POL354 Lecture 15 – Economic Transition/Democratization Cont’d & National
Thursday, January 26, 2012
Recall It was necessary to dismantle as rapidly and completely as possible the old Soviet
command-administrative system. The conjunction of state power and economic power was
inconsistent. Destatization and privatization along with the establishment of markets was
essential for transition.
When confronted with opposition and resistance, Gorbachev held back. Boris Yelstin then
stepped in as the president of the Russian Republic and put forth a radical transformative
proposal in late Fall of 1991 and was legislatively put in place beginning in January 1992.
This proposal was very neo-Liberalist in its ideology. It called for some state intervention to
control the currency but would involve significant dismantling of state ownership.
This would create a period known as shock therapy. This was socially and economically
disruptive but it was believed that the country would emerge from this in better ship and on
its way to marketization and thus the democratization of the country.
Argument - The privatization component of this strategy was deeply flawed. This could be
because ideology doesn’t translate to application, could be the oligarchs who corrupted the
process or could be due to the Soviet Union. In effect the country went through a process of
demodernization/deindustrialization without accumulating the benefits of a capitalist
system. As a consequence in August 1998 there was a major financial crisis and a good deal
of circumstantial evidence to prove that the government of Russia had produced a massive
Putin steps into these circumstances in the summer of 1999 when he is appointed Prime
Minister of the country. Putin is confronted with a rapidly collapsing economy, inflation,
huge state debt, unpaid foreign dept. As Putin takes control (becomes president in March
2000) the country sees an economic turn around. For the first time there is a period of real
economic growth in Russia.
Moderate and controlled inflation
State is able to generate surplus to pay of debts
Increase in wages
Increase in foreign investment
The economy grows steadily, stability is introduced, and Putin is associated with this
dramatic turn around. There are different views as to why this happened:
Sceptics argue that timing was everything, the economy could not have continued to decline
any further. Putin came to power at the time of energy exports.
Putin also put in place a number of sensible/discrete policies aimed at improving economic
Undertook tax reform – under Yelstin nobody paid taxes and tax rates were
extremely high. Putin levelled out taxes and this strategy works. There was an
increase in tax revenues that significantly helped the state.
Yelstin had not introduced any new labour legislation, the laws were left over from
the Soviet Union. Putin introduced a new labour code, but he did so in a fashion that
heavily favoured ownership and management in comparison to labour. Introduced land legislation – land has always been a problem for Russia. Yelstin did
absolutely nothing to provide a legal framework within which land could be
privatized. Putin very quickly introduced a law that allowed for the privatization of
urban land so that individuals could own the land on which their houses were built.
Introduced legislation that allowed for private ownership of the land on which
commercial enterprise operated. This has only happened theoretically and not
Legislation to theoretically provide protection for partners in a co-ownership
Putin did a number of specific things that can be seen as contributing towards
However, there were outstanding issues relating to privatization and modernization, under
1. The issue of corruption and organized crime through the privatization process and
the absence of a legal framework within which it could take place, organized crime
and corruption expanded exponentially. The evidence indicated that by the time
Putin came to power, corruption and organized crime and infiltrated every aspect of
Russian life. It existed at all levels of government and affected all sectors. Elected
officials put themselves in positions where they could undertake criminal activities
and at the same time be immune from prosecution. The former security agencies
had opened up a large number of private security firms which were closely
connected to the security agencies. Military, which had suffered from budget cuts,
was also corrupted. Officials were selling off military equipment. Major financial
institutions had been thoroughly corrupted – basically money laundering
institutions. The major industrial firms (especially those involved in export) were
majorly corrupted. When Putin comes to power, a study conducted in Russia found
that people in Russia spend about $36 billion on bribes. In 2005 this study was
replicated and it was concluded that the size of the average bribe had increased 13x
reaching $316 billion USD. 80% of all firms paid bribes regularly. 2007 the
market for business corruption exceeded federal revenues $2.16:1, estimates were
that organized crime had its hand in a large percent of Russian GDP. What did Putin
do? From 2000-2008 it was not a major item on his agenda, there was little to no
legislation put in place to deal with this problem. A change in rhetoric changes in
2008 and is associated with Medvedev. Medvedev names corruption as the
fundamental problem for Russian advancement. It is suspected that most of those
who were the targets of legislation were the victims of those who were able to use
the legal system as a means of resolving conflict with their competitors. Very little
has been done by way of responding to the endemic corruption that has penetrated
both the state and private sector.
2. The Oligarchs As a class they were a group of extremely wealthy individuals who
had capitalized on the modernization process for their own benefit. The Forbes
listed of the riches people in the world contained 30 Russian oligarchs.
Disproportionate concentration of economic wealth and power. This has obvious
implications for democracy. Hinders the potential for a market and the separation of
a market and the political power. In August of 2000 Putin holds a meeting with a
group of the most powerful/wealthy of the oligarchs. – Sets limits on their political
activity – must be approved by Putin and he must feel it to be appropriate. Putin
makes the oligarchs pay taxes, and Oligarchs who hold large assets that are of
importance to the Russian state (national interest/security) must be prepared to take economic actions that the state determines is essential for Russia’s national
interests. Oligarchs are expected to be private entrepreneurs and agents of the state
when the state calls on them. In return the Oligarchs got to keep the majority of
their property. Putin never challenged the group as a whole but instead individually.
Identified several sectors in which he stated that the state would reacquire control
of certain industries gas, oil, energy, electric power, machine building (related to
MIC). Through a process of reacquisition and gaining and controlling shares over
these companies, Putin re-establishes state control over them. Putin identified
individual Oligarchs who had to be dealt with through coercion (Berezovsky and
Khodorkovsky one of the wealthiest oligarchs with most of his holdings in oil. His
oil empire was part of the assets that Putin wanted to reinstate state control over.
Put heavy financial support into the Liberal parties who were challenging Putin.
Possible presidential candidate. Given numerous warnings by the state to stop his
economic activity. He was arrested, held for an extended period of time and put on a
major public trial (many years in prison).
Prokhorov may run for next Russian federal election.
3. Who has taken control of many of the companies that had been turned over to the
state? There have been a number of studies on this – there are a disproportionate