USSR: IMPLICATIONS OF REDUCED OIL EXPORTS

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP85T01058R000507890001-7
• Release Decision: RIPPUB
• Original Classification: S
• Document Page Count: 14
• Document Creation Date: December 22, 2016
• Document Release Date: December 2, 2009
• Sequence Number: 1
• Publication Date: September 4, 1985
• Content Type: REPORT

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Central Intelligence Agency
4 September 1985
USSR: Implications of Reduced Oil Exoorts
Summary
Steadily declining oil production in the USSR apparently is
preventing the Soviets from sustaining oil exports to the West.
Soviet hard currency earnings from oil sales could decline
substantially in 1985--possibly by as much as $3-4 billion, or
over 10 percent of total hard currency export earnings. There
are few signs that deliveries to Eastern Europe will be cut this
year. If the Soviets continue to insulate Eastern Europe from
oil disruptions, such a policy would be in stark contrast with
the way the USSR handled a tight hard currency situation in 1981-
82, when it eventually diverted oil deliveries from Eastern
Europe to the West.
Until very recently, Moscow has shown little sign of serious
concern about its hard currency situation and we believe that the
USSR is in a good position financially to handle the sharp
decline in oil export earnings for the balance of 1985. If oil-
export earnings remain depressed, however, Moscow probably will
soon be forced to take more active measures, including possibly
substantially increased borrowing, import cutbacks, and selling
more gold.
For the longer term, a continued decline in oil output--and
reduced prospects for oil exports--will pose some difficult
choices for the leadership. Indeed, Gorbachev is currently
visiting the West Siberian oil and gas region probably to get a
hands-on feel for the problem before finalizing investment
choices for the coming five-year plan.
o There is little room for increased diversions of oil from
the domestic economy in order to boost exports to the West,
This memorandum was prepared by
the National Issues Group of the Office of Soviet Analysis.
Comments and queries may be addressed to Chief, National Issues
Group, SOVA
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a maneuver the Soviets have used in recent years to sustain
hard currency exports. Some slight savings from
conservation and substitution programs will probably be
realized, but the prospect for widespread savings is not
bright. Thus, any major cutbacks in domestic oil allocation
are likely to result in disruptive bottlenecks that would
threaten Gorbachev's modernization program and perhaps cost
him some political setback.
o Substantial cutbacks to Eastern Europe would result in
serious economic difficulty to the economies of the
region. Moscow will have to weigh carefully the attendant
risk of economic instability and increased political
tensions in the region that could stem from such cutbacks.
o The Soviets will need to continue importing sufficient
quantities of grain and feedstuffs for the livestock
program, and obtain the necessary industrial materials to
prevent production bottlenecks. Increased imports of
Western machinery also would seem necessary if Gorbachev's
industrial renovation targets are to be met.
Facing these conditions, Moscow probably has no alternative
but to accept some continuing decline in its oil exports to the
West, while trying to reap whatever savings it can from the
domestic economy and Eastern Europe. In our judgment, the
Soviets will continue to import essential agricultural and
industrial goods, and will have sufficient earnings to purchase
Western machinery and technology that have the highest
priority. But reduced hard currency availability could affect
other planned imports of Western equipment at a time when the
Soviet demand for such goods is likely to increase as a result of
Gorbachev's modernization program.
Production Problems Grow
Soviet domestic oil output fell last year--by about 100,000
barrels per day (b/d)--the first time since World War II. On the
basis of the oil industry's recent performance, including 14
months of declining output, we judge that production for 1985
will fall by over 300,000 b/d, or by about three percent.
Moscow is becoming increasingly concerned about its oil
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prospects. Major steps taken by the leadership to prevent
declines in oil output have been to no avail. Last year, Moscow
increased substantially investment in oil production, and earlier
this year it overhauled the management of the oil sector. In
early August, the Politburo decided on a 60 percent increase in
construction and assembly work for the West Siberian oil and gas
complex in the 1986-90 period. Such measures offer some prospect
of slowing the longer-term decline in output, but can do little
to improve oil output in the next year or two. The high level of
concern was most recently reflected in Gorbachev's trip to West
Siberia on 4 September, probably intended to give him a hands-on
feeling for the problem before finalizing investment choices for
the coming five-year plan.
