In 1995 the government, through loans secured from the International Monetary Fund (IMF) and through income from the sale of oil and natural gas, succeeded in stabilizing the national currency by establishing a ruble corridor. This corridor fixed the exchange rate of the ruble that the Russian Central Bank would defend. Consequently, the rate of inflation dropped, and some macroeconomic stabilization ensued. However, the government continued to borrow large sums of money on domestic and foreign markets while avoiding real structural reforms of the economy. By failing to establish an effective tax code and collection mechanisms, clear property rights, and a coherent bankruptcy law and by continued support of failing industries, the government found it increasingly expensive to maintain an artificially set ruble exchange rate. The problem was that the government-set exchange rate did not reflect the country's economic reality and thereby made the ruble the target of speculators. As a result, the ruble collapsed in 1998, and the government was forced to withhold payments on its debt amid a growing number of bankruptcies. The ruble eventually stabilized and inflation diminished, but the living standards of most Russians improved little, though a small proportion of the population became very wealthy. Moreover, most economic gains occurred in Moscow, St. Petersburg, and a handful of other major urban areas, while vast tracts of Russia faced economic depression.
Another element of economic reform was the privatization of Russian industries. Reformists in the Yeltsin government sought to speed privatization, hoping that the threat of a return to communism would be more remote once a Russian capitalist class had developed. The reformists, like many Western economists, believed that only by privatizing factories and enterprises and letting them fight for survival would the economy have any hope of recovering. Initially, the government implemented a voucher system according to which every citizen could in theory become a stakeholder in Russian industry and its privatization. Russians could invest their voucher (the sum of 10,000 rubles), sell it, or use it to bid for additional shares in specific enterprises. However, the average Russian did not benefit from this rather complicated scheme. By the end of 1992, some one-third of enterprises in the services and trade fields had been privatized.
The second wave of privatization occurred in 1994–95. However, to the average Russian, the process seemed to benefit solely the friends of those in power, who received large chunks of Russian industry for little. In particular, Russia's companies in the natural resource sector were sold at prices well below those recommended by the IMF to figures who were close to “the Family,” meaning Yeltsin and his daughter and their allies in the government. From this process emerged the “oligarchs,” individuals who, because of their political connections, came to control huge segments of the Russian economy. Many of these oligarchs bought factories for almost nothing, stripped them, sold what they could, and then closed them, creating huge job losses. By the time Yeltsin left office in 1999, most of the Russian economy had been privatized.
The stripping of factories played a major role in the public's disenchantment with the development of capitalism in Russia. To many Russians, it seemed that bandit capitalism had emerged. The majority of the population had seen their living standards drop, their social services collapse, and a great rise in crime and corruption. As a result, Yeltsin's popularity began to plummet.
Political and social changes
Having played a key role in defeating the attempted coup against Gorbachev in 1991, Yeltsin saw his popularity surge. A skillful politician, he was first elected president of the Russian Soviet Federated Socialist Republic in 1991 before the collapse of the U.S.S.R, and he was reelected in 1996. Although he had come to represent for many the face of political and economic reform, his first priority was the preservation of his own power and authority. In dealing with those around him in both the government and the bureaucracy, Yeltsin effectively utilized a divide-and-rule strategy that led to the emergence of various factions that battled each other. Indeed, in some cases bureaucrats spent more time in conflict with each other than they did governing the country. Yeltsin also had the tendency to frequently remove ministers and prime ministers, which led to abrupt changes in policy. Throughout his presidency Yeltsin refused to establish his own political party or to align himself openly with any party or group of parties. Instead, he believed that the president should remain above party politics, though he was at the heart of the political process, playing the role of power broker—a position he coveted—until his resignation in 1999.
When the Soviet Union collapsed, the Russian Federation continued to be governed according to its Soviet-era constitution. The office of president had been added to the political structure of the Russian Soviet Federated Socialist Republic in 1991. However, the constitution did not specify which branch, legislative or executive, held supreme power. Political differences over various issues (e.g., the course of economic reform and the power of both the Communist Party and industrial interests) manifested themselves as constitutional conflicts, with Yeltsin's supporters arguing that ultimate power rested with the president and his opponents charging that the legislature was sovereign. Personality clashes between Yeltsin and the parliamentary leadership led to a break between the legislative and executive branches.
High inflation and continued economic crisis placed great pressure on Yeltsin. The government's focus on financial stabilization and economic reform to the apparent neglect of the public's social needs contributed to the growing political battle between the legislative and executive branches. Complicating Yeltsin's difficulties was the fact that many deputies in the parliament had vested interests in the old economic and political structure. The leader of the parliament, Ruslan Khasbulatov, and Yeltsin both sought support from regional elites in their political battles with each other by promising subsidies and greater local control. The political battle between Yeltsin and Khasbulatov climaxed in March 1993 when Yeltsin was stripped of the decree-making powers that he had been granted after the August 1991 attempted coup. Yeltsin was not prepared to accept total defeat. On March 20 Yeltsin announced that he was instituting an extraordinary presidential regime until April 25, when a referendum would be held over who “really ruled” Russia. He stated that during this period any acts of parliament that contradicted presidential decrees would be null and void. Many of Yeltsin's ministers, including Prime Minister Viktor Chernomyrdin (Chernomyrdin, Viktor Stepanovich), only half-heartedly supported the president's move, and Yeltsin, after intense political haggling, was forced to back down. Nonetheless, it was agreed that a referendum would be held on April 25. Four questions were posed to the Russian people, written by the Congress of People's Deputies to embarrass Yeltsin: (1) Do you trust the President of the Russian Federation, Boris Nikolaevich Yeltsin? (2) Do you approve of the socioeconomic policies implemented by the President of the Russian Federation and the government of the Russian Federation since 1992? (3) Do you consider it essential to hold pre-term elections for the presidency of the Russian Federation? and (4) Do you consider it essential to hold pre-term elections for the People's Deputies of the Russian Federation? In addition, the Congress passed a provision that, for a question to be approved, it needed the backing of at least half of all eligible voters (and not just half of the actual ballots cast); however, the Constitutional Court ruled that only the latter two questions needed at least 50 percent and that the first two questions were nonbinding. With Yeltsin's camp using the slogan “Da, da, nyet, da” (“Yes, yes, no, yes”), the results were a victory for Yeltsin. Nearly three-fifths of voters expressed confidence in him personally, and more than half supported his economic and social policies. Half of voters favoured early presidential elections, but two-thirds supported early parliamentary elections; however, with only 43 percent of eligible voters backing early parliamentary elections, Yeltsin was forced to continue his uneasy relationship with the Congress.