THE USSR'S INTERNATIONAL ECONOMIC BREAKOUT

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• Collection: General CIA Records
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• Document Page Count: 22
• Document Creation Date: December 22, 2016
• Document Release Date: March 6, 2012
• Sequence Number: 1
• Publication Date: January 1, 1987
• Content Type: REPORT

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Directorate of ~~
Intelligence
The USSR's International
Economic Breakout
An Intelligence Assessment
SOV 87-/OOOSX
January 1987
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Directorate of Secret
Intelligence
Economic Breakout
The USSR's International
This paper was prepared by
the Office of Soviet Anal sis
Division, SOVA
Comments and queries are welcome and may be
directed to the Chief, Economic Performance
Secret
SOV 87-/OOOSX
January 1987
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The USSR's International
Economic Breakout 25X1
Key Judgments The USSR has embarked on awide-ranging campaign to increase its role
ln/ormation available in international economic affairs. It has restructured its foreign trade
as of 19 December 1986 apparatus, proposed new forms of economic cooperation with Western
was used in this report.
firms, expanded its use of international financial instruments, and applied
to participate. in the General Agreement on Tariffs and Trade (GATT).
These initiatives reflect, in part, a new generation of Soviet leaders who are
willing to consider more active tactics in pursuit of their economic and
political goals. The sharp drop in hard currency revenues from energy
exports has added further impetus to pursuing new trade and financial
avenues.
The course of future Soviet activity in the world economy will depend, in
large part, on decisions regarding the role of Western technology and
equipment in Gorbachev's modernization drive. The leadership will proba-
bly spend the next year or two gaining experience and expertise in the
international financial arena as well as assessing continuing domestic
programs before deciding whether or not to abandon its conservative
positions regarding reliance on foreign technology, Western participation
in the economy, and its willingness to substantially expand indebtedness to
the West.
Until the Soviets settle on a long-term economic strategy for dealing with
the West, we can expect cautious but steady expansion of activity in the in-
ternational arena. In the interim, we judge that actions by Moscow are
unlikely to achieve its stated goals of greatly expanding exports of
manufactured goods, raising the quality and technical level of its domestic
output to world standards, or attaining recognition as a major economic
and trading power:
? While the recent reorganization of the foreign trade apparatus will
probably speed up contract negotiations and better serve the needs of the
end users, the changes do not remedy the lack of domestic incentives for
producers, the distorted price structure, and the inadequate technological
base that underlie the poor position of Soviet-manufactured goods in
world markets.
? Moscow is likely to take a more flexible approach to its financial
activities, but present limitations on hard currency earnings, coupled with
some vestiges of traditional Soviet conservatism, are likely to restrict any
large-scale speculative approaches to financial management.
Secret
SOV 87-10005X
January 1987
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? To date, provisions for joint ventures do not appear to offer sufficient
incentives to Western businessmen to invest more than token amounts in
the USSR. Even with attractive joint-venture regulations, the level of
investment is likely to be too small to have much impact on Soviet exports
of manufactured goods.
? Lackluster Soviet trade performance, combined with continued central
control over trade activities, will undermine efforts to join GATT and
other international economic organizations as well as to advance propos-
als for international economic security through the United Nations and
other international bodies.
Even gradual expansion of activities in the near term, however, would have
important implications for US policy interests:
? Greater interest by Western firms in the success of any joint ventures is
likely to improve the assimilation of Western technology at given Soviet
enterprises and could increase the flow of controlled technology to the
USSR. Moreover, joint ventures established outside the USSR or
subsidiaries of joint ventures in third countries could give Soviet techni-
cians greater access to controlled technology.
? Greater involvement in international trade and financial markets would
make it easier for Moscow to hide the level of its financial activities
through the use of numerous instruments, such as interbank deposits or
borrowing from nonbank institutions and banks that do not report to
international financial bodies.
? A higher level of activity in the international economy, especially in
international forums, will provide Moscow with new opportunities for
political activism. In addition, a larger number of Soviet officials in the
West increases the potential for KGB activity.
US interests could be challenged to a greater degree should the regime
decide that its piecemeal approach has not worked and that it must rely
more heavily on Western technology and equipment for its modernization
efforts to succeed. Such a turn to the West might be accompanied by
greater domestic economic reforms. Under such circumstances, we would
expect to see a much bolder Soviet entry into the international economic
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arena, a major increase in the flow of Western technology to the USSR,
and a boost in Soviet activity in world financial markets. Such a policy
might make the Soviets more flexible on selected East-West issues,
although flexibility is likely to be constrained by an expressed Soviet policy
aim of reducing vulnerability to Western economic leverage.
Even without a major expansion of economic links to the West, increased
Soviet understanding of international financial and commercial markets
carries a risk that Moscow may attempt to manipulate these markets to the
detriment of US national security interests. The West has been moving
rapidly toward globally integrated financial markets, and this has created a
potential for Soviet misuse of the system, such as the placement of false
data or tampering with the worldwide transmission of data. We believe the
probability of such an action would be small as long as the USSR's
growing involvement is paying dividends. Indeed, to the extent that its
growing activities on international markets tie the USSR closer to the
world economic community, the West probably benefits since the Soviets
have a greater stake in working to solve problems within the system.
Moscow's stake, nonetheless, is not likely to weigh heavily in decisions
where political and strategic interests are involved.
