PROJECTIONS OF THE SOVIET HARD CURRENCY POSITION

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• Collection: General CIA Records
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• Release Decision: RIPPUB
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• Document Page Count: 24
• Document Creation Date: December 22, 2016
• Document Release Date: March 6, 2012
• Sequence Number: 1
• Publication Date: May 1, 1985
• Content Type: REPORT

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Intelligence
Projections of the Soviet
Hard Currency Position
Secret
SOV 85-10100
May 1985
Copy 4 7 4
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Intelligence
Hard Currency Position
Projections of the Soviet
This paper was prepared by Office
of Soviet Analysis,
directed to the Chief, National Issues Group,
SOVA
omments and queries are welcome and may be
Secret
SOV 85-10100
May 1985
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OCG Cl
Projections of the Soviet
Hard Currency PositionF___-] 25X1
Summary In its trade with the West, Moscow has long pursued a conservative policy.
Information available The USSR's aversion to becoming dependent on the West for both imports
as of 15 May 1985 and credits has been reinforced in recent years by the debt problems of its
was used in this report.
East European partners and the sanctions imposed by the West after the
USSR's invasion of Afghanistan in late 1979 and the imposition of martial
law in Poland in late 1981. The leadership's disappointment over the failure
of Western machinery and equipment to raise productivity further contrib-
uted to Moscow's negative attitude toward expanding trade relations.
Efforts to hold down borrowing from the West were sidetracked in 1981 as
the Soviets incurred a current account deficit due to a sharp rise in imports
of farm products, particularly grain and meat, while the steep rise in prices
for oil exports ended. In 1982-83, however, Moscow moved its current
account back into surplus-mainly by increasing exports of oil and by
reducing agricultural imports-and thereby reduced its hard currency debt
to the West. Provisional estimates indicate that the USSR ran a sizable
surplus again in 1984; declining imports of machinery and equipment and
nongrain agricultural commodities more than offset sharp increases in grain
imports. The outlook for 1985 is somewhat less favorable because energy
export earnings may drop at a time of continued high imports of grain.
Hard currency imports are important in meeting agricultural needs and in
providing industrial inputs-such as tubular and nontubular steel-not
produced at all or not in sufficient quantity and/or quality in the USSR.
Moreover, imports of Western technology have helped Moscow deal with
serious problems in the energy, chemical, and automotive sectors, and they
would support implementation of an urgently needed industrial moderniza-
tion program. Last, imports-both legal and illegal-have been useful in the
defense industries.
Barring an unexpected rise in energy prices and/or revision in Soviet
borrowing policies, reduced hard currency oil exports could well force the
USSR to cut the volume of imports from hard currency countries at least
through 1990. In these circumstances, the USSR will have every incentive to
offer large additional supplies of natural gas to Western Europe at prices
below those available from competing sources. It has, moreover, the gas
reserves and technical capability to do so.
iii Secret
SOV 85-10100
May 1985
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Under varying assumptions regarding the volume of energy exports, prices,
and borrowing through the year 2000, our projections of import capacity
indicate that:
? Under an optimistic scenario for energy export volume, assuming a
5-percent annual decline in real energy prices and an unchanged debt
service ratio, Soviet import capacity declines slightly through 1990.
? In our worst case scenario for energy exports-where hard currency oil
exports decline more substantially and new export gas pipelines are not
built-import capacity falls considerably faster through 1990. In this
situation, the Soviets-barring a rise in oil prices-could retain the
volume of imports at the 1983 level through 1990 only by abandoning their
conservative borrowing policy and allowing the debt service ratio to rise to
nearly 40 percent.
Although we believe Moscow would accept some rise in its debt burden to
maintain hard currency imports-say, perhaps, to 25 percent-we think it
would be unwilling to accept the potential political and financial vulnerabil-
ities associated with a high debt burden. Under most scenarios, therefore,
Moscow will have to accept at least some cuts in its capacity for real hard
currency imports.
Such a situation need not present the leadership with major economic
problems, however. Even with a significant decline in imports, the Soviets-
barring a series of very poor harvests-would be in a position to import:
? All of the grain needed to allow for continued growth in per capita food
consumption.
? Sufficient quantities of raw materials to prevent major bottlenecks from
emerging.
? Essential technology and equipment for key investment areas.
Furthermore, Moscow might be able to partially offset any reduction in
Western imports by leaning more heavily on Eastern Europe. Indeed,
imports of machinery and equipment from Communist countries have been
growing rapidly and now make up over two-thirds of total machinery and
equipment imports. But the Soviets will have to weigh carefully the impact
on its allies of any attempts to get more from them.
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Moscow also could intensify its efforts to arrange compensation deals.
Western firms, however, generally have been reluctant to enter into such
agreements. The Soviets would probably have more success in attracting
Western investment in joint ventures, but Moscow probably will continue to
shy away from such deals for domestic political reasons. In addition, the
USSR could find useful turnkey projects where Western contractors assume
responsibility for all on-site work. However, the size and complexity of
major import projects, limits on hard currency, and concern over the
presence of large numbers of Western workers may dampen the regime's
enthusiasm for such projects.
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Prospects for Nonenergy Exports 8
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Projections of the Soviet
Hard Currency Position'
Since the mid-1970s, the Soviets have pursued a
conservative policy in their trade with the West. After
a surge of borrowing to finance imports led to a rapid
runup of debt in the early 1970s, Moscow returned to
its practice of limiting borrowing, even though its
credit rating was excellent and it could have afforded
to buy more.
We believe Soviet unwillingness to borrow more from
the West during the latter part of the 1970s reflects
several factors. In part, the USSR feared that a rising
debt would make it dependent on the West, a concern
that was reinforced by the debt problems of its East
European partners, notably Poland. Soviet attitudes
toward trade with the West-especially the United
States-became even more cautious following the
sanctions imposed after the USSR's occupation of
Afghanistan in 1979 and the imposition of martial
law in Poland in late 1981.
