Stalinism and alcoholism in the Soviet Union (3)

The gaping hole the campaign blew in the budget

“A crushing blow”: a Soviet anti-alcohol propaganda poster from 1985. In the poster, tomato juice punches a vodka bottle, promising the victory of “sobriety” over alcohol. Yet it would soon become clear that the real crushing blow had fallen on the Soviet budget.

In the previous instalment, we noted that the fiscal and economic tsunami unleashed by the anti-alcohol campaign, launched in the Soviet Union in mid-May 1985, had become visible within just six months. In this section, we shall show, with concrete data, that the phrase “fiscal and economic tsunami” is by no means an exaggeration.

The anti-alcohol campaign did indeed blow a gaping hole in the Soviet budget.

When Gorbachev came to power promising to revitalise and re-energise the Soviet economy, the Kremlin soon found itself confronted with a rapidly expanding budget deficit. Various interest groups within the bureaucratic caste seized on the young General Secretary’s accession to press for greater resources and higher spending, while state revenues were also falling sharply.

So where did this budget deficit come from?

One common explanation points to falling oil prices. Yegor Gaidar - Russia’s former acting Prime Minister and one of the architects of privatisation and shock-therapy policies - explains the crisis in the final years of the Soviet Union largely in terms of the decline in oil revenues in his book Collapse of an Empire. [*] The same approach is evident in Gaidar’s 2007 article, “The Soviet Collapse: Grain and Oil”, in which he argues that the collapse in oil prices cost the Soviet Union roughly US$20 billion a year. [**]

It is certainly true that the surge in oil prices during the 1970s provided a significant increase in revenue for energy-exporting countries such as the Soviet Union. Yet the rapid rise of the 1970s was followed by an equally rapid decline in the 1980s. By 1986, the price of oil had fallen far below its peak, seriously undermining the Soviet economy’s foreign-currency earnings. The fall in oil prices can therefore certainly be counted among the causes of the budgetary crisis.

Oil price trends from the 1970s to the mid-1980s. (Source: The Economist)

The mistake is to conclude from this that the Soviet Union was brought down by falling oil prices. Such a claim reduces a complex historical process to a single external factor, producing a crude, superficial and therefore misleading “explanation”. The decline in oil revenues undoubtedly placed severe pressure on the Soviet economy, whose exports were based largely on natural resources; [***] but taken on its own, it could have been weathered as a serious yet manageable economic downturn.

The loss of revenue caused by the anti-alcohol campaign produced a fiscal shock comparable in scale to that caused by falling oil prices. For decades, the Soviet state had derived enormous revenues from the production and sale of alcoholic beverages. Alcoholism had become a genuine social problem, corroding everyday life, work discipline and public health; yet the Stalinist regime had not only exacerbated this problem, but had also profited from it financially, turning vodka and wine revenues into one of the key pillars of the budget. Now, however, the very same regime was attempting, through administrative decrees and a top-down campaign, to curtail this source of revenue at breakneck speed.

The problem lay precisely here: the Stalinist bureaucracy sought to curb alcohol sales without addressing the social and economic roots of alcoholism; yet in doing so, it cut through one of the main revenue arteries of its own budget. The anti-alcohol campaign thus became a litmus test, exposing the regime’s own contradictions not only in its fight against drunkenness and alcoholism, but also in the fragile structure of Soviet public finances.

The American historian Chris Miller, in his book The Struggle to Save the Soviet Economy: Mikhail Gorbachev and the Collapse of the USSR, records that Ligachev made the following striking comparison at a Politburo meeting on 11 June 1986:

“(…) in 1985, 11 billion rubles of vodka were sold, but in 1984 the figure was 54 billion rubles.”

