Economic Challenges Facing Russia

Russia is not a rich country, but it has everything it needs to be a rich country. Farmland, oil, gas, iron, aluminum, and a labor force of 70 million people. So what happened? Why is Russia not rich? Chapter 1. Early Russia. Serfdom and the Commune. The country of Russia started out here in Eastern Europe. This land was first unified by the Mongols. Slowly over time the Russians would ally themselves with different Mongol clans in order to gain more land, power, and influence. Eventually the Russians became more powerful than the Mongols and in 1547 Russia became an independent country under the leadership of Moscow. With the Mongols gone it became a lot easier for people to move from one part of Russia to another. And this was a problem because Russia was incredibly big. So if a peasant did not like their lord, they could move to another part of this gigantic country. As a result, a lord could lose their workforce. Without enough workers, the lord can't live off of the taxes they provide. Those taxes paid for the military. And if this happened in a region close to the border of Russia, then you suddenly had a region without the protection of an army. This left Russia vulnerable and the nobility powerless. And so they implemented a new system called Serfdom. The way Serfdom works is that peasants become serfs. A serf was assigned a plot of land and was forced to work and live on that land for the rest of their lives. When they died their children would have to work the land afterwards. A lord could then buy and sell the land in order to buy and sell the serfs. They could force a serf to perform any work the lord demanded. And a serf wasn't even allowed to marry without the lord's permission. In short, serfdom was just another form of slavery. But this system kept the Russian elites in power. The Russian leader could give more land and serfs to people who served the government, and it allowed the government to move serfs into Siberia in order to colonize the region. But serfdom also kept people poor. A serf did not get to keep the food they produced, so there was no need to ever grow more food than you needed to survive. It's not that they were lazy, it's that they didn't care. It was a problem of motivation. If a peasant works their ass off and a landlord ships a few more crates of produce, they don't see an extra ruble. So where's the motivation? But over the centuries other countries had abolished SAFTA and their now independent farmers had slowly developed better agricultural techniques and produced more food. Eventually countries began producing more food than they needed to eat for themselves. And farmers began moving into cities. For most of human history 99% of people worked on farms. But thanks to innovation that became 98%. As a result, just reducing the amount of farmers by one percentage point meant you had twice the amount of people who could work outside of agriculture. And those people began working as craftspeople in workshops. When steam engines were invented, those workshops were turned into factories. Factories produce a large number of goods. And in order to earn money, those factories produced things everybody wanted to buy such as steel products or clothing. But in order to actually sell the large amount of goods you are making... You need a large amount of people with money who can afford to buy what you are making. And people in Western Europe had that money because farmers produced enough food they could sell some of it for a profit. But most Russian farmers were not rich enough because they did not innovate because any profit they did make went usually to their landlord. But there were also people who did not live and serve them. Those were farmers living in a commune. And the commune was land that was owned by a community, usually a village or a small town. In these communes, households were granted a piece of land they could work on. The size of that land was determined by the amount of people living in that household. But what if you have more children and your household has more people? Well, then land gets periodically shuffled around between the farmers to make sure everybody had enough land. But if your land might be taken over by someone else in a few years, Why would you spend years developing your farmland if it's going to profit somebody else? As a result, even if you were not a serf, you had almost no motivation to start innovation. Chapter 2. Imperial Russia. Bad geography. If there aren't enough customers inside your own country, you can find customers in other countries. Today a lot of poorer nations start their development by selling to richer nations. But for Russia this was almost impossible. To understand why, let's look at this map. This is a map of Russia's navigable rivers. Meaning these were the rivers they could use to transport cargo on. As you can see this river system ends up in four locations. First is up here in the Arctic Ocean. This part of the world used to be frozen for long periods of time before human-made climate change. As a result, you can only use this trade route a couple of months per year. The second is at St. Petersburg, but this region also freezes over most of the year, meaning that once again you could only use it for a couple of months. The third is down here in the Caspian Sea, and the Caspian Sea does not connect to the rest of the world. And lastly is this one here in a place called Rostov-on-Don. You might remember it from the failed coup attempt in June 2023. But this region wasn't colonized by Russia until the late 18th century and rivers in Siberia did not at all connect to the main population centers in European Russia. As a result for most of Russian history the country did not have reliable access to the oceans meaning cargo had to be transported on land. But that requires a lot more energy than a ship which can go with the flow. As a result, Russian goods were more expensive to sell and foreign goods were more expensive to buy. Russian products could not compete with those of the English, the French or the Germans. And so Russian industry didn't grow as fast because they did not have access to as many customers as other European countries. And so instead the Russian elites focused on building more farms rather than building factories. And as a result Russia's population increased from 14 million people in 1722 to 129 in 1897 as more and more parts of Russia were turned into farmland. But by the year 1800 only about 12.8% of people lived in towns or cities compared to 40% in France and 70% in Germany. And while those other countries increased the productivity of individual farmers In Russia, farmers were 16% poorer in 1800 than they were in 1700. At the same time, Russia was also politically less important because without a modern industry, Russia couldn't produce modern weapons. And in 1853, Russia lost the war against France, Great Britain and the Ottoman Empire. And so on one hand, Russia was facing a population that was becoming poorer and poorer and who might start a revolution. And on the other hand, Russia was facing a world in which they became weaker and weaker compared to countries like Great Britain, France, Germany or the USA. And so in the 1850s, the Russian Empire began looking for a solution. Chapter 3. Laissez-faire Russia. Failing to reform. Russia's plan to begin their own industrialization started in 1861 with the Emancipation Reform of 1861. In this reform, the 23 million serfs living in Russia were granted their freedom. The idea was that by granting farmers more freedom, they would adopt new technologies, produce more food, and Russia would finally be able to industrialize and become rich. But there was a problem in its implementation. For example, from now on, serfs became free, independent farmers. Each farmer was given a plot of land that they themselves owned. But this land wasn't free. They had to pay a mortgage to buy the land. Those farmers were then not allowed to sell this land again. And if they died before repaying their mortgage, their children would inherit the land and the mortgage. But for millions of people, the land they were assigned wasn't large enough to support them and their families. In order to get more food, most families had livestock which was allowed to graze on the land of their landlords. But when serfs were freed, landlords demanded money in exchange for letting cattle walk on their land. As a result, any extra money those farmers earned usually went straight back to their former landlords. And a lot of people couldn't survive in this system and decided to leave their farm and find work somewhere else. But even if they did find work in a factory, they were still forced to repay the mortgage of that land hundreds of kilometers away. As a result, any extra money they earned always went to their former landlord. As a result, the emancipation of the serfs did very little to help those serfs. The other Russian farmers mostly lived in communes and this reform did nothing to make them more efficient. Meaning most Russian farmers weren't even affected by this reform at all. The government had hoped that by making a couple of changes to the social structure of Russia that they would be able to fix all the country's problems. But the problem was still a lack of competition. And by making sure that the profits of the average people largely went to the richest people, it meant that there weren't enough customers in Russia to support its own industry, and its geography made it impossible to sell to foreign customers. The only reliable customer Russia had was the government. As a result, the only truly profitable businesses was the military industry. The government needed weapons and was willing to pay whatever amount was needed to keep weapons factories operating. The Russian government paid for these factories and equipment by taking out foreign loans. And in order to repay these loans, the government taxed average people. People who were barely surviving. The government could have taxed the elites, seeing as they owned most of the wealth. But the Russian political system at that time worked in a way that the emperor kept the nobility rich and powerful and in exchange those nobles supported the emperor. By taxing the elites the Russian emperor would turn its supporters into its opponents and so for the next 30 years Russia industrialized a little bit but in general the life of the average Russian wasn't any better. Chapter 4 Industrial Russia the failure of the aristocracy In 1891, Russia suffered a drought and then a famine. And it's difficult to tax farmers when those farmers can't grow food. If Russia had developed industry they could simply tax factories. But those barely existed. As a result, Russia couldn't repay all the loans it took out for industrialization. And so the government decided to change their economic policy to prevent this from happening