SOVIET OIL TRADE IN 1982-83

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• Original Classification: S
• Document Page Count: 18
• Document Creation Date: December 22, 2016
• Document Release Date: May 11, 2009
• Sequence Number: 2
• Publication Date: June 1, 1984
• Content Type: REPORT

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Directorate of Secret
Intelligence
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Soviet Oil Trade in 1982-83
Secret
SOV 84-10092X
June 1984
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Directorate of Secret
Intelligence
Soviet Oil Trade in 1982-83
This paper was prepared by Office of
Soviet Analysis. Comments and queries are welcome
and may be directed to the Chief, Soviet Economy
Division, SOYA,
Secret
SOV 84-10092X
June 1984
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secret
Summary
Information available
as of 15 April 1984
was used in this report.
Soviet Oil Trade in 1982-83 I 25X1
Despite soft world oil prices and sluggish domestic production, the USSR
increased exports of oil for hard currency during the 1982-83 period,
mainly by cutting deliveries to Eastern Europe and increasing reexports of
OPEC oil. As a result, Soviet oil revenues reached a record $14.9 billion in
1982 and may have even surpassed this level in 1983.
Several developments influenced Moscow's decision to increase oil exports
for hard currency. Soviet net debt had increased by more than $3 billion in
1981 as a result of rising agricultural imports and weakening oil prices.
Also, after the poor harvest in 1981, the USSR needed large revenues to
pay for additional imports of grain and other agricultural goods in 1982.
The stepped-up oil exports helped trim Moscow's debt by more than $2 bil-
lion, to $10.1 billion by the end of 1982. Although this eased the pressure
to earn even larger amounts of hard currency, Moscow increased its
volume of hard currency oil exports in 1983 to compensate for lower prices.
After years of supplying Eastern Europe with rising amounts of oil (which
peaked at 1.6 million barrels per day during 1980-81), Moscow cut
deliveries in 1982 by 131,000 b/d. This facilitated a $1.5 billion increase in
oil sales to hard currency customers. The USSR further boosted its 1982
earnings by reexporting 176,000 b/d of oil received from Libya and the
Middle East as payment for earlier deliveries of Soviet arms. In 1983 the
USSR probably did not cut East European deliveries further, but it
increased reexports of OPEC oil to 233,000 b/d.
The USSR will find it increasingly difficult, however, to maintain or
increase oil exports to hard currency countries while satisfying its own
needs and those of its CEMA clients and other soft currency customers.
We believe domestic production is stagnating and may soon decline. Any
substantial diversion of oil from domestic use would affect economic
performance-an unacceptable consequence, particularly when the Soviets
are trying to sustain an improvement in economic growth. We believe that,
although the Soviets may cut oil exports to Eastern Europe gradually, they
probably would be unwilling to risk the economic and political repercus-
sions of more than marginal cuts.
Secret
SOV 84-10092X
June 1984
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In the long term, the Soviets probably cannot count on reexports of
bartered OPEC oil. If world oil prices rise, OPEC countries probably could
obtain better trade terms by eliminating the middleman and selling their
oil in world markets and paying off their debts to the Soviets in cash.
Moscow probably would consider making only marginal cuts in exports of
oil to non-Communist soft currency countries like Finland or India and to
key Communist clients such as Cuba. We believe that none of these
marginal sources will prevent a long-term decline in the availability of
Soviet oil for hard currency sales.
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The Importance of Oil in Foreign Trade
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Soviet Oil Trade in 1982-83
Introduction
The USSR is the world's leading petroleum producer
and is second only to Saudi Arabia as an oil exporter.
More than one-third of Soviet oil exports go to hard
currency markets, tying the USSR's hard currency
balance of payments closely to the international oil
market.' About one-half go to CEMA countries,
which depend on the USSR for most of their oil
supplies. This assessment examines developments in
Soviet oil trade during the 1982-83 period and dis-
cusses the options to maintain hard currency nil
exports despite increasing production probleiU
The Importance of Oil in Foreign Trade
Sales of oil and oil products have been the USSR's
leading source of export revenues since the early
Selling Oil for Hard Currency
Moscow's trade with hard currency customers is
conducted on a commercial basis and reflects supply
and demand in international markets. Because the
USSR is a relatively small oil supplier to Western
countries, it must match OPEC s prices to remain
competitive. As a result, it reaps substantial profits
when OPEC prices are high and suffers when the
market weakens and prices fall (assuming the same
Dvolume of oil exports). The Soviets do not appear to
manipulate prices or quantities of oil exports for
political leverage.
