Economics, Eurasia, History, Policy, Politics

1990s: how Russia decided to go from communism to capitalism (part 1 of 6-part series)

The foregoing article is an excerpt from the third chapter of my book, “Grand Deception,” which I wrote in response to Bill Browder’s bestseller, “Red Notice” but also as a retort to the relentless demonization campaign against Russia and its leadership in the West. Browder, an investor and hedge fund manager who made his fortune in the 1990s Russia, describes his fascinating experience during that time. However, he almost entirely glosses over the broader context within which events played out. Instead, he offers the same terse explanation he had regurgitated countless times in his various presentations and speeches, and it goes like this: after the collapse of the USSR, the government of Russia decided to go from communism to capitalism.[1] They thought that the best way to do this would be by giving everything away practically for free through various privatization schemes. Very rapidly, they transferred the nation’s economic resources into private hands.

But the unusual aspect of this transfer was that the private hands that received Russia’s wealth were not the same ones that had built it up since there were no restrictions on who could participate in the privatization program. As a result, the crown jewels of the nation’s productive resources ended up in the hands of a small group of oligarchs, most of whom covertly represented the interests of various western financiers.

It was this great wealth giveaway that drew Browder to Russia when he discovered that “they were giving money away for free in Russia.” He arrived in Moscow in the early 1994 and spent $25 million of Salomon Brothers’ money to buy bundles of Russian privatization vouchers. In only a few weeks’ time, Browder’s $25 million portfolio was worth $125 million – a hefty 400% return on investment. Things like that don’t happen every day. In fact, they virtually never happen. How then, and why did they happen in Russia? Who decides to give away their country’s wealth nearly for free? And how is it that an American investor can parachute into Moscow, pick up $25 million worth of uncirculated U.S. Federal Reserve banknotes and buy up large stakes in choice Russian companies? Browder’s tale about Russia going from communism to capitalism is far too simplistic, and to more fully understand the extraordinary events he describes we need a more detailed analysis of their historical context.

Transition after the collapse of USSR

I told Chubais, ‘You are creating the conditions for a revolution.’ Chubais said, ‘You’re too sensitive. No need to think about the people. Even if 30 million die, new ones will be born. Thirty million didn’t find their place in the market.’Vladimir Polevanov, Chairman of the State Property Commission[2]

Beginning in the late 1970s and through 1980s, Soviet Union experienced an escalating economic and political crisis. By 1985 when Mikhail Gorbachev came to power, there was growing pressure to reform the system and free the economy from the shackles of state control. However, Gorbachev’s gradual and piecemeal approach failed to produce the hoped for results.

A more radical approach was necessary and toward the late 1980s, a firebrand nationalist leader Boris Yeltsin rose through the communist party ranks to become Gorbachev’s chief rival for executive power. Yeltsin had questionable loyalty to the Communist party and didn’t hesitate to upset its many vested interests in the Soviet system. In the summer of 1990 he urged Gorbachev to draw up a “500 days” plan to rapidly transition USSR’s system of public ownership and central planning to a capitalist market economy based on private property and entrepreneurship. To formulate such a plan, Yeltsin had put forth the 39-year old economist Grigori Yavlinsky who took on the assignment.

The plan proposed a set of neoliberal economic policies that included reducing government spending, abolishing price controls and legalizing private property. To undertake such a radical transition, the USSR needed very substantial financial aid from the leading Western powers. However, Gorbachev’s numerous requests for such aid were consistently turned down and he ultimately withdrew his support for Yavlinsky’s plan. The plan however had full backing from Boris Yeltsin. His push for radical reforms gained momentum in June of 1991 when he became president of the Russian parliament, and again after the August coup and counter-coup when Gorbachev was forced to resign as the Secretary General of the Communist Party and to cede his political authority to Yeltsin.

With Gorbachev and the old guard out of the way, Yeltsin wasted no time to push ahead with the reforms at breakneck speed. In November 1991, he assumed the role of Prime Minister and won the privilege[3] to implement the reforms through presidential decrees – even if such decrees would be illegal under Russian laws.[4] He appointed Yegor Gaidar as deputy Prime Minister and Minister of Economics and Finance, and Gaidar brought in Anatoly Chubais, a 36-year old economist from St. Petersburg. The new cabinet launched the transition program in January of 1992. The changes immediately plunged Russia into a dramatic crisis that would persist through the remainder of the decade to become the longest economic depression of the 20th century and the worst humanitarian disaster since World War II. In this environment, a group of well-connected oligarchs and foreign financiers looted the better part of Russia’s considerable wealth.

