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Historian Jeffrey Sommers analyzes the plunder of public resources in the ‘90s and how the Putin-led state has embraced a toxic mix of religion and nationalism. Hosted by Paul Jay.

Why the Soviet Union Imploded – Jeffrey Sommers (pt 1)
Why the Soviet Union Imploded – Jeffrey Sommers (pt 2)

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Hi, I’m Paul Jay. Welcome to theAnalysis.news. In a few seconds, I’ll be joined by Jeffrey Sommers. We’re going to talk about the Russian state, the rise of Putin, and what it means in terms of the current war in Ukraine. Be back in just a few seconds.

As Israel continues its bombing of Gaza, Russia continues its attack on Ukraine. These wars have some things in common, but that’s not what we’re going to talk about today. We’re going to talk about Ukraine, the Russian invasion, and the rise of the state as led by Putin and what we make of it today.

Now joining us again to talk about this is Jeffrey Sommers. If you haven’t watched my previous interviews with Jeff, you really should because they help set this one up. You’ll find them in the links below.

Jeffrey Sommers is a professor of political economy and public policy at the University of Wisconsin-Milwaukee, where he also serves as a senior fellow at the Institute of World Affairs. In addition to his academic work, he’s been published in outlets such as the Financial Times, the New York Times, Project Syndicate, the Guardian, the Nation, Social Europe, and often in Counterpunch. Thanks for joining me, Jeffrey.

Paul, great to be here.

So, in the previous segments, we talked about the end of the Soviet Union and the beginning of the rise of this new version of Russia. We talked to some extent about the ’90s, but I left off the last interview asking a question that I think leads to the issue of the rise of the oligarchs and the rise of the state under Putin. 

The question I was left off with was, as the ’90s unfolded, certainly at the beginning of the selling of public assets, the big privatization that took place after the fall of [Mikhail] Gorbachev and the dissolution of the Soviet Union, a lot of assets were sold to individual Russians, many or most of whom had been in the party or certainly were seniors in the bureaucracy, which probably meant in the party. Assets that might have been worth hundreds of millions, maybe even billions, were sold for two or three million, I’m told. If I’m right about that, where did these people get two or three million? Nobody was supposed to have individually two or three million dollars entering the ’90s. So, what had happened prior to the dissolution of the Soviet Union that there were such people?

It’s a good question, and it’s a fascinating one, and one which I think can still see you probably wearing concrete shoes and finding yourself at the bottom of a deep river if you ask too many questions along this line of inquiry. But nonetheless, it is fascinating.

Under Joseph Stalin, actually, even under this period of totalitarianism, we saw periodically the rise of millionaires. Stalin, when he did discover them, had them typically shot. But nonetheless, you’re absolutely right. We’re not supposed to see people in possession of much money during the Soviet Union. Nonetheless, it happens.

Well, how so? First of all, I would like to set this up in terms of a brief political economy of the 1980s and 1990s, and just very cursorily looking at the differences, again, between China and Russia and the very different trajectories that they took. Thinking about how both of them played an essential role in the creation of this neoliberal, globalized order that emerged in the 1980s out of the crisis of the 1970s— crisis being relatively low profits in the Western capitalist world.

Just to rehearse that different set of trajectories and their importance for launching a 40-year period of profitability and some prosperity for some in the world system thereafter, we have China playing the role of a large state with a massive reserve army of labor. A state that is strong can impose its authority, can put in place the infrastructure that is needed, and can bring in all of this industry from Western capitalist states where labor costs had become uncompetitive, at least according to their owners. It provided a vehicle for restoring profitability within the global system by providing high-quality manufactured goods at relatively low labor costs, delivered efficiently onto markets. And, of course, as we know, China was able to use its leverage as a supplier of these essential goods to get the majority share, 51% plus ownership of many joint ventures with foreign firms, and to have significant degrees of technology transfer from abroad to them. So that puts them on this launching pad for a mission to economic development and prosperity, which, of course, as we know, over the past four decades, they’ve been wonderfully successful with something that I don’t think anyone else could really do. They had a unique set of advantages at a specific point in history, which allowed them to leverage neoliberalism and globalization into this project of national development, which delivered such fantastic results for them.

By contrast, the Soviet Union was an entirely different animal. As much as living standards were not on par with the richest countries in the world, they were nonetheless still too high in order to have a workforce that would be competitive in terms of the global system, and this desire to set up new production facilities and take advantage of very low-cost labor. 

Number one, there was not a lot of excess labor in the Soviet Union, at least not to the extent that there was in China. Again, it was far too expensive. But what did the former Soviet Union have, and especially Russia? Well, as we know, that was raw materials. Those raw material prices when depressed from their very high levels in the 1970s. We have to remember that the 1970s crisis was not only caused by too much competition driving profits down and wages which kept going up but also rising raw material prices. Well, in the 1980s, the Soviet Union began to supply an increasing quantity of these raw materials at low prices, and this helped to return the global system to profitability. And, of course, this continues in the 1990s. This is why the 1990s are often referred to as the peak of neoliberalism, the point where we had a unipolar world in which the United States prevailed over the system almost without peer competition, profits were very, very high, and there was much prosperity.

