The constant focus on the attitudes of individual Soviet leaders, measured by their public pronouncements, style, and degree of apparent enlightenment, obscures the extent to which Soviet foreign policy depends on an underlying economic reality: the world price of a barrel of oil.

To maintain over 150,000 technicians in 76 countries, constructing everything from oil refineries and nuclear reactors to SAM anti-aircraft missile systems, the Soviet Union must either earn or borrow substantial amounts of foreign ex change.1 In 1985, for example, the Soviet Union provided foreign military and economic aid estimated at more than $20 billion (not including the covert assistance it funneled to a score of guerrilla movements). In 1985, it could afford to undertake foreign activities of this magnitude be cause it exported the equivalent of 1.7 billion barrels of oil in petroleum and natural-gas products—a quantity which made it, not Saudi Arabia, the world's leading producer and exporter of energy.

Since the world oil price averaged just under $30 a barrel that year, the Soviet Union, even with these expansive undertakings, had a foreign-exchange surplus. If, on the other hand, falling oil prices had deprived the Soviet Union of this revenue from its energy exports, it would not even have had sufficient foreign exchange to finance its own food imports and to service its $20.4 billion foreign debt.

In other words, there is a powerful relationship between Soviet oil revenues and the foreign exchange it has available for its global activities. The Soviets could of course make up any shortfall in their foreign-exchange account by borrowing from the West, as they have done in the past. But the seeking of Western credit on favorable terms often requires a moderation—if only a temporary one—in Soviet foreign designs.


The Soviet foreign-exchange bind traces back to the Bolshevik Revolution. With most of its gold and foreign reserves seized by the Allies in 1917, the Soviet Union was virtually paralyzed. It could not obtain credits abroad to purchase drilling bits to reopen its oil fields, fertilizers to save its crops, or spare parts to keep its trucks on the road. As far as its foreign activities went, it had to resort to clandestine sales of art and national treasure to finance its Communist International (Comintern) apparatus and diamond smuggling to support its diplomats. It even permitted its intelligence service to sell secret documents—both phony and real—to anti-Communist exile groups throughout the 1920's.

Confronted with this desperate situation, and the need for foreign credit, Lenin moved to scale down and moderate the more aggressive aspects of Soviet foreign policy. To expedite obtaining financial credits from the West, he even suspended the central Bolshevik principle of advancing world revolution. When Britain threatened to cancel trade negotiations because of Soviet aid to revolutionaries in Afghanistan and India, Lenin agreed publicly to end propaganda aimed at the British empire. To make this new policy more credible to British intelligence, orders were subsequently sent to Soviet embassies calling off subversive activities, in diplomatic codes which Soviet intelligence knew the British were intercepting—and reading.

To recruit American capital to Russia, Lenin radically revised “War Communism” to allow private capitalism a place in the Soviet economy. Under his “New Economic Policy” (NEP), he sent representatives to the United States to encourage businessmen to invest in “concessions” in the So viet Union from which they were promised large profits. The offer attracted some 350 foreign companies, resulting in a much-needed infusion of equipment and technology—all financed by Western credits—during the 1920's.

To acquire technology and equipment from Germany, not only did Lenin cut off aid to German revolutionary organizations, but the Kremlin entered into a secret arrangement with the German government allowing it to rearm in the Soviet Union. Although prohibited by the Versailles peace treaty from having any real military forces, the Germans covertly organized and trained their armored divisions and air force over the plains of Russia. The German general staff also manufactured in Russia vast quantities of banned armaments, including tanks, aircraft, poison gas, battleships, and submarines. The 150 million Reichmarks a year the Soviet Union received from this deal—which accounted for a third of the German military budget—financed a substantial portion of Soviet activities abroad in the 1920's. (The unforeseen part of this unconventional arrangement was that many of the same German armored divisions that trained in Kazan in the late 1920's would return as invaders in 1941.)

