Friday, June 08, 2007

Oil and the collapse of Soviet Empire

The fall of the Soviet Union in 1991 was preceded by a deep economic crisis during its last years. Until a few days ago, I wasn't sure why this crisis started in late 1980s and not earlier or later. The former Russian prime minister Yegor Gaidar says there was a good reason for that. The reason was oil.

During late 1970s and early 1980s, the oil prices were high and Soviet Union was making a lot of money by selling oil to Western nations. That allowed to buy food and other goods that the dysfunctional socialist economy of USSR could not produce in sufficient amounts. Then, in 1985, the oil prices plummeted. In half a year, they fall more than twice. And so did the oil revenues of the Soviet Union.

Soviet leader Mikhail Gorbachev desperately tried to reform the Soviet economy. But no reform, even the most perfect one, could compensate for sudden disappearance of most of oil revenues. Soviet Union had to borrow money to pay for food imports. By 1989, Western banks stopped lending money to Soviet Union, because they did not believe the country would be able to pay it back. At that point, the only loans that Soviets could get came from Western governments directly and those loans came with strings attached.

In 1990, Baltics declared independence. In January 1991, Soviet tanks attacked the TV tower in Vilnius, Lithuania. For next two weeks, Baltic states were tense. Will Soviets follow through and remove the pro-independence leadership of Baltics with military force? Nothing happened. According to Gaidar, Soviet Union had gotten the following message about Baltics:
Do as you wish, this is your country. You can choose any solution, but please forget about the $100 billion credit.
The goodwill of Mikhail Gorbachev may have played some role in Soviet Union not using military force, but the fear of not getting $100 billion credit sealed the deal.

Here is the full transcript of Gaidar's speech on this topic. He has also published a book, Gibel' Imperii: Uroki dlya sovremennoi Rossii [The Collapse of an Empire: Lessons for Modern Russia, with English translation available in two months] which I plan to read, once I get hold of it.

Oil prices are now high again and Russia is swimming in oil money, with $400 billion reserves for the case if the prices fall. Preventing Russia from using military power by threatening to withhold credits wouldn't work these days.

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