Why did the Soviet Union fall?

Picked up from Tyler Cowen’s post in 2007 (Tabarrok in a review of MR blog in 2011 mentions this post).

It is based on this AEI lecture by Yegor Gaidar  which in turn is a summary of this book written in 2007. Gaidar simplifies the collapse of USSR to a great extent. He says it was basically because of two commodities – grain and oil.

  • Grain as USSR did not make attempts to increase its agricultural productivity. Stalin actually did things like  expropriation of peasants’ property, forced collectivization, and extraction of grain against all the advices. So, Russia from the largest foodgrain exporter became an importer over time. For imports, it needed foreign exchange which was scarce in a country which followed closed-door policies. Where does foreign currency come from?
  • Well, it was oil and gas. As USSR discovered oil and gas suddenly in Siberia which also coincided with surge in oil prices in 197os. This helped USSR finance the import of grains. Russia increased oil production 12 times in 12 years! Oil prices declined in 1980s and  production could not be increased beyond a point.  However, urbanising Russia needed more grains, the Union came under pressure. It also made errors to use oil funds to finance wars in Afghanistan (to keep oil prices high which backfired as Saudis too US side realising USSR was trying to gain control over Middle East ).
  • Towards collapse USSR tried to get loans to finance their grain needs. But few banks were interested. Even help from West (read US) did not come. The message seemed to be do what you want to but we are not lending. USSR needed around $ 100 bn at that time.

Very interesting. Did not know it was that simple (of course lots of political events thrown in middle, read the paper for more ).

Gaidar says most things have simple explanations. We just look for more complicated stories:

There were several factors which pushed me to write this book. The first was the rise in oil prices, which in real terms have started to approach the level of the late Brezhnev period. The second was the disturbing tendency to mythologize the late Soviet period in current Russian society and popular culture. These myths include the belief that, despite its problems, the Soviet Union was a dynamically developing world superpower until usurpers initiated disastrous reforms. At least 80 percent of Russians are convinced of this flawed interpretation of history.

Historically, such myths have a dangerous precedent—namely, Germany between World War I and World War II. Then, the legend went that Germany was never defeated in the war, but “stabbed in the back” by the Jews and the Socialists. To some degree, the responsible party was the democratic German government, as it was unprepared to publish materials about what really happened before and after World War I. Similarly, access to documents about the Soviet collapse is becoming  increasingly restricted, but we were still able to make public a number of them that can properly explain what happened to our country.

Hmm. What lessons for today? Again Russia is dependent on oil and worse its leaders believe oil prices will continue to rise forever (This Time is Different).

We must remember that Russia today is an oil-dependent economy. No one can accurately predict the fluctuations of oil
prices. The collapse of the Soviet Union should serve as a lesson to those who construct policy based on the assumption that oil prices will remain perpetually high. It would seem that in our country, which has lived through the collapse of the late 1980s and early 1990s, this fact would be evident. But as soon as the prices went up again at the beginning of 2000 and in 2004 became comparable in real terms to those at the beginning of the 1980s, the idea that “high oil revenues are forever” has gained an even wider acceptance.

Well this paper was written in 2007 so it was a pretty timely advice. In 2007 he said some lessons were learnt:

Of course, the Russian government has taken into account some lessons from the experience of the Soviet collapse and has been conducting a careful policy during the current period of high oil prices. The administration has accumulated a considerable reserve of foreign currency, “sterilized” a significant portion of oil revenues in the Stabilization Fund, and approached budgetary spending with great care. Nevertheless, the temptation to take and immediately divide these revenues is great. Those who argue on every television channel or newspaper about how to better spend these relatively modest funds, which would only be enough for maintaining stability for two to three years if oil prices decline, should read again the documents that demonstrate how a seemingly stable superpower disintegrated in only a few short years.

Another lesson more apt now is leadership and governance:

One more lesson that is relevant for Russian politics today is that authoritarian regimes, although displaying a façade of strength, are fragile in crisis. In conditions of relative stability, society is prepared to tolerate the lack of real elections. People are prepared to come to terms with this situation as an inevitable and habitual evil. But they will do so only until the country encounters a serious challenge, requiring decisive and tough measures in order to adapt to unfavorable conditions.

In this latter case, it becomes evident that the “contract” between authoritarian rulers and their subjects— which secures stability by people’s tolerance of the authorities and the authorities’ noninterference in people’s affairs—will need to be reexamined. Such reevaluation undermines the regime. The rulers, who for the longest time have insisted that their rule is the best, find it hard to ask for and get broad societal support in a moment of crisis. In this situation, the society has a habit of answering, “For many years, we were told that we are led to a ‘brighter future,’ but now you would like us to tighten our belts. Instead, tighten your belts— or leave.”

Governance has taken a different meaning in Russia as of now. It believes not just oil prices but Putin can stay the leader  forever.

In the Gaidar looks at role of democracy in growth:

Russia does not need new upheavals. During the course of the twentieth century it saw enough of them. In this regard, the understanding by the elites and society that a real democracy is not an ideological dogma or something imposed by the West, but rather an important precondition for the stable development of the country, will finally give Russia the hope of escaping crises and cataclysms. This realization is vitally important for Russia’s development in the next decades.

Sadly, no lessons were learnt by its leaders. People obviously are taking lessons from the past and revolting against the current government.

Truly fascinating tale of Grain and oil… Russia’s comparative advantage was agriculture and it was just destroyed. And they have never been able to recover from this..

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