NSC MEETING ON POLAND

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP84B00049R000300630003-2
• Release Decision: RIPPUB
• Original Classification: S
• Document Page Count: 82
• Document Creation Date: December 20, 2016
• Document Release Date: January 3, 2008
• Sequence Number: 3
• Publication Date: September 27, 1982
• Content Type: REPORT

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NSC review completed - may be declassified in
part
NSC Meeting on Poland
Contents
Tab A Agenda
Tab B Polish Debt Paper
Tab C Private Sector Initiative Paper +1 L PVVP-
Tab D Pipeline Update Q~G ~JnG.I~
Tab E Internal Situation
Tab F MEMCONs from SIG G IG Meetings
Tab G SNIE : Pol"2 04uet,~T Cwt, 4., .f04 f` fl - 1Q efts
L -e cam.t'- ? ae '
Sec . 1` & ( ~~ C 0 - LT ' ~-~`V c Cam
State Dept. review
completed
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M t t i I N U 1 n r v K PJ A I I U N
MEMORANDUM FOR: See. Distribution
SUBJECT : Meetings
Cabinet Room
Type of Meeting NSC
Date Thursday, 30 September
Time 11:00 - 12:00
Place
Chaired By President
Principal Only?
Yes
Subject/Agenda (1) Polish official debt,
(2) Polish private sector initiative,
When to Expect Papers
Distribution:
O/DCI
O/DDCI
ExDir
DDI
Chm/NIC
DDO
SA/IA
OCO/SOO
ES
D/ES
ES/MI # 196
27 September 1982
i es---stu4i-es
Per Carol Cleveland, NSC, 12:00 noon
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Polish Debt Situation
Background
Beginning in the early 1970s, the Poles financed a large
portion of their economic growth by borrowing from the West#
enjoying relatively easy access to Western capital markets.. As
their development plans began to falter, they became less able to
service their debt.
In 1972, Poland's gross hard currency debt totaled $1.6
billion. Its debt service, consisting of $200 million of principal
and $74 million of interest, amounted to only 15% of its foreign
exchange earnings from exports of goods and services to non-
,Communist countries. Poland's imports from non-Communist countries
exceeded its exports to these countries by $1.3-$3.3 billion
annually between 1973 and 1979 as the authorities continued to
pursue their development program. By 1979, Poland's external
hard currency debt stood at $21 billion and its debt service ($3.6
billion in principal and. $2.2 billion in interest payments)
equalled 92% of its hard currency export earnings. By mid-year
1981, Poland's hard currency debt stood at approximately $26
billion. it owed roughly $20 billion of this to 16 Western
countries, $11 billion to official creditors or guaranteed by
them, including $1.9 billion to the U.S. Government; and $9
billion of unguaranteed debt to private banks, including $1.3
billion to U.S. banks.
Developments in 1981
At the beginning of 1981, it was estimated that Poland
would require some $11 billion in hard currency financing to
cover its projected trade deficit for 1981 and to service its
debt. Poland was clearly not in a position to raise such sums
and on march 26, 1981, Poland notified its creditors that it
would no longer be able to guarantee payment of its external
debts.
The governments and private banks responded to the Poles by
agreeing to enter into debt rescheduling negotiations. Separate
debt rescheduling exercises were organized by the official and
private creditors. Fifteen official creditor nations (later
increased to 16 with the addition of Spain) concluded negotiations
with the Government of Poland and a multilateral debt rescheduling
agreement was signed in Paris April 27, 1981. This agreement
served as an umbrella agreement for subsequent government-to-
government agreements to reschedule 90% of Poland's debt service
obligations to these creditors of both the principal and interest
falling due during the last three-quarters of 1981. These
obligations, totaling $2.4 billion, are to be repaid during a
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4-year period beginning in 1985. Interest on the rescheduled
interest is to be charged during the grace period, 1981-1985.
The U.S.-Poland government-to-government for rescheduling $380
million agreement was signed on August 27, 1981.
Western banks, moving on a parallel track, established a
consortium to negotiate a debt rescheduling agreement with the
Polish Government by September. The consortium reached an ad
referendum agreement with the Poles for rescheduling 95% of the
principal ($2.3 billion). of their debt falling due during April-
December 1981, over 8 years, including a 4-year grace period. -
The consortium of Western banks set a pre condition for
signing the document, namely that Poland pay all of the 1981
interest-an estimated $700 million-which fell due in the last 9
months of 1981....?_' The.Poles were unable to fulfill this condition
until May 1982.
The interest rate charged by the banks on the rescheduled
debt was 1 3/4 percent above LIBOR. These interest charges are to
be paid over the life of the agreement, including during the
grace period. The banks also levied a 1% signature fee -- $27
million -- which they collected when the agreement was signed.
Payment. of the 5 percent of principal -- about $200 million
-- that was originally due in 1981 was subsequently postponed
until 1982 when it was to be paid in three equal installments
beginning in May.
Developments in 1982
A. Official Creditors
On December 13, 1981, the Government of Poland declared a
state of martial law. In January 1982 Poland's official creditors
decided not to enter into discussions to reschedule Poland's 1982
debt servicing obligations due them until the GOP: 1) terminated
martial law; 2) released the prisioners, and 3) entered into
substantative negotiations. with the Church and Solidarity. They
reaffirmed this agreement in August after reviewing the political
gestures announced by General Jarulezski on July 22, 1982
celebrating the 35th anniversary of the installation of the
communist regime in Poland. Notwithstanding their reaffirmation
of the three political preconditions for rescheduling discussions,
European Governments indicated their willingness to proceed with
technical talks on- Poland's debt.
On September 23, 1982 Poland's official creditors discussed
Poland's performance under the terms of the 1981 rescheduling
agreement. The Polish Government has not completely fulfilled
its obligations under that agreement. The O.S. Government,' for
example, has received only $16 million of the $42 million that
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was not rescheduled and therefore due in 1981. Other governments
have also not fully collected the nonrescheduled 10% of 1981's
debt service obligations due them. For calendar year 1982 Polish
debt service. obligations to the U.S. Government total an estimated
$340 million.
B. Western Banks
The Poles are current on their obligations to western banks
under the terms of the 1981 rescheduling agreement. They have
1) made all the 1981 interest and signature fee payments necessary
to implement the agreement, 2) paid two of the three installments
on the 5 percent of principal that was postponed into 1982 when
they came due (the third installment is due in November) and 3)
are apparently current on the interest payments on the rescheduled
debt. The western banks and the GOP have also agreed to terms on
a rescheduling of Poland's 1982 private debt service obligations.
The rescheduling terms are essentually the same as in the 1981
agreement: 1) 95.percent of principal -- approximately $2.2
billion -- is to be rescheduled for 7 1/2 years including a four
year grace period; 2) the remaining 5 percent is to be paid in
two installments in 1983. 1982 interest payments falling due
between a) January and April 1982 is to be paid on October 20,
1982, b) May and August 1982 is to be paid on December 20, 1982
and (c) September and December 1982 is due March 20, 1983. There
is a 1 percent signature fee and the interest charge on the
rescheduling is again 1 3/4 percent above LIBOR.
The bank and the Poles also arrived at a separate agreement
regarding the provision of a trade facility. Western banks will
make half of the 1982 interest they collect available to the
Poles in the form of 6 month loans to finance exports to Poland
from the -banks' home country. As these loans are repaid they can
be rolled over. An interest rate of 1 1/2 percent above LIBOR
is charged on these new loans. This trade facility will expire
in one year but can be renewed for a second and again for a
third year. V V
The signing deadline for these two agreements has been set
for October 20, 1982.
The above agreements only cover the non-guaranteed portion
of Poland's debt to western banks. U.S. banks have filed claims
and collected $247 million fray Commodity Credit Corportation as
of September 21, 1982.
C. Kasten Amendment
The Urgent Supplemental Appropriations Act (P.L. 92-216)
enacted July 18, 1982 contained an amendment (Section 205)
introduced by Senator Kasten, which prohibits the Commodity Credit
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Corporation (CCC) or any other U.S. agency for the remainder of
fiscal year 1982 from paying funds to cover guaranteed or insured
loans to Poland unless (1) Poland is declared in default or (2)
The President reports monthly to the Congress that such payments
serve the national interest of the United States. The President
delegated the reporting responsibility to the Secretary of State,
who, after consultation with the heads of interested. Executive
agencies, has filed reports for July and August. The amendment
expires September 30, 1982. _
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Discussion Paper on Private Sector
Assistance to Poland
C
The attached draft executive order and background paper
address the possibility of establishing a Presidential Commission
on Private Sector Assistance to Poland, primarily in the agri-
cultural sector. That draft indicates that the Commission shall
assess the current condition and needs of the Polish private
agricultural sector, and devise and implement an economic and
technical private sector assistance program. Funding will come
from private donations, use of CCC-owned zlotys and possibly
dollar appropriations.
This proposal raises a number of questions and options for
discussion:
-- A recent CIA study (Polish Agriculture: Policy and prospects,
September 1982) indicates that the major problems facing the
private agricultural sector in Poland are the need for: substan-
tial investment in agricultural equipment, seed and fertilizer,
an increase in financial returns to the farmer, and further
reduction/elimination of unfavorable State procurement prices.
? What are the major short and medium term agricultural
objectives of the proposal?
? Will the proposal be able to make any impact on these
major problem areas by itself or should we link our
proposal to the Polish Government adopting significant
reforms and providing resources to the private
agricultural sector?
-- We understand that the proposal is planned to be announced
by the President on October 13,"1982.
? Do we want to-tie the announcement to some positive
development in Poland, or is there a compelling
argument for proceeding on October 13, 1982?
? Do we want to involve the private sectors of other
western countries? Do we want Secretary Shultz to
raise this proposal in his bilateral discussions
with the Europeans next week? Should there be a
'quid pro cquo? from the Europeans in return for our
effort?
SECRET
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? Should this proposal stand on its own or should it
be seen as an alternative to the `Church's proposal"
for a $2 billion "Polish Recovery Plan"? How do
the twn relate to each other?
Funding needs and sources are unclear.
? How will funding be arranged for the administrative
dollar expenses of the Commission's operations in
the United States as well as travel and per.diem -
costs for the Commission?
? Do we plan to use all of the CCC-owned zlotys or
will some be held in reserve? Is there concrete.
evidence that the Poles would agree to use of
zlotys for this purpose?
? At a time of very stringent budget operations, do
we want to suggest that we may have some flexibility
on dollar appropriations?
` What are the various institutions who could accept
and efficiently distribute private donations?
? Bow could we insure that any hard currency donations
did indeed wind up in the hands of Polish farmers
and not the Polish regime? Would the regime permit
this?
Attachments:
Draft Executive order
Draft Cable
A&;; zzan
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PRESIDENTIAL CO?iMIStION ON ?RIVATX SECTOR ASSISTANCE
TO POLAND
By the authority vested in she as President by the
Constitution and statutes of the United States of Aneriea,
and in order to assist and improv, the well-being of the
Polish people who have endured many hardships, it is hereby
ordered as follows: ?
Section 1. Establishment. (a) There. is established
the Presidential Commission on Private Sector Assistance to
Poland, which shall be composed of not more than twelve members
from the private s.cto: appointed by the President.
(b) The President shall designate a Chairman and Vice
Chairman from among the members of the Comrci3sion.
Section 2. Functions.. (a) The Commission shall assess
the current condition and needs of the Polish private agri. .
cultural sector; and, devise and-implement an economic and
-technical private sectcr assistance program to bolster the
Polish private agricultural sector.