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Contents
Page
Key Judgments
iii
Soviet Motivations
1
Efforts To Improve Trade Effectiveness
1
Reorganizing the Foreign Trade Apparatus
1
Redefining Joint Ventures With the West
2
Developing Financial Sophistication
4
Expanding Ties to Multilateral Economic Institutions
8
Future Soviet Actions
11
Implications for the United States
12
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The USSR's International
Economic Breakout
In a sharp break with tradition, Moscow has recently
launched a spate of initiatives that collectively por-
tend amajor expansion in the breadth and depth of its
participation in international economic and financial
activity. Many of its actions have received widespread
publicity-the application for participation in the
General Agreement on Tariffs and Trade (GATT),
the restructuring of the foreign trade apparatus,
provisions for joint ventures, and the unexpected
settling of outstanding Czarist bonds. At the same
time, the Soviets have quietly worked with Western
banking and trading institutions to examine ways to
expand the range of financial instruments available to
finance Soviet hard currency imports.
Soviet Motivations
While many of these initiatives had been considered
in the past, it has taken a new generation of Soviet
leaders to diverge from a tradition of over 60 years of
conservative approaches to trade and diplomacy.
Heightened Soviet interest in expanding economic
links to the West can be ascribed to several factors:
? Changes in senior economic management have re-
sulted in the ascendancy of action-oriented individ-
uals who realize that new tactics must be used to
meet Soviet economic challenges, particularly mod-
ernization and accelerated growth. A revamped
foreign policy apparatus is also taking a more
dynamic approach to Soviet international affairs,
including economic issues.
? The reorganization of key domestic economic sec-
tors and the foreign trade apparatus is an effort by
Gorbachev to streamline the bureaucracy and to
allow it to respond to these challenges. The new
trade policy team probably realizes that Soviet goals
in the international arena have been frustrated in
the past by conservative and ideologically con-
strained approaches and, in general, by a relative
ignorance of the operations of the international
financial and commercial markets.
? The need to develop a competitive Soviet export
sector for manufactured goods has increased the
pressure for Soviet representation in international
economic organizations. Moscow feels that its cur-
rent reliance on raw material exports for the bulk of
its trade earnings is not consonant with its level of
economic development and, moreover, makes it too
vulnerable to fluctuations in world commodity
prices.
? The recent deterioration in the Soviet hard currency
position, the result of reduced earnings from both oil
exports and arms sales, has encouraged the Soviets
to explore alternative sources for financing imports.'
Efforts To Improve Trade Effectiveness
Reorganizing the Foreign Trade Apparatus. In late
September 1986 the Soviets announced a major over-
haul of the Ministry of Foreign Trade (MFT). More
than 20 ministries and 70 large associations and
enterprises have been granted authority to conduct
trade directly with their foreign partners as of
1 January 1987. To carry out this trade, the ministries
and production associations will have foreign trade
organizations placed under their jurisdictions, many
of which will be transferred from the MFT.
Breaking the MFT's monopoly over foreign trade is
clearly tied to Soviet efforts to expand exports of
manufactured goods by strengthening the link be-
tween producers and world markets. In addition, it is
designed to improve the efficiency of importing West-
ern technology by giving end users more say in
contract negotiations. Under the current system, ne-
gotiations are drawn out, and purchases often do not
meet the requirements of end users, because price
considerations of the foreign trade organizations win
out over technical specifications
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Table 1
Soviet Ministries With Direct Access to
Foreign Trade Partners, as of 1 January 1987
Gossnab (State Committee for Material and Technical Supplies)
Gosagroprom (State Agro-Industrial Committee)
GKNT (State Committee for Science and Technology) a
Goskomsport (State Sports Committee) e
Goskomizdat (State Publishing Committee) a
Machine-building ministries
Minenergomash (Ministry for Power Engineering)
Mintyazhmash (Ministry of Heavy Machine-Building Industries)
Minelektrotekhprom (Ministry of Electrical Equipment Industry)
Minavtoprom (Ministry of Automotive Industry)
Minselkhozmash (Ministry of Machine Building for Agriculture)
Minpribor (Ministry for Instrument Making and Automation)
Minstankoprom (Ministry for Machine Tool Building Industries)
Minkhimmash (Ministry of Chemical and Petroleum Machine
Building)
Minmorflot (Ministry of Merchant Marine) a
Minrybkhoz (Ministry of Fisheries) e
Mingeo (Ministry of Geology)
GUGK (Main Administration of Geodesy and Cartography)
Minkhimprom (Ministry of Chemical Industry)
Minstroimaterialov (Ministry of Building Materials Industry)
Minmedbioprom (Ministry of Medical and Biological Industries)
Tsentrosoyuz (The Central Union of Consumer Cooperatives) a
e Entities previously having some control over their foreign
economic relations.
Included in the list of ministries being granted the
right to conduct trade directly are the State Agro-
Industrial Committee (Gosagroprom), the State Com-
mittee for Supplies (Gossnab), the Ministry of Chemi-
cal Industry, and several machine-building ministries,
although their precise roles have yet to be defined (see
table 1). The Soviets have publicly indicated that, at
least for the present, the MFT will continue to control
trade in raw materials, food, and about 60 percent of
machinery imports.
Gosagroprom will acquire control over
all agricultural trade, which would further reduce the
MFT's power. It is expected that, in time, additional
ministries and enterprises will be granted autonomy
At present it is uncertain exactly how funds are to be
allocated to cover imports, but it appears likely that
distribution of funds among the various sectors of the
economy will continue to be centrally determined. Six
billion rubles reportedly will be allocated to selected
ministries and enterprises-presumably to at least
some of the ministries and enterprises being granted
authority to conduct trade independently-to finance
trade transactions for an unspecified time, possibly a
year. Failure to meet export targets, however, will
result in a reduction in allocated funds. Selected
ministries and enterprises will be able to retain up to
90 percent of export earnings-although the US
Embassy in Moscow indicates that this will pertain
only to above-plan exports-and Vneshtorgbank
(VTB-the Bank for Foreign Trade) can extend them
credits.
