here i have discussed the Yeltsin years, 10 years of economic turmoil after the fall of the soviet union. At various points I have also compared the Russian economic conditions to that of India

1. Russia: The End of a Time of Troubles
Presented by:
Mevin Mathew
Mohit Madaan

2. FLOW OF PRESENTATION
Background
• Fall of USSR
• Rise of Boris Yeltsin
Economic reforms
• Between 1917-1991
• Between 1991-1999
Political Impact of economic reforms
Economical Policies
• Liberalization and stabilization
• Privatization (between 1992-1994 and 1995-1999)
Economic trouble(1991-1999)
• Ruble, barter, Demonetization
• Region, Federal Authority, Taxes
• The legal system
• Crisis of August 1998
• Demographic Crisis
Putin to Power
Background
• Fall of USSR
• Rise of Boris Yeltsin
Economic reforms
• Between 1917-1991
• Between 1991-1999
Political Impact of economic reforms
Economical Policies
• Liberalization and stabilization
• Privatization (between 1992-1994 and 1995-1999)
Economic trouble(1991-1999)
• Ruble, barter, Demonetization
• Region, Federal Authority, Taxes
• The legal system
• Crisis of August 1998
• Demographic Crisis
Putin to Power

3. FALL OF USSR
UNDERLINING CAUSES
• Years of Soviet military buildup at
the expense of domestic
development
• Economic growth stalled/stagnant
economy
• Failed attempts at reform
• War in Afghanistan
• General feeling of discontent,
especially in the Baltic republics
and Eastern Europe (i.e.
Chernobyl)

4. August Coup
• August 1991 – “hard-line”
Communists tries to take over the
government
• Last effort to save USSR
• Country went into an uproar;
massive protests
• Soldiers themselves rebelled –
“can’t fire on our countrymen”
• Coup collapsed after 3 days
• After the coup, Estonia and Latvia
declared their independence.
• Other republics soon followed

5. Collapse of the Soviet Union
• A new entity was formed
“Commonwealth of Independent
Republics"
• Russia and 15 independent
former USSR countries
• Complete political independence,
linked to other Commonwealth
countries by economic, and
military ties
• The Soviet Union, with its
centralized political and
economic system, had ceased to
exist in December, 1991

6. RISE OF BORIS YELTSIN
• Gorbachev was unable to
reestablish real control
• Yeltsin negotiated the transition
of power made inevitable by the
will of the people.
• December 1, 1991 all non-
Russian republics declared
independence (population
wanted democracy)
• Boris Yeltsin was the first
democratically elected
president of Russia

7. RUSSIA’S ECONOMIC REFORM
• Soviet system focused on industrial and military
development
• Institutions of state made decisions about what and
how much to produce
• State coordinated inputs and outputs and set prices
• State allocated credit and resources and hence
budget constraints were soft
• Managers of the firms were concerned primarily with
meeting production targets
Between 1917-1991

8. The Soviet years
1920s-1950s
• Soviet system achieved a rapid economic growth based on massive
mobilization of resources
• Created a formidable industrial and military power
• Rapidly expanded employment and invested in physical capitalization
1960s
• Growth rates declined due to diminishing returns
• Technological innovation stagnated
• Mandated increased production in heavy industrial sectors such as steel
than to create incentives for high technology and consumer products
1980s
• Economic growth disappeared
• Restructuring of the economy required

9. RUSSIA’S ECONOMIC REFORM
• In June 1991, Boris Yeltsin had been elected as president
• In October 1991, he announced that his administration would
radically reform the economy from socialism to capitalism
• He entrusted the reform process not to politicians, but, in his
words to “professionals”
• This turned out to be ideologically committed group and
came to be known as “young reformers” all under the age
of 40
Between 1991-1999

10. • Yeltsin authorized to mandate components of his
economic reform program by decree, change the
structure of government, and appoint all cabinet
ministers without parliamentary approval.
• Yeltsin adopted “shock therapy” to deal with the suffering
Russian economy
Yeltsin declared “It will be worse for everybody for
about half a year”