Moscow's changing perception of the contribution of
Western machinery and equipment also played a
major role in the Soviet leadership's less favorable
attitude toward trade with the West. In the late
1970s, the Soviets started to express their disappoint-
ment over the failure of Western imports to contribute
significantly to industrial output. Some sectors experi-
enced difficulties in absorbing new technology. Even
in those areas where Western technology clearly
helped (computers, the automotive and chemical in-
dustries, oil and gas exploration, and development),
diffusion was minimal.
The net result of these factors was that, beginning in
1976, Moscow returned to a policy of holding down
borrowing in the West. During 1977-80, net debt to
the West actually declined by $800 million, while real
growth of machinery and equipment imports fell
considerably.
position with non-Communist countries (appendix A).
From 1981 to 1983
Moscow's policy of holding down borrowing from the
West was temporarily shelved in 1981 as imports of
farm products, particularly grain and meat, rose and
the steep rise in world prices for oil ended (see
appendix tables B-1 and B-2). Even though imports of
machinery and equipment fell sharply, the USSR's 25X1
net hard currency debt climbed by more than
$3 billion to $12.4 billion (see table 1). Apparently
because of a strong commitment to its Food Program
in a period of poor harvests, Moscow borrowed
heavily-mainly on short-term credits-to cover its
agricultural imports. However, it put off imports of
some nonagricultural commodities and started a cam-
paign to boost the volume of oil exports by reducing
exports to Eastern Europe and limiting domestic
supplies.
Moscow managed to turn its payments position
around in 1982 by sharply increasing exports of oil to
hard currency customers (see table 2). It was aided in
this by an improved harvest, which permitted a
reduction in agricultural imports. These changes en-
abled the Soviet Union to reduce its net debt to $10
billion in spite of substantial drawings on credit to
finance imports of Western machinery and large-
diameter pipe, paced by deliveries for the
Siberia-to-Western Europe natural gas pipeline.
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The USSR's balance-of-payments account position 25X1
continued to improve in 1983, even though deliveries
for the new export pipeline helped to push up imports
of machinery and equipment and to keep pipe imports
at a high level. Even so, real imports of machinery and
equipment probably remained below the 1976 level.
Total hard currency imports rose very little because
agricultural imports fell in the wake of a substantial
increase in agricultural production in the USSR.
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Table I
USSR: Estimated Hard Currency Debt to the West a
Government and 3,630 7,850
government-backed debt
a Our estimate of the USSR's gross hard currency debt at yearend
1983 is considerably lower than that put forth by the Organization
for Economic Cooperation and Development and the Bank for
International Settlements. We believe that most of the difference
between the two sets of estimates is a result of OECD/BIS
inclusion of the two CEMA banks and Finland in the amounts
outstanding. Differences in assumptions about amounts actually
drawn and the degree of double counting in the raw data also play a
part.
b Preliminary estimate.
The Soviets also have sizable assets in the form of gold reserves-
estimated at 2,200 tons valued at $24 billion at yearend 1984-and
20,865 20,000 20,500 20,200
outstanding credits to the less developed countries (LDCs) for the
purchase of civilian and military goods. Our estimates place LDC
hard currency debt to the USSR at yearend 1984 at roughly $17
billion. But a sizable portion (perhaps as much as half) of the $15
billion in outstanding military debt is owed by countries that may
well be unable to make scheduled repayments-for example,
Ethiopia, South Yemen, North Yemen, Peru, Tanzania, and Mo-
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Hard currency imports of grain dropped by more than
10 percent to 32 million tons valued at $4.9 billion.
Grain imports from the United States declined mark-
edly
The small increase in hard currency exports in 1983
was the result of an $800 million rise in the value of
oil exports (to $15.6 billion). The 13-percent rise in the
volume of gross Soviet oil sales to 1.4 million barrels
per day (b/d) was made possible, in turn, mainly by
reexport of larger oil imports from the Organization
of Petroleum Exporting Countries (OPEC) in partial
payment for past arms deliveries. Arms exports to the
less developed countries-which amount to approxi-
mately $7 billion or roughly one-fifth of total Soviet
hard currency receipts-probably increased slightly in
1983. Despite the improvement in the USSR's current
account position, Soviet net hard currency debt to the
West increased to an estimated $10.9 billion, largely
as a result of government-backed credits to finance
pipe and equipment purchases.'
From 1984 to 1985
Moscow's hard currency position remained healthy in
1984 as a 3-percent drop in exports was virtually
offset by a 2-percent fall in imports (see appendix
table B-3). Purchases from France, Italy, Japan, the
Netherlands, and West Germany dropped sharply as
deliveries of machinery and equipment and large-
diameter pipe for the new export pipeline were phased
out. Imports from Argentina, Brazil, and Canada-
all important agricultural suppliers-also declined or
leveled off, while those from the United States rose by
64 percent due to the rise in grain purchases. The
total hard currency grain bill for calendar year 1984
probably exceeded the 1983 bill by some $2 billion.
As for exports, the value of arms deliveries to the
LDCs fell by an estimated 4 percent. The volume of
hard currency oil exports increased by an estimated 5
percent, offsetting a 3-percent drop in average prices.
