Back in the USSR The Soviet, centrally planned, system began in the USSR in the 1920's. In the early decades the system of planning allowed the emphasise to be on capital goods production and created quite high levels of economic growth. However by the 1980’s the Soviet Socialist economic system with its inherent features, like state monopoly of the means of production, severe regulation of all aspects of economic activity, and its equality of income distribution failed to provide efficiency and improved living standards. Russia started its transition to a market economy in the late 1980’s due to economic factors, regardless of any politicians’ ideas or wishes. The goal of the radical reforms was to create a new economy based on competition of enterprises, incentives for employees and freedom from the control of bureaucratic state administrative authorities.,

Transition to a Market The low level of efficiency of Russia’s economy greatly affected the nation’s living conditions. By the end of 1991 the consumer goods market could not function. For example, to buy a television set, a washing machine, a car or a carpet the people had to wait their turn for several months or even years. In supermarkets often only empty shelves could be seen, the shops sold goods in exchange for special tokens that proved to be very often useless. People from provincial towns had to go to the capital (Moscow) to buy foodstuffs, like sausage or butter, etc. Under those severe conditions economic reforms began. The first step taken was the liberalisation of prices for consumer goods and services and a centralized system of resource distributions was abolished.

Transition to a Market The prices of goods and services were to be determined by market forces, not set by the State. Mass privatisation of State and municipal enterprises was started. By 1994, 70 percent of Russia's large and medium- sized enterprises were privatised along with about 90 percent of small enterprises. The reforms were designed to encourage personal initiative and individual ownership of businesses. Commodity and stock exchanges were introduced.

What were the effects of the reforms? The reforms were largely introduced as ‘shock therapy’. They were designed to move the economy quickly towards a market system. While it was recognised that the ‘shock therapy’ was going to cause some initial pain, it was supposed to bring relatively quick positive results. In 1992, the first year of economic reform, retail prices in Russia increased by 2,520 percent. A major cause of the increase was the decontrol of most prices in January 1992, a step that prompted an average price increase of 245 percent in that month alone.

Inflation in Russia Inflation has declined to 4.3% in 2012.

Economic Growth in Russia

The GFC increased unemployment Unemployment fell to 5.2% in 2012.

Increasing underemployment Underemployment is a major issue in Russia. Many people run their own businesses because they can not get jobs but do not earn above a subsistence income. Underemployment rose from 2.8% in 1993 to 16.7% in 1994 but has since declined to 5% adding to the 5.2% unemployment rate in Less than a quarter of the unemployed receive benefits.

Unemployment is much higher in regional areas

Real Wage Growth

Percentage Change in Households’ Real Income, Wages, and Pensions

Increased income inequality The move to a market system has increased income inequality and especially in the mid-90’s the level of poverty. The gini co-efficient rose from 0.26 in 1991 to 0.41 by 1994 and was 0.42 in The proportion of income, which belongs to the 20 % of the richest people in Russia, was 32.7% in 1990 rising to 46.6% in The proportion of income, which belongs to the 20% of the poorest people in Russia, was 9.8% in 1990 declining to only 6.1% in 2006.

Quality of Life The quality of life declined in Russia in the 1990’s with recession, rising unemployment, hyperinflation and declining real incomes. The percentage of the population living in poverty rose to 34% in The average life expectancy fell from 69 years in 1990 to 64 in For men it was even worse falling from 64 in 1990 to only 57 in Suicide rates also increased along with crime rates and the level of mental illness.

Quality of Life

In 2011 the life expectancy of a male improved to 63.4 years and 75.4 years for a woman. Increased unemployment and lower incomes all increased the suicide rate. Russia now has the second highest suicide rate in the world after Lithuania. Russia has also been affected by HIV/AIDS. Russia has the fastest growing HIV rate in the world, with new cases doubling every 12 months.

Exchange Rate The high inflation led to a loss of purchasing power and a decline in the value of the rouble. In 1991 there was 0.17 roubles to a US$ by 2002 it took 32 roubles to get 1 US$. A loss of value of 188 times its purchasing power. It improved to be 24.5 roubles to a US$ in 2008 But declined again in 2012 to 31 due to lower oil prices and economic uncertainty.

