Russia, Dictatorship, and Oil Prices – Is the West Ignoring the Path to Victory?

A guest submission for the Blind Spot by the “Data Artist”.

Are the Ukrainians on the verge of glorious victory over tyranny or entering a war of attrition that could last for many years?

It is really hard to know what to think when members of the same Western governments repeat such different messages. This is a war though. Bluff and counterbluff have always been part of conflict. Are Western ministers talking about a long war simply to show Putin the level of Western commitment to the Ukrainian cause, aimed at crushing his belief in victory or do they genuinely believe the war will last for years?

Sadly, the data cannot tell us the answer to that question. However, it can shed some light on the possible consequences of oil and gas sanctions in a long war.

In the twilight decades of the Soviet Union, the “great socialist experiment” has become:

• a major producer of shoddy, low-quality goods that were produced extremely inefficiently;
• a global leader in producing cheap and cheerful weapons to arm the world’s masses;
• a total failure at agricultural production, in spite of its vast areas of fertile farmland. Each year growing more dependent on imports of western grain;
• a major exporter of oil and gas.

In the 25th Party Congress in 1961, the Soviet Union adopted a plan to increase oil production by a factor of five. Unlike most plans of the latter days of the Soviet Union, it was a plot that was largely achieved. Hard currency started pouring in, even if much of it poured out to pay for food and more advanced technologies. Turbulence in the Middle East saw oil prices almost double between 1970 and 1973, followed by a sudden further fourfold increase. With prices and output continuing to climb, by 1980, the value of oil exports per capita to the Soviet Union reached $3,100 per annum.

The nature of the Soviet Economy did not mean the sudden oil wealth translated into super yachts for its leaders and a Toyota in every driveway like in some middle eastern nations. It mostly masked an economic system that was starting to collapse and a military/industrial complex that was in danger of consuming the whole nation.

Subsidising the Soviet’s global empire, keeping up with the American military, and occupying Afghanistan were all just about affordable with oil selling at over $30 per barrel.

However, as the 80s progressed, the world started to experience “Oil Glut”. High prices reduced overall consumption, leading to the innovation of more efficient uses of energy.

On top of that, new supplies started coming from reserves in areas such as the North Sea. By the mid-1980s, oil prices were in freefall. It has long been debated whether falling oil prices caused the collapse of the Soviet Union, or whether the high prices of the 1970s only slowed its inevitable downfall. Nevertheless, by 1987, the Soviets had started to negotiate their withdrawal from Afghanistan – the last soldier leaving in February 1989. By 1990, the per capita earnings from oil exports had fallen by two thirds. In 1991, despite the attempts of Mikhail Gorbachev to restructure the Soviet economy, the entire Soviet system collapsed.

Years of chaos, mass kleptocracy and economic decline followed until a tough enforcer came along to restore order (luckily just as oil prices had started to rise again). Overall, the growth of GDP improved life materially for most Russians, particularly between 2000 and 2012. Not even the new generation of oligarchs, with backgrounds in security services, was nimbl enough to steal all of the money immediately.

So here we are in 2022, with a “transformed” Russia once again taking on the West. Putin’s Russia is no longer a major producer of low-quality goods. It is now almost entirely focused on the production of commodities, notably oil, gas, and grain…with a small side-line in exporting shoddy weapons. While agriculture has been transformed for the better, once again, Russia is almost entirely dependent on a high oil price for its economic survival and the survival of its leadership.

So what has the West done to bring down Putin? Everything possible to boost the price of hydrocarbons and Russia’s raw material exports. Exports will continue to flow from Russia, perhaps they will merely fund the purchase of goods from China and emerging markets, but the competitive advantage of Russia in that particular trade has improved enormously.

Maybe this will only be a short war, but in the long term, history and data reveal that the surest way to sink the economy of an oil-dependent dictatorship is to push oil prices down, not force them up.