THE USSR S ABILITY TO INCREASE NONENERGY HARD CURRENCY EXPORTS DURING THE 1980S

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• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP83T00853R000200190002-3
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• Document Creation Date: December 20, 2016
• Document Release Date: March 2, 2007
• Sequence Number: 2
• Publication Date: December 1, 1982
• Content Type: REPORT

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Directorate of S ecret
-Air I
The USSR's Ability
To Increase Nonenergy
Hard Currency Exports
During the 1980s
v)'N FILE DEPARTMENT OF INTERIOR
L A INSTRUCTIONS APPLY
v:]N FILE DEPARTMENT OF
AGRICULTURE RELEASE
Secret
SOV 82-10212
December 1982
Copy 4 2
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 Directorate of Secret
Intelligence
The USSR's Ability
To Increase Nonenergy
Hard Currency Exports
During the 1980s
This paper was compiled byl
the Office of Soviet Analysis, with contributions from
the Office of Global Issues. Comments and queries
are welcome and should be addressed to the Chief
Soviet Economy Division, SOVA
Intelligence Council.
Secret
SOV 82-10212
December 1982
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Secret
The USSR's Ability
To Increase Nonenergy
Hard Currency Ex orts
During the 1980s
1I
Key Judgments The Soviet Union's hard currency earnings from exports of commodities
Information available other than energy amounted to about $13.5 billion in 1981-roughly 40
as of l December 1982 percent of its total hard currency receipts in that year. We believe that
was used in this report.
nonenergy earnings (in 1981 dollars) could be increased to as much as
$17.5 billion by the late 1980s. To achieve that increase, the Soviets would
have to allocate more investment and manpower to a variety of indus-
tries-at a time when they are short of both resources. In some instances,
an effort to raise the volume of Soviet exports significantly could lower
world prices; this is especially true of markets driven largely by speculation
(such as precious metals and diamonds), in which even rumors of increased
Soviet sales can push prices down. As a result, the actual increase in
earnings might well be 1 or 2 billion dollars less than the maximum that we
project.
We rate the possibilities of the various Soviet export products as follows:
? The Soviets stand a good chance of increasing hard currency earnings
from sales of precious metals, nickel, chrome, and chemicals. Yearly
earnings from these commodities (about $4.5 billion in 1981) could
increase to almost $7.5 billion by the late 1980s. The Soviets have large
stocks of gold available for sale and are steadily increasing production.
Their exportable surplus of platinum-group metals could well double by
the end of the decade, the result of sharply increased production. The So-
viets are guaranteed increased earnings from chemical exports as a result
of long-term compensation and buyback deals with Western firms.
? Chances are only fair that the Soviets will be able to boost their hard cur-
rency earnings from sales of machinery or to increase receipts from rail
shipments between Europe and the Far East. At most, these earnings
could increase by about $300 million by the end of the decade. This
figure must be heavily discounted, however. Western demand for Soviet
machinery and rail services will probably remain weak; only a strong and
sustained recovery in Western economies would alter market conditions
to Moscow's advantage.
? We do not foresee any dramatic increase in Soviet hard currency weapon
sales. We do foresee a continuation of current military sales and
assistance programs. Indeed, military assistance will remain a principal
means of Soviet entree in many countries, and we anticipate more
aggressive sales campaigns in the future.
Secret
SOV 82-10212
December 1982
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? Chances are poor that the Soviets will increase sales of diamonds, timber,
and cotton. These earnings amounted to about $2.5 billion in 1981, and
we estimate that they will remain constant through the decade.
The Soviets could alter their present export policy if hard currency
stringencies became bad enough. They could curtail sales to other Commu-
nist countries and divert a greater share of exports to the West. Deep,
sudden cuts in Soviet deliveries, however, could compound the economic
difficulties already facing Eastern Europe, Cuba, and Vietnam. Moreover,
a large portion of Soviet trade is tied to long-term barter deals. It is
doubtful that Moscow would renege on these agreements except under the
most extreme circumstances.
In some cases, the Soviets may be able to increase exports by limiting
allocations to domestic consumers. They already are exporting large
amounts of oil, steel, chemical fertilizer, and scrap metal despite domestic
shortages. The leveling off of Soviet steel production could free increasing
amounts of alloys, such as nickel and chrome, for the export market.
Nevertheless, given increasing shortages of a wide variety of essential
commodities in their own economy, we doubt that the Soviets will be able
to cut back on domestic allocations to any significant extent.
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Giving Higher Priority to Export Industries 14
1. USSR: Share of Hard Currency Trade in Total Trade
2. USSR: Total Hard Currency Receipts
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Secret
The USSR's Ability
To Increase Nonenergy
Hard Currency Ex orts
During the 1980s 1I
Although hard currency exports are only a small
fraction of gross national product, the USSR counts
heavily on these earnings to help finance priority
imports such as grain and state-of-the-art equipment
and technology. The slowdown in Soviet economic
growth is making it harder for Moscow to increase the
volume of hard currency exports while continuing to
meet domestic needs and other export commitments.
The pattern and composition of hard currency exports
in the 1980s will reflect these two factors: domestic
economic conditions, and the leaders' perception of
the trade-off between the benefits of hard currency
earnings and the costs of limiting essential materials
for the domestic economy and for the USSR's client
states.
After an assessment of the importance of hard curren-
cy earnings to the Soviet economy, this paper exam-
ines those nonenergy commodities-such as precious
metals, some nonferrous metals, chemicals, and tim-
ber-that seem to offer the most potential for export
growth during the 1980s.' In our review, we draw
heavily on expert opinions regarding the market out-
look for many Soviet exports. The paper closes with a
review of choices the USSR will face if the leaders
decide to devote a larger share of supply to the hard
currency market.
This paper does not examine in detail the outlook for
hard currency exports from oil and gas or the meas-
ures the Soviets could adopt to manage hard currency
problems by limiting imports. These topics are dis-
cussed in other assessments. In addition, research
under way on Soviet arms sales and the timber,
fertilizer, and nonferrous metals industries should
permit firmer estimates of the export potential of
these important sectors.
' In our compilation of the Soviet balance of payments, sales of gold
and arms are normally accounted for outside the merchandise trade
account. Because this paper addresses Soviet hard currency earn-
ings potential, which is broader than merchandise ex .
ors earnm s
we include gold and arms sales in our calculations
Finally, throughout this report we focus on the ability
of the USSR to increase the volume of its nonenergy
exports. We do not try to project trends in the prices
that the USSR may receive for its exports. Projections
of earnings are therefore expressed in 1981 dollars.