By the late 1920's, Soviet oil production from the Baku fields had been largely restored, and exports of oil, as well as of timber and agricultural commodities, had largely alleviated the foreign-exchange crisis. Its trade relations with the West normalized, the Soviet Union could afford a more expansive foreign policy. It resumed—and escalated—covert support of subversive groups in India, Afghanistan, and elsewhere; confiscated, without compensation, almost all the foreign concessions it had awarded; and dismantled most of the German military apparatus on its territory (though pilot training continued until 1932).

The onset of the great depression, which extinguished most of the markets for Soviet exports in Europe and America, ended this brief period. During the 1930's Stalin not only abandoned the rhetoric of world revolution under the slogan “Socialism in One Country,” but adopted a policy of accommodation toward, if not outright appeasement of, potential enemies. When the Japanese invasion of Manchuria in 1931 threatened the Soviet-owned Chinese Eastern railroad, Stalin, rather than resisting, sold the railroad to the Japanese puppet state of Manchukuo and arranged a non-aggression pact with Japan. In 1932 alone, the Soviet Union signed nonaggression treaties with Poland, Finland, Estonia, Latvia, and France. (Subsequently it invaded all these nations, except for France, and annexed part or all of their territory.) In 1933, in return for American recognition, Stalin pledged that the Soviet Union, directly or indirectly, would refrain from any subversive acts against “the political or social order of the whole or any part of the United States.” Despite Hitler's stated goal of destroying the Comintern, Stalin concluded a nonaggression treaty with Nazi Germany in 1939, and proceeded to profit handsomely for the next two years from surcharges on goods transshipped across Russia to evade the Allied blockade. Then, after being attacked by Germany, Stalin allied himself with the United States and England. In return for massive lend-lease shipments from the United States, Stalin agreed to dissolve the Comintern itself—which, since Lenin, had embodied the aim of overthrowing capitalism.


After the war, with its economy in a shambles, the Soviet Union itself desperately needed foreign help. Although the Allies did not accede to Stalin's demand for massive reparations from Germany and Japan, he expropriated from Eastern Europe and Manchuria vast quantities of capital goods—including entire factories, railroads, and shipyards. Until Stalin's death in 1953, not only did the Soviet Union furnish virtually no substantial foreign aid to non-Communist nations, but it effectively extorted aid from its allies through distorted barter arrangements.

Stalin's successors, confronted with increasing unrest in Eastern Europe in the mid-50's, could not divert substantial resources to overseas adventures. In 1954 they even found it necessary to cut off further economic credits to Communist China. Indeed, much of the subsequent tension with China proceeded from the Soviet Union's decision to use its scarce foreign exchange to strengthen itself at the expense of its Communist allies during this period.

In the late 1950's, Khrushchev attempted to change the direction of foreign aid by supplying Eastern Europe with increased quantities of oil and gas from newly-developed fields in the Ural Mountains. He also initiated a number of dramatic foreign-aid enterprises designed to compete directly with the West. The most notable of these projects was the construction of the Aswan Dam in Egypt.

Khrushchev's pledge to undertake this project in 1958 flowed not from any ongoing foreign-aid program—the Soviets had not then even created an administration for disbursing economic aid—but from a unique opportunity to gain entry into the Middle East. In 1956, after the United States and Britain abruptly withdrew their offer to build the Aswan Dam, Egypt nationalized the Suez Canal and, by doing so, precipitated a brief war with England and France. With anti-Western feelings running at fever pitch, Khrushchev stepped into the vacuum, and offered the Egyptian government what it vitally needed to restore its credibility. financing for the dam. The Soviets, after two years of hard negotiations, were willing to lend the Egyptians only about one-quarter of the amount necessary to build the dam. The loan was presumably to be paid back through the cotton and other agricultural products that the Soviets were already importing from Egypt. (As it turned out, however, the Egyptian goods were insufficient to repay the loan and, not without irony, the large shortfall was made up from surplus American wheat Egypt received from the United States in the 1960's.) Despite the public-relations coup involved in building the dam, Khrushchev at the time of his removal in 1964 came under criticism for his decision to provide these much-needed re sources to a non-Communist country.