11. • Reformers planned to free most prices (three
quarters of which were still state-controlled)
• Liberalize Imports
• Overhaul the tax system
• Eliminate the budget deficit
• Tighten monetary policy
• Privatize the majority of state-owned firms

12. Political impact of economic reforms
• Economic reforms were
quite controversial
• Russian voters also did
not support these
reforms
• This was evident in the
1993 elections for seats
in the state Duma
33%
40%
27%
SEATS WON IS STATE DUMA
ELECTIONS
Parties of Economic Reform (Russia's choice and
Yabloko)
Centrist Parties, ambivalent about reforms
Parties against Capitalist Reforms

13. ECONOMICAL POLICIES OF BORIS
YELTSIN
Policies
Price and Trade
Liberalization
Macroeconomic
stabilization
Privatization

14. LIBERALIZATION AND STABILIZATION
Reformers sought
tight monetary policy
to rein in inflation
Reformers
achieved some
initial success
Opposition to
this policy
Tight monetary and fiscal
policies were progressively
relaxed due to powerful
political and economic
forces
1992-Viktor
Gerashchenko was
made Chairman of
the Central Bank of
Russia (CBR
Gerashchenko
(chairman of CBR)
was in hands of
the parliament
Disagreed with the
reformers’
approach to
monetary policy
Offered liberal
credits to Russia’s
struggling
industrial
enterprises
Thus government was
unable to impose
monetary discipline and
a hard budget constraint
on Russian firms

15. Indian Liberalization (1991)
Reforms
• Abolition License- Permit Raj
• Reduced tariffs and interest
rates
• Automatic approval of FDI in
many sector
Impact
• A huge private sector emerged.
• Income Tax Department and
Customs Department became
efficient in checking tax evasion
India reported its highest GDP growth rate of 9.6% in 2006 after reforms
US$ 132 million US$ 5.3 billion
Foreign Investment Growth:

16. PRIVATIZATION
Anatoly Chubais: “They steal and steal and steal. They are
stealing absolutely everything, and it is impossible to stop them. But
let them steal and take their property. They will then become
owners and decent administrators of this property ”

17. 1992-1994: Vouchers and Auction
• Every Russian was given a “voucher”, which could be
exchanged for stock in privatized firms, invested in voucher
fund, or sold for cash
• The direct exchange of stock was supposed to take place at
“voucher auction”
• The reformers achieved their goal of rapidly privatizing large
number of firms
• Between Jan 1992 and June 1994, the government privatized
16,500 firms, shares of which were held by over 41 million
Russians, either directly or through voucher investment funds
Very quick process:
Citizens were not
able to understand

18. • The directors of Russia’s large industrial enterprises opposed
as the move “threatened their control” over much of the
economic structure Russia had inherited from Soviet
industrialization.
• To compromise with the industrial directors opposition,
government offered preferential access to their firm’s shares
through 3 separate programs
• Most popular among these was the “option 2”, with which
managers received 51% of the voting shares in their firms at
a nominal price
• Some managers acquired even greater control over their
firms through a variety of complex but illegal schemes

19. Privatization, 1995-1999: Pledge Auctions
Natural gas, oil, and
mineral deposits
were excluded from
the process of mass
privatization
Boris Yeltsin and the
reformers faced huge
fiscal crisis in 1995
Vladimir Potanin
proposed that the banks
would give a large loan
to the government for
one year
As collateral, banks
would hold and manage
the state’s block of
shares in 29 large state
owned oil and mineral
assets
If government is unable
to repay back the loan,
ownership would be
transferred to bank
holding the shares
GKI( State Property
Committee)
authorized
Oneksimbank and
other banks to
organize the pledge
auctions
Most of the banks
agreed among
themselves in advance
which bank would bid
for each block of shares
Outside bidders were
disqualified on the
technical grounds and
foreign bidders were
excluded from 7
auctions
Government raised
$800 million in
loans from the
auction

