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Why did the Soviet Union fall?
In a simplified way, the story of the collapse of the Soviet Union could be told as a story about grain and oil.
That is from Yegor Gaidar. In the 1980s it was necessary to import more and more grain, and Saudi Arabia was no longer supporting oil prices. It worked like this:
The timeline of the collapse of the Soviet Union can be traced to September 13, 1985. On this date, Sheikh Ahmed Zaki Yamani, the minister of oil of Saudi Arabia, declared that the monarchy had decided to alter its oil policy radically. The Saudis stopped protecting oil prices, and Saudi Arabia quickly regained its share in the world market. During the next six months, oil production in Saudi Arabia increased fourfold, while oil prices collapsed by approximately the same amount in real terms.
As a result, the Soviet Union lost approximately $20 billion per year, money without which the country simply could not survive. The Soviet leadership was confronted with a difficult decision on how to adjust. There were three options--or a combination of three options--available to the Soviet leadership.
First, dissolve the Eastern European empire and effectively stop barter trade in oil and gas with the Socialist bloc countries, and start charging hard currency for the hydrocarbons. This choice, however, involved convincing the Soviet leadership in 1985 to negate completely the results of World War II. In reality, the leader who proposed this idea at the CPSU Central Committee meeting at that time risked losing his position as general secretary.
Second, drastically reduce Soviet food imports by $20 billion, the amount the Soviet Union lost when oil prices collapsed. But in practical terms, this option meant the introduction of food rationing at rates similar to those used during World War II. The Soviet leadership understood the consequences: the Soviet system would not survive for even one month. This idea was never seriously discussed.
Third, implement radical cuts in the military-industrial complex. With this option, however, the Soviet leadership risked serious conflict with regional and industrial elites, since a large number of Soviet cities depended solely on the military-industrial complex. This choice was also never seriously considered.
Unable to realize any of the above solutions, the Soviet leadership decided to adopt a policy of effectively disregarding the problem in hopes that it would somehow wither away. Instead of implementing actual reforms, the Soviet Union started to borrow money from abroad while its international credit rating was still strong. It borrowed heavily from 1985 to 1988, but in 1989 the Soviet economy stalled completely...
The money was suddenly gone. The Soviet Union tried to create a consortium of 300 banks to provide a large loan for the Soviet Union in 1989, but was informed that only five of them would participate and, as a result, the loan would be twenty times smaller than needed. The Soviet Union then received a final warning from the Deutsche Bank and from its international partners that the funds would never come from commercial sources. Instead, if the Soviet Union urgently needed the money, it would have to start negotiations directly with Western governments about so-called politically motivated credits.
In 1985 the idea that the Soviet Union would begin bargaining for money in exchange for political concessions would have sounded absolutely preposterous to the Soviet leadership. In 1989 it became a reality, and Gorbachev understood the need for at least $100 billion from the West to prop up the oil-dependent Soviet economy.
Here is the full article. The pointer is from VoxBaby. Do you have further thoughts?
Posted by Tyler Cowen on June 13, 2007 at 06:17 AM in History | Permalink
Comments
From the article: "As a result, the Soviet Union lost approximately $20 billion per year, money without which the country simply could not survive."
Although 20 Billion is a large amount of money, the whole system of corruption in the USSR and spending on war and space industry was probably a bigger drain on the economy. It probably had an impact, might even have been the drop that made the bucket flow over, but that doesn't mean all the previous drops were of lesser impact or importance. The search for a single cause for a historical development as complicated of the Soviet implosian often underappreciates the complexity of it all.
Posted by: Sam at Jun 13, 2007 7:49:39 AM
Very interesting, stuff. Of course this is one of the many stories that one could possibly apply to illuminating the fall of the USSR, to focus on it alone while ignoring the complex cultural realities and the arms race, corruption and other failed economic programs is to have an incomplete account of a variegated narrative.
Posted by: John Goes at Jun 13, 2007 8:10:22 AM
Actually this idea not that new.
There is an article http://www.hubbertpeak.com/reynolds/SovietDecline.htm with the same idea.
Also CIA had online
CIA's Analysis of the Soviet Union, 1947-1991 but not it seems gone. The book contained interesting views dated 1977 where almost all the propositions ( grain, peak oil etc ) were taken into consideration and were supposed to lead to Soviet Problems
Posted by: Sergey Kurdakov at Jun 13, 2007 8:18:00 AM
Btw earlier Gaidar views were that excessive investments into machine building industry ( which seems were the reflection of idea that time that growth is correlated with hight percent of machine building investments ) lead to high inflation (like in Poland ) and following crisis - so he got to oil idea later.
