INTERNATIONAL ECONOMIC & ENERGY WEEKLY 13 MAY 1983

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP84-00898R000200060002-7
• Release Decision: RIPPUB
• Original Classification: S
• Document Page Count: 30
• Document Creation Date: December 22, 2016
• Document Release Date: February 8, 2011
• Sequence Number: 2
• Publication Date: May 13, 1983
• Content Type: REPORT

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Intelligence
International
Economic & Energy
Weekly
DI IEEW 83-019
13 May 1983
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International
Economic & Energy
Weekly
1 Perspective-Moscow's Energy Policy in the 1980s
3 Briefs Energy
International Trade, Technology, and Finance
National Developments
13 USSR: Oil Supply Prospects for the 1980s
23 Summit Countries: Shifts in Competitiveness
Comments and queries regarding this publication are welcome. They may be
directed to irectorate o,/'Intelligence
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International
Economic & Energy
Weekly (U)
Synopsis
Perspective-Moscow's Energy Policy in the 1980s
In addition to heavy emphasis on West Siberian oil and gas, the major
elements of Soviet energy policy for the 1980s include increased substitution of
gas for oil, conservation, and modernization of industrial facilities. Because of
the investment squeeze and the increasingly complex technical requirements in
energy production, we believe the USSR will have an even greater need for
Western equipment and technical expertise in the 1980s than it did in the
1970sJ
USSR: Oil Supply Prospects for the 1980s 25X1
After three decades of large and steady increases, the rate of growth of Soviet
oil production has begun to slow. In the second half of the decade, we believe
production will level off and decline to 11 to 12 million b/d.
Zaire: Returning to the IMF 25X1
One year after approaching the IMF for a new standby agreement, Zaire is
still finding it hard to meet Fund preconditions. The government's willingness
to adopt a strict adjustment program will largely determine the country's
eligibility for debt relief and its success in attracting additional international
Summit Countries: Shifts in Competitiveness 25X1
The enormous rise in the exchange value of the dollar and pound during 1981
and 1982 has caused a major loss of US and UK competitiveness. ~~ 25X1
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International
Economic & Energy
Weekly
Perspective Moscow's Energy Policy in the 1980s
The driving force behind Soviet energy policy is Moscow's desire to remain
self-sufficient in energy. As the Soviets have noted, "The Soviet Union is
currently the only highly developed country in the world meeting its own fuel
and energy needs from its own resources." That the Soviets intend to maintain
energy independence is evidenced by their increased determination to exploit
Siberian energy resources even though it exacts a high investment cost from
the rest of the economy.
In addition to heavy emphasis on West Siberian oil and gas, the major
elements of Soviet energy policy for the 1980s include increased substitution of
gas for oil, conservation, and modernization of industrial facilities. To a large
extent, the current strategy is driven by an awareness on the part of the
leadership that it may have to accept an oil production decline in the late
1980s. This prospective decline-already being acknowledged by planners-
defines the need for conservation and substitution and forces continued heavy
investment in West Siberia as a holding action. Despite Moscow's willingness
to date to boost investment in energy, we believe that by the mid-to-late 1980s
the USSR will be unable to provide the investment required to simultaneously:
? Keep oil production from falling.
? Expand secondary refining capacity to permit a shift in the structure of
refined products.
? Provide processing, distribution, and storage facilities to handle increasing
output of natural gas.
? Offset the drop in the energy content of coal.
? Speed development of nuclear power.
? Provide new energy-efficient equipment to meet the ambitious conservation
and substitution goals.
? Satisfy the needs of the nonenergy sectors of the economy (including
defense).
Rapidly rising unit costs of energy production, processing, and distribution will
accelerate the sharp decline in overall capital productivity. Soaring require-
ments for investment in energy will limit the opportunities to substitute capital
for labor elsewhere in the economy. -The energy sectors, including associated
infrastructure, are scheduled to receive more than one-half of the increment in
total investment during 1981-85, and this share will have to rise still further
unless total investment growth is increased sharply. While some increase is
possible, problems in metallurgy and machinery production will limit the
Soviets' ability to rapidly accelerate the growth in Soviet investment.
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Because of the investment squeeze and the increasingly complex technical
requirements in energy production, we believe the USSR will have an even
greater need for Western equipment and technical expertise in the 1980s than
it did in the 1970s. Our analysis of Soviet equipment manufacturing capabili-
ties and the continuing problems in the oil industry indicate that requirements
in the 1980s will center on Western equipment and technology for deeper
drilling, fluidlift, and well completion and servicing. In addition, the Soviets
will be in the market for sophisticated exploration equipment, offshore drilling
platforms, and secondary oil refining technology. Because gas is critical to
maintaining total Soviet energy production growth in this decade, continued
imports of large-diameter pipe, pipelayers, pipe-wrapping and insulating
materials, and turbine-compressors will be necessary. Western equipment and
technology will be especially crucial for exploiting "sour" gas deposits.
Despite the increased resource commitment to energy in the 11th Five-Year
Plan, we believe the combined output of oil, natural gas, and coal will increase
only 11 to 12 percent in 1981-85 compared with the 17 percent planned for
this period and the 22 percent achieved in the last five-year plan. As yet, the
Soviets have not specified their energy production goals for 1990, but, in our
judgment, combined fuels output will grow only 6 to 7 percent in the latter half
of the decade under the best of circumstances. At the start of the 1990s, gas
will be the largest single source of Soviet energy. Indeed; with oil output in de-
cline by the late 1980s and coal production stagnant in terms of energy
content, the increases we foresee in fuel availability will be largely the result of
rising gas output.
If the cost of exploiting oil and gas becomes prohibitive in the late 1980s, the
main thrust of Moscow's energy policy is likely to change. Indeed, coal and nu-
clear power may come to the fore as suggested by recent Soviet references to a
new 20-year energy program. By the 1990s coal-slurry pipelines and advances
in long-distance electricity transmission could make exploitation of remote
coal deposits economic. Nuclear power is also likely to play a larger role in
Soviet energy supplies in the 1990s. Nonetheless, until such programs become
a reality, the Soviets face costly energy problems that will absorb much of
their attention and resources.
