European Affairs

Russia today has reverted to the brutal impulses of its Soviet precursor in Chechnya. It is a country in steep social and demographic decline with a life expectancy the lowest in 40 years. IMF loans have been halted due to lack of economic reform.

And yet, Mr. Gustafson's new book Capitalism Russian-Style - which seeks to evaluate Russia's progress towards a free market economy from the collapse of the Soviet Union in 1991 to the financial crisis of August 1998 - finds some reason for hope. "What the crisis revealed above all was how dramatically Russia had changed over the course of a decade. For better or worse a revolution had begun in Russia," the author writes.

One may or may not agree with Mr. Gustafson's interpretation. Either way, however, he has produced a meticulous, vivid and highly readable account of the travails of economic reformers like Yegor Gaidar and Anatoly Chubais under President Boris Yeltsin's erratic leadership as they took on the Herculean task of transforming a 70-year-old failing communist economy into a modern capitalist one, from privatization of state-owned enterprises to the building of a legal framework. Having travelled to Russia throughout the period of the 1990s, Mr. Gustafson was a first-hand witness to the events.

The reformers had to start from scratch. Unlike Eastern and Central Europe, Russia had no history of working market institutions to draw on, no culture of entrepreneurship, having gone straight from almost medieval feudalism to collectivism and the communist leap towards industrialization. In this context, expectations in the early 1990s that capitalism would develop spontaneously in the mere absence of communism proved seriously naive. The decade of the 1990s, as Mr. Gustafson writes, can either be looked at as the story of a failure, a false start, or a period of transition and creation in which a nascent new order began taking shape. In both scenarios, the financial collapse of August 1998 was a moment of truth for Russia's political elite as well as its nouveau "entrepreneurial" class, which lost fortunes.

It became clear that Russia's progress had been vastly overestimated. The government gave up defending the ruble, halted debt repayment and admitted to the mysterious disappearance of billions of dollars in IMF money and international aid.

Yet, social collapse was averted precisely because of the backwardness of the Russian economy; the barter system that prevented economic development also insulated it from the ruble crisis. "The chief casualty of August 1998 was a state of mind," he writes, not economic reform itself.

Meanwhile, Mr. Gustafson argues, the wild 1990s had also seen the building of private institutions, and the foundations of a new economy, which responds to the laws of the market, however imperfectly at this time. Furthermore, the changes that have taken place are so deep as to be irreversible and will continue to move Russia towards a capitalist model.

Ultimately, however, the question is whether there is or can be such a thing as "capitalism Russian-style." "If it stays on the road to capitalism, Russia will no more resemble the models of liberal theorists than do, says, the capitalist systems of Brazil, Mexico, or for that matter Italy and Japan," Mr. Gustafson writes. Perhaps, but how elastic should the definition of capitalism be? "Capitalism Russian-style" sounds a bit like "market economics with Chinese characteristics," as coined by Deng Xiaopeng.

This does not exactly look like what we are used to thinking of as capitalism here in the West, where private property, contract law, working equities markets and banks, systems of supply and demand and a host of other features add up to functioning market economies. Fudging definitions can only go so far. There was, for instance, nothing democratic about the German Democratic Republic, except the name; like other parts of the Soviet bloc, the East Germans had plenty of elections, but no choice. The vast majority of Russians today have little choice either, economic, political or otherwise.

In the foreword, Mr. Gustafson's colleague and co-author in other contexts, Daniel Yergin, writes that "Russia's second revolution" has brought "Russia back into the mainstream of western nations." That it is there now - or ever was - may be quite a debatable proposition.


This article was published in European Affairs: Volume number I, Issue number I in the Winter of 2000.