YUGOSLAVIA: AN APPROACHING CRISIS

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP86T00302R000801270010-6
• Release Decision: RIPPUB
• Original Classification: S
• Document Page Count: 24
• Document Creation Date: December 22, 2016
• Document Release Date: August 26, 2008
• Sequence Number: 10
• Publication Date: January 31, 1983
• Content Type: SNIE

Director of
( entra
Intelligence
Yugoslavia:
An Approaching Crisis?
 YUGOSLAVIA:
AN APPROACHING CRISIS?
Information available as of 26 January 1983 was
used in the preparation of this Estimate.
 THIS ESTIMATE IS ISSUED BY THE DIRECTOR OF CENTRAL
INTELLIGENCE.
THE NATIONAL FOREIGN INTELLIGENCE BOARD CONCURS.
The following intelligence organizations participated in the preparation of the
Estimate:
The Central Intelligence Agency, the Defense Intelligence Agency, the National Security
Agency, and the intelligence organizations of the Departments of State and the
Treasury.
Also Participating:
The Assistant Chief of Staff for Intelligence, Department of the Army
The Director of Naval Intelligence, Department of the Navy
The Assistant Chief of Staff, Intelligence, Department of the Air Force
The Director of Intelligence, Headquarters, Marine Corps
 Page
SCOPE NOTE ........................................................................................................... I
DISCUSSION .......................................................................................................... 7
The Economy: What To Do? ..................._......................................................... .. 7
The Financial Crisis ............................................................................................ 7
The Domestic Impact ......................................................................................... 8
The Deadlocked Debate ..................................................................................... 9
The Political Strains ..............................._............................................................... 9
Ethnic Tensions ................................................................................................... 11
Other Political Rifts ............................................................................................ 11
The Military ........................................................................................................ 13
Implications ............................................................................................................. 13
For Yugoslavia .................................................................................................... 13
For the Soviets .................................................................................................... 14
For the West ....................................................................................................... 17
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 Developments in Yugoslavia since Tito's death have created doubts
about the country's ability to overcome domestic political disputes and
rivalries in the interest of maintaining the economic viability and
cohesiveness of the state as a whole. This Estimate examines the nature
of Yugoslavia's problems and the current and likely future post-Tito
leadership responses. It looks at the ways in which the USSR and the
West could influence the situation and assays the country's prospects for
the next 12 to 18 months.)
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 Yugoslavia's independent Communist regime is entering one of its
most difficult periods since it broke with the Soviet Bloc in 1948.
Economic mismanagement, a worsening credit situation, deep-seated
ethnic tensions, and political ineptitude seriously threaten the post-Tito
system of government
Two grave problems now challenge both the new leadership's
abilities and the post-Tito leadership system: an economic slowdown
exacerbated by efforts to deal with a financial crisis, and the reemer-
gence of ethnic strains, most seriously evident in demands by the
Albanian minority, that bring into question the validity of existing
constitutional mechanisms for compromising ethnic differences.
But Yugoslavia's principal problem is the weakness of the national
leadership left in place by Tito. Trapped in a political system that
requires elusive consensus on all important decisions, the leaders in
Belgrade are increasingly hostage to rival regional interests. The
consequence has been a failure to agree on ways out of their economic
fix and an inability to halt a growing pattern of ethnic strains in the
fractious multinational state. As a result, Yugoslavia faces a prolonged
period of increasing political and economic instability, with a growing
risk of a serious internal crisis.
We believe, however, that Belgrade, because of deep differences in
the leadership and between Belgrade and the regions, will attempt to
muddle through without adequate systemic changes. If so, Yugoslavia
would be on a high-risk course. Indicators of a deepening crisis would
be a continued deadlock about meaningful reforms, urgent rescheduling
or default, and increasing leadership instability, with new leaders
moving into the center of power. The new team, being untried and
facing worsened political and economic problems, would be even more
hard pressed to make requisite course corrections. And, in the longer
term, there would be growing risks that unrest over economic conditions
and resurgent ethnic disputes would move toward violent domestic
confrontation.
Should the civilian leaders continue to function ineffectively,
greater involvement in politics by the military is likely. In the unlikely
worst case of an imminent disintegration of the system, the military
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 solving long-range problems.
The West can help Yugoslavia through its immediate financial
problems. Western government aid of $1.3 billion, in conjunction with
$1.2 billion from international financial institutions and if accompanied
by more effective stabilization measures in Yugoslavia, can help
Belgrade avoid a major financial crisis in 1983. Conditioned financial
assistance would not only demonstrate continued Western support for
Yugoslavia's independence but could also assist the Yugoslavs to devise
more rational domestic policies. Even this government assistance will
not be enough if banks do not roll over maturing obligations and extend
new credits. Further, neither governments nor banks can insulate
Yugoslavia from much tougher economic and political problems in the
months and years ahead. Long-term austerity and growing hardships
are likely to be the rule well into the mid-1980s
Moscow will judge the Western financial initiative according to its
likely impact on Soviet long-term objectives toward Yugoslavia, These are:
- To move Yugoslavia back into the Soviet camp.
