(UNTITLED)

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP86T01017R000505170001-2
• Release Decision: RIPPUB
• Original Classification: T
• Document Page Count: 23
• Document Creation Date: January 12, 2017
• Document Release Date: March 11, 2011
• Sequence Number: 1
• Publication Date: August 8, 1986
• Content Type: MEMO

Sanitized Copy Approved for Release 2011/03/11 :CIA-RDP86T01017R000505170001-2
Q
Next 1 Page(s) In Document Denied
Sanitized Copy Approved for Release 2011/03/11 :CIA-RDP86T01017R000505170001-2
 Sanitized Copy Approved for Release 2011/03/11 :CIA-RDP86T01017R000505170001-2
DIRECTORATE OF INTELLIGENCE
8 August 1986
USSR: Expanding Its Financial Horizons
Summary
The Soviet Union could lose as much as $6 billion in hard currency
earnings this year as a result of lower oil prices. Moscow's currently strong
credit rating allows it the flexibility of covering most of these losses by
borrowing at favorable rates in the traditional Eurocurrency market. The
Soviet leadership is unlikely to let its debt gram too large, however, out of
fear of diminishing bankers' confidence and to avoid increasing its dependence
on Western banks. Higher gold sales--a traditional cushion for the USSR in
times of hard currency shortages--are likely, but Nips cow also will Trove
cautiously in this market in an attempt to keep prices high.
In its efforts to mitigate the effects of the hard currency shortfall,
s esrre o lrmrt the overall cost of its borrowing and, to sane extent,
obscure the magnitude of its growing debt. Although Gorbachev's appointees
may be more willing than their predecessors to take advantage of a wider range
of Western borrowing facilities, financial conservatism, endemic risk-
aversion, and the need for centralized contro 'll probably limit Moscow's
borrowing through these channels.
This typescript menorah um was re ared b Office of Soviet
Analysis was coordinated with the
Office o o a ssues. es ions an cwrnrents are welcarre and should be
directed to Chief, Econanic Performance Division,
py of
25X1
25X1
25X1
25X1
25X1
25X1
25X1
Sanitized Copy Approved for Release 2011/03/11 :CIA-RDP86T01017R000505170001-2
ese latter initiatives, in all likelihood, stem from the
 Sanitized Copy Approved for Release 2011/03/11 :CIA-RDP86TO1O17ROOO5O517OOO1-2
USSR: Expanding its Financial Horizons
Moscow's Financial Bind
The fall in world oil prices has prompted a flurry of Soviet
.activity in both financial and commodity markets as Moscow seeks
ways to counter the financial losses inflicted by its principal
hard currency earner. Domestic oil production problems in early
1985 and falling prices by yearend resulted in lost revenues of
about $3 billion last year. Such losses could possibly double
this year in the wake of still lower oil prices. The Soviets'
problem has been compounded by a depreciating dollar which has
eroded the purchasing power of those oil dollars still flowing
Moscow's responses to date have been largely predictable,
with the Soviets employing a combination of debt buildup and
increased gold sales to limit the size of immediate import
cuts. Although hard currency export revenues dropped 15 percent
last year--due largely to a 20 percent reduction in oil earnings
--the import decline was held to just 5 percent. This was
accomplished by increasing gold sales nearly $800 million to $1.8
billion, and boosting net indebtedness from $10.4 billion to
$14.4 billion. The USSR also managed a steep buildup of assets
in Western banks during the fourth quarter, preventing net debt
from climbing to record levels. Both borrowing and gold sales
continued at a brisk pace during the first quarter of 1986, which
25X1
25X1
II Sanitized Copy Approved for Release 2011/03/11 :CIA-RDP86TO1O17ROOO5O517OOO1-2
 1 I
Sanitized Copy Approved for Release 2011/03/11 :CIA-RDP86T01017R000505170001-2
helped to keep imports from dropping sharply in the wake of
Indeed, the Soviets' approach to date parallels their
response to their financial pinch in 1981 when a weakening oil
market also constrained export earnings (see Figure 1). In
addition to a debt increase and higher gold sales, Moscow also
redirected some oil from Eastern Europe to hard currency markets
beginning in 1982. The dilemma confronting Moscow this time,
however, is that a severe hard currency crunch could persist
until at least the end of the decade should oil prices fail to
recover significantly. Under such circumstances, the Soviet
leadership is unlikely to continue foreign borrowings at the rate
exhibited in the past 18 months, not only to avoid jeopardizing a
solid credit rating, but also out of fear of becoming too
dependent on Western banks and their governments. Borrowings
will continue and the net debt is likely to grow, but import cuts
continuing losses in oil revenues.
