Wednesday, May 16, 2007
Gaidar on the Soviet Collapse
A deeply interesting paper from the former Russian prime minister, based upon a lecture delivered at AEI, compiled and translated by my superb assistant, Igor Khrestin, and edited by senior fellow Leon Aron. (All quotations are footnoted in the link.)
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. According to chairman of the State Planning Committee Yury Maslyukov:
We understand that the only source of hard currency is, of course, the source of oil. . . . If we do not make all the necessary decisions now, next year may turn out to be beyond our worst nightmares. . . . As for the socialist countries, they may all end up in a most critical situation. All this will lead us to a veritable collapse, and not only us, but our whole system.
[Nikolai] Ryzhkov [chairman of the State Council of Ministers] commented at the same meeting:
The Vneshekonombank's [Soviet Foreign Trade Bank] guarantees are needed, but it cannot provide them. . . . If there is no oil, there will be no national economy.
It is fascinating to hear now the opinion that Eduard Shevardnadze, then foreign minister, "betrayed" the interest of the Soviet Union—especially when documents that were prepared for him at the time are available. In reality, a number of Soviet agencies urged him to secure at any cost these "politically motivated credits."In the meantime, the Soviet Union started to have severe food shortages, and grain deliveries were not being made to large cities. One of Gorbachev's closest associates, Anatoly Cherniayev, described the situation in Moscow in March 1991:
If [the grain] cannot be obtained somewhere, famine may come by June. . . . Moscow has probably never seen anything like that throughout its history—even in its hungriest years.
When the situation in the Soviet Union is examined from financial and hard currency perspectives, Gorbachev's policies at the time are much easier to comprehend.
Government-to-government loans were bound to come with a number of rigid conditions. For instance, if the Soviet military crushed Solidarity Party demonstrations in Warsaw, the Soviet Union would not have received the desperately needed $100 billion from the West. The Socialist bloc was stable when the Soviet Union had the prerogative to use as much force as necessary to reestablish control, as previously demonstrated in Germany, Hungary, and Czechoslovakia. But in 1989 the Polish elites understood that Soviet tanks would not be used to defend the communist government.
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."
What were Gorbachev's options at the time? He could not easily dissolve the Soviet empire; the conservative elements inside the Soviet leadership were strongly against this notion. Yet he could not prevent the dissolution of the empire without a massive use of force. But if force was employed, the Soviet state would not get the necessary funds from the West, without which Gorbachev had no chance of staying in power.
This conundrum was the source of Gorbachev's dilemma, forcing him to strike a deal with both the military and Boris Yeltsin. Hardliners from the KGB and the army who perceived that Gorbachev was simply too weak of a leader staged a coup in August 1991 under the banner of the State Committee for a State of Emergency (GKChP).
Within three days it was clear, however, that the plot had failed because its leaders did not know how to deal with the situation. Even if they found one division able to crush all the people who demonstrated against the GKChP, would the grain appear? Where would they find the food necessary to feed the larger cities? Would the West rapidly give the $100 billion? Their case, like the Soviet state itself, was entirely lost.
On August 22, 1991, the story of the Soviet Union came to an end. A state that does not control its borders or military forces and has no revenue simply cannot exist. 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.
05/16 11:41 AM