US Foreign Assistance to Russia in the 1990s, "Shock Therapy" and the Unbearable Smugness of Victoria Nuland

Mikhail Zygar, a Russian journalist who has written a lot on Russia under Putin, recently published a long interview with Victoria Nuland, a US diplomat who retired earlier this year after being involved at the highest level in US policy toward Russia for the better part of the past 30 years.¹ I didn’t find the interview particularly interesting, but I think it was very revealing about how full of it and self-satisfied she and her friends are. I don’t want to go over everything she said I take issue with, because it would take forever and I plan to address most of it elsewhere, but I do want to talk about one particular claims she makes in the interview, because I think it’s something that is just straightforwardly false and it will give me a chance to clear up a widespread misunderstanding about the role of the West in the so-called “shock therapy” implemented by the Russian government in the 1990s and US foreign assistance to Russia during that period. I will conclude with a brief reflection on what the way in which Nuland misrepresents that history tells us on the failure of Western elites to engage in a serious exercise of self-reflection about their role in the current mess.

Here is the passage of Nuland’s interview with Zygar I have in mind:

Victoria Nuland: We tried to be extremely generous, as you know. There was almost a hundred billion dollars in support of various kinds that came from us and other Europeans. Including, I remember, first negotiations in the IMF to support the ruble, etc. But I think, you know, a lot of those things that were done to open the economy so fast didn't allow the population to adjust, you know so many people, as you know, lost their own social safety net and suffered, whereas a few people got very very rich and neither the Russian government nor we appreciated the backlash that was going to come as a result of that.

Mihail Zygar: A lot of people would actually disagree. I mean, I've I've spoken to many former ministers of the first Russian government, a reformist government…

VN: Kozyrev [the Russian foreign minister at the time] and company.

MZ: Yeah, reformist government, and they love talking about the absence of any Marshall Plan for Russia. And they say that Gaidar’s [deputy prime minister of Russia at the time] government was expecting, was waiting for some some kind of real help from the United States and they hoped that [the] Russian economy should have been supported and they say that there was no Marshall Plan, there was not enough substantial help from the West. Do you agree?

VN: It's objectively untrue. If you look at how much the IMF and the World Bank and we as nations were giving…

MZ: Even Soviet debts were not forgiven for Russia.

VN: They were largely forgiven, they were largely forgiven. Lend-Lease wasn't forgiven, but Lend-Lease was forgotten about, but mostly Russia was able to completely reschedule its debt and a huge amount of it was forgiven. Not private debt, that had to be negotiated. But if you look at the figures, as I said, between 1991 and 1996 more than a hundred billion dollars in foreign assistance went into Russia, mostly through the IMF and the World Bank because we wanted the management systems that came with that. You know I think where things began to get out of whack was when the state enterprises started getting sold off very quickly and some people got very rich and then, when the rubble got into trouble in [19]98, could we have done more then? Should we have? It happened very quickly, as you know, but I also think that, the vastness of Russia, probably things should have moved more slowly on both sides, if that makes sense.

Not to beat around the bush here, virtually everything she says in that passage is false.

First, during the 1990s (which is longer than the period Nuland is talking about but let’s be generous), the IMF and the World Bank disbursed approximately $20 billion to Russia.² There were also some bilateral assistance, but as Nuland herself hints at, it was relatively small. I don’t have time to look for a detailed breakdown, but it’s also unnecessary, since data from the IMF show that net official flows to and from the former Soviet republics — excluding the Baltic states — during that period were negative.³ This means that, as incredible as it may sound, Russia and the other former Soviet republics actually paid more to Western governmental and inter-governmental organizations, mostly to service the Soviet debt, than they received. To be clear, it’s even more true if we look at the period between 1991 and 1996 that Nuland was talking about, because for reasons I will explain below Western economic assistance to Russia increased after 1995. Moreover, since Russia had agreed to assume the Soviet debt in 1991, it would be even worse if we just focused on Russia because it means that other countries didn’t have to service the Soviet debt and that was the bulk of the payments that former Soviet republics had to make to Western governmental and inter-governmental organizations during that period.