(b) This private sector assistance program shall include
plans for:
ot '.
(1) generating public support for this private sector
assistance program;
(2) coordinating the United States private sector program
with similar prograitts undertaken by our European'allies; and
(3) submitting a quarterly progress report to the
President.
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Section 3. Administrative provisions. (a The Sseretazy
of Agriculture shall, to the extend permitted
by law and subject
to the availability of funds, 11rovide the commission with such
administrative services, funds, facilities, staff anst of ,
support as may be necessary for the effective "rfornance of its
functions.
(b) Members of the Commission shal]. serve without
compensation: While engaged in the work of the Ca=%isslc&f
members May receive travel expenses, including per dime
? lieu of subsistence, as authorized by law (5 U.S.C. 5701-
5707).
.
Section 4. General Provisions. (a) -The Commission is
authori zed to -conduct meetings and utilize such other procsdnsas
as-it may deem necessary, and under such conditions it deems
appropriate, for tht effective performance of its functions.
(b) The Commission shall terminate ons year from the
date of this Order.
THE WHITE HOUSE
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 USE Of CERTAIN POLISH CUR!XNCIES
vested in the President by section 709 of the International
Security and. Development Art of 1981 (Public Law 97-119) 'With
people of the United States and Poland which assist-in meeting
the objectives of the private sector assistance program.
? Section . Delegations of Authority. (a) The functions
regard to programs 3n agriculture, including activities to assist
the private agricultural sector in Poland, are delegated to- the
Secretary of Agriculture.
(b) In carrying out these functions the Secretary of
Agriculture shall coordinate his activities with those of the
Presidential Connnission on Private Sector Assistance to Poland,
make available Polish currencies received by the United States
from the April 1981 and October 1981 sale of United States
Government-held dairy p4?oducts to Poland in such amounts as
designated by the President in advance to United States private
sector groups in support of activities of common benefit to the
URAFT
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??' I. Background: The United States Government has proposed an
? initiative whereby the U.S. private sector would render assistance
to the Polish private sector -- with primary emphasis on agri-
culture. The initiative was conceived prior to the Polish Church'a
recommendation for a five-year, $2.02 billion 'Poland Recovery
Plan" to aid the private sector, but coincides with the Church's
proposals. This initiative is perceived as a humanitarian
people-to-people" effort, consistent with the Administration's-
policy toward Poland. Its purposes includes a) strengthening
Polish government without compromising the integrity of our
-
the Polish private sector which has suffered from years of
inconsistent and arbitrary government interference. and lack of
sanctions, (a) promo
ting in the long term a more moderate doeatstic
Polish policy as a result of strengthened free oark?t forges.
As this is a private sector initiative, the official Involve
Dent of the U.S. Government will be kept to a ainimstm. -
-- This initiative will not nullify but rather support the
Allied declaration of January 11, 1982, and the throe
criteria it endorsed.
The funding sources are subject to possible change per
relevant discussions with Polish authorities. The U.S.
is prepared to manifest some flexibility= however, the
Polish government must be prepared to accept the general
framework of the Initiative.
ew~ yo detailed blueprint of the Initiative can or should be -
prepared at-this time for the private sector organizations
will be responsible for Its preparation and implementation.
suitable investment, (b) sending a signal of moderation to the
I?I. Establishment of Comm fission: The t7n tad States Government
?is establishing a Iresi eTntial Cos:~aission to spearhead the
private sector assistanre program for Poland. The Commission
shall be composed of no more than 12 iaembers to be appointed by
? the President. The 12 members will be drawn from the
Polish- American community, labor, academia, the Church, farm associations,
agricultural industries. one Commission-member will serve as a
liaison to the E?aropean Community. Functions of the Commission
shall include a) assessing the current, condition and needs of the
Polish private agricultural sector, bi' devising and implementing
an economic and technical assistance program to bolster the
Polish private sector -- with emphasis on agriculture, e) generating
public support for the private. sector assistance initiative,- d)
coordinating the U.S. program with similar initiatives under- -
taken by our allies and/or .:eve1oping a program jointly with
them, and e) provici.nq a quarterly progress report to the
President. The Commission will conduct regular meetings and
utilize such other proc..dures as it may deem necessary for the
effective performance of its functions.
SECRET
De c as
siiy on: OADR
SECRET
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EUR/EEY: dr her spr ing
09/17/82 ext. 20575
EUR/EEY:JRDaVis
IMMEDIATE BONN, WARSAW IMMEDIATE
jrd
decl: oadr
drh
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Presidential commission on Pr ivate.Sector
Assistance to Poland
1. S - entire text.
2. background: the president is planning to announce
the formation of a Presidential commission on private
sector assistance to Poland to stimulate assistance to
the Polish private sector-with primary emphasis on
agriculture. The initiative was conceived before the
Polish Church's proposal for.a five-year, 2.02 billion
dollar 'poland recovery plan' to aid the private
sector, but does not conflict with the church's
proposals. This White House initiative is perceived as
a humanitarian 'people-to-people' effort, consistent
with the administration'; policy toward poland. It
foresees minimal Polish government involvement. Its
purposes include: a] strengthening the Polish private
sector which has suffered from years of inconsistent
and arbitrary government interference and lack of
suitable investment, b] sending a signal of moderation
to the polish government without compromising the
integrity of our sanctions, c] promoting a more
moderate domestic Polish policy as a result of
strengthened free market forces.
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 f ,.
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3. Official USG involvement will be kept to a minimum.
-- this initiative will not nullify but rather support
the allied declaration of January 11, 1982 and the
three criteria it endorsed.
C
no detailed blueprint of the initiative can or
should be prepared at this time, since private sector
organizations will be responsible for its preparation
and implementation.
Since some of the funding will be drawn from zloties
owned by the commodity credit corporation whose
expendture is subject to Polish government approval,
the amount of money available from this source cannot
now be determined. The us is prepared to manifest some
flexibility; however, the polish government will have
to be prepared to accept the general framework of the
initiative.
4. establishment of commission: The commission shall
be composed of no more than 12 members to be appointed
by the President. the 12 members will be drawn from
the polish-american community, labor, academia, the
church, farm associations, agricultural industries.
one commission member will serve as.a liaison to the
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 undertaken by our allies and/or developink a program
jointly with them, and e] providing a quarterly
progress report to the president. the commission will
conduct regular meetings and utilize such other
procedures as it may deem necessary for the effective
c
performance of its functions.
european community. functions of the commission shall
include a] assessing the current condition and needs of
the Polish private agricultural sector, b] devising and
implementing an economic and technical assistance
program to bolster the Polish private sector-with
emphasis on agriculture, c] generating public-support
for the private sector assistance initiative, d]
coordinating the'u.s. program with similar initiatives
5. funding: funding for the initiative will be derived
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from two sources:
private: the american private sector is expected to
make donations in support of this efforts The
commission will designate an organization to conduct a
fund raising drive and to receive donations.
a
-- public: the united states department of agriculture
will provide zloty funds [up to dlrs 70 million in
ccc-owned zlotys] for in-country use. after the
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commission has devised a private sector assistance
program, and has determined how much assistance is
needed, if*any, the us government will evaluate the
program and will consider rendering additional _
government funds [perhaps a supplemental] commensurate
with the needs of the program and as may be necessary
for its successful and effective implementation.
6. presidential statement: the president will
announce the establishment of the commission on October
13.
7. for bonn. embassy should seek appointment with
c
appropriate frg officials making points outlined
?
-above. you should also attempt to draw out your
interlocutor's' on plans frg has for increased
humanitarian aid, including their evaluation of polish
episcopate proposals. You should emphasize that while
the-U.S. is not prepared to support a program on the
scale of that put forth by the Polish bishops, we think
the President's initiative is compatible in concept.
In any case, the Commission will be consulting with the
FRG on ways we might best coordinate our efforts.we
would hope frgwould be in a position to endorse
president's proposal-when it is made public.
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8. for Warsaw: ambassador may draw on above in his
meeting with archbishop glemp. Ambassador should also
attempt- to draw Glemp out on extent of Polish church's
involvement in Polish Bishops' proposal as well as ??
Polish government's attitude toward it. Emphasizing
that Presidential initiative on private sector
assistance to Poland is still in preliminary stage,
Ambassador should also explore Church's willingness to
become involved in administering it as well as Glemp's
reading of likely Polish government attitude toward it.
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~.E =ff Directorate of ~.vuiiu~iitlal
Intelligence 25X1
U nil
Polish Agriculture:
Policy and Prospects 25X1
An Intelligence Assessment
Confidential
EUR 82-10087
September 1982
Copy 3 8 5
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Directorate of Confidential 25X1
Intelligence
Polish Agriculture:
Policy and Prospects 25X1
An Intelligence Assessment
Confidential
EUR 82-10087
September 1982
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Polish Agriculture:
Policy and Prospects
Key Judgments The Jaruzelski regime is making little progress in resolving Poland's
Information available agricultural problems, which have resulted from more than three decades
as of 27 August 1982 of neglect and mismanagement by successive Communist regimes. Even if
was used in this report.
Poland has an average grain harvest of 20 million tons this year, it faces a
shortfall of more than 3 million tons. The government has raised food
prices to reduce excess demand, but it has not taken adequate steps to
increase supply. The present regime is in a particular bind since it cannot
import large quantities of grain or other food products from the West
because of its financial problems and Western credit sanctions.
The regime has not provided incentives that would induce private farmers,
who account for about 75 percent of agricultural output, to produce more.
For years, the state has not allocated sufficient investment to the agricul-
tural sector and has not ensured the profitability of private farms. The
present government has threatened a return to compulsory deliveries, but it
is reluctant to make good on the threat out of fear that the private farmers
will cut production in response.
The regime's tougher approach to private farmers under martial law has
yielded ambiguous results during the first seven months. Partially because
of fodder shortages, farmers have increased livestock sales enough to
satisfy rationing requirements, but they have not filled state grain needs.
The shortfall has forced the government to buy additional grain in the
West, using proceeds from the sale of high-quality meat. The regime could
face serious supply shortages again later this year if the harvest turns out to
be worse than is now indicated or if farmers decide for other reasons not to
sell sufficient quantities to the state. Should Warsaw reimpose compulsory
deliveries of grain, and perhaps other farm products as well, the regime
could be dragged into a confrontation that might become a major turning
point in the Polish crisis.
iii Confidential
EUR 82-10087
September 1982
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Confidential
Polish Agriculture:
Policy and Prospects
Agricultural Problems in Perspective
In the years since World War II, Warsaw's agricul-
tural policy has had two conflicting goals. One goal-
increased farm production-requires increases in
agricultural investment and in financial returns to
farmers, which would be facilitated by high procure-
ment prices. The other-low food prices for urban
workers-militates against high state procurement
prices and has led to huge consumer subsidies. The
general problem is not unique, but its resolution is
more difficult in Poland than in other Communist
countries because most farmland remains in private
hands and workers have reacted violently against
attempts by the government to raise retail food prices.
Poland has been a net importer of grain since the
beginning of the Communist period. It became a net
agricultural importer in the 1970s, when Polish farm-
ers failed to keep pace with increasing consumer
demand for foodstuffs and the regime decided to boost
imports rather than ignore or curb that demand. In
1970, agricultural raw materials and food imports
constituted 25 percent of total imports from the West;
by 1981, these imports had jumped to 45 percent of
total hard currency purchases. Agricultural exports,
meanwhile, declined from one-fourth of Poland's ex-
ports to the West in 1971-75 to only 10 percent in
1981 (table 1).
