USSR: IMPACT OF CREDIT RESTRICTIONS ON FOREIGN TRADE AND THE ECONOMY

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• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP83T00233R000100190001-3
• Release Decision: RIPPUB
• Original Classification: C
• Document Page Count: 28
• Document Creation Date: December 22, 2016
• Document Release Date: May 10, 2010
• Sequence Number: 1
• Publication Date: May 1, 1982
• Content Type: REPORT

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Directorate of Confidential
Intelligence
USSR: Impact of Credit
Restrictions on Foreign Trade
and the Economy
Confidential
SOV 82-10070
May 1982
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Information Subject to Criminal Sanctions
All material on this page
is Unclassified.
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Directorate of Confidential
Intelligence
USSR: Impact of Credit
Restrictions on Foreign Trade
and the Economy
Information available as of 21 April 1982
has.been used in the preparation of this report.
This assessment was prepared by the Soviet
Economy Division, Office of Soviet Analysis, with
contributions from SOVA's Econometric Analysis
Division, the Office of European Analysis, and the
National Intelligence Officer for Economics.
Comments and queries are welcome and may be
directed to the Chief, Soviet Economy Division,
Confidential
SOV 82-10070
May 1982
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USSR: Impact of Credit
Restrictions on Foreign Trade
and the Economy
Overview One of the most difficult problems for the Soviet leadership in the 1980s
will be how to deal with a severe scarcity of hard currency at a time when
the economy is slowing sharply. Although the slowdown results from the
interplay of many forces, and the overall weight of hard currency imports
in the economy is small, these imports play an important role in easing food
shortages, raising energy production, sustaining technology and productiv-
ity, and making up for unexpected shortfalls of key products. Hard
currency imports, for example, comprise perhaps 10 percent of Soviet
investment in machinery and equipment.
But while the Soviet need for Western goods and technology is rising, the
purchasing power of Moscow's hard currency earnings during the 1980s is
likely to decline:
? The volume of oil exports will be steadily squeezed between rising oil
consumption and oil production that is now constant and will fall later.
? Soft oil markets probably will keep real oil prices from rising for several
years.
? Gas exports will increase substantially if the gas export pipeline is built,
but not enough to offset the drop in oil exports.
? Hard currency earnings from arms sales are unlikely to increase much,
because LDC clients will be less able to pay.
? Other exports suffer from production problems (wood products, metals)
or an inability to compete on a large scale in Western markets
(machinery, chemicals).
The Soviet hard currency position is still relatively strong; the debt service
ratio is only about 17 percent. Nonetheless, prospective stagnation in the
volume of exports means that any attempt to achieve a substantial increase
in imports will quickly push up hard currency debt to an unacceptable
level. Indeed, a large inflow of Western capital would be required just to
maintain the current volume of imports, and this would result in a doubling
of debt by 1985 and a quadrupling by 1990. The debt service ratio would
approach 30 percent by 1985-a level high enough to cause concern in
financial circles-and reach dangerous proportions (45 percent) by 1990.
In this tight situation, a Western credit policy of restricting the volume and
hardening the terms of government-guaranteed credits can play an impor-
tant role in:
? Avoiding overexposure by private banks, as has already occurred in
lending to Eastern Europe, and the potentially costly claims on Western
budgets if guarantees have to be made good.
Confidential
SOV 82-10070
May 1982
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Putting added pressure on the Soviet authorities to reexamine their
priorities.
To illustrate the potential impact of Western credit restrictions, we have
projected the effects of some possible sets of restrictions. A leveling off of
new Western lending at the average rate of 1976-80 would result in a
decline in import volume of about 10 percent during 1982-90 and would
keep the hard currency debt within manageable proportions. Substantial
reductions in government-guaranteed lending coupled with a cessation of
medium- and long-term private lending would cut imports by nearly 1-5
percent. Any reduction in imports would be magnified by the increasingly
taut Soviet economy.
Even moderate declines in hard currency imports can greatly complicate
Soviet economic problems and make allocation decisions more painful.
Large agricultural imports are essential to the growth of meat consumption
even in normal crop years. Expansion of gas consumption and exports
requires massive purchases of Western large-diameter pipe. Large imports
of metals and chemicals are an integral part of Soviet economic plans.
Orders of Western machinery and equipment have already been sharply
curtailed; further cuts would certainly impinge on priority programs in
steel, transportation, agriculture, and heavy machine building.
It is possible that even some Soviet military and foreign policy programs
would be squeezed in the latter part of the 1980s if sizable cuts in
allocations of foreign exchange had to be imposed. The economy is so
taut-indeed, it is already rent with widespread shortages-that the
repercussions of any substantial cuts are bound to spread widely, even to
military industries with all their traditional immunity. Moreover, such
programs as aid to Eastern Europe, Cuba, or Third World countries, which
directly or indirectly use,up foreign currency and are already unpopular
within the USSR, would encounter greater opposition.
25X1
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Official Credits to the USSR-Background and Current Status
1
Soviet Demand for Imports
6
Prospects for Hard Currency Earnings
7
Assumptions
Effect on Imports
Effect on Hard Currency Debt
Finding Alternative Credit Sources
14
Economic Assistance From Eastern Europe
15
1.
Official Credit Commitments to the USSR in 1977-80 by
Industrial Sector
3
2.
USSR: Estimated Drawings on Western Officially Backed Credits
in 1975-80
5
3.
USSR: Hard Currency Imports
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5. USSR: Hard Currency Exports
6. Key Assumptions About Soviet Hard Currency Exports in the 1980s 11
7. USSR: Impact of Credit Restrictions
8. USSR: Orders of Machinery and Equipment
1. USSR: Western Credit Drawings and Repayments
2. Projected Soviet Hard Currency Gap: Reference Case
4. Soviet Imports: Impact of Flat Lending and Severe Credit
Restrictions
5. Soviet Debt Service Ratio: Impact of Flat Lending
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USSR: Impact of Credit
Restrictions on Foreign Trade
and the Economy
The recent sharp turnaround in Soviet hard currency
trade, coupled with the difficulties that several East
European countries are having in paying their debts,
is raising serious questions about the Soviet Union's
external financial strength.
This paper assesses the extent of the USSR's reliance
on Western credits and the consequences for Soviet
hard currency debt and import capacity of reductions
in the volume of credits granted to the USSR. The
assessment begins with a review of the credits pro-
vided or guaranteed by Western governments. It then
discusses the impact of credit restrictions on hard
currency debt, debt service ratios, and Soviet import
capacity. The USSR, of course, would try to sidestep
the effects of restraints on Western credits, so the
range and effectiveness of possible Soviet responses
are analyzed. The paper concludes with some judg-
ments regarding the impact of credit restrictions on
the Soviet Union and on the level and composition of
East-West trade.
Official Credits to the USSR-
Background and Current Status
Recent Trends
During the 1970s the USSR and Eastern Europe took
advantage of political detente to greatly increase
imports from the West. The volume of Soviet hard
currency imports more than tripled during the decade,
for an annual growth of 13 percent. Hard currency
imports increased as a share of total Soviet imports
and in relation to GNP. Although still small in the
aggregate (less than 2.percent of GNP), hard currency
imports are important to many high-priority Soviet
economic programs, including those for raising meat
consumption and energy production. They comprise
perhaps 10 percent of investment in machinery and
equipment.'
The expansion of hard currency imports in the 1970s
was financed mainly by increased earnings from
higher oil and gold prices, gas exports, arms sales, and
Western credits, particularly through mid-decade.
Exports other than oil, gas, and arms have on balance
barely held their own. Starting from a very low base,
Soviet hard currency debt reached almost $15 billion
by the end of 1976, and the net inflow of Western
capital after interest payments paid for more than 20
percent of hard currency imports during 1971-76. The
net inflow then slowed greatly during 1977-78 and
became a small net outflow in 1979-80 (figure 1).