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Energy
OPEC Production OPEC oil production in April averaged 15.4 million b/d, nearly matching the
Holds Steady level in March. Production in Saudi Arabia rose to 3.9 million b/d in April on
the heels of OPEC's recent pricing and production accord. Nigeria's produc-
tion increased sharply in April, averaging 1.2 million b/d. The US Embassy
has reported that Nigerian production could top the 1.6-million-b/d mark this
month, which would violate its 1.3-million-b/d quota allowed under the OPEC
agreement.
OPEC: Crude Oil Production
Million 6/d
1982
1983
Quota
19838
January
February March
First
Quarter
April
Total
18.8
17.5
17.0
14.9
15.5
15.8
15.4
Algeria
0.6
0.725
0.7
0.6
0.7
0.7
0.7
Ecuador
0.2
0.2
0.2
0.2
0.2
0.2
0.2
Gabon
0.2
0.15
0.2
0.2
0.2
0.2
0.2
Indonesia
1.3
1.3
1.1
1.0
1.1
1.1
1.2
Iran
2.3
2.4
2.7
2.6
2.6
2.6
_
2.1
Iraq
1.0
1.2
0.8
0.8
0.6
0.8
0.7
Kuwait
0.7
1.05
0.6
0.8
0.9
0.8
0.7
Libya
1.2
1.1
1.4
1.2
1.1
1.2
1.1
Neutral Zone
0.3
b
0.3
0.2 ~
0.2
0.2
0.4
Nigeria
1.3
1.3
0.8
0.7
.0.9
0.8
1.2
Qatar
0.3
0.3
0.3
0.2
0.2
0.2
0.2
Saudi Arabia
6.3
~
4.6
3.6
3.6
3.9
3.9
UAE
1.2
1.1
1.2
1.1
1.1
1.1
1.1
Venezuela
1.9
1.675
2.1
1.8
2.1
2.0
1.7
a Preliminary.
b Neutral Zone production is shared about equally between Saudi
Arabia and Kuwait and is included in each country's production
quota.
Saudi Arabia has no formal quota; it will act as swing producer to
meet market requirements.
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Iranian crude oil production slipped 500,000 b/d from March levels as some
long-term customers-particularly, the Japanese-remained reticent to sign
new contracts.
Press reports that Japanese buyers were awarded a $2-per-barrel discount on
Iranian crudes have been denied by Iranian oil officials. Other countries
maintained production levels within their OPEC-mandated ceilings. Venezuela
cut production 400,000 b/d from March but drew down oil stocks to maintain
export levels. Libya called off its barter and processing deals and held
production to 1.1 million b/d in a show of support for the OPEC agreement.
Dutch natural gas production in 1982 declined for the third consecutive year
Continue To Fall as mild weather, conservation efforts, and a sluggish economy reduced
demand. Domestic sales were off 5 percent from year-earlier levels while
export sales fell 19 percent. An increase in Italian gas production and the use
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of alternative supply sources by other countries contributed to the sharp drop
in exports. Dutch gas exports to France, for example, were down 40 percent,
largely as a result of increased French imports of Algerian gas. Recent data in-
dicate that the fall in sales continued into 1983. Sales during the first quarter
were down by 7 percent compared with year-earlier levels, with reduced
exports accounting for. nearly all of the decline. Officials of Gasunie-the
Dutch gas distribution monopoly-now expect exports will decline to about 30
billion cubic meters annually by 1985 and remain around that level for a
number of years.
EC Energy Proposals The recent meeting of the EC energy council resulted in some movement
toward a more comprehensive Community energy policy. At the meeting the
EC Commission submitted two proposals aimed at promoting more efficient
use of coal and natural gas. The proposals were generally supported by the
member states but no final decisions were made. The first proposal encourages
EC members to convert oil-fired systems used by industry and public buildings
to coal. While each country would supply funds for its own conversions,
members would be required to report on their progress to the EC Commission
at the end of each year. The second proposal recommends allowing natural gas
prices to adjust freely to changes in the cost of supplies and the price of
competitive fuels. The Commission is not interested in aligning natural gas
prices but wants to eliminate subsidies and avoid overly rigid or noneconomi-
cally justified rates. These proposals, along with several others such as new
incentives for energy conservation and support for oil and natural gas
exploration, will be further examined at the next energy council meeting
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International Trade, Technology, and Finance
Mexican Debt At a recent meeting with creditor countries and IMF observers, Mexico City
Discussions reluctantly agreed to a multilateral rescheduling for about $2 billion in
private-sector debt owed to official institutions. The Mexicans chose not to
reschedule via the Paris Club-the traditional method of resolving officially
guaranteed debt payment problems-because they feared such talks would
interrupt other ongoing negotiations and jeopardize government-to-govern-
ment credit lines. Mexico City was concerned that part of the $2 billion of offi-
cial export credits promised earlier this year would be diverted by the Paris
Club to cover old debt.
Mexican officials prefer that their recent bilateral treaty with Spain serves as
a model for any multilateral agreement. The Spanish agreement, which
reschedules guaranteed private-sector principal over six years with athree-
year grace period, represents Mexico City's efforts to assist the private sector
in servicing its foreign debt to private banks and suppliers. The Mexicans
believe this approach is the fastest means of restoring normal trade financing
and satisfies the IMF condition that Mexico City not assume private-sector
debt. Mexico City promised last week to send a formal statement of its position
to all creditor governments and asked them to provide detailed information on
official guarantees and credits subject to rescheduling. Because of technical
problems involved in collecting precise data on amounts owed and the number
of creditors involved, we believe the two-month timetable suggested for
completing this rescheduling is too optimistic.
Budapest Seeks Hungarian Vice Premier Marjai, in a meeting with EC Commissioner
Trade Agreement Haferkamp last month, proposed a basic trade agreement with the EC.
With EC Budapest wants the EC to reduce its restrictions on imports from Hungary, es-
pecially on beef and some industrial products, and it has raised the possibility
of a free trade area and other preferential arrangements. Romania and
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Yugoslavia already have trade agreements with the EC. Budapest's desire for
a trade agreement with the EC indicates the Hungarians are not turning
further to the East in response to their hard currency payments problems. The
EC would be interested in an agreement both to differentiate Hungary from
some other CEMA countries and to move away from CEMA-EC dealings.
