USSR: FACING THE DILEMMA OF HARD CURRENCY SHORTAGES

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• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP87T00787R000200260002-5
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• Original Classification: S
• Document Page Count: 30
• Document Creation Date: December 22, 2016
• Document Release Date: March 16, 2011
• Sequence Number: 2
• Publication Date: May 1, 1986
• Content Type: REPORT

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USSR: Facing the Dilemma
of Hard Currency Shortages
SOV 86-/0027X
May 1986
ropy 4 2 9
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Directorate of Secret
Intelligence 25X1
USSR: Facing the Dilemma
of Hard Currency Shortages
A Research Paper
This paper was prepared by)
the Office of Soviet Analysis
Comments and queries are welcome and may be
directed to the Chief, Economic Performance
Division, SOV~
Secret
SOV 86-10027X
May 1986
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USSR: Facing the Dilemma
of Hard Currency Shortages
Summary Low energy prices, declining oil production, and a depreciating dollar will
/~t/ormation avai/able substantially reduce the Soviets' ability to import Western equipment,
as oJ'2 May 1986 agricultural goods, and industrial materials for the rest of the decade. The
was used in this report.
decline in Moscow's hard currency import capacity-most likely on the
order of one-third--comes at a time when Gorbachev probably is counting
on increased inputs from the West to assist his program of economic
revitalization.
Although projections of future import capacity are fraught with uncertain-
ty, we believe that Moscow faces the prospect of real imports falling to lev-
els comparable to those of the mid-1970s. This estimate allows for some in-
crease in debt to the West, substantial annual gold sales, and an $18
average price per barrel for Soviet crude oil and oil products during 1986- 25X1
90. It also reflects our belief that Moscow will be unable to increase
substantially nonenergy exports, including arms, during this period.
Possibly caught by surprise and uncertain over the degree of the problem,
Moscow reacted to last year's fall in oil earnings with increased borrowing
and gold sales. By late 1985, however, Soviet traders' purchasing activity
had slowed, and by February 1986 planned purchases were being scaled
back. While some orders continue, the cutbacks appear to be across the
board and are even affecting imports of equipment for oil and gas fields.
These cuts, in addition to dealing with the immediate scarcity of hard
currency, will allow the leadership time to implement a more coherent
import strategy~ne that reflects the long-term nature of the problem.
The import pattern that emerges should give a clearer indication of the rel-
ative importance of various economic sectors to Gorbachev's program.
Gorbachev faces a difficult time in choosing among competing demands for
foreign exchange:
? The modernization program. While the success of Gorbachev's modern-
ization program hinges on internal factors, his lofty goals imply that
some highly specialized imports from the West for such sectors as energy,
machine tools, microelectronics, and telecommunications must be contin-
ued, if not increased. Import cuts in key intermediate goods such as
specialty steels, in turn, could strain already taut production schedules.
Secret
SOV 86-10027X
May ! 986
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? Consumer welfare. A cutback in hard currency agricultural imports
would result almost immediately in reduced availability of such
commodities as meat, vegetable oil, coffee, cocoa, and some fruits and-
depending on the size of the grain crop-could mean slower growth in do-
mestic production of meat, milk, and eggs.
There are several areas where Moscow could take action to counter the
adverse impact of the hard currency cuts:
? Economic initiatives. Soviet planners will need to revise the five-year
plan to account for reduced imports. Moreover, should current efforts to
boost productivity and efficiency falter, they might consider bolder
economic reforms to carry out Gorbachev's ambitious capital renewal
policy without drawing heavily on resources slated for defense.
? Western involvement in the Soviet economy. Prior to the fall in oil prices,
Soviet planners, including Gorbachev, were reportedly considering alter-
ing the nature of the relationship between Soviet entities and Western
firms to enhance the effectiveness of the technology and equipment that
the USSR will be able to afford. They recently have shown an interest in
joint ventures entailing Western profit sharing and managerial presence,
closer engineering and production consultations with Western firms, and
the creation of more training facilities with Western participation.
? Political relations with the developed West. We believe the Soviets will
consider ways-short of real concessions on significant political or
security issues-to foster a climate conducive to attracting cheap govern-
ment-backed credits and Western involvement in the Soviet economy.
The Soviets could consider, for example, toning down anti-US rhetoric,
relaxing restraints on Jewish emigration, and allowing expanded intra-
German ties. Flexibility would be strongly constrained, however, by an
expressed Soviet policy aim of reducing long-term vulnerability to
Western economic leverage.
? Relations with Eastern Europe. Moscow is likely to increase pressure on
its East European allies to fill some of the gap in hard currency imports;
it may also divert some of its oil exports away from the region. But
Eastern Europe is-not in a position to provide the scale of support the So-
viets require. Moreover, as falling oil prices reduce the value of planned
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Soviet exports to Eastern Europe, the latter will be in a stronger position
to resist Soviet pressures for increased exports.
? Relations with the Third World. Moscow's policies toward the Third
World, including its clients, are not likely to be significantly affected.
The hard currency component of military and economic aid has been
traditionally kept to a minimum. Hard currency support has been sizable
only with Cuba, totaling $700 million in 1984. We expect the Soviets to
be more aggressive on the international arms market, including an
increased willingness to part with state-of-the-art arms and provide
military technicians in order to boost hard currency sales.
