Petrostate: Putin, Power, and the New Russia

THE EARLY YEARS

Although they were unaware of its ultimate potential at the time, seventeenth- and eighteenth-century residents of what was to become Baku knew about and used the region’s petroleum and natural gas. In fact, historians date the discovery of petroleum in the Baku area to a much earlier time. They point to the Parsees, a fire-worshipping cult that appeared centuries ago.¹ These followers of Zoroaster built a temple seven miles outside Baku that served as a holy site until 1880. Its perpetual flames were probably fed by natural gases escaping from the abundant deposits under the temple.² Even Marco Polo during his thirteenth-century travels noted that traders were very active in carrying oil-soaked sand to Baghdad.

Central Russian influence in Baku and the Caucasus in general came relatively late. After the fall of Constantinople, control of the Black Sea fell to the Turks, who kept the Russians out of the area for several centuries. On the other side of the Caucasus the Persians had control of the Caspian Sea. Ivan the Terrible pushed Moskovy’s influence down the river Volga to Astrakhan on the north shore of the Caspian Sea in the sixteenth century, but formal Russian control of Baku did not come until the conquest of the area by Peter the Great in 1723. Once in command, Peter sought to ship some of the region’s kerosene to St. Petersburg for possible use, but his advisers thought it was not worth the effort.³ It did not matter much since shortly thereafter, in 1735, the Persians regained Baku and impeded what little petroleum trade with the north there was. It was only in 1806 that the Russians recaptured Baku and in 1813 that they finally signed a peace treaty with Persia that authorized the transfer of control over most of the Caucasus from what is today Azerbaijan to Russia.⁴

Before the arrival of the Russians, petroleum extraction was very primitive. For centuries indigenous petroleum traders had to extract the petroleum with rags and buckets. By using hand labor they were able to increase the depth of some of the pits but it was all quite unsophisticated. When the Russians came, they were able to improve the technology somewhat and production increased accordingly. In 1848 a Russian, A. F. Semenov, drilled the first relatively deep well, but even then the well was only sixty to ninety feet deep.⁵

In 1821, after their reconquest of the area, the Russians set up a special franchising system for those who wanted to produce and sell petroleum. Given how few hours of light there are in St. Petersburg during the winter, by 1862 there was a good market in the north for kerosene made from Baku’s petroleum.⁶ The rights to drill and pump petroleum on a specific site were extended on a monopoly basis by the state for four-year periods.⁷ However, the lease could be revoked at the end of that time and there were no options for renewal. This deterred some investors and precluded more serious exploration and drilling activity, causing the leaseholders to extract as much as they could during the four years of their lease with little or no thought about maximizing the long-run output of the area. This system prevailed until January 1873 when a more efficient public auction system was introduced.⁸ As Table Intro.1 indicates, the changes facilitated a sharp increase in production. Although it was small to begin with, production doubled that year. The discovery of Baku’s first gusher in June 1873 facilitated this growth.⁹

COMPETITION FOR MARKETS

These developments in turn attracted other prospectors, especially foreigners like the Swede Robert Nobel. Nobel arrived in Baku in March 1873 and soon came to exercise enormous influence in the area, not only as a producer but also as a refiner and marketer.¹⁰ By 1883 production exceeded 1 million tons; by 1887 it exceeded 2 million tons (50 million tons equals approximately 1 million barrels a day). Equally significant, in 1877 and again in 1882, 1885, and 1891, strong and increasingly effective tariffs were passed that helped to curb Russian imports of American kerosene.¹¹

