On 7:32pm on December 25, 1991, a red flag with a golden hammer and sickle was lowered for the last time from the Kremlin. It was replaced with the Russian tricolor: white, blue, red. “I hereby discontinue my activities at the post of President of the Union of Soviet Socialist Republics,” Mikhail Gorbachev announced bitterly. The last leader of the USSR had learned several weeks earlier the leaders of Russia, Ukraine, and Belarus—formerly constituent republics of the Soviet Union, now independent countries—had declared an end to the Soviet Union. They had also cast Gorbachev out of a job.
The demise of the Soviet Union set the stage for the emergence of a post-Cold War world, an order that is currently going through rapid change, perhaps even dissolving. Yet the Soviet collapse, the foundational event of the past quarter century of international politics, is an event that we still poorly understand. How did one of the world’s two great superpowers dissolve in only several years? What accounts for the terrible legacy it bequeathed contemporary Russia, of a shoddy economy and authoritarian politics? And what, more broadly, does the end of the Soviet Union tell us about the synthesis of democracy and capitalism? That pairing long defined the “Pax Americana” of the past quarter century, yet today it looks as fragile as at any point since the Soviet flag was brought down from the Kremlin.
The Soviet Union’s collapse transformed the lives of Soviet citizens, dividing them into fifteen separate countries. It was also a test, many people believed, of the most influential political theory to emerge from the transition from Cold War to post-Cold War: Francis Fukuyama’s notion of the end of history. Fukuyama proposed that with the Soviet collapse, ideological conflict had come to an end; capitalism and democracy were the inevitable victors. But the Soviet Union itself always fit uncomfortably within that narrative. Moscow had liberalized politically, but suffered an economic collapse, and lost its empire in the process. China also began the 1980s committed to a centrally-planned economy and authoritarian governance. Unlike Gorbachev, Chinese leader Deng Xiaoping opted to ditch communism but keep authoritarianism, demonstrating on Tiananmen Square that he was willing to shed blood to keep control. The Soviet Union appeared to follow Fukuyama’s advice but did poorly; China ignored it, and experienced three decades of record-setting economic growth.
One might conclude—as have authoritarian elites in China and Russia—that the Soviet collapse proves that democracy is dispensable. Instead of democracy, the authoritarian right suggests, the Soviet Union should have kept tight political control and focused instead on economics. Soviet General Secretary Yuri Andropov attempted to implement such a program of authoritarian modernization during the early 1980s, and current Russian President Vladimir Putin is said to believe that, had Andropov not died after just a year and a half in office, he would have revitalized the country’s economy. And Chinese President Xi Jinping—who is widely believed to admire Putin’s leadership methods, and who many fear is himself making a bid for lifelong rule—regularly exhorts China’s governing cadres to learn the lessons of the USSR. The prime lesson, he believes, is the risk of unclenching the Communist Party’s iron fist.
Behind this, however, is a faulty interpretation of Soviet history. The notion that political and economic reforms were separate processes misunderstands Soviet politics. Politics and economics were interlinked. The most divisive political debates during the perestroika period were about the distribution of economic resources. Gorbachev came to embrace political reform in large part because the Communist Party structure proved so resistant to economic efficiency. Where the Soviet Union diverged from China, it was because powerful interest groups obstructed Gorbachev’s policies. The military and KGB staved off serious budget cuts until the final year of perestroika by threatening and eventually launching a coup to protect their privileged position. The farm lobby tenaciously opposed letting individual farmers lease land. Industries ensured that their subsidies were not cut. The energy industry was only partially cleaned up; the Soviet gas industry—today called Gazprom—survived perestroika basically unscathed, and even now faces only limited pressure to act efficiently. By some estimates, Gazprom today squanders billions of dollars each year in waste and corruption. The gas industry was not spared from demands for increased efficiency out of ignorance or ideology; it was spared because it was too powerful to touch.
The influence of interest groups was particularly relevant to the most significant divergence between the Soviet Union and China: fiscal and monetary policy. By the late 1980s, balancing the USSR’s budget was impossible. Interest groups demanded fat subsidies, and Gorbachev struggled to resist. Soviet leaders knew that the blank-check credits given to farms and industries caused debilitating shortages and threatened skyrocketing inflation. By 1991, food supplies in urban areas, even in Moscow, were at a dangerously low level, as inflation wreaked havoc with supply chains and distribution networks. Key politburo leaders—from liberals such as Gorbachev to Stalinists like Yegor Ligachev—understood that a rapid expansion of the money supply caused shortages in official stores and inflation on the black-markets. They disagreed, however, about how to restrain growth in the money supply. Gorbachev wanted to slash spending on subsidies and the military, but he feared the political consequences—and interest groups successfully opposed many cuts.