- Short of that, to get Yugoslavia to move closer to Soviet positions
on international issues.
- To strengthen Soviet influence in Yugoslavia and acquire
greater use of Yugoslav ports and airspace for the Soviet
military.
The USSR is not likely to see the Western financial initiative as in-
tended or liable to bring about changes so fundamental that they would
undermine these Soviet objectives. Consequently, Moscow is not likely
to see the initiative as a challenge to which it must react directly.
But, if Yugoslavia should be faced with a disintegrating political
system, Moscow would work hard to defend its interests and acquire
greater influence. In the process, it might become more deeply involved
than originally contemplated, just as in the case with the West,
Moscow's primary leverage would be economic: 22 percent of Yugosla-
via's trade is with the Soviet Union and 34 percent of its exports go to
that country. In keeping with tougher trading policies toward its CEMA
partners, Moscow already is trying to improve its own terms of trade
with Belgrade. It could go even further by curtailing that trade and dis-
rupting the Yugoslav economy.
But, short of the worst case, the Soviets will not pull out all the eco-
nomic stops to destabilize the country because it would almost certainly
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 be seen by the Yugoslav people, its leaders, and its military forces as an
act of de facto aggression against Yugoslavia. The political effect would
be to reinforce Yugoslavia's already well-developed antipathy toward
the USSR. Moreover, the Soviets probably view any increased instability
in Eastern Europe as highly risky, given the precarious financial and
economic situation of the CEMA states.
Yugoslavia will remain troubled and vulnerable to outside pres-
sures for at least the next year and a half-conditions that heighten its
potential as a source of great-power rivalry. A major crisis is unlikely
within the next year, whether Belgrade makes significant changes or
not. Rather, the evolution of the situation is likely to be gradual.
Although the post-Tito leadership seems to have grasped the nature of
the problems, its performance to date leads us to believe that it may not
be capable of acting on them in a timely and effective enough way to
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 SLOVENIA
1.9 M
91%S lovenes
BOSNIA AND
HERCEGOVINA
4.1 M
40% Muslim nationals
32 Serbs
18 Croats
2,1 Belqrade
CROATIA
4.6 M
75% Croats
12 Serbs
Serbs 96%
Vojvodina
(Autonomous province)
2.0M
54% Serbs
19 Hungarians
1 Montenegrins
C 1 Albanians
9% Montenegrins I
13 Muslim nationals -.JU Kasovo L
N
)7 Albanians K.*" 1.6 111111
All /
7111 ARrIWo
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MACEDONIA
1.9 M
67% Macedonians
20 Albanians
5 Turks
2 Serbs
 1. Yugoslavia's strategic importance rests on its
status as an independent state capable of facilitating or
impeding Soviet access to the Adriatic and the Medi-
terranean. Although Communist in orientation and
occasionally troublesome in its support of Third World
"liberation movements," the regime in Belgrade has
made independence of Soviet dictates its top priority
since 1948. The Soviets recognized these facts only
grudgingly, but were unable to prevent Yugoslavia
from building up its economic ties with a prosperous
2. Although Yugoslavia's quarrelsome peoples frus-
trated efforts to achieve solid stability, Yugoslavia
under Tito's leadership enjoyed increasing prosperity,
relative calm at home, and a widely recognized role as
a leading nonaligned nation. Yugoslavia's principal
problem is the weakness of the national leadership left
in place by Tito. Two grave problems now challenge
both the post-Tito leadership and the post-Tito domes-
tic system: an economic slowdown exacerbated by
efforts to deal with the financial crisis, and the
reemergence of regional rivalries and ethnic strains,
most seriously evident in demands by the Albanian
minority that bring into question the validity of
existing constitutional mechanisms for compromising
1970s, Tito defused potential regional rivalries by
permitting foreign borrowing (see figure 1)-without
paying sufficient attention to improving productivi-
ty-to feed high growth rates in which all the regions
shared. During that period the decentralized economic
system evolved as a mechanism serving more to
distribute than to create wealth. Although self-man-
agement in theory permits workers to own and man-
age their enterprises, in fact the leaders in the six
republics and two provinces that make up the Yugo-
slav Federation, using their extensive powers in the 25X1
decentralized economy, became the dominant eco-
nomic decision makers. They grew increasingly pro-
tectionist and isolated from each other in pursuing
local interests. Ignoring national economies of scale
and ultimate profitability, they built redundant enter-
prises, blocked competition on the "unified market,"
and granted unrealistic price increases and subsidies to
favored industries. Thus, by the early 1980s inflation
in the 30- to 40-percent range became chronic, exports
lost their competitiveness on Western markets, and
balance-of-payments deficits became a serious burden,
foreshadowing debt repayment problems. In effect
Yugoslavia experienced the worst of two worlds: the
stifling effect of overcentralized control at the regional
level and the anarchic situation resulting from a center
that was responsible for maintaining the country's
credit rating but had little control over the volume or
The Economy: What To Do?
