motives diverted reform efforts from economic needs
By the end of 1991, shortage and inflation persisted The inflation
rate loomed at over 100%
Slide 69
The Economy Before the Collapse Pre-existing problems Although
Gorbachev may have fallen short, the Soviet Unions system
deteriorated on its own Production levels declined throughout the
late 1970s They hit a free fall in the late 1980s under
Gorbachev
Slide 70
Growing State Sector Presented Problems The state controlled
almost every economic activity By 1991, most people were on the
state payroll Although the economy appeared fully employed, many
people did nothing We pretend to work and you pretend to pay us
became a popular saying Post-Soviet policymakers feared increasing
unemployment Minimal pensions and wages necessitated that people
work after retirement
Slide 71
Problems with STATE SECTOR Chronic shortages caused by
sub-optimal planning was an enduring problem Industrial production
far outstripped consumer production This imbalance contributed to
the low standard of living Economic growth under the planning
system carried high costs The system created inefficiency Because
of the systems emphasis on economies of scale, MONOPOLIES dominated
the economy Massive firms operated efficiently as monopolies
Slide 72
LACK OF INCENTIVES The Soviet economic system discouraged
technological innovation the West developed computer hardware and
telecommunications Even with a strong post-secondary education
system, Soviet Russia fell far behind The lack of incentive to
improve production yielded poor- quality goods Soviet Russias
manufacturing sector could not compete globally Instead, the Soviet
economy relied on natural resource exports, especially oil and gas
But global oil and gas prices were falling The Soviet economy could
no longer protect itself from world competition Before 1989, the
Soviet Union rarely traded with non-communist countries These
conditions exposed the Soviet Union to the resource curse
Slide 73
Flaws of the Soviet system Money had no real value since prices
did not reflect supply and demand Price lists determined prices for
everything sold in the Soviet Union Additionally, the ruble could
not be converted in international markets About 3,000 different
exchange rates existed for almost every item in foreign trade The
state controlled conversion rates Two types of rubles with
different values existed in the economy Enterprise accounts used
one type Consumers used the other The Soviet economy lacked
important financial institutions and markets These missing
essentials included a private banking system, a real estate market,
a stock market, and private companies
Slide 74
Negative growth rates Exacerbated by Gorbachevs reforms, these
conditions stunted growth By the collapse of the Soviet Union on
December 25, 1991, growth rates hit -17% Growth rates had declined
from +3% in 1989
Slide 75
Slide 76
REFORM UNDER BORIS YELTSIN The fifteen newly independent states
of the former Soviet Union diverged in their methods of economic
reform. This section will focus on Russias reform process as
implemented by President Boris Yeltsin. Between the fall of the
Soviet Union in 1991 and the end of Yeltsins presidency in 2000,
Russia made great strides in breaking down the planning system and
opening the door to privatization.
Slide 77
Shock Therapy in Theory The return of shock therapy Fall of
1991, Boris Yeltsin surveyed reform options He settled on the plan
put forth by a group of young economists led by Yegor Gaidar
Yeltsin appointed Gaidar prime minister Gaidar advocated rapid
transition to a market economy through shock therapy
Slide 78
SHOCK THERAPY demanded three immediate and simultaneous
reforms
Slide 79
SHOCK THERAPY in THEORY These three key policies inflicted a
short-term shock on the population Prices increased suddenly
Inflation quickly reached high levels Unemployment rose as the
state allowed unprofitable industries to fail Market mechanisms
would eventually kick in Gaidar expected the economy to grow within
three years The economy would stabilize well before Yeltsin was up
for re-election
Slide 80
Shock Therapy in Practice Elimination of price controls Shock
therapy began with the sudden freeing of prices on January 2, 1992
Average prices increased by 245% overnight Production dropped as
expected With relaxed import controls, foreign goods filled the
market Larger cities imported the most foreign goods Freed price
controls and relaxed import controls solved the chronic shortage
state But prices mostly surpassed the average Russians budget
Gaidar assured Yeltsin that market mechanisms would push prices
down He believed Russian manufacturers would try to match the
quality of foreign goods He also believed they would offer lower
prices to Russian consumers
Slide 81
BACKLASH! By April 1992, industrial enterprise managers opposed
shock therapy They were referred to as red managers They opposed
the end of subsidies to their firms Some refused to restructure to
accommodate market mechanisms Others lacked the means to
restructure even if they wanted to Debt accumulated as managers