again. Instead of waiting for the elites to invest in industrialization, it was now the government investing in industrialization. In order to build a basic factory you needed coal. There are different types of coal. The best coal for a factory in the 19th century was something called cocaine coal. But for a very long time Russia did not have access to cocaine coal. But this changed with the development of the Donetsk region in modern day Ukraine. This region had access to cocaine coal and iron ore. But it only started industrializing in the 1870s. Before then Russia had to import most of its coal. But importing coal was very expensive for Russia, meaning that most factories, machines, and trains in Russia had to run on very expensive coal. But by the 1890s, it was possible for Russia to make their own, just as countries like France, the United Kingdom, or Germany were doing. Using Russian-made steel and coal, they were able to build rail lines connecting Russian cities and industries together. As a result, Russia was finally able to overcome the war. its large size. Instead of relying on rivers which didn't even reach the oceans, Russia could now build a rail line from one part of the country to another. They connected the iron mines of the Urals with the port in St. Petersburg and the steel factory in Ukraine. The government then funded factories to be built all over the empire. And now Russia seemed to finally be able to develop as a nation and stop being poor. But there was a problem. Because when the Russian government funded a new factory or company, that business was given a monopoly. Meaning that it was the only business allowed to operate in a particular region or industry in Russia. As a result, Russian factories did not have to compete with each other. And when factories don't compete with each other, they have no incentive to innovate. And without innovation, your economy can't develop. The reason the government used this system is because the emperor could give companies to the elites in exchange for their political support. And in order to protect them from competition even further, they put high taxes on foreign products. So even if Russian products were more expensive, they were still cheaper than foreign products. And if an entrepreneur wanted to start a new company of their own, they would need to receive permission from either the Russian emperor or his minister of finance. Meaning that it was almost impossible for someone with a good business idea to actually set up that business in Russia. As a result, any industry that was developed did not keep developing because there was zero competition. On top of that, the Russian people were poorly educated with only 28% of Russians 9 years or older able to read or write, compared to let's say 96% in Germany, France or the UK. And education in Russia was largely determined by one's ethnic group. German and Jewish people living in Russia were much better educated, but they usually didn't speak Russian very well. And as a result, the knowledge that Russia did have was not easily shared with the rest of the population. As a result, Russia's industrialization was a lot slower than other countries. By 1913 the average Russian was about 50% more productive than they were in 1860. The average German in that same time period became 250% more productive. And the average US American 275% more productive. And even if we compare it to let's say Japan, a country that also started its industrialization process in the 1860s, they had become 75% more productive. And then Russia made one of the worst economic decisions in its history. They went to war with Germany in World War 1 between 1914 to 1917, losing over 2 million soldiers, suffered a famine as those soldiers weren't producing food anymore, and the people started two revolutions. In the end, Russia became communist and was renamed the Soviet Union. Chapter 5 Communist Russia The Communist Revolution So now, without nobility, Russia should finally be able to industrialize and stop being poor. But there was a problem. The Russian Revolution was an economic disaster. The first thing the government did was to take control of the economy. The more companies they controlled, the less efficient those industries became. Then Russia had a civil war, which the communists did eventually win. And so now it was 1921, the civil war was over and Russia's economy was 63% smaller than in 1913 before the war. And the new communist leadership had to decide which version of communism they were going to use. There are a lot of different versions. On one hand, a government can give control of companies to its employees who then democratically decide how to run the businesses they work for. On the other hand, you have a communism where nobody owns businesses except the state. And the Soviet Union decided on the second option. But why? Well, Russia is incredibly big. In order to create policies that affect the whole country, you need to have a government that can actually control all of it. And in the case of Russia, there were a lot of regions that still wanted to be independent. And if you give democracy to people who want independence, then you will eventually lose control over those regions. They might withhold vital resources. or civil war might destroy Axis entirely. The further away those regions are, the more difficult it is to control them, because most Russians lived in Europe. As a result, if Russia wanted to maintain control over Asian regions, it would constantly have to send troops and material from Europe to Asia because there weren't enough Russians living in Siberia to do it themselves. In order to prevent this, the Russian Empire, the Soviet Union, and modern-day Russia have all used the same strategy. Strict, government authority over all parts of regional government and regional economies. Under the Russian Empire they did this by giving these lands over to loyal nobility. Modern day Russia has oligarchs and the Soviet Union had something called a command economy. The way a command economy worked in the Soviet Union is that they created a five-year plan. In this plan they planned everything to the smallest detail. Which products are made? How is each product made, what amount of each product is made, and a thousand other things were all put in this plan. Factories were given quotas they had to achieve using the plan created by the central government. If a factory failed to meet these standards they would receive more resources to help them. And this strategy was quite effective in the early Soviet Union. That's because it got rid of the monopolies and cartels. In the Russian Empire, nobility might refuse to do business with someone because they were in a different faction in the government. They might make deals in exchange for personal favors instead of what is economically efficient. As a result, the economy was incredibly inefficient. But under the five-year plans, those factories, companies, and regional governments were given quotas. In order to reach their quotas, they had to connect the economy together and find more efficient ways of getting their job done. And as a result, the old imperial trade barriers were removed. But because Russia had little industry left after a world war and a civil war, they were forced to import most of these products in the beginning. They paid for it by selling food to other countries. At times, they sold so much food there wasn't enough. for the Soviet people, creating famines across the USSR. Which in turn meant fewer workers and more unhealthy workers. As a result, the Soviet Union's economy didn't grow as fast as it could have. The result of this policy was a 2% increase in industry per year compared to just 0.5% growth under the Russian Empire. See on screen right now what the difference between 0.5% and 2% growth is over a period of 100 years. However, the Russian worker was less productive than similarly developed countries at the time. Farmers were 10% less productive and factory workers were 7% less productive. Chapter 6. Stalin's Russia. A Command Economy. By 1928, 13% of the Soviet population worked in industry, producing 52% of the country's GDP. The Soviet government looked at these figures and calculated that for every 10% of the population moving from farm work to factory work that the economy would grow by 69%. And they concluded that was very nice. And so the communist government decided to move people into cities and factories in order to make the Soviet Union richer. But according to the government, people weren't going to the cities fast enough on their own. So the new Russian leader, Joseph Stalin, implemented a brutal policy of forced relocation. They took people's farms from them and forced them to work in factories and live in cities. Between 1928 and 1940 another 20% of the population moved into the cities. But cities require a lot more maintenance than towns and farms. They need sewage systems, public transport, healthcare services and much more. And you need educated people to run those services. But the Russian empire never put a lot of effort into education. And so the USSR set up education programs around the country to bring the literacy rate up. By the 1930s the Soviet Union had enough skilled laborers that they were able to build factories all on their own without having to import materials from abroad. And by now a new problem appeared in the communist system. Corruption. If you were a factory manager you might take some materials you get and sell them on a black market. Or maybe you are just not that good at your job and don't want to admit it. So you start lying about problems that might not really exist. But how do you solve this problem? Well, according to Joseph Stalin, the solution was punishment. Very harsh punishment. Bad managers were sent to gulags. But that just makes those managers hide their activities even more. And so they implemented a system of denunciation. Where people working in factories were encouraged to denounce their bosses. And while this fear that anyone might denounce you did work, it also meant that if you wanted to get a promotion, you could simply denounce one of your bosses. Because anyone could be sent to the Gulag from the most brilliant rocket scientists to war heroes to the Polish. And those Gulags were placed in regions most people did not want to live. Siberia. The average Gulag worker was only half as productive as a free worker. However, they could be sent to places nobody else wanted to go. to develop vital infrastructure in far-off regions. And as the Soviet economy advanced, its people had a wider selection of goods available to them. They had more money and they were generally healthier, although there were notable exceptions such as the Ukrainians. However, if Russia had stayed out of World War I and simply continued their economic policies under the Russian Empire, they would have achieved roughly the same