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Marketization and Authoritarianism in Russia

Updated on January 20, 2013

Following the break up of the Soviet Union in 1991 Russia’s new elites led by President Boris Yeltsin sparked a new economic reform process of ’Shock Therapy’. This began in January 1992 and involved 3 key aspects; liberalization of prices, privatization of state assets and stabilization of the economy through fiscal policy. The policy was intended to rapidly shift Russia from a centrally planned economy to one guided by the free market. Dismantling the planned Soviet economy and replacing it with a westernized one came alongside an apparent sway of democratisation in Russia. Democratic centralism had been destroyed and the ideals of liberal democracy seemingly embraced. This would seem reasonable given that conventional wisdom dictates a link between free market economies and liberal democracy. Liberal democracy in Russia though remained only an ideal, but one that could not be implemented as the deeply unpopular shock therapy had been prioritised by President Yeltsin. The results of shock therapy it shall be argued rather than promoting democracy has encouraged authoritarian government. Authoritarianism then did not begin with presidency of Vladimir Putin, but merely continued the trends and tendencies of his predecessor; Boris Yeltsin.

The Russian people were led to believe the market economy would bring wealth and improved living standards. They were also assured by the president that any turmoil experienced would be brief and minimal, lasting only a matter of months and that by the passing of a year life would be better for the Russian people. The political rhetoric would not become reality. Instead Russia experienced a prolonged period of unprecedented economic decline. The president had set expectations too high, indeed even maintaining late Soviet period “stagnation” would have been too high an expectation. With such a wide gap between expectations and reality support for the reforms quickly disappeared. Yeltsin’s response was to centralize political power in the office of President. A value judgement was made that economic reform would be prioritised above the democratic process.


The Costs of Shock Therapy

Each branch of the process triggered it’s own unique set of problems for the Russian people. The first policy implemented was the liberalization of prices. Value would no longer be determined by central planners but by the fluctuations of the market. The desired outcome of this was a positive supply response which would increase production. In practice the opposite happened as Russia experienced a 7 year decline in production. The policy also triggered rampant inflation and in one month prices had risen by a factor of 3.5. This trend would continue with consumer prices rising by 520% in the first economic quarter of 1992 alone. For the total year of 1992 inflation reached 2500%, this can be compared with the Soviet Union’s 1980’s average of just under 2%. During the Soviet period people were able to build up modest savings, price liberalization induced inflation wiped these away. Inflation also gave rise to discontent by causing tax payments not to be made and thus wages to public sector workers and pensions were in danger. Such rises are evidence that the anti inflationary monetarist fiscal policies of transition were a failure. This was the first step in ending Yeltsin’s honeymoon period and ending support for his radical economic reform. These are but some direct causes of public disillusionment with the reform process which were induced by price liberalization.

The most radical and ultimately disastrous branch of reform was privatization. This was to be the key to economic growth as transferring state assets into private hands would apparently encourage competition, efficiency and economic diversification. Pure economic consideration was not the only motivation for privatization though. It also had a political side to it. The rapid exchange of state assets into private hands would create a capitalist class invested in maintaining the new system. More importantly for Yeltsin; the rapid privatization of state assets would make any potential return to socialism fraught with difficulties.

The privatization process came in two forms: the voucher system and exchange of shares for loans. The voucher system of privatization began in 1992. This consisted of assigning vouchers to citizens for shares in state assets. In the Soviet Union there was no property owning class thus anyone with funds to purchase a sizeable enterprise had possibly gathered them by shady means. This meant two things for voucher privatization; theoretically it would avoid a concentration of ownership and prevent ownership being the domain of organized crime. In implementation this was not to be, motivated by poverty people sold these shares to the highest bidder in order to make essential purchases. Rather than making the Russian masses property owners, the voucher system encouraged chaotic, unequal and unregulated ownership.

The next stage of privatization saw the government exchange shares for loans with the oligarchs. There could be no suggested pretext of fairness this time. The government was faced with a large budget deficit, gold reserves had fallen below 300 tonnes and the first class debtor status of the USSR was long gone. Shock therapy had brought economic chaos and the government had to raise funds. Shares for loans was a quick and convenient way of doing so. Under the Soviet system everyone could claim communal ownership of the state run enterprises. Now they were being sold off and the people would receive no benefit. Yeltsin’s own deputy Anataloy Chubias said this looked like enriching a few elites at the expense of the collective. These elites were leading bankers who now controlled the few profit making companies in Russia. Much of the commercial banking sector was either run by organized crime or holding links with it. This process had helped private bankers obtain 25 of the places among Russia’s 50 richest people. Disillusionment with reform was summed up by a popular joke of the time; “everything the communists told us about communism was a lie. Everything they told us about capitalism turns out to be true”.

