World

Did the move to the free market unleash Russia’s demons?

4 March 2022

6:36 PM

4 March 2022

6:36 PM

Back in 2009 on an unseasonably warm autumn evening in Moscow, I was walking to dinner with a banker friend, a former British army officer with whom I’d bonded over a shared interest in history. At the time, we were both advising a large Russian bank which had recently listed its stock in London, and were irritated beyond measure to see its share price tanking, despite a booming Russian economy and it having no exposure to the American sub-prime mortgage market.

As we crossed Mayakovsky Square, I blurted out almost without thinking; ‘You know the last time we had a financial crisis like this one, it ended up in a war.’ Germany, we agreed, no longer posed a threat. But here we were in the capital of a former imperial power that had been humiliated and partially dismembered, experienced financial collapse, mass unemployment and hyperinflation, and was now in the hands of a dynamic new leader who was centralising power around himself.

I remembered that conversation this past week, as Russian tanks rolled into Ukraine. Much of the commentary that surrounds these appalling events has criticised the West’s ‘end of history’ triumphalism following the Soviet Union’s collapse, that displayed a gaping lack of sensitivity towards Russian insecurity.

What has been overlooked, however, is the nature of the transition of the Russian economy from communism to capitalism and whether that was possibly a more decisive cause of the unleashing of the demons of militaristic authoritarianism that have captured Russia under Putin.

In the heady days that followed the victory of Boris Yeltsin in the 1991 putsch, free market idealists swept into power convinced that shock therapy was the only way to turn Russia into a successful market economy. Those were the days of the 500 Day Plan of academic economists Grigory Yavlinsky and Stanislav Shatalin, for rapidly dismantling the communist leviathan and replacing it with a fully working market system. In 500 days Russia would manage, by will alone, to achieve what had taken most western countries centuries of effort.


Egged on by western economists and following the success of the Czech voucher privatisation—that had had gifted the state industrial complex to its citizens almost overnight—Russia bravely followed suit.

Unfortunately, Russians were not Czechs. For a country which until the communist takeover in 1948 had run one of the world’s most successful industrial economies, the transition was deceptively easy.

But Russians had no first-hand experience of a market economy. For 70 years they had been force-fed cartoon images of rapacious capitalists in top hats feasting on the blood and sweat of oppressed workers. Given that to most Russians that was what capitalism was supposed to look like, we should not be surprised that this is pretty much where Russia’s experiment with ‘shock therapy’ ended up.

Without a properly worked out institutional framework, or any concept of the rule of law, much less a welfare state to support those displaced by the transition, chaos ensued. While the smart, ambitious and ruthless fought, in some cases literally with guns, for control of the commanding heights of the economy, or sold anything not bolted down for dollars, the majority who had been raised in a system which had guaranteed a job for life, found themselves out in the cold. Grim as life has been in the hollowed out rust-belts in the West, it was hardly fun either being stuck in the equivalent of a company town in far off Siberia, when the sole industry or mine that provided not just employment, but a full range of health and social services, collapses.

Anyone who has read Gogol and Dostoyevsky will recognise an irrational tendency in the Russian psyche to push ideas to illogical extremes. Having tested Marx’s theories to destruction, it was time to see what mayhem could be wrought when the theories of Popper, Hayek and Friedman are let rip.

By the mid-90s, Moscow, St Petersburg and a few other cities boomed on the back of buoyant oil and commodity prices and inflows of opportunistic foreign cash. But life elsewhere was grim. The mortality rate in the Russian Federation rose from 11.4 per 1,000 in 1991 to 18 in 2005 as rampant alcoholism, HIV and heroin addiction took hold. That’s almost twice the (pre-Covid) rate seen in the US or UK. In Russia, deaths of despair have been a reality for decades.

Meanwhile, the best and the brightest, many of them products of a Soviet education system that rivalled anything in the West, fled for Wall Street, Silicon Valley and Tel Aviv.

After Russia’s double default in 1998 that eventually sealed Yeltsin’s fate, Putin was initially welcomed as a breath of fresh air, an opportunity to rein in the excesses of ‘the Wild East’ and put Russian capitalism on a more stable and sustainable footing. But Putin was also a product of his upbringing and education. Ultimately, wresting political control from the oligarchs allowed him and his clique to consolidate power and control over Russia’s wealth. For the many ordinary Russians – ‘Dead Souls’ with worthless pensions and dead-end jobs, and nostalgic for the days when Russia dominated – the promise to make Russia great again was understandably appealing.

There is an old Russian saying that he who goes to war should prepare two graves, one for the enemy and one for himself. Many in Russia, as in the West, will be hoping that by launching an unprovoked war against Russia’s Ukrainian neighbours, the Russian president will have dug his own grave.

But whether whatever, or whoever, comes after Putin will be better equipped to salvage the wreckage that remains of Russia’s botched transition from communism to a pluralist market economy, as the old Irish quip has it, I wouldn’t start from here.

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