«Another Past»: Could August 1991 have led to different economic outcomes for Russia?
This August marks 34 years since a group of high-ranking state officials, calling themselves the State Committee on the State of Emergency (GKChP), attempted to seize power in the country. Those three August days, from the 19th to the 21st, were then referred to as a «putsch,» but are now more often called «the last effort to save the USSR.» Its failure paved the way for Boris Yeltsin`s rise to power, his two presidential terms, and with them, privatization, hyperinflation, and «loans-for-shares» auctions. Could things have unfolded differently, at least in the economic sphere? This article explores this question with experts.
Prices Soared 26-Fold
The attempted coup, known as the August Putsch, ended ignominiously on August 21, 1991. The GKChP participants sought to save the USSR from collapse, but failed. The committee voluntarily disbanded, and its leader, Gennady Yanayev, resigned from his self-proclaimed duties as President of the USSR. The following day, the members of the August Putsch were arrested. The GKChP`s failure brought Boris Yeltsin and a group of young reformers to power. They initiated economic reforms, later dubbed «shock therapy,» which included voucher privatization and «loans-for-shares» auctions—outcomes that continue to raise questions today.
The actions taken by the authorities at that time triggered hyperinflation and a sharp economic downturn. While Russia`s GDP fell by 10% in 1991 compared to 1990, the real volume of the economy plummeted by 34.8% between 1992 and 1996. In 1992 alone, prices skyrocketed almost 26-fold, with inflation reaching 2608.8%. This eradicated the savings of millions of Russians, pushing many to the brink of survival. Cities became overrun with criminals, and capital, intellectual talent, and valuable resources flowed out of the country. Vladimir Gorbunov, an associate professor at the RUDN University`s Faculty of Economics, states: «The low level of trust in the new government`s actions, coupled with criminality, corruption, and the influence of foreign capital aimed at undermining established values, set the country`s economy back by years, and in some areas, by decades. The `capital flight,` `brain drain,` overcoming the `GKO pyramid scheme,` and the return of control over illegally privatized enterprises through court orders began a decade later, only after a shift in the country`s political course and an analysis of the August 1998 crisis.»
The Oligarchy as a Phenomenon
Historians often attribute the tragedy of the 1990s – the deplorable state of the state and society – to improperly conducted privatization. Economists pinpoint the specific serious missteps. Mikhail Gordienko, a professor at the Plekhanov Russian University of Economics` Department of Sustainable Development Finance, asserts: «In short, Boris Yeltsin and the young reformers` main error during privatization was the transition to a different, imported economic model for the country at any cost. This resulted in the loss of state sovereignty in many economic sectors and beyond, which the Russian government is still striving to restore today.» A crucial aspect of privatization was not so much the availability of money as the knowledge of how a market economy functions. The general population largely lacked this knowledge, with rare exceptions, which allowed large blocks of shares to be concentrated in a few hands, often through manipulative means, leading to widespread injustice. The acquisition of shares, even for a pittance, undoubtedly incurred certain costs. It is challenging to contrast the Russian oligarchs of that period with foreign investors, as their interests were remarkably similar: gaining control over assets and transferring them abroad. This often occurs under weak state power, especially when large capital frequently loses its national allegiance, the scholar emphasized.
Nevertheless, examples of alternative, positive privatization scenarios exist in other countries. In China, for instance, the transition of the economy into private hands was combined with the preservation of state control and a gradual introduction of market mechanisms. This model, developed in the PRC, proved particularly resilient during economic crises, though it now faces specific challenges regarding its growth ceiling. One might also recall the experiences of some Eastern European countries, where auction sales emphasized domestic, national major investors, which later facilitated the concentration of shares and improved the quality of management in economic entities.
However, according to Gordienko, alternative options were not considered in Russia because the decisions made were primarily driven by the interests of transferring control over state property into private hands. Swift action was deemed necessary, aided by the keen support of Western advisors—market economy experts. The interests of specific groups were realized, which subsequently formed Russia`s largest holding structures and created a new social stratum: the oligarchy.
A Ruble Divides Easily, a Billion Does Not
Alexander Razuvaev, a member of the Supervisory Board of the Guild of Financial Analysts and Risk Managers, explained why the economic transformations of the 1990s still spark public debate.
Question: Market reforms began in the country shortly after the failure of the GKChP. How do you view those dramatic events of August 1991 from today`s perspective?
Answer: The collapse of the GKChP marked the beginning of a very contradictory era. In my Telegram channel, I conducted a poll: today, less than 7% support Boris Yeltsin, while 30% support the GKChP. The public`s attitude toward Russia`s first president is unambiguous, and in such a situation, analysts usually ask: could things have turned out differently? Yeltsin received immense public trust at the beginning of his presidential career. But what is remembered about his era now? «Black October» in 1993, the ill-conceived storming of Grozny in January 1995, and omissions regarding Ukraine. Naturally, at the moment of the USSR`s collapse, Crimea should have been immediately taken from Ukraine, and possibly Odesa as well.
And that`s just politics. Economically, Yeltsin`s rule was virtually a catastrophe. From 1992 to 1994, Russia`s GDP and industrial production nearly halved. The state transformed into a country of beggars and bandits. Boris Yeltsin indeed inherited many problems from the last leader of the USSR, Mikhail Gorbachev. In my opinion, the main problem was the disproportion between commodity and monetary mass, which led to commodity shortages. To overcome this, Yeltsin and one of the ideologues of liberal reforms, Yegor Gaidar, freed prices. The result was inflation, which reached a staggering 2600% in 1992. Soviet savings books, where citizens had saved money for many years, even decades, instantly became worthless papers.
Question: These are far from all the grievances people hold against the government of that time. How do you evaluate privatization?