traded for industrial inputs without money In the early 1990s,
barter economies existed in both agriculture and industry
Slide 82
The end of shock therapy To assuage opposition, the state
issued Central Bank credits to firms in the spring of 1992 They
also increased printing of the ruble This compromise caused spikes
in the budget deficit and inflation These effects especially hurt
consumers This violation of fiscal austerity and deficit control
signaled the end of shock therapy All other areas of the reform
plan receded as well Russia opted for more gradual reforms after
1992 This path necessitated abandoning several aspects of liberal
market reform
Slide 83
Privatization in Theory: 3 Main goals of privatization 1 st :
creation of a middle class 2 nd : creation of a market economy 3 rd
: separation of ownership from management
Slide 84
Privatization in Theory: 1 st goal of privatization First,
creation of socioeconomic stratification, particularly a middle
class Private property rights and ownership would allow classes to
form Economically, middle classes provide a reliable source of
taxation Politically, they represent varied interests that support
political pluralism Political pluralism contributes to the creation
of a democracy
Slide 85
Privatization in Theory: 2nd goal of privatization Second,
creation of a market economy Yeltsins main political legacy is
destroying the communist economic system The introduction of
private property prevented an easy return to the old system
Economist Anders Aslund believes two thirds of an efficient market
economy must be private No more than one third of national
employment can exist in the public sector
Slide 86
Privatization in Theory: 3rd goal of privatization Third,
separation of ownership from management In the planned economy,
managers did not legally own their firms They only controlled them
because of their access to information about the firm Newly
empowered managers lacked oversight from a board of directors They
pocketed extra money from selling excess products on the black
market
Slide 87
Yeltsin hoped to introduce managerial accountability to a board
of directors This principle was referred to as corporatization He
intended to incentivize managers with the principles of supply and
demand Directors would assess managers on profit and loss, instead
of political criteria Competitive managers would replace
poor-quality, command-era managers
Slide 88
Privatization in Practice Gaidar and Yeltsin passed the
privatization legislation in June 1992 They initiated the program a
month later, in July 1992 The program attempted to satisfy
conflicting ownership claims between managers, local governments,
and workers
Slide 89
State Committee on Property: created the State Committee on
Property to oversee the process This committee was also called the
Goskomimushchestvo They classified firms eligible for privatization
Small firms employed less than 200 employees Medium firms employed
200-1,000 employees Large firms employed over 1,000 employees The
committee divided firms into federal, provincial, and municipal
property They forced specific firms to privatize Wholesale trade
Retail trade Food services Construction Consumer services
Slide 90
SUMMARY: Firms classified by the State Committee on
Property
Slide 91
Privatization options Firms could choose between three
different paths of privatization These options differed in the
percentage of shares owned by insiders Insiders include managers
and workers of the firm The firm auctioned off their remaining
shares or traded them for vouchers All three options granted
insiders favored access to shares They allowed for over 25% insider
ownership Gaidar made this sacrifice to incentivize managers to
participate in privatization This decision was political, not
economic Critics called this a giveaway They believed this
concession prevented separation of ownership and management
Slide 92
Privatization in Theory: VOUCHERS
Slide 93
First stage of privatization: voucher program firms had the
option of auctioning off shares Share auctions began in December
1992 Thousands of auctions occurred every month between December
1993 and June 1994 Firms traded shares for vouchers through the
voucher program The voucher program began in August 1992 This phase
of privatization was brief Vouchers had to be claimed by the end of
January 1993 and invested by July 1, 1994
Slide 94
VOUCHERS The state distributed privatization vouchers to every
man, woman, and child The effort hoped to involve public sector
workers in the process of privatization Doctors and teachers did
not privatize their firms but could still participate Citizens
could trade their vouchers for shares of privatizing firms This
feature aimed to create a vibrant stock market Initially, each
voucher held a value of 10,000 rubles in shares When the first
privatization legislation passed in June 1992, vouchers were worth
$84 Russians received an average of $50 a month in wage Vouchers
held considerable value
Slide 95
Russians could use their vouchers in various ways Buy shares of
the firm they worked for (as long as it underwent privatization)