2 Estimates of hard currency debt exclude sums owed the USSR by
the LDCs for credits extended in support of Soviet military sales
and economic assistance. If the growth in Soviet net claims on the
LDCs was taken into account, the USSR's hard currency debt
position would have improved in 1983
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Table 2
USSR: Estimated Hard Currency Balance of Payments
Current account balance
Merchandise trade
balance
Other invisibles and
transfers
Capital account balance
on credits received
Gross drawings b
Government backed
Commercial
Repayments
Government backed
Commercial
Net change in assets
held in Western banks C
On credits extended
to the LDCs
Gold sales
Net errors and omissions d
-4,607
1,904
-4,797
1,714
27,978
31,977
32,428
31,614
27,778
27,544
27,715
27,439
-1,375
-1,200
-1,150
-1,050
760
900
1,000
1,100
1,100
1,100
5,805
720
6,371
2,865
6,200
2,450
4,300
3,600
1,972
2,195
2,000
2,850
2,800
2,500
4,399
670
4,200
-400
1,500
1,100
969
3,050
3,200
3,315
3,800
3,900
730
1,915
2,000
2,000
2,500
2,600
239
1,135
1,200
1,315
1,300
1,300
-395
-235
-715
-910
725
1,580
2,700
1,100
750
700
-1,198
-2,624
-4,800
-843
-2,858
-1,925
a Provisional estimate.
b Including additions to short-term debt.
A minus sign signifies a decline in the value of assets.
d Includes hard currency assistance to and trade with Communist
countries. In 1981, the USSR apparently granted hard currency
assistance to crisis-ridden Poland of $800 million to $1 billion.
"Errors and omissions" also includes credits to developed Western
countries to finance sales of oil and other commodities, as well as
errors and omissions in other line items of the accounts. Among the
omissions is an adjustment for fluctuations in the US dollar vis-a-
vis other Western currencies. A rough estimate indicates, for
example, that, if the data on gross credits drawn less repayments
and the increase in assets were adjusted for the exchange rate
effect, net credits drawn in 1982 would be -$1.4 billion to -$1.9
billion instead of the -$2.4 billion shown in the table. This in turn
would result in an increase of $500 million to $1 billion in outflows
under errors and omissions.
Data from the Bank for International Settlements
(BIS) indicate that, during the first nine months of
1984, net Soviet liabilities to Western commercial
banks fell slightly. At the same time, Soviet debt on
Western government and government-backed cred-
its-used mainly to finance purchases of equipment
and pipe-probably declined somewhat. We estimate
that by the end of the year the USSR's net hard
currency debt to the West had dropped by $500
million to $10.4 billion.
Moscow resumed substantial syndicated Euroloan
borrowing in the second half of the year after being
almost absent from this market since 1979. With the
revival of Western lending to Eastern Europe and the
greater availability of Eurofunds in 1983, Moscow
apparently decided to test the market by trying for a
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Table 3
USSR: Equipment Orders Placed
With Hard Currency Trading Partners a
Chemical and petro-
chemical equipment
metallurgical equipment
Metalworking and
4,779
5,866
3,783
2,818
2,674
2,641
6,830
3,774
2,237
1,091
190
397
4,288
1,326
835
67
4,262
4,358
3,461
1,986
2,484
2,244
2,542
2,448
1,402
1,024
1,629
1,818
1,628
702
305
1,028
641
363
a When comparing Soviet orders for Western equipment with
actual deliveries as shown in table B-2, the reader should bear in
mind that our information represents only a portion of total imports
and that lags-running from a few months to several years-exist
between the date a piece of equipment is ordered and the time it is
delivered.
b Includes orders for the Orenburg gas pipeline.
the USSR's short-term debt.
$150 million syndication. This syndication, concluded
in May 1984, was oversubscribed by $100 million.
Ultimately, the Soviets concluded six additional syn-
dications for a total of $900 million. The rates
charged the Soviets have been very favorable. We
believe that these loans were used primarily to replace
older higher interest credits and to help retire some of
The USSR's hard currency position could deteriorate
somewhat in 1985. Agricultural imports probably will
remain high. Grain orders already on the books and
anticipated agreements indicate that these imports
will be about 25 million tons in first-half 1985.
Machinery and equipment imports should remain at
about the 1984 level. Soviet equipment orders dropped
from $6.8 billion worth in 1981-when large orders
for the export pipeline were placed-to $2.2 billion in
1983 and to only about $1.1 billion in 1984 (see table
3). Oil exports may be down, and, if West European
energy demand continues to be soft, Moscow probably
will be unable to boost deliveries of natural gas
sufficiently to offset any sizable drop in oil revenues.
Why So Cautious?
Why hasn't Moscow abandoned its conservative trade
policy and imported more from the West, given its
robust hard currency position and pressing economic
difficulties? We do not know which factors are para-
mount, but the Soviets may:
? Be fearful of moving away from their ultraconserva-
tive borrowing policy. As already indicated, the
experiences of some of their East European allies-
notably Poland-have reinforced this concern.
? Wish to limit their dependency on hard currency
imports. Oleg Rakhmanin, first deputy head of the
CPSU Central Committee's Bloc relations depart-
ment, probably expressed a longstanding Soviet
attitude when he called recently for a joint CEMA
policy to ensure the Bloc's "invulnerability from the
West" by reducing imports to a "minimum."
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? Consider it of paramount importance to retain great
flexibility in their hard currency position, in the face
of uncertainties in the weather and in world mar-
kets. The USSR would have been hard pressed to
import the agricultural products it needed following
the poor agricultural performance of 1979-81 if oil
prices had weakened before they did.
? Want to maintain a safety net in case oil production
continues to fall or in case they see an urgent need
to come to the aid of one or more of their East
European allies.
? Be confident they can maintain satisfactory rates of
economic growth by maintaining imports from non-
Communist countries at about their current level,
while realizing moderate growth in net imports from
the Communist countries.
? Be skeptical about the extent to which imports of
materials or technology and equipment from the
West will help (a) break the many bottlenecks that
exist in industry, transportation, and agriculture
and (b) span technological progress.