Although the EC Foreign Ministers have instructed the Commission to
prepare a counterproposal quickly, negotiations over concessions probably will
be protracted
Japanese Japanese firms are making important gains in the development of gallium
Semiconductor arsenide-based integrated circuit technology that could be important in future
Research civil and military systems. The current Japanese leader, Fujitsu, recently
announced the most advanced gallium arsenide device yet, with speed 10 times
that of an equivalent silicon device. Japanese firms, with strong government
support, are committing considerable research funds to develop gallium
arsenide technology for supercomputers and optical communications.
Japanese Economic During his visit to Thailand in early May, Japanese Prime Minister Nakasone
Aid to Thailand announced Tokyo's 1983 aid package that included a $280 million low-interest
loan~own from $294 million last year-and some minor trade concessions.
Tokyo offered to reduce its contentious $1 billion trade surplus with Thailand
by increasing quotas for Thai industrial exports and agreed to consider
reducing tariffs for Thai agricultural exports. Bangkok is probably disappoint-
ed with this package. The measures to reduce the trade surplus are too modest
to have much effect ~
Japan this year substantially increased its loans to two
of Thailand's Asian neighbors, South Korea and Malaysia.
National Developments
Developed Countries
Spain Nationalises The Spanish Government has effectively fulfilled its campaign promise to
Electric Utilities nationalize the seven main electric utilities. Under the terms of an agreement
signed with the companies last week, Madrid will have a majority interest in a
new corporation that will control all of Spain's electrical production. The
Socialists hope the nationalization will both please their supporters and
improve the operation of the electrical sector, which recorded a small deficit
last year. The utilities' acquiescence in the takeover and the fact that the
government already exerted considerable control over the industry suggest that
the move will stir little opposition.
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Cuban Private Western banks reportedly reached an agreement last month on rescheduling
Debt Rescheduled Cuba's private debt. All of Havana's medium- and long-term maturities due
from September 1982 through this December-about $200 million-were
rescheduled to be repaid over the next eight years, including athree-year grace
period. In addition, the banks agreed to maintain $373 million in short-term
credits through the end of this yea
The terms of the agreement are similar to those accepted by Cuba's official
creditors in March but the still leave Havana with insufficient short-term
credit. Cuba needs at least $600 million in
short-term cre its to malntaln a minlma evel of imports. Even with an
additional $117 million in hard currency available through Soviet and East
European banks in the West, Havana will need another $110 million. Asa re-
sult, the Cubans may look for guaranteed short-term credits from sympathetic
governments to avoid even deeper cuts in imports.
Kenyan Concern Senior Kenyan officials told the US Embassy last week that they are
Over US Aid particularly anxious to obtain nearly $30 million in promised US aid for
budgetary support before the IMF's review next month. Kenyan finance
officials know they. must sharply reduce the country's projected midyear
budget deficit of $40 million to qualify for continued access to IMF funds. The
Kenyan Government also is aware that US budget constraints and bureaucrat-
ic procedures may stand in the way of disbursing the $30 million before
midyear. Suspension of the nearly $200 million IMF program would signifi-
cantly diminish Kenya's ability to pay for essential imports and development
projects. Failure to obtain the requested US aid would be a major blow to
President Moi, but, in our judgment, the country's financial situation is so
precarious that he could not afford to alienate the United States.
Financial Uncertainties Prime Minister Seaga last week announced new taxes and a freeze on
jor Jamaica government spending in an effort to cut the growing budget deficit in the next
three years. He says his government had overshot by $150 million the IMF
target in March for net international reserves, but he expects that new loans
will close this gap soon. Seaga appears to be counting on receiving a large loan
from private Kuwaiti investors, but recent US Embassy reporting indicates
this is unlikely. Moreover, traditional commercial lenders, mostly US and
Canadian banks, seem unwilling to provide much additional financing.
Jamaica's currency will probably continue to lose value when the government
shifts additional imports to a more expensive exchange rate. Unemployment
will remain an important political worry, and Seaga's attempt to avoid large
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government make-work schemes may crumble under political pressure. Any
surge in public spending or failure to attract significant foreign financing could
jeopardize continued IMF support and prompt Jamaica to seek at least a
partial debt rescheduling before the end of 1983.1 25X1
Suriname Reaches The tentative accord recently reached between Paramaribo and US-owned
Preliminary Bauxite Suralco suggests that Suriname, at least for now, will not nationalize its
Accord aluminum industry. The agreement establishes a 15-percent retroactive in-
crease in bauxite production taxes for 1982 in return for sizable tax reductions
through 1985. These cuts are unlikely to restore Suriname's international
competitiveness or significantly boost the bauxite sector's output-which
contributes about 80 percent of the country's export earnings. The agreement
thus may further squeeze government revenues and set back the regime's
ambitious development program announced last week. Ongoing negotiations
between Suriname and the aluminum companies over employment, wages,
production, and marketing will provide a clearer indication of the role
Paramaribo intends to play in the bauxite sector.
Zambian Price Zambia last week sharply raised prices of fertilizer and maize meal-the
Increases staple food in the country-in another austerity move aimed at bolstering
Threaten Unrest support for special treatment at the meeting next week of the Paris Club,
which will discuss rescheduling of Lusaka's debts to Western governments.
Lusaka is requesting that official creditors take the unusual step of reschedul-
ing the country's pressing short-term debt-in addition to a normal reschedul-
ing of medium- and long-term obligations.
The new prices will mean substantial belt tightening for Zambian consumers
and farmers already facing higher costs as a result of the lifting of price
controls on most other goods last December and the devaluation of the kwacha
by 20 percent in January. The increase of maize meal prices-a sensitive issue
even in the best of times-could foment unrest, particularly in the copper belt
where the country's most powerful labor unions are threatening a general
strike to protest the inadequacy of recent wage increases.
