THE SOVIET ECONOMIC PREDICAMENT AND EAST-WEST ECONOMIC RELATIONS

• Document Type: CREST
• Collection: General CIA Records
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• Document Creation Date: December 22, 2016
• Document Release Date: August 23, 2010
• Sequence Number: 3
• Publication Date: January 1, 1985
• Content Type: REPORT

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Nationa.! Secret
Foreign
Assessment
Center
Economic Relations
The Soviet Economic
Predicament and East-West
Secret
SOV 82-I000IX
January 1982
Copy 3 O 8
STAT
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National
Foreign
Assessment
Center
Economic Relations
The Soviet Economic
Predicament and East-West
Information available as of 15 December 1981
has been used in the preparation of this report.
STAT
SOVA
Comments and queries are welcome and may be
This paper has been coordinated with the Office of
Scientific and Weapons Research and the National
Intelligence Officer for the USSR and Eastern
Europe. (u)
Secret
SOV 82-10001
January 1982
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Foreword
Economic Relations
The Soviet Economic
Predicament and East-West
This is a supplement to the Special National Intelligence Estimate
Dependence of Soviet Military Power on Economic Relations With the
West, SNIE 3/11-4-81, 17 November 1981. That estimate examined the
contribution of Western goods and technology to Soviet economic perform-
ance and defense programs and outlined possible Western restrictions on
East-West economic relations. This assessment provides more detailed
discussion of topics covered in the estimate.
Although not coordinated with other NFIB agencies, the assessment has
taken into consideration comments from those agencies. Like the estimate,
it omits consideration of such topics as: the economic costs to Western
countries participating in trade restrictions; the problem of obtaining
Western cooperation; how to restrict leaks, diversions, espionage, or the
flow of open information; and how to differentiate between Eastern Europe
and the Soviet Union in Western export control policy.
Secret
SOV 82-! 0001
January 1982
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The Soviet Economic
Predicament and East-West
Economic Relations
Key Judgments As the Soviet Union completes the first year of its new five-year plan, the
economy has turned sour-even before the long-anticipated labor and
energy. problems have come into play. Three: bad harvests have left
agriculture in disarray, and transportation and materials bottlenecks and
dwindling productivity gains have reduced industrial growth sharply.
Soviet GNP growth may well be limited to 1 to 2 percent on average by the
mid-1980s.
Slower economic growth will give President Brezhnev and his colleagues
increasingly tough and politically painful choices in resource allocation and
economic management. Annual increments:.to national output in the early
1980s will be too small to simultaneously meet mounting investment
requirements,. maintain growth in defense spending at the rates of the past,
and raise the standard of living. Simply stated, something will have to give.
The Soviet need for Western goods and credits will therefore increase
greatly. Imports- can relieve some economic problems by raising the
technological level of key.Soviet industries and by reducing shortages of
grain and such important industrial materials as steel. During the 1970s,
increased. imports made a sizable contribution to the Soviet production of
oil and gas, chemicals, and motor vehicles, and vastly increased grain
purchases were critical to raising and then sustaining Soviet meat con-
sumption. In .the 1980s, Western equipment and know-how will be
particularly important to raising. productivity in the critical machine-
building and energy industries. The Soviets must continue importing large
amounts of agricultural products.-and will probably expand their purchases
of steel and some other industrial materials.:
In obtaining and exploiting Western technologies and equipment, however,
the Soviets give priority to those having military application. Through legal
and illegal means-including clandestine acquisitions and third-country
transfers-they have obtained Western designs, test data, production
know-how, and actual hardware and have used them in developing new
weapons or improving existing military capabilities. The Soviet defense
establishment has in some cases been able to:
? Avoid, false starts .in early weapon design:
? Reduce the time in which more reliable weapon testing programs are
conducted and weapon systems manufactured.
v Secret
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? Save years in improving production processes for critical weapon parts.
? Incorporate acquired Western components directly into weapon proto-
types to maintain development schedules.
? Develop. countermeasures effective against specific Western weapons.
The USSR knows that it must scramble in the 1980s to keep pace with
technological improvements of Western weapon systems. Western technol-
ogy could be especially valuable in:
? Production of microelectronic devices critical to guidance systems for
missiles, precision-guided munitions, and signal-processing devices for
ASW and ballistic missile defenses.
? Manufacture of electro-optical devices for night vision.
? Production of advanced airframes and aircraft propulsion systems.
The.-USSR will also need Western equipment and technology to manufac-
ture weapon systems more cheaply for itself and its Warsaw Pact allies.
A Western effort to hamper Soviet defense programs by, increasing the
restrictions of East-West economic relations could take several forms:
? Because the prospects for Soviet hard currency earnings in the 1980s are
far from bright, Western credits will have to cover an increasing
proportion of Soviet imports from the West. Limits on credit availability
could therefore force the USSR to reduce hard currency purchases,
especially in the early 1980s.
To stop the flow of technology most directly useful to Soviet military
programs would require 'the tightening of existing export controls and the
expansion of the existing controls to cover emerging technologies such as
robotics and nonmetallic materials, as well as more effective blockage of
illegal acquisitions.
? Western embargoes of selected goods and technology-such as grain and
petroleum equipment-could seriously aggravate existing Soviet econom-
ic problems.
? A sustained, total embargo by the USSR's principal Western suppliers
could hurt Soviet economic growth by creating more bottlenecks in key
sectors than Moscow could handle simultaneously.
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If Moscow were convinced that it could not break up an embargo by
playing upon the economic interests of individual Western countries, it
would probably respond by becoming less cooperative in some aspects of its
foreign policy and by pursuing more autarkic economic development.
Heavy military spending probably would continue, with Soviet consumers
forced to tighten their belts. Even so, a denial of critical strategic
technology would delay Soviet defense development and procurement
programs, although the main impact on Soviet military capabilities
probably would not be felt until the 1990s.
In the longer run, as economic problems increase, a post-Brezhnev
leadership will be forced to reconsider development priorities and-
perhaps-to consider economic reform. Any decision to reduce defense
spending at that point will depend heavily on the political balance in the
Politburo, the confidence of the new leaders, how much more desperate the
economic situation has become, the level of consumer dissatisfaction,
and-above all-the international environment.
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Key Judgments
The Soviet Economic Predicament
Agriculture
Industry
Energy
1
Rising Costs
2
Labor Productivity
2
Support to Eastern Europe
2
Hard Currency Bind
3
Consumer Welfare
4
Leadership Response
5
Outlook for the Economy
5
Soviet Benefits From East-West Economic Relations
6
Agricultural Products
6
Other Agricultural Commodities
8
Oil and Gas Equipment
9
Industrial Materials
10
Machinery and Technology in Other Priority Sectors.
11
Microelectronics 14
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The Defense Burden and East-West Technology Transfer
16
The Acquisitions Effort
16
Methods of Exploiting Foreign Technology
17
Examples of Military Gains From Technology.. Transfer
17
Military Requirements for the 1980s _
18
Impact of Western Restrictions on Trade and Credits,
23
1.
Average Annual Percentage Rates of Growth of Soviet
Industrial Production
2
2.
Output and Productivity in Soviet Industry
(Average Annual Percentage increase)
3
3.
Soviet Hard Currency Exports of Products Other Than Oil and Gas
4
4.
Soviet Hard Currency Trade
5.
Share of Hard Currency Trade in Total Soviet Trade
6.
Soviet Hard Currency Trade With Selected Countries, 1980
8
7.
Measures of the Importance of Soviet-Western Trade to
Selected Western Countries, 1980
9
8.
Potential Impact of Western Trade Restrictions on Selected
Soviet Economic Sectors .
20
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The Soviet Economic
Predicament and East-West
Economic Relations (v)
As was described in the estimate, Soviet economic
performance is worsening. Although the economy is
still growing, its rate of growth is falling, from nearly
4 percent per year in the 1970s to an average of 1.5
percent per year in 1980 and 1981. The chief causes
of the slowdown are rising resource costs, an ineffi-
cient economic system, production shortfalls in agri-
culture and industry, and an accumulation of plan-
ning mistakes. As a result, growth in labor
productivity has slowed just as demographic trends
are beginning to curtail the supply of new labor.n
Agriculture
Agriculture has been Moscow's biggest headache.
The Soviets have now suffered their third straight
harvest failure. We estimate that the 1981 grain crop
was about 170 million tons-19 million tons less than
1980's poor crop. Meat production and most other
Soviet crops are expected to exceed last year's de-
pressed level, however, and total farm output, there-
fore, probably increased slightly compared with that
of 1980. Nevertheless, output will still fall short of the
1976 level. F__1
While the odds are that the weather will be better
next year, an early return to the unusually favorable
weather patterns that existed from the mid-1960s to
the mid-1970s seems unlikely. Rather, the somewhat
harsher conditions that prevailed for 20 years prior to
the mid-1960s are likely to be the rule. In that
environment, the gains in agricultural output that.
accrued between the mid-1960s and mid-1970s-
largely the result of good weather-will be nearly
impossible to achieve in the 1980s unless Moscow
speeds up sharply the deliver of machinery and
fertilizer to agriculture
Industry
While agriculture has had most of the headlines,
industry also has been doing poorly. Growth in almost
every major sector is running behind the pace of a
year ago. Industrial output grew by less than 2
percent in 1981, well below its nearly 3-percent
growth during 1980. This is the worst performance in
the postwar period (see table 1). Key problem areas
include:
? Industrial Materials. Lagging output of raw mate-
rials and semifinished products is a major reason for
the economy's malaise. Shortages of basic materials
such as steel, cement, nonferrous metals, and lum-
ber have become serious in recent years. This has
constrained new fixed investment, created bottle-
necks throughout the economy, and disrupted-and
in some cases halted-construction activity and
industrial operations.