Import Priorities, 1985-2000
Athough Soviet hard currency imports equal only
about 5 percent of the USSR's gross national product,
they have played a particularly important role in
compensating for shortfalls in farm production. Im-
ports of specialty steels and of large-diameter pipe for
the gas pipeline system also have been critical. The
share of machinery and equipment from hard curren-
cy countries in the USSR's total machinery and
equipment investment, however, has been declining
since 1976 and, according to our estimates, is now less
than 10 percent. Nevertheless, imports of Western
technology have undoubtedly helped Moscow deal
with some serious problems, notably in the energy
sector and in the chemical and automotive industries.
In addition, legal and illegal imports from the West-
such as dual-purpose electronic equipment-have aid-
ed the Soviets in modernizing their defense industries.
The extent to which the 1982 Food Program succeeds
in making the USSR more self-sufficient in agricul-
tural production will largely determine how much the
Soviets can spend on nonagricultural goods within the
conservative borrowing limits they seem to have es-
tablished. During the 1985-2000 period, we believe
the USSR will import sufficient quantities of farm
products to keep per capita consumption of quality
foods near present levels, purchase necessary industri-
al materials, and buy enough machinery and technol-
ogy to meet priority investment goals. If forced to
choose among these purchases because of hard cur-
rency constraints and continued unwillingness to in-
crease dependence on Western credits, Moscow prob-
ably would try to ensure its imports of grain and
feedstuffs at the expense of other farm products and
nonagricultural imports because of the higher priority
it has accorded in recent years to rationing demand
for quality foods, particularly meat. Its second priori-
ty probably would be the industrial materials needed
to prevent production bottlenecks, and the equipment
and technology to help develop and exploit energy
sources. Its third priority might well be equipment
and technology for other key areas, notably for the
agricultural and food industry sectors. At the bottom
of the list would be other machinery and equipment
and those nonfeedstuff farm products that are tempo-
rarily in short supply because of production problems.'
Agricultural Products. The USSR has been a net
importer of agricultural products since the early
1970s, and agricultural imports have claimed about
one-third of total hard currency purchases since 1980.
Grain-the USSR's largest farm product import-is
supplied mainly by the West and currently accounts
for nearly two-thirds of total Soviet purchases of farm
products for hard currency. The need for grain derives
' How much the Soviets can spend on less important commodities
will to some extent depend on relative prices of various imports. If,
for example, the nominal price of grain increases less rapidly than
the rate of inflation we have assumed, the Soviets would have more
room to purchase nongrain commodities. If the nominal price of
grain were to remain level-and assuming the Soviets buy on
average 30 million tons a year-while the average rate of inflation
remains at 5 percent a year, the Soviets would in 1990 realize a
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from the early years of the Brezhnev-Kosygin regime,
when the leaders promised consumers larger supplies
of meat and other livestock products but could not
supply them from domestic production.
Hard currency expenditures for nongrain agricultural
products-largely meat, butter, vegetable oil, sugar,
and soybeans and soybean meal-also have risen
sharply since the mid-1970s. Without these imports,
per capita availability of a variety of foods would have
declined substantially during 1979-82 and the average
diet would have been even more monotonous.
Moscow's need for grain is largely driven by the size
of the domestic grain crop, although a number of
other factors such as size of the animal inventory,
availability of other feeds, changes in feeding efficien-
cy, and quantities of meat, milk, and eggs to be
produced also help determine the need. We estimate
that Soviet grain production during the 1986-90
period probably will average 195 million tons annual-
ly. With a more favorable climate, such as that which
existed during 1976-80, grain production could aver-
age about 220 million tons per year; a less favorable
climate, such as that of the 1961-65 period, would
reduce average annual grain output to 165 million
tons.
Assuming no change in feeding efficiencies, a slight
growth in livestock herds, and an average annual
grain crop of 195 million tons, Moscow would need to
import an average of 35 million tons of grain annually
during 1986-90 to achieve plan targets for production
of meat, milk, and eggs. Meeting goals for production
of livestock products would, in turn, reduce the need
for meat imports to bolster per capita availability,
saving perhaps $300 million annually. Imports of
other farm products will depend on domestic produc-
tion and the extent to which the Soviet leadership is
committed to increasing per capita consumption lev-
els.
Industrial Materials. The USSR relies to varying
degrees on the West for imports of large-diameter
pipe, specialty steels, molybdenum, raw and interme-
diate phosphate materials, plastics, dyes, pesticides,
manmade fibers, and chemical catalysts. Total hard
currency purchases of tubular steel products reached
record highs in 1982 and 1983 with the construction
of the Siberia-to-Western Europe gas pipeline. Im-
ports of chemicals from hard currency countries have
declined in volume since 1980, but Moscow continues
to import substantial amounts of superphosphoric acid
to produce high-quality fertilizers.
In the near future, purchases of large-diameter (1,020
to 1,420 mm) pipe will remain critical for the con-
struction of gas pipelines. But, by the late 1980s, the
Soviets could be able to scale down pipe purchases as
domestic manufacturing capacity is put into opera-
tion. In addition to pipe, the Soviets will continue to
buy large amounts of cold-rolled sheet steel for the
machine-building and the automobile and other con-
sumer durables industries; tin plate for canning and
packaging; and various types of high-quality metal
products for use in transformers and electric motors.
Purchases of these products may decline after 1986 or
1987, when the Novolipetsk metallurgical plant is
expected to go into full operation.
We expect Moscow to continue to buy phosphate
materials, plastics, dyes, pesticides, manmade fibers,
and catalysts from the West. To this end, it has in
place a number of long-term trade and technical
cooperation agreements with Western firms calling
for major exchanges of products and technologies.
