The Soviet Union had a planned socialist economy, in which the central government controlled everything from production planning and prices to distribution. The Soviet satellite states in Eastern Europe had planned economies as well. After the breakup of the USSR, Russian reformers were confronted with the daunting task of building a modern capitalist economy while simultaneously striving to create a democratic state based on effective laws and reliable administrative structures. The collapse of Communism in Eastern Europe in the late 1980s and the dissolution of the Soviet Union at the end of 1991 disrupted the close economic relations Russia had previously enjoyed with neighboring Communist states and other Soviet republics. Political turmoil and uncertainty inside the Russian government also contributed to the country’s economic woes. Compared with most of the former planned economies of Eastern Europe, Russia experienced an unusually severe and protracted drop in officially reported economic output.

In 1992, after the collapse of the union, the government of the Russian Federation implemented a series of radical reforms designed to transform the Russian economy from one that was centrally planned and controlled to one based on free enterprise and market forces. Major components of the reforms included establishing privately owned industrial and commercial ventures, with foreign as well as Russian investment, and privatizing state-owned enterprises. Vouchers were issued to each Russian citizen that were to be used to purchase shares in firms being privatized, which often were sold at auction; in practice, these vouchers frequently were sold for cash and were accumulated by entrepreneurs. A commodity- and stock-exchange system also was set up.

A decade after the implosion of the Soviet Union in 1991, Russia is still struggling to establish a modern market economy and achieve strong economic growth. In contrast to its trading partners in Central Europe - which were able to overcome the initial production declines that accompanied the launch of market reforms within three to five years - Russia saw its economy contract for five years, as the executive and legislature dithered over the implementation of many of the basic foundations of a market economy. Russia achieved a slight recovery in 1997, but the government's stubborn budget deficits and the country's poor business climate made it vulnerable when the global financial crisis swept through in 1998. The crisis culminated in the August depreciation of the ruble, a debt default by the government, and a sharp deterioration in living standards for most of the population. The economy rebounded in 1999 and 2000, buoyed by the competitive boost from the weak ruble and a surging trade surplus fueled by rising world oil prices. This recovery, along with a renewed government effort in 2000 to advance lagging structural reforms, have raised business and investor confidence over Russia's prospects in its second decade of transition. Yet serious problems persist. Russia remains heavily dependent on exports of commodities, particularly oil, natural gas, metals, and timber, which account for over 80% of exports, leaving the country vulnerable to swings in world prices. Russia's agricultural sector remains beset by uncertainty over land ownership rights, which has discouraged needed investment and restructuring. Another threat is negative demographic trends, fueled by low birth rates and a deteriorating health situation - including an alarming rise in AIDS cases - that have contributed to a nearly 2% drop in the population since 1992. Russia's industrial base is increasingly dilapidated and must be replaced or modernized if the country is to achieve sustainable economic growth. Other problems include widespread corruption, capital flight, and brain drain.