Why the Soviet Union Imploded – Jeffrey Sommers (pt 2)

Paul Jay

Hi, I’m Paul Jay. Welcome back to theAnalysis.news. We’re going to continue our discussion with Jeffrey Sommers about the death of [Mikhail] Gorbachev and dig into the last years of the Soviet Union and how Gorbachev’s policies paved the way for the rise of the oligarchs. Be back in just a few seconds.

Now joining us again is Jeffrey Sommers. We’re continuing our conversation. If you haven’t watched part one, you really should because it sets us up for part two. Jeffrey Sommers is a professor of Political Economy of Public Policy at the University of Wisconsin, Milwaukee, where he also serves as a senior fellow at the Institute of World Affairs. In addition to his academic work, he’s been published in all kinds of big publications, and the list is in the first interview.

Here’s another quote from Jeff’s article that I found in Counterpunch”

Excerpt

“Gorbachev’s reforms let loose creative forces alright, just not ones making the economy more productive, but rather those that gave rise to the post-Soviet oligarch and later siloviki-dominated economy.”

Paul Jay

Which I understand means “strongman,” which mostly meant the military and intelligence agencies.

Excerpt

“… later siloviki-dominated economy.”

Paul Jay

Thanks for joining us again, Jeff. Explain how his reforms that were supposed to help democratize actually really led to a state that was far from democratic, the chaos of the ’90s, and then we get into the era of [Vladimir] Putin.

Jeffrey Sommers

So in endeavoring to democratize the economy or to improve the economy, you have in Gorbachev a figure who assumes that first, you need to democratize the society, which all sounds great. He looks to [Vladimir Ilʹich] Lenin to find inspiration and guidance on how to do this. Now, every official within the Soviet Union would have had their 43-volume, edited set of Lenin’s works, of which I would say 99% of them never cracked the spine. Gorbachev was somebody who had cracked those spines, those book spines. He knew those books, and he was in them all the time, looking for guidance on what to do. He again wanted to have his glasnost first that you needed to open the society. This was because, of course, the Soviet Union did stifle innovation, and it did suppress people voicing their opinions. How could you make an economy that was vibrant and dynamic in that kind of environment?

Paul Jay

Let me ask a question here. When you say suppressed innovation, now, the Soviet Union beat the Americans to space.

Jeffrey Sommers

Yes.

Paul Jay

It was a great humiliation for Canada and the United States. That’s innovation; that’s science. There was real innovation going on there.

Jeffrey Sommers

I have a son who is college-age, and he’s an aspiring rocket scientist, and he never fails to remind me just how incredible some of the Soviet rocket designs were and that the Americans to this day are still having to rely on some of that technology. In fact, just as an anecdote, the Americans are in this intermediary stage. They have produced their new rocket that is going to be able to launch a manned mission to the moon again. It keeps getting put off because of some engineering challenges. They’ll get rid of those wrinkles eventually. For a while, for several years, in fact, when the shuttle wasn’t working any longer, they were decommissioned. We were relying on these Soyuz rockets to get to the International Space Station.

During these tensions, of course, between the Americans and the Russians because of Russia’s war in Ukraine, the Americans were making some snide remarks regarding how backward the Russians were. The head of Russia’s space program said something to the effect of, “well, you will not have access to our rockets anymore, and you can use trampolines to get into space if you’re so advanced.” That’s absolutely right. There were certain sectors where the Soviets were always remarkably advanced. When they dumped resources and talent into areas, they could do some wonderful things. There’s no doubt about that.

Paul Jay

My understanding because I knew a guy that was one of the first people pushing containerization in North America. Apparently, that was originally developed in the Soviet Union. The whole concept of containers to transport from ships to rail. The other thing– again, I haven’t verified this, but I was also told that method of construction where the cranes go higher and higher as the buildings are built, apparently, that’s a Soviet innovation.

Jeffrey Sommers

Yeah, interesting.

Paul Jay

As you say, there was innovation. How did it get so much more bureaucratized and so paralyzed?

