After the dissolution of the Soviet Union in 1991 and the end of its centrally-planned economy, the Russian Federation succeeded it under president Boris Yeltsin. The Russian government used policies of shock therapy to liberalize the economy as part of the transition to a market economy, causing a sustained economic recession. GDP per capita levels returned to their 1991 levels by the mid-2000s. The economy of Russia is much more stable today than in the early 1990s, but inflation still remains an issue. Historically and currently, the Russian economy has differed sharply from major developed economies because of its weak legal system, underdevelopment of modern economic activities, technological backwardness, and lower living standards.Richard Connolly, The Russian Economy: A Very Short Introduction (Oxford University Press, 2020).
Russia began its transition to a market economy in January 1992. It was formally recognized as such by the European Union in May 2002 and by the United States in June 2002.
Historical background
Economic history of the Russian Empire Russian national income per capita increased and moved to closer to the most developed economies of Northern and Western Europe from the late 17th century to the 1740s. After the 1740s, the Russian economy stagnated and declined. In the 18th century, Russian national income per capita was about 40–70% of British per capita income but higher than Poland's. By 1860, Russian GDP per capita was similar to that of Japan; one-third of GDP per capita in the United States or the United Kingdom; and twice that of China or India. Russia was a late industrializer.
Serfdom, which held back development of the wage labor market and created a shortage of labor for industry, was abolished in 1861. In the aftermath, GDP per capita was volatile and did not substantially increase. Steady economic growth began in the 1890s, alongside a structural transformation of the Russian economy. By the time World War I started, more than half the Russian economy was still devoted to agriculture. By the early 20th century, the Russian economy had fallen further behind the American and British economies. From the late 19th century to the early 20th century, the economy grew at a similar pace as the Japanese economy and faster than the Brazilian, Indian and Chinese economies.
Despite all this Russian Empire from the beginning of the reign of Nicholas II, it began to change dramatically in economic terms. It was the fastest growing economy in the world, the average GDP growth was higher than the Western European one, and the volume of production per capita was equal to it.Пол Грегори Экономический рост Российской империи (конец XIX — начало ХХ в.): Новые подсчеты и оценки / Пер. с англ. — М.: «Российская политическая энциклопедия» (РОССПЭН), 2003. — 256 с. P.30 The standard of living also grew high.Царствование Императора Николая 2/ Сергей Ольденбург.-М.:Центрполиграф, 2022.-654 с. .P. 489-490
Economic history of the Soviet Union For about 69 years, the Russian economy and that of the rest of the Soviet Union operated on the basis of a centrally planned economy, with a state control over virtually all means of production and over investment, production, and consumption decisions throughout the economy. Economic policy was made according to directives from the Communist Party, which controlled all aspects of economic activity. Since the collapse of Communism in the early 1990s, Russia has experienced difficulties in making the transition from a centrally planned economy to a market based economy.
Much of the structure of the Soviet economy that operated until 1987 originated under the leadership of Joseph Stalin, with only incidental modifications made between 1953 and 1987. Five-year plan and annual plans were the chief mechanisms the Soviet government used to translate economic policies into programs. According to those policies, the State Planning Committee (Gosudarstvennyy planovyy komitet—Gosplan) formulated countrywide output targets for stipulated planning periods. Regional planning bodies then refined these targets for economic units such as state industrial enterprises and state farms (sovkhozy; sing., sovkhoz) and collective farms (kolkhozy; sing., kolkhoz), each of which had its own specific output plan. Central planning operated on the assumption that if each unit met or exceeded its plan, then demand and supply would balance.
The government's role was to ensure that the plans were fulfilled. Responsibility for production flowed from the top down. At the national level, some seventy government ministries and state committees, each responsible for a production sector or subsector, supervised the economic production activities of units within their areas of responsibility. Regional ministerial bodies reported to the national-level ministries and controlled economic units in their respective geographical areas.
The plans incorporated output targets for raw materials and intermediate goods as well as final goods and services. In theory, but not in practice, the central planning system ensured a balance among the sectors throughout the economy. Under central planning, the state performed the allocation functions that prices perform in a market system. In the Soviet economy, prices were an accounting mechanism only. The government established prices for all goods and services based on the role of the product in the plan and on other noneconomic criteria. This pricing system produced anomalies. For example, the price of bread, a traditional staple of the Russian diet, was below the cost of the wheat used to produce it. In some cases, farmers fed their livestock bread rather than grain because bread cost less. In another example, rental fees for apartments were set very low to achieve social equity, yet housing was in extremely short supply. Soviet industries obtained raw materials such as oil, natural gas, and coal at prices below world market levels, encouraging waste.