Now, getting us back to your question, how does Russia fit into this system as continuing to provide these raw materials? Well, as we had mentioned in our last talk, as the 1980s unfolded and as we get the Gorbachev reforms, which were designed to restore some efficiency and competitiveness in the system within the Soviet Union, they had exactly the opposite effect. Again, Gorbachev pursued this model of restoring or creating democracy. He’s always got his face in the works of [Vladimir] Lenin. He’s trying to figure out where the system went wrong and how to write it. He’s convinced that, more or less, the recipes for success are located there. We see this dramatic flourishing of democracy at this time. It was thought that this would also give rise to innovation, and this would save the Soviet economy. Instead, it launches this period of rampant rent-seeking and theft. It takes the tendencies that had emerged and fully flowered of corruption throughout the late 1970s and through the 1980s and throws gasoline on it. It’s in this environment that you get this new class of people that emerge, that begin to accumulate capital.

They create, within the early Soviet Union under Gorbachev, things such as cooperatives. We discussed this a little bit last time: these economic cooperatives, which were like subdivisions, oftentimes within existing enterprises. The idea that Gorbachev had was that there were probably all sorts of goods and services that the existing Soviet enterprises could deliver if they just had more freedom of latitude in which to act. So what they essentially did was to say, “Hey, guys, look, if you got a factory that’s producing so many metric tons of steel rebar for construction, if you can do something else with that steel as well and bring it into the market and sell it at whatever market price it will command, you can keep those profits and continue to find these new, un-heretofore discovered areas of need in the economy.” So that’s how it was supposed to work.

To do this, the Soviet authorities also began allowing the creation of banks to provide some of the capital needs of these newly emerging cooperatives. The money that was provided, oftentimes, for investment and expansion into certain areas was backed up by the state, by the government. So, in a sense, this was a license to create money in the late Soviet Union and then to steal it if you chose.

Now, how did you steal the money? Well, you had to turn it into a foreign hard currency and send it abroad. We discussed this a little bit last time, that it was the KGB that was tasked with this job of showing some of these new managers or managers of existing state enterprises that were beginning to create these cooperatives how you dealt with international finance. Sometimes, you might need to buy electronics from abroad or whatever it is. You needed to engage international finance in order to do this. The KGB was the only area where the resident’s skills and knowledge existed of how to work the system of banks, especially offshore banks, and one has to remember that this was another element of overcoming the 1970s crisis of profitability, which was to begin avoiding your tax bills.

We see this really big explosion, especially in London, of the offshore banking industry, which, again, goes all the way back to the 1950s in terms of the euro-dollar market and the need to deal with the intricacies of rebuilding Europe after World War II. Europe has all these countries, and you can’t have all these multinational companies getting taxed every time they cross the border. So, everyone does a wink and a nod to tax avoidance every time you cross the border. That was more or less, I think, legitimate.

They created in that process in the 1950s the offshore banking structures, which in the 1970s and the 1980s would be used for much larger scale tax evasion and all sorts of dubious activities. The KGB provides this skill set to this emerging class of managers and entrepreneurs. They weren’t always the new owners of these enterprises in the [Boris] Yeltsin years. They did not always come from within these enterprises. Some did of the type that I just referenced, but others were figures in the Komsomol. So, in other words, energetic young members of the Communist Party. They had a really great Soviet Union-wide network. They were engaged in all these conferences all the time. They knew each other. They could use that same network for all sorts of practices, corrupt and otherwise. And they did. And then there were also some academics of talent, often coming out of physics, which today still produces, along with philosophy, they have the two highest sets of standardized test scores for aspiring new students. P&P, physics and philosophy, produces a lot of smart people. Some of them find their way into these activities as well. Some of them do things really simple, like selling flowers, of which, in the Soviet Union, that was a really big deal. You were always bringing flowers for some occasion, i.e., Names Day.

The same thing happened in the U.S. A lot of people who studied physics wound up either in Big Tech or on Wall Street.

Wall Street, right. Exactly. Yes, Wall Street and Big Tech; that’s exactly right. So there were people who started off young, energetic, small, and from these rather humble beginnings. Just through a lot of hustle, ended up acquiring quite a bit of money that way as well. Not enough money to buy a state nickel company or something like that. It wouldn’t be worth a massive sum of money. This is where we started to see some of the initial capital accumulation.

What I am trying to lay out are the various ways in which this initial capital accumulation started. It was with these commercial banks that were set up, as I was explaining, it was with these guys that got into these entrepreneurial activities. Simple as, again, selling flowers and honey at markets. Next thing you know, their operations go big, and they’re starting to operate across the entire width and breadth of the Soviet Union.