Jeffrey Sommers

Yeah, so you have these different tiers of the Soviet economy, just like you do in any economy; there are different tiers. It was all those very top tiers that were displaying that kind of dynamism. The lower tiers of the economy, especially those dealing with consumer products, etc., services, are just not vibrant at all. Not that there was never any dynamism or vibrancy even there. In fact, there have been some interesting books published on the Soviet consumer culture because there was a consumer culture for the middle class, especially in places like Moscow and Leningrad, at that time, but overall, not very innovative and not rewarding. People who displayed some degree of entrepreneurial spirit–

Gorbachev decided that he was going to democratize society, and then he, on the perestroika front, the politics and the economy front, started to think about how to deliver on this innovation there.

Now this problem of the Soviet economy being stagnant was one that had been recognized for quite some time. Leonid Brezhnev, the guy who deposed Khrushchev in ’64 and then died in ’81, his successor, Yuri Andropov, was a guy who was the head of the KGB and very, very smart. He certainly recognized that the Soviet economy was one that had failed to modernize and keep up with the West and that had to be changed. He knew that just like during the 1930s in the Soviet Union, lots of new machinery and technology would need to be purchased to modernize the economy and that investments, big investments, would need to be made in improvements of its transportation.

For instance, the rolling stock, in other words, the trained cars, locomotives, and various container cars, etc., the state of the rail itself was in abysmal shape by the early 1980s. You have to remember the country is really big. There are a dozen time zones, which in part, was an advantage if you were planning for World War III.

Now the Soviets haven’t gone through being, to their minds, attacked during World War I. Certainly, being attacked in World War II. They assumed that there would be World War III and they would be attacked again. Germany would rise, and this probably may be in conjunction with the United States, and they would again be attacked in a generation or so. They planned for it. So instead of building their industry in places that were the most rational in terms of reducing transportation costs, they would do just the opposite. They had planned inefficiencies. They put their manufacturing capacity and spread it all over the vast expanse of this country so that it would survive a war.

Now the problem is that it introduced all sorts of costs: transportation costs, energy costs, and time costs. It was a more expensive way to run an economy, but it was a way to survive World War III. So that was a problem. The drop-off was going to begin addressing that and several other things. Of course, he kicks off. He has kidney failure, and doesn’t last very long. Then he’s replaced by another Brezhnev-like fellow, [Konstantin] Chernenko, who doesn’t do anything. He doesn’t last very long. He was very ill.

You have to remember the Soviet economy had also become dependent and somewhat lazy in terms of their use or reliance on these big oil and gas discoveries in western Siberia in the 1960s. This is something that Vladimir Putin, by the way, has recognized. He’s talked about. He just hasn’t been able to fix it. Brezhnev just relied on this cash cow. The oil came in, and that allowed him to keep upping the game in terms of the Soviet military. Don’t worry so much about agricultural productivity. Why? Because you can buy food from the global markets, including the United States. They started buying from the United States.

During the Brezhnev years, especially the 1970s, if you speak with people who were alive at that time in that part of the world, they’ll tell you all the good years everything was stable. Brezhnev was delivering in terms of basic consumer products, food, etc.

By the time you hit the 1980s, there was huge neglect in investments in terms of the economy, and of course, as we know, Paul, I know you’re familiar with this, as I suspect many of your listeners are. The United States began to launch somewhat of a counter-attack against the Soviet Union. The United States and the Soviet Union were in the Cold War. In the 1970s, the United States looked to be on the losing end of this as the Soviets were funding revolutions all over the world, creating instability that’s increasing commodity prices which were very bad for the West. There’s Vietnam, which the Soviets are supporting.

By the time we get to the late [Jimmy] Carter administration, you have this Polish nationalist, Zbigniew Brzezinski, who is the head of the National Security Agency. He literally says that we have to give the Soviets their own Vietnam. He has his own kind of personal foreign policy for the United States, which he implements. He says, “hey, we’re going to bait the Soviets to invade Afghanistan. There’s no way they are going to tolerate Islamic fundamentalism right on the border of the Caucasus where the Soviets have plenty of Muslims.” He’s absolutely right. So bate them in, give them known Vietnam, as Brzezinski said in his own words, and then we cooperate with the Saudis to drive the price of oil down. The big thing that the Soviets sell in international markets. We drive the price of that down to $10 a barrel, and the Soviets find themselves with their pants down. They got a war in Afghanistan, the price of oil has crashed, and they have to somehow figure out how to modernize without cash, which kind of sounds like the 1930s again with those collapsed grain prices.