Whatever its net assessment of Khrushchev's grand ventures abroad, the new Soviet leadership moved to downgrade foreign aid to the role of stimulating markets for Soviet exports (especially weapons). This lower profile also fit in with the theme of détente in the late 1960's. Under Brezhnev, the Soviets again sought to import large amounts of capital from the West on favorable terms in order to develop their oil, gas, and petrochemical industries. To this end, Armand Hammer of Occidental Petroleum (who had been dealing with the Soviet Union since the time of Len in) persuaded President Nixon to inform the U.S. Export-Import bank that it was in the “national interest” to finance a Soviet pipeline and storage facilities to transport gas between the Ural Mountains and the Black Sea. Consequently, the bank provided the Soviet government with a |182-million low-interest loan—the largest credit ever granted to a Communist country. Less successfully, Hammer also attempted to arrange for the Soviet Union a $4-billion loan from Japan, which was to be used to build a trans-Siberian pipeline. Although it was suggested that the Soviets might even return four islands to Japanese sovereignty to sweeten the deal, it never went through.

The magnitude—and direction—of Soviet foreign aid changed dramatically in the 1970's. From 1953 until 1973, the combined military and economic aid to non-Communist countries supplied by the Soviet Union, which was almost entirely in the form of loans, averaged just under $1 billion a year. In 1974, it leaped to $7 billion; by 1979, it had exceeded $10 billion; and by 1982, it had reached nearly $20 billion. At the same time, the subsidies that the Soviets supplied to the Communist bloc, much of which were re-advanced as foreign aid to further Soviet objectives, increased more than tenfold.

This quantum leap in foreign aid was accompanied by a commensurate increase in the willingness of the Soviet Union to confront the West. In Asia, it moved into Afghanistan, funded Vietnam's military domination of Cambodia and Laos, and took over the huge naval and air base at Cam Ranh Bay. In Africa, it provided the military wherewithal to establish and entrench client regimes in Angola, Mozambique, and Ethiopia. In the Middle East, it turned the pro-Soviet government in Syria into a formidable regional power, supported Libyan incursions into Chad and Sudan, and became the dominant supplier of weapons for Iran, Iraq, South Yemen, and Algeria. In Latin America, in addition to its continued subsidization of Cuba, it undertook to support anti-American regimes in Nicaragua and Grenada. It even quietly resumed economic aid to China—after a twenty-year hiatus.

This new phase in Soviet expansion was made possible economically in the winter of 1973 by the explosion of world oil prices.


Although Russia has been a major producer of oil since czarist times, its earnings from exports were limited until the early 1970's by a combination of high transportation costs and low world prices. In the 1960's, with oil fetching less than $2 a barrel on the world market, the only real export market was the Communist bloc; and even here, for the most part, the oil was delivered as part of long-term credits that the Soviets had extended to their allies.

Since the Soviets believed, with some justification, that oil prices were being artificially de pressed by a cartel of Western oil companies, they attempted to break this control of marketing and refining by offering their own surplus crude at bargain prices to government-owned oil companies in India and Italy—and, in the case of India, by building a refinery to process it. But this strategy, aimed at disrupting the market, only caused the cartel to push the world price even lower. Despite falling prices, the Soviet Union developed new fields in the Urals and Siberia in the 1960's that more than trebled its oil production. By October 1973, it had become the world's largest producer—surpassing both Saudi Arabia and the United States.

The Soviet pricing problem was solved by the wave of oil shocks, beginning in 1973, that collapsed the Western cartel and panicked the market. The first crack in the cartel's solid front actually had come two years earlier in Libya—which had granted a concession to Armand Hammer's Occidental Petroleum, an independent marketer of oil, well outside the cartel's purview. In the negotiations over Libya's share, Hammer agreed to Qaddafi's terms. The Persian Gulf nations, led by Iran, then demanded that the cartel match these terms; this gradually ratcheted up the price to $2.18 a barrel, and weakened the cartel's control over the marketplace.

