State monopoly, limited competition and the excessive exploitation of resources was always the basis for the economic model that the Kremlin tried to force upon Ukraine
The long evolution of economic models in Russia was nothing more than the reincarnation of the very system that was based on the domination of the state, monopolies, limited competition and stifled private initiative, which posed a potential threat to the government, extensive agriculture, non-economic incentives, lack of respect for private property rights and the unlimited exploitation of the workforce and natural resources. The implementation of this model in Ukraine ruined its European economic institutions and triggered gradual socio-economic degradation, causing Ukraine to remain far behind civilized countries.
Before the start of the 18th century, the Russian economic model had little contact with external influences. This changed with Peter the Great’s Westernisation reforms that were expected to lead the country to the big European political arena. Economist and historian, Alexander Gerschenkron, made a valid point, stating that the Grand Duchy of Muscovy, which later became the Russian Empire, wanted to bring in innovative technologies and organization practices from the West to free its economic potential, while using its traditional methods, most of them based on the domination of the state, centralised administration and distribution of assets, the marginalization of private initiative etc.
For Ukraine whose lands were drawn into Russia’s orbit piece by piece throughout the 17-18th centuries, this entailed the crushing and transformation of the economic and social structures established in the late Middle Ages and built on completely different principles. The Ukrainian state and its institutions, whether under the Polish-Lithuanian rule or during the Cossack Hetmanate, had never had total influence and control over the economy, allowing it to develop freely, guided by external markets and domestic demand.
Just as in other European states, commercial life in Ukraine was centred around two key spheres. The main one was agriculture, followed by urban craftsmanship and trade. These served as the basis for property rights and economic self-organization expressed in land ownership, initially by the nobility, then the Cossacks, and craft workshops with Magdeburg self-governance which Muscovy had never practiced. Open and relatively unpopulated until the 18th century, Ukraine’s steppe regions offered plenty of opportunities for commercial colonisation. This led to the development of a special social type of land owner – entrepreneurial daredevils who constantly competed with nature and nomads, relying only on themselves.
Ukraine’s foreign trade developed westward to Europe through Austrian and Polish markets, and south-eastward where the Ottoman Empire and Crimea were its major trade partners. The westward trade corridor through which cattle, grain, horilka and other agricultural products was shipped to European countries dates back to the 16th century. It connected Ukrainian merchants from Volyn, Poltava and Starodubsk with Gdansk, Breslau, Stettin, Marburg, Riga and other trade centres of Early Modern Europe.
The situation changed when Russia began to pursue its political and economic interests in the early 18th century. Thanks to the victory in the Great Northern War (1700-1721), it could redistribute political influence in Central-Eastern Europe and instill its rules of international business on its neighbours that were less shrewd. By 1714, St. Petersburg had monopolised trading in strategic goods including Ukrainian potassium, flax, goat fat, timber for shipbuilding and so on. Ukrainian merchants were ordered to transport their goods to northern ports in Riga and Arkhangelsk instead of the common routes to Krakow, Gdansk and Breslau.
Peter’s mercantilism did not really have faith in private initiative, preferring state-controlled financial and industrial groups known as kumpanstvo (these were initially voluntary communities to fulfill shipbuilding obligations – Ed.) organized by officials and merchants under the protectorate of the tsar’s circle. Foreign traders could then buy export goods, i.e. cod, salmon, caviar, flax and skins, but only from the companies which held a monopoly on the industries producing and trading these goods. These merchants, such as Gavrilo Raguzinski, the nephew of Peter the Great’s well-known diplomat Sava Raguzinski, were also granted favourable trade concessions in Ukraine.
The village community was another element of this agriculture-based economic system. It guaranteed that skilled peasants – in partial or total serfdom – worked duly for their landlords or the state. American historian Steven Hoch described the village community primarily as a mechanism of mutual social control within rural Russian society. It was based on the leveling principle and developed a specific labour ethic whereby everyone was equal (unless they belonged to the privileged class of elders or estate managers), obedient and working as much as was necessary to meet needs. Russian community peasants were not poorer or richer than their counterparts in Western Europe. However, their attitude to work was entirely different, dominated by stifled initiative, fear of punishment, envy and hostility towards their neighbours.
MODERNISATION À LA RUSSE
The “great reforms” of 1856-1874 in Russia were somewhat similar to a reanimation therapy for the empire: it had to restructure its internal order and economic model to preserve its influence on the world arena. The Emancipation Reform of 1861 cancelled the dependence of peasants, who were the key producers in export-oriented segments. It freed millions of workers for industry, triggering its sustainable growth for several decades, but never became the foundation for the development of simple commodity production in rural areas. This was restrained by the peasant community institution that was in control of passport registration, tax collection, as well as the re-allotment of the compulsory work that peasants had to do for the state, arable lands and assets.
The reform introduced this institution – with an obvious policing function – as a useful tool of social control even in regions that had previously had none, including Left-Bank and Right-Bank Ukraine, southern Ukrainian provinces and the Crimea. This artificially stifled the agricultural initiatives of Ukrainian peasants, and hampered simple commodity production that accounted for barely 10% of gross output in the early 20th century. Latifundia owners immediately took advantage by monopolising the production of export-oriented sugar and alcohol by the end of the 1890s, bringing the scope of farming in entire provinces down to monosegments that had nothing to do with domestic demand.