As part of the reorganization, the Soviets have creat-
ed acoordinating commission made up of the heads of
the major ministries and departments engaged in
trade activities (see table 2). It is supposed to provide
strategic guidance to the foreign trade sector; its
command over resources, however, appears to be far
less than that accorded the state committees formed
to oversee agriculture and construction. The commis-
sion's clout has been enhanced by the naming of
Vladimir Kamentsev, a recently appointed deputy
chairman of the Council of Ministers with reportedly
strong administrative and negotiating skills. The
MFT and the State Committee for Foreign Economic
Relations (GKES~which administers economic and
military programs-will continue to monitor foreign
trade operations but, at least for the MFT, with
reduced power: GKES, on the other hand, is to
oversee cooperation projects on Soviet territory in
addition to construction projects overseas. VTB ap-
pears to have gained a greater role in controlling the
distribution of scarce hard currency funds.
Redefining Joint Ventures With the West. Moscow is
likely to complement increased end user autonomy
with the capability to conclude joint ventures with
Western firms. The Soviet leadership has passed a
decree that will permit up to 49-percent foreign equity
and allow for some foreign management and quality
control, repatriation of profits, and other prerequisites
over their trade transactions.
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Table 2
Composition of the State Foreign
Economic Commission
Chairman First Deputy Chairman
V. M. Kamentsev A. K. Antonov
USSR Council of Ministers Council of Ministers and USSR
Representative to CEMA
State Committee for Science Gosplan
and Technology First Deputy Chairman
Chairman
Gosagroprom Ministry of Foreign Trade
First Deputy Chairman Minister
Machine-Building Bureau Ministry of Finance
Chairman Minister
Vneshtorgbank (VTB) Gossnab
Chairman First Deputy Chairman
State Committee for Foreign Ministry of Foreign Affairs
Economic Relations Deputy Minister
Chairman
to make such ventures attractive to Western firms.
The Soviets see several advantages to such a
relationship:
? Partnership with a Western firm would provide
access to established markets and trademarks that
could make it easier to sell Soviet-made goods in the
West.
? Quality control by the Western partner would help
assure that products meet world market standards.
? Along-term equity relationship with a Western firm
could allow for automatic updating of production
lines to keep up with changing Western demands
and technology.
? Joint ventures would also allow for transfer of
technical know-how related to organization and
management of production and the use of advanced
technology, neither of which is easily transferred
through traditional equipment purchases.
? Such arrangements would allow for the transfer of
Western technology at little or no hard currency
cost to the Soviets until after production begins.
The Soviets have set down some general guidelines for
the operation of joint ventures, although most details
remain vague. Capital contributions from the West
reportedly will take the form of equipment, technol-
ogy, or financing; and the USSR's share will include
spending on "social infrastructure." Management of
the joint enterprises will consist of a board with
Soviets occupying the positions of both chairman and
director-general.
According to the Soviet press, production plans for
joint ventures will not be set by central planners, and
purchases from and sales to domestic enterprises are
to be conducted through foreign trade organizations
with prices set at world levels, thus effectively segre-
gating these enterprises from the rest of the domestic
economy. At the same time, joint ventures will be
required to abide by Soviet law in setting wages, hours
of work, and vacation time for Soviet workers.
ogy.
The Soviets have expressed particular interest in
establishing joint ventures in chemical manufactur-
ing, machine building-including equipment for the
energy sector-wood processing, electronics, commu-
nications, and the light and food industries. Soviet
officials say they are currently considering over 100
joint-venture proposals from Western firms, including
those from the United States, Japan, Italy, Germany,
and Sweden. Negotiations on these proposals are still
in the preliminary stages, although a few letters of
intent have been signed. Import substitution will play
a major role in joint-venture decisions by the Soviets,
but they also expect that the venture will generate
sufficient exports to at least cover hard currency costs.
Soviet trade officials have also proposed to Western
businessmen on several occasions that joint ventures
in the West be established to market Soviet technol-
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Although such joint ventures have strong appeal to
many Soviet officials, there are several other types of
arrangements that would provide many of the same
advantages. For example, buy-back and coproduction
arrangements would allow for access to Western
technology but with less direct Western involvement.
Indeed, many of the discussions under the rubric of
joint ventures appear to be little more than coproduc-
tion or buy-back arrangements in the manufacturing
sectors. For example, an agreement with a Finnish
firm for the construction of apaper-producing factory
that has been touted as a joint venture calls for the
Finns to provide equipment in return for delivery of
25 percent of the annual production as payment, an
arrangement that probably differs little from earlier
compensation agreements.
The purchase of Western management services could
also improve Soviet efficiency in introducing new
technological processes and organizing production.
Such arrangements should be particularly attractive
to the Soviets in key sectors of the economy where
they might desire to limit the extent of Western
involvement, such as in agriculture and the develop-
ment of raw materials. Discussions along these lines
began late in 1985, but there has apparently been
little followup since the drop in oil prices and in-
creased interest in joint ventures.
The Soviets are also increasing their efforts to pro-
mote the formation of joint enterprises with other
members of the Council for Mutual Economic Assis-
tance (CEMA). Some progress seems to be at hand,
but most East European countries probably see these
efforts as attempts by Moscow to lay heavier claims
on their manufactures (see inset on Soviet-East
European joint enterprises).
Developing Financial Sophistication
Although the degree of actual borrowing has yet to be
determined, Gorbachev's financial managers are
clearly interested in taking full advantage of the wide
range of Western financial markets and instruments
to improve the effectiveness of Soviet borrowing activ-
ities (see table 3). Past financial managers were
extremely conservative in their financial dealings with
the West-relying heavily on Eurocurrency borrow-
ings, promissory-note financing, and government-
backed credits-and seemingly obsessed with obtain-
ing the lowest nominal interest rate (to the point of
allowing a substantial compensating markup in the
cost of imported equipment). As a result, the USSR
often paid more for its funds, despite the nominally
low interest rate, and received greater adverse publici-
ty in doing so than other borrowers with an equal
credit risk.
