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Oil And Communism

Brad Plumer notes that one underanalyzed factor in the collapse of the Soviet Union was the machinations of OPEC. For reasons that had nothing to do with the Soviet Union, Saudi Arabia took some steps in 1985 that absolutely devastated the Soviet oil industry and massively cut Soviet hard currency earnings. That, says Brad, helps explain why the USSR started coming apart in the late 1980s instead of, say, ten years later

The flipside of this, which Brad seems to overlook, is the role OPEC policy played in propping the USSR up in the 1970s. The supply disruptions of the 70s massively increased the price of oil, but didn't involve any serious disruptions in the supply of Russian oil. The result was a bonanza for the Soviet government which was arguably crucial to the sustainability of Communism à la Brezhnev. Sufficient revenues were flowing into state coffers to permit adequate consumption of public services and basic goods notwithstanding the fact that none of the other sectors of the Soviet economy were really producing much of anything in a tolerably efficient manner. This made it possible to continue running large, worthless enterprises as de facto "workfare" schemes and cover up the fact that nothing was really working. Even better, since these jobs were controlled by the state, the political apparatus' ability to control access to employment worked as a kind of "soft" coercive measure that was able to enforce loyalty to the regime without recourse to Stalinesque large-scale hard coercion.

Many Russians who haven't exactly made it in the Brave New World of entrepreneurship, crony capitalism, and gangsterism still look back to the Brezhnev era as the salad days of Russian life. And in many ways it was. If, like most people, you're not terribly interested in politics things were basically fine. If you followed orders and didn't speak your mind about public affairs and ideas, you could go about your business, and were guaranteed a job and access to a standard of living that, though poor by American standards, was still quite good by world standards, especially at a time when many countries we now think of as "developed" (Ireland, South Korea, Spain, etc.) were still relatively poor themselves. Meanwhile, all this was happening as the economies of the rich world suddenly started performing extremely poorly.

As it happens, this was all totally unsustainable and, in fact, it was not sustained. But just as in America, political leaders get both credit and blame for economic conditions that aren't really under their control. As the oil boom evaporated, it became necessary to start looking at ways to get the sectors of the economy that actually employed the vast bulk of the population to function tolerably. It was no longer possible to just let the oil industry subsidize everything else. And of, course, controlled reform didn't work.

There are at least two interesting issues posed by this. One is that if the supply shocks of the seventies somehow hadn't happened, would the Soviet Union have fallen much sooner? Quite possibly yes. But if it had, things would have taken a different turn. Between 1973 and 1989 there were a lot of demographic shifts inside the USSR that reduced the proportion of Russians in the whole pie. The 80s also saw a lot of developments in the Communist periphery, notably Poland. The result was that when things did fall apart, they had an outside-in quality, whereas an earlier denoument might have been more a collapse-at-the-center scenario. The other thing is that in the real world Communism managed to fall after a period in which key portions of the non-Communist world (Southern Europe, the Asian fringe, Latin America) had started moving decisively toward democracy. If Communism had started unraveling at a time when the "free world" was still substantially unfree, the eventual consolidation of democracy in Eastern Europe might not have played out so favorably.

The other issue is whether the Soviet government of the 1970s couldn't have taken advantage of the situation to initiate reforms under more favorable terms. If you need to make wrenching changes, it's usually better to try and implement them before the dawning of an economic crisis. Oil money, instead of floating a non-functioning economy, could perhaps have been used to grease the wheels of economic reform. That might have allowed for a China-style transition to an open economy with a closed political system.

April 16, 2005 | Permalink

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"Brad Plumer notes that one underanalyzed factor in the collapse of the Soviet Union was the machinations of OPEC ... The other issue is whether the Soviet government of the 1970s couldn't have taken advantage of the situation to initiate reforms under more favorable terms."

Understanding the collapse of the USSR really demands the 'great man' theory of history. Such a large portion of the events were dependent on Gorbachev and his worldview that the system was rotten that it really can't be ignored.

The two possible "Man in the High Castle" scenarios I see are these:

- What would've prevented the Politburo from pushing forward a reformer in the first place?

Since the price of oil hadn't collapsed when Gorby became leader, I don't think Plumer's theory works here.

