This is a terrible story with a spark of black humor in it. Mikhail Bakhtin spent the late 1930s working on what some say was his masterwork, a study of the German novel in the 18th century (specifically, the Bildungsroman). I’ll quote the rest of the story from two published books, since there’s a lot of inaccurate material floating around on the internet (for instance, some people set the scene during the Siege of Leningrad, but as far as I can determine Bakhtin was living in the outskirts of Moscow during the war). The first is p. xiii of Michael Holquist’s introduction to the Bakhtin collection Speech Genres and Other Late Essays:
The essay on the Bildungsroman is actually a fragment from one of Bakhtin’s several lost books. In this case, nonpublication cannot be blamed on insensitive censors. Its nonappearance resulted, rather, from effects that grew out of the Second World War, one of the three great historical moments Bakhtin lived through (the other two being the Bolshevik Revolution and the Stalinist purges). Sovetsky pisatel (Soviet Writer), the publishing house that was to bring out Bakhtin’s book The Novel of Education and Its Significance in the History of Realism, was blown up in the early months of the German invasion, with the loss of the manuscript on which he had worked for at least two years (1936-38). Bakhtin retained only certain preparatory materials and a prospectus of the book; due to the paper shortage, he had torn them up page by page during the war to make wrappers for his endless chain of cigarettes. He began smoking pages from the conclusion of the manuscript, so what we have is a small portion of its opening section, primarily about Goethe.
A shorter version is on p. 56 of The First Hundred Years of Mikhail Bakhtin by Caryl Emerson:
The page proofs for this massive volume perished when a bomb hit the Moscow publishing house where it was in production during World War II—after which Bakhtin, in a story that has become so famous it was repeated, somewhat garbled, in the mid-1990s by the chain-smoking hero of the American film Smoke, “smoked away” four-fifths of his back-up copy, that is, used it for cigarette papers during the lean war years.
(Incidentally, on the previous page Emerson says, “To the despair of archivists and present-day transcribers, till the end of his life Bakhtin wrote exclusively with a sharpened lead pencil on soft paper.”)
I googled around looking for a Russian discussion of the story and didn’t find much; an article by A. B. Bocharov turned out to be quoting a translation of an English-language article (Charles I. Schuster, “Mikhail Bakhtin as rhetorical theorist,” College English 47 (1985): 594-607). But I did discover a tidbit about Paul Auster, who loves this story so much he’s used it several times; Arkadii Dragomoshchenko’s piece on Auster quotes his wife Siri Hustvedt: Однажды я ему рассказала историю о М. Бахтине, который в блокадном Ленинграде пустил на самокрутки свой труд о немецком романе, и Пол использовал его в своем фильме “Дым” [Once I told him the story of how during the siege of Leningrad Bakhtin used his work on the German novel to roll cigarettes, and Paul used it in his film Smoke]. So it’s his wife who’s responsible for the garbled version Emerson mentions.
You can read an excitable web page dedicated to this anecdote here; I learned about the story from this AskMetaFilter question.