Posted by: Sergey Kurdakov at Jun 13, 2007 8:26:31 AM
This is a somewhat dated analysis of the drop in Soviet oil output that should be of interest on this topic:
http://www.hubbertpeak.com/reynolds/SovietDecline.htm
The other point of importance omitted in this article is the way the Soviets used the "profits" from oil production to subsidize the military sector. Without oil the Soviets could not even afford the level of military spending they had, let alone expand spending in response to the Reagan military build up. To a great extent the Russian economy is just another OPEC type country with the correlation between real gdp growth and oil production well over 0.9.
Since this week is the anniversary of the Reagan tear down this wall speech
the importance of oil as the proximate cause of the collapse of the USSR in the 1980s-90s rather then the US military expansion is important to understand when trying to apply the lessons of the cold war to the modern world.
Posted by: spencer at Jun 13, 2007 9:00:22 AM
We should tie this into a little more history of the economy of the 1970s with the Connally-Nixon analysis of the US oil market. Even before the first oil crises of the early 1970s when Saudi Arabia first raised oil prices Treasury Secretary Connely had convinced Nixon that falling US oil production would create a major balance of payment problem as US oil imports grew significantly. They needed to figure out how to pay for the increased oil imports and the Soviet harvest failure gave them just this chance. They sold the US surplus grain stocks to the Soviets and cut back the acreage farmers were allowed to plant. This double barreled hit to grain supply was designed to cause the price of US food exports to soar and so finance the expanded US oil imports.
So just as now when government actions to deal with the oil crises is creating a surge in food prices, the same mechanism worked in the 1970s.
But this also raises a problem with the Gaidar article . The reason the original soviet grain crises hit was that in the late 1960s the Soviets had finally started to eat meat almost every day. But to get a pound of nourishment from meat takes about seven pounds of grain. So in the 1980s it was not a question of sever food rationing, rather it was a question of eliminating the one real improvement in the Soviet standard of living they had experienced in recent years -- starting to eat meat regularly.
Posted by: spencer at Jun 13, 2007 9:14:38 AM
Sorry, I just gotta chuckle.
As I'm reading it, I'm thinking -- "yeah, that's it ... the Soviet Union collapsed, not because of an
unsustainable economic system that punished anyone who was genuinely productive ... it was the Arabs!
Yeah!!!!! The Arabs. If they just hadn't increased oil output, why, the Soviet economy could have
run at full steam indefinitely. Man, just that *one, tiny, unpredictable* little shock. It was just that
*one* possibility that the Soviet economy couldn't withstand."
Some people can't see the forest because of all the damn trees in the way.
Posted by: Person at Jun 13, 2007 9:27:48 AM
No Person. Soviet economy stuck in 70s. The growth with the hight oil prices were just mere 3 percents per year. In beginning of 80s the economy stopped to grow ( then the oil prices were highest ). For that reason Gorbachev started to invest into
machine building - the economy virtually stopped and stagnated. It won't move even with hight oil prices. So the additional military spendings, collapse of oil prices and finally decrease in oil production easily killed USSR. But USSR will eventually collapse even without drop in oil prices. It really really started to disintegrate internally ( low morale at workplaces etc ) and this was quite well visible from inside.
One more thing was the come of western culture with videotape recorders. They really
delivered a hard blow on views of ordinary people on what state of the world is.
Posted by: Sergey Kurdakov at Jun 13, 2007 9:39:06 AM
The soviets had been limping along with a completely disfunctional monetary system for decades. Their power was maintained by gunpoint, not money.
I attribute their collapse to three reasons.
1) The military defeat in Afganistan was both costly and demoralizing for the Soviet Union.
2) The inability to technologically compete with the West. The US, Europe and Japan were moving into the computer age. Manufacturing chips, computers and software required a greater degree of economic freedom and competition.
The inability to keep up technologically forced both the Soviets and China to either open up or fall technologically behind.
3) Chernobyl. This disaster revealed Gorbachev's newly instituted policy of peristroka and glastnost to be a fraud. Sweden had to inform the world that this disaster had occurred while the Soviets were trying to cover it up. I think this was the pivitol point that lead gorbachev to institute a real version of glastnost resulting in the breakup of the soviet union.
Posted by: cb at Jun 13, 2007 9:40:33 AM
Sergey_Kurdakov: I was being sarcastic in my previous post. I agree with you: with the Soviet economy, it
was just a matter of time, and it would be wrong to act like this or that even was "the" cause.
