3 Lessons From The Russian Hyperinflation Of 1992


In 1985 the Soviet Union was a global superpower, second only to the United States.

Since 1917 she had embarked on a unique path, with a command economy based on the ideology of Marxism-Leninism.

Despite the warnings of economics such as Ludwig von Mises and Friedrich Hayek, through much of the 20th century socialist system gave the appearance of working well. But by the 1970s and 1980s the cracks were beginning to show.

In 1985, Mikhail Gorbachev took the reins as the new Soviet leader. The economy was stagnating and Gorbachev knew things needed to change.

At that stage the inflation rate stood at 4.6%. Gorbachev wasn’t facing a terminal crisis but rather a slow decline.

But things would soon change.

Gorbachev embarked on a series of economic reforms known as “perestroika” or “restructuring.” He did this along with a range of political reforms that would weaken the grip of the Communist Party on the country.

He naively believed that these reforms would preserve the socialist economy and preserve the Soviet Union as a global power. Yet the changes created a tidal wave of opposition that spiraled out of Gorbachev’s control.

By 1990 the inflation rate had risen to 19%.

In the first quarter of 1991 the budget estimated 55 billion rubles in revenue. Actual revenue was just shy of 20 billion. Expenditure was 47 billion.

Things soon got worse.

By the end of 1991 inflation reached 200% as Gorbachev financed his budget deficits with money printing.

Mikhail Gorbachev

Gorbachev’s supposedly moderate reforms angered both hardline communists who wanted to preserve the command economy and those such as Boris Yeltsin who believed that Russia needed to free herself from the Soviet Union and embrace market reforms.

Gorbachev, the man who tried to save the Soviet Union became increasingly irrelevant as he was caught between the two factions.

In August of 1991, when a new treaty was about to come into force creating a looser federation between the fifteen republics of the Soviet Union, the hardline communists staged a coup and placed Gorbachev under house arrest. The coup soon collapsed and Gorbachev returned to power, but his personal prestige and that of the Soviet Union was broken. He knew it was the end.

On Christmas Day 1991, Gorbachev resigned as President and the hammer and sickle was lowered from the Kremlin, never to be raised again.

The fifteen republics of the Soviet Union became independent states, initially retaining the Soviet ruble for a short period before later establishing their own currencies.

Boris Yeltsin

In Russia, the successor state of the Soviet Union, with Boris Yeltsin now President, inflation continued to rage.

It reached a peak of 2,318% by the end of 1992.

That’s prices increasing by 24 times in a year!

It has been estimated that the printing presses created more money in 1991 than they had in the previous 30 years.

The high inflation continued until 1995 causing a massive drop in living standards and a huge increase in poverty. One third of the population fell below the poverty line.

The social and economic costs were enormous and Russia is still paying the price today.

But why did this happen?

Why The Russian Hyperinflation Happened

The roots of Russia’s 1990s hyperinflation run very deep.

Before World War One the Russian Empire was on a gold standard, like the other European powers. And just like the other powers this was abandoned when fighting began in order to finance the conflict.

Russia’s wartime experience was shortages, inflation and huge numbers of deaths. They fought the Central Powers on the Eastern Front for two and a half years before the country revolted in February 1917 and Tsar Nicholas II gave up the throne.

Less than a year later the Bolsheviks under Lenin took power and began their communist revolution. Russia descended into a bitter civil war for almost 5 years but the Bolsheviks survived and expanded their state to become the Soviet Union. The course into chaos was set.


The short version is that the Soviet Union collapsed and descended into hyperinflation because socialist economies do not work.

While the flaws inherent in the socialist economic model do not lead to immediate collapse, they will cause structural problems and malinvestment that will destroy the wealth of the nation and ultimately lead to failure. In the case of the Soviet Union this just happened to be 74 years.

The failure of the socialist system is best articulated by Ludwig von Mises who argued that a socialist economy is impossible because the central planners do not have price data and therefore have no means of economic calculation.

A free market distils an enormous amount of data into prices and it is these prices which allow consumers and businesses to make economic decisions.

When you take away market prices you take away the most important tool for economic calculation. Without it, central planners will always fail.

Or as Margaret Thatcher succinctly put it:

“They always run out of other people’s money.”

When Russia embarked on the socialist experiment, she was the least industrialised of the major European powers and had suffered immensely through World War One and the subsequent civil war.

Yet Lenin and his comrades wanted to move as quickly as possible towards socialism, despite the chaos their country was in. Their socialist policies caused the war torn nation to go through a period of hyperinflation between 1917 and 1923 as they financed their expenditure through printing money.

At the beginning of 1923 prices were 21 times higher than before the war.

They were so blindly ideological and economically ignorant that they even decided that they wanted to abolish money, believing it to be a capitalist anachronism. Faced with hyperinflation, they thought getting rid of money would solve the problem. It was the same kind of madness that causes a seasick sailor to jump overboard in a storm.