Indeed, the US was so intent on making Russia pay the Soviet debt that, as then Russian foreign minister Andrei Kozyrev and deputy prime minister Yegor Gaidar — neither of whom can be suspected of anti-Western bias — recalled in their memoirs, the Bush administration at one point even tried to bully the Russian government, which at the time still had to break free of the Soviet Union and was desperate for international recognition, into selling 100 tons of its gold reserves to pay that debt.⁴ The Russian government refused on the ground that it would have been a “financial Brest-Litovsk” and US officials relented when Russia effectively agreed to take responsibility for the Soviet debt.⁵ In other words, while Russia was undergoing one of the worst economic crises in history and the Russian population’s standard of living was totally collapsing (it was so bad that many Russians had to grow their own vegetables to survive during that period), the West made it pay more than it gave to assist with the transition. If that’s what it looks like when the US is “trying to be extremely generous”, as Nuland put it, then I’d hate to see what it looks like when it’s stingy…

The decision not to provide significant macroeconomic assistance to Russia in a timely fashion was all the more unfortunate that it wouldn’t have required a very large effort to potentially change the course of reform in Russia. Western economists who advised the Russian government at the time estimated that it needed $25 billion in 1992, most of which in the form of loans and not grants. By comparison, the Marshall Plan had represented 4.7% of the GDP of the US in 1948 over 4 years, which in 1992 would have been almost $309 billion or $77 billion a year.⁶ So it’s fair to say that, despite what Nuland pretends, what the US did for Russia and the other former Soviet republics after the collapse of the Soviet Union was a far cry from what it did for European countries after WWII. It’s also worth noting that, largely thanks to the actions of the Russian officials it attempted to racket at the end of 1991 by asking them to sell their gold reserves, the US reaped a “peace dividend” from reduced military spending of $69 billion in 1992 alone that reached one and a half trillion dollars over the course of the 1990s.⁷ The decision not to do more for Russia immediately after the disintegration of the Soviet Union was a lot of things, mostly tragically short-sighted, but “extremely generous” it was not.

To some extent, the fact that it wasn’t done can be explained by the political constraints Bush and Clinton faced at the time, but that’s not to pretend that the US showered Russia with aid when it did nothing of the sort. To do that, as Nuland does, is to add insult to injury. Furthermore, it’s not just that the West didn’t do much to help Russia when it needed it the most, it’s also that it promised that it would do a lot more and failed to honor that promise. In fact, it did that not once but twice, another small detail that Nuland somehow neglected to mention. The first time was in April 1992, when Gaidar and his team of reformers were being attacked in Russia, so in part for that reason and in part because Clinton criticized him for not doing more to help Russia on the campaign trail Bush announced a package of multilateral assistance that was supposed to amount to $24 billion, but which almost completely failed to materialize in subsequent months.⁸ The second time was one year later, after Clinton became president. At the time, Yeltsin was in conflict with the Russian parliament and faced defeat in a referendum he’d called to settle the issue, so Clinton promised a multilateral package of assistance to the tune of $43 billion.⁹

After Clinton made that promise, the Russian minister of finance Boris Fyodorov, who between Gaidar’s dismissal in December 1992 and his short-lived return in September 1993 was the main reformer in the Russian government, warned that “if this [was] another year in which there is a lot of noise or just confirmation of aid promised earlier it would be catastrophic”.¹⁰ Needless to say, in spite of that warning, that is exactly what happened as, except for a paltry $1.6 billion in bilateral assistance that was disbursed a few months later (just as the conflict between Yeltsin and the Russian parliament was about to reach a bloody climax), the aid once again failed to materialize. Obviously, this pattern of dangling large amounts of aid that is never disbursed and more generally of making promises to Russia that are not honored didn’t exactly endear the US to Russian people, but again you wouldn’t know anything about that if you just listened to Nuland. In fact, I could go on for hours about the various ways in which the US screwed Russia since the end of the Cold War, but somehow we don’t hear much about that.¹¹ But in the rest of this post I would rather like to make a few more observations about economic reforms in Russia during the 1990s and the role of the West in pushing them.