? Energy. Sluggish increases in energy output will
pose a major problem during the coming decade.
Growth in primary energy production probably fell
to less than 2 percent in 1981 and is likely to
average only '2 to 3 percent through the mid-1980s,
despite a substantial investment in energy. (Energy
growth during most of the 1970s, in contrast, aver-
aged almost 5 percent annually.) Oil output at best
is likely to stagnate at 12.million barrels per day
(b/d) through the early 1980s before dropping, and
production of coal will increase only slightly during
most of the decade. Consequently, natural gas and
nuclear power' must provide practically all of the
growth in energy output through at least the mid-
1980s. Meanwhile, spot fuel shortages have become
more frequent, reflecting a tighter energy supply as
well as distribution problems. The Soviets are trying
to increase the efficiency of energy use, but substan-
tial success is unlikely until the late 1980s. (c)
? Machinery.. Machine building has been the focus of
Soviet investment programs-both military and ci-
vilian-and has outperformed other industrial sec-
tors in recent years. Nonetheless, growth of civilian
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Average Annual Percentage Rates of Growth
of Soviet Industrial Production
6.6
6.3
5.9
3.4
1.9
5.4
2.6
1.6
7.2
5.1
4.0
1.1
-0.1
5.9
2.6
0.1
12.0
8.9
8.6
3.9
3.9
5.4
1.8
0.9
Wood, pulp, and paper
2.6
2.9
2.6
0
2.0
Fuels
6.3
5.0
5.0
3.3
1.1
Electric power
11.5
7.9
7.0
4.5
2.1
Machinery
7.4
6.9
7.9
5.4
2.4
Civilian
8.9
8.2
9.0
5.8
1.5
Military
4.1
3.6
4.5
3.4
6.0
Consumer nondurables
4.8
6.4
3.4
1.6
1.7
Light industry
2.6
7.2
2.7
2.6
1.7
Processed foods
6.8
5.9
3.9
0.7
1.7
machinery output (after increasing at about 6.5
percent annually in 1976-79) fell below 4 percent
per year in 1980 and to roughly 1.5 percent in 1981.
? Rising Costs. The rising cost of exploiting raw
,-materials has become an increasing drag on indus-
trial productivity. The. general quality of mineral
deposits has declined, and most minerals, energy,
and timber must now be obtained from remote
areas, notably Siberia.
Labor Productivity.
-
the increase in labor productivity reflects rising raw
material costs, imbalances in production, a slower
rate of technical progress, and worker disinterest
(see table 2). Productivity in industry during 1981
increased at an estimated annual rate of 1.2 per-
cent-far below the average of 4.2 percent targeted
..,for the 1981-85 plan.)
Support to Eastern Europe
During the past decade Moscow has also shouldered a
sharply increasing foreign aid burden in order to
maintain a buffer of politically reliable regimes on its
western border. Soviet economic support of Easter
Europe rose from nearly US $5 billion in 1975 to
more than $18 billion in 1980. (This was almost 801
percent of Moscow's total aid to Communist countries
and more than 1 percent of Soviet GNP.) The aid has
taken two primary forms: selling fuels and commod-
ities to East European countries at below-market
prices and permitting some of them to incur trade
deficits with the USSR occasionally. Although Mos-
cow is trying to reduce its aid burden, mainly by
reducing annual oil deliveries, its concern for contin-
ued political stability and Soviet influence in the
region will not permit substantial aid cutbacks soon.
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Output and Productivity in Soviet Industry
(Average Annual Percentage Increase)
a Estimates are based on 10-month data.
Capital Shortages
The Soviets have apparently decided to cope with
tightening resource constraints by cutting back on the
growth of investment in fixed capital. Fixed invest-
ment in the 1981-85 Five-Year Plan is to increase-at
an average annual rate of less than 2 percent-well
below the 7 percent per year achieved in 1966-75 and
below the 3.5 percent attained in 1976-80. This
constraint will exacerbate the Soviets' already diffi-
cult problems in investment allocation. Within indus-
try, energy is slated for a sharp 50-percent increase in
investment and machine building for a 40-percent
increase. Agriculture will retain its past 27-percent
share of total economy-wide investment. F__1
9.2
6.4
5.9
3.4
1.9
2.6
3.0
1.5
1.6
0.7
6.4
3.3
4.4
1.8
1.2
Hard Currency Bind
Moscow can loosen some of the domestic resource
constraints by importing foreign goods and technol-
ogy-but its ability to import is threatened by declin-
ing hard currency revenues. The Soviet hard currency
position deteriorated in 1981 because of softer world
prices for Soviet oil and other raw materials and
sharply increased imports of Western agricultural
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goods. The 1981 Soviet trade deficit probably reached
$6 billion.
Moscow's overall financial position with the West is
still good; its hard currency debt service ratio is only
To meet the rising requirements of energy, the de-
fense industry, and agriculture, Soviet planners will
have to shortchange the branches that produce con-
sumer goods and even some critical sectors such as
steel and transportation. They will make their produc-
tion plans look consistent on paper only by decreeing
unrealistically high goals for conservation of the raw
materials and the semifinished products produced in
lower priority sectors.F_~
The growth in investment can slow down-or even
fall-without a sharp impact on economic growth in
the near term. The Soviets''stock of plant and equip-
ment will continue to increase fairly rapidly for a
time, even with little growth in investment. But the.
investment decisions taken now are bound to reduce
the growth of fixed capital in the economy consider-
ably by the mid-1980s. F__-]
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about 15 percent. Nevertheless, hard currency earn- 25X1
ings will almost certainly worsen during the 1980s as
exports decline. The basic problem is that Soviet oil j)'4
deliveries to the West will probably fall in the next
few years because of stagnating or falling production
and rising demand at home. The Soviets' only sub-
stantial new hard currency earner will be gas exports,
when the Siberia-to-Europe pipeline project is com-
pleted. Gas earnings will not rise substantially before
the mid-1980s, however, and total gas earnings by the
late 1980s will barely cover the drop in oil revenues.
Soviet production costs are high.
In commodities other than oil and gas, the Soviets will
do well to hold annual exports constant at roughly $9
billion through the 1980s. As table 3 shows, these
commodities have not been doing well lately. Pros-
pects are poor for sales of both raw materials and
anufactured goods, because:
? Western demand for raw materials is sluggish, and
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Soviet Hard Currency Exports of Products
Other Than Oil and Gas
1976
1977
1978
1979
1980
Total
1,801
2,281
2,430
2,313
2,994
3,160
2,821
Coal and coke
93
86,
89
88
70
65
58
Machinery and equipment
140
277
319
314
514
566
507
Ferrous metals
129
182
174
123
142
141
134
Wood and wood products
365
361
449
427
405
380
`..328
Chemicals
67
159
129
143
196
324
403
Agricultural products
205
264
227
256
175
138
112
Diamonds
175
282
284
291
376
380
376
Other
627
670
759
671
1,116
1,166
903
? Most Soviet manufactures are not well suited to
Western markets.
Soviet arms sales are already substantial-currently
$5 billion a year-and are unlikely to increase much
further, while exports of Soviet gold and platinum
group metals could not increase substantially above
current levels without depressing the market.)
Consumer Welfare
The Soviet population enjoyed substantial improve-
ment in living standards during the 1960s and 1970s,
but this improvement is beginning to taper off. The
year 1981 was the third in succession of increasing food
shortages, mostly in the area of quality foods-meat
and dairy products. Rationing of these items, mostly
in the form of informal purchase limits, has become
increasingly frequent and widespread since the winter
of 1980/81. Factors other than the nationwide per
capita availability of food supplies, however, explain
the shortages. These are: large-scale leakages from
government food distribution channels, the mainte-
nance of fixed prices in state retail outlets, and
growing demand generated by wage increases.
Whatever the cause of the shortages, the consumer's
mood is generally one of pessimism and resigned
acceptance. Although some work stoppages occurred
in 1981, Soviet workers are still a long way from
venting their dissatisfaction as the Polish workers
have. To diminish the potential for labor unrest, th
leadership has allowed the proliferation of special
food distribution systems (once reserved largely for
the Soviet elite) at the factory level. The special food
distribution, coupled with the traditional stoicism of
the populace, has been enough to maintain labor
peace. In effect, the leadership has shifted the worst
burden of the food shortage to social groups like the
elderly, who are the least likely to protest.
The most serious consequence of the slowing growth
in consumer welfare, from the leaders' point of vie
is its impact on labor productivity. We expect per
capita consumption to stagnate during the mid-to-la
1980s; and this interruption in the Soviets' modest
progress toward improved living standards is likely to
reduce worker motivation-and hence productivity.
The leadership is counting upon gains in labor produc-
tivity alope to provide 90 percent of the growth in
industrial output and the entire growth in agricultural
output called for in the current five-year plan
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Moscow thus faces a dilemma. Rather than increasing
investment to restore past rates of economic growth
and boost consumer welfare, it is relying upon a
strategy of promoting efficiency and productivity
throughout the economy. But the Soviet labor force is
less willing than it once was to defer material satisfac-
tions to the future, and unless Moscow provides
sufficient increases in quality foods and goods now, we
do not think this strategy will work.