They proceed anyway. They have no choice. Gorbachev issued in 1987 the directive on enterprises. What he’s thinking at this time is that “well, we’ve got the centrally planned economy…” just as we were discussing earlier, Paul and all these state-owned factories have to produce x quantity of this product or x quantity of that product. It does not satisfy the needs of the Soviet people, especially in terms of their desire for consumer goods. That was followed by the directive on cooperatives in 1988. What Gorbachev says to the state factories, “hey guys, our bet is that you see all sorts of opportunities for making and selling things in the economy that we don’t see with the central plan, with glasnost plan, and we’re going to free you up. Go at it. If you see something that you think you can produce that there’s a market for, do it, sell it and keep the money.” This was thought to be the way to begin modernizing the Soviet economy.

Now, what happens? Well, first, let me give some examples of successes. These might appear trifles too. You might just kind of laugh a little bit, but nonetheless, this is an actual way in which it was working. Let’s take a look at the Soviet Republic of Latvia at this time. There are big kolkhoz, a collective farm, and some of these are pretty big businesses, by the way, in a place called Ādaži. In Ādaži, the co-host director decides that, well, instead of just growing potatoes and then every year when harvest comes and grabbing a bunch of college students and making them harvest these things as part of their contribution to the state for no labor, for no wages, doing it for the revolution and then dumping them somewhere where they rot, let’s do something different. Let’s make potato chips. In Ādaži, they start a potato chip plant, and it’s gangbusters. People love it. People in Latvia are buying these things up left and right. They love them. Who doesn’t like potato chips with their beer? So they are selling these things like crazy. Next thing you know, they’re buying pickup trucks and SUVs from Toyota, and they’re driving around, and everyone’s saying, whoa, look at those guys. Aren’t they special? It’s still the biggest potato chip company in Latvia. So it worked well.

Then there was another collective farm that started making beer, [inaudible] beer. They did the same thing. So that was how it was supposed to work. Other things were happening as well. So instead of making basic consumer goods, some company directors decided, “well, boy, there are some opportunities here.” So let’s say you figured out that, “well, as a state enterprise, instead of making things that the economy needs, I’m just going to use whatever procurement I’m allotted of, say, oil and brass or whatever, and I’m going to sell it on the world market. I’m going to pocket the arbitrage between the state prices, which is next to nothing, and with world prices.” Now, this is kind of hard to do because you’re going to need connections, and you’re going to have to get stuff out of the country. You’re going to have to start utilizing things like offshore bank accounts. This is where this whole new world emerges. Not only that but some of these enterprises were told that they could create their own banks. They start creating their own banks, and they start making their own money. In fact, they start issuing debt, which the central bank has to back up. So it turns into the Wild West very quickly. Just to elaborate on this Latvia example, for inference–

Paul Jay

Just quickly reminding everyone this is under Gorbachev. This is not under Yeltsin. We’re still supposedly the Soviet Union.

Jeffrey Sommers

Yes, this gets the steroid shot under Yeltsin, and it really goes wild. This is happening under Gorbachev. The biggest port for the export of Soviet oil was in a place called Ventspils. It’s a charming little port city on the Baltic coast in present-day Latvia. Well, if you can figure out how to get oil and metals trans shipped there and then out, you’re going to start making money.

Now, who are the figures that start brokering this? Well, this will help you to understand some of the tensions within the current Soviet Union between the oligarchs of the Yeltsin period and those strong men today that are backed by Putin. In the 1980s under Gorbachev, the mid-late ’80s, Gorbachev tasked the KGB to help these factory directors start businesses because some of the products it was assumed they were going to be sold abroad, etc. He says, “Hey, you guys know that stuff– the KGB. You are sophisticated. We’ve been having you use offshore bank accounts for generations to fund revolutions, whether it’s Sandinistas in Nicaragua or something else. You know how to use all this shady dodgy infrastructure to move money around. So help these directors.”