As part of its decision to broaden its financial deal-
ings, Moscow is moving aggressively to build the
requisite expertise.
cow reports that Yuriy Ponomarev, considered by
Western bankers to be quite knowledgeable as well as
a risk taker, has been promoted to a key banking
position. This appointment is another sign that Mos-
cow may become more innovative in international
finance.
VTB and Soviet-owned banks in the West are already
adopting a more sophisticated approach:
? They are participating in swaps involving exchanges
of obligations in various currencies as well as substi-
tution of fixed for variable interest rates-a method
of diversifying the debt portfolio.
? Moscow Narodny Bank, the Soviet-owned bank
based in London, recently put together a $100
million note issuance facility (NIF), a new instru-
ment incorporating an option to issue notes as well
as raise cash through bank advances. VTB has also
recently accepted a French proposal to organize its
own NIF.
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Soviet-East European Joint Enterprises
To promote intensive economic development, Moscow
highlighted increased cooperation between Soviet and
East European enterprises at the CEMA summit in
June 1984 and later as part of CEMA's heralded
Long-Term Economic, Science, and Technology Pro-
gram. During the signing of the program in December
1985, the USSR and five other CEMA members
announced thelormation of a multilateral production
association, Interrobot, to develop and produce robot-
ics. The Soviets have also signed agreements for
bilateral enterprises such as `Robot" with Czecho-
slovakia and two machine tool production associa-
tions with Bulgaria. Despite the fanfare accorded the
announcements, these associations represented only a
modest move toward direct enterprise links envi-
sioned by Moscow and probably varied little from
longstanding specialization arrangements within
CEMA.
A more recent decree, however, outlines Moscow's
strategy for removing obstacles and creating incen-
tives to accelerate the formation of enterprise-to-
enterprise ties among socialist countries:
? Selected Soviet associations and enterprises will be
given the right to formulate projects and seek
partners in other CEMA countries.
? Organizations will be free to negotiate and sign
contracts for volumes and prices of goods and
services under joint projects.
? Firms will be.financially independent, with revenue
remaining under the control of the enterprises-
exceptfor small deductions going to sector
ministries.
? Profits made by enterprises will be distributed in
proportion to participants' contributions.
In addition the Soviets signed bilateral agreements
with most East European countries at the annual
CEMA premiers' meeting in early November 1986
that are designed to promote direct ties. These sign-
ings, coupled with the recent decree, would appear to
go far in opening the way for increased Soviet-East
European cooperation. Other critical issues hamper
direct links-as evidenced by criticism at the pre-
miers' meeting on the slow progress in implementing
cooperative agreements-and must still be resolved.
Art~cial prices and exchange rates complicate the
valuation of labor and capital between countries and
may lead to disputes over profit sharing. Input de-
mand by joint firms that are ostensibly free to set
their own output levels may be at odds with centrally
decreed plans.
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Table 3
Soviet Financial Options
Cash, demand deposits, time Readily available pool of funds, Low to no interest earnings. Large percentage of assets in
deposits boosts credit rating, requires no these types of accounts.
special expertise to administer.
Higher interest rates, longer Risk of capital loss if bonds sold VTB invested $3.2 million in
terms, low risk. Requires little before maturity. Finnish bond in August for first
management. time. Soviet-owned banks in the
West permitted to hold some
Western bonds.
Hard currency loans Best rates available. Few creditworthy borrowers, Largely lending to client states,
less liquid than other asset with little participation by
types. Soviet-owned banks in interna-
tional syndicates.
Other-such as real estate, Possible large capital gains, High risk, illiquid; requires ex- Relatively inactive except for a
commodities, futures, options portfolio diversification. peruse and management skills. few unsuccessful real estate
ventures and gold speculation
by Soviet-owned banks, with
large losses. Activity now most-
ly confined to dealings in for-
eign exchange and gold options.
Attractive commerical rates. Deposits must be rolled over Active users of interbank mar-
Some potential for obscuring and interest paid in short inter- ket, but evidence that deposits
sources and uses of funds. vats. Bankers expect offsetting and credits balance out.
deposits.
Bank lines of credit Competitive interest rates, no Reported in BIS statistics. USSR taps this market heavily
publicity, flexible. Usually not and has ties to West German,
tied to trade. Austrian, and Japanese banks.
Government-backed credits Subsidized, below market; at Requires cash downpayment. Before 1975, all loans had gov-
fixed rates with terms of up to Inflexible, tied to imports. ernment backing. Since then,
12 years. USSR categorized as rich coun- over 50 percent of USSR's net
try-higher rates. debt has had government
backing.
Attractive interest rates, repay- Reported in BIS statistics; up- Heavy use in mid-1970s to fi-
ment terms, and loan amounts. front commissions and fees. nance large projects. Cut back
in early 1980s but reentered in
1984 with heavy use in 1985.
Promissory-note financing Readily available export financ- Inflexible since they are tied to Heavily used in the mid-1970s
ing, some of which may be eligi- import purchases. Usually re- and again more recently. Some
ble for government guarantees. quires cash downpayment. Of- of the paper is sold at a discount
Notes held privately are not re- ten no control over creditors in the a jorjait market. The
ported in BIS statistics. since paper may be traded. Soviets try to control the
amount of paper by purchasing
as much as possible.
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Table 3
Soviet Financial Options (continued)
borrower not limited to draw-
down at specific times. Pur-
chases may be made from any
supplier for eligible goods.
Lower rates than syndicated
loans with wide range of op-
tions: fixed or floating rates,
range of repayment terms, and
public or private offerings.
Nonbank-held bonds not re-
ported to BIS.
