USSR: THE ROLE OF COMPENSATION AGREEMENTS IN TRADE WITH THE WEST

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP80T00702A000500040009-3
• Release Decision: RIPPUB
• Original Classification: S
• Document Page Count: 25
• Document Creation Date: December 12, 2016
• Document Release Date: October 3, 2001
• Sequence Number: 9
• Publication Date: November 1, 1978
• Content Type: IS

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lease 2001/11/08 : CIA-RDP80T00702A000500040009'1,,I
Assessment
Center
Compensation Agreements
In Trade With the West
USSR: The Role of
An Intelligence Assessment
Secret
ER 78-10660
November 1978
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USSR: The Role of Compensation Agreements
In Trade With the West
Central Intelligence Agency
National Foreign Assessment Center
Key Judgments
The USSR has increasingly looked to compensation agreements with
Western firms to repay the costs of buying Western equipment and technol-
ogy. The exports guaranteed under the more than 45 agreements concluded
over the past decade in fact will have a value much larger than the $8 billion
worth of agreement-related imports from the West.
Earnings from agreements signed thus far will boost Soviet hard
currency exports in the 1980s especially. The rise in earnings from compensa-
tion deals-from about $830 million in 1977 to nearly $4 billion in 1985-
will soften the impact of the expected decline in oil production in the early
1980s and the resulting fall in oil exports to the West.
Although Soviet interest in compensation agreements with the West has
intensified, the rate at which new deals have been concluded has fallen off
considerably in the last four years. Internal Soviet problems and Western
disenchantment stand in the way of negotiating new agreements. On the
Soviet side, the policy of committing Soviet raw materials as the price for
Western help in developing Soviet resources has been questioned. The Soviet
bureaucracy, moreover, is ill equipped to handle compensation agreements,
while Soviet doctrine clearly conflicts with Western demands for equity
participation and/or management control. Even if agreements can be reached
in principle, the primitive level of Siberian infrastructure and the difficulties
involved in taking on several large development projects simultaneously will
slow the proliferation of compensation arrangements.
On the Western side, companies are reluctant to accept many Soviet
products. Unlike in 1974, when fuel and raw material shortages made long-
term supplies of Soviet products attractive to Western firms, they now regard
compensation agreements as a disagreeable condition for winning Soviet
contracts. The depressed West European chemical industry is already worried
about the chemical fertilizers and petrochemicals that the USSR soon will
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begin to export under compensation agreements. Deals involving energy-
based exports, on the other hand, continue to interest Western companies.
Despite the reduced appeal of compensation agreements, the USSR is
currently negotiating several large deals with Western firms. If concluded,
they would increase Soviet raw material production and exports appreciably
by 1985. The negotiations now under way center on chemicals, wood and
wood products, oil, natural gas, and aluminum. Over the longer term,
compensation agreements tied to Siberian natural gas deposits in Yakutsk
and Urengoy, a major steel complex, copper deposits, and exploitation of
offshore oil reserves could materialize.
But Soviet ability to conclude these agreements will turn on:
? Soviet willingness to modify its demands so as to entice Western
commercial interest.
? The willingness of the West to extend much larger credits to the
USSR.
? The pace of Soviet internal development, especially in Siberia and the
Far East.
? Western requirements for Soviet raw materials coupled with a willing-
ness to rely on the USSR as a supplier.
The expected downturn in oil production and other economic problems
may make the USSR more accommodating as it tries to boost domestic
energy production and develop alternative hard currency exports. The
enthusiasm of Western firms will depend on the pace of economic growth and
overall East-West relations.