Now, these directors, a lot of them, will become the new oligarchs. They’ll get fantastically rich. They’ll shove the KGB guys to the side, and they are very resentful. They have been stewing for years over this. It’s Putin that actually slowly begins putting those KGB guys back in charge.

Paul Jay

They’re stewing because these guys who are doing factory– the directors of these enterprises, they’re starting to cash in.

Jeffrey Sommers

Oh, yeah. They make them rich.

Paul Jay

The quote-unquote “strong men” are not getting their taste.

Jeffrey Sommers

No, exactly. Just as you put it, they did not get their taste. And, man, are they angry about it. Getting back to the Gorbachev period now, so if you want to start selling stuff, again, commodities, getting world prices, all that stuff– and there are figures waiting now, like Marc Rich in the United States, who Bill Clinton famously pardoned on his last day in office, something that–

Paul Jay

The guy that created Glencore.

Jeffrey Sommers

Yeah, and several other dodgy enterprises in Vienna to facilitate all this stuff. Jimmy Carter, of course, said, “this is one of the most disgraceful things any U.S. President has ever done.” He was a huge contributor– Marc Rich to the Democrats and to Bill Clinton. People like Marc Rich started seeing this potential to engage these new figures emerging in the Soviet Union to get the stuff out on the global markets. Then what happens is you get the Komsomol guys in. These are fast movers, shakers, young guys, mostly guys. These are the Young Communists. They’re ambitious. If you are young and ambitious and are looking to make a mark for yourself in the Soviet Union, you joined the Young Communists. Not only does it give you a channel for upward mobility, but a Soviet-wide network for doing so. They have conferences. They all know each other.

Paul Jay

Now, in your article, you talked about how most of the leaders over the decades were actually believed. They believed in Lenin’s objectives, vision, and so on.

Jeffrey Sommers

Most of the top leadership.

Paul Jay

You say they weren’t posers. These guys are– are they not the posers?

Jeffrey Sommers

Oh, yeah. They’re just opportunists. An old friend of mine who was the head of not just publishing but of all information for the Soviet Latvian Republic during Gorbachev’s reforms, she was appointed by Gorbachev to open information up in Soviet Latvia. She told me that the Communist Party is just filled with hacks and opportunists. Every once in a while, you’d come across a true believer. The Communist Party people hated these true believers. They were like, “oh, God, you’re a dupe, and you’re slow, you’re stupid, and you still believe in all this stuff. Just get out of our way.” The people at the very top of the system, a lot of them, still were true believers. Not all of them, but a lot of them.

At any rate, these Komsomol guys, who were from Vladivostok in the east to Riga in the west, they were all in touch with each other. They all began opening these new enterprises to make money, figuring out things to sell or steal, sometimes legitimate, sometimes illegitimate. In 1990 this had gotten to the point where these cooperatives had started creating enough hard currency cash flow that they needed institutions to handle it.

The first legal currency exchange was set up in the Soviet Union in 1990 in Riga by two Komsomol guys. They had first made their money by– they were very enterprising, hauling around Soviet rubles in duffle bags on trains. There was a really slight arbitrage rate between Riga, Leningrad, and Moscow. They were making money just hauling it back and forth between all these places and making that little time. Then what they learned, of course, was imagine if you could start getting all the Soviet rubles from all of these new cooperatives and exchange it for dollars, for Swiss francs, for British sterling. Imagine the cut you could get on that. So these guys do that. They form the first legal currency exchange. They’re very blunt and open about what they’re doing. They have a sign. It became known as Parex, which was the first and the biggest bank in Latvia. It finally went down in 2008 during the financial crisis. These guys are worth hundreds of millions of dollars. At any rate, the sign that they used to have in their window said, “we accept all currencies; we ask no questions.”

Guys from these cooperatives are coming from all over the Soviet Union, switching out the Soviet rubles for hard currency. Then they used to have another sign. This was in 1985 that said, “do your business with us. We’re closer than Switzerland.”