The USSR sells oil to the West mainly under long-
term annual contracts between Western firms and
Soyuznefteeksport, the Soviet foreign trade organiza-
tion authorized to import and export oil. This organi-
zation, headquartered in Moscow, conducts its trade
through subsidiaries in the more important West
European countries. Moscow also sells a small
amount of oil on the spot market, primarily to benefit
from short-term fluctuations in the market price.
(The USSR frequently adjusts long-term contract
prices to market conditions.) Because of the recent
soft oil market, the Soviets have increased the share
of oil being sold in the spot market and in short-term
1970s, increasing from one-tenth to more than one-
third of total merchandise exports during the decade.
Oil sales to hard currency customers accounted for an
even larger share of hard currency earnings from
merchandise exports, growing from nearly one-fifth to
more than one-half during the same period (see table
1). The fifteenfold jump in world oil prices provided a
large windfall to Soviet hard currency earnings. Al-
though the volume of oil sold for hard currency
doubled from 1970 to 1982, its value rose from $430
million to nearly $15 billion.
The volume of Soviet oil exports to Communist
countries generally has been 1.5 to 2 times that to
hard currency countries. Because the USSR provides
oil to its client states at concessionary prices, however,
it earns roughly equal amounts from sales to Commu-
nist countries and hard currency customer
contracts.
deliveries to Communist countries fell by nearly 9
percent. In contrast, deliveries to hard currency coun-
tries fell an estimated 5.7 percent in 1981, while those
to Communist countries were maintained at about 2
million b/d (see table 2).
total oil exports increased by 165,000 b/d. Exports to ; Total exports of Soviet oil in 1983 reached an estimat-
hard currency countries increased 36 percent, while ed 3.59 million b/d, 201,000 b/d more than in 1982.
In 1982 the USSR produced 12.25 million barrels per
day of oil, only 75,000 b/d more than in 1981, but
' In 1982-83 oil exports accounted for about 56 percent of Moscow's
hard currency earnings from merchandise trade and roughly 40
percent of all its foreign exchange earnings. Merchandise trade
excludes sales of ma. or weapon systems to less developed countries.
(Domestic production increased only about 70,000
b/d.) Nearly 70 percent of the increase in exports
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Table 1
USSR: Exports to Hard Currency Countries, 1970-83
Million US $
(except where noted)
Total 2,424 2,727 2,924 5,009 7,869 8,280 10,225 11,863 13,336 19,417 23,584 23,778 26,552 26,382
merchandise
exports a
Crude oil 430 608 600 1,304 2,741 3,391
and oil
products
Crude oil 18 22 21 26 35 41
and oil
products as
a share of
merchandise
exports
(percent)
a Excludes sales of major weapon systems to less developed
countries.
b Preliminary.
went to hard currency countries; and the balance went
to India, Yugoslavia, and Finland in the form of
reexported oil from Libya and the Middle East.
Deliveries to Communist countries (excluding Yu o-
slavia) probably were about the same as in 1982
Hard Currency Sales
1982. An effort to increase oil sales to hard currency
customers began in late 1981 and continued through-
out 1982-83. Several developments influenced this
decision. In 1981 the Soviet hard currency trade
imbalance increased sharply; it was 60 percent higher
than in 1980 and the largest since 1976. As a
consequence, the USSR's net debt rose by $3.3
billion. Also, after the poor harvest in 1981, Moscow
needed large amounts of hard currency to pay for
imports of grain, meat, and other agricultural goods.
In 1982 oil deliveries to hard currency countries
reached an estimated 1..24 million b/d, some 330,000
b/d above the 1981 level. These exports accounted for
nearly 37 percent of total Soviet oil shipments and
earned a record $14.9 billion. Deliveries to OECD
countries for hard currency 2 reached 1.17 million
b/d, 94 percent of total hard currency oil exports.
This reversed a three-year decline in exports to these
countries.