While world commodity price trends will have a
major impact on gross Soviet hard currency earnings,
we are not in a position to forecast those trends. The
current duration of the Western recession, along with
the timing and strength of the eventual upswing in
Western economies, is clearly the dominant factor in
an assessment of this type. At this point, there are
wide differences among Western specialists on this
matter. In balance-of-payments projections for the
USSR, the influence of price trends is best handled by
testing the effect of alternative price assumptions in a
scenario-type analysis. Single-valued projections of
hard currency earnings would be of little help, as
illustrated by the very large changes over the past two
years in price forecasts for commodities such as oil
and gold
Trends in Soviet Imports and
Hard Currency Receipts
Rising Imports
Trade between the USSR and the West climbed
steeply in the 1970s as the Soviet Union increasingly
looked abroad for help in raising the technological
level of Soviet plant and equipment, relieving industri-
al bottlenecks, and increasing living standards. Pur-
chases from the West as a share of total Soviet
imports rose dramatically, from 23 percent in 1970 to
38 percent in 1980-a nearly ninefold increase in
value terms and a doubling of volume (table 1).
Although hard currency imports are equal to only 1.6
percent of the ruble value of Soviet GNP (domestic
ruble price basis), this trade is more important than
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Table 1
USSR: Share of Hard Currency
Trade in Total Trade a
? The Kama River truck plant, based exclusively on
Western equipment and technology, produces one-
half of Soviet heavy-duty trucks.
? Grain imports account for about 13 percent of total
grain supplies, even in normal years, and imports of
grain, soybeans, and meat directly or indirectly
support 20 percent of Soviet meat consumption.
25
Ferrous metals 10 6 7 47 77 75
Chemicals 18 25 36 34 42 42
Agricultural products
14
24
25
27
42
66
Grain
5
1
0
73
87
90
Consumer goods
23
26
13
12
9
9
a The importance of hard currency trade in total trade is understated
in Soviet statistics because of the favorable prices the USSR extends
to the CEMA countries for exports and imports. In 1980, for
example, exports to Eastern Europe would have been $7 billion
higher had Moscow received world market prices for the goods it
shipped there, but Soviet imports from Eastern Europe would have
been $10 billion lower had world prices prevailed.
this figure implies. Imports from the West have
helped the USSR deal with a variety of crucial
industrial and agricultural problems. For example:
? Submersible pumps purchased from the West added
an estimated 2 million b/d to Soviet oil production
in recent years.
? Imported steel accounts for about 6 percent of
Soviet supply, including all of the large-diameter
pipe needed for long-distance transmission of natu-
ral gas.
? Imported chemical equipment enabled the Soviets
to double production of ammonia, nitrogen fertiliz-
er, and plastics and to triple production of synthetic
fiber.
The current Five-Year Plan calls for sharp increases
in capital and in labor productivity to provide most of
the growth it specifies for the economy.2 Productivity
growth to this degree will be difficult to achieve
without continued large infusions of Western technol-
ogy (which the Soviets must pay for in hard currency).
The Soviets could increase imports by additional
borrowing from the West. Continued borrowing at the
average level of recent years, combined with addition-
al borrowing for the Yamal pipeline, would permit
Moscow to maintain roughly stable real imports over
the next few years. But in the second half of the 1980s
new credits would be exceeded by the debt service
obligations on previous borrowing. As a result, in the
absence of more borrowing, real imports from the
West will be determined largely by export earnings
after mid-decade.'
Hard Currency Receipts
Moscow's total hard currency earnings were about
$33.5 billion in 1981-a huge increase over the $3
billion in 1970 (table 2). In terms of 1981 prices,
however, earnings rose from roughly $21 billion to
$33.5 billion during this period. The rise in the value
of hard currency exports resulted largely from higher
world prices for oil, gold, and other commodities. In
1981 merchandise exports reached almost $24 billion,
of which oil and gas sales netted about $16 billion.
Arms sales earned an estimated $5 billion and gold
about $2.7 billion; and interest on assets held in the
West, plus earnings from invisibles and transfers
(tourism, services), brought in about $2 billion
' See DDI Intelligence Assessment SOV 82-10127 (Confidential
NF), September 1982, USSR: Economic Projections, 1982-90. (u)
' Ibid, p. 16. (u)
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Table 2
USSR: Total Hard Currency Receipts
Merchandise exports
(f.o.b.) a
Estimated interest
Other invisibles
and transfers
1970
1975
1980
1981
3,003
11,453
32,721
33,489
2,424
8,380
23,584
23,778
74
188
857
505
760
900
a Includes oil and gas and some deliveries of arms.
b Estimated principal and interest payments on weapon systems and
major export equipment; excludes follow-on support.
After several years of rapid increases in hard currency
earnings (especially the boom years of 1979-80 result-
ing from the jump in world oil prices), Moscow's hard
currency position started to turn sour in 1981. By the
end of that year, the Soviets were in a hard currency
crunch originating in a confluence of events that
apparently caught the leadership by surprise:
? In the first quarter of 1981, Moscow gave Poland
almost $1 billion in emergency hard currency aid.
? Oil prices unexpectedly began to fall.
? A third consecutive bad crop forced the Soviets to
buy more grain, meat, and soybeans than they had
planned.
? Recession in Western economies lowered the de-
mand for Soviet exports and caused world prices to
plummet. Prices of key Soviet exports (gold, timber,
platinum, and diamonds) fell anywhere from 50 to
75 percent.
These unexpected expenditures and shortfalls led
Moscow to draw down its hard currency assets in
foreign banks, divert large amounts of crude oil and
petroleum products from client states and the Soviet
1970
1975
1980
1981
100
100
100
100
81
73
72
71
economy to Western purchasers, sell substantial
amounts of gold in a weakening market, and ration
expenditures for hard currency imports other than
food and some strategic imports.' The emergency
measures paid off in 1982, enabling Moscow to
improve its hard currency position. The USSR had a
good chance to end the year with a hard currency
trade deficit substantially less than 198 l's $4 billion.
The Long-Term Problem
The Soviet leaders probably expect some relief from
their hard currency problems in the near term. They
can expect crop yields to be higher than in the past
two drought-ridden years, making possible some re-
duction in grain imports. (In 1981 hard currency
outlays for grain and agricultural products exceeded
$11 billion, or 40 percent of total hard currency
imports.) 5 In addition, an upswing in Western econo-
mies would increase the demand for Soviet exports, a
' Soviet grain imports in 1982 will probably be about 10 million
tons less than in 1981. Because of lower volume and lower prices,
the Soviet grain import bill in 1982 will beat least 25 percent lower
than in 1981.
