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Economic Forces for Change


The long-term economic forces for change are even more important. Opportunities for making money by stripping privatized Soviet assets and speculation have already declined, forcing managers to begin looking for efficiency gains instead. The August 1998 banking crisis spelled an end to the economic model, based on financial speculation, and demonstrated the importance of developing the real economy. The shock of the crisis altered the behaviour of the Russian ruling elite compelling the government and the private sector to look for ways of improving state regulation and corporate management and to rethink their attitude to the issues of budget deficit and foreign loans.  

Gazprom headquarters in Moscow

Economic and industrial growth revived soon after the crisis, changing the Russian economys nature almost overnight. The large depreciation of the ruble stimulated import substitution on a major scale, leading to a rapid growth in domestic output. In addition, a positive terms of trade change from rising oil prices gave a further boost to the economy from the third quarter of 1999. Importantly, the political consensus of policymakers in favor of budgetary prudence, forged in the wake of the financial crisis, was maintained over the subsequent years.

As the economy turns around, it will generate demand for better services in banking, insurance, accounting, legal services, and advertising, causing these sectors, which are the blood vessels of a market economy, to grow and mature. Privatized enterprises come under increasing competitive pressures to restructure and invest. They are already being forced to think about cutting costs, marketing their products, and developing new ones. There is growing pressure to extend privatization to areas of the economy where it has been held back until now, especially land ownership and the so-called natural monopolies, such as natural gas extraction and power generation.

Many of the key institutions of a market economy now exist. Money has returned to a central role in the economy; the borders are largely open to the flow of people and goods, and hundreds of thousands of new private businesses, both big and small, operate in an environment governed by market forces.

Thus, the reforms seem to have gained a self-sustaining character driven by the new interests created by the vibrant private sector. The wealth of the country has passed largely into private hands. A new class has come to the fore, many members of which are descended from the Soviet administrative class, the nomenklatura. But they no longer owe their rank and privileges to the Communist state and the command economy. They are in business for themselves, and their prosperity is now bound up with continued marketization.

Moreover, Russia can hardly escape the powerful pressure of such worldwide forces as the revival of liberal economic doctrines in the last generation and the tidal wave of globalization, privatization, and liberalization. Technological change and global competition will continue to act powerfully on Russia, as they have done ever since the time of Peter the Great.

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Yeltsin's Legacy

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The "Catching up" Cycles
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