3. Since Tito's death, the interplay of the chronic
mismanagement of the economy, the depressed world
economy, and a retrenchment in international foreign
lending has led to serious economic decline and moved
Yugoslavia close to insolvency in the first quarter of
this year. Policymakers in Belgrade are squeezed
between domestic pressures to maintain regional au-
tonomy and to foster prosperity and international
banking pressures to change practices that created a
4. Past mismanagement of the economy makes it
especially vulnerable to external shocks. In the late
5. Yugoslavia's economic crisis emerged full blown
in 1982 after Poland's financial collapse in 1981
sensitized international lenders to economic weakness-
es throughout the socialist economies in Eastern Eu-
6. Yugoslavia is now approaching insolvency after
trying unsuccessfully last year to secure adequate new
Western credits and to roll over its short-term credit
lines. Its credit problems-combined with a higher
current account deficit than projected-forced Bel-
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 Figure 1
Yugoslavia's International Financial Position:
The- Trends
Cross Debt
Milton I S S
Current Account Balance
Billion US S
illioiiiIII
Total Reserves %lines Goldh
Million US S
2.500
2.000
500
1.000
$00
__.N 11.
1970 71 72 73 74 75 76 77 78 79 80 81 820
'CIA projection
' Foreign exchange reserves of the National Bank, SDR (special drawing
rights) holdings, and reserve position in the IMF
.
grade to draw down reserves and augment austerity
measures in an attempt to cover the 1980s financing
requirement. By the end of 1982, official foreign
exchange reserves had dwindled to less than $500
million, the equivalent of less than three weeks' worth
of hard currency imports.
7. In the first half of 1983, Yugoslavia faces heavy
debt service obligations and a seasonally lox% inflow of
foreign exchange receipts. The resulting financial gap
will probably exceed its remaining hard currency
reserves in the Yugoslav National Bank and regional
8. Belgrade, however, has implemented austerity
measures aimed primarily at securing Western loans
and at conserving hard currency-import restrictions,
devaluation of the dinar to boost exports, energy
conservation measures, and military budget cuts.
While these measures cannot solve Yugoslavia's long-
term economic crisis, they have met with grudging
acceptance from the Yugoslav people but have not
revived sufficient lender confidence to prevent a
payments crisis in early 1983.
9. Only a revival of bank lending and financial
support by Western governments will permit Belgrade
to clear up and prevent large arrearages, debt resched-
uling, or eventual default. The magnitude of govern-
ment financial assistance-on the order of $1.3 billion
from governments within the next six months and an
additional $1.2 billion from international financial
institutions I in 1983-will ease Yugoslavia's current
problems, but this aid will not relieve Belgrade of the
need to reduce its payments deficits through a more
effective stabilization program. The aid package might
still riot work if commercial banks fail to renew credit
lines, and, even if the aid package works, financial
The Domestic Impact
10. To deal with these financial difficulties, Bel-
grade introduced severe import restrictions in 1982.
They succeeded in reducing the country's balance-of-
payments deficits but not as much as expected, be-
cause earnings from hard currency trade and invisi-
The International Bank [or Reconstruction and Develuprnent
(IBR U), the International Monetary Fund (IAIF), and the Bank for
International Sett lernents (BIS). (u)
8
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25X1
 bles-particularly tourism-also declined. Worse, the
restrictions had an adverse effect on economic growth:
industrial output stagnated as firms suffered material
shortages, and growth in the "social product" fell to 1
percent, well below the 5-percent average of the
previous five years. (See figure 2.)