- If the price of oil had remained high in the late 80's, could Gorby's reforms have succeeded without the total collapse of the system?

This one is a more interesting 'what if' scenario. I tend to doubt it, but this one is certainly conceivable.

Posted by: Petey | Apr 16, 2005 12:28:50 PM

Nonsense. Reagan gave a speech and then it was all over.

Posted by: praktike | Apr 16, 2005 12:52:40 PM

Nonsense. Reagan gave a speech and then it was all over.

Where have you been the last week or so? The pope visited Poland and it all came crashing down.

Posted by: David | Apr 16, 2005 12:58:45 PM

I forgot. I forgot. Does this mean I'm gonna get sent to the Gulag? I'm really sorry. Reagan and the Pope... Reagan and the Pope...

I really don't want to get sent to the Gulag again. None of the stores there have Reggiano Parmesan, and I like a flavorful cheese on my pasta.

Posted by: Petey | Apr 16, 2005 1:04:59 PM

This discussion ignores the impact of the Afghanistan invasion on the collapse of the USSR. Not only the cost, but the demoralizing aspect of it upon the population.

I think as we look back there were a large number of factors which came together, and the collapse was ultimately caused by the weak foundation provided by Communism.

Posted by: Steve4Clark | Apr 16, 2005 1:13:09 PM

I don't think oil revenues was such a determining factor in the 1970s or 80s. What are we talking about - $25-30 billion/year - something like that? - for a country of 250 million people. That's a 100 bucks per head per year? Sorry, doesn't seem like a big deal at all.

Gorbi did it.

Posted by: abb1 | Apr 16, 2005 2:08:32 PM

Oh, and also the Brad Plumer link has this:

Saudi Arabian crude costs around $1.50 a barrel to find, drill, and pump; in Russia it's about $15 a barrel. So if prices fall too low, oil companies will close up shop in Siberia.

This little snippet demonstrates total misunderstanding of the Soviet block economy vis-a-vis the rest of the world. Soviet crude costs were exactly $0. I suppose these costs could've been calculated in rubles, and even that wouldn't be easy and totally irrelevant.

The above claim that if prices fall too low, oil companies will close up shop in Siberia may be correct about today's Russia, but it is plainly ridiculous in respect to the Soviet Union. Sorry, Brad.

Posted by: abb1 | Apr 17, 2005 7:47:06 AM

For reasons that had nothing to do with the Soviet Union, Saudi Arabia took some steps in 1985 that absolutely devastated the Soviet oil industry and massively cut Soviet hard currency earnings.

No, the Saudis did that at the request of the United States, just like the US delivered the altered software that helped blow up the Russian natural gas pipeline.

If you followed orders and didn't speak your mind about public affairs and ideas, you could go about your business, and were guaranteed a job and access to a standard of living that, though poor by American standards, was still quite good by world standards,

Sustained by exports to other non-communist countries, by R&D done by non-communist countries, communist expansion and most importantly, by pretending nothing was wrong, further exacerbated by getting rid of trouble-makers, and ignoring the fact that the standard of living outside the major cities Westerners got to vist (Leningrad, Kiev, Moscow) (and frequently for non-party members in those cities) was as bad as any third-world country, like Ethiopia. This being 40 years AFTER the 'wonderous' industrial expansion that supposedly made everything ok. On the other hand Party members made out FINE!

[This is the 'Let's save full-tilt socialism/marxism from the Leninists' argument.]

And since we're doing that, did you know that up until 1943, people in Germany were living high off the hog? Why, it was positively a wonderland of spiffy stuff, and this in the middle of a massive war. All you had to do was shut up and go along (They certainly had an over-abundance of lampshades!) If only Hitler had died, and say, Goebbels had taken over, he could have enacted some reforms that would have led to a kindler, gentler, Nazism.

I'm sorry, I know you're trying to not argue in that direction but it sure sounds like it.

One is that if the supply shocks of the seventies somehow hadn't happened, would the Soviet Union have fallen much sooner?

