Russia Won’t Suffer the Soviet Union’s Fate

If you believe low oil prices killed the Soviet Union, it seems reasonable to wonder whether the current commodities bust will topple President Vladimir Putin or even break up Russia.

Cheap oil, however, didn’t destroy the Soviet empire: Communism did. Putin’s Russia is more oil-dependent than its predecessor, but it isn’t bound by ideology or principle, and that may help the regime stay in power.

The Soviet Union was a strange kind of petrostate. In 1985, fuel accounted for 52.7 percent of its exports. But only 24.7 percent of the exported crude, 61.6 percent of oil products and 45 percent of natural gas were sold for hard currency, in other words, at market prices. The rest was supplied to Comecon countries for “transfer rubles,” the Soviet Bloc’s common currency, or was bartered to other nations within the Soviet orbit. Satellite countries were able to obtain oil and gas in exchange for goods the Soviet Union didn’t particularly need. This was, in effect, a system of subsidies.

Much of the hard currency earned by exports to the capitalist world was used to purchase grain. The collectivization of farming under Stalin and the subsequent decline of Soviet agriculture turned Russia from the No. 1 grain exporter into the biggest importer. Yegor Gaidar, who implemented the radical post-Soviet reforms in Russia in the early 1990s, wrote in 2007 that after Saudi Arabia stopped supporting oil prices in 1985, the Soviet leadership was faced with a stark choice:

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.

All the options were politically unacceptable, so, according to Gaidar, the Communist Party Central Committee simply decided to ignore the problem and borrow from Western banks while the Soviet Union’s credit ratings were still high.

The rest is history. Yes, the oil price collapse contributed to the Soviet Union’s demise, but it merely catalyzed the dissolution of a system that put ideology ahead of economics.

Putin’s Russia has a worse case of oil dependence than the Soviet Union ever did. Oil and gas now make up about two-thirds of Russia’s exports. Andrei Movchan, a former asset manager who runs the economic policy program at Moscow Carnegie Center, argues that as much as 70 percent of Russia’s gross domestic product today is “oil-dependent” (that includes government expenditures, which are 60 percent financed with oil taxes, imports bought with hydrocarbon export revenue and the consumption and investment generated by oil and gas beneficiaries). Most Russian economic fundamentals — international reserves, currency exchange rates, government revenue, the GDP itself — are highly correlated with oil prices.

Russia now has a much sturdier economic system, however. Despite Putin’s recent embrace of an imperial, deeply conservative ideology, it is a capitalist country.

The country is the fourth wheat exporter and, unlike the USSR, it can feed its people. Imported food made up 32 percent of the Russian food market in the first quarter of 2015, but these products mainly served to provide variety.

And modern Russia hasn’t been able to reconstitute the bygone empire. Perhaps it is a blessing that commodity prices are likely to remain low because the revenue crunch could prevent Putin from grabbing more territory or buying more allies. Russia’s subsidies to its few satellites such as Belarus and a few other post-Soviet states are only a fraction of what the USSR dispensed. And though defense spending has increased in recent years, Russia is not engaged in a full-scale arms race with the U.S.

The two big drains on modern Russia’s oil revenue are social spending, greatly increased under Putin to create a loyal electoral core, and catastrophic corruption in the big state companies that form the core of the Russian economy. Putin has shown he could change his mind about both.

Putin embraced devaluation as a way to keep Russia afloat almost immediately after oil prices started to fall. The inflation tax that imposed on Putin’s loyal voters has been harsh. At the same time, the government has been slashing costs in health care and education. The cuts may be small given the magnitude of the oil slump, but they show Putin is willing to transfer some of the hydrocarbon-related pain to the Russian people. It’s a risky tactic, but it’s better than the Soviet leaders’ denial mode.

The regime cronies who run the state companies seemed untouchable until recently. But last week, Putin fired his friend Vladimir Yakunin, head of the Russian railroad monopoly, apparently fed up with incessant demands for more subsidies to hide glaring mismanagement at the company. And Rosneft, the largest oil producer, which is run by Putin’s longtime associate Igor Sechin, has been refused funding for four of the five projects it submitted to Russia’s National Welfare Fund, which forms part of the country’s international reserves.

Putin has demonstrated he can be pragmatic, and his response to the crisis, while flawed in many ways, should help Russia weather this storm.

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