Between 1970 and 1986, the growth rates of capital investment in the oil and gas industries were considerably higher (three- to five-fold) than in the industry and the economy on average. If the output of low-cost deposits is stable and has a large share in the country’s total output, then the rise of marginal costs of the new deposits doesn’t have a remarkable effect on average production costs (that is, figures of marginal and average costs don’t go separate ways during the increase of production). In a strict sense, resource rent is the sum of differences between the price and marginal costs of resources (not necessarily natural). Gas was first extracted there in 1953. Extraction and transportation of oil demands smaller capital investment but at a larger marginal cost. In the same way, the cost of production is not the reported cost of production at any moment of time, but the cost that could have been established under the efficient organization of the industry, i.e. one-third of prewar shipments. In the 1960s–1980s, the main benefits in energy savings—three-quarters—were achieved by decreasing the second kind of energy efficiency. The most important factor is that the institutions established in the Soviet planned system turned out to be extremely poor at preparing for adapting to the chaos of the world markets, which the state couldn’t control. It suffered lack of industrial capacity and it's peasant farmers withdrew from the market into self sufficiency. 206, 261. The Soviet Union's war effort in World War II began on when the Soviet Union was invaded on the 22 of June 1941. Harrison, "Soviet Production and Employment in World War II: a 1993 Update", Soviet Industrialisation Project no. 28 Clifford G. Gaddy and Barry W. Ickes, "Resource rent and the Russian economy," Eurasian Geography and Economics vol. Soviet Tank Production WWII Posted on June 13, 2020 Unlike the United States, the Soviet Union came into World War II with an extensive tank industry-one the Soviets had unashamedly based on American-style mass production. So, possibly these industries would create even more problems. 45 See, for instance: Margaret Chadwick, David Long, and Machiko Nissanke, Soviet Oil Exports: Trade Adjustments, Refining Constraints, and Market Behavior (Oxford University Press, 1987). They were heavily marked down compared to world prices. Strategic bombing of Ploiești began on June 26, 1941 when 17 bombers were sent from Crimean airfields. As it was in 1942/43 the USSR received more aviation gasoline from the USA than it did from domestic production, Keith When reflecting on whether the resource curse existed in the Soviet Union, it is important to determine the meaning of this term. Crude oil output in Russia amounted to 600,000 barrels in 1874 and reached 10.8 million barrels within a decade, which equaled to about a third of the USA’s output. They were taken under the strong influence of the American engineer John Holland, one of the great pioneers of this field at the beginning of the century. The figure of marginal cost is almost always unknown. In the latter case, the economy is highly dependent on the global market (and its consequences, such as Dutch disease and extremely high volatility of resource prices and capital flows). As a result, the resource base in eastern regions of the Soviet Union remained largely untapped. A different source on number of weapons manufactured between the Soviet Union and Germany. In 1991, the Soviet Union collapsed, but the debate on the role of oil and gas dependence is still a huge issue. At the same time, over three thousand kilometers of new railways were built. Oil production in the Volga-Urals region was growing fast and reached its peak by around 1975.36 However, afterward, its decline was steeper than expected. All this significantly increased the freight turnover allowing for faster relocation of forces, production and increased efficiency. 35 (Centre for Russian and East European Studies, University of Birmingham, 1993), table 2. Transportation of gas demands huge capital expenditure on constructing gas pipelines and compressor stations, but the marginal cost of its extraction and transportation are relatively low.  Industrial output did not recover to its 1940 level for almost a decade. It’s commonly believed that in a planned economy, enterprises don’t have sufficient incentives to cut costs, but still, as confirmed by the argument above, these incentives can change and are influenced by the flow of incoming resources. This is a paradox: when a country has the opportunity to make the necessary changes, there is no longer the desire to do so (as in most raw-materials-exporting nations during resource booms) and, on the contrary, when the opportunity to conduct changes is sharply reduced, the willingness to make changes caused by acute necessity sharply increases. But despite this, within its last ten years, it experienced grave problems caused by its fuel and energy complex. This was all caused by the invasion of the Soviet Union by Axis forces in Operation Barbarossa and it resulted in a rapid decline in industrial and agricultural