About 40 percent of the total Soviet hard currency
debt of $20.5 billion at yearend 1981 was guaranteed
by Western governments. Drawings on officially sup-
ported credits rose rapidly and steadily until 1976,
when they leveled off. Use of private credit has
fluctuated widely. Medium- and long-term private
credits have been raised mainly in the Eurodollar
market and have been used for general balance-of-
payments purposes, unlike government-guaranteed
credits, which are tied to particular exports and
projects.
The large jump in Soviet export earnings resulting
from higher oil prices in 1979-80 enabled Moscow to
pay for increased imports of food and steel, to virtual-
ly cease commercial borrowing, and to build up its
' Comparisons of imports with domestic values are complicated by
the artificiality of the official exchange rates for the ruble. For
example, according to Soviet statistics, total imports in 1971-75
amounted to 85.5 billion foreign trade rubles. A researcher in one
of the leading Soviet scientific research institutes, however, esti-
mates the total value of imports for this period at 190.8 billion
rubles in internal prices. Western researchers have also argued that
using the official exchange rate significantly understates the do-
mestic ruble value of Soviet imports.
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Figure 1
USSR: Western Credit Drawings and Repayments
hard currency assets. In the past year or so, however,
softening oil prices, weak markets for other Soviet
exports due to the Western recession, bad crops, and
unexpected hard currency expenditures in support of
Poland turned the Soviet hard currency balance of
payments from surplus to deficit. Moscow drew down
its hard currency balances, resumed large gold sales,
obtained short-term loans from Western banks and
suppliers, and took steps to cut imports. But they
could not borrow on a large scale in the Eurodollar
market as they did in 1975-76 because deteriorating
East-West relations and the Polish crisis made West-
ern bankers far more nervous. In 1981 new commit-
ments turned upward as a result of business connected
with the new gas export pipeline.
Soviet Use of Official Credit
Since the USSR began large purchases of Western
technology in the early 1970s, Moscow has used
official and officially backed credits to finance one-
third of its imports of plant, equipment, and large-
diameter pipe from the West. Annual Soviet drawings
on government-backed credits jumped from an aver-
age of $475 million in 1971-73 to nearly $2 billion by
1975, but have held at $2.5 billion per year since
1978. The volume of new commitments fell from a
peak of nearly $4 billion in 1976 to less than $2 billion
by 1980, reflecting falling Soviet orders for Western
machinery and equipment.
Although heavy drawings in recent years have re-
duced the backlog of undrawn commitments, Moscow
still had $5 billion in undisbursed credits available at
yearend 1981 (excluding commitments for pipeline
orders). Perhaps $1 billion of these commitments were
pledged, however, to contract proposals that have now
been scrapped. The combination of rising debt service
payments and level drawings has steadily reduced the
net resource inflow to the USSR on official credits
from a maximum of $1.2 billion in 1976; by 1980-81
there was a small net outflow from the USSR as debt
service exceeded drawings.
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Official Credit Commitments to the USSR
in 1977-80 by Industrial Sector a
West
Germany
France
Italy b
United
Kingdom
Japan c
Total
8,992
208
2,673
2,810
775
728
1,450
Complete plants
2,993
718
1,311
423
300
Steel
168
44
124
Chemical
1,900
432
790
44
37
7
33
a value of contracts supported by official credits with an original
maturity of more than five years.
b Presumably includes credits for pipe exports.
C OECD reports for all countries except Japan. Data for Japan are
based on announcements of credits backing specific contracts.
Subsidized interest rates and long-term maturities on
most government-backed credits have helped Moscow
conserve some scarce hard currency. The interest rate
subsidy reached a record level in 1981-on the order
of $300-400 million-as commercial rates in most
Western countries averaged 6 percentage points more
than those charged on official loans. Last October's
increase in the OECD interest rate guidelines and a
possible reclassification of the USSR into the "rich
country" category will reduce the subsidy, but only
slowly. Several years will be required to pay off the
official credit committed on concessionary terms, and
many credits extended under earlier agreements can
still be drawn at lower rates. Because of the lengthy
maturities available on official financing (up to eight
and a half years), Moscow's 1981 debt service bill was
approximately $200 million less than it would have
been with a maturity limit of five years.
In 1977-80, contracts for sales of large-diameter pipe
and chemical plants were the primary beneficiaries of
government-backed financing (table 1). Pipe contracts
backed by official financing totaled at least $2.5
billion, and approximately $300-500 million in con-
tracts for other energy-related equipment also re-
ceived official guarantees or credits. Officially guar-
anteed credits covered $3 billion in contracts for
complete plants; two-thirds of these commitments
were for chemical plants with the remainder going for
steel mills ($170 million), aluminum plants ($160
million), and factories for machinery and consumer
goods ($690 million together). OECD data report
some $3 billion in official credit commitments for
machine tools and other plant equipment in 1977-80.
Small amounts of credits have financed orders for
telecommunications equipment, ships, and earth-mov-
ing vehicles.
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The Role of Individual Western Creditors
West Germany has been the leader in providing
government-backed financing to the USSR, account-
ing for more than one-fourth of Soviet drawings on
new commitments extended by the West in 1975-80
(see table 2). Bonn approved a growing amount of
guarantees in 1979-80, although the volume of new
German commitments remained well below the 1974
peak. The upward trend accelerated in 1981 on the
strength of increased Soviet orders of machinery and
equipment (largely for the gas export pipeline) and
perhaps greater desire by lenders to ensure their
credits. West German commitments of guarantees on
repayments of principal and interest on loans to the
USSR-largely because of recent gas pipeline con-
tracts-amounted to $4.3 billion at yearend 1980 and
have increased since then. Despite the large volume of
commitments, West Germany has depended less on
government-backed financing to support exports of
capital goods than other countries. Germany's esti-
mated annual disbursements of $640 million in 1975-
80 covered just over a third of its exports of machin-
ery, equipment, and large-diameter pipe. Shares for
other Big Six countries are above 40 percent.
At yearend 1981, the USSR's debt to West Germany
on guaranteed credits stood at approximately $3
billion. Undisbursed commitments on principal were
probably on the order of $1.5 billion. To support
pipeline equipment sales, Bonn has approved $500
million in Hermes credit guarantees and established a
$930 million supplier credit line through its partially
subsidized AKA (Ausfuhrkredit Gmbh) rediscount
facility.
Although' Japan ranked second in the amount of
official credit and guarantees extended to the USSR
between 1974 and 1980, its share of total new com-
mitments fell sharply in 1977-79 compared with
earlier years. In large part this was the result of
diminished Japanese interest in Siberian resource
projects. Showing-its support for Afghanistan-related
sanctions, Tokyo approved no new loans in 1980
except for a $300 million official credit for large-
diameterpipe. New commitments climbed in 1981 as
Japan provided another pipe loan, credits of $100
million against Soviet purchases of pipelayers, as well
as supplier credits for several other plant and equip-
ment contracts. In 1981 Tokyo also approved a credit
to finance $1 billion in equipment purchases over two
years for a Siberian timber resources project:
Disbursements of Japanese credits averaged an esti-
mated $525 million in 1975-80; drawings peaked at
$675 million in 1978 and fell back to $500 million
annually in 1979-80 as the reduction in new commit-
ments contributed to a decline in Japanese exports of
machinery and pipe from $1.5 billion to $1.2 billion.
At yearend 1981, the USSR owed Japan $2.1 billion
on official loans and an estimated $500-700 million, on
guaranteed commercial credits.
In contrast to Japan, France has been generally
increasing its share of Western credit commitments to
the USSR in recent years. As a result, French credit
disbursements-which averaged an estimated $485
million annually in 1975-80-rose rapidly from $300
million in 1975 to $600 million in 1980. The impor-
tance.of the French export credit system in promoting
sales to the USSR is demonstrated by the fact that
official credits and guarantees financed an estimated
65 percent of machinery and pipe exports to the
Soviet Union and 29 percent of total exports in 1975-
80, the highest shares for any Big Six country. Paris
has reported that Soviet debt on official credits and
guarantees totaled $2.3 billion at yearend 1981. Un-
disbursed commitments are estimated to be $1.2
billion. Paris has also offered $1.8 billion for financing
Soviet purchases of French equipment for the Yamal
pipeline; about $1 billion has been committed in firm
contracts.