Although the development and execution of a more prudent
import strategy is probably preoccupying the Soviet planners,
Moscow also seems to be altering--at least at the margin--its
approach to international finance.. While not abandoning its
financial conservatism by any means, the Soviets at least appear
willing to push out the boundaries of their "financial
possibilities frontier." Some of Moscow's actions predate the
current crunch, but they have taken on added importance as funds
dwindle. Such moves are probably not intended to garner
will bear a much larger burden over the next few years.
Sanitized Copy Approved for Release 2011/03/11 :CIA-RDP86T01017R000505170001-2
25X1
25X1
 Sanitized Copy Approved for Release 2011/03/11 :CIA-RDP86T01017R000505170001-2
____r.
81 82 83
~_--Net Debt
?
84 85 86
30
40, Billion
Current Dollars
10 -~
4~ Billion
Current Dollars
I
:,Exports
Imports
79 80 81 82 83 84 85 86
20 ~ Billion
18~ Current Dollars
Figure 1
Recent Soviet Financial Strategy
When hard currency export revenues suffer,
as in 1981 and 1985, imports are constrained...
gold sales rise... ,? Gold
'T'-`-"T-"'--'T
81 82 83
84 85 86
...and net debt climbs.
10
Sanitized Copy Approved for Release 2011/03/11 :CIA-RDP86T01017R000505170001-2
 __. 1 .I
Sanitized Copy Approved for Release 2011/03/11 :CIA-RDP86T01017R000505170001-2
require.
the funds needed to stave off sizable import cuts. The Soviets
already are moving to decrease imports to redress the financial
imbalance, with Foreign Trade Minister Aristov stating that
imports from the West could be cut between one-fourth and one-
third this year. Nonetheless more sophisticated approaches could
help Moscow adjust more quickly to changing international
conditions and more cheaply obtain the foreign exchange it will
Moscow, nonetheless, probably remains leary of pushing a
good thing too far. bankers'
concerns about Soviet creditworthiness are growing as low oil
prices continue, .with apprehensions somewhat heightened following
the Chernobyl' accident. While Moscow will not have any
difficulty finding willing lenders, it does face the possibility
of higher interest costs. Rather than risk "losing face" by
being tagged with a lower financial stature than it deems worthy,
Moscow appears to be trying out options beyond traditional, long-
term syndications. By "segmenting" financial markets, the USSR
syndications have been oversubscribed this year.
Exploiting Old Friends...
Moscow's financial position remains relatively strong
despite the setbacks suffered in the oil market. The Soviets
have taken advantage of their excellent credit rating and
attractive interest rates to arrange more than $1 billion in
long-term syndications this year. In fact, the USSR remains such
an attractive borrower vis-a-vis most other debtors that three
25X1
25X1
Sanitized Copy Approved for Release 2011/03/11 :CIA-RDP86T01017R000505170001-2
 Sanitized Copy Approved for Release 2011/03/11 :CIA-RDP86T01017R000505170001-2
R ~ ~
is insuring adequate money flows while effectively bypassing
exposure limits set by the West's major financial institutions,
and, to some extent, obscuring its debt position.
One major example of such activity is Moscow's reemergence
in the forfaiting markets.2 After making extensive use oP this
technique in the second half of the 1970s to finance purchases of
machinery and equipment and, to a lesser extent, in the early
1980s to help buy grain, the USSR cut back on such loans in favor
of other financing.
o The Western press reports that the Soviets also used
forfaiting financing this spring to fund a $40 million
plastics plant to be built by an Italian firm. Although
forfaiting loans are generally medium term (in the
neighborhood of 3 to 5 years), this paper carried a long,
1~/2 year term with a fixed interest rate subsidized by the
2 The forfaiting market is essentially a market for "indirect" supplier
credits. In this market the seller of the note is usually an exporter who is
seeking to pass on al.l the risks and responsibilites for the collection of a
debt in exchange for immediate cash payment. The buyer has recourse only to
the originator of the note--a Soviet-awned bank in this example--and may -
resell at any time, dischar~in~ his obligation. A ready market exists because
25X1
25X1
Sanitized Copy Approved for Release 2011/03/11 :CIA-RDP86T01017R000505170001-2
 Italian export bank.