If Hoover hadn't propped up the Soviet Union with food in ~1922, would the Soviet Union have collapsed then? YES! If Hitler had intelligently carried out his invasion, would the Soviet Union have collapsed then? YES! Did the system work well? About as well as attaching a kite to a giraffe turns it into a submarine! (Did anybody mention Carter selling grain to the Soviet Union in the 70's? Because they never ever could feed themselves?)

Now that that's out of the way:

Plumer:
The big Republican theory has it that Reagan's military buildup in the 1980s (along with the war in Afghanistan) was the ten-ton weight that crippled the Soviet system, forcing the country into a costly arms race that crowded out much-needed capital for economic growth, and really kicked the already-weak communist economy right in its bright red teeth.

Bah. This theory is just as bad. (But since it originates with the 'reformed' trotskyite wing (socialism with us in charge ok! communism evil!), I'm not surprised.)

They never changed their military production levels. They kept trucking with the same production levels from 1950 to 1985. The only serious change was the drastic increase in the production of thermonuclear weapons prompted by the Cuban missle crisis. (Why? Because they would have 'lost' (lost being everybody on their side dies, we take serious but not catastropic casualties; awful but not annihilation). That way they could be sure to annihilate us.

Anyways, from any angle sabotaging their economy was way more useful than trying to have a showdown, since military production was the thing that they were best at (which is perfectly sensible for 'War Communism'), whereas the economics of situation was their worst weakness. Hit 'em where it hurts. Reagan's military buildup's only effect that I can discern was to re-emphasize that we were still in the game, and that the promised land of a universal proletarian dictatorship was not in the offing anytime soon.

Which left them with several choices. They opted to attempt to really reform, which blew away the obscuring illusions, and promptly allowed their official economy to APPEAR to be the size it actually was, which was 1> small, 2> mostly useless. Alas, so much for the good old days when everything appeared to be ok. Sorta like the longing for the anti-bellum South. At least they did not opt to risk blowing up the world. That wouldn't have worked without Gorby acting as the hinge.

The chinese, notably, decided this was all a bad idea. They have opted to attempt the conversion to fascism. Which means I have now gone full-circle in this comment.

In our next Bat episode! Will China fully adopt the fuhrerprinzip? Will they take the money and run, and do some Mexican-style nationalization? Or will the oppressed minorities break through the Great Wall of Empire, followed by a Russian-style collapse? Or will Darla finally marry John and everyone will live happily ever after???? (snort) Don't miss the exciting conclusion, 'My Lenin, My Lenin, Why Have You Forsaken Me?'

ash
['My sympathies are with the man in the white shirt.']

Posted by: ash | Apr 17, 2005 9:08:26 AM

...standard of living outside the major cities Westerners got to vist (Leningrad, Kiev, Moscow) (and frequently for non-party members in those cities) was as bad as any third-world country, like Ethiopia.

This is just not true. Standard of living outside the major cities was nothing like Ethiopia, at least not during the decades that are being discussed here: 70s and 80s.

Also, I find the comparison with Nazism not entirely appropriate: failed attempt to create a society without private ownership of the means of production and failed attempt to build a society with a master-race may be similar in many respects, but the essence of ideologies driving these projects is very much different. One is egalitarian economics, the other is racism. Among other things, underlying motives are worth considering too.

Posted by: abb1 | Apr 17, 2005 10:20:29 AM

FWIW, a few lines from somebody who grew up in the USSR and saw these things first hand

1. Soviet standard of living. Whether it was higher or lower than Spain or Korea did not matter, as there was no way to compare that. Everybody knew that it was lower than in the US or France, but it was not a major source of discontent because many believed the societies were fundamentally different, and many believed the Soviet society had its advantages like guaranteed jobs etc. There was no difference between standard living of party members and non-members, as a huge fraction of the population was in the party. It is the few party apparatchiks who enjoyed significantly better life, but that was not very visible. What was also important was the feeling that over time the standard of living was improving, maybe at a very slow pace, but still improving. The country was still living with memories of WWII, sort of “the most important thing we are at peace, everything else is not all that important”

2. Afghanistan was not really relevant to perestroika. There was no large scale opposition to the war, most of the dissent was aimed at the poor fate of the Afghan people, not at the fact the USSR was losing the war.