The central planning system allowed Soviet leaders to marshal resources quickly in times of crisis, such as the Nazi invasion, and to reindustrialize the country during the postwar period. The rapid development of its defence and industrial base after the war permitted the Soviet Union to become a superpower.
The attempts and failures of reformers during the era of perestroika (restructuring) in the regime of Mikhail Gorbachev (1985–91) attested to the complexity of the challenge.
Transition to market economy After 1991, under the leadership of Boris Yeltsin, the country made a significant turn toward developing a market economy by implanting basic tenets such as market-determined prices. Two fundamental and interdependent goals — macroeconomic stabilization and economic restructuring — the transition from central planning to a market-based economy. The former entailed implementing fiscal and monetary policies that promote economic growth in an environment of stable prices and exchange rates. The latter required establishing the commercial, and institutional entities — banks, private property, and commercial legal codes— that permit the economy to operate efficiently. Opening domestic markets to foreign trade and investment, thus linking the economy with the rest of the world, was an important aid in reaching these goals. The Gorbachev regime failed to address these fundamental goals. At the time of the Soviet Union's demise, the Yeltsin government of the Russian Republic had begun to attack the problems of macroeconomic stabilization and economic restructuring. By mid-1996, the results were mixed.
Since collapse of the Soviet Union in 1991, Russia has tried to develop a market economy and achieve consistent economic growth. In October 1991, Yeltsin announced that Russia would proceed with radical, market-oriented reform along the lines of "shock therapy", as recommended by the United States and IMF. Hyperinflation resulted from the removal of Soviet price controls and the central bank's policy in the early 1990s. Jeffrey Sachs, an economist who advised the Russian government on the reforms, said that the shock therapy reforms failed in Russia (after having succeeded in Poland two years before) due to loose monetary policy by the central bank and the lack of financial support of the transition by the West. He explains the latter by the US government viewing Poland as an ally and Russia as an antagonist.
Assuming the role as the continuing legal personality of the Soviet Union, Russia took up the responsibility for settling the USSR's external debts.
Russia experienced hyperinflation between 1992 and 1995. Prices increased by 300% in January 1992, and by as much as 1,000% in the first three months. The inflation rate was 2,509% for the year 1992, 840% for 1993, 215% for 1994, and 131% for 1995. The Russian GDP contracted an estimated 40% between 1991 and 1998, despite the country's wealth of natural resources, its well-educated population, and its diverse – although increasingly dilapidated – industrial base. Some economists said that this figure may be misleading, since much of the Soviet Union's GDP was military spending and the production of goods for which there was little demand. The discontinuation of much of that wasteful spending created the false impression of larger than actual economic contraction.Shleifer, Andrei; Treisman, Daniel, October 2003 A Normal Country – Harvard Institute of Economic Research
Critical elements such as privatization of state enterprises and extensive foreign investment were rushed into place in the first few years of the post-Soviet period. But other fundamental parts of the economic infrastructure, such as commercial banking and authoritative, comprehensive commercial laws, were absent or only partly in place by 1996. Although by the mid-1990s a return to Soviet-era central planning seemed unlikely, the configuration of the post-transition economy remained unpredictable.
On November 7, 1990, an open letter to Mikhail Gorbachev was published and signed by a rank of thirty Western sources, most of whom were academics. The contents of the letter made the argument to the Soviet head of state that while moving the Economy of the Soviet Union away from a centrally planned system towards a free market mixed economy was a step forward, they warned the leader against following through with what the West had done following the end of feudalism; privatising the land itself, instead opting towards a Georgist system of common ownership and the collection of public revenue through land value taxation. Nobel prize-winners Franco Modigliani, James Tobin, Robert Solow and William Vickrey were among the letter's signees. Today, Russia imposes a degree of land-value taxation. British economist Fred Harrison worked closely with Russia's State Duma in regards to tax reform during the 1990s. However, land value taxation in these countries is not nearly as high as the letter recommended.
Monetary and fiscal policies In January 1992, the government clamped down on money and credit creation at the same time that it lifted price controls. However, beginning in February, the Central Bank, headed by Viktor Gerashchenko, loosened the reins on the money supply. In the second and third quarters of 1992, the money supply had increased at especially sharp rates of 34% and 30%, respectively. By the end of 1992, the Russian money supply had increased by eighteen times. This led directly to high inflation and to a deterioration in the exchange rate of the ruble.