(I guess sarcasm doesn't translate easily. :-P )
Posted by: Person at Jun 13, 2007 9:43:22 AM
I'm also chuckling, but at a different joke: A fat man sits on a weak stool. The stool breaks. Afterwards, a bunch of engineers come by, and describe the evident failure of the stool--without making any reference to the imposed weight!
Both the USSR & Spain had subtaintial external forces being applied. These outside forces had a very great deal to do placing strain on a poorly designed economy. The article presumes that the West was going to put stringent restrictions on the credits, but we've seen over & over that this isn't necessarily the case. The article takes the size of the M-I complex for granted, and ignores the extent of its justification due to the likelihood of western military intervention.
Reagan amped up the pressure on the Soviets every way that he could. The entire idea was to push the Soviet leadership into a position from whence collapse was inevidable. I would say that he succeeded.
In fairness, the point of the article seems to me to be that high oil prices are not guaranteed, and assuming that they are will cause your oil-based economy to collapse (again), so don't do it. As such, the omissions are probably forgivable.
Posted by: Nathan Zook at Jun 13, 2007 9:45:58 AM
Along the same lines, Nathan_Zook, you could criticize the Social Security system for being predicated on a low,
stable "dependency ratio". It reminds me of that Malcom_Gladwell article where he -- making the same error as in the
article linked here -- says that the failure of corporate pension plans was because they were "shocked" by a change in the ratio. No, they were simply what happens when you make promises you can't keep.
Posted by: Person at Jun 13, 2007 10:00:25 AM
Fascinating article Tyler. Thanks for the quotes and the link!
Posted by: Matthew at Jun 13, 2007 10:01:50 AM
spencer.
The massive Soviet grain purchases of 1972 were triggered by a massive drought-induced failure of production, and they did not wish to cut back on the gains in meat production compared to the Stalin era that had occurred during the Khruschchev "corn campaign." Grain prices remained very high into 1974, "the great world food crisis," now largely forgotten, but perhaps back. The Soviets did their purchasing covertly at the time. There is not much evidence of any coordination with the Nixon administration. These price pushing purchases occurred before the first OPEC oil price hike at the end of 1973, and so had nothing to do with it.
Person,
It was not a matter of the Arabs not increasing oil production, it was a matter of the Saudis in particular getting tired of having to keep reducing production in order to keep the oil price propped up above $30 per barrel while the Iranians and Iraqis were both cheating on their production quotas to sell more oil to buy arms with cash to fight each other. By 1985 the Saudis were running internal budget deficits and were borrowing to keep their hungry princes happy, and had had enough of their OPEC colleagues free riding. Also, Person, although it is a side show, but the gloom about social security is just hysteria. It is in fine shape. Not comparable at all. Pick a better example.
cb,
Your points are excellent. Regarding the military, it was not so much the amount, it was the fact that the USSR was falling behind technologically. The original push to liberalize came under Gorby's mentor, longtiime KGB chief Andropov, who knew full well that the USSR was falling behind technologically, although he maintained hard line policies in the Cold War and in politics. Chernenko backslid briefly to the Brezhnev stagnation, but Gorbachev was pushed by all the elements you mention, with the oil price problem aggravating everything big time.
More generally, I would note that the Soviet leaders knew they were too dependent on oil. Their long range planners were trying to see if they could get less dependent on it. They did not succeed, and they still have not in Russia, although with oil prices high once again, it does not seem like such a problem.
Posted by: Barkley Rosser at Jun 13, 2007 10:16:02 AM
I have a hard time accepting the economic reasons for the collapse of the USSR. After all, who has worse economies than Cuba or North Korea and they show no signs of abandoning communism? I still prefer the story in a biography of Gorbachev that Kruschev had a lot to do with it. Kruschev tried to reverse a lot of Stalin's evil, reform the USSR and even denounced Stalin. Gorby was in college at the time and admired Kruschev greatly. Gorby became very bitter when Kruschev was kicked out, so he and many friends decided to pretend to support the revived Stalinism under Kruschev's successor until they could get into positions of power and restore Kruschev's reforms.
Posted by: Fundamentalist at Jun 13, 2007 10:16:38 AM
interesting article
Posted by: Mary at Jun 13, 2007 10:19:53 AM
Barkley_Rosser: The point I was making about oil was that it was not "the" cause, but just one of many possibilities for how the collapse would play out.
Regarding SS, what aspect is false? Is it false that the SSA has actually run out of assets, and is in effect running an unfunded plan whereby it can only pay benefits by taxing current workers? Is it false that it is predicated on a certain dependency ratio? Is it false that it is vulnerable to a positive feedback loop whereby younger workers increasinly remove themselves from the taxable US labor pool as the deal SS offers gets worse and worse? It it false that it has numerous times had to raise taxes and cut benefits?