Reduction in Oil Exports
The West. Soviet oil exports to the West declined by about
40 percent during the first quarter this year compared with the
same period in 1984. This was largely due to the harsh winter,
which hampered oil production and sharply increased domestic oil
consumption. Although few data are available, oil exports
apparently rebounded during the second quarter--but not enough to
offset the earlier declines
Traditionally, the Soviets have substantially accelerated
oil exports in the latter months of the year to offset low first-
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quarter deliveries. According to Western journals with excellent
contacts in the energy markets, however, oil traders expect the
USSR to cut contract deliveries of oil by between one-third and
one-half for an indefinite period beginning as early as
September.1 The Soviets have not made an official announcement,
but, according to the reporting, have given some customers verbal
notice several weeks in advance. Although similar press
"warnings" have not been completely borne out in the past, the
recent events are unusual.
o The Soviets generally provide only short notice on
reductions or cancellations in contract deliveries. This
time, they reportedly informed some customers several weeks
ago, which suggests that the export difficulties may be
major.
o When the USSR has claimed "force majeure"2 in the past, the
declarations were usually accompanied by statements that the
disruptions in deliveries will be temporary or made up
later. Such qualifications are notably absent this time
Some cutbacks are already taking place. Some customers of
Soviet oil reported in the Western press that gas-oil deliveries
to Western Europe were reduced in August. In addition, in the
spot market--where the USSR makes roughly half of its sales to
1 These cuts suggest that Moscow seriously underestimated the difficulty of
turning around the slide in oil production that was evident in late 1984. The
Soviet State Planning Committee (GOSPLAN) annually allocates approximate
quantities for export to the West. These allocations, in turn, provide the
basis for the spate of oil-export contract signings at the beginning of each
2 Force majeure is a contract clause that exempts a party from fulfilling a
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the West--prices for Soviet oil in recent weeks have risen faste
than the market as a whole, which probably reflects scarcities o
Soviet oil available there. Such movements in prices in the pas
have preceded a substantial decline in Soviet oil sales.
To our knowledge, the Soviets have not tried to boost oil
imports from the Middle East for reexport to the West. During
the first few months of the year, the reexports averaged about
300,000 b/d, about the same level as during all of last year.
The Soviets in recent years have been able to increase oil
delivieries from OPEC--particularly from Libya and Iraq in
payment for arms purchases--as a way of increasing its overall
exports to the West.
Eastern Europe. Less information is available on Soviet of
exports to Eastern Europe, but there are only indications of som
sporadic and small-scale cutbacks to Yugoslavia and Bulgaria. F
lower Soviet deliveries of oil and coal this year have forced
Sofia to increase its purchases of energy on the international
markets.
Nevertheless, in our judgment, Moscow is doing its best to
sustain oil deliveries to the region. The Soviets almost
certainly would not make any substantial cutbacks in midyear, as
this would be extremely disruptive on any centrally planned
economy. Rather, any reduction in such deliveries--as was the
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LJA I
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case in 1982--would be made at the beginning of the following
year, in concert with overall economic planning on an annual
basis. The absence of grumbling from the East Europeans suggest
that reductions in deliveries to the region are only marginal,
and that no Soviet announcement has been made of a larger, more
general cutback for next year.
Implications for Hard Currency Earnings
Near Term. The expected decline in the volume of oil sold
to the West, combined with lower world oil prices (which so far
have averaged almost 10 percent below prices during January-
August last year), could lead to a reduction in hard currency
earnings of about $3-4 billion for 1985 as a whole. This would
be a drop of 20 to 25 percent in earnings from oil sales, and a
decline of more than 10 percent in the USSR's total hard currency
earnings.