There are solid grounds to criticize the role of the West in general and the US in particular in connection to reforms in Russia, but the usual criticism, according to which the West is responsible for destroying Russia’s economy in the 1990s by imposing “shock therapy”, is misguided on several counts. First, although Gaidar’s team made plenty of mistakes, it wasn’t “shock therapy” that destroyed the Russian economy but Gorbachev’s reforms. The Soviet economy was already collapsing when Gaidar and his team launched “shock therapy” and this would not have stopped, quite the contrary, in the absence of “shock therapy”. But people only see the collapse of standard of living during that period and never think seriously about that counterfactual, even though it’s impossible to assess the role of Gaidar’s policies in the economic hardship that followed by looking at the former without also considering the latter. Gorbachev had no idea what he was doing and his reforms were incredibly poorly conceived, although to be fair I’m not sure that a relatively smooth transition of the Soviet economy to a market economy was possible even with a competent leadership and in any case the West is not responsible for Gorbachev’s incompetence.

“Shock therapy” was not imposed by the West but by the circumstances and, in fact, it had already stalled by the summer of 1992 because former Soviet elites, who had largely preserved their power after the collapse (that’s part of what made the collapse possible in the first place), realized it would harm them and opposed it. Indeed, they had benefited from Gorbachev’s reforms, but it was in their interest to prevent further liberalization because partial liberalization allowed them to exploit various rents it created and therefore Gaidar’s policy was a threat to their interests.¹² Privatization was only allowed to proceed because Anatoly Chubais, the reformer in charge of it (who after Gaidar definitely left government at the end of 1993 became the leader of the so-called reformers in the Russian government), cut a deal with them by agreeing to give workers to get priority in the purchase of shares of their enterprises, which effectively allowed the managers, who had already acquired de facto control of their enterprises through “spontaneous privatization” during the last years of the Soviet Union, to legalize their control.¹³ Subsidies to enterprises resumed and the deficit increased, the central bank abandoned the previously strict monetary policy and massively fueled inflation in the process, etc. To the extent that the West played a role in that development, which to be clear was limited, that’s because as explained above it failed to put together a large package of macroeconomic assistance to ease the transition at the beginning of 1992 and weakened the reformers politically by making false promises.

Moreover, when reform started to decelerate in the middle of that year, the West did not actually stop to support Russia. In fact, putting aside export credits and food aid during the winter of 1992 to prevent a famine, that’s precisely when Western economic assistance started, with the first IMF loan agreement being signed during the summer. Incidentally, Nuland claims that US officials decided to provide economic assistance to Russia through the IMF because “[they] wanted the management systems that came with that”, but that’s another lie. The IMF was not well-suited to help Russia, but it was chosen to provide aid for the transition because that was politically easier. Indeed, any bilateral assistance to Russia would have had to be approved by Congress and that would therefore have required the president to spend political capital on getting the aid through Congress, which neither Bush nor Clinton were willing to do, though as we have seen that didn’t prevent them from promising the Russians they would.¹⁴ Nuland presumably came up with that story about “management systems” because, if she’d told the truth, she would have been forced to admit that, contrary to her claims that Americans “tried to be extremely generous”, providing economic assistance to Russia and the other former Soviet republics was not a priority for the US at the time. Anyway, to come back to the issue I was discussing before that digression, it’s therefore not true that the West imposed “shock therapy” in return for aid. It actually started providing macroeconomic assistance through multilateral institutions precisely when “shock therapy” was paused.

Over the next few years, the Clinton administration politicized aid to Russia by using its influence on the IMF to make it provide loans to Moscow with more lenient conditions than was customary and to ignore the fact that Moscow was violating even those reduced conditionalities, because it was a way to bolster Yeltsin domestically against his opponents and buying his reluctant acquiescence to NATO expansion. In doing so, the US effectively became a player in Russian domestic politics and associated itself with much hated figures in Russia, which seriously damaged the West’s image for a lot of Russians. But it didn’t even ensure that difficult but effective economic reforms would be carried out in doing so, because in doing that the Clinton administration became dependent on Yeltsin just as much as the reverse was true and therefore could not credibly threaten to cut aid if he failed to do the necessary reforms, which Yeltsin’s government therefore mostly failed to carry out.¹⁵ This moral hazard only delayed the inevitable and made the crash worse when it finally happened in 1998. Russia went through a massive financial crisis just as it was beginning to recover and it’s only then, because it no longer had a choice, that the Russian government started to adopt some budgetary discipline. This and the rise of oil prices made possible the economic boom under Putin.