I think I might have even mentioned the case of Latvia last time, which became really the hub of offshore banking activity for the post-Soviet oligarchs that were looking to get their money to places like New York and London. Of course, thinking about the political economy and overcoming that crisis from the 1970s and maintaining profitability in the 1990s, something like a full $250 billion comes out of Russia and ends up in the equity markets of New York alone. So, that really boosts asset prices. Then, of course, in London, we have the purchase of all this real estate and all the rest.

Now, in the case of a place like Latvia, to give a concrete example of how this initial capital accumulation could work, we had, as I think I mentioned before, this bank called Parex, which would go on to become the biggest bank in Latvia in the 1990s up until the financial crash of 2008 wiped it out. You had two enterprise and Komsomol members, young communists, and they get their humble start by filling duffel bags full of rubles and taking the train and going between Riga, St. Petersburg, and Moscow. What they discover is that on the street markets, there’s different— it’s ever so slight— but there’s this arbitrage. Different levels at which they can exchange this currency for others; that’s how they get their start. As I indicated before, these guys then start, they get the first official approval for a currency exchange within the Soviet Union in 1990. They become then the clearing house for these cooperatives and some of the state managers who are running some of these cooperatives. Throughout the entire Soviet Union, the money is flowing into Riga again. 

As I think I mentioned last time, they were not very subtle. Parex used to have a sign in the front of its bank. Now, this would have been in the early 1990s, after they established a bank in addition to their Soviet-era currency exchange. But when they create this bank, they have this sign that says, “We take all currencies. We ask no questions.” It’s right on the sign in front. Another of their signs, as I think I’d mentioned before, was, “Riga, we are closer than Switzerland.” They had a bit of a sense of humor. And, of course, they were also very direct about what they were doing. They both became people who ended up with— their net worth was estimated around $800 million each.

Now, how this then unfolded in the 1990s is that we had this privatization period that began. There were friends of ours, like Boris Kagarlitsky, who is now in jail just east of the Urals for his criticisms of Putin’s government. He, as I think I mentioned before, was in the Moscow City Council. It’s called the Moscow Duma between 1990 and 1993, arguably the most democratic period in Russia’s history. He tried to expose what was going on. I think I may have mentioned this example before. For instance, just to highlight, this is great public relations. Boris really was smart with this kind of thing. Just to highlight the level of theft, he went to this one hotel near the Kremlin that was being sold for next to nothing. Boris had the chandelier alone in that hotel appraised, and then he gave a speech saying that they were privatizing and selling this hotel for less than the chandelier was worth, which was true. So that speaks to your point regarding the kopecks on the ruble.

Let me jump ahead a bit. During this period, which was in the ’90s, there was a very chaotic grab by anyone who had some capital, can get hold of these private enterprises and get super rich, and they did. If I understand it correctly, at this point, the state and Yeltsin are fairly subordinate to the power of the oligarchs in the midst of all this chaos. When Putin came to power over the years, did that relationship change? Because it seems like now, we’re at a point where the oligarchs are subordinate to the state to a large extent, and Putin has been able to establish the state as the most powerful force, and the oligarchs better get along with it. If I’m right about that, how does that process take place?

Well, you’re absolutely right about that, Paul. I remember some of these resentments that started to be expressed. A friend of mine used to be the head of publishing, which, in effect, was all information for the Soviet Republic of Latvia during Gorbachev’s period. She started reporting to me in the late 1990s that the KGB guys were getting really restless, and they were getting, frankly, pissed off about what had transpired in the 1990s, not because the country had been sold out but because they didn’t get theirs.

There’s an interesting thing. Do you know the show The Americans? I’ve been rewatching it because I think it’s one of the best series that’s ever been on TV and shockingly nuanced for an American network dealing with Soviet spies in the United States. We’re up to the last season now rewatching it, and there’s a split in the KGB, pro-Gorbachev and anti-Gorbachev. With the anti-Gorbachev saying these reforms, especially democratization, are going to lead to the end of the Soviet Union. Well, in some ways, I guess maybe they did. It certainly was followed by the end of the Soviet Union. This kind of split in the KGB that thought democratization was a big mistake, does Putin come out of there?

No. He’s really, to my mind, a very distinctive figure because he bridges so many different groups. That is his tremendous advantage or has been his tremendous advantage. He understood so many different groups, and he was seen as credible with so many different groups. So he gains credibility with the military, who definitely comes out of that wing of this has been a huge disaster, the collapse of the Soviet Union and the West is going to just run roughshod over us. That’s the message that they’re telling him all along. We’re really seeing the country being screwed. These oligarchs are the ones that have done this to us, along with the West. Then there are the oligarchs. In other words, he’s referencing Yeltsin. He was somebody who could not control the oligarchs; you are absolutely right about that. But he was also not so much seeking to control them. In other words, as they used t