Rising Unemployment Panamanian officials fear that as many as 2,500 workers may be laid off in
in Panama Colon this year because of sharply declining commercial activity. In addition a
decline in sugarcane output this spring, coupled with the closing of the San Fe-
lipillo sugar mill outside of Panama City, is expected to result in the loss of
4,000 jobs. Panamanian officials are concerned over unrest in Colon-the
country's second-largest city where an estimated 30 percent of the labor force
already is unemployed. The US Embassy notes that it has received reports that
the suspension of operations at the sugar mill and depressed economic
conditions in general may spur increased street violence in Panama City,
where unemployment may already be over 20 percent.
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Sharp Drop in Soviet Moscow's net hard currency debt apparently fell by $2.4 billion in 1982.
Hard Currency Debt Recently released data indicate that Soviet liabilities to Western commercial
banks probably dropped by about $1.5 billion, whereas assets held in these
banks rose by nearly $1.6 billion. The resulting $3.1 billion reduction in the
USSR's net commercial debt more than offsets. the estimated $700 million
increase in the USSR's debt on Western government-backed credits. Most of
the drop in the commercial debt was due to a sharply reduced need for short-
term credits for agricultural products-purchases of which fell by about $2
billion in 1982. The increase in debt on Western official credits probably was
primarily due to the startup of deliveries of equipment and large-diameter pipe
for the Siberia-to-Western Europe natural gas pipeline.
USSR: Estimated Hard Currency Debt to the West, Yearend
Chinese Economic China's agricultural sector posted strong and broadly based gains in 1982, but
Performance in 1982 other sectors had mixed results. According to the State Statistical Bureau,
grain production hit a record 353 million tons, up 9 percent from 1981. Overall
agricultural output rose by 11 percent because of exceptionally favorable
weather, increased inputs, and new policies linking peasant incomes to
production.
In other sectors of the economy:
? Exports rose by 6.5 percent in real terms, while imports increased by 0.3 per-
cent. Holdings of foreign exchange reached record levels.
? Industry grew by 7.7 percent, almost double the 4-percent target, but heavy
industry's 9.9-percent growth (versus a 1-percent target) strained energy
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supplies and siphoned off inputs earmarked for the production of consumer
goods. Light industry's growth was only 5.7 percent-less than the 7-percent
target and the lowest rate in several years.
? Recovery in heavy industry also helped boost labor productivity by
2.3 percent, but unit costs fell by only 0.04 percent-far less than the
planned 2- to 3-percent reduction.
? Rural incomes grew by 5 to 10 percent in real terms, about twice the gain in
urban incomes but slower than in the past. Personal savings deposits grew by
29 percent, in part reflecting shortages of desirable consumer goods.
? Investment spending, again far above plan (25 percent), was concentrated in
less essential areas. Progress on key energy and transportation projects
lagged because of shortages of funds and construction materials.
China Seeks Increase in Beijing last month announced several measures to increase foreign investment
Equity Joint Ventures in its equity joint venture program. The most important are the greater access
the joint ventures will have to China's domestic market-from which they are
largely excluded-and the lifting of the requirement that such ventures earn
sufficient foreign exchange to cover all external costs and repatriated profits.
Beijing also has exempted these ventures from import duties and business
taxes and has lengthened the forgiveness period for income taxes. Beijing also
plans to publish later this month a complete set of rules supplementing its joint
venture laws and will hold a national conference on foreign investment to deal
with other stumblingblocks. Since its inception in 1979, Beijing's equity joint
venture program has attracted only about $100 million-less than 10 percent
of total foreign investment in China. Depite China's efforts, we believe some
investors will continue to avoid equity joint ventures because of doubts about
the long-term stability of China's investment climate.
CEMA Summit A meeting of Soviet and East European party economic secretaries in Moscow
Postponed Again last month failed to set a date or an agenda for a CEMA summit. A Romanian
diplomat says differences among the CEMA members could not be resolved at
the political level and would have to be addressed again at the experts' level, is-
sue by issue. The Soviets reportedly refused to consider Romania's call for
increased supplies of Soviet oil. Other major disagreements involved mecha-
nisms proposed for improving economic coordination within CEMA. A senior
Soviet economist, who is a specialist on CEMA, has told the British
Ambassador the differences are unlikely to be solved in time for a summit to
be held before early next year.
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The USSR wants to limit its obligations to provide the East Europeans with oil
and other raw materials at preferential prices. At the same time, however, it
wants to ensure that the East European economies remain strong enough to
maintain political stability. In addition, the Soviets are concerned about the
economic dependence of their East European allies on the West. The continued
delay in agreeing on an agenda reflects resistance-especially from Romania
and Hungary-to Moscow's efforts to establish closer coordination within
CEMA and tighter Soviet control. The Soviets want to accelerate integration
of planning and production in order to ensure more efficient investment and to
reduce duplication of production. Most of the East Europeans want trade
concessions from the USSR, but Moscow apparently has not tried to attain its
broader aims by being more responsive on trade.
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USSR: Oil Supply Prospects
for the 1980s '
After three decades of large and steady increases,
the rate of growth of Soviet oil production has
begun to slow. Production of oil and gas condensate
in the USSR now stands at 12.4 million b/d, only
about 400,000 b/d more than in 1980. Though still
posting small increases-about 1 percent annually
during the current five-year plan-the Soviet oil
industry has not reached an annual production
target since 1972. These recent small increases
were made possible only by a willingness on the
part of the Soviet Government to fund an enormous
and costly development effort in West Siberia,
which now supplies 58 percent of Soviet oil produc-
tion. We believe Moscow should be able to ap-
proach its production goal of 12.6 million b/d for
1985. Thereafter, rising investment costs will prob-
ably cause production to level off and decline
slowly to 11 to 12 million b/d by 1990.
The slow growth in Soviet oil production is a result
of planning and strategy choices made during the
1970s, increasingly difficult field conditions, and
often mediocre performance by the oil industry:
? Outside of West Siberia only two major onshore
producing regions, Komi and Kazakhstan, are not
in decline, and both will remain relatively small
producers throughout this decade. The Soviets
concede that their promising offshore areas will
contribute little before the 1990s.
? By the late 1980s, production at most of the large
fields on which the Soviets have relied for most of
their oil over the past two decades will be declin-
ing rapidly. Production from smaller deposits
yields lower returns per unit of effort.
? Although we estimate the Soviets have reserves of
50-70 billion barrels, reserve quality is declining.
