How Russia Went Wrong
December 25, 1991: President George H.W. Bush looked into the camera as he prepared to give a victory speech that few Americans could have imagined just a few months earlier. The Soviet Union, which for more than four decades served as the United States’ main geopolitical and ideological rival, had ceased to exist.
“This is a day of great hope for all Americans,” Bush declared in his televised address. “Our enemies have become our partners, committed to building democratic and civil societies. They ask for our support, and we will give it to them. We will do it because as Americans we can do no less.”
Over the next decade, Washington threw its weight, both politically and financially, behind liberal forces in Russia that pledged to transform the country into a model capitalist democracy. In practice, their economic reforms caused a decade of impoverishment for ordinary Russians and paved the way for the emergence of the oligarchic class. At the same time, the new Russian government crushed its opposition in the parliament by sending tanks, a move that was endorsed by the Clinton administration.
As the Soviet Union entered 1991, there were clear signs of trouble on the horizon. Two years earlier, a revolutionary wave had toppled the governments of Moscow’s allies in eastern and central Europe. At the same time, Soviet leader Mikhail Gorbachev’s efforts to revive the Soviet economy after a decade of stagnation had succeeded in undermining the old central-planning system but failed to put a viable alternative in place. Political unrest soon spread into the periphery of the Soviet Union itself, as ethnic conflicts broke out and a growing number of regional elites began to agitate for independence.
Even in the heart of the Soviet empire, the Russian Soviet Federative Socialist Republic, Gorbachev increasingly found himself under siege. On the one hand, conservative elements of the Soviet leadership accused Gorbachev of destabilizing the country and betraying the Marxist-Leninst cause. At the same time, Gorbachev’s support among reformists was being challenged by Boris Yeltsin, a longtime party apparatchik who reinvented himself as an anti-communist populist in the late 1980s. A showdown between the two men appeared imminent after June 1991, when Yeltsin defeated one of Gorbachev’s closest allies to become the first president of the RSFSR and immediately after his victory promised to push for greater autonomy from the Kremlin.
How did Washington view these seemingly momentous political shifts? According to Wayne Merry, the chief political analyst for the U.S. embassy in Moscow from 1991 to 1994, almost no one seemed to appreciate the gravity of the events taking place. He recalled visiting Washington in the early summer of 1991 for consultations before taking up his post in Moscow. Nearly all of the senior government officials Merry spoke with insisted that the Soviet Union had entered a quiet period of “stagnation and drift.”
“In fact, one of the most senior people I spoke with in the [National Security Council] staff told me: ‘It’s too bad you’re going out to Moscow now because all the really important changes in the Soviet Union have already taken place,’” he said.
This perception was soon challenged in a fairly dramatic way. In the closing days of August 1991, a group of communist hardliners launched a coup attempt while Gorbachev was vacationing in Crimea. Shortly after the putschists announced the establishment of their interim government, a large crowd under Yeltsin’s leadership rallied in Moscow to express its defiance. Over the next three days, the coup leaders bickered among themselves over how to proceed before ultimately capitulating once it became clear that they had lost momentum. Gorbachev returned to the Kremlin, but in the eyes of the general public and most of the elite, victory over the hardliners belonged to Yeltsin alone.
The August 1991 coup attempt marked a point of no return for the Soviet Union. Just days after the putsch failed, Yeltsin suspended the Communist Party’s activities on the territory of the RSFSR and moved to confiscate its buildings. In the rest of the empire, regional communist leaders quickly rushed to declare their independence from Moscow. The Soviet Union and its governing institutions remained, but the Communist Party, the heart of the entire system, had lost its power and authority.
Merry told TAC that, even after the failed putsch, few in Washington believed that the Soviet Union was going to collapse anytime soon. As an example, he revealed that in late October 1991, a very heated argument erupted between George Kolt, the CIA’s top Soviet analyst, and Edward Hewett, the leading Soviet expert at the NSC. The reason for the confrontation was a memo Kolt had authored in which he argued that Ukraine could break away from the Soviet Union within five years, a notion Hewett rejected as absurd.
“When I found out about this conversation, I hit the ceiling, because both the embassy in Moscow and our consulate in Kyiv had been telling Washington for some time that Ukraine was going to be independent in five weeks, not five years,” Merry said. “It was quite evident that no one was paying attention to these warnings.”