However, it took more than tariffs to stem the flow. Russia had become an early battleground for oil producers seeking to carve out exclusive markets for themselves. John D. Rockefeller and his Standard Oil of the United States, as the world’s largest producer, had taken over a dominant share of the Russian market. Eventually high tariffs on imported oil made it less attractive to import, but before Standard Oil and its U.S. petroleum could be pushed out of the Russian market, the Nobels—Robert and his brother Ludwig— had to find some way to facilitate the shipment of their petroleum and kerosene from Baku to the urban centers of Moscow and St. Petersburg. Just as during the Crimean War it was easier to move troops from Paris and London to the Crimea than from St. Petersburg and Moscow, so it was easier to move kerosene from the United States to St. Petersburg than it was from Baku. Seeking a way to facilitate the flow of Russian oil to the north, in 1878 Ludwig, designed a pipeline to carry crude oil from the well to their refinery and then on to the Caspian Sea. To carry large enough quantities across the Caspian Sea to make the venture profitable, he also conceived of and constructed the first oil tanker, the Zoroaster.¹² His tankers docked at Astrakhan, where the oil was transferred to barges that then moved up the Volga. A storage depot was established in Tsaritsyn (later to become Stalingrad and now Volgograd) where by 1881 the petroleum could be reloaded onto railroad cars, a convenience that was particularly important in the winter when the Upper Volga was frozen. One result of Nobel’s innovation and the government’s higher tariffs was the all but complete halt of kerosene imports from the United States. Imports, which were 4,400 tons in 1884, fell to 1,130 tons in 1885 and to an almost unnoticeable 22 tons in 1896¹³—one loss (temporarily) for the Rockefellers.

The cultivation of domestic markets was followed by an effort to expand foreign markets. For obvious geographical reasons, Persia had always been a major consumer of Baku’s oil. For equally obvious geographical reasons—that is, Baku’s location on the essentially landlocked Caspian Sea—it was difficult to supply other regions of the world, including St. Petersburg. Since this was before Stalin came along to build his canal network, the challenge at the time was to break through the barrier of the Caucasus Mountains to gain access to the Black and Mediterranean Seas and thus to the ocean routes beyond.

Only in 1878 when the Russians pushed the Turks out of Batumi on the Black Sea did a new route became a realistic possibility. Shortly thereafter, led by A. A. Bunge and S. S. Palashkovsky, a group of Russian oil producers in the Baku region obtained a franchise to build a railroad over the mountains from Baku through Tbilisi to Batumi. Since they were short of funds, they sought the help of the Nobels. Initially, the Nobels refused, fearing that their dominance of the Baku trade, especially their St. Petersburg markets, would be jeopardized by the additional competition. Not to be denied, Bunge and Palashkovsky turned instead to the French house of Rothschild. Having recently backed a refinery on the Adriatic, the Rothschilds were anxiously searching for a source of crude oil to free themselves from dependence on Rockefeller’s Standard Oil.¹⁴ The cork on Russian exports was pulled when that trans-Caucasian railroad was completed in 1883–1884. Table Intro.1 indicates how overall exports increased. Exports from Batumi, which totaled 3,300 tons in 1882, increased to 24,500 tons in 1883 and 65,000 tons in 1884, an amount equal to previous total exports from all Russian ports.¹⁵ The flow soon became even greater when a forty-two-mile pipeline replaced the most rugged portion of the railroad route in 1889.¹⁶

RUSSIA AS AN OIL EXPORTER

The increased flow of Rothschild’s petroleum from Batumi and Nobel oil via the Volga put competitive pressure on Standard Oil’s markets in England. The era was one of oil abundance, and sellers vied to under-price their competitors. Angry over the threat presented by Russian oil to his English and European markets, Rockefeller and Standard Oil retaliated in what was to become a familiar pattern by cutting prices. For a time this tactic succeeded, but ultimately the Russian producers prevailed and carved out a share of the market for themselves. Whereas the combined Rothschild-Nobel share of the British market amounted to only 2 percent in 1884, by 1888 it had expanded to 30 percent.¹⁷ Overall, however, compared to worldwide American exports, Russian exports were relatively more important only in Asia. Thus in 1897, 75 percent of American exports went to Europe and 16 percent to Asia, whereas only 59 percent of Russian exports went to Europe but 38 percent went to Asia.¹⁸ The pattern was much the same in 1913.