Sanitized Copy Approved for Release 2011/03/11 :CIA-RDP86T01017R000505170001-2
Moscow also appears to be boosting its use of third parties
to obtain funds. In particular, the Soviets appear to be looking
more toward the banks they own in the SNest for opportunities to
increase access to low-cost funds.
Sanitized Copy Approved for Release 2011/03/11 :CIA-RDP86T01017R000505170001-2
25X1
25X1
 Sanitized Copy Approved for Release 2011/03/11 :CIA-RDP86T01017R000505170001-2
It is unclear how far iVloscow will push these banks. On the one
hand, the Soviets have been interested--at least since their last
financial crunch in 1981--in extracting as much surplus cash from
these banks as possible.3
While the Soviet Union's current
The Soviets may also be tapping the International Investment
Bank (IIB) for funds. The IIB, headquartered in iVloscow,
generally funds long-term CEMA projects.
Box text).
needs for hard currency are great, it will probably require these
banks to move cautiously before engaging in any activities that
could backfire with losses far outweighing potential gains (see
25X1
25X1
25X1
25X1
II Sanitized Copy Approved for Release 2011/03/11 :CIA-RDP86T01017R000505170001-2
 i
Sanitized Copy Approved for Release 2011/03/11 :CIA-RDP86T01017R000505170001-2
Playing the Interbanks
least according to official records--a Soviet bank.
Vneshtorgbank and Soviet-owned banks in the West are active
users of the interbank market. This market--as its name implies
--involves bank-to-bank transactions in which banks with excess
cash can earn a small ret-.urn or banks with a cash shortage can
borrow to meet cotmiitmenfs. Rates worldwide vary, usually
slightly below the best commercial rates. There has long been a
"gentlemen's agreement" among bankers that deposits, for the most
part, will be offsetting so that n es advantage of this
relatively cheap source of funds.
The sometimes lax reporting by banks of the flow of funds
through interbank channels as well as a gradual erosion over the
years of the "gentlemen's agreement" has prompted some Western
observers to claim that Moscow is abusing this market. In
particular, it is argued that Moscow obtains low-cost interbank
funds and then uses the money to underwrite imports and/or cover
the cost of foreign activities. At a minimum, laundering money
through intermediaries, it is alleged, would artificially inflate
the size of Soviet assets and thus reduce Western estimates of
its net debt. The process involves one of the Soviet-owned banks
in the West--which is not legally a Soviet bank--borrowing
cheaply via the interbank market and then depositing the money in
the bank of another country, usually one that does not report its
liabilities and assets to the Bank for International Settlements
(BIS)--a repository and regular reporter of international money
flows. This money is then transferred to VTB, which in turn
redeposits it in a Western bank in the BIS reporting area. The
end result is that the only transaction that is reported in
Western statistics and includes the Soviet Union is the last one,
and this is reported as a Soviet deposit in the West. The
earlier money flows are either not reported or do not involve--at
25X1
25X1
Sanitized Copy Approved for Release 2011/03/11 :CIA-RDP86T01017R000505170001-2
 i
Sanitized Copy Approved for Release 2011/03/11 :CIA-RDP86T01017R000505170001-2
Although we have no evidence of Soviet misuse of the
interbank markets, the loophole exists and might be tempting to
Moscow during these austere times. We doubt, however, that
Moscow will play this game. The money is not free, and, even if
the rates are low, costs probably rise as the process becomes
more intricate. Moreover, there is a large element of risk in
borrowing heavily in what is basically a short term market and
using the money for long term purposes. Given that the Soviets
can borrow long term at only one quarter percentage point above
the interbank rate in London, there is probably little to be.
gained by paying only slightly lower rates for money that may not
be rolled over.