Credit disbursements by Italy increased from an
estimated $150 million in 1975 to $350-400 million
per year in 1978-80 as large commitments made in
1975-76 helped boost exports of machinery and pipe.
Rome's refusal to approve a major new credit line
because of the Afghanistan sanctions and concern
over mounting interest subsidies probably reduced
drawings somewhat in the past two years and perhaps
led to some decline in disbursements. Italy reportedly
released only a small amount of guaranteed supplier
credits in 1981, although terms were set for the $500
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USSR: Estimated Drawings on Western
Officially Backed Credits in 1975-80
Japan
Other
1980
Annual
Average
1975-80
1,997
2,450
1,991
2,565
2,411
2,533
2,324
575
650
575
675
675
700
642
300
350
450
550
650
600
483
150
175
200
400
350
350
271
100
125
100
200
200
225
158
10
5
5
20
20
20
13
450
525
500
675
500
500
525
412
620
161
45
16
138
232
a Based on Western country trade data, which generally show a
smaller amount of exports to the USSR than Soviet trade data.
million financing package offered to support Italy's
pipeline-related exports. Final approval of credits for
Nuovo Pignone's contract to supply compressors
awaits the end of Rome's "pause for reflection" on
participation in the project. Soviet debt on Italian
officially backed credits is estimated at $1 billion with
$600-700 million in undisbursed commitments, ex-
cluding those for pipeline sales.
Despite offering a $2 billion line of credit on very
favorable terms between 1975 and 1980, the United
Kingdom supplied less than 10 percent of Western
official credits and guarantees provided to the USSR.
Little more than half of the "Wilson line" was
committed to firm contracts before London allowed
the facility to expire as part of the Afghanistan
sanctions. Nonetheless, nearly two-thirds of Soviet
orders for British machinery have been covered by
government-backed financing.
British credit disbursements probably reached $225
million in 1980 (compared with $100 million in 1975)
on the strength of major commitments in 1977-79.
The sharp falloff in new commitments in 1980 may
have reduced drawings last year. At yearend 1981,
Credit Drawings Credit Drawings
As a Percent of As a Percent of
Machinery and Total Imports a
Pipe Imports a 1975-80
1975-80
50 24
36 20
65 29
45 25
65 22
50 2
48
Moscow probably owed about $750 million on British
officially backed credits and had $300-400 million in
undisbursed commitments available. Although Lon-
don has not yet offered a special pipeline credit
package, it undoubtedly is prepared to provide prefer-
ential terms to support the UK's expected $400
million in pipeline contracts.
Loans guaranteed by Canada in support of capital
goods exports to the USSR began in 1970 but did not
become significant until after establishment of the
1975 financial protocol. Not until 1978-80 did ma-
chinery exports and credit disbursements increase
markedly over earlier years. At yearend 1981, Can-
ada had committed $300 million to export contracts;
disbursements on these commitments were probably
no more than $100 million. Ottawa reportedly autho-
rized a new $600 million credit line in early 1982. The
Canadian Wheat Board has the authority to provide
up to three-year financing for grain sales, but appar-
ently the USSR has not used these facilities to finance
its purchases.
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Although other countries also extend official credits
or.guaranteed commercial loans to the USSR, the
overall. exposure is relatively small. US commitments,
mainly by Eximbank and totaling less than $1 billion,
were made in the middle of the 1970s. No new
commitments have been authorized in recent years. In
Western Europe, Austria, Belgium, Spain, and Swe-
den all have made available financial facilities of $100
million or more. The largest is a $500 million package
extended by the. Austrian Government in 1980 to
finance Austrian equipment and machinery exports.
A new $500 million loan reportedly was under negoti-
ation in early 1982.
Interest Rate Subsidies
France and Italy probably provide over half of the
interest rate subsidy enjoyed by Moscow through its
official credit operations. In 1981, thanks to these
subsidies, the Soviets saved an estimated $150 million
in interest payments to France and $110 million on
interest payments to Italy. If all official debt had been
contracted at commercial rates, the Soviets would
have had to pay $35 million more to the United
Kingdom and perhaps $20 million more to Japan.
Any West German subsidy was undoubtedly quite
small since only 1 to 3 percent of exports to the USSR
have been financed,through West Germany's AKA
rediscount facility. When the Soviets demand interest
rates below market. levels on Hermes-guaranteed
credits, the German exporter usually covers the fi-
nancing cost by charging higher prices.
Interest rate subsidies have been viewed by some
governments' as an inexpensive way to promote em-
ployment'and exports. The rise in domestic interest
rates has increased the subsidy element in, the past
few years,'however. Subsidy costs in 1981 probably
represented 15 to 20 percent of the value of machin-
ery'exports-to the'USSR for France and Italy and
roughly-4 0 percent -for the United Kingdom: Paris,
Rome, nd London are concerned that-elimination of
subsidized' credits-without adequate restraint on
German and Japanese guarantees-would damage
their competitive' position because of the lower com-
mercial interest rates in West Germany and Japan.
Despite the help from large infusions of hard currency
imports in the 1970s, the performance of the Soviet
economy is worsening. Although the economy is still
expanding, its rate of growth has fallen drastically.
The slowdown stems mainly from rising resource
costs, systemic inefficiencies, shortfalls in agriculture
and in key industries such as steel, and an accumula-
tion of planning mistakes. As a result, growth of labor
productivity has slowed markedly at a time when
demographic trends have greatly curtailed the supply
of new labor.
Economic growth in the 1980s, projected at 2 percent
per year or less, will probably be insufficient to both
support past rates of increase in defense spending and
maintain a perceptible rise in living standards. Indeed
many Soviet citizens believe that living standards
have been declining over the past few years. If defense
outlays continue to rise by about 4 percent per year
(as we now project), they will preempt about two-
thirds of annual increments to GNP in 1990, as
compared with one-fourth now. Leadership choices
will be far more difficult; in particular, allocations to
consumer industries, agriculture, and transportation
will inevitably suffer.
The resource bind confronting Soviet leaders in turn
suggests that hard currency imports will be even more
important to the USSR in the 1980s than in the
1970s.
Moscow needs large imports of Western farm pro-
ducts, especially grain, to increase food supplies
even in good crop years and to keep them from
falling in bad years.
Western pipe and compressors are essential for the
rapid expansion of Soviet gas production, which will
be the main source of additional energy supplies and
hard currency in the 1980s. Western equipment also
is increasingly important in oil production.
Imports of Western production equipment-espe-
cially advanced machine tools-would help to raise
labor productivity, which is the key to Soviet eco-
nomic growth in the 1980s.
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2,943
4,157
6,547
8,448
14,257
15,316
14,645
16,951
21,585
26,017
185
770
1,423
509
2,323
2,627
1,354
2,360
3,279
4,360
Other agricultural products
475
423
933
1,273
1,533
1,458
1,836
1,478
2,287
4,400
Machinery
960
1,282
1,739
2,334
4,593
5,074
5,114
5,969
6,028
6,039
Rolled ferrous metals
366
489
884
1,905
2,565
2,251
1,750
2,503
3,413
3,469
Chemicals
213
257
279
720
742
630
670
831
1,203
1,565
Other
744
936
1,289
1,707
2,501
3,276
3,921
3,810
5,375
6,184
Millions of constant
US dollars (1970)
Total
2,705
3,547
4,242
5,118
7,268
8,254
7,470
7,292
8,430
9,166
185
733
730
196
997
1,257
670
937
1,100
1,188
Other agricultural products
484
298
339
615
751
715
649
471
757
1,419
Machinery
946
1,149
1,353
1,622
2,700
2,929
2,827
2,716
2,512
2,350
Rolled ferrous metals
215
321
583
1,074
1,030
1,147
909
1,113
1,423
1,330
Soviet requirements, in other words, will match fairly
well the pattern of past purchases of Western goods
(table 3).