production. Thus, we can’t say that the effect of capital’s movement to the oil extraction industry started to work all at once, it started to take effect in the late 1970s, as the national leaders clearly realized that the increment of oil stock started to lag behind oil production. Agriculture wouldn’t be able to boost the harvest output due to chronic problems that had accumulated over decades. But by 1955, the USSR had resumed commercial oil exports to the West. For instance, the Soviet Union provided huge subsidies to both domestic and foreign (Comecon nations) energy consumers. Thus, the share of indirect taxes or turnover tax (which helped extract the rent) in these products’ retail prices amounted to about 80 percent.66, Describing the methodology of calculating the resource rent, Gaddy and Ickes point out that “both the revenues and the costs of production must be considered in relation to the most profitable alternative use of resources. 1 Mr Manmohan S, Kumar and Kent Osband,“Energy pricing in the Soviet Union,” Working Paper, no. 6 Gaddy Clifford. That’s why cheap energy supported the huge, by international standards, but very energy-intensive military and industrial complex. What is just as important, it led to extremely high volatility of output (and, therefore, of oil exports and revenues), which is considered one of the main manifestations of the resource curse (only under certain conditions, linked to the fact that the country doesn’t have good instruments to overcome the volatility of revenues, such as a stabilization fund or a developed financial market). Then we can assume that there are taxes—formal and informal (such as bribes for government officials and involuntary support of the social sector of the city or the region). This, in turn, causes two effects: resource movement and expenditure. The turnover tax composed the principal part of this difference. The country's main economic and military industrial base was now based in the regions a bit east of the Volga, regions that were primarily in the Urals. In particular, this happened during and after the crises of 1982, 1986, 1998, 2008, and 2014. The Soviet Union took part in World War II from 1941 until the war's end in 1945.  The sheer speed of the German advance meant that any Soviet evacuation efforts were troublesome. In the Urals and Siberia, metallurgical plants were being built and expanded at an accelerated pace. In the second scenario of 2 percent annual growth of marginal production costs the rent does fall, but insignificantly. The first effect leads to movement of capital and labor from the processing industry and the service sector. They were not linked to the shortages of oil and gas, but rather had to do with rapidly increasing costs (of exploring, extracting, and transporting materials), huge inefficiency, repeated shocks, and other unpleasant surprises. It made me wonder if the adoption of turretless Soviet self-propelled guns prior to 1944 might have been influenced by this situation. But the R variable is important for society. Other huge deposits were explored shortly after this, including the immense Samotlor field in 1965 (it was rapidly put into service; the first industrial well was completed in April 196840). , As soon as the war broke it, it was clear to the Soviet government that this conflict would require a total war approach. The second option seems more likely, considering that the Soviet Union did sharply raise the deliveries of high-tech products in the 1970s. 4 See M. Harrison, Soviet Planning in Peace and War, 1938-1945 (Cambridge, 1985), appendix 4. History has no place for the subjunctive mood, but, proceeding from the political-economic explanation of resource dependence, it may have been likely. Gulags were the main supplier of labor for many defense commissariats. Secondly, starting from the mid-1970s (and until the early 1980s), gas rent approximately equaled oil rent, and for many years after 1991 it was about twice as big as oil rent. . Foreign light tanks continued to be delivered under Lend-Lease, but domestic production would be replaced by cheaper armoured carsand the pl… This city was part of a khanate that was annexed by the Russian Empire at the beginning of the century. Such an approach is used to explain the existence of many non-competitive industries in the Soviet, and then in the Russian, economy. This required the country's leadership to take urgent measures to strengthen the nations economy, with a primary focus on the defense industries. As oil rapidly gets more expensive, even with the same real incomes, it gets more profitable for companies, households, and the government to substitute it with other energy sources (the substitution effect). In the beginning of the 1960s, when the giant Western Siberian oil and gas deposits had not been discovered yet, the authorities actively promoted the idea of building the Lower Ob Hydropower Plant (in 1961, Nikita Khrushchev talked about its construction as a resolved issue51). 26 June, 1987. 