The USSR has been supplying an increasing share of
the OECD countries' oil imports in recent years (see
table 3). The most important hard currency customers
are the Netherlands, West Germany, Italy, France,
and Belgium.' In 1982-83 these countries purchased
about two-thirds of total Soviet hard currency oil
exports.
The Soviets were able to increase oil exports in 1982
in part by trimming the delivery of oil to some East
European countries. In late 1981 the USSR informed
.several of its allies that it would reduce oil deliveries
' Finland is a soft currency customer; Turkey purchased oil for soft
currency until 1983
' The large volume of oil exported to the Netherlands reflects
transshipment of Soviet oil to other countries via the Rotterdam
spot market, as well as the Netherlands' imports for domestic
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Table 2
USSR: Estimated Trade in Crude Oil and Oil Products
Hard currency
969
914
1,243
1,380
OECD b
944
881
1,171
1,308
Austria
30
35
28
30
1,855
1,876
1,709
1,705
300
300
270
270
384
384
342
342
380
381
354
354
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Table 2
USSR: Estimated Trade in Crude Oil and Oil Products (continued)
Other
136
125
117
135
Yugoslavia
105
93
88
110
North Korea
20
20
17
15
Afghanistan
7
8
9
NA
Non-Communist
313
309
320
370
Finland d
194
198
228
253
India
72
88
84
116
30
12
1
Gross imports
78
98
197
255
Hard currency
78
58
165
200
Iraq
26
2
37
Net exports
3,195
3,126
3,192
3,335
Hard currency
891
856
1,078
1,180
Soft currency
2,304
2,270
2,114
2,155
a Preliminary.
b Excluding Australia, Canada, Luxembourg, and New Zealand,
which received no Soviet oil; Finland; and, in 1980-82, Turkey.
c Morocco was classified as a hard currency customer in 1982-83
but as a soft currency customer in 1980-81.
d Finland and Turkey are OECD countries.
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at concessionary prices beginning in 1982 and proba-
bly continuing through 1985. We estimate that annu-
al deliveries to Czechoslovakia, East Germany, and
Bulgaria were cut by about 10 percent, or a total of
nearly 100,000 b/d. Deliveries to Hungary were
reduced about 7 percent, or 13,000 b/d. Shipments to
Poland in 1982 were 19,000 b/d less than in the
previous year, but the reduction probably was due to
below-capacity operation of Poland's industrial plants
rather than to a deliberate cut by the Soviets. Because
of these reductions, the USSR had an additional
131,000 b/d available for export to hard currency
customers in 1982. At an average price of about $32
per barrel, this oil added $1.5 billion to Soviet hard
currency earnings.
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Table 3
USSR: Share of Oil Imports by
Hard Currency OECD Countries a
3.5
2.4
The other major source of the increase in Soviet oil
exports in 1982 was Libyan oil accepted by the
Soviets as debt repayment. The Soviets arranged for
Libya to supply additional crude oil at the rate of
about 190,000 b/d from June 1982 through March
1983 in lieu of cash payments for Soviet arms deliver-
ies. Before this arrangement, the Soviets had been
lifting about 40,000 b/d of Libyan crude oil annually
for reexport to other countries. The amount rose to
some 140,000 b/d in 1982. Although some of this oil
was delivered to soft currency countries such as
Yugoslavia and Finland (for resale), part of it made its
way to Western markets
Apparent domestic consumption (production minus
net exports) of oil in the Soviet Union in 1982 was
about the same as in 1981. Some oil might have been
shifted from domestic consumption for export in 1982.
Oil supplies to some enterprises were cut in 1982, but
this may have been caused by regional distribution
problems rather than by a conscious effort to redirect
oil for export. A drawdown of stocks may have
provided additional oil for export
1983. The pressure to earn hard currency from oil
exports continued in 1983, though it was not as
intense as in 1982. Moscow had improved its balance
of payments in 1982 and was even able to reduce its
net debt by more than $2 billion. Also, a better
harvest in 1982 reduced requirements for imported
grain. Nevertheless, the USSR needed to increase oil
exports for hard currency to compensate for lower oil
prices and to maintain imports at about the same level
as in 1982 without increasing its net indebtedness. F-
The USSR increased oil exports to hard currency
customers in 1983 to an estimated 1.38 million b/d,
up 11 percent from 1982. Deliveries to OECD coun-
tries rose 11.7 percent to 1.31 million b/d. Hard
currency earnings from sales to OECD customers
amounted to about $14.2 billion. Assuming that the
volume of oil exported to non-OECD hard currency
customers was the same as in 1982, total hard
currency revenues from oil sales probably were about
$15 billion.