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Key Judgments ........................................................................................ i
Background ................................................................................................ 1
Review of Existing Agreements ................................................................ 2
Natural Gas ........................................................................................... 2
Chemicals ............................................................................................... 5
Other Major Agreements ...................................................................... 5
Role of Compensation Agreements in Total Soviet Exports ................ 6
Some Constraints on Soviet Use of Compensation Agreements ............ 6
Domestic Constraints ............................................................................ 6
Coolness in the West ............................................................................ 8
The Climate for New Deals .................................................................... 10
Outlook ..................................................................................... . ................ 11
Deals Likely in the Near Term .......................................................... 11
Possible Development Projects .............................................................. 12
Extension to Manufactured Goods? .................................................... 15
1. USSR: Scheduled Natural Gas Exports ............................................ 5
2. USSR: Scheduled Compensation Exports ........................................ 5
3. Selected West European Countries: Dependence on Soviet Natural
Gas Imports ....................................................................................... 9
Figures
1. USSR: Existing Projects Under Compensation Agreements .......... 3
2. USSR: Estimated Hard Currency Flows From Signed Compensation
Agreements ........................................................................................ 7
3. USSR: Potential Projects Under Compensation Agreements .......... 13
Appendixes
A. Compensation Agreements: What They Are and How They Work .. 17
B. USSR: Compensation Agreements With the West .......................... 19
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Key Judgments ........................................................................................ i
Background ................................................................................................ 1
Review of Existing Agreements ................................................................ 2
Natural Gas .......................................................................................... 2
Chemicals .............................................................................................. 5
Other Major Agreements ...................................................................... 5
Role of Compensation Agreements in Total Soviet Exports ................ 6
Some Constraints on Soviet Use of Compensation Agreements ............ 6
Domestic Constraints ............................................................................ 6
Coolness in the West ............................................................................ 8
The Climate for New Deals .................................................................... 10
Outlook ...................................................................................................... 11
Deals Likely in the Near Term .......................................................... 11
Possible Development Projects .............................................................. 12
Extension to Manufactured Goods? .................................................... 15
1. USSR: Scheduled Natural Gas Exports ............................................ 5
2. USSR: Scheduled Compensation Exports ........................................ 5
3. Selected West European Countries: Dependence on Soviet Natural
Gas Imports ....................................................................................... 9
Figures
1. USSR: Existing Projects Under Compensation Agreements .......... 3
2. USSR: Estimated Hard Currency Flows From Signed Compensation
Agreements ........................................................................................ 7
3. USSR: Potential Projects Under Compensation Agreements .......... 13
Appendixes
A. Compensation Agreements: What They Are and How They Work .. 17
B. USSR: Compensation Agreements With the West .......................... 19
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USSR: The Role of Compensation Agreements
In Trade With the West
Background
The major impetus behind the rapid expansion
of Soviet trade with the West in the 1970s has
been the desire to acquire capital, technology,
and equipment to develop Siberia and to expand
production in certain high-priority industrial sec-
tors. The USSR is counting on Siberia with its
untapped deposits of oil, natural gas, coal,
timber, copper, and other metals to support
economic growth in the 1980s and beyond. West-
ern help also has been sought in expanding
production in several important industries-
chemical fertilizers, petrochemicals, motor ve-
hicles, and both ferrous and nonferrous metals-
in which Soviet technology lags the West or in
which expanded capacity is needed quickly.
Largely because of the extensive use of long-
term Western credits to accelerate the acquisi-
tion of capital goods from abroad, Soviet debt to
the West has grown from less than $2 billion at
the end of 1970 to roughly $16 billion at the end
of 1977. To provide a large share of the foreign
exchange required to meet debt repayment obli-
gations, the USSR has sought compensation
agreements with Western firms. These agree-
ments cover Soviet exports as well as imports; a
Western firm contracts to supply equipment for a
Soviet project, and the Soviets obtain guarantees
from Western firms to purchase Soviet prod-
ucts-often from the output of the project.`
Although Moscow concluded its first compen-
sation agreements in the 1960s,2 it was not until
the early 1970s that the Soviets began a major
push. In 1971-72 several massive projects pro-
posed to Western firms called for product pay-
back.' Meanwhile, compensation agreements
have received strong endorsement from the So-
viet leadership. Brezhnev's February 1976 report
to the 25th Party Congress stressed the impor-
tance of compensation agreements in the 1976-
80 plan. In early 1976, a spate of articles in the
Soviet press pointed to compensation agreements
as a new form of economic collaboration with the
West. Several technical articles have set forth
the theoretical criteria for assessing the effi-
ciency of compensation agreements.' Since 1976,
Soviet policy statements about trade with the
West have usually given prominence to the vir-
tues of compensation agreements.
Compensation agreements indeed offer several
advantages to the USSR. They are an economi-
cal way to obtain equipment from the West.
Soviet purchases are financed by long-term gov-
ernment-backed credits with very low real inter-
est rates.' Since, for a given project, compensa-
tion exports will--at a minimum-roughly
match debt service requirements, the real cost of
the equipment to the USSR is essentially the
alternative output sacrificed by assigning domes-
tic resources to building the project and-later-
producing the portion of the output used as
payback.
Compensation agreements also reduce risk.
The heavy reliance of the Soviet economy on
' For a discussion of the definition and mechanics of compensa-
tion agreements, see appendix A. These agreements are also called
"product payback" or "product buy-back."
2 The first ones were a West German deal involving Soviet
shipments of phosphate rock in return for phosphorus furnaces
(1966), a gas-for-pipe deal with Austria (1968), and a timber
agreement with Japan (1968). Compensation agreements bear little
relationship to the concessions granted to Western firms in the
1920s. In the latter case foreign firms-in return for royalty
payments to the Soviet Government-were allowed exclusive rights
to develop and exploit certain commercial opportunities within the
USSR, investing capital goods, technology, and in some cases labor.
