The financial crisis of August 1998 was but the culmination of an unparalleled economic decline precipitated by the disastrous ‘shock therapy’ of Yeltsin’s first term. Although the government retreated from that original strategy, it still adhered to the neoliberal strategy of macroeconomic stabilization, market liberalization, and privatization of state assets. Under pressure from the International Monetary Fund (IMF) and the World Bank, the government eventually brought inflation under control (from 2,609 per cent in 1992 to 11 per cent in 1997), liberalized most sectors, slashed subsidies and social expenditures, and by 1996 had privatized approximately 70 per cent of all state enterprises. The government could boast that it had not only halted the massive decrease in GDP but, for the first time since 1991, had even briefly achieved slight economic growth (in the third quarter of 1997), along with a 600 per cent boom on the Russian stock market.
By 1998, however, the net result was eight years of catastrophic decline on an unprecedented scale. The GDP dropped a staggering 43 per cent from 1991 to 1997; to put that into perspective, the Great Depression in the United States entailed only a 32 per cent decline; even the colossal devastation of the Second World War reduced the Soviet GDP by just 24 per cent. As Russia hurtled downwards, developed countries enjoyed unprecedented economic prosperity, widened the gap between themselves and Russia, and even threatened to reduce Russia to the rank of a third-world state. The decline was staggering; in 1980 the per capita GDP of Russia was 38 per cent of the United States, but that had dropped to just 4 per cent by 1999. Even when adjusted for purchasing power parity (to offset distortions in exchange rates), Russia’s per capita GDP in 1999 was only 4,200 dollars—slightly more than Botswana (3,900 dollars), but less than Namibia (4,300 dollars) and Peru (4,400 dollars). The post-Soviet depression affected not only industrial production but also agriculture, where gross output contracted by a third and an even greater decrease in the country’s livestock (by approximately a half).
As important as quantitative decline was the qualitative regression: as investment collapsed and Soviet factories faced keen competition from world markets, Russia devolved into a supplier of raw materials and energy resources. The result was a primitivization of the Russian economy: manufacturing branches (including high-tech and defence industries) either converted to the production of low-grade consumer goods or shut down completely. For example, computer chip production fell from 1.6 billion dollars in 1989 to 385 million dollars in 1995; a leading electronics manufacturer in 1992 was producing shampoo four years later. The aerospace branch that had earlier produced 2,500 planes per annum and accounted for 60 per cent of the world’s fleet was virtually idle; in 2000 it produced just four aeroplanes (compared to 489 by Boeing). As Russian exports concentrated on energy and raw material, the economy became heavily dependent upon volatile markets subject to huge price fluctuations. Agriculture underwent a similar decline. For lack of state subsidies, private capital, and effective demand, agricultural producers reduced the use of fertilizers (by 89 per cent) and even machinery (cutting petrol consumption 74 per cent).
Russia also suffered a major degradation in fixed capital and human resources. Given the dearth of investment (because of scanty foreign direct investment, capital flight, high interest rates, and tight money policies), Russian machinery became obsolescent and hence progressively less competitive on international and even domestic markets. The losses in human capital were also immense, especially because of the massive ‘brain drain’ that robbed the country of much of its talented, educated élite. The degradation applied even to those who stayed, as many—especially the young—abandoned education and technology for the higher-paying jobs in the trade and business sector.
Despite rosy expectations, transition brought devastating economic decline. Liberalization gave Russian producers access to global markets, but also exposed them to its volatility, prices, standards—which could have a major impact on production costs and profitability. For example, Soviet energy prices were but a third of those prevailing on world markets; deregulation of domestic energy prices thus gave inefficient enterprises little chance to survive. Moreover, the break-up of a single Soviet ‘economic space’ suddenly deprived producers of their traditional sources of supply and sale. Indeed, the former Soviet republics looked elsewhere, and inter-republic trade within the CIS shrank 70 per cent in the 1990s.