This tragedy was not simply a rash social experiment concocted by a group of corrupt politicians and their inept advisors. Russia’s transition to capitalism was planned and directed by certain power structures attached to the U.S. government, and executed through various western political and financial institutions led by the International Monetary Fund (IMF), World Bank, Federal Reserve Bank of New York, International Finance Corporation and a number of other non-governmental organizations and academic institutions,. Among the latter, Harvard University played a very prominent role, lending the project the prestige of its name as well as an important degree of intellectual legitimacy.

The Harvard connection

When Gorbachev commissioned Grigori Yavlinsky to produce the “500 days plan,” Yavlinsky had already been working on just such a plan with a group of Harvard University professors among whom were Jeffrey Sachs, David Lipton and Graham Allison. Allison was the founding dean of the JFK School of Government which from 1987 had been receiving CIA funding for research on intelligence and policy.[5] It is through this collaboration that Yavlinsky came to adopt the “shock therapy” for Russia in accordance with the economic reforms model developed by Jeffrey Sachs and David Lipton.

Harvard’s involvement with the Russian transition program was not limited to intellectual support: an entire brain trust of consultants and operatives associated with the university set out to direct and supervise the implementation of Russian reforms. Harvard’s operation in Moscow was run through the Harvard Institute for International Development (HIID) and directed by Andrei Schleifer, a 35 year-old Russian-born professor of economics. Schleifer was appointed to this post by his friend and mentor Lawrence Summers, then chief economist at World Bank and former Harvard professor. Summers, in turn was the protégé of Robert Rubin, another Harvard alumnus and Secretary of the Treasury under President Bill Clinton. In 1993, Clinton would appoint Summers as Under Secretary of the Treasury for International Affairs. Working under Rubin, Summers was the administration’s point man on Russia policy.

Among other prominent members of Harvard’s Russia task force were Marshall Goldman, the director of Harvard’s Russian Research Center who was a frequent visitor to the Soviet Union over several decades; Robert Hormats, former Assistant Secretary of State and associate at Goldman Sachs and Kissinger Associates; US Vice President Al Gore, and Jonathan Hay, a recent Harvard Law School graduate who would be appointed to manage HIID’s day to day operations in Moscow. The agency conveniently set up its Moscow offices right at the heart of Russia’s government bureaucracy, at the Council of Ministers building, enabling HIID’s executives to forge close ties with the key ministers, particularly Gaidar and Chubais. For its work during the four years from 1992 to 1996, HIID obtained $57.7 million from the U.S. Agency for International Development (USAID),[6] most of it by far without competitive bidding. It also helped disburse another $300 million of USAID grants to other contractors.[7]

1992: the shock therapy gets underway

Soviet leadership under Secretary General Mikhail Gorbachev was well aware of the necessity of reforming USSR’s economy and began to cautiously implement market reforms starting in the mid-1980s.[8] However, as gradual reforms failed to return the economy to growth, by 1991 Yeltsin had resolved to go with the western-prescribed shock therapy.

His government launched the program on the 2nd January of 1992 with a two-pronged attack on price controls and government spending. For decades, Soviet State Ministry of Central Planning (Gosplan) had determined prices for consumer and industrial goods. The abrupt termination of price controls for 90% of consumer goods and 80% of industrial goods produced an almost immediate 500% price jump. Within the year, inflation reached 2,500%. By early 1993, domestic oil prices increased 85-fold, making the cost of fuel for transport and agricultural machinery prohibitive.[9] Food production collapsed and Russian produce almost vanished from consumer markets. At the same time, Russian markets were open wide to unrestricted competition from foreign imports, further eroding domestic production. The government also cut social spending by 40% in the first quarter of 1992, including drastic reductions in defense spending, social services, and pensions[10] which were halved to about $30 per month, leaving pensioners to cope on $1 per day. Even at that, pensions were not paid regularly. Almost overnight, ordinary Russians found many of life’s necessities out of reach and millions of them faced hunger. Health services collapsed and an acute shortage of drugs and medical equipment appeared.

