Russian Reform and Economics: The Last Quarter of the 20th Century

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Thesis: As the reformation of the USSR was becoming a reality, Russia's economy was

crumbling beneath it. Russia began its economic challenge of perestroika in the 1980's.

The Russian people wanted economic security and freedom, while the government was

trying to obtain democracy. The previous management styles needed to be changed along

with the way that most businesses in Russia operated.

I. Reformation of USSR

A. The change from communism to democracy.

B. The change in government has had a great effect on the Russian people and


C. The reformation left the Russian economy upside down.

II. Post-Reform economy versus Pre-Reform economy.

A. There were many steps in the reformation of the economy.

B. What are some of the effects of a reforming economy?

C. There are many changes that are still needed in order for the Russian economy

to grow.

III. What will be the future of Russia's Economy?

Main Body

As the reformation of the USSR was becoming a reality, Russia's economy was

crumbling beneath it. Russia began its economic challenge of perestroika in the 1980's.

The Russian people wanted economic security and freedom, while the government was

trying to obtain democracy. The previous management styles needed to be changed along

with the way that most businesses in Russia operated.

The Russian Federation consists of 17,075,400 square km, which is roughly 76.2

percent of the former USSR, and covers about 12 percent of the earth's land surface. The

Russian Federation's population in 1991 was 147.3 million (Smith, A., 7).

During the 1980's the Russian government started a reformation process called

'perestroika,' meaning restructuring (Aganbegyan, 1). Perestroika signifies qualitative

changes and transformation in the government and in the economy. The four stages of

perestroika are the 'Preliminary stage (March 1985-February 1986),' the 'Stabilizing stage

(March 1986 - January 1987),' the 'Expansive stage (January - November 1987),' and the

'Regrouping stage (November 1987 onwards)' (Hill & Dellenbrant, 140). The government

also identified two other processes. 'Glasnost,' which means openness, supported the

strong economic reform (Aganbegyan, 1; Hill & Dellenbrant, 54). The acceleration of

economic reform was called 'uskorenie' (Aganbegyan, 1).

Many changes took place during the years contained in each of the stages of

perestroika. This changes ranged from government policies and structure to industrial

production procedures to economic policies. The major change came in 1991 with the

breakup of USSR. This freed the individual states and allowed them to become

independent countries. All of these new countries went through radical government

changes. Many of them, including Russia, chose to implement democracy. This change

from a central military based structure into democracy effected all of the former soviet

states' centralized economic departments.

The assets were owned by the people and were distributed by the state during the

communist reign in Russia. All of the resources were also distributed by the state for the

betterment of the people. The government ran all state budgeted enterprises. All of the

private enterprises, that marketed consumer goods, were taxed by the government and

were also closely regulated.

Before the democratic government, Russian workers received the same pay whether

they worked hard or not, causing wages to be low and work conditions to be very poor.

Russian workers would steal from the government in order to supplement their low wages.

The Russian theory was that people were motivated by their collective interests. This

proved to be very wrong. The actual growth for national income in 1987 was 1.6 percent

less than what the government had predicted (Hill & Dellenbrant, 106).

With all of the changes going on in each of the stages of perestroika there was a lot

of political, bureaucratic, managerial, and intellectual opposition to what the leaders were

establishing. This goes to show that people will always resist change.

Perestroika identified many problems with the existing government, economics, and

living conditions of the people. The lack of overall government regulations like

unemployment insurance, a decent taxation system, and a centralized market caused many

of the conditions. Another problem was the lack of legal infrastructure and protected

property rights.

The old factories in Russia couldn't keep up with the new technology of the

Information Age. In 1987 Russia had less than 200,000 computers compared to the United

States' 25,000,000 (Smith, H., 239). Innovation in Russia was looked at as a disruption of

the flow of production even though technological modernization was needed badly. The

idea of quantity overruled quality in most of the factories. Many pieces of machinery were

built but not the parts to replace broken ones, millions of shoes produced in the odd sizes,

and exploding TV's were common place under this idea.

Russia had a total economic collapse in 1990-1991 causing total imports to fall under

1988's 135.9 billion roubles and exports down from 1988's 102.5 billion roubles (Smith, A.,

199-200). Russia exported 76 percent of USSR's total exports and imported 68.4 percent

(204). In 1988, Russia's produced 569 million tons of oil, 590 million cubic meters of natural

gas, and 425 million tons of coal (206). Industrial output was down 13 percent in the first

quarter of 1992 (Smith, A., 178). National income was down 14 percent and retail prices

were up to six times the previous prices (178). 13 percent of the industry was subsidized

to make up for operating losses (Smith, H., 238). There was many reasons for the

economic growth rate falloff including centralized price determination, centralized allocation

of resources and products, to many exchange rates, hard currency problems, and retention


Glasnost revealed many of the problems dealing with issues in the society and the

peoples' living conditions. The people of Russia had very little income and very little food.

The food supply was very limited and caused the government to resort to rationing. The

lack of food caused many health problems for the people.

The outcome of Russia's problems are based on the decisions and policies taken

in the first steps of perestroika.

1988 to 1990 was the transition phase for the Russian government and economy.

