INTELLIGENCE MEMORANDUM SOVIET-EGYPTIAN FINANCIAL RELATIONS

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP85T00875R001600030105-2
• Release Decision: RIPPUB
• Original Classification: S
• Document Page Count: 18
• Document Creation Date: December 22, 2016
• Document Release Date: October 27, 2011
• Sequence Number: 105
• Publication Date: August 1, 1970
• Content Type: IM

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DIRECTORATE W
INTELLIGENCE
pp 1~T DESRON
ER IM 70-105
August 1970
Copy No.?
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Intelligence. Memorandum
Soviet-Egyptian. Financial Relations
I
FILE COP
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WARNING
This document contains information affecting the national
defense of the United States, within the meaning of Title
18, sections 793 and 794, of the US Code, as amended.
Its transmission or revelation of its contents to or re-
ceipt by an unauthorized person is prohibited by law,
GROUP 1
Excluded Itam automalIC
downgrodlnp and
dedauifaallan
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25X1
CENTRAL INTELLIGENCE AGENCY
Directorate of Intelligence
August 1970
INTELLIGENCE MEMORANDUM
Soviet-Egyptian Financial Relations
:Introduction
The USSR in recent months has provided. Egypt
with new types of sophisticated military equipment
and has increased both the number and the responsi-
bilities of its military personnel in Egypt.' By.
comparison, the current level of'Soviet support for
the.Egyptian economy is small indeed. This memo-
randum examines the nature of the financial flows
between the USSR and Egypt in the past few years,
the importance of these flows for the Egyptian
economy, and prospects for the near future.
Nature of Soviet-Egyptian Economic Relations
1. When Farouk was in power, occasional barter
trade provided the only economic contact between
the USSR and Egypt. In 1953 the new revolutionary
government signed a trade and payments agreement
and, after a brief contraction, trade expanded
rapidly. The first economic and military aid
agreements, which came in 1957,* vastly expanded
the scope of Soviet activities in Egypt. During
the following decade, $1,010 million in economic
Czechoslovakia was the supplier for military
agreements signed, in 1955 and 1956.
Note: This memorandum was produced solely by CIA.
It was prepared by the Office of Economic Researoh
and was coordinated with t1-;e Office' of Current In-
teZZigence
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aid credits were extended, and now military aid
agreements were'concluded in every year but two
(see Table; 1) .
Table 1
Egyptian-Soviet Aid Agreementa
Million Current US $
Amount of Aid
Value
Grants or
Disc
t
oun
s
Jul 1957
8.6
8.6
.Jan.1958
175.0
175
0
Dec
1958
100.0
.
100.0
Feb
1960
225.0
225.0
Mai
1964
0.3
Sep. 1964
324.4
324.4
110.0
110.0
66.7
66.7
Total
1,010.0
1,009.7 0.3
Militar
1957
155
50
105
1958
60
20
40
1960
150
50
100
1961
270
90
180
1962
150
50
3.00
1963
100
35
65
1964
250
125
125
1965
25
15
10
1967
15; j
75
75
1968
75 a/
40
35
1969
50 a/
25
25
Total
1,435
575
860
a. Proration of these amounts between grant
and oredit aesietanoe is based on analogous'
arrangements and may distort the! magnitude
of repayment obtiga tione.
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2. Most Soviet economic aid to Egypt has been
tied to specific aid projects, including the. Aswan
High Dam and'its hydroelectric power producing and
transmitting facilities,, the Alexandria shipyard,
expansion of the Helwan steel complex, and many
smaller industrial installations. The terms of
Soviet economic aid have been typical of the Soviet
program in the less developed world. Interest. on
project aid was 2/% annually and a 12-year amorti-
zation period was allowed for, with repayment in
commodities. Two major exceptions were the $177
million in cred.;.ts extended for land reclamation
and capital goods. These credits were to be repaid
in five years.
3. Military aid consisted of a combination of
price discounts and liberal financing. Interest
rates were at least as low for military as for
economic credits, but amortization was originally
scheduled over shorter periods (3-5 years for. early
agreements). Because of the much more rapid im-
plementation of military aid agreements and the
shorter amortization period, substantial repayments
of military aid began as early as 1959, while re-
payments of economic aid became significant only
in 1964.