Ostensibly to counter inflation, the central bank stopped printing money and curtailed credit to firms, causing a severe contraction in money supply, forcing the Russian economy to grind along with only about 15% of currency it needed to operate. This liquidity crunch took place at the same time as prices of goods skyrocketed. Suddenly, nation’s enterprises were unable to pay their workers and suppliers. The debt that companies owed to one another and to the banks ballooned by 8,000% in the first half of 1992,[11] leading to a 20% contraction in industrial production and an 18% decline in the GDP. Millions of people received no wages for months and even years,[12] while much of the working population received compensation in goods like lightbulbs, macaroni, jackets, or other products that they had to exchange in the streets for things they needed.

The central bank further kicked the dying economy by increasing the interest rates it charged to member banks from 2% in late 1991 to more than 80% in April 1992. It also removed all restrictions on interest rates banks could charge to their clients.[13] This made it almost impossible for Russian firms to finance their operations or to invest in modernizing of the industry. As a result, business investment collapsed by nearly 50 percent in 1992 alone. [14]

With the economy in a dramatic contraction, hyperinflation in full swing and country’s enterprises facing a severe cash shortage, the government’s tax receipts collapsed. As the chief of Russia’s Chamber of Accounts Venyamin Sokolov articulated it, “You can tie our businessmen up, you can imprison them and beat them to near unconsciousness and still they will pay no tax, because they have no – and I repeat – no money.”[15] The consequence was that Russia’s tax treasury went broke and the government had to borrow money to finance its operations. Following the counsel of its Western advisors, Yeltsin’s government borrowed funds by selling three-month ruble treasury notes to private investors at interest rates that started at 30% but rapidly rose well beyond 100%. This was unnecessary and spectacularly irrational; Russia’s natural resources and government’s monopolies were capable of generating enough economic rent to comfortably fund government operations. Short-term debt financing only made sense as an expedient to extract massive interest income from Russia’s government: most of the bonds by far were bought domestically by private investors with money lent to them by the IMF. As Leonid Grigoriev, Russia’s first envoy to the World Bank explained, “Of course, the government was to return this money and that is why the yields on 3-month paper reached as much as 290%. … It had nothing to do with the market and therefore such yields can only be understood as a payback, just a different method.[16] Russian government bonds or the “GKIs,” became so remunerative that they attracted a veritable investor feeding frenzy, not only among the local banking oligarchs but also the Harvard Management Corporation and even many of the staffers of the HIID, IMF and other western agencies.

Voucher privatization

With the economy in disarray, agricultural production devastated, inflation soaring out of control and ordinary Russians struggling to get by, the stage was set for the second phase of shock therapy: the speedy privatization of state owned enterprises. Funded with $325 million of US taxpayer dollars,[17] the voucher privatization scheme was approved in the summer of 1992 and the distribution of vouchers began on 7th October of the same year.


Ten thousand rubles privatization voucher.

To give the privatization program a semblance of fairness and transparency, some 150 million vouchers were distributed to all Russians. But the actual transfer of ownership was apparently rather less generous than what was publicly disclosed and advertised. Anne Williamson who lived in Russia since 1987 as a freelance reporter gave a detailed account of how exactly the voucher privatization was implemented:[18]

“What GKI did was to value all state property at 150 billion rubles at 1991 prices and to divide that figure by a population of 150 million, leaving a share worth 10,000 rubles to each individual, the voucher’s face value. Two thirds of the 150 billion whole was immediately excluded from privatization entirely. The remaining third was then divided again. Again, one half of that third was excluded. The remaining half of the third was the property privatized in 1992-94, but it too was divided.

Small property – mostly municipal holdings – was auctioned for cash. Only what remained of the last division was subject to voucher privatization as it had been defined. However, of any single property privatized by voucher, 46% went to workers, 5% to management, 29% was sold at cash auctions and the remaining 20% – at a minimum – was left in the state’s hands, meaning that at the end of the privatization process the state’s largest shareholding dwarfed others’ claims and therefore was the controlling shareholder of any “privatized” Russian asset.

The program had indeed put in place an expensive, time-consuming, distracting and destructive paper chase at the conclusion of which the government stood still mighty as the largest shareholder in any single allegedly privatized enterprise.”