Paul Jay

So it’s money laundering. Is that what’s driving it?

Jeffrey Sommers

Well, that’s what it becomes. The metaphor–

Paul Jay

Because otherwise, who wants to buy the rubles?

Jeffrey Sommers

Everyone wants to get rid of these things as fast as they can. Especially the people who actually see how the economy works. They know this system is going to collapse.

Paul Jay

If you can send some suitcases of drug money there and convert them to rubles, then you wind up with some real products.

Jeffrey Sommers

Well, there are all sorts of opportunities, no doubt. What happens is that you have this massive offshore financial infrastructure that is developed in Riga, but not just there. Tallinn a little bit. Vilnius a little bit. You can think of the Soviet Union after it collapses. It’s like this huge sequoia that falls down and dies of old age, and then all these mushrooms begin sprouting off and living off of the dead tree. Well, that’s the Soviet economy in the 1990s. It’s a big, huge tree that has fallen over, and there are all these mushrooms that are sprouting on it. Well, all that money has to go somewhere and hopefully out of the country because you never know if you’re going to have a new government that’s not going to be friendly to you. So everyone is anxious to send their money via Regan to London or New York. The Americans are quite keen on this in the 1990s. They love it. So something like a quarter of a trillion dollars in money from the former Soviet Union ends up in the U.S. stock market in the 1990s. Now, the U.S. gets a little upset about it when eventually, the Iranians start making use of it– and the North Koreans and also the Taliban and others. Maybe this does need to be a little bit regulated. In the 1990s, gloves are off. Do whatever you want. Let’s send all this money–

Paul Jay

They’re competing with some western banks that like doing the same thing.

Jeffrey Sommers

Oh, yeah. What the western banks are doing is they’re setting up offices in Riga. So there’s actually a professional association for offshore banks called Shorex. They were holding meetings openly in Riga. It costs $10,000 to attend one of their meetings in which they would teach you the ins and outs of how to use all these offshore networks. So if you were a factory director in Minsk, let’s say in Belarus, and you wanted to steal a bunch of money and not pay taxes, they showed you how to do that.

Paul Jay

When I interviewed Buzgalin, I asked him if, by the last months or year or so of Gorbachev, had he essentially become an instrument or even a pawn for these rising, very wealthy, so-called communists? Buzgalin, more or less, said, “yeah, Gorbachev actually really becomes a real facilitator rather than someone whose policies didn’t go where he wanted them to go.”

Jeffrey Sommers

Yeah. There’s a debate on this. There’s this one school, the Revolution from Above School, which states that the top leadership of the country wanted to take it down and then profit off of it. Well, there’s a lot of that, no doubt, but not at the level of Gorbachev.

I know Buzgalin. I have immense respect for his integrity and intelligence, which is much higher than my own, but I don’t know if I would agree with that on Gorbachev. I think it was more a matter of Gorbachev’s vanity. At a certain point, he loses control of the system. He is a decent man. He does not want to use violence. You think about other empires, and when they unwind, there is just tragic violence that occurs. He was being implored by loyalists to get off the stick and take care of this before it was too late. There was only one time that he did that in any significant way, and that was in Armenia. That was because in Armenia, because of the whole ethnic issue with the [inaudible 00:28:02] and the Iranians right on the border, and all the rest, their border started becoming way too porous. That was the one instance in which he used force, and 200 protesters were killed. His late wife, Raisa [Gorbacheva], said he was never the same after that. He was just broken by the need to do that.

I think what happened with Gorbachev was that as he was unable to reform the economy in the direction that he wanted, and as he was losing control over it, he retrieved it into the one area where he could exercise agency, or at least where he felt he could, and where he was applauded and celebrated for doing so. That was in the realm of nuclear disarmament.

