The crash of August 1998 was first and foremost a failure of the central state. The government's inability to balance its budget and its resort to massive short-term borrowing led inevitably to default and devaluation – in effect, bankruptcy on a nation-wide scale. But states, unlike private companies, do not simply go out of business. The Russian government's bankruptcy was only the prelude to what promises to be a long and painful period of insolvency and crisis. That is because the August collapse was only the surface symptom of a deeper and more complex disease.

The Russian state is shrinking. Since the breakup of the Soviet regime there has been a steady decline in the share of Gross Domestic Product collected in revenues by the state at all levels (see table 9.1).

These numbers understate the actual extent of the decline, because up to 40% of the true GDP is produced by the unofficial economy and is not fully reflected in official GDP figures. Allowing for the large share of goods and services generated by the “unofficial” economy, state revenues are less than one-quarter of total GDP – and are still falling. Moreover, since Russian GDP itself has declined by roughly half since 1990, state revenues in absolute terms have dropped by almost three-quarters. And finally, more and more of the government's revenue at all levels consists not of actual “live” money but of barter and various write-offs and quasimonies.