Table
Interbank Deposits by Soviet-Owned Banks
Percentage of deposits made to:
VTB BIS Banks Non-BIS Banks
Deposits made by:
MNB-London
67
30
3
E-W United Bank
64
32
4
Eurobank
47
49
4
MNB-Singapore
89
1
10
25X1
25X1
Sanitized Copy Approved for Release 2011/03/11 :CIA-RDP86T01017R000505170001-2
 Sanitized Copy Approved for Release 2011/03/11 :CIA-RDP86T01017R000505170001-2
25X1
25X1
Another third-party operation focuses on Moscow's use of its
clearing account arrangements.4
_..and Exploring New O tions
Although the Soviets are still adhering to their long-
standing financial conservatism and relying largely on familiar
instruments, they do appear more willing to expand their
financial horizons. Such a course is by no means a precursor of
a significantly larger role for the Soviets in world financial
markets. Indeed, Moscow's past activity in global financial
markets has almost exclusively been linked to facilitating trade
flows, and thus the dollar magnitude of Soviet transactions is
likely to contract along with oil earnings. But the scope of
Soviet financial activity may well expand as Moscow increases the
4 A clearing account is method b which tradin
accounting basis in order to avoid hard curreneg partners exchange goods on an
the status of the tradin arran anent, usually ynpa s~oftscurrencylsuch aspthef
"transferable ruble."
25X1
25X1
? Sanitized Copy Approved for Release 2011/03/11 :CIA-RDP86T01017R000505170001-2
 i
Sanitized Copy Approved for Release 2011/03/11 :CIA-RDP86T01017R000505170001-2
benefits of a smaller pool of funds.
use of new international financial instruments to maximize the
25X1
25X1
ii Sanitized Copy Approved for Release 2011/03/11 :CIA-RDP86T01017R000505170001-2
 Sanitized Copy Approved for Release 2011/03/11 :CIA-RDP86T01017R000505170001-2
The Soviets have been active players in foreign exchange
markets for years but are showing signs of increased
sophistication in the wake of erratic foreign exchange movements,
particularly the need to offset the effect of dollar
. depreciation. After being persuaded to accept its first ECU-
denominated loan in October 1984, the USSR requested ECU
financing on several more loans during 1985.5
Lastly, Moscow appears to have recognized that more
sophisticated financial dealings entail increasing the number of
actors to handle its transactions as well as expanding its role
5 The l]CxT--an acronym for European Currency Unit--is an accounting currency
based upon a weighted average of exchange rates for all European currencies,
lessening the impact of exchange rate fluctuations.
25X1
25X1
25X1
25X1
Sanitized Copy Approved for Release 2011/03/11 :CIA-RDP86T01017R000505170001-2
 -- i
Sanitized Copy Approved for Release 2011/03/11 :CIA-RDP86T01017R000505170001-2
trade trends and alliances.
Meanwhile, Moscow is pushing to obtain observer status in
GATT, the multinational group that promotes tariff and trade
cooperation, which would increase Soviet exposure to Western
New Ventures into Gold, Diamonds and Precious Metals
Moscow's financial adventurism also appears to be reflected
in its dealings on commodities markets. In particular, gold
sales have accelerated this year. At the end of the first
in world economic affairs in general.
25X1
25X1
25X1
25X1
25X1
25X1
II Sanitized Copy Approved for Release 2011/03/11 :CIA-RDP86T01017R000505170001-2
 Sanitized Copy Approved for Release 2011/03/11 :CIA-RDP86T01017R000505170001-2
quarter the Soviets had already sold over 100 tons through
conventional means,
Moscow has traditionally conducted its sales and purchases
on the major gold exchanges. Although the heavy volume of Soviet
trading has at times helped conceal the level of net sales, the
market is now more aware of Soviet transactions so that almost
any perceived change in the level of their sales could affect
prices relatively quickly. Thus Moscow seems to be seeking less
visible ways to market its gold.