The USSR, however, realizes that it will not be able
to expand hard currency imports in real terms at the
breakneck pace of the first half of the 1970s (22
percent per year) or even at the more leisurely pace of
the last half of the 1970s (5 percent per year). The
cautious formulation of the foreign trade section in
the 1981-85 Plan contrasts sharply with the bullish
trade prospects expressed in previous five-year plan
guidelines. In remarks to the Supreme Soviet in
November, State Planning Committee Chairman
Baybakov implied that the volume of trade with non-
Communist countries would grow by only 2.3 percent
per year during 1981-85 compared with just over 5
percent in 1976-80. Allowing for some rise in the
Soviet hard currency trade deficit, the Plan might
envisage an average annual growth in hard currency
imports of 2 to 2.5 percent to 3 percent per year. As
will be shown below, even this relatively modest goal
cannot be achieved without an excessive increase in
Western financial exposure to the USSR.
Prospects for Hard Currency Earnings
In the past, the USSR has been able to offset sizable
trade deficits with large sales of gold and arms (table
4). But the outlook for Soviet hard currency exports is
so poor that Moscow will not be able to stave off large
and growing requirements for hard currency by using
the gold/arms option. In the 1970s, the USSR relied
primarily on sales of petroleum, natural gas, timber
and wood products, chemicals, metals, and diamonds.
Machinery exports were not an important factor
(table 5). In the 1980s, however, the volume of energy
exports is likely to decline substantially while the
other exports, on balance, hold their own. Gold and
arms sales cannot save the situation.
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USSR: Hard Currency Payments Position
Trade balance
-500
-313
-1,356
-1,757
-978
-6,419
-5,595
-3,300
-3,794
-2,036
-2,519
-4,000
Exports, f.o.b.
2,201
2,630
2,801
4,790
7,470
7,838
9,721
11,345
13,157
19,549
23,498
23,800
Imports, f.o.b.
2,701
2,943
4,157
6,547
8,448
14,257
15,316
14,645
16,951
21,585
26,017
27,800
Gold sales
NEGL
24
289
962
683
725
1,369
1,618
2,522
1,490
1,780
2,700
Net interest
-83
-48
-60
-80
-102
-568
-716
-846
-881
-799
-710
-1,500
Arms receipts
35
50
NEGL
250
250
1,200
1,500
1,500
1,700
5,500
3,300
5,000
Other invisibles and transfers
570
259
207
583
712
351
_ 511
1,800
1,823
-360
1,600
1,000
Current account balance
22
-28
-920
-42
565
-4,711
-2,931
772
1,370
3,795
3,451
3,200
Direct investment abroad
0
-6
0
-9
-11
-3
-31
0
0
0
0
0
1,910
6,132
5,332
2,096
4,165
4,511
3,033
5,700
1,164
1,972
2,611
1,991
2,565
2,411
2,433
2,400
746
4,160
2,721
105
1,600
2,100
600
3,300
891
1,287
2,445
3,238
3,443
3,625
4,061
3,300
483
730
1,056
1,305
1,476
1,722
1,966
2,000
Commercial
NA
75
80
172
408
557
1,389
1,933
1,967
1,903
2,095
1,300
Lending to other countries b
-25
-55
-679
-809
-1,029
295
-1,711
140
-1,582
-2,926
200
1,600
Capital account balance
NA
501
-157
350
-21
5,137
1,145
-1,002
-860
-2,040
-828
4,000
Statistical discrepancy <
NA
-473
1,077
-308
-544
-426
1,786
-798
-510
-1,755
-2,623
-7,200
a Estimated.
b Net change in Soviet assets held with Western commercial banks (a
negative sign signifies an addition to assets).
c Includes intra-CEMA hard currency trade and other transactions.
Merchandise Exports
We think that Soviet oil production will begin to
decline by mid-decade and that domestic consumption
will continue to rise slowly.' Unless Moscow elects to
reduce exports to Eastern Europe beyond the cuts
introduced in 1981, the stage is set for a continued fall
in exports of oil and oil products for hard currency.
(They dropped in volume by 25 percent between 1978
and 1981.) Because of the uncertainties concerning
the future of production, consumption, and prices for
oil and the relative priorities of the various domestic
and export uses of oil, projections of oil exports cannot
be made with any precision. In our view, however, the
trend is clear-only the extent of the decline is
uncertain. Soviet oil exports could disappear entirely
by the end of the 1980s, and it is highly unlikely that
the Soviets could afford any sizable oil imports.
Alternatively, Moscow could choose to maintain small
hard currency oil exports at the expense of its own
consumers and/or those of Eastern Europe.
Gas exports, in contrast, will rise-although not by
enough to offset the expected fall in oil exports.
Potential gas exports can be projected on the basis of
the capacity of the export pipeline and the contracts
signed with West European countries. Whether the
pipeline is used to full capacity is uncertain because it
depends on the growth of West European gas demand.
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Million current US dollars
Total
2,630
2,801
4,790
7,470
Petroleum
567
556
1,248
2,548
Natural gas
20
23
23
86
Coal and coke
125
121
135
252
Machinery and equipment
184
225
299
341
Ferrous metals
131
134
204
222
Agricultural products 346 347 414 685
Diamonds 257 371 515 545
Other 567 546 1,120 1,521
Million constant
US dollars (1970)
Total
Petroleum
Natural gas
Coal and coke
2,430
441
13
80
153
406 437 375
26 26 65
78 83 92
Machinery and equipment
Ferrous metals
Wood and wood products
Chemicals
252
561
169 195 199
184 222 232
97 114 188
219 173 252
346 359 315
496 747 780
7,838
9,721
11,345
13,157
19,549
23,498
3,276
4,514
5,275
5,462
9,558
12,028
220
347
566
1,063
1,404
2,706
391
370
359
293
313
362
560
657
789
1,188
1;419
1,388
167
171
186
145
225
246
712
852
1,045
967
1,357
1,476
256
215
229
300
555
765
572
627
730
545
570
478
478
511
606
773
1,043
1,304
1,206
1,457
1,560
2,421
3,105
2,745
2,848
3,174
3,308
3,962
4,044
3,686
476
588
813
747
611
592
91
156
182
221
273
273
86
89
88
70
65
58
277
319
314
514
566
507
182
174
123
142
141
134
361
449
427
405
380
328
159
129
143
196
324
403
264
227
256
175
138
112
282
284
291
376
380
376
670
759
671
1,116
1,166
903
The volume of timber and wood products exports-
some 6 percent of total hard currency exports-has
trended downward in the 1970s, and we expect little
or no growth in the 1980s. Shortages of labor and
equipment will limit the harvesting of timber, which
must come increasingly from remote areas. In addi-
tion, rising domestic demand for lumber and paper
products has caused persistent shortages in the past
several years.
Chemical exports grew dramatically in the 1970s but
still account for less than $800 million in foreign
exchange receipts. Most of the growth in exports
resulted from buy-back deals under which Western
firms provided the plant and equipment in return for
future product exports. In fact, Western help has
allowed the USSR to become the world's leading
ammonia exporter-about 2 million tons were export-
ed in 1980. Exports of other chemicals are not as
large, nor are they likely to grow substantially in the
1980s. Western exporters already have begun to voice
concern about the dumping of Soviet polyethylene and
polyvinyl chloride in their markets.
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During the 1980s Soviet exports of platinum-group
metals (mainly palladium), nickel, copper, and alumi-
num probably will increase, while exports of chromite,
manganese, lead, and zinc will at best remain steady
and more likely will fall. The USSR produced about
half of the world's platinum-group metals during the
1970s and is assured of large increases in production
of these metals in the 1980s as byproducts of expand-
ed copper and nickel production in northern Siberia.