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Deteriorating Export Earnings in 1986 and Beyond
2
Slumping Oil Revenues
2
A Declining Dollar
3
Over the Longer Term
3
Coping With Revenue Declines
4
Cutting Imports To Close the Gap
4
Gorbachev's Modernization Program
6
A. USSR: 1985 Syndicated Loans
B. Soviet Gold Marketing Strategy
C. Hard Currency Projections
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USSR: Facing the Dilemma
of Hard Currency Shortages
Downturn in 1985
Moscow's hard currency trade surplus dropped from
$4.4 billion in 1984 to under $1 billion in 1985 as a re-
sult of declining export earnings. On the basis of
preliminary Soviet trade data for the year, we esti-
mate that hard currency exports declined by over 15
percent to $27 billion, the lowest level since 1979 (see
figure 1). Falling domestic oil production and weaken-
ing oil prices took the largest toll, leading to a 20-
percent reduction in earnings from oil exports. The
available data further indicate a similar percentage
decline in Soviet arms exports, while most other
commodities remained at about the 1984 level. In
contrast, imports fell only about 5 percent, with most
of the reduction coming in the second half of the year.
Figure 1
USSR: Hard Currency Imports and
Exports, 1970-85
Exports
Imports
Moscow countered the earnings decline through in-
creased borrowing.' According to Western financial
statistics, Soviet debt to Western banks increased by
$6.5 billion in 1985. Although short-term borrowing
increased, the Soviets took advantage of their strong
credit rating to raise about $2.8 billion in medium-
and long-term syndicated loans at favorable interest
rates and repayment periods (see appendix A). Mos-
cow also requested some Western firms to arrange for
supplier credits or deferred payments for Soviet pur-
chases. In addition, gold sales reached approximately
180 metric tons, compared with less than 100 tons in
each of the previous two years, earning Moscow about
$1.8 billion. These adjustments, along with cuts in
imports, allowed Moscow to rebuild assets from a low
of about $8 billion at the end of March 1985 to
$12 billion by the end of December, about $2 billion
" I "
so
higher than the amount at the end of 1984.
' In addition to covering payment for reported imports, Soviet hard
currency export revenues are used to meet unrecorded expenditures
and debt service obligations. Reported exports overstate actual
earnings because of credits-net of repayment-extended to the
LDCs. Thus, the drop in hard currency exports last year required
the Soviets to look to other sources of funds to a greater extent than
had been the case the last few years.
The sharp reversal of Moscow's hard currency posi-
tion appears to have taken Soviet planners by surprise.
Soviet officials, in fact, may have initially viewed the
export shortfalls last year as a temporary event
resulting from lagging oil production and severe win-
ter weather. Throughout the summer and early fall,
trade officials continued to negotiate and sign major
contracts with Western firms for projects to be con-
structed during the 1986-90 period. The failure to 25X1
come to grips with the problem sooner may also have
been due to some confusion in the Soviet bureaucracy
as new appointees to top positions in the State Plan-
ning Committee (Gosplan) and Foreign Trade Minis-
try worked to develop strategies that would incorpo-
rate new directions proposed by Gorbachev. By late
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fall, however, Soviet officials were complaining of
hard currency shortages
The
buildup in Soviet assets, in turn, reflected Mocow's
taking advantage of favorable borrowing conditions to
provide a cushion against future hard currency needs.
Deteriorating Export Earnings in 1986 and Beyond
Slumping Oil Revenues. The sharp drop in world oil
prices this year has dramatically altered Moscow's
earnings position. Reduced prices, combined with taut
availability of Soviet oil for export stemming from
production problems, are likely to push Soviet hard
currency exports in 1986 down even further than in
1985; earnings from oil and gas could fall by as much
as $6-7 billion. The bulk of this drop-about $5
billion-would result from sustained low crude oil
prices of about $15 per barrel or less and lower gas
prices.2 Up to another $2 billion could be lost if oil
production problems lead to a further drop in the
volume of exports. We estimate that oil production
will at best remain at the current rate of about 12
million barrels per day (b/d) and could fall to 11.6
million b/d by the end of the year.
As in 1985, oil exports to hard currency countries
would probably bear the brunt of any production
declines. With few short-term opportunities at home
for stepping up the pace of energy conservation or oil
substitution, reduction in deliveries to domestic con-
sumers probably would disrupt production at a time
when Gorbachev is placing a high premium on boost-
ing economic growth (see inset on the domestic de-
mand for oil). With hard currency shortages of its
own, Eastern Europe would be hard pressed to replace
Soviet oil deliveries diverted to the West, despite the
fall in oil prices. The region already faces tight energy
supplies as evidenced by severe shortages in several
countries during the past year, and even modest cuts
in oil deliveries could seriously undermine the eco-
nomic performance of several countries.
' At present, the condition of the world oil market makes it almost
impossible to predict an average oil price for 1986. We have
estimated an average price per barrel of $17 for all exports of
Soviet oil, which assumes a world crude oil price of $15 for the year
and also takes into account the relatively high share of refined
Domestic demand for oil is likely to remain close to
the current rate of 9 million b/d as Gorbachev pushes
forward with his industrial modernization program.
Most of the easy gains in substituting gas for oil have
already been made, especially for boiler fuel in
electric power generation. A further decline in the
power industry's use of oil is possible-as much as
275,000-b/d oil equivalent by 1990 ij'coal supplies
increase, nuclear power plant construction acceler-
ates, and hydropower generation is not constrained by
low water levels. Gas substitution beyond this level-
though technically feasible-is likely to be con-
strained by the lack of feeder pipelines and control
instrumentation. On the other hand, increased de-
mand for power generation at thermal power stations
to offset shortfalls in any of these areas could reduce
the potential gain substantially.
Forced conservation through reduced oil allocations,
though possible, is risky. Most Soviet enterprises
lack the proper measurement and control instrumen-
tation to effectively monitor and adjust their expendi-
ture of fuel (either oil or gasJ. Given the heavy
emphasis on rapid output growth in the energy-
intensive sectors of the economy, such as machine
building and metalworking, it seems unlikely that
much forced conservation could occur without seri-
ously jeopardizing Gorbachev's plans for moderniza-
tion.
The modernization program will also push up de-
mandfor more light fractions in the mix of refined oil
products. We estimate that the Soviets will need to
refine about 600,000 b/d of additional light oil
products (gasoline, jet fuel, diesel fuel) by 1990.