The mechanisms of marketisation used in Russia thus appeared fundamentally unfair and the cause of much resentment. Perhaps such resentment may have been successfully contained to communists only had the social costs not been so high. It is generally claimed that a majority of Russians had been in favour of light marketization, but the mechanisms and weight of marketization meant the process quickly became unpopular and fostered widespread resentment even among those favouring a capitalist system.

The decline of the Russian economy had surpassed that of the USA in the great depression. It actually surpassed the United States great depression level by 40%. This meant that the reduction of state spending became both ideologically and practically justifiable, quite simply; there was less revenue to tax. The implications of this would be felt by the most vulnerable in Russia. Firstly, health spending was slashed and by the time Yeltsin left office 41% of the population could not afford medical drugs, 11% had no medical care at all and under the table payments to doctors became common practice, although an estimated 12 million people go without care as they can not afford to bribe their doctor. Secondly, a fledgling private sector widened the income gap for women. This was coupled by loss of state benefits for mothers which led one legislator to comment “It is a pity, but in times of crisis we must sacrifice the women and children”. Children suffered from falling education budgets, resulting in a lack of necessities like textbooks. Those in low paid jobs and the new unemployed suffered disproportionate costs due to having less or no free income at a time of huge service cuts. Yet another popular joke gives a flippant yet apt summation of the situation “Russia which managed to discredit the idea of socialism is going to do the same with capitalism”.


The Tanks Are Turned on Parliament
The Tanks Are Turned on Parliament

Authoritarian Responses to Crises

The economic failures of shock therapy in Russia are glaringly obvious and easily quantified by measurement. The extensive social costs discussed above provide a bridge between the economic disaster of transition and the ensuing political unrest and subsequent authoritarian tendencies of government.

The first major authoritarian display of the presidency came in response to the 1993 constitutional crisis. This was a product of the liberalisation of prices a year earlier. As the effects of the policy were being revealed parliamentary opinion began to turn against the president. This was not a communist rebellion although Yeltsin would present them as stalking horses for a return to socialism. Instead this was a division within the capitalist camp. Uncontrolled price rises had suggested to these moderate reformers that the road to capitalism should be built more slowly and be efficiently regulated. Yeltsin’s belief was that any slowing of the process would encourage a return to socialism Tensions between the executive and legislative branches became a struggle for power. In March 1993 Yeltsin made a ‘special order of rule’ which implied the dissolution of parliament, but was retracted due to uncertainty regarding any potential military response. This prompted parliament to make an attempt at impeachment at the ninth congress of peoples deputies. After the motion fell 72 votes short, one deputy named Sergei Barburin declared that parliament had ’committed suicide’. This would prove to be the case as in September Yeltsin moved and illegally dissolved the supreme soviet. The constitution stated that any attempt by the president to dissolve parliament would mean the president automatically cedes power. Parliament moved to uphold the constitution and impeached Yeltsin. This was to prove fruitless as Yeltsin would not adhere to the constitution. Instead the military was deployed. Tanks shelled the white house and troops stormed the building. Violent force was used to defeat Russia’s fledgling liberal democracy .

The legislature was not the only branch of Russian democracy to lose. Yeltsin acted quickly to remove opposition to him. Given his violation of the constitution it is perhaps unsurprising that the constitutional court was suspended. Regional legislators and administrators who opposed the dissolution of parliament were removed from office. Survival for trade unions meant staying out of politics. A total of 18 communist and nationalist organisations were banned and 15 newspapers closed. The communist party itself was also suspended.

Yeltsin’s next step was to draft a new constitution. This would go to a referendum in December 1993. It required not only a majority of those voting ratify it, but that turnout be over 50%. The constitution was passed with a 58% yes vote and official turnout given at 54%. The central election commission would continually reduce turnout figures amid claims of falsification. Many believed turnout to be below 50%. This belief was shared from liberals to communists, but they did not attempt to force a recount as it was better to have an imperfect constitution than none at all. These imperfections included an apparent lack of democratic mandate. Furthermore power was centralized in the presidency. He would be able to issue decrees so long as they did not conflict with the new constitution or laws passed by the legislature. This was not a significant check or balance on his power though as the legislatures ability to pass laws was restricted by a constitutional requirement of a majority of all members of both houses, not just those sitting in session. This would be used to push ahead with unpopular economic reform , the very reform which had created these conditions of unrest and instability in which authoritarianism could thrive . The executive was also strengthened by a clause stating that if parliament were to vote a motion of no confidence against it then parliament may be dissolved, not the government. Furthermore, the overturning of a presidential veto would require an unrealistic 2/3 vote. Yeltsin had seemingly succeeded in creating a “democracy for the bureaucracy”, where checks and balances were minimal.

