September 30, 2022

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From Gorbachev to Putin, that’s why the Kremlin’s power depends on the price of oil –

Not only true in 2022. This was also true in the 1970s, when the Soviet Union led by Leonid Brezhnev lent its support to the governments of the Arab League. Against Israel also for economic reasons. Moscow was intended to support the protest against the Jewish state primarily for political reasons with an anti-Western key. Not only, not primarily, to support and fuel the oil shocks at the beginning and end of that decade. But higher prices supported the Soviet Union economically and thus extended its life: the superpower in the 1980s would have produced 12 million barrels per day, a level that has not been reached since then.

In 1970 a barrel was still sold for $2 (today $15), while by 1974 the price expressed in current values ​​had risen to $90. These increases gave the Soviet Union the resources to maintain a stagnant system and better integrate it into the world economy through exports, despite the decline of the Brezhnev era. Were it not for the price shocks of the 1990s, it is possible, then, that Gorbachev would not have found himself compelled to administer reforms, simply because the Soviet Union would have collapsed earlier. And this is absolutely true because gas prices, which Russia began to export to Europe in the 1960s, were tied to crude oil prices.

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Surely the last Soviet leader had to deal with an unfortunate hand of paper. When he took power in March 1985, the price of a barrel was $28, which is equivalent to $77 today. But Gorbachev during the years of his rule would not have revised such prices, and in parallel with this, he would have experienced a long decline in the country’s production capacity due to the obsolescence of factories and the lack of new investments. When Gorbachev fired Glasnost and Perestroika in 1986, the barrel was as low as $24 in current dollars.; It was only $30 in 1988 and it was still only $50 when the old guard tried to turn it on, in August 1991, that would have led to the dissolution of the Soviet Union. These prices were enough to make a profit from the sale of individual batches of oil. But it was not enough to finance the Soviet system enough to prevent the impoverishment of the population and the collapse of the military-industrial apparatus. Gorbachev might have had better luck in a decade of expensive oil, but not in his years.

The same is true of Boris Yeltsin, the first president of post-Soviet Russia to whom the dismantling of the Soviet Union left him responsible for all the debts of the former superpower. At current values ​​today, the price of a barrel was only $ 26 in the midst of the unbridled privatization and price liberalization in 1994: the country did not have enough financial resources to cushion the shock of economic reforms, which also for this reason largely failed. At the time of the Russian sovereign default in August 1998, the international price of oil in current dollars was only $24 and had fallen to twenty at the end of that year. With fossil fuels accounting for at least half of Russia’s budget revenue, Yeltsin did not have the means to confront the country’s endemic poverty. The lack of investment was such that Russian crude oil production collapsed from 12 million barrels per day in 1988 to seven million in the mid-1990s. State revenue fell dramatically.

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In this Putin was more fortunate. At the beginning of 2000, when the future dictator took office in the Kremlin, the price of crude oil was $44 in current value. But it has since started rising non-stop, reaching $188 in 2008, on the eve of the Great Recession. Putin’s Russia was able to increase production by more than ten million barrels per day (thanks to foreign investment allowed by Yeltsin’s liberalization), while higher international prices financed the growth of a new urban middle class and a stabilization fund at the time.

Thus, Russia is going through a relatively healthy Great Recession. Since then, oil has never fallen to its lowest levels in the 1980s and 1990s. Putin is exploiting this to consolidate his grip on power, as well as over Russia’s resources. So much so that today he appears to have fully absorbed the Soviet lesson in the Middle East during the 1970s: the geopolitical destabilization, now practiced by the Kremlin in Ukraine and Europe, offers the payoff of growing tension in global hydrocarbon markets and Russia’s budget revenue. If only Gorbachev had enjoyed Putin’s oil prices, perhaps the memory of his character in Russia today would be better.