Even a major surge in Western demand that doubled
the price of these products, however, would yield the
Soviets an increase in foreign exchange earnings of
less than $2 billion.
Moscow probably has some chance of increased earn-
ings from sales of diamonds. In 1980 receipts from
diamond sales totaled $1.3 billion, equal to 6 percent
of commodity exports. Because Western demand is
highly volatile, however, earnings fluctuate widely.
Machinery exports increased nearly sevenfold during
the 1970s and now account for 6 percent of total
Soviet hard currency exports. The largest customer
for these exports has been Iraq, with whom relations
are now tenuous at best. Most Soviet machinery is not
well suited to Western markets, nor is it backstopped
by a developed network for service or spare parts. The
Soviets can mass produce, at low cost, simple machin-
ery and equipment such as standard machine tools
and have had limited success in exporting such pro-
ducts to the West. The market for these products,
however, is generally stagnant, while competition
from newly industrialized countries is growing. More-
over, given the growing stringencies in steel and other
raw material supplies, Soviet machine builders will
have all they can do to meet the demands of the
domestic economy.
Gold
The USSR ranks second to South Africa as a produc-
er and marketer of gold. During the 1970s the Soviet
Union accounted for about one-third of annual world
gold production and about one-fourth of the newly
mined gold moving in world trade. In 1980, gold
production was 320 tons, roughly one-half that pro-
duced by South Africa, but more than the combined
output of all other producers. Gold traditionally has
ranked as one of the USSR's top export earners, with
cumulative receipts in the 1970s netting Moscow $15
billion-an amount equal to about 10 percent of
Soviet hard currency requirements in the decade. In
1980 the USSR had a gold inventory of 1,800 tons.
In assessing gold as a source of hard currency in the
1980s, Moscow will have to balance its potential for
large sales against the market's ability to absorb
Soviet offerings. Initially, the USSR could market
300 tons or more of gold a year if all production net of
domestic requirements were offered for sale. This
volume could rise by 50 to 75 tons by the end of the
decade if domestic production continues to increase
steadily.
Arms Receipts
Military sales have become an important export earn-
er for the USSR. In the past three years, the net cash
inflow from arms deliveries has averaged $4.6 billion,
15 percent of foreign exchange receipts. It is unlikely
that the volume of arms sales for hard currency will
continue to increase. Indeed, it could fall. The
USSR's military order book bulged in 1980 but fell
last year. The dramatic decline in surplus oil revenues
of Middle East producers such as Libya will make it
more difficult for the USSR to demand cash for new
deliveries.
The Reference Case
An assessment of the effect of credit restrictions
requires a basis for comparison-a projection of what
would happen to hard currency imports, debt, and
debt service ratios in the absence of formal credit
restrictions. We call this estimate the Reference Case.
In developing the Reference Case and later assessing
the potential effects of credit restrictions on Soviet
import capacity, we have used a detailed accounting
model of Soviet debt accumulation and balance of
payments. The model can be used to estimate Soviet
ability to finance hard currency imports, as well as
associated debt accumulation and debt service ratios,
under a range of import and credit assumptions.'
' The model keeps track of four types of financing: (1) export gas
pipeline credits, (2) other government-backed credits, (3) other
commercial medium- and long-term credits, and (4) short-term
credits. The model also takes account of the different maturity and
interest rates applicable to each category of financing.
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Key Assumptions About Soviet
Hard Currency Exports in the 1980s
Energy exports
Oil (billion 1981 US $)
9.1
6.8
3
Volume (million barrels
per day)
0.8
0.6
0.3
Price (1981 US $ per barrel)
30
30
30
Gas (billion 1981 US $)
3.5
6.5
9
Volume (billion cubic meters)
27.6
39.6
54.6
Price (1981 US$ per
thousand per cubic meters)
127
165
165
Nonenergy commodities
Sales (billion 1981 US $)
8.7
8.7
8.7
Gold (billion 1981 US $)
3.2
3.2
3.2
Volume (million tons)
300
300
300
Price (1981 US$ per ounce)
330
330
330
Arms sales (billion 1981 US $)
5
5
5
Total export earnings
(billion 1981 US $)a
29.5
30.2
28.9
Figure'2
Projected Soviet Hard Currency Gap:
Reference Case
I I I I I I I I I I
1981 82 83 84 8,5 86 87 88 89 90
"The sum of merchandise imports, principal repayments, and other ex-
penditures such as intra-CEMA hard currency trade.
bThe sum of receipts from merchandise exports, arms, gold, and net 25X1
invisibles.
We believe that our projections of earnings capacity
and imports are conservative in the sense that they do
not overstate the Soviet need for Western credits.
Assumptions
The key determinants of the future volume of Soviet
hard currency exports are based on the preceding
discussion. They are summarized in table 6 along with
the price assumptions. We assume that nominal prices
for Soviet exports and imports are the product of real
prices (1981 dollars) and a rate of inflation that rises
from 5 percent in 1982 to 6 percent in 1983 and to 7
percent per year during 1984-90. We assume that real
prices of all commodities except natural gas remain
constant at current levels through 1990. The real
price of Soviet gas exports increases by 30 percent by
1985, as parity with the oil price is approached.
To calculate the requirements for Western credits, we
have assumed in the Reference Case that the Soviets
would attempt to at least hold import volume constant
at the 1981 level through the decade.4 This keeps
Soviet financing requirements within reasonable
bounds; even so, the gap between imports plus debt
service and earnings (which would have to be financed
with new credits) is still very large (figure 2). Debt
would rise to $43 billion in 1985 and to $78 billion in
1990. The debt service ratio would increase to 28
percent in 1985 and 45 percent in 1990 (figure 3).
Whether the international financial community would
support debt accumulation of this magnitude is
uncertain.
As suggested earlier, a strong case can be made that
the Soviets need substantial growth in the volume of
imports from the West over the decade to achieve
medium- and long-term economic objectives. But with
Our import calculation is the sum of merchandise imports plus the
average statistical discrepancy of the past two years. The statistical
discrepancy is a balancing item used to account for unrecorded
flows such as intra-CEMA hard currency trade, aid to Poland, and
credits extended to finance exports such as oil to European
customers and machinery to LDCs.
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Figure 3
Projected Soviet Debt Service Ratio:
Reference Case
1981 82 83 84 85 86 87 88 89 90
our earnings projection, growth of real imports at even
2 percent per year-far less than in the recent past-
would lead to clearly unreasonable financing require-
ments. Soviet hard currency debt would have to
increase from about $21 billion currently to $50
billion in 1985 and to $130 billion in 1990. The debt
service ratio would rise concurrently, from about 17
percent now to 31 percent in 1985, and to 71 percent
in 1990. Neither Soviet financial watchdogs nor
Western bankers would be likely to allow debt to
accumulate so rapidly.
Credit Restrictions
The Reference Case implies a large net inflow of
capital just to maintain a constant volume of hard
currency imports. Western restrictions on lending
would compel the USSR to reduce its imports in real
terms and would also hold down the growth of debt
and the debt service ratio compared with the Refer-
ence Case (table 7).
Merchandise imports-billion
dollars, current prices
Reference case
29
38
53
Severe credit restrictions
29
33
44
Merchandise imports-billion
dollars, 1981 prices
Reference case
29
29
29
Flat lending
29
26
26
Severe credit restrictions
29
24
25
Gross hard currency debt-
billion current dollars
Reference case
21
43
78
Flat lending
21
29
23
Reference case
17
28
45
Flat lending
17
20
15
Severe credit restrictions
17
15
7
a Repayments of principal and interest on all debt as a percent of
earnings from merchandise exports and sales of arms and gold.