At the same time, many in Washington were reluctant to accept that Gorbachev was on his way out. Merry revealed that in December 1991, a Kremlin aide reached out to him to complain that Gorbachev had been receiving calls from Bush administration officials and members of Congress urging him not to hand power over to Yeltsin. “Gorbachev had members of his staff trying to convince him that it was time to go, and here he was getting all these phone calls from people who were telling him not to give up,” he said.
Regardless of Washington’s preferences, however, the Soviet Union was rapidly heading towards its end. On December 1, 1991, more than 90 percent of Ukrainian voters cast their ballots in favor of independence from the Soviet Union. A week later, Yeltsin and the leaders of Ukraine and Belarus gathered in the Belarusian village of Viskuly to sign the “Belovezha Accords,” which dissolved the Soviet Union. On the evening of December 25, 1991, Gorbachev announced his resignation. Less than a half hour after his speech, the red flag of the Soviet Union was lowered from the Kremlin one last time.
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As the head of a new Russian state, Yeltsin was faced with a daunting set of economic challenges. The disintegration of the Soviet Union into 15 independent republics completely upended supply chain networks that had been built over decades to meet the needs of a unified state. At the same time, although the Soviet Union was no more, no one had canceled its massive debts. The burden of paying them off fell to the young government in Moscow. Finally, months of political and economic unrest had caused a product shortage crisis, leading to barren shelves in grocery stores across the country.
In the final months of the Soviet Union, Yeltsin assembled a team of liberal economists—most notably Yegor Gaidar as prime minister and finance minister and Anatoly Chubais as deputy prime minister—with the mission of transforming Russia into a “normal capitalist society,” as many of them put it. Under Gaidar’s leadership, they persuaded Yeltsin to adopt a “shock therapy” approach to economic reform, which entailed a rapid abolition of price controls, state subsidies for domestic industries, and trade barriers. Only such a rapid dismantling of the old Soviet system and introduction of market mechanisms, they argued, could save the country from mass starvation and societal collapse.
In January 1992, Gaidar moved to put his “shock therapy” into action, ordering the removal of price controls on 80 percent of wholesale and 90 percent of retail goods. Over the next several months, most of the remaining price controls were also released and the other elements of “shock therapy” were implemented. Gaidar’s original prognosis had suggested that prices would jump by 200 to 300 percent in the first several months and then stabilize as market dynamics kicked into gear. The reality turned out to be much different.
By the end of 1992, prices had skyrocketed by 2,508 percent while real wages fell by about a third. Hyperinflation impoverished tens of millions of Russians practically over night by wiping out their life savings. Although grocery store shelves were now filled with products, the cruel irony was that many Russians could not afford to buy them. Over the course of 1992, Russians were forced to cut their consumption of vegetables by 84 percent, meat by 80 percent, fish and milk by 56 percent. Even members of the military were not immune to this food crisis. In early 1993, a nationwide scandal broke out after it was revealed that four navy conscripts died of starvation in the Far Eastern port city of Vladivostok. Another 250 of their fellow recruits were subsequently hospitalized with alimentary dystrophy.
The next step for the Yeltsin administration was mass privatization, an initiative which was managed by Chubais. In the summer of 1992, he launched the voucher privatization program. Under the scheme, the Kremlin gave every Russian citizen a voucher that was supposed to represent their proportionate share in the country’s economic assets, which came out to 10,000 rubles. In theory, voucher privatization was supposed to help establish a Russian middle class that would become reliable bulwarks against a potential communist revival.
This strategy had two glaring flaws. First, following more than seven decades of communism, few Russians understood how stocks worked or viewed them as legitimate forms of wealth. Second, due to rapid hyperinflation, the value of the vouchers quickly deteriorated. This presented an opportunity for a small group of insiders, most of whom were Soviet-era factory managers or individuals who became wealthy off the black market, to buy up substantial shares in the tens of thousands of state enterprises that had been put up for privatization.