4. Bilateral commercial trade has been eco-
nomically far more advantageous to Egypt than to
the USSR. From the Soviet point of view this
trade represents an accommodation of Egypt's needs
for mainly political reasons. From the Egyptian
point of view the trade provides major economic
benefits. Egyptian exports to the USSR consist
primarily of relatively low grade cotton not
readily marketable in the West (see Table 2). A
dependable Soviet and East European market for
cotton provides a useful buffer to fluctuations in
world markets and shipment of surplus cotton to
the USSR and East European countries is a major
stabilizing influence on the world prices for
Egyptian cotton. The major Soviet commercial ex-
port has been petroleum, which was in critically
short supply in Egypt until 1967 when the E. Morgan
fields went into operation. The USSR has also
agreed to supply other key materials, such as
wheat and solid fuels. Moreover, in addition to
its official aid program, the USSR provided Egypt
with large credits on bilateral commercial account.
The 1953 payments agreement specified settlement
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Valae in 1I It c Qs $
1953
1954
1955
1956
1957
1958
1959
1960
1961
1962
1963
1964
1965
1966
1967
1968
Egyptian
G.)
imports of
Of which:
POL
(
15.54
8.82
11.55
40,32
86.31
92.09
92.40
73.29
114.14
108.47
141.96
162.54
219.14
208.64
_
295.37
207.90
co
percent)
Egyptian
N.A.
63
71
49
32
39
34
27
19
16
10
7
7
8
m
t (
exports b/
Of which:
Cotton
12.00
8.90
15.30
50.30
110.90
107.10
75.06
101.79
96.20
73.00
123.60
123.60
163.40
150.00
145.10
170.70
H
(percent)
99
99
79
87
91
97
98
99
98
87
73
58
68
63
46
39
Balance
-3.54
+0.08
+3.75
+9.98
+24.59
+15.01
-17.34
+28.50
-17.94
-35.47
-18.36
-30.94
-55.74
-58.64
-150.27
-37.20
a. All non-military goods, including capital goods for development projects.
b. All .sports, including those for interest and amortisation payments.
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in hard currency of debts over an agreed limit, but
a'subsequent 1963 agreement was deliberately vague
on this point, and at least after 1963 the USSR
allowed the Egyptians to accumulate large bilateral
account deficits.
5. Soviet assistance to Egypt has included
essential services as well as critical goods. in
addition to,imports of, capital goods, long term
credits have paid the salaries of Soviet economic
technicians working in Egypt. The military aid
program has involved both professional assistance
and training operations. Some of the Soviet mili-
tary personnel have been provided free of charge,
but most such services are believed to be charged
to Egypt's bilateral clearing account. Transporta-
tion of goods moving by sea between the USSR and
Egypt has been covered since 1958 by a separate
maritime agreement, which specifies that shipments
be assigned equal:iy to the Soviet and Egyptian
merchant fleets. Because of the limited size and
erratic scheduling of the Egyptian merchant marine,
however, far more than half. of all goods have been
transported in Soviet owned or leased bottoms and
charged, presumably, to the bilateral clearing
account.
The Soviet-Egyptian Balance of Payments
6. The main elements in Egypt's balance of
payments with the USSR since 1962 are shown in
Table 3.* Since tt.e mid-1950s Egypt has imported
large amounts of military equipment from the USSR.
Indeed, in some years military deliveries exceeded
Egyptian imports of civilian goods from the USSR.
The military shipments have fluctuated greatly from
one year to the next, however, peaking in 1961 and
1967, with considerable declines in the interim and
since 1967. Civilian imports grew steadily and
rapidly between 1960 and 1967. Egypt ran large
deficits on trade accounts every year during 1961-68
even if military deliveries are excluded. On serv-
ices accounts, interest payments and payments to
cover the repatriated portion of the salary of Soviet
technicians in Egypt and the expenses of Egyptian
student trainees in the.USSR have considerably ex-
ceeded Soviet payments for use of the Suez Canal.
On capital account, the major elements are Soviet
* The derivation of Table 3 is explained in the
Appendix.