Emphasis on the Industrial Sector. Successive Com-
munist regimes in Poland-like regimes in other
Soviet Bloc countries-have considered improvement
of the agricultural sector to be less important than
industrial development. Only 11 to 15 percent of the
Polish state investment budget was apportioned to
agriculture in the 1950s and 1960s.' Even when food
supply problems were widespread in the 1970s, state
investment in the sector averaged just 15 percent of
total state investment. In 1980, balance-of-payments
problems caused Warsaw to cut total investment,
including investment in agriculture, sharply. These
levels of investment meant that farmers did not
receive modern machinery and high-quality seeds,
and the rural infrastructure (for example, roads,
storage facilities, and irrigation projects) was not
upgraded. To some extent, weather damage to
crops-a primary cause of poor harvests in the late
1970s-could have been reduced had the state invest-
ed more in flood control and land improvement
projects and in the construction of transport and
storage facilities. Even in a good harvest, the inade-
quate rural infrastructure contributes to losses aver-
aging around 15 to 20 percent of the crop. The
situation is aggravated further by inadequate invest-
ment by private farmers. Many are reluctant to invest
in land which they feel may be taken eventually by
the state, either by force or after their retirement. As
a result, inadequate storage facilities, outdated farm
implements, and poor soil management are common
problems which lower production. F_~
Discrimination Against the Private Farmer. Unlike
its neighbors, Poland decided not to socialize farming
forcibly in the 1950s because the regime feared that
resistance by the farmers would disrupt food supplies
for years. Warsaw instead tried to pressure farmers
into joining collectives. It assigned compulsory deliv-
ery quotas of products that private farmers had to sell
to the state, at the same time depriving them of many
farm inputs, especially key items such as tractors and
fertilizers. Because of the lack of proper inputs, yields
per unit of land have been less for most crops on
private farms than on state farms.
By the mid-1970s, only one private farmer in 13
owned a tractor; most of the others depended on
horses to farm their land. In 1975, the supply of
fertilizer provided private farms per unit of land was
only half that allotted to state farms. Relative to land
area and livestock numbers, the state farms received
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Table 1
Polish Agricultural Trade
Total (billion $)
2.34
3.61
12.75
16.49
18.16
19.44
15.66
Of which: Western
0.79
1.13
6.80
7.37
8.04
8.49
5.42
Food and agriculture (billion $)
0.43
0.45
1.41
2.11
2.34
2.86
2.98
Of which: Western
0.26
0.28
1.04
1.73
1.95
1.69
2.47
Grain (million tons)
2.68
2.46
4.03
7.37
7.34
7.67
7.04-
Wheat (million tons)
1.38
1.10
1.48
2.31
2.93
3.47
3.44
Corn (million tons)
0.78
0.23
0.63
1.81
2.09
2.52
2.43
Barley (million tons)
0.49
1.09
1.38
2.41
1.50
1.13
0.88
Meat (thousand tons)
38
45
16
33
2
174
175
Total (billion $)
2.23
3.55
10.51
14.49
16.86
17.25
13.40
Of which: Western
0.82
1.26
4.12
5.48
6.35
7.51
5.49
Food and agriculture (billion $)
0.44
0.45
1.41
1.27
1.41
1.30
0.78
Of which: Western
0.35
0.41
0.68
0.96
1.05
1.03
0.65
Grain (million tons)
0.09
0.20
0.10
0.01
0.07
0.0
0.0
Meat (thousand tons)
197
148
209
153
167
150
73
a Estimated.
b Polish Statistical Office, Rocznik Statystyczny Handlu Zagranicz-
nego, 1966, 1971, 1976-81.
more machinery and equipment and had greater
access to services of veterinarians and soil scientists.
Many private holdings, however, were too small or too
divided for mechanized techniques to be economical.
Despite the pressures, most farmland remains in
private hands. In 1980, private farms accounted for
76.9 percent of gross farm production; state farms,
17.8 percent; collectives, 4.3 percent; and associations,
1.0 percent of output. Associations provide services
such as plowing and harvesting to private farmers and
demonstrate new farming techniques
Private farms are small because of direct and indirect
constraints imposed by the government and because
many farms were split into small noncontiguous par-
cels as a result of the now-forbidden tradition of
dividing a father's land among his surviving sons.
About 2 percent of Poland's farmland was lying
fallow in 1981 because many noncontiguous plots
were too small to be used profitably. In the early
1950s, private farmers were not permitted to hold
more than 15 hectares (1 hectare equals 2.47 acres).
This subsequently was increased, and by the late
1970s farmers were allowed to own 50 hectares of
land. This year, apparently recognizing the key role of
private farming (and perhaps economies of scale), the
regime doubled the amount. Local officials often have
been a stumbling block: they have been slow to
approve land sales to prosperous farmers and have
used their controls over credit and their other powers
to hinder farm expansion. Moreover, chronic short-
ages of machinery have made farmers reluctant to
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acquire more land. As a result of these factors, the
great majority of farms have been much smaller than
the allowable maximum; in 1980 only 5 percent of
farms were over 15 hectares.
Unfavorable Pricing Policies. State procurement
prices for farm products have rarely been high enough
to provide much stimulus to production. Regimes have
raised procurement prices substantially only in re-
sponse to pressure from workers to increase food
supplies-and then many times have raised input
prices, eroding farmers' real gains. After crisis periods
in 1956, 1970, 1976, and 1980, the government
increased procurement prices of most livestock and
grains. In the first three instances, farmers responded
by selling more livestock to the state. In the case of
hogs, for example, a procurement price increase of 21
percent in 1957 led to a hike in hog sales to the state
of 26 percent the following year; the 1971 price
increase of 26 percent led to a 38 percent rise in
procurements in 1972; and the 17 percent purchase
price rise in 1977 increased sales to the state by 16
percent the following year. The same trend is evident
in the procurement of milk and cattle, although there
is a lag of two years before cattle sales increase
because of the time required to raise animals for
market.'
The costs of many inputs such as fertilizers, pesti-
cides, and farm machines were doubled in the late
1950s, and some were increased by 20 to 30 percent
again in the late 1960s. In the early 1970s, Gierek
temporarily increased real farm income by raising
procurement prices much more than input costs. In
1974, however, input prices were increased by 10
percent while purchase prices rose only 7 percent. For
' Simple regression analysis shows a strong positive relationship
between the numbers of hogs and cattle or the amount of milk sold
to the state and the procurement prices of these items. But not all
grains show the same positive correlation between amounts sold to
the state and procurement prices. Although wheat and barley
deliveries are responsive to purchase price changes, rye-which is
the biggest part of the grain crop-is much less so. In any case, this
approach does not take into account variations in the weather or
offsetting changes in costs. Sales of agricultural products to the
state actually fell in 1980 and 1981 despite substantial increases in
procurement prices because mediocre crops and a jump in non-
agricultural wages led to much bigger increases in black-market
example, the state passed on the higher costs of
imported feed grains to farmers but failed to take into
account these higher costs when setting procurement
prices. To avoid worker discontent, the government
refused to raise retail prices (which did not cover
prevailing procurement costs) and, because it wanted
to avoid a greater subsidy burden in the state budget,
refused to raise procurement prices. In real terms,
private farm income declined 6.6 percent in 1974 and
6.2 percent in 1975, discouraging farmers from in-
creasing production and helping to bring on the crisis
of 1976.
Deterioration in Agricultural Labor. Low farm in-
comes have forced many farmers to take second jobs
to make ends meet. A survey in the mid-1970s showed
that nearly 60 percent of Poland's private farm
families depended to some extent on nonagricultural
income. Because second jobs divert these people from
farm work, yields reportedly are 20 to 30 percent
lower on their farms than on others of similar size or
soil fertility.
As in other countries, the attraction of higher incomes
and improved lifestyles has drawn many young farm-
workers to the cities in the last three decades. Indeed,
the number of private farmworkers declined 30 per-
cent from 1970 to 1980. The quality of labor on
private farms also has fallen; presently over one-third
of the private farmers are over 60 years of age. Some
older farmers are being enticed off the land, however,
by liberalized retirement benefits-granted in 1980-
which allow farmers to retire at age 65 for men and
60 for women if they surrender their land to the State
Land Fund or to younger relatives.
Recent Agricultural Performance
Despite all the problems, Poland had an agricultural
boom in the early 1970s that was unprecedented in its
postwar development. Between 1970 and 1974, grain
production increased an average of 9.0 percent a year,
cattle numbers by 4.7 percent, and hog numbers by
12.5 percent. Other farm products such as milk,
vegetables, and fodder crops increased significantly
(table 2)
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Table 2
Poland Agricultural Production
Agricultural production a
(Index, 1970=100)
Crops b
Grain (million tons)
(1970=100)
16.3
100.0
19.9
122.1
20.4
125.2
21.9
134.4
23.0
141.1
19.6
120.2
20.9
128.2
19.4
119.0
21.5
131.9
17.3
106.1
18.3
112.3
19.7
120.9
Potatoes (million tons)
(1970=100)
50.3
100.0
39.8
79.1
48.7
96.8
51.9
103.2
48.5
96.4
46.4
92.2
50.0
99.4
41.1
81.7
46.6
92.6
49.6
98.6
26.4
52.5
42.6
84.7
Sugar beets (million tons)
(1970=100)
12.7
100.0
12.6
99.2
14.3
112.6
13.7
107.9
13.0
102.4
15.7
123.6
15.1
118.9
15.6
122.8
15.7
123.6
14.2
111.8
10.1
79.5
15.9
125.2
Cattle (million)
(1970= 100)
10.8
100.0
11.1
102.8
11.5
106.5
12.2
113.0
13.0
120.4
13.3
123.1
12.9
119.4
13.0
120.4
13.1
121.2
13.0
120.4
12.6
116.7
11.8
109.3
Hogs (million)
(1970=100)
13.4
100.0
15.2
113.4
17.3
129.1
19.8
147.8
21.5
160.4
21.3
159.0
18.8
140.3
20.0
149.3
21.7
161.9
21.2
158.2
21.3
159.0
18.5
138.1
a Source: L. W. International Finance Research, Inc., Economic
Growth in Eastern Europe, OP-48, OP-54, 1975; OP-65, 1981.
b Polish Statistical Office, Rocznik Statystyczny, 1971-81.
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Table 3
Poland: Per Capita Consumption of Selected Food Products a
Meat (kilograms)
53.0
56.1
59.3
62.1
65.6
70.3
70.0
69.1
70.6
73.0
74.0
Milk (liter)
262
266
263
263
261
264
258
263
264
264
262
Eggs (units)
186
193
196
202
205
209
214
214
219
221
222
Sugar (kilograms)
39.2
39.6
40.9
42.4
43.9
43.2
43.9
41.5
42.7
43.9
41.4
Fish (kilograms)
6.3
6.4
6.8
7.2
7.3
7.2
7.7
7.6
7.3
7.6
8.0
Cereals (kilograms)
131.0
128.0
127.0
125.0
123.0
120.0
119.0
121.0
120.0
120.0
124.0
Potatoes (kilograms)
190.0
189.0
187.0
183.0
177.0
173.0
171.0
168.0
166.0
163.0
158.0
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As a result of increased production, Polish diets
improved considerably in this period. Per capita con-
sumption of meat increased 5.5 percent annually, eggs
2.5 percent, fats 2 percent, and sugar 2.6 percent. At
the same time, supplies of less-desirable foods such as
potatoes and grains decreased 1.6 percent annually
(table 3).