In early 1983 the Soviets were faced with an unstable
oil market and falling prices. In February, the North
Sea oil producers, Nigeria, and the USSR lowered
their prices (see table 4). Following the lead of these
producers, OPEC-in an unprecedented move-
slashed the price of its benchmark grade of Saudi
Arabian light crude from $34 to $29 per barrel in
March
Moscow's numerous appeals in February and March
1983 to OPEC to close ranks and halt plummeting oil
prices reflected its concern over the threat to the 25X1
Soviet hard currency position of a possible price war
within OPEC. In March the price of Soviet crude had
fallen to $28 per barrel, a $4 drop from its 1982
average price. Because each dollar of decline in the oil
price costs Moscow nearly $455 million in revenues on
an annual basis (assuming 1.24 million b/d of hard
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Table 4
USSR: Crude Oil Sales
Prices in 1983
1 January
31.50
1 February
29.25
1 March
28.00
1 May
28.50
1 July
29.00
15 August
29.50
15 November
29.00
1 December
28.50
a Prices are originally set in long-term contracts, generally of one
year, but frequently are adjusted to meet current market condi-
tions. The prices shown exclude sales in the spot market.
currency oil exports), the Soviets faced a nearly $2
billion loss in foreign exchange earnings if their price
remained at $28 per barrel and the volume remained
the same as in 1982.
OPEC, in turn, was concerned that aggressive Soviet
pricing and increased exports to the West were under-
mining the cartel's ability to stabilize prices. The
Soviet crude oil price of $28 per barrel delivered to
Western Europe was described by a Western oil
journal as being about $1.50 per barrel below the new
$29 OPEC price for benchmark crude oil after adjust-
ment for freight and quality differentials. Although
destabilization of OPEC prices would not, as noted
above, be in the Soviets' interest, Moscow was proba-
bly cutting its price to maintain hard currency earn-
ings from oil in a soft world market
To solicit cooperation from major non-OPEC produc-
ers in preventing further deterioration of the world oil
market, Algerian Oil Minister Nabi, representing
members of OPEC, met with Soviet officials in June
1983 to consult on oil prices. This was the first formal
contact between OPEC and the USSR. The Soviets
informed Nabi that they would not increase exports to
the West and shortly thereafter announced an in-
crease in their crude oil price to $29
Responding to a sagging oil market and the need to
maintain hard currency earnings, Moscow again low-
ered its oil price twice late in the year (table 4). These
cuts were small; they allowed Moscow to test the
market, and its restraint implied concern for the
overall pricing structure of crude oil. The Soviets may
have been interested in expanding their share of the
market early in the winter rather than later, when
world prices might have softened
For 1983 as a whole, the price of Soviet crude oil
averaged $29 per barrel, $3 below the 1982 average.
Taking into account transportation costs, Soviet oil
sold below the OPEC benchmark price throughout
the year. Prices for oil products in Western Europe
also declined. Average product prices fell 10 percent
from $34.60 per barrel in 1982 to $31.10
The Soviets also boosted their hard currency oil
exports in 1983 by reexporting oil supplied by other
countries. OPEC oil exports to the USSR were even
larger than in 1982. We estimate that the USSR
reexported about 233,000 b/d of Libyan, Iranian,
Iraqi, Saudi Arabian, and Syrian oil in 1983, some
55,000 b/d more than during 1982. About three-
fourths of the reexported oil went to hard currency
countries, and the reexport of oil to soft currency
countries probably freed additional Soviet oil for
export to hard currency countries. Thus, liftings of
reexported oil constituted about one-sixth of total
Soviet oil exports to hard currency countries. As in
1982 the OPEC shipments were in lieu of payments
for earlier deliveries of Soviet arms and equipment
that some of the oil-producing countries would other-
wise have found difficult to make
Libyan deliveries averaged about 121,000 b/d during
In June, however, the Soviets obtained a
continuation of the barter, although at a lower rate
(75,000 b/d) than in 1982.