results by the late 1930s. Meaning that all those people who starved, all those... gulags and all that suffering achieved exactly the same as the Russian imperial system would have. And while the average Russian was wealthier, they were still much poorer than developed countries in Europe and North America. But in the end Russia was able to regain its position as an important European power. But this was largely due to the fact that the rest of the world suffered from the Great Depression while the Soviet Union did not. It's not so much that the Soviet command economy was so much better. It just happened to emerge in a time when capitalism was failing and the far right was failing even harder. Chapter 7. Cold War Russia. The Slow Slowdown. Throughout this video, the territory of Russia and the Soviet Union has changed quite a lot and it will keep changing. However, for the sake of this video, we will focus on the territory of modern day Russia. And we're not including occupied territories in Ukraine, Georgia or Moldova. During World War II, Russia went through a process of rapid industrialization as they received foreign aid from their allies. As a result, the Soviet Union after World War II had become a superpower, with an army able to defeat that of any other country in the world except perhaps the USA. And a few years later, Stalin died as well in 1953. Leaders decided to remove a lot of the cruel policies of Stalin's. Gulags were closed, punishments were reduced, and ethnic cleansing was largely abolished. But this presented a new problem. Under Stalin, managers were kept in line through fear of punishment. Bad managers were often sent to gulags. While this had some success, punishing people for doing bad things isn't as effective as rewarding people for doing good things. So they created a system where the leaders of different regions and businesses would get a performance review. The leaders that scored the highest were rewarded and those who scored the lowest were fired. As a result, Russia would finally, finally get some competition with only the most competent people getting promoted based on their performance. This is a system that China and Vietnam are using today which has resulted in their rapid economic development. But if you're corrupt, then this system is a major threat to you. And in the Soviet Union, there were so many corrupt officials that they managed to block this new system. As a result, Russia did not get competition, it did not root out corruption, and eventually the Russian economy just became more and more and more corrupt. If the Soviet Union had actually implemented competition between its regions, then it's likely that their industry would have kept developing over time and that they would eventually have become a rich nation. But instead, Russia stuck to corruption. The system the USSR used instead was to divide the country up between themselves. Different leaders would receive control over a region or an industry. This meant there wasn't as much oversight as different departments sometimes didn't know what the others were doing. Meaning there were more opportunities to be corrupt. And in exchange for being given a piece of the USSR's economy or territory, you in turn support the leader of the Soviet Union. As a result, Russia turned back to its old system where the entire country was carved up between the elites. Except instead of the elites being nobility, they could now be from anywhere. And so once again there was zero competition and zero innovation. And if a manager failed to meet that production quota in their 5 year plans, the government simply gave them more resources. As a result, inefficient factories were given more resources while efficient factories were given fewer resources. Meaning that more and more money was spent on making the economy less efficient. And by the 1970s Russia started importing high-tech products from other countries because they lacked the innovation to make these products themselves. And while they had a lot of scientific achievements, they were unable to turn them into useful products. To give an example of this, let's look at the Soviet video game industry. Because the most popular video game of all time isn't Minecraft or Pokemon or Grand Theft Auto, it's Tetris. And Tetris was created in 1984 in the Soviet Union. The Soviets could have set up an entire industry of software engineers dedicated to making some of the best video games in the world. They could have exported them to Japan, the USA and Western Europe. However, in the Soviet Union, the entire economy was managed in a five-year plan. So in order to make a new video game, central planners had to plan those games five years in advance. And those central planners were some of the most experienced people in any industry. But innovation usually comes from younger people looking to change the current system, rather than relying on things that were done in the past. As a result, a bunch of software engineers who had experience with, let's say, telecommunications software or industrial software, had to come together and plan video games for the next five years. They simply didn't know what to do or what customers wanted. Even with the best intentions, innovation cannot be planned. And as a result the largest video game industries are located in the USA, the European Union, and the Japan. And this was the case for a lot of new industries the Soviet Union tried to create, but failed to turn into useful products. The only exceptions to this were the military, space, and industrial software. And as the Soviet economy began to lag behind in the 1970s and 80s, they had to import more and more products from other countries in order to make up for their own lack of innovation. By the 1950s the Soviet Union imported roughly 10% of their GDP but by the 1980s it was up to 25%. But if you want to buy from other countries you need money. So the USSR began selling oil and gas to Western Europe and weapons to other communist nations. But this wouldn't work forever and by 1985 the USSR was in deep economic crisis. Chapter 8. Declining Russia The breakup of the USSR. And in 1985, a new Soviet government took over under the leadership of Mikhail Gorbachev. And they wanted to completely reform the Soviet Union. They wanted to give control of businesses over to people who worked... them, they wanted businesses to compete in a free market, and the government would stop financing failing businesses. But they faced a major issue. In order to implement these reforms, the government needed to know exactly what was wrong with the country. But up until now, it was illegal to openly criticize the communist government. In order to fix communism, they had to allow free speech. And only then did the government begin reforming the economy, introducing new changes over the course of five years. But if the government stopped giving money to inefficient businesses, then those workers would lose their jobs and customers lose access to products. And because they were allowed to criticize the government, a lot of people who suffered during this reform began openly talking about how terrible their new government was. On the fringes of the USSR, people didn't talk about reforming communism, but about ending communism and leaving the Soviet Union. And in just a few short years, the Soviet Union broke apart. as first its vassal states in Europe declared their independence and then the regions inside the union declared independence. In the end this transition of the economy produced some small results. On average in 1989 the average Russian earned 7 112 dollars per year. A wealthy country was classified as earning seven thousand six hundred twenty dollars per year at that time. Turning Russia into an upper middle income country. With the average Russian being about two thirds as wealthy as the average Portuguese person and about half as wealthy as the average Italian person at that time. Chapter 9 Capitalist Russia, the oligarchy And so now, without communism, Russia should finally develop and stop being poor. But there were a few problems. After the fall of the Soviet Union, the newly independent countries went into roughly two directions. There was the direction that countries like Poland and Slovakia went into. Transitioning into a capitalist economy by opening up their economy to foreign trade, joining the European Union, and using the large number of highly educated people from the Soviet era to develop newer and more advanced industries, such as selling car parts to German factories or providing cheaper medical treatment. treatments, such as laser eye surgery or hair transplants. And it's expected that the former soviet states that joined the EU will be at the same level of development as the west by the 2030s to 2050s, with Poland and Czechia being the first to reach this level. And then there is the other group of countries. These countries instead turned the soviet system into an oligarchy. This group of countries includes Kazakhstan, Belarus and Russia. And an oligarchy is a terrible way to run your economy. But how did they get there? Well, the Soviet government had strict control over the economy. When that government collapsed, the controls were removed, until the government only controlled social services, fiscal policy, and monetary policy, like most countries around the world are doing today. But who should control all the businesses if the government was losing control of them? Well... the workers. And so employees were given a share in the business they worked at. But the economies of the former Soviet countries were in ruin. The Soviet system relied on central planning and suddenly inexperienced managers had to come up with their own plans. As more Soviet countries declared independence, it became harder for factories to do business with each other as they were now in two different countries. Meaning certain goods might be too expensive or could not be created at all. And thanks to the reform before the USSR collapsed, The countries were already in an economic crisis even before the breakup. And so a lot of companies were mostly worthless and a lot of them went bankrupt and a lot of people were fired and struggled to survive. And then a couple of rich people came in and offered to buy their worthless shares in the companies. Most people were desperate and people who are desperate are more likely to sell their own possessions. This happened so much that eventually a small group of people was able to seize control of most of the Russian economy between 1989 and 1993. This small group of people were then included into the government, providing political support to the president. And in return the president gives them free rein to do almost anything they want, as long as it doesn't cause trouble for the central government. And so Russia essentially returned to the old imperialist and communist systems. The elites control the