Among the most important is a $6.5 billion, 10-year
reciprocal trade agreement with the French firm
Rhone Poulenc to supply chemical equipment and
technology, pesticides, fertilizers, and animal feed in
exchange for such energy-intensive chemicals as
naphtha, ammonia, and methanol. Similar though less
extensive agreements have been signed with British
and Italian companies. Other raw materials needed
will include metal ores and alloying materials of
strategic importance to both civilian and military
industries, especially tungsten, molybdenum, and
manganese.
Machinery and Equipment. Moscow is likely to con-
tinue to import sizable quantities of machinery and
equipment from hard currency countries. We believe
that in the 1985-2000 period the Soviets will need
Western machinery and equipment for the energy
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industries, agricultural and food-processing indus-
tries, machine tool production, construction and trans-
portation projects, process control and other electron-
ics industries, and chemical production.
Moreover, Moscow has reason to increase total im-
ports of machinery and equipment to make up for
domestic shortages. Moscow no doubt expects much
of the increase in imports of machinery and equip-
ment to come from East European and other Commu-
nist countries, which now provide about two-thirds of
such imports. In real terms, purchases of equipment
from the Communist countries have increased about
12 percent a year since 1975. But the extent to which
Communist countries can continue to expand their
exports of machinery and equipment to the USSR is
still uncertain and will depend on how much they are
willing to restrain their own investment programs to
satisfy Soviet demands.
Nevertheless, the Soviet leadership perceives that
importing Western technology will have only a limited
impact on promoting efficiency and modernization.
Moscow is therefore likely to concentrate on improv-
ing the performance of Soviet research and develop-
ment and strengthening R&D ties with production
sectors. Thus, the Soviets will continue for the most
part to look to the West mainly for equipment and
technology that domestic and East European produc-
ers cannot manufacture at all or in sufficiently sophis-
ticated forms.
Limited Export Potential
Even though the USSR could put a rising volume of
imports from the West to good use, Moscow's real
hard currency purchasing power may well decline
through at least 1990. Although it could pick up in
the 1990s, it might still be below the present level by
the end of the century. To address the great uncer-
tainties involved in determining prospects for Soviet
oil and gas exports, we have developed alternative
scenarios that allow fairly wide ranges in availability
of oil for export and in West European demand for
natural gas.
Energy Exports. In 1983, the Soviet Union earned
nearly $19 billion in hard currency from sales of
crude oil, petroleum products, and natural gas to the
West. These exports accounted for more than half of
the USSR's total hard currency receipts. To project
their future hard currency earnings, we have devel-
oped three scenarios each for oil and gas exports to
the West. The scenarios for oil exports are based on
varying projections of domestic oil production and a
series of assumptions about the minimum oil needs of
client states in Eastern Europe and elsewhere and of
other soft currency trading partners, notably Finland.
The gas-export scenarios are based on our estimate of
the current capacity of existing pipelines to Western
Europe (the low case) and the probable maximum
amount of Soviet gas that could be absorbed under
conditions of rising demand and low indigenous pro-
duction in Western Europe (the high case) (see table 4
and inset for our projections of oil and gas earnings
and the assumptions underlying them).
The high gas-export scenario would require the con-
struction of the equivalent of two additional export
pipelines, as well as relaxation of Western concerns
about relatively high percentages of dependency on
Soviet gas and the absence of economically viable
Western gas supply alternatives.
In the case of high oil exports, we assume that the
Soviets-through a combination of new discoveries,
increased purchases of Western oil equipment and
technology, improved oilfield operations, and the pro-
duction of a small amount of synthetic liquid fuels-
manage to hold oil output at about the current level
through the end of the century; that is, 12 million b/d.
In the low oil-export scenario, we have assumed that
domestic oil production begins to decline gradually to
about 10 million b/d in the year 2000. Continued
oilfield operating problems, a more realistic view on
the part of the leadership of the high burden on the
economy of investment in the oil industry, and rapidly
deteriorating reserve quality would be consistent with
this scenario.
Under each production scenario, we assume that
Moscow can:
? Continue to substitute natural gas for oil and im-
prove the efficiency of energy use allowing only a
slight rise in domestic oil consumption through 1990
and holding it about level through 2000.
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Table 4
USSR: Hard Currency Earnings Projections
High Oil and Gas Exports Low Oil and Gas Exports Midpoint Oil and
Gas Exports
Invisibles receipts 2.0 2.5 2.8
(including interest receipts)
? Reexport OPEC oil as a way to settle trade accounts
for arms and other deliveries, although we see little
opportunity for sizable increases in reexports.
? Give a high priority to its client states, although
probably not as high as the requirements of the
domestic economy or hard currency exports.
? Meet the needs of non-Communist soft currency
countries such as Finland with which they have a
mutually beneficial trading relationship.
The outlook for Soviet exports of gas for hard curren-
cy is much better than that for oil sales. With 40
percent of the world's proved gas reserves and practi-
cally no foreseeable constraints on domestic output,
production will be determined by both domestic and
export demand. We have again considered two sce-
narios. Our low export scenario is based on the
projected level of deliveries under existing contracts
with some modest expansion in the 1990s up to the
capacity of existing or soon-to-be-completed domestic
and transit pipelines. The high export scenario as-
sumes not only a larger increase in West European
gas demand in the 1990s, but also the willingness of
West Germany, France, Italy, and possibly some
other countries to become dependent on the Soviet
Union for as much as one-half their gas supplies, as
well as the absence of large-scale Western alternative
sources of gas.
