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Lack of Investment Capital


The transition from state socialism to capitalism required enormous financial resources. Gaidars team hoped that the West, which so enthusiastically hailed the end of communism in Russia and its plan to switch to a market economy, would provide massive financial assistance for Russian reforms. This, however, did not happen on the scale expected by the reformist government. There was no other choice but to drastically cut social expenditures. 


As a result, the fairly comprehensive system of social protection put in place during the Soviet period was severely crippled. Tight budgetary constraints did not provide adequate social security for the growing army of the unemployed and poor. Chronic underfunding affected such vital areas as national health care, education, and culture, posing a serious threat to the stability of Russian society.

Pinning their hopes on Western aid, Russian reformers lost sight of the brutal fact that global integration and the international division of labor do not cancel competition between countries and economic blocs. The prospect of the emergence of a new powerful rival in the east of Europe and Asia did not necessarily delight Western politicians and business leaders. The Russian government dismantled most of the trade barriers that prevented Western goods from entering the Russian market. As a result, Western companies rapidly established footholds in Russia and in a few years, through their greater efficiency and competitiveness, practically put out of business entire branches of domestic industry, such as the textile industry.

Bowed down under the crushing burden of accumulated foreign debt, including the Soviet debt honored by the post-Communist government, Russia found itself in a situation where its very economic independence was at stake. The inability to compete on equal economic terms with the West threatened to relegate the former superpower to the status of a raw materials supplier for Western transnational corporations.

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Deformed Capitalism

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Russian Federation

The "Catching up" Cycles
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