For almost twenty years the petroleum flowed so readily in the Baku region that there seemed to be no reason to develop new fields or exercise much care in pumping existing fields. The waste was enormous, not to mention hazardous. In what was to become a standard reaction in the years to come, visitors were appalled by the inefficiency, sloppiness, and lack of care exercised by Russian petroleum operators.¹⁹

Still, little changed as long as the oil kept flowing. Moreover, the per capita consumption of oil—or more appropriately, petroleum products— was much lower in Russia than it was in other advanced countries in the world. This was due in large part to the lower standard of living at the time in Russia. In the late nineteenth century, for instance, Russian consumption of kerosene per capita was one-half of that in Germany.²⁰ And since domestic productive capacity exceeded domestic petroleum needs, petroleum producers generally sought to divert a portion of their output to foreign markets. For example, during the good production years of 1903 and 1904, the Russian-based producers exported 16 percent of their total production (see Table Intro.1). In 1904 absolute petroleum exports reached their peak of 1.8 million tons. However, because domestic consumption by that time had increased, the relative share of petroleum exports earlier in 1890 and 1892 was actually higher; then 22 percent of all petroleum produced was exported.

Not surprisingly, therefore, Russian petroleum exports often exceeded those of the United States during the late 1890s and the early twentieth century. And if they were not the largest exporter, the Russians were certainly the second largest. It is difficult to tell precisely which years the Russians out-exported the Americans because the data are incomplete. When export-import data for crude oil are available for comparison, the United States statistics on imports and exports of petroleum products begin only in 1920.²¹ Net American exports of refined products were high, but oddly enough, American imports of crude oil from 1920 to 1924 were even higher.

Nevertheless, as Table Intro.1 indicates, Russian production exceeded American production from 1898 to 1902, and virtually all of it came from the wells around Baku. In that four-year window, Russia was the largest producer of petroleum in the world. The Middle East was viewed as a barren desert then, and it was not until 1938 that the ARAMCO Consortium discovered oil in Saudi Arabia. The only other oil-producing areas of note at the turn of the century were in the Dutch East Indies and Mexico. Even with that, in 1897 Russia and the United States accounted for about 95 percent of the world’s production.²²

PRODUCTION STAGNATION

The high point for Russia was in 1901, when Russian production reached a pre-revolutionary peak of 11.987 million tons. The comparable figure for the United States was 9.468 million tons (see Table Intro.1). But while American production of crude oil reached 12 million tons the following year and continued to climb every year but one until 1924, Russian production did not exceed the 1901 level until 1929. Why did Russian production decline after 1901?

Initially there were rumors that the fields of Baku were running dry. Such rumors were not easily dispelled. Indeed, one early effort to set the record straight was by the noted Russian scientist Dmitry Mendeleyev, who wrote a paper entitled “The supposed exhaustion of the Baku oilfields.”²³ Output did decline but not in the country as a whole. The Russians sought to cope with the drop in output in existing wells in a variety of ways. First, as production fell in some of the older Baku fields, prospectors drilled new fields nearby. Second, new deposits outside the Baku region were discovered. Whereas Baku accounted for 96 percent of all Russian production in 1897, by 1910 it made up 85 percent and by 1913 even less.²⁴ New fields that opened up at Grozny in Chechnia, at Emba (300 miles to the north on the northern shore of the Caspian Sea), and at Maikop, only fifty miles from the Black Sea, accounted for most of the difference.

Although there is some reason to believe that the existence and even early production at some of these sites as at Grozny predated the arrival of the Nobels, many of the more important fields were subsequently developed by foreigners like the Nobels, especially with English capital.²⁵ Western assistance also helped improve the technology. Learning how to drill deeper produced the quickest results. The commonly used Russian drilling methods, which often relied on wooden, not metal, tools, made it difficult to go deeper than 300 feet. By the end of the nineteenth century, Nobel and some of the other foreign companies were drilling wells more than 1,800 feet deep. With the help of the American-produced rotary drilling system, by 1909 the wells went as deep as 2,400 feet.²⁶

Yet ultimately the Russians could not prevent a sharp decline in their production and exports. The drop was partly due to the failure of Russian companies to import the necessary technology. In what will turn out to be a recurring pattern, few Russian companies bothered to keep up with the rapidly changing refining and drilling techniques. Russian oil companies also conformed to the period’s dominant international trend: ruthless corporate scheming and bitter rivalries. Inevitably, the jockeying for market share around the world by companies such as Standard Oil and Shell had some impact. Price cutting was a common tactic. As a result, many producers cut back on their operations and occasionally went bankrupt. Recurring depressions had the same winnowing impact. Russian markets were not immune to such rivalry. In 1911 Shell became a major player in the Russian market when it purchased the Rothschild family’s petroleum holdings. Shell entities then produced 20 percent of Russia’s petroleum output, second only to that pumped by the Nobels. Since the revolution and expropriation were only six years away, it was probably one of the smartest sales the Rothschilds ever made. But most deal making of this sort involved financial juggling, not technological innovation, and thus added little to the country’s productive capabilities.

