Book Review: The Coming Soviet Crash: Gorbachevs Desperate Pursuit of Credit in Western Financial Markets by Judy Shelton

The first section of this book, “The Financial Condition of the Soviet Union,” is in many ways the most interesting. Using the Soviet Union’s own statistics, Shelton shows that the Soviets have been running huge budget deficits for several years, despite their claims to the contrary. By issuing credits for state ventures that fail to meet their production quotas, Gosbank, the Soviet central bank, has created an annual budget deficit that is almost double that of the United States. In a Western economy, those deficits would likely give rise to spiraling inflation. However, because prices of many Soviet goods are fixed, that inflation takes the form of severe shortages of consumer goods.

Although the broad outlines of Soviet economic problems have been known for years, Shelton fills in a number of details about how the U.S.S.R. manages its deficit financing and how that financing affects Soviet citizens. Faced with an increasingly resentful population and an economy heading toward collapse, Gorbachev’s perestroika plan attempts to stave off the crisis in two ways.

The first involves loosening the reins of central economic control. Local managers are to get more leeway it/making hiring and firing decisions, and badly managed concerns are to be allowed to go bankrupt. While this probably will help increase the efficiency of some ventures, such a policy promises Soviet citizens only the down side of capitalism (bankruptcy and unemployment) without any of its benefits.

Since most Soviet citizens feel that they’ve already sacrificed enough for the benefit of the state, the second part of Gorbachev’s perestroika plan is as vital as the first. By raising imports of Western goods, he hopes not only to modernize Soviet industry with Western technology, but also to increase the availability of consumer goods and placate the restive population. But such a strategy requires large amounts of hard currency to pay for those imports, since the ruble is Monopoly money on international currency markets.

In her second section, Shelton tells “How Moscow Acquires Outside Financing.” Although previously barred from Western markets by the Soviet Union’s default on money owed on Czarist loans and bonds, the Soviets recently negotiated favorable settlements on those debts with the English and Swiss governments. This, in turn, opened the door for borrowing from Western banks, and also cleared the way for the Soviets to issue their first Eurobond.

The Soviets obtain still more financing through foreign branches of the Moscow Bank, as their location provides a loophole for laws that bar credit to the Soviet Union itself. They also plan to get capitalist financing from their joint ventures with Western companies. Finally, although the Jackson-Vanik Amendment prohibits the federal government from issuing loans or credits to the Soviet Union, Gorbachev intends to circumvent that restriction by gaining admittance to the International Monetary Fund and World Bank.

Shelton finds all these developments disturbing, and with good reason. She argues that since money is fungible, lending the Soviets money to buy more butter also allows them to buy more guns. To that end, the last and shortest section of her book,”Guidelines for the West,” provides eight general rules for dealing with the Soviets, including not trading economic assistance for political concessions and not becoming overly enchanted with either Gorbachev himself or his country’s moves toward capitalism. Although advocates of laissez-faire trading policies will no doubt have quarrels with the idea of increasing government monitoring of international trade and finance, her suggestions for the most part are quite sound.

This book does have a few flaws, starting with its title. Though eye-catching, it would be somewhat misleading were it not for the more accurate subtitle. Indeed, although Shelton hints at a Soviet collapse, she never comes right out and predicts it, nor does she mention non-economic factors (such as ethnic dissent) that might contribute to a collapse. She also fails to more than touch on the many other problems of socialism that led the U.S.S.R. to its current economic malaise (though to be fair, the failures of central planning are so numerous and deep that entire books have been devoted to the subject).

More serious is the lack of statistics on Soviet military strength. Since the fungibility of capital is one of Shelton’s key points, statistics on the growth and/or maintenance of Soviet force levels during Gorbachev’s tenure might provide valuable reinforcement for her case. She also tends to overstate the Soviet Union’s ability to copy Western technology successfully, stating at one point that “High quality products can be carefully copied, reproduced in quantity, and the knockoffs sold to foreign buyers as Soviet products”—ignoring the fact that the Soviet Union’s technological infrastructure is so poor that in many cases they not only don’t have the tools to build such products, they don’t even have the tools to build the tools.

Still, these are minor flaws next to Shelton’s overall achievement. Written in a clear and largely jargon-free style, The Coming Soviet Crash sheds considerable light on a heretofore unknown aspect of both Communist economies and East-West relations. As such, it should be required reading for businessmen thinking about working with the Soviets, and anyone else seeking the truth about glasnost and perestroika.

Lawrence Person is a writer and editor in Austin, Texas.