Hence, the problem is not that the West imposed liberal economic policies, which were necessary but largely not implemented until after the Russian government no longer had a choice. The truth is that the West was simply not in a position to impose market reforms and, once the window of opportunity for macroeconomic assistance had been missed, neither was anybody else because the political conditions in Russia made that impossible and only a crisis could have brought about the necessary adjustments, which it did eventually.¹⁶ The real criticism of the US that people should make is that, by not providing macroeconomic assistance immediately after the collapse of the Soviet Union and subsequently politicizing aid to prop up Yeltsin domestically and buy his acquiescence to NATO expansion, it actually delayed necessary reforms and prolonged the economic crisis in Russia. Moreover, by tying its fate to Yeltsin, the Clinton administration purposely and visibly took a side in Russian domestic politics, thereby durably alienating a large share of the Russian population. Indeed, although Yeltsin may have been better than the alternative and may not have been able to stay in power as long as he did without American support, he still left the country in the hands of people who effectively looted it and the Russians haven’t forgotten that.¹⁷ I’m trying not to be caricatural here, US officials also faced political constraints during that period and ultimately most of the blame for the mistakes that were made during the transition should fall on Russian elites, but that’s not a reason to misrepresent what happened and it doesn’t change the fact that in many ways Western policy toward Russia during the post-Cold War era was extremely short-sighted.

You would think that, as someone who was at the center of Washington’s policy-making about Russia during most of that period, Nuland would have done some soul-searching about what she and her friends could have done better to prevent us from getting into that mess, but I couldn’t find any hint that she did in her interview with Zygar and on the contrary she seems perfectly self-satisfied. Obviously, the bulk of responsibility for Russia’s invasion of Ukraine falls on Putin, but it doesn’t mean that Western officials don’t have any and Putin’s malevolence doesn’t excuse their own incompetence. There is a lot more to be said about Nuland’s track record while she was in office, but that’s a story for another time. In this piece, I wanted to focus on what she said about foreign assistance to Russia during the transition, because it’s relatively straightforward to debunk it. Despite this fact, none of the “fact-checking” organizations, which are so prompt to debunk pro-Russia disinformation, will take her to task for her misrepresentations. This constant gaslighting will therefore be allowed to continue, resulting in a completely distorted and one-sided picture of how we got into that mess, which in turn makes it more difficult to get out of it.

1. Except during Trump’s presidency, which she spent outside of government, she served in every US administration since the collapse of the Soviet Union and was one of the most prominent “Russia hand” in the US government during that period.

2. According to John Odling-Smee, “The IMF and Russia in the 1990s”, IMF Working Papers (August 2004): 19, the IMF disbursed a total of $13.3 billion to Russia during that period, while according to International Monetary Fund, “Russian Federation: Staff Report for the 2000 Article IV Consultation”, IMF Staff Country Reports (November 2000): 55, the World Bank had disbursed $7.2 billion to Russia as of June 2000.

3. European Bank for Reconstruction and Development, Transition Report 2000: Employment, skills and transition (2000), 81. For Central and Eastern European countries that were not part of the Soviet Union and the Baltic states, net official flows were slightly positive, which is partly because unlike Russia many of them receive timely macroeconomic assistance and some like Poland also benefited from substantial debt forgiveness. See Anders Åslund, How Capitalism Was Built: The Transformation of Central and Eastern Europe, Russia, the Caucasus, and Central Asia (Cambridge: Cambridge University Press, 2012), 134-5 and 142-3 and Steven Greenhouse, “Poland is Granted Large Cut in Debt”, The New York Times, March 16, 1991 on that point.

4. Andrei Kozyrev, The Firebird: The Elusive Fate of Russian Democracy (Pittsburgh: University of Pittsburgh Press, 2019), 59 and Yegor Gaidar, Days of Defeat and Victory (Seattle: Washington University Press, 1999), 118–20.