The improvement in farm output was due to a
coincidence of favorable weather and Gierek's efforts
to give greater support to private farmers. During
these years, the government increased purchase prices
of grain and livestock, reduced land taxes, abolished
compulsory deliveries, and granted national health
insurance and retirement benefits
The farming boom faltered in the middle of the
decade. Between 1975 and 1980, production of many
farm products stagnated or fell. Grain production
stayed at 1975 levels; only in 1976 and 1978 did it
surpass 20 million tons. The potato and sugar beet
harvests fell to record lows in 1980 after four years of
stagnation at the 1975 level. Cattle and hog produc-
tion were at 1973 levels in 1980. Livestock numbers
stagnated or fell every year after 1978.
Although imports were increased, shortfalls in output
slowed the growth of consumption of quality food-
stuffs. Consumption of meat rose only 5 percent in the
last half of the decade and consumption of eggs rose
6 percent. Consumption of milk stagnated, while
consumption of sugar fell by 4 percent. At the lower
end of the quality scale, cereal consumption rose only
3 percent, and potato consumption fell 9 percent
These downward trends can be blamed partly on the
weather, but they also reflect a shift by the Gierek
regime to policies that weakened incentives for private
farmers. For example, the regime raised farmers'
input costs more than procurement prices in order to
reduce farm subsidies while maintaining low retail
prices. At the same time, it kept down investment in
agriculture for budgetary reasons and to keep re-
sources flowing into industry
By 1977, the decline in farm production and an
eruption of worker unrest prompted Gierek to shift his
agricultural policies once again in favor of private
farmers. The regime expanded farmers' pension
rights, raised procurement prices, promised to allow
larger private farm holdings, and pledged to keep
farmers' price-cost ratios favorable. This time
Gierek's plan did not work. Private farmers did not
increase production, apparently because they were
uncertain about the regime's real intentions. Their
doubts seem to have been justified, since the state
failed to make good on many of these promises. Poor
weather in 1977-80 also tended to keep production
below the high levels of 1974
Solidarity Era. In early 1981, farmers organized
their own Rural Solidarity, after urban workers had
shown the way with the original Solidarity. The
farmers' union, which claimed membership of 2 mil-
lion of Poland's 3.5 million private farmers, won a
number of concessions. The Kania regime promised
legislation guaranteeing the right to own and inherit
land. It also promised to increase investment in
agriculture, sell more land to private farmers, increase
farm credits and subsidies, and maintain a favorable
price-cost ratio. The government moved slowly, how-
ever, to implement these commitments. Bills on inher-
itance and land consolidation were introduced into the
Sejm committees but were not formally approved.
Local officials in many cases continued to hinder the
transfer of land to private farmers. Regime promises
to increase state investment in agriculture also were
broken. While agricultural investment was 18.6 per-
cent of total state investment in 1981, total investment
was reduced by 25 percent in real terms; hence real
investment in agriculture was less last year than in
1975.
the regime's
inability or unwillingness to fulfill its promises of
more favorable treatment of private agriculture in-
creased the farmers' historical mistrust of the govern-
ment at a time when the Kania regime badly needed
their support. The regime had yielded to Solidarity's
demands for huge wage hikes, which sharply in-
creased consumer demand and inflationary pressure.
Supplies of foodstuffs in 1981, however, declined
absolutely because farm output and the amount of
food processed and stockpiled fell in 1979 and 1980.
With prices controlled in the state distribution system,
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a huge gap developed between supply and demand,
resulting in long food lines, hoarding, and increased
black-market activity. The regime increased imports
of food and agricultural goods and reduced exports of
these products, but failed to close the gap.
The government hoped to reduce excess demand (and
decrease the state food subsidy) by raising retail
prices, many of which had been frozen for more than
a decade. Solidarity refused to accept the price in-
creases, however, and the government was forced to
impose rationing on an ever-widening scale. Most
workers blamed the regime for the shortages, and
rumors spread that the government was hiding large
food reserves. Polish press reports of discussions at
Solidarity and party meetings indicate that workers
generally considered the farmer as much a victim of
the system as anyone, an attitude that reflected the
populace's deep-seated enmity toward the regime and
belief that it was trying to drive a wedge between
farmers and workers. Few attributed the problem to
the inflationary wage increases that had been won by
Solidarity
Consumers responded to empty store shelves by in-
creasing their purchases through private channels.
Polish statistics and press commentaries indicate that
farmers increasingly ignored delivery contracts with
the state and sold their products in black markets,
where they could get prices several times higher than
the state's procurement prices-with payment often in
scarce goods rather than money. The leaders of Rural
Solidarity often told the regime that farmers were
reluctant to sell to the state because of the govern-
ment's failure to provide promised inputs to private
farmers. The result was that the state was unable to
procure sufficient amounts of food or meet its ration
commitments even though the country in 1981 had a
grain harvest of 19.7 million tons-equal to the
average for the 1970s and 10 percent above the
previous year-and a potato crop only moderately
below normal. At one point the government estimated
that 30 percent of meat sales were outside the state
system, and by the end of the year state grain
procurements fell to only one-third of the scheduled
monthly amounts. By the time martial law was im-
posed, the state retail system was hamstrung by severe
shortages, and the economy was operating largely on
In an effort to increase the amount of food moving
through the state distribution system, the regime
gradually raised agricultural procurement prices by
an average of 80 percent, but state prices still lagged
far behind black-market prices. The government also
increased purchases of food in the West, alleviating
some shortages but worsening the foreign trade bal-
ance and preempting imports of goods critically need-
ed by industry. In the second half of 1981, Jaruzelski
increasingly used the military to conduct campaigns
against the black market and to eliminate distribution
bottlenecks, but even the presence of the military did
not convince the farmers to sell their scheduled
amounts to the state.
Martial Law. Immediately after the imposition of
martial law, the new regime made several threats in
an effort to induce farmers to sell more produce to the
state. A drop in some procurements and reports of
farmers killing livestock and hiding food to protest
martial law prompted the regime to raise the prospect
of a return to compulsory deliveries in press commen-
taries and at Party meetings with farmers. Military
teams were redeployed to the countryside to press
farmers to fulfill their grain contracts. The govern-
ment for the first time in recent years talked about
legal action against farmers who failed to fulfill their
contracts. More immediately, the state refused to sell
key inputs-which were available only in limited
amounts-to farmers who did not make sufficient
The government raised procurement prices 33 percent
for cattle, 15 percent for hogs, and 44 percent for
grain. By February, these increases-along with re-
gime threats and stringent prohibitions on black-
market sales-had increased the amount of food
reaching state stores. Retail price increases averaging
300 to 400 percent helped reduce excess demand.
Although food appeared to be more available, the
Polish press reported that retail sales of food, adjusted
for inflation, were down 17 percent in the first five
months of 1982 compared to the same period last
year. Meat and egg supplies declined around 20
percent in the first quarter of 1982 compared to the
same period in 1981.
a barter basis.
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Because of these food supply problems, the regime
reiterated its threats concerning compulsory deliveries
of grain. To keep pressure on the farmers, it again
spelled out in a press report during June some plans
that were under consideration. Under one proposal,
farmers would be compelled to deliver 60 percent of
their total production to the state. Other proposals
would restrict a farmer's purchases of inputs to half
the value of his total sales to the state or increase the
penalties for failure to meet commitments in procure-
ment contracts. The regime thus far has not imple-
mented any of these proposals
While stepping up pressure on the farmers, the regime
on balance has offered them little positive inducement
to produce and sell more to the state. Despite pledges
to reduce input costs, the government in January
raised wholesale farm input prices by 36 percent and
the cost of services provided to private farmers by 330
percent. It increased procurement prices by only 21
percent on average and now estimates that farmers'
real income will decrease this year by at least 20
percent. Warsaw did make the increases in livestock
and grain procurement prices retroactive to Novem-
ber 1981. For several months it paid a premium of up
to 20 percent for on-time fulfillment of grain con-
tracts, but the delivery premium was canceled in July.
The regime has extended credit for purchases of
agricultural inputs and has continued subsidies on
some machinery and fertilizer which remain in short
supply. It has offered to pay farmers who deliver grain
above contracted amounts with interest-bearing
"grain bonds" redeemable at higher prices in 1983-
85. The regime attempted to underscore its support of
private farmers by securing parliamentary approval of
several measures that had been introduced before
martial law, including the bills liberalizing farm
inheritance and pensions and increasing the maxi-
mum farm size from 50 to 100 hectares.
Mixed Results. During the first seven months of
martial law, Warsaw's approach yielded mixed re-
sults: farmers did not fulfill their grain procurement
requirements but did increase livestock sales. During
the first four months of the new "grain bond" pro-
gram only 4,000 tons of grain (out of the more than
400,000 tons procured during that time) were sold to
the state in return for bonds. Farmers probably held
back grain because of their concern over unsettled
conditions, their need for grain to feed to livestock,
and their frustration over the lack of availability of
inputs.
In the early days of martial law, the government had
to rely on Soviet meat deliveries to fill a quarter of its
rationing commitment. Over the first quarter of 1982,
however, it was able to procure enough to cover
completely a rationing commitment that had been
reduced 10 percent from the previous quarter. We
believe that the government's ability to increase live-
stock and poultry purchases improved because of
distress slaughtering of chickens due to feed shortages
and the sale of animals held back from slaughter in
late 1981 as farmers waited for higher procurement
prices. Government threats and inducements probably
played only a minor role.F_~
The government met the country's grain needs by
exporting 60,000 tons of high-quality meat to the
West in the second quarter to pay for the import of
400,000 tons of grain. Although grain imports should
meet present consumer demand, the state may face
shortages again later this year-perhaps very soon-
because farmers are not selling sufficient amounts of
grain to the state. By the end of August, with 90
percent of grain harvested, the press reported that
procurements were only 40 percent of the total
amount which the state planned to buy from farmers.
The numbers of cattle and hogs on private farms rose
7.3 percent and 10.3 percent, respectively, between
January 1981 and January 1982, probably because
farmers bred more livestock to sell at last year's high
black-market prices. Now, with that opportunity
closed off to most farmers, they seem to be cutting
their holdings. Farmers face a 30-percent decline in
the availability of feed concentrates supplied by the
state and higher costs. While human needs for grain
apparently have been satisfied with the aid of imports,
the regime was short 360,000 tons of fodder at the end
of June. We believe the shortage of feed led to
increased cattle and hog slaughter and higher meat
procurement in June which, in turn, will mean meat
shortages later this year. What could be most cata-
strophic for the future are a 71-percent increase in
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sales of breeding sows for slaughter and an 18-percent
drop in hog breeding in May 1982 compared to the
same month last year
The increase in private holdings of livestock in the
year to January was offset by declines on state farms
of 14.0 percent in cattle numbers and 18.2 percent in
hog numbers. Livestock holdings on state farms
dropped because these farms continued to find it
unprofitable to raise livestock and because the regime
drew heavily on the state farms last year to fulfill
rationing commitments. The decline in state farm
herds will put additional pressure on the regime to
persuade private farmers to sell more to the state
Outlook
In the next year, the regime will have to depend
heavily on domestic production, and especially the
private farmer, to satisfy the food needs of the
population; hard currency shortages will preclude
large imports of meat or grain. Current assessments
point to an average grain harvest of 20 million tons in
1982, which still would be 3 million tons below
estimated need if 2 million tons were imported. Crop
growth is hindered by severe shortages of fertilizers,
pesticides, and other farm inputs, but (as of mid-
August) harvest prospects were normal only because
weather has been favorable.