Since the mid-1970s, well flow rates have steadily
declined and water cuts have rapidly increased
even in oil-rich West Siberia, sure signs that the
best reserves are being depleted and that the
Soviets must devote greater effort just to keep
production from falling. To make matters worse,
new deposits tend to be deeper, harder to drill,
and more remote.
? Emphasis on maintaining high rates of produc-
tion growth has resulted in Soviet failure thus far
to implement an exploration program adequate
for proving up substantial new reserves, especially
outside of West Siberia. Consequently, potential-
ly oil-rich portions of the Arctic, East Siberia,
and even parts of West Siberia will contribute
little significant new oil output until the 1990s.
? Though the USSR produces the bulk of equip-
ment used by its oil industry and Soviet research-
ers are well-versed in technical theory, special
applications (such as sophisticated exploration,
deeper drilling, sour gas, and offshore positioning
and drilling) will require reliance on Western
equipment and technology for the foreseeable
future.
? Despite the priority accorded to oil production,
the Soviet oil industry suffers from the same kind
of inefficiency and mismanagement that tend to
plague other civilian sectors of the economy.
Supply Outlook
No single one of the above problems would by itself
preclude the Soviets' maintaining some growth in
oil output over the rest of this decade. But taken
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together, they have dramatically raised the cost of
producing a barrel of crude. The Soviets plan to
increase the oil industry's share of industrial invest-
ment from 12 percent in the previous five-year plan
to 16 percent in the current 1981-85 plan. By 1985,
they will be allocating 26 percent of all incremental
investment to the oil sector. Our estimates of
investment requirements indicate that Moscow
would have to increase investment in the oil indus-
try from 8 billion rubles in 1981 to some 20 to 25
billion rubles in 1990 just to keep production at-or
slightly above-its present level. In an era of slow
economic growth and lackluster performance in
other key sectors of the economy, the Soviets will
find it difficult to accelerate the pace of oil industry
investment.
Consequently, given the apparent adequacy of the
reserve base, oil production during the rest of the
decade will be largely determined by the invest-
ment options chosen by Soviet leaders. At least
through the end of the 11th Five-Year Plan in
1985, most investment and field development
choices have already been made. If the Soviets
follow through with these investment plans, they
will probably come very close to, if not meet, their
announced target of 12.6 million b/d for 1985.
In the last half of this decade, Soviet planners will
probably be choosing from among three investment
options:
? The Soviets could continue to increase investment
in the oil industry over the coming 12th Five-
Year Plan but at a decreasing rate of growth.
This strategy would most likely result in produc-
tion plateauing in the vicinity of 12.5 million b/d
and subsequently declining slowly to 11 to 12
million b/d by 1990. Though such a program
would still be expensive-investment and drilling
effort would have to grow by 50 to 100 percent
between now and 1990-it would be consistent
with Moscow's past willingness to make the effort
needed to avoid an energy crisis.
adequate, but the costs of exploiting them proba-
bly would be prohibitive: total investment and
drilling would have to triple; 60,000 more wells
would have to go on artificial lift to help pump an
additional 19 million b/d of water; the industry
work force would need to nearly double; and
everything would have to "go right" in the oil-
fields and on the exploration front. This option
would be very expensive, and, without some
unforeseen windfall discoveries, would create a
drag on other sectors of the economy.
? At the other end of the spectrum, the Soviets-if
dogged by increasing production problems,
worse-than-expected geologic conditions in the
oilfields, and a need to shift investment to other
hard-pressed industries--could choose to halt the
growth of resources going to the oil industry after
this five-year plan. Such an approach could result
in production peaking by 1985 and subsequently
falling to as low as 9 to 10 million b/d by 1990.
This option would create a serious gap between
Soviet oil supply and demand.
Though the situation might change, the Soviets are
apparently moving in the direction of the first
option. Recent speeches by Andropov,
statements by senior spokesmen of the oil
and gas industries, and the still sketchy details of
the Soviets' new 20-year energy plan indicate that
Moscow is feeling the energy investment pinch.
Soviet planners are
attempting to shift energy investment from oil to
gas. If this process continues-and it certainly
would represent a rational choice-little, if any,
further growth in Soviet oil output would occur
beyond 1985.
Implications of the Slowdown
The possibility of an oil production plateau poses
serious problems for the Soviet leadership, given
the oil demand outlook for the 1980s. In 1990,
Soviet internal requirements for crude oil should
? With an enormous increase in investment, the
Soviets could hold production between 12 and 13
million b/d until 1990. We believe reserves are
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grow to 9.5 to 10 million b/d, up from 8.9 million
b/d in 1980. By the Soviets' own admission, an
ongoing conservation program has been largely
unsuccessful, primarily because the structure of
domestic oil consumption does not lend itself to
substantial discretionary cuts in use and the price
system does little to help reduce demand. Though
some gains have been made in the substitution of
gas for oil, opportunities to substitute both addi-
tional gas and coal appear to be limited by capital-
stock considerations and the transportation
network.
Neither can the Soviets afford to make substantial
near-term cuts in the more than 3 million b/d of oil
currently being exported. About two-thirds of this
amount supplies Eastern Europe with roughly
three-fourths of its oil needs. Though Moscow has
imposed selective cuts of 10 percent on some of its
soft-currency buyers, only small and gradual addi-
tional cuts in supplies to Eastern Europe are feasi-
ble during this decade. Further reductions over the
short term of as little as 100,000 b/d could appre-
ciably diminish Eastern Europe's economic pros-
pects, and cuts greater than 200,000 b/d could risk
driving some of these economies into absolute
decline.
About one-third of Soviet exports are sold on the
Western market, and represent the Soviets' princi-
pal source of hard currency. Moscow has indicated
that it intends to sustain hard currency earnings-
even to the point of accepting some reduction in
domestic economic growth. Unless world oil prices
firm and begin to rise, Moscow will need to main-
tain exports to the West at somewhere near the
current level to achieve this goal.
Regardless of whether the high or low side of the
projection of oil production is achieved, our projec-
tions of Soviet economic performance in the 1980s
indicate that growth of GNP will continue to
decline-from over 2 percent during the current
five-year plan period to between 1 and 2 percent
during the 12th Five-Year Plan (1986-90). Indeed,
Soviet growth would be only marginally higher
with oil production of 12 million b/d than with 11
million b/d.
