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Liberalization of Foreign Trade

"Gorbachev Factor"

Finally, the crisis of the Soviet economy was precipitated by the liberalization of foreign trade. The Soviet bloc used to have its own privileged trade zone of countries united in the Council of Mutual Economic Assistance, or Comecon. It was set up in 1949, when the onslaught of the cold war led to the emergence of economic barriers between Eastern Europe and the West. Up to 80 percent of Soviet foreign trade was with the Comecon member states. 

 

By the 1970s the socialist countries had established effective economic co-operation, based on their specialization in the production of different types of machinery, equipment, and agricultural produce. In its drive toward greater economic integration, Comecon appeared to be even more successful than the European Economic Community. Starting in 1973 the USSR shielded its Eastern European partners from the shock of the many-fold increase in the price of oil: it supplied it to the Comecon member states at greatly reduced prices. There were few reasons to doubt the beneficial nature of the Comecon cooperation: the Soviet Union provided socialist countries with raw materials well below world prices in return for more technologically sophisticated goods.

With the advent of Gorbachev, when it became clear that the new Soviet government was reluctant to enforce Moscow’s political domination over the socialist bloc countries, the internal cohesion of the socialist bloc began to crack. The Comecon member states blamed some of their economic difficulties on the poor quality of products supplied by their neighbors. They believed they could resolve their economic problems by expanding trade with the capitalist West. This, however, was hindered by the lack of hard currency, as transactions within Comecon were conducted in roubles, which could not be used outside the socialist bloc. To put an end to mutual recriminations that soured relations within Comecon, the member states agreed to put trade within Comecon to the test of a convertible currency.

The switch to hard currency was also advocated by some of Gorbachev’s advisers. They argued that the Soviet Union would only benefit from selling more oil to capitalist countries at world prices and buying better-quality Western equipment and goods. The Soviet bloc countries would be quickly brought to their senses when they would face the prospect of paying world prices for Soviet oil and would appreciate more the USSR’s role of a major donor within Comecon.

Persuaded by these arguments, Gorbachev authorized the switch to hard currency accounting within Comecon. The problem, however, was that none of the Comecon countries—from poor Romania to relatively prosperous East Germany, and even to the powerful Soviet Union—had sufficient hard currency reserves. The switch caused the collapse of trade links within the socialist bloc. It deprived the USSR of access to Eastern European markets, compounding its economic self-isolation.

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The Economy in Crisis

 

Soviet Russia

Understanding the Soviet Period
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"Great Leap" to Socialism
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