82 Shows by how many percent enery consumption rises when GNP increases by 1 percent. The resource curse theory is not an all-inclusive doctrine, but rather a combination of many hypotheses about the effect of different factors (mechanisms) that determine the negative correlation between the growth of resource availability and the change in economic growth rates. Specifically, west of the Caspian Sea, with Soviet oilfields at Maikop, Grozny, and Baku, which were threatened by the Germans, but not captured, except for Maikop. According to Daniil Yergin, “this resulted in a blast of entrepreneurial activity. Rather limited. Damage Soviet Oil Production Joel Hayward EVEN before Operation Barbarossa petered out in December 1941, Germany's oil reserves were severely depleted. : N. Baibakov, N. Pravednikov. Essentially, it largely determines the political economy of the society, which lives off resource rent. . Nevertheless, the advocates of the second option included the ministers of the oil and gas industry and the geology minister, so this strategy won. The thing is, despite the economy’s high energy efficiency, its high level of economic development has led to the country consuming a great deal of oil, both by industries and households (thanks to the very high level of vehicles per capita), and it even had to import large amounts of oil. A highly unusual situation—the multiple increase of prices on the world market and the discovery of huge oil and gas deposits—started to seem quite natural. It’s also worth noting that growth in industrial output was supposed to be six times greater than growth in oil production, and growth in agricultural production was supposed to be three-and-a-half times greater than that of oil production43. The growing returns on the invested capital and labor in the oil industry should cause a resource movement effect, and they did. The new Urals and Volga region turned out to be a honeypot. This disease emerges and progresses through the real exchange rate of a national currency and, in particular, through its strengthening.11 There are two ways that this could happen: through the increase of the national currency’s nominal exchange rate or through a higher rate of inflation in the country compared to that in other countries (its trading partners). This is largely to do with the way Soviets designed and mass-produced weapons. 7 As cited by: Martinot, Eric, “Energy efficiency and renewable energy in Russia: Transaction barriers, market intermediation, and capacity building,” Energy Policy, vol. 60 Viktor Karpov, “Oil and Gas Profile of Industrialization in Tyumen Region in 1960-1980s.” Taxes, Investments, Capital (Tyumen, 2004), vol. Oxford Collection. A. Bergson, The Real National Income of Soviet Russia Since 1928 (Cambridge, MA, 1961), p. 128. The output of nonferrous rolled metal, cable products, and ball bearings, had almost completely ceased. Procurements of meat from abroad increased by 5.2 times: from 164.9 thousand tons in 1970 to 857.5 thousand tons in 1985. Do [we] really need to solve the food problem radically and quickly, when it’s so easy to buy tens of millions tons of grain, followed by huge amounts of meat, and other food products from America, Canada and Western European nations? By 1939, they dropped to 0.4 million tons. then we started to come to the conclusion that this wealth had at the same time seriously undermined our economy; the due and overdue reforms were continuously postponed.”114, In turn, historian Steven Kotkin writes that oil money made it possible to boost salaries and expand perks and privileges of the constantly increasing number of Soviet elite. Interest and discount rates did not reflect the preferences of society (and only loosely reflected those of the country’s leaders) in regards to risks or the choice between the present and the future. This sharply reduced the inflow of foreign currency and made the Soviet Union export more oil. The increasing imports made the Soviet Union include large volumes of oil and gas (mostly oil) exports in future plans. Back in 1960, just twenty-five years earlier, the Soviet Union’s GDP per capita was on par with Japan’s. Western Siberia became the third major oil-producing region in the USSR and the biggest one in the country’s history. For instance, at a Politburo session in May 1984, then premier Nikolay Tikhonov said: “The oil we sell to capitalist nations mostly goes to pay for alimentary and some other goods. The political-economic explanation of the resource curse is composed of three groups of theories: cognitive, which accuse government actors of short-term vision;21 social, which point at adverse effects of privileged classes, sectors, networking clients, or interest groups;22 and statist theories, which put an emphasis on institutional weakness or strength of the government, its capability to produce and use resources, ensure property rights, and oppose the demands of interest groups and rent seekers.23 All these theories view resource rent as an independent variable and economic stagnation as a dependent variable. Energy saving efforts mostly failed. Of this total, domestic crude oil production accounted for only 3.8 million barrels while 60 percent (roughly 28 million barrels) of German oil was imported from overseas where the United States controlled the lion’s share of production. 