Prospects for Nonenergy Exports. ' The USSR's hard
currency earnings from exports of commodities other
than energy amounted to about $13.6 billion in 1983,
only two-fifths of its total hard currency receipts. We
believe that earnings from exports other than energy,
gold, and arms could be increased by as much as 3 to
4 percent a year. To achieve that increase, however,
the Soviets would have to allocate more investment
and manpower to a variety of industries when they are
short of both resources. In addition, Western demand
would have to be robust enough to accommodate a
large volume of Soviet sales. Because neither of these
conditions is likely to be met, we believe a more
realistic rate of real growth for these exports may be 0
to 2 percent per year. In the scenarios, we project
growth in the volume of nonenergy exports at 1.5
percent annually, a rate only slightly below the rough-
ly 2.4 percent yearly average recorded during the
1976-83 period.
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Assumptions Underlying Hard Currency
Balance-of-Payments Projections
Oil exports fall from 1.4 million barrels a day (b/d) in
1983 to (a) 900,000 b/d by 1990 and 800,000 b/d by
2000 in the high oil-export scenario, (b) 500,000 b/d
by 1990 and 200,000 b/d by 2000 in the low oil-
export scenario, and (c) 700,000 b/d by 1990 and
500,000 b/d by 2000 in the midpoint case.
Gas exports rise from 26 billion cubic meters (m3) in
1983 to (a) 54 billion m3 in 1990 and 120 billion m3 in
2000 in the high gas-export scenario, (b) 46 billion m3
in 1990 and 60 billion m' in 2000 in the low gas-
export scenario, and (c) 50 billion m3 in 1990 and 90
billion m' in 2000 in the midpoint case.
Real nonoil, nongas exports grow by 1.5 percent a
year in the 1985-2000 period after falling 7 percent in
1984.
Nominal gas prices drop from the 1983 level of $123
per thousand m3 to $115 in 1986 before returning to
$123 by 1990. They then (a) rise with the rate of
inflation through 2000 in the high and midpoint gas-
export scenarios or (b) rise with the rate of inflation
through 1995 and then at 7 percent a year in 1996- 25X1
2000 in the case of low gas exports.
The nominal gold price falls from $400 per troy ounce
in 1983 to $340 per troy ounce in 1984 to $300 in
1985 and then rises with the rate of inflation through
2000.
Interest rates average about 11 percent.
The 'average maturity structure is eight years on
Western government-backed credits and five years on
medium- and long-term commercial bank credits. F
rise 2 percent per year.
Real net earnings from invisibles (excluding interest)
grow by 2 percent a year during 1984-2000.
Gold sales rise from 60 tons in 1983 to 300 tons by
1988 and then level off
Real unrecorded expenditures and net lending to
LDCs are held at 15 percent-the average in 1980-
83-of earnings from merchandise exports (including
arms).
The overall annual inflation rate applicable to non-
energy exports and imports is 0 percent in 1984 and 5
percent in 1985-2000.
Nominal oil prices decline from $30.50 per barrel for
the mix of crude oil and petroleum products exported
to hard currency countries in 1983 to $28.55 in 1986
before returning to $30.50 in 1990. The price then
rises with the rate of inflation (5 percent per year) in
1991-95 and then at 7 percent a year through 2000.
Our projections, of course, depend a great deal on the
volumes of oil, gas, and gold sold. Each additional
100,000 b/d of oil sold would increase annual pur-
chasing power by an average of roughly $1 billion,
using the real prices we have assumed. Each addition-
al billion cubic meters of natural gas sold would yield
about $100 million in real terms. And for each
additional 50 tons of gold sold, real hard currency
receipts would rise by about $500 million.
The projections are also highly sensitive to world
market prices for oil, gas, and gold. Every $1 change
in the real price per barrel of oil changes Soviet hard
currency purchasing power in 1990 by about $330
2.5X1
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million under the high oil-export scenario; a reduction
of $5 per 1,000 cubic meters in the real price of gas 25X1
would result in a loss of $270 million in earnings.
Another $250 million in earnings would be forfeited if
the price of gold were $25 lower per troy ounce than
we have assumed. Conversely, the Soviets would 25X1
benefit if the real prices of their major export com-
modities were higher than we have assumed.
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The Soviets stand a fairly good chance of increasing
hard currency earnings from sales of precious metals,
nickel, chromium, and certain chemicals. The
USSR's exportable surplus of platinum-group metals
could well double by the end of the 1980s as a result
of sharply increased production. Moreover, the Sovi-
ets are guaranteed sizable earnings from chemical
exports as a result of long-term compensation and
buy-back deals with Western firms.
Moscow could also step up gold sales, which in 1983
amounted to an estimated 60 tons, worth $750 mil-
lion. Indeed, the Soviets could-without dipping into
reserves-sell about 300 tons a year but might be
reluctant to do so if such heavy sales threatened to
push the price down to an unacceptable level.
Chances are only slim, meanwhile, that the Soviets
will be able to substantially boost their hard currency
earnings from sales of machinery or to increase
earnings by transshipping cargoes by rail between
Europe and the Far East. Western demand for Soviet
machinery and rail services will probably remain
weak. Chances are also poor that the Soviets will be
able to increase sales of timber and agricultural
products. Real exports of these goods have declined
over the past eight years, and there are no indications
that they will pick up soon. Output of the timber
industry has been stagnating, and it does not appear
that Moscow is prepared to devote enough investment
to this sector to enhance its export capability.
Barring a radical change in the Third World political
scene, we likewise do not foresee any dramatic in-
crease in Soviet hard currency sales of arms to the
LDCs, at least over the next few years. Major hard
currency purchasers of military equipment-such as
Libya, Iraq, and Syria-are in financial difficulties
that could well prevent them from increasing these
imports. We do, however, foresee a continuation of
military sales and assistance programs. Indeed, mili-
tary assistance will remain a principal means of Soviet
entree in many countries, and we expect even more
aggressive sales campaigns in the future.
