While the CIA devoted considerable effort to research and analysis of the problems that confronted the Soviet petroleum industry and its exports, once William Casey took over as the head of the CIA, he began to tackle the issue more aggressively. Some, including Peter Schweizer of the Hoover Institute and Yegor Gaidar, former Acting Prime Minister of Russia in the early years of Boris Yeltsin’s presidency, have advanced the view that Casey sought to cripple the Soviet petroleum industry’s export-earning capabilities to prevent it from generating the hard currency Russia so desperately needed to pay for its food and technology imports.32
Schweizer goes so far as to argue that the CIA under William Casey launched a complicated scheme that ultimately led to the collapse of the Soviet Union. As Schweizer tells the story, CIA chief Casey received authorization from his boss, President Reagan, to work with Saudi Arabia to weaken the Soviet petroleum industry. This was typical of Casey’s out-of-the-box thinking. As he saw it, Casey reasoned that the Saudis would cooperate because they were angered by the Soviet invasion of Afghanistan, a brother Islamic country. Saudi Arabia at the time actively supported the Afghan guerillas fighting the Soviet occupiers. Before long the Soviet Union found itself bogged down there. Casey also sought to weaken the USSR at home.
From his own background in international finance Casey understood that the Soviet Union depended heavily on petroleum exports to pay its international bills. This included not only payment for massive imports of grain (by the late 1970s, the Soviet Union had become the world’s largest importer of grain) but for imported factories (for example, large chemical plants) and technology that the USSR was unable to produce itself. These imports were also important in providing the Soviet Union with the wherewithal needed for its military-industrial complex. According to Schweizer, Casey thought that if he could somehow shrink the value of the USSR’s petroleum exports, that shrinkage would force the Soviets to curtail their involvement not only in Afghanistan but elsewhere in the world. All of this suggests, however, that Casey was unconvinced by the earlier CIA predictions that Soviet oil output would fall. If those earlier conclusions had been right, the Soviet hard currency earnings would have been reduced without any need to seek Saudi help and, short of money, the Soviet Union would have been forced to withdraw from Afghanistan. A drop in hard currency export earnings would also have hurt industrial investment within the USSR itself. Except for the revenue earned from petroleum and to a lesser extent natural gas exports, the Soviets had virtually no other way to pay their external bills. Consequently, Casey sought ways to reduce the USSR’s earnings from its petroleum exports. While he might not precipitate the Soviet Union’s collapse, at least he could weaken its structure.
To implement this ingenious scheme, Casey sought out the Saudi leadership in 1985 and, according to Schweizer, urged them to increase their output and export of crude oil. By expanding world supply they would precipitate a drop in world oil prices. Casey argued that this would not only help the U.S. economy but would seriously hamstring the Soviet economy and presumably force the Soviets to curb their adventures in Afghanistan.
What was the exact cause and what was the effect even now is not known precisely. As reflected in Table 2.1, Saudi output fell to a sixteen-year low in 1985 after hitting an all-time high in 1980. Then after King Fahd’s visit to Washington to see President Reagan in February 1985, the Saudis did pump more oil.33 Output in 1986 rose 45 percent over 1985 (see Table 2.1).34 But perhaps equally if not more important, increased petroleum pumped from the North Sea and West Siberia hit the market at the same time. As anticipated, average prices in 1986 fell to half of what they had been the year before, to $25.63 a barrel (see Table 2.1). By 1988, average prices dropped even further to $24.71.
We could only guess at the time what the impact of the fall in prices was on the Kremlin leadership. With the benefit of hindsight, Casey appears to have anticipated correctly. Relying on Politburo archives, Yegor Gaidar reports that Soviet leaders were in near panic. The drop in prices, he says, cost Russia $20 billion a year.35 Their financial condition was evidently much worse than we on the outside knew. It was widely believed that even if oil prices were to fall, the Soviets could use their large stocks of gold to pay their bills. But Yegor Gaidar now reveals that by early 1986, they had only $7.6 billion left, not the $36 billion in gold that most outside observers at the time assumed. Most of their gold had already been sold to pay for earlier grain imports. In 1963, for example, Khrushchev spent one-third of the country’s gold to import 12 million tons of grain.36 Once oil prices started to fall, not only did each barrel of petroleum exported earn fewer dollars but the drop in export earnings also forced the Soviets to reduce their industrial imports and the investment they needed to sustain oil production.37 This in turn affected morale already shaken by the turmoil precipitated by Gorbachev’s 1985 perestroika campaign. As a result, crude oil output began to drop sharply. By 1990, crude oil output was down about 10 percent (see Table 2.1), which meant a further reduction in imports and the need to borrow even more money from foreign banks and governments.
Because Gorbachev and his programs were so popular in the West, there were many calls to be supportive. This gave birth to “a grand bargain” proposed by Graham Allison, dean of the Kennedy School of Government at Harvard University.38 But a growing number of foreign suppliers and bankers came to realize that the USSR’s financial plight was so serious that the Soviets might not be able to repay any such loan. This in turn led them to withhold credits. This only served to increase anxiety in the Kremlin.39 Yegor Gaidar recounts that as the financial situation continued to deteriorate, out of desperation Gorbachev found it necessary to contact Chancellor Helmut Kohl of Germany. He begged for immediate help, explaining that the situation in the USSR had become “catastrophic.”40
All of this had a destabilizing impact on the USSR. By 1988, faced with intermittent bad harvests, an empty treasury, an increasingly unpopular war in Afghanistan, and a domestic economy in turmoil as it sought to free itself from some of the excesses of central planning, Gorbachev and some of the other Soviet leaders were finally forced to acknowledge that the Soviet Union had overextended itself.41 Its economic wherewithal could no longer support its imperial pretensions. That explains at least in part Gorbachev’s decision to begin the withdrawal of Soviet troops from Afghanistan on February 15, 1989. (It is hard to resist making comparisons with the United States fighting in Vietnam and Iraq.)
Admirers of CIA chief Casey credit him and his efforts with Saudi Arabia for forcing the Soviet Union’s retreat in Afghanistan and by extension for the collapse of the USSR itself two and a half years later.42 Undoubtedly the increase in world petroleum output and the resulting drop in price that followed seriously undermined the Soviet Union’s international financial creditworthiness and its ability to support its own and its East European satellites’ economies.43
But was the cause and effect so straightforward and so simple? Prices in 1985 did indeed fall from $50 a barrel (in 2005 prices) to $24 a barrel in 1988. While the Saudis did increase production in 1984, 1985, and 1986, they actually reduced production in 1987. Belatedly in 1988 they again made an increase but to a level less than they produced in 1980 and 1981. Whatever the cause, the Soviets did evacuate Afghanistan on February 15, 1989, but only after Soviet output hit its peak. The Saudis boosted output in 1990 by 70 million tons, much more than the 50-million-ton increase in 1988. But by 1990 the war had already come to an end. If the Saudi increase in production had such an impact on USSR prices, why didn’t oil prices fall in 1980 when the Saudis were pumping two and three times as much oil as they pumped in the mid-1980s, and why did Saudi Arabia wait until the 1990s, rather than in 1985, after Casey’s intervention, to make major increases in production?