We estimate that meat production could fall to a level
that would provide as little as 50 kilograms per capita,
compared with 74 kilograms in 1980. To fill its
promise to keep meat consumption at 60 kilograms,
the regime would need to harvest about 25 million
tons of grain, well above expected domestic produc-
tion.
Outside sources of grain are few. Other East Europe-
an countries and the USSR will not be able to provide
any significant amount of grain or other foodstuffs
because those countries themselves have insufficient
supplies. Poland has not received any new grain
credits so far in the 1982-83 marketing year. The
French and Canadian Governments, which supplied
financing for 2.5 million tons of grain in 1981-82,
have not renewed grain credits for the current mar-
We believe the regime will do everything possible to
avoid reverting to compulsory deliveries. The history
of Polish private farming in the Communist era shows
that the Polish farmer has responded to inducements
rather than threats; government harassment of private
farmers usually has been accompanied by stagnant or
decreased production. The regime, seeking to channel
more food through the state distribution system, has
stated it needs to procure 5.5 million tons of grain
from private farmers in the 1982-83 marketing
year-over 3 million tons more than the 2.3 million
tons procured in 1981-82. Sufficient inducements,
however, still do not exist to encourage private farm-
ers to sell to the state. Cost-price ratios have become 25X1
less favorable, and officials have said that procure-
ment prices for livestock and grain will not be in-
creased in the second half of 1982.
Moreover, the farmers have found that Warsaw can-
not provide them with adequate supplies of concen-
trated feed and other inputs. In this situation, the
worker-farmer may turn more attention to his indus-
trial or service job. The US agricultural attache in
Warsaw believes that many farmers will become
subsistence farmers in the next year, producing main-
ly for themselves and their relatives. Other farmers
may change to more profitable crops such as vegeta-
bles or even flowers.
Any number of factors-such as a disappointing
harvest, the ouster of moderate regime leaders, a
decision to cut back food imports even further, or a
heightened worker reaction to the poor food situa-
tion-would increase the chances of a tougher regime
policy. The workers' tempers are already frayed by
political repression and depressed living standards; at
any time they might vent their frustrations in demon-
strations over meat shortages or other specific griev-
ances.
If Polish officials decide they have no choice but to
institute compulsory deliveries of grain and perhaps
other farm products, they could begin quickly because
military teams in the countryside have already inven-
toried stocks. Such a move would dramatically esca-
late the crisis. It would take a large-scale effort by
keting years.
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security forces to enforce compulsory deliveries; peas-
ants would find ways to hide their produce and some
would resist. In the longer run, farmers would cut
back production and the decreased availability of food
would further anger workers already disgruntled with
high prices. In addition, the Polish Church, whose
mainstay is the peasantry, might well feel compelled
to come to the aid of its members and thus become
more of a participant in the crisis rather than a
calming moderator.
Confidential 10
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Memorandum for:
VIA : Bob Gates
Attached is the pipeline update you requested
to prepare the DDCI prior to tomorrow's NSC
meeting. The update was prepared by
Attachment:
as stated
Acting Director
28 September '82
Director,
EURA
Office of European Analysis
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The Soviet Pipeline: A West European Update
Relatively little has happened during the last few weeks,
following the flurry of activity associated with the first
shipments of equipment to the USSR in violation of the US
embargo.
Equipment Delivery Status
o Dresser (France) has shipped three compressors out of a
contract for 21.
o John Brown Engineering has shipped six 25-MW turbines
out of a contract for 21; these six turbines exhausted
the company's stock of GE-built rotors.
o Nuovo Pignone apparently has.shipped three compressors
and two 25-MW turbines, out of contracts for 57 in each
category; the company had enough GE-built rotors to
equip 14 turbines.
o AEG-Kanis reportedly will ship two turbines this week,
out of a contract for 47 (42 25-MW and five 10-MW); it
has GE-built rotors for two of the larger turbines and
three of the smaller ones.
Gas Contract Status
Unless Moscow grants an extension, West Germany must notify
the USSR in October whether it will keep the contract volume at
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CONFIDENTIAL
10.5 billion M3 annually or reduce this amount by up to 20
percent. The West Germans would like to delay the decision as
long as possible. If forced to decide now, they probably will
take a reduction -- but less than the 20-percent maximum.
Italian officials have stated that they will not end Italy's
"pause for reflection" before the latest Soviet deadline of 30
September. In fact, no action is likely on Soviet gas until the
gas deal with Algeria is signed -- perhaps in October. We still
believe the Soviet deal will be concluded, but because of
pressure from the Socialists the amount is likely to be six
billion M3 annually rather than eight.
Political Developments
All four European governments recognize that the pipeline
dispute is damaging to the Alliance. The British, led by Foreign
Secretary Pym, are pressing hardest for discussions with the
United States to resolve the problem. The West Germans and the
Italians are also willing to participate. The French have been
the most negative, taking the position that the Europeans are the
aggrieved parties and that the United States therefore must take
the first step toward compromise. Paris rejected proposals for a
mid-September meeting in the absence of concrete proposals from
Washington. Later in the month Foreign Minister Cheysson told
Pym that he might agree to a joint meeting of the Foreign
Ministers with Secretary Schultz in New York, depending on the
results of his bilateral talks with the Secretary. We believe
the French will discuss proposals on COJOM, other technological
trade, and energy alternatives. They are unlikely to move very
-2-
('YIATF T TIAATT TAT
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far on the question of subsidized credit.
The impending change of government in Bonn will not
significantly affect the pipeline situation. Franz Josef
Strauss, the head of the Conservative CSU, opposed the pipeline
deal from the beginning but even he says it is now too far along
to be stopped. A CDU/CSU-led government probably will take a
somewhat harder line toward the Soviets in general, but in terms
of specific key issues the change will not be great. In the
particular case of credits, the Schmidt government was already on
record in favor of an end to subsidized credits for the USSR and
was sympathetic toward tighter COCOM restrictions.
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Major Western Suppliers for Compressor-Station Equipment
General contractors for Mannesmann-Cre
compressor stations (22 stations-$940
usot-Loire
million)
Nuovo Pignone
(19 stations-$560 million)
Subcontractors for:
Gas turbines-Frame III 10-MW AEG-Kanis a (5 tur
bines)
Gaslinecompressors Demag(5 comp
ressors)
Line stations (40)
Gas turbines-Frame V 25-MW AEG-Kanis a (42 tu
rbines)
Nuovo Pignone a (57 turbines)
John Brown a (21 t
urbines)
Gasline compressors Creusot-Loire (42 c
ompressors)
Nuovo Pignone a (57 compressors)
Dresser-France (21
compressors)
Frame V turbine rotor sets General Electric (6
3 rotor sets)
General Electric (57 rotor sets)
Computer system for central control of Thomson/CSF
export pipeline
Thomson/CSF
Soviet order (Nov. 1981) for 40 Frame V rotor Alsthom-Atlantiqu
sets (end use uncertain)
e a
Projected Soviet Gas Deliveries to Western Europe a
(billion cubic meters)
Austria:
2.4
3.0
3.5
4.0
4.0
Existing contracts
2.4
2.5
2.5
2.5
2.5
New contracts
-
0.5
1.0
1.5
1.5
France:
5.2
4.0
4.0
9.0
12.0
Existing contracts
5.2
4.0
4.0
4.0
4.0
New contracts
-
-
-
5.0
8.0
Italy: b
7.0
7.0
7.0
12.0
15.0
Existing contracts
7.0
7.0
7.0
7.0
7.0
New contracts
-
-
-
5.0
8.0
West Germany: a
10.9
15.0
18.0
22.5
22.5
Existing contracts
10.9
12.0
12.0
12.0
12.0
New contracts
-
3.0
6.0
10.5
10.5
Switzerland:
-
-
-
-
0.1
Existing contracts
-
-
-
-
-
New contracts
-
-
-
-
0.1
Total:
25.5
29.0
32.5
47.5
53.6
Existing contracts
25.5
25.5
25.5
25.5
25.5
New contracts
-
3.5
7.0
22.0
28.1
a Excluding Finland; amounts of annual offtake under the new contracts are subject to reduction by up
to 20 percent under scheduled semiannual negotiations with the Soviets.
b Italy has not yet signed the new purchase contract.
c Excluding potential deliveries of 0.8 billion cubic meters to West Berlin.
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CONFIDENTIAL
US Coal and the Siberian Pipeline
Key Judgments
US coal is one of the alternatives being investigated as a
means of reducing or supplanting West European purchases of
Soviet natural gas. We believe that there is little prospect for
expanding West European coal use during the 1980s beyond that
already planned. Indeed, our analysis indicates that West
European coal consumption in 1990 may fall short of planned
levels by as much as 950,000 b/doe.
Beyond 1990, however, considerable potential exists for
expanding coal use in Western Europe. As growth in nuclear power
slows and electricity demand picks up, much of the burden for
generating electricity will fall on coal. In the industrial
sector, the bulk of existing oil and gas-fired boilers will need
replacing. If West European governments help industrialists
overcome the considerable capital costs of switching, we believe
coal could capture much of this market--saving an estimated 1.8
million b/doe of oil and gas by the-year 2000. Combined with
North Sea and Dutch gas supplies, expanded coal use could well
obviate the need for additional purchases of Soviet gas in the
1990s. Soviet gas imports, therefore, could be limited to the
900,000 b/doe already contracted for during this period.
Increased coal use will not only enhance the energy security
of Western Europe but also improve prospects for US coal
exports. West European plans to diversify sources of coal
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supplies will probably give the United States roughly a one-third
share of the coal export market over the next two decades. At
current prices, sales of US coal to Western Europe could amount
to roughly $3 billion in 1990 and $4.5 to $7 billion by 2000
compared with sales of $1.9 billion in 1980.1
To achieve maximum export levels, however, the US will have
to expand sharply port capacity and dredge channels. Such
measures would enhance the security of coal as an energy
alternative and help restrain increases in coal prices. As the
"swing" supplier in the coal market, the US share of the export
market could be considerably higher depending on foreign coal
supply disruptions. Largely as a result of filling Polish
shortfalls, for example, US coal shipments to the European
Economic Community increased by some 275,000 b/doe over the last
two years.
1 Estimates based on current FOB coal prices at US ports.
Delivery of coal by US flagships would further raise US
revenues.
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CONFIDENTiALI
US Coal and the Siberian Pipeline
Energy Security
According to industry estimates, dependence on imported
natural gas will increase sharply in Western Europe over the next
two decades. Even with slow growth in West European gas demand,
depletion of domestic gas supplies2 will result in import
dependence growing from less than 15 percent currently to about
50 percent by the turn of the century. If the Siberian pipeline
proceeds as now planned, continental Europe will be dependent on
the USSR for 25-30 percent of its total 1990 gas requirements.
Beyond 1990, West European gas needs will probably continue to
rise, possibly necessitating additional supplies of as much as
1.2 to 1.3 million b/doe from the Soviet Union or elsewhere.
This growing level of gas imports will significantly increase
Western Europe's vulnerability to disruptions in natural gas
supplies.