Buy shares of other privatizing firms Buy shares through mutual
funds This diversified their portfolio and spread risk across
different firms Buy shares in a voucher fund Sell them Give them
away
Slide 96
VOUCHER PROGRAM Firms resisted the voucher program because they
did not receive money from it In May 1993, Yeltsin stated that
firms must sell 29% of all shares for vouchers This proved
moderately successful as the average came closer to 20% Citizens
invested most vouchers by 1994 The first stage of privatization
finished that year
Slide 97
Second stage of privatization: auctions of state holdings July
1994 auctioning off remaining state holdings for cash Firms
received part of the proceeds as capital for restructuring The
government received the rest of the proceeds The government aimed
to finance its budget deficit without increasing inflation They
anticipated billions of dollars of revenues The government also
intended to create larger blocks of shares for foreign investors
Foreign investors could then increase their role in corporate
governance During the second stage of privatization, the benefits
to insiders decreased
Slide 98
The second stage of privatization failed in many ways Vladimir
Polevanov, the more conservative Minister of Privatization, froze
privatization Nationalists and communists in parliament influenced
this decision Polevanov advocated the re-nationalization of many
firms This prospect scared off foreign investors
Slide 99
Loans for shares scheme failure of the second stage of
privatization made the government desperate for revenue In 1995,
the Russian government settled on the loans for shares scheme They
auctioned off 12 blue-chip companies to a group of commercial
banks
Slide 100
Loans for shares scheme: All interested bidders, foreign and
domestic, could participate The bank offering the largest loan to
the government won a block of shares Banks could not sell the
shares until September 1, 1996 They could only keep a third of the
capital gains after they sold the shares The government made 1
billion dollars
Slide 101
Corruption in the loans for shares scheme On the surface,
bidders appeared to support the government However, banks mainly
wanted to control Russias largest companies Ultimately, the Russian
government could not repay the loans The banks assumed ownership of
the companies
Slide 102
The loans for shares scheme spawned a backlash Few banks had
the strength to participate Participating banks organized auctions
themselves This system presented a conflict of interest between
auction participants By the end of the process, banks openly
quarreled The process tainted the reputation of privatization It
transferred a large portion of the economy to a small group of
wealthy business people This group became known as the
oligarchs
Slide 103
SUMMARY: Loans for Shares
Slide 104
THE OLIGARCHS
Slide 105
1n 1991 Baturina founded INTECO (), Construction, though it
began as a plastics business. husband Yuri Luzhkov, became the
mayor of Moscow in 1992, corruption he awarded municipal contracts
to his wife's company. For instance, the contract to produce 85,000
seats for Luzhniki Stadium, Moscow's largest stadium, in
1995Luzhniki Stadium controlled 20% of construction in Moscow
Baturina then bought shares in Gazprom and Gazprom Sberbank.
Sberbank
Slide 106
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Slide 116
Other corruption Organized crime groups often purchased shares
from failing firms at little cost This practice stripped the firm
of value Purchasing shares this way did nothing for capital stock
or the economy in general
Slide 117
The effects of the privatization program By 1996, 75% of large
and mid-sized firms successfully underwent privatization Almost 90%
of industrial output also privatized Conservatives called
privatization a crime against the nation Privatization succeeded in
redistributing assets They did not reach the middle class as
originally intended The efforts did not provoke major social revolt
However, many people took issue with the speed of its
implementation Privatization also occurred at the same time as
other pervasive negative changes As a result, the public linked
privatization and negative changes
Slide 118
PRIVATIZATION by the Numbers
Slide 119
Causes of the 1998 Economic Crisis Non-inflationary measures
Growing DEBT
Slide 120
Non-inflationary measures By 1996, inflation and the ruble
exchange rate stabilized The years 1996 and 1997 were characterized
by stabilization and low inflation The ruble reached a
semi-convertible state Russia achieved stabilization by stopping
the Central Bank from printing money Reducing the money supply
decreased inflation
Slide 121
Non-inflationary measures The government borrowed money to
handle the growing deficit issued short-term treasury bills and
some longer-term treasury bills received loans from the
International Monetary Fund Federal revenues decreased and the
state reduced spending Federal and regional governments failed to
collect taxes This setback benefited large oil and electrical firms
They provided energy to firms who could not afford it In return,