Continued Financial Conservatism
The Soviets have adhered to a conservative borrowing
policy since the mid-1970s, after a surge of borrowing
led to a rapid runup of debt. In current dollar terms,
the USSR's net hard currency debt to the West
soared from less than $1 billion at yearend 1972 to
$10 billion at yearend 1976 but has remained at about
that level to the present time. The ratio of debt service
to total hard currency receipts has fluctuated between
15 percent and 18 percent.
In Financing Scenario A (table 5), we assume that
Moscow continues this established conservative ap-
proach and holds the ratio of debt service to total hard
currency receipts at 20 percent or less.' Even under
the high oil- and gas-export scenario, Soviet import
capacity would decline slightly through 1990, before
picking up sharply in the 1991-2000 period. In the low
and midpoint oil- and gas-export scenarios, real im-
port capacity would decline considerably more before
rising throughout the 1990s. In the low-energy export
case, it would still be about 10 percent less than in
1983 by the year 2000.
Relief Through Western Credits?
Western credits could support sizable additional hard
currency imports if the Soviets become substantially
less conservative about borrowing. Moscow still enjoys
a good credit rating and probably would have little
difficulty in raising substantially more credits in the
West so long as they were used to support exports to
the USSR. Most West European governments proba-
bly will continue to back credits-mainly long term-
to finance machinery and equipment sales by their
firms to the USSR. And Western banks will probably
be willing to increase their short- and medium-term
exposure to Soviet banks if doing so increases their
customers' exports. Moreover, the Soviet Union can
raise additional untied Euroloans as long as the
market remains relatively liquid.
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Table 5
USSR: Hard Currency Import Capacity
Billion 1983 US $
(except where noted)
Low Oil and Gas Exports Midpoint Oil and
Gas Exports
20 19 19 19
22.4 24.8 24.4 28.6
Our second scenario assumes that Moscow will bor-
row what is necessary to maintain a constant level of
real imports (Financing Scenario B). In the most
optimistic export scenario, the USSR would have to
let its debt service ratio rise to about 25 percent by
1990 to hold real import capacity constant in 1984-90.
Moscow just might be willing to allow its debt service
to rise to this level if it foresaw relief shortly in the
form of improved export prospects. To maintain con-
stant real imports in the case of low and midpoint oil
and gas exports, however, the USSR would have to
permit its debt service ratio to climb to 39 percent and
36 percent, respectively, in 1990 and to 106 percent
and 62 percent in 2000.
The foregoing analysis suggests that-barring an
unforeseen surge in Soviet export earnings or a rever-
sal of its conservative debt management policies-
Moscow will be forced to accept some reduction in
imports from the West. If handled properly, such a
situation need not present the leadership with major
economic problems, however. Even with cuts in real
imports, we believe the Soviets-barring a series of
very poor harvests-still will be in the position to
import:
? All of the grain needed to allow for some growth in
per capita consumption of meat and other quality
foods.
? Sufficient quantities of industrial raw materials to
prevent bottlenecks from emerging, especially since
the USSR's own capacity for such important inputs
as specialty steels and large-diameter pipe should
increase sharply during the 1986-90 period.
? Essential technology and equipment for key invest-
ment areas.
Furthermore, Moscow should be able to partially
offset any reduction in Western imports by relying
more heavily on its Communist allies. The Soviets
continue to press Eastern Europe for increased im-
ports of machinery and equipment and other manu-
factured goods. Indeed, shipments of machinery to the
USSR increased substantially in each of the past two
years. In many cases, the Soviets may find East
European technology and equipment as well suited to
their purpose as Western equipment, because it is
more compatible with much of the already installed
machinery and East European engineers can more
easily assist in its installation and repair.
The USSR, in turn, could attempt to boost its hard
currency earnings:
? Though the leadership has publicly stated that it
will maintain oil deliveries to Eastern Europe during
1986-90 at the 1985 level, Moscow could reverse
itself and cut oil deliveries as it did in 1982.
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? Moscow might try stepping up its exports to the
West by pushing compensation deals as it did in the
mid-1970s or it could try to attract investment in
joint ventures. To gain Western interest, however,
the Soviets may have to allow Western contractors
to assume responsibility for all on-site work and/or
on-site quality control once production begins.
Alternatively, Moscow may reassess its borrowing
policies and allow a substantial rise in medium- and
long-term indebtedness. Such a decision is more likely
if the ability to repay such borrowing is assured
through compensation arrangements. However, the
leadership could well opt for allowing debt to rise
substantially if:
? It reverses current policy and embarks on an expan-
sionary investment program to improve long-term
growth prospects and reduce the technological lag.
? The East Europeans prove unable to boost equip-
ment exports or deal with cuts in energy deliveries.
? A series of domestic crop failures require unduly
hard choices between agricultural and nonagricul-
tural imports.
It is likely that, in the final analysis, Moscow will opt
to employ a combination of measures. Thus, it might
feel it can comfortably raise its debt service ratio-
say, up to 25 percent-to reduce the depth of import
cuts. At the same time, it could continue to press
Eastern Europe for modest concessions and perhaps
realize some gains from compensation deals and from
on-site Western contractors.
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Appendix A
USSR: Hard Currency Trade Partners, 1970-83 a
(as Reported by Partner Countries to the IMF)
Less developed countries
(continued)
Less developed countries
(continued)
Belgium
Algeria (1980 on)
Rwanda
Panama
Denmark
Angola (1977 on)
Senegal
Paraguay
Federal Republic of Germany
Benin
Sierra Leone
Peru
France
Burkina
Sudan
Trinidad and Tobago
Greece (1978 on)
Burundi
Tanzania
Uruguay
Ireland
Cameroon
Togo
Venezuela
Italy
Cape Verde (1978 on)
Tunisia
Luxembourg
Central African Republic
Uganda
Netherlands
Congo
Zaire
Cyprus
United Kingdom
Ethiopia
Zambia
Hong Kong
Other European countries
Equatorial Guinea
Latin America
Indonesia
Austria (1971 on)
Gabon
Argentina
Iraq.