While West European governments plan to increase imports of
coal substantially over the next two. decades, coal imports pose
little security risk. The international coal market is currently
demand constrained and export capability is likely to exceed
demand for the forseeable future. Abundant supplies will be
available from the United States, Canada, Australia, South Africa
2 Norwegian and Dutch gas used in Europe is included in domestic
supplies.
3
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CONFIDENTIALI
and later Colombia. Moreover, Polish coal shipments are
reemerging and the government is likely to foster a steady flow
of exports to maintain a foothold in its traditional West
European markets to earn hard currency.
Coal Plans and Outlook
Plans for increased coal use closely followed the oil price
hikes of 1979-80. Although there was heightened interest in coal
after the first oil price shock in 1973-74, the price of oil
relative to coal did not rise enough to cause major fuel
substitution during the 1970s. Only in 1980 did coal become
substantially cheaper than oil for industrial users. We believe
the 1980s should see a major departure from the previous decade
with a sharp increase in coal use spurred by the large
differential between coal and oil and gas prices. In 1981 steam
coal could be delivered to Western Europe at about 45 percent of
the price of Middle East oil and at half the price of Soviet
natural gas. Although declining oil prices this year have
lessened coal's price advantage, a. substantial differential is
expected to be maintained during the 1980s.
According to the latest government forecasts, West European
coal requirements in 1990 are projected to reach 7.43 million
b/doe--up 2.4 million b/doe over consumption last year. We
believe coal demand in Western Europe will grow substantially,
3 One million b/d oil equivalent is equal to 74 million tons of
coal equivalent (MICE).
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CONFIDENTIALI
but growth will be less rapid than indicated in these official
projections.
for example, demand will total 6.6 million
b/doe by 1990--800,000 b/doe below government projections.
Several factors account for this lower demand forecast:
o low prospects for economic growth and high interest
rates which both affect investment in new coal-fired
plant and equipment,
o lowered projections of electricity demand,
o soft oil prices and rising coal prices which have
lessened coal's economic advantage and created
uncertainty over the future evolution of coal prices,
and
o continuing concern about the environmental impact of
using coal and the costs of complying with
environmental standards.
Our assessment is that West European coal use by 1990 will
approximate 6.5 million b/doe compared with about 5 million b/doe
in 1981. This evaluation is based on our review of the most
recent private-sector forecasts as well as on our own analysis of
key coal use sectors.
Sectoral Demand
Electric utilities will add the largest increment to coal
demand during the 1980s, accounting for about three-fourths of
the increase. Low levels of electricity demand, however, have
slowed the construction of new coal-fired plants and soft oil
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\.VLV C L-L/FjL'4 I L MLJ
prices are likely to halt the conversion of some existing
facilities to coal. Over 50 percent of the expected additions to
coal-fired capacity anticipated by 1990, for example, is not yet
under construction; because lead times average 6-8 years, current
government projections will probably not be realized.
According to industry sources, industrial coal use will
increase by some 200,000 b/doe during the 1980s. Much of this
increase will come from conversion to coal in the cement
industry. Coal use in industrial boilers--the largest industrial
consumer of energy--will grow slowly. Industry is locked into an
existing capital stock of oil and gas-fired boilers, most of
which do not need replacing for several years. Moreover, the
high capital costs of coal boilers will likely preclude.the early
retirement of existing boilers. Coal is likely to make inroads
only where boilers are needed at new sites and when boilers reach
the end of their useful life, primarily in the late 1980s and
early 1990s. Other constraints slowing the move to coal in
industry are:
o lack of coal storage facilities,
o inadequate coal distribution infrastructure,
o lack of ash disposal sites, and
o environmental restrictions.
Other Sectors. Coal use in the residential sector will
continue to decline. Gas is still the cheapest means of home
heating and the capital intensive nature of coal-fired district
heating systems largely limits their use to Scandinavian
countries. Coal demand for synthetic fuels production is
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CONFIDENTIAL
expected to be small through the 1980s according to both
government and private-sector forecasts. Rising project costs,
the high cost of coal feedstocks in Europe, and uncertain
profitability in view of the soft oil market have all combined to
cause delays in coal gasification and liquefaction projects.
During the 1980s, coal based synfuels are likely to be
limited to applications where the cost effectiveness of a
technology is enhanced by its use with a closely related
industrial process such as production of reducing gas in the
steel industry. In West Germany, the leading European developer
of synfuels, the government continues to give liquefaction and
gasification a high priority in research funding mainly in the
hope of developing export sales. According.to recent State
Department reporting, only two gasification demonstration
projects are likely to receive continuing government support and
a third is proceeding as a commercial venture. However, a study
concludes that the
total contribution to 1990 German energy supplies will not likely
exceed 60,000 b/doe from all synfuels projects including those
producing low and medium Btu gas. In France, despite open source
reporting that CDF (the French Coal Company) will produce
synthetic natural gas with an energy equivalent of 66,000 b/doe
by 1990, our estimate based on the study is that only one-
sixth that level is likely to be produced.
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UUNP'1 UC'!V Z"1 HL
(In Text Table)
Coal Demand Close Up
West Germany. Opposition to nuclear power and the
relaxation of coal import quotas have paved the way for increased
coal use. Since imported steam coal currently costs about $67
per ton c.i.f. at West German ports while domestic coal runs
above $110 per ton, lowered barriers on imported coal provide
ample financial incentive to plan coat-fired power plants. Based
on State Department reporting, West Germany is expected to make
the largest additions to coal-fired electric generating capacity
in the European Economic Community during the 1980s, increasing
coal-fired capacity by some 10,000 MW. Considerable problems of
coat access and storage will severely limit industrial coat
use. Natural gas is expected to experience the most dynamic
demand growth in the industrial sector increasing by some 100,000
b/doe during the decade according to industry projections.
United Kingdom. We believe coat use in electricity
generation will decline during the 1980s. Additions of nuclear
power and oil-fired plants are planned, and several aging coal-
fired units--totalling 7,400 MW--are slated for retirement.
Increased industrial coat use, however, should raise overall coat
consumption albeit slightly. The National Coat Board is
currently handling almost one thousand inquiries from
industrialists considering a switch from oil to coal. The scope
for oil to coat conversion is considerable given that 40 percent
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CONFIDENTIALI
of the 15,000 steam raising units are more than twenty years
oil. Problems of coal access and storage, however, are likely to
impede the substitution process relative to its potential.
Moreover, pressure by domestic coal producers on the Government
for implementation of quotas on cheap imported coal, we believe,-
will lessen coat's competitive edge over oil products.
.France. We believe coal consumption will increase slightly
above current levels by 1990. An aggressive nuclear program will
continue to cut into coal consumption for electricity generation,
but Paris expects increased industrial coal use to pick up the
slack. Although there is yet no significant shift to coal in
industry with the exception of cement, Paris has provided
numerous incentives which should assure that industrial coat
usage increases roughly in line with plans.
Italy.
consumption in 1990 will, reach about 300,000 b/doe--240,000 b/doe
below the estimate of the National Energy Plan. Plans to convert
existing oil-fired power plants to coat will probably proceed but
only two new plants are likely to be in operation by 1990, rather
than the 3-5 under discussion. Reasons for the slowdown in the
construction of new coat-fired plants, officials contend, are:
lower than expected growth in electricity demand, greater use of
existing capacity, availability of electricity imports from
France, and problems in siting new plants. Soft oil prices,
moreover, are a disincentive for industries to convert to coat.
9
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Netherlands. Because of strong opposition to nuclear power,
much of the burden of diversifying Dutch energy'sources away from
oil and gas has fallen to coal. A program is currently being
outlined to convert 2000 MW of existing oil- and gas-fired
electric generating capacity to coal. Construction of new coal-
fired plants, however, has been delayed until the late 1980s
because of present over-capacity in thermal power generation.
Industrial use of coal will increase: the rate of penetration
will be limited by the fact that a large share of industrial fuel
consumption is used for producing feedstocks.
Belgium. Stagnant electricity demand over the last two
years has resulted in a downward revision of growth forecasts by
the government. only one new coal-fired power plant is planned
for the 1980s. Declining oil prices, moreover, are likely to
delay the conversion of some existing oil-fired plants to coal.
In industry, the high capital cost of conversions to coal and the
physical problems of access and storage of coal will impede
coal's penetration in this market.
Denmark leads the way in converting oil-fired power plants
to coal: coal use for electricity generation exceeded 80 percent
last year, up from only 20 percent in 1973. With further
conversions planned and all future base-load electricity plants
to be coal-fired, coal consumption will continue to rise, albeit
at a more moderate pace.
Spain is relying primarily on coal in the near term to
reduce its heavy dependence on oil until the nuclear program gets
underway. Demand for coal is expected to surge through 1985 due
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to increased coal use by electric utilities and the cement
industry according to market studies. Thereafter, growth is
likely to slow unless the nuclear program falls substantially
behind schedule.
Greece. Plans for the construction of two 350 MW power
stations using imported steam coal were dropped from the revised
national energy plan last year. Domestic lignite is to be the
primary fuel for electricity generation. Only private industry--
primarily cement--is switching to steam coal, all of which must
be imported.
Sweden. Environmental concerns will result in a cautious
approach to coal. Coal consumption in 1990 is expected to be
about half of estimated potential according to government
estimates. Steam coal will be used mainly in industry and in
hot-water plants for district heating.
Ireland. The bulk of new base-load electricity generation
will be coal-fired. A 900 MW coal-fired plant is currently being
built at Moneypoint of which 600 MW are expected to be in service
by 1986. In addition, the cement,-sugar, and dairy industries
are converting to coal.
Austria. Environmental objections will slow down the
construction of coal-fired power plants. High transport costs
for coal because of Austria's landlocked position will likely
hamper industrial coal use.
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C:UNr'1L)I N'1'1HL
Western Europe: Coal Requirements
(thousand b/doe)
1973
1979
1981 19901
Total
4,827
4,889
4,979 6,450
West Germany
1,600
1,546
1,650 1,950
United Kingdom
1,525
1,448
1,320 1,400
France
556
613
559 590
Spain
171
219
329 460
Belgium
222
219
216 230
Italy
207
229
268 460
Denmark
39
84
108 190
Netherlands
85
64
79 195
Greece
94
80
78 145
Austria
72
62
62 95
Turkey
92
131
157 385 25X1
Other
164
194
153 350
1 Projection based on review of most recent private-sector
forecasts as well. as our own reporting and analysis.
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CONFIDENTIAL
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e
Western Europe: Forecasts of Coal Demandl
(million b/doe)
Forecast
Coal Demand
Date
1990 2000
Data Resources
May 1982
6.5 9.3
OECD/World Energy
Outlook
Apr 1982
7.3-7.7 11.4
IEA/Country Review?
Feb 1982
7.4 --
Exxon
Feb 1982
7.0 8.5
Chevron June 1982 6.2
Shell Jan 1982 6.8
1 Countries included in these projections vary slightly among
forecasters.
2 Data are for 16 West European members of the IEA plus France
and Finland.
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Prospects Beyond 1990
Beyond 1990, considerable potential exists for further
expansion in coal use in Western Europe. Projected fuel price
trends favor coal. Recent private-sector forecasts point to
upward pressure on oil prices after the mid-1980s, and gas prices
are likely to increase, given their present linkage to oil
prices. Although coal prices will also trend upward, they are
unlikely to keep pace with alternative fuels. We expect coal to
maintain or improve on its already substantial price advantage
over competing fuels.