entire economy. Each elite controls one part of the economy and can manage it the way they want to, as long as they don't oppose government policy. And in fact a lot of Soviet departments were simply bought up and given a new name. Gazprom, UES, Trasneft, Rosbank and Roscontract. The elites in charge of these companies are called oligarchs. And those oligarchs have organized this system in such a way that each person has a monopoly in a particular industry or region. Similar to what happened under the Russian Empire during the early industrialization period. Where businesses might refuse to cooperate because they are in different factions in the government. Where certain regions will sell off resources in exchange for political favors. And where competition is almost non-existent. Russia has transitioned into a new type of economic model. a model called industrial feudalism. Chapter 10. Putin's Russia. Industrial feudalism. Under President Putin, the country was carved up between the oligarchs who each got to rule a portion of the economy or a portion of Russia's territory. They generally get to make up their own rules in their own companies and regions as long as they don't contradict the decisions of the president. The oligarchs keep the president in power and in exchange the president keeps the oligarchy rich. And so the new Russia continued the Soviet Union and the Russian Empire's tradition of little competition, little innovation and little development. To understand how the oligarchy controls the economy and stops innovation, let's look at Russian agriculture. Russia has a lot of farmers, and those farmers don't sell their harvests directly to customers. They sell it to a wholesaler. But what if your government makes a law which said that only one wholesale company is allowed to operate in your area? As a result, that company can ask a low price for the food farmers produce, because they aren't allowed to sell to anyone else. Those wholesalers then once again sell that food at a much higher price to supermarkets. As a result, the farmer stays poor and the oligarch in charge of the wholesale company gets very, very rich. And as a result, those farmers don't even have enough money to invest in their own business. And so the average farmer can spend a lot less on innovation. And this process is common throughout Russia using different methods. The goal of Russia's economy isn't to make its people richer, but to keep the oligarchy in power. As a result, the Russian government has become more and more corrupt because a corrupt government enriches the oligarchy. For example, social services are in the hands of the oligarchy, who take some of that money for themselves. There are exceptions to this however. For example, when Russia started a full-scale invasion of Ukraine in 2022, the leader of the central bank was able to prevent the Russian currency from becoming worthless. Thanks to this one lady's leadership and the organization she manages, she was able to stave off disaster. And that's just one competent person in one key position. Russia has plenty of smart, educated, competent people, but their talents simply aren't being used. But of course, not every Russian works for an oligarch. Outside the oligarchy is an economy with plenty of smart, educated, and competent people, but their talents aren't being utilized to the fullest extent. These people tend to be more entrepreneurial and set up new businesses in new industries not controlled by the oligarchy. But as soon as those industries become successful and grow large enough, the government steps in, takes over the companies and hands them over to one of the oligarchs. The goal is to prevent outsiders from gaining too much power, but also keeping the elites happy by occasionally giving them a new business. And so any new successful industry in Russia is turned into yet another oligarch controlled industry without competition and without innovation. But if your property can be taken away from you by the government at any moment, it also means that an oligarch who is no longer useful might have their property taken away from them as well. And so in order to keep their money safe, Russian oligarchs don't invest that money into Russia, but they send it to foreign bank accounts. They put that money in the USA, the EU and Switzerland. Which were historically a safe place for people to invest their money in regardless of political alignment. And this is also the case for a lot of foreign companies. If a large foreign company sets up factories in Russia, then the government can take those factories away at any moment if that company does something the Russian government doesn't like. While there were companies operating in Russia after it became capitalist, Most companies preferred investing in countries with strong property rights, where they can be certain their businesses won't be stolen from them. As a result, Russia has largely isolated its economy from foreign competition. Meaning there is no competition from inside Russia and no competition from outside Russia. The only time Russia actually needs to compete is when they sell their products to a foreign market. As a result, the only two Russian industries that have actually developed are a small high-tech weapons industry and the oil and gas industry, where Russia sells weapons and energy to other countries in order to prop up government finances. But this also causes a problem, because as machinery gets older they will need replacement parts. The older the machine, the more likely it is that a company has moved on to produce new and more advanced machines, and so you can't buy replacement parts for old machines anymore. Except for Russia. which was the only country still producing old soviet technology. But as foreign companies moved on and stopped buying Russian equipment, some of those Russian factories might shut down because they no longer have enough customers. Those parts then become unavailable. This causes a chain reaction where various other Russian factories shut down as their machines break down. In order to keep its industry alive, the Russian government has to spend money keeping obsolete factories in business. thereby maintaining the old soviet system of supporting inefficient companies. As a result, Russia's economy has become more and more and more closed off from the rest of the world as it has to rely more and more and more on replacements produced inside Russia. And because a lot of Russian industries barely innovate, there were no customers to buy your newer machines even if you did make them. And for those high-tech components, the Russian industry does need, it had to buy them from other countries such as high tech computers. As a result, Russia is completely reliant on other countries for high tech products while their own products are becoming less and less valuable as they become more and more obsolete. This goes hand in hand with a Russian culture where people have to do as they are told and not speak up about issues. Meaning that just like in the Soviet Union, a lot of managers had no idea how to fix the company because people were not allowed to tell them. In short, almost everything in Russia is geared towards keeping the people in power and not towards making a wealthier nation. Oligarchs don't fight to make new industries, they instead try to take over the industries that already exist in the country. And unless Russia fixes this problem, it will remain a country that sometimes develops for a couple of years or maybe even decades, but usually stagnates and declines. Even if somehow Russia got a president who actually cared about economic development, it would be almost impossible to implement. Because such plans need money, and most of the money is earned by the oligarchs. And if they decide to tax the oligarchs, then the president is likely replaced with someone else. Someone who does not tax the oligarchs. And so in the end, after the breakup of the USSR, Russia saw a massive increase in inequality. In many countries this was a reason to improve the economy and lift the poor out of poverty. But in Russia the poor have largely remained poor, and those who became rich early got to stay rich. For example, the people who were well educated before the breakup generally got a good job after the breakup and could live relatively comfortable lives. And they largely chose to spend those comfortable lives in the richer regions of Russia. Meaning that finding teachers to teach the poor is a lot more difficult than finding a job. difficult because those teachers don't want to live there and moving millions of students around in a country the size of russia is incredibly expensive too expensive for the country to afford as a result the children of the rich will also get a good education but the children of those who are not rich will likely remain poor and those who are poor are unable to build up wealth over time such as owning their own house, with a large percentage of Russians forced to rent for the rest of their lives which will create generational poverty for decades to come. For example, after the Soviet Union collapsed the currency lost most of its value and Russians lost 70-80% of their savings, with inflation reaching 1500% in 1992. Between 1989 and 2016 the average household income increased by 40% despite rising inequality. This inequality was so big that by 2016 the top 5% owned 85% of the wealth in Russia compared to 63% in China and 66% in the USA. And Russia's level of income inequality is higher than almost all other post-communist states. And then Russia did something really, really really stupid. It decided to start a full-scale invasion of Ukraine. The Europeans opened a history book and learned that, oh my god, Russia has been trying to invade Europe since it was created almost 500 years ago. And the EU and its allies began to close themselves off from the Russian economy. As a result, Russia started suffering shortages of high-tech products. airplane parts, machinery, and even military components. Even if Russia manages to find new suppliers, it will cost a lot of money to transition the Russian economy from relying on western products towards relying on Chinese products or perhaps Indian products in the coming decades. And even if it manages to recover from the war, it will still be suffering from a lack of competition and a lack of innovation. And unless Russia transitions into a completely new economic system, it won't ever become a rich country. But that is unlikely to happen within our lifetimes anyway. And so this is why Russia is not a rich country today. If you liked this video, then click the like button and subscribe for more content. We've also made a video on why India is still a poor country and why Africa is still a poor continent. If you want to see those videos, then click them on screen right now. This was Avery from History Scope. Thank you for watching.