Also hurtful to Russian production was the Czarist government’s decision in 1896 to change the concession system that had governed Russian oil production.²⁷ In an effort to collect more revenue, the government instituted a combined auction royalty system. (It presaged the system that Middle Eastern states would come to use in the 1950s and 1960s.) At the time, however, the royalties demanded by the Czarist government seemed exorbitant, sometimes reaching as high as 40 percent. With the wisdom of hindsight, today that older Russian system looks like a bargain for a foreign investor. But considering that it was roughly seventy-five years before anyone else imposed such seemingly confiscatory terms, concession holders within Russia opposed the change and reduced output.

Most damaging, however, was the growing labor and civil unrest that hit the Batumi and Baku areas. Led in part by Stalin, strikes occurred in the Batumi area as early as 1901–1902.²⁸ They were followed in July 1903 by an oil worker strike in Baku. Interspersed between almost annual strikes in 1904, 1905, and 1907 were the activities of the reactionary Black Hundreds, supporters of the Czar who often resorted to mob action. What the strikers did not pillage or burn, the Black Hundreds did. Nor did the complex racial mix of Tatars, Armenians, Jews, Russians, and Muslim Turks and Persians add to the tranquility of the region once tensions erupted. The climax came during the 1905 Russian Revolution. Two-thirds of all the oil wells were destroyed. As a result, overall production fell by more than 3 million tons and exports were cut in half.²⁹ Whereas Russia produced 31 percent of the world’s petroleum output in 1904, by 1913, due to the labor unrest, Russia’s share had fallen to 9 percent.³⁰ Neither production nor exports were to recover significantly until long after the 1917 Revolution.³¹

The rather disappointing years of production and export in the decade before the Revolution should not obscure the fact that the petroleum industry in pre-revolutionary Russia had an important role to play (see Table Intro 1). Not only did Russia produce more petroleum than any other country for a short period of time but there were also periods when petroleum contributed in a fairly important way to the country’s export earnings. True, petroleum exports never came close to matching grain export earnings, which accounted for 50 to 70 percent of the country’s export earnings from 1895 to 1914.³² But except for timber, petroleum was often the largest nonagricultural export. In the peak years of 1900 and 1901, petroleum generated 7 percent of Russia’s export earnings, a foretaste of the much greater role petroleum would play after the revolution.

THE REVOLUTION

The 1917 Bolshevik Revolution had an immediate impact on oil production. The unrest caused by the workers’ demands for more control over managerial decision making caused output to fall from 10.8 million tons in 1916 to 8.8 million tons in 1917. In some cases, workers’ committees were formed to superintend management. Naturally this interrupted production. The Bolsheviks declared formal confiscation the following year, on June 6, 1918, officially nationalizing the fields.³³ Then production fell to 4.1 million tons.

The path of recovery was erratic because the revolution was followed by a counterrevolution that was supported by various foreign companies. As we saw, one of the more notable aspects of the prerevolutionary period of Russian oil development was the important role played by foreigners. Swedish, French, British, and even American investors and operators devoted large sums of money in an effort to gain control and increase production. With the exception of the Rothschilds who sold out earlier to Shell, the revolution meant a loss for most of them. The decade that followed was marked by the efforts and intrigue of many of the former foreign operators to out-maneuver the newly empowered Bolshevik rulers to regain or repatriate some of their money. Even with the help of foreign military intervention, most failed, but oil men have always been more venturesome and bigger risk takers than most of us.

