The noble failure of Russia’s liberal reformers

The Tragedy of Soviet Market Economists: The Failed Quest to Civilise Russia, 1972-2022, Tobias Rupprecht, Cambridge University Press, £32

The 1990s in Russia are the stuff of myth. The decade saw a drop in living standards like few other periods in modern history: GDP contracted by roughly 40 per cent between 1991 and 1998, male life expectancy fell from about 64 years in 1990 to under 58 by 1994, and, by the mid-decade, roughly a third of the population lived below the official subsistence minimum. The experience was so searing that it has defined Russian politics ever since. 

The Russian propaganda machine regularly invokes the likhie devianostye – ‘reckless nineties’ – to legitimise Putin’s rule and discredit liberal democracy. In looking to the 1990s as an argument against liberalism, the Russian right can count on unexpected support from economists on the academic left such as Isabella Weber and Joseph Stiglitz, who look to the Russia of the 1990s as an example of the cruelty of ‘neoliberal shock therapy’. In his illuminating new book, historian Tobias Rupprecht provides a much-needed corrective to such arguments.

To make its case, the book weaves together the history of debates over economic reform among liberal economists with the political and economic history of the 1990s. Rupprecht’s broadly convincing argument is that the liberal reformers – contrary to the claims that ‘shock therapy’ devastated the livelihoods of Soviet citizens after the USSR’s collapse – did not cause the economic crisis. In fact, he argues, it was precisely the failure of liberal economists to shape policy that prolonged the economic crisis. 

The origins of the Soviet Union’s terminal economic crisis are well known to scholars: a decline in the oil price and stagnating productivity growth created an urgent need for economic reform, known as perestroika (‘reconstruction’). In this newly permissive atmosphere, liberal economic ideas such as price liberalisation and private ownership of enterprises – previously treated as ‘bourgeois’ heresy – began to command widespread attention in the media and the academy. For the time being, however, they had little effect: Gorbachev and his prime minister Nikolai Ryzhkov, afraid of the public backlash against consumer price inflation and elite backlash against slashing subsidies, expressed interest but recoiled from imposing austerity measures. Long before any liberal economist held a position in government, the economy was in precipitous decline, driven by ever higher budget deficits, runaway inflation (in sectors that could set their own prices) and ballooning foreign debt. It would take Gorbachev’s successors many years to clear the financial wreckage that the Soviet collapse left behind.

Rupprecht fervently rejects the notion that the Soviet Union might have fared better if it had followed a ‘Chinese path’ of gradual economic reform without political liberalisation, an argument which, to him, ‘strangely recommends the continuous rule of a totalitarian party, the CPSU, with its abysmal record of imperial foreign policy and human rights violations’. Such moral objections aside, Rupprecht argues that emulating Deng Xiaoping’s reforms in the Soviet Union simply stood no chance of producing a comparable outcome: China had an abundant young labour force, an entrepreneurial peasantry, and, through Taiwan and Hong Kong, much better access to foreign markets. None of that was available to the Soviet Union, and Gorbachev, unlike Deng, was reluctant to embark on the path of austerity, let alone to crack down violently on the political backlash such policies were bound to produce.

Only after Boris Yeltsin became the president of a newly independent Russia were liberal economists invited into government. Yeltsin would later say that he had appointed them as a ‘kamikaze crew that would step into the line of fire and forge ahead, however strong the general discontent’. Key positions in the new government were staffed with economists mostly in their early thirties, who had cut their teeth in the elite research institutions in Moscow and Leningrad during the perestroika years: Anatolii Chubais was put at the head of the privatisation agency Goskomimushchestvo; Yegor Gaidar became minister of finance and by mid-1992 acting prime minister; Andrey Nechaev served as Russia’s first economy minister; Petr Aven as minister of international economic relations; while Yevgeny Yasin – of an older generation – was economic advisor to Yeltsin, and later minister of the economy.

What proved fatal to the liberals’ reform agenda of 1992-93, Rupprecht argues, was the total lack of monetary discipline. The Central Bank, still run by old Soviet cadres, refused to curb credit creation, while, at the behest of the powerful enterprise managers, trillions of rubles in factory and agrarian credits were approved only to be written off within months. Inflation reached 2,500 per cent in 1992, but with no authority over monetary policy and public spending, Gaidar’s government was powerless to stop the attendant drop in purchasing power. The depth of economic decline in the 1990s, in other words, was the result of too little, not too much ‘shock therapy’.

Some of the book’s most illuminating pages describe the vexing process of privatisation, the other cornerstone of the economic reform project alongside the introduction of competitively set prices. In an economy in which every single enterprise belonged to the state, this was an immense challenge. When the Gaidar government took over, it was already well underway, as enterprise managers had transferred assets from publicly owned companies into privately controlled co-operatives (‘privatisation from below’). In Rupprecht’s account, the liberal reformers were too weak to stop the looting; they could merely try to put the process on a more orderly footing.

