Politics and economics were closely intertwined in Russia after the dissolution of the Soviet Union. President Boris Yeltsin (r. 1991–1999) wanted to create conditions that would prevent a return to communism and right the faltering economy. Following the example of Poland, Russian reformers opted in January 1992 for liberalization at breakneck speed.

To implement the plan, the Russians abolished price controls on 90 percent of all Russian goods. The government also launched rapid privatization — the sale of formerly state-owned industries and agricultural concerns to private investors. In an attempt to share the wealth that privatization was expected to generate, each citizen received a voucher to buy stock in these private companies, but ownership usually remained in the hands of the old bosses — the managers and government officials from the Communist era — undermining the reformers’ goal of worker ownership.

President Yeltsin and his economic reformers believed that shock therapy would revive production and bring widespread prosperity. The results were quite different. Prices increased 250 percent on the very first day and kept on soaring, increasing by a factor of twenty-six in the course of 1992. At the same time, production fell a staggering 20 percent. Nor did the situation stabilize quickly. After 1995, inflation still raged, though at slower rates, and output continued to fall. The Russian economy crashed again in 1998 in the wake of Asia’s financial crisis.

Rapid economic liberalization worked poorly in Russia for several reasons. Soviet industry had been highly monopolized. Production of many items had been concentrated in one or two gigantic factories or in interconnected combines. With privatization, these powerful state monopolies became powerful private monopolies that cut production and raised prices in order to maximize profits. Moreover, corporate managers and bureaucrats forced Yeltsin’s government to hand out enormous subsidies to reinforce faltering firms and to avoid bankruptcies. New corporate leaders included criminals who intimidated would-be rivals in attempts to prevent the formation of competing businesses.

Runaway inflation and poorly executed privatization brought a profound social revolution to Russia. The new capitalist elite — the so-called Oligarchs — acquired great wealth and influence, while large numbers of people fell into abject poverty and the majority struggled to make ends meet. Managers, former Communist officials, and financiers who came out of the privatization process with large shares of the old state monopolies stood at the top. The new elite held more wealth than ever before, and the Oligarchs maintained control with corrupt business practices and rampant cronyism. Under these conditions, effective representative government failed to develop, and many Russians came to equate democracy with the corruption, poverty, and national decline they experienced throughout the 1990s. Yeltsin became increasingly unpopular; only the support of the Oligarchs kept him in power.