Leadership Response
So-far the leadership's response to growing economic
difficulties has been cautious and conservative. We
have seen, for example, no sign of an effort to curb
military outlays in order to boost the civilian econo-
my. Physical indicators of future levels of defense
spending-such as programs in train and investment
in defense production and R&D facilities-point to
continued real growth of about 4 percent per year. '
Nor have we seen the Politburo take any significant
steps to change the system of planning and manage-
ment in order to cope with the economic slowdown.
The planners' main concession to the resource bind
has been to cut investment growth during 1981-85to
the lowest rate since World War II.
Nonetheless, the leaders' reluctance to make any
fundamental changes in resource allocation or eco-
nomic organization suggests that their view of the
Soviet economic situation is less pessimistic than ours.
They have taken some steps to improve planning and
stimulate technological progress and believe these will
be successful eventually. In addition, Soviet leaders
believe that some of their problems are transitory.
They apparently expect that:
? Demographic trends will lead to an upturn in the
labor supply in the 1990s.
? Better weather and greater efficiency will restore
growth in farm output and help solve the food
problems.
? Increased production of gas-plus energy conserva-
tion in general-will more than offset any stagna-
tion in oil production in the years ahead.
? New technological fixes and breakthroughs will
improve economic performance and productivity.
More generally, they tend to make their economic
assessments in comparative terms and may take some
solace in the fact that the Western economies are also
experiencing serious difficulties and challenges.
ent leadership.
Perhaps the most important reason for the inertia in
Soviet domestic economic policy, however, is the
inability or unwillingness of an aging leadership to
undertake decisive actions and fundamental reforms.
The ruling group seems incapable of making the hard
policy choices involved in shifting resources in a major
way, modifying administrative arrangements, and
changing organizational structures. Such choices,
which would necessarily affect entrenched institution-
al interests and generate bureaucratic conflicts, would
be fraught with political uncertainties. Fundamental
changes in economic policy thus must await a differ-
Outlook for-the Economy
The economic problems now facing the Soviets in
agriculture, industry, and capital formation are for
the most part familiar. They have increased in intensi-
ty, however, leaving the Politburo less and less room
for maneuver. In the 1960s and early 1970s, Moscow
was able to satisfy a number of economic priorities
simultaneously:
? Average living standards rose appreciably.
? Productive capacity increased rapidly in all sectors
of the economy.
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? Sustained growth in defense spending led to major
qualitative improvements in weapons systems as
well as an impressive expansion of military forces.
In the 1980s, a many-sided attack on priorities will no
longer be possible. In this new environment, there will
be some losers, greatly complicating decisionmaking.
The leadership must face these facts:
? GNP growth may be limited to 1 to 2 percent per
year by the mid-1980s.
? If defense spending continues to rise at about 4
percent per year, the defense share in increments to
GNP could rise from about one-fourth now to one-
half in the mid-1980s, and to two-thirds by 1990.
Slower growth in industry and steady growth in
defense means much slower growth in investment
and increasing tensions among regional interests.
? Consumer-oriented programs probably will lose out,
and those responsible for public order will have to
worry more about the popular mood.
The present leadership. is not disposed to undertake
new policy initiatives, but economic circumstances in
the mid-to-late 1980s will force the Soviet leadership
then in.power to decide anew on development priori
ties and-perhaps-to consider the need for economic
reform.
Soviet Benefits From East-West Economic Relations
Dissatisfied with the nation's economic performance
but unable to improve. it immediately, Moscow has
sought relief through East-West trade and technology
transfer. In particular, Moscow has sought help in
(1) raising the technological level of Soviet fixed cap-
ital, (2) relieving industrial supply bottlenecks, and
(3) increasing living standards. Accordingly, imports
balance-of-trade surplus with France, Italy, and the
Netherlands but ran sizable deficits with a number of
countries-notably Japan.and the major grain export-
ing countries (table 6). While hard currency trade rose
in importance for the Soviet Union between 1970 and
1980, trade with the USSR still plays a relatively
minor role in Western trade (table 7).
In the 1980s, increased reliance on productivity gains
will heighten Soviet interest in obtaining Western
goods and technology. As in the 1970s, access to
Western products and ideas can fill or at least reduce
important gaps in agricultural and industrial perform-
ance. Soviet purchases will focus on:
? Agricultural products, especially grain.
? Oil and gas equipment.
? Industrial materials.
? Chemical equipment.
? Machinery and manufacturing technology in
priority sectors.
other
? High technology, particularly computers and mi-
croelectronics.
Agricultural Products
Because of chronic agricultural problems; the USSR
has been a net importer of agricultural products over
the past decade, with its purchases rising substantially
in the last few years. Without Western grain, Soviet
consumers. would not have had the increase in meat ..
consumption they enjoyed in the early 1970s and
would have had to endure a much sharper decline in
consumption in recent years. Net grain imports aver-
aged. 14 million tons during the past decade. In 1981,
grain purchases and record imports of meat and other
agricultural products will total nearly $13 billion-40
percent of Moscow's total hard currency imports.
of machinery, ferrous metal products, and foodstuffs Grain. Grain has accounted for 50 percent, or more of
have dominated Soviet-Western trade-primarily in hard currency imports of agricultural commodities in
return for. Soviet fuels and raw materials (table 4) ll but three years of the past decade. The need for
Purchases from the West rose from 17 percent of total
Soviet imports in 1970 to 38 percent in 1980. This was
a nearly ninefold increase in value and a twofold
increase in volume (table 5). In 1980, the USSR had a
rain derives from Moscow's promise to the people of
larger supplies of quality foods, particularly livestock
products. Increasing or at least maintaining meat .
consumption is essential to the regime's efforts to
boost worker morale and productivity.
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Mill
US
ion
$
Percent
of Total
Million
US $
Percent
of Total
Million
US $
Percent
of Total
Million
US $
Percent
of Total
Million
US $
Percent
of Total
Million
US $
Percent
of Total
Fuels 49
3
22
3,887
48
15,095
64
8
NEGL
497
3
700a
3
Crude oil and petroleum products 38
7
18
3,276
41
12,028
51
8
NEGL
497
3
700,
3
Natural gas 1
3
1
-220
3
2,706 ,
12
0
0
0
0
0
0
Coal and coke 9
3
4
391
5
362
2
0
0
0
0
0
0
Machinery and equipment 14
0
6
560
7
1,388
6
927
34
4,593
.32
6,039
23
12
9
6
167
2
246
1
279
10
2,567
18
3,469
13
6
7
3
256
3
765
3
208
8
742
5
1,565
6
84
3
214
2
203
1
20
5
9
572
7
478
2
615
23
3,856
27
8,800
34
Grain 2
2
1
3
NEGL
0
0
101
4
2,323
16
4,400
17
Other 18
3
8
569
7
478
2
514
19
1,533
11
4,400
17
215
3
152
1
260
10
436
3
745
3
Cn
-I
A A
T a
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Share of Hard Currency Trade
in Total Soviet Trade
Crude oil and
petroleum products
26
40
43
10
72
NA
Machinery and
equipment
5
9
3
22
37
26
Wood and wood
products
44
37
48
34
27
15
Agricultural products
14
24
25
27
42
66
Grain
5
1
0
73
87
90
Consumer goods
23
26
13
12
9
9
After three consecutive poor grain harvests, imports
of grain will. play a more critical role than ever before.
Even with respectable grain crops, the USSR will
need large imports-20 to 25 million tons of grain
annually-for several years just to push up per capita
meat consumption by 1 to 2 percent annually. If the
USSR could buy no grain after 1981, its average
annual meat production would be cut by about 2
million tons, even if its own grain crops were respect-
able. Without foreign meat as well as foreign grain,
per capita availability of meat would fall by roughly
20 percent.
Other Agricultural Commodities. During the 1970s,
hard currency outlays for agricultural products other
than grain-largely meat, butter, vegetable oil, sugar,
and soybeans and meal-have registered fairly steady
growth. If these purchases had not been made, the
quality of the average Soviet citizen's diet would have
deteriorated substantially. Imports of soybeans and
Soviet Hard Currency Trade
With Selected Countries, 1980
Exports
Imports
Trade,
Balance
Total
23,498
26,017
-2,519
Developed West
21,304
21,330
-26
Australia
9
1,194
-1,185
Austria
894
610
284
Canada
46
1,496
-1,450
France
3,453
1,326
1,127
Italy
3,235
1,438
1,797
Japan
1,463
.2,730
-1,267
Netherlands
1,582
555
1,027
Sweden
546
496
50
Switzerland
686
620
66
United Kingdom
1,323
1,467
-144
United States
233
2,081
-1,848
West Germany
4,767
4,603
164
Others
3,067
1,714
1,353
LDCs
2,194
4,687
-2,493
Argentina
47
1,790
-1,743
Brazil
34
390
-356
Iraq
729
398
331
Libya
252
443
-191
Others
1,132
1,666
soybean meal have become particularly important as
domestic oil seed production has declined and as the
n
d to stretch feed-7 plies for livestock has grown.
If the Soviet Union could not buy these products in
the West, its people would not go hungry, but they
would be forced to consume an increasing share of
calories from grain and potatoes. The already serious
food shortages would become more widespread, and
worker morale and productivity would suffer corre-
spondingly.