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factor that could improve the USSR's hard currency
balance of trade by several billion dollars.-
But even though some improvement in its hard cur-
rency position is likely in the next few years, the
USSR will be increasingly hard pressed to maintain
favorable trade trends after mid-decade. The prospect
of continued softness in the world oil market, coupled
with uncertainties over Soviet ability to maintain the
present volume of oil exports to the West, lies at the
heart of the problem. Soviet oil output in the latter
half of the decade seems very likely to level off, and it
could well fall.' At the same time, we anticipate that
Soviet oil consumption will continue to increase
steadily, despite efforts to substitute other energy
sources.' We believe that, if the Soviets maintain the
present volume of oil sales to other Communist coun-
tries, they can only do so by cutting exports to the
West (see the discussion on shifting from East to
West, page 13). Under these circumstances, it is likely
that Soviet oil sales to the West will fall considerably
by the late 1980s. In 1981 hard currency oil exports
amounted to about $12 billion-about one-half of
Soviet hard currency exports of merchandise and
about one-third of total hard currency receipts
Soft world oil prices will also make it harder for
Moscow's major cash customers (Libya, Iraq, Syria)
to continue buying Soviet weapons at recent rates.
These countries currently account for about 75 per-
cent of Soviet receipts from arms sales. These sales
amounted to at least $5 billion in 1981 and rank
second only to oil in terms of Soviet hard currency
earnings (see the discussion of arms sales, page 8).
The only large new source of additional hard currency
earnings on the horizon is the Siberia-to-Western
Europe gas pipeline, which will not be in full opera-
tion until the second half of the decade. These
6 The Directorate of Intelligence is in the process of a complete
reexamination of Soviet oil prospects. The judgments expressed
here regarding trends in production and trade are thus preliminary.
(c)
' See DDI Research Paper SOV 82-10161 (Unclassified), October
1982, Soviet Views on Energy Consumption in 1985. (u)
' See DDI Intelligence Assessment SOV 82-10177X (Secret),
November 1981, Recent Trends in Soviet Oil Exports, for a
detailed discussion of Soviet oil sales. (u)
revenues should reach $5 billion after all loans have
been repaid, and total gas earnings (including existing
contracts) could be roughly $10 billion in the 1990s.
The rise in revenue from gas sales would not be
sufficient, however, to offset a marked decline in oil
exports to hard currency countries. If the Soviets wish
to lift the volume of imports of Western goods and
services from the level reached in 1981-82, they will
have to look to other exportable commodities to earn
the cash.
Moreover, Western monetary policy is likely to be
more deflationary during the 1980s than it was in the
1970s. Real interest rates probably will remain high,
tending to hold down world commodity prices. We
consider it unlikely that the Soviets will receive
another windfall from rising world prices as they did
from the price boom of the late 1970s. If this forecast
is correct, future Soviet hard currency earnings will
depend more on Moscow's ability to raise the volume
of exports than on rising world prices
Our analysis indicates that, of the thousands of
products and services on the Soviet export list, only a
few offer much chance for increased hard currency
earnings during the 1980s. In our judgment, sales of
precious metals, some nonferrous metals, machinery,
and chemical fertilizer offer the greatest opportunities
for export expansion. Sales of arms, timber, dia-
monds, and cotton are expected to be substantial but
not to increase much in the next several years.
Together, nonenergy commodities and services earned
about $13.5 billion in 1981-about 40 percent of total
Soviet hard currency receipts.
We calculate that earnings from these commodities
and services could increase by almost $4 billion by the
late 1980s (table 3). This estimate, however, assumes
that Soviet planners are willing and able to increase
investment and allocations of labor in order to sustain
an export push on a broad front. The estimate also
assumes that Western demand will be robust enough
to accommodate a large volume of Soviet sales even
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Table 3
USSR: Estimated Nonenergy
Export Potential
revenue. In view of these uncertainties, the actual
growth in the volume of Soviet nonenergy exports for
hard currency is likely to be less than the projection
Sales (1981)
Sales Potential
(Late 1980s)
Absolute
Increase
Total
13,550
17,430
3,880-
Minerals and metals:
4,480
7,525
3,045
Of which:
Platinum-group
metals
300
840
Diamonds
1,000
1,000
Chromite
15
100
Other b
235
235
Arms sales
5,000
5,000
Chemicals
730
1,240
510
Of which:
Nitrogen
fertilizer
55
400
Potash fertilizer
95
135
Methanol
15
140
Other
565
565
Cotton
440
440
Land bridge
300
500
200
a See text for discussion of the uncertainties involved in this estimate.
b Primarily sales of aluminum, asbestos, and scrap metal.
c Primarily sales of plastics and bulk chemicals.
though efforts by the USSR to raise hard currency
earnings by increased sales might be hampered by
existing capacity in the West-a large portion of
which is presently idle.
For commodities that are sensitive to business cy-
cles-metals, chemicals, timber-Soviet export suc-
cess will depend largely on the timing and strength of
Western economic recovery. For commodities whose
demand is partly determined by interest rates and
speculative forces-precious metals and diamonds-
Moscow must contend with unpredictable forces in
which an attempt to sell a larger volume can be self-
defeating in terms of its effect on prices and total
presented in table 3.
Individual exports are described in detail in the
following section; the general discussion of options
and potential resumes on page 13.
Minerals and Metals
Minerals and metals historically have been a major
source of Soviet hard currency earnings. Sales of
minerals and metals netted the USSR about $4.5
billion in 1981, roughly 15 percent of total hard
currency receipts in that year. Gold, platinum-group
metals, and diamonds account for the bulk of hard
currency earnings. We anticipate that the USSR's
exportable surplus of minerals and metals will contin-
ue to grow during the 1980s, paced by steady in-
creases in the production of gold and sharp gains in
the output of platinum-group metals and nickel. On
h b ' f
t e as is o our estimates of the probable increase in
the Soviet exportable surplus (discussed below), min-
erals and metals sales represent potential annual
earnings of more than $7 billion by the late 1980s,
roughly two-thirds more than earnings in 1981.
Gold. Of all minerals and metals exports, gold is by
far the most important in terms of potential hard
currency earnings. The USSR ranks second to South
Africa in the production and sale of gold. During the
1970s the USSR accounted for about one-third of
annual world gold production and about one-fourth of
the newly mined gold moving in world trade. In 1981
Soviet gold production amounted to about 325 tons,
about half that of South Africa but more than the
combined output of all other world gold producers.