Although many kinds of credit restrictions are possi-
ble, the implications of two particular options are
outlined here.' In one case-the Severe Credit Re-
strictions Case-we assume that, beginning in 1983,
(a) disbursements under government-guaranteed cred-
its to the USSR fall at the rate of 10 percent per year,
and (b) commercial lenders, interpreting this cutback
as a warning about Soviet creditworthiness, cease all
new disbursements after 1982. The second case exam-
ined-the Flat Lending Case-is less restrictive. It
' In all cases, we assume that credit restrictions do not apply to
lending related to the new gas export pipeline. The projections of
debt, debt service ratios, and import capacity do reflect the pipeline
credits and purchases.
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Figure 4
Soviet Imports: Impact of Flat Lending and
Severe Credit Restrictions
Flat Lending
Severe Credit Restrictions
flow of new credits that this case allows the USSR. In
constant 1981 dollars, imports affordable in the Se-
vere Credit Restrictions Case are 17 percent less than
in the Reference Case in 1982-85 and 10 percent less
in the Flat Lending Case. After 1985, import capacity
is 10 to 15 percent lower in both cases.
Whether one follows a policy which results in limiting
disbursements on Western credits to present levels or
imposes more severe restrictions that lead to a decline
in overall lending (in which guaranteed lending falls
and commercial lending stops), the effects on Soviet
imports are quite similar.
Effect on Hard Currency Debt. Compared with the
Reference Case, credit restrictions would avoid an
undue accumulation of Soviet debt. Even so, in the
1981 82 83 84 85 86 87 88 89 90
assumes that disbursements under government-
backed credits are held constant at the average level
of 1976-81 (about $2.4 billion) and that disbursements
from medium- and long-term commercial lending are
$2 billion a year, the average level of 1976-81 but far
above recent levels. This keeps the ratio of commer-
cial credits to official credits at the high end of the
recent range. The two cases should bound a wide
range of possible restrictive policies.
Effect on Imports. Both cases representing the formal
imposition of restrictions on official credits to the
USSR limit Soviet imports considerably (figure 4).
Imports drop in 1983 and then stay below the Refer-
ence Case level through 1990.
Before 1985, the Severe Credit Restrictions Case
limits Soviet imports significantly more than the Flat
Lending Case does, but the difference disappears in
later years. After 1986 the additional debt service
requirements associated with the greater borrowing
permitted in the Flat Lending Case offset the larger
Flat Lending Case the projected borrowing for the gas
export pipeline increases debt by nearly 40 percent by
1985, although debt declines subsequently. In the
Severe Restrictions Case, debt declines in the period.
As a result of recent lending and credit disbursements
for the gas export pipeline in 1982-85, scheduled
principal repayments overtake assumed credit draw-
ings within a few years in both credit restriction cases.
Thus, after 1985, debt declines, and the Soviet finan-
cial position, as measured by the debt service ratio, is
much sounder than in the Reference Case (figure 5).
Soviet Response to Credit Restrictions
To soften the impact of credit restrictions on Soviet
ability to import hard currency goods and services,
Moscow could consider a variety of responses. It could
seek credits in countries not participating in credit
restrictions or attempt to obtain some relief from the
assistance it has been giving to Eastern Europe and
other client states. It might try to reduce the drain on
its hard currency balances by stepping up its search
for compensation deals and barter arrangements. If
these options proved to be unrealistic or insufficient to
offset the impact of Western credit denial, the USSR
would have to divert commodities from domestic use
to export or cut back imports paid for in hard
currency. These alternatives are considered in order.
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Figure 5
Soviet Debt Service Ratio:
Impact of Flat Lending
Finding Alternative Credit Sources
Moscow would surely try to borrow from other
sources if it confronted credit restrictions in major
Western countries. The most likely sources of new
funds would be in Austria, Sweden, and Switzerland.
Already this year, Austria and Sweden have granted
general trade credits to finance exports to the Soviet
Union. While these countries all sell machinery that
the USSR wants, they do not have the capacity to fill
the broad range of Soviet requirements. In addition,
the Austrian, Swiss, and Swedish banking communi-
ties generally follow policies similar to those of the
major banks throughout Europe. If most large Euro-
pean banks adopted policies to limit or reduce their
exposure to the USSR, the Austrian, Swiss, and
Swedish banks would be unlikely to increase their
exposure unless new loans were tied to exports to the
USSR.
Borrowing from OPEC countries could also help
supplant Western credits. Although most East Euro-
pean countries have raised funds in the Middle East,
the USSR has not in the past obtained any substantial
loans from OPEC financial institutions. In the last
few months Moscow has shown considerable interest
in gaining access to OPEC petrodollar reserves, how-
ever. Delegations from Soviet-owned banks in the
West have visited several Middle Eastern countries in
an effort to persuade them to increase their deposits in
Soviet banks. But the financial resources of many
OPEC countries, particularly those most friendly to
the USSR, Libya, for example, will probably be
strained for some time, limiting Moscow's chances for
obtaining hard currency loans.
Funds might also be sought in Latin America, notably
in Argentina and Brazil. Both countries sell a large
volume of agricultural commodities to the USSR. But
Brazil allowed Poland to accumulate a $1.5 billion
debt to finance Brazilian exports and as a result of
this experience would be extremely careful about
extending large credits to another Communist coun-
try. In late March, Soviet officials began negotiations
with Argentine officials for a $300 million credit for
grain purchases. Argentina, however, is not in a
position to offer the USSR any significant credits.
Eastern Europe will not be able to borrow to make up
for the cuts in credits to the USSR resulting from
Western restrictions. Poland's bankruptcy and the
beginning of rescheduling negotiations on Romania's
debt have by themselves greatly reduced CEMA's
access to credits. Even Hungary-with a good record
of sound financial management-is now in a serious
hard currency bind. The chilly borrowing climate also
has recently extended from banks and the Eurocur-
rency markets to the export credit agencies of West-
ern governments. Moreover, if the West restricts
credits to the USSR, the ability of the rest of CEMA
to borrow would be further weakened. Eastern Europe
might be able to escape some of this negative spillover
only if Western governments were able to make clear
that their policies will differentiate between Eastern
Europe and the USSR.
Even if the East European countries enjoyed more
favorable credit ratings, it would be difficult for them
to borrow on behalf of the Soviets. Bankers and
private creditors would be aware of any borrowing in
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excess of Eastern Europe's own requirements. More- tougher Soviet policy because it pays hard currency
over, since official credits are tied to purchases of for'the oil it purchases from the USSR. The USSR
specific equipment, plants, and projects needed by the has already notified Czechoslovakia, East Germany,
USSR, it would be immediately obvious if Eastern and Hungary that it intends to cut originally sched-
Europe attempted to obtain credits to purchase simi- uled crude oil deliveries by about 10 percent. A
lar items. diversion of this magnitude-about 4.5 million tons a
year-to the Western market would add nearly $1
Economic Assistance From Eastern Europe billion a year to Moscow's hard currency earnings; a
Facing critical economic and financial problems of its diversion to the West of 10 percent of current oil
own, Eastern Europe will be neither able nor willing exports to Bulgaria and Poland would add another
to provide much assistance to Moscow. In fact, the $500 million.
flow of assistance traditionally has been in the oppo-
site direction as Moscow has extended large amounts Cutbacks in deliveries of Soviet oil and other hard
of aid to enhance its political leverage within CEMA. goods, however, would be a serious blow to Eastern
Soviet insistence that Eastern Europe assist in soften- Europe. Given their financial problems, the East
ing the effects of Western credit restrictions could Europeans have little chance of buying oil or other
threaten serious disruption in the Soviet camp. Mos- goods on the world market or from the Soviets for
cow might well decide that the resulting damage to its hard currency. Since conservation efforts have largely
political interests would be greater than the marginal been ineffective to date, the burden would fall on
help that might be squeezed out of its CEMA allies. domestic growth and living standards. In Czechoslo-
vakia and Hungary this would mean continued stag-
The East Europeans could not replace the West as a nation in national income and a decline in per capita
source of imports because they are in no position to fill terms. East German industrial growth rates would
Moscow's immediate needs for grain and meat or even slide but remain positive. If the cutbacks continued
the longer term requirements for raw and industrial over several years, slower growth could turn consumer
materials. In only a few selected instances such as dissatisfaction into open unrest in several countries.
coal and some kinds of rolled steel does Eastern
Europe offer good substitutes for Western exports of The Soviets may reason that most of the regimes will
raw materials and basic industrial products. The East be able to adapt to lower levels of assistance and
Europeans do provide a large volume of machinery might even use the credit restrictions as an excuse to
and equipment to the USSR-roughly 70 percent of improve the USSR's terms of trade with the East
all such imports by the USSR-but in the main the Europeans. Political considerations, however, are
machinery does not approach the quality or the more likely to cause the Soviets to refrain from
technological level of that available in the West. compelling Eastern Europe to export more to the
Eastern Europe would continue to serve occasionally USSR while accepting a lower volume of Soviet
as a conduit for high technology flowing from the exports. Fear of growing unrest and reduced Soviet
West to the USSR. Restrictions on credits to the leverage in CEMA would be primary concerns.