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Measures of the Importance of Soviet-Western Trade.
to Selected Western Countries, 1980
Soviet Trading
Partner
Exports to USSR
as Percent of
Imports From USSR
as Percent of
Percent of Trading Partner's GNP
Exports to World
Imports From World
Exports to the
USSR
Imports From the
USSR
Argentina a
15.0
Australia
5.1
Austria
2.7
Brazil a
2.1
Canada
2.1
0.1
0.5
NEGL
France
2.2
2.7
0.4
0.6
Italy
1.6
3.0
0.4
0.8
Japan
2.1
1.3
0.3
0.2
Netherlands
0.7
1.6
0.3
0.8
United Kingdom
0.9
1.5
0.2
0.4
United States
0.7
0.2
0.1
NEGL
Oil and Gas Equipment
Western equipment was important in increasing the.
Soviets' energy production in the 1970s and will be
critical to the modest gains planned for the 1980s.
Western products are most needed in the oil and gas
industries. For example:
? Soviet deficiencies in drilling, oil extraction, and gas
and oil pipeline construction prompted Moscow to
buy about $5 billion in oil and gas equipment in the
1970s.
? High-capacity US oil pumps have probably added 2
million b/d to Soviet oil output in recent years.
? Purchases of large-diameter pipe from Western
Europe and Japan ($4-5 billion in the 1970s) have
been critical to rapid growth of gas production.
The Soviets now need to import a broad range of
Western petroleum equipment, including equipment
for exploration, drilling, oil production, offshore oper-
ations, and gas pipeline construction. They have al-
ready found most of the relatively shallow, easily
located, accessible oil and gas deposits, and will need
Western seismic and well logging technology to boost
oil reserves in the 1980s. The 5- to 6-year time lag
between discovery and production would prevent
Western equipment ordered today from having much
impact on oil production before the late 1980s.1
Western rigs, drill pipe, tool joints, drill bits, blow-out
preventors, and drilling-fluid technology can substan-
tially aid Soviet efforts to nearly double the amount o
drilling for oil and gas in 1981-85 and to increase it
further in the late 1980s. The Dresser drill-bit plant,
expected to be in operation soon, would certainl
enhance Soviet oil producti b the late 1980s
Foreign equipment is important to Soviet plans to
double the number of oil wells aided by submersible
pumps and gas-lift equipment. Soviet-made submers-
ible pumps and gas-lift equipment are of low capacity
and reliability, and because the amount of water
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extracted along with oil is increasing, fluid lifting
capacity will have to increase by the mid-1980s
'merely to maintain oil output at 12 million b/d. The
Soviets probably expect to import about 100 submers-
ible pumps annually (in the 1970s they imported a
total of 1,200).
The Soviets also have an increasing need for Western
enhanced-oil-recovery technology, but the effect of
Western assistance would be relatively small and felt
only after 1985. Moscow has received substantial
assistance from the West in exploring offshore zones
that will enhance oil and gas production by the late
1980s. Continued Western assistance could especially
speed development in the Caspian area.
The USSR relies extensively on the West for gas
pipeline equipment-large-diameter pipe and valves,
compressors, and pipelayers. It imported 10 to 12
million tons of line pipe alone in the past decade, at a
cost of $4-5 billion. Although the Soviets have recent-
~ly built a plant to manufacture large-diameter pipe,
they have yet to master the production technology.'
Pipeline capacity is therefore the principal bottleneck
in Soviet gas production, and a denial of pipeline
equipment would be a major setback to the industry.
If the USSR did not have access to Western equip-
ment and pipe, the oil and gas production lost could
amount to 2 or 3 million barrels a day (calculating gas
in oil-equivalent terms) in the middle and late 1980s.
The larger part of this loss would be gas. The oil and
gas output foregone in that case would represent up to
roughly 10 percent of the energy output which we
expect by 1985. If Soviet oil production declined and
gas production increased much less than we currently
forecast, Moscow's hard currency earnings might fall
sharply, and economic growth would be even slower
than the rate of 2 percent or less that we now expect.
' Although the Soviets produce pipe up to 1,420 mm (56 inches) in
diameter, little is for natural gas pipeline service. Most Soviet pipe
is spiral welded and lacks the high-strength, low-alloy metallurgy of
Western steel for Arctic pipeline service. Most of the large pipe
imported by the USSR is fabricated with_a single longitudinal weld
Industrial Materials
The only industrial materials for which the USSR
relies substantially on the developed West are steel,
molybdenum, and some chemical products. Steel im-
ports-primarily large-diameter pipe'from Western
Europe and Japan-helped Moscow avoid serious
bottlenecks in some industrial sectors during the
1970s. Imports of molybdenum, much of it from the
United States, increased from 3,000 tons. in 1970 to
13,000 tons in 1980, making Moscow a net importer.
The bulk of Soviet imports of tin, cobalt, and tungsten
come directly from less developed countries.
Continued large purchases of steel would help offset
the inadequacies of current investment in new steel-
making making capacity and help offset shortfalls in the
production of iron ore and coking coal. The USSR
also needs continuing access to Western metallurgical
technology to reduce its dependence on imports of
Western specialty steels. The French are helping to
build the important Novolipetsk steel plant, which
will produce 7 million tons of specialty steels per year
when it comes on stream (in 1986 at the earliest).
Moscow continues to buy chemical products from the
West, including phosphate materials, plastics, dyes,
pesticides, manmade fibers, and catalysts. Purchases
from the West totaled nearly $1.6 billion in 1980.
Several major trade and technical cooperation agree-
ments with Western firms will provide support for this
trade:
? Among the most important is a $6.5 billion 10-year
reciprocal trade agreement (signed in late 1980)
with France's Rhone Poulenc for equipment and
technology, pesticides, fertilizers, and animal feed in
exchange for Soviet energy-intensive chemicals such
as naphtha, ammonia, methanol, and possibly crude
oil.
? The Soviets signed a $1.5 billion 10-year deal in.
early 1980 with Italy's Montedison for seven chemi-
cal plants (together valued at $800 million) in return
for raw materials, fertilizer, and petrochemicals.,
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? Smaller agreements signed with UK and Japanese
firms will provide the Soviets with oil-recovery
chemicals, pesticides, dyes, plastics, and catalysts.
Chemical Equipment
Western equipment and related process technology
has contributed heavily to the growth of the chemical
industry:
? In the 1970s the Soviets doubled their output of
nitrogen fertilizer and plastics and tripled their
synthetic fiber production, largely because of im-
ported equipment.
? Relying heavily on Western technology, Moscow
has doubled ammonia output and become the
world's leading ammonia exporter.
? Chemical equipment imports accounted for almost
one-third of Soviet purchases of Western machinery
in the -1970s.
Soviet equipment imports increasingly have been as-
sociated with product buy-back or "compensation"
deals, under which Western firms agree to long-term
purchases of Soviet products-usually the products
that are manufactured in the Western-equipped fa-
cilities.
The Soviets plan substantial orders during 1981-85
for Western chemical equipment and/or technology
to produce urea, pesticides, ethylene, benzene, and
downstream petrochemicals-as well as 14 additional
ammonia plants. Deficiencies in Soviet pesticide de-
velopment and the need to achieve balanced develop-
ment of pesticides and fertilizers will also prompt
purchases of Western pesticide production equipment.
Moscow will probably buy Western equipment for
planned West Siberian complexes producing fertiliz-
ers, plastics, manmade fibers, synthetic rubber, and
petrochemicals
Denial of Western chemical equipment and technol-
ogy would:
? Slow down the increases in Soviet production of
consumer goods and chemical-based industrial
materials.
? Hurt agricultural production.
? Delay Soviet acquisition of a more efficient chemi-
cal industry with enhanced export capabilities.
Without Western equipment, the Soviets would have
to import many more chemicals than they currently
do-or cope with more serious shortages than they
already have
Machinery and Technology in Other Priority Sectors
Western equipment and technology have aided other
priority machine-building sectors considerably in the
1970s. Moscow has a pressing need to raise the
quality of its industrial output while using fewer
material resources, and this need ensures a continuing
Soviet demand for Western products
Motor Vehicles. The Soviets have modernized and
expanded their motor vehicle industry with Western
help. When they began an ambitious 15-year modern-
ization program in the mid-1960s, specialized Soviet
machinery for mass automotive production was
scarce. They turned to the West for massive help,
spending an estimated $3 billion for equipment and
technology during 1966-80.
The truck industry received the lion's share of the
imports:
? About one-half of Soviet hard currency investments
were for the Kama Truck Plant; the United States
provided some of the world's most advanced auto-
mated foundries, as well as automated diesel engine
machining and assembly lines.
? The Likhachev Truck Plant (ZIL), a major producer
of military trucks, received substantial manufactur-
ing technology from US, Japanese, and West Ger-
man firms.
The 15-year program was completed in 1980, and
investment in the automotive industry will probably
decline. No new truck or passenger car plants are
called for in the current five-year plan period
(1981-85). Existing Soviet plans to install new capac-
ity for heavy trucks could be activated after 1985,
however, creating a large new demand for Western
production technology.
Construction Equipment. Many industrial programs
have been delayed because the construction and
earthmoving equipment needed to build plants has not
been available in sufficient variety or quantity. Soviet
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production of a 75-ton off-highway truck, for exam-
ple, began only in the late 1970s, more than 10 years
late. Manufacture of heavy industrial tractors and
bulldozers has been set back by faulty tractor and
engine designs. The USSR also is weak in the manu-
facture of heavy-duty transmissions, suspension sys-
tems, and axles that can support weights of 50 tons or
more.