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Moscow may have pressed the Libyans for the exten-
sion because it needed additional oil to meet con-
tracts. Several clients complained in May and June
1983 that the USSR was not fulfilling its oil delivery
contracts. At the same time, a request by Brazil for
increased oil shipments in July was refused because
the Soviets claimed that they were sold outF-
In addition to Libyan oil, we estimate that the USSR
received about 37,000 b/d of Iraqi crude oil in 1983
(up from a negligible amount in 1982) and about
40,000 b/d of Iranian crude, more than twice the
quantity lifted during 1982. The Soviets also reexport-
ed some Saudi Arabian oil for the first time in 1983.
In May the USSR and Iraq agreed to cover Iraqi
military debts to the Soviet Union through 1983 with
deliveries of $1.2 billion worth of Saudi Arabian oil.
These deliveries reflect Saudi Arabia's support for
Baghdad in the Iran-Iraq war. If the Soviets had
received the entire amount in 1983, shipments would
have averaged 120,000 b/d, but preliminary Soviet
trade data indicate that supplies were averaging only
about 20,000 b/d.
We believe that diversions of oil from Eastern Europe
did not substantially contribute to the increase in
Soviet oil exports for hard currency in 1983. We
estimate that oil was exported to Eastern Europe at or
only slightly below the 1982 rate. Further reductions
as large as those of 1982 probably would have resulted
in a public outcry of the sort that followed the
cutbacks in 1982 in East Germany.
Soviet oil production in 1983 increased by only about
70,000 b/d, less than 1 percent above the 1982 level.
Some domestic supplies may have been shifted from
industrial uses to export in early 1983, when mild
weather reduced oil demand. It would have been
difficult, however, for the Soviets to shift much oil
from the domestic economy, in view of the 3.5-percent
increase in industrial output in 1983.1
The situation in the Soviet electric power industry in
1983 makes it unlikely much oil was saved through
substitution of other fuels. With coal production in
' Because the increase in production and imports does not account
for all of the increase in exports, a drawdown of stocks may have
Selling Oil for Soft Currency
The Soviet Union trades with soft currency countries
through bilateral clearing accounts. Under a type of
barter system, sales of individual commodities are
stipulated in agreements planned to balance overall
trade. Soft currency countries except Finland and
Romania generally pay for Soviet oil in commodities
that are not readily salable for hard currency. Oil is
bartered to CEMA countries under a formula that
sets the price for each year's transactions at the
average world market price of the previous five years.
1983 down 2 million metric tons from 1982, some
power plants that normally use coal probably were
burning oil, the most common backup fuel. Further-
more, the above-plan increase in electric power in
1983 came from thermal plants, some of which are
fired by oil
Soft Currency Sales
Communist Countries. In 1982, because the average
OPEC price had risen to more than two and a half
times its 1978 level, the CEMA five-year average
price was well below the world market price (see table
5).5 Thus, the CEMA countries received Soviet oil at
very attractive concessionary prices. In 1982 these
countries paid the USSR an average of $22 per barrel
for oil, only two-thirds of the world market price.
With the recent decline in world oil prices, the five-
year average has come closer to the current world
market price. As a result, the implicit subsidy in the
CEMA price dropped from an annual average of $12
billion in 1980-81 to about $7 billion in 1982. If the
five-year average price formula continues and there
are no major price changes, Eastern Europe will be
paying above world prices for Soviet oil in 1984. F_
' The German Institute for Economic Research claims that in 1980
CEMA began calculating prices on a three-year sliding scale, but
Soviet and East European trade data indicate that the five-year
moving average is still in use, and a Soviet Embassy official in
February 1984 stated that the three-year moving average is merely
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Table 5
USSR: Estimated Price of Oil
Sold to Eastern Europe a
Average World
Price
for Previous
Five Years
Implicit Price
Subsidy
1975
11.05
5.69
5.36
1976
11.77
6.08
5.69
1977
13.00
7.98
5.02
1978
13.00
10.07
2.93
1979
18.54
11.98
6.56
1980
31.67
13.47
18.20
1981
35.01
17.60
17.41
1982
33.75
22.24
11.51
1983
29.49
26.39
3.10
a Prices based on 90-10 mix of crude oil and oil products delivered
to Eastern Europe.
of oil imported in 1982 by offering them hard curren-
cy for the amount saved. According to official CEMA
data, however, total Cuban imports of oil (virtually all
of which are from the USSR) increased 6 percent in
1982.6 Some of this oil is shipped from Venezuela on
Soviet account under a quadrilateral swap agreement.