The Turkish occupation of Baku in September 1918 provided the opening the old investors had been waiting for. Aware that the Bolsheviks were distracted by unrest in the north, the British sent in an expeditionary military force. It was tasked with helping Azerbaijan prop up its independence, which it had declared in March 1918, and later with insuring that Turkey remove its troops once the Armistice to World War I was declared in November 1918. This was not solely an anti-Bolshevik gesture, but also an anti-Russian step to protect Persia and block Russian access to British India. Much the same type of maneuvering took place after the Second World War, only in the late 1940s the Soviets attempted to reverse the process and extend their influence from Azerbaijan into the northern part of Persia/Iran.

With the 1918 British takeover and denationalization of the Baku oil fields, hopes in the European stock markets soared on the expectation that the weak Bolsheviks would never come back. Moving fast in hopes that it could establish a presence in the area where previously it had been weak, Standard Oil of New Jersey signed a contract in January 1919 with the independent government of Azerbaijan.³⁴ It paid one-third of a million dollars for drilling sites. The Nobels toyed with the idea of selling their shares to the Anglo-Persian Oil Company but quickly grabbed yet another offer from Standard Oil. A tentative agreement was signed on April 12, 1920. Despite the fact that the Bolsheviks retook the area later that month and nationalized the region’s oil fields, Standard Oil remained convinced the Bolsheviks would not be able to hold on. Reflecting its confidence, it paid Nobel half a million dollars for some additional land. Ultimately Standard Oil paid Nobel several million dollars for its stock that had already become worthless. According to Robert Tolf, this Standard Oil purchase was later to constitute one-tenth of the entire American claim against the Bolsheviks for American property seized during the revolution.³⁵ However, this speculative fever was not limited to Standard Oil. Shell Oil, along with other European investors, also bought what turned out to be worthless shares.

While the Soviets had gained physical control over the territory, they soon discovered that without the technical and managerial help of foreigners and others who had fled the area they could not really operate the oil fields. Output continued to fall until it reached a low in 1921 of 3.781 million tons, a level not seen since 1889. To add to their headaches, the Bolsheviks also found that the Western oil companies had united to boycott Russian oil exports, a pattern that was fairly common whenever oil fields were nationalized (these boycotts were usually only partially successful), at least until the late 1960s.³⁶ Formed in mid-1922, the Front Uni represented an oil consortium of fifteen companies, all of which promised they would not buy Russian “illegally produced petroleum.” But because of Western greed and Russian connivance, the Front Uni’s embargo was broken even before it began to operate. Shell, itself a leader of the boycott, made a purchase of Russian oil in February 1923 and the French followed soon after.³⁷

THE FOREIGNERS RETURN

The oil company embargo broke apart even earlier, particularly after it looked like Lenin had come to recognize that the nationalization of private property and the expulsion of foreign companies was a mistake. Acknowledging that they could not properly operate their newly nationalized oil fields, the Soviets began to solicit foreign help and the oil companies responded. Lenin personally approved such measures under the New Economic Policy (NEP), which authorized extending concessions for foreigners. One of the first to respond to the Soviet request for help was an American company, the Barnsdall Corporation.³⁸ Signed in October 1921, the Barnsdall contract actually predates the embargo. This was an important breakthrough for the Soviet Union. Not only did Barnsdall help the USSR restore production but it also served to attract several other foreign companies, including British Petroleum, the Societa Minerere Italo Belge di Georgia, and eventually a Japanese group in Sakhalin.³⁹ Once a breach had been made, the embargo failed.

The foreigners did what they were supposed to do. They restored the oil fields and started new ones. Barnsdall brought in advanced rotary drills and deep well pumps. Production rapidly recovered, and although there is some uncertainty as to how much Barnsdall made out of the venture, by 1924 when it left the Soviet Union, production was back up to 7 million tons. Production continued to increase, as did foreign technical help. Besides work at the wells, foreign help included American, German, and British assistance in the building of a second pipeline from Baku to Batumi, the French supply of a Schlumberger well-logging process, and American (Standard Oil of New York), German, and British support for refinery construction.⁴⁰

Once output had recovered, the Soviets began systematically to revoke their concessions. By December 1930 most of them had been closed out. Standard Oil, however, was allowed to retain its concession at the kerosene refinery built in Batumi until at least 1935 and the Japanese stayed on Sakhalin until 1944.⁴¹ But ultimately all foreign concessions were terminated.