' The product payback form of transaction is not limited to
Soviet-Western deals. A similar pattern has developed for Soviet
projects in which East European countries are investing. Soviet aid
projects with less developed countries reverse the flows: Soviet aid is
often repaid by later deliveries from the project.
IV. G. Vasil'yev and V. A. Sorokin, "On the Question of
Economic Effectiveness of Compensation Agreements," Dengi i
Kredit, August 1976, and V. Savin, "The Effectiveness of Coopera-
tion on a Compensatory Basis," Foreign Trade, May 1977.
'Loans for the projects carry an average interest rate of about 7
percent, roughly equal to the inflation in world prices of the
products to be delivered by the Soviets as repayment.
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planning makes reduction of risk important to
Soviet managers, who have found foreign trade
with the West particularly difficult to plan. The
latest Western recession, for example, hit Soviet
exports hard. Reduced demand in 1975 virtually
halted the rapid growth in Soviet hard currency
exports, driving home to Moscow the dependence
of Soviet exports on Western economic condi-
tions. Under compensation agreements Soviet
industrial ministries and foreign trade organiza-
tions are guaranteed long-term export markets,
providing protection from developments in the
West that would otherwise reduce Soviet export
earnings and hard currency reserves.
The Soviet drive to conclude compensation
agreements is an effort to placate those-both at
home and in the West-who are concerned with
the rapid growth of the USSR's debt. Soviet
officials have emphasized the share (about one-
half, according to one senior official) of the debt
that has been incurred to import equipment for
compensation projects and have pointed to long-
term export contracts under these agreements as
proof of the USSR's ability to service its debt.
Compensation agreements, by providing for a
guaranteed market, will also help Moscow estab-
lish export industries. Soviet enterprises will gain
experience in producing for export while Soviet
products establish niches in Western markets. In
all likelihood, the USSR hopes to renew export
contracts after compensation agreements expire.
Review of Existing Agreements
The USSR has concluded more than 45 com-
pensation agreements with the West in the past
decade.' (The agreements are listed in appendix
B; project locations are shown in figure 1.)
Under these agreements, almost $8 billion in
Western equipment and technology will be in-
stalled in the Soviet Union. In some cases-
natural gas and coal-equipment, technology,
and pipe were imported to develop export indus-
6Soviet officials claim more than 60 compensation agreements
with Western firms. This number probably includes some which
have not been signed, some very small deals, some contracts which
do not fit the definition used in this paper, and some exaggeration.
For example, the Soviets identify the Moscow World Trade Center,
financed by US Eximbank credits, as a compensation agreement
because the complex will be rented to Western firms.
tries; export earnings guaranteed under compen-
sation agreements far exceed the capitalized cost
of project-associated imports. In other instances
(chemical plant imports, for example), the pri-
mary Soviet goal has been to develop productive
facilities to meet domestic needs, siphoning off
only that portion of output required to repay
project-associated debt.
The most important agreements in terms of
boosting Soviet exports have been the gas-for-
pipe deals, which provide for Western exports of
large-diameter pipe to be installed in pipelines to
carry Soviet gas to Western Europe. The gas-for-
pipe deals will generate Soviet exports worth
many times the $2.8 billion spent on Western
pipe and pipeline equipment. Under some of the
agreements, exports will continue into the 21st
century (see table 1). The first gas deal was
signed with Austria in 1968, and similar con-
tracts have since been signed with Italy, West
Germany, and France. Soviet hard currency gas
exports under these and supplementary contracts
reached 11.5 billion cubic meters in 1976 and are
scheduled to reach 34 billion by 1985 as addi-
tional pipelines are completed. Hard currency
earnings from gas sales will account for 60 to 75
percent of Soviet earnings from compensation
agreements signed so far (see table 2).
The earnings from natural gas sales will de-
pend on hard-to-predict fuel prices. The con-
tracts call for prices to be adjusted in line with
changes in prices of other fuels, assuring the
Soviets of higher earnings as Western energy
prices rise. Soviet trade data show that prices
received in 1976 were about half the $60 per
thousand cubic meters charged by other gas
exporters. Prices probably rose substantially in
1977,' largely because of Moscow's successful
renegotiation of a gas contract with Italy. The
Italians paid only $18 per thousand cubic meters
in 1976; the newly negotiated price for the
second half of 1977 was $59.
The Soviets will probably benefit from large
gas price increases for the next several years.
'The USSR's omission of quantity data on gas exports in 1977
precludes an accurate estimate of prices.
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USSR: Existing Projects Under Compensation Agreements
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