1 (1996): 9-41. The Influence of Natural Resources on Economic Development: a Brief Review of Theories and the Problems of Applying Them to the Case of the USSR, Discovering Oil From Azerbaijan to Western Siberia, Estimates of the Russian Economy’s Resource Rent in the Soviet Period, Energy Efficiency of the Soviet Economy as an Indicator of Weakening of Energy Preservation Incentives. 15 Calculated on the basis of: Global, British Petroleum, “Statistical Review of World Energy 2006,” http://www.bp.com/content/dam/bp-country/en_ru/documents/publications_PDF_eng/Statistical_review_2007.pdf (2007). Moreover, in the mid-1960s, many experts working in Gosplan and the oil and gas industry did not expect that this could happen at all. However, we should make two notes that make the calculated data different from reality. How did it get to that point? 8 (2005): 559-583, 569. How this rent is created (how much effort is spent): for instance, getting technological rent demands a high initial effort and doesn’t corrupt beneficiaries as considerably as oil rent does. Indeed, as Rehschuh states unequivocally, “the oil-rich Soviet Union would have been better off pursuing conventional investments in oil extraction” than in coal processing and “constantly changing investment allocation decisions” that focused on refining for export over exploration and production … A significant contribution to meeting the needs of the front was made by the population of the country, which, despite the hardship and deprivation, worked in all sectors of the economy. Secondly, the planned system generates irrational incentives and conflicting preferences and doesn’t have a way of bringing them together other than time-consuming negotiations or administrative pressure. But oil dependence was not an issue back then as absolute volumes of exports were small and prices were not highly volatile. This happens due to a combination of two effects—the substitution effect and the income effect. However, it is the political-economic mechanisms that have been attracting the lion’s share of researchers’ attention over the last two decades. In the first case, the difference made up about eight years (from 1974 to 1982), and in the second one, it was also about eight years (2000–2008). However, between February 1974 and August 1975, the ruble’s exchange rate climbed from 0.79 to 0.69 per dollar (but oil prices increased insignificantly from $10.11 to $11.16 per barrel). 02 (1999): 297-322. In total 2,593 industrial enterprises, more than 12 million people, about 2.4 million livestock, significant food reserves, agricultural machinery and objects of cultural value were evacuated.. But in our case, we speak about oil and gas rent, which reduces the array of possible characteristics linked to it (although it could be very broad). This assumption is very important since if oil and gas production efficiency (calculated as the percentage of material actually extracted from deposits) approached Western standards, output would grow much faster. The mechanism at the heart of Dutch disease assumes that the movement of labor and capital to the resource sector only takes place when this sector experiences a boom, or, more precisely, until the returns on the invested capital are higher than in other industries. 3 (1998): 905-915. It seemed that the larger this number was, the better geologists worked. Also, by the end of the 1960s, geologists came to the conclusion that the Yamalo-Nenets Autonomous Region in the northern Tyumen Region had huge, unprecedented natural gas deposits.41, It’s important to note that Western Siberian deposits were located in extremely harsh climatic conditions (although less extreme than Eastern Siberian ones, which Russia plans to explore in the medium term). Unfortunately, the Soviet Union lost that opportunity. From the start of Operation Barbarossa, when German troops invaded the USSR in June 1941, until the end of the war, Azerbaijan produced 75 million tonnes of crude oil, 80% of the union’s petrol, 90% of its naphtha and 96% of its lubricants. The irony is that the most powerful stimulus for the Soviet energy-saving policy was not the growth of oil prices in the 1970s, but their drop in the 1980s. During World War I and the Civil War, oil production in Russia suffered a lot but then started to recover. In a similar way, if excess value (of extraction) appears during the extraction of raw materials, it is also included in the calculations of resource rent. On 26 May 1943, The State Defense Committee made a resolution on Restoring Railways in Liberated Areas and up until the end of the war, 50 thousand km of main railway lines, 2.5 thousand stations and sidings were restored. It’s widely known that the rise in oil prices in the 1970s led to an energy crisis in most developed nations, but at the same time, became a powerful catalyst for increasing the energy efficiency of their economies. The resource curse theory maintains that rent seeking (or, to be exact, the fight for rent) is one of the main roots of oil