The Putin Reforms President Putin has been responsible for the greatest improvements for the Russian economy and the people of Russia. His main reforms have been:  A Labour Code was adopted that more securely protects the right of employees.  The government has adopted a Tax Code that has created a more favorable business climate.  The Government has paid particular attention to changing the tax system to reduce tax avoidance and evasion.

The Putin Reforms Social programs to increase and speed up the payment of pensions, allowances, and salaries to employees engaged in the public sector.  In the mid-nineties delays were often 6-12 months. For this extensive modernisation of the economy, the government intends to create and guarantee a favourable investment and business climate, to have predictable and stable macroeconomic policy and to realise structural reorganisation of the economy.

What have been the effects? By 2007 Russia had achieved:  Economic Growth at 7.7%.  Unemployment has fallen to 6.2%  Inflation has declined to 11%.  Real wages have risen 15% a year (2000-7).  Real Pensions have increased 15% a year ( ).  Real Income per capita has increased 10% a year (2000-7).  The budget was a surplus.  The current account was a surplus of almost $74 billion US in 2007 but is expected to move towards a balance by 2010.

The Success Story   There has been a major increase in foreign direct investment into Russia since the reforms began. Many of these ventures are joint ventures, between Russian and foreign firms.   Foreign investment has risen considerable since 2006 with 69% going into exploration and mining of fossil fuels (mostly oil).

However, trade is very dependent on oil prices

As is the Russian budget

What reforms have ocurred?  The success of President Putin’s policies can be shown by economic growth and living standards rising.  The Government has introduced Capital Adequacy requirements for banks to increase the security of the banking system to encourage savings and investment.  According to regular public opinion polls the President’s policies to deal with crime, corruption, and poverty were well supported.  Crime and corruption still remain major issues.  There are still many challenges facing Russia. Much of its recent economic success has been due to rising world oil prices (its major export). This has provided tax revenue to the government and also spurred spending and growth.  Declining oil prices may slow the economy down and create budget shortfalls.  Inflation and relatively high unemployment still remain problems.

Dmitry Medvedev?  Due to constitutionally mandated term limits, Putin was ineligible to run for a third consecutive Presidential term.  In March 2008 Russia elected a new president – Dmitry Medvedev  Putin was then nominated by the latter to be Russia's Prime Minister Prime Minister  Policies are likely to keep following the same pattern –  The government has created state owned monopolies in the key economic sectors, eg, oil, gas.  They have secured the country's natural resources and key economic sectors from private interests, whether foreign or local.  The Government aims to attract private foreign investment into both minority investments into state controlled monopolies and into direct foreign owned enterprises.

The Impact of the GFC The Global Financial Crisis had a major impact on the Russian Economy.  Falling oil prices have drastically reduced national income and government revenue.  Unemployment rose to 9.9%  Economic growth fell by 10.1%  The rouble lost 20% of its value in  Russia went from a budget surplus of 3.6% of GDP to a deficit of 6% of GDP.

The Impact of the GFC on Poverty in Russia

Policy responses to the GFC Government anti-crisis measures including a stimulus package which sent the budget into deficit of 6.5% of GDP. It was used to bolster wages, pensions, and other benefits. This helped reduce the poverty rate in 2009 to an estimated 14% Bringing the number of people living below the subsistence minimum (equivalent to about $169 per month) to below 20 million. The World Bank estimates that the poverty level will return to the pre-crisis level of 12.5% in 2010.

Where to now? The Russian economy is recovering and will continue to do so if oil prices average over $70 US a barrel. The lower rouble will help Russian competitiveness. Strong fiscal stimulus from the government should cushion the worst effects of the recession. However many of the underlying problems of a narrow export base and inefficient industries remain.

The rebound has started

What are the challenges? Structural reforms have stalled in recent years, although there are increasing calls to modernize the economy and reduce its dependence on oil. The crisis has further increased the dominance of the State in Russia’s economy, Reducing inefficient and weak enterprises’ dependence on state support, accompanied by significant restructuring, will be a central, yet difficult, challenge in the years ahead.

What are the challenges? The World Bank (2011) considers that Russia’s short-term economic and fiscal situation remains favourable because of high oil prices. But the balance of macroeconomic risks has shifted toward an uncertain growth path as inflation pressures subside and external risks associated with sovereign debt issues in Europe and the USA create economic uncertainty. In 2012 Putin returned as President. He is trying to gain more control over the oil industry which is Russia’s main export earner. But this may also dampen investment.

A Western view of Russian economic reform