Beginning in October 1992, every Russian citizen – including children – received a voucher with a nominal value of 10,000 rubles, which they could use to buy shares in enterprises earmarked for privatisation, invest through licensed voucher funds, or simply sell for cash. In the face of social hardship and rampant inflation, the latter option was most widespread, while the state-licensed investment funds all went bust. The scheme was aborted within two years, turning Chubais into ‘the most hated man in Russia’. 

A second wave of privatisation followed in 1995, ahead of the presidential election, when Chubais, fearing a resurgent Communist Party, acquiesced in the infamous ‘loans for shares’ scheme. The state, teetering on the edge of bankruptcy, borrowed money from a group of bankers, who received shares in the remaining state-owned enterprises as collateral; the loans, as everyone involved understood, would never be repaid, and much of the oil industry fell into private hands. Given how effective Russian elites were at bending the reform process for their own material gain, one is left to wonder if the extent of collusion between liberal economists and ‘the system’ wasn’t greater than the book is ready to admit, but this is naturally difficult to prove.

The experience of inflation and privatisation of the 1990s would permanently tarnish the image of liberalism in the eyes of many Russians. On the Western academic left, it gave rise to the notion that ‘neoliberalism’ was to blame for Russia’s woes. Rupprecht concedes that privatisation ‘disproportionately served the interest of old Soviet elites and gangsters’. But he cautions that ‘all efforts to create legitimacy for the quick transfer of collectively owned property are a forlorn cause’ and that ‘privatisation was widely seen as unfair in Eastern Europe, irrespective of the methods used’. Despite the unfairness of the transition, Rupprecht maintains that privatisation benefited the economy: it relieved the state budget of loss-making enterprises and privatised firms adapted to market competition far better than those left in state hands.

After he came to power in 2000, Vladimir Putin invited another group of liberal economists into government (Alexei Kudrin as finance minister, Andrei Illarionov as Putin’s personal economic advisor, with Chubais now charged with reforming the state electricity monopoly) to help his project of authoritarian modernisation. Having stabilised the country’s finances after the crash of 1998 (and riding on a commodity supercycle, which boosted export earnings), they presided over a decade of stunning economic growth, averaging seven per cent a year. A sizeable middle class emerged in Russian cities, while the fortunes of the elite rose even faster, and soon began to drive up prices for prime real estate in London and St Moritz.

To Rupprecht, their involvement as technocrats under Putin encapsulates the ‘tragedy of Soviet market economists’ of the book’s title: standing at the margins of Russian society and with no democratic path to power, they faced a choice between irrelevance and service to an ever more authoritarian leadership. Those ‘systemic liberals’ who chose the latter path struck a Faustian bargain: they looked to the state as the vehicle to advance markets and private property, but, in doing so, enabled Putin’s neo-imperial ambitions, which they rejected.

One cannot help but read the book as an obituary for the period of Russian history that came to an end in 2022, never a liberal democracy but nonetheless a place in which the liberals at the heart of the book had left a deep mark. For now, the war in Ukraine has destroyed any open debate over the country’s future, as well as the vestiges of academic freedom and the liberal press that emerged in the wake of 1991. The war has also dealt a near lethal blow to the lifework of the ‘systemic liberals’: the market economy which they had helped to build in the hope that it would ‘civilise Russia’ has turned into a war economy characterised by high inflation, asset grabs and financial repression. Chubais, alongside thousands of other Russian liberals, fled the country within weeks of Russia’s full-scale invasion of Ukraine.

Based on an impressive range of interviews, memoirs, and published and archival sources – including, notably, material from the IMF archives – Rupprecht conjures a vivid picture of the political and economic history of the 1990s and the early 2000s. In addition, he makes ample use of the vast, if largely forgotten, body of work on the ‘transition’ produced at the time by economists and political scientists. As one of the first works of academic history dealing explicitly with the 1990s, the book accounts for the liberals’ small triumphs as much as their defeat at the hands of a political system that had no interest in individual liberties and that continues to make property rights contingent on political loyalty. 

Rupprecht’s overall sympathetic portrayal of the market economists is reminiscent of Benjamin Nathans’ history of the Soviet dissident movement, which set out to give another prominent yet politically marginal group in Russian society the serious history it had long been denied. The book does not, of course, in any way diminish the impoverishment that large parts of the population experienced during the 1990s (a topic which awaits a monograph of similar quality). Still, Rupprecht succeeds in saving Russia’s liberal economists from what the Marxist historian E.P. Thompson once called the ‘enormous condescension of posterity’.