The Transition from Socialism to Capitalism in Russia

Introduction

Russia has become tightly connected with the global economy after the collapse of the Soviet Union. However, the country with its rich natural resources is relatively different from other states that experience transition economies. Being a special country, it embraced effective transformation to capitalism later than other Eastern European countries. However, it attracted high capital flows, increased trade with other countries, and modernized both the industry and services sector. The enhanced competition that existed in the global market was supposed to involve the country in the international trade and expand its production possibilities. However, many inherited distortions and shortcomings, such as shadow economy, a lack of private businesses, and difficulties with the rule of law, led to numerous challenges. After proclaiming its independence in 1991, Russia started the process of difficult transition from the socialist central economy to the market one. It was the beginning of Russian integration into the world economy. The main emphasis was put on the principle of comparative advantage. In the Soviet Union, this principle seemed to be the most difficult one because external trade reflected political and ideological principles. It was impossible to make a sudden change in external trade because of many factors. However, the Russian economy has overcome many transformations since 1990, and the country further achieved significant changes and effects.

Historical Background of the Transition from Socialism to Capitalism in Russia

Before the Socialist Revolution of 1917, Russia was the fifth largest economy in the world. Social and political changes led to the formation of the Soviet Union. Sakwa (2013) assumes that during the last years of existence of the Soviet Union, Russian economy experienced numerous difficulties. During the Cold War, its industry produced mainly missiles and tanks that were not widely used in everyday life. In the 1990s, Russia had extraordinary problems with shifting from socialism to capitalism (Sakwa, 2013). Capitalism was a new concept in the country, and its transitional period was full of collisions and pitfalls. They were supposed to rebuild economy that stayed in weak conditions.

Before the collapse of the Soviet Union, the country had a good international status, but in the 1990s, it lost its position in the world (Renza & Thornton, 2012). For many years, it was a crucial world power that existed in opposite to the capitalist world. However, everything has changed after 1990, and nobody wanted to help Russia to rebuild its economy on its way to capitalism. The country has lost its former power and became nobody in the world arena. Moreover, it lost a number of territories that were part of the USSR. Fourteen other countries that comprised the Soviet Union before its collapse did not contribute to Russian economy anymore. Thus, Russia did not lose only territories that had rich natural resources and agriculture, but also it lost its workforce. Remarkably, the former Soviet Union used their republics as a source of the food production, oil, and natural gas, but after proclaiming its sovereignty, Russia could no longer use these recourses. Most weapons were located in Ukraine and Belarus, and it was rather expensive to destroy and relocate them.

Russian transition period from communism to capitalism was accompanied by crime caused by the Russian Mafia that has been influential there until nowadays. Wilson (2015) notes that crime was always present in Russia, even during communism, when criminals created the Russian black market. The Soviet system was corrupted from its very beginning, and it was increased during the transformational period when there were almost no rules. The Soviet system was broken after the collapse of the Soviet Union and Russia was under the influence of organized crime. Its influence was a major factor of what was happening in Russia and has continued until today. This powerful group does not only affect the local economy, but it also influences international investments.

Russian Oligarchs

The oligarchs were a new dimension of white-collar criminals who worked for the government. They bought industries and businesses in Russia. In the Soviet Union, all property was owned by the state – the land, natural resources, plants, etc. When communism began to transform into capitalism, the state started to sell everything. However, ordinary individuals could not buy this property because all purchases were made by government insiders at rock-bottom prices (Pursiainen, 2012). For example, Yukos was a government-owned Oil Company that was privatized by people who had friends in the government and in the bank. When it was going up for sale, individuals took a loan in the bank, and then resold the company for its true value, becoming billionaires overnight. Finally, such a transaction became a huge financial loss to the government.

The collapse of the Soviet Union created huge opportunities for oligarchs who struggled to defense their wealth. The Russian state still has big problems, trying to manage this part of the population consisting of powerful actors. Chrissikos (2014) assumes that the reason for oligarchy in Russia was a result of its political economy. It was rather difficult for oligarchs to defense their wealth, especially during the first years of independence. Russian people understood the importance of legal institutions that protected property rights, but it was almost impossible to create them. Mafia protection rackets became a normal thing in post-communist Russia. However, they were more a threat than a solution. New Russian businessmen were supposed to pay rackets 20 percent of turnover for their protection.

Potential Problems

Another problematic issue for Russia was its population that declined through decreasing birth rates and fertility rates. Today, Russian population has declined to 150 million people, and this number is becoming smaller every year (Wilson, 2015). Population decline in Russia was extremely problematic in the transition period. Moreover, low population growth was continuing during the coming years. Many findings suggest that the main reason for Russia’s democratic decline is a lack of health care (Lane, Oding, & Welfens, 2012). During the transition period, health care service became unavailable for many citizens because of its high cost. Therefore, many people do not have access to expensive operations or preventive care. Eventually, they become alcoholics, trying to forget their troubles, which does not make things better.

