In January 1992 the Yeltsin government removed price controls on most items - the first essential step towards a market-based economy. The immediate goal of getting goods into the stores was achieved, and the long queues typical of the Soviet era disappeared. However, inflation soared and became a daily concern for Russians, whose purchasing power declined as prices for even some of the most basic goods rose. The government was forced to print money to finance the budget and to keep failing factories afloat. By 1993 the budget deficit financed by the printing of money consumed one-fifth of GDP. Consequently, people lost faith in the value of the ruble and started to use US dollars instead. Inflationary pressures were exacerbated by the establishment of a "ruble zone" when the Soviet Union collapsed: many of the former republics continued to issue and use rubies and receive credits from the Russian Central Bank, thereby further devaluing the ruble. In the summer of 1993 the Russian government pulled out of the ruble zone, effectively reducing Russian influence over many of the former Soviet republics.
During the Soviet era the factory had been not only a place of work but often also a source of social services, such as child care, holidays, and housing. If the government allowed many industries to collapse, it would have not only to provide relief for unemployed workers but also to guarantee a whole array of social services - a responsibility it was in no position to assume. Yet the inflation caused by keeping factories afloat undermined popular support for both Yeltsin and economic reform, as many Russians struggled to survive. Factories resorted to paying their workers and their creditors in kind, creating a barter economy. It was not uncommon for workers to go months without being paid or to be paid in, for example, rubber gloves or crockery, either because they made such things themselves or because their factory had received them as payments from its debtors. Meanwhile street markets sprang up where people tried to sell their personal possessions in a desperate effort to maintain their incomes.
In 1995 the government moved to resolve the crisis and end the misery. With loans from the International Monetary Fund (IMF) and the proceeds from the sale of oil and natural gas, it fixed the ruble's exchange rate at a level that the Russian Central Bank was committed to defend. Inflation fell and the economy started to stabilize. Yet the government continued to borrow money on domestic and foreign markets while avoiding serious structural reforms of the economy. It failed to establish an effective tax system, clear property rights, and a coherent bankruptcy law, but continued to support failing industries. As a result the ruble exchange rate proved increasingly expensive to defend, and became the target of speculators. In 1998 the ruble collapsed, and the government defaulted on its debts amid a growing number of bankruptcies. The ruble eventually stabilized and inflation diminished, but living standards hardly improved for most Russians, though a small proportion of them became very wealthy. Moreover, any improvements were confined to Moscow, St Petersburg, and some other urban areas; elsewhere, vast tracts of Russia were gripped by economic depression.
Another element of economic reform was shifting Russian industry into private hands. The reformists hoped that the threat of a return to communism would dwindle once a Russian capitalist class had developed, and believed, like many western economists, that the economy could recover only if enterprises were privatized and then left to fight for survival. As well as allowing privately owned industrial and commercial ventures to start up (using both foreign and domestic sources of investment), the government moved to sell state-owned enterprises to private owners. Initially, the government issued to each citizen a voucher worth 10,000 rubles: Russians could invest their entire vouchers, sell them, or use them to bid for additional shares in specific enterprises. However, the average Russian did not benefit from this rather complicated scheme. By the end of 1992 some one-third of services and trade enterprises had been privatized.
In a second wave of privatization in 1994-5, much of Russian industry was sold at knock-down prices to the friends of "the Family", meaning Yeltsin and his daughter Tatyana Dyachenko and their allies in the government. Natural resource companies were sold at prices well below those recommended by the IMF. From this process emerged the "oligarchs", individuals who, because of their political connections, controlled huge segments of the Russian economy. Many oligarchs bought factories for almost nothing, stripped our and sold their assets, and then closed them, creating huge job losses. By the time Yeltsin left office in 1999, most of the Russian economy had been privatized.
The stripping of the factories played a major role in the public's disenchantment with the development of capitalism in Russia, To many Russians, it seemed that bandit capitalism had emerged. Most people had suffered a fall in living standards, the social services had disintegrated, and the country was engulfed by a wave of crime and corruption, Yeltsin's popularity plummeted.
Ethnic Relations and Russia's "Near-Abroad"
Post-Soviet Russia emerged with formidable ethnic problems. Many of the autonomous ethnic regions that had been part of the Russian empire since before the 1917 Revolution wanted to escape Russian hegemony, and ethnic Russians made up less than four-fifths of the population of the Russian Federation. The term rossiyanin was used to denote a citizen of the Russian Federation and was not given any ethnic Russian connotation. However, a committee set up to construct a Russian identity to rally people around the new Russian Federation eventually concluded that national identity could emerge only from the grass roots, and history had shown that attempts to impose an identity from above led to an authoritarian or totalitarian state. The Russian Orthodox Church re-established itself as a force in the moral guidance of reborn Russia, but many minority groups observed religions other than Christianity, notably Islam.
During the Yeltsin years, Russia's numerous administrative regions sought greater autonomy. For example, Tatarstan negotiated additional rights and privileges. The republic of Chechnya declared independence in 1991, but Russia refused to accept the declaration. Chechen nationalism was based on the struggle against Russian imperialism since the early nineteenth century and the living memory of Stalin's massive deportations of the Chechen population in 1944 that had resulted in the deaths of a large segment of the population. In late 1994 Yeltsin sent the army into Chechnya in the aftermath of a botched Russian-orchestrated coup against the secessionist president, Dzhokhar Dudayev.
There were fears that if Chechnya succeeded in breaking away from the Russian Federation, other republics might follow suit. Moreover, Dudayev's Chechnya had become a source of drug dealing and arms peddling. In 1995 Russia gained control of the capital, Grozny, but in 1996 Russian forces were pushed out of the city. Yeltsin, faced with a forthcoming presidential election and great unpopularity because of both the war and economic problems, had General Aleksandr Lebed sign a ceasefire agreement with the Chechens. The Russians subsequently withdrew from the republic, postponing the question of Chechen independence.
When the Soviet Union collapsed, the Commonwealth of Independent States was established to serve as a forum for the former Soviet republics (which Moscow now called the "near- abroad"). The CIS had its origins on December 8, 1991, when the elected leaders of Russia, Ukraine, and Belarus signed an agreement forming a new association to replace the crumbling USSR. The three Slavic republics were subsequently joined by the Central Asian republics of Kazakhstan, Kyrgyzstan, Tajikistan, Turkmenistan, and Uzbekistan, by the Transcaucasian republics of Armenia, Azerbaijan, and Georgia, and by Moldova. (The remaining former Soviet republics of Lithuania, Latvia, and Estonia declined to join the new organization.) The Commonwealth formally came into being on December 21, 1991, and began operations the following month with the city of Minsk in Belarus designated as its administrative centre.