An Illustrated History of Slavic Misery: The Russian Economic Guinea Pig

Posted on August 19, 2014

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I don’t know if it was as inevitable as the world likes to make out, but by 1991 the Soviet Union was on it’s last legs. It had 15 of these legs, and at this point many had started breaking away from the body. Russia was by far the largest and most powerful of the republics that made up that huge state, contributing 60% of the GDP and dominating the military and communist party. In many ways, it had the most to lose from the break up of the Union of Soviet Socialist Republics. When the end finally came, it very nearly lost everything.

When the USSR died and was replaced initially by the Commonwealth of Independent States, Russia was in a particularly tough position. Nowhere did the specter of the Soviet Union loom larger. The Communist party still had a large following, and Soviet-era media was still wildly popular in the country. The leader of Russia at the time was a chap you may have heard of, a fairly entertaining bloke by the name of Boris Yeltsin. Born in 1931 near Yekaterinburg, he had joined the Communist party during Khruschev’s anti-Stalinist reforms. He was handpicked by Gorbachev to tidy up the mess in Moscow as the 80s lurched into their second half, but he quickly grew tired of the pace of Gorby’s reforms. Too quick for Bozzer.

When he was elected in 1991, he did so on a huge wave of optimism. Indeed, he headed the resistance against a planned coup in 1991, climbing on a tank in what became one of the iconic images of the time. Any optimism that was prevalent at his arrival quickly disintegrated however, as the Chicago-boys economists flooded into the country. Communism may have been dead, but it was going to be replaced by neoliberalism. Which is a little bit worse. And by a little bit, I mean a lot bit. Russia was to be the great victory for capitalism; the example that showed how superior the ideology of the free market was to any form of socialism. What happened was a violent decaying state that descended into criminality and desperation.

Following his role in preventing the attempted coup previously, Yeltsin was afforded one whole year of unconditional power in order to remake the Russian economy. Neoliberalism was followed practically to the letter, and as intensely as possible in order to make any resistance impossible. As one economist working at the World Bank stated at the time;

‘Only a blitzkrieg approach during the window of opportunity provided by the fog of transition would get the changes made before the population had a chance to organize to protect its previous vested interests’

[Joseph Stiglitz]

Any government intervention in the domestic economy was removed. The welfare state was entirely dismantled. After decades of communism, central planning was demolished and the economy was left to the whims of the market. Price controls were abolished; state enterprises were privatized with the country opened up to foreign investment. State spending was splashed, and austerity became the new black. The average income and quality of life worsened dramatically as unemployment rose at a terrifying rate. The middle class disappeared, their life savings lost as money lost all value, and the poor were as good as wiped out. The rich? Well, they got richer, as an estimated $2 billion was moved into offshore accounts every month. Prior to the introduction of radical capitalism, Russia had no millionaires. As 2003 rolled around, it had 17 billionaires, mostly through the process of stripping the country of value and moving it immediately offshore.

Russia was essentially an economic guinea pig. As the prized pig of communism and the largest ‘other’ in the ideological battle, it’s conversion to capitalism was always going to be a parade-worthy conversion. To call it optimistic would be generous however, as the economic rebuilding was done in an almost suicidal fashion. Well, by almost suicidal I clearly mean absolutely suicidal. Decades of institution building were forced through in a heartbeat on a country that quite plainly wasn’t ready for it, and neither should they have been. In order for such an ideological shift to work, careful nurturing was needed. Russia got violent force instead, and the expected depression gripped the country. The economic devastation that took place is almost unrivalled in modern history. Everything was ruined. The country had become completely dependent on imports. By the end of the 1990s, bartering was the main source of currency. No economy should be built on bartering. A survey carried out in 1996 revealed that 30% of people were paid on time and in full, 31% were paid late and 39% weren’t paid at all. Grim.

Sure, there was protest, but more often than not it was met with the most iron of fists. On October 3rd 1993 a few hundred supporters of parliament protested demanding news after a referendum to hold snap elections fell apart. Yeltsin responded by ordering the crowd be machine-gunned, and around 100 demonstrators were killed. The next day saw a stand off at the parliament building, which led to Yeltsin ordering an admittedly reluctant army to lay siege to the parliament building, leaving it a charred ruin. Around 500 died in this attack. Yeltsin had made his way to his position by defending this very building. As his approval ratings hit single digits, Yeltsin did what most world leaders do when their popularity slumps; he started a war. The spiky Chechen republic was invaded in the hope of a quick win to increase morale. As I’ve written about previously, that most certainly did not happen.

To describe the 90s as bleak for Russia would be an understatement. Russia does bleak better than most, take a look at some of its literature and cinema for example, but this took bleak to a whole new level. By 1998, over 80%, 80%(!) or Russian farms were bankrupt. The number of Russians living in poverty had risen from two million in 1989 to 74 million in the mid nineties. 74 million is a much bigger number than two. In the decade more than two million premature deaths were estimated, as alcoholism, suicide, murder and disease ran roughshod over the country. Suicide alone increased by double. This increased death rate led to a huge orphan population, most of whom didn’t even receive orphan care. Another estimated two million children lived in abandoned houses or the sewer systems below the cities. Drug use went up 900%. The HIV positive rate exploded. Human trafficking became viable business as the teenage sex trade spiraled out of control. The mafia was well and truly in charge of the largest country in the world, and in some ways this was welcomed, as they were the only ones who could curb the crime epidemic that was sweeping the nation.

This wasn’t an accident. As much as many like to believe that things like these are a terrible side effect of good intentions, this is not the case with regards to economic shock therapy, as Naomi Klein refers to it. The aim is to strip a country of anything valuable it has and sell it off to the highest bidder, all be it a bidder that isn’t bidding particularly highly. For example, Norilsk Nickel was sold for $170 million, despite its annual profits alone reaching around $1.5 billion. Yukos, an oil company that controls more oil than the nation of Kuwait, was sold for $359 million and now earns more than $3 billion in revenue every year. Then you cut the spending on the people of the country, cut wages and increase working hours, meaning people have to work harder for less. Oh, and for no reward at the end of it. In Russia in the 90s, any and all tax disappeared. The poor just flat out couldn’t pay it due to having absolutely nothing, and the rich were far too powerful to be taxed. This meant that the state was almost entirely reliant on foreign aid to survive, and not many countries were in too much of a giving mood when it came to the state many still associated with and referred to as the Soviet Union. By August 1998, Russia was ruined. The IMF refused any more debt, a shock in itself, as they seem to thrive on dragging out the suffering of the addicted, and Russia had to restructure its debt and devalue the ruble entirely.

Panic spread throughout the financial world, and something of an international crisis began. Russia’s collapse followed that of East Asia the year prior, and any faith the investing world had in neoliberalism died with it. Yeltsin’s approval ratings hit a frankly hilarious 6%. September of 1999 saw a series of terrorist attacks on apartment buildings. Russia itself had to change. On the night before the year 2000 came in Boris Yeltsin stepped down from the presidency, leaving the (then) unknown Vladimir Putin to take over. Of course Yeltsin’s last act was to demand legal immunity for himself, something Putin allowed in his first act as president. The heist, and with it the destruction of post-Soviet Russia, was complete.

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