Eventually reality kicked in and some sense returned and Lenin actually decided to partially back the Soviet currency with gold as well as issuing silver and copper coins. Printing of paper money to cover budget deficits was forbidden.

However these measures did not stabilise the currency. Stalin debased the precious metal components of the coins due to shortages and continued to print paper money to finance his 5 year plans.

When the Soviet Union had to confront the menace of Nazi Germany between 1941 and 1945 state revenues could not cover the expenditure, despite new taxes, the sale of government bonds and voluntary donations. The printing presses went into overdrive.

The Soviet Union went through a monetary reform in 1947 in an attempt to bring wartime inflation under control. They also went through another reform in 1961 where money was again tied to gold although this gold convertibility was not available to the public.

Stalin’s successors, Khrushchev and Brezhnev never significantly altered the nature of the Soviet model or the Soviet economy. The Soviet economy continued to be backward, going through decades of economic stagnation while also being weighed down with the immense millstone that was cost of the Cold War arms race.

When Gorbachev took power in 1985, it wasn’t just too late to save the Soviet Union, it was impossible.

As a devastated country in 1917, she was in no position to embark on radical political and economic theories. Yet as Mises shows, it wasn’t poor circumstances or poor execution that caused the failure. At its very core, socialism cannot work. The circumstances of the first half of the 20th century merely made a bad economic system even worse.

Being a good socialist, Gorbachev tried his best to save the Soviet system but it was never going to work. He was ignorant of economics and his multiple and divergent economic plans caused chaos and deep uncertainty as to the future of the economy.

Igor Klyamkin sums up the Gorbachev era well,

‘So if in such a society one introduces a representative democracy, the elected parliaments cannot but become societies of angry consumers, who demand redistribution at the expense of other groups .. . But since the rulers can only give by taking away, and there is no one they can take from, they have only one solution: to print more new money and divide it among all the claimants.’

Perhaps better policy decisions would have resulted in a more smooth transition to a functioning market economy, without the economic chaos and hyperinflation. 74 years of socialism was always going to need a painful adjustment but it didn’t have to be as devastating as it was.

A Russian market in 1992

Factionalism, political intrigue, ego and economic illiteracy all contributed to poor policy decisions which hampered the emerging Russian economy and made the inflation much worse. Soviet authorities were slow to confront and deal with problems in a timely fashion, often compounding the problem with inaction.

Gorbachev argues that if he hadn’t embarked on economic reform he would have remained General-Secretary of the Soviet Union for a long time.

He is probably correct. Maybe he could have lasted another decade or so and presided over a slow economic decline rather than a rapid one.

Gorbachev’s reforms did not themselves cause the economic problems and lead to collapse of the Soviet Union. He just made a bad situation worse and hastened the country’s inevitable demise.

As the most recent example of a superpower failing, there are lessons to be learned from what happened in Russia.

Lessons for Investors from the Russian Hyperinflation

1. Superpowers Fail

When the Soviet Union collapsed it was the second largest superpower in the world. Very few people saw it coming. Even the USA, her Cold War enemy, did not want the Soviet Union to disintegrate, because they feared the instability it could create.

This wasn’t some empire collapse you read in the History books from thousands of years ago. This was the world’s second largest superpower collapsing just a few short decades ago.

It is infrequent that a superpower fails. But it does happen.

Not every year, but perhaps a few times within someone’s lifetime. And when it happens the implications can be huge.

The twentieth century saw the collapse of the Austro-Hungarian, Ottoman, British, French and Portuguese empires, as well as the Soviet Union.

Boris Yeltsin in August 1991

So could we see another superpower collapse in the 21st century?

Maybe. I’m not saying that we definitely will or even that it is imminent. But it is certainly possible. Even if they don’t collapse this century, no great power lasts forever, so they will collapse at some point.

The prime candidates for a significant shift in the 21st century would be the USA, the EU and communist China. If any of those powers collapsed, or at least significantly declined, it would send shockwaves through the global economy.

Now when I say that an empire collapses, I don’t mean that things collapse into total anarchy and chaos. It doesn’t mean, as Jim Rickards likes to say, that we all live in caves and eat canned food.

It may just be a case of losing one’s overseas colonies and accepting a reduced role on the global stage, as was the case of the British Empire. Or it might mean secession, political disintegration and severe economic crisis, as was the case of the USSR and Russia. But whatever the challenges, life goes on and people find a way through.

Being aware of this political risk doesn’t mean you should race out, sell all your stocks, go into gold and buy a bunker. But you should be mindful of political risk and a systemic shift in the global economy and consider positioning a small portion of your portfolio defensively for just such an outcome.