Russia is not a rich country, but it has everything it needs to be a rich country. Farmland, oil, gas, iron, aluminum, and a labor force of 70 million people. So what happened?

Why is Russia not rich? Chapter 1. Early Russia. Serfdom and the Commune.

The country of Russia started out here in Eastern Europe. This land was first unified by the Mongols. Slowly over time the Russians would ally themselves with different Mongol clans in order to gain more land, power, and influence. Eventually the Russians became more powerful than the Mongols and in 1547 Russia became an independent country under the leadership of Moscow. With the Mongols gone it became a lot easier for people to move from one part of Russia to another.

And this was a problem because Russia was incredibly big. So if a peasant did not like their lord, they could move to another part of this gigantic country. As a result, a lord could lose their workforce.

Without enough workers, the lord can't live off of the taxes they provide. Those taxes paid for the military. And if this happened in a region close to the border of Russia, then you suddenly had a region without the protection of an army.

This left Russia vulnerable and the nobility powerless. And so they implemented a new system called Serfdom. The way Serfdom works is that peasants become serfs. A serf was assigned a plot of land and was forced to work and live on that land for the rest of their lives. When they died their children would have to work the land afterwards.

A lord could then buy and sell the land in order to buy and sell the serfs. They could force a serf to perform any work the lord demanded. And a serf wasn't even allowed to marry without the lord's permission.

In short, serfdom was just another form of slavery. But this system kept the Russian elites in power. The Russian leader could give more land and serfs to people who served the government, and it allowed the government to move serfs into Siberia in order to colonize the region.

But serfdom also kept people poor. A serf did not get to keep the food they produced, so there was no need to ever grow more food than you needed to survive. It's not that they were lazy, it's that they didn't care.

It was a problem of motivation. If a peasant works their ass off and a landlord ships a few more crates of produce, they don't see an extra ruble. So where's the motivation?

But over the centuries other countries had abolished SAFTA and their now independent farmers had slowly developed better agricultural techniques and produced more food. Eventually countries began producing more food than they needed to eat for themselves. And farmers began moving into cities. For most of human history 99% of people worked on farms. But thanks to innovation that became 98%.

As a result, just reducing the amount of farmers by one percentage point meant you had twice the amount of people who could work outside of agriculture. And those people began working as craftspeople in workshops. When steam engines were invented, those workshops were turned into factories.

Factories produce a large number of goods. And in order to earn money, those factories produced things everybody wanted to buy such as steel products or clothing. But in order to actually sell the large amount of goods you are making... You need a large amount of people with money who can afford to buy what you are making.

And people in Western Europe had that money because farmers produced enough food they could sell some of it for a profit. But most Russian farmers were not rich enough because they did not innovate because any profit they did make went usually to their landlord. But there were also people who did not live and serve them. Those were farmers living in a commune. And the commune was land that was owned by a community, usually a village or a small town.

In these communes, households were granted a piece of land they could work on. The size of that land was determined by the amount of people living in that household. But what if you have more children and your household has more people? Well, then land gets periodically shuffled around between the farmers to make sure everybody had enough land. But if your land might be taken over by someone else in a few years, Why would you spend years developing your farmland if it's going to profit somebody else?

As a result, even if you were not a serf, you had almost no motivation to start innovation. Chapter 2. Imperial Russia. Bad geography. If there aren't enough customers inside your own country, you can find customers in other countries.

Today a lot of poorer nations start their development by selling to richer nations. But for Russia this was almost impossible. To understand why, let's look at this map.

This is a map of Russia's navigable rivers. Meaning these were the rivers they could use to transport cargo on. As you can see this river system ends up in four locations.

First is up here in the Arctic Ocean. This part of the world used to be frozen for long periods of time before human-made climate change. As a result, you can only use this trade route a couple of months per year.

The second is at St. Petersburg, but this region also freezes over most of the year, meaning that once again you could only use it for a couple of months. The third is down here in the Caspian Sea, and the Caspian Sea does not connect to the rest of the world. And lastly is this one here in a place called Rostov-on-Don.

You might remember it from the failed coup attempt in June 2023. But this region wasn't colonized by Russia until the late 18th century and rivers in Siberia did not at all connect to the main population centers in European Russia. As a result for most of Russian history the country did not have reliable access to the oceans meaning cargo had to be transported on land. But that requires a lot more energy than a ship which can go with the flow.

As a result, Russian goods were more expensive to sell and foreign goods were more expensive to buy. Russian products could not compete with those of the English, the French or the Germans. And so Russian industry didn't grow as fast because they did not have access to as many customers as other European countries.

And so instead the Russian elites focused on building more farms rather than building factories. And as a result Russia's population increased from 14 million people in 1722 to 129 in 1897 as more and more parts of Russia were turned into farmland. But by the year 1800 only about 12.8% of people lived in towns or cities compared to 40% in France and 70% in Germany.

And while those other countries increased the productivity of individual farmers In Russia, farmers were 16% poorer in 1800 than they were in 1700. At the same time, Russia was also politically less important because without a modern industry, Russia couldn't produce modern weapons. And in 1853, Russia lost the war against France, Great Britain and the Ottoman Empire. And so on one hand, Russia was facing a population that was becoming poorer and poorer and who might start a revolution. And on the other hand, Russia was facing a world in which they became weaker and weaker compared to countries like Great Britain, France, Germany or the USA. And so in the 1850s, the Russian Empire began looking for a solution.

Chapter 3. Laissez-faire Russia. Failing to reform. Russia's plan to begin their own industrialization started in 1861 with the Emancipation Reform of 1861. In this reform, the 23 million serfs living in Russia were granted their freedom.

The idea was that by granting farmers more freedom, they would adopt new technologies, produce more food, and Russia would finally be able to industrialize and become rich. But there was a problem in its implementation. For example, from now on, serfs became free, independent farmers. Each farmer was given a plot of land that they themselves owned. But this land wasn't free.

They had to pay a mortgage to buy the land. Those farmers were then not allowed to sell this land again. And if they died before repaying their mortgage, their children would inherit the land and the mortgage.

But for millions of people, the land they were assigned wasn't large enough to support them and their families. In order to get more food, most families had livestock which was allowed to graze on the land of their landlords. But when serfs were freed, landlords demanded money in exchange for letting cattle walk on their land.

As a result, any extra money those farmers earned usually went straight back to their former landlords. And a lot of people couldn't survive in this system and decided to leave their farm and find work somewhere else. But even if they did find work in a factory, they were still forced to repay the mortgage of that land hundreds of kilometers away. As a result, any extra money they earned always went to their former landlord.

As a result, the emancipation of the serfs did very little to help those serfs. The other Russian farmers mostly lived in communes and this reform did nothing to make them more efficient. Meaning most Russian farmers weren't even affected by this reform at all. The government had hoped that by making a couple of changes to the social structure of Russia that they would be able to fix all the country's problems.

But the problem was still a lack of competition. And by making sure that the profits of the average people largely went to the richest people, it meant that there weren't enough customers in Russia to support its own industry, and its geography made it impossible to sell to foreign customers. The only reliable customer Russia had was the government. As a result, the only truly profitable businesses was the military industry.

The government needed weapons and was willing to pay whatever amount was needed to keep weapons factories operating. The Russian government paid for these factories and equipment by taking out foreign loans. And in order to repay these loans, the government taxed average people. People who were barely surviving.

The government could have taxed the elites, seeing as they owned most of the wealth. But the Russian political system at that time worked in a way that the emperor kept the nobility rich and powerful and in exchange those nobles supported the emperor. By taxing the elites the Russian emperor would turn its supporters into its opponents and so for the next 30 years Russia industrialized a little bit but in general the life of the average Russian wasn't any better.

Chapter 4 Industrial Russia the failure of the aristocracy In 1891, Russia suffered a drought and then a famine. And it's difficult to tax farmers when those farmers can't grow food. If Russia had developed industry they could simply tax factories.

But those barely existed. As a result, Russia couldn't repay all the loans it took out for industrialization. And so the government decided to change their economic policy to prevent this from happening again.