5. James Goldgeier and Michael McFaul, Power and Purpose: U.S. Policy toward Russia After the Cold War (Washington D.C.: Brookings Institution Press, 2003), 68-72. The US representative at the negotiations actually threatened to stop delivery of American grain if Moscow refused. This happened as everyone in both Russia and the West expected a famine in large Russian cities that winter.

6. Calculations based on Barry Eichengreen and Marc Uzan, “The Marshall Plan: Economic Effects and Implications for Eastern Europe and the Former USSR,” Economic Policy 7, no. 14 (April 1992): 13 and U.S. Bureau of Economic Analysis, “Table 1.1.5. - Gross Domestic Product,” August 29, 2024, https://apps.bea.gov/iTable/?reqid=19&step=3&isuri=1&select_all_years=1&nipa_table_list=5&series=a&first_year=2016&scale=-6&last_year=2020&categories=survey&thetable=x.

7. Åslund, How Capitalism Was Built, 312-13.

8. Goldgeier and McFaul, Power and Purpose, 80–84, Åslund, How Capitalism Was Built, 312 and Curt Tarnoff, “U.S. Assistance to the Former Soviet Union 1991-2001: A History of Administration and Congressional Action” (Congressional Research Service, January 15, 2002), 7–10.

9. Goldgeier and McFaul, Power and Purpose, 91–95 and 98–102, Peter Reddaway and Dmitri Glinski, The Tragedy of Russia’s Reforms: Market Bolshevism Against Democracy (Washington D.C.: United States Institute of Peace Press, 2001), 398–99, Kristina Spohr and Kaarel Piirimäe, “With or without Russia? The Boris, Bill and Helmut Bromance and the Harsh Realities of Securing Europe in the Post-Wall World, 1990-1994,” Diplomacy & Statecraft 33, no. 1 (January 2, 2022): 171–72, Tarnoff, “U.S. Assistance to the Former Soviet Union 1991-2001,” 11–16 and Stefan Hedlund, “Russia and the IMF: A Sordid Tale of Moral Hazard,” Demokratizatsiya 9, no. 1 (2001): 117–19.

10. Leyla Boulton, “Fyodorov Hopes Aid Will Be Disbursed Quickly,” Financial Times, April 13, 1993.

11. See Philippe Lemoine, “Putin, NATO Expansion and the Missing Context in McFaul’s Narrative”, Center for the Study of Partisanship and Ideology (November 2022) for another example.

12. Åslund, How Capitalism Was Built, 55-60.

13. David Hoffman, The Oligarchs: Wealth and Power in the New Russia (New York City: Public Affairs, 2011), 185-193. See Michael Ellman and Vladimir Kontorovich, The Destruction of the Soviet Economic System: An Insider's History (Armonk: M.E. Sharp, 1998), 156-158 for how the looting of state property started under Gorbachev.

14. Goldgeier and McFaul, Power and Purpose, 98-102.

15. Hedlund, “Russia and the IMF: A Sordid Tale of Moral Hazard”.

16. It’s not easy to say exactly when it became too late for macroeconomic assistance to make a real difference. Some people think that it should have happened at the same time as the “big bang”, when prices were liberalized at the beginning of 1992, on the ground that as early as April the Soviet elites had recovered and Yeltsin started to withdraw his support to Gaidar’s team. If that is right, then it was probably impossible for the West to provide macroeconomic assistance to Russia in a timely manner, because the totally improvised way in which the Soviet Union was dissolved arguably didn’t leave enough time for that. However, reforms were also derailed temporarily in Poland due to popular discontent before the Polish government eventually resumed them in return for significant macroeconomic assistance from the West, so I think even as late as 1993 there is a chance that it might have worked. In any case, by the time Gaidar’s party lost the parliamentary elections in December 1993, it was certainly over.

17. Hoffman, The Oligarchs and Paul Klebnikov, Godfather of the Kremlin: The Decline of Russia in the Age of Gangster Capitalism (Orlando: Harcourt, 2000).