In return, Moscow supplies oil to one of Venezuela's
West European customers. This agreement has been
proceeding shipment by shipment since the 1980
expiration of the formal protocol. One shipment was
observed in early 1982. After a lapse in late 1982,
shipments under this arrangement were resumed in
The USSR provides oil to Yugoslavia under bilateral
trade agreements but at world prices. In 1983 the
deliveries were increased by about 25 percent, ac-
counting for two-fifths of Yugoslavia's oil consump-
tion. The increase may have reflected Moscow's con-
cern for balancing increased Western assistance to
Belgrade.
Although payment for most of the Soviet oil exported
to Eastern Europe does not require hard currency, oil
exported to Romania is paid for in hard currency or
"hard goods"-commodities that can be sold in West-
ern markets. Part of the oil delivered to Hungary also
is reimbursed with "hard goods," and some has been
paid for in hard currency.
The availability of Soviet oil at concessionary prices
has made Eastern Europe heavily dependent on the
USSR for supplies. Excluding Romania, the region
depends on Soviet deliveries for 90 percent of its crude
oil imports and 85 percent of its total oil require-
ments. After years of supplying Eastern Europe with
rising amounts of oil (which peaked at 1.6 million b/d
in 1980-81), the USSR set back its client states'
expectations of continued support by announcing cut-
backs in 1982 deliveries
Cuba, the largest non-European Communist importer
of Soviet oil, has received annual deliveries of about
220,000 b/d in recent years. Oil products account for
more than 40 percent of these imports. The Soviets
tried to get Cuba to hold constant or reduce the level
Non-Communist Countries. Soviet exports of oil to
non-Communist soft currency customers are close to
or at world prices. The most important customers are
Finland and India
In 1982 the Soviets supplied nearly 230,000 b/d of oil
and oil products to Finland, four-fifths of Finnish oil
consumption. To reduce the Finnish bilateral trade
surplus, the Soviets agreed to supply an additional
20,000 b/d of Libyan crude oil for resale in late 1982
and increased this to 26,000 b/d in 1983. By correct-
ing the trade imbalance, the Soviets avoided risking a
cutback in imports of high-quality Finnish products.
The Soviets have a long-term agreement to supply
India with 95,000 b/d during. 1981-85 and have
agreed to supply an additional 20,000 b/d annually in
1983 and 1984 to reduce the Indian bilateral trade
6 Cuban data indicate that in 1982 Havana received more than
$200 million in hard currency from Moscow for oil supplied but not
consumed domestically. This oil was reexported. I
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surplus. The Soviets have historically supplied India
with crude oil from Iran and Iraq. In 1983 some of the
oil for India came from Saudi Arabia under the Iraqi
debt payment arrangement with the Soviets
Outlook
In view of the slow progress in retarding domestic
demand for oil and the likelihood of a downturn in oil
production later in the decade, some decline in Soviet
oil exports seems likely. The Soviets probably will
strive to sustain their hard currency oil exports but
will find it increasingly difficult to maintain the
present level because total demand probably will
outstrip domestic oil supply.'
Moscow will have to make some difficult choices in
the allocation of oil among hard currency countries,
Eastern Europe, other soft currency customers, and
domestic consumption. Although further reductions in
oil deliveries to Eastern Europe could free oil for hard
currency markets, the Soviets would have to weigh the
economic impact on these countries against hard
currency gains. Further cutbacks in oil supplies could
impair Eastern Europe's emerging economic recovery.
The East Europeans have already cut hard currency
oil imports for domestic use, and their inability to
earn larger amounts of hard currency will limit
purchases on the world market despite reduced prices.
The Soviets probably are unwilling to risk the eco-
nomic and political repercussions from further abrupt,
sizable cuts, but they might consider small cuts spread
that exports of certain types of fuel and raw material
to CEMA members will be limited as part of an
overall energy conservation program.