20. Case of NORILSK NICKEL
Factory at Norlisk
Oneksimbank won auction for $170.1 million and starting price was $170 million
Rossiiski Kredit (interested in the bid)- was informed on the day of auction that it was having
procedural irregularities
Rossiiski Kredit Chairman later on revealed that they were ready to pay $355 million

21. Privatization in India (1991)
Disinvestment Commission was set up during 1991 -92 for identifying PSUs equity
disinvestment and for suggesting modalities of disinvestment
Enunciation of the National Telecom Policy in 1994-95 which opened up basic telecom services
to competition.
Foreign equity participation up to 49% was permitted in case of a joint venture between an
Indian and a foreign firm
A key reform in infrastructure development was the creation of a major new source of funding
for national, state and rural road construction, called the Central Road Fund (CRF) under the
Central Road Fund Act of 2000.

22. The Rise of the “Oligarchs” (1995-1997)
• During 1990s, Russians began to refer to a handful of
powerful businessmen as “the oligarchs” indicating their
political influence
• Reasons that forced the government to bend towards oligarchs
Inability of the state to meet its fiscal obligations, the government needed
funds the oligarchs provided
Upcoming presidential elections, 1996

23. Russia has the most billionaires per trillion dollars of national
output. India comes second
The predominant source of plutocratic wealth in India is from
three factors — land, natural resources and government
licenses.
Most of India’s billionaires have benefited from sweet deals in
real estate, mining, telecom, oil and such like.

24. Billionaire businessman Mukesh Ambani is quoted as bragging
that the ruling Congress Party is "Apni Dukan“ (our shop),
implying that he owns the ruling party.
Telecom minister Andimuthu Raja left an estimated $40 billion on
the table by accepting bribes in exchange for lower bids from
Indian and foreign bidders on 2G cellular spectrum auction
India's Highway Minister Kamal Nath is alleged to skim 15% on all
the projects his ministry overseas.

25. Presidential Elections, 1996
• Presidential elections was a
“crucial event” for both Boris
Yeltsin and oligarchs
• Major problems confronting
them were:
• In January 1996, just few
months before elections
Zyuganov led the polls by
substantial margins, followed
by Yeltsin at 5th place
Yeltsin’s Zyuganov’s

26. Threats posed by Possible Zyuganov’s Presidency
Zyuganov would end Russia’s experiment with markets
and democracy and would promote communism again
Would not honor the pledge auctions arrangements
Oligarchs would to lose not only millions of rubles
but political power as well
Therefore it was necessary for them to derail the
ambitions of Zyuganov

27. THE DAVOS PACT
• At Davos, Switzerland in Feb 1996, Russia’s most powerful
businessmen agreed to cooperate to support Yeltsin’s
reelection bid
• They offered all their resources-
1. Media
2. Funding
3. Regional contacts
• Although Russian law limits presidential candidates to spend
only $3 million, Yeltsin’s campaign team admitted to spend $
100 million ( in reality it was $ 500 million- 1 billion)

28. The Ruble
• The currency that Russia inherited in 1991 was the “Soviet Ruble”, the currency used by all 15
former Soviet states
• Only Russia’s central bank could actually print new rubles and provided it to other new states
• But central banks of other states could issue Ruble credit
• Russia’s central bank did not have any complete control over the country’s money supply
• In July 1993, Russia’s central bank issued the new currency- Russian Ruble

29. Problems of the Barter System
January 1992
( 10%)
January 1999
( 50-70 %)
• Without cash revenues, firms were unable to pay
salaries
• The federal government could not effectively tax
industries that relied on barter
• Government was unable to evaluate accurately the
value of a firm’s assets and transactions
• So many firms relied so much on barter that few
firms had cash to pay taxes at all
• Provincial governments began to tax in kind and
eventually the federal government forced to do so.

