Russia is an inseparable part of the capitalist world economy. While her economy resumes growth, it remains dominated by peasant agricultural production. The speed of its earlier industrialization omitted the development of an intermediate industrial and consumer-oriented sector, leaving a major imbalance, with little existing between cottage and heavy industry.
Despite the workers' strikes, the years before World War I see renewed growth, aided by rising world wheat prices. But Russia's backwardness, low labor productivity, and high material costs contribute to its low rank in industrial output. The tsar fails to organize an effective war economy and responds to a collapse in international trade and domestic revenues by printing money fueling inflation.
The Russian economy is devastated by the chaos of a world war, two domestic revolutions, and a breakdown in food supplies brought on by a terrible winter. The economy's militarization assists the takeover by the Bolshevik dictatorship and the institution of "war communism." Private land and the free market are abolished, and a state monopoly on prices and the food trade imposed.
Russia's postwar industrial output is less than 20 percent of the prewar level, with whole sectors of the economy destroyed. Lenin aims to rebuild the shattered economy. As core industries are nationalized, debates rage about the optimum extent of state planning. Russia's colossal debt, owed to international creditors, is wiped out when the regime refuses to recognize the debts of the tsar.
The future core of the Soviet command economy, Gosplan (General Commission on State Planning), is established in 1921. Faced with economic crisis, Lenin introduces a tactical compromise with capitalism to incentivize production and trade. His 1921 National Economic Plan, which allows private agriculture and limited small trade, results in an immediate and dramatic improvement.
Stalin imposes the command economy. The First Five-Year Plan sets extravagant targets for heavy industry's expansion. Every enterprise and worker must meet dictated norms, to be fulfilled without discussion. As the Depression hits the rest of the world, the Soviet economy powers ahead. But as Soviet agriculture is forcibly collectivized, at significant human cost, production drops by 30 percent.
The Second Five-Year plan calls for still higher industrial growth. Steel, coal, power, chemicals, and the military are given absolute priority. Quantity reigns over quality, and falsified statistics are common. Victims of Stalin's mass arrests, forced to work as prisoner employees in prison camps, form a core of the Soviet economy. By 1939 the gulag is the largest employer in Europe.
The command economy forges ahead during WWII, with labor mobilized on an epic scale and productivity increased with forced overtime. Military output reaches staggering proportions, propped up by Allied aid under the lend-lease scheme. Rapid industrialization has turned the USSR into a power capable of defeating Hitler, but military strength gives a false impression of the nation, weakened by shortages.
The Fourth Five-Year Plan aims to restore and surpass prewar levels of production. The command economy goes into overdrive to achieve output miracles no matter what the cost and makes a rapid recovery. As the Cold War begins, resources are prioritized to heavy industry, nuclear weapons, and the space race. Agriculture and light industries lag, and food and essentials remain in short supply.
The command economy tries to increase output by adding input. Khrushchev aims to boost agriculture by cultivating an extra 35 million hectares of virgin lands. After short-term gains, food shortages return, and the USSR must import wheat. Attempting to reform central planning, Khrushchev replaces the central ministries with local councils better placed for practical economic decision-making.
Brezhnev continues to pour resources into the military industrial complex. Unbeknownst to the Soviet or world public, the military consumes more than 30 percent of Soviet GNP. Khrushchev's local councils are abolished, centralized industrial ministries restored. Prime Minister Aleksei Kosygin's economic reforms give enterprises slightly more freedom of practice, but not enough to alter the system.
The Eighth Five-Year Plan places greater emphasis on consumer goods. The USSR grows more dependent on the West for these and new technology, and establishes new partnerships with Western firms. In 1966 a Fiat-licensed Lada factory slowly starts to meet the public's growing desire for private cars, but there remains a stark absence of supporting services, including modern roads.
By the time of the '73 oil crisis, the USSR is the world's largest producer of oil and natural gas and the third largest of coal. Inefficient Soviet factories consume vast amounts of energy, but amid this plenty, the public continues to suffer chronic energy shortages. The oil windfall keeps the economy running, but by the mid-1970s the industrial economy ceases to grow and begins its slow decline.
Despite huge investment, the collectivized farm system still fails to deliver; 28 percent of gross agricultural output comes from the 1 percent of land cultivated on personal plots. A law enshrines the need for private plots and encourages enterprises and army units to develop auxiliary farming for their own purposes. Arms spending increases in answer to President Reagan's aggressive foreign policy.
In 1986, the year oil prices collapse, Mikhail Gorbachev aims to jump-start the economy by reforming the centrally planned system. Under perestroika, he legalizes individual and family enterprise along with the ownership of joint stock companies, and gives enterprises more control over their own budgets. But the decrepit economic structure remains, shortages increase, and the queues grow longer.
Led by Yegor Gaidar, Boris Yeltsin's reformist team institutes economic shock therapy: Military and welfare budgets are cut; many subsidized prices are liberalized; private trade is legalized. Soaring prices wipe out people's savings, but shortages and the black market disappear. An embryonic market economy begins. Citizens receive privatization vouchers, and the sell-off of state assets begins.
The reformers rush to privatize and make the move to the market irreversible. Corrupt officials and entrepreneurs alike exploit the chaotic transition to capitalism to profiteer and make vast fortunes. The oligarchs' seizure of state assets at bargain prices is seen by many as the theft of the century. Shops are filled with goods, but the gulf between rich and poor widens exponentially.
Spiraling debt driven by the lack of tax revenues and the highly speculative government bond market forces the devaluation of the ruble and Russia's default on debts. Banks collapse, and Russia sinks into further economic crisis.
President Putin makes it legal to buy and sell a limited amount of Russian land for the first time since pre-Soviet days. The Russian economy quickly bounces back from the crash, fueled by tough financial disciplines, the enduring resilience of the people, and high commodity prices. Putin continues market reforms, but the economy remains highly vulnerable to commodity price swings.
The economy is segmented: Some sectors, like heavy industry, are struggling while natural resources and the service sector prosper. Increased production, modernization, and high world prices boost Russia's oil sector. The U.S. and EU recognize Russia as a market economy, a step toward WTO membership. But foreign investment falls to a scant $1.1 billion in the first half of 2002.
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