Multiple-option facilities (note Incorporates several types of
issuance facilities-NIFs) loan facilities at option of bor-
rower: notes issuance, cash ad-
vance, or revolving credit. Bor-
rower may request banks to bid
competitively or may take pre-
determined rate of interest.
Several currencies usually
available-no need for interest,
debt, or currency swaps.
Medium-term funds only with
restrictions on purchases.
If public offering, widespread
publicity may affect credit rat-
ing.
Lenders have option to cancel
facility after some preagreed
time period. Borrower cannot
lock in low rates for long terms.
Fees payable to arrangers quar-
terly, irrespective of utilization.
Also, utilization fees assessed.
VTB's first bankers' acceptance
in August 1985 was with US
and Canadian banks, followed
by August 1986 acceptance
with British banks.
Moscow Narodny Bank
launched floating rate, private
placement bond in May 1986.
Rumor that VTB will soon offer
long-term fixed-rate bond.
VTB has not yet borrowed in
this manner. Moscow Narodny
Bank issued its first NIF
through its Cayman office on
15 August 1986.
? Last year the Soviets agreed to an acceptance
facility-a financing technique in which the bank
guarantees payment to exporters for trade docu-
ments-with US and Canadian bankers for grain
purchases. In August 1986, VTB arranged a 100-
million-pound-sterling bankers' acceptance led by a
British bank, the first time the Bank of England has
permitted the Soviets to borrow in this manner.
issuance of Soviet bonds.
The Soviets are also making unprecedented moves in
world bond markets. In August 1986, VTB agreed to
invest $3.2 million in ayen-denominated bond issue,
marking the first entry of the USSR into the interna-
tional bond market. Most financial analysts believe
that this venture is an indicator of Moscow's interest
in marketing its own bond issues, a cheaper source of
long-term funds than syndicated borrowing. Recent
settlement with the British on Czarist bonds in default
since 1917 removes a longstanding impediment to the
The Soviets appear to have recognized that more
sophisticated financial dealings entail expanding their
presence in the international financial arena. Soviet
banking authorities have renewed efforts to establish
a branch of VTB in Tokyo and have been negotiating
with Kuwait to establish joint banking operations to
fund projects in the USSR and in third world coun-
tries. Moscow Narodny Bank has reportedly opened a
subsidiary in the Cayman Islands to take advantage
of the tax break offered in the issuance of new
financial instruments. Moscow is also seeking financ-
ing from nonbank institutions: MNB has requested
direct loans from Japanese insurance companies to
VTB to finance Japanese exports to the USSR.
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Expanding Ties to Multilateral
Economic Institutions
The Soviets are exploring the possibilities of expand-
ing ties to a number of international economic institu-
tions. To some extent, increased participation in these
bodies goes hand in hand with Moscow's efforts to
enhance its ability to boost exports. Such membership
also provides Moscow with an opportunity to both
expand its knowledge in this area and to gain new
forums to promote its political interests. Soviet actions
to date on this front, however, do not appear to be as
well thought out or as carefully planned as other
recent trade moves. In particular, years of neglect
probably have left Moscow without a clear under-
standing of the costs and benefits of association with
some of these international institutions. For example,
Ivan Ivanov, ahigh-ranking official on the newly
created State Foreign Economic Commission, told US
Embassy officers that there were only three or four
Soviet experts on GATT.
Despite recent rebuffs, the Soviets' interest in GATT
remains keen. The Soviets apparently believe that
membership in GATT will expand their general
knowledge of world economic conditions and trade
opportunities. In their view, it will also help to
integrate the USSR into the international economy by
making Soviet exports eligible for reduced tariffs and
numerous other trade benefits that accompany GATT
membership. Further, the coming round includes ne-
gotiations on services that could affect Soviet activi-
ties in international shipping. They may also believe
that GATT membership would make them less vul-
nerable to economic sanctions.
Meeting GATT membership criteria would prove
difficult, however, despite arguments by the Soviets
that their recent reorganization of the foreign trade
sector makes the Soviet economy more compatible
with the aim of GATT. Although the reorganization
could help improve the efficiency of Soviet foreign
trade, crucial trade decisions remain centrally con-
trolled. Thus, the Soviets have still not accepted the
concept of free trade, which forms the basis of GATT.
It is also unclear whether Moscow would be willing to
provide the detailed statistics and trade policy de-
scriptions required by GATT. Moreover, with no
meaningful tariffs or quota systems, the Soviets have
few direct concessions that they can offer for acces-
sion to GATT. Such Soviet concessions would have to
incorporate commitments to increase imports from
GATT signatories, which other centrally planned
countries who have joined GATT have acceded to,
such as Poland and Romania. The Soviets would have
difficulty meeting such commitments, however, given
current hard currency problems and only a limited
potential for expanding exports.
While the Soviets would probably view their initial
participation within GATT as an economic learning
experience, in time Moscow might bring a strong
political element to the organization. The meetings
could be used to criticize US actions or upset the
GATT decisionmaking process-which relies on con-
sensus rather than votes-in favor of developing
countries. Such activity has been common Soviet
practice in some international forums and would
complicate procedures in an organization that has
been unusually successful in avoiding politicization
(see inset on Soviet activities in other international
bodies)
Although there has been some reported interest in
joining the International Monetary Fund (IMF), Sovi-
et officials have denied any intention of seeking
membership. The USSR rejected IMF membership as
too restrictive after participating in the organizational
meetings at Bretton Woods, New Hampshire, in
1944. In particular, the USSR was unwilling to give
up autonomy in setting its own trade and exchange
rate practices, did not agree with the gold subscription
requirements, and refused to release sensitive econom-
ic data such as gold reserve and balance-of-payments
information. These factors are likely to continue to
contribute to the Soviet lack of interest in the organi-
zation. In addition, as a large industrial nation, the
USSR would be required to pay a sizable subscription
upon joining. Since it is unlikely to draw heavily on
IMF funds, it would be a net creditor, which would be
a major departure from its policy of extending eco-
nomic aid on a bilateral basis.