Meeting this demand will hinge on the Soviet Union's
ability to increase its catalytic cracking capacity.
Moscow will need to construct or acquire 1 S catalytic
cracking units, each with a capacity of 40,000 b/d
throughput. The Soviets have built only two such
units since 1977. Importing the needed cracking
capacity from the West would be the fastest and
technically most efficient option, but would cost over
$1 billion in hard currency.
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Figure 2
USSR: Hard Currency Exports, With
Alternate Estimates for 1986
1985 oil volume
at $17 per
barrel a
- 200,000 barrels
_ per day less than
in 1985 at $17
per barrel
r-Additional
impact of dollar
depreciations
" Assumes a lagged reduction in gas prices and a slight increase in the
quantity of gas exports.
b Assumes impact of a 20-percent depreciation of [he dollar, affecting
70-percent of imports that are in nondollar currencies. Values for 1984 and
1985 are converted from rubles to dollars using the average ruble/dollar
rate for the given year. In 1984 and early 1985 the Soviets benefited from a
3-percent dollar appreciation.
Oil production has fallen for two consecutive years,
and we expect further declines during the rest ojthe
decade. A massive dose of new investment, such as
that scheduled for 1986, could stabilize or even
increase production for a short time. But this would
only be a stopgap measure; we expect depletion and
rising maintenance costs to outrun the introduction of
new capacity, requiring ever-increasing allocations of
investment each year just to sustain production:
? New well ,/tow rates have been declining steadily
since 1975. We expect this trend to continue as
irtfill drilling is stepped up and nort/towing wells are
put on pump.
? Rising water cuts, which currently exceed SO per-
cent in Tyumen' and 69 percent nationwide, intensi-
fy production problems. The water problem will
worsen as the well inventory expands.
? In the long run, new provinces with giant oilfields
will have to be found and developed if prospects are
to improve. In this context, the Barents Sea may
hold considerable potential, but any sizable com-
mercial productionjrom this area is unlikely before
the 1990s.
A Declining Dollar. Moscow must also contend with
a sharp erosion in its buying power caused by the
rapid fall of the US dollar. Roughly two-thirds of
Soviet exports are priced in US dollars, while about
70 percent of Soviet purchases are made in other hard
currencies. As a result, a 20-percent drop this year in
the value of the US dollar against the market basket
of currencies used to finance Soviet imports would
decrease the buying power of Soviet export earnings
to a level 15 percent below that of last year (see
figure 2).
Over the Longer Term. Moscow's reaction to current
problems will be influenced to a large extent by its
estimates of the long-term outlook for oil exports. At
present, the Soviets may not view the problem as long
term
We believe
that the Soviets will eventually have to come
to grips not only with low oil prices, but also with
declining oil production (see inset). Moreover, our
projected increases in gas sales of approximately 50
percent will only partially compensate for falling
earnings from oil exports as the price of gas-
following that of oil-constrains gas revenues.
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Coping With Revenue Declines
While the USSR is currently in a healthy financial
position, Soviet planners have limited options avail-
able to offset a sustained fall in oil earnings:
? Soviet assets in Western banks currently amount to
$12 billion, and Moscow could probably draw down
these assets by as much as $4 billion without
seriously jeopardizing its liquidity position.
? The USSR's excellent credit rating among Western
creditors offers the possibility of increased borrow-
ing at favorable rates. For example, Moscow could
easily raise another $1-2 billion in syndicated bor-
rowings this year and additional amounts from
other sources. The Soviets may also push for lower
interest rates and longer repayment terms on loans
that they negotiate.
? We believe that the USSR-with an estimated
2,800 tons of gold in reserve and annual production
of 340 tons-could increase annual sales to 300 tons
from recent levels of 100 to 200 tons without
disrupting the market, and perhaps discreetly sell an
additional 150 tons through futures markets and
nontraditional buyers. Sales of 300 to 450 tons in
1986 would raise an additional $1.2-2.7 billion in
revenues over the 1985 level of $1.8 billion. (See
appendix B for a more detailed discussion of Mos-
cow's gold strategy.)
? The Soviets may even seek to expand arms sales by
offering more sophisticated weapons to a larger
number of clients, perhaps on a barter basis as a
substitute for what normally would be hard curren-
cy purchases.
? Moscow also could look to boost other nonenergy
exports such as diamonds, chemicals, nonferrous
metals, and wood products by offering the goods at
prices below market values or via countertrade
arrangements. In the long run, Soviet efforts to
expand exports of manufactured items-especially
machinery and equipment-by offering greater in-
centives to producers may also have some success.
So far this year, the Soviets have actively utilized
several of these options to offset the continued decline
in their export earnings. Gold sales through February
are estimated at 100 tons or more, and the Soviets
have raised about $800 million in syndicated loans in
Western financial markets. They also appear to be
pressing for government-backed credits with maturi-
ties of 10 years or longer and interest rates below 7
percent in an effort to lessen their debt service
obligations over the next few years. Although first-
quarter statistics are not yet available, Moscow may
also have drawn down some of the assets that it
rebuilt in the fourth quarter of 1985.
Moscow, however, is unlikely to continue for long
with a strategy of heavy borrowing to limit the fall in
import capacity. The leadership, recognizing that
East-West lending is a political as well as an economic
phenomenon, is loath to put itself in the position of
being overly dependent on Western banks and their
governments. In particular, Moscow is unlikely to
undertake any steps-either by large borrowing or
excessive drawdown of existing assets-that would
jeopardize its ability to finance key imports such as
grain in bad harvest years.
Other than expanded gold sales, the USSR's options
offer little potential to counter declining oil revenues.
