Well the term theocracy means a system of government where priests rule in the name of god, so your answer would be the second. Priests were part of the ruling class.
Answer:
In 1985, Mikhail Gorbachev became the leader of the Soviet Union.Gorbachev saw that the arms race with the United States and the war in Afghanistan had the potential to bankrupt the Soviet Union. Gorbachev was a reformer. He believed that political and economic reforms went together, and if the Soviet economy was not reformed, it could collapse Under his policy of glasnost—speaking openly about Soviet problems—Soviet citizens were allowed to criticize the government.Finally, Gorbachev wanted to improve relations with the United States. In 1987, Gorbachev and Reagan agreed to a new arms treaty in which the Soviet Union and the United States each pledged to eliminate short- and medium-range nuclear missiles.
The signs were cuts in production, rise in unemployment, bank failures, and consumer borrowing. Personal debt weakening economy, etc.
