The Untold Story of a Key Maneuver that
Hastened the Downfall of the Soviet Union
By Tyrus W. Cobb
I wrote my dissertation at Georgetown on the “Ramifications of the Soviet Energy Dilemma” in 1982. A key thesis was that the Soviet Union was very vulnerable because of its heavy dependence on the export of oil and gas for hard currency revenues, and that the United States and the west had significant leverage through their technology and investment potential to influence Soviet behavior. This message was not immediately well received, as the belief that the USSR was economically and militarily strong and capable of asserting its will across the globe, held sway.
However, key figures in the Reagan administration did come to understand the heavy Soviet dependence on its oil/gas exports to earn badly needed hard currency. Consequently, that meant that any steps that served to increase the availability, and decrease the global price, of oil and gas would impose severe hardships on the USSR.
That was particularly the case since the Soviets were devoting such a significant portion of their GNP to the defense sector. Any action taken that would decrease hard currency earnings would mean that Moscow would have to shift resources to other sectors—including personal consumption—to compensate for the lost revenues.
I had also advocated that the US and its allies withhold technology and investment the USSR badly needed to extract petroleum, since the easy to drill oil fields in the western regions of the country had been exhausted and future production would have to come from more remote and inaccessible regions deeper in Siberia and offshore. And that exploration and production would require extensive western technology and investment.
The U.S. and the Saudis collude to cause Moscow extreme hardships
When Mikhail Gorbachev assumed the mantle of power in 1985, he already knew the precarious state of the Soviet economy and its critical dependence on oil and gas revenues. He also appreciated that the USSR must have Western technology and investment in order to maintain energy production at then current levels.
That same year the United States undertook actions to put the Soviet economy under greater pressure by working with key oil producers to greatly enhance production. Specifically, CIA Director Bill Casey leaned on the Saudis to “turn on the spigot”. They did, expanding production 5-fold, and in doing so, the vast new quantities of oil reaching the world market suddenly depressed the global price of oil to under $10 a barrel, down from a high in the $60 range. This caused the Soviets to lose at least $40 billion in revenue.
While that one action cannot be assigned full responsibility for the ultimate collapse of the Soviet Union, it certainly played a major role, as Soviet officials later admitted. Former Russian acting Prime Minister, Yegor Gaidar, for example, has cited this US-Saudi action as the critical piece in the unraveling of the USSR. Gaidar stated:
“We are certain about the date the Soviet Union started to collapse. It was not August of 1991 or December of the same year. The process began September 13, 1985, when Saudi Arabia’s Minister of Oil Industry Sheikh Yamani declared that his country changed its oil policy, stopped curbing down oil extraction and restored its share in the oil market. In the next 6 months oil production in Saudi Arabia increased dramatically.”
More recently, Russian analysts have been more direct in asserting that the quick increase in Saudi production resulted from “collusion between the United States and Saudi Arabia”. They are right. The NYT’s Tom Friedman quoted a Russian analyst saying that the “joint action” taken by the U.S. and Saudi Arabia in 1985 caused the collapse of the Soviet Union. According to Friedman:
The Russian newspaper Pravda published an article on April 3 (2014) with the headline, “Obama Wants Saudi Arabia to Destroy Russian Economy.” It said: “There is a precedent [for] such joint action, one that caused the collapse of the U.S.S.R. In 1985, the Kingdom dramatically increased oil production from 2 million to 10 million barrels per day, dropping the price from $32 to $10 per barrel. [The] U.S.S.R. began selling some batches at an even lower price, about $6 per barrel. Saudi Arabia [did not lose] anything, because when prices fell by 3.5 times [Saudi] production increased fivefold. The planned economy of the Soviet Union was not able to cope with falling export revenues, and this was one of the reasons for the collapse of the U.S.S.R.
Because of the sudden increase in oil availability after this action, the global price of oil dropped. The following chart dramatically shows the rapid decline of the price of oil from 1981 to the almost historic low of $10 in 1985:
Conclusion:
I think we can safely conclude that the Reagan administration decision to have Director Casey persuade the Saudis to ramp up oil production in 1985 was a, if not the, critical event leading to the dissolution of the Soviet Union. Former Reagan National Security Advisor, Robert “Bud” McFarlane, confirmed to me that the Saudis agreed with our suggestion on stepping up oil production, and did.
Rae Huffstutler, at the time head of the Soviet Division at the CIA, wrote back to me that while the spike in oil production and consequent drop in prices was a principal factor in the collapse of the USSR, it was not the only cause. Rae writes,
“Some of their woes might be ascribed to pressure from the West to deny a wide array of technology and equipment, some to our joint policy with oil producers, but mostly they did it to themselves with a command economic system that was inefficient and corrupt, and a Party leadership that would not make difficult decisions.”
I might also note that contemporary Russian analysts, such as the one Freidman quoted, have charged that exactly the same thing is happening today—that the U.S. is colluding with major oil producers to flood the world with oil, thus depressing prices and dramatically reducing Moscow’s foreign exchange earnings, which account for almost 50% of all revenues the government takes in!
However, unlike 1985, there is no evidence, despite Russian hysteria and a desire to assign blame for their economic woes on a “foreign conspiracy”, that there is any global plot to drive oil prices down. That drop is the result of: (1) Market forces, such as fracking and other new technologies, which have spurred petroleum and gas production across the globe, especially in North America; and (2) Decreased global demand due to the 5-year recession, increased fuel efficiency in the transportation sector, and alternative energy sources entering the market.
Having said that, one might wonder if Moscow is once again facing an existential economic crisis driven by a surge in global oil production…..as it did in the late 1980’s! Ah, but that is a topic for a future piece!
Tyrus W. Cobb served as Director of Soviet, European and Canadian Affairs on the National Security Council from 1983-88.