Jeffrey Sachs explains why he thinks "shock therapy" was so tough in Russia : Planet Money In the early 90s, American economist Jeffrey Sachs was a part of a team that tried to transform Russia's economy. It did not go as planned. He tells us what he thinks went so wrong. | Subscribe to our weekly newsletter here.

The day Russia adopted the free market

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If you happened to run a country in the 1990s and your economy was on the brink of collapse, there seemed to be this one person you'd call, this one American economist - Jeffrey Sachs. Jeff was a rising star at Harvard, and he'd helped turn around countries like Bolivia and Poland.


And in October of 1991, that call was coming from Moscow.

JEFFREY SACHS: This was a bad crisis. I know something about how to address the bad crises, and so I was happy to try to help.

CHILDS: So Jeff flies from Boston to Moscow, and he heads to the Kremlin.

SACHS: And I was in the Kremlin meeting President Boris Yeltsin to talk about the economic crisis in Russia.

ROSALSKY: For decades, Russia had been this laboratory for a radical social experiment - an experiment that made free markets illegal and replaced them with an intricate system of central planning. But for a lot of reasons, by late 1991, that system had almost completely broken down.

CHILDS: Russia was now in this sort of awkward situation where it had two governments - the crumbling Soviet government and the new democracy headed by Yeltsin. And Yeltsin and his new team of radical economists decided they could use some help.

ROSALSKY: So Jeffrey Sachs heads through the Kremlin's security gates, past the statues of Marx and Lenin, and he sits down at this table with other egghead economists. In walks a beaming Boris Yeltsin.

SACHS: And he walked across the room and said, gentlemen, I just got confirmation from the heads of the military. The Soviet Union is over. And that was the moment that the Soviet Union ended.

ROSALSKY: Wow. I mean, that's pretty incredible, right? How did it feel to be in the Kremlin at that moment?

SACHS: Well, these were extraordinary days. It felt very exciting and promising. But obviously, it was tumultuous and deeply worrisome, too.

ROSALSKY: Worrisome because the Russian economy was in a tailspin. The country was sliding towards chaos. Rent seekers and opportunists and the Mafia were filling the void. And the new Russian government trying to combat all this was basically just Boris Yeltsin and a ragtag group of young advisors - and now Jeffrey Sachs.


ROSALSKY: Hello, and welcome to PLANET MONEY. I'm Greg Rosalsky.

CHILDS: And I'm Mary Childs. In the early 1990s, there was this short window of time, this brief opportunity where reformers thought they could revolutionize Russia - not just demolish communism and a thousand years of autocratic rule, but also create a new system marked by freedom, democracy and the dynamic market economy.

ROSALSKY: Today on the show, the story from economist Jeffrey Sachs. He tells us what it was like in the room during this incredible period of history and his view on what went so horribly wrong.


ROSALSKY: In the early 1990s, Russia was in this kind of scary moment. The old Soviet government was imploding, and the centrally planned economy was breaking down. President Boris Yeltsin had run on a platform of ushering in democracy and a free market. He promised to transform Russia, to end the shortages and to open up trade with the West. And he'd won with about 60% of the vote. The people had voted in a market economy.

CHILDS: So Jeff Sachs was joining Yeltsin's team of economic reformers to try to end the crisis, the shortages of basic consumer goods like toilet paper and food, the rampant inflation, the currency's freefall. At that point, people weren't even really using the currency anymore. They were bartering.

ROSALSKY: But also, the reformers wanted to try something kind of radical - to take this dying communist economy and give it a quick shock to jolt to life a functioning market economy. People were calling this shock therapy.

CHILDS: The idea was to get the pain over with quickly because the transition from communism to capitalism was almost inevitably going to be painful. So Jeff's thinking was to do it as fast as possible to stop prolonging that pain. But not everyone agreed that this was the right way to go.

