When the Soviet Union disbanded in 1991, there was a disorderly transition to a market economy that gave the advantage to a small number of well-placed bureaucrats. The Soviet economy consisted almost entirely of industries owned and operated by the government. In the early 1990s, these were sold at drastically low prices, often to the high-level Soviet bureaucrats who had run them in the old command economy. The hope was that this process of privatization would enable industries to operate more efficiently in a competitive “free market” setting. Two and a half decades later, there have been some gains in efficiency and profitability, mostly only in a few key export-oriented industries. The most widespread effect of privatization was to make a small number of bureaucrats fabulously rich very quickly. Many became what are known as oligarchs—individuals who are so wealthy and politically connected that they wield enormous, often clandestine power. These oligarchs continue to exercise power in government and private enterprise.

The transition to a market economy took place so rapidly that it was known as “shock therapy.” A wide range of policies attempted to revitalize the sluggish economy by moving as quickly away from the old command economy as possible. Today, approximately 65 percent of Russia’s economy is in private hands, a dramatic change from the virtually 100 percent state-owned economy of 1991.

Unfortunately, shock therapy came at steep cost for many Russians. A major part of the reforms was the abandonment of government price controls that once kept goods affordable to all. Instead, newly privatized businesses determined prices in the environment of great uncertainty created by shock therapy. This led to skyrocketing prices for the many goods that were in high demand but also in short supply. While a few people became rich, many lost their savings because of inflation and could barely pay for basic necessities such as food. Toward the end of the 1990s, as opportunities opened and competition developed, the supply of goods increased and prices fell. But even today, the effects of shock therapy are still being felt. For example, Russian economists estimate that even though average incomes have grown by 45 percent since 1991, almost all of this gain has gone to the wealthiest 20 percent of the population; the bottom 20 percent of the population is earning about half what they did in 1991.

Natural gas and crude oil have emerged as the region’s most lucrative exports, introducing a new wave of globalization and fossil fuel–dependent economic development. Although control of Russia’s oil and gas resources still lies largely in the hands of the Russian government, the struggle to control Central Asia’s oil and gas resources is ongoing, involving multinational corporations and many foreign governments (Figure 5.14).

By the year 2000, after an initial decade of economic instability, rising revenues from oil and gas began to finance Russia’s economic recovery. In response, Russia’s central government tightened control over the entire oil and gas sector. Today, Russia is the world’s largest exporter of natural gas, and taxes on energy companies fund more than half of the federal budget. While this does guarantee that at least some of the revenues from the new fossil fuel–based industries benefit Russia’s population, the remaining profits are concentrated in the hands of a few oligarchs.

Russia’s relationship with Europe is intertwined with the lucrative oil and gas trade. The majority state-owned Gazprom is Russia’s largest company as well as the world’s largest gas company, and because Gazprom is state controlled, the Russian government can use the company to promote the country’s geopolitical interests. Russia occasionally tries to use its gas exports to manipulate the politics and economies of Ukraine, Belarus, and countries in Central Europe. These countries are all much more reliant on gas from Gazprom than is the rest of Europe. EU member states receive about 25 percent of their natural gas from Gazprom, with Central Europe much more dependent on Gazprom than other parts of the EU. Russia is also very reliant on this trade; approximately 30 percent of Gazprom’s profits come from sales to the European Union.

In 2009, Russia curtailed Ukraine’s access to Gazprom’s gas in a dispute over prices and as a response to Ukraine moving closer to the EU rather being a Russian ally. Because pipelines that supply Europe with gas run through Ukrainian territory, gas shortages also developed in parts of Europe. The EU became concerned about its reliance on Russian energy and is now rapidly turning to other sources of fossil fuels as well as renewable energy sources. The political dimensions of these issues are discussed further later in this chapter.

Central Asia has yet to find stability because a tug-of-war has evolved between Russia and foreign multinational energy corporations over the right to develop, transport, and sell Central Asian oil and gas resources. The new Central Asian states do not have the capital to develop the resources themselves, yet individuals and special interests in the Central Asian countries are reaping enormous financial rewards from selling the rights to exploit oil and gas to outsiders.

Because Central Asia is landlocked, the only way to get oil and gas from there to world markets is via pipelines (see Figure 5.14), the routes of which have become a major source of contention. Russia, the United States, the European Union, Turkey, China, and India have all developed or proposed various routes. A 1900-mile (3000-kilometer) pipeline from the Caspian Sea to China serves the growing demand for energy in China. The United States maintains a military presence to protect its interests in countries such as Georgia and Uzbekistan, both of which, along with Turkey, have pipelines to Europe. Russia has built pipelines that traverse its own territory and reach into Europe. Each of these parties has made numerous efforts to encourage Central Asian countries to use their pipelines instead of those of their competitors. 108. ENERGY REVENUES AND CORRUPTION INCREASE IN RUSSIA

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Russia’s Relations with the Global Economy Both the European Union and the United States want to ensure that Russia’s oil and gas wealth does not finance a return to the hostile relations of the Cold War. For this reason, Russia was invited to join the World Trade Organization (WTO) and the Group of Eight (G8), an organization of eight affluent countries with large economies.

Looking to form an economic counterweight to the United States and the European Union, Russia has recently been meeting with Brazil, India, and China to form a trade consortium known as BRIC. All four countries are large, populous, and have had spectacular economic growth over the last decade, making the alliance a symbol of the growing power of the “developing” world. Of the four, Russia’s economy is the slowest growing and arguably the least diverse in the group due to its dependence on fossil fuel exports, but it is also the wealthiest on a per capita basis.

