Russia Economy in the Early 1990’s Part 1

By | February 7, 2022

The evolution of the economy and economic policy of the Russia is deeply intertwined with the international, regional and internal political events that have marked the recent history of the country. On the international level, the dissolution of the USSR and the insertion of the Russia in the international political community imply, at least in the medium-long term, the acceptance of the rules of the market economy, and therefore a progressive liberalization of commercial exchanges; a consequence that now appears irreversible is the collapse of the network of privileged economic relations with the countries of Eastern Europe – based on the existence of political prices and clearing systems- accompanied by the reorientation of foreign trade especially towards the OECD area. Secondly, the end of bipolarism necessitates the reduction of arms and the drastic downsizing of the productive apparatus directly and indirectly linked to military demand and control, with the consequent need for industrial reconversion of enormous proportions. A third important element of novelty is the opening to foreign capital, indispensable both to integrate internal financial resources and facilitate the adoption of Western technologies, and to introduce modern business management criteria. Finally, the adhesion to the world organizations of economic cooperation and regulation, in particular the International Monetary Fund, should not be underestimated,

At the regional level, i.e. in the economic area corresponding to the territory of the former USSR, the results of the attempt at political and economic re-aggregation of the former republics have so far been scarce, even if, in fact, some improper form of regional economic community, based on pre-existing economic ties, on the still important role of the ruble outside the Russia, and on a minimum of common monetary and currency policy actions. However, the failure or in any case the stalemate of the integration process in the Commonwealth of Independent States (CIS), and the conflict between some of the former republics, make it more difficult to deal with some structural knots of the economy that must be resolved at the regional level (reconversion of the ‘military apparatus, energy supply, sectoral restructuring of national industries, monetary stability in the ruble area); and they have already had the immediate effect of the slowdown in intra-regional trade, a non-negligible cause of the contraction in production in Russia as in the other former republics.

On the internal level, finally, all the political changes that have taken place have also been marked by changes in economic policy guidelines: from the gradual reformist approach of perestroika gorbačëviana, to the recipes for rapid and radical passage to the market proposed by the ” democratic leadership ” of El’zin and supported by the Monetary Fund, to rethink the price liberalization measures to be adopted in the face of galloping inflation, under the pressure of the main parliamentary opposition to the government, labeled as an ” industrial lobby ”.

The repercussions of political and institutional changes on the economy are superimposed on the progressive wearing down, already underway for years, both of the production capacity (backward compared to Western technological standards and compromised by insufficient turnover and maintenance of the plants), and of the management capacity economic, which has become inadequate for the management of a modern industrial economy and perhaps also to guide the ” extensive development ” of the past.

The decline in production today appears to be of dramatic size, but the slowdown in economic growth had begun some time ago. The Gross Domestic Product, which in the 1960s had grown on average in real terms by 6 ÷ 8% a year, and had maintained an average growth of 4% in the decade 1974-83 and of 3% in the following six years, has systematically decreased during the 1990s: in 1990 there was a reduction, albeit modest, of around 0.4% for the first time, a sign of the production instability already underway; the effects of this collapse were fully manifested in 1991 (contraction of the GDP of 9%) and even more during 1992 and 1993, in which the decrease was respectively 18% and 19%; IMF projections still indicate a reduction, of the order of 17%, for 1994.

According to elaineqho, the contraction of the Gross National Product in real terms affected all components of global demand. The collapse of investments was, however, the warning signal and the engine of the crisis: with the disappearance of the centralized financial allocation system, the renewal of the stock of fixed capital, which for some time already had serious problems of low productivity due to technological obsolescence and physical aging, has completely stopped (gross investments have undergone reductions of more than 60%), which has not only prevented the introduction of innovations, but even the already reduced ordinary replacements and the same maintenance of the plants; many investments have been left unfinished and irretrievably lost; furthermore, the intentions of industrial restructuring and conversion were thwarted, but the traditional, capital-intensive sectors, in particular the energy sector, in which 40% of the investments of the entire Russian industry are concentrated, have also entered into crisis.

The difficulties in the energy sector had immediate effects on exports (oil and gas are the main items of Russian exports), which were also heavily affected by the dissolution of COMECON and the difficulties of commercial relations within the former USSR. On the other hand, the start of the liberalization of foreign trade, the aid and emergency supply programs, as well as the imitation effect activated by the latter, have led to an increase in imports, despite the concomitant reduction of global demand. The reduction in exports and the increase in imports have meant that since 1990 the trade balance of Russia has systematically recorded negative balances.

The reduction in consumption, a consequence of the fall in GDP, is not an active factor in the recession, the causes of which are instead sought on the supply side and, to a large extent, in the restrictive economic policy implemented by the Russian government to combat inflation. As regards the first aspect, in addition to the difficulties already mentioned relating to the endowment of fixed capital, the non-correspondence of the commodity composition of production to that of demand continues to have an important weight in the persistent shortage of goods; Finally, the disruptive effect of the ” radical ” approach to the transition to capitalism was decisive, with the abandonment of the rules of administrative governance of the economy (the so-called ” command system ”.

Russia Economy in the Early 1990's 1