The Russian Economic Crisis and the Future of Russian Economic Reform

Abstract

THE RUSSIAN ECONOMIC CRISIS OF 1998 began soon after the 'coming Russian boom' had finally been sighted. Officially recorded output (GDP), after declining continuously from 1989 through 1996, had shown a marginal increase of 0.9% between 1996 and 1997. Consumer price inflation had been brought down from 224% in 1994 to 11% in 1997. It slowed further in the first half of 1998. At first sight, this steep reduction of inflation seemed to have been achieved by orthodox monetary means. The rate of change of the broad money supply (M2) had been reduced from 224% growth during 1994 to a slight decline in the first half of 1998.1 In late 1997 and early 1998, therefore, it looked for a while as though an economic recovery was at last beginning. But this was Russia-a country not designed for happy endings. From the spring of 1998 things went badly wrong. In 1998 GDP was 4.6% below 1997, and consumer price inflation was 84% over the year as a whole. The country had had four governments in the course of the year. Market reform was discredited. The prime minister confirmed by parliament on 11 September, Evgenii Primakov, presided over a government in which everyone except the minister of finance, Mikhail Zadornov, was opposed to reform, and Zadornov did not hold a senior cabinet post. When President El'tsin, in mid-May 1999, sacked the Primakov government, replacing Primakov with Sergei Stepashin, it did not appear that the new government would provide a new momentum to reform. Despite its near-unanimity about what it did not like, the Primakov government was unable to agree on a plan of action.2 Primakov acted, or rather, did not act, in the great tradition of Marshal Kutuzov, who beat Napoleon by not fighting him. In economic policy, however, the track record of Kutuzovism-practised by many governmentsis not impressive.3 The 1998 economic crisis and its aftermath raised the biggest possible questions about Russia and its capacity to begin an economic recovery in the near future. In this article I shall try at least to narrow down the range of possible answers to those questions. The first section is a brief, summary review of Russian economic reform attempts from Gaidar to Kirienko-that is, from late 1991 to the summer of 1998. To put that record in context, I shall compare it with that of other ex-communist countries. The second section is a consideration of some of the possible explanations of Russia's weak performance in the 1990s, including some hindsight about Western assistance. The third section is a closer look at the 1998 crisis: first a narrative and