Soviet Union would not change this pattern because it
is rooted in the Soviet dominance of the intelligence In addition, Moscow might want to avoid some of the
services of Eastern Europe. other consequences of forcing East European compli-
ance. The countries bearing the brunt of Soviet
The USSR, however, could help itself by scaling back demands (Czechoslovakia, East Germany, and Hun-
its deliveries to Eastern Europe of goods marketable gary) might seek indirect amelioration of the burden
in the West in exchange for East European goods not through cutbacks in defense spending commitments
readily salable in the West. These cuts presumably and in aid to Soviet clients in the Third World. Latent
would not affect Poland. Moscow is now concentrat- anti-Soviet nationalism also might revive because of
ing its assistance to CEMA on Poland to try to
prevent further economic chaos there. Romania might
also escape some of the damage resulting from a
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perceptions within Eastern Europe of a Soviet return
to the "colonialism" of the Stalin era. Less able to
satisfy popular demands, the regimes would have to
step up repression to maintain power if Soviet-induced
hardships angered dissidents and "national commu-
nists" alike.
Compensation Trade
The USSR's ability to use compensation agreements
to avoid the consequences of Western credit restric-
tions is quite limited. No major deals are now under
negotiation, and the depressed economic conditions in
the West will make it difficult for the Soviet Union to
conclude large new initiatives for some time.
The enthusiasm of Western firms for most of the
compensation deals proposed by Moscow has cooled
considerably since the mid- I970s. Western firms com-
pare the potential projects in the USSR with projects
elsewhere where conditions regarding equity partici-
pation and managerial participation are far more
favorable. The Soviets often table harsh financial
demands, including (1) long-term credits to pay for
equipment required to develop related infrastructure
as well as the production facilities, (2) medium-line
credits to cover consumer goods purchases needed to
defray local costs, and (3) deferred payments on the
credits during the full period of project development.
Western companies also see a number of pitfalls in
agreeing to accept deliveries of Soviet products over a
long period. Commitments to buy specific quantities
of raw materials and semimanufactures are attractive
when world supplies are tight and prices are rising,
but they lose their charm when demand is slack and
the Western partner in a compensation agreement
finds it hard to market the products or to use them in
its own plants.
Some Western companies are also reluctant to con-
clude compensation agreements because they do not
want to sponsor additional competition on their mar-
kets. For example, the USSR purchased many chemi-
cal plants during the 1970s. Under the terms of some
of the contracts for these plants, large Soviet chemical
deliveries to depressed markets in Western Europe
have begun and will continue over the next several
years. These exports have aroused a great deal of
opposition and have made Western companies wary of
entering into contracts involving products that do not
have a solid market.
Barter Arrangements
Although in the past the USSR has bartered Soviet
arms for Zambian cobalt, trolleys for Greek citrus
fruits, and fertilizers for Thai corn, these arrange-
ments do not have much potential for easing the
Soviet hard currency position. Barter deals presently
account for only a very small portion of Soviet trade,
mainly with less developed countries. Since most of
what the USSR wants from LDCs can be sold by
these countries in world markets, they have little
reason to make barter deals with the Soviet Union.
Domestic Diversions
Lacking other alternatives, the Soviet leadership
could decide to divert domestic production to the
export sector. With respect to oil, at least, this option
already may be under active consideration, although
it depends in large part on meeting plans for substitut-
ing gas for oil in the domestic economy. Diverting a
significant volume of domestic production, however,
would carry a heavy cost simply because the goods
most marketable in the West are also in high demand
in the USSR.
Import Cuts
Moscow thus would have little choice but to reduce
imports. How the Soviets might choose to allocate
such cuts will depend on the degree of credit restric-
tions and developments within the economy. Accord-
ing to our calculations, Soviet planners face import
reductions of $3-4 billion a year in real terms if credit
restrictions limit access to Western goods. By the end
of the decade, import shortfalls would be closer to $5
billion annually.
In their deliberations, planners will have to balance
the needs of consumer-oriented programs against the
desire to continue industrial modernization and the
urgent requirements for raw materials and industrial
products to deal with domestic shortfalls that have led
to severe bottlenecks in the economy.
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Assuming agricultural production returns to the
1965-78 trend, imports of grain and other farm
products could fall by roughly $3 billion between
1982 and 1985, even after allowing for rebuilding of
grain stocks. One-half of these potential hard curren-
cy savings would offset the cost of purchases for the
gas export pipeline. A large part of the remainder will
probably be allocated to growing purchases of the raw
materials and intermediate goods increasingly needed
to feed Soviet industry.
Imports of equipment and capital goods are likely to
bear the brunt of any additional cutbacks that might
be necessary over the next few years. Imports of
machinery and equipment have in fact fallen fairly
consistently in real terms in recent years. Orders
turned up in 1981 only because of the gas export
pipeline (table 8).6 In the absence of pipeline contracts,
1981 orders with Western firms would have totaled
only $2.4 billion.
Even if some near-term reductions in agricultural
imports were possible as a result of better crops, and
imports of raw and industrial materials were held
constant in real terms, capital imports other than for
the export pipeline would fall sharply. While the
composition of recent orders suggests no clear trend in
the pattern of machinery imports from the West, the
priority given to the energy sector in the 1981-85 Plan
suggests that energy-related machinery imports will
more than hold their own, and other machinery
purchases would suffer as a result of credit restric-
tions. The cuts might be severe enough to affect not
only new capital purchases but also the sizable and
growing flow of spare parts and replacement machin-
ery needed to maintain Western plants already in
operation in the USSR.
Import decisions will become even more difficult by
mid-decade. As indicated above, Soviet economic
growth is trending downward as the leadership
searches for ways to accelerate productivity gains. To
sustain popular morale and promote labor productiv-
ity, the Politburo would want to increase or at least
maintain agricultural imports. After 1985 the gap
The orders represented in table 8 do not reflect all orders but are a
good indicator of trends in the level and composition of machinery
orders.
USSR: Orders of Machinery and Equipment a
Total (million US $)
2,818
2,674
2,593
6,708
By country of origin
West Germany
694
614
895
2,176
France
598
409
752
1,812
Japan
345
331
335
838
United Kingdom
192
214
139
437
Italy
177
505
56
823
United States
560
277
232
296
Canada
98
128
NEGL
0
Other
154
196
182
326
By category of
equipment
Oil and natural gas
832
190
397
3,777
Chemical and
petroleum products
702
607
412
453
Metalworking and
metallurgical
363.
784
804
547
Electronic
179
360
38
760
Other
742
733
942
1,171
Total (percentage shares)
100
100
100
100
By country of origin
By category of
equipment
Oil-and natural gas
30
7
15
56
Chemical and
petroleum products
25
23
16
7
Metalworking and
metallurgical
13
29
31
8
Electronic
6
13
1
11
Other
26
28
37
18
a Excluding purchases of Western linepipe.
b Including orders for the export gas pipeline totaling $4.3 billion.