the state allowed them to export without paying taxes and tariffs
Over time, these firms accrued tax debts to the government
Slide 122
Non-inflationary measures The state also withheld wages from
state- sector employees In 1996 and 1997, the state fell behind on
payment of wages and pensions Russians worked for no pay
Slide 123
Growing debt By late spring and summer of 1998, the state
started borrowing foreign currency These loans financed their
troubling domestic short-term debt In the first eight months of
1998, Russias foreign debt increased by 18.5 million dollars This
reduced the foreign currency reserves required to support the ruble
On July 20, 1998, the International Monetary Fund offered Russia
aid The package they offered aimed to finance wages and domestic
short-term debt Instead, Russia used the package to attempt to save
the ruble and failed
Slide 124
Slide 125
Effects of the 1998 Financial Crisis The financial crisis
occurred on August 17, 1998 Russia devalued the ruble defaulted on
its domestic and international debts The crisis eliminated all
savings in Russia Devaluation of the ruble made imported goods too
expensive Russians returned to purchasing domestic products This
increase in consumption boosted the recovery of domestic industry
By 1999, Russias economy started to grow for the first time since
the collapse of the Soviet Union The recovery of domestic
manufacturing played a part Increases in prices for raw material
exports also contributed greatly Growth continued until the global
financial crisis in 2008
Slide 126
VLADIMIR PUTIN & DMITRI MEDVEDEV Economic Growth from 2000
to 2008 President Vladimir Putin (elected in 2000) In his first
term (2000-2004), he enacted a series of reforms drafted by Yeltsin
Flat income tax of 13% New legal code Systems to prevent money
laundering Regime for liberalizing currency Reduction of taxes on
profits from 35% to 24% New land code allowing Russians to own
commercial and residential land
Slide 127
Putins Reforms
Slide 128
GDP reaches 8.5% in 2000! GDP reached an all-time high of 8.5%
in 2000 and sustained high levels growth
Slide 129
Economic growth Between 1999 and the summer of 2008, Russias
economy grew rapidly The result: budget surpluses, no foreign debt,
and sizeable hard-currency reserves Inflation remained modest GDP
growth reached an all-time high in 2000
Slide 130
RUSSIAN GDP
Slide 131
Rising oil prices Russias growth coincided with a rise in
prices for Urals crude oil This crude oil blend was Russias chief
export Price of barrel increased from $12 USD in 1998 to $70 in
2007 increased government and personal income Higher incomes
increased demand for manufactured goods and commercial
services
Slide 132
Professor Philip Hanson Professor of the Political Economy of
Russia and Eastern Europe, Retired Emeritus Centre for Russian and
East European Studies University of Birmingham It is by their
indirect effects that oil and gas price rises fuelled Russian
growth.
Slide 133
RUSSIAN OIL
Slide 134
THE RESOURCE CURSE The resource curse describes negative
effects associated with abundant natural resources Some economies
experience increasing debt, nationalization of resources,
government corruption, and negative growth Russia experienced many
negative consequences due to its supply of natural gas and oil
Slide 135
SUMMARY: Resource Curse
Slide 136
Dutch disease Russias heavy volume of mineral exports invoked a
sharp inflow of foreign currency This influx created a high
exchange rate As a result, domestic manufactured goods became too
expensive Russians purchased imported goods instead This phenomenon
is called Dutch disease
Slide 137
SUMMARY: Dutch Disease
Slide 138
Decay of other industries Russia was excessively dependent on
oil exports While Russia grew with the record growth of oil prices,
Putin loosened fiscal policy He began permitting oil companies to
take on debt Imports increased with the onset of Dutch disease
Slide 139
STABILIZATION FUND In 2003, the state established a
Stabilization Fund to store resource extraction tax revenues This
store of money was intended to serve as an emergency fund if oil
prices fell The state could use the money to fight inflation or
defend the ruble
Slide 140
STABILIZATION FUND In 2008, the government divided the
Stabilization Fund into two separate parts The Reserve Fund and the
National Prosperity Fund government did not use the money to
improve the poor manufacturing sector Russias manufacturing
received little attention even after the collapse The economy
lacked alternative industries when oil prices plummeted in
2008
Slide 141
Critique by Analyst Evgeny Gontmakher The state did not invest
in improving oil extraction technology and infrastructure This
problem greatly hindered Russias ability to recover from the 2008
financial crisis When oil prices crashed in 2008, so did the
Russian economy Russias economy mirrored the conditions of the
period following the 1998 crisis
Slide 142
Analyst Evgeny Gontmakher This is all a result of --incorrect
economic policy, --oil dependence, --and rampant corruption. Until
the system changes, these problems will persist.