11. The poor economic performance caused hard-
ships for the population. There were shortages of
consumer goods-particularly gasoline, coffee, and
medicine. Unemployment increased-hitting hardest
at urban populations, young people, and residents of
less developed regions in the south. The impact on
consumers would have been worse had not local
officials, wary of popular resentment, ignored federal
austerity goals in the first half of the year and allowed
investment and wages to increase faster than originally
decreed. Even after freezing prices in late July, the
federal authorities deferred a wage freeze at the
urging of normally quiescent trade unions
12. The population has also attenuated the conse-
quences of the government's belt tightening by resort-
ing to a thriving "second economy." Unreported in-
comes soften the blow of statistical declines in real
income. And many urban Yugoslavs depend on rela-
tives on farms for foodstuffs not available, or too
expensive, through the formal distribution system. But
a government-imposed deposit of about $80 for for-
eign travel and severe customs restrictions this fall
sharply limited the option of shopping trips to the
West-a customary supplementary source of consum-
er and luxury goods-and also violated an unwritten
political compact granting Yugoslavs full freedom to
13. The downturn in the economy has given rise to
inconclusive and divisive debates about how to get out
of the economic/financial fix, which are eroding
confidence in the regime. Several broad reform direc-
14. The official Kraigher Commission Report of
April 1981 mixed general calls for more market
reforms with insistence that the existing economic
''Social product' is a standard Marxist measure for growth
entailing all economic activity mina services and depreciation. (u)
system be preserved. Lack of clear goals has impeded
achievement of consensus on any of its recommenda-
tions. Several federal government officials-chief
among them Deputy Premier Zvone Dragan-are
trying to advance the market reform cause, but they
face strong opposition from entrenched interests that
25X1
rely on state subsidies0
25X1
15. Proposals for retrenchment to centralized eco-
nomic direction are even more unpopular. Memories
of the inefficient, centralized Stalinist system of the
postwar era still make Yugoslavs wary of reinvesting
authority in Belgrade. Equally important are fears-
deep seated among non-Serbs-that Belgrade, which is
simultaneously the Serbian capital, can fall too easily
under the sway of the Serbs-the country's largest
ethnic group.
16. Proponents of pure self-management argue that
the republics' authority in economic decisions should
devolve to the workers, as the constitution requires.
The idea has an attraction, particularly for Yugoslavs
trapped in now-meaningless posts in the "self-manag-
ing" structure. But beyond lipservice to this goal, there
is no strong support for the idea in the leadership,
which apparently fears further diffusion of authority
The Political Strains
17. Yugoslavia during Tito's lifetime was able to
function successfully, despite weaknesses in its system
of governance, because Tito had the personal authority
to intervene at critical junctures to impose remedial
measures. In his final years, with no one of sufficient
stature in the wings to assume his role, he attempted to
create and institutionalize a new system of collective
political rule that would preclude struggles or one-man
rule and guarantee that none of Yugoslavia's major
ethnonational groups would have cause to challenge
the integrity of the Yugoslav state. The result was a
cumbersome system that has obstructed timely policy-
making
18. At the inception of their rule, Tito's heirs vowed
they "would never stray from Tito's path"-decentral-
ized self-management at home and nonalignment in
foreign policy. Their adherence to his policy legacy
has been almost total. But Tito's legacy included
unresolved problems requiring constant policy adjust-
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 Figure 2
Yugoslavia: Trends in Key Growth Indicators, 1975-81
Percent of increase or decrease
Social Product
Note change in scales
Agricultural and Fisheries Output
6
4
40
zo_f.~.
0 1975 76 77 78 79 80 81
10
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 ment and a readiness to make major changes when
necessary. The collective leaders in Belgrade have not
mastered this critical corollary, and the regions are
squabbling over sharing economic hardships. The re-
stilt is that centrifugal political interests are now
gaining strength and popular confidence in Belgrade is
waning. Aside from indecisive and ineffective leader-
ship, no single political issue is yet paramount but
19. Confrontations among the ethnonational com-
munities have been a recurrent feature of postwar
Yugoslav history and sometimes forced even Tito on
the defensive. Economic stringencies are sharpening
the conflicts of interest among Yugoslavia's republics
and provinces. Following Tito's death, the federal
regime lost the prestige it derived as a result of his
dominant authority and unimpeachable reputation as
an ethnic nonpartisan. None of his successors has an
even remotely comparable reputation.
20. Under these conditions, there has been a gradu-
al but steady increase in ethnic assertiveness in several
quarters. Several of Bosnia's Muslim leaders, for exam-
ple, are suspected of encouraging a Muslim secular
movement aimed at monopolizing power in their
republic. More recently, there have also been sponta-
neous-though still isolated-eruptions of violence,
probably aggravated by the diminished chances for
jobs, among young Croat and Serbian nationalists.
Croat-Serbian rivalries are still far from the crisis
proportions they reached in the early 1970s, but, if
these trends continue, grave disputes between the two
largest ethnic groups in Yugoslavia (see map on page 6)
21. The most serious ethnic strife to date has been
the violent rioting by the Albanians in the country's
Kosovo Autonomous
Tito's death. Special
units restored order,
pacified.
Province less than a year after
police, militia, and some Army
but the Albanians are far from
22. The Albanians are restive because they believe,
as non-Slavs in an overwhelmingly Slavic state and
residents of Yugoslavia's least developed region (see
figure 3), they have been relegated to the bottom of
the economic heap. The Albanians' prescription for re-
elevated to a full republic
23. The larger import of the Albanians' demand is
that one of Yugoslavia's major nationalities is challeng-
ing the distribution of power bequeathed by Tito. The
events in Kosovo kindled fears, mainly in Serbia, but
also in the Slavic republics of Montenegro and Mac-
edonia, that republic status for Kosovo would lead to
increased migration of non-Albanians and calls for
redrawing republic borders to create an "ethnically
pure" Albanian republic that might eventually seek
24. Some Serbian politicians are using enflamed
ethnic tension to strengthen their personal power.