Moscow cannot compensate for this drop by expanding other
exports. Soviet earnings from natural gas sales to Western
Europe are not expected to rise substantially this year. On
average, Soviet gas prices have fallen somewhat, and the USSR has
allowed at least one nation to postpone increases in purchases of
Soviet gas. Other exports--including sales of metals, machinery,
and weapons--face limited Western or LDC demand and, in some
cases, constrained domestic availability.
The USSR is probably in a fairly good financial position to
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cope with this year's oil export decline. At the end of March
Soviet assets in Western banks stood at a comfortable $8.8
billion. So far, Moscow has shown few signs of serious concern
about the need to compensate for a major drop in oil earnings.
Gold sales appear to to be up only slightly over the
rel atively low levels in 1984.
While Moscow has borrowed close to $1 billion from the West
so far this year, most of this money apparently has been
used to pay off earlier, higher-priced loans.
p The Soviets turned down a French offer of approximately $500
million in credits for Astrakhan' and Tengiz energy
development contracts, which were signed this spring.
The expected erosion of its oil export earnings during the
balance of 1985, however, could force Moscow to take more active
measures in the near future. Options exercised in the past to
deal with hard currency shortages include increases in net 25X1
borrowing, cutbacks in imports, and larger gold sales. In
response to a hard currency bind which developed in the first
half of 1981, Moscow cut back hard currency allocations to the
foreign-trade organizations in late 1981 and early 1982, causing
delays in purchases and payments. In addition, the Soviets
substantially increased short-term borrowing (mainly for grain
purchases) and gold sales. 25X1
On balance, we believe that the USSR is financially in a
good position to satisfy most, if not all, of its import
25X1
requirements from the West in 1985. Moscow will be helped this
year by a better domestic grain crop and thus substantially
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reduced grain import requirements in the latter half of the
year.3 In addition, overall imports of Western industrial goods
during the first quarter were lower than during the comparable
period in 1984. It is not yet clear whether such imports have
remained at reduced levels since then. While Soviet orders for
machinery and equipment are up sharply during the first half of
the year compared with last year, actual imports of machinery and
equipment will not begin to rise until 1986 or beyond, given the
usual lags in implementing contracts for large projects.
Moreover, many of the deals are financed by long-term credits.
Nevertheless, there is some evidence that the Soviets are
becoming increasingly concerned about their financial 25X1
situation.
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3 Moscow also should enjoy the benefits of a buyer's market this year in the 25X1
international grain trade. World supplies are expected to be abundant,
largely because of a bumper crop in the United States. 25X1
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Longer Term. Beginning in the next year or so, the Soviets
will likely have to deal with steadily declining export earnings
from oil.
o Domestic oil output continues to slide despite substantial
increases in investment in the oil industry. Although the
oil industry management has been overhauled, prospects for a
turnaround in output are poor.
o World oil prices continue to slide with little prospect for
a reversal until the late 1980s.
o Opportunities for boosting arms sales to OPEC nations--the
traditional source for increased oil imports--are limited by
the ability of these nations to absorb and pay for more
Moscow has been hard pressed to compensate for the
production decline by reduced domestic consumption. It has been
trying to reduce the economy's use of oil for several years,
primarily through energy conservation and programs for switching
to the use of gas instead of oil in industry. There have been
few signs so far that the USSR has, in fact, reduced its oil
use. The Soviet press has been mum on successes in this area,
suggesting that progress is dragging despite the leadership's
emphasis on conservation. In addition, our analysis of the
electric power industry--the main target of the gas-for-oil
substitution programs--indicates that the oil "saved" at some
power plants has been consumed anyway in offsetting major
shortfalls in the supply of coal to other power plants and in
producing above-plan amounts of electricity.
