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Russian Political Economy:

Soviet Command Economy vs. Russian Free Market Economy

Ross Watt

L. Stan

PSCI100

19/11/2008
 After the fall of the Berlin wall in 1989, and the dissolution of the Soviet Union in 1991, it

was clear that there would be great change politically, socially and economically in Russia. The

socialist, command economic system that had been used for over sixty years in Eastern Europe

and Russia had come to an end. The change from a socialist government to a representative

democracy greatly impacted opinions and views on social issues and the economy. A much

more capitalist mindset was taken on by the government, and the Russian free market economy

was developed (Gibson, 2002). However, the customs of an entire nation cannot be changed

immediately. The new economy possessed, and still possesses today, remnants of the old

command economy. The three areas of major economic importance, liberalization, stabilization,

and privatization proved to be difficult areas for Russia to manage as they attempted to reform

their economy (Feige, 1994). Although the new Russian economy is only half the size of that of

the former Soviet Union, the new one includes formidable assets. Russia possesses abundant

supplies of several valued natural resources, including those necessary in supporting a modern

industrialized economy. Russia also possesses a well educated labour force with substantial

technical expertise. However, socialist economic management practices combined with a poor

infrastructure, and inefficient supply systems, negatively affect efficient utilization of those

resources (Aslund, 2001). The old Soviet command economy and the struggling new Russian

free market economy are vastly different, and in order for Russia to be successful in their

economic future, they must identify which type of economy they intend to use, as their current

mixed system is greatly flawed.

The Soviet Union¶s command economy was in place for close to sixty years. As most

command economies are, it was organized on the basis of state control over all measures of

production, investment, and consumption decisions throughout the economy. A command

economy is defined as an economic system in which economic decisions are made by

centralized planners who determine what sorts of goods and services to produce and how they
are to be priced and allocated, and may include state ownership of the means of production

(command economy: Definition from Answers.com ). In the Soviet Union, under communism,

production outputs were overstated in order to achieve objectives in the planned command

economy, with no regard to the quality or value of the goods produced. An example of this can

be seen by observing the Soviet farm machinery industry, which manufactured six times the

amount of tractors as were produced in the United States at the time. However, the Soviet

agricultural output continued to fall far behind the U.S. because production was so inefficient

and wasteful. Events such as this caused Soviet consumers to turn to substitute products

imported from foreign sources, as most things produced in the USSR at the time were

unsuitable for consumption (Aslund, 2001).

This is not to say that the command economy system was wrong or ineffective. The

Soviet economy expanded on a stable trend for most of the twentieth century. However, due to

poor management, coercion, greed, and corruption, along with factors of production, it was

unable to be sustained or monitored. Production and allocation were inefficient, and welfare

outcomes fell short of what was necessary (Feige, 1994).

By the end of the 1980¶s, just before the fall of the Soviet Union, which triggered its

political and economic transition, Mikhail Gorbachev, a member of the Soviet Communist Party,

was the head of state of the USSR (Feige, 2002). Gorbachev, along with other communist

leaders of the Soviet union who had preceded him for the previous sixty years, displayed how

with the proper coordination between themselves and producers, a command economy could

produce a stable, high output balance. However, Gorbachev¶s command economy was subject

to a problem with time and consistency for the centrally planned economic activities of the

government. A transition to a lower level of government coercion and performance was

necessary. This caused a decrease in income due to rising monitoring costs and the Soviet

Union¶s loss of economic reputation (Harrison, 2002).

 At the same time that this was occurring within the Soviet command economy, the

USSR was involved in a political conflict. In 1991, Estonia, Latvia, Lithuania, Ukraine, Belarus,

Moldova, Georgia, Armenia, Azerbaijan, Kazakhstan, Kyrgyzstan, Uzbekistan, Tajikistan, and

Turkmenistan declared their independence from the USSR. Gorbachev resigned as General

Secretary of the Communist Party of the Soviet Union. He, along with representatives of 8

former Soviet republics created a new economic community, but he was unable to reunite them

under one political union. In December of the same year, Ukraine voted for independence from

the union (Online Encyclopedia and Dictionary ± Russia). The Commonwealth of Independent

States, an organization of former Soviet republics, was founded and the Soviet Union dissolved.

Gorbachev resigned, and the new president of the Russian Federation, Boris Yeltsin, replaced

him. Yeltsin promised to change Russia¶s socialist command economy to a free market

economy (Aslund, 2001).