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Soviet Behavior in International
Economic Organizations
funding commitments.
The USSR has been an active participant in a number
of international specialized organizations since the
mid-1920s, when it joined the Universal Postal Union
(UPUJ and the International Telecommunications
Union (ITUJ. Moscow has tended to gravitate toward
those organizations that can provide technical and
economic information as well as coordinate interna-
tional services. On the other hand, it has shied away
.from organizations such as the IMF and GATT,
which require sizable funding commitments and/or
information that it considers sensitive. Its level of
participation in aid and humanitarian organiza-
tions-such as the UN High Commission for Refu-
gees, the International Fund for Agricultural Devel-
opment (IFADJ, and the United Nations Children's
Fund (UNICEF)-is also low, probably to avoid
Soviet behavior in these organizations ranges from
constructive and businesslike to highly propagandis-
tic and obstructionist. To a large extent, Soviet
behavior is determined by the level of specialization
of the organization:
? Soviet conduct in the highly specialized organiza-
tions such as the World Intellectual Property Orga-
nization (WIPOJ and the International Civil Avia-
tion Organization (ICAO) is businesslike and
constructive. The USSR uses these organizations
to collect technical information and to advance and
support proposals that serve its national interests.
? At the other extreme, the Soviets use the United
Nations Educational, Scientific, and Cultural Or-
ganization (UNESCO) as a political forum to at-
tack Western interests and spout disarmament pro-
paganda. This behavior is calculated to win the
,favor of Third World countries, to protect the
USSR from unwelcome initiatives, and tofurther
Soviet political agendas.
? There are also a number of international economic
organizations-those most similar to the GATT in
function-in which the Soviets are mostly coopera-
tive but occasionally advance political aims. For
example, in the Economic Commission for Europe
(ECEJ, the Soviets cooperate reasonably well on the
technical level but sometimes use the forum for
propaganda purposes. Other organizations in which
Soviet conduct is mixed include the International
Labor Organization (ILO) and the United Nations
Committee on Trade and Development (UNCTAD).
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Although we expect the USSR's interest in the IMF
to continue to be weak, some factors could eventually
cause it to reconsider membership:
? The size of the Soviet economy, from which voting
shares are determined, makes it likely that the
USSR would receive a voting share large enough to
gain a seat on the Executive Board and put it in the
position to influence important Fund decisions such
as the structure of the Fund, changes in quotas, and
allocation of Special Drawing Rights (SDRs).
? The Soviets also could use their position to influence
decisions on lending to Soviet Third World clients.
In particular, Moscow may believe its image could
be enhanced as a lender within the IMF.
Joining the IMF would also give Moscow the option
of subscribing to membership in the World Bank. The
costs and benefits of joining the World Bank would be
much the same as those for the IMF, and, thus,
World Bank membership is also not likely to be
immediately attractive to the Soviets, unless their
involvement in international trade and finance in-
creases considerably.
Since the CEMA summit in June 1984, the Soviets
have been actively pursuing their longstanding inter-
est in establishing formal European Community
(ECJ-CEMA ties. Economic and trade issues probably
motivated Soviet interest in earlier years, but the
present effort has a more pronounced political flavor.
Moscow clearly wants some form of official EC
recognition to enhance the status of the organization
within the international community. In addition, the
Soviets probably hope to establish a forum to discuss
the entire range of East-West issues with the West
Europeans without the presence of the United States.
Another longstanding Soviet goal has been to keep
relations with the EC on a mulilateral basis to block
EC arrangements with individual East European
countries. However, in a major concession last year to
break the deadlock, the Gorbachev regime gave the
green light for Eastern Europe to conclude bilateral
arrangements with the EC. Moscow is still likely to
monitor closely the East Europeans' dealings with the
Soviet approaches to other world institutions, such as
the United Nations, have also had a decidedly politi-
cal bent. The Soviets first broached their ideas about
an economic security initiative in general terms at the
UN last year. Soviet Foreign Minister Shevardnad-
ze's 23 September 1986 address to the United Na-
tions General Assembly included a strong pitch for a
new, comprehensive system of international securi-
ty-a Soviet theme that ties together all of Gorba-
chev's disparate disarmament and foreign policy ini-
tiatives. The economic component of Gorbachev's
proposal calls for the establishment of a system of
equal economic security, removal of economic block-
ages and sanctions, and creation of vehicles to handle
the international debt problem. Included in this pro-
posal is an effort to draw up principles to govern the
use of part of the funds released from proposed
military budget reductions to provide the lesser devel-
oped countries (LDCs) with some economic relief.
None of these ideas are new. The Soviets have simply
restructured outdated North-South themes-areas
where Soviet economic interests are small and the
prospects for political visibility are high. By weaving
them together with other proposals on security and
political issues into one overall framework, however,
the Soviets are trying to create an illusion of newness
and to lend concreteness to what Gorbachev calls new
political thinking. Some of these ideas were embodied
in a series of proposals put forth in mid-1986. Soviet
initiatives have not met with much enthusiasm from
the LDCs; in fact, Soviet and LDC interests on
international economic issues have been diverging
over the last decade. However, with a new set of
policymakers in place and Gorbachev's call for new
ideas, it is possible that in time the leadership will
propose some fresh ideas, particularly if it is interest-
ed in taking a global approach to addressing interna-
tional economic problems that affect the USSR's
trade and financial position.
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economic reform.
Future Soviet Actions
How Moscow proceeds relative to recent initiatives
will depend, in large measure, on future decisions
regarding the role of Western technology and equip-
ment in Gorbachev's modernization drive, the extent
of Western managerial involvement and corporate
ownership, and the acceptable level of hard currency
indebtedness. Moreover, it will take some time before
these decisions are made. Gorbachev's new team of
managers will need time to acquire the experience and
expertise necessary to confidently move heavily into
the international financial and commercial arenas.