Thus far unsuccessfully, Serbia has revived demands-
rejected by Tito in 1975-for reassertion of Serbia's de
jure powers over Kosovo and the Vojvodina .Autono-
mous Province. Serbian assertiveness, in turn, has
aroused fears of other nationalities that their interests
too are at risk. Non-Serbs continue to block efforts by
the Serbs to expand their authority at the expense of
the balances of power in the federal system.
25. These disputes on the Albanian minority ques-
tion also have a strategic dimension. The Hoxha
regime in neighboring Albania, which vocally supports
the Albanian minority cause in Yugoslavia and rejects
ties to the great powers, will probably soon face the
uncertainties of a political succession. This prospect of
change poses in many Yugoslav minds the likelihood
that Albania will break out of its isolationism. Recent
efforts by Moscow to woo Tirane show that the USSR
wants very much to reestablish its influence on a
vulnerable Yugoslav flank. These fears augment tradi-
tional Yugoslav wariness-warranted or not-that
Moscow might allow its Bulgarian allies to revive their
claims on Yugoslavia's Macedonian Republic, which
abuts Kosovo and has a restive Albanian minority of its
26. The difficulty Yugoslav leaders have had in
addressing the country's economic problems and the
Albanian minority issue reflects the fact that Yugosla-
via is tending toward a loose confederation of eight
republican and provincial power centers. Often even
members of the leadership in Belgrade are loyal
primarily to their various home regions. And federal
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25X1
25X1
 Figure 3
Yugoslavia: Regional Disparities
National average Southern regions
Northern regions Kosovo(the least developed region)
Estimated Per Capita Product
1981 USS
1965
1981
1965
1981
1965 - 647
? 237
1981 1.394
1965 78.5
1981 77.9
1965 - 21.5
12.0
1981 ~ 22.1
12.1
policy proposals can be blocked in the Federal Assem-
bly or ignored with impunity by republican or provin-
cial governments, because the federal authorities are
27. Tito's old guard also faces a generation gap. The
younger, better educated party membership is resent-
ful of their prolonged dominance. During the party's
12th Congress, in June, the press reported a recurring
complaint about "horizontal rotation"-that is, that
the same senior officials move endlessly among key
28. Yugoslavia's increasingly open media have been
making much of the corruption and influence-ped-
dling that pervades the Yugoslav hierarchy. The par-
ty's reputation has suffered as a result because, with
Yugoslavia's austerity programs now taking their toll
on lower and middle income groups, anger has been
growing over the privileged status of the hierarchy. fl
29. Even though members of the old guard kept
their grip on most senior posts during the Congress in
June, no one in the party Presidium has shown a
capacity to be primes inter pares in Belgrade. But
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 both failing health and the mechanics of political
rotation have eroded the core of experienced party
leaders once thought likely to dominate the coalition
of old-guard Titoists within the collective leadership.
Vladimir Bakaric of Croatia, looked to as a key
stabilizing figure in post-Tito Yugoslavia, died recent-
ly. Milos Minic, Tito's main expert on foreign affairs,
lost his key federal posts in a Serbian power struggle
last spring because he was perceived as acting as a
Yugoslav rather than a Serb. Ex-Defense Minister
Nikola Ljubicic "rotated" to the Presidency of Serbia,
an important republic post but one with limited
national visibility. Of Tito's closest aides, only Stane
Dolanc, who lost his Presidium seat last June, still has a
potentially significant federal post. Dolanc is an able
and pragmatic politician with a reputation for wari-
ness of Soviet intentions. As Interior Minister, he
knows the details of corruption allegations and could
play a decisive role in a power struggle.
30. The chances for younger federal leaders and
technocrats from the republics and provinces to claim
more influence seem to be growing as their elders'
performance draws increasing criticism. Even under
normal conditions, a push for power would be likely
from this quarter within the next few years. But, as far
as we know, the next generation remains an amor-
phous potential force without a political program or a
The Military
31. The Yugoslav military, representing the most
strongly disciplined-and perhaps the only truly inte-
grated national-institution in the country, may well
become a key factor. Some Yugoslav generals are
openly critical of the economic situation and con-
cerned about the potential for unrest. But, although
they helped Tito thwart political challengers on sever-
al occasions, they have avoided choosing sides in
today's policy debates. We believe that the generals
give high priority to maintenance of law and order
and national independence and would move speedily
and ruthlessly if serious unrest should destabilize the
32. However, while the Army's role in managing
the crisis would probably be a stabilizing one over the
short term, the Army probably could not wield the
reins of power for any protracted period of time
without serious problems. Many of the non-Serb na-
tionalities regard the Army as antipathetic to their
special interests. Moreover, the cohesiveness of the
military without Tito as an anchor point for its loyalty
has yet to be proved. Past factional behavior by a
minority of generals and certain veterans groups, with
power bases in the regions and provinces, suggests
potential fissures that could deepen over both policy
For Yugoslavia
33. Yugoslavia faces a prolonged period of econom-
ic decline with growing risks of political instability.