This gave near free reign to the president and allowed further authoritarian measures to be taken. A year later in December 1994 the presidential guard attacked the headquarters of the Most Financial Group. MFG were controlling shareholders in the independent television network NTV. NTV had been critical of Yeltsin’s government and MFG was headed by Vladimir Gusinsky, an associate of Moscow mayor and critic of Yeltsin; Yuri Luzhkov.

This uneasy relationship with the media would not be typical though having already banned much of the opposition as aforementioned. This is exemplified by coverage of the 1996 presidential election campaign. Well known links to media figures like Boris Berezovsky, control of state TV and oligarchic domination of newspaper ownership meant that although there were competitive elections, they were heavily influenced by media coverage. The extensive favourable media coverage enjoyed by Yeltsin was directly attributed to the loans for shares scheme by Anatoly Chubias. He stated that the loans had been used to finance Yeltsin’s campaign and this was the decisive factor in stopping the seemingly inevitable victory of the First Secretary of the Communist Party; Gennady Zyuganov. Yeltsin’s anointed successor Vladimir Putin stated that freedom of the press in the 1990’s was under threat, not from communist ideology, but the “dictates of oligarchic capital”. It may be worth reiterating at this juncture that oligarchic capital was the benefactor of the loans for shares scheme.

Although many Russians favoured a mixed economy, the failure of shock therapy had revitalised the Communist Party and broadened its support. They had become the largest party in the largest bloc in the 1995 parliamentary elections. Surveying suggested almost half the population would support the Bolsheviks had the revolution to reoccur. Furthermore, most longed for the stability of the Brezhnev era. Now there was a level of fear of a communist victory in the presidential elections within in the corridors of power. This produced a further authoritarian plan of action as defection strategies were drawn up, these measures included electoral fraud and emergency rule.

Even with a super-presidential system in place, like his health Yeltsin’s ability to effectively govern continually deteriorated. His approval rating was in single digits. His untenable position was shown in his anointing of Putin as his successor. Putin’s role in the Chechnyan conflict skyrocketed his popularity and he was a new face untarnished by association to the Yeltsin reforms. Putin became a symbol of an end of ’revolution’. This factor certainly motivated Yeltsin’s decision to choose him; “He is not a maximalist, and this is what set him apart from the others”. Putin looked like the man who could fulfil the aforementioned unique criteria of providing Brezhnev era stability within a market framework. His ability to provide this is perhaps the most striking feature of his presidency. For this reason the choice of Putin as successor was perhaps the most successful decision made during the Yeltsin presidency, given his priority of entrenching a market system and defeating communism. The markets have remained in place and although the Communist Party also remain Russia’s second choice in presidential elections they are now seemingly in no position to win. Yeltsin’s endorsement of Putin also marked his final act of corrupt or authoritarian tendencies. For although the political motivation for this has been discussed there was also a personal rationality for the decision; Putin agreed to keep Yeltsin out of prison.

Concluding Statements

The study of post soviet Russian economic reform reveals a great chasm between expectation and reality. People were promised that shock therapy would bring better living standards within one year. Instead Russia’s transition from socialist to market economy brought an unparalleled rapid decline by all major social and economic indicators. This research should provide a challenge to predominant assumptions regarding the linkage of free markets and democracy, while recognising that there were free market democrats in Russia who presented an alternative path to capitalism from Boris Yeltsin. Although Yeltsin’s rhetoric of defending authoritarian measures and usurping power came in the guise of anti communism, it was these capitalist moderate reformers who were the first victims of this authoritarian tendency during the constitutional crisis of 1993. The route from shock therapy to authoritarianism and corruption is sketched out. Following this route reveals that the Vladimir Putin presidency was certainly not the starting point of authoritarianism in post soviet Russia. The consequences of Yeltsin’s economic reform was to create conditions of instability and uncertainty whereby authoritarian practices became the required methods of maintaining power. In his rise to power he had been a champion of democracy. When he had power democracy contradicted his radical reform agenda.

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