extracting countries’ problems that diverts resources from production activities.110, But who received the rent from exporting hydrocarbons to socialist nations? Then Ministers Council chairman Alexey Kosygin is known to have personally addressed the head of GlavTyumenneftgaz with requests like this one: “We’re short on bread — give [us] 3 million tons above the plan.”107 Carrying and lifting equipment, ships, and agricultural machinery became the main articles of imports. We can note that between 1950 and 1965, the elasticity of energy consumption by GNP growth was more than 1,82 while between 1965 and 1975 it was below 1. w5398. The situation with gas in the Soviet Union was completely different. Adolf Hitler worried that his armed forces would soon grind to a halt for want of petroleum products. The results of many studies showcase this. The second one, through spending extra revenue of the resource sector inside the country, increases the demand for services (it is assumed that the service sector is non-traded, that is, it’s hard to substitute foreign goods with domestically produced ones). Lvov and Pugachev,77 using the input-output data of Russia for 1991 at world prices, tried to estimate the volume of indirect subsidizing of the economy with the help of oil and gas rent. According to some experts, the cost of extracting an extra ton of oil during this period exceeded its price. By the middle of 1944, prisoners worked at 640 industrial enterprises in the country. Here, we would like to conduct an in-depth analysis of the origins and progress of the Soviet Union’s oil and gas dependence in order to reach a deeper understanding of its parallels with the oil and gas dependence of modern Russia. Five-year plans for the national economy of the Soviet Union, Soviet combat vehicle production during World War II, German armored fighting vehicle production during World War II, Romanian armored fighting vehicle production during World War II, "Great Patriotic War of the Soviet Union of 1941-45", "Экономика СССР в годы войны - Россия, Russia", https://en.wikipedia.org/w/index.php?title=Soviet_industry_in_World_War_II&oldid=992642119, Wikipedia articles needing factual verification from September 2019, Creative Commons Attribution-ShareAlike License. 2 (April-June 2005), http://eng.globalaffairs.ru/number/n_4960. Figure 4 below represents oil and gas rent in the USSR and Russia between 1950–2010 (in 2011 prices). 59 Mariya Slavkina, Triumph and Tragedy. Armoured vehicles under about 15 tonnes could be produced and rebuilt in many light industrial installations, such as automotive, streetcar, and light tractor factories. Secondly, the Soviet economy, even during periods of the highest oil and gas prices, was dependent on oil and gas much less than modern Russia. 44 Data on actual oil output from: Global, British Petroleum, “Statistical Review of World Energy 2006 (2007). This situation can be analyzed in the categories of the substitution effect and the income effect. Geologists could only work in the winter, when many swamps were frozen enough to be able to withstand heavy machines. In the mid-1980s, the ratio between the average wholesale price on crude oil and the retail price of 93-octane petrol was about 1:17. For some reason, the country’s economy became dependent on the extraction and export of oil and gas and, thus, on the highly unpredictable conditions of the oil and gas markets that the country was not able to significantly influence. Gorbachev himself was unable to break the policy, which began under Brezhnev, of a rapid growth of investment in the fuel and energy complex and the inability to introduce energy-saving policy. The leadership of the country proved incapable of seeing the changes that were taking place in the world economy and reacting to them appropriately. 62 Izvestiya, October 15, 1984 (as cited by Goldman, 42). For example, in the early 1960s, the deputy head of Gosplan responded to the offer from senior Tyumen officials to establish annual production of 10–15 million tons of oil without even checking the geological maps in front of him, saying that “the huge oil and gas deposits frequently mentioned by the Tyumen people are nothing more than a creation of a provincial and sick imagination. There are many explanations for the decline of the Soviet economy: The existing methods of social sciences do not apparently allow us to conduct a detailed analysis of the role of the above-mentioned factors, considering the share of each of them, in the slowdown and depression of the Soviet economy. Gaddy and Ickes use the term “inverted funnel” to explain how the resource rent flows vertically down in the economy—from the beginning to the end of value chains.28. Of how the authors drew the difference between actual and natural oil and the Civil war, even more (. The dissemination of this factor ’ s reliance on exports of natural resources their physical volume by... By 1955, the ratio between the Soviet Union signed an agreement to lend-lease.. The Germans were not competitive on the role of oil and gas surpassed. 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