Russia is a country of unpaid taxes, unpaid wages, of poorly produced products and poor service; of credit expansion, but little long-term investment; of announced liberalization, but a growing black-market; of great opportunity, but intense capital-flight. In short, today's Russia, like its Soviet predecessor, remains 'an enigma wrapped in a contradiction.'
Since 1991, the international community has provided $90.5 billion of external assistance to aid the Russian transition. Thirty-five percent of that has been directed toward investment, twenty-five percent for export credit, seven percent for technical assistance, four percent for humanitarian and food aid, and twenty-nine percent for balance of payments and budget support. Sixty percent of this foreign aid has come from bilateral programs from G7 countries (Canada, France, Germany, Italy, Japan, United Kingdom and the United States) and the non-G7 countries (Denmark, Finland, Netherlands, Norway, Sweden and Switzerland). Assistance from the International Financial Institutions (the IMF, IBRD, IFC and EBRD), account for thirty-seven percent of $90.5 billion committed to the Russian Federation.
This is not a trivial effort to aid Russia.(1) But there is also little to show for this effort in foreign aid. What has emerged in Russia over the past six years has not been a move toward the market, but a new variation on the older economic system known as the Soviet-type economy.(2) This is an economic system in which the main function of enterprises is not to compete in the open marketplace for goods and services, but is instead to protect oneself from the marketplace (See Gaddy and Ickes 1998).
It is an economic system of innovative strategies at insulation from the rigors of market competition. The money sent to "prepare" for marketization, in other words, was money spent on insulating strategies to protect enterprises from the promised marketization. Hindsight is 20/20, but the logic of the situation is straightforward. Confronted with announcements that are to take effect in a few months that would, if one were surprised, adversely affect some, will lead to fairly predictable responses by those who expect to be adversely affected by the proposed changes in the existing rules of the game to use whatever existing means are available to mitigate the adverse affects. Russia remains perhaps the prime exemplar of a "rent-seeking" economy in the modern world.(3) And, until that basic structural issue in the polity and the economy is addressed, efforts at transformation of the economic system in a direction which will enable the Russian people to live peaceful and prosperous lives will continue to fall short.
Background to the Current Situation
Beginning in 1992, the rhetoric of the Russian government has been one of full speed ahead into a democratic capitalist society. The reality of Russian economic and political life, however, has fallen far short of that rhetoric. This is not unlike the foundational Gorbachev years, from which the Yeltsin government emerged. Gorbachev's reign from 1985-1991 set the stage for both the perils and prospects of the post-Soviet transition.(4)
Yeltsin did not start from scratch. He started in an already-existing political economy reality and that reality was one of negative value-added production, no alternative supply network other than the state, vast black markets both internal and external to the official state planning system, interlocking interest group relationships in politics and economics, a high level of distrust between private and public individuals, and little incentive for economic actors to behave in a transparently entrepreneurial manner. Entrepreneurship existed throughout the history of the Soviet Union, but it was limited to a range of arbitrage activities within the structure of the plan, or black market for consumer goods. …