Any shortfall in oil available to the domestic
economy would result in reduced use of capital
equipment if other fuels cannot provide an offset.
Oil use could be reduced in various ways. The most
efficient method would be to retire equipment that
uses the most oil relative to what it produces for the
economy. Given the USSR's cumbersome approach
to economic management, however, we are more
likely to see the imposition of restrictions on energy
use across industrial sectors. Open sources make it
clear that such limits have been used extensively
over the past year or so to cope with electric power
shortages. These restrictions are not an effective
substitute for a more rational and longer term
approach to energy-efficient use of capital re-
sources and result in a larger than necessary penal-
ty on economic performance.
Total requirements for Soviet oil, then, should
remain between 12 and 13 million b/d, leaving
Moscow in the most likely case with a total "paper"
shortfall of some 500,000 to 1 million b/d during
the latter half of the decade. Particularly distress-
ing from the Soviet point of view are the unpleasant
tradeoffs-between domestic needs, hard currency
requirements, and economic growth and political
stability in client states-that managing this short-
fall will require.
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Secret
Zaire: Returning to the IMF
One year after approaching the IMF for a new
standby agreement, Zaire is still finding it hard to
meet Fund preconditions. Kinshasa is struggling to
stay within its budget targets because of falling
revenues from key mineral exports and mounting
spending pressures. Monetary and credit restraints
are likely to be loosened. Moreover, Kinshasa is
reluctant to enforce IMF proposals for a floating
exchange rate because if does not wish to lose
control over the value of its currency.
The government's willingness to adopt a strict
adjustment program will largely determine the
country's eligibility for debt relief and its success in
attracting additional international donor assist-
ance. We believe that President Mobutu realizes
the seriousness of the country's financial situation,
but we are less sure that he is willing to make any
substantial new sacrifices. Moreover, even if an
IMF stabilization program is concluded, as in the
past there will probably be slippage in meeting
performance targets.
1982 in Retrospect
due to official creditors.
Zairian economic performance last year was disap-
pointing largely because the worldwide recession
kept down demand for Zaire's key mineral exports.
Export earnings fell to about $1.4 billion, for an
overall decline of 30 percent since the demand for
copper and cobalt began to fall in 1980. Despite a
drop in imports of almost 10 percent, the current
account still registered a $360 million deficit,
which exhausted Kinshasa's scant foreign exchange
reserves. Zaire barely managed to pay 15 percent
of its more than $900 million medium- and long-
term debt service obligation last year, most of it
President Mobutu's unwillingness to clamp down
on public spending made matters worse. The bud-
get deficit rose to about 9 percent of GDP-almost
double the figure for 1981-despite much-bally-
hooed attempts to streamline the civil service and
the temporary recall of almost half of the country's
diplomatic personnel. Low revenues-a result of
lax domestic tax collection and decreased customs
receipts-and growing expenditures caused the def-
icit to balloon. Monetary expansion to help cover
the deficit reached an annual rate of nearly 70 25X1
percent and reversed a deflationary trend that
began in 1980. GDP declined by an estimated 2
percent.
Mobutu initiated several reforms during the latter
part of the year, but they proved to be too little and
too late to have a positive effect on 1982
performance:
? He replaced the corrupt Zairian head of
GECAMINES, the government mining compa-
ny, with an experienced Belgian, Robert Crem.
? He imposed a new accord on GECAMINES and
SOZACOM, the state-run minerals marketing
agent, to provide a more accurate account of
transactions between them.
? He reduced Zaire's exorbitant cobalt price to
bring it in line with the world market in an effort
to boost sales.
? He decontrolled most food crop prices in an effort
to reduce imports and to increase production of
Zaire's main staples-particularly maize.
As earnings from the country's mineral exports
dropped, however, the dearth of foreign exchange
caused a tightening of longstanding shortages of
petroleum, capital equipment, and machinery, fur-
ther crimping economic growth
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Current account balance
15.4
1.7
-255.3
-360
-420
Trade balance
728.6
752.3
420.3
457
380
Exports (f.o.b.)
1,834.6
1,953.6
1,477.3
1,420
1,390
Copper
678.9
912.1
723.0
686
740
Cobalt
570.8
377.8
161.4
81
40
Crude oil
152.7
225.2
264.2
270
220
Other
432.2
438.5
328.7
383
390
Imports (f.o.b.)
1,106.0
1,201.3
1,057.0
963
1,010
Crude oil
149.9
209.5
257.0
238
230
Other
956.1
991.8
800.0
725
780
Net services ~
-780.4
-884.7
-780.0
-924
-930
Unrequited transfers
67.2
134.1
104.4
107
130
e Estimated.
n Projected.
Figures for 1979-80 include interest due before rescheduling.
Estimates for subsequent years include interest payments Zaire is
expected to be able to meet.
Catering to the IMF
Seeking relief from the country's economic bind,
Kinshasa approached the IMF in late 1982 for a
$220 million one-year standby loan. Zaire's last
program, an Extended Fund Facility negotiated in
mid-1981, had been quickly suspended after Kin-
shasa failed-by a wide margin-to meet budget
targets. Compared with 1981, Zaire's domestic
economic management has deteriorated so badly
and its financing needs have grown so large that
any accommodation with the Fund will be harder
to achieve than in the past.
The IMF-with strong support from Kinshasa's
international creditors and donors-is requiring
Zaire to implement several Fund recommendations
before an agreement is signed. Kinshasa is being
asked to:
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March 1976
Compensatory Financing Facility
65
Standby arrangement (12 month)
47; made all
drawings
May 1977
Compensatory Financing Facility
33
April 1977
Standby arrangement (12 month)
53; 6 drawn
August 1979
Standby arrangement (18 month)
152; made all
drawings
June 1981
Extended Fund Facility
1,075; 206
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Secret
? Keep the government budget deficit within strict-
ly monitored guidelines.
? Float the country's overvalued currency.
? Restrain credit and monetary expansion.
Meanwhile, international donors are conditioning
future aid on Kinshasa's willingness and ability to
reduce corruption further and to reform the mining
and agriculture sectors.