During the 1970s the Soviets sold about 2,100 tons of
gold (roughly 70 million troy ounces), netting about
$20 billion. In terms of ability to pay for imports, gold
provided about 10 percent of Soviet hard currency
needs in the 1970s. By the end of 1981, the USSR had
accumulated a gold stock of about 1,900 tons, an
amount worth almost $28 billion at 1981 prices.' F_
' Based on an average 1981 gold price of $464 per ounce. See
Annual Gold Review and Outlook, J. Aron & Co., April 1982.
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Investment decisions already made indicate that Sovi-
et gold production will continue to increase steadily to
about 375 tons by the late 1980s. Allowing for the
industrial use of gold in the Soviet economy-some 50
tons per year-Moscow could boost its annual gold
sales to 325 tons by the late 1980s without drawing
down its gold stocks. Gold sales of this magnitude
represent potential earnings of about $4.8 billion after
mid-decade (at an average 1981 price of $464 per
ounce).
Conceivably, the USSR could try to push its earnings
even higher by selling gold out of stocks. Any such
attempt, however, would place considerable down-
ward pressure on the price of gold. The international
market for gold is extremely sensitive to the volume of
sales (or even to rumors). We cannot estimate the
effect on earnings of large additional Soviet sales
because of the thinness of the market and the impor-
tance of speculative factors. Much will depend on
South African gold sales policy
The Soviets might also try to increase earnings by
allocating additional resources to gold production. We
believe they have large unexploited gold deposits,
mostly in the southern USSR. Boosting gold produc-
tion would involve comparatively little cost to the
economy. The gold industry accounts for less than
1 percent of annual Soviet industrial investment and
of the industrial labor force. Moreover, the Soviets
still use large amounts of prison labor in the construc-
tion of gold plants and in underground mines, at
relatively small cost to the state. Nevertheless, if the
Soviets launched a program to boost gold production
above the levels we have projected, it would be at least
a decade before substantial amounts of new capacity
could come on stream. In the Soviet Union, leadtimes
as long as 15 to 20 years are involved in building new
plants. Existing Soviet gold plants are operating at or
near their effective capacity, so little additional out-
put is possible from current facilities.
The Platinum Group. During the 1970s the USSR
produced about 50 percent of the world's platinum-
group metals and accounted for about the same share
of world trade. Soviet production consists mainly of
palladium-about three times as much palladium as
platinum-whereas South African production is
mainly platinum. Platinum commands a far higher
price than palladium in world markets. In most
industrial uses, platinum and palladium are not readi-
ly substitutable.
The USSR exports most of its output of platinum-
group metals. Exports to non-Communist countries
during 1970-80 amounted to almost 23 million ounces
(about 715 tons), or about two-thirds of total estimat-
ed Soviet production during that period. Total earn-
ings amounted to $3-4 billion during the 1970s. Some
additional, although small, amounts probably were
exported to other Communist countries. Annual ex-
ports peaked during 1972-74, averaging over 2.7
million ounces, then declined to about 2 million
ounces during 1976-80. Sharply higher prices in world
markets enabled Moscow to sell less and still achieve
its hard currency objectives. For example, the peak
sales of 2.9 million ounces in 1973 netted the USSR
about $380 million; sales of about 2 million ounces in
1980 earned roughly $600 million. Because of the
drop in world prices and a cut in the volume of sales,
Soviet earnings dropped to about $300 million in
1981.
The USSR is assured of large increases in the produc-
tion of platinum-group metals in the 1980s, as produc-
tion of copper and nickel expands in northern Siberia.
We estimate that Soviet production of these metals
(mainly palladium) could easily increase to about
5 million ounces by the late 1980s; of this, perhaps
4 million ounces would be available for export. At
1981 prices, sales of platinum-group metals of this
magnitude would bring as much as $850 million per
year into Soviet coffers.10
The availability of competing Western supplies could
limit the market for Soviet exports, however. South
Africa, for example, has large reserves and can easily
expand production.
Nickel. The USSR is the world's largest producer of
nickel. Output amounted to about 240,000 tons in
1981, roughly one-third of total world production in
10 Based on average 1981 prices of $493 per ounce for platinum and
$116 for palladium. Our estimate assumes that palladium will
continue to account for 75 percent of future Soviet sales and
platinum for 25 percent.
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that year. The Soviets plan to increase the production
of nickel by at least 30 percent during the 1981-85
Plan period. We believe this goal will be met. Perhaps
as early as 1985 and probably no later than 1990,
Soviet nickel production will increase to about
350,000 tons a year, roughly 45 percent more than
output in 1981.
During the 1970s the Soviets accounted for 3 to 5
percent of Western supply. Japan, France, and West
Germany buy most of the Soviet nickel exports.
Exports of nickel to hard currency countries averaged
about 20,000 tons per year during 1970-76. Sales
dropped to about 11,000 tons in 1977 but rebounded
to about 22,000 tons in 1980 and about 30,000 tons in
the sales
were up sharply through November 1982 and might
reach 40,000 tons for the year, worth perhaps $180
million at currently depressed prices.
The USSR should have an exportable surplus of
60,000 to 70,000 tons of nickel by the mid-to-late
1980s-some $500 million in potential hard currency
earnings at 1981 prices. The nickel market, however
is likely to remain weak until the mid- I 80s
I I t
he substan-
tial level of unused nickel presently available
in the West, along with major expansions in the less
developed countries (LDCs), will be more than ade-
quate to meet any realistic increase in demand for the
next few years. The Soviets could not place sharply
higher amounts of nickel on the market without
pushing prices down. The jump in Soviet nickel sales
in late 1982 already has been cited as one of the
factors contributing to the drop in world prices."0
Diamonds. The USSR is second to Zaire in the
production of natural diamonds. Soviet production
has increased slowly since the mid-1950s and in 1981
reached an estimated 2.5 million carats of gem-
quality stones and 8.5 million carats of industrial
stones.
Efforts to boost diamond production have been limit-
ed mainly by the remote location and harsh climatic
conditions of the country's principal deposits. The
largest deposits are in the Magadan Oblast and
Yakutsk and can only be worked during the summer.
Because of the long leadtimes involved in bringing
new deposits into commercial operation-10 to 15
years-it would take the Soviets at least a decade to
increase production substantially. We believe that
Soviet production of gem stones will remain level at
about 2.5 million carats per annum during the rest of
the 1980s. Output of industrial stones probably will
inch forward, possibly reaching 9.0 million carats by
the mid-1980s.
The USSR has exported gem-quality and industrial
diamonds for many years. Practically all of the ex-
ports of industrial diamonds go to other Communist
countries; shipments to the West are small, amount-
ing to only a few million dollars in recent years. The
Soviets are believed to export about one-half of their
annual output of gem diamonds. Almost all are
marketed in the West through the de Beers cartel,
which controls 80 to 90 percent of world diamond
trade. Sales of gem diamonds averaged about 1.2
million carats per year during 1970-80, about 10
percent of the diamonds moving in world trade.