As the economic situation continued to deteriorate, Yeltsin encountered growing opposition from the once supportive Russian parliament. During the August 1991 coup attempt, lawmakers from the Congress of People’s Deputies and the Supreme Soviet had rallied around Yeltsin and months later voted to grant Yeltsin emergency economic powers for one year. By mid-1992, many of the Russian president’s early allies had become disenchanted with his “shock therapy” approach to market reforms.
Over the course of the following year, tensions between Yeltsin and the parliament continued to escalate. The ultimate showdown came on September 21, 1993, when Yeltsin issued a decree dissolving the parliament. Almost immediately, Russia’s constitutional court ruled that Yeltsin’s decree lacked any legal basis. Parliament’s reaction was likewise defiant. Both the Congress of People’s Deputies and the Supreme Soviet voted to impeach Yeltsin and replace him with his Vice President Alexander Rutskoi, who had gone over to the opposition.
In response, Yeltsin sent riot police to lay siege to the Russian White House in Moscow, which housed the Supreme Soviet, on September 25. He also ordered city authorities to shut off electricity, heat, and water to the building. The parliamentarians countered by forming their own armed militia and called for mass protests. Over the next several days, periodic clashes between opposition supporters and police erupted in the streets of Moscow, some of which were initiated by protestors, others caused by police who attacked nonviolent demonstrators.
In a bid to halt the fighting, Patriarch Alexey II, head of the Russian Orthodox Church, opened peace negotiations between the two sides on September 30 at Moscow’s Danilovsky Monastery. This fragile ceasefire broke down on October 3, when riot police attempted to disperse a crowd of peaceful protestors that had gathered in central Moscow. The demonstrators fought back and soon overpowered police.
Part of the crowd decided to march on the White House and, upon arriving, stormed the police cordon surrounding the building. From there, the violence continued to escalate as opposition supporters seized control of the neighboring mayor’s office. In the evening, gunfire broke out between government forces and paramilitary organizations loyal to the parliament after the latter attempted to take over Moscow’s main television station.
The following morning, Yeltsin sent ten tanks and special forces units to subdue the parliament. After several hours of heavy bombardment, troops loyal to the government entered the White House and arrested the lawmakers inside. According to Russian government figures, 187 people were killed and another 432 were wounded during the October 1993 constitutional crisis, although some independent sources estimate that the death toll was closer to 2,000.
In the aftermath of the conflict, President Bill Clinton offered a spirited defense of Yeltsin’s actions to the press, declaring that the Russian president had “bent over backwards” to avoid violence. “If such a thing happened in the United States, you would have expected me to take tough action against it,” he said. Meanwhile, in private, Clinton called Yeltsin to congratulate him on his victory.
With his opponents in the parliament now defeated, Yeltsin introduced a new constitution that concentrated power overwhelmingly in the hands of the presidency. The constitution was ratified in a national referendum in December 1993, ensuring that for the rest of Yeltsin’s time in office, neither the legislative or judicial branch would have much opportunity to veto his decisions.
Meanwhile, Russia’s economic situation continued to get worse. By 1994, the Russian government was struggling with its financial obligations. Due to widespread tax evasion, the government perennially lacked the funds necessary to pay pensions, social benefits, and even salaries for state employees, including law enforcement and members of the military. As the backlog of unpaid wages continued to grow, some regions tried to compensate government workers with food instead of money.
To tackle this problem, Chubais worked out an ambitious new privatization scheme. Under his plan, the Kremlin would acquire the funds to pay its bills by borrowing from Russian banks in exchange for temporary shares in large state-owned enterprises. If the government failed to repay the loans, as was widely expected, then the banks would be allowed to auction off the shares, which theoretically could have still generated some revenue for the Russian budget. What happened in reality was that the banks manipulated the auctions to give away the shares to well-connected insiders at well below market prices.
The beneficiaries of Chubais’s “loans for shares” program became Russia’s new oligarch class. These new tycoons, many of whom were former Soviet officials and factory managers, gained control over a significant port of the country’s natural resources and industry. Later, they used the profits from these new assets to position themselves as political kingmakers by buying up television stations, newspapers, and magazines.