The Budget D~cit and Monetary Policies. In an
attempt to strengthen its case with the IMF, Zaire
has announced a budget for this year that projects
a deficit exactly equal to the amount-$420 mil-
lion-that Fund staffers have said would be tolera-
ble. The US Embassy in Kinshasa reports that, by
deferring all public spending except for employee
salaries, Zaire has built up a surplus during the
first few months of 1983 and has remained well
within suggested IMF budget targets. Kinshasa
will find it increasingly difficult to avoid incurring
budget deficits, however, as spending pressures
mount later this year. We see little evidence of
monetary or credit restraint.
Officials in Kinshasa have been less quick to
respond to the Fund's request for an exchange rate
realignment. The Bank of Zaire has resisted IMF
proposals to adopt a floating exchange rate regime,
hoping that the Fund will settle for a series of
devaluations. According to the US Embassy in
Kinshasa, the IMF will be reluctant to accept this
approach because it distrusts leaving the related
decisions to Zaire's political leaders.
Reforms in Mining. Kinshasa's main reform
achievements so far this year have been in the
mining sector. Crem, the newly appointed director
of GECAMINES, has moved swiftly to gain con-
trol of the company's financial accounts and to
monitor sales. He has also slashed GECAMINES's
budget expenditures by laying off large numbers of
expatriate workers, divesting the company of many
money-losing, nonmineral-producing subsidiaries,
and decreasing production of cobalt in the face of
slack demand. In addition, GECAMINES and
SOZACOM have been able to agree on a competi-
tive pricing strategy for cobalt. 25X1
Crem nevertheless faces several obstacles in imple-
menting the GECAMINES-SOZACOM accord.
According to Embassy reporting, SOZACOM di-
rector Lukusa Mwengula resents the authority
GECAMINES has acquired, and he attempts to 25X1
obstruct Crem's initiatives whenever possible.
GECAMINES and SOZACOM have also failed to
agree on a repayment scheme for the massive
cobalt prefinancing debt to Zaire's Belgian market-
ing agent, Societe Generale des Minerais (SGM).
Dealing With Corruption. In response to interna-
tional pressure-particularly from the United
States-Mobutu has launched a highly touted anti-
corruption campaign. By early March, approxi-
mately 70 people had been arrested, 150 were
under investigation, and 116 civil servants and
businessmen had fled the country to avoid question-
ing. Even so, the campaign has barely scratched the
surface of the system of patronage and graft that
pervades the country. The campaign has focused on
prosecuting individuals-mostly small businessmen
and midlevel officials-rather than establishing
measures to prevent corrupt practices or to monitor
and limit their scope. Moreover, Mobutu has been
in no hurry to process these cases
In our view, Zaire will continue to experience
severe financial strains even if Kinshasa manages
to secure an IMF loan. Even though an agreement
would probably lead to a rescheduling of much of
Zaire's $1.6 billion medium- and long-term debt
service obligation for 1983, we doubt-based on
Kinshasa's track record-that the country would
be able to meet even substantially lower payment
schedules. Mobutu would, therefore, be likely to
turn increasingly to various forms of international
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aid to carry him through. He can probably expect
to receive about $400 million in concessional eco-
nomic support from the OECD countries if an IMF
agreement is concluded, but much of this would be
slated for longer term technical and development
assistance rather than short-term financial support.
Kinshasa's international trade situation is grim.
Although copper prices have picked up this year,
the increase in revenues-the US Embassy esti-
mates an increase in revenues of only $60 million-
will not be enough to compensate for losses in other
areas. We expect world prices for three of the
country's other major exports--cobalt, oil, and
diamonds-to remain depressed throughout the
year. Moreover, until GECAMINES frees itself
from its debt to SGM, much of the country's
copper and cobalt earnings from prefinanced stocks
will go to the Belgian marketing company. In
addition, fire damage to petroleum production fa-
cilities several months ago is expected to cause oil
earnings to fall further. According to the US
Embassy in Kinshasa, imports this year will edge
upward slightly.
Zaire faces another year of declining GNP and
rising inflation and unemployment. We expect the
fall in GNP to be at least 1 percent in 1983.
Kinshasa will probably not expand mining output
because of continuing low world prices-particular-
ly for cobalt. Factories will continue to operate at
only 20 to 40 percent of their capacity because they
will not be able to import the intermediate and
capital goods they need. Agricultural output is not
likely to increase appreciably this year, and unem-
ployment will probably remain at.current high
levels-60 percent, according to an analysis by
Zaire's national labor union. Inflation is likely to
increase again this year as government officials
continue to pump money into the economy. ~~
Prospects for Change
We believe that Mobutu is adroit at appearing to
be responsive to international pressure while doing
Real GDP Growth
Percent
Consumer Price Growth
Percent
Copper Production
Thousand Metric Tons
Budget Deficit as a
Percent of GDP
Composition of Ezports, 1980
Percent
Other- 5
Coffee-8
a Estimated.
b Projected.
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Secret
no more than the minimum needed to win support.
His record in avoiding US Brooke Amendment
sanctions this year provides a good example of his
willingness to respond to specific demands. He will,
however, accept specific guidelines particularly re-
garding budget deficits and repayment of debt, but
we anticipate slippage in meeting targets.
Recent measures to bolster the mineral sector
appear likely to stick over the longer term. World
Bank and EC loans to GECAMINES totaling
almost $50 million should help to renovate the
mines and to overhaul GECAMINES's adminis-
trative structure.
Contrary to its agreement under the SOZACOM-
GECAMINES accord, however, the government
probably will continue to tap GECAMINES's
share of mineral receipts for non-mining-related
purposes.
It is still too early to tell how serious Kinshasa is
about implementing a sustained agricultural devel-
opment policy. Even though the government has
announced a program aimed primarily at increas-,
ing self-sufficiency in basic foods-thus slashing
Zaire's enormous annual food import payments to
South Africa and Zimbabwe-farmers and urban
consumers will not benefit unless the government
follows through with concrete measures to back it
up. For example, price decontrol, if pursued, will
probably not have a major impact on production for
several years because of inadequate purchasing and
distribution networks in Zaire. Even then, produc-
ers will be reluctant to make additional investments
until they have been assured that the government
will continue to pursue a policy of price deregula-
tion. Lack of funds and organization will cause
further difficulties.