And the leadership will probably spend the next year
or two assessing the results of ongoing domestic
programs-shifts in investment priorities, manage-
ment reorganizations, and the discipline campaign-
before considering bolder moves, especially systemic
in third countries.
In the meantime, we can expect cautious but steady
movement into the international economic arena. The
next significant Soviet action is likely to be in the area
of joint ventures; the first contracts could be signed
within the next few months. Although with less
fanfare, the Soviets will probably encourage expan-
sion of coproduction and use of Western management
services. They are also likely to look for more opportu-
nities to participate in joint projects in the Third
World with Western firms. While the Soviets have
used Western equipment to enhance the competitive-
ness of their bids on projects in the Third World in the
past, they have rarely formed direct partnerships with
Western firms when bidding on these projects. Ar-
rangements like the one they are negotiating with
Kuwait could provide the necessary funding without
Moscow's having to offer credits. More remote is the
possibility of Soviet multinational companies, primari-
ly in cooperation with Western firms. The Soviets
have indicated, however, that the provisions for joint
ventures will include the right to establish subsidiaries
Progress along these lines is apt to be slow. Some
Western firms may be willing to make a relatively
small investment to gain entry into the Soviet market,
but most are likely to approach negotiations cautious-
ly. Years of dealing with cumbersome Soviet bureau-
cracies, shoddy Soviet manufactures, and unimpres-
sive results from joint ventures with other socialist
countries will make most businessmen wary. Even
Western enthusiasm for joint ventures in China-the
socialist country with the most liberal regulations-
has recently waned. In addition, Western firms are
likely to encounter numerous difficulties before arriv-
specific problems cited by
Western businessmen include an appropriate defini-
tion of profit and the accounting and pricing proce-
dures to be used for raw material inputs.
The Soviets themselves are also apt to approach
actual negotiations cautiously. Granting the amount
of control over production decisions required by West-
ern partners would go against the grain of most Soviet
managers. At present, it appears that there is still a
considerable amount of uncertainty among midlevel
Soviet officials who deal regularly with Western
businessmen over exactly what form joint ventures
would take. Given this uncertainty, Moscow will
probably settle on only a few of those proposals
currently under discussion to serve as pilot projects.
Even if impediments to successful joint ventures can
be overcome, the level of Western investment is likely
to be too small to have much of an impact on
expanding Soviet exports of manufactured goods. And
the recent changes in the foreign trade apparatus will
probably not have much success in expanding exports.
Although they will probably improve the operation of
trade by removing the MFT as a cumbersome middle-
man for some trade actors, the changes do not remedy
the lack of domestic incentives for producers, the
irrational price structure, and the inadequate techno-
logical base that underlie the poor position of Soviet
manufactured goods in world markets. In addition,
depressed earnings from traditional exports will se-
verely constrain purchases of foreign equipment that
could compensate for some of these shortfalls.
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How the Soviets will respond to lackluster export
performance is difficult to predict. In the short term,
they are most likely to introduce piecemeal adjust-
ments to deal with some of the specific problems that
develop. They might try isolating the export-oriented
producers and joint ventures from the inefficiencies of
the economy, much as the defense industries are
protected. However, the benefits of trade-especially
in areas of technology assimilation and diffusion-
would be similarly isolated.
As long as Moscow continues its conservative ap-
proach toward reliance on Western technology, a
large increase in the role that the USSR plays in the
international financial arena is unlikely. However, the
Soviets will probably become more adaptable to new
financial instruments and more flexible in the man-
agement of their assets. But the present limitations on
Moscow's hard currency earnings, coupled with tradi-
tionally conservative banking personnel, are likely to
restrict sharply any large-scale speculative approaches
to financial management. Soviet reaction to gold
trading and real estate scandals involving Soviet-
owned banks in the past resulted in a tightening of
central control from Moscow and is indicative of
Moscow's attitude.
The Soviets will continue their approaches to a variety
of international economic organizations for both polit-
ical and economic reasons. GATT will probably re-
main akey area of interest to the USSR both for the
prestige factor and the chance to participate in negoti-
ations that the Soviets consider will affect their
interests. Lackluster trade performance and a trade
sector that remains largely under the control of
central authorities will, however, undermine argu-
ments by the Soviets that their system is becoming
more compatible with the aims of GATT.
For largely political reasons, the Soviets will continue
to press for formal EC-CEMA relations although
probably without expections of anything but minimal
economic gains. IMF and World Bank membership
are not likely to be pursued actively at the present
time. Membership in these bodies remains secondary
to Moscow's interest in GATT, and the leadership
would probably like to weigh the costs and benefits of
several years in GATT before pursuing membership
The USSR will almost certainly become more active
in promoting its own solutions to international eco-
nomic issues. It may perhaps go so far as to propose
new international forums for dealing with such issues,
especially if it feels strongly enough that it is being
unjustly discriminated against by existing institutions.
What forms the new Soviet proposals are likely to
take are difficult to predict. We may see a repackag-
ing of old proposals with slightly different nuances
rather than bold new proposals. To the extent that the
content of Soviet initiatives remains similar to past
proposals, international response is likely to be luke-
warm at best. In addition, the small Soviet share of
world trade coupled with only modest improvements
in trade and economic performance could weaken
Soviet positions.
