Cause of Inflation in Russia During the Early 1990s

Subject: Economics
Pages: 2
Words: 377
Reading time:
2 min

The main reason for booming inflation in Russia in early 90s as the case-study suggests was the transition to market economy which required deregulation of economy and transformation of planning economy into viable and effective economic governance. As abovementioned case-study further suggests ‘the central element of this plan was an end to price controls…Once controls were removed…prices surged’. Inflation was rising on a rate of about 30% every month.

The inflationary forces were strong and aggressive that its annual rate amounted 3000% in 1992 and 900% in 1993. The heritage of Soviet Union regulation of prices and significant deficit of FSMG products during Soviet era led to accumulation of much amount of rubles in Russian citizens’ hands. After the liberalization of prices they threw large amount of rubles to the market which caused booming inflation. Besides this privatization and government’s subsidizing money-loosing enterprises led to considerable budget deficit that couldn’t be bridged by ever decreasing taxes.

For instance as the case-study on Russian Ruble crisis suggests ‘in the first quarter of 1992, the budget deficit amounted to 1.5% of the country’s GDP. By the end of 1992 it had risen to 17 %’ (p. 402). As the government could not resolve this problem using regulating measures it opted for the simplest decision – printing money which in its turn increased the level of inflation even more. As a consequence ruble considerably fell against the dollar and other currencies. Ruble fell from 125 to 1500 rubles to dollar.

The reason for hyperinflation in Russian economy is evident. First of all, market policy that was used by Russian government may be called ‘shock therapy’ which suggests direct and rapid privatization and deregulation. These measures proved to be inefficient to both social and economic sector resulting in deprivation and pauperization of Russian people and declining of production that is total recession of economy.

If we ask what measures should have been taken to prevent these consequences the most reasonable answer is gradual transition to market economy which means thorough evaluation of risks and creating comprehensive privatization, rate, budget and monetary policies. Instead of following advices of IMF and American advisors such as Richard Pipes Russian government had to be more responsible and balanced.