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between availability of meat and other quality foods
and consumer demand is likely to widen substantially.
Consequently, imports of grain and meat probably
will trend upward.
The USSR could probably cut back on hard currency
purchases of manufactured consumer goods, but such
imports are relatively small-less than $1 billion last
year. Moscow might also be able to reduce some
imports of raw and industrial materials after the
middle of the decade if two large steel complexes now
under construction at Novolipetsk and Kursk begin
operation. The Soviets would then be able to reduce
but not eliminate purchases of many types of Western
rolled steel. The USSR also is building a plant to
manufacture 1 million tons of large-diameter pipe
annually. If production reaches this level, Soviet
imports of large-diameter pipe could be halved at a
saving of roughly $500 million. On the other hand,
large purchases of raw materials and basic industrial
-products have been a fixture in the Soviet import list
since the mid-1970s. Moscow has used foreign trade
to alleviate domestic shortages, and with the poor
performance of Soviet basic industries continuing-if
not worsening-shortages of industrial materials can
be expected in the future.
In the latter part of the 1980s, however, Moscow will
have much less room for maneuver in preserving
imports of farm products and industrial materials at
the expense of equipment and machinery purchases.
Indeed, shortages of hard currency may be intensify-
ing just as interest in foreign machinery is reviving.
As noted, the USSR already had curtailed its equip-
ment and machinery imports in the latter part of the
1970s, and these imports are likely to be fairly low in
the next few years except for energy equipment. By
the mid-1980s, however, the Politburo is likely to find
that the productivity gains implied by its 1981-85
Plan are not materializing. It could then decide to try
to increase investment at a faster rate with the help of
.foreign machinery and equipment in order to modern-
ize the economy and deal with the bottlenecks that
arise when plan targets are overambitious and
inconsistent.
A reduction in the availability of Western credits will
make even more difficult the decisions Moscow must
make among key priorities in the 1980s-sustaining
growth in military programs, feeding the population,-
modernizing the civilian economy, supporting its East
European clients, and expanding (or maintaining) its
overseas involvements. Because economic growth will
be slow through the 1980s, annual additions to nation-
al output will be too small to simultaneously meet the
incremental demands that planners are placing on the
domestic economy. Even now, stagnation in the pro-
duction of key industrial materials is retarding growth
in machinery output-the source of military hard-
ware, investment goods, and consumer durables. Un-
der these conditions, restrictions on government-guar-
anteed credits, coupled with the likely negative
reactions of private lenders, would increase the likeli-
hood of shortfalls in both civilian and military pro-
grams. This will intensify the pressures on Soviet
leaders-that are already building-to alter policies
of long standing.
If growing economic stringencies and credit restric-
tions prompt Soviet leaders to cut back on imports, it
seems likely that, in true bureaucratic tradition, ini-
tial efforts would be implemented in a broad brush
fashion affecting a number of Soviet ministries across
the board. Even now there are indications that the
Soviet authorities are moving in this direction, as they
did during the hard currency crunch of the mid-
1970s. Specifically, major Western exporters of indus-
trial goods to the USSR have been notified that
Soviet purchases are being scaled back or delayed.
For Soviet foreign trade organizations, this means
deep cuts in some instances-on the order of 25 to 30
percent. The very top priority programs no doubt
would be spared, but many relatively high priority
ones, including some military programs, could be hurt
at least indirectly.
Cuts in machinery imports, for example, would retard
progress in modernizing a number of industrial sec-
tors-steel, machine building, oil refining, robotics,
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microelectronics, transportation, and construction
equipment-at a time when Moscow is counting on a
strategy of limited investment growth and relying
instead on productivity growth. Unlike in the late
1970s, however, when a backlog of undigested West-
ern equipment enabled the USSR to live off old
machinery orders, very few new projects involving
Western equipment are now under way, and the need
to modernize existing facilities is great. Because
growth in domestic investment is being held back by
shortages of steel and deficiencies in machinery pro-
duction, Moscow's only alternative to Western equip-
ment as a means of modernization would be a shift
away from the high priority accorded defense
industries.
In the long term, sustained credit. restrictions would
force Moscow to reappraise its priorities. No one can
predict how various Soviet programs would be affect-
ed. It is reasonable to assume that those requiring the
largest hard currency expenditures would be the most
vulnerable to cuts. There would be growing pressure
from various institutional interests to spread the
burden of hard currency shortages widely. Moreover,
the tautness of the economy and the critical role
Western imports play in many areas virtually assure
that sizable import cuts in almost any industry would
have adverse repercussions in other areas:
? Imports of Western machinery are equal to about
10 percent of Soviet capital investment in equip-
ment. The one-third reduction in plant and equip-
ment expenditures cited above could cut total cap-
ital investment by a noticeable amount.
? Imports of oil and gas equipment, for example,
could make a difference of 2 or 3 million barrels per
day of oil-equivalent production in the middle and
late 1980s. The larger part of this would be gas.
? Half of Soviet electronic production facilities-a
sector of high importance to the Soviet military
effort-is of Western origin. Continued access to
Western technology will be important for further
expansion.
Hard currency shortfalls could also impinge on de-
fense production through their effect on civilian min-
istries that support production of military hardware.
For example, a cutback in purchases of numerically
controlled machine tools could hamper defense-relat-
ed industrial processes such as the manufacture of
gears and disks for high-performance turbojet en-
gines. An inability to purchase high-quality steel
products could lead to a change in production plans at
facilities that manufacture military items such as
submarine hulls.
The trade-offs among these major domestic programs
will not be easily resolved, particularly if the issues
become politicized during succession maneuvering.
But failure to modify domestic resource allocation at
a time when credit restrictions prevent a large net
inflow of resources from abroad would set back Soviet
economic progress and, in turn, jeopardize the
USSR's ability to sustain growth in military and
industrial power vis-a-vis the West in the 1990s.
Soviet leaders will become increasingly tempted to
bridge the gap in domestic resources by borrowing
abroad or by changes in policy. By mid-decade a
stringent credit environment could force Moscow to
choose between programs that promote the health and
well-being of the domestic economy and the econo-
mies of its allies and those that foster continued
international tension and military competition with
the West.
In the evolving environment of credit stringency, the
Soviet have already shown some inclination to change
their policies. They have, for example, tried to reduce
economic support to Eastern Europe. Soviet ability to
squeeze Eastern Europe is limited, however, by the
political considerations discussed earlier. Alternative-
ly, Soviet leaders might become more aggressive in
pressing Third World countries-or even industrial-
ized countries-to make concessions to the USSR in
bilateral trade negotiations. Although Soviet leverage
in this area historically has been weak, the loss of
markets resulting from a prolonged Western recession
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might induce some countries to yield to well coordi-
nated Soviet pressure for concessionary trade in both
raw materials and manufactures.
The Politburo might also look long and hard at
foreign aid expenditures or the cost of direct involve-
ments in Third World countries. Support of revolution
is relatively cheap, but Moscow might give greater
weight to cost considerations in the future. More
important, the USSR might become more reluctant to
undertake major commitments to new or existing
client states because of the heavy outlays these com-
mitments entail. It might even consider reducing its
present level of involvement in countries such as Cuba
and Vietnam. Already, Cuba is under pressure to
reduce oil imports, and economic aid to Vietnam-
including subsidized food and oil deliveries-is appar-
ently not increasing, despite urgent pleas from Hanoi.
Finally, the potential of Western credits as part of a
program to deal with growing economic difficulties
might suggest to a new set of Soviet leaders, as they
are forced to modify the 1981-85 Plan and formulate
plans for 1986-90 and beyond, that a less aggressive
international posture would work to their advantage.
Some in the leadership already see the 1980s as a
period of retrenchment; a time to husband their
resources, preserve their military might, and shift
their growth strategy from massive injections of all
resources to smaller injections of better resources.
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