Gorbachev would have preferred to coopt the interest groups, but most rightly sensed that a market economy held few benefits for them. Collectivization and decades of subsidies had left the Soviet agricultural system so far from efficient practices that even today, a quarter century after the reintroduction of capitalism, Russian farms are still struggling to adjust. Farm bureaucrats and agricultural workers were right in concluding that market reforms held few potential benefits for them. The military, too, saw no point in reform. They already had access to top technology, and their funding levels were already sky high. Moreover, military leaders genuinely believed that the Soviet Union needed high defense spending to stave off a capitalist assault. Many industries, too, realized that their production processes lagged far behind Western countries, even as their labor costs were significantly higher than poor Asian producers. They, too, rightly sensed that capitalism offered as much risk as reward. It is hardly surprising that these groups all sought to subvert Gorbachev’s efforts at reform.
They often succeeded. It was no secret Gorbachev did not wield absolute power in the Soviet Union, or that interest groups were able to delay or derail reforms. “We are much more entrenched in conservatism than the Chinese,” Fedor Burlatsky explained to a journalist in 1987. Compared to China, economic interest groups in the Soviet Union were more powerful and more vigorously opposed change. In China there was no agricultural lobby that opposed decollectivization; instead, Chinese peasants actively fought for control over their farms. Chinese industries, like those in any country, pushed for subsidies and government support, but manufacturing played a smaller role in China’s economy and politics than in the Soviet Union, so industries were unable to undermine change.
Most importantly, Deng Xiaoping faced no threat from the security services. Indeed, one of Deng’s first moves upon taking power in China was to slash military spending, proving that he controlled the military, and not the reverse. China’s army received 10% of industrial investment in the late 1970s, but less than 6% by 1986. The immense power of the Soviet military and KGB meant that such a move in the USSR was inconceivable. Gorbachev was unable to seriously cut the military budget. In the years immediately before he became General Secretary—when he was, as a Politburo member, among the top political leaders in the country—Gorbachev was not even allowed to know details about the defense budget, because the figures were classified. The pervasive power of the Soviet security services was not something Gorbachev could ever have changed quickly. The surprising thing is that he managed to change it at all.
The vast power of the Soviet Union’s economic interest groups—clinging to their privileges, obstructing efficiency—was the key factor in the polarization of Soviet politics and the collapse of the country’s economy. Because these interest groups dominated the Communist Party, Gorbachev never had the option of using the party as a tool of reform. The Communist Party and the patronage networks that dominated it were very institutions that most needed to be cut down. The Soviet economy could escape stagnation only if the party’s and the interest groups’ privileges were slashed. Political liberalization, much derided by the authoritarian right, was Gorbachev’s only hope of limiting these groups’ clout. Democracy, Gorbachev told the Politburo, “guarantees our chosen path” by redistributing power away from the bureaucracy and entrenched interests, and toward representatives of the people. It was a risky bet, but what other option did he have? Gorbachev’s democratization efforts are often criticized for obstructing economic policymaking. The opposite is true: economic changes were only possible insofar as Gorbachev shook up Soviet politics. Glasnost facilitated widespread public criticism of cosseted elites, while political restructuring reduced the lobbies’ influence. Without these changes, Gorbachev could not have run the risk of far-reaching economic reforms. He would have been toppled immediately if he had.
Did a different path exist, one that would have seen the Soviet Union reform its economy without either an inflationary spiral or a collapse of its tax system—and ultimately, the dissolution of the state? Clearly Gorbachev and his allies were wrong to bet so heavily on the anti-alcohol campaign in 1985. Perhaps he could have tried harder, too, to oppose or redirect some the capital spending associated with the “acceleration” program. Acceleration had no positive economic effects, and it caused the first, decisive uptick in the money supply. After this point the money supply galloped inexorably higher, due to political conflicts that were beyond Gorbachev’s limited power to resolve. Lacking political capital, how could Gorbachev hope to control capital investment? His reforms suffered from a basic dilemma: the sectors that most needed to change were also the most able to obstruct reform. It is hard to see how the Soviet Union’s vast industrial wasteland could have been restructured in an organized, consensual manner.
The only force that proved strong enough to break the military-industry-agriculture coalition that dominated Soviet politics was the final downfall of the USSR. Until mid-1991, the three economic lobbies were bound together by interest, ideology, and inertia. Had Gorbachev been able to divide the coalition partners, playing one interest group against the others, he might have had more success in asserting control over the Communist Party and the Soviet state. But a strategy of divide and rule proved impossible. So long as they dominated the Communist Party, and so long as the Party controlled the state, these groups’ shared interests overwhelmed any tactical alliance Gorbachev could have conceivably offered. In the years after the collapse of 1991, with the military divided and discredited by the failed coup, and with industry and agriculture writhing under the pain of inflation and depression, Russian President Boris Yeltsin finally managed to split the groups, coopting much industrial support while slashing farm subsidies and cutting military funding. But even though the Soviet Union by then no longer existed, Yeltsin still faced several years of resistance in his attempt to break the lobbies’ stranglehold on the federal budget and on the central bank. Only after Yeltsin shelled parliament in 1993, pushing the country to the brink of civil war, was the military-industry-agriculture coalition finally destroyed.