At first glance it might seem that expelling foreign private companies was merely a response to traditional communist doctrine. But from the perspective of the post-communist Putin-era presidency, expelling foreign companies once Russia’s own companies have begun to prosper has become standard Russian practice. Certainly today Shell Oil and Exxon-Mobil would agree that the harassment they recently faced in 2006 designed to make them walk away from their several billion dollar operations off the island of Sakhalin is more a form of nationalist than communist pressure.

Soviet petroleum policy then, just like Russian policy today, is not consistent. Almost at the time the Soviets were closing down Standard Oil’s concession, they issued a new series of contracts. The critic Anthony Sutton records how companies such as Badger, Universal Oil Products, and Lummus were called back to rebuild and reconstruct refineries.⁴² Having been supported by wartime Lend Lease contracts, some of their work continued until 1945. With this help, production and exports rose rapidly. Because of the damages inflicted by the Germans in World War II, production fell from its 31 million tons record in 1940 to 22 million tons in 1946. But with foreign help, as Table Intro.1 shows, by 1949 they had established a new production record

As production increased, so did the amount of administrative control emanating from Moscow. In the early days, however, there was more control in principle than in practice. Theoretically control over industry was centered in the Supreme Council of the National Economy (VSNKH), which was created shortly after the revolution in 1917. VSNKH in turn derived its power from the Council of People’s Commissars (CPK).⁴³ The CPK (the forerunner of the Council of Ministers) also created the Chief Oil Committee (Glavny Neftianoi Komitet) under the VSNKH on May 17, 1918. But only a few months later the Turks and then the British pushed the Bolsheviks out of the Baku region.

Meaningful control by the Russian authorities had to wait until they sent the British and Turks home in the spring of 1920. Then, recognizing the communication problem between Moscow and the Caucasus, the Chief Oil Committee authorized the creation of three local operating trusts. Azneft, which apparently was the most efficient and aggressive of the three, took over control of the Baku region. Grozneft took over Grozny, and Embaneft took over the fields in the Emba area.⁴⁴ The three trusts in 1922 formed a commercial syndicate, Neftesyndikat (later succeeded by Soiuzneft) to handle exports and other foreign activities.⁴⁵ Neftesyndikat proved to be a very aggressive monopoly. It joined together in a fifty-fifty partnership in 1923 with the English firm Sale & Company to market oil in the United Kingdom.⁴⁶ Neftesyndikat reserved the right to buy out all Sale & Company shares in ten years. This first British company was followed by the second. This time the partnership was between Neftesyndikat and Royal Dutch Shell. The Soviets also entered an arrangement with Standard Oil of New York to market Russian oil in the Near and Far East. They made other deals with British-Mexican Petroleum, Asiatic Petroleum, and Bell Petrole.

Neftesyndikat kept expanding and set up the Russian Oil Products (ROP) company in London jointly with Arkos, a Soviet foreign trade organization set up by the Soviet Ministry of Foreign Trade. By 1925 Russian Oil Products had its own filling station network. The Soviets also set up a filling station network in Germany called Derop through its subsidiary Deutsche-Russische Naptha Company. Ultimately other wholesale and filling station subsidiaries were formed in Sweden, Spain, Portugal, and Persia. With such a network to supply, Soviet oil exports increased rapidly. Soviet oil exports surpassed the previous level in 1926–1927 even though the production level was not exceeded until two years later. Reclaiming and in some cases going beyond its pre-revolutionary penetration, Soviet oil had an important impact in world markets. According to W. Gurov, who at the time was chairman of Soiuznefteeksport, at their peak from 1929 to 1933, Soviet oil exports amounted to 24.8 million tons over the five-year period. This accounted for 17 percent of all the petroleum imported by West Europeans.⁴⁷ Soviet statistics also show sales to the United States of as much as 50,000 tons in the peak year 1930.⁴⁸

