Among successes, we include the rapid removal of price controls on most goods and the liberalization of both domestic and foreign trade, as well as the construction from scratch of markets for corporate shares and government bonds. Exports increased from about $54 billion in 1992 to about $75 billion in 1999, despite the 1998 financial crisis. Macroeconomic stabilization was for the most part successful from 1995 on, after repeated failures in previous years. From a peak of 245 percent in January 1992, monthly inflation was brought down to close to zero in August 1996. Though inflation spiked up after August 1998, it did not mark the end of stabilization, as some observers precipitously concluded: inflation was back down to less than 2 percent a month by late 1999.

Mass privatization succeeded in rapidly converting state property into private property and distributing shares to a large part of the population. Serious problems of corporate governance remained, however. The clearest failure of economic reform in the 1990s was the inability of central policymakers to define, enact, and implement tax reforms that would remove incentives for bureaucratic predation on businesses, especially small firms.

The goal of our book is to explain why some attempted reforms were implemented (at certain moments) while others were blocked or diverted. We argue that the answer lies in the realm of politics. The successful reforms were combined with political strategies that managed to coopt or isolate potential opponents. We call the crafting of political strategies the "how" of reform and contrast it to the question of the "when" of reform—predicting when particular reforms will occur.

Efficiency-enhancing reforms almost always threaten the interests of certain social actors with the power to block reform. The stakeholders in the Russian Federation varied from issue to issue but generally included the parliamentarians in the Duma, major bankers, raw materials barons, and regional governors. These four sets of stakeholders defined the central reformers’ room to maneuver. In each sphere of economic reform, stakeholder groups formed coalitions to protect their interests and impede central attempts at change. They could be overcome only by skillfully designed strategies that mobilized supporters of reforms while dividing the opposition to them.

On some occasions in the 1990s, Russia’s reformers quickly found the mixture of tactics that could overcome stakeholder resistance. On others, they stumbled into a tactically astute position almost by accident, after a number of false starts. In one important case—the reform of state finances—they never found a way forward. This failure had severe consequences that weakened, at least temporarily, some of the other successes of reform.

To overcome opposition to privatization, central reformers agreed to give a controlling tranche of shares to insiders—managers and workers. Though the government lacked the power to fundamentally redraw the structure of informal control that had developed in industry, it could turn the claims of "squatters" into tradable securities, laying the ground for a voluntary reassignment of control rights through trade. And it could side with the most powerful stakeholders to expropriate others—the industrial ministries—thus reducing the number of veto points over efficient use of assets. Although the corporatization of enterprises and the distribution of their shares to their workers and managers did not immediately solve problems of corporate governance, it provided somewhat greater discipline than the blatant asset stripping by managers and party bosses that took place during the late Gorbachev period.

After repeated failures, the reformers found workable tactics for macroeconomic stabilization in 1995–96. The major commercial banks were offered incentives to switch from making profits on inflation to investing in protected government security markets. The central bank was put in charge of dealing in government bonds, a highly profitable opportunity, to make up for the loss of commissions and profits it had earned by channeling cheap credit. Sectors that had previously been heavily subsidized—manufacturing, agriculture, public services—were appeased with large energy subsidies. Through these policies the government prevented a coalition of commercial banks, inefficient industry, and agriculture from uniting in 1995, as it had in 1992, to defeat monetary austerity.

In the case of federal taxation, the reformers did not find a strategy to dislodge the anti-reform coalition. As a result, tax revenues continued to fall, while evasion and unofficial economic activity spread. In large part because of the distortions of the existing tax and regulatory systems, economic growth was slow to resume. When the international financial crisis of 1998 reached the Russian Federation, the weakness of public finance precipitated investor panic and the crash of the ruble. The Russian government responded in counterproductive ways.

Each successful strategy for breaking the anti-reform front of stakeholders had significant real costs as well as substantial benefits. The government’s mass privatization program created widespread private ownership, accelerated the restructuring of state firms, and surely reduced the corruption that would have accompanied continued state ownership. But the acceptance of "Option 2"—the privatization method in which workers and managers received 51 percent of voting shares in their enterprise—legalized a preexisting structure of control that was less open to outside investors than the reformers would have liked. The decision to coopt major banks through the protected GKO (Treasury Bill) market and the loans-for-shares auctions was a critical aspect of the successful stabilization plan. But it accelerated the concentration of economic power in the hands of a small group of oligarchs who headed different financial-industrial groups. This concentration was an obstacle to further institutional reforms, such as reform of corporate governance, and helped defeat all tax reform efforts.

Most criticisms of reform in the Russia Federation adopt one of two standpoints. Some compare the outcomes to a wish list of items that would be desirable. On this criterion, reform in Russia is disappointing. But this standpoint is absurd: not everything desirable is feasible. Other criticisms implicitly or explicitly compare reform in Russia with that in countries such as Poland or the Czech Republic (though not usually to, say, Kazakhstan or Ukraine).

We argue that the obstacles to reform in the Russian Federation were incomparably greater than in Poland or the Czech Republic, for two main reasons. First, neither Poland nor the Czech Republic had the problems of national integration or the federal structure that the Russian Federation has. Federalism creates pressures for central redistribution that a politically weak central regime ignores at its peril. Indeed, Prague’s failure to respond to the economic distress of Slovakia’s heavy industry helps explain why Czechoslovakia no longer exists. Building coalitions to overcome anti-reform stakeholders is often harder in politically decentralized countries. In the Russian Federation, regional governments were among the most powerful stakeholders, opposing reform of the tax system and macroeconomic stabilization programs that might have required large transfers across regions or cuts in federal subsidies and would have caused geographically concentrated increases in unemployment. A more secure federal structure was never successfully created by Yeltsin or his governments.

Second, the competitive parts of Russia’s economy were more concentrated, both sectorally and geographically, than they were in any of the Eastern European countries. A few raw materials industries, located in a handful of regions, accounted for a large share of profits, exports, and tax payments. The concentrated economic power of the leading oil and gas barons was virtually preordained, especially after the decentralization measures of early perestroika. So were the close—though sometimes troubled—relations of these industries with their regional governments. Since the survival of any government depended in part on preserving energy supplies to the country’s regions, this stakeholder group had enormous political power that could not simply be countermanded by presidential decrees. There was no realistic alternative to bargaining with the raw materials barons, attempting to divide them, and persuading them to exchange highly inefficient rents for less inefficient ones. No cohesive industrial group in the Czech Republic or Poland had such concentrated economic and political power to obstruct or divert reform.

President Putin faces the same set of challenges faced by earlier reformers. The power of different stakeholder groups may change over time. But implementing any drastic policy or institutional change will require an effective strategy to coopt some of the energy barons, banks, and regional leaders while isolating and expropriating others.

In our book we compare the task of an economic reformer to that of a mountaineer crossing a steep, uncharted mountain range. There is no map to guide the mountaineer through the territory. Even if a path exists, the mountaineer may not find it. The mountain range is different in different countries, so maps used by reformers in one setting will be of little help in another. More important are the skills of the mountaineer, his or her techniques for rappelling over boulders or circumnavigating new obstacles as they emerge. These techniques can be studied. It is our hope that the techniques for successful reform strategies that we discuss in the book may help inform those who attempt restructuring economies in other parts of the world.