2. Socialist Countries In Transition Offer Opportunity

The collapse of the Soviet Union was a classic crisis investing moment. A country that had experienced socialism for 74 years was transitioning to a market system. A country where the state dominated industry was moving back to private property and private business.

Economists and historians had debated and analysed Russia’s move into socialism but the dramatic reversal back into capitalism and its implications were unknown. The only real model experts could observe was Poland, who started the transition from socialism to capitalism two years earlier in 1989, albeit in a more benign political environment.

Because of the inefficiencies of the Soviet economic model, Russia’s economic growth in the 20th century had dramatically lagged behind the rest of the world. As they embraced the market economy and separated it from the state, opportunity would abound.

Sadly, the transition from socialism to capitalism was neither just nor orderly. Without an adequate legal basis to govern both market behaviour and the transfer of property from state to private hands, the privatisation that occurred was often unethical and illegal. Those who profited by buying up assets on the cheap became a new class of oligarchs.

Nevertheless the basic tenet of crisis investing was true in this case as it always is. Political and economic crises lead to assets being dramatically undervalued and the opportunity to make big gains emerges. This is especially the case when a socialist economy embraces the free market.

We have seen what has happened in Russia, China and Vietnam as they have opened their economies to the world. Perhaps there will be similar opportunities one day in Myanmar, Cuba, North Korea, Venezuela and the central Asian republics of the former Soviet Union.

3. You Can Be Wrong For A Long Time Before You Are Right

One of the big challenges in contrarian investing is timing.

It is possible to have your thesis right but be early. In some cases very early.

The collapse of the Soviet Union and the monetary chaos that ensued is an excellent case in point.

Most mainstream observers did not pick that the Soviet Union would collapse. But Mises did in the 1920s. French historian Emmanuel Todd predicted it in 1976.

Yet there was no way for either of those two, or anyone else, to pick the exact timing.

As an investor, it’s okay to be right and little bit early. But if you are right and too early you can spend years waiting. You might lose your nerve and give up right before your contrarian thesis plays out. And you will definitely miss out on gains while you wait.

There isn’t any easy way to mitigate this risk. The best you can do is to avoid over committing to trying to time any particular contrarian play and dollar cost average into a position over a number of years.


The Soviet Union was a major superpower but it was built on structurally shaky foundations. Its communist ideals caused economic failure, while it also suffered from the Cold War arms race, and the political challenges caused by its imperial “pseudofederal” structure.

Gorbachev emerged as the leader and set about trying to save the Soviet Union, but merely hastened its inevitable decline. As Serhii Plokhy puts it there was “good reason to celebrate” the peaceful dissolution of the USSR and the fact that its collapse did not descend into Civil War.

What emerged from the ashes of the Soviet Union was a wild west economy where a new class of oligarchs emerged, who, although in a shady manner, had acquired assets at dirt cheap prices.

Investors should take heed that superpowers can and will go through major structural change with the possibility of decline or even collapse.

It has happened in the past and will certainly happen in the future. When that is going to happen is impossible to know, but the current global powers – the USA, China and the EU – will face this reckoning in the future, as every superpower has.

When that day comes, you want to make sure that you are as well protected from downside risk as you can be, with your eyes open to potential opportunities.


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Alexandrov, B. “The Soviet Currency Reform,” Russian Review 8, no. 1 (1949): 56-61, https://doi.org/10.2307/125474.

Brown, Archie. The Gorbachev Factor. Oxford: Oxford University Press, 2009.

Efremov, Steven. “The Role of Inflation in Soviet History: Prices, Living Standards, and Political Change.” Dissertation, East Tennessee State University, 2012.

Filatochev, Igor, and Roy Bradshaw. “The Soviet Hyperinflation: Its Origins and Impact throughout the Former Republics.” Soviet Studies 44, no. 5 (1992): 739–59. https://doi.org/10.1080/09668139208412045.

Hoffman, David. The Oligarchs: Wealth and Power in the New Russia. New York: Public Affairs, 2011.

Mises, Von Ludwig. Economic Calculation in the Socialist Commonwealth Auburn, AL: Ludwig Von Mises Institute, Auburn University, 2008.

Nove, Alec. An Economic History of the USSR: 1917-1991. London: Penguin Books, 1992.

Plokhy, Serhii. The Last Empire: The Final Days of the Soviet Union. London: Oneworld, 2015.

Image Credits

The Kremlin by Michael Parulava on Unsplash

Mikhail Gorbachev is licensed under CC-BY-SA 3.0

Boris Yeltsin Waves is licensed under CC-BY-SA 4.0

Lenin 1921 is in the public domain {{PD-scan}}

Russia Market 1992 by Brian Kelley is licensed under CC BY-SA 2.0

Boris Yeltsin 22 August 1991 by Kremlin.ru is licensed under CC-BY-SA 4.0

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