Then, in October 1973, came the first real shock: the Egyptian and Syrian attack on Israel. The Yom Kippur War was accompanied by the declaration of an embargo by Saudi Arabia and four other Arab producers on the delivery of oil to the United States and other Western nations, which sent prices spiraling upward to $16 a barrel by the end of the year. In the turmoil that followed, the OPEC oil producers effectively nationalized the concessions that had been controlled by the Western cartel and, auctioning off their oil to the highest bidder, turned the oil market into a free-for-all.

The next oil shock came in Iran in 1977, when riots against the Shah closed down that country's oil fields, and prices soared to $30 a barrel. And when in 1980 Iraq invaded Iran, causing another round of frantic buying as Japan and Europe sought to stockpile oil, prices were driven up to $40 a barrel.

Whether by design or willy nilly, the Soviet Union played a role in the events which had precipitated the 2000-percent rise in the value of its chief export. The policy of undermining the Western cartel, which the Soviet Union had begun a decade earlier in India (if not Suez), was brought to a successful realization by its client state in the Middle East, Libya. As U.S. intelligence learned from its intercepts of the traffic in messages between Tripoli and Moscow during Libyan negotiations with Armand Hammer, the Soviet Union was not uninvolved in the outcome. After the Western cartel's control over prices was weakened, the Soviet Union provided Egypt with the mobile surface-to-air missiles, anti-tank weapons, and canal-bridging equipment that made the Yom Kippur War possible. The Soviet Union also later furnished Iraq with the armaments to invade Iran.

The windfall the Soviet Union received from these oil shocks was immense. It came at a time when the new oil fields in Siberia were coming on stream and raising Soviet oil production from three billion to four-and-one-half-billion barrels a year. By the early 1980's these fields were also producing the equivalent of another billion barrels of oil a year in natural gas. This meant that each one-dollar increase in the price of oil and natural gas—which is loosely pegged to oil—raised the value of the Soviet energy product by some $5.5 billion a year. The oil shocks of the 1970's, which by 1981 had escalated the world price by $37 dollars a barrel, were producing a theoretical profit to the Soviet economy of over $200 billion a year. Such a bonanza would add roughly 10 percent to the Soviet gross national product.


In terms of geopolitical benefits, the inflated oil prices radically improved the Soviet Union's global standing. To begin with, they completely changed its terms of trade with the West. Up until the oil shocks, the Soviet Union had no major product to export to the West, except gold—whose production was limited. Its other exports were mainly luxury goods like caviar, furs, crab meat, and diamonds, which could be dispensed with or embargoed. After 1974, with European nations frenziedly bidding for oil to build their stockpiles, the Soviet Union began increasing its shipments of heating oil and diesel fuel to Europe from its Baltic refineries. By the early 1980's, its annual energy exports to the West rose to over half-a-billion barrels—which included crude as well as gas pro duct—and generated nearly $25 billion in hard currency. This accounted for 80 percent of the Soviet Union's total income. In all, in the decade since the first oil shock, it has been estimated that the Soviet Union has gained over $300 billion in foreign exchange.

This huge transfer payment from West to East, unprecedented in its magnitude, greatly widened the scope of Soviet foreign policy. It not only al lowed the Soviet Union to undertake global ad ventures on a scale that previously would have been inconceivable; it freed Moscow, for the first time since the Revolution, from dependency on non-Communist governments for credit on favor able terms. Moreover, it financed the massive purchase of grains from the West to ameliorate living conditions in the Soviet Union.

Secondly, after the price explosion the Soviet Union gained enormous leverage over its Communist allies through the export of energy. By 1980, it was exporting some 1.3 billion barrels of oil (or its equivalent) a year to Eastern Europe, Cuba, and Vietnam, worth over $40 billion at prevailing world prices. To be sure, the Soviet Union charged its allies only a fraction of the free-market price, which averaged for most of the Communist bloc approximately one-third of the $40-a-barrel price. The difference, which came to over $30 billion, amounted to an annual Soviet subsidy for its allies.

Communist nations are free to resell this oil at world prices, though Moscow presumably expects its allies to use the proceeds for activities that dovetail with its own strategic purposes. Cuba, for example, was allotted 88 million barrels of crude in 1980 which, at $40 a barrel, was worth over $3.5 billion dollars a year (for which it paid in sugar—at a very nominal rate). Cuba resold part of the oil in the free market, earning over $800 million in hard currency which it employed in part to finance guerrilla movements in Latin America and to provide its own foreign aid to Nicaragua and Grenada.