According to Miller, in 1984 - that is, before the campaign - alcoholic beverages accounted for 16 per cent of total retail sales. The decline in tax revenues from alcohol caused by the campaign was of the same magnitude as the fall in revenues from oil exports. At another Politburo meeting a year later, the Minister of Finance, Boris Gostev, would make the same point. According to Gostev, in 1987 “losses due to falling oil prices on the world market were 15 billion. From [falling sales of] vodka-also 15 billion.” [****]

These figures, of course, do not diminish the significance of the fall in oil prices; [*****] but they do show how misleading it is to try to explain the fiscal and economic crisis facing the Soviet Union solely in terms of oil prices. The anti-alcohol campaign was a revenue shock created by the state itself. For years, the Stalinist regime had sustained a substantial portion of its budget with revenues derived from the alcohol consumption of the working class and working people; then, when it attempted to curtail this source of revenue by administrative fiat, it blew a hole in the budget comparable in scale to the oil shock. [******]

Soviet budget deficit and export revenues, 1985-1990 (% of GDP). Source: Chris Miller, The Struggle to Save the Soviet Economy: Mikhail Gorbachev and the Collapse of the USSR, p. 63.

The graph above, reproduced from Miller’s book, also illustrates the gravity of the situation. It shows the Soviet Union’s budget deficit and export revenues as shares of gross domestic product between 1985 and 1990. According to the graph, while the budget deficit was still relatively limited in 1985, it rose sharply in the year following the launch of the anti-alcohol campaign and, from 1988 onwards, settled at a much higher level. Over the same period, export revenues as a share of GDP fluctuated, but followed a downward trajectory. The graph shows that Soviet public finances and the wider economy were being squeezed from both sides: on the one hand, oil and other export revenues were weakening; on the other, the state’s own decision to curtail the substantial revenues it derived from alcohol sales caused the budget deficit to expand rapidly.

[*] Yegor Gaidar, Collapse of an Empire: Lessons for Modern Russia, trans. Antonina W. Bouis, Washington, DC, Brookings Institution Press, 2007, pp. 39-70.

[**] Yegor Gaidar, “The Soviet Collapse: Grain and Oil”, On the Issues, American Enterprise Institute for Public Policy Research, April 2007. The text was compiled from the transcript and video recording of Gaidar’s lecture delivered at the American Enterprise Institute on 13 November 2006.

[***] Ernest Mandel notes that Soviet exports consisted of natural resources such as oil, natural gas, minerals, timber and gold, while machinery, equipment and transport vehicles accounted for more than 35 per cent of imports, foodstuffs for more than 20 per cent, and manufactured consumer goods for roughly 12 per cent. Ernest Mandel, Beyond Perestroika: The Future of Gorbachev’s USSR, revised edition, trans. Gus Fagan, London: Verso, 1991, p. 39. For this reason, the loss of convertible-currency revenues from oil exports could not be offset by increasing exports of manufactured goods or machinery and equipment, since these products were extremely uncompetitive on the international market owing to their low quality - that is, to their relatively low use-value.

[****] Chris Miller, The Struggle to Save the Soviet Economy: Mikhail Gorbachev and the Collapse of the USSR, The University of North Carolina Press, 2016, p. 64.

[*****] However, an important distinction must be noted here: revenues from the sale of alcoholic beverages were rouble-denominated budget revenues, whereas the fall in oil prices directly reduced the Soviet Union’s convertible-currency earnings. In his memoirs, Gorbachev writes that “a sharp drop in oil prices cost the Soviet Union nearly half of its hard currency earnings.” Mikhail Gorbachev, Memoirs, New York: Doubleday, 1996, p. 468.

[******] Miller also notes that Gostev drew attention to other factors contributing to the budget deficit: “And these were not the only factors in the government’s deficit, Gostev pointed out. ‘The total cost of subsidies, if nothing is changed, will grow to 100 billion rubles on food products alone by 1990.’ Spending on the military-industrial complex, which made up around one-fifth of overall production, was not even mentioned as a potential source of resources for balancing the budget.” Miller, ibid., p. 64.

To be continued