Aside from price competitiveness, an expected slowdown in
the growth of nuclear power will place added requirements on coal
for electricity generation. Based on the most recent country
projections for the 1990s, nuclear power capacity is expected to
grow at less than half the rate of the 1980s. Concern over
nuclear wastes and perceived accident risks have lessened public
and political confidence in nuclear power. Moreover, long lead-
times for licensing and construction of plants and great
financial burdens due to the high capital costs accompanied by
high interest rates are likely to continue.
Shortfalls in nuclear power will likely be met by coal.
Most countries have policies that generally prohibit new oil-
fired capacity and some countries also prohibit new gas-fired
capacity. Current coal-fired plant construction programs--
delayed during the 1980s because of sluggish electricity demand--
will likely be completed in the 1990s along with major
expansions. As a result, West European governments are likely to
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trim oil and gas use in electric utilities to less than 4 percent
of projected electricity generation by the end of the century.
The greatest potential for increased coal use exists in
industry; the industrial sector consumes nearly twice as much oil
and gas as do electric utilities. By the early 1990s, many of
the oil and gas-fired boilers installed in the late 1960s and
early 1970s will reach the end of their useful lives. If
governments help offset the large capital costs of switching to
coal through subsidies, tax incentives, and low interest loans,
industrial coal use could reach 3.6 million b/doe by the year
2000, about 1.8 million b/doe above most current projections.
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Western Europe: Energy Prices
Forecasting long-term energy price trends is difficult.
Nevertheless, an analysis of key fuel markets leads us to believe
relative energy prices in Western Europe will remain fairly
stable over the next two decades.
Moat long term energy projections by industry assume flat or
declining real oil prices through the mid 1980s. Oil prices are
projected to rise by 2-3 percent per year in real terms from
1985-2000. As market conditions tighten, other energy prices are
also assumed to increase.
We expect coal prices to rise but remain competitive with
oil.
coal will
have about a 20 percent price advantage over oil in 1990 even
after including the extra cost of building coat-fired power
plants. The large resource base for coal, considerable scope for
expanded production, and a diverse set of competing suppliers
will all tend to restrain real increases in coal prices.
We expect gas prices will continue to increase sharply over
the next two decades. Cheap indigenous supplies are dwindling
and new gas reserves--those in the North Sea, for example--will
be costly to develop. Moreover, there is increasing linkage
between oil and gas prices in new contracts.
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Sensitivity of Coal Demand
As a substitute for oil, coal demand is responsive to
changes in oil prices. We believe, however, that further
moderate declines in oil prices will probably have little effect
on coal demand. The bulk of increased coal use during the 1980s
will come from electric utilities where coal requirements are a
function not only of relative fuel prices but also of government
policy to reduce oil use. Moreover, coal currently enjoys a
substantial price advantage over oil in the utility sector, and
oil prices would have to fall significantly before having a major
effect.
In existing facilities, for example, coal requires only
about a $.20 per million BTU price advantage over oil to offset
the added handling costs associated with burning coal. As a
result, oil prices would have to fall by roughly 35 percent
before existing coal-fired facilities would consider a switch to
oil. When considering the installation of new coal-fired
capacity, coat requires about a $.75 per million BTU price
advantage over oil to offset both higher capital and handling
costs of coal-fired equipment. The price of oil would thus have
to fall about 10-15 percent below current levels to make industry
reconsider the installation of new coal-fired boilers. For
European power stations, which rely heavily on cheaper imported
coal, the price of fuel oil would have to fall about 30 percent
before utilities reconsidered coal plans.
Lowered projections of electricity demand have probably had
a larger effect on future coal requirements than declining oil
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prices.
percent change in total electricity generation affects West
European coal requirements by about 100,000 b/doe.
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The Coal-Gas Trade-Off
According to industry estimates, nearly 40 percent of the
increase in Western Europe's gas use over the next two decades is
expected in the industrial sector. We believe increased use of
coal could probably supplant about one-fourth of projected
industrial gas demand by the year 2000. Higher industrial coal
use, coupled with additional gas supplies from Norway and the
Netherlands--for use in the residential sector, where coal use is
severely restricted--could well obviate the need for additional
purchases of Soviet gas in the 1990s.
If industrial coal demand is to reach its potential in the
next decade, however, some actions must be taken. These would
include:
o Development of the infrastructure system, including
ports, railways, depots and ash disposal systems,
essential to industrial coal use.
o Development of coal ports in the major exporting
countries.
o Dissemination of information and demonstration projects
on the conversion from oil and gas to coal.
o Adoption of financial incentives or other measures to
stimulate conversion to coal.
o The removal of overly stringent environmental or other
constraints on coal use.
o Continued development of more efficient and
environmentally clean technologies in the areas of
combustion, coal handling and coal conversion.
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(In Text Table)
Sectoral Fuel Use and Substitution Potential
Coal can be directly substituted for gas in only limited
circumstances--primarily in large industrial and utility
boilers. In electric utilities, coal is expected to back out
about 280,000 b/doe of gas during the 1980s according to industry
projections. Gas consumption, however, will increase in both the
residential and industrial sectors where coal use is currently
constrained by physical and economic factors.
Electricity Generation
Electric utilities are the major market for coal. Coal has
a substantial economic advantage over oil and gas for electricity
generation and is the primary fuel for new thermal power
plants. Gas consumption by electric utilities will continue to
decline; West European governments are pursuing policies to trim
gas use to less than 5 percent of fuel for electricity generation
by 1990. West German utility gas consumption, for example, the
largest in Europe, is projected to fall by about 100,000 b/doe by
1990 according to industry sources. Beyond 1990, we believe the
decline in gas consumption will slow, and gas use will probably
stabilize at around 190,000 b/doe by 2000--representing some 3
percent of fuel for electricity generation.
Residential
Residential heating demand will be the fastest growing
market for gas. According to industry estimates, about 60
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percent of the increase in Western Europes gas use over the next
decade is expected to be in the residential sector. Coal is
unlikely to be directly substituted for gas in any significant
quantity. In the longer-term, increased use of electricity
produced from coal is an option for replacing gas with coal in
the residential sector.4
Industry
Consumption of both coal and natural gas will increase in
the industrial sector during the 1980s according to all
government and private sector forecasts. Most industry analysts
believe growth in coal use will be slow, however, its rate of
penetration impeded by the physical restrictions of coal access,
storage, and handling and by the high capital costs of converting
or installing new coal-burning equipment. New coal boilers, for
example, are between one and half and three times as expensive as
oil or gas boilers. The ancillary equipment required--storage,
handling and preparation equipment--is also considerably more
expensive with coal. Taken together, capital costs are generally
two to four times as much for coal. Non-fuel operating costs are
also higher; coal requires additional handling equipment and
boilers need more servicing. Electricity consumption for
conveyors, handling and stoking equipment also pushes up
operating costs.
No specific estimate of expanded coal use in electricity
generation was made for the 1990s. For example, however,
1 million b/doe of additional coat, which would require about
55 new 700 MW units, could replace approximately 500,000 b/doe
in residential gas consumption.
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Y
In balancing the higher capital and non-fuel operating costs
of coal-fired equipment against reduced fuel costs,
industrialists are likely to opt for a coal boiler over an oil or
gas-fired boiler at a new site or when replacing worn out
boilers. The economics of replacing existing oil and gas-fired
boilers with coal, however, are not as favorable with pay back
periods far in excess of two years. As a result, with boiler
stocks in Western Europe dominated by relatively new oil and gas-
fired boilers, growth in coal use will likely be slow during the
1980s.
According to industry projections, gas use in the industrial
sector is expected to increase by about 370,000 b/doe by 1990,
accounting for roughly 40 percent of the increase in Western
Europe's gas requirements during the 1980s. Although all
industry analysts believe gas will be significantly more
expensive than coal, it has several non-price advantages: the use
of gas largely avoids the difficulties of fuel access, storage,
and handling associated with coal use. Moreover, natural gas is
a clean burning and controllable fuel.
Beyond Z990, coal use could expand substantially in the
industrial sector. With many oil and gas-fired boilers due for
replacement and government incentives to overcome the high
capital costs of switching, industrial coal demand could reach
3.6 million b/doe by 2000--1.8 million b/doe above current
projections. We believe coal will largely displace oil--oil
boilers being greater in number and older than most gas
boilers. Moreover, nearly 20 percent of industrial gas
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requirements are used for feedstocks in the chemical industry
where coal is not directly substitutable. On the other hand, the
higher price of gas compared with oil in many countries will
likely spur industrialists to switch from gas to coal where
technically feasible. Altogether, we believe about 450,000 b/doe
of gas can be backed out of the industrial sector through
expanded coal use by 2000.
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r
Comparative Economics of Coal and Oil-Fired Boilersl
Thousand dollars
Cost of Coal
per year
over oil
Coal
Oil
Percent
Capital charges
158
72
219
Fuel costs
916
1,297
71
Operating costs
174
96
181
Total costs
1,248
1,465
85
(U)
Source: Cambridge Information and Research Services Limited and
the Coal Industry Advisory Board.
1 Assumes a steam-raising plant capable of producing 60,000
pounds of steam perhour operating at 75 percent of capacity for
4000 hours in the year. Cost of capital is 10 percent per
annum.
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Potential for US Coal Exports
US coal shipments to Western Europe have increased sharply
in recent years--jumping from some 260,000 b/doe in 1979 to
670,000 b/doe last year. Future US coal exports will largely be
the result of countries' plans for diversifying suppliers and
their perceptions of supplier reliability. Supply disruptions
caused by strikes in Australia and Poland over the last two years
have heightened the awareness of the need for diversity of
supply. By filling previous shortfalls, the United States has
gained a strong foothold in the European steam coal market; in
1981, for example, the United States supplied nearly a third of
the steam coal imported by Western Europe, -up from less than 3
percent in 1979.
Although the US market share may eventually decline due to
the reemergence of Polish shipments and increased exports from
South Africa in the mid 1980s, recent market studies
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estimate a 26-30 percent share of the steam coal market
for the United States in Western Europe over the next decade.
Including US shipments of metallurgurical coal--historically the
mainstay of US-European coal trade--we believe the United States
will capture roughly a third of the West European coal import
market. US coal exports are thus likely to reach nearly 800,000
b/doe in 1990.
By 2000, we believe US coal shipments could range between
1.2-1.8 million b/doe depending upon the development of
industrial coal demand. As the swing supplier in the market,
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b
however, the US share of West European coal purchases could be
substantially higher if coal supplies from other countries are
disrupted.
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%. V LN r L LJ A LN 1 1 tiL
Western Europe: Coal Imports
(million b/doe)
1979
1980
1981
Total
1.30
1.49
1.52
Steam Coal
.76
.89
.97
Metallurgical Coal
.54
.60
.55
US Share of West European Coal Market
(percent)
1979 1980 1981
Total
20
32
Steam Coal
3
18
Metallurgical Coal
45
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Western Europe: Spot Steam Coal Prices 1981
($ US per million BTU)
FOB Price
Coast
Ocean
Freight
Del
P
ivered
rices
Australia
$1.97
$.82
$2.79
Canada
1.83
.71
2.54
Poland
2.11
.33
2.44
South Africa
1.67
.44
2.11
United States
1.97
.52
_
2.49
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Several factors in the United States could restrict European
purchases of US coal, according to the Coal Director of the
European Economic Community. Inadequate coal sampling methods
have allowed wide variations in coal quality, causing problems
with power station equipment and compliance with air quality
standards. Continued sharp increases in rail transport rates,
moreover, could rob US coal exporters of their competitive
advantage in ocean transport. Cargo preference legislation,
currently before Congress, would require that 40 percent of trade
volume be shipped in American flag vessels. Europeans fear such
legislation would not only create administrative hurdles but also
price US coal out of the market because of the higher rates
charged by US shippers.