To overcome domestic shortcomings, Moscow now
plans to buy Western plants and technology for
producing construction equipment:
? Fiat of Italy will supervise construction of a turnkey
facility to produce earthmoving equipment.
? Negotiations are under way with several Western
firms for technology to produce industrial tractors
and engines.
? The USSR will purchase US technology to produce
electric wheel drives.
? The Soviets are interested in obtaining licenses and
technical help for manufacturing US tractors
Until these programs are completed, the Soviets still
will need to buy construction and earthmoving equip-
ment from the West. Denial of Western goods would
seriously disrupt their plans to become more self-
sufficient and would force them to use less efficient
equipment. East European production of construction
equipment is too limited in scale and variety to meet
Soviet demand.
Mining Equipment. The Soviets produce most of
their own mining equipment, but imports have been
important, especially where higher capacity machin-
ery is required. Between 1972 and 1980, Moscow
imported about $1.6 billion worth of Western equip-
ment, primarily heavy-duty dump trucks, excavators,
bulldozers, and mining drills. About one-third of this
total was provided by the United States and most of
the remainder by Japan and West Germany. Most of
the mining equipment that the USSR buys abroad,
however, is provided by Eastern Europe-notably
East Germany, Czechoslovakia, and Poland.~
The South Yakutia coal mines, developed with Japa-
nese assistance, have employed most of the Western
mining equipment. Earthmovers, particularly bulldoz-
ers, are used in gold mining operations in the
Magadan, Irkutsk, and Lena regions, as well as in
other coal and ore mines.
We believe that the Soviets will continue to depend,on
Western mining equipment in the 1980s. For
example:
? Vast open-pit Siberian coal mines are being devel=
oped and will require enormous earthmoving and:..
hauling capability.
? Development of the Ekibastuz coal basin has been,
lagging badly, and increased imports of large-capac-
ity dump trucks, for example, could speed it up.~
Without access to Western equipment, the Soviets
would encounter some short-run problems. The big-.
gest would be the grounding of some existing machin-
ery soon because of the lack of new spare parts. In
time, however, the Soviets could increase imports .
from Eastern Europe or shift their own production
lines
Machine Tools. The USSR is the world's largest
producer of both conventional and numerically con-
trolled (NC) machine tools. Its output, however, co
silts mainly of general-purpose machine tools rathe
than special-purpose and complex types.( Moreover,
many machine tool models are still produced well
after they are obsolete. This practice yields some
economies of scale, but it reduces the flexibility an
precision of the Soviets' machine tool park
Machine tool production has fallen far short of re-
quirements in recent years:
? Output of basic metal-cutting machine tools has
dropped the past five years.
? A few new plants were built in the 1970s to produce
automatic transfer machinery for the automotive
industry, but little new capacity has been added in
other areas of machine tool production.
? Computer numerical control (CNC), used increas-
ingly in the West by 1980, exists in the USSR only
in prototypes.
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? The USSR produces more NC tools than the United
States does, but they are inferior because of the poor
quality of controller, electromechanical positioning,
=and feedback devices and the relatively backward
state of minicomputer technology.
The Soviets accordingly have turned to the West for
some of their machine tool needs. Over the past
decade they spent more than $4 billion for tools, of
which three-fourths were conventional types. Imports
of automated lathes supplemented domestic produc-
tion; imports of gear-cutting machinery (from the
United States) provided superior precision and pro-
ductivity; and imports of closed-loop, multiaxis NC
machine tools provided tools that had no domestic
counterparts. The USSR has also purchased many
machine tools from Eastern Europe, even though they
are inferior to Western models. East Germany exports
up to half its annual output to the USSR, and other
suppliers include Czechoslovakia, Hungary, and
Yugoslavia.
The Soviets almost certainly will continue to import
machine tools, especially advanced types of NC tools
and machining centers. Moscow recognizes their val-
ue in raising industrial productivity and saving metal.
Present CoCom controls on sales to Communist coun-
tries are limited to the more advanced types of NC
machine tools and some specialized machine tools for
military production.' Most Soviet machine tool pur-
chases have satisfied these guidelines, but the USSR
also has bought advanced equipment when member
nations have loosely interpreted ambiguous CoCom
definitions or downplayed the strategic implications of
a given sale. The Soviets have also responded quickly
to most changes in CoCom regulations. When CoCom
restrictions on three-axis machining centers and bor-
ing mills of small size.and limited accuracy were
relaxed in 1977, for instance, the USSR quickly
increased its purchases of such equipment, especially
the more sophisticated West German and Japanese
models.
Robotics. The Soviet robotics industry is in its infan-
cy. It has a production capacity of only about 350
units a year and is incapable of series production. By
' CoCom members include the NATO nations-except Iceland-
and Japan.
the end of 1980, the USSR was using an estimated
1,500 to 2,000 robots-well below the 5,000 planned
Many of these were of foreign origin. Robots will be
increasingly needed to improve productivity in mass-
production industries.
Soviet industrial robots are relatively primitive by
Western standards. Most are first-generation ma-
chines performing either a single repetitive function o
an unvarying sequence of functions. Most of them
lack the microprocessor controls, large memories, and
advanced sensors needed for pattern recognition and
adaptive operation. The Soviets have made only a few
experimental models of more complex robots.F
The Soviets have relied on imports for a low-cost L
supply of reliable industrial robots. They have bought
more than 500 robots from Hungary and an unknown
number from Japan, France, and Italy. They also
have been using foreign design and manufacturing
technology.
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The need for substantial imports of robots and related
technology probably will continue for some time.
Moscow has approached several Japanese firms abo
acquiring industrial robot technology and related
know=how. It has arranged with Renault of France to
jointly develop miniature robot drive units and indus-
trial robots for serial production.
High Technology
The technology gap between the USSR and the West
in high-technology products is large and growing.
Computers. Large computers and minicomputers in
the Soviet Union are two generations behind current
US offerings. Development of even these older model
has been slow. The most important deficiencies are:
? Soviet computer systems are unreliable. This is due
in part to the low quality of the imported materials
and in part to a lack of modern computer production
and test equipment.
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? Neither the USSR nor its East European partners
r.can supply the large numbers of magnetic disk
auxiliary memory devices with the high speed and
large capacity essential to advanced data processing.
Proper software and other support (such as mainte-
nance and spare parts) have been deficient, if not
absent altogether.
In microelectronics, the Soviets have not kept up
with the West in making rapid advances in technol-
ogies related to production and test equipment,
materials, assembly, and packaging. The strong
~ military orientation of the microelectronics program
instead has encouraged the use of the tried and true.
Weaknesses in computer production in the Council of
Mutual Economic Assistance (CEMA) countries have
induced the Soviets to buy Western. Since 1972,
Moscow has imported more than 1,300 computer
systems (valued at $400 million) and $70 million
worth of add-on peripheral equipment-and spare
parts. Minicomputers, generally for R&D, represen
.95 percent of the units imported and 64 percent of
their value. The relatively few large systems pur-
chased have been for high-visibility, high-priority
projects such as the Kama River Truck Plant, the
Moscow regional air traffic control system, and the
Olympic Games system.
CoCom controls on computers are extremely complex.
In general, however, they provide that:
? Low-performance computers, including most mini-
computers, may be exported at the discretion of th(
exporting country.
Somewhat more powerful computers, including
many high-speed, high-capacity computers, are sub
ject to a pro forma submission to CoCom. The
CoCom members have agreed in advance to approve
the export of these computers if certain conditions
are met.
? The most powerful computers require unanimous
CoCom agreement for sale to proscribed destina-
tions.
Computers of the type that CoCom has agreed in
advance to approve are available from the United
States and other CoCom countries. They are built in
Japan by Fujitsu and Hitachi, in the United Kingdom
by ICL, in France by CII, and in West Germany by
Siemens. The USSR would continue its campaign to
acquire the most powerful Western computers wheth-
er legal sales were halted or not. The value of illegal
acquisitions would be enhanced if Moscow could also
acquire the related software and support applications.
East European countries would be inhibited from
diverting their legally acquired computers to the
USSR by fear of discovery and sanctions-and be-
cause they need the computers themselves. However,
Moscow is in a position to obtain East European help
if it insists.
Microelectronics. During the past decade the USSR
has obtained a full range of microelectronics-related
technology, materials, and equipment from the West
worth several hundred million dollars. These pur-
chases have included unembargoed items, embargoe~
items legally approved for export by CoCom, and
embargoed items acquired illegally and clandestinely)
The overwhelming majority of acquisitions are em-
bargoed items obtained illegally by diversion. Such
equipment is generally of reduced effectiveness, how
ever, since illegal channels do-not easily convey a
manufacturer's installation, training, or maintenance
services or provide easy access to spare parts
Although most of the equipment that has been ac-
quired illegally is of US origin, Japan and West.
European countries have become important suppliers'
.Firms in Italy, Switzerland, the United Kingdom, and
West Germany have diverted basic materials and
technologies, and firms in these countries and France
have diverted some advanced production equipment.
Telecommunications. The Soviet common carrier
telecommunications system, like the Bell Systems in
the United States, provides .communications services
to government, the military, commerce and industry,
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and the general public. The Soviet system, however,
cannot satisfy the rapidly growing demand for serv-
ices in either quantity or quality. It is therefore
undergoing major expansion and modernization.F-
The USSR supplements domestic production of com-
munications equipment with imports. The United
States is not a major supplier. The USSR buys radio
relay links, switching equipment, and transmission
equipment from Eastern Europe for use in its common
carrier system. A few of these items are manufactured
under Western license, but the United States cannot
prevent these sales.
