5. From perestroika to predators

The influx of skilled personnel in the military-industrial complex , as described in blog post 4, was viable until the 1960s, but after these years it was difficult to keep up the growth model. The rural workforce was no longer underemployed and also because women made up a large part of the Soviet workforce, there was no 'reservoir' of labor anymore. Women felt the burden of working full time and having to take care of domestic responsibilities. By the late 1970s the number of annual abortions approached two times the number of live births.^[1]

Furthermore, natural resources started to become scarce as a result of the rapid industrialization. Pollution became a growing problem. The agricultural sector was lacking in development compared to Western countries. So even while the population was growing, there was not enough grain to feed these potential workers. This situation can be explained by the confiscation of innovations by the military industry.^[2] Many general scientific breakthroughs were immediately considered classified if thought to have a potential military application.

The Soviet Regime kept looking to the scientific-technological sector to solve these deficiencies, but the economy was not able to keep up with defense and consumer demands.^[3] The Soviet citizen of the 1970s was now better educated and had more skills than ever before and almost two thirds of the population lived in a city. They had a more consumerist attitude than their pre-war ancestors and became cynical towards the ultimate goal of socialism. The lacking quality or availability of many products limited consumer choice and frustration grew. ^[4]

It was up to Gorbachev, the well-educated and resolute leader who was voted General Secretary of the Soviet Union by the Politbureau in 1985, to transform the poorly performing economy and other facets of public life. This transformation is known as the perestroika, which means restructuring. Gorbachev saw three economic difficulties: inefficiency, backwardness and low morale.^[5] One of the measures was reducing the huge outlays of the military industrial complex, which he paired with talks with the US and China on strategic arms limitation. To Gorbachev's dismay, these savings proved more limited than he had hoped and did little to revive the economy.^[6] He understood that economic improvement was essential and in 1987 he introduced structural economic reform in the form of "market socialism." This policy sought to temper state ownership of major industries with economic decentralization and limited privatization, starting with minimizing the controls of the planned economy. However, over the years this had turned into a vast bureaucratic mechanism of some 25 to 30 million party officials controlling key enterprises. Only very few of them were eager to revolutionize the economy. Furthermore, Gorbachev clung to keeping the agricultural sector under state control in line with the socialist dogma. It turned out that the socialist principles of a planned economy and state ownership of capital were very hard to weed out. The propaganda of the Soviet myth from the 1920s and 1930s had taken firm root. He tried to tackle this opposition with the principle of glasnost (openness). Books that had been long-banned were published, media started to print about previously suppressed social problems and debates about economic failures started to replace stories about triumphs of the Five Year Plans. It also encouraged nationalism of ethnic groups within the Soviet Union, for instance in Nagorno-Karabach. The remnants of this conflict persist until this very day.

The economy deteriorated; in 1990 and 1991 the Soviet economy declined by respectively 8 and 20 percent. ^[7] Inflation escalated to 8 percent each month. Simple consumer goods such as soap simply became unavailable. To cope with this chronic shortage, Soviet citizens relied heavily on blat — informal networks of personal contacts and reciprocal favors used to obtain goods and services that formal distribution channels failed to provide (Ledeneva, 1998).^[8] A doctor might treat a shopkeeper's relative in exchange for hard-to-find groceries; a factory worker might trade spare parts for a favor from a bureaucrat. This shadow system of exchange became so deeply woven into daily life that, as we will see later in this series, it left a durable imprint on how post-Soviet Russians — including its early computer programmers — organized cooperation outside formal markets.

The overall standard of living slumped and people on the lowest rungs of the socio-economic ladder slipped into poverty. People became more and more resistant to reforms and to Gorbachev as a leader. Glasnost revealed a lot of the dark side of the Soviet Union, making the Soviet dream even less legitimate. The very measures that Gorbachev used to reform the stalling Soviet Union turned out to be its downfall. In August 1991, hardliners attempted a coup against Gorbachev to preserve the old order — an attempt defeated in large part thanks to Yeltsin, who famously stood atop a tank outside the Russian parliament to rally resistance. But the coup fatally weakened Gorbachev's authority, and by December, Yeltsin, together with the leaders of Ukraine and Belarus, moved to formally dissolve the Soviet Union at Belavezha — without Gorbachev even present at the table.