ROSALSKY: There were some economists who argued that the transition to capitalism should be handled slowly, focusing on incremental reforms. And it sounds like you and the reformers felt an urgency to do market reforms as quickly as possible. Why was there such urgency?

SACHS: Well, urgency on certain things and no possibility of urgency on many other things. There was a collapse of an empire, a collapse of a government. When there's no grain coming to the cities or when the currency is collapsing, those are not measures for gradualism. So you know, there's academia, frankly, and there's real life. And real life said this was an emergency.

CHILDS: Jeff had kind of a shock therapy playbook that he'd been perfecting for years, and he'd used it just two years before in Poland.

ROSALSKY: Poland had also been a communist economy, and like Russia, it had high inflation and shortages of basic things.

SACHS: Many believed that there was no solution to the Polish economy, that it wasn't even possible to try to form a government because the economic situation was so hopeless. And I said no.

CHILDS: And two years after shock therapy, its economy was already looking promising, so much so that it was basically why Russia's reformers called him in the first place.

ROSALSKY: Jeff's playbook had five parts. The first part, letting the market set prices. In a market economy, prices are typically set by supply and demand. They serve as super important signals. When there's a shortage of something, prices rise. These higher prices are like this flashing neon sign to producers, telling them, make more of this. Well, under communism, for the most part, there were no price signals. There were commands. The government told producers what to make and how much to charge. But with communism crumbling, no one was telling producers what to make. And they didn't really have price signals either. They were kind of stuck in this no man's land. So they got those chronic shortages of basics, like sugar, soap, toilet paper and even food.

CHILDS: So step one in Jeff's playbook - set prices free.

SACHS: The main idea was that in a broken, controlled-economy system, we tried to make supply and demand work so that the shortages disappear.

ROSALSKY: But freeing prices alone wasn't enough to end the shortages. Under communism, trade had been restricted, especially with Western countries, like the U.S. or the U.K. When trade did happen, mostly between nations in the Soviet bloc, they often didn't use money. They instead had this kind of international barter system, trading goods for goods. So step two in Jeff's playbook was freeing trade.

SACHS: We tried to get international flows of trade working, especially since the Soviet system had collapsed. What had been barter exchange among Eastern countries no longer existed. So there needed to be international trade with Western countries.

CHILDS: Freeing trade meant people could buy stuff from outside the country and from companies that weren't just the state-run monopolies. So maybe people can get better stuff, but also, those state-run monopolies will have to improve because they have real competition.

ROSALSKY: And for international trade to be possible, the country needed a currency that could be exchanged with foreigners, a currency that could be exchanged in a predictable and quick way and allow it to flow more easily. So, you know, you can go up to a counter at the airport and exchange rubles for dollars or vice versa. By freeing prices and freeing trade and reforming the currency, Jeff's playbook said this little, fragile market economy would boot up.

CHILDS: In Poland, the shortages ended because Poles would drive their trucks back and forth to neighboring countries, buying stuff that they could resell in Poland for higher prices. Polish stores and street vendors offered all kinds of products. Black markets evaporated. Within a few years, people were calling the country's boom the Polish miracle.

ROSALSKY: But, we should say, there were these big risks that came with market reforms. Moving away from price controls, especially given the shortages, meant inflation was kind of a given. The big risk, however, was that it would spiral and get out of control. More broadly, market reforms meant a broad restructuring of the entire communist economy, which meant many people could lose their jobs and have to get new ones.

CHILDS: In Poland, inflation and unemployment did get much worse at first. But the government followed the rest of Jeff's playbook. The next part, step three, is specifically designed to account for this risk. It's designed to curb inflation. And for this, Jeff drew on standard old economic ideas, like austerity. He called for the government to balance its budget, cut spending and raise taxes. And he called for the central bank to tighten monetary policy, to not print money willy-nilly.