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Institutionalized Corruption The cost of doing business in Russia is affected by a high level of corruption. In 2013, the organization Transparency International rated Russia the most corrupt of the BRIC countries and among the most corrupt in the world. With the exceptions of Belarus, Moldova, Georgia, and Azerbaijan, all countries in this region were rated as more corrupt than Russia. Civil servants and the police often expect businesses to offer bribes to receive licenses and to avoid other regulatory hurdles. This affects large corporations and small entrepreneurs alike.

Even those who make it through the labyrinth of setting up a business must then face protection racketeers, as organized crime has become a fact of life during the post-Communist era. Many oligarchs have become closely connected to the Russian Mafia, a highly organized criminal network dominated by former KGB (Russia’s intelligence agency during the Cold War, now known as the Federal Security Service, or FSB) and military personnel who control the thugs on the streets. The Russian Mafia has extended its influence into nearly every corner of the post-Soviet economy, especially in illegal activities and the arms trade. These crime syndicates have also developed international networks through which they control illicit activities abroad, especially in Europe.

The Growing Informal Economy A large share of the economic activity in the region takes place in the informal sector. To some extent, the new informal economy is an extension of the old one that flourished under communism. The black market of that time was based on currency exchange and the sale of hard-to-find luxuries. In the 1970s, for example, savvy Western tourists could enjoy a vacation on the Black Sea paid for by a pair or two of smuggled Levi’s blue jeans and some Swiss chocolate bars. Today, many people who have lost stable jobs due to privatization now depend on the informal economy for their livelihood.

Workers in the informal economy tend to be young, unskilled adults; retirees on tiny pensions; and those with only a low level of education. The majority of these workers operate out of their homes by selling, among other things, cooked foods, vodka made in their bathtubs, and clothing and electronics that have been smuggled into the country. The World Bank has estimated that the informal sector makes up about 40 percent of the Russian economy. In the Caucasian countries, the number is as high as 50 to 60 percent. Such large percentages indicate that people may actually be better off financially than official GDP per capita figures suggest.

Despite the fact that the informal economy helps people survive, it is not popular with governments. Unregistered enterprises do not pay business and sales taxes and usually are so underfinanced that they tend not to grow into job-creating formal sector businesses. In many cases, informal businesspeople must pay protection money to local gangsters (the so-called Mafia tax) to keep from being reported to the authorities.

Unemployment and the Loss of Social Services Since becoming privatized, most formerly state-owned industries have cut many jobs in an attempt to compete against more-efficient foreign companies. Losing a job is especially devastating in a former Soviet country because one also loses the subsidized housing, health care, and other social services that were often provided along with the job. The new companies that have emerged rarely offer full benefits to employees. There is little job security because most small private firms appear quickly and often fail. Discrimination is also a problem, given the absence of equal opportunity laws. Job ads often contain wording such as “only attractive, skilled people under 30 need apply.”

Unemployment figures for the region vary widely. Since 2013, official unemployment rates have been under 6 percent in Russia, and under 9 percent in Ukraine. In Belarus, unemployment is officially only about 1 percent, but actual unemployment may be higher because many remaining state-owned firms cannot pay employees still listed as workers. Many people do not bother to register as unemployed because of the absence of unemployment benefits. The rate of underemployment, which measures the number of people who are working too few hours to make a decent living or who are highly trained but are working at low-paying jobs, is even higher in all of these countries.

Across most of the region, agriculture is precarious at best, either hampered by a short growing season and boggy soils or requiring expensive inputs of labor, water, and fertilizer. Because of Russia’s harsh climates and rugged landforms, only 10 percent of its vast expanse is suitable for agriculture. The Caucasus mountain zones are some of the only areas in the region where rainfall adequate for agriculture coincides with a relatively warm climate and long growing seasons. Together with Ukraine and European Russia, this area is the agricultural backbone of the region (Figure 5.15). The best soils are in an area stretching from Moscow south toward the Black and Caspian seas, and extending west to include much of Ukraine and Moldova. In Central Asia, irrigated agriculture is extensive, especially where long growing seasons support cotton, fruit, and vegetables.

Changing Agricultural Production During the 1990s, agriculture went into a general decline across the entire region. In most of the former Soviet Union, yields dropped by 30 to 40 percent compared to previous production levels. This was due mostly to the collapse of the subsidies and internal trade arrangements of the Soviet Union. Many large and highly mechanized collective farms were suddenly without access to equipment, fuel, or fertilizers. Since that time, agricultural output has rebounded but even today it remains below Soviet levels. Russia’s commercial agricultural sector is still characterized by many large and inefficient farms, most of which are now run by corporations. Russians are now heavily dependent on “homegrown” food—small household plots, gardens, and family farms that produce 59 percent of the total agricultural output on only 20 percent of the arable land.

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In Central Asia, agriculture has been reorganized with more emphasis on smaller, food-producing family farms. Grain and livestock farming (for meat, eggs, and wool) are increasing. Production levels per acre and per worker also are increasing. China, through the Asian Development Bank, has provided assistance in reducing the use of agricultural chemicals, which were used extensively during Soviet times.

Farmers in Georgia, favored with warm temperatures and abundant moisture from the Black and Caspian seas, can grow citrus fruits and even bananas; they do so primarily on family, not collective, farms. Before 1991, most of the Soviet Union’s citrus and tea came from Georgia, as did most of its grapes and wine. Georgia still exports some food to Russia, but because of political tensions between the two countries, Georgia is increasing the amount of food and wine it sells to Europe and other markets outside this region.