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Prospects for limiting demand during the next several years
also are not bright. Gorbachev's program for retooling and
installing more energy efficient equipment promises substantial
savings, but only in the long run and after considerable
expense. Over the next several years, the modernization program,
vigorously pursued, will itself consume large quantities of
fuel. Indeed, given Gorbachev's stated objectives, the mix of
output is likely to become more rather than less energy
intensive.
Implications for Eastern Europe
Moscow's allies would have considerable difficulty coping
with a cutback in Soviet oil deliveries. Most of the countries
in the region--plagued by sluggish export growth, large debt-
service obligations, and uncertain borrowing prospects--do not 25X1
have enough hard currency to purchase a substantial portion of
their oil requirements on the international markets. Moreover,
securing more oil through barter arrangements has been made more
difficult because of a reluctance on the part of Third World
countries to increase such deals. 25X1
Moscow repeatedly has told its allies that deliveries will 25X1
not be cut in 1986-90. It made a similar promise in 1980,
however, for the 1981-85 period, but cut deliveries anyway in
1982 when it needed to increase hard currency earnings. In
aggregate, oil shipments to the region have not increased since
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The East Europeans survived the 1982 cutbacks without much
difficulty because the region was reexporting some Soviet oil for
hard currency. Cuts during 1986-90 would be much more
troublesome as they likely would come out allocations for the
domestic economies--at a time when Moscow will be putting more
pressure on East Europe to increase production and delivery of
energy-intensive goods (i.e. machinery and equipment). Balance-
of-payments constraints would limit East European purchases of
oil from hard currency sources, and reduced oil consumption in
the region would affect economic productivity and growth. Lower
growth would increase the likelihood of political instability in
Eastern Europe and increased public resentment toward the Soviet
Union.
Implications for Trade With the West
Moscow probably has little alternative but to accept some
continuing decline in its oil exports to the West, while trying
to reap whatever savings it can from the domestic economy and
Eastern Europe. Faced with prospects for substantially reduced
hard currency earnings, the Soviet leadership may be hard pressed
to satisfy the entire range of import goals in the coming
years. We believe, however, that the Soviets will continue to
import sufficient quantities of grain and feedstuff's to keep the
livestock program on track and obtain the industrial materials
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needed to reduce production bottlenecks.
The reduced availability of hard currency will probably
affect imports of Western machinery and equipment the most.
Barring a series of harvest failures and/or an unexpectedly rapid
decline in oil production, Moscow should be able to earn enough
hard currency through 1990 to purchase Western equipment that has
the highest priority--equipment needed to develop oil and gas
reserves at Astrakhan' and Tengiz, for example. But any cutback
in imports of other Western machinery and technology would be
occurring at a time when Soviet demand for such goods is
increasing as a result of Gorbachev's modernization program. A
less conservative borrowing policy could allow Moscow greater
leeway in setting the level of these imports.
Changes in Soviet purchasing strategy may provide early
indication of how the Soviets are assessing their prospects for
oil production and hard currency exports. Specific indicators
might include:
o Scaling back, stalling, and/or cancelling project
negotiations now underway.
o Insistence that countertrade arrangements be included for
all but the highest priority purchases.