Because prices were sharply higher toward the end of 25
this period, Soviet earnings increased from about
$175 million in 1970 to about $1.3 billion in 1980.
According to unconfirmed press reports, the Soviets
substantially increased the volume of diamond sales in
1981, and this in turn contributed to the slump in
world diamond prices. Prices fell by almost 50 percent
from the 1980 peak, and Soviet earnings did not
match the peak posted in 1980.
According to the US Bureau of Mines, increased 2
world production of diamonds (paced by sharp in-
creases in Australian output) should be more than
adequate to meet demand, and prices are likely to
remain stable. (This estimate assumes that the de
Beers cartel will continue to stockpile diamonds in
order to protect prices.) We, therefore, judge that the
USSR will not be able to increase its exportable 2
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surplus of gem diamonds much during the rest of the
1980s. The Soviets could try to divert a greater share
of annual production to the export market, but such a
policy could backfire by increasing world supply and
placing additional pressure on prices. Much would
also depend on the willingness of de Beers to accept
increased Soviet offerings. On balance, we believe
that sales of diamonds will continue at about $1
billion annually in 1981 prices.
Chromite. The USSR is the world's largest producer
of chromite, an alloy used mainly in the production of
stainless steel. Production has remained at 3.0 to 3.5
million tons per annum since 1970. This stagnation
(the result of the depletion of the richest and most
easily accessible deposits) will soon end. The Soviets
recently started to work a huge deposit in Kazakh-
stan, which will add 800,000 tons to current output by
1985 and possibly 2 million tons by 1990. Even with
the depletion of older deposits, total chromite produc-
tion will increase to about 4 million tons by 1985 and
possibly 5 million tons by 1990. We believe the
Soviets planned to use most of the increment to
support production of stainless steel and other special-
ty steel products. But Soviet steel production has
leveled off and will probably increase only slowly in
the 1980s.'2 As a result, a greater portion of domestic
chromite production could be diverted to the export
market
The Soviet Union has sold chromite on the world
market for many years. Exports to the West, however,
fell from about 775,000 tons in 1970 to about 115,000
tons in 1981-a drop of about 85 percent. The Soviet
share of Western supply fell from about 25 percent to
less than 5 percent during this period. Domestic
production problems, increased availability from oth-
er sources, and the effect of recession on Western
demand have contributed to the weakening of Soviet
chromite exports in the last few years.
We believe that the USSR could increase the amount
of chromite for sale to the West from about 100,000
tons in 1981 to over 800,000 tons by 1985 and still
meet export commitments to other Communist coun-
tries, and domestic requirements. At 1981 prices ($135
"See DDI Intelligence Assessment SOV 82-10089 (Confidential
NF), June 1982, Sluggish Soviet Steel Industry Holds Down
Economic Growth. (u)
per ton), a sale of 800,000 tons in 1985 represents
more than $100 million in potential hard currency
earnings-about seven times the $15 million in 1981.
1 -1
Actual Soviet earnings will probably be less than the
amounts implied by this number. Much will depend
on the policy of other exporters who have large unused
capacity, on the extent and timing of recovery in
Western steel production, and on the ability of the
market to absorb the increased Soviet offerings. In
any event, chromite exports will continue to account
for only a small fraction of Soviet hard currency
receipts.
Arms Sales
Arms sales have long been one of the leading sources
of hard currency for the USSR. Between the early
1970s and 1981, estimated annual hard currency
earnings from arms sales (including larger amounts of
military hardware as well as support services) in-
creased from negligible amounts to at least $5 billion
and perhaps as much as $9 billion annually." Specifi-
cally:
? Soviet sales of weapon systems and major support
equipment have totaled about $55 billion since
1973, sparked by the resupply efforts following the
Middle East war.
? Four Arab states-Algeria, Syria, Libya, and
Iraq-accounted for about two-thirds of the pur-
chases and had the ability to pay for the arms in
hard currency.
We do not foresee any loss of enthusiasm on the part
of the USSR for military sales and assistance pro-
grams. Neither the political nor the commercial inter-
ests of the USSR would be served by a change in
policy that would deny or curtail the supply of arms or
advisers to Third World countries. Indeed, military
assistance will remain the principal means of Soviet
entree, and we anticipate a more aggressive sales
campaign in the next decade as Moscow focuses on
stiffening competition from major Western suppliers.
" Research presently under way in the Directorate of Intelligence
indicates that in addition to the annual payments for major arms,
the USSR may be earning $3-4 billion annually in hard currency
for follow-on support including maintenance, ordnance, and other
supplies and services).
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Moscow will almost certainly provide arms and tech-
nical assistance as long as opportunities exist and will
try to earn the maximum return in hard currency-
although, as noted below, its ability to do so has been
eroded by the deterioration in the current account
balances of the USSR's LDC customers
Algeria, Syria, Libya, and Iraq are likely to continue
to depend primarily on Soviet weaponry and military
equipment through the 1980s. These countries give
Soviet weapons the highest import priority, and (bar-
ring a collapse in world oil prices) we expect little
change in the volume of their arms trade with the
USSR over the next several years. These countries
account for about 75 percent of the $20 billion in
major equipment orders on which delivery had not yet
been made as of late 1982
While the USSR is likely to retain most of the market
it already holds, its ability to expand its sales is
limited. Financial constraints probably will prevent
Moscow's LDC customers from increasing their pur-
chases much beyond present levels. LDCs, including
oil producers, are short of cash and simply do not have
the ability to increase weapons purchases dramatical-
Even for the USSR's present customers, financial
stringencies could lead to adjustments in payment
If payment stringen-
cies became serious enough for the countries buying
Soviet arms, however, Moscow might be forced to
accept barter deals as partial payment for weapons
and to offer customers more liberal repayment terms.
Chemicals
Soviet exports of chemicals to hard currency countries
amounted to $730 million in 1981-roughly 12 times
the 1970 level in current prices and a threefold
increase in constant 1970 prices. About 60 percent of
Soviet chemical exports go to other Communist coun-
tries, largely under long-term barter agreements.
A large share of the present and projected Soviet
chemical exports to the West are tied to long-term
compensation and buyback deals with Western firms.
The Soviets have signed several long-term product
exchange agreements which call for a substantial
increase in two-way chemical trade during the 1980s.
We estimate that hard currency sales of all chemicals
could reach over $1.2 billion (1981 prices) by the late
1980s.
