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Monday, September 23, 2013

It was oil, not Reagan, that brought down the Soviet Union

by John MacBeath Watkins

One of the enduring myths in our history is that Ronald Reagan won the Cold War by starting a huge military buildup that  the Soviet Union couldn't match, causing their empire to collapse.

My own opinion is, the Soviets started their buildup well before we started ours, and accelerated the buildup when they went to war in Afghanistan. They pissed off Saudi Arabia, and their empire collapsed when the Saudis dropped the price of oil.

First, I refer you to this chart comparing Soviet and American defense spending:

The Soviet buildup clearly preceded the American one, and had flattened out before the American buildup equaled theirs. It remained at about the same level until the end of the Afghan war, then fell like a stone.

The Soviet deployment in the Afghan war started in 1979. In 1985, Saudi Arabia stepped up oil production, and from the early 1970s on, the North Sea oil was coming on line. These factors produced shocks to the price of oil:

Now, the Soviet Union earned much of its hard currency with oil exports, but it had a lot of heavy industry, and was capable of producing lots of stuff. We should keep in mind that economic sanctions, if they are effective, often take a long time to be effective. A country can endure a great deal as long as it produces enough to eat, or as North Korea has shown, even if it doesn't, provided the regime makes sure the people see no alternative to enduring it.

But however much stuff the Soviet Union could produce, it could not efficiently predict or fulfill the needs of customers, which goes a long way to explaining this chart:

Mikhail Gorbachev managed a sharp increase in GDP, but the economy was still not earning enough foreign exchange, and the problem was made worse by a farm sector that was not producing enough food to feed the nation. This meant that what foreign exchange the country had was needed for buying grain.

I should point out that this theory is not my own invention. Yegor Gaidar wrote a very well-researched paper for the American Enterprise Institute in 2007, which I recommend you read. From Gaidar's paper:

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.
Which meant they had to go looking for loans from countries that were capable of producing things the world wanted, like food. Gaidar again:

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.
This was not acceptable to the hardliners in the Kremlin, who staged a coup in August, 1991. Within three days, it became apparent that the plotters had no plan to make grain appear or control the empire. In a matter of weeks, the Soviet Empire ceased to exist, because it could not use sufficient force to retain control and still feed the people well enough to avoid a popular uprising.

This is a very different story about the fall of the Soviet Union than the one that persists in the minds of many Americans. In it, the American buildup was reactive, not preemptive, and the Soviet Union could not afford to continue, not because it couldn't afford the military buildup -- money it owed itself, in that the defense industry belonged to the government -- but because it could not afford food. The Saudi decision to let the price of oil fall to half what it had been bankrupted them, not the Reagan buildup. The price of oil went from about $42 when the Saudis mad their decision, to as little as $9.75, and stayed around $20 a barrel for years.

In this narrative, a productive farm sector, sound finances, and good relations with other countries were the basis for America coming out on top. Reagan contributed little to these, and his military buildup and tax cuts actually increased our debt and reduced our solvency, though fortunately not enough to cripple us.

This is a lesson in the perils of an aggressive foreign policy -- invading Afghanistan had as much as anything to do with Saudi decision to open the spigot, though there were certainly other factors.

This is also a lesson that a sound economy is essential to the strength of the nation. And that had to do with America having some of the most scientific farming in the world, and with the flexibility of a market economy.

It also tells us something about empire. The Soviet empire was not economically rational, and was a drain on the dominant country. It's my belief that in general, attempts by one country to militarily dominate an unwilling foreign population, in our modern age of global capital and stateless income, simply will not pay off.

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