With regard to the vouchers distributed to ordinary Russians, the government made no effort to educate them about the vouchers or what they represented and most people were unsure what they should do with them.[19] As inflation steadily eroded the ruble’s purchasing power, the vouchers’ 10,000 ruble face value made it seem like they were rapidly losing value and most Russians were prepared to exchange them for a few dollars, a bit of food or a bottle of vodka. Moreover, the way these vouchers could be converted to actual dividend-paying shares of Russian firms was conceived to facilitate abuse and fraud. Hundreds of voucher investment funds sprang up and deployed a small army of agents across Russia hustling the people to sell their vouchers. In this way they collected tens of millions of vouchers, bringing them back to Moscow where wealthy investors and their agents with hundreds of millions of newly printed American banknotes stood ready to buy them wholesale for token sums of money. By the end of 1994, large stakes in 65% of all officially registered companies were transferred into private hands. A handful of oligarchs appropriated the bulk of it, while top managers of many enterprises and foreign investors like Bill Browder took most of the rest.

Voucher privatization was followed by a long and often violent struggle over enterprise assets and financial flows. Where new owners could gain control over management, rather than developing their firms and investing in operations, they resorted to asset stripping and transferring their loot into foreign bank accounts. Around $25 billion per year was taken out of Russia in this way.[20]

Loans for shares scheme

While voucher privatization transferred company shares to private investors, the government became the controlling shareholder in all of them, creating a legal and political risk for the oligarchs’ long-term interests. To remedy this situation, they cooked up the so-called loans-for-shares scheme. Supposedly a brainchild of Anatoly Chubais, this scheme was organized in 1995 and sold to the public as government’s solution to short-term financing pressures. In reality, it was a massive transfer of ownership in Russia’s most valuable resources to a small group of oligarchs known in Russia as “semibankirschina,” or the group of seven bankers. These resources included giant deposits of oil and natural gas, gold, silver, platinum and diamond mines, world’s largest paper, steel, automobile and aerospace factories and electric and telecom monopolies.

Under the scheme, banks like Vladimir Potanin’s Oneximbank, Vladimir Gusinsky’s Most Bank and Mikhail Khodorkovsky’s Bank Menatep loaned money to the government and received shares in government-owned companies as collateral. The government was supposed to repay the loans after about three years, but if it failed to do so, the banks could auction off the company shares in their custody and split any profits with the government. However, because the very banks that held company shares in their custody also organized the auctions and controlled the bidding process, they were able to win the auctions in almost every case, buying up companies at prices that were barely higher than the minimum initial bids. In this way, Khodorkovsky took 78% ownership in the oil giant Yukos. With oil reserves the size of Kuwait, Yukos was worth at least $5 billion, but Khodorkovsky bought it for only $310 million. Boris Berezovsky walked away with Sibneft, another oil giant worth about $3 billion, for only $100 million. For $171 million, Vladimir Potanin became majority owner of Norilsk Nickel which controlled about a third of the world’s Nickel reserves.[21] Not long after these auctions, Norilsk Nickel’s annual profits reached $1.5 billion.[22] Potanin also took ownership of the oil giant Sidanco for $130 million. Only two years later, the firm was valued at $2.8 billion in international capital markets. Besides the seven bankers, Harvard Management Company (HMC)[23] and George Soros were the only other investors allowed to participate in the loans-for-shares auctions.[24]

To add insult to injury, it turned out that the bankers did not even use their own money to buy the companies – they bought them with public funds. Namely, before the auctions, several ministers in Boris Yeltsin’s cabinet diverted large sums of government money from the state banks into the private banks owned by the oligarchs who used it as collateral to issue themselves credit to buy firms through auctions they rigged for their own benefit. As an example, Khodorkovsky’s Bank Menatep obtained the money earmarked to fund the Russian Academy of Science. When Menatep was buying Yukos, Academy of Science employees stopped receiving their salaries.[25]


While Khodorkovsky’s Menatep bank handled the public money meant for funding of the Russian academy of sciences, scientists went unpaid. Protest signs read: “A hungry physicist is a SHAME for Russia” and “Give scientists the salaries that they are OWED.” (Photo credit: Nina Kouprianova)

Representatives of Western powers and financial institutions were well aware of the larceny perpetrated by the oligarchs and Yeltsin government, but they raised no objection. During his final trip to Moscow in the early 1995, Jeffrey Sachs himself warned Western officials about this blatantly corrupt scheme, but it appeared that none were moved by his warnings. He later wrote: “I was stunned by the obtuseness of the response, from the IMF, and OECD visiting mission, and later from very senior U.S. officials, including Larry Summers.[26] Nobody was inclined to interfere with this brazen theft of Russia’s wealth, raising the suspicion that the process was intended to play out as it did. Through the whole privatization process from 1992 through 1996, the seven oligarchs gained control of 60% of the Russian economy.[27] At the same time, Russian government’s proceeds from privatization amounted to about 0.15% of state revenues[28] while the vast majority of ordinary Russians found themselves left out with their hopes for a better life after communism forever shattered.