Kinshasa's ability to implement a comprehensive
program of economic reform over the next few
years will depend greatly on demand for its mineral
exports. In the last nine months, copper prices have
risen 20 percent above the record lows of mid-1982.
If the recent trend toward world economic recovery
continues, Zaire's mineral sector reforms and its
decision to increase copper production over the
longer term would help ease the country's financial
squeeze.
More important is what role Mobutu will play.
While we believe his actions will be guided for a
time by a desire for continued financial support
from his foreign patrons-particularly the United
States, France, and Belgium-his political patron-
age system, graft at high levels, and neglect of the
national economy in favor of special regions and
interest groups is unlikely to change. Mobutu has
relied on this system to maintain control since he
seized power in 1965, and we see no reason why he
would be willing to abandon it now.
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25X1
25X1
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Secret
Summit Countries: Shifts
in Competitiveness
Since late 1978 relative cost competitiveness among
the Summit countries has shifted by magnitudes
not experienced since the advent of floating ex-
change rates in early 1973:
? The United Kingdom has suffered the sharpest
competitive loss followed by the United States.
Since 1978 the United Kingdom's exchange rate-
adjusted unit labor costs have risen by 40 percent
relative to those of its competitors; those of the
United States by 30 percent.
? In contrast, particularly sharp improvements
have occurred in Japan and West Germany
where domestic costs relative to those of competi-
tors, when adjusted for exchange rate move-
ments, are down 25 percent and 10 percent,
respectively, from 1978 levels.
On a bilateral basis, the shifts in relative costs are
even more pronounced, particularly those for the
United States and Britain. Since 1978, for ex-
ample, US unit labor costs have risen 50 percent
compared with dollar-based unit labor costs in
Japan and by 40 percent compared with those in
West Germany. Among the other Summit coun-
tries, US bilateral competitiveness has worsened
against all except Britain and Canada over the last
four years.
Exchange Rates and Domestic Costs
Changes in exchange rates have played an impor-
tant, although not exclusive, role in the competi-
tiveness shifts. In.the case of the United States, the
30-percent worsening in relative competitiveness
since 1978 has been due almost entirely to the
strengthening of the dollar. In the case of the
United Kingdom, the stronger pound contributed to
British losses in competitiveness, but so did sub-
stantially higher domestic cost inflation than expe-
rienced by its competitors. Japan's improved com-
petitiveness was due chiefly to extremely low
domestic cost increases, but, in its bilateral position
with the United States, the drop in the yen-dollar
rate played an equally important role.
Among the other Summit countries, the compo-
nents of West Germany's change in overall compet-
itiveness were much like Japan's. Sharply lower
domestic cost rises were the key element; vis-a-vis
the United States, however, the depreciation of the
mark was just as important. France and Italy each
experienced gains in competitiveness because the
effect of their depreciating currencies outweighed
that of their more-rapid-than-average domestic
cost inflation.
Why the Exchange Rate Shifts 25X1
The shifts in exchange rates that have been of
substantial importance in the realignment of com-
petitiveness over the past few years have been a
source of controversy. In particular, two factors
popularly thought to determine exchange rate
movement-a country's inflation rate relative to
those of its competitors and its current account 25X1
position-seemed to have been outweighed by in-
ternational differences in interest rates. The United
States and Britain, for example, had the largest
increases in real short-term interest rates and also
experienced the largest appreciations.
The role of demand management policies is less
clear-cut, although in some countries they did seem
to contribute to exchange rate movements. In
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Summit Countries: Trends in Cost Competitivness'
I I I I I I I I I I I I
75 197172 73 74 75 76 77 78 79 80 81 82
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Secret
Summit Countries: Changes in Relative Bilateral Costs, 1979-82a
United Japan West France United Italy Canada
States Germany Kingdom
a Percent change in ratio of dollar-based unit labor costs of countries
in rows to dollar-based unit labor costs of countries in columns.
Summit Countries: Components of Shifts
in Cost Competitiveness,1979-82 a
Change in Exchange
Rate-Adjusted Relative
Unit Labor Cost
United States 31.6
Japan - 25.0
West Germany -8.9
France - 3.2
39.2
- 3.3
7.0
e Due to a divergence of sources for the data on which this table is
based, components will not add to total shift.
France, for example, monetary growth rates were
well above average, real interest rate increases were
small, and the franc did depreciate. On the other
hand, Britain also had rapid monetary growth and
a smaller budget deficit, but interest rates rose and
the pound appreciated. Japan and West Germany,
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Change
in Relative Unit
Labor Cost
Change
in Weighted
Exchange Rate
-1.0
19.8
- 22.7
- 8.2
-14.6
9.1
12.5
-10.4
15.6
16.4
32.1
-21.9
12.4
-3.0
with the lowest growth for M1, experienced small
real interest rate rises and relatively small changes
in the value of their currencies.
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Summit Countries: Changes in Exchange Rates, Interest Rates,
Money Supplies, and Budget Deficits, 1979-1982
Change in Weighted
Exchange Rates
Change in Real Short-
Term Interest Rates
Change in
M1
Change in
Budget Balance
(percent)
(percentage points)
(percent)
(percent ojCNP)
United States
19.8
5.6
14.5
-3.7
Japan
- 8.2
3.7
8.0
2.2
West Germany
9.1
2.7
4.9
-1.6
France
-10.4
3.7
44.0
-1.0
Implications and Outlook
The enormous rise in the exchange value of the
dollar and pound since 1978 has caused a major
loss of US and UK competitiveness. As a result,
real net exports have declined significantly, worsen-
ing the US and British recessions and unemploy-
ment rates, and creating a record deficit in the US
Secret .
13 May 1983
Japan and West Germany.
merchandise trade balance. Since 1980 US real net
exports declined by $20 billion, despite the deep US
recession, and UK real net exports dropped by $4
billion. On the other hand, Japan and West Germa-
ny have seen their lower costs lead to sharp rises in
real net exports. Without a reversal of these com-
petitiveness shifts, the trends in net export balances
likely will continue, retarding economic recovery in
the United States and Britain while boosting it in
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