ROSALSKY: Now, Jeff knew the politics of this could turn ugly. Austerity can be tough. I mean, it kind of sucks for people. And so is restructuring an entire inefficient communist economy. So the next play, step four in his playbook, was to create a new social safety net, programs to help people who are struggling - things like unemployment benefits, health care, helping retirees.

CHILDS: And also, to help offset the suckiness of this transition, the final and crucial step, step five, was to get the West to support this fragile new market economy with money - money to support all the steps - to stabilize the currency, to fight inflation, to pay for social programs and to balance the budget. And Jeff says, in Poland, they did all the steps. They balanced the budget. They kept money-printing in check. And the West ponied up and gave them a bunch of financial support.

ROSALSKY: And within a couple years, inflation had fallen dramatically. And by 1993, Poland was the fastest-growing economy in Europe.

SACHS: Those measures, broadly speaking, worked. Poland achieved economic growth, a significant rise of living standards, and it created the institutions to become part of the European Union, which it did in 2004. I regard all of that as a success of this direction of change that I recommended.

CHILDS: So in Russia, they decided to try it, to do the playbook.

ROSALSKY: And so when you turned to Russia, was sort of the dream or the hope that the playbook that you deployed in Poland would work the same way in Russia?

SACHS: Well, basically, understand that Russia was vastly, vastly different in scale, more worrisome in every dimension. So you could know the transformation ahead, that it was very, very dangerous and very difficult starting in 1991.

CHILDS: He knew Russia wasn't Poland and that this was enormously risky. But to him and to Boris Yeltsin, it was worth a try. So on January 2, 1992, Yeltsin launched Russia's capitalist revolution. It was headline news all over the world.


UNIDENTIFIED NEWS ANCHOR: Our lead story is Russia's sudden plunge into the rigors of the free market.

CHILDS: That day. In an instant, prices more than doubled, which did freak people out. Not Jeff, though. Not yet. To him, this was kind of unavoidable, part of the plan.


UNIDENTIFIED REPORTER #1: While ordinary Russians grumble and cope, American experts watch, and two of them join us. Jeffrey Sachs...

ROSALSKY: That day, Jeff went on PBS.


SACHS: I would expect that if the full package of measures - not just the price reform, but the budgetary reform, monetary reform and floating of the ruble, all of which are being undertaken right now - if all of those go into effect as planned and if there's some Western assistance in a timely way, that within three or four months, we ought to see the end of the intense shortages and the hyperinflation which has been gripping the Russian economy since - as a legacy of the communist period.

ROSALSKY: It turned out those were some very big ifs. For one, budgetary reform. Yeltsin wasn't acting unilaterally. He had to get things through parliament, which was largely made up of holdovers from Soviet times. Within two weeks of starting the reform, it was very clear that they were not down.


UNIDENTIFIED REPORTER #2: The speaker of the parliament called for Yeltsin's resignation on Monday, saying Yeltsin's reforms were utterly senseless, divorced from the realities of economic life. Still, it appears...

ROSALSKY: Russia's parliament, in large part, represented the old Soviet elite - the so-called red directors, the industrialists who manage Russia's state-owned enterprises. These enterprises were bloated and dependent on government spending. And the market reforms, they threatened them. So the red directors lobbied hard against the budget reforms. They wanted more government spending and for support from the central bank. They mostly got their way.


UNIDENTIFIED REPORTER #3: Instead of subjecting inefficient or useless enterprises to the discipline of the market, the Russian Central Bank has been keeping them afloat by extending credits to them - in effect, printing money.

CHILDS: The next fight - monetary reform. Jeff's playbook required the government to control inflation and stabilize its currency. But the problem for Yeltsin and his reformers was that they didn't control the central bank. They couldn't even control their own currency. Russia used the ruble, but so did the 14 other former Soviet republics.


UNIDENTIFIED REPORTER #4: All the successor states of the Soviet Union now have their own central banks, which issue rubles, creating chaos and making it impossible to stabilize the currency.