30. Demonetization
• New monetary surrogates emerged, mainly as local currencies
• Examples:
Tatarstan’s government issued their own money substitutes
Local commercial banks and firms, issued promissory notes called
vekselia or twechels (from German word from bill of exchange)

31. FEDERAL UNITS IN RUSSIA
• There are 89 Federal Units, or “subjects”
organized into six legal categories
21- Republics, each
of which bears name
of a non-Russian
ethnic group
49- oblasts
6- Krais, populated
by ethnic Russians
Moscow and
St. Peterbergs as
“federal cities”
10- autonomous
okrugs
1- autonomous
oblast

32. Regional authority
v/s
Federal Authority

33. Taxes
Problem due to Russia’s
inefficient federal system
• Goods could not move freely across
regional borders
• Federal system was unable to
acquire its share of tax receipts
from regional and local authorities
Problems due to complex
and confiscatory tax laws
• Government taxed gross revenues
rather than profits
• Firms were subject to 17 different
taxes that added 110% of revenues
• Limited deductibility of items
• Required frequent reporting

34. Efforts to Crack Down Tax Evasion
Government created a “ Tax Police”, complete with guns
and significant executive authority
Tax collectors were treated harshly by citizens, in 1996,
26 were murdered, 74 injured, and 6 kidnapped
Ultimately , government had difficulty in meeting its
budgetary obligations
Russian Orthodox Church intervened

35. Morbid legal system leads to violent
Entrepreneurship
Legal
system
Was Not
having
effective
court system
Judiciary
Was Not
independent
Federal govt
was not
able to pay
judges
Maintained by
regional heads,
manipulated
laws

36. Privatization of Security
• There was a high rise in several niches
such as private security, contract
enforcement, and transaction insurance
• Russians had a perception that Arbitrazh
courts were slow to rule and unable to
enforce decisions
• Because of high entrepreneurial risks
associated with the failure of business
partners to observe contracts or pay debts
3 basic types of private
protection
• Units of police and security forces
that sold their services privately
and illegally
• Illegal organized criminal groups,
so called Russian mafias
• Private protection agencies

37. Growth of Russia’s Private Security Industry
1992 1993 1994 1995 1996 1997 1998
Private Protection Companies 0 1,237 1,586 3,247 4,434 4,705 5,650
Private Security Services 0 2,356 2,931 4,591 5,247 4,973 4,720
Private Detective Agencies 0 947 2,088 149 182 809 434
Total 0 4,540 6,605 7,987 9,863 10,487 10,804
Costs of their services varied
• 20-30% of profits for business transactions
• Up to 50% for collecting bad debts

38. THE AUGUST 1998 CRISIS
 PM a
1.
•Government defaulted on its domestic debt
2.
•Devaluation of Ruble
3.
•Suspension of repaying of foreign private
debt

39. Defaulted on its domestic and foreign debt
Government
Domestic
Banks
Foreign
Investors

40. Devaluation of Ruble
Devaluation
Promotes
export
Reduces
Imports

41. THE AUGUST 1998 CRISIS
Possible Reasons for August Crisis
• Government stated falling oil
prices
• Asian financial crisis
• Overvalued ruble
• Excessive borrowings
• Debt was too costly and too short
term
Consequences of crisis
• Sharp drop in real income, living
standards and employments
• Temporary paralysis of payments
and settlement system
• Ruined the balance sheet of the
large private banks whose holdings
were primarily government bonds
• Government defaulted on $ 40
billion in ruble-dominated bonds,
heavy losses for private investors

42. PRESIDENT PUTIN IN 2000
 Diagnosis about the problem
Russia at the
turn of the
Millennium
• State should have
power
Open letter to
the Russian
voters
• Emphasized need
of Law and Order

43. Putin in Power
 Re-organized the fedral system- additional layer of political
authority between centre and regions- 7 federal super-
regions
 Abolished treaties that created special tax privilages for
several regions
 Controlled the oligarchs
In short
1. Made state more powerful
2.Stability in law and order

44. Oligarchs during Putin's presidency
Roman Abramovich Mikhail Khodorkovsky