Thomas Friedman: High oil prices killed the USSR and could kill Iran, too
... How Russia deals with its oil and gas windfall is going to be a huge issue. But today I’d like to focus on how the Soviet Union was killed, in part, by its addiction to oil, and on how we might get leverage with Iran, based on its own addiction.
Economists have long studied this phenomenon, but I got focused on it here in Moscow after chatting with Vladimir Mau, the president of Russia’s Academy of National Economy. I mentioned to him that surely the Soviet Union died because oil fell to $10 a barrel shortly after Mikhail Gorbachev took office, not because of anything Ronald Reagan did. Actually, Professor Mau said, it was “high oil prices” that killed the Soviet Union. The sharp rise in oil prices in the 1970s deluded the Kremlin into overextending subsidies at home and invading Afghanistan abroad — and then the collapse in prices in the ’80s helped bring down the overextended empire.
Here’s the story: The inefficient Soviet economy survived in its early decades, Professor Mau explained, thanks to cheap agriculture, from peasants forced into collective farms, and cheap prison labor, used to erect state industries. Beginning in the 1960s, however, even these cheap inputs weren’t enough, and the Kremlin had to start importing, rather than exporting, grain. Things could have come unstuck then. But the 1973 Arab oil embargo and the sharp upsurge in oil prices — Russia was the world’s second-largest producer after Saudi Arabia — gave the Soviet Union a 15-year lease on life from a third source of cheap resources: “oil and gas,” Professor Mau said.
The oil windfall gave the Brezhnev government “money to buy the support of different interest groups, like the agrarians, import some goods and buy off the military-industrial complex,” Professor Mau said. “The share of oil in total exports went from 10-to-15 percent to 40 percent.” This made the Soviet Union only more sclerotic. “The more oil you have, the less policy you need,” he noted.
In the 1970s, Russia exported oil and gas and “used this money to import food, consumer goods and machines for extracting oil and gas,” Professor Mau said. By the early 1980s, though, oil prices had started to sink — thanks in part to conservation efforts by the U.S. “One alternative for the Soviets was to decrease consumption, but the Kremlin couldn’t do that — it had been buying off all these constituencies,” Professor Mau explained. So “it started borrowing from abroad, using the money mostly for consumption and subsidies, to maintain popularity and stability.” Oil prices and production kept falling as Mr. Gorbachev tried reforming communism, but by then it was too late.
The parallel with Iran, Professor Mau said, is that the shah used Iran’s oil windfall after 1973 to push major modernization onto a still traditional Iranian society. The social backlash produced the ayatollahs of 1979. The ayatollahs used Iran’s oil windfall to lock themselves into power....
[Friedman goes on to say that lower oil prices could have the same effect on Iran that they had in the 80s on the USSR.]
Read entire article at NYT
Economists have long studied this phenomenon, but I got focused on it here in Moscow after chatting with Vladimir Mau, the president of Russia’s Academy of National Economy. I mentioned to him that surely the Soviet Union died because oil fell to $10 a barrel shortly after Mikhail Gorbachev took office, not because of anything Ronald Reagan did. Actually, Professor Mau said, it was “high oil prices” that killed the Soviet Union. The sharp rise in oil prices in the 1970s deluded the Kremlin into overextending subsidies at home and invading Afghanistan abroad — and then the collapse in prices in the ’80s helped bring down the overextended empire.
Here’s the story: The inefficient Soviet economy survived in its early decades, Professor Mau explained, thanks to cheap agriculture, from peasants forced into collective farms, and cheap prison labor, used to erect state industries. Beginning in the 1960s, however, even these cheap inputs weren’t enough, and the Kremlin had to start importing, rather than exporting, grain. Things could have come unstuck then. But the 1973 Arab oil embargo and the sharp upsurge in oil prices — Russia was the world’s second-largest producer after Saudi Arabia — gave the Soviet Union a 15-year lease on life from a third source of cheap resources: “oil and gas,” Professor Mau said.
The oil windfall gave the Brezhnev government “money to buy the support of different interest groups, like the agrarians, import some goods and buy off the military-industrial complex,” Professor Mau said. “The share of oil in total exports went from 10-to-15 percent to 40 percent.” This made the Soviet Union only more sclerotic. “The more oil you have, the less policy you need,” he noted.
In the 1970s, Russia exported oil and gas and “used this money to import food, consumer goods and machines for extracting oil and gas,” Professor Mau said. By the early 1980s, though, oil prices had started to sink — thanks in part to conservation efforts by the U.S. “One alternative for the Soviets was to decrease consumption, but the Kremlin couldn’t do that — it had been buying off all these constituencies,” Professor Mau explained. So “it started borrowing from abroad, using the money mostly for consumption and subsidies, to maintain popularity and stability.” Oil prices and production kept falling as Mr. Gorbachev tried reforming communism, but by then it was too late.
The parallel with Iran, Professor Mau said, is that the shah used Iran’s oil windfall after 1973 to push major modernization onto a still traditional Iranian society. The social backlash produced the ayatollahs of 1979. The ayatollahs used Iran’s oil windfall to lock themselves into power....
[Friedman goes on to say that lower oil prices could have the same effect on Iran that they had in the 80s on the USSR.]