ROSALSKY: This was a nightmare for getting inflation under control. And over the course of 1992, Russia's inflation approached hyperinflation. Prices increased over 2,500%.


UNIDENTIFIED REPORTER #5: One newspaper commentator said today that money is melting like ice cream.


UNIDENTIFIED REPORTER #6: To many Russians, conditions look worse than they did under communist rules.

ROSALSKY: Prices skyrocketed, shocking many Russians.


UNIDENTIFIED REPORTER #6: But it's increasingly difficult to convince them that this is a necessary, if painful, transition to the promised land of free market.

CHILDS: Watching all of this, Jeff is starting to worry about this thing not working. And the lives of millions of people are at stake, and so is the stability of an enormous, powerful country.

SACHS: I was worried about people having food to eat, having social stability, avoiding shooting wars. Who knew? This is one of the biggest events in modern history. Who knew? What you could know is this is very dangerous. And the most important message I gave is the West should help.

ROSALSKY: From the very beginning, Jeff lobbied the West to help Russia. He appeared on TV programs. He wrote op eds. He spoke with leaders. He spoke with lenders. Like, there was this one moment six months into the reform effort when he gave a big speech to the IMF and World Bank.


SACHS: And Russia has made clear it will go forward with or without the international financial support. But we know that only with international support from the IMF and the World Bank is success likely in this remarkably arduous process. We really are at a critical juncture, where days and weeks will count.

CHILDS: But Jeff says at this critical juncture, the West did not back Russia's reforms with serious money. And Jeff says without that support, the crisis got worse. And eventually Yeltsin lost faith in the reformers. He fired his prime minister, a radical reformer who had initially recruited Jeff. Yeltsin replaced him with someone from the old guard, a longtime communist and prominent red director who had been resisting reforms. And then Russian politics got even uglier in 1993. The parliament led an armed revolt against Yeltsin. And in response, Yeltsin sent in the military to dissolve it.


UNIDENTIFIED REPORTER #7: The Russian parliament burning, sat on fire as the Russian army was called to suppress an armed revolt led by hardline opponents trying to overthrow President Boris Yeltsin.

ROSALSKY: Then Yeltsin held new parliamentary elections. And with the economy in the toilet, the reformers lost big.

SACHS: I saw by the fall this is not going to work. And at that moment I said, OK, I tried and then quit at the end of 1993. That's my story.

CHILDS: That's his story. But as the efforts fell apart, a chorus of people started to blame shock therapy and Jeff Sachs for Russia's financial crisis. Like, they tried to change too much too fast, and they'd put too much faith in free markets. Jeff has been thinking about what happened in Russia for the last three decades, and he still thinks it was worth a try. But for him, this wasn't really even shock therapy. His playbook had worked in Poland. They'd balanced the budget. They'd gotten inflation under control, and the West had thrown money at them. In Russia, those things didn't happen. Jeff says the budgetary and monetary reforms were just not enough. And when the West did send some money, it was too little, too late. Jeff still believes his playbook works. It just didn't work in Russia because it wasn't actually his playbook.

SACHS: And my point was that the mechanisms that had worked in Poland should be deployed in Russia - for example, a ruble stabilization fund. The IMF rejected that. Well, what that means is the U.S. government rejected that. I believed there should be a debt standstill. The U.S. government rejected that. I believed there should be large rapid financing. The U.S. government rejected that. And the big difference between Poland and Russia was that the U.S. government viewed Poland as an ally, and it viewed Russia as an antagonist.


CHILDS: After the break, how Jeffrey Sachs went from advising the Russian government to tattling on it.


ROSALSKY: While Jeffrey Sachs worked with a team that focused on stabilizing Russia's economy, there was a whole other office of economists working on the largest privatization effort the world has ever seen, taking an entire economy owned by the government and selling it off to individuals, company by company. That team was led by a Russian guy named Anatoly Chubais. Journalist David Hoffman wrote a book about this privatization effort, and he interviewed Chubais extensively.