How could you say that what he was doing was anything but admirable in that regard? I mean, he was unilaterally calling off the Cold War to say, we’re not playing anymore. Now, one could argue that he should have made use of that card to get more resources from the West to fund a transition. But even by the time he was able to get pennies because the western leaders– so now we’re talking Bush ’41, etc., they knew the game was kind of coming to an end, and they were just handing Gorbachev crumbs, and those crumbs were disappearing. They were not being used for anything but theft. They were supposed to be used for things like pulling the Soviet trips out of the GDR, and building them new apartment buildings in Russia or the Soviet Union. None of that happened. That money just disappeared somewhere in the black hole, the Soviet Union. They were begging for food.

The whole damn thing had pretty much just collapsed by the end. It just wasn’t functioning at all. They couldn’t even feed themselves in the last half year of the existence of the Soviet Union. I think he retreated into this one world where he was still respected by international leaders and where he thought he could actually accomplish some good. Of course, the whole thing was falling apart. Yeltsin was humiliating him on a near-daily basis.

This is where I would maybe take a little issue with Buzgalin as well. Again, a person who I have huge respect for. He’s so smart, and he’s invited me actually to Russia a few times. I think the world of what he’s done intellectually and his political contributions. He knows the place so much better than I do. I think you couldn’t even just go to the people anymore. I think Gorbachev wanted to– he really was a democratizer in a lot of ways. You could say, all right, he’s trying to just create Swedish-style democratic socialism, which means private business and some government regulation thereof.

Tragically, I call him a figure of Greek tragic proportions. He wanted to go to the people and have them back him, and they just loathed him. So he went to rallies with industrial workers in Russia and in Ukraine and said, “Hey, we really want to keep this union together, and we really want to democratize it to your benefit.” By the end of that last six months, Yeltsin would be able to counter and say, “no, we want to get out of this union.” They had these really primitive ideas about economic development. Yeltsin thought, he literally believed this, that if you dissolved the Soviet Union that Russia would get rich. That Russia was supporting, because in its central budget, all the other republics, which was true with the exception of one republican Central Asia. He thought that’s what it was. It was a simple accounting thing.

It’s kind of like the argument that some people will make in the United States. We could just get rid of all these welfare bums and imagine how rich we would be. So that’s what Yeltsin is saying. The workers are like, “yeah, get rid of those bums in the other republics.” In Ukraine, the workers were saying the same damn thing. I mean, so when you had Gorbachev in Ukraine trying to get the workers behind them, they were like, “imagine how rich Ukraine would be if we just detached from the Soviet Union. We got the Donbass with all this industry. We got the Black Earth Belt, which is one of the richest agricultural regions in the world. You just untether us from the Soviet Union, and we’re going to be fabulously rich.”

Now, as we know, even up until this day, three decades later, the Ukrainian economy still– its GDP is not equal to where it was during the Soviet period. So it’s just tragic in terms of the results for them as well, in terms of their economy.

The people were not behind him. The people were not behind him. Then, of course, you have the nationalists in the Baltic republics and in the caucuses as he kept unleashing freedoms. They, quite understandably, were like, “alright, we got a taste of this. Let’s just go all the way. I mean, this is our opening.” They ran for the exit doors. So the Latvians, Estonians, Lithuanians, and Georgians, they just shot straight for the exits. They did everything they could to acquire or reacquire, in the case of the Baltic states or even Georgia, to some extent, they’re independents, understandable. Gorbachev was getting no cooperation from anyone.

Paul Jay

You called him the wrong man at the wrong time.

Jeffrey Sommers

Yead. That said, I don’t know if there was a right man.

Paul Jay

Yeah, but I think that was the point. By that point, the writing was on the wall.

Okay, so in the next segment, we’re going to talk about this split between the oligarchs that emerged in the ’90s, which emerged largely from the party and the bureaucracy. There’s always a good question, the public assets were sold off in the ’90s. Where did these guys get money to buy these assets? Even if– was it Buzgalin telling me? One of these factories was worth billions, and somebody bought it for four or five million, but where did they get the four to five million if there was supposedly socialism in the party? Anyway, we’re going to talk about this split between them and the state security, the military, and then eventually, the rise of Putin and who he represents. So that’s the incoming segment and segments.

Thanks very much, Jeffrey. Thank you for joining us. Don’t forget to donate button, subscribe, get on the email list, and the next part will be coming soon.