Fertilizers. The USSR is the world's largest producer
of chemical fertilizers and is a major exporter. It has
recently accounted for about 15 percent of the potash
and about 8 percent of the nitrogen moving in the
world trade. In 1981 nitrogen exports to hard curren-
cy countries amounted to about 145,000 tons, earning
some $55 million. Potash sales to the West amounted
to about 405,000 tons in 1981, netting about $95
million.)
Because of rising production, the USSR's exportable
surplus of nitrogen probably will double to 2.5 million
tons per year by 1985. We estimate that two-thirds of
the increased exports will go to hard currency coun-
tries. Total hard currency exports in 1985 could reach
$400 million, of which about half would be in the
form of compensation for earlier equipment imports.
Increased Soviet offerings should not by themselves
be enough to upset the market. The Soviets' 8-percent
share of recent world nitrogen fertilizer trade will
probably not change much during the 1980s.
25
25
25
25
The USSR's exportable potash surplus is likely to
increase to about 3 million tons by 1985, about 25
800,000 tons more than in 1981. Assuming that other
Communist countries continue to use about three-
fourths of annual Soviet sales, potential hard currency
earnings at 1981 prices-$180 per ton-could reach
about $135 million in 1985. The Soviet share of world 25
potash trade probably will increase radually
throughout the 1980s.1 25
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Methanol. The USSR is second to the United States
in the production of methanol-an alcohol widely
used in industry and as a fuel extender for gasoline.
Output amounted to 1.9 million tons in 1980 and is
likely to increase to about 3.4 million tons by the mid-
1980s, when two plants purchased from the United
Kingdom are completed. Barring an unlikely sharp
jump in domestic methanol consumption, the export-
able surplus of methanol could increase to about
835,000 tons by the mid-1980s, nearly triple the
current amount. Of this total, about 485,000 tons
already are committed as a payback under compensa-
tion agreements. If exports to Eastern Europe hold at
present levels (roughly 140,000 tons), the Soviets
would have about 210,000 tons available for sale to
the West outside of the compensation channels. At
1981 prices ($200 per ton), potential earnings (includ-
ing compensation) could reach about $140 million by
the late 1980s.
Timber
Soviet production of industrial roundwood (unproc-
essed logs) fell from about 313 million cubic meters
(mcm) in 1975 to 276 mcm in 1981. The poor
performance.of the timber industry reflects obsolete
logging equipment, insufficient infrastructure, trans-
portation bottlenecks, shortages of labor, and inade-
quate investment. The industry has had a low invest-
ment priority for the past 10 years, as Moscow has
shifted more investment to energy and agriculture.
We estimate that the timber industry will receive no
increase in investment during the current Plan; more
than likely it will receive less. As a result, the Soviets
will be increasingly hard pressed to forestall further
drops in output.
The USSR has been a major timber exporter for
many years. Hard currency exports consist primarily
of low-value industrial roundwood (mainly to Japan)
and semifinished lumber (mainly to the United King-
dom). Hard currency earnings from timber sales
averaged about $1 billion per annum during 1976-79.
Earnings peaked at about $1.5 billion in 1980, the
result of sharply higher world timber prices, but fell to
about $1.1 billion in 1981.
In terms of volume, about 75 percent of Soviet exports
of industrial roundwood go to hard currency coun-
tries-they account for about 10 percent of the
Western supply. Most of the remainder go to Eastern
Europe. Because of the low quality of Soviet wood
products (such as paper and cardboard), hard curren-
cy exports are small and are likely to remain so for the
foreseeable future. Exports of wood products go main-
ly to Eastern Europe.
Soviet plans call for production of industrial round-
wood to increase to 325 mcm by 1985-an outcome
we consider clearly unrealistic. We estimate that
Soviet output will stagnate at about 275 mcm for the
foreseeable future. Even this estimate assumes that
Moscow will adopt measures to alleviate current
problems, particularly transportation bottlenecks, and
that more labor and investment will be allocated to
the timber industry.)
The Soviets could take some steps to boost production,
at least in the short term. They could increase cutting
in the more accessible forests in the western USSR
(though many of these have already been overcut).
This would increase timber production in the short
term but would delay large-scale development of the
remote Siberian forests that form the bulk of the
USSR's wood resources. Moscow also might try to
increase the supply of labor available for the timber
industry, possibly by increasing the number of foreign
workers. About 300,000 forced laborers are engaged
in the timber industry, primarily in logging camps and
sawmills." Their number could only be increased,
however, by taking forced labor away from other
construction projects.)
Exports of industrial roundwood have consistently
amounted to about 5 percent of annual domestic
production. If this ratio holds and output levels off at
about 275 mcm, export earnings will level off at about
$1.1 billion (1981 prices). There would not be much of
an increase in the exportable surplus by diverting
timber away from either domestic uses or other
Communist countries. Shortages of wood products
already are plaguing many sectors of the Soviet
economy and interfering with many construction proj-
ects. Moreover, most exports to Eastern Europe are
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covered by long-term reciprocal barter agreements,
under which the Soviets receive goods that would have
to be paid for in hard currency if the reciprocal
shipments ceased. In any event, sales to Eastern
Europe are comparatively small.
The Soviets may well benefit from increased demand
for timber in Western Europe and rising world prices
later in this decadel
Ithe Soviets can reasonably expect a strong
market in Western Europe as a result of forced
reductions in exports from Sweden and Finland-
major Soviet competitors. The Scandinavian forests
have been overcut and cannot sustain previous export
volumes for long. Moreover, world timber prices
should rebound with the expected economic recovery
in hard currency countries.)
Machinery
Soviet machinery exports amounted to about $1.5
billion in 1981. Earnings increased nearly sevenfold
during 1970-81 and now account for about 5 percent
of total Soviet hard currency receipts. The Soviets can
mass-produce simple machinery and equipment at low
cost and have had some success exporting such prod-
ucts for hard currency. The bulk of exported Soviet
machinery consists of industrial transport equipment,
simple machine tools, small tractors, trucks, and
passenger cars. As a rule, however, these exports are
technically inferior to Western hardware and are not
backstopped by an efficient network of service and
spare parts. Thus, the Soviets account for only negligi-
ble shares of Western machinery markets.
The value of Soviet hard currency machinery exports
increased at about 20 percent per annum during the
1970s, largely because of steadily rising prices in the
West. In constant 1970 prices, the increase was only
11 percent per year. For some types of machinery
exports (machine tools, grain combines, mining equip-
ment, pumps), the volume of sales has fallen substan-
tially in recent years, probably in response to growing
domestic needs.)