Many findings suggest that after the collapse of the USSR, Russia has lost its spheres of influence in the former Soviet republics and other countries (Chrissikos, 2014). For example, it was desperately trying to keep Central Asia under control because it has a rich abundance of natural resources, such as oil and natural gas. Sakwa (2013) states that they were also courting China with the aim to establish good ties with it. Since 1990, Russia has lost influence over Eastern Europe. Thus, such countries as Poland, Hungary, and the Check Republic joined NATO very quickly, just after they declared their independence in 1991 (Pursiainen, 2012). Therefore, things continued to change rapidly for Russia on its way from communism to capitalism.

What Distinguishes Russian Capitalism from the Western Capitalism?

Historically, the establishment of communism was the main event of the 20th century. As a result, a protected struggle between communist and capitalist worlds has occurred after the October Revolution of 1917 in Russia. This revolution has changed the Russian direction for many years. In its intention to transform socialism into capitalism, Russia has overcome many difficulties. Soviet industry was mainly organized at state-owned enterprises, and it was a difficult path of changing these standards and turning state property into private property. One of the main features of socialism in Russia was class-focused approach that encouraged workers to produce a surplus for the government that distributed it.

In the 1990s, the opposition movement led by Yeltsin (the first Russian President) proclaimed individual freedom, democracy, and economic reforms. However, these intentions failed, as contrasted with those determined by Gorbachev during “perestroika.” Chrissikos (2014) asserts that Yeltsin and his followers, who came to power in 1991, decided to transform Russian socioeconomic system radically and rapidly. His government tended to quickly eliminate the remaining elements of a socialist system and create a capitalist one. Yeltsin with his followers wanted to replace the Soviet system with a capitalist system similar to that in the West, hoping to do it with minor changes. However, in their rapid way to capitalism, Russia demonstrated its inability to provide economic reforms. Instead of them, associated crime and corruption led to the enormous disparities in income of Russian people.

According to Glinavos (2010), intelligentsia was among the biggest losers in Russia during that period (p. 123). They experienced the greatest frustration in the free market relations. Moreover, Soviet economists were not influential in Russia. Real power over economic policy was held by managers and politicians who were not well aware of the economic laws. These disparities moved Russia away from its potentials. Thus, the situation in Russia in the 1990s was disastrous due to many factors mentioned above. Moreover, many experts consider that the main reason was the leadership style of Yeltsin who inherited it from Gorbachev (Pavlac, 2011). Russian capitalism has been different from the Western capitalism because it was corrupted and made by oligarchs.

Peculiarities of Russian Capitalism

Russian political belief system was based on the soviet doctrine that was broken in the beginning of the 1990s. Radical changes empowered Russia to change its ideology and direction. On its way to transformations, the country has experienced many difficulties rebuilding its social order. Sakwa (2013) assumes that after the Gorbachev’s perestroika everything that was considered inevitable became unbearable. Russian people tried to get rid from socialist and communist ideas very quickly. However, it was supposed to be a long and complex process. It was not easy to transform a former regime and develop new capitalist ideas among the population of the former Soviet Union. Since Russia became an independent state, it would like to build capitalism on their own. However, the former fifteen republics were closely connected economically and culturally with each other. Most people were not sure how to live in a new social environment.

Actually, Russia has lost its power in the former republics and spent a lot of forces to move to social-democratic standards. This transformation seemed to be often ridiculous and corrupted. The country made a fast removal from the Communist party to a number of democratic parties, resulting a removal of previous party leaders. The erosion of the communist background, the poor economic situation, and the whole decline in different spheres of life encouraged Russia to move from socialism to capitalism. Pavlac (2011) asserted that for the majority of Russia the concept of democracy was two-folded. The political transformation started under the slogan of freedom and democracy. The Russians appealed to provide freedom of speech, religion, and press that were supposed to be guaranteed by a new constitution.

In the 1990s, Russia has experienced a growing importance of foreign economic relations that led to the growth of international trade. However, these relations had an artificial character in many regions. For example, Russian Far East trading relations were not truly opened in the region (Renza & Thornton, 2012). First, export growth was observed under conditions of sharp production decline in industries. Second, the commodity structure of exports was very unstable and had little in common with the long-term needs of economic development in the Russian Far East. Moreover, an increasing share of exports in some important commodity groups (alloys, petrochemicals, non-ferrous metals, and rolled steel) was carried out by a few enterprises. It is true that international trade has grown and become a very important part of Russia’s economic life, especially with neighboring countries.

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There is no doubt that today’s Russia is a market economy, although its markets are characterized by significant imperfections. Moreover, Russia has made a tremendous progress in privatizing economy and operating enterprises on a commercial basis. However, the lack of transparency in the relations between the state and enterprises engaged in international trade is a more general problem of Russian trade. There is no doubt that transformational changes occurred in the 1990s predetermined the beginning of new opportunities and achievements in the world economy.

Conclusion

Russia has overcome many difficulties after the collapse of the Soviet Union in its way of transformation from communism to capitalism. Although this way was rather complicated, the country has become a significant part of the global economy and trade. Due to its rich natural resources, it attracted foreign countries to develop trading relations with it. The enhanced competition involved Russia in the international trade and expanded its production possibilities. Russian transition from the central economy to the market one allowed it to integrate into the world economy. Although, it was impossible to fulfill sudden changes, Russia has refused from its socialist political and ideological principle and moved toward the principle of comparative advantage.