After the collapse of the Soviet Union in and collapse of Russia's controlled economy , a new Russian Federation was created under Boris Yeltsin in The Russian Federation had multiple economic reforms, including privatization and market and trade liberalization, due to collapse of communism. Though the economy is much more stable compared to the early s, inflation still remains an issue for Russia. 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 s, 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 originated under the leadership of Joseph Stalin , with only incidental modifications made between and 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.
Central planning operated on the assumption that if each unit met or exceeded its plan, then demand and supply would balance.
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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.
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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 —91 attested to the complexity of the challenge. After , 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, the results were mixed. Since collapse of the Soviet Union in , Russia has tried to develop a market economy and achieve consistent economic growth.
In October , 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. Assuming the role as the continuing legal personality of the Soviet Union, Russia took up the responsibility for settling the USSR's external debts , even though its population made up just half of the population of the USSR at the time of its dissolution. Such a figure may be misleading, however, 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.
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 Although by the mids a return to Soviet-era central planning seemed unlikely, the configuration of the post-transition economy remained unpredictable.
In January , 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.
By the end of , 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. The sharp increase in the money supply was influenced by large foreign currency deposits that state-run enterprises and individuals had built up, and by the depreciation of the ruble. Enterprises drew on these deposits to pay wages and other expenses after the Government had tightened restrictions on monetary emissions. Commercial banks monetized enterprise debts by drawing down accounts in foreign banks and drawing on privileged access to accounts in the Central Bank.
Trends in annual inflation rates mask variations in monthly rates, however. Instability in Russian monetary policy caused the variations. After tightening the flow of money early in , the Government loosened its restrictions in response to demands for credits by agriculture, industries in the Far North, and some favored large enterprises.
Economic history of the Russian Federation
In the pattern was avoided more successfully by maintaining the tight monetary policy adopted early in the year and by passing a relatively stringent budget.
For the first half of , the inflation rate was However, experts noted that control of inflation was aided substantially by the failure to pay wages to workers in state enterprises, a policy that kept prices low by depressing demand.
An important symptom of Russian macroeconomic instability has been severe fluctuations in the exchange rate of the ruble. Prior to July , the ruble's rate was set artificially at a highly overvalued level. But rapid changes in the nominal rate the rate that does not account for inflation reflected the overall macroeconomic instability. The announcement reflected strengthened fiscal and monetary policies and the buildup of reserves with which the government could defend the ruble.
By the end of October , the ruble had stabilized and actually appreciated in inflation-adjusted terms. It remained stable during the first half of Another sign of currency stabilization was the announcement that effective June , the ruble would become fully convertible on a current-account basis.
This meant that Russian citizens and foreigners would be able to convert rubles to other currencies for trade transactions. In the Soviet era all enterprises belonged to the state and were supposed to be equally owned among all citizens.
Privatization transferred much of this wealth into the hands of a few, making them immensely rich. Stocks of the state-owned enterprises were issued, and these new publicly traded companies were quickly handed to the members of Nomenklatura or known criminal bosses. For example, the director of a factory during the Soviet regime would often become the owner of the same enterprise. During the same period, violent criminal groups often took over state enterprises, clearing the way by assassinations or extortion.
Corruption of government officials became an everyday rule of life. Under the government's cover, outrageous financial manipulations were performed that enriched the narrow group of individuals at key positions of the business and government mafia.
Many took billions in cash and assets outside of the country in an enormous capital flight. The largest state enterprises were controversially privatized by President Boris Yeltsin to insiders  for far less than they were worth.
Government efforts to take over the credit expansion also proved ephemeral in the early years of the transition. Domestic credit increased about nine times between the end of and The credit expansion was caused in part by the buildup of interenterprise arrears and the RCB's subsequent financing of those arrears.
The Government restricted financing to state enterprises after it lifted controls on prices in January , but enterprises faced cash shortages because the decontrol of prices cut demand for their products. Instead of curtailing production, most firms chose to build up inventories. To support continued production under these circumstances, enterprises relied on loans from other enterprises.
By mid, when the amount of unpaid interenterprise loans had reached 3. The government also failed to constrain its own expenditures in this period, partially under the influence of the post-Soviet Supreme Soviet of Russia , which encouraged the Soviet-style financing of favored industries. This budget deficit was financed largely by expanding the money supply. In late , deteriorating economic conditions and a sharp conflict with the parliament led Yeltsin to dismiss neoliberal reform advocate Yegor Gaidar as prime minister.
Gaidar's successor was Viktor Chernomyrdin , a former head of the State Natural Gas Company Gazprom , who was considered less favorable to neoliberal reform. Gorbachev's new system bore the characteristics of neither central planning nor a market economy.
Instead, the Soviet economy went from stagnation to deterioration. At the end of , when the union officially dissolved, the national economy was in a virtual tailspin. In the Soviet GDP had declined 17 percent and was declining at an accelerating rate. Overt inflation was becoming a major problem.
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Between and , retail prices in the Soviet Union increased percent. Under these conditions, the general quality of life for Soviet consumers deteriorated. Consumers traditionally faced shortages of durable goods, but under Gorbachev, food, wearing apparel, and other basic necessities were in short supply. Fueled by the liberalized atmosphere of Gorbachev's glasnost and by the general improvement in information access in the late s, public dissatisfaction with economic conditions was much more overt than ever before in the Soviet period.
The foreign-trade sector of the Soviet economy also showed signs of deterioration. The total Soviet hard-currency debt increased appreciably, and the Soviet Union, which had established an impeccable record for debt repayment in earlier decades, had accumulated sizable arrearages by In sum, the Soviet Union left a legacy of economic inefficiency and deterioration to the fifteen constituent republics after its breakup in December Arguably, the shortcomings of the Gorbachev reforms had contributed to the economic decline and eventual destruction of the Soviet Union, leaving Russia and the other successor states to pick up the pieces and to try to mold modern, market-driven economies.
At the same time, the Gorbachev programs did start Russia on the precarious road to full-scale economic reform.