o Greater concentration on domestic projects oriented toward
supplying the export market when negotiating purchases from
1k__ r _ i
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Distribution for USSR: Implications of Reduced Oil Exports
Copy: 2 - Deputy Director for Intelligence (7E47 HQ)
A
/DCI (7E12 HQ)
3 - NIO/Economics (7E47 H
4 - Asst. NIO/Economics, (7E47)
5
- NIO/USSR-EE (7E62 HQ
6 - NIO/Europe (7E47 HQ)
7 - D/SOVA (4E58 HQ)
8 - DD/SOVA (4E58 HQ)
9 - D/OGI (3GOO HQ)
10 - SA/DDCI (7E12 HQ)
11 - Ch, Product Evaluation Staff (7G15 HQ)
12 - C
h, Collection Requirements & Evaluation Staff
(3E63 )
13 - D/CPASHQ(7G15 HQ)
14 - OCR/DD (6E4 H
15 - D/OIAS(3N1007Bldg 213)
16 DD/OGI (3GOO HQ)
17 - C/OGI/SRD (3G31 HQ)
18 - OGI/SRD/PR (3G31 HQ)
19 - OGI/SRD/MA (3G31 HQ)
20 - OGI/SRD/SF (3G31 HQ)
21 - C/SOVA/NIG (4E51 HQ)
22 - C/SOVA/NIG/EPD (5E66 HQ)
23 - C/SOVA/NIG/DPD (4E65 HQ)
24 - SOVA/NIG/EP/RM (5E66 HQ)
25 - SOVA/NIG/EP/FT (5E66 HQ)
26 - SOVA/NIG/EP/EP (5E66 HQ)
27 - SOVA/NIG/EP/IA (5E66 HQ)
28 - C/SOVA/DEIG (5E66 HQ)
29 - C/SOVA/DEIG/DID (4E31 HQ)
30 - C/SOVA/DEIG/DEA (5E56 HQ)
31 - C/SOYA/RIG (5E25 HQ)
32 - C/SOVA/RIG/EAD (5E25 HQ)
33 - C/SOVA/RIG/TWAD (4E12 HQ)
34 - C/SOVA/SIG (4E31 HQ)
35 - C/SOVA/SIG/SFD (4E13 HQ)
36 - C/SOVA/SIG/SPD (4E13 HQ)
37 - CPAS/IMD/CB (7G15 HQ)
38 - DDI/Registry (7E47 HQ)
39 - CPAS/CSG (7F33 HQ)
40 - Executive Secretary, PFIAB (BW09 CHB)
41 - Robert Bidwell - Douglas Faulkner, Office of
Intelligence (DP-421), Dept. of Energy,
(Room GS-257 Forrestal Bldg.)
42 - Roger Robinson, Senior Director International
Economic Affairs, National Security Council
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(Room 365 OEOB)
43 - Douglas R. Mulholland, Special Assistant to the
Secretary (National Security) (Room 4324 Main
Treasury)
44 - Donald B. Kursch, Deputy Director for Economic
Affairs, EUR/SOV, Department of State (4223 State)
45 - Ambassador Rozanne Ridgway, Assistant Secretary
of State for European and Canadian Affairs (6226
State)
46 - Elliot Hurwitz, Special Assistant, Office of the
Under Secretary for Economic Affairs, Department
of State (7620 State)
47 - Ty Cobb, Director, East-West Section, National
Security Council (Room 361 EOB)
48 - Ambassador Morton I. Abramowitz, Director, INR,
Dept. of State (Room 6531)
49 - Avis Bohlen, Policy Planning Council, Dept.
of State (Room 7316)
50 - John Danylyk, INR/EC/CER, Dept. of State (Room
8722)
51 - Director, National Security Agency, U12/SAO, Ft.
Meade, MD
Robert Gallagher, Deputy Chief, Office of
Intelligence Liaison Department of Commerce
(3520 Main Commerce)
54 - Mr. Bruce Smart, Under Secretary for International
Trade, Department of Commerce (3850 Main Commerce)
55 - Franklin J. Vargo, Deputy Assistant Secretary
International Economic Policy, Department of
Commerce (3865 Main Commerce)
56 - Jack Brougher Jr., International Trade
Administration, Department of Commerce
58 -
59 -
60 -
Mr. Darnell Whitt Intelligence Advisor, Dept. of
Defense (Rm. 3E22A)
Ronald S. Lauder, DAS/Defense, European & NATO
Policy (Room 4D882, Pentagon)
Andrew W. Marshall, Director Net Assessment,
Department of Defense (3A930 Penta
on)
g
61 - Paula J. Dobriansky, European and Soviet Affairs,
National Security Council (368 EOB)
62 - Ambassador Jack Matlock Jr., Senior Director,
European and Soviet Affairs, (368 EOB)
Original Document - SOVA/EPD/RM Chrono
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