The most important purchaser by physical volume and market share was Italy. According to Gurov’s calculations, Soviet oil accounted for 48 percent of Italy’s total oil imports during the ten-year period from 1925 to 1935. In addition to their economic significance, these exports took on political importance after Mussolini became prime minister in 1922 and dictator in 1925. In other words, politics, at least in this instance, was no barrier to export. Only in 1938 and 1940 did the Soviet Union refuse to export petroleum to Mussolini’s fascist government.⁴⁹ The Soviets were only slightly more discreet in selling petroleum to Hitler’s Germany. Sales remained at the relatively constant level of 400,000–500,000 tons until 1936.⁵⁰ Exports to Germany then fell to about 350,000 tons in 1936 and to 275,000 tons in 1937. In 1938 and 1939 they dropped to almost nothing but shot back up to 657,000 tons in 1940 after the signing of the Nazi-Soviet Pact. In fact, in 1940 Soviet sales to Nazi Germany accounted for 75 percent of all Soviet petroleum exports that year.

PETROLEUM AND THE SOVIET BALANCE OF TRADE

Given their magnitude, Soviet petroleum exports were important not only for the purchaser but also for the Soviet balance of trade. Whereas before the revolution petroleum exports at their peak accounted for 7 percent of Russia’s export earnings, in 1932 Soviet petroleum earnings generated 18 percent of total Soviet export receipts. That was a pre–World War II record. Exports in that record year amounted to 6.1 million tons and accounted for 29 percent of total production. Soviet net exports of petroleum far exceeded American net exports in 1932–1933. It should be pointed out that while the 18 percent share of oil exports in overall Soviet export earnings was due in part to the increase in the physical volume of petroleum exports, it was also due to the sharp fall in Soviet grain exports. Forty years earlier, when Russia was the bread basket of Europe, grain exports accounted for 70 percent of national export earnings. However, by the twentieth century, Russia’s role as a grain exporter had diminished so much that grain generated only 53 percent of the country’s export earnings. Then with the advent of communism and collectivization in particular, grain never again accounted for as much as 22 percent of the export volume. On those rare occasions when the Soviets were able to export grain, these exports seldom amounted to more than 10 percent of the country’s overall total export revenues.

Important as petroleum was, however, it was not as crucial as some observers thought. Sutton, for example, mistakenly asserts that petroleum exports “became a significant factor in Soviet economic recovery, generating about 20 percent of all exports by value; the largest single source of foreign exchange.”⁵¹ In fact, in 1928 petroleum accounted for only about 14 percent of all earnings.⁵² Moreover, the relative earnings of timber exports exceeded those of petroleum throughout the 1920s and 1930s, often by a substantial margin. For that matter there were years such as 1922–1923, 1926–1927, 1930, 1931, 1937, 1938, and 1940 when grain earned more than petroleum despite poor harvests and widespread famine.

The fall-off in petroleum exports after 1932 was due to the depression that afflicted all exports. From a peak of 3.2 billion rubles in 1930, Soviet export revenues fell to 2.8 billion rubles in 1931 and kept falling yearly (except for 1937) until they reached a mere 462 million rubles in 1939. (All trade figures cited here are stated in terms of constant 1950 ruble prices.) Reversing the trend, export revenue rose briefly in 1940, but this was a by-product of the Nazi-Soviet Pact. Because of the increase in the sale of petroleum to Germany, exports to Germany amounted to 50 percent of all Soviet exports (including petroleum) that year. In part, some of the reason for the drop in exports was that the Soviet Union began to need more of its raw materials for its own domestic production needs. More important, Soviet efforts were undercut by the collapsing economies of their customers. Depression may be a capitalist disease and it may have had no ostensible effect on the internal workings of the Soviet economy, but there is no denying that a depression of this length and magnitude was bound to have a devastating effect on the world demand for raw materials. This in turn affected Soviet petroleum export earnings. The Soviets quickly realized that they were exporting more but earning less. Thus, while 4.7 million tons of petroleum exports earned them 548 million rubles in 1930, two years later in 1932 when they increased export volume to 6.1 million tons, they generated only 375 million rubles in revenue.