Belgrade's current policy of belated ad hoc adjust-
ments, no matter how rigorous and austere their
eventual dimensions, will themselves not improve
Yugoslavia's chances of economic recovery. Moreover,
the current financial crisis, which could continue into
early 1984, is encouraging Belgrade to address funda-
mental weaknesses in its economic and political sys-
34. To begin mastering its problems, Yugoslavia
must soon start to make fundamental systemic
changes. For these changes to take place, several
developments are necessary:
- Belgrade must overcome its differences and give
the lead to market reformers in the current
leadership.
- There must be speedy passage of effective new
banking and financial arrangements.
- The Yugoslavs must reach a consensus soon on an
effective economic stabilization and recovery
program.
- Western lenders-particularly private banks-
must recognize these achievements and agree to
roll over debts and reopen credit lines to Yugosla-
35. We believe, however, that Belgrade, because of
deep differences in the leadership and between Bel-
grade and the regions, will attempt to muddle through
without adequate systemic changes and will not regain
the confidence of Western banks. The ensuing econom-
ic crisis might well force leadership changes. Neverthe-
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25X1
25X1
 less, financial constraints will grow more rigorous and
the regions will gain in power and de facto autonomy.
Under these conditions, the new leadership's chance to
be effective would be tenuous at best. In short,
Yugoslavia faces a prolonged period of increasing
political and economic instability, with a growing risk
of a serious internal crisis.
36. A major crisis is unlikely within the next year,
whether Belgrade makes significant changes or not.
Rather, the evolution of the situation is likely to be
gradual. The main indicators of increasing instability,
in order of their likelihood and our rough sense of
their sequence, are:
- Continued inability of the leadership to agree on
how to implement either the Kraigher Commis-
sion Report or other meaningful reforms.
- A worsening economic situation and growing
problems in managing the foreign debt.
- Reticence of foreign lenders to make new loans,
leading either to urgent rescheduling or default.
- Leadership instability, with new leaders even less
able to cope with regional factions.
- Increased political importance of the Yugoslav
military as the only institutional bulwark of the
federal system.
- More serious dissatisfaction over economic aus-
terity, causing unrest, particularly in the least
developed regions, where austerity cuts deepest,
with a comparable backlash in the more affluent
regions.
- Widening but conflicting demands for sweeping
political reforms and requests by some dissidents
for Western support.
- Serious ethnic disputes, with renewed violence in
Kosovo and a return to the virulent Serb-Croat
rivalry, the most serious polarity of all.
so ineptly that internal stability is threatened. In fact
one might expect that some political leaders would
seek to call in the military in an effort to support their
positions. However, it is unlikely that the military
would respond to such a call, particularly if it ap-
peared to have been prompted principally by political
partisanship. On the other hand, if the crisis reached
the stage of violence or destabilizing Serb-Croat dis-
putes, the Yugoslav military would probably intervene
to restore order. However, military intervention would
be only a temporary palliative and the deeper crisis
38. Yugoslavia has never lost its importance to the
Kremlin, despite its break from Soviet domination 35
years ago. Belgrade has helped to frustrate Moscow's
efforts to control the Communist movement and to
spread its influence in the Nonaligned Movement. Its
example still challenges the permanence of the Soviets'
East European empire. And its strategic significance
has if anything increased as recurrent crises in the
Middle East emphasize the need for improved Soviet
access to the Mediterranean.
39. Thus, despite the Soviets reluctant accommoda-
tions with Yugoslavia's independent status, the USSR's
long-range goals toward Yugoslavia have remained
constant:
To ultimately end the schism and get Yugoslavia
back into the Soviet camp.
- Short of that, to get Yugoslavia to move more
closely toward Soviet positions on international
issues.
- To strengthen Soviet influence in Yugoslavia in
general and to acquire greater use of Yugoslav
ports and airspace by the Soviet military.
This postulated deepening crisis could be halted or at
least eased at various points if the urgency of the
situation prompted Belgrade to undertake the neces-
sary reforms. If the more serious of these projections
came to pass the Yugoslav Federation would in very
real terms begin to unravel.
37. The military is not eager to arbitrate the quar-
rels of the fractious Yugoslavs. Nevertheless, it is likely
to be thrust to the fore if the political leaders perform
The relative stability of the Tito era offered Moscow
few opportunities to advance these goals. For example,
it has been forced to expend most of its energy trying
to prevent the West from increasing its influence in
Belgrade and attempting to thwart any developments
that might set back its own long-term plans.