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Main Ingredients of Egypt's Malance of Payments with the USSR
1962
1963
1964
1965
1966
1967
1968
1969
Current itess (net) -191.55
-195.90
-124.32
-141.13
-164.45
-339.37
-172.01
-122.94
(Excluding military deliveries) (-41.55)
(-45.90)
(-47.32)
(-61.13)
(-64.45)
(-169.37)
(-72.01)
(-32.94)
Total goods -185.47
-168.36
-113.94
-135.74
-158.64
-320.27
-137.20
-84.47
Non-military goods -35.47
-18.36
-38.94
-55.74
-58.64
-150.27
-37.20
+5.53
Exports (f.o.b.) +73.00
+123.60
+123.60
+163.40
+150.00
+145.10
+170.70
Imports (c.i.f.) -108.47
-141.96
-162.54
-219.14
-208.64
-295.37
-207.90
Military goods -150.00
-150.00
-75.00
-80.00
-100.00
-170.00
-100.00
-90.00-
Services -6.08
-27.54
-10.38
-5.39
-5.81
-19.10
-34.81
-38.47
Interest -3.58
-5.14
-7.28
-8.19
-9.81
-12.10
-15.81
-18.4
Suez Canal use +5.10
+4.30
+6.90
+9.90
+11.00
+2.00
+1.00
Technical assistance -9.40
-24.10
-12.00
?-9.90
-10.00
-12.10
-19.00
at
-20.O) at
Other services (net) +1.80
-2.60
+2.00
+2.80
+3.00
+3.00
-1.00
-
Long term capital +159.56
+190.49
+85.10
+102.87
+145.76
+248.00
+163.95
+107.x4
Economic development loans (net) +52.56
+83.49
+53.10
+44.87
+67.76
+78.00
+63.95
+17.54
Drawings +55.00
+87.00
+64.00
+57.60
+82.00
+90.10
+84.50
+46.00
Repayments -2,44
-3.51
-10.90
-12.73
-14.24
-12.10
-20.55
-28-.46
Military grants b/ +106.00
+100.00
+50.00
+36.00
+45.00
+85.00
+50.00
+45.00
Military loans (net) b/ +7.00
+7.00
-18.00
+22.00
+33.00
+85.00
+50.00
+4=.00
Drawings +50.00
+50.00
+25.00
+44.00
+55.00
+85.00
+50.00
+tf5.00
Repayments -43.00
-43.00
-43.00
-22.00
-22.00
--
--
:--
Short term financing c/
Of
which:
f
Bilateral trade credits +34.99
-8.29
+42.50
+46.82
+24.89
+93.37
-2.49
i
0
a. Mostly military technicians.
b. some portion of the cost of rearming Egypt after the June 1967 war is considered a
loan. n Lieu o more precise information the Zoan/grant proportion is presumed analogous to Soviet terms eZ:=avhere.
C. i:esidual which includes errors and omissions. Short term financing covers in partic-:Zar the bilateral trade gap,
Suez Canal use, part of technical assistance, and "other services". Of the total amount., only a sum equivalent to Suez
Canal payments is believed to have been settled in hard currency.
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development loans and military loans and grants.
in some years Egypt has also received a substantial
capital inflow by auuumulating deficits on clearing
account.
7. For almost a decade Egypt has run.deficits
on its current account transactions with the USSR.
These deficita have, averaged. about $175 million a
year and they add up to more than $1 billion over
the 9-year period., The bulk of these deficits
are attrib?table, to Soviet deliveries of military
goods. If''these deliveries are excluded but repay-
ments of military loans are included (giving a
balance on . transactions. in productive'goods and
services), the deficits fall to well below $100 mil-
lion in every year except 1967.
8. TYa net.Egyptian deficits, excluding mili-
tary deliveries, increased markedly in the mid-
1960s, but have since declined. The increase re-
flected primarily a stepup of Soviet deliveries on
both commercial and aid accounts to offseta re-
stricted flow of imports from the West, which was
partly the result of a worsening hard currency
balance. The record deficit in 1967 was primarily
the result of emergency shipments of Soviet grain
after PL 480 assistance from the United States
ceased.. Since 1967, however, Egyptian exports to
the USSR have grown while civilian imports have
returned to the, pre-1967 level. Consequently the
deficit shrank greatly in 1968 and almost dis-
appeared in 1969.
9. The overall balance-of-payments trends re-
flect the following elements:
a. A. rapid buildup in Soviet deliv-
eries of goods under.economic aid.agree-
raents until 1963, followed by a ,decline
in 1964-65, then by a leveling out at a
high level of about $75 million in.1966-
68, when the bulk of the equipment for
the Aswan High Dam was delivered. Since
1968, aid deliveries have declined be-
cause major deliveries for the Aswan.High
Dam project have been completed and the
USSR has extended no new investment credit.
since 1964.
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b. A marked increase in repayments
of economic credits in 1964-67 and even
larger increases in 1968-69.
c.. The provision of substantial
credits to Egypt on clearing account
every year during 1963-67, with the
credit reaching $93 million in 1967
alone, There was a shift, however,
to'a, clearing accounts surplus in 1968.
d. A- rapid buildup' f military re-
payments until the mid-1960s followed
by a decline in 196.5-66, reflecting'?the
stretching out of scheduled repayments.
Since 1966 there has been'a moratorium
on military credit repayments.
