Russia

Chapter 6. The Economy

LIKE MANY OTHER ASPECTS OF RUSSIAN LIFE, the Russian economy underwent a journey through uncharted waters in the early 1990s. First came the disintegration of the centrally planned economy that was a hallmark of the state-controlled economy and then its replacement by an economy operating on the basis of market forces. Some of the former communist states of Central Europe began their process of economic transition two years before Russia and have provided positive models. But Russia lacks experience with market economies and the institutions needed to operate them. Moreover, deeply en-trenched remnants of central planning present challenges in Russia that other countries were able to avoid.

Russia undertakes the transition with advantages and obstacles. Although only half the size of the former Soviet economy, the Russian economy includes formidable assets. Russia possesses ample supplies of many of the world's most valued natural resources, especially those required to support a modern industrialized economy. It also has a well-educated labor force with substantial technical expertise. At the same time, Soviet-era management practices, a decaying infrastructure, and inefficient supply systems hinder efficient utilization of those resources.

For nearly 60 years, the Russian economy and that of the rest of the Soviet Union operated on the basis of central planning--state control over virtually all means of production and over investment, production, and consumption decisions throughout the economy. Economic policy was made according to directives from the communist party, which controlled all aspects of economic activity. The central planning system left a number of legacies with which the Russian economy must deal in its transition to a market economy.

Much of the structure of the Soviet economy that operated until 1987 originated under the leadership of Joseph V. Stalin (in office 1927-53), with only incidental modifications made between 1953 and 1987. Five-year plans (see Glossary) and annual plans were the chief mechanisms the Soviet government used to translate economic policies into programs. According to those policies, the State Planning Committee (Gosudarstvennyy planovyy komitet--Gosplan) formulated countrywide output targets for stipulated planning periods. Regional planning bodies then refined these targets for economic units such as state industrial enterprises and state farms (sovkhozy ; sing., sovkhoz --see Glossary) and collective farms (kolkhozy ; sing., kolkhoz --see Glossary), each of which had its own specific output plan. Central planning operated on the assumption that if each unit met or exceeded its plan, then demand and supply would balance.

The government's role was to ensure that the plans were fulfilled. Responsibility for production flowed from the top down. At the national level, some seventy government ministries and state committees, each responsible for a production sector or subsector, supervised the economic production activities of units within their areas of responsibility. Regional ministerial bodies reported to the national-level ministries and controlled economic units in their respective geographical areas.

The plans incorporated output targets for raw materials and intermediate goods as well as final goods and services. In theory, but not in practice, the central planning system ensured a balance among the sectors throughout the economy. Under central planning, the state performed the allocation functions that prices perform in a market system. In the Soviet economy, prices were an accounting mechanism only. The government established prices for all goods and services based on the role of the product in the plan and on other noneconomic criteria. This pricing system produced anomalies. For example, the price of bread, a traditional staple of the Russian diet, was below the cost of the wheat used to produce it. In some cases, farmers fed their livestock bread rather than grain because bread cost less. In another example, rental fees for apartments were set very low to achieve social equity, yet housing was in extremely short supply (see Housing, ch. 5). Soviet industries obtained raw materials such as oil, natural gas, and coal at prices below world market levels, encouraging waste.

The central planning system allowed Soviet leaders to marshal resources quickly in times of crisis, such as the Nazi invasion, and to reindustrialize the country during the postwar period. The rapid development of its defense and industrial base after the war permitted the Soviet Union to become a superpower.

The record of Russian economic reform through the mid-1990s is mixed. The attempts and failures of reformers during the era of perestroika (restructuring--see Glossary) in the regime of Mikhail S. Gorbachev (in office 1985-91) attested to the complexity of the challenge. Since 1991, under the leadership of Boris N. Yeltsin, the country has made great strides toward developing a market economy by implanting basic tenets such as market-determined prices. Critical elements such as privatization of state enterprises and extensive foreign investment went into place in the first few years of the post-Soviet period. But other fundamental parts of the economic infrastructure, such as commercial banking and authoritative, comprehensive commercial laws, were absent or only partly in place by 1996. Although by the mid-1990s a return to Soviet-era central planning seemed unlikely, the configuration of the post-transition economy remained unpredictable.

Economists have struggled to achieve accurate measurement of the Russian economy, and they have questioned the accuracy of official Russian economic data. Although the market now determines most prices, the Government (Russia's cabinet) still fixes prices on some goods and services, such as utilities and energy. Furthermore, the exchange rate of the ruble (for value of the ruble--see Glossary) to the United States dollar has changed rapidly, and the Russian inflation rate has been high. These conditions make it difficult to convert economic measurements from rubles to dollars to make statistical comparisons with the United States and other Western countries.

According to official Russian data, in 1994 the national gross domestic product (GDP--see Glossary) was 604 trillion rubles (about US$207 billion according to the 1994 exchange rate), or about 4 percent of the United States GDP for that year. But this figure underestimates the size of the Russian economy. Adjusted by a purchasing-power parity formula to account for the lower cost of living in Russia, the 1994 Russian GDP was about US$678 billion, making the Russian economy approximately 10 percent of the United States economy. In 1994 the adjusted Russian GDP was US$4,573 per capita, approximately 19 percent of that of the United States. A second important measurement factor is the extremely active so-called shadow economy, which yields no taxes or government statistics but which a 1996 government report quantified as accounting for about 50 percent of the economy and 40 percent of its cash turnover.