Sales of passenger cars seem to be the best hope for
increased Soviet hard currency earnings for the next
few years. The USSR began exporting them to Eu-
rope in the late 1950s. Its strategy then and now has
been to focus on low-cost, durable cars, with sales
since the late 1960s spearheaded by the "Lada."
Because the Lada is basically a Fiat 124 with some
BMW technology, it can be easily serviced in existing
facilities in the West. Parts are interchangeable as
well. France, Belgium, and the United Kingdom are
the major hard currency markets, although the Soviet
market share is less than 1 percent in each country.
25,
25
Earnings from car sales amounted to about $350 25
million in 1980 and about $375 million in 1981 (based
on sales of about 70,000 and 75,000 units, respective-
ly). We believe that such earnings can increase consid-
erably if Soviet production rises as expected. The
Soviets should have an exportable surplus of about
100,000 cars by 1985. At the current average export
price for Soviet cars ($5,000 per unit), potential 25
earnings could climb to about $500 million by the
mid-1980s.
Even with a rise in sales of passenger cars, we doubt
that the rapid growth in earnings in the 1970s can be
sustained during the 1980s. The market for machin-
ery is generally stagnant, and prices have fallen in
recent years. Although prices are likely to increase in
line with increased Western economic activity, the
Soviets will face stiff competition from other machin-
ery exporters in newly industrialized countries and
possibly Eastern Europe. Moreover, given the strin-
gencies in steel and other raw materials, Soviet
machine builders will be hard pressed to meet the
demands of the domestic economy. The Soviets may
in fact be forced to reduce the quantity of some types 2
of machinery allocated for export-for example,
earthmoving and mining equipment and machine
tools.
Because of the large number of products involved,
potential hard currency earnings from machinery
exports are extremely hard to predict. Our best
estimate is that hard currency earnings will increase
slightly to about $1.6 billion after mid-decade, paced
almost completely by increased sales of private auto- 2
mobiles.)
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Cotton
In some years the USSR grows more cotton than the
United States. It exports about 30 percent of its
annual ginned crop, although only part of these
exports are for hard currency. Sales of about 180,000
tons of ginned cotton (mainly to France, Japan, West
Germany, and the United Kingdom) brought in about
$440 million in 1981. Because Soviet production is
leveling off, however, and there is little prospect of
higher world prices, we doubt that Soviet earnings
from cotton sales will increase much during the rest of
the 1980s.
Soviet targets for production of raw cotton 16 average
9.2-9.3 million tons per annum during 1981-85, some-
what less than the 9.6 million tons achieved in the late
1970s. Longer range plans call for production to reach
10.7 million tons by 1990, an outcome we consider
unlikely. Cotton yields in the USSR are already the
highest in the world, and potential for expanding
irrigated land in the cotton-growing area is limited.
Nor are the Soviets likely to benefit from increased
world cotton prices. According to the US Department
of Agriculture, world cotton production will match or
exceed demand through the decade and prices will
probably remain stable." If the Soviets tried to divert
more cotton to hard currency countries, the increased
Soviet offerings could well force world prices down.
The growth in Soviet cotton textiles production has
been steady at a rate slightly below the growth in
population. Cotton textiles now account for 70 percent
of total textile production. Reports of cotton shortages
over the past few years, combined with the disappear-
ance of excess inventories of fabrics and clothing (a
problem that plagued retail trade for years), suggest a
substantial unsatisfied demand for cotton products.
With consumer discontent already manifest over food
shortages, the leadership probably will not reduce
domestic allocation of cotton in order to increase
export earnings.
16 As a rule of thumb, to convert ginned cotton to raw cotton,
multiply by 3
1' See US Department of Agriculture Foreign Agricultural Report
No. 154, 1979, "World Cotton Production and Use Projections for
1985 and 1990." The USDA projections assume no changes in
synthetic fiber prices (for example, as a result of petroleum price
increases). Sharp increases in synthetic fiber prices would tend to
Trans-Siberian Land Bridge
The Soviets may be able to earn additional hard
currency from the Trans-Siberian land bridge
(TSLB)-the system that moves container cars from
the Far East to Europe via the Trans-Siberian rail-
road. Earnings amounted to about $300 million in
1981-a tenfold increase over those in 1972, the first
year of operation. We believe that earnings will rise to
$400 or $500 million by the late 1980s.
Traffic levels on the TSLB increased from about
330,000 tons in 1972 to about 2.6 million tons in
1981. The security and low rates contributed to its
early popularity. A 40-foot container shipped from
Tokyo to Rotterdam costs $4,000 via the TSLB and
$6,500 via a transoceanic conference containership.
Competition from the TSLB has become so intense
that British containership traffic reportedly will be
forced to withdraw from the Europe-Far East trade
route in the next few years."
A key link in the TSLB is the port of Vostochnyy,
which is dedicated exclusively to container traffic.
The Soviets are taking steps that will triple the port's
capacity to about 8.5 million tons of container freight
by the late 1980s. The Soviets also are improving
computer tracking of containers and making greater
use of large containers. Moreover, completion of the
Baikal-Amur mainline railroad (BAM) in the late
1980s will speed up traffic b offering alternate routes
for at least part of the way.
If freight volume increased to some 8.5 million tons
per year-to match the freight-handling capacity of
Vostochnyy-potential hard currency earnings could
jump to about $1.0 billion per annum. This level of
earnings is out of reach for many years, however, for a
variety of domestic and international reasons:
? Operations at Vostochnyy have been handicapped
by inefficient loading and unloading procedures.
Weekly, 31 March 1980.1
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? Movement along the railroad has been hampered by
chronic shortages of rolling stock and severe trans-
portation bottlenecks in the western USSR. Also,
the military often disrupts schedules with its re-
quirement to move military supplies.
? Finally, the Soviets are limited in their ability to cut
rates. Most of the USSR's modern transoceanic
containerships are concentrated in the Far East-to-
Europe route, since they were forced out of the US
market in 1980. Thus the land bridges might under-
cut the Soviets' own ships. The TSLB also will face
growing competition from nonconference container-
ships. These carriers consistently offer rates below
those of either conference carriers or the TSLB.r
Possible Soviet Adjustments to
the Bleak Outlook for Exports
In addition to the measures described above, the
Soviets have other options for coping with hard
currency stringencies. They could divert exports from
client states to the West or even divert more to the
export market at the expense of domestic customers.
In addition, there are some small steps that Moscow
could take to extract hard currency from the popula-
tion. Finally, the Soviet Union could improve its
export prospects considerably in the long term if it
were willing to accept some fundamental changes in
the management of its trade sector and in the role of
Western firms in that sector.