The USSR also imports communications equipment
from CoCom countries and from Sweden, Yugoslavia,
and Finland. Most of the equipment it needs either is
not on the CoCom list of controlled items or can be
sold at the discretion of the exporting country.'
The Role of Western Credits
Western willingness to extend credits to the USSR
and Soviet willingness-to accept an increasing debt
burden will heavily influence the scale and timing of
Soviet hard currency imports in the 1980s. Between
1971 and 1978, Western credits provided approxi-
mately 12 percent of the USSR's import capacity.
During 1979-80, thanks to the rapid increase in oil
and gold prices, Moscow was able to increase its
imports from the West without increasing its net debt.
The share of imports covered by credits will have to
rise, however, if East-West trade is to contribute
significantly to offsetting domestic shortfalls on a
broad front, rather than in a narrow range of produc-
ing sectors
Overall, we expect Soviet imports that must be paid
for in hard currency to grow at an annual average rate
of 3 percent during 1982-90. This 'is faster than the
' CoCom controls do apply to a $172 million French contract with
the USSR for computer-controlled telephone switching equipment
and a turnkey plant for its manufacture. The plant would give
Moscow a serial production capability for modern telephone ex-
changes. The equipment technology, moreover, exceeds that re-
quired for the communications system. France apparently now
agrees with the US contention that the sale should not proceed in
its original form. However, even if the sale is stopped, the Soviets
could obtain less sophisticated switching equipment and production
rate implied by Planning Chairman Baybakov in his
plenum address on the 1981-85 Plan but not as fast as
the annual 5-percent rate recorded in 1976-80. As
Soviet planners face domestic resource constraints in
the next several years, a slower rate of increase in
import volume would add to their troubles in dealing
with prospective shortages and raising the technologi-
cal level of domestic fixed investment.
Moscow encountered a hard currency bind in 1981
(page 3), and, with no relief in sight, it faces even
more of a crunch in the coming years. It could try to
get around the earnings constraint by borrowing
more, but this would increase its debt very rapidly.
The key considerations are:
? If hard currency oil exports were held at current
levels through mid-decade, the maintenance of a 2-
to 3-percent real growth of hard currency imports-
a reasonable rate for meeting the economy's major
import needs-would raise Soviet debt from $19
billion in 1981 to almost $40 billion in 1985.
? If oil exports virtually disappeared during 1982-85,
however, debt would exceed $50 billion.
? Beyond 1985, debt would rise in either case to
unmanageable levels
Neither Soviet planners nor Western bankers would
permit such a massive financial burden to develop.
The Soviets might try to borrow on such a scale if
they thought their earnings constraint would end
soon; but because it probably will not, their borrowing
is likely to become much more conservative. Thus a
Western imposition of credit restrictions-plus Soviet
retrenchment-would accelerate the decline in Soviet
import capacity in 1982-85. In the late 1980s, howev-
er, Moscow could import almost as much as if no
credit restrictions had been imposed, because the
restrictions would have appreciably reduced its debt
service.
A harder Western stance on financing terms would
also raise the cost of Soviet imports. Moscow now
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benefits substantially from subsidized credits ex-
tended by Western Europe and Japan:
? Roughly 40 percent of the USSR's outstanding debt
carries interest rates 4 to 5 percentage points below
commercial market rates.
? A denial of concessionary terms on the roughly $2
billion a year the USSR now receives in official
financing, for example, would raise Moscow's annu-
al debt service costs by an average of $100 million
per year in 1982-90.
The Defense Burden and East-West Technology
__Transfer
,,;:The problems in the economy as a whole have made
the acquisition of Western goods and technology
increasingly important to Soviet defense programs:
? Western goods have helped to improve the perform-
ance of a strained economy (page 6), and this has
lightened the burden of growth in defense spending.
~? More directly, legal and illegal acquisitions of mili-
tary-related technology have saved the Soviets con-
siderable time and resources in designing and pro-
ducing new weapons and military support systems.
The importance in the 1980s of raising the technologi
cal sophistication of weapons will ensure continued
Soviet interest in obtaining advanced Western tech-
nologies
Guns vs. Butter
Moscow continues its extraordinary allocation of re-
sources to the military. Soviet defense programs ac-
counted for an average of 11 to 13 percent of gross
national product (GNP) in 1965-78 and 12 to 14
percent in 1979-80. Since the mid-1960s, military
programs have preempted about 15 percent of final
industrial output. This figure includes more than 30
percent of the final output of the critical machine-
building and metalworking sector, leaving less than 60
percent for investment and the consumer.
The effect of defense spending on production for the
civilian economy is not easily measurable but is
certainly considerable. Soviet leaders seem to be
increasingly concerned about the defense burden.
There have recently been indications of disagreement
among Soviet leaders over the extent of the connec;
tion between consumer material well-being and labor
productivity. This suggests that guns-or-butter ques-
tions are more contentious now than they were when
the economy was performing better.F--]
Most resources freed up by defense budget reductions
would not increase production for civilian consump;,
tion immediately, but consumer welfare would benefit
in the longer run. For example, the release of some of
the skilled labor, R&D capability, and technologically
advanced machinery that is now producing weapon
systems would eventually improve productivity in
critical sectors of civilian industry. A redirection of
materials bound for defense would also raise output
by easing the supply bottlenecks that have played an
important role in slowing industrial growth.
The Acquisitions Effort
Although Soviet weapons are designed to minimize
the requirements for technologies ,in which the USSR
is deficient, the USSR has turned to legal and illegal
acquisitions of Western technologies to make up for
domestic shortcomings. The Soviet program to ac-
quire and exploit Western technologies having mili-
tary applications has top priority.
Through the acquisitions of Western technology and
hardware, the Soviets have:
? Reduced engineering risks by following or copying
proven Western designs.
clearly fall into the third category and are in comnetition
with grain imports (included in the second category).
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Cut R&D time and production costs by using
Western designs and technology and equipment.
Incorporated countermeasures early in the Soviet
nearly always a stopgap measure to accelerate the
initial operating capability of the weapon while
Soviet defense industries develop an ability to pro-
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weapon development process.
r;
rl ethods of Exploiting Foreign Technology
eSoviets exploit Western technology and hardware
n several ways:
Researchers adapt Western materials research,
manufacturing processes, and specifications to de-
velop improved Soviet materials for military appli-
cations.
? Military designers compare Western technical doc-
umentation on preliminary designs and on success-
ful finished designs, gaining insights which they use
to avoid technical risks and to reduce the traditional
Soviet resistance to the use of unproven components
in military systems. This permits them to avoid
unprofitable R&D paths, saving substantial time,
and resources.
? Technical insights gained from the analysis of
Western military hardware samples often influence
Soviet weapon designs; they also contribute to the
development of measures for countering the exploit-
ed Western weapons.
? Developers make direct use of Western test proce-
dures, technical data, and instrumentation to im-
prove their own diagnostic routines. This allows
them to use shorter, more reliable testing programs
for complex components and systems and conserves
highly skilled military development manpower.
tion processes, equipment, and know-how directly.
Production process specifications and process con-
trol systems acquired through legal and illegal
channels are used to manufacture critical high-
quality military components-years before Soviet
defense industries could develop the same capability
on their own.
In a few cases, Soviet weapon designers have even
directly incorporated key components purchased in
the West into Soviet weapon designs in order to
meet a critical mission requirement. This practice is
duce the components.
Examples of Military Gains From Technology
Transfer
Evidence has been accumulating on Soviet gains in
the military area from legally and illegally acquire
Western equipment and technology. Some examples
follow. Illegal acquisition of ASW-related technology
and a wide variety of CoCom-controlled minicom-
puters has enhanced Soviet ASW capabilities. The
Soviets are applying Western designs and industrial
technology to the IL-76 aircraft that will be used in
their AWACS program; numerically controlled West-
ern machine tools are used in the production of the
SUK-25 ground support fighter; and Western wide-
body technology has been incorporated into the new
bomber/cruise missile carrier, the AN-400. The Unit-
ed States has provided powdered-metallurgical manu
facturing know-how that the Soviets probably will us
to develop improved domestic tungsten-based alloys
for kinetic-energy armor-piercing ammunition.F
The USSR has been willing to tolerate a short-term
dependence on foreign sources of technology in order
to speed the development and production of high-
priority weapon systems. The SA-7 shoulder-fired
tactical surface-to-air missile is a good example of
direct Soviet use of Western components for a weapo
system. Certain components purchased from Japan
reportedly were used by the Soviets for the first
several years of serial production.
The Soviets have reduced their resource costs and
enhanced their manufacturing capabilities by using
foreign materials technology and manufacturing
know-how. For example, the direct use of US semi-
conductor production and test equipment (including
turnkey lines) has significantly raised the technologi-
cal level, quality, and reliability of critical Soviet
microelectronics components. The Soviets have used
Austrian precision high-speed rotary forging equip-
ment in their production of small arms gun barrels
and artillery gun tubes rather than expending consid-
erable time and resources to develop their own domes
tic capability.
