Wednesday, June 13, 2007

Aha! Why Putin rattles his styrofoam saber

From Strategypage, via Glenn Reynolds:

Russia today is a much diminished version of the Soviet Union. The population of 140 million is shrinking because of a plunging birth rate, and falling life expectancy. The Russian GDP, at $900 billion, is less than seven percent of the United States (which has more than twice as many people). That, however, is an improvement. In the early 1990s, when economists and accountants got the first good look at the Russian economy since the early 20th century, it was found that the Russian GDP was about four percent of the U.S. GDP. Add back all the lost components of the Soviet Union, and you still don't have a GDP amounting to more than six percent of the American one. How did the Soviet Union achieve superpower status on such a thin economic base? They did it mostly with illusion, and an excessive arms budget that ruined the economy. Starting in the 1960s, the military got a priority on government spending, and permission to build an industrial complex that dominated the entire economy. This was part of a political deal, to keep one faction of the Communist Party in power.

With a GDP more than ten times the size of the Soviet Unions, the U.S. could spend five percent of GDP on defense, and far outspend the Soviet Union. Worse yet, Soviet accounting practices, like so much else they did, were opaque and self-delusional. It wasn't until after the Soviet Union collapsed that anyone could get an idea of how large the Soviet defense budgets were, and it turned out they were less than half the size of the American ones. Suddenly, a lot of Soviet military policies made sense. Russia bought lots of weapons, but did not have the money to maintain them, or even allow the troops to train with them. That was known, and in light of how the Soviet defense budget was set up, was understandable, and inevitable.

The really bad news is, most Russians are still not aware of how screwed up their Soviet era military was. There are two reasons for this. First, Russians take for granted how their armed forces operates. Russians complain about the brutality and incompetence in the military, but that's all they've ever known. Second, Russians remember fondly that their ramshackle armed forces defeated the Germans during World War II. What the Russians play down is how much the Germans lost World War II in Russia, rather than being beaten. The Germans made a lot of serious mistakes during the war, while the Russians got their act together. What Russians fail to realize is that the Soviet Union was an accidental, and largely imaginary, superpower. Russia has long employed large scale deception, and the Soviet Union continued this on a sustained basis. Military weaknesses (poor training and readiness) were hidden, and strengths (sheer number of weapons and troops) emphasized. But as was seen many times (from Budapest in 1956, to Chechnya in 1994), the Soviet military system produced little in the way of real military power. Soviet weapons, as impressive as they appeared to be, always came out a distant second when they were used against Western ones. The main thing that kept the Soviet military reputation going was the need of Western militaries to make the Soviet Union look strong, in order to justify high Western military budgets.

I'm thinking peace dividend here.

UPDATE: Tyler Cowen has more:

The timeline of the collapse of the Soviet Union can be traced to September 13, 1985. On this date, Sheikh Ahmed Zaki Yamani, the minister of oil of Saudi Arabia, declared that the monarchy had decided to alter its oil policy radically. The Saudis stopped protecting oil prices, and Saudi Arabia quickly regained its share in the world market. During the next six months, oil production in Saudi Arabia increased fourfold, while oil prices collapsed by approximately the same amount in real terms.

As a result, the Soviet Union lost approximately $20 billion per year, money without which the country simply could not survive. The Soviet leadership was confronted with a difficult decision on how to adjust. There were three options--or a combination of three options--available to the Soviet leadership.


Unable to realize any of the above solutions, the Soviet leadership decided to adopt a policy of effectively disregarding the problem in hopes that it would somehow wither away. Instead of implementing actual reforms, the Soviet Union started to borrow money from abroad while its international credit rating was still strong. It borrowed heavily from 1985 to 1988, but in 1989 the Soviet economy stalled completely...

The money was suddenly gone. The Soviet Union tried to create a consortium of 300 banks to provide a large loan for the Soviet Union in 1989, but was informed that only five of them would participate and, as a result, the loan would be twenty times smaller than needed. The Soviet Union then received a final warning from the Deutsche Bank and from its international partners that the funds would never come from commercial sources. Instead, if the Soviet Union urgently needed the money, it would have to start negotiations directly with Western governments about so-called politically motivated credits.

In 1985 the idea that the Soviet Union would begin bargaining for money in exchange for political concessions would have sounded absolutely preposterous to the Soviet leadership. In 1989 it became a reality, and Gorbachev understood the need for at least $100 billion from the West to prop up the oil-dependent Soviet economy.

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