25X1
25X1
25X1
25X1
25X1
25X1
Sanitized Copy Approved for Release 2011/03/11 :CIA-RDP86T01017R000505170001-2
 Sanitized Copy Approved for Release 2011/03/11 :CIA-RDP86T01017R000505170001-2
Sanitized Copy Approved for Release 2011/03/11 :CIA-RDP86T01017R000505170001-2
 I
Sanitized Copy Approved for Release 2011/03/11 :CIA-RDP86T01017R000505170001-2
Africa to control the sales of unpolished diamonds,
1~loscow is also continuing to market diamonds agressively.
The Soviets already have an arrangement with DeBeers of South
television.
Such an alliance may have been instrumental in driving up diamond
prices by 7.5 percent after they had fallen early in the year.
To help with sales, the Soviets also appear ,to have stepped un
marketing activities, including an advertising campaign on US
and are expected to rise again this year
i~7oscow also could earn extra dollars in the palladium market
even though there is no indication yet of increased sales.
Palladium sales account for the bulk of Soviet earnings in the
platinum metals, and Soviet exports have risen in recent years
Increasing sales from the 1.7 million ounces sold in
1985 to 2 million ounces this year would bring in over $30
million at current prices. Early in 1986, the USSR changed its
payment terms for palladium from 90-day credit to cash and
abandoned the previous practice of fixed-price offerings, a
Information on Soviet activity in the platinum market is
contradictory. Recent press reporting indicates that the Soviets
change
price.
25X1
25X1
25X1
25X1
25X1
25X1
J
ii Sanitized Copy Approved for Release 2011/03/11 :CIA-RDP86T01017R000505170001-2
 . Sanitized Copy Approved for Release 2011/03/11 :CIA-RDP86T01017R000505170001-2
have not yet increased platinum sales, even though demand is
strong. In addition, the steadily declining sales over the past
decade may mean that the USSR's supply of platinum is
insufficient to increase exports.
Moscow could increase platinum sales by
25 percent over the 1985 level. Such sales would amount to an
additional 50,000 ounces and boost earnings by more than $20
million at current prices.
Outlook
At present, the only prospect for earning large sums of new
hard currency is increased gold sales--a traditional cushion for
the Soviets in times of currency shortages. Some market analysts
believe a one-time yearly total sale of around 450 tons is
possible without large price effects--if handled judiciously.
This level of sales would push earnings from $1 billion to $2.5
billion above the 1985 level. Moscow's other financial
activities might generate payoffs totalling perhaps $500 million
given current market demand. While these earnings seem
inconsequential in the face of a possible $6-billion shortfall in
revenues from oil exports, they nonetheless help limit the
severity of import cuts.
iVIoscow probably believes that superpower status requires it
to become more active in international economic forums, with the
need to become more financially sophisticated heightened by the
25X1
25X1
25X1
25X1
~~ Sanitized Copy Approved for Release 2011/03/11 :CIA-RDP86T01017R000505170001-2
 Sanitized Copy Approved for Release 2011/03/11 :CIA-RDP86T01017R000505170001-2
Soviets perceive their hard currency situation.
Moscow's actions in this arena will entail some new forms of
cooperation with the West. The extent of the relations will be
tempered by reduced trade flows and an unwillingness to let
dependence on the West get too far out of hand. In fact, its
deteriorating hard currency position may even inhibit vioscow from
pursuing some riskier activities. But change already is
underway, and the scope of new ventures and the resulting pace at
which they proceed may be a good indicator of how seriously the
utilization of Western financial markets.
sharp drop in the price of oil and the depreciating dollar.