Although Russia’s oligarchs were hardly the first group in the history of capitalism to acquire disproportionate wealth and power, their rise to the top was unique. As Harvard University economist Marshall Goldman noted in his 2003 book, The Piratization of Russia, even the robber barons of America’s Gilded Age could boast of providing some value to society, whether in the form of new technologies, industries, or infrastructure. By contrast, “these Russian oligarchs did not build” anything. “They simply purloined what previously belonged to the state and in the process became instant millionaires, if not billionaires,” he wrote.
What about Chubais’s stated goal of providing the government with much need revenues? Even on that front, the results were disappointing. Goldman calculated that the Russian government managed to earn a mere $6 billion from its privatization efforts between 1992 to 1999, meaning that nearly two-thirds of state enterprises were sold for pennies.
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Notwithstanding the ugly nature of Russian privatization, Chubais saw his star rise in Washington, quickly becoming the Clinton administration’s favored intermediary for U.S. financial aid to Russia. Thomas Graham, the chief political analyst at the U.S. embassy in Moscow from 1994 to 1997, said that the Treasury and State departments held “very close consultations” with Chubais to discuss “the best way to pursue economic reform in Russia,” offering specific pointers on fiscal and macroeconomic policy.
Graham explained that the administration was willing to overlook the controversies surrounding Chubais’s privatization drive since it operated under the assumption that “any attempt at radical reform would meet significant resistance because Russia is a fairly conservative country and it was clear that the reforms being implemented would have dire consequences for large segments of the population.”
“We approved of Chubais, we approved of what he was doing, and we conveyed our support for what we called the ‘radical reformers’ through various channels, including Yeltsin himself,” he said. “We thought that maintaining them in positions of power and influence was critical to the types of domestic developments we wanted to unfold in Russia.”
One of Chubais’s closest allies was the Harvard Institute for International Development (HIID), the center point of U.S. efforts to advance market reforms in Russia during the 1990s. Between 1992 and 1997, HIID was awarded $57.7 million in mostly noncompetitive grants from the United States Agency for International Development (USAID). Perhaps even more extraordinarily, HIID was responsible for managing USAID’s $300 million Russia portfolio, a privileged position that allowed it to oversee the activities of its competitors.
HIID helped funnel much of that money towards several think tanks run by Chubais and his associates, such as the Russian Privatization Center and the Institute for Law-Based Economy. Despite their nominal nonprofit status, these organizations functioned as quasi-government institutions that authored economic policy documents and even negotiated loans with international financial institutions on behalf of the Kremlin.
As George Mason University professor Janine Wedel, who spent years researching the Chubais–HIID partnership, wrote in a 1998 article for the Nation, these organizations enabled “reformers to supersede channels of government decision making, such as parliament, and to bypass legitimate bodies of government, such as ministries and branch ministries, that might otherwise be relevant to the activities being performed.”
U.S. officials made no secret of the fact that the primary goal of their economic aid program to Russia was to bolster Chubais’s political standing. In a 1997 interview with Wedel, Ambassador Richard L. Morningstar, U.S. aid coordinator to the former Soviet Union, admitted,“When you’re talking about a few hundred million dollars, you’re not going to change the country, but you can provide targeted assistance to help Chubais.”
Andranik Migranyan, who served on Yeltsin’s presidential council, told The American Conservative that Washington’s open patronage for Chubais and his allies provoked growing resentment from other factions of the Russian elite, especially from members of the foreign policy and security establishments.“Quite a few people on the most senior level regarded Chubais and Gaidar as traitors, as politicians who sold out to the West and did not understand Russia’s national interests,” he said.
HIID was eventually brought down by its own corruption scandal. In 1997, it was revealed that two of the institute’s leading figures, economist Andrei Shleifer and lawyer Jonathan Hay, had abused their insider connections and information to make personal investments in Russia. In response to the allegations, USAID canceled a $14 million grant to HIID. Meanwhile, Harvard dissolved the institute in 2000 and five years later was forced to pay the Department of Justice a $26.5 million settlement for breaching its contract with USAID.
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While factions within the Russian elite battled for power and resources, Yeltsin’s popular support continued to plummet. In the 1995 parliamentary elections, the Communist Party took first place and captured more than a third of the seats in the State Duma. Poll numbers for the upcoming 1996 presidential election were less than reassuring for Yeltsin: Communist Party leader Gennady Zyuganov was firmly in first place, while the Russian president’s approval rating was in single digits and he ranked dead last among five potential candidates. Yeltsin’s prospects appeared so dire that several members of his inner circle urged him to declare a state of emergency and cancel the election.
