Assignment: Economic Dislocations
In the 1990s, the Russian economy went from bad to worse. By the middle of the decade, output dropped by one-third and hyperinflation stalked Russian consumers like a great plague.* Year after year, the vital statistics—GDP growth, productivity, prices, wages—told a grim story.* Failure to crack down on organized crime was partially to blame for the deep malaise, as was official corruption that, among other things, turned the privatization program into a bonanza for crooks.
A grossly mismanaged privatization program allowed crooks—operating behind the scenes, greasing palms, and using Kremlin connections—to gain control of huge chunks of the Russian economy. In this way, the sell-off of state assets at fire sale prices created multimillionaires (“oligarchs”) while most Russians sank deeper into poverty. Meanwhile, Russia lacked the legal and financial structures necessary for the development of a diversified economy capable of competing in a global marketplace.
Under Yeltsin, most Russians perceived they were worse off than under Communism. A decade later with Putin at the helm, the picture was much brighter.* The reason: a sudden steep rise in oil and natural gas prices on the world market in the post-9/11 period. A major producer and exporter of fossils fuels (oil and natural gas), Russia reaped windfall profits before the global recession drove world oil prices down in 2008.*
In short order, Russia paid off its external debt and amassed the world’s largest foreign currency surpluses during this period of irrational exuberance, but ultimately failed to capitalize on it. By failing to diversify the Russian economy or to create a business environment attractive to foreign investors, Putin squandered Russia’s energy-export windfall. The downside of Russia’s extreme dependence on energy exports became evident when world oil and gas prices collapsed and export revenues plummeted in 2008-2009, a prelude to the current economic crisis rocking Russian civil society to its core.
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