Why Russia’s Post-Soviet Market Transition Failed
Post-Soviet Russia is often cited as an example of the failures of capitalism. But this misses the point. The regime that emerged was characterised by monopolies, cronyism, and a command economy - hardly a free-market paradise.
Friedrich Hayek warned of exactly this. When states try to design markets from the top down, rather than letting them grow through voluntary exchange and decentralised knowledge, they don’t escape authoritarianism - they repackage it. Without secure property rights, rule of law, and a civil society that supports market norms, economic liberalism can’t take root.
That’s the Hayekian insight - real markets don’t appear by decree. They emerge slowly and organically, out of custom, trust, enforceable contracts, and dispersed decision-making. They rely not on technocrats, but on rules and restraint.
And that was precisely what Russia’s transition lacked.
After the Soviet collapse in 1991, Russia appeared to stand before a historic opportunity. But instead of building liberal institutions, it rushed to privatise without a legal foundation. The West applauded asset sales, assuming markets would follow. They didn’t.
The so-called “loans-for-shares” scheme in 1995–96 exposed the core flaw: privatisation without competition or accountability. Strategic industries - oil, gas, metals - were transferred to politically connected insiders through opaque auctions and closed networks.
The so-called oligarchs didn’t succeed through innovation or open markets. Their wealth came from navigating Soviet-era institutions rebranded under a capitalist banner. It wasn’t entrepreneurship — it was proximity to power.
Meanwhile, Russia’s institutions, courts, regulatory bodies, and parliament, remained weak or captured. In 1993, a constitutional crisis between Yeltsin and parliament escalated into armed conflict. Rather than decentralising power, the post-Soviet state concentrated it further.
The economic results were catastrophic. Inflation in 1992 reached over 2,500%, erasing savings overnight. Poverty surged above 30%. Male life expectancy dropped by nearly a decade. GDP shrank by almost 40%. What ordinary Russians experienced was not liberalisation, but institutional collapse.
Still, the West mistook privatisation for progress. Policymakers assumed that transferring ownership - regardless of how or to whom - would eventually yield a functioning market.
But capitalism isn’t about ownership alone. It’s about rules. Courts. Contracts. Independent institutions. Fairness. When people don’t trust those rules, markets can’t function — and won’t be defended.
By the late 1990s, seven men controlled more than half of Russia’s GDP. Regulatory agencies served elite interests. The line between business and government vanished. What had failed wasn’t the market — it was the belief that one could be imposed by bureaucrats who never believed in it.
The tragedy of Russia’s post-Soviet transition wasn’t too much freedom. It was the absence of the institutions that make freedom real.
If Russia is ever to build a true market economy, it won’t come through more top-down reforms or another round of state-led restructuring. It will require decentralisation, rule of law, and - above all - trust in the spontaneous order that markets require to function.
Alisa Ye