3. IMHO, oil prices did play a role, but in an indirect way - the faltering economic situation pushed the Politburo to select a young reformer, Gorbachev, as opposed to a hard-liner. If Andropov (ex-KGB chief who succeeded Brezhnev) had not died early, it is very likely that the USSR would have been still around, but looking much like North Korea. Those guys did know how to rule the people and keep them in check.

4. Reagan and the Pope: Again, had it not been for Gorbachev, their policies would have resulted in more confrontation and that's all. (The USSR always had its favorite option to clam down and isolate itself from the external world.) If Carter had stayed for the second term, the odds of perestroika would now have changed much. It is not that Reagan won the Cold War, it's that Gorbachev decided to stop fighting it and withdrew.

5. Gorbachev: Completely agree with Petey - the peaceful collapse of the communist block is almost entirely thanks to Gorbachev. I am not saying he was planning it. But he did make a few crucial steps to open up the Soviet society for internal discussions (glasnost), which made it obvious to everyone that the emperor had no clothes. And Gorbachev was humane enough not to succumb to large scale repressions when the system started to unravel.

The sad irony is that Gorbachev remains deeply unpopular in Russia and rather forgotten in the West

Posted by: MrM | Apr 17, 2005 12:02:30 PM

In a December 5th New York Times column, Thomas Friedman wrote the following:

"You give me an America that is energy-independent and I will give you sharply reduced oil revenues for the worst governments in the world. I will give you political reform from Moscow to Riyadh to Tehran. Yes, deprive these regimes of the huge oil windfalls on which they depend and you will force them to reform by having to tap their people instead of oil wells. These regimes won't change when we tell them they should. They will change only when they tell themselves they must.

When did the Soviet Union collapse? When did reform take off in Iran? When did the Oslo peace process begin? When did economic reform become a hot topic in the Arab world? In the late 1980's and early 1990's. And what was also happening then? Oil prices were collapsing.

In November 1985, oil was $30 a barrel, recalled the noted oil economist Philip Verleger. By July of 1986, oil had fallen to $10 a barrel, and it did not climb back to $20 until April 1989. "Everyone thinks Ronald Reagan brought down the Soviets," said Mr. Verleger. "That is wrong. It was the collapse of their oil rents." It's no accident that the 1990's was the decade of falling oil prices and falling walls."

I think Gorbachev, Reagan and the Pope are all overrated. Also, the Eastern Block countries were better off than say, Brazil, with its extreme poverty.

Does this mean Clinton should get less credit for the economy during the 90s?

Posted by: Peter K. | Apr 18, 2005 2:40:21 PM

In a December 5th New York Times column, Thomas Friedman wrote the following:

"You give me an America that is energy-independent and I will give you sharply reduced oil revenues for the worst governments in the world. I will give you political reform from Moscow to Riyadh to Tehran. Yes, deprive these regimes of the huge oil windfalls on which they depend and you will force them to reform by having to tap their people instead of oil wells. These regimes won't change when we tell them they should. They will change only when they tell themselves they must.

When did the Soviet Union collapse? When did reform take off in Iran? When did the Oslo peace process begin? When did economic reform become a hot topic in the Arab world? In the late 1980's and early 1990's. And what was also happening then? Oil prices were collapsing.

In November 1985, oil was $30 a barrel, recalled the noted oil economist Philip Verleger. By July of 1986, oil had fallen to $10 a barrel, and it did not climb back to $20 until April 1989. "Everyone thinks Ronald Reagan brought down the Soviets," said Mr. Verleger. "That is wrong. It was the collapse of their oil rents." It's no accident that the 1990's was the decade of falling oil prices and falling walls."

I think Gorbachev, Reagan and the Pope are all overrated. Also, the Eastern Block countries were better off than say, Brazil, with its extreme poverty.

Does this mean Clinton should get less credit for the economy during the 90s?

Posted by: Peter K. | Apr 18, 2005 2:40:21 PM

Well, what exactly was the effect on the USSR of the low oil prices in the 1980s? How many billions of dollars did they lose in 1986 compare to 1985? Give me some numbers. Otherwise this is just yada-yada-yada.

Posted by: abb1 | Apr 18, 2005 3:20:04 PM

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