EVENTS

Date:	Monday, November 13, 2006
Time:	10:30 AM -- 11:30 AM
Location:	Wohlstetter Conference Center, Twelfth Floor, AEI 1150 Seventeenth Street, N.W., Washington, D.C. 20036

November 2006

The Collapse of the Soviet Union: Lessons for Contemporary Russia

How will the Kremlin’s campaign to recapture the economy’s “commanding heights” and its apparent abandonment of structural reforms affect long-term growth? As Russia increasingly displays many of the characteristics of authoritarian regimes and “petro-states,” what are the risks to the development of a liberal economy and a democratic society?

On November 13, AEI hosted a lecture by Yegor Gaidar, acting prime minister during the first government of President Boris Yeltsin and the architect of the free-market revolution in post-Soviet Russia. Gaidar related the lessons of the Soviet state’s failure to the new direction of the Kremlin in the last few years, including the recentralization in politics and the economy, as well as growing fiscal dependency on energy prices.

Yegor Gaidar
Institute for the Economy in Transition

In the summer of 2002, after the Russian government introduced a flat income tax, completed fiscal federalism reforms, introduced private land property, and created the Stabilization Fund, the window of opportunity for further reforms was effectively closed. Present Russian economic problems are comparable to the problems the Soviet Union faced in the late Brezhnev period--namely, a sharp rise in oil prices.

In present Russian society, there is a disturbing tendency to mythologize the late Soviet period. The myths include the belief that the Soviet Union, despite its problems, was a dynamically developing world superpower, until usurpers initiated disastrous reforms. At least 80 percent of Russians are convinced of interpretation of history. This revisionism is comparable to that in Germany during the interwar period.

The collapse can be traced to two factors in the Soviet economy: grain and oil. In 1928 and 1929, Russia debated whether to choose “the Chinese model” of agriculture, but Stalin chose forced collectivization and extraction of food from the countryside. This solution had long-lasting consequences, especially a sharp decrease in long-term agricultural productivity.

The Soviet system followed a rational socialist model: large projects and concentrated resources. Tactically, this was a success between mid-1950s and the early 1960s. The problems with this strategy were the limited amount of arable land and the increasing urbanization of Soviet society. Thus, grain procurement did not increase at all from the 1960s on. Russia--the biggest exporter of grain during the prewar period--became the world’s largest importer.

As the Soviet Union grappled with serious problems with agriculture, rich oil deposits were discovered in western Siberia in the 1970s. There was intense debate within the Soviet leadership on how to exploit the oil and production. The leaders of the oil industry predicted serious technological and delivery problems. Due to the unusual elasticity of supply and demand of the oil market, prices fluctuate widely and are prone to immense external shocks. Here the Soviet leadership was fortunate again: oil prices began to rise sharply in the mid-1970s.

Soviet leaders, however, did not heed the historical lessons of resource dependency. The only way they knew how to control oil prices was through manipulation. According to materials in the KGB archives, then-KGB head Yury Andropov discussed with Arab terrorists the possibility of attacking oil fields to keep prices high. Furthermore, the Soviet leadership unwisely decided to spend much of the oil profits waging an unnecessary war in Afghanistan.

Thus, the timeline of the Soviet downfall begins not in August 1991, but on September 13, 1985. Sheik Imani, the Saudi Arabian minister of oil, declared that his country would radically change its oil policy, ceasing to protect oil prices. Over the next six months, production in Saudi Arabia increased fourfold in real terms. In turn, the Soviet Union began to lose approximately $20 billion annually. Short on hard currency, the Soviet Union had to choose between ending subsidies to Warsaw Pact countries, radically cutting food imports, or drastically reducing military production. None of these were seriously discussed by the Soviet leadership. They chose to close their eyes and hope the problem would magically disappear.

The Soviet Union began to borrow significant sums. With a perfect credit rating in 1985, it could borrow as much as it wished. By 1989, Western commercial partners were no longer as accommodating, suggesting that the Soviets go directly to government sources. Maligned foreign minister Eduard Shevardnadze was ordered to secure funding at any cost. The Soviet leadership then realized the full gravity of the situation: the Soviet economy hinged on oil production.

When examining the situation in the mid-1980s from a hard-currency perspective, Mikhail Gorbachev’s policies are more understandable. The rules of negotiating politically motivated credit from Western democracies came with a set of policy changes--for example, rescinding the threat of force in eastern Europe. Thus, in 1989, the Polish elites knew that the Soviets would not send in the tanks to defend the Polish communist government. From this perspective, the Soviet government could only begin negotiating the terms of its surrender.

Gorbachev could not prevent the dissolution of the Soviet empire without massive use of force. Should such force be deployed, the Soviet Union would not receive $100 billion in desperately needed credit from the West. The Soviet military leadership, however, blamed Gorbachev for Soviet weakness. On August 22, 1991, the Soviet Union came to an end. A state that does not control its borders or its military forces and has no revenue simply cannot exist.

What lessons from the Soviet collapse can observers apply to the current situation in Russia? The country has an oil-dependent economy. Risk must be minimized when managing macroeconomic policy in a petro-state. Politically, there is a danger that sensible economic policy may be overcome by populism. An autocratic regime, although it may display a facade of strength, is fragile in crises. Should the Russian leadership ask the citizens to tighten their belts, the people may remind them that they have been fed this line for the past seventy years.

AEI research assistant Igor Khrestin prepared this summary.