Reading time: 6 minutes

Context

For many decades, the USSR was regarded as an economic powerhouse. It achieved rapid industrialisation through central planning, despite an enormous human cost. In the 1950s and 1960s, it grew rapidly, and many observers in the West considered it possible that the USSR would surpass the US as the biggest economy in the world. Furthermore, it also achieved full employment, stable low prices for basic items, and free social services to its population. It seemed that the system worked, attaining both growth and material well-being for the population. 

However, by the 1970s and 1980s, there were many signs of economic problems. Growth rates were declining, as well as consumption, with many people having to recur to black markets. In technological terms, the USSR was lagging behind the capitalist world, with lower quality and quantities of industrial production. This implied that the country was not able to compete in international markets for manufactured goods. From industrial power, the USSR turned into a mere exporter of raw materials. Moreover, some indicators of life quality like infant mortality or life expectancy were declining. 

The very nature of the Soviet regime prevented it from dealing successfully with the economic and social challenges it faced in the 1970s and 1980s. Reforming a socialist regime, whit state ownership of the economy and firm control of the Communist Party was not an easy endeavour. However, the regime was not doomed to collapse like it did in 1991. Many frail and inefficient regimes subsist despite serious troubles. The story and the impact of the collapse can only be understood when looking at the attempts at reform, and the events and decisions of the agents at the time. 

Gorbachev’s reforms 

The most important actor was Mikhail Gorbachev, who served as the General Secretary of the Communist Party of the Soviet Union from March 1985 to August 1991, which was the most influential position in the Soviet State.  Contrary to what some might believe, he did not act as a sole visionary, but rather he represented a faction inside the Communist Party that defended the need for reforms deviating from orthodox Marxist thought to overcome the problems of the USSR. 

A political overhaul of the Soviet Union began during this period. The period is named for Perestroika policies. The term means restructuring, which encompassed economic, social, and political reforms. Regarding the economic activity of the USSR, two important laws deeply changed the functioning of the Union: 

  • The 1987 law on State Enterprises, which decentralized economic controls: removed restrictions concerning workers’ wages and companies’ chosen output production, allowing them to keep a share of their profits and reinvest them. Besides, factory and farm managers were to be elected directly by the company workers, rather than through the Party. 
  • The 1988 law on Cooperatives, that permitted the creation of privately owned businesses in the services, manufacturing, and foreign-trade sectors. The size of these cooperatives was not limited by law and they could participate in any legal economic activity, being able to form joint ventures with foreign companies as well. Effectively, they were indistinguishable from capitalist enterprises. 

Furthermore, another concept deeply related to the Perestroika, was the Glasnost, meaning transparency. Gorbachev wished to increase the openness of state affairs to the public, which was pursued by increasing media freedom. This provided ideological opponents of Marxism-Leninism, from Nationalists to Liberals, new platforms to express their dissatisfaction. However, this was also a period of tension and unrest. 

Returning to the cooperatives, numerous administrators and managers, especially in the foreign trade sector, were able to enrich themselves through lucrative deals with foreign investors. This culminated in Artem Tarasov, a founder of one of these cooperatives, proclaiming to the media that he was the first soviet millionaire in history. To the soviet population, who were taught from early the importance of economic equality and economic democracy, this was outrageous, at best. Riots ensued. 

The fact is the whole Perestroika proved to be a failure: in 1989-90 the USSR experienced significant inflation, allowing speculators to purchase goods at state-owned stores, which had fixed prices, and resell them at exorbitant rates. This led to state-wide shortages which further fueled the wrath of the population, increasing public unrest. The moderate 2.3% real economic growth in 1985 had turned into a -11% recession in 1991. 

Pressured by nationalist and pro-independence movements across the different republics, the Soviet regime organized a referendum in March 1991, where it was asked to the Soviet citizens if they wished to remain in a renewed Soviet Union. With a turnout of 80% of its population, over 76% voted that they wished to preserve the USSR, despite the hardships. 

However, this was not enough to prevent the dissolution of the USSR. Boris Yeltsin, who had been elected the president of the Russian section of the USSR in June of 1991, albeit initially claiming to be a pro-USSR reformer, would deal the decisive blow. His signature of the Belavezha Accords with the leaders of the Ukrainian and Belarussian republics in December 1991 marked the effective end of the USSR. 

The aftermath 

After the dissolution of the USSR, Russia was turned upside down, with enormous changes in the economy, society, and politics.  

Firstly, there was an opening of the Russian economy to the world, promoting the relations with foreign countries, especially with the U.S, as the dissolution of the Soviet Union also marks the end of the Cold War, followed by liberalization of the economy with Boris Yeltsin’s radical reforms.  

This shock therapy included the sale of the Russian state assets, privatization of some industries, and the liberalization of the economy. Although, these reforms did not happen the way Yeltsin predicted. During this process, the state assets were sold at a lower price than what they valued, and there was hyperinflation reaching 2 000% during 1992. The government, in an attempt to control it, implemented tight monetary and fiscal measures (such as taxes and interest rate increases and subsidy cuts). Nevertheless, this led to a shortage of goods because the producers began slowing down their production.   

In these circumstances, Russia lost most of its power and could no longer achieve global supremacy. It moved from a country that fought for global supremacy to a broken and corrupt country with an uncompetitive economy. Its economy suffered from the loss of some of its states. Another factor to take into consideration is that its Cold War economy was targeted to the military sector and it faced some difficulties in being competitive when they enter the global market. Consequently, there was a major decrease in real GDP per capita. 

A comparison of the real GDP per capita of the USSR with the USA and the world GDP per capita shows the dramatic crises around the time of the collapse that lasted for many years. 

This breakdown of the economy had an extensive effect on the living conditions of the population. Life expectancy decreased from 70 years to 64, only between 1988 and 1994, and by 1992 about a third of the population lived in poverty. There was also an extensive gap between rich and poor, worsened by the high corruption within the regime, revealed by the Gini Index that reached 48,4 in 1993. Besides that, the liberalisation of prices made an entire class of people with fixed income (such as pensioners) suffering a drop in living standards. Furthermore, there was an increase in criminality (in 1990 were registered 1. 84 million crimes, and in 1995, 2.76) since the regime lessened its force in an effort of democratisation, allowing the growth of the Russian mafia. 

Cartoon from 1992, regarding Yeltsin’s reforms. 

As the market barriers disappeared, western companies entered Russia. But other barriers disappeared as well. Western products, trends, and tastes became widely accepted and disseminated. These contacts with the West were not only an economic shock, but a cultural one as well. 

The collapse of the USSR created economic, geopolitical and cultural shocks and problems that are somewhat present today and may help to understand 2021 Russia. 


Sources: American Enterprise Institute for Pulbic Policy Research; BBC; Brookings Papers on Economic Activity; Financial Times; Gapminder; History.com; International Labour Office; Investopedia; Irénées; Journal of Eurasian Studies; Macrotrends; National Bureau of Economic Research; Norwich University; Pew Research Center; Russia Beyond; Statista; The Atlantic; The Conversation; The Guardian; US News; VOXEU; Wilson Center; World Bank. Robert W. Strayer, Why Did the Soviet Union Collapse?: Understanding Historical Change. 


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The team

Rui Ramalhão

André Rodrigues

Mariana Gomes

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