Posted by: Person at Jun 13, 2007 10:24:22 AM
Barkley Rosser -- I was personally involved with arranging the PL-480 loans from the dept of Ag in 1972 that the Soviets used to purchase much of the grain.
I pointed out in my comments that this happened before the big increase in oil prices.
The single most important determine of grain prices is world grain stocks. When stock fall below one year supply prices soar. So the spike in grain prices was a two step program -- first eliminate the stocks and second cut output so stocks are not rebuilt.
The article and other of this nature do not deny that the communist system was probably doomed. The question is was was the proximate cause that made it happen when it did and the evidence is overwhelming that it was oil.
Posted by: spencer at Jun 13, 2007 10:40:48 AM
BTW this article is based on a book published in russian by Gaidar.
The story why the book appeared in my eyes is following.
As you might know Kremlin organized antiliberal (antidemocratic ) Nashi movement. And at some point at Nashi forum I crossed with Gaidar's daughter which leads the opposing youth movement. That time nashi put their story why USSR collapsed and that story depicted liberal (democratic ) forces as corrupt pro american spies. During discussion of that event I stressed on Gorbachev confessions that drop of oil prices
made decisions for him to be tought I also made reference to CIA analysis of the soviet union. In next year Gaidar published his book and told that he started it at about the time of those discussions at nashi forum.
Maybe my view is wrong, still if I'm it is intresting how it is possible to influence flow of events on internet.
Posted by: Sergey Kurdakov at Jun 13, 2007 11:04:12 AM
Good article, but as some have noted, it leaves out the cost of keeping up with the USA in military spending. If Reagan had not instituted the massive US military buildup, the Soviets might have held on longer. Also, Reagan's administration was instrumental in courting the favor of the Saudis and encouraging them to increase production to drop oil prices.
The Saudis were concerned about Soviet influence in the Middle East and a possible Soviet inspired coup, so they had their own reasons for raising production.
Concerning the disastrous Soviet war in Afghanistan - don't forget that this is where the US provided vital intelligence and arms shipments (remember Ollie North?). Without the satellite imagery and ground-to-air missiles the US provided, the war would not have been the drain on the USSR that it became.
I was not aware of the Nixon-Connely grain issue. That fleshes out the story of the fall of the Soviet empire. Hopefully the leadership in Russia (and the US) can take a lesson from the past when it comes to superpower stability.
For those interested in the Reagan influence on these events, the book "Victory" by Peter Schweizer is a good overview (although it is overly pro-Reagan in my opinion. You'd think the guy knocked the Berlin Wall down by hand after reading the book.)
Posted by: Another guy at Jun 13, 2007 11:10:09 AM
The disagreements on the comments are merely between discussing the root and proximate causes of Soviet collapse. The root cause, of course, was the command economy of the USSR and its inherent disincentives for growth and incentives for corruption. But it was able to meander for a long while. The longer it went on, the weaker it got - at least relatively to the West - but it still needed some sort of shock to produce collapse.
The role of oil prices is something to consider. Especially as high oil prices now is what's precisely providing the Putin regime with the resources it needs to assert Russian interests.
Posted by: Chris Durnell at Jun 13, 2007 11:34:52 AM
P.J. O'rourke commented in one of his books (I can't remember which one)that the "Sony walkman" contributed to the fall of the USSR because when the Soviet citizen's realized that lots of even poor people in the US had a sony walkman (as opposed to only the elite Soviets) it was time to say enough is enough. Of course PJ was putting an amusing spin on the economic and technological differences that obviously were important.
Posted by: indiana jim at Jun 13, 2007 11:35:34 AM
indiana_jim: I heard the same story, except substituting "jeans" for "Sony walkman".
Posted by: Person at Jun 13, 2007 11:59:52 AM
'Also, Reagan's administration was instrumental in courting the favor of the Saudis and encouraging them to increase production to drop oil prices.'
Exactly. Peter Schweitzer tells the story quite well in 'Reagan's War'. The Red Army in Afghanistan and Iran's threatening to defeat Iraq were the openings that Reagan had with the King of Saudi Arabia.
Gaidar doesn't seem to be aware that this was deliberate policy of Reagan; to defeat (not contain)the USSR.
Posted by: Patrick R. Sullivan at Jun 13, 2007 1:14:01 PM
I recall being in Leningrad in '88 and having cleaning ladies begging me and my buddies for a Walkman. I could have made a killing if I'd stocked up on Levis before the trip. The desire for Western goods was palpable.
Posted by: Bernard Guerrero at Jun 13, 2007 1:23:00 PM