Shifting Exports From East to West
A substantial diversion of goods from other Commu-
nist countries to the West would enhance hard curren-
cy revenues considerably. Indeed, the Soviets have
much to gain by shifting resources to the Western
market. Soviet trade subsidies to allies have posed a
major opportunity cost for Moscow. Exports of raw
materials and fuel to Eastern Europe, Cuba, and
Vietnam at below-market prices have represented an
increasingly large amount of forgone hard currency
revenue. Oil shipped to Communist countries in 1981,
for example, might have earned roughly $20 billion if
sold in the West, and sales of ferrous and nonferrous
metals could have brought in $2 billion more. (This
calculation assumes that such sales would not have
lowered world prices substantially.)
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hand, the "tough steps" offer the potential for a major
hard currency payoff but would take years to effect.
Giving Higher Priority to Export Industries
Diverting resources from domestic to export-oriented
industries would also pose tough choices for Moscow.
It would almost certainly challenge existing planning
priorities and create potentially serious bureaucratic
disputes. Moreover, such a program would require
major changes in industrial management.
Diverting additional investment resources to those
industrial sectors that offer the greatest potential for
export growth (precious metals, some nonferrous met-
als, and chemicals) would probably add to Moscow's
investment problems. Overall investment growth has
fallen dramatically, from 3.4 percent in the last half
of the 1970s to a planned growth of 1.6 percent
annually during 1981-85. All sectors of the Soviet
economy (except energy and agriculture) are facing
investment stringencies. Any decision to direct addi-
tional investment to one sector would require cuts in
other sectors.'9
Even if Moscow increased investment allocations in
those sectors that offer export growth, there is little
likelihood that output could increase much beyond the
amounts we currently project. Leadtimes of at least a
decade are required to bring new capacity on stream;
little additional output would be available until the
1990s at the earliest.
Other Options
In addition to the measures discussed above, the
Soviets have other ways of coping with hard currency
stringencies. Some steps could be taken easily; others
would require ideological accommodations. The list of
options discussed below is by no means exhaustive.
The measures described as "nickel-and-dime" steps
could be taken quickly with little, if any, shock to the
Soviet system-but they would improve the hard
currency situation only marginally. On the other
Nickel-and-Dime Steps. A relatively painless step
would be for the government to encourage or compel
Soviet citizens to turn in goods that can be sold for
hard currency. Gold and diamonds would be probable
candidates. Although the USSR already has large
gold reserves, obtaining additional amounts from the
population would be an alternative to increased in-
vestment in gold mining and would permit larger sales
should market conditions warrant them. The govern-
ment has raised the ruble price it will pay for gold at
least three times since 1964. As an additional entice-
ment, Moscow might offer consumer goods, vacations,
or coupons allowing purchases at hard currency
stores. Equally plausible, the leadership might adopt a
Stalinist approach and order the confiscation of pri-
vately held gold and diamonds. We cannot predict the
success of the carrot or the stick approach, but either
could probably be more effective in amassing gold and
diamonds in the hands of the state in the short run
than could a program to boost production.
Moscow could also consider establishing hard curren-
cy savings accounts for Soviet citizens, similar to the
hard currency savings accounts in Poland. It is illegal
for Soviet citizens to hold hard currency. Neverthe-
less, the authorities know that Western currency is in
circulation in large amounts and is a primary medium
of exchange in the black market. Perhaps the major
hurdle to be overcome would be a general suspicion
that it would be simple to put the money into such an
account but difficult, if not impossible, to get it out.
Similarly, the leadership could simply make it legal
for Soviet citizens to hold hard currency and allow
citizens to spend the money in hard currency shops.
This is done in East Germany. Such a step would
allow the government to tap some of the hard curren-
cy being held by Soviet citizens.
Another approach available to Moscow is an intensive
campaign to boost tourism, perhaps offering large
discount rates to hard currency customers. To limit
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the strain on hotels and other facilities, Moscow could
limit visitors from Communist countries. Although
the Soviets have a long way to go in terms of
attracting Western tourists, they gained experience
and built better tourist facilities during the 1980
Olympics
The Soviets also might consider establishing export
zones in the country, possibly similar to those in
China. The principal output of such a region would be
dedicated for the export market. Western firms could
be called in, possibly on a profit-sharing or equity-
participation basis." Some of Siberia's huge mineral 25
deposits could be candidates for this type of scheme.
The giant deposits at Aldan and Udokan are conserv-
atively estimated to account for about 5 percent of the
world's proven reserves of iron ore and copper, respec-
tively. The Soviets could export all of the output from
these deposits and still have more than enough iron
ore and copper from deposits in more accessible
regions of the country to meet domestic needs and
provide a comfortable margin for export. Assuming a
rapid repayment period for development of these
deposits-20 years-the potential earnings from sales
of the minerals could amount to over $3 billion per
More Adventurous Options. The USSR has enormous
mineral and timber resources. These resources will be
in increasing demand in the world in the longer term,
but the USSR has not made the most of its position.21
Exploitation and marketing of Soviet resources could
be helped greatly by joint arrangements with Western
firms or governments. Such arrangements would re-
quire the Soviets to make substantial ideological
concessions, of course, but if necessary they could do
it. Lenin's advocacy of using Western firms to develop
Soviet resources might serve as a justification. I
The timber industry seems an ideal candidate for
some type of equity arrangement. The bulk of the
USSR's enormous forest resources are located in
Siberia. They could be exploited by Western firms
with little visibility and, from Moscow's point of view,
little contamination of the Soviet population. Given
the capital-intensive nature of Western logging opera-
tions, the number of Western workers would be small.
Furthermore, any proposed project would be dedicat-
ed solely to the export market and thus would not
directly affect the domestic economy or Soviet mili-
tary potential. Finally, the Soviets would not have to
add much infrastructure beyond that already in place.
Completion of the BAM in the late 1980s, for exam-
ple, will open up millions of acres of forests that were
hitherto unexploitable.
20 See, for example, USSR and East European Role in Raw
Material Markets: Year 2000, A. D. Little Corp., 1977; and Wood,
Pulp, and Paper, Demand, Supply and Trade, Food and Agricul-
tural Organization of the United Nations, 1977
annum.
" Under a profit-sharing scheme, the Soviets would share the
profits with the Western firm on a mutually agreed upon basis.
Under an equity-participation arrangement, the Western partner
would own part of the assets of the project and be entitled to part of
 Approved For Release 2007/03/03: CIA-RDP83T00853R000200190002-3
Approved For Release 2007/03/03: CIA-RDP83T00853R000200190002-3