Instead of waiting for the elites to invest in industrialization, it was now the government investing in industrialization. In order to build a basic factory you needed coal. There are different types of coal.

The best coal for a factory in the 19th century was something called cocaine coal. But for a very long time Russia did not have access to cocaine coal. But this changed with the development of the Donetsk region in modern day Ukraine. This region had access to cocaine coal and iron ore.

But it only started industrializing in the 1870s. Before then Russia had to import most of its coal. But importing coal was very expensive for Russia, meaning that most factories, machines, and trains in Russia had to run on very expensive coal.

But by the 1890s, it was possible for Russia to make their own, just as countries like France, the United Kingdom, or Germany were doing. Using Russian-made steel and coal, they were able to build rail lines connecting Russian cities and industries together. As a result, Russia was finally able to overcome the war. its large size.

Instead of relying on rivers which didn't even reach the oceans, Russia could now build a rail line from one part of the country to another. They connected the iron mines of the Urals with the port in St. Petersburg and the steel factory in Ukraine. The government then funded factories to be built all over the empire. And now Russia seemed to finally be able to develop as a nation and stop being poor. But there was a problem.

Because when the Russian government funded a new factory or company, that business was given a monopoly. Meaning that it was the only business allowed to operate in a particular region or industry in Russia. As a result, Russian factories did not have to compete with each other. And when factories don't compete with each other, they have no incentive to innovate.

And without innovation, your economy can't develop. The reason the government used this system is because the emperor could give companies to the elites in exchange for their political support. And in order to protect them from competition even further, they put high taxes on foreign products.

So even if Russian products were more expensive, they were still cheaper than foreign products. And if an entrepreneur wanted to start a new company of their own, they would need to receive permission from either the Russian emperor or his minister of finance. Meaning that it was almost impossible for someone with a good business idea to actually set up that business in Russia.

As a result, any industry that was developed did not keep developing because there was zero competition. On top of that, the Russian people were poorly educated with only 28% of Russians 9 years or older able to read or write, compared to let's say 96% in Germany, France or the UK. And education in Russia was largely determined by one's ethnic group. German and Jewish people living in Russia were much better educated, but they usually didn't speak Russian very well.

And as a result, the knowledge that Russia did have was not easily shared with the rest of the population. As a result, Russia's industrialization was a lot slower than other countries. By 1913 the average Russian was about 50% more productive than they were in 1860. The average German in that same time period became 250% more productive. And the average US American 275% more productive. And even if we compare it to let's say Japan, a country that also started its industrialization process in the 1860s, they had become 75% more productive.

And then Russia made one of the worst economic decisions in its history. They went to war with Germany in World War 1 between 1914 to 1917, losing over 2 million soldiers, suffered a famine as those soldiers weren't producing food anymore, and the people started two revolutions. In the end, Russia became communist and was renamed the Soviet Union. Chapter 5 Communist Russia The Communist Revolution So now, without nobility, Russia should finally be able to industrialize and stop being poor.

But there was a problem. The Russian Revolution was an economic disaster. The first thing the government did was to take control of the economy.

The more companies they controlled, the less efficient those industries became. Then Russia had a civil war, which the communists did eventually win. And so now it was 1921, the civil war was over and Russia's economy was 63% smaller than in 1913 before the war. And the new communist leadership had to decide which version of communism they were going to use. There are a lot of different versions.

On one hand, a government can give control of companies to its employees who then democratically decide how to run the businesses they work for. On the other hand, you have a communism where nobody owns businesses except the state. And the Soviet Union decided on the second option.

But why? Well, Russia is incredibly big. In order to create policies that affect the whole country, you need to have a government that can actually control all of it. And in the case of Russia, there were a lot of regions that still wanted to be independent.

And if you give democracy to people who want independence, then you will eventually lose control over those regions. They might withhold vital resources. or civil war might destroy Axis entirely.

The further away those regions are, the more difficult it is to control them, because most Russians lived in Europe. As a result, if Russia wanted to maintain control over Asian regions, it would constantly have to send troops and material from Europe to Asia because there weren't enough Russians living in Siberia to do it themselves. In order to prevent this, the Russian Empire, the Soviet Union, and modern-day Russia have all used the same strategy. Strict, government authority over all parts of regional government and regional economies. Under the Russian Empire they did this by giving these lands over to loyal nobility.

Modern day Russia has oligarchs and the Soviet Union had something called a command economy. The way a command economy worked in the Soviet Union is that they created a five-year plan. In this plan they planned everything to the smallest detail.

Which products are made? How is each product made, what amount of each product is made, and a thousand other things were all put in this plan. Factories were given quotas they had to achieve using the plan created by the central government. If a factory failed to meet these standards they would receive more resources to help them.

And this strategy was quite effective in the early Soviet Union. That's because it got rid of the monopolies and cartels. In the Russian Empire, nobility might refuse to do business with someone because they were in a different faction in the government.

They might make deals in exchange for personal favors instead of what is economically efficient. As a result, the economy was incredibly inefficient. But under the five-year plans, those factories, companies, and regional governments were given quotas. In order to reach their quotas, they had to connect the economy together and find more efficient ways of getting their job done.

And as a result, the old imperial trade barriers were removed. But because Russia had little industry left after a world war and a civil war, they were forced to import most of these products in the beginning. They paid for it by selling food to other countries.

At times, they sold so much food there wasn't enough. for the Soviet people, creating famines across the USSR. Which in turn meant fewer workers and more unhealthy workers. As a result, the Soviet Union's economy didn't grow as fast as it could have. The result of this policy was a 2% increase in industry per year compared to just 0.5% growth under the Russian Empire.

See on screen right now what the difference between 0.5% and 2% growth is over a period of 100 years. However, the Russian worker was less productive than similarly developed countries at the time. Farmers were 10% less productive and factory workers were 7% less productive.

Chapter 6. Stalin's Russia. A Command Economy. By 1928, 13% of the Soviet population worked in industry, producing 52% of the country's GDP. The Soviet government looked at these figures and calculated that for every 10% of the population moving from farm work to factory work that the economy would grow by 69%.

And they concluded that was very nice. And so the communist government decided to move people into cities and factories in order to make the Soviet Union richer. But according to the government, people weren't going to the cities fast enough on their own.

So the new Russian leader, Joseph Stalin, implemented a brutal policy of forced relocation. They took people's farms from them and forced them to work in factories and live in cities. Between 1928 and 1940 another 20% of the population moved into the cities.

But cities require a lot more maintenance than towns and farms. They need sewage systems, public transport, healthcare services and much more. And you need educated people to run those services. But the Russian empire never put a lot of effort into education. And so the USSR set up education programs around the country to bring the literacy rate up.

By the 1930s the Soviet Union had enough skilled laborers that they were able to build factories all on their own without having to import materials from abroad. And by now a new problem appeared in the communist system. Corruption.

If you were a factory manager you might take some materials you get and sell them on a black market. Or maybe you are just not that good at your job and don't want to admit it. So you start lying about problems that might not really exist.

But how do you solve this problem? Well, according to Joseph Stalin, the solution was punishment. Very harsh punishment.

Bad managers were sent to gulags. But that just makes those managers hide their activities even more. And so they implemented a system of denunciation. Where people working in factories were encouraged to denounce their bosses. And while this fear that anyone might denounce you did work, it also meant that if you wanted to get a promotion, you could simply denounce one of your bosses.

Because anyone could be sent to the Gulag from the most brilliant rocket scientists to war heroes to the Polish. And those Gulags were placed in regions most people did not want to live. Siberia.

The average Gulag worker was only half as productive as a free worker. However, they could be sent to places nobody else wanted to go. to develop vital infrastructure in far-off regions. And as the Soviet economy advanced, its people had a wider selection of goods available to them.

They had more money and they were generally healthier, although there were notable exceptions such as the Ukrainians. However, if Russia had stayed out of World War I and simply continued their economic policies under the Russian Empire, they would have achieved roughly the same results by the late 1930s. Meaning that all those people who starved, all those... gulags and all that suffering achieved exactly the same as the Russian imperial system would have.