40. As Yugoslavia enters a period of possibly serious
instability, the worst development from the Soviet
standpoint would be the emergence of a regime that
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 would favor Western-oriented reforms and a pro-
Western foreign policy. On the other hand, should the
Federation disintegrate, the Soviets would face the
threat of a crisis-and possibly spreading instability in
the Balkans and particularly on the southern flank of
the Warsaw Pact, where Romanian stability is already
a serious question mark
41. In worst case scenarios such as these, the Soviets
would work hard to defend their interests and to
achieve at least some of their long-term goals but
would probably try to avoid direct military involve-
ment. They might, for example, wish to sponsor
elements in Yugoslavia that sought to restore national
unity and enhance Communist power, particularly if
backing by the Army and an important ethnic coali-
tion-say, the Serbs and Montenegrins-made the
effort credible. Or in a situation of total turmoil, in
which they could find no viable homegrown champi-
on, the Soviets might consider the use of military force
to protect their interests and to sponsor the formation
of a government sympathetic or beholden to the USSR.
But the use of military force outside the Warsaw Pact
in Europe, as well as the magnitude of the effort
required, would give the Soviets serious pause. Mos-
cow has not considered Yugoslavia to be a vital
national interest for almost 30 years, and it is well
aware that the West does not tacitly concede a Soviet
right to move militarily against Yugoslavia. Thus, as
was not the case concerning, for example, Czechoslo-
vakia in 1968 and Poland in 1981, the Soviets must
ponder military action in Yugoslavia in the context of
strong and declared Western interests and in the light
of the East-West competition as a whole. In short,
while the actual behavior of the Soviets cannot be
predicted with any real certainty, the temptation to
take action, short of military intervention, will be
large-especially if Yugoslavia veers strongly to the
West. It is thus possible that either the Soviets or the
West could find themselves involved in Yugoslavia to a
degree not initially contemplated.
42. In any event, because the situation in Yugosla-
via is not likely to reach crisis stage in the next year
and a half, Moscow's more immediate concerns will be
the consolidation of Andropov's leadership at home,
serious domestic economic problems, rivalries with the
United States and China, and difficulties elsewhere in
Eastern Europe. Nonetheless, Yugoslavia will remain
an area of continuing interest, and, if it drifts into
much greater instability, Moscow will perforce seek to
protect its position there and could find itself drawn
into a role it would prefer not to play.
43. Over the past 10 years the USSR's economic ties
to Yugoslavia have been growing stronger, and they
offer the Soviets some leverage. (See figure 4.) About
34 percent of Yugoslavia's exports go to the USSR, up
from 15 percent 10 years ago, and 19 percent of
Yugoslavia's imports come from the USSR. We esti-
mate that in 1982 Yugoslavia had a trade surplus with
the USSR of approximately $650 million. Yugoslavia
sells to the Soviets-at inflated prices-goods such as
clothing, shoes, and heavy machinery that it cannot
market in the West for the same kind of financial
return. On the import side, Yugoslavia is particularly
dependent on Soviet energy, which fills 19 percent of
its total need, and pays for its imports with exports,
rather than with scarce hard currency. (See figure 5.)
44. Prompted by their own economic problems, the
Soviets are likely to make tougher economic demands
on the Yugoslavs (as indeed they already have vis-a-vis
their Bloc allies). Among other things, they probably
will use their economic leverage to remind the Yugo-
slavs of the importance of maintaining ties to the East
and minimizing relations with the West. They may
also try to use economic pressures to constrain any
Yugoslav movement toward reforms of a Western
character. Some Soviet pressure is already apparent in
the USSR's current demands for better price arrange-
ments in its bilateral trade with Yugoslavia and in its
insistence on increased deliveries of goods that the
Yugoslavs need to sell for hard currency in the West.
45. We do not believe, however, that the Soviets
will pull out all the economic stops in an effort to
destabilize the Yugoslav economy. This would almost
certainly be seen as an act of de facto aggression by
Yugoslavia's people and by the national political and
military leaderships as well. And the Soviets would
fear that the West would in these circumstances try to
strengthen its influence in Belgrade by stepping up its
own programs of economic and political aid. Overall
then, while likely to continue to offer some economic
inducements to Yugoslavia, the Soviets will probably
move to toughen their terms of trade with Belgrade. (s
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 Figure 4
International Distribution of Yugoslav Trade by Region
Percentage share in Yugoslavia's total trade
Comm unista Oil-exporting LDCs
USSR Non-olI -c xiorling LUCx
Industrall.ed west
46. The Soviet Union has maintained a studied
silence about the widely reported Western aid package
and otherwise not offered any prescription to Yugosla-
via about how to solve its economic problems-a
marked contrast to its behavior vis-a-vis Poland. As the
Western aid package is currently structured, the USSR
is not likely to undermine Western efforts to prevent
Yugoslav insolvency-efforts which, if successful,
could improve the attitude of bankers toward Eastern
Europe as a whole. At the same time, Moscow will
attempt to profit from this assistance by intensifying
its efforts to improve its own terms of trade with
Belgrade.