The level of arms sales is heavily linked to the oil
market: we doubt that Moscow can expand these
exports greatly as long as depressed oil prices weaken
the economies of major arms purchasers in the Middle
East. Attempts to boost exports of other nonoil com-
modities-such as machinery and equipment and raw
materials-are likely to have limited success given
generally weak demand for raw materials and West-
ern resistance to shoddy Soviet-manufactured items.
Cutting Imports To Close the Gap
Moscow faces the almost certain prospect of a sub-
stantial and sustained reduction in its capacity to
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import from the West in 1986 and beyond. The extent
of this reduction, however, is highly problematical,
with the price of oil the key variable. In our view,
Moscow faces the real possibility that its annual
import capacity will be cut by one-third from the
1984 level of $27 billion. The resultant $18 billion
annual average hard currency import capacity esti-
mated for 1986-90 (expressed in 1984 depreciated
dollars) is based on the following key assumptions:
? Each year during 1986-90 the volume of oil exports
declines by 100,000 b/d. The blended price ob-
tained from the mix of crude and petroleum product
sales declines from $28 per barrel received in 1985
to an average of $18 per barrel during 1986-90.
? Gas exports rise from 33 billion cubic meters (m') in
1985 to nearly 50 billion m' in 1990.
? Gold sales increase to an annual average of 300
tons, but arms sales stagnate at the 1985 level.
? Moscow is unable to increase substantially other
nonenergy exports for hard currency.
? Borrowing increases, but not past the point where
service on existing debt exceeds 30 percent of hard
currency earnings.
? The US dollar declines by 30 percent during 1986-
90 vis-a-vis West European and Japanese curren-
cies, with most of the decline occurring in 1986.
The situation is obviously fraught with numerous
uncertainties about the level of Soviet exports, the
price conditions Moscow will face, and the financial
options to be taken by the leadership:'
? In the extreme, if a prolonged oil price war cut oil
prices to $10 per barrel, severe oil production
difficulties further depressed Soviet oil exports, and
' Sensitivity tests on our projections indicate that, except for
changes in oil prices or arms sales, changes in the assumptions have
only a marginal impact on projections of Soviet import capacity.
(See appendix B for details on the sensitivity of the projections to
other nonenergy exports such as arms declined,
Moscow's annual hard currency import capacity
could drop to below $10 billion.
? Conversely, if Moscow undertook draconian mea-
sures that held the line on oil production and even
boosted oil exports by sharply cutting both domestic
consumption and deliveries to its Communist cli-
ents, it would be able to raise annual import capaci-
ty to roughly the 1984 level. To the extent that
external factors, such as rising oil and gold prices,
work in Moscow's favor, Soviet policies could be less
severe and still allow imports to rise. For example, if
world oil prices quickly recovered to $20 per barrel,
Moscow's annual import capacity would climb by
almost $2 billion.
Mounting evidence indicates that Soviet planners are
in the process of adjusting the import program for 25X1
1986 and beyond to reflect reduced Soviet earnings.
reports that the Soviets told a visiting Swedish delega-
tion in April that they need to cut imports from the
OECD by 30 percent this year and that imports of
consumer goods would be practically eliminated. The
Stockholm report is supported by a recent Western
press article that quotes Soviet Foreign Trade Minis-
ter Aristov as claiming that Western purchases will
fall 25 to 30 percent this year.
The decision to cut hard currency expenditures is
affecting all types of purchases. The major emphasis
at present, however, is cutting equipment imports
rather than other items-agricultural products and
intermediate goods-needed to meet current output
targets:
? Soviet oil minister Vasiliy Dinkov stated in late
January that most of the currently planned pur-
chases of Western equipment for oil and gas fields
would be postponed if not canceled
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a t ough cuts are occurring, some new contracts
are still being signed.
the US Embassy in Moscow
report that the Soviets have scaled back plans for
two petrochemical complexes, originally valued at
about $1 billion each, and an agrochemical plant
worth about $400 million.
Other imports are also being cut, but not as extensive-
ly as machinery purchases.
Figure 3
USSR: Composition of Hard Currency
Imports, 1984
Chemicals 5
inteimetliateti
Other
intermediates 3
Machinery and
equipment, 21
a Includes raw materials (including fuels), wood and wood products,
and consumer goods.
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309103 586
These cutbacks, in addition to dealing with the imme-
diate scarcity of hard currency, will allow time fora 25X1
coherent import strategy to be put into place
I
.
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at Chernobyl'.
~ The import pattern that emerges over the next
12 to 18 months may bear little resemblance to the
established priorities of recent years (see figure 3).
Soviet decisions on what imports are cut and which
remain should give a clear signal of the importance
attached by the leadership to various sectors of the
Soviet economy. Reassessing import plans may be
further complicated, however, by the damage to the
domestic economy resulting from the nuclear accident
Gorbachev's Modernization Program. Because of the
relatively small role that trade plays in the economy
as a whole, the overall impact of import reductions on
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Soviet Dependence on Western Machinery
Although imports of Western machinery and equip-
ment account for only about 10 percent of total Soviet
investment in machinery and equipment, these im-
ports have been carefully selected to meet the needs
of priority sectors of the economy. Since 1980, pur-
chases for the chemical, energy, and metallurgical
sectors have accounted for almost 70 percent of total
Soviet orders 4f machinery and equipment.
The Soviets often complain that they have been
disappointed with the results of Western machinery,
but the degree 4J'success in using such imports often
depends on whether they must be interfaced with
other Soviet-built machines or can be used in a stand-
alone manner (for example, turnkey plants). The
latter have contributed substantially to growth in
output and enhancement of technology in selected
industries, notably chemicals, automotive, pulp and
paper, and several defense-oriented machine-building
Figure 4
USSR: Share of Machinery and
Equipment Imports in Total Machinery
Investment, 1984 a
Percent
Domestic
production
63
Assumes a coefficient of 1 for converting machinery prices from foreign
trade rubles to domestic rubles.
industries.