And while the average Russian was wealthier, they were still much poorer than developed countries in Europe and North America. But in the end Russia was able to regain its position as an important European power. But this was largely due to the fact that the rest of the world suffered from the Great Depression while the Soviet Union did not. It's not so much that the Soviet command economy was so much better.

It just happened to emerge in a time when capitalism was failing and the far right was failing even harder. Chapter 7. Cold War Russia. The Slow Slowdown.

Throughout this video, the territory of Russia and the Soviet Union has changed quite a lot and it will keep changing. However, for the sake of this video, we will focus on the territory of modern day Russia. And we're not including occupied territories in Ukraine, Georgia or Moldova.

During World War II, Russia went through a process of rapid industrialization as they received foreign aid from their allies. As a result, the Soviet Union after World War II had become a superpower, with an army able to defeat that of any other country in the world except perhaps the USA. And a few years later, Stalin died as well in 1953. Leaders decided to remove a lot of the cruel policies of Stalin's.

Gulags were closed, punishments were reduced, and ethnic cleansing was largely abolished. But this presented a new problem. Under Stalin, managers were kept in line through fear of punishment. Bad managers were often sent to gulags.

While this had some success, punishing people for doing bad things isn't as effective as rewarding people for doing good things. So they created a system where the leaders of different regions and businesses would get a performance review. The leaders that scored the highest were rewarded and those who scored the lowest were fired.

As a result, Russia would finally, finally get some competition with only the most competent people getting promoted based on their performance. This is a system that China and Vietnam are using today which has resulted in their rapid economic development. But if you're corrupt, then this system is a major threat to you. And in the Soviet Union, there were so many corrupt officials that they managed to block this new system.

As a result, Russia did not get competition, it did not root out corruption, and eventually the Russian economy just became more and more and more corrupt. If the Soviet Union had actually implemented competition between its regions, then it's likely that their industry would have kept developing over time and that they would eventually have become a rich nation. But instead, Russia stuck to corruption.

The system the USSR used instead was to divide the country up between themselves. Different leaders would receive control over a region or an industry. This meant there wasn't as much oversight as different departments sometimes didn't know what the others were doing. Meaning there were more opportunities to be corrupt.

And in exchange for being given a piece of the USSR's economy or territory, you in turn support the leader of the Soviet Union. As a result, Russia turned back to its old system where the entire country was carved up between the elites. Except instead of the elites being nobility, they could now be from anywhere. And so once again there was zero competition and zero innovation.

And if a manager failed to meet that production quota in their 5 year plans, the government simply gave them more resources. As a result, inefficient factories were given more resources while efficient factories were given fewer resources. Meaning that more and more money was spent on making the economy less efficient. And by the 1970s Russia started importing high-tech products from other countries because they lacked the innovation to make these products themselves. And while they had a lot of scientific achievements, they were unable to turn them into useful products.

To give an example of this, let's look at the Soviet video game industry. Because the most popular video game of all time isn't Minecraft or Pokemon or Grand Theft Auto, it's Tetris. And Tetris was created in 1984 in the Soviet Union.

The Soviets could have set up an entire industry of software engineers dedicated to making some of the best video games in the world. They could have exported them to Japan, the USA and Western Europe. However, in the Soviet Union, the entire economy was managed in a five-year plan.

So in order to make a new video game, central planners had to plan those games five years in advance. And those central planners were some of the most experienced people in any industry. But innovation usually comes from younger people looking to change the current system, rather than relying on things that were done in the past.

As a result, a bunch of software engineers who had experience with, let's say, telecommunications software or industrial software, had to come together and plan video games for the next five years. They simply didn't know what to do or what customers wanted. Even with the best intentions, innovation cannot be planned.

And as a result the largest video game industries are located in the USA, the European Union, and the Japan. And this was the case for a lot of new industries the Soviet Union tried to create, but failed to turn into useful products. The only exceptions to this were the military, space, and industrial software.

And as the Soviet economy began to lag behind in the 1970s and 80s, they had to import more and more products from other countries in order to make up for their own lack of innovation. By the 1950s the Soviet Union imported roughly 10% of their GDP but by the 1980s it was up to 25%. But if you want to buy from other countries you need money. So the USSR began selling oil and gas to Western Europe and weapons to other communist nations. But this wouldn't work forever and by 1985 the USSR was in deep economic crisis.

Chapter 8. Declining Russia The breakup of the USSR. And in 1985, a new Soviet government took over under the leadership of Mikhail Gorbachev. And they wanted to completely reform the Soviet Union. They wanted to give control of businesses over to people who worked... them, they wanted businesses to compete in a free market, and the government would stop financing failing businesses.

But they faced a major issue. In order to implement these reforms, the government needed to know exactly what was wrong with the country. But up until now, it was illegal to openly criticize the communist government. In order to fix communism, they had to allow free speech.

And only then did the government begin reforming the economy, introducing new changes over the course of five years. But if the government stopped giving money to inefficient businesses, then those workers would lose their jobs and customers lose access to products. And because they were allowed to criticize the government, a lot of people who suffered during this reform began openly talking about how terrible their new government was.

On the fringes of the USSR, people didn't talk about reforming communism, but about ending communism and leaving the Soviet Union. And in just a few short years, the Soviet Union broke apart. as first its vassal states in Europe declared their independence and then the regions inside the union declared independence.

In the end this transition of the economy produced some small results. On average in 1989 the average Russian earned 7 112 dollars per year. A wealthy country was classified as earning seven thousand six hundred twenty dollars per year at that time. Turning Russia into an upper middle income country. With the average Russian being about two thirds as wealthy as the average Portuguese person and about half as wealthy as the average Italian person at that time.

Chapter 9 Capitalist Russia, the oligarchy And so now, without communism, Russia should finally develop and stop being poor. But there were a few problems. After the fall of the Soviet Union, the newly independent countries went into roughly two directions.

There was the direction that countries like Poland and Slovakia went into. Transitioning into a capitalist economy by opening up their economy to foreign trade, joining the European Union, and using the large number of highly educated people from the Soviet era to develop newer and more advanced industries, such as selling car parts to German factories or providing cheaper medical treatment. treatments, such as laser eye surgery or hair transplants. And it's expected that the former soviet states that joined the EU will be at the same level of development as the west by the 2030s to 2050s, with Poland and Czechia being the first to reach this level. And then there is the other group of countries.

These countries instead turned the soviet system into an oligarchy. This group of countries includes Kazakhstan, Belarus and Russia. And an oligarchy is a terrible way to run your economy.

But how did they get there? Well, the Soviet government had strict control over the economy. When that government collapsed, the controls were removed, until the government only controlled social services, fiscal policy, and monetary policy, like most countries around the world are doing today.

But who should control all the businesses if the government was losing control of them? Well... the workers.

And so employees were given a share in the business they worked at. But the economies of the former Soviet countries were in ruin. The Soviet system relied on central planning and suddenly inexperienced managers had to come up with their own plans.

As more Soviet countries declared independence, it became harder for factories to do business with each other as they were now in two different countries. Meaning certain goods might be too expensive or could not be created at all. And thanks to the reform before the USSR collapsed, The countries were already in an economic crisis even before the breakup. And so a lot of companies were mostly worthless and a lot of them went bankrupt and a lot of people were fired and struggled to survive. And then a couple of rich people came in and offered to buy their worthless shares in the companies.

Most people were desperate and people who are desperate are more likely to sell their own possessions. This happened so much that eventually a small group of people was able to seize control of most of the Russian economy between 1989 and 1993. This small group of people were then included into the government, providing political support to the president. And in return the president gives them free rein to do almost anything they want, as long as it doesn't cause trouble for the central government. And so Russia essentially returned to the old imperialist and communist systems. The elites control the entire economy.

