As Gaidar’s research into the minutes and correspondence of the Politburo makes clear, there is no doubt that the fall in world petroleum prices did hurt the Soviet Union.44 But the collapse was due to more than the drop in oil prices. After 1987 there was also a drop in Soviet oil production, which also hurt earning power. The lower prices undoubtedly did contribute some to the drop in output, just as it was to do in the early and mid-1990s. But did lower prices have that much effect on the Ministry of Petroleum and its affiliates? In the Soviet era, profits and prices were not all that important as a stimulus to production. What mattered were targets set by the plan. Market incentives came into play only after privatization. Admittedly the increased use of water injection cited by the CIA in its 1977 report did hamper production, but it was not an unsolvable problem. The CIA prediction that Soviet oil production would fall and the USSR would soon become a major importer notwithstanding, we will see to the contrary in Chapter 5 that Soviet oil production did increase again—and substantially— after 1999.
While there may have been a connection between increased Saudi oil output, lower oil prices, and the Soviet Union’s collapse, the Bill Casey intrigue does not explain why the USSR did not collapse in 1980–1981 when Saudi output was at a record high, double what it was in 1986. Note even at the 1980–1981 high point of production, the USSR still produced more petroleum than Saudi Arabia. It was only in 1992 that Saudi output exceeded Russian output. Despite the elevated level of production, oil prices were actually at a record high then. It may have been that the anxiety created by the Soviet invasion of Afghanistan in 1980 had a greater impact on oil prices than the increased Saudi output. But the fact that prices did not fall until 1981 — and that the Soviet Union was unaffected, at least in the early 1980s — suggests that while Casey’s efforts to undermine the Soviet Union’s economy may have had an impact, it cannot be argued that his conspiring with the Saudis was the sole or even the most important cause of its collapse. Nonetheless, Casey’s involvement is yet another bizarre episode in this fascinating and ongoing interplay of geology, economics, ideology, politics, and greed.
3
Pirates Unleashed:
Privatization in the Post-Soviet Era
THE USSR IS NO MORE
The disintegration of the Soviet Union unleashed a cascade of centrifugal forces, both political and economic. In 1992, after the USSR broke up into fifteen independent and occasionally hostile countries, a Moscovite traveling to Kiev or Minsk could do so only if he had a passport for foreign travel. If that Moscovite tried to ship goods to Ukraine, Belarus, or Uzbekistan, he would have to send them through customs, pay a tariff, and accept payment for his goods in something other than rubles. None of this had been necessary before when they were all brother republics within the USSR. Equally disquieting, Boris Yeltsin, the hero in putting down the August 1991 coup attempt and the duly elected president of Russia, had serious drinking and health problems (both physical and mental). This made it impossible for him to focus properly on matters of state. Yeltsin had no problem forcing the breakup of the USSR and spinning off the other fourteen republics (including Ukraine and Belarus that were Slavic), which before the revolution were provinces of the Russian empire. But in an action that haunts Russia today, Yeltsin decided that Russia would not let anyone else split off from Russia and so ordered his troops to put down an insurrection in Chechnia, a relatively unimportant but problematic region within Russia’s boundaries. Unlike Ukraine and Belarus, which share Slavic ties to Russia, Chechnia is a Moslem rather than a traditionally Slavic region. It was forced into the Russian empire in the late nineteenth century. If instead Stalin had decreed that Chechnia was an independent republic like its neighbor Georgia, it too might have been spun off as a newly independent country and no one would have complained.
In addition to the political fragmentation, the breakup of the country and the disappearance of that unified economic space hit Russia very hard and pushed it toward bankruptcy. While the CIA in the 1980s once estimated that the Soviet Union’s gross domestic product (GDP) was about half that of the United States, by 1992 the agency concluded that the Russian GDP had fallen to about 10 percent of the U.S. GDP. Some economists such as Simon Johnson, Daniel Kaufman, and Andrei Shleifer suggest that this is an understatement. They argue that the official statistics do not reflect the full growth of the just legitimized private sector.1 Given the turmoil of the times, that may be true, but there is little doubt that most of the traditional industrial sectors suffered badly. By 1996, for example, petroleum production, the country’s crucial sector, was off 47 percent from 1987. Some of the decline was due to poor production practices of the sort described earlier by the CIA. But even more important, the rivalry to privatize the various oil fields, refineries, and pipelines was at its peak and inevitably very disruptive. Equally discouraging, with oil prices in the mid-1990s hovering around a low $20 a barrel (in 2005 adjusted prices) there was not much incentive to increase productive capacity.
Virtually no Russian petroleum company increased production from 1990 to 1999. For many observers, it appeared that petroleum production was declining, almost as the CIA had predicted. Much of the industry was privatized in the mid-1990s and almost all the new owners seemed more interested in stripping and sending assets outside the country while they could still do so and before what many assumed would be a violent and far-reaching reaction. Capital flight from the country as a whole was thought to be on the order of $1 billion a month. To top it off, the country was racked with inflation (prices rose twenty-one-fold in 1992) and the government budget was running serious deficits because few of those who should be paying taxes did so.
The failure to pay income tax typified the problems encountered in the transition to a market-type economy. Private ownership became the new model, replacing central planning and state ownership of the country’s factories, stores, and farms. In the Soviet Union, state taxes were levied as a turnover tax included as part of a product’s retail price and so unnoticed by the buyer. The income tax that everyone paid also went unnoticed, having already been deducted from workers’ cash envelopes before they received them. In the same way, the enterprise income tax was also automatically withheld by the state. Consequently, there was no need to file an income tax form nor send in an individual tax payment. As a result, only a few economists were aware that the Soviet Union even had taxes. That is why it was common for Russians to insist that the Soviet Union was superior to the United States not only because it had no unemployment or inflation but because it had no taxes.
PRIVATIZATION AND CHAOS
When the state transferred ownership of all those stores and factories to private owners, all that changed. Since it no longer could make deductions automatically, beginning in the late 1980s the state had to find some way to induce the new private owners as well as individual wage earners, voluntarily on their own, to send in taxes. That was something the public had never done before. Few could be expected to do so voluntarily just because some state official said they should. Given that tax rates were 30 percent or more and that the state was ill prepared to chase after tax delinquents, it was not surprising that in 2000, even after nearly a decade of private ownership, only 3 million Russians out of the 70 million who were supposed to pay taxes actually did so.2