Imports of Western technology have helped the
Soviets overcome some crucial shortcomings in Sovi-
et technology:
? In the steel sector, purchases of Western technology
for rolling operations and pipe production have been
particularly important.
? In the chemical sector, Western imports have pro-
vided key technologieslor the production, handling,
and storage o.1'fertilizers and for production of
plastics and synthetic.~bers.
? In the oil and gas sectors, recent imports of such
items as Western pipe, pipelayers, offshore drilling
and production equipment and technology, and
well-completion equipment have provided substan-
tial aid to Soviet oil development. In thefuture, the
Soviets will need and probably will continue to buy
corrosion-resistant pipe, and production and pro-
cessing equipment for Astrakhan, Karachagarde,
economic performance will be limited. The conse-
quences for several key sectors, however, could be
quite serious. The share of machinery and equipment
from hard currency countries is, according to our
estimates, about 10 percent of total machinery invest-
ment. Purchases of Western equipment, nonetheless,
have been important in improving production in the
defense, chemical, metallurgical, oil and gas, and
automotive industries (see figure 4 and inset on Soviet
dependence on Western machinery). Moreover, the
modernization program's lofty goals-when matched
against a realistic assessment of the capabilities of
domestic industries-imply that some highly special-
ized imports from the West for such sectors as energy,
microelectronics, and telecommunications must be
continued, if not increased. In addition, in an era of
Tengiz, and for offshore needs.
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increasingly tight resources, marginal changes in
availability of all resources (including hard currency)
become more important
Figure 5
USSR: Availability of Meat per Capitaa,
1960-84
Other aspects of Gorbachev's plan to accelerate eco-
nomic growth are also likely to suffer as import cuts
exacerbate already taut production schedules. Short-
ages of needed intermediate goods and spare parts
that have been imported in the past to prevent
bottlenecks could slow or even temporarily halt pro-
duction in some enterprises. Imports of specialty
steels, in particular, are important to a number of
sectors of the economy, including machine building.
In addition, some sectors of the chemical industry
require imports of key ingredients such as superphos-
phoric acid. Imported replacement parts are regularly
needed in the energy and mining sectors for pipelayers
and heavy earthmoving equipment.
Consumer We%/'are. The consumer, too, is unlikely to
escape unscathed from import cutbacks. Imported
farm products-over half of which have been hard
currency purchases-have played a major role in
maintaining dietary quality over the past few years,
while agricultural production has been in the dol-
drums. Large grain imports have kept the livestock
program on track, while other imports-including
vegetable oil, fruit, sugar, coffee, and meat-have
added quality and variety to a nutritionally adequate,
but traditionally monotonous diet. For example, only
by importing record quantities of meat-an average
of about 900,000 metric tons annually during the
1980-82 period~iid Moscow keep per capita con-
sumption close to the previous record achieved in 1975
(see figure 5). A reduction in imports of hard currency
agricultural products-which have averaged $10 bil-
lion annually since 1980-would result almost imme-
diately in reduced availability of many commodities.
Moreover, in the absence of bumper harvests of grain
and other feed crops, import reductions would mean
slower growth in domestic production of meat, milk,
and eggs. This, in turn, would probably lower worker
morale and reduce incentives to meet Gorbachev's call
for increased worker discipline.
Domestic output
Net imports
a Soviet official statistics on meat production are adjusted to conform to
Western definitions of retail weight (trim, including slaughter fat and bone,
is removed).
A series of poor harvests would present the Soviet
leadership with particularly difficult choices when
balancing consumption goals with hard currency con-
straints. For example, cutting livestock herds to re-
duce the need for imported grain would postpone
achievement of the 1990 per capita meat consumption
target. At the same time, hard currency constraints
would increase the urgency to successfully implement
Gorbachev's domestic policies to improve agricultural
performance and reduce waste. Some success here
would lessen the impact of import cuts in the long run.
Long-Term Adjustments
Changing Economic Initiatives. In allocating the
burden of import cuts among the various claimants,
Gorbachev is likely to factor in hoped-for gains
stemming from his efforts to improve worker disci-
pline and economic management. Specifically, he
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would like to eliminate some high-tech imports need-
ed for economic modernization by substituting equip-
ment that either the USSR or Eastern Europe is
currently capable of producing. In addition, Moscow
is most likely counting on improved machinery pro-
duction to reduce the scope of equipment it now needs
to import from the West. Hard currency outlays for
agricultural products and intermediate goods may
also be reduced to the extent that Gorbachev's efforts
to improve domestic performance on these fronts
begin to bear fruit. Weather, as always, will play a
pivotal role; a series of good harvests might allow
Moscow to cut imports substantially without jeopar-
dizing consumer welfare goals.
We doubt, however, that Gorbachev will be able to
achieve the necessary improvements through current
economic initiatives. Over time, as gains from disci-
pline and management reorganization fall short of
expectations, Gorbachev and his lieutenants may give
increased consideration to bolder economic initia-
tives-greater decentralization, increased privatiza-
tion-that many Western observers feel are necessary
to sustain substantial improvements in domestic eco-
nomic efficiency.
With total imports severely constrained, Soviet plan-
ners may also take innovative steps to maximize the
benefits from the limited amount of imports that can
be obtained. Gorba-
chev believes that the USSR must alter the nature of
its relationship with Western firms if it is to increase,
over time, the effectiveness of imported technology
and equipment and find ways to reduce the immediate
hard currency cost of imported technology. Soviet
officials are most likely to consider coproduction and
equity arrangements with Western firms as the most
effective way of tapping Western capital and manage-
rial skills.