While we believe that Moscow will continue with its current
efforts, and even expand them where low risk opportunities are
present, we expect this expansion to be deliberate and well
thought out. Gorbachev's appointees may be willing to take on
new ideas, but conservatism, risk-avoidance, and centrally
controlled decisionmaking which characterize past and present
Soviet financial activities is clearly antithetical to the full
25X1
25X1
ii Sanitized Copy Approved for Release 2011/03/11 :CIA-RDP86T01017R000505170001-2
 -- . i --
Sanitized Copy Approved for Release 2011/03/11 :CIA-RDP86T01017R000505170001-2
Typescript Distribution List
1 - DCI (7E47)
2 - IYJCI (7E47)
3 - SA/llCI (7E47)
4 - ID/DCI (7E47)
5 - Executive Registry (7E47)
6 - DDI (7E47)
7 - Senior Review Panel (7B42)
8 - 12 - OGPAS/11VD/CB (7G15)
13 - NIO/USSR (7E47)
14 - NIO/DC>;,i~i ( ?E47 )
15 - NIO/SP (7E47)
16 - C/L>DO/SE ( 7E22 )
17 - IDO/SE (7E22)
18 - C (7E22)
19 - (7E22)
20 - 814 KEY)
21 - 58)
22 - ID/BONA (4E58)
23 - C/SOVA/NIG (4E51)
24 - C/BONA/NIG/DPD (4E65)
25 - C/SOVA/NIG/EPD (5E66)
26 - C/BONA/NIG/EPD/IA
27 - C/SOVA/NIG/EPD/RM
28 - C/BONA/NIG/EPD/FT
29 - C/SOVA/NIG/EPD/EP
30 - C/SOVA/R.IG (5E25)
31 - C/SOVA/R,IG/EAD (5E25
32 - C/SOVA/R.IG/TfNAD ( 4E12 )
33 - C/BONA/SIG (4E13)
34 - C/BONA/SIG/SFD (4E13)
35 - C/BONA/SIG/BPD (4E13)
36 - C/SOVA/DEIG (SE46)
37 - C/SOVA/DEIG/DEA (SE68)
38 - C/BONA/DEIG/DID (4E31)
39 - PDB STAFF (7F30)
40 - C/NIC/AG (7E47)
41 - C/ES/CIB (4E66)
42 - C/FBIS/AG (1016 KEY)
43 - C/ACIS (7D35)
44 - AC/CRES (3E63)
45 - C/IPC (2F21)
46 - D/ALA (3F45)
47 - D/NESA (2611)
48 - D/E[]RA ( 6602 )
49 - C/PES/N1PS ( 6F44 )
50 - D/OGPAS (7F17)
51 - D/O~, (2E60)
External Distribution:
52 - D/OEA (4F18)
53 - D/OGI (3G00
54 - AD/OIA
55 - D/O64~i. 5F46 )
25X1
25X1
Sanitized Copy Approved for Release 2011/03/11 :CIA-RDP86T01017R000505170001-2
 . Sanitized Copy Approved for Release 2011/03/11 :CIA-RDP86T01017R000505170001-2
Robert H. Baraz
Director, Office of Analysis for the Soviet Union and Eastern Europe
Bureau of Intelligence and Research
Department of State, lam. 4758
Dr. Stephen D. Bryen
Deputy Under Secretary for Trade Security Policy
Department of Defense
Pentagon, Ian. 40767
Col. Tyrus W. Cobb
Director, East-West Section, European and Soviet Affairs
DOB, Ian. 373
John Danylyk
Chief, Camunist Economic Relations Division
Bureau of Intelligence and Research
Department of State, Ian. 8662
Stephen I. Danzansky
Senior Director and Special Assistant to the President for
International Economic Affairs
National Security Affairs
DOB, lam, 373
David Epstein
Office of the Secretary of Defense
Net Assessments
Pentagon, lam. 3A930
Elliot Hurwitz
Special Assistant for the Office of the Undersecretary
for Economic Affairs
Department of State, lam. 7260
Susanne Lotarski
Director, Office of Eastern Europe and Soviet Affairs
Department of Commerce, lam. 3410
James Bean
Office of Soviet Union Affairs
Department of State, lam. 4223
Ambassador Jack F. Matlock, Jr.
Special Assistant to the President
Sr. Director, European and Soviet Affairs
DCiB, lam. 368
II Sanitized Copy Approved for Release 2011/03/11 :CIA-RDP86T01017R000505170001-2
 Sanitized Copy Approved for Release 2011/03/11 :CIA-RDP86T01017R000505170001-2
Tom Simons
Deputy Assistant Secretary for European and Canadian Affairs
Department of State, }an. 6219
Lucian Pugliaresi
Director, International Economic Affairs
National Security Affairs
Franklin J. Vargo
Deputy Assistant Secretary for International Economic Policy
Departrnent of Commerce, lan. 3850
W. Allen Wallis
Undersecretary for Econanic Affairs
Departrnent of State, Rn. 7256
II Sanitized Copy Approved for Release 2011/03/11 :CIA-RDP86T01017R000505170001-2