During this time Russian leaders were forecasting a full recovery from the economic

collapse by the year 2000 (Colton & Legvold, 70). Russian leaders started changing the

government from the top down. In the preliminary phase they changed the highest levels

of the administration. In the stabilizing stage change was in the lower levels and was had

an emphasis on politics instead of the economy. 563 of 965 party members were replaced

between March 1985 and August 1988 (Hill & Dellenbrant, 144). In the expansive stage

changes brought about a wider democracy, decentralization in politics and the economy,

vertical and horizontal reform, electoral reform, and the rights of information act. The

electoral voting system began experimentation during June 1988 (Hill & Dellenbrant, 101).

Reform brought about the allowance of protesting government and political abuses. Other

government regulations also needing reform were commercial and financial codes, the

existing tax system, and private property rights.

A policy in 1991 approved the establishment of a free market economy called the

'Memorandum on the Economic Policy of the Russian Federation' (Smith, A., 177). This

policy contained the removal of government constraints, privatization, and economic

assistance from the west. Boris Yeltsin proceeded to create a real economic market


The Russian government was pushing for the adoption of the International Monetary

Fund among the new nations of the former USSR. Russia was attempting to change to one

fixed exchange rate by July 1, 1992 (Smith, A., 191). The creation of a stabilization fund

of $6 billion was to help price reform and stabilize the economy.

Several major reform laws were passed between November 1986 and June 1987.

The first was the 'Law on Individual Labour Activity' in November 1986, 'Formation of

Cooperatives' between October 1986 and February 1987, and 'Law on Cooperatives' in

May 1988 (Hill & Dellenbrant, 93). The 'Law on State Enterprises' passed in June 1987

allowed state enterprises more independence, profits, and investments by the government


A reform in the foreign trade system allowed for new joint ventures in Russia. Many

of these joint ventures were between Russia and the United States. These joint ventures

proved to be very difficult to operate at first. Cooperative enterprises were also started to

help boost the economy. Many of these cooperatives were restaurants, bakeries, and

repair shops were profits and member voting are equally shared. The cooperatives were

modeled after the cooperatives established in Hungary. All cooperatives set their own

prices based on demand not by the state pricing system. The future outlook of the

cooperatives is that they should help to keep unemployment down during the reformation


Many private enterprises were allowed to produce consumer goods and consumer

services. The private enterprises were only allowed to hire workers if they were in the

family. Most of the workers were required to use it as a second job to their existing state

directed job. The goods produced by these private enterprises were mostly hand made

items. Most services included repair type services like home repair, car repair, appliance

repair, etc. The new private enterprises are looking to be very successful. Private farms

have become more productive than the state run collective farms. President Gorbachev

addressed the private enterprise managers 'Be your own bosses, run your own businesses,

do your own investments, keep your profits, and make your plants efficient' (Smith, H.,

241). This gave independence and accountability to the industrial producers and other

private enterprises. Gorbachev also stated that the use of uskorenie on science and

technology would help to boost the economy (Smith, H., 178).

Many of the positive outcomes of the economic reformation have helped to justify the

process to the people and the administrators. Gorbachev promised that unemployment

would not be an outcome of the new economic reform, while consumers are now able to

choose imported or domestic goods in the newly created open economy. The Russian

television programs now covered more and are becoming more exciting. They are covering

international news, doing investigative type reports, and are even having phone-in programs

on controversial topics. All of the new implementations are bringing in new technology and


Some of the problems to the economic reformation have been the side effects and

opposition to the reform. Most of the opposition has come from the political, bureaucratic,

managerial, and intellectual sides of the government and industrial producers. There has

been strong resistance to farm reform from several government leaders. One side effect

of the reformation has been an unstable rouble, which has fluctuated from 70 roubles to

$1.00 all the way to 230 roubles to $1.00 causing much chaos (Colton & Legvold, 57).

There has been a large number of negative trends in trade and production (Colton &

Legvold, 61). High inflation rates have resulted from fighting over control of the supply of

credit and money amongst the former soviet states. Prices of consumer based products and

services have tripled and then doubled within a very short period of time (Colton & Legvold,

55). All of these problems has pushed the actual implementation dates the 1990s.

What will it take for Russia to end the slumping economy while trying to achieve a

free market and democracy? Some economists have predicted that in order for Russia to

stabilize its economy and achieve capital equality of European countries that an estimated

$1.7 trillion dollars or $1.2 trillion invested at 7 percent or $571 billion per year was needed

(Smith, A., 218).

Works Cited

Aganbegyan, Abel. The Economic Challenge of Perestroika. Bloomington, IN: Indiana

UP, 1988. Pg 1,6,17-18

Colton, Timothy J. and Robert Legvold. After the Soviet Union: From Empire to

Nations. New York: W.W. Norton, 1992. Pg 51,54-57,59-62,64-65,70,74,78

Hill, Ronald J. and Jan Ake Dellenbrant. Gorbachev and Perestroika: Towards a New

Socialism. England: Edward Elgar, 1989. Pg 51,54-55,93-101,104-107,115,140-


Lawrence, Paul R. and Charalambos A. Vlachoutsicos. Behind the Factory Walls:

Decision Making In Soviet and US Enterprises. Boston: Harvard Business SP,

1990. Pg 3-4,11,39,43,45-47

Smith, Alan. Russia and the World Economy: Problems of Integration. London:

Routledge, 1993. Pg 1,7,177-178,187-188,191,199-200,204-206,218,221

Smith, Hedrick. The New Russians. New York: Random House, 1990. Pg 178,187,209,