Even before the sharp downturn in oil earnings, Soviet
officials had expressed interest in joint ventures en-
tailing Western profit sharing and managerial pres-
ence. According to a Western press report, they are
even considering joint-venture regulations along the
lines of the Hungarian legislation that permits West-
ern equity of up to 50 percent.
joint ventures were being considered as part of an
effort to formulate a plan to streamline the foreign
trade infrastructure. The Soviets have also taken an
interest in engineering, managerial, and production
consultation with foreign experts in the energy and
chemical sectors and have shown interest in setting up
a training school with courses in drilling, well comple-
tion, and operation of offshore oil wells.
Foreign Policy Options. The decline in hard currency
imports may also induce Moscow to introduce some
marginal changes in its approach to Eastern Europe,
the Third World, and the Western Alliance.
The USSR could turn to Eastern Europe to help
carry some of the burden of reduced earnings, either
by increasing imports above planned levels or decreas-
ing oil exports to the region. Soviet oil exports to the
region of approximately 1.4 million b/d-almost 40
percent of total Soviet exports to Eastern Europe-are
the linchpin of current bilateral trade ties. Although
Moscow has pledged to maintain the current level of
deliveries, it may consider diverting oil to Western
markets.
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Eastern Europe could absorb a marginal reduction in
oil deliveries over the next few years, especially if
world oil prices remain low. But the region's econo-
mies could not cope with cuts of the magnitude 25X1
necessary to provide substantial relief to the Soviets.
Large cuts in oil deliveries would force Eastern
Europe to look westward, which runs counter to
Moscow's longstanding efforts to increase intra-Bloc
trade at the expense of trade with the West. More-
over, such cuts could undermine the ability of the
various regimes to maintain the level of stability that
has been the rule in recent years.
The East Europeans have strong economic reasons to
resist Soviet pressures for further increases in exports
over the planned level. The past several years have
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seen a marked reduction in the size of East European
trade deficits with the USSR; by the end of last year,
all East European countries, except Poland, had near-
ly balanced trade with the Soviets. Moscow, more-
over, has apparently been successful in getting East-
ern Europe to begin repaying outstanding debts. The
recently signed trade plans for 1986-90 call for the
East Europeans to continue increasing exports-both
in quantity and quality-to the point where they will
soon be running trade surpluses. The East Europeans
agreed to these terms at a time when the CEMA oil
price was only marginally above the world price.
When the current oil price plunge begins to lower the
CEMA oil price, the rate of repayment will accelerate
quickly.b
Soviet economic policies with the Third World since
the end of the Khrushchev era have been pragmatic,
aimed at obtaining the most economic and political
benefits while limiting the cost. Economic aid is
relatively small and generally tied to Soviet exports,
with hard currency outlays kept to a minimum. For
this reason, the USSR's policy toward the less devel-
oped countries (LDCs) is not likely to change much as
a result of Soviet hard currency problems. Moscow
will continue to sell arms and offer economic assis-
tance to these countries for economic, political, and
strategic reasons.
In particular, Moscow will maintain its close ties to
client LDCs such as Cuba, Vietnam, and Nicaragua,
and continue to supply sufficient trade and aid to keep
these economies afloat. It will probably be even more
insistent that these countries increase their exports to
the USSR and use Soviet aid more efficiently. Such
pressures are likely to lead to increased strains in
relations between the USSR and these states, but,
given their dependence on Soviet assistance and lack
of viable alternatives, any fundamental realignments
are highly unlikely.
The Soviets may focus their economic assistance
program with nonclient states even further on selected
projects considered to have large economic or political
b Oil prices are set within CEMA on the basis of average world
prices for the previous five years. If crude oil prices average $15 for
the rest of the decade, prices for Soviet oil sold to Eastern Europe
payoffs. They could more aggressively compete for
projects in the relatively more advanced LDCs with
offers of favorable credits. Such projects would in-
crease Soviet nonenergy exports and earnings from
related services and costs not covered by credits.
Moscow may also increase its efforts to negotiate
barter arrangements, particularly for purchases of
desired agricultural commodities. Faced with finan-
cial problems of their own, the LDCs may become
more receptive to Soviet overtures for barter deals.
Finally, the Soviets may become more aggressive on
the international arms market and more willing to
part with state-of-the-art arms.
Western economic leverage.
Greater Soviet need for Western trade and credits
could lead Moscow to take Western attitudes and
reactions into account when formulating its foreign
policies, but not necessarily to become more accom-
modating.,The likelihood of Soviet flexibility would
depend substantially on how much opposition Gorba-
chev might encounter to such a position within the
Soviet leadership, whether he believed that pursuing
the issue might be useful in driving a wedge between
Washington and its allies, and how vulnerable he
perceives his domestic program is to cutbacks in
Western imports. In addition, possible flexibility here
would be strongly constrained by an expressed Soviet
policy aim of reducing long-term vulnerability to
With these major qualifications, it is nonetheless
conceivable that Moscow-while maintaining its
sharp competition with the United States in the Third
World-might be somewhat more flexible on selected
East-West issues in an effort to create a climate more
conducive to expanding Western commercial involve-
ment in the Soviet economy. The Soviets could consid-
er, for example, such tactical moves as toning down
anti-US rhetoric, relaxing restraints on Jewish emi-
gration, allowing expanded intra-German ties, and
improving the atmospherics of Japanese-Soviet
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Appendix A
Month Lenders/Arranger
Signed
February Arab-African International Bank,
United Bank of Kuwait
Banco di Roma, Bank of Nova Scotia, Bank of
Tokyo, Dresdner Bank, Credit Lyonnais, Insti-
tuto Bancario di Sao Paulo di Torino
May Lloyd's Bank International, Banco Commerciala
Italiana, Banco di Roma, Banque Paribas, Sumi-
tomo Bank, Credit Lyonnais
Credit Commerciale de France, Bank Interna-
tionale aLuxembourg, Kyowa Bank, Yasuda
Trust Bank, Banco di Sicilia, Sumitomo Trust,
Industrie Bank von Japan
August First Chicago, Arab Bank, Banque Indosuez,
Dresdner Bank, Fuji Bank
August/ Unnamed Japanese banks in London
September
September Banque Generale de Luxembourg, Caisse
d'Epergne de 1'Etate du Grand Duche
Industrial Bank of Japan
October Amsterdam/Rotterdam Bank, Tokai Bank,
Nederland Banque Nationale de Paris,
Lanschot Bondsparbanken
Union Banques Arabes et Francaises (UBAF)
November Societe Generale, Bank of Tokyo, Banco di Sici-
lia, LTCB, Mitsui Trust Nippon Credit Bank,
San Paulo-Lariano Bank, and others
Japanese bank in London, Moscow Narodny
Bank process agent
Terms Value
(million US 3J
Interest rate is 0.5 percent plus LIBOR, a and 100
loan is payable in full at the end of five years.