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Only rarely have the Soviets successfully reverse-
engineered sophisticated production tooling in order
to produce equivalent equipment in the USSR. To the
extent that the improvement in military materials and
manufacturing can find more generalized applications
in other products, the acquisition of technology im-
proves the general level of the Soviet development and
production base, to the benefit of the entire economy
/The Austrian rotary forges that produce gun barrels
are used to produce axles for railcars.
Through illegal acquisition, the Soviets have in addi-{
ion been able to evaluate specific Western weapons
rd develop effective countermeasures. Some Soviet
around their turrets as a measure against shaped-
charge munitions.
Avoiding false sta
the most importan
achieve savings vi
learned from the
rts and worthless research is one o
t ways in which the Soviets can
a technology transfer. Had they
experience of the US-manned lung
landing program, for example, they would have
achieved tremendous savings in time and resources in
their own program. The US development program for
the manned lunar landing prompted the Soviets to
undertake development of the TT-05 large space-
launch vehicle. For over 14 years the TT-05 program
consumed the energies of thousands of designers and
engineers at a major missile design bureau, a major
production plant, and numerous subcontracting orga
nizations. The phenomena that destroyed three prot~
types on the launch pad-vibration and acoustic
disturbances-had been diagnosed by the United
States during its Saturn V missile program in the
early 1960s. The Soviet Union did not begin to
appreciate these problems until the mid-1970s, after
the space-launch vehicle program had been canceled
and its chief designer fired.
Military Requirements for the 1980s
The need for substantial qualitative improvement in
military capabilities will heighten Soviet interest in
obtaining Western goods and technology. During each
of the last two decades the Soviets have deployed
about 200 military and aerospace systems (this count
includes both newly designed and substantially modi-
fied systems). Preliminary analyses suggest that the
USSR may have more than 200 under development in
the 1980s. We have already identified about 110
systems slated by the Soviets for deployment in the
1980s, of which 60 to 70 are expected to be deployed
by the middle of the decade.
Because of the rising importance of quality in the
ompetition between Eastern and Western military
capabilities, advances in sophisticated microelectron-
cs and materials probably will pace the development
~f new weapon systems. Accordingly, the Soviets and
heir Warsaw Pact allies will probably find that many
bf the new Western component and subsystem tech-
nologies are critical to their military programs.
For example, Soviet ability to produce sophisticated
microelectronic devices is critical to production of
guidance components for missiles and precision-guid-
ed munitions, of signal-processing devices for ASW
and airborne-radar systems, and of minicomputers for
,electronic warfare systems and other battlefield elec-
tronics. Production of ultrapure detector materials is
critical to the production of electro-optical devices for
night vision and target acquisition. Advances in pow-
dered-metallurgical materials processing are critical
to the production of advanced airframes and aircraft
propulsion systems and penetrators for kinetic-energy
After acquiring these advanced technologies, the So-
viets, will need to master material-processing technol-
ogies before they can apply them to their military
`"hardware. Production of microelectronics requires
strict clean-room environment, ultrapure material
processing techniques, and such sophisticated fabrica-
tion techniques as electron-beam welding and laser
trimming, etching, and masking. The ultrapure mate-
rials themselves require advanced refining techniques.
In addition to advanced powdered-metallurgical man-
ufacturing processes for making high-quality turbine
blades, high-performance turbojet and turbofan en-
gines require very precise, intricate disks and gears
that can be machined only by computer-assisted
numerically controlled tools. Production of composite
materials for airframes depends on advanced tech-
niques for processing and fabricating fiber-reinforced
polymer materials.
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The specific technology transfers that are or would be
useful to a particular Soviet weapon program are
often difficult to identify, however. For example:
? Delays encountered in the acquisition abroad of
component technologies for a major system may
force the Soviets to develop substitute technologies
that could go undetected for years. The West may
thereby perceive a Soviet deficiency where none
actually exists. This was the case with Soviet MIRV
development. That program began in the early
the early 1970s, in part because of our estimates of
what the Soviets would need-but did not have-to
develop a MIRV capability.
? Technologies abandoned by the West may prove
useful to the Soviets. Long after the United States
had discarded the Dynasoar and Manned Orbiting
Laboratory satellite programs, the Soviets apparent-
ly pursued the discarded US technologies in their
.corresponding development programs.
Denial of agricultural products by the United States
alone would not have a major effect, even in the short
run:
? Moscow could buy most of the grain it needs in the
next few years from other suppliers, although it
might have to pay premium prices.
? In the longer run, Moscow could expand its trade
with major non-US grain exporters; non-Soviet
markets could be supplied out of US stocks.
? Under a US embargo the Soviets could not get the
mix of wheat and corn they prefer, however, be-
cause the United States is the world's major corn
exporter.
Unilateral US restrictions of sales of energy equip-
ment and technology would also not have much
impact:
? US producers now have a monopoly in manufactur-
ing critical high-capacity pumps for extracting oil,
but other Western suppliers could enter the field
within two years if those pumps were embargoed.
? The acquisition of some material on foreign technol-
ogy may give the Soviets only a few pieces of a
technological puzzle. We may know they have these
? Western firms also could eventually fill any gap
created by US denial of equipment for oil explora-
tion and drilling.
missing pieces may be critical to the successful
? Only West European and Japanese firms manufac-
integration of the range of complex technologies and
ture the large-diameter gas pipe and valves essentia
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to Soviet gas production, and they can also supply
L
on system.
the necessary pipelayers and compressor station
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Limits to US and Western Restrictions
The countries participating in CoCom control almost
all of the technology directly related to Soviet military
R&D and weapons programs. In theory, therefore,
they, could take steps to stop the leakage of equip-
ment, designs, test data, and the like to the USSR. A
sustained and effective denial of goods and technology
by the United States and its allies would also create
appreciable problems in most Soviet economic sectors.
In some cases, however, CoCom-wide actions would
not be sufficient to block Soviet access to valuable
goods and technology (see table 8). In most cases, an
embargo limited to US exports would be ineffective.
In chemicals and other industrial materials, the Unit-
ed States has only a slightly greater potential for
causing economic difficulties for Moscow:
? US suspension of sales of superphosphoric acid
(SPA) would upset development of the Soviet fertil-
izer industry, forcing Moscow either to install evap-
orators to concentrate merchant-grade phosphoric
acid, or to import additional phosphate materials.
? Denial of US chemicals other than SPA would have
little impact. In 1980 the United States supplied, in
value terms, only 0.1 percent of the pesticides, 2
percent of the plastics, and 4 percent of the man-
made fibers imported from the West. (Two years
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Potential Impact of Western Trade Restrictions
on Selected Soviet Economic Sectors
Product or Technology
Grain
Small
Substantial
Other agricultural products
Small
Moderate
Oil and gas equipment
Small
Substantial
Large-diameter pipe and rolled
steel
Small
Substantial
Chemical products
Moderate
Moderate
Allied action, including Australia, could reduce
Soviet imports by 70 percent; Soviets can import
grain from non-US suppliers to fulfill needs.
Allied embargo would aggravate already serious
food shortages; US is not a major supplier.
Allied denial would reduce expected Soviet oil-and
gas output by 2-3 million barrels/ day by late r'
1980s. Allied countries within roughly two years
could overcome US monopoly in high-capacity oil
pumps.
Western Europe and Japan supply all of the pipe
critical to growth in gas production and most of
the rolled steel imports for machine building and
metalworking.
Allied embargo would be felt throughout econo-
my; US denial of superphosphoric acid would hurt
Soviet fertilizer production. Pesticides are needed
to boost crop yields.
Western denial would affect all economic sectors;
US provides only a small share of equipment
imports.
Substantial CoCom countries provide most of Soviet needs;
non-US suppliers are numerous.
Construction and mining Small Moderate Western denial of production technology for
construction equipment would disrupt Soviet plans
to increase domestic equipment manufacture;
denial of mining equipment would create only
short-run difficulties; non-US equipment is widely
available.
Soviets are unlikely to need substantial imports of
Western equipment and technology in next few
years.
Allied restrictions would have considerable impact
on large computers but not on minicomputers,
which are available from non-CoCom members;
Soviets prefer US products and services, although
non-US firms could almost duplicate some US
offerings.
ern equipment and technology-by legal and
illegal means; US retains leading edge, but Japan
and Western Europe can supply most Soviet needs.
Soviets can cover most needs from Eastern Europe
and non-CoCom Western countries.
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earlier the comparable US shares were about 10
percent, 5 percent, and 6 percent.)
? US unilateral restrictions on other industrial mate-
rials could do little, since Western Europe and
Japan dominate the Soviet steel market, and molyb-
denum-which the United States has sold to the
1 Soviets-could be purchased through a chain of
Western brokers or through East European trading
organizations.
Similarly, in construction and mining equipment and
machine tools, the United States has no technological
monopoly:
? Komatsu and Sumitomo of Japan and Fiat, in
particular, now match-or have the technological
capability to match-US-produced off-highway
trucks, industrial tractors, and earthmoving
equipment.
? Most Soviet needs for Western mining equipment
can also be satisfied by Japan and Western Europe.
? Much of the advanced numerically controlled ma-
chine tool technology is widely available from non-
US suppliers.
? The United States has the most advanced robot
technology, but the Soviets more urgently need
simpler types for routine applications, such as repet-
itive welding operations in car manufacturing. Mos-
cow may thus prefer Japan to the United States,
since Japan has a greater robot production capacity
and more experience in practical applications.