Was the Soviet Union simply unreformable? China’s experience proved that there was nothing inherent in Marxism-Leninism, in autocratic political systems, or in centrally-planned economies, that makes a transition to a market economy impossible. In the USSR, to be sure, decades of wasteful investment left the country a burdensome economic inheritance. Yet the most damaging legacy of the command economy was not economic inefficiency, but political sclerosis. The Soviet system proved unreformable not because its economic problems were insurmountable, but because it entrusted vast political power to groups that had every reason to sabotage efforts to resolve the country’s economic dilemmas. In part, this situation was the result of the USSR’s relative wealth. When Deng took power in China, for example, the country’s farmers were on the brink of starvation. No matter what Deng did, the state of China’s countryside could hardly get worse, so China faced no built-in lobby that opposed change. By contrast, the USSR was stuck in a middle-income trap: many Soviet citizens, especially among the elite, lived decent lives that were threatened by change. Whereas Chinese farmers embraced decollectivization, Soviet farmers—who had benefited from several decades’ worth of farm subsidies—found that Gorbachev’s agriculture policies offered risks as well as rewards. A similar mechanism obstructed change in Soviet manufacturing and service enterprises, too.
Economic efficiency was also restrained by the relative leniency of the Communist Party during the postwar period. Under Stalin, the party had few interest groups, because the Soviet dictator enforced his writ through purges and mass killings. Enterprise managers dared not miss production targets, on pain of death. The rapid rotation of cadres, facilitated by Stalin’s purges, reduced the influence of patronage networks. Brezhnev’s policy of “stability of the cadres” ended the use of the firing squad to encourage effective management. That made the Soviet system more humane, but it degraded incentives to work efficiently. Bureaucrats and managers now faced few reasons to act effectively: their firms could not go bankrupt, their salaries did not depend on performance, and they received promotions based on political connections. In China, the Cultural Revolution of the 1960s had shaken up the Party and the bureaucracy, cutting back the strength of interest groups and paving the way for Deng Xiaoping’s market reforms. In the Soviet Union, by contrast, the 1960s and 1970s saw patronage networks and interest groups solidify. Gorbachev inherited a system in which economic lobby groups played a larger role than ever before. Yet his powers as head of the Communist Party were weaker than any Soviet leader since the Bolsheviks took power in 1917.
It was not inevitable that combining central planning and single-party rule would create a system with such fundamental flaws. Different decisions in the decades before perestroika might have avoided such disastrous results. Stalin need not have collectivized agriculture. The Kremlin could have chosen to build its massive factories in concentrated regions rather than spreading them across the frozen wastelands of Siberia. The Communist Party could have backed reforms proposed during the mid-1960s to make enterprises more efficient. Brezhnev could have opted not to coddle Soviet farms with increasingly unaffordable subsidies. By the time Gorbachev came to power, however, these choices had been made. There was no way out. The Soviet system gave power to a new ruling class: generals, collective farm managers, and industrial bosses, all of whom beneftted from waste and inefficiency. They dominated the Communist Party and hijacked its policymaking process, so that by the 1980s, there was no longer a boundary between industrial lobbies and the Communist Party itself.
The political clout of these interest groups proved far more significant than anyone expected. Gorbachev’s legacy—and the entirety of Soviet history during the perestroika period—cannot be understood without a clear view of the vicious infighting that determined which policies were implemented and which were discarded. Documents from the Soviet archives show that every perestroika-era policy was the result of conflict and compromise, a negotiation process in which Gorbachev often held the weaker hand. As Gorbachev reminded George H. W. Bush in 1991: “We need to reduce arms in a way that won’t make the army rise up.” That was the dilemma, in a nutshell: to reform the economy without angering the energy industries, or the farm bosses, or—most dangerous of all—the security services. The threat of a coup, potentially violent, backed by regressive economic interests, was always lurking in the background. That was a threat Deng Xiaoping never faced.
 Jeffrey Sachs and Wing Thye Woo, “Structural Factors in the Economic Reforms of China, Eastern Europe, and the Former Soviet Union,” Economic Policy 9, no. 18 (Apr. 1994): 101-145.
 Anders Aslund, “Why Gazprom Resembles a Crime Syndicate,” The Moscow Times, Feb. 28, 2012.
 This was true in the 1990s, too; Yeltsin’s Prime Minister Viktor Chernomyrdin was a gas industry veteran and defended its prerogatives; see Thane Gustafson, Wheel of Fortune.
 Mark D’Anastasio, “Soviets Now Hail China as a Source of Ideas for Reviving Socialism,” Wall