Communism Collapsed Due to Collapse in Oil Price in Late 1980’s and German Banks – Not Due to Reagan

Dr. Susmit Kumar

From the early 1950s to the mid-1960s, the Soviet Bloc’s economic growth was astounding. Its GDP increased at a tremendous rate following the planned economy program of transferring a large amount of manpower from the agricultural sector into industry. In many respects, the region was transformed more than Western Europe during these few decades, although that may have been chiefly due to the fact that it was so much poorer and underdeveloped to begin with. Russia’s steel output, a mere 12.3 million tons in 1945, soared to 65.2 million tons in 1960 and to 148 million tons in 1980, making the U.S.S.R. the world’s largest producer; electricity output rose from 43.2 million kilowatt-hours, to 292 million, and then to 1.294 billion kilowatt-hours during the same periods; and automobile production jumped from 74,000, to 524,000, and then to 2.2 million units. The list of production increases could be added to almost indefinitely. The Soviet Bloc achieved an average of more than 10 percent annual growth in industrial output during this period. Its space program, which including successfully launching the first space vehicle, “Sputnik,” even surpassed the American space program, and the U.S. had to work hard to close the “space gap.”[i]

In the 1970s, however, growth reduced to a rate of three to four percent. The previous high rate of growth had been due primarily to the use of vast, reallocated pools of labor and capital, and these had become utilized to their full extent, unable to provide further dramatic increases in productivity. Japan, by using modern technology like computers, telecommunications, and robotics instead of relying so much on labor, was able to surpass the U.S.S.R. in terms of GNP, as was the West. In comparison, Soviet equipment was outdated.

Premier Mikhail Gorbachev attempted to reform the Soviet economy in the 1980s with “glasnost” (freedom of speech, transparency in government) and “perestroika” (reconstruction of economy, economic reforms), for which he needed money. Western banks, especially German, initially gave the Soviet Union loans, but subsequently stopped, leading to economic crisis in the U.S.S.R. Soviet intervention in Afghanistan in the 1980s also resulted in a financial black hole. Lower crude oil prices during the late 1980s, oil being the primary Soviet export, further exacerbated the situation.

After record-breaking prices in the early 1980s, there was drastic reduction is price of crude oil, the main Soviet export, during late 1980s and early 1990s after the end of Iraq-Iran War (1980-88). Crude oil price dropped from an average of $78.2 a barrel in 1981 to as low as $7 a barrel one time. These two factors led to a rise in Soviet external debt. Oil was the main export and source of hard currency for the U.S.S.R. Insufficient investment and lack of the modern technology needed to harness hard-to-reach oil fields prevented her from expanding production, however, and in fact Soviet oil production began to decline. The government was also borrowing heavily to modernize its economy. These two factors led to a rise in Soviet external debt. In 1985, oil earnings and net debt were $22 billion and $18 billion, respectively; by 1989, these numbers had become $13 billion and $44 billion, respectively. By 1991, when external debt was $57 billion, creditors (many of whom were major German banks) stopped making loans and started demanding repayments, causing the Soviet economy to collapse. [ii]

Because of lack of hard currency Russia's shelves were empty of bread. In 1984-85, the USSR imported 55.5 million tons of both wheat and coarse grain, a record for a single country to take in one year. Beginning with the 1972-73 crop season, the Soviet Union imported more wheat than any nation had ever done. It is an irony that today Russia is the number one exporter of wheat in the world.

Even the CIA had not predicted the Soviet Union’s collapse in 1991. Despite being a military super-power, with significant number of aircraft carriers, submarines, military aircrafts and tanks, second only to the US, the Soviet Union collapsed due to the paucity of some tens of billions of dollars.

Had oil prices increased, like it did during early Putin administration (2000s) or had German banks financed Gorbachev’s Perestroika and Glasnost like Japan and China financed US debts since 1980s, the USSR and communism would not have collapsed in 1991 at all. Both Japan and China have invested more than $1 trillion in the US Treasury Bonds, each. Even countries like India and Russia had significant amount of their FOREX invested in the US financial system. It is just [US] Republican Party propaganda that this collapse was due to Reagan’s military buildup. Had Japan not financed American deficits in the 1980s, the U.S. economy and capitalism would have collapsed before communism.