10. Even though a sizable part of Soviet mili-
tary aid to Egypt. has been in the form of grants
and Egypt made' substantial'repayments of military
'credits until 1967', the net Egyptian 'indebtedness
to the USSR exceeded $1 billion at the end of 1969
(see Table 4). Only about one-sixth of the economic
aid 'drawings of over $600 m-llion had been repaid
and repayments represented about'40% of drawi?ngs,on
military credits (and only ''about half of total mili-
tary goods has been a grant).' Accumulated commer-
cial debts totaled over $150 million.
Economic Impact of Soviet Aid to Egypt
11. Although its economic and military aid to
Egypt has been substantial, the USSR clearly has
not taken upon itself the responsibility for sup-
porting that country's economic growth. Before
1961, Soviet aid was very small. During the 1961-65
plan period the USSR played a crucial role in the
planning and construction'of some key investment
projects, but financed a relatively small?part of
total investment. Soviet machinery and technical
services financed by credits represented. about 30%
of the imported goods used in Egyptian state invest-
ment and 81 of the total value of state investment.
Moreover, the USSR provided only about 15%'of the
total net capital inflow as repayments on Soviet
military debt mounted and Egypt borrowed heavily
from the West (see-Tables 5 and 6).
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Table 4
Estimated Accumulation of the Egyptian Debt to the USSR at
1953/57
1958
1959
1960
1961
1962
1963
1964
1965
1966
1967
1968
(Es 1969
timate)
Total
Estimated commercial
trade balance
+44.84
+16.49
-5.10
+35.10
-11.58
-34.99
+8.29
-42.50
-46.82
-24.89
-93.37
+2.49
0
-152.04
Economic aid drawings
-2.00
-13.60
-13.00
-30.00
-55.00
-87.00
-64.00
-56.60 b/
-81.00 b/
-90.10
-84.50
-46.00
-622.90
Military aid drawings
-16.00
-28.00
-10.00
-50.00
-58.00
-50.00
-50.00
-25.00
-44.00
-55.00
-85.00
-50.00
-45.00
-566.00
Debt accumulation
+28.84
-13.51
-28.70
-27.90
-99.58
-139.99
-128.71
-131.50
-147.42
-160.89
-268.47
-132.01
-91.00
-1,340.84
Economic repayments:..
+0.04
+1.72
+1.87
+2.44
+3.51
+10.90
+12.73
+14.24
+12.10
+20.55
+23.46
+108.56
Military repayments
+16.70
+16.70
+16.70
+43.00
+43.OG
+43.00
+22.00
+22.00
--
--
+223.10
Debt retirement
+16.74
+18-42
+18.57
+45.44
+46.51
+53.90
+34.73
+36.24
+12.10
+20.55
+28.46
+331.66
Balance
+28.84
-13.51
-11.96
-9.48
-81.01
-94.55
-82.20
-77.60
-112.69
-124.65
-256.37
-111.46
-62.54
-1,009.18
a Does not include interest.
b. . Excluding $2 million in grants.
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 Net inflow.of Soviet
capital c/
Million.US $
1967 aj 1968 ai-
159 -9
42 46 49 .61 64 169
a. Net capital flow from non-Soviet sources was ne atize-
b, Balance on current account. Financing during 1962-68 included about
X80 million in reserve drawdown,-
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Table 5
Long and Short-Term Capital-Flows
1962
1963
1964
1965
1966
Total net capital inflow
into Egypt b/
344
293
281
242
170
c. Balance on current account, excluding military deliveries.
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Post-Plan
Plan Period
Pre-War Period
Post-War Period
1961
1962
1963
1964
1965
Total
1966
1967
Total
1968
1969
Total
Egyptian investment
518.9
577.5
689.1
856.5
837.9
3,479.9
690.4
623.8
1,314.2
476.0
685.0
1,161.0
Ebtimated import content
of Egyptian investment
129.7
144.4
171.9
214.1
209.4
869.5
172.6
155.9
328.5
119.0
171.0
2,0.0
Drawings on Soviet
economic aid
21.5
42.5
71.0
75.5
60.8
271.3
69.8
86.0
155.8
87.0
65.0
152.0
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12. During FY 1966 and 1967, Soviet aid became
crucial to the Egyptian economy. The net flow of
Soviet aid increased sharply at a time when recur-
rent balance-of-payments deficits had greatly less-
ened Egypt's ability to obtain a net flow of funds
from the West, and had forced substantial cuts in
imports from the West and in domestic investment
expenditures requirir~i such imports. In 1967,
drawings on Soviet development credits financed
more than one-half of capital goods imports and
the net capital inflow from the USSR rose while
Egypt had a deficit on capital account with the
rest of the world. Because of reduced inver,,tment
expenditures, sharply reduced imports of industrial
materials, and a series of poor crop years, the
economy stagnated during 1966-67. If work on Soviet
projects had not accelerated during these years,
there would almost certainly have been a decline
in GNP.