It would take more than twenty years before the volume of Soviet petroleum exports would exceed the 1932 level. While production continued to expand, at least until the chaos of World War II, Soviet authorities began to direct more and more of the country’s production inward. This was partly because of the realization that exports could be sold only at a low price and partly because the growing Soviet economy came to need more and more petroleum at home. Soviet planners also had to deal with a drop in yield at the Baku oil fields. That had an adverse effect on the state’s efforts to meet the yearly production plan targets. The annual plan was a system introduced by Joseph Stalin in 1927–1928 to stimulate economic growth. When the USSR nationalized all the country’s factories and means of production, it also did away with the private profit and loss system. But the Soviets needed an incentive system, so in place of profit and loss the state set out yearly and five-year plans specified in physical terms such as meters, tons, and product units. Managers and workers were rewarded with bonuses when the plan targets were met and penalized when they were not, and it was a disappointment when oil production fell temporarily in 1932. Fortunately it rose again sharply in 1934 but thereafter increased only modestly. As a result, petroleum output lagged far behind the targets set out for the Second Five-Year Plan, which ended in 1938. Production totaled 30 million tons, significantly behind the 46.8 million goal.⁵³ With the technology then at their disposal, the Soviets could not increase the production rate at their traditional fields in Baku and at Grozny.

Yet just as production seemed to be tapering off in the Caucasus, important new fields were discovered in the region between the Volga and the Urals. Eventually called the “Second Baku,” the first discoveries in this area were made as early as 1929.⁵⁴ As in earlier years, however, a shortage of proper drilling equipment delayed the region’s expansion. Only after the Second World War was petroleum in the newly discovered fields produced in large quantities, and the region, particularly its giant field at Romashkino, then came to outproduce Baku.⁵⁵

CONCLUSION

There was nothing unique about what happened to the Soviet petroleum industry prior to the Second World War. Many of the trends and practices had already been established in the pre-revolutionary years and, as we shall see, would be repeated after the Second World War ended. For that reason it is worth summarizing what happened so that in the pages ahead we can more easily note the similarities when they recur.

To sum up, foreign help was very important to the Russian petroleum industry prior to the revolution as well as before the Second World War. That includes technological assistance at the drilling, extracting, and refining stages. Nor did the Soviets refrain from seeking foreign help to facilitate the foreign marketing of their petroleum. Often that meant selling to companies like Standard Oil or Shell so they could do the distributing. In other instances, it meant joining together with a Western company to form a joint Russian-local venture not only to handle wholesale distribution overseas but also on occasion to operate retail filling stations abroad as well. The concept of trading with multinational and notorious capitalist enterprises or even creating their own multinational network evidently posed no ideological hurdle for the Soviets. Nor, for that matter, was politics much of a barrier. The Soviets abandoned their previous party line and agreed to sell their petroleum to Mussolini’s fascists and Hitler’s Nazis, even when decency, if not self-interest, should have precluded such action. The politics of ideology was seldom allowed to stand in the way of the principle of profit.

One justification for seeking foreign help was the Soviets’ periodic fear that their reserves might run out and that they were utilizing their output ineffectively. They expressed the same fears prior to the revolution, and—as we shall see—this would recur in later eras. Increased production was essential, not only because of the need to supply domestic demand but also because of the role petroleum played as an earner of foreign currency. At its peak, in 1932, petroleum accounted for 18 percent of foreign earnings. That depression year also saw the Soviet Union export more petroleum than did the United States and probably more than anyone else in the world. But to export that much, the Soviet Union had to divert 29 percent of its crude oil production from domestic use within Russia, a level not reached again until 1976.

Petroleum is indeed important as an exportable commodity, but its importance depends not only on Russia’s ability to pump oil but on prices in the world market. When crude oil prices fall, the impact on the whole Russian economy can be serious as it was in the 1930s and would be in the 1980s and 1990s. Conversely, when energy prices are high, Russia finds itself with unprecedented power. Prior to 1973, while it needed the earnings from petroleum exports to pay for its imports, the world still regarded the Soviet Union as a spoiler, a price discounter, willing if not eager to cut petroleum prices and unsettle the capitalist oil companies. After 1973, the Yom Kippur War, and the resulting Arab oil embargo, the Soviets switched tactics and, more often than not, they sought to sustain prices at a level as high as possible to enhance the country’s earning power. Profits, not politics, became the priority.