RUSSIA IS often cited as an example of the folly of following the advice of Western economists, who called loudly for Russia to undergo “shock therapy.” To characterize the policies that Russia actually followed as “shock therapy” is grossly inaccurate, however, since the initial effort to control inflation lasted only four months. In the early years of the transition (1992–94), the Russian government imposed discipline on monetary and fiscal policy for short periods, and repeatedly pulled back from the precipice of hyperinflation; yet, as quickly as they took hold, efforts to restrain demand evaporated and inflation surged forward. In comparison with the East European countries, Russia has been very unsuccessful in controlling inflation and stabilizing its currency; in comparison with the abysmal records of most of the other countries of the former Soviet Union, Russia's performance has been about average. The effect of delaying stabilization in Russia was a roller coaster of inflation and contraction, which combined the worst effects of both: a precipitous decline of production, living standards, and government services, combined with monumental levels of capital flight and without substantial restructuring of industry. These lost years had lasting impact on the health of the Russian economy, the legitimacy of Russian democracy, and Russia's status as a great power.
From 1995 to 1998 Russia used a tight money policy to stabilize the ruble and bring inflation down, but failed to reduce its budget deficit. Consequently, large capital inflows were used to finance the deficit, and high interest rates squeezed out investment in the private sector. This was not a sustainable policy, because the need to finance the deficit required ever greater inflows of capital, and mounting government debt made the investment increasingly dubious. Finally, on August 17, 1998, the game was up and the ruble collapsed, sweeping away the government of the reformers. Again an opportunity had been missed, and the cost in terms of Russia's purchasing power and the real wages of its citizens was staggering: Russia's per capita real income in 2000 was 46 percent of its level in 1998. The third stage of the transition, which was inaugurated by the ruble's collapse, has been a period of improvised monetarism. A surprising consensus has finally emerged among Russia's political