13. Since 1967, the net capital inflow from the
USSR to Egypt, excluding military deliveries and
technicians, has fallen to near zero. The commer-
cial account has become nearly balanced and net
development aid has fallen sharply as deliveries
declined while payments increased. Military ship-
ments have been large, though much smaller than in
1967.
Outlook
14. Unless the USSR allows Egypt once again to
run large deficits on commercial account, a net
outflow of non-military goods and services from
Egypt to the USSR is likely for at least 3 or
4 years. Expansion of the Helwan steel complex
and construction of aluminum and ferroalloy plants
to consume Aswan Dam electricity are expected to
absorb by 1975 or 1976 most of the $275 million of
credits still to be drawn for these projects.
Credit.drawdown will probably be at an annual rate
of about $50 million -- a rate likely to be more
than offset by scheduled debt amortization and
interest payments, which at the very least will
level off at about the 1970 level of about $50 mil-
lion. A commercial trade surplus seems more likely
than resumption of sizable Egyptian deficits. The
USSR will probably continue to purchase part of
Egypt's share of El Morgan crude oil for shipment
to Cuba,and possibly elsewhere, and to buy excess
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output of Egyptian manufacturing industries. Egypt
probably will obtain substantial raw development
credits some time in tho next few years, but, be-
cause of the inevitable lag between extension and
implementation,,actual deliveries under such credits
would not become important for at least 2'or 3 years.
15. The extent and duration of the anticipated
outflow from Egypt will depend heavily on Soviet
decisions on repayment of military debt. If repay-
ments are resumed in 1972, as the Egyptians recently
announced in Moscow, the net outflow from Egypt
could increase by some $80 million in that year.
16. Despite the reduced flow of aid, the USSR
probably will maintain and even increase its man-
agerial role in Egyptian economic affairs. Manage-
ment of economic enterprises on a significant scale
dates back to 1967 when Soviet technicians replaced
Koppers Company personnel at the Helwan steel mill.
The USSR was partly successful in raising output,
which had been only about one-third of rated ca-
pacity in 1966. Subsequent;,y, Soviet personnel
assumed most managerial func~%ions in the Alexandria
shipyard.
17. Whatever the eventual Soviet economic role
may be, Egypt in the next few years will remain
largely dependent on its own resources for economic
development. Debt rollover agreements concluded
with Western creditors since 1966 in the main
restrict new credit extension to the amount of
repayment, and in a few cases (such as the United
States) a net outflow is stipulated. Egypt is
heavily in debt to the International Monetary Fund,
and, thus far, there has been only one small new
credit from the International Bank for Reconstruc-
tion and Development. With only about $400 million
in credits from other Communist countries remaining
to be drawn, oil company investment commitments now
appear to constitute the most important remaining
scarce of net foreign capital inflow into Egypt.
Fortunately for Egypt, its own foreign exchange
earnings are expanding. Rising agricultural and
petroleum output should continue to raise exports
and, with the Arab-Israeli conflict likely to
remain intense, subsidies from other Arab states
should continue. Thus the absence of any net
capital inflow from abroad should not prevent some
expansion of the Egyptian economy.
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Conclusions
18. The USSR during the 1960o provided Egypt
with considerable economic aid. Soviet aid was
especially important to Egypt in 1966 and 1967,
when Soviet deliveries rose shL.ply whilO credits
from Western sources were unavailable because of
Egyptian arrears on past debts. Since the 1967
war, however, deliveries of Soviet aid to Egypt
have fallen, economic aid repayments have increased,
and, excluding military deliveries and tochnicians,
the not flow of Soviet resources to Egypt has shrunk
to near zero.
19. Egypt has benefited considerably from its
economic relations with the USSR, but Soviet trade
with and aid to Egypt have fallen far short of
assuring an adequate rate of economic growth.
Egypt exports surplus cotton that the USSR does
not need and imports machinery and raw materials
that it needs very badly. The USSR has boon
willing to help build selected :.nvestment projects
to accommodate Egyptian trade needs and on rare
occasions has provided emergency shipments of key
commoiities. But, unlike its relations with the
client states of Eastern Europe, the USSR hogs not
taken on the responsibility of assuring Egypt's
economic success. In contrast to its growing
commitment to Egypt's defense, the USSR's economic
involvement in Egypt has been small.
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