To make matters worse, Zyuganov was starting to make inroads with one of Yeltsin’s most important constituencies: Western financial elites. In February 1996, the Communist Party boss traveled to the World Economic Forum in Davos to make a speech outlining his economic program for Russia. He struck a conciliatory tone, vowing to respect private property and keep elements of the market economy in place if elected. Much to the alarm of the Russian oligarchs in attendance, the longtime apparatchik’s pitch received a warm reception from global capitalist heavyweights. Boris Berezovsky, who was one of Russia’s most powerful businessmen at the time, watched with horror as Western CEOs at the forum “flocked to [Zyuganov] like flies to honey.”
Fearing that a Communist victory would deprive them of their newly acquired wealth, the Russian oligarchs decided that they had no other choice but to join forces to prevent such an outcome. Shortly after the Davos Forum, the oligarchs offered Yeltsin support for his campaign in exchange for a promise that he would continue the privatization of large state enterprises and ensure that they received significant shares. The Russian president agreed and the oligarchs quickly moved to establish a well-funded electoral headquarters led by Chubais. At the same time, the oligarchs mobilized the full weight of their media empires to wage an information war against Zyuganov.
The oligarchs were not the only ones working to help elect Yeltsin. As Deputy Secretary of State Strobe Talbott recalled in his 2003 memoirs, during a cabinet meeting in early March 1996, Clinton dismissed warnings against openly supporting Yeltsin. “I know the Russian people have to pick a president and I know that means we’ve got to stop short of giving a nominating speech for the guy,” Talbott quotes Clinton as saying. “But we’ve got to go all the way in helping in every other respect.”
Later that month, the International Monetary Fund provided Russia with a $10.2 billion loan, money which Yeltsin vowed to use to cover unpaid wages and increase social spending. Several weeks later, Clinton made a much publicized trip to Russia in which he repeatedly touted Yeltsin as a great reformer. “Thanks to President Yeltsin’s leadership, 60 percent of Russia’s economy is now in the hands of its people, not the state; inflation has been cut, democracy is taking hold,” Clinton declared while standing next to the Russian leader during a joint press conference in Moscow.
“It was clear that the United States wanted Yeltsin to win and was backing him in a very obvious way, which in a more normal time we would have considered undue interference in another country’s domestic politics,” Graham said.
Some of the American support for Yeltsin resembled more of a farce than crafty political maneuvering. In February 1996, Russian Deputy Prime Minister Oleg Soskovets paid a team of three longtime political consultants from California, George Gorton, Joseph Shumate, and Richard Dresner, $250,000 plus all expenses to help the Yeltsin campaign with polling, focus groups, and messaging. The consultants established a war room in Moscow’s ritzy President Hotel, where they reportedly worked closely with Yeltsin’s daughter, Tatyana Dyachenko. Although Russian officials later downplayed their impact on the campaign, the three Californians sought to portray themselves as the architects of Yeltsin’s victory. Their exploits became the subject of an infamous July 1996 Time magazine cover story titled “Yanks to the Rescue.”
In the first round of voting held on June 16, 1996, Yeltsin barely edged out Zyuganov 35 percent to 32 percent. Two weeks later, Yeltsin secured another term in office after winning the runoff race with 54 percent of the vote. Although Zyuganov conceded defeat, there were widespread accusations of irregularities and even outright fraud. In February 2012, then-president Dmitry Medvedev reportedly told a group of Russian opposition leaders, “It is unlikely that anyone has doubts who won the presidential elections in 1996. It was not Boris Nikolayevich Yeltsin.” (The Kremlin subsequently walked back that statement.)
The Clinton’s administration’s involvement in the 1996 presidential election remains controversial in Russia to this day. Migranyan argued that Washington’s backing was critical to Yeltsin’s victory since it discouraged many influential political players from turning against the Russian president. “Such unequivocal support from the Clinton administration and the collective West did not give an opportunity to many forces which could have joined the protests,” he said. “If Yeltsin did not receive support from the West, his opponents would have toppled him.”