For sources and footnotes, please scroll below.


Alex Krainer is a hedge fund manager and author. His book, banned by Amazon in September 2017 is now available in pdf, kindle, and epub formats at the following link “Grand Deception: Truth About Bill Browder, the Magnitsky Act and Anti-Russian Sanctions.Paperback version is now available here. Alex also wrote one book on commodities trading.



[1] This phrase, “going from communism to capitalism,” became something of a mainstay talking point in the western media to explain what was going on in Russia as though this going was of such great value that it justified the unbelievably irrational and destructive conduct of the Russian government and disastrous advice of its western consultants.

[2] Polevanov interviewed in the film, “The Rise of Putin and the Fall of the Russian Jewish Oligarchs” by Alexander Genteleev.

[3] This extraordinary privilege was granted to the president by the People’s Deputies Congress decision No. 1831-1 on the Legal Support for the Economic Reform.

[4] For example, on 29 January 1992, Yeltsin issued the Presidential Decree No. 65 which simply stated that, “Everyone has the right to trade anywhere in whatever they wish.” (Engdahl, How ‘shock therapy’ has ruined Russia 1993)

[5] This is according to CIA’s own unclassified documents (Lundberg 1995)

[6] USAID obtained these funds from the $350 million aid package authorized by President George Bush under the 1992 “Freedom for Russia and the Emerging Eurasian Democracies and Open-Market Support Act.”

[7] (Wedel 1998)

[8] An important and fairly radical part of those efforts was the 1988 banking reform which triggered a wave of creation of cooperative and commercial banks, starting in August of that year. (Fedorov 1989, vol. 1, no. 4)

[9] (Engdahl, How ‘shock therapy’ has ruined Russia 1993)

[10] (Lindgren 1999)

[11] (Engdahl, How ‘shock therapy’ has ruined Russia 1993)

[12] (Williamson, Russia’s Fiscal Whistleblower 1998)

[13] (Engdahl, How ‘shock therapy’ has ruined Russia 1993)

[14] After the 50% decline in 1992, business investment continued contracting: 12% in 1993, 23% in 1994, and 13% in 1995 (Gerber and Hout 1998)

[15] (Williamson, Russia’s Fiscal Whistleblower 1998)

[16] Cited by journalist Anne Williamson before the Committee on Banking and Financial Services of the U.S. House of Representative on 21 Sep. 1999. (Sailer 2014)

[17] This is according to Anne Williamson September 21, 1999 testimony before the Banking and Financial Services Committee of the U.S. House of Representatives. (Sailer 2014)

[18] The paragraph cited is from Willamson’s book “How America Built the New Russian Oligarchy” which was widely circulated and read in manuscript in the late 1990s, but which has meanwhile become unavailable either online or from any booksellers. The paragraph was quoted by journalist Bob Djurdjevic on his website Truth In Media. (Djurdjevic 1998)

[19] To the extent that his narrative is true, it was for this reason that Bill Browder even learned about the opportunities in Russia. Apparently, managers of one of the large state companies (the Murmansk Trawler Fleet) hired Browder who at the time was working for Salomon Brothers and paid a $50,000 consulting fee so that he could tell them whether they should buy their company, which owned $1 billion worth of ships, for $2.5 million.

[20] (Hudson 1999)

[21] (Taibbi 1997)

[22] (Klein 2007)

[23] Harvard Management Company invested on behalf of the Harvard Endowment.

[24] (Wedel 1998)

[25] (Taibbi 1997)

[26] (Sachs 2012)

[27] (Williamson, Don’t Cry for Boris Yeltsin 2007)

[28] (Lindgren 1999)


One thought on “1990s: how Russia decided to go from communism to capitalism (part 1 of 6-part series)

  1. Pingback: Grand Deception: the 1990s raid on Russia | The Naked Hedgie

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