The Russian Federation, under the leadership of Boris Yeltsin, took a major step

towards liberalization by introducing a free market economic system. The free market system is

a complete opposite of the command system. In a free market economy, regarding business

directly, there is privatization, free enterprise, choice, and little or no government intervention

(Online Encyclopedia and Dictionary - Free market). However, Yeltsin did not go so far as to

introduce a completely capitalist system, as this would be too great a change for Russia.

In the years to follow, Russia`s economy struggled and became inactive because of

poorly implemented and incomplete reforms. In 1998, increasing debt motivated by a lack of tax

revenues and the highly speculative government bond market forced the devaluation of Russian

currency (Ruble) and Russia's default on debts (Aslund, 2001). This in turn caused banks to

collapse creating further economic crisis. In response, President Vladimir Putin passed a law

legalizing the buying and selling of a limited amount of Russian land for the first time since pre-

Soviet days. Stimulated by strong financial disciplines, and high commodity prices, the
economy was able to recover. Putin continued making market reforms, but the economy

remained highly vulnerable to commodity price swings (Commanding Heights : Russia

Economic | on PBS).

Currently, the Russian economy is growing successfully on the free market system and

has accomplished substantial growth in its GDP every year since 1999 (Aslund, 2001). The free

market system has enabled Russia to attract foreign direct investment. These new economic

practices combined with an improving infrastructure, and more efficient supply systems, has

positively affected efficient utilization of Russia`s vast resources. Their pool of technical talent

in aerospace, nuclear engineering and basic sciences has enabled them to quickly enhance

their infrastructure and supply systems, as well as production efficiency, because these areas

are now controlled and financed by private companies under the free market system (CIA - The

World Factbook ± Russia).

There are three areas of importance that need to be focused on and addressed when

analyzing and controlling an economic system. They are liberalization, stabilization and

privatization.

Liberalization refers to the level of relaxation of government restrictions, generally in the

areas of social or economic policy, in this case, economic (Online Encyclopedia and Dictionary

± Liberalization). This is the first major difference between the Soviet command economy and

the Russian free market economy. Promotion of increased liberalization meant a complete

reversal for Russia, as their previous command economy had strict government regulation and

influence (Feige, 1994). Trade liberalization both within Russia and with other countries and

markets reduced trade barriers and created relatively unimpeded transactions. This improved

importing, exporting, foreign direct investment, investment opportunities and created an overall

more favourable business environment.

 Stabilization, as the name suggests, refers to stabilizing the economy as it makes its

transition. In the case of Russia, bringing down high inflation rates and balancing government

budgets were the main focuses after the fall of the Soviet Union (Feige, 1994). The Stabilization

fund of the Russian Federation was established in 2004 as a part of the federal budget. Its aim

was to balance the federal budget if at any time oil prices were to fall below a cut off price. The

Stabilization Fund was then divided into two funds. The Reserve Fund is invested abroad each

year in low producing securities and utilized when oil and gas incomes fall. The National

Welfare Fund is invested in higher risk and return ventures and federal budget expenditures

(Russia¶s Growing Dependence on Oil and Its Venture into a Stabilization Fund). These were

just some of the actions taken by the Russian government to stabilize the new economy.

Privatization, the most important element in the discernment between command and free

market economies, was the most difficult for Russia to achieve in their transition. A major issue

with insider ownership and government control arose, which made it difficult for the new

economy to prosper (Feige, 1994). The term ³free market´ refers to an idealized market, where

all economic decisions and actions by individuals regarding transfer of money, goods, and

services are voluntary, and are therefore devoid of coercion and theft. Russia, however,

continued to use a more government regulated system. However, recently, they have been

working towards allowing more privatization and recognize several types of legal entities in their

economy including individual entrepreneurs, joint stock companies, non-profit organizations,

production cooperatives and political parties (BBC News, 2008).

The free market economic system is currently working well for Russia. However,

Russia, until the 1990s, was organized under communist rule. The communist, command

market tendencies from Soviet days plague the market in some aspects, especially in the

government`s willingness to relinquish the majority of its economic power to private firms. It is

because of this conflict between Russia`s old and new economic systems that the Russian
Federation has still not been able to fully recover and flourish to its full potential economically.

Hesitation to succumb completely to a capitalism based free market economy, due to ties with

socialism, continues to cause confusion and problems within the Russian economy. Russia will

continue to resist full economic stability until they can fully distinguish their economic style and

stop resisting change.