Interest rate is 0.5 percent plus LIBOR, and loan 100
is payable in full at the end of five years.
Eight-year loan with afour-year grace period at 91
interest rates of 0.25 percent plus LIBOR for first
3.5 years and 0.125 percent plus LIBOR for the
rest of term.
Seven-year loan at interest rates of 0.25 percent 210
plus LIBOR for first 3.5 years and 0.375 percent
plus LIBOR for rest of term with afour-year
grace period.
Seven-year loan at interest rates of 0.25 percent 67
plus LIBOR for first 3.5 years and 0.375 percent
plus LIBOR for the rest of term with four-year
grace period.
Eight-year loan at interest rates of 0.25 percent 350
plus LIBOR for first three years and 0.375
percent plus LIBOR for rest of term.
Eight-year loan at interest rates of 0.25 percent 250
plus LIBOR for the first four years and 0.375
percent plus LIBOR for the rest of term with a
four-year grace period.
No details available. 23.25
Eight-year loan with four-year grace period and 60.5
repayable in nine semiannual installments at an
interest rate of 0.25 percent plus LIBOR.
No details available. 100
Eight-year loan with afive-year grace period, 85.1
repayable in seven installments at an interest rate
of 0.25 percent plus LIBOR.
Credito Italiano (Milan); Arranger-Italian bank Eight-year club loan, repayable in nine install- 100
in London, syndicated by seven Japanese banks ments at an interest rate of 0.25 percent plus
LIBOR.
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USSR: 1985 Syndicated Loans (continued)
Month Lenders/Arranger
Signed
November First National (Chicago), Morgan Guaranty
Trust, Irving Trust, Bankers Trust, Royal Bank
of Canada
Terms Value
(million US SJ
Part of the loan is committed funds, and remain- 500
der is a revolving banker's acceptance to finance
grain purchases and other imports. The rate is
0.25 percent over banker's acceptance rate for
first two years, and repayments are due six
months after drawdown.
December Morgan Grenfell, other Western banks invited to Eight-year loan at an interest rate of 0.25 percent 148
take positions plus LIBOR, with repayment in nine semiannual
installments and afour-year grace period.
Seven-year loan at an interest rate of 0.25 percent 200
plus LIBOR.
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Appendix B
Soviet Gold Marketing Strategy
The Soviets have considerable flexibility with regard
to gold sales. We estimate that the USSR produces
approximately 340 metric tons of gold annually,
although between 1982 and 1984 gold sales dropped
below 100 tons per year. By adding new production to
its stockpiles, the USSR has built up its reserves to
about 2,800 tons.
Analysis of Soviet hard currency balance-of-payments
trends indicates that Moscow uses gold primarily as a
financing mechanism rather than a trade commodity
like oil. The Soviets generally sell more gold when
they need a rapid infusion of cash, and less-even
when prices are high-when they are in a good cash-
flow position. Thus, during the mid-1970s when they
needed to finance large purchases of grain and equip-
ment, gold sales were high, whereas in recent years
sales have been low as record oil sales to the West
have obviated the need for extra cash (see figure 6).
The decline in oil export earnings in 1985 sparked
gold sales of 180 tons, and we believe a continued fall
in oil earnings may well lead Moscow to resume even
Figure 6
USSR: Gold Marketing Strategy,
1975-85
Large rise
in imports
Oil earnings
level, large
grain imports
I
80
larger gold sales during the next few years.
Market specialists believe that Moscow could proba-
bly sell as much as 300 tons of gold on the open or
"physicals" market in 1986 without much effect on
the price-if the sales are spread over the year and
the USSR might commit to a sale in the futures
market and then-although it would be unusual in
that market-actually deliver the gold and take the
money. Increased sales in futures would be less likely
to cause price ripples than straight market sales above
300 tons, because Moscow is already a large player in
very closely and that Moscow would need to be very
cautious to increase its sales volume in an orderly and
nondisruptive manner.
the Soviets would turn to the
futures markets to sell any major quantities in excess
of 300 tons. Moscow uses the gold futures market to
speculate, but-like most players in this market-
does not get involved with physically transferring the
commodity. With its cash flow currently constrained,
the futures market.
In addition to marketing gold on the physicals and
futures markets,
Moscow is increasing its direct bilateral gold sales.
Oil and
other export
earnings drop
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. Direct sales take place at a
mutually acceptable price and usually without any
impact on the market. Although these sales normally
show up in the partner country's annual foreign trade
data (the Soviets do not report gold sales), the market
would not be aware of the trade in a timely fashion.
The USSR is also looking to gold "swaps," although
earnings from this pale in comparison to direct sales.
Since Soviet gold is of higher purity than South
African gold, Moscow can earn apremium-which
averaged about 40 cents an ounce last year-by
swapping its gold for a claim on unallocated vault
gold, which is then sold on the market. We estimate
that the Soviets earned $2.3 million from swaps in
1985 and are likely to earn much more this year. The
Soviet Foreign Trade Bank swapped 49 metric tons-
for apremium of about $650,000-in January, the
most significant quantity observed in one month in
recent years.