Answer: This is a sore point for our country. As the saying goes, a ruble divides easily, a thousand rubles divides, but with difficulty, and a billion never divides. The idea of privatization, at the very least, needed refinement. In my view, vouchers should have been circulated exclusively through the network of Sberbank branches—the largest, state-owned, and most trusted bank by citizens at the time. Voucher investment funds (VIFs) should have been limited to large companies with firm commitments to convert into mutual funds (PIFs). Trading on the Moscow Interbank Currency Exchange (MICEX) should have been launched no later than July 1994. Furthermore, the money lost in Russians` savings accounts should have been exchanged for shares in major Russian companies, especially in the oil and gas sector, at fair value. Simultaneously, a strict fight against financial pyramids was necessary. Frankly, the vast majority of Soviet people at the time did not understand what these «MMM,» «Khopyor,» «Vlastelina» schemes were or how dangerous they were, but professionals should have known this and protected citizens from them. The bank deposit insurance system should have been launched in 1992, not 2004. I recall that the first banking crisis occurred in Russia in August 1995, and depositors were among the main victims.
Question: Why did voucher privatization become almost the main disappointment for compatriots?
Answer: For some reason, Russians at the time were convinced that by receiving a voucher, they would immediately become wealthy. But let`s compare the figures and prices. A voucher cost $10-20 on average then, depending on the place of acquisition. How much would that be today, considering inflation? Around $200 in current stock prices. With that money, you could have a nice dinner for two at a Moscow restaurant, and that`s it. So, what kind of wealth from one voucher?! But at that time, no one explained this, no calculations were made, and the purpose of what was happening was never communicated to the citizens. As a result, the minds of compatriots, who poorly understood economics, were dominated by magical thinking: «Had no penny, and suddenly a fortune.»
Question: And what did «loans-for-shares» auctions change?
Answer: No «loans-for-shares» auctions should have been conducted. Russia had a budget deficit at that moment, but to cover it, several companies could have been sold to foreign investors, naturally, for their real value and with the state retaining control through a «golden share.» It was also necessary to maintain state control in the banking and raw materials sectors. Currently, the state sector`s share in the domestic economy is 70%, and we are still developing! In the 90s, the country experienced high inflation, largely a consequence of the budget deficit being financed through the printing press. The money received from the sale of enterprises could have been directed to the budget, stabilizing the financial system and the money market. Amid runaway inflation, it was essential to have a flat income tax scale, abolish all internal offshore zones, and in cases of «gray tax optimization» by companies, proceed with their immediate nationalization. In such conditions, the 1998 default would not have happened. One could even consider the level of geo-economics and implement different management decisions there.
Question: What do you mean?
Answer: The economic structures of Russia and Kazakhstan were very similar. For both countries, the oil sector was key at that time. At the moment of the USSR`s collapse, the first president of Kazakhstan, Nursultan Nazarbayev, should have been persuaded to join Russia. This would not have been very difficult; he himself was inclined towards integration. I recall that it was Nazarbayev who authored the idea and stood at the origins of the Eurasian Economic Union. He declared its necessity during his historic speech at Moscow State University back in 1994. So, if the leadership at that time had shown wisdom, our country would look completely different now. However, there was a lack not only of wisdom and experience but also of common sense, as a result of which Russia in the 90s risked simply disappearing from the world map. Everyone wanted capitalism. Naturally, only some became rich. Well, that`s how it turned out…
It Could Have Been Worse
Question: Could things have turned out differently with some changes in details? The genre of alternative history is popular in literature now: can you speculate on what the 1990s might have looked like if something or someone had been different?
Answer: I`ve thought about this too, but I`ve come to discouraging conclusions. In my opinion, it could only have been worse. Of the possible scenarios, as they say today, Russia took the best path, although it`s hard for anyone who lived through the 90s to believe that. For example, if someone else had been Prime Minister instead of Viktor Chernomyrdin at that time, Russia could have simply plunged into an abyss. I rate him highly. He, at least, preserved the oil and gas sector as the backbone of our economy.
Or let`s imagine such a scenario: suppose in 1995 we had the most honest president, and he divided Yukos into 145 million shares and gave each citizen of the country one such security. What would have happened next? Realizing what this asset was, «slick guys» in suits and ties from Goldman Sachs, at the request of Exxon or Total, would have bought up the controlling stake for not very much money from a population that understood little about economics but valued dollars in hand. They would have used cunning, deception, and sometimes even force, and that would have been it. All resources would have simply been drained from the country, and if the government tried to change the situation, sanctions would have been immediately imposed. And our economy in that state would not have withstood them. We now understand what that would have looked like.
Or imagine they decided to conduct honest privatization and sell everything at a fair price, since they wanted to go that route. Think about it yourself: who could have bought Soviet enterprises then, when neither specific individuals, nor cooperatives, nor even banks and other enterprises had such funds? What would have happened? Foreigners would have come in with their capital, and the entire country would have fallen into concession.
Question: Are there any economic positives from Yeltsin`s rule?
Answer: With a caveat, it must be acknowledged that a stock market did emerge in Russia at that time.
Question: Why with a caveat?
Answer: In fact, it was designed only for foreigners. A standard transaction on the RTS at that time was $300,000. There was no trading on the MICEX. A simple Russian couldn`t buy anything on the RTS, so the stock market that developed then was also flawed. We only achieved normal capitalism after Vladimir Putin came to power. Everyone was forced to pay taxes, the stock market became a priority… Thank God we all survived the 90s. Now Russia is a successful country, the fourth economy in the world. We have withstood sanctions. As for the Yeltsin era—a very dark time when there was practically no state, when tanks fired on parliament, when there was Chechnya—it will be given a fair assessment in history textbooks and in the people`s memory, I hope.