On the cusp of the 19th and 20th centuries, the Russian Empire saw a rapid concentration of capital and production, the rise of major industrial enterprises as a result of the 1860-1890s government industrialisation programme, which were the foundation for monopolistic conglomerates. The latter could now coordinate actions on an imperial scale through syndicated unions that helped them entrench monopolies and squeeze out the competition from the markets. As well as its accelerated modernisation and industrialisation, Russia’s top priority was to maintain the status of a world power and that of a bastion of Slavs and Orthodoxy in Europe and the East. Thus, its economic policy was largely aimed at keeping up with the West, a trend that continued under Soviet rule.
The key obstacles to industrialisation as a strategic priority in this chase included weak private entrepreneurship, the lack of extensive financial resources and no effective system to accumulate and exchange capital between industries (through banks and stock exchanges) – something the empire urgently needed. As its economy grew, the state had to develop railroads and heavy industry. This determined the state’s decisive role in the process as it collected cash through the tax system and re-distributed it, searched for currency resources to import equipment and technologies, and created a favourable environment for foreign investment. Meanwhile, the entire burden of this policy was laid on peasants who made up the majority of taxpayers (up to 80% as of the beginning of the early 20th century) and provided the key resources for exports (grain, meat etc). High taxes significantly limited its capacity to purchase industrial goods, while the state’s re-distribution function made the industry relatively independent of the demand of the majority of the population.
Meanwhile, this policy essentially cemented the empire’s technological backwardness. The import of rails, steam engines, engines, and industrial semi-finished goods doubled, leading to a stable trade deficit. The state’s dominance in the economic policy of the Russian Empire, caused by stifled private initiative, had devastating consequences and was the wrong track for development, even taking military-political goals into account. Such policy had already proved ineffective during: the Franco-British maritime rivalry in the mid-19th century, when Great Britain with its mixed system of state- and privately owned shipbuilding facilities turned out to be much more effective and flexible than France with its hyper-centralised and bureaucratic state-owned shipbuilding industry.
The economic boom of the Russian Empire gave Ukraine two results, neither of which was particularly successful. Firstly, the structure and regional centralisation of the economy had not been shaped from the bottom up to reflect the needs of the market, but from the top down to fit the empire’s strategic interests. Secondly, a specific category of entrepreneurs emerged, largely big ones, whose business ethics and priorities were dictated by their close ties with the political elite and the resources it could distribute, rather than the ambition to build a self-reliant and independent business.
THE SOVIET ECONOMY: BACK TO FEUDALISM
Partly a reincarnation of the collapsed Russian Empire, the Soviet Union also inherited its industrial facilities and resources. Despite the Bolshevik regime’s promises to give factories to the workers and land to the peasants, the state remained their monopolist owner. Former serfdom and taxes were replaced by appropriation – not only the confiscation of the surplus, but the entire harvest as well. As a result, there was absolutely no point in farming, leading to the 1921-1923 famine.
At the same time, the industry was in decline, affected by post-war turmoil and unprofessional management. The effect of the New Economic Policy introduced by the Bolshevik government to save the country’s economy in 1921-1928 was temporary. Once the situation was stabilised, Communist Party leaders headed by Stalin embarked on building a totalitarian model that was incompatible with any market elements or relevant social classes. Ideologically, Stalin’s economic programme was largely based on the legacy of Lev Trotsky, the architect of “war communism”. One of the foundations of this economic philosophy was to return to the non-economic compulsory collection of whatever resources the state needed. “Is it true that compulsory labour is always unproductive?” Trotsky said at the 3rd All-Russian Trade Union Assembly in April 1920. “My answer is that this is the most pathetic and vulgar prejudice of liberalism.”
In the 1930s, these concepts were already implemented in new labour armies that did compulsory work. They were made up of collectivised peasants in farming and GULAG prisoners, as well as peasants fleeing to cities to escape hunger – in industry. Collectivisation made short work of both the middle class, which was redundant in the Bolshevik system, but also the “politically and ideologically hostile element” of society – the Ukrainian peasants. Peasants and workers in the Soviet Union were free by law but in reality, dependent on the state, after the government introduced the passport system and monopolised employment and salary payment over 1930-1932.
Agriculture remained the weak spot of the imperial and Soviet economies that even Khrushchev’s ambitious reforms failed to cure. In 1959-1964, the average annual output of meat and grain barely met early 20th century levels. With the continuation of the kolkhoz system, which determined pricing, relations and plans in agriculture, the Kremlin was forced to raise retail prices on resources and foodstuffs, occasionally resorting to imports.
A decisive aspect of the soviet remake of the Russian Empire’s economy was to get control of energy resources – a strategic asset at the time that kept it relatively stable through the end of the century. However, the downside of this economic model was its extensive nature, poor productivity and overexploitation of natural resources, while internal skews and overwhelming bureaucracy seemed to be absurd paradoxes.
The socialist economy had no fully-fledged uniform domestic market even in the most sustainable Brezhnev times. The harvest seasons of the 1980s brought police borders between oblasts, counties and union republics, which prevented the produce grown or legitimately purchased from being taken out. The economic decline in 1970–1985 in both industry (from 8.4% in the late 1960s to 3.5% in 1981–1985) and agriculture (from 4.4% to 1.4%) was irreversible. Productivity shrank from 6.3% to 3% and investment plummeted from 7.5% to 1.8%.
Political reforms launched in the USSR in the late 1980s accelerated the economic collapse but did not exhaust the model’s ability to reincarnate. Slightly altered, it is now re-emerging in Russia and the Yanukovych-ruled Ukraine. But do we need this?