Same problems, different nation

The president of the new Russian nation, Boris Yeltsin, inherited much of the Soviet Union's problems. It turned out it was impossible to revitalize the economy without felling its socialist pillars. Under Yeltsin, economists supported by Western consultants urged so-called "shock therapy": rapid, concurrent adoption of free prices, private ownership, tight control of money supply and restricted government spending.^[9] To accomplish privatization, the government issued vouchers (basically shares of the country's wealth) to 95% of the population, which could be channeled into purchases of state assets via investment funds. The aim of this voucher privatization was to transform the formerly state-owned enterprises into profit-seeking businesses, distributing property equally and winning over popular support in the effort. In theory, many Russians would own a stake in the economic system, making opposition or reversal of the market system unlikely. However, because of the economic hardships of the time, many Russians sold their vouchers to local business owners and enterprising individuals. This led to an unequal concentration of vouchers in the hands of a select few, who obtained huge shares in massive state-owned companies.^[10] During 1992 to 1994, almost 95% of small scale business and nearly 70% of large factories had passed into private hands, albeit the hands of a few private individuals - something the Russian government had aimed to avoid. This practice has later been dubbed prikhvatizatsia, containing the Russian verb "khvat'" which can be translated to grabbing. It has a similar meaning to it as the Dutch word "graaiflatie" (a pun on grabbing and inflation). It is from these few lucky individuals that the modern day Russian oligarchs were born.

For those not so lucky, the economic reforms caused huge inflation, which completely devalued savings and fixed incomes. Some studies have shown that by the mid 1990s, approximately 40% of the population was living below the poverty line.^[11] Moreover, health hazards multiplied because both Yeltsin and Gorbachev failed to address the environmental issues caused by the Soviet heavy industrialization, like water and air pollution, toxic waste and cancer. Life expectancy in former Soviet states reduced in the 1990s, and the healthcare system remained systematically underfunded. One in three newborns were born sickly. ^[12] For many Russians, shock therapy meant economic ruin. And as we saw in blog post 3, it was a shock that did not wear off.

In 1992, as a consequence of economic reform, military purchases were reduced by two thirds. Government military spending was halved in 1995^[13]. This lead to growing unrest within the military industrial complex. According to estimates by the Russian ministry of economy, 2.5 million workers left the defense industry between 1991 and 1995.^[14] A lot of these workers were employed in other lines of work, and not all of them legal.

Privatization went hand-in-hand with growth of criminal activities. In 1992 already a fair percentage of metal, energy resources and other products were illegally exported. As a result of the quick and dirty privatization schemes, criminal elements could easily integrate into national and international economy. Business owners also began to increasingly violate the law; in part they were forced by the general climate of economic malaise and ill-conceived tax legislation.^[15] The result was a structure in which criminal organizations controlled the activities of more than 40,000 business entities in 1994.^[16]    This control was often established and maintained through what became known in Russia as krysha, which literally means roof. These "violent entrepreneurs"^[17]  increasingly offered a broad array of protection services, gaining the criminals a steady stream of income. In the absence of a functioning police or court system, many business owners welcomed these protection from gangs.^[18] Even though researchers have questioned whether organized crime would realistically seek control over loss-making enterprises, according to data from the Russian Ministry of Internal Affairs, in 1996 some 58 to 60 million people were connected with the shadow economy - nearly 40% of the population.^[19] 

This was the fragile foundation on which Russia's financial system rested when, on August 17, 1998, the government defaulted on its domestic debt and let the ruble float freely. Within weeks the currency lost roughly two-thirds of its value, and the banks that had thrived on krysha-style extraction rather than sound lending were among the first to collapse, taking millions of ordinary depositors' savings down with them — for many, the second time in a decade their savings had been wiped out. What had looked, to some, like the chaotic but survivable order of the "wild nineties" now revealed itself as structurally hollow: an economy that had never fully escaped the logic of protection rackets could not withstand a real shock.

As we saw in blog 3, the political aftershcock of the 1998 financial crisis was what helped the siloviki to positions of power. When Putin became president, his centralized "rule of law" dealt with the gangs providing protection services. But the concept of krysha has also become more centralized, taking on a political connotation. The source of protection now is someone in the state, or closely connected to it. ^[20]

From class enemy to cyber criminal: the inheritance of Soviet paranoia

Cybercrime in Russia developed along these same patterns. The U.S.S.R had the largest engineering community in the world, but in the 1990s many trained and capable technicians found themselves abandoned by the state to live without reliable or sustainable work.^[21]"No one wanted to work at a factory and make $200 a month,” says Sergei Pavlovich, a former Belarussian hacker who discoverd at 14 how to get rich in the post-Soviet world. His hacking memoir is titled How to steal a million.^[22] Alexei Kruchenok, a software developer in Belarus, says: "If you didn't have economic opportunities, you looked at the gray internet market for money."^[23]Very much like krysha culture, the hacker groups both resembled organized crime syndicates and legitimate businesses.

After being imprisoned at 21, Pavlovich now works as a cybercrime expert in the U.S., helping businesses protect themselves against hackers like him. This tension between crime and legitimate enterprise is also reflected in how Russian hacker culture itself evolved. After the turn of the millennium, the grey hacker culture in Russia also changed. Under Putin's "rule of law" the skills of law enforcement have increased, leading to more arrests. Most of the hackers still in the game are more professional and discreet. They either work for legitimate IT-companies, or they managed to forge relationships with the state.