47. The Soviets have some limited military leverage.
The Yugoslavs are largely independent producers of
military hardware: they are dependent on the USSR
only for advanced military equipment, such as antiair-
craft missiles, tanks, and jet fighters, and the spare parts
needed to maintain and operate this equipment. Mos-
cow could slow down deliveries of military equipment
and spare parts. This would force Belgrade to seek
other suppliers of Soviet weaponry or compel them to
48. However, Yugoslavia produces most of its
ground forces equipment: those items deemed by the
Yugoslavs to be crucial to their military strategy. This
strategy relies on partisan warfare fought from re-
doubts in the mountainous countryside. Also, the
Yugoslavs have some military leverage over Moscow.
The use of Yugoslav repair facilities to overhaul
several diesel submarines each year allows the Soviets
to significantly increase the on-station time of subma-
rine patrols in the Mediterranean. The use of Yugoslav
airspace has been very valuable in helping Moscow
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25X1
 Figure 5
Yugoslavia's Energy Sources
Imports
USSR 19
oP1:C 17
49. The Soviets have only limited resources for
applying political pressures in Yugoslavia. They do
not, in fact, possess any strong political assets in the
country:
- No Yugoslav leaders are known to favor accom-
modation to Soviet foreign policy goals.
- The reserve of avowedly pro-Soviet sympathizers
inside Yugoslavia is a small faction-called Com-
informists-that has been driven underground.
- Soviet efforts over the years to seek special
influence with the secret police have not borne
fruit, and are not likely to do so in the foresee-
able future.
The Yugoslavs remain sensitive and vigilant to any
Soviet clandestine activities, and their security service
seems to think that it can maintain control. Nonethe-
less, we would expect the Soviets to attempt to
strengthen their covert assets during a prolonged crisis.
50. Moscow could, to be sure, make trouble by
helping to exacerbate national and ethnic tensions. It
could, for instance, play on Serbia's fears of Croatian
nationalism or encourage the Kosovo Albanians. But
playing the ethnic game would be very risky. Thus, if
Moscow is seen to be siding with the Serbs, it loses
ground with Yugoslavia's non-Serb majority, which
fears Serbian dominance. Supporting the Albanians, on
the other hand, would undermine Moscow's efforts to
develop a stronger relation with the Serbs and possibly
other Slavs. Moscow could also encourage Bulgarian
claims on Yugoslavia's Macedonian Republic. But it
must be wary of fomenting Bulgarian irredentism on
the Macedonian issue lest latent problems of a similar
nature erupt elsewhere in its East European empire. fl
51. Overall, under the gradually deteriorating condi-
tions we see most likely to hold sway in Yugoslavia over
the next year and a half, we would expect the USSR to
apply some economic and other kinds of pressure on
Yugoslav leaders, as a reminder that Moscow's interests
must be taken into serious account. But we doubt that the
Soviets will go much further than this, principally be-
cause their tangible support in Yugoslavia is limited and
because blatant pressure is likely to be counterproductive.
52. The United States and its West European allies are
already moving to help Yugoslavia through its liquidity
crisis over the next six months. In some ways the effort
itself is as important as its results; it is a sign to the
Yugoslav leaders and its people that the West supports
Yugoslavia and its international posture. However, even
if the assistance is provided, Yugoslavia's financial and
economic problems are far from over and its leaders will
be looking to the West for continued aid.
25X1
25X1
53. The continuing need for Western financial support
will maintain pressure in Yugoslavia to correct misman-
agement practices and hold to more severe austerity
goals. One particular sector, the decentralized banking
system, will come under pressure from abroad because
Belgrade will have to better control the hard currency
flow in regional banks in order to repay foreign debts.
The federal leadership's limited powers over the repub-
lics also will be sorely tested in holding down local 25X1
17
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 demand for nonessential imports, higher wages, and
industrial subsidies. The specific, short-term reforms and
austerity measures will take political power and will, but,
on the basis of the austerity measures already taken, they
are not beyond Belgrade's capacity
54. Even under the best of circumstances-sufficient
and properly conditioned outside support and improved
domestic leadership-Yugoslavia's economic problems
will certainly continue into 1984. The West will be able
to encourage Yugoslav decisionmaking toward a more
rational economic course and help maintain Yugosla-
via's current international alignment. However, it can
neither guarantee the political courage to make the
additional unpalatable and difficult decisions nor
rapidly restore economic prosperity and political
stability. The achievement of these two goals will
depend on Yugoslavia's own leadership and will, at
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