In the case of East European countries that needed the low-cost fuel to keep their own economies from collapsing, the subsidy heavily in creased their dependence on the Soviet Union. Poland, for example, was threatened by the Soviet Union in 1981 with a cutoff in its allotment of 105 million barrels a year if it did not crack down on the Solidarity movement. Polish leaders, understanding that the nation would be bankrupt without this Soviet assistance, acceded to the demand.

Even Yugoslavia, which prides itself on its political independence, relied throughout the early 1980's on receiving from the Soviet Union just under 100 million barrels of oil a year (al though, in its public accounting, it disguised some two-thirds of this oil as Middle East imports). The value of this annual subsidy, which was worth upward of $3 billion in 1981, had at least to be taken into consideration in any action that seriously went against the interests of the Soviet Union. In this context, it is not particularly surprising that Yugoslavia publicly sup ported the Soviet Union on almost all its foreign-policy initiatives in the 1980's.

Thus the higher oil prices rose, the more potentially costly it became not only for the bloc countries but even for neutral nations to oppose Soviet policy.


The Soviet Union also gained from inflated oil prices a rich market for arms sales, its second largest export. Throughout the 70's and early 80's, Saudi Arabia and other Arab oil producers actually gave the Soviet Union 50 to 60 million barrels of oil a year to pay for shipments of armaments to Syria. In separate oil-for-arms barter deals, Iraq, Iran, and Libya provided another 50 million barrels a year. (North Korea and other Soviet allies received an additional 60 million barrels a year from Iran.) When the price of oil then escalated, partly because of the wars being waged with these weapons, the Soviet Union received a windfall from selling its Middle East oil on the world market.

This meant, in effect, that the Soviet Union was being subsidized by Saudi Arabia and other Middle East nations for stationing military advisers and prepositioning planes, tanks, and missiles in the Levant. Between 1979 and 1983, according to CIA estimates, the Soviet Union sold oil producers over $27 billion worth of arms (with $9.2 billion worth going to Syria, $7.2 billion worth to Iraq, $5.8 billion to Libya, and $2.7 billion to North and South Yemen). During these years, arms shipments paid for by oil producers accounted in value for over 12 percent of total Soviet exports.

Finally, the demand for oil helped the Soviet Union acquire Western technology on a scale not seen since the days of lend-lease. Contrary to prevailing myths in the media, the vast preponderance of technology transfers from West to East proceeded not from espionage or theft but from openly-arrived at deals with some of the largest corporations in the West.

During the 1970's, for example, the Bechtel Corporation installed in the Soviet Union the pipelines, compressors, and processing facilities that greatly enhanced its capabilities for exporting petrochemicals. Similarly, Caterpillar delivered to the Soviets highly-specialized pipelaying equipment (which could also be used for missile handling). The Soviet offer to deliver 70 billion cubic meters a year of Siberian natural gas to Western Europe (the equivalent of 2 million barrels of oil a day) induced English, French, Italian, and West German corporations, with the full backing of their governments, to sell the Soviet Union the turbines, control mechanisms, alloyed steel, drilling bits, and earthmoving equipment necessary to construct the transcontinental pipeline. The technology for entire industrial centers was transferred to the Soviet Union by European and American contractors during the 1970's. As the price of oil soared during the decade, the value of Soviet machinery imports from the West increased by 1000 percent, reaching $9 billion in 1983.

This inflow of capital goods and technology was indeed counted on by Gorbachev to modernize Soviet industry. And so long as the price of oil moved upward, this transfer of capital from the West to the East could reasonably be expected to continue. On this score, there is no economic symmetry between the United States and the Soviet Union. Whereas rising oil prices decrease the GNP of the United States, Japan, and Western Europe, since they are net importers, they increase the GNP of the Soviet Union, since it is a net exporter. (According to a 1983 Treasury Department analysis, every $7 increase in the price of a barrel of oil decreased the GNP of 26 industrial nations of the OECD by approximately 1 percent while increasing the GNP of the Soviet Union by roughly .5 percent.)


