Historians and economists on the left and right might argue over whether the Soviet Union’s state-controlled economy was better for its nearly 300 million citizens, but the facts cannot be denied: “shock” therapy, designed with close guidance by Western economists, allowed a few oligarchs to buy off the bloc’s wealth for cheap as hundreds of millions suffered from economic depression along with the kind of extreme inequality that continues to this day.
How Did It Happen?
The architects of the USSR’s privatization, Yegor Gaidar and Anatoly Chubais, were advised by Harvard professor Jeffrey Sachs and his colleagues at the Harvard Institute for International Development. Immediate liberalization, they argued, was the only way of dismantling the Soviet-era system, a mission—argued Sachs—”of great moral rightness.” The message was clear: impose “shock therapy,” which Sachs described as a “rapid end of price controls in order to re-establish supply-demand equilibrium."
Aware of the potentially devastating social implications of economic liberalization, Sachs advocated for a program of humanitarian aid and assistance, which would ultimately be whittled away at the behest of the International Monetary Fund, the World Bank and the European Bank for Reconstruction and Development. The aid that did make it to Moscow was funnelled through the “Harvard boys,” Gaidar and Chubais, who personally profited from the process.
What They Did
Privatization began in the early 1990s under then President Boris Yeltsin, who lifted price controls on 90 percent of traded goods in 1992 and introduced a voucher system that gave citizens free potential shares. The vouchers were supposedly set up with the intention of avoiding a concentration of wealth into the hands of a few, but many ordinary Russians sold their vouchers to profiteers, who quickly bought up large shares in private companies.
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To speed up the process, the Russian government created a “loans-for-shares” program that helped sell off the country’s biggest natural resource firms for almost nothing. For example, Yukos, an oil and gas company, was sold to Mikhail Khodorkovsky for 6.2 percent of its price—US$310 million—and Sibneft, an oil company worth slightly less, was sold to Boris Berezovsky for just US$100 million.
How It Got Out of Control
Capital flight and foreign buy-ups aside, the Russian people suffered because the state was too weak to prevent exploitative capitalists from accumulating previously state-owned enterprises. While some public officials colluded in corruption, it was this new generation of corporate bosses who almost universally indulged in money laundering, offshore accounts and tax avoidance.
This new generation of Russian capitalists bought a majority of their vouchers from poverty-stricken Russians, concentrating wealth and power in a few hands. Many stripped their newly-acquired companies of assets in order to enrich themselves, greatly stunting investment and growth, according to Nobel Prize winning economist Joseph Stiglitz.
What Did It Do?
Because the state was no longer able to regulate the market, inflation in Russia soared. In less than eight years, poverty increased tenfold while the rate of income inequality increased to almost twice that of the United States.
In the first three years of shock therapy, industrial production also contracted to levels worse than the Great Depression of the 1930s and GDP fell by about half. At the same time, the market value of Russian manufacturing companies was calculated at 1,000 times less than their U.S. counterparts.
As social programs were systematically eradicated, Russians felt poverty more acutely than before while the country’s new, post-Soviet elite hoarded US$150 billion in foreign accounts, property and investments and spent the rest on a growing luxury economy.
Today, the number of Russian billionaires continues to grow, up to 77—one of the highest in the world—from 36 back in 2004. Just over 100 Russians own more than a third of the entire country’s wealth, according to author Karen Dawisha, who chronicled primitive accumulation in Russia from the fall of the USSR until 2014.
In Russia, this has resulted in a growing nostalgia. In a poll conducted by Gallup in 2013, just 19 percent of Russians said the breakup of the Soviet Union was beneficial compared to 55 percent who said it was harmful. And there is a pattern: seven out of 11 countries who were part of the former USSR are more likely to believe the collapse hurt their countries, according to the same poll.