By using the physicals market, the futures markets,
and direct bilateral sales, the Soviets could probably
sell an additional 150 tons in 1986-bringing the
yearend total to 450 tons-without causing a major
sustained price decline, but would have difficulty
repeating this. Annual demand for gold, both for
industrial use and for investment and stockpiling, is
fairly constant. Knowledgeable gold market analysts
even view the current fall in oil prices as having a
neutral effect on the price of gold. Increased purchas-
ing power of industrialized oil-importing nations will
increase demand for gold enough to offset the decline
in the demand from the oil-exporting nations. We
believe, however, that concerted or repeated use by
the Soviets of the various methods to market gold
would eventually cause a price adjustment in all the
gold markets as word got around that the USSR was
selling on a continual basis.
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Appendix C
Hard Currency Projections
This appendix provides an estimate of Moscow's
capacity to import from the West in 1986-90 and still
maintain a sound hard currency position. The esti-
mate is based on assumptions regarding hard curren-
cy income streams, Soviet borrowing behavior, and
the international financial environment. The sensitiv-
ity of this estimate to changes in our assumptions is
also examined.
Baseline Projections of Import Capacity
In projections last spring, we estimated that Moscow
would need to reduce annual imports by as much as
$2.8 billion in real terms by 1990 from the 1984 level
of $27.3 billion to maintain its present debt service
ratio (dsr) of 19 to 20 percent.' Alternatively, if
Moscow were to try to maintain imports at the 1984
level, the dsr would have to rise to nearly 35 percent.
Since those earlier projections were made, a number
of key assumptions have been changed to reflect more
realistic earnings and debt service streams for Mos-
cow in light of recent changes in international mar-
kets. Projected oil and gas prices were lowered to
reflect a soft energy market expected to continue
throughout the rest of the 1980s. Projected arms sales
have been scaled back to reflect anticipated weak
demand by Moscow's primary arms customers. In
addition, the high level of Soviet borrowing in 1985
has constrained Moscow's future import capacity by
increasing future debt service payments.
Our earlier projection also did not take into account
changes in the US dollar vis-a-vis the currencies of
those countries from which the Soviets purchase a
majority of their hard currency imports. To get a
more accurate estimate of Soviet purchasing power,
especially in light of the recent depreciation of the
dollar, we have incorporated a dollar depreciation
factor into our current projection.8
Using the revised assumptions, we conclude that the
dsr would have to increase to almost 90 percent by 25X1
1990 if Moscow tried to keep real imports at the 1984
level (see inset for a listing of assumptions and key
results). On the other hand, if Moscow continued its
conservative borrowing policy, holding its dsr to just
under 20 percent, average imports for 1986-90 (in
constant 1984 depreciated dollars) would fall to $16
billion-approximately the level of imports recorded
in the early 1970s.' 25X1
Neither of these scenarios is particularly realistic. In
practice, we would expect Moscow to choose a bor-
rowing (dsr)/import combination somewhere between
the two extremes. For each percentage-point increase
in the dsr by 1990 over the current level, Moscow
could finance an estimated $0.8-0.9 billion in addi-
tional imports for 1986-90. However, debt in current
dollars would also increase about $1.4 billion for the
same period. A dsr of 30 percent would allow the
Soviets to import $1.7 billion more per year than if
the dsr stayed just under 20 percent. Under such a
scenario, Moscow would still have to reduce imports
to $18 billion.10
Because of the multitude of factors affecting the relative strength
of the dollar vis-a-vis foreign currencies-many of which work in
opposite directions-exchange rate trends are difficult to project
'All values in this paper, except where otherwise noted, are in 1984
depreciated dollars. This convention allows for comparisons across
' The debt service ratio is defined as the percentage share of
payments of principal and interest on Soviet debt in total hard
currency receipts and is a widely used indicator of a country's
financial soundness. The USSR's debt service ratio is very favor-
able by international standards. By contrast Mexico's debt service
ratio in 1985 was estimated at 4
time that otherwise would have been difficult to interpret.
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Assumptions Underlying Hard Currency
Balance-oJ-Payments Projection
Projections of Exports
? Oil exports fall from 1.18 million b/d in 1985 to
700,000 b/d by 1990, at a rate of 100,000 b/d per
year.
? Gas exports riselrom 33 billion m' in 1985 to 48
billion m' in 1990.
? Real arms sales show no growth in 1986-90 alter
dropping an estimated 30 percent in 1985.
? Real nonenergy, nonarms exports are held constant.
? Real net earnings from invisibles (excluding inter-
est) remain constant.
? Annual gold sales increase to 300 tons.
Projected Price Trends
? The overall annual irtflation rate applicable to
exports and imports is 3 percent in 1986-90.
? Nominal oil prices declineJrom $28 per barrel for
the mix ol'crude and petroleum products exported
to hard currency countries in 1985 to an average of
$18 per barrel in 1986-90.
? Nominal gas prices drop Jrom the 1985 level of
$119 per thousand m3 to an average price of $96 in
1986-90.
Our projections are based also on somewhat simplistic
assumptions representing our "best guess" about fu-
ture trends. The level of Moscow's hard currency
earnings and ultimately imports could be influenced
by Soviet options as well as events totally beyond the
control of Moscow. In the next two sections, we
examine a number of alternatives to test the sensitiv-
ity of our projection to changes in the assumptions."
" For purposes of comparison, we have constructed a "baseline"
scenario against which all the following scenarios will be compared.
Its chief characteristics are a debt service ratio of no more than 30
percent by 1990 with a resulting annual import capacity of $18
? The nominal gold price continues to grow at the