Paper of the week: the inside story of the Soviet Union’s collapse

Executive summary: it’s the economy, stupid.

This one is truly extraordinary. Yegor Gaidar, Russian economist and market reformer, former acting Prime Minister of Russia, former Russian economic minister, and possible Putin poisoning victim, has written a book about the collapse of the Soviet economy in the 1980’s that has been extracted into this astonishing paper.

Some choice extracts:

In a simplified way, the story of the collapse of the Soviet Union could be told as a story about grain and oil. As for the grain, the turning point that decided the fate of the Soviet Union began with the economic debate of 1928-29, when the discussion centered on what would later be called the “Chinese path” of development… At the time, the head of the Soviet government, Aleksei Rykov, and the chief ideologist of the Communist Party, Nikolai Bukharin, earnestly defended the idea of a path which included preserving private agriculture and the market, and ensuring financial stability — but holding onto the party’s political control.

The Soviet leadership ultimately chose another path. The solution preferred by Joseph Stalin was the expropriation of peasants’ property, forced collectivization, and extraction of grain. Judging from the available documents, the essence of this decision was relatively simple. Bukharin and Rykov essentially told Stalin: “In a peasant country, it is impossible to extract grain by force. There will be civil war.” Stalin answered, “I will do it nonetheless.”

The result of the disastrous agriculture policy implemented between the late 1920s and the early 1950s was the sharpest fall of productivity experienced by a major country in the twentieth century. The key problem confronting the Soviet Union was well-expressed in the letter sent by Nikita Khrushchev to his colleagues in the leadership of the party. The letter fundamentally stated: “In the last fifteen years, we have not increased the collection of grain. Meanwhile, we are experiencing a radical increase of urban population. How can we resolve this problem?” …

In 1963, Nikita Khrushchev sent a letter to the leaders of the Socialist bloc, informing them that the Soviet Union would no longer be able to supply them with grain. That year, the Soviet state bought 12 million tons of grain–and spent one third of the country’s gold reserves to do so. Khrushchev commented: “Soviet power cannot tolerate any more the shame that we had to endure.” …

“[S]ocialist industrialization” had resulted in the Soviet industry being unable to sell any processed (value-added) products. Nikolai Ryzhkov, chairman of the USSR Council of Ministers, expressed the sentiment clearly at another meeting of the Soviet leadership: “No one will take our machinery production. That is why we are exporting mainly raw materials.” …

The Soviet economy thus hinged on its ability to produce and export raw commodities–namely, oil and gas. The Soviet leadership was extremely fortunate: at almost exactly the time when serious problems with the import of grain emerged, rich oil fields were discovered in the Tyumen region of Western Siberia. …

The Soviet premier, Aleksey Kosygin, used to call the chief of the Tyumenneftegaz, Viktor Muravlenko, and explain the desperation of the situation: “Dai tri milliona ton sverkh plana. S khlebushkom sovsem plokho.” [Please give three million tons above the planning level. The situation with the bread is awful.] …

The shortest quotation about the intellectual capacity of the Soviet leadership came from the Politburo minutes: “Mr. Zasiadko has stopped binge drinking. Resolution: nominate Mr. Zasiadko as a minister to Ukraine.” …

[O]ne of the Soviet leadership’s biggest blunders was to spend a significant amount of additional oil revenues to start the war in Afghanistan. The war radically changed the geopolitical situation in the Middle East. In 1974, Saudi Arabia decided to impose an embargo on oil supplies to the United States [dramatically raising the price of oil]. But in 1979 the Saudis became interested in American protection because they understood that the Soviet invasion of Afghanistan was a first step toward — or at least an attempt to gain — control over the Middle Eastern oil fields.

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. …

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. …

The only option left for the Soviet elites was to begin immediate negotiations about the conditions of surrender. Gorbachev did not have to inform President George H. W. Bush at the Malta Summit in 1989 that the threat of force to support the communist regimes in Eastern Europe would not be employed. This was already evident at the time. Six weeks after the talks, no communist regime in Eastern Europe remained.

Of course, the West was still careful about directly supporting independence movements inside the Soviet Union. When the Lithuanian authorities approached the American embassy in Moscow to ask whether the United States would lend support to the independence of Lithuania, the immediate response was negative. When the Soviet Union tried to use force to reestablish control in Baltic states in January 1991, however, the reaction from the West — including from the United States — was fairly straightforward: “Do as you wish, this is your country. You can choose any solution, but please forget about the $100 billion credit.” …

On August 22, 1991, the story of the Soviet Union came to an end… The document which effectively concluded the history of the Soviet Union was a letter from the Vneshekonombank in November 1991 to the Soviet leadership, informing them that the Soviet state had not a cent in its coffers.