In the longer-term, the inability of US ports to accommodate
vessels of 100,000 deadweight tons5 (dwt) could severely limit
coal shipments to Western Europe. With ocean freight rates
accounting for between 15-30 percent of the delivered price of
steam coal, future world coal trade is likely to be dominated by
large colliers of 100,000 to 150,000 dwt in order to capture
economies of scale. Currently, all major foreign coal-exporting
countries as well as Japan and the importing countries of Western
Europe have at-least one coal terminal that can accommodate
vessels of 100,000 dwt and up, and more are planned. Unless
5 The port of Hampton Roads can load a vessel of approximately
100,000 dwt, but this can be done only under special tidal
conditions. Normally, the port is limited to loading up to
80,000 dwt colliers.
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deeper channels are dredged or alternate coal loading
technologies6 developed in the US, a significant portion of coal
will move in ships too large to call at present US ports by the
year 2000.
6 Some economic alternatives to port dredging are vessel-to-ship
loading arrangements, i.e., small ships, barges and floating
terminals topping off large colliers.
30
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~-%J" r I U r: N Ir l HL
Sizes of Ships Transporting Coal
Percent of Seaborne Coal Trade
1970
1
975 1980
Ship Size (Deadweight Tons)
Under 60,000
60
90
66 49
-100,000
Over 100,000
10
24 25
10 26
Source: HPD Shipping Consultants Limited.
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SECRET
29 September 1982
TALKING POINTS FOR DDCI
Poland
The Polish regime appears to be moving toward the formal
dissolution (delegalization) of Solidarity, which could cause a
resurgence of popular unrest.
For the past ten days regime spokesmen have publicly
argued that the country needs a trade union movement,
but one without Solidarity.
The alternative most often suggested is the so-called
"zero option" in which all current unions, including
Solidarity, would be replaced by new unions which would
be phased in over a three-year period beginning next
year.
The Polish parliament could discuss, and conceivably pass, a
new trade union bill when it next meets around 10 October.
Some delay in the passage of the legislation is possible
and would not be out of character with the regime's
step-by-step return to "normality".
Jaruzelski may wish to press forward now because he believes
that the trade union issue must be resolved before martial law is
terminated, and he apparently still hopes to do this before the
end of the year.
-- Some officials probably are confident that the regime
has the underground union under control and that the
authorities can easily contain any negative reaction to
the abolition of Solidarity.
If the union is formally dissolved, Solidarity's leadership
would feel compelled to react. But
they believe they will not be ready for a general
strike until next spring at the earliest.
They could call for large demonstrations in protest on
10 November, the second anniversary of the regime's
legal recognition of Solidarity, or 13 December, the
first anniversary of martial law.
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Reaction from the factories is less easy to predict. Many
workers have been cowed by harassment and by threats of the loss
of their jobs and probably are resigned to Solidarity's demise.
-- We believe there would be some spontaneous
demonstrations but doubt that they would be widespread
enough to challenge seriously the regime's control.
The regime probably will go ahead and establish its new
trade unions, but these will lack credibility and authority and
will not be able to bridge the gap between the authorities and
workers.
Underground Solidarity will continue its efforts to
organize an effective opposition movement. Some will
become even more radical because of regime
intransigence.
-2-
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The Polish Government has announced that industrial production increased
1 percent last month compared with August 1981. Officials attributed the gain to
continued good results in extractive sectors-coal, copper, and sulfur-which
depend little on Western imports. The increase-the first such year-to-year rise
since martial law-also reflects a boost in food industry output. The harvest was
larger and earlier than last year, when more of the harvest took place in
September. Despite the gain, overall output continues to hover at the level of the
last seven months, indicating that the regime has been able to arrest the 1981 out-
put decline but not achieve any recovery.F_~
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Poland:
Regime Tactics
Against Demonstrators
Polish authorities had little trouble controlling the
much-heralded demonstrations on 31 August, the
second anniversary of Solidarity's landmark accord
with the regime. They used different tactics, however,
from those employed against protesters in early May
and in the early days of martial law. The regime
apparently has recognized the increasing willingness
of many protesters to resist and apparently wanted to
minimize the violence. It evidently directed its police
units to try to prevent crowds from forming or
growing to the point where significantly more force
would be needed. Security forces did use firearms in
two cities, allegedly in response to firebombs. As in
the past, the authorities on 31 August relied primarily
on the police, although in a few cases they brought in
army units. The regime's main goal continues to be
maintenance of control and it will use whatever force
is necessary, although it apparently is willing to vary
its tactics to minimize bloodshed.
Rising Violence
Immediately after the imposition of martial law,
protesters rarely resisted the police. One significant
exception occurred in the Silesian town of Wujek
where seven miners were shot to death; the police
claimed they had been assaulted by the protesters.
Since December demonstrators throughout the coun-
try have shown more willingness to defend themselves
or even attack-usually with rocks and paving stones,
but occasionally with Molotov cocktails. This trend
evidently has prompted the regime to change-at
least for the moment-its techniques for crowd con-
trol.
Changing Tactics
In past skirmishes with demonstrators, particularly
last December and during the disorders in May, the
authorities gave the police a relatively free hand. The
special riot forces usually formed into large phalanxes
and waded into the crowds, batons flailing, with little
regard for the age or sex of the people they attacked.
beating them to the ground before making arrests.
According to Embassy officers, the security forces
employed different tactics on 31 August. In most
cases they acted as though they had orders to avoid
using riot batons and to confront demonstrators only
from a distance. Police used large amounts of tear
gas, often firing randomly or even at individual
protesters, to prevent crowds from forming. If this
proved ineffective, they employed-again at a dis-
tance-heavier barrages of tear gas and water can-
nons; for the first time in most cities they also used
signal flares and artillery simulators to disperse the
crowds into smaller groups. They then deployed as
small squads and cordoned off areas to prevent dem-
onstrators from regrouping.
Police were generally careful to leave escape routes
open to retreating demonstrators, evidently not want-
ing to provoke violent reaction from a cornered mob.
Moreover, the police pursued small bands of protest-
ers through the streets in only a few cases and usually
not very far.
While the regime tried to minimize the violence, it did
not hesitate to use more force to maintain the upper
hand. Security forces-apparently under orders to use
firearms if sufficiently threatened-opened fire and
killed four demonstrators in Wroclaw and Lubin. The
authorities claim the security forces took such action
only after they were attacked by protesters with
firebombs
The Military's Role
Since the imposition of martial law, the army general-
ly has been kept away from direct confrontation with
demonstrators, although many units have been alerted
or deployed during periods of unrest. Some military
Secret
EUR ER 82-028
29 September 1982
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Secret
forces were used in December to support police forces
that were clearing worker-occupied factories and
mines-as in Gdansk and Wujek. Since then, how-
ever, the regime has mainly used police-particularly
the special riot forces-to maintain control. In May
army units were deplpved but were not involved in
direct confrontations.
During the 31 August disorders, the authorities again
relied primarily on the police forces. In a few cities,
however, the authorities evidently concluded that
military units were needed. In Gdansk and Krakow,
soldiers were employed directly-but only for a short
time-to help keep crowds from regrouping. In Lubin
the authorities brought in a number of army troops to
take over from riot police the day after the shootings,
evidently to defuse the volatile situation. The soldiers,
however, reportedly became involved in the clashes,
and fired tear gas and made arrests during subsequent
demonstrations.
Elsewhere on 31 August, the regime-as in the past-
made a strong show of force by deploying military
units extensively and putting some of them on in-
creased alert. Most were used in security patrols and
evidently were intended primarily as a deterrent. The
authorities, nevertheless, clearly were prepared for
any contingency-the US Embassy reports at least
some army units in Warsaw had been issued live
ammunition
Outlook
The regime will continue to meet demonstrations head
on with whatever force necessary to maintain control,
but will seek to keep the violence to a minimum.
Government officials will take special care to ensure
they are not taken by surprise, and will mobilize
overwhelming security forces to deal with disorders.
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DDI #7859-82
29 September 1982
MEMORANDUM FOR THE RECORD
FROM Stanley M. Moskowitz
National Intelligence Officer for USSR-EE
SUBJECT: SIG Meeting, 28 September 1982
1. Those present at the meeting were Secretary Regan, Secretary Baldrige,
Undersecretary Buckley, Administrator McPherson, Mr. Mau, Mr. Leland, Dr.
Rowen, Secretary Block, Mr. Gregg, Secretary Weinberger, Mr. McDonald, Mr.
Bailey, Deputy Director Harper, Undersecretary Olmer, and Undersecretary Ikie.
2. Chairman Regan started by a brief exposition of the Polish debt
situation. He stated that the private banks were ahead of Western governments
in gettinc some repayment. Secretary Baldrige asked why the banks were
getting ahead of us and were getting some payments on interest when the
Western governments were getting nothing. It was pointed out that part of our
sanction policy was that we would not reschedule the Polish debt until there
had been some liberalization inside Poland which Secretary Regan said had not
happened and was not likely to happen. Secretary Regan also said that at
least we were not in the position of putting up any new money to get a return
on the interest due us as he said the private banks had. Mark Leland from
Treasury said that next year, since the Poles had not made any payments on
their 81 debt, of either declaring them in default for 81 or rescheduling.
Leland also said that it was likely that other Western creditors would push
for rescheduling, and would do so despite whatever position we held to.
Secretary Regan concluded the discussion by saying that we would have to meet
with the other Western creditors and see what ideas they had.
3. The major part of the meeting was given over to a discussion of an-
NSC proposal to set up a Presidential Commission that would help raise and
funnel privte monies into private agriculture in Poland. It was clear from
the way Secretary Regan posed the question that he was skeptical about the
merits of the proposal. He was joined by Secretaries Baldrige and
Weinberger. The latter was particularly concerned about ensuring that any
funds that went to Poland qot into private rather than government hands.
There was general agreement that the President's interest in this undertaking
stemmed strictly from the humanitarian aspect of getting surplus commodities
IF
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to the Polish people. The Church was the best means to accomplish this end,
and indeed this had already been done last winter. Secretary Block who had
signed a letter to Director Stockman last week strongly supported the private
sector initiative, agreed with Regan and Baldrige that this proposal ought to
be discussed with the Allies, ought to be better thought out, and needed more
study. Secretary Regan remanded the proposal back to the IG for more study.
He also asked Treasury to come up with a brief for the President's use with
Cardinal Glemp on the amounts of humanitarian assistance the US Government had
provided to Poland. He said that the US had provided $10 million dollars in
private funds and $42 million dollars in public funds for 1982 and that a
total of $48 million dollars in public funds have been earmarked for
humanitarian assistance via Catholic relief and Project Hope.
4. There was a brief discussion of a paper on providing multi-lateral
assistance to India. This stemmed from the surprisingly good visit of Mrs.
Ghandi. The tenor of this discussion was that we did not want to get back
into a grant aid program to India and we should use a commission that was
already established to explore ways in which we could increase trade.
Secretary Regan explained that the main problem was that the Indians had a
great need for hard currency but it was very hard to see where that money
might come from. There was an agreement that we should discourage the use of
the Asian Development Bank.
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