Problems Russia has encountered in the transition from a command economy to a market economy

February 22^nd 2012

Problems Russia has encountered in the transition from a command economy to a market economy

            Since the collapse of Communism in the early 1990s, Russia has experienced many difficulties in making the transition from a command economy to a market economy. In a command economy, all production decisions are made by a group of political leaders who have the power to enforce their decisions throughout the entire economy. A market economy is an economy that is coordinated by many individuals who make independent decisions in a free market-place. The transition form a command economy to a market economy was a huge step for Russia that created many problems such as: economic collapse, hyperinflation, privatization, corruption, price drop for oil, and many more.

            The collapse of Soviet Russia was the underlining cause of the economic crisis in Russia. Newly elected President of Russia, Boris Yeltsin, announced that he was going to proceed with “shock therapy”, which refers to the sudden release of price and currency controls and immediate trade liberalization within a country, to help the transition for Russia from command economy to market economy. Sadly, this policy did not work and resulted in an economic collapse, which millions of people to become poor.

            Hyperinflation was caused in Russia by the removal of price controls which was part of shock therapy. In 1998, the Russian financial crisis caused hyperinflation.

            The privatization of state-owned industrial assets took place in the 1990s. In communist times, private enterprise had been illegal. Privatization was part of the Russia transition to a market economy. But things did not go the way it should have. The enterprises were supposed to be equally owned between all the citizens but they fell into the hands of some oligarchs. Many Russians consider these  "oligarchs" to be thieves. Through their great wealth, the oligarchs wielded significant political influence which created major corruption.

            Corruption also was a great factor in the transition. Stocks of the state-owned enterprises were issued, and these new publicly traded companies were quickly handed to criminal bosses. For example, the director of a factory during the Soviet era would often become the owner of the same enterprise. Government officials become corrupt and Under the government's cover they were manipulating others. Many took billions in cash and assets outside of the country in an enormous capital flight.

            Lower prices for Russia's major exports like oil and minerals and a loss of investor confidence due to the Asian financial crisis worsened their financial problems. The result was a rapid decline in currency, loss of foreign investment, delayed payments debt and the threat of runaway inflation.

            These were some of the the problems Russia had encountered in the transition toward a Market economy.