Iceland (1977 on)
The Gambia
Bolivia
Israel
Malta
Ghana (1976 on)
Brazil
Jordan
Norway
Guinea-Bissau
Chile
Ivory Coast
Liberia
Dominican Republic
Malaysia
Libya
Ecuador
Nepal (1977 on)
Madagascar
El Salvador
Philippines
Malawi
Singapore
Sri Lanka (1977 on)
Thailand
Mexico
Yemen Arab Republic
Yemen, People's
Democratic Republic of
a Some of the Soviet trade with the hard currency LDC partners,
however, probably is on a barter basis. Conversely, part of the trade
with bilateral LDC partners may be on a hard currency settlement
basis.
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Appendix B
Table B-1
USSR: Hard Currency Exports
by Major Commodities
Total
Oil and oil products
Natural gas
Machinery and equipment
Wood
Chemicals
Agricultural products
Diamonds a
Military b
Other c
Total
Oil and oil products
Natural gas
Machinery and equipment
Wood
Chemicals
Agricultural products
Diamonds
2,824
9,780
27,784
27,978
31,977
32,428
430
3,391
12,295
12,232
14,808
15,577
14
220
2,704
3,968
3,673
3,209
176
538
1,234
1,189
1,380
1,411
389
739
1,500
1,016
848
854
64
243
768
783
703
742
192
547
458
553
593
436
175
478
1,304
NA
NA
NA
239
1,885
5,068
5,900
7,162
7,318
1,145
1,739
2,453
2,337
2,810
2,881
Million 1970 US $ d
2,824
3,690
5,295
4,980
6,015
6,200
430
530
675
640
870
980
14
100
295
320
315
300
176
265
450
430
500
510
389
375
335
200
175
175
64
150
395
385
430
500
192
250
105
160
200
135
175
280
375
239
930
1,840
2,145
2,555
2,610
1,145
810
825
700
970
990
c Includes diamonds from 1981 through 1983.
d Estimated.
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Table B-2
USSR: Hard Currency Imports
by Major Commodities
Machinery and
equipment b
967
4,593
6,039
4,523
6,114
6,998
Machinery and
equipment b
967
2,700
2,350
1,750
2,350
2,700
Chemicals
215
448
610
575
585
585
Fuels
16
75
45
25
85
130
a This value probably excludes sizable agricultural imports that
cannot be identified and are included under the residual in
nonagricultural imports.
b Excluding purchases for the Orenburg gas pipeline; such imports,
however, are included in the total.
c Estimated.
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Table B-3
Soviet Hard Currency Trade With Selected Countries
Million US $
1
980
1981
1982
1983
1984
E
xports Imports
Balance
Exports
Imports
Balance
Exports
Imports
Balance
Exports
Imports
Balance
Exports
Imports
Balance
Total 2
7,784
26,070
1,714
27,978
27,778
200
31,977
27,544
4,433
32,428
27,715
4,713
31,614
27,439
4,175
Developed West 2
1,818
21,514
304
21,248
21,586
-338
22,866
22,100
766
23,314
21,719
1,595
23,454
21,383
2,072
Of which:
Australia
9
1,194
-1,185
16
748
-732
19
703
-684
16
546
-530
27
592
565
Austria
894
610
284
1,187
705
482
931
739
192
764
1,063
-299
944
1,096
-152
Belgium
1,297
590
707
1,038
625
413
1,424
790
634
1,337
825
512
1,473
616
857
Canada
46
1,496
-1,450
69
1,914
-1,845
29
1,902
-1,873
33
1,725
-1,692
23
1,726
-1,703
France
3,453
2,326
1,127
3,509
2,314
1,195
3,074
1,749
1,325
3,270
2,332
938
3,010
2,186
824
Italy
3,235
1,438
1,797
3,453
1,393
2,060
3,893
1,687
2,206
4,048
1,939
2,109
3,882
1,629
2,253
Japan
1,463
2,730
-1,267
1,135
3,076
-1,941
1,044
4,038
-2,994
1,114
2,937
-1,823
1,033
2,527
-1,494
Netherlands
1,582
555
1,027
1,417
637
780
2,076
496
1,580
1,653
661
992
1,983
340
1,643
Sweden
547
496
51
405
482
-77
565
476
89
881
344
537
693
334
359
Switzerland
686
620
66
460
691
-231
763
567
196
689
466
223
666
504
162
United Kingdom
1,323
1,467
-144
897
1,193
-296
1,122
1,038
84
1,600
853
747
1,713
1,008
705
United States
233
2,081
-1,848
255
2,310
-2,055
214
2,859
-2,645
446
2,120
-1,674
376
3,480
-3,104
West Germany
4,767
4,603
164
5,053
3,757
1,296
5,610
4,020
1,590
5,490
4,536
954
5,579
4,152
1,427
LDCsa
5,966
4,556
1,410
6,730
6,192
538
9,111
5,444
3,667
9,114
5,996
3,118
8,160
6,056
2,104
Of which:
Argentina
47
1,790
-1,743
43
3,298
-3,255
38
1,747
-1,709
35
1,755
-1,720
32
1,358
-1,326
Brazil
34
390
-356
23
742
-719
248
573
-325
144
797
-653
117
458
-341
Iraq
729
399
330
1,259
5
1,254
1,347
25
1,322
504
516
-12
336
823
-487
Libya
252
443
-191
264
502
-238
305
1,534
-1,229
357
1,369
-1,012
172
1,394
-1,222
a Including military deliveries not broken Out by country.
Source: Official Soviet foreign trade statistics.
17 Secret
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