Slide 143
Increased government ownership Government ownership of the
economy increased between 2003 and 2007 The state pressured firms
to invest instead of allowing market forces to provide incentives
State ownership of oil expanded considerably The state-controlled
natural gas company Gazprom purchased Sibneft The government also
took over gas company Yukos and oil company Rosneft Government
control of oil rose from 19% in 2004 to over 50% by 2008 The
Russian gas industry has not undergone privatization yet
Slide 144
GAZPROM swallowed Sibneft
Slide 145
Yukos swallowed Rosneft
Slide 146
The growth rate of oil production fell between 2004 and 2007
Exports fell proportionally
Slide 147
The 2008 Global Financial Crisis: Calm before the storm Dmitri
Medvedev: presidency, spring 2008 Russia was in an unprecedented
period of prosperity The stock market thrived Foreign direct
investment grew rapidly But investment remained low compared to
other emerging markets Real disposable income increased by over 10%
a year Consumer spending increased remarkably Unemployment fell
from 12% in 1999 to 6% in 2008 Poverty fell from 41% at subsistence
minimum to 12%
Slide 148
The BRIC Russia became a part of four notable emerging markets,
collectively known as BRIC Brazil Russia India China
Slide 149
The Global Financial Crisis began in September 2008 Between
June 2008 and January 2009, Russias stock market lost 70% of its
value The ruble lost 1/3 of its value against the dollar The
Central Bank increased spending to save the ruble but failed
Russias foreign reserves fell from rising corporate debt, bank
trouble, and credit issues Inflation hit a 14-month high of 13.9 by
February 2009 According to Bank of America Securities-Merrill
Lynch, industrial output fell by 16% between October 2008 and
February 2009
Slide 150
REVENUE & GROWTH Government revenue fell by 28% in the
first quarter of 2009 A decrease in commodity prices, including
Urals crude oil, caused this reduction Urals crude oil was Russias
primary mineral export GDP growth declined to -0.2% in 2009 Russia
experienced budget deficits for the first time since the 1998
economic crisis
Slide 151
Global Financial Crisis: Russia by the Numbers
Slide 152
Stunted recovery By the first quarter of 2009, Russia exhibited
the same ailments as it did in the 1990s Negative growth High
unemployment High inflation Low oil export prices Weak
manufacturing
Slide 153
Slide 154
1998 Recovery Prudent fiscal policy rising oil prices aided
Russias transition out of the 1998 crisis Boris Yeltsins
administration established these policies before Putin entered
office
Slide 155
Putins Authoritarianism Putin introduced a more authoritarian
developmental model He implemented more autocratic state-led
economic policies Russias growth did not result from these policies
In fact, Putins approach stunted Russias ability to transition out
of the 2008 crisis
Slide 156
RECOVERY Recovery depended on several factors that would prove
difficult to achieve Domestic consumer demand would have to
increase High unemployment and inflation strongly worked against
this goal World oil prices would have to rise The global recession
suppressed demand for oil The state would have to implement prudent
fiscal policy
Slide 157
Russia Today Enduring problems Russias manufacturing sector
fails to compete in the global marketplace Russia can only compete
in raw materials exports Russias GDP over-relies on oil and gas The
economy is at the mercy of world markets
Slide 158
MODERNIZATION & MEDVEDEV Dmitri Medvedev initiated a new
modernization The effects of the global economic crisis
necessitated that Russia diversify its economy Dependence on oil
exports made Russias economy fragile
Slide 159
Skolkovo Innovation District Medvedev launched the construction
of a Russian Silicon Valley called Skolkovo This project intended
to use Russias educated labor force to innovate new products
Medvedev located the site in a new economic zone outside Moscow
Skolkovo will probably not contribute significantly to GDP for
years or decades
Slide 160
MEDVEDEVS PROMISED REFORMS Medvedev promised to stabilize
Russias legal regime approach to property This change would
encourage and protect foreign investors