MOSCOW, December 2. /TASS/. Twenty-five years ago, on December 3, 1991, Russian President Boris Yeltsin signed a decree on price liberalization from January 2, 1992 to usher in market reforms and free pricing in the country.
Factors that prompted Russia’s transition to a market economy
By the start of perestroika in the Soviet Union in 1985, the country was already experiencing a crisis of the planned economic system. Wages were growing faster than the output of consumer goods and foodstuffs. This factor was creating a chronic shortage of goods. Many decisions taken during the years of perestroika only made things worse.
For example, after the government lifted state monopoly on foreign trade in 1987, Soviet enterprises found it more advantageous to sell goods abroad than to deliver them to the domestic market.
By mid-1991, no funds had been left in the Soviet government’s budget to subsidize state prices. Meanwhile, the national republics within the Soviet Union started the uncontrolled issuance of the Soviet ruble to cover the deficit of their budgets. As a result, control of the financial system was actually lost. While household incomes were nominally growing, people could not buy many essential goods even with special ration cards and shop shelves became empty.
After the failed coup d’etat in the Soviet Union in August 1991, President of the Russian Soviet Federative Socialist Republic (RSFSR) Boris Yeltsin entrusted the development of market reforms to a team of liberal economists led by Yegor Gaidar.
As Gaidar later wrote in his book "Power and Ownership," the reformers initially planned to liberalize prices, i.e. to switch from state regulation to market pricing, in mid-1992. The reformers relied on the experience of East European countries, which had liberalized prices in 1989-1990.
However, after information was specified on supplies for cities, the Gaidar team decided that the country might be confronted with a hunger without the immediate price liberalization. The reformers told Yeltsin that free market prices should be introduced already in December 1991.
On November 6, 1991, Yeltsin formed the RSFSR government, in which Gaidar assumed the duties of a vice-premier for economic policy.
On December 3, 1991, Yeltsin signed a decree on price liberalization. The decree set free the wholesale and retail prices of most goods and services, except for a small group of socially essential items (sugar, salt, some types of bread, gasoline, vodka, milk and others).
The decree entered into force on January 2, 1992. It was subsequently followed by other legislative acts aimed at the transition to a market economy, including the decree on the freedom of trade (January 29). Retail price regulation was finally terminated in Russia in 1995 after exemptions from Yeltsin’s price liberalization decree were cancelled.
The price liberalization helped the Russian government actually immediately to solve the problem of a shortage of goods. However, this was followed by the swift depreciation of the ruble. Inflation soared to a monthly rate of 245.3% in January 1992 in Russia. It fell to 38% in February, 29.9% in March, 21.7% in April and 11% in May. Overall, inflation hit 2,508.8% in 1992 (the prices jumped by 25 times). For comparison, prices grew by 33% in Hungary, by 54% in Czechoslovakia and by 249% in Poland after they were liberalized.
Gaidar and other liberal economists assessed positively as a whole the decision to switch to market prices. In their opinion, this measure helped save the country from hunger and even prevent a civil war. They considered high inflation and a plunge in household incomes as something inevitable. However, they believed that this had been largely prompted by the following factors:
- the printing of Soviet rubles on the demand of union republics in 1991;
- the actions by deputies of the RSFSR Supreme Soviet and Vice-President Alexander Rudskoi who pressed for a sharp increase in budget expenditures in the second half of 1992;
- excessively high wages during the last years of the existence of the USSR.
At the same time, Russia’s shock therapy was subjected to criticism as it caused the impoverishment of people and exacerbated the crisis in the economy. In the early 1990s, Vice-President Rudskoi and Supreme Soviet Chairman Ruslan Khasbulatov criticized the market reforms especially actively.
In 2010, liberal party Yabloko leader Grigory Yavlinsky who had also been among candidates for carrying out Yeltsin’s reforms asserted that the threat of hunger had been far-fetched and it had been necessary to implement other reforms first, including privatization (it started only in mid-1992) to mitigate the effect of price liberalization.