Each elite controls one part of the economy and can manage it the way they want to, as long as they don't oppose government policy. And in fact a lot of Soviet departments were simply bought up and given a new name. Gazprom, UES, Trasneft, Rosbank and Roscontract. The elites in charge of these companies are called oligarchs.

And those oligarchs have organized this system in such a way that each person has a monopoly in a particular industry or region. Similar to what happened under the Russian Empire during the early industrialization period. Where businesses might refuse to cooperate because they are in different factions in the government. Where certain regions will sell off resources in exchange for political favors. And where competition is almost non-existent.

Russia has transitioned into a new type of economic model. a model called industrial feudalism. Chapter 10. Putin's Russia.

Industrial feudalism. Under President Putin, the country was carved up between the oligarchs who each got to rule a portion of the economy or a portion of Russia's territory. They generally get to make up their own rules in their own companies and regions as long as they don't contradict the decisions of the president.

The oligarchs keep the president in power and in exchange the president keeps the oligarchy rich. And so the new Russia continued the Soviet Union and the Russian Empire's tradition of little competition, little innovation and little development. To understand how the oligarchy controls the economy and stops innovation, let's look at Russian agriculture.

Russia has a lot of farmers, and those farmers don't sell their harvests directly to customers. They sell it to a wholesaler. But what if your government makes a law which said that only one wholesale company is allowed to operate in your area? As a result, that company can ask a low price for the food farmers produce, because they aren't allowed to sell to anyone else.

Those wholesalers then once again sell that food at a much higher price to supermarkets. As a result, the farmer stays poor and the oligarch in charge of the wholesale company gets very, very rich. And as a result, those farmers don't even have enough money to invest in their own business. And so the average farmer can spend a lot less on innovation.

And this process is common throughout Russia using different methods. The goal of Russia's economy isn't to make its people richer, but to keep the oligarchy in power. As a result, the Russian government has become more and more corrupt because a corrupt government enriches the oligarchy.

For example, social services are in the hands of the oligarchy, who take some of that money for themselves. There are exceptions to this however. For example, when Russia started a full-scale invasion of Ukraine in 2022, the leader of the central bank was able to prevent the Russian currency from becoming worthless. Thanks to this one lady's leadership and the organization she manages, she was able to stave off disaster.

And that's just one competent person in one key position. Russia has plenty of smart, educated, competent people, but their talents simply aren't being used. But of course, not every Russian works for an oligarch. Outside the oligarchy is an economy with plenty of smart, educated, and competent people, but their talents aren't being utilized to the fullest extent.

These people tend to be more entrepreneurial and set up new businesses in new industries not controlled by the oligarchy. But as soon as those industries become successful and grow large enough, the government steps in, takes over the companies and hands them over to one of the oligarchs. The goal is to prevent outsiders from gaining too much power, but also keeping the elites happy by occasionally giving them a new business.

And so any new successful industry in Russia is turned into yet another oligarch controlled industry without competition and without innovation. But if your property can be taken away from you by the government at any moment, it also means that an oligarch who is no longer useful might have their property taken away from them as well. And so in order to keep their money safe, Russian oligarchs don't invest that money into Russia, but they send it to foreign bank accounts. They put that money in the USA, the EU and Switzerland. Which were historically a safe place for people to invest their money in regardless of political alignment.

And this is also the case for a lot of foreign companies. If a large foreign company sets up factories in Russia, then the government can take those factories away at any moment if that company does something the Russian government doesn't like. While there were companies operating in Russia after it became capitalist, Most companies preferred investing in countries with strong property rights, where they can be certain their businesses won't be stolen from them. As a result, Russia has largely isolated its economy from foreign competition. Meaning there is no competition from inside Russia and no competition from outside Russia.

The only time Russia actually needs to compete is when they sell their products to a foreign market. As a result, the only two Russian industries that have actually developed are a small high-tech weapons industry and the oil and gas industry, where Russia sells weapons and energy to other countries in order to prop up government finances. But this also causes a problem, because as machinery gets older they will need replacement parts. The older the machine, the more likely it is that a company has moved on to produce new and more advanced machines, and so you can't buy replacement parts for old machines anymore.

Except for Russia. which was the only country still producing old soviet technology. But as foreign companies moved on and stopped buying Russian equipment, some of those Russian factories might shut down because they no longer have enough customers.

Those parts then become unavailable. This causes a chain reaction where various other Russian factories shut down as their machines break down. In order to keep its industry alive, the Russian government has to spend money keeping obsolete factories in business. thereby maintaining the old soviet system of supporting inefficient companies. As a result, Russia's economy has become more and more and more closed off from the rest of the world as it has to rely more and more and more on replacements produced inside Russia.

And because a lot of Russian industries barely innovate, there were no customers to buy your newer machines even if you did make them. And for those high-tech components, the Russian industry does need, it had to buy them from other countries such as high tech computers. As a result, Russia is completely reliant on other countries for high tech products while their own products are becoming less and less valuable as they become more and more obsolete.

This goes hand in hand with a Russian culture where people have to do as they are told and not speak up about issues. Meaning that just like in the Soviet Union, a lot of managers had no idea how to fix the company because people were not allowed to tell them. In short, almost everything in Russia is geared towards keeping the people in power and not towards making a wealthier nation.

Oligarchs don't fight to make new industries, they instead try to take over the industries that already exist in the country. And unless Russia fixes this problem, it will remain a country that sometimes develops for a couple of years or maybe even decades, but usually stagnates and declines. Even if somehow Russia got a president who actually cared about economic development, it would be almost impossible to implement.

Because such plans need money, and most of the money is earned by the oligarchs. And if they decide to tax the oligarchs, then the president is likely replaced with someone else. Someone who does not tax the oligarchs. And so in the end, after the breakup of the USSR, Russia saw a massive increase in inequality. In many countries this was a reason to improve the economy and lift the poor out of poverty.

But in Russia the poor have largely remained poor, and those who became rich early got to stay rich. For example, the people who were well educated before the breakup generally got a good job after the breakup and could live relatively comfortable lives. And they largely chose to spend those comfortable lives in the richer regions of Russia.

Meaning that finding teachers to teach the poor is a lot more difficult than finding a job. difficult because those teachers don't want to live there and moving millions of students around in a country the size of russia is incredibly expensive too expensive for the country to afford as a result the children of the rich will also get a good education but the children of those who are not rich will likely remain poor and those who are poor are unable to build up wealth over time such as owning their own house, with a large percentage of Russians forced to rent for the rest of their lives which will create generational poverty for decades to come. For example, after the Soviet Union collapsed the currency lost most of its value and Russians lost 70-80% of their savings, with inflation reaching 1500% in 1992. Between 1989 and 2016 the average household income increased by 40% despite rising inequality. This inequality was so big that by 2016 the top 5% owned 85% of the wealth in Russia compared to 63% in China and 66% in the USA.

And Russia's level of income inequality is higher than almost all other post-communist states. And then Russia did something really, really really stupid. It decided to start a full-scale invasion of Ukraine. The Europeans opened a history book and learned that, oh my god, Russia has been trying to invade Europe since it was created almost 500 years ago.

And the EU and its allies began to close themselves off from the Russian economy. As a result, Russia started suffering shortages of high-tech products. airplane parts, machinery, and even military components. Even if Russia manages to find new suppliers, it will cost a lot of money to transition the Russian economy from relying on western products towards relying on Chinese products or perhaps Indian products in the coming decades. And even if it manages to recover from the war, it will still be suffering from a lack of competition and a lack of innovation.

And unless Russia transitions into a completely new economic system, it won't ever become a rich country. But that is unlikely to happen within our lifetimes anyway. And so this is why Russia is not a rich country today. If you liked this video, then click the like button and subscribe for more content. We've also made a video on why India is still a poor country and why Africa is still a poor continent.

If you want to see those videos, then click them on screen right now. This was Avery from History Scope. Thank you for watching.

Transcript for:Economic Challenges Facing Russia

Transcript for:
Economic Challenges Facing Russia