Moscow, December 25, 1991

Throughout his first term Yeltsin is tormented by the cruel impact on people of the change from communism to capitalism. After January 2, 1992, when prices are freed, the rise in prices far exceeds the predictions of IMF economists. Hyperinflation wipes out life savings, turning millions of Russians into paupers and stoking discontent and resentment. Free for the first time in decades to sell what they like, lines of people appear on Moscow streets from every walk of life offering household items from spare shoes to ornamental clocks to make ends meet. With an insufficient money supply to meet everyday needs, conditions deteriorate. Crime increases, salaries go unpaid, and the gap between rich and poor widens. The birth rate falls, and the death rate rises.

Every sector of society feels the pain. Farms and factories lose their subsidies and cannot buy raw materials. In the first six months of rampant capitalism national income falls 20 percent, creating pressure on the Yeltsin team to reverse course. When Deputy Prime Minister Yegor Gaidar brings in a single exchange rate, the result is a collapse of the ruble and a huge demand for U.S. dollars to protect against inflation.

In March 1992, agitated by rumors of a global conspiracy to strangle Russian industry by liberalizing raw material prices, the Russian parliament blocks a plan to free domestic oil prices. Entrepreneurs who have acquired export licenses are able to continue buying Russian oil for next to nothing and sell it abroad for dollars. It is the start of a process that will lead to the emergence of the oligarchs.

Privatization minister Anatoly Chubais ends the state monopoly in property ownership with the largest privatization program in the history of the world. Ownership shares given to factory workers under privatization laws drawn up in collaboration with the International Finance Corporation in Washington are snapped up by industrial directors, most of them former stalwarts of the party, who become wealthy capitalists overnight. (E. Wayne Merry, head of the U.S. embassy political section from 1991 to 1994, complains to Washington that America’s “evangelical” attempt to remold Russia in its own image is enabling the rise of the oligarchs and initiating an era of crime and economic destruction.) Many of the new rich send their money abroad in hard currency for safekeeping. In the first two years of Russian independence, the Central Bank of Russia estimates that the flow of capital out of the country reaches $100 billion, more than the combined total of inward investment and international aid.

The nouveau riche gain a reputation for throwing their money around, spawning new anecdotes: A “New Russian�� asks another how much he paid for his Rolex. On being told $5,000, he retorts scornfully, “I know where you can get one for $6,000.” Another anecdote concerns an IMF official who moans that “everything the communists told us about communism was a lie. Unfortunately, everything the communists told us about capitalism turned out to be true.” One of the first Russian billionaires is Yelena Baturina, who runs a construction company. She is the wife of Yury Luzhkov, who becomes Moscow’s mayor in 1992 and oversees a two-decade building boom.

The common Russian perception of Yeltsin’s economic team is expressed by Alexander Solzhenitsyn, who returns from exile in the United States three years after the end of the Soviet Union. The writer and Nobel Laureate says that Gaidar has “thrown into poverty tens of millions of his compatriots, wrecking their savings” and that Chubais enacted privatization “with the same blind madness, the same destructive haste as the nationalization of 1917—18 and the collectivization of 1930.”¹³ Eight weeks before his death in 2009, in an interview in Moscow for this book, Gaidar said he had no regrets about the decisions he made in December 1991, as they were absolutely necessary. “People were awaiting food catastrophe, and there was a danger of a breakdown in energy supply. Only by freeing prices did food return to the shops.” He admitted some tactical mistakes in the transition from a command economy to a free market, “but strategically I think we made the right decision to avoid a humanitarian catastrophe in a nuclear country.”