Although Yeltsin managed to survive the 1996 election, he did not have much of an opportunity to bask in his victory. Shortly before the second round of voting, the Russian president suffered a heart attack, which made it difficult for him to talk or move. At his inauguration ceremony in August 1996, Yeltsin spoke for less than a minute and observers noted that he looked physically unwell. In November 1996, Yeltsin was forced to undergo a seven-hour coronary bypass surgery.
While Yeltsin recovered, Russia was nominally governed by his longtime Prime Minister, Viktor Chernomyrdin. Behind the scenes, a group of seven oligarchs that had aided Yeltsin’s reelection campaign worked to shape the country’s economic policy to their personal benefit. The Russian press nicknamed the group Semibankerschina, “seven bankers,” an unflattering allusion to the Semiboyarschina, seven nobles who briefly seized power in Russia in the early 16th century during the Time of Troubles. Even after Yeltsin returned to governing in early 1997, the Semibankerschina remained the power behind the throne.
With the Communist threat defeated, it was not long before the oligarchs began attacking one another. The bankers’ unity started to crack in August 1997, when the government sold a 25 percent share of Russian telecommunications giant Syazinvest to a bank run by one of the oligarchs. The losing consortium accused the government of foul play and launched a media offensive to discredit the sale. In the months that followed, a full-scale information war broke out between the oligarchs, with each side exposing the other’s corruption dealings.
As Russian elites fought among themselves, few noticed that storm clouds were gathering over the economy. In late 1997, a financial crisis in Southeast Asia and falling commodity prices put serious pressure on the ruble, sparking fears among investors that the Russian economy was heading towards a meltdown. Yeltsin further unnerved the markets in March 1998 when he abruptly dismissed his entire government and appointed Sergei Kiriyenko, a 35-year-old unknown technocrat, as his new prime minister.
With the economic and political situation in Russia continuing to deteriorate, the IMF sought to prevent a crisis by providing Moscow with a $11.2 billion emergency loan in July 1998. That did little to stop the bleeding. On August 13, 1998, the Russian stock market collapsed as investors rushed to take their money out of the country. Several days later, the Kremlin was forced to devalue the ruble and default on its domestic debt.
The August 1998 financial crisis delivered a crushing blow to an already fragile Russian economy. Just as in 1992, a new round of hyperinflation wiped out people’s life savings and caused the prices of basic necessities to skyrocket. Real GDP fell by 4.9 percent in 1998, while unemployment jumped to nearly 12 percent. Meanwhile, Yeltsin’s behavior only became more erratic. After firing Kiriyenko in late August 1998, Yeltsin cycled through three prime ministers over the course of a year before settling on Vladimir Putin, the director of Russia’s Federal Security Service.
When Yeltsin unexpectedly announced his resignation in favor of Putin on New Year’s Eve in 1999, many Russians breathed a sigh of relief. The Russian president left the office with a single-digit approval rating. During his eight years in office, Russia’s GDP collapsed from $518 billion in 1991 to $196 billion in 1999, a decline more dramatic than what the United States experienced during the Great Depression. As a result of the economic hardship, the death rate in Russia was 1.5 times higher than the birth rate, which sparked widespread concerns that the country was rapidly approaching a demographic abyss.
Under Putin, many of the Russian elite who got their political start in the 1990s, unlike Yeltsin, Gaidar, and Chubais, have a far more hostile attitude towards the West. Graham says that the United States has partially itself to blame for that fact.
“We were very bad when we tried to involve ourselves in Russia’s domestic politics in a large way,” he said. “We never understood Russia sufficiently well enough to ably manipulate its politics, which came back to haunt us.”
Russia eventually reasserted its status as a major power under Putin, but the damage had been done. Even 30 years after the collapse of the Soviet Union, many Russians look back upon the 1990s as a time of national humiliation at the hands of Yeltsin and his Western allies. A decade that began with the loftiest optimism ended in cynicism and anger. Although time eventually heals all wounds, the recent events in Ukraine suggest that the hostility between Russia and the U.S. is unlikely to go away anytime soon.
Dimitri Simes has written for the National Interest and Nikkei Asia and was a 2020 Robert Novak Journalism Fellow.