In computers and microelectronics, the Soviets still
prefer US equipment. Other countries, however, could
rapidly fill most Soviet needs. should the United States
pull out:
? The United States leads the world in manufacturing
the very-high-speed, high-capacity scientific com-
puters and the most advanced peripherals and
microprocessors.
? The United States can also provide a more complete
range of hardware, software, and support than can
Japan, its closest competitor.
? Several foreign firms, however, could come close to
duplicating US services.
? The United States could not prevent other CoCom
countries from selling their own computers unless
(1) it were willing to renege on its prior agreement in
CoCom not to-object to exports by others and
(2) other CoCom countries concurred.
? The United States has some control over sales of
other foreign systems to the USSR because parts
and peripherals may be of US origin.
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cause it has found some non-US products to be poor
substitutes and because the United States can sup-
ply the full range of state-of-the-art technology
from basic materials through final test. In the event
of a US embargo, however, Japan and Western
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Not even a CoCom-wide embargo could seriously
affect some Soviet economic sectors:
? The participation of Australia would be needed to
reduce Soviet imports of grain and grain products as
much as 70 percent.
? CoCom restrictions on offshore oil production E
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land, Singapore, Mexico; and Yugoslavia. - 0
? Non-CoCom countries such as Austria, Switzer-
land, and Sweden have been important (though
small) suppliers of machine tools to Moscow.
(MAAG of Switzerland is one of the world's top
manufacturers of precision grinding machinery.)
Israel.
? Minicomputers are available in non-CoCom coun-
tries such as Brazil, Austria, Switzerland, and
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The Economic-Defense Linkage: Summing Up
The survey of Soviet policy and practice presented
above shows how the USSR's military programs have
benefited indirectly as well as directly from East-
West economic relations. Although the Soviet econo-
my is large and diverse, with a broad technological
and scientific base, the USSR has had to make an
extraordinary commitment of resources to achieve its
present military power. Beset by stagnating productiv-
ity and growing resource constraints, it has used
imported Western products to:
? Minimize the encroachment of growing civilian
economic needs on defense production facilities,
primarily those in machine building.
? Raise the efficiency and quality of industrial pro-
duction intended for military procurement.
Western restrictions on trade and technology transfer,
by increasing the strain on the economy, would
therefore hinder the Soviet defense effort.
The Economic Base
Restricting the quantity of Western goods and tech-
nology imported for civilian use would increase the
strain on military programs since most defense indus-
tries also produce for the civilian sector. The focus of
the USSR's efforts to improve both civilian and
military industrial capabilities is the machine-build-
ing and metalworking branch of Soviet industry.
Western embargoes on machinery and materials that
are used either to produce machinery or to supple-
ment domestic machinery production therefore would
impinge most quickly on the resources available for
military production.'
? An embargo on specialized oil and gas production
equipment would force Moscow to allocate military-
oriented metallurgical and machine-building facili-
ties to produce such equipment; reduced Soviet
petroleum output_in the interim would aggravate
civilian industrial problems and might therefore
cause additional encroachment on defense
production.
imposed are sustained and effective.
? An embargo on large-diameter gas pipe and other
high-quality steel products could cut into production
of such military items as submarine hulls.
? An embargo on equipment for plants manufacturing
cars, trucks, and mining and construction vehicles
Kas well as an embargo on such vehicles themselves)
would increase the pressure in the Soviet Union to
devote more floorspace in military plants to produc-
ing those items
Western denial of grain and other agricultural prod-
ucts would also hamper the Soviet military effort. To
increase domestic farm output, Moscow might have to
allocate more factory space, for example, to producing
farm machinery instead of tanks and armored person-
nel carriers. A Western embargo on selling farm
machinery or on building the facilities that manufac-
ture such machinery would also put. pressure on
existing priorities. Reduced per capita food consump-
tion would work against Soviet efforts to raise worke
productivity, increasing the problems facing industry
By curtailing Soviet import capacity-primarily by
restricting credits but also by hampering Soviet oil
and gas production and thus hard currency exports-
the West would clearly raise the cost to the Soviet
Union of maintaining the present policies on resource
allocation. Moscow probably could maintain top-
priority imports and thus cushion the immediate
impact on military industries. The increased number
of bottlenecks created in the civilian economy, how-
ever, would eventually force allocation of military-
related resources to general economic needs.
Military Procurement
Tighter restrictions on Moscow's acquisition of West-
ern industrial technology would slow the qualitative
improvements in Soviet weapon systems needed to
keep pace with Western military capabilities. As has
been shown, the Western know-how and the plant and
equipment that can improve civilian industrial output
often serve a dual function-particularly in machine
building and metalworking-by aiding weapon devel-
opment. Reducing Moscow's access to advanced ma-
terials, specialized machine tools, and electronics
would particularly affect Soviet defense procurement.
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A Western embargo of industrial plant and equipment
would clearly hurt military programs:
? Denial of microelectronics components and produc-
tion technology would hamper the development of
weapon guidance systems and precision machine
tools for specialized defense production.
? Denial of minicomputers and related technology
would hamper the development of electronic war-
fare capabilities.
? Denial of numerically controlled machine tools
would hamper many defense-related industrial proc-
esses, such as the manufacture of gears and disks for
high-performance turbojet engines.
? Preventing Western design or construction of indus-
trial plants-like the agricultural combine factory
proposed by International Harvester-would ham-
per Soviet production of vehicles, ships, and other
equipment for military as well as civilian use.
Because many advances in Soviet weapon capabilities
will depend on substantial improvements in materials
processing, Western restrictions on Moscow's acquisi-
tion of processing technology might also affect de-
fense procurement.
? Denial of powdered-metallurgical material process-
ing know-how would retard development of ad-
vanced airframes.
? Denial of techniques for producing ultrapure mate-
tals would slow microelectronics development for
Moth military and civilian use considerably.
Impact of Western Restrictions on Trade and Credits
The Soviets' worsening economic performance pre-
sents the West with correspondingly greater opportu-
nities to aggravate their defense burden. The economy
is increasingly strained to meet the demands of
consumption, investment, and defense. Although
Moscow planned to increase investment in the non-
defense sector, it reportedly has redirected some
resources back to the military because of the stepped-
up US defense program. If Soviet military spending
continues to grow at a high rate, the civilian sector
will receive increasingly smaller increments in eco-
nomic output for both consumption and investment.
Efforts to raise productivity will be undercut as a
result, intensifying the pressure on supplies of raw
materials and semifinished goods. Moscow will thus
have less flexibility than before to adapt to bottle-
necks created by substantially reduced availability of
Western goods and technology.
Several forms of Western restrictions on East-West
trade and technology transfer could hurt Soviet eco~
nomic performance and-directly or indirectly-
Moscow's defense programs. The restrictions differ,
however, in their ability to affect areas of major
economic and military importance. Western actions
with the greatest potential for hindering the military
effort include:
? The expansion of CoCom controls to include emerg-
ing technologies such as numerically controlled ma-
chine tools and robotics, older Western technologic
that the Soviets have not mastered, and areas such
as shipbuilding and the manufacture of cars, trucks,
and construction vehicles.'
? Greater efforts to prevent illegal technology trans-
fer, including increased compartmentation and clas-
sification of US weapon designs and test data-
actions that can be taken unilaterally.
? Embargoes on key products and technologies such
as grain and oil and gas equipment, which would
seriously aggravate Soviet economic problems with-
out halting East-West trade entirely.
In the short run, Western restrictions on technology
transfer probably would not prompt Soviet reduction
of military spending. Although the Brezhnev regime
would have to deal with several painful choices re-
garding resource allocations that it has thus far
avoided, it almost certainly would maintain the high
priority of defense, particularly if East-West tensions
6 Because the USSR uses Eastern Europe as an illegal conduit for
hard-to-trace technology, the value of any extension of the CoCom
list would be seriously weakened if Eastern Europe were not
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were high. A post-Brezhnev regime would try to
convey an impression of stability, continuity, and
unity-avoiding radical changes in resource alloca-
tion. In such an environment, it is unlikely that any
Soviet leader would be inclined or able to challenge
the defense establishment's top priority. Consumer-
oriented programs would suffer as a result.
Over the longer run, however, the military's priority
may decline as a new generation of leaders takes
command. Being less personally committed to today's
approaches, and facing mounting economic problems
aggravated by the sustained denial of Western goods
and technology, the new leaders might eventually see
substantial advantages in reducing military, spending
in order to free up the labor and material resources
urgently sought in key civilian sectors
Any cuts in defense programs would occur slowly,
however, particularly if international tensions re-
mained high. Overall Soviet military capabilities
would therefore be affected only gradually. The cuts
would probably be concentrated in the general pur-
pose forces, especially the Ground Forces, because:
? The Soviets probably are relatively comfortable
with their military positions-against both the West
and China-in general purpose forces. In particular,
they probably consider themselves ahead in the
number of their ground force weapon systems.
? A reduction in general purpose forces could return
more people to the general civilian work force than
would a reduction, for example, in the ICBM force.
? The production facilities and industrial materials-
notably steel-now used for general purpose forces
are less specialized than those now used for strategic
forces and thus can be transferred more readily to
critical civilian needs such as energy, transportation,
and agriculture
In addition to possibly prompting reductions in gener-
al purpose forces, a stringent Western denial of goods
and technology could interfere with qualitative im-
provements across a range of Soviet weapon systems.
The effects of this denial on Soviet military power
would be delayed but would accumulate in the last
half of the 1980s and could have a major impact o
Soviet programs in the 1990s.
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