DAVID HOFFMAN: So Chubais came out of St Petersburg. He was kind of a cool character - tall guy, red hair, I would say sort of reserved, you know, not particularly exuberant, but he really had some ideas about how things could change.

CHILDS: Hoffman says that for Chubais, privatization - converting state-owned enterprises into private companies - was like a religion, and it was more important than just making the economy more efficient and productive. His goal was political because he thought if they created a new class of private owners who had a vested interest in this new system, they would fight for Russia's new capitalism.

ROSALSKY: But creating this class of huge winners, especially in this turbulent economy where most people were losing, meant extreme inequality. And Anatoly Chubais seemed completely fine with that.

HOFFMAN: Anatoly Chubais was never going to be a popular hero for taking all that Soviet property and giving it to anybody who would be a private owner.

ROSALSKY: The first phase of Chubais's privatization was kind of like this gigantic nationwide garage sale. And what was on the table? A bunch of state-owned companies. And the first one up for sale under this program was - and I'm not making this up - the Bolshevik Biscuit Factory. It was founded by a baker in 1855, and it was this, like, cookie factory that was nationalized after the Bolshevik Revolution. It was pretty famous throughout Russia.

CHILDS: Now, under Chubais's program, regular people would have a chance to buy shares of companies like and including the Bolshevik Biscuit Factory. The government sent each Russian citizen a voucher - in total, 148 million vouchers. They were the tickets to shop at this garage sale. The vouchers could be used to buy shares of companies, or they could be sold for cash. And at the time, with the economic crisis, most people, most ordinary Russians were eager to sell. But there was a handful of people who were eager to buy and had enough money to do it.

ROSALSKY: And we should say that this garage sale of state-owned businesses was cheap. Like the Bolshevik Biscuit Factory - it sold for about $700,000. For comparison, a nearly identical cookie factory sold in Europe the year before for $80 million. Like, we're talking deals here.

And it wasn't just the one biscuit factory. Under the program, about 15,000 small- and medium-size enterprises went private. And in this mad rush to privatize industry, a small group of Russians won big. You might have heard of them before. We now call them oligarchs.

CHILDS: These soon-to-be oligarchs got rich enough to buy the vouchers through various schemes - some legal, some not so legal. For example, there was this one dude who became a big-time car dealer. In one scheme, he bought, like, tens of thousands of cars from a major auto factory by taking out loans - loans which he knew would be worth a lot less in the near future because of hyperinflation. And he made big profits from this hustle.

ROSALSKY: These up-and-coming oligarchs scoured the nation, buying as many vouchers as they could. And through Chubais's program, they were able to get their hands on a wide array of state-owned enterprises, and they made bank.

CHILDS: In the first phase, about 70% of the Russian economy was privatized. But that remaining 30% - that was the good stuff, Russia's most valuable industries.

HOFFMAN: The key thing is, who was going to get the crown jewels? Now we're talking about oil refineries. We're talking about big factories - a nickel factory and a potash - things that would be providing enormous profits for years to come.

CHILDS: This was phase two. If phase one was the garage sale in the front yard, phase two was more like a secret closed room because by 1995, the economy was in the gutter. Crime and corruption were everywhere. Yeltsin had gotten super unpopular. His approval ratings were in the low single digits, and he was facing reelection against a popular communist challenger. And the government was broke. It couldn't pay salaries and pensions. It was desperate for money.

ROSALSKY: To solve this constellation of problems, Chubais backed a scheme called loans for shares - loans to the government in exchange for shares of those crown jewels - you know, the big oil refineries, steel companies, mining operations.

HOFFMAN: And I think this was one of the moments where he and some of the others said it was more important to save Boris Yeltsin and to save reform than to get picky about who was going to buy those factories and that it was not important who the owners were. It was simply important that they not be the state, that they be private owners.