Implications for the United States
These new Soviet initiatives-even if constrained and
slow to develop-will have important repercussions
for US policy interests. Increased cooperation with
Western firms would be likely to improve Soviet
assimilation of Western technology at given enter-
prises, although diffusion throughout the economy is
likely to continue to be difficult. Soviet ability to
make effective use of Western equipment and technol-
ogy has been constrained in the past, partly by the
inability of Soviet managers and engineers to work
hand in hand over an extended period with their
Western counterparts. A vested interest by Western
business in the effective use of Western equipment
and technology, backed by a sustained on-site pres-
ence, could substantially improve their impact. More-
over, Western firms involved in joint ventures with the
USSR are likely to want to incorporate state-of-the-
art technology into these projects and could press
their governments to relax COCOM controls. Fur-
thermore, joint ventures established outside the
USSR or subsidiaries of joint ventures in third coun-
tries could give Soviet technicians greater access to
controlled technologies.
in the other two international bodies.
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borrowing.
Greater Soviet involvement in international trade and
financial markets would make it easier for Moscow to
hide the level of its financial activities. This could be
achieved through the use of numerous instruments
such as interbank deposits or by borrowing from
nonbank institutions or banks that do not report to
international financial bodies. In the past, Soviet
reliance on government-backed credits and on a select
grouping of major commercial banks in the United
States and Western Europe provided Western govern-
ments with the ability to effectively monitor and, to a
limited extent, control the level and terms of Soviet
tive than in the past.
The Soviets may attempt to use increased trade with
the LDCs to strengthen Soviet prestige and influence
in the Third World. The Soviets would probably be
willing to offer loans at attractive rates to debt-ridden
LDCs to obtain contracts for projects, particularly
those that would generate repayments in raw materi-
als needed for the domestic economy. While this
would not represent a shift from current Soviet policy
toward the Third World, success in generating higher
quality Soviet exports combined with LDC debt prob-
lems would make trade with the USSR more attrac-
Greater Soviet activity in the international economy,
especially in international organizations, would in-
crease the number of Soviet officials in the West and,
thus, the opportunities for KGB activity.
opportunities to promote additional active-measures
campaigns would increase, and this would be particu-
larly acute with respect to IMF decisions regarding
financial support to various Third World members.
If the regime decides in several years that it must rely
more heavily on Western technology and equipment
for its modernization efforts to succeed, we would
expect to see a much bolder Soviet entry into the
international economic arena and an even greater
impact on US policy interests. Under such circum-
stances, we could expect an increase in the flow of
Western technology to the USSR with a commensu-
rate rise in Soviet hard currency borrowing. Moscow's
low indebtedness, substantial reserves of near-monies
such as gold and energy, centralized control over
resources, and large unexploited internal markets
would-in theory-make the USSR an attractive
market for Western direct investment.
Western governments would have to contend with
their own growing group of exporters seeking more
favorable trading conditions-low-interest credits, re-
duced export controls, and better bilateral relations in
general. The pressures to do business with the Soviets
would be even greater if they implement internal
reforms that result in internationally competitive
joint-venture and equity arrangements. In fact, the
Soviets could dangle lucrative trade deals in front of
the Europeans and reiterate the theme of Pan-Euro-
peanism to encourage them to adopt trade policies vis-
a-vis the USSR that are at variance with US policy.
Similar efforts could be directed toward the Japanese.
A sharply increased desire for Western technology
and the accompanying credits might also provide the
West with opportunities to advance its interests. In
particular, Moscow might become somewhat more
flexible on selected East-West issues to create a
climate more conducive to expanding Western in-
volvement in the Soviet economy. But actual flexibili-
ty would be strongly constrained by an expressed L~~ ~
Soviet policy aim of reducing vulnerability to Western
economic leverage. Moreover, a Soviet policy that
would allow for a greatly expanded economic role for
the West might only be pursued after significant
changes to the domestic economy had been successful-
ly undertaken. Such conditions-while possibly creat-
ing short-term openings for the West-could also
diminish the potential for Western leverage over the
longer term.
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Even without a major expansion in economic and
financial ties to the West, increased Soviet under-
standing of how international financial and commer-
cial markets operate carries a commensurate risk that
Moscow may attempt to manipulate these markets to
the detriment of US national security interests. The
West has been moving toward globally integrated
financial and commodity markets at a tremendous
pace. The ability to engage in financial, equity, and
commodity transactions has outstripped international
regulatory agreements. In addition, the rapid rise in
transaction volume and the relative inexperience of
many of the players have, in the minds of many
experts, created the clear potential for an internation-
al crisis precipitated by one or more shocks to the
system.
Should Moscow gain the requisite expertise and mar-
ket access, it is not inconceivable that it could effec-
tively precipitate such a crisis without being detect-
ed-at least not until after the fact. For example, the
judicious placement of false data into the system or
otherwise tampering with the worldwide transmission
of financial or commercial information could delay or
distort global financial data links, possibly causing a
temporary shutdown of international markets and
clearing systems.
The USSR could conceivably employ such tactics for
a variety of reasons. Financial or commercial market
disruption could be initiated to preoccupy the interests
of Western governments at a time when the Soviets
were engaged in activities-for example, in Eastern
Europe or the Middle East-that would otherwise
result in a united response from the Western Alliance.
In such cases Moscow would be seeking to disrupt
rather than to irreparably damage Western trade and
financial practices. If the Soviets come to the conclu-
sion that they could not effectively compete with the
West technologically and economically and that such
failure carried substantial risks to their long-term
ability to maintain strategic parity, they could poten-
tially attempt to precipitate a more prolonged eco-
nomic crisis in the West.
Such extreme actions, however, would have to be
weighed against the probable lack of Soviet control
over the events following the initial crisis, especially
those in the political sphere. Moreover, we believe
such actions would be unlikely as long as the USSR's
growing international role was paying economic or
political dividends. If, on the other hand, Moscow
perceived few benefits and remained a minor player in
these markets, then the economic loss it would suffer
by creating mischief in the marketplace would pale
compared with the potential for significant damage to
Western economic stability.
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