Concluding this post, it is relevant to be aware of the overarching theme of Soviet paranoia and how deeply it influenced many aspects of Soviet life, stretching long after the collapse of the Soviet Union. Where blog post 2 revealed the special services' role in enacting this paranoia through active measures, blog post 4 and this post have shown how the same idea of an ubiquitous enemy — within and without — also shaped the Soviet economy. The elimination of the kulaks as "class enemies" supplied both the capital, through forced grain requisition, and the displaced rural labor that the rapid build-up of the military-industrial complex — the Soviet answer to the enemy without — required. This heavy, decades-long focus on the VPK eventually drained the broader economy, leaving it for the taking of "violent entrepreneurs" once central control collapsed. It was amidst these turbulent economic circumstances that highly educated engineers found themselves looking for a sustainable way of living. In combination with the rise of the internet and a weak government, it created fertile breeding ground for Russian hacker culture.

Notes and references

Image 1: https://images.squarespace-cdn.com/content/v1/5b7e6da2e17ba37b839bb218/84034054-808a-49c4-8b39-bd08665705f3/Gorbachev.jpg

Image 2: https://allthatsinteresting.com/wordpress/wp-content/uploads/2017/07/empty-grocery-store.jpg

Image 3: https://dygtyjqp7pi0m.cloudfront.net/i/40078/34439636_1.jpg?v=8D74DC7E97F9DE0

Image 4: https://www.gw2ru.com/history/1309-russian-kiosks-1990s

1. Thompson, J. M. (1996). A vision unfulfilled: Russia and the Soviet Union in the twentieth century. D.C. Heath and Company. (p. 448)↩︎

2. Mazat. N. (2015). Structural analysis of the economic decline and collapse of the Soviet Union. (Paper 029)Anais do XLIII Encontro Nacional de Economia, ANPEC – Associação Nacional dos Centros de Pós-Graduação em Economia. (p. 7) https://www.anpec.org.br/encontro/2015/submissao/files_I/i3-186e370d13d34b7043cb737da8d75390.pdf. ↩︎

3. Thompson, 1996, p. 464↩︎

4. Thompson, 1996, p. 464↩︎

5. Thompson, 1996, p. 474↩︎

6. Thompson, 1996, p. 477↩︎

7. Thompson, 1996, p. 494↩︎

8. Ledeneva, A. V. (1998). Russia's economy of favours: Blat, networking, and informal exchange. Cambridge University Press.↩︎

9. Thompson, 1996, p. 464↩︎

10. Gillham, R. (2026, June 30). Shock therapy in russia: The economic upheaval of the 1990s. TheCollector. https://www.thecollector.com/shock-therapy-russia-economic-1990s/↩︎

11. Gillham, 2026↩︎

12. Thompson, 1996, p. 534↩︎

13. Budanov, I. A., Ivanter, V. V., Korovkin, A. G., & Sutyagin, V. S. (Eds.). (2007). Военно-промышленный комплекс [Military-industrial complex]. (p.729) In Прикладное прогнозирование национальной экономики [Applied forecasting of the national economy] (Chapter 29). Institute of Economic Forecasting, Russian Academy of Sciences. [https://ecfor.ru/wp-content/uploads/books/uch/29.pdf]↩︎

14. Bystrova, I. V. (2002, May 15). Otechestvennyy voenno-promyshlennyy kompleks v XX veke [The domestic military-industrial complex in the 20th century] [Conference presentation]. Tsentr ekonomicheskoy istorii, Moscow State University. https://www.hist.msu.ru/Labs/Ecohist/OB8/bystrova.htm↩︎

15. Krivosheev, V. V. (2025). Organizovannaya prestupnost' v Rossii v 1990-e gody: ot «krasnoy mafii» k gospodstvu «avtoritetov» [Organized crime in Russia in the 1990s: From the "red mafia" to the dominance of "authorities"] (Part 2). Sotsial'naya kompetentnost' [Social Competence], 10_(1), 25–26.↩︎

16. Krivosheev, 2025, p. 26↩︎

17. A term coined by the Russian sociologist Vadim Volkov↩︎

18. MacKinnon, A. (2023, January 15). Moscow muscle: Life in Russia is about protection. The International Chronicles. https://www.theinternationalchronicles.com/2023/01/15/moscow-muscle-life-in-russia-is-about-protection/↩︎

19. MacKinnon, 2023↩︎

20. MacKinnon, 2023↩︎

21. Bodner, M. (2016, December 30). How Russia became a hacking superpower. The Moscow Times. https://www.themoscowtimes.com/2016/12/30/russia-hacker-superpower-a56704↩︎

22. Walt, V. (n.d.). If you can’t beat Russian hackers, hire one. Fortune. Retrieved August 26, 2026, from https://fortune.com/2017/01/21/russian-hackers-cybersecurity-cybercrime/↩︎

23. Bodner, 2016.↩︎