ROSALSKY: And who would be these new private owners? - a small group of oligarchs who actually devised this entire scheme. This is how they went from, like, sports-car rich to megayacht rich. Between November and December 1995, Chubais auctioned off to the oligarchs 12 of Russia's most profitable industrial enterprises.

CHILDS: But these weren't really even auctions because Chubais and his team had predetermined with the oligarchs who would get what and for roughly how much. So the auctions were a total sham. And the prices for these corporations were a steal. And then upholding their part of the deal, the oligarchs did everything they could to help Yeltsin's campaign. They donated millions. They hired political operatives. They blanketed the airwaves with pro-Yeltsin propaganda. And in 1996, Yeltsin staged a dramatic comeback and was reelected.

ROSALSKY: Boris Yeltsin had initially sold privatization as ushering in this sort of democratic capitalism that would benefit ordinary people. He even offered a slogan - we need millions of owners rather than a handful of millionaires. But in the end, privatization did create a handful of millionaires - actually, even billionaires.

CHILDS: As the loans for shares program was being hammered out, Jeffrey Sachs had returned to Russia for a brief visit. He wasn't an adviser to the government anymore, but he came back several times to help create an institution to study the Russian economy. And on one of those trips, he met with some of his old colleagues, who explained this shady operation.

SACHS: People told me how incredibly crooked the whole thing was. It seemed pretty distasteful to me. I didn't like it.

CHILDS: Jeff didn't like it. It felt like it undermined the whole mission of what they'd been trying to accomplish.

SACHS: So I talked to the IMF, to the World Bank and to the U.S. government and said, this really seems quite sordid, unpleasant and improper, and you should look into it. And they shrug their shoulders, basically.

ROSALSKY: The former adviser and cheerleader for the Russian government had become a major critic of the government he had tried so hard to help. With loans for shares, it was like Russia's new warped capitalism had devoured its new fledgling democracy. And this new capitalism wasn't pretty. Between 1990 and 1999, roughly speaking, Russia's economy shrank in half. The only people who seem to win in this new economy were the oligarchs, who, by the way, funneled much of their newfound wealth out of the country. The reform era was over, and that little window of opportunity had closed.


ROSALSKY: Thank you to David Hoffman. His book is called "The Oligarchs: Wealth And Power In The New Russia." If you have a question or comment, email us at And you can find us on social media - you know, Twitter, Facebook, Instagram, TikTok, all the things. We're - @planetmoney.

CHILDS: You can also sign up for Greg's amazing newsletter. It's very good. It's the right amount of economics in your inbox once a week. You can sign up at


CHILDS: This episode was produced by Willa Rubin and engineered by Gilly Moon. It was edited by Jess Jiang. Alex Goldmark is our executive producer. I'm Mary Childs.

ROSALSKY: And I'm Greg Rosalsky. This is NPR. Thanks for listening.


ROSALSKY: So one more thing. At the end of our conversation, Jeff said this sort of profound thing about these big moments in history, these moments that can help change an entire nation's trajectory. He points to a book.

SACHS: One of the most important writings, in my view, of the 20th century is Keynes' book, "The Economic Consequences Of The Peace."

CHILDS: Economist John Maynard Keynes - you might have heard of him - was inspired to write this book after the end of World War I, when he saw the Allied powers impose harsh penalties on Germany - penalties that would devastate the German economy.

SACHS: It was a prophetic book. He said that in another generation we'll have a rise of even a worse whirlwind than we just went through if we go down this path.

ROSALSKY: To Jeff, how the West treated Russia after the Cold War has some eerie parallels. In both cases, he says, the victors of the war consigned the losers to a period of economic crisis and political turmoil. Now, he says, of course, decisions by Western leaders three years ago did not singularly determine the kind of country Russia is today. But, he says, they surely didn't help.

SACHS: It's really at the core of political economy that economic crisis can lead to political crisis. It sounds like a trivial idea, but it's a very important idea. And it means, avoid economic crisis. That's the lesson.


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