In 1983, oil prices began falling, as European nations reduced the stockpiles they had built up at the start of the Iraq-Iran war. At about the same time, Soviet crude-oil production peaked at 12.5 million barrels a day and gradually began declining. Then the price abruptly collapsed, falling from $30 a barrel in mid-December 1985 to $15 a barrel in February of this year. Soviet oil production meanwhile had fallen to 11.5 million barrels a day.

To make matters worse, the Soviet pipeline was delivering less than half the expected 70 billion meters of natural gas a year to Western Europe; and the price, which was pegged by a complicated formula to the free-market price of crude oil, was scarcely half of what the Soviets had expected in 1981. This decline was made more disastrous for the Soviets because they were paid for their exported oil in dollars, which had declined by more than 33 percent against European currencies (and the Soviets had to trade these dollars in for Deutschmarks to pay for a large share of their machinery imports from Germany).2

Thus the halving of prices amounted to a new oil shock, which reversed the flow of wealth from East to West. It quickly eroded the advantages of being a petropower. With oil exports accounting for 80 percent of its foreign exchange, the Soviets had to reckon with the fact that for every decline of a dollar in the price of oil, they would lose a billion dollars a year in hard currencies. The $15 decline thus meant that the Soviet Union would earn $15 billion less in foreign exchange in 1986. Its terms of trade would, at these lower prices, quickly deteriorate. Since its commitments to buy machinery and wheat from the West could not be cut back so quickly, it had no choice but to in crease drastically its debt to the West.

Falling prices also greatly reduced the dependence of the Soviet Union's allies—and neutral countries—on Soviet fixed-price exports. The price drop caused considerable problems as well for Communist-bloc nations that funded their foreign activities by reselling their Soviet oil allotment. Cuba, for example, finding the resale value of its Soviet oil sharply eroded, had to postpone payment on its foreign debt this April. Soviet relations with allies would become progressively more difficult if the world price were to drop below the Soviets' fixed price—as it did in the 1950's. The Soviet oil allotment would then become a tax rather than a subsidy for the allies.

Moreover, the Arab oil producers who buy most of the Soviet weapons are themselves vulnerable to falling prices. Even Saudi Arabia is running such a huge deficit this year that it has delayed announcing its 1986 budget. And if these producers can no longer afford to purchase weapons, the Soviet Union's ability to earn foreign exchange will be further reduced. Under those circumstances, the Soviet Union would have to reassess the value of maintaining unsubsidized military establishments in Libya and Syria.

Finally, in the Soviet Union itself, despite all the raised expectations of a reformed economy, lower oil prices would greatly constrict the import of Western capital and technology. As a May 15 Defense Department memorandum entitled “Effect of Declining Oil Prices on the USSR” noted: “The drop in oil prices has created a critical problem for the Soviets in their hard-currency account. . . . The USSR will confront intractable economic choices and its ability to purchase grain, technology, and computers will be severely affected. To pursue economic modernization the Soviets need to obtain turn-key plans, and after Chernobyl they may need large amounts of food and milk. Their loss of hard currency, therefore, poses a grave dilemma.”

For the past decade, the success of the Soviet Union in maintaining—and expanding—its empire has rested largely on the wealth generated by its petroleum exports. It follows that keeping prices down is in the political (as well as the economic) interest of the West.

1 The only really determined effort to estimate these Soviet costs was made in September 1983, in a study for the Director of Net Assessment in the Pentagon by Charles Wolf, Jr., K.C. Yeh, Edmund Brunner, Jr., Aaron Gurwitz, and Marilee Lawrence. See The Costs of the Soviet Empire, Rand Corporation, 1983.

2 When, in March 1986, oil fell to $10 a barrel, the Soviets received unexpected—and possibly unintended—help from Vice President George Bush. After he suggested that the United States might encourage Saudi Arabia to cut back on its oil production, oil prices rallied back to the f 15 level.

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