The Soviets could attempt to maintain hard currency
earnings by reexports of OPEC oil. As long as the oil
market remains soft, bartered OPEC crude oil proba-
bly will be available for resale. The barter enables the
debtor countries to meet their financial obligations
through deliveries of oil that they would otherwise
find difficult to sell. Bartering the oil to the Soviets
guarantees the OPEC countries a market at a con-
tracted price during a period of declining world
demand. Having established customers, the USSR
will want to maintain these additional supplies both to
earn hard currency and to protect its reputation as a
reliable supplier. The Soviets also can use the oil to
help balance bilateral clearing accounts.
In the long term, however, as world oil demand
strengthens, Moscow cannot rely on OPEC oil be-
cause the producing countries, by eliminating middle-
man fees, could obtain better trade terms by selling
their oil in world markets and paying the Soviets cash
to discharge debts resulting from earlier arms pur-
chases. Also the OPEC countries would not risk being
undercut in the market by Soviet sales of OPEC oil,
as noted earlier.
Any substantial diversion of oil from domestic use
would affect the performance of the Soviet economy.
Domestic demand for oil will continue to grow for
some time, and the substitution of alternative fuels
will be slow. The Soviets have not given energy
conservation the priority needed to hold down domes-
tic demand for fuels. Agriculture and heavy transport
are not set up to use other fuels, and the need to
develop an extensive gas distribution network will
limit the pace of substituting natural gas for oil in
industrial and residential uses. The investment re-
quired to convert some industries to alternative fuels
also will limit the rate of conversion.
Cutbacks in deliveries to soft currency customers
outside Eastern Europe would provide additional oil
for the USSR to divert to the hard currency market.
As with the East European countries, the benefits
from cutbacks to other Communist clients would have
to be balanced against potential economic and politi-
cal costs. Soviet pressure on Cuba to reduce oil
imports will continue, but any substantial reduction in
Soviet oil deliveries to Cuba is unlikely. Havana is
facing its worst economic outlook in years, with
revenues from sugar sales to the West plunging and
hard currency availability seriously constrained. We
believe deliveries to North Korea are already lower
' As noted earlier, Moscow has already had to rely on reexports to
help meet its domestic and foreign demand for oil.
25X1
25X1
25X1
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USSR: Oil Exports to OECD
Hard Currency Countries
1 II III IV I 11 III IV I 11 111 IV 1 11 III IV 1 II 111 IV 1 11 111 IV
1978 1979 1980 1981 1982 1983
than the 20,000 b/d stipulated in the 1981-85 bilater-
al commercial protocol. Other Communist less devel-
oped countries (LDCs) receiving subsidized oil, such
as Vietnam, also have severe economic problems, and
the Soviets probably see little net benefit in cutting
these already small deliveries.
In considering the possible reduction of oil deliveries
to soft currency customers such as Finland, India, and
the non-Communist LDCs, Moscow would have to
weigh the effect on its foreign policy goals. Finland
and India would be especially vulnerable to reduced
sales, because they rely on the USSR for a large share
of their oil imports. Although they could become
targets for marginal cuts, sizable reductions would
exacerbate Moscow's balance-of-trade surplus with
these countries and, in the case of Finland, would
restrict Soviet imports of high-quality goods. Never-
theless, cutbacks to these countries would be easier to
handle than the problems that would arise from
reductions to Eastern Europe.
If the Soviets could increase the share of oil products
in total oil deliveries to hard currency customers, they
could increase revenues without increasing the volume
of oil and oil products sold.' The share of oil products
in total Soviet oil deliveries to OECD countries for
hard currency has increased from 42 percent in 1978
to 48 percent in 1983 (see figure 1). Gasoline and
Heavy fuel oil is the principal product that the Soviets have
available for sale, but demand in the West for this product has
declined. The Soviet position in the product market was further
worsened in the summer of 1983 by the sale of fuel oil that was
below specifications, seriously damaging buyers' confidence.
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Secret
diesel fuel are in demand in Western Europe, but the
Soviets do not have enough secondary refining capaci-
ty, especially cracking equipment, to provide large
quantities of these products. Nonetheless, the higher
world market price for oil products compared with
crude oil, together with the growing Soviet domestic
demand for light and middle products, could provide
the impetus for increased investment in secondary
refining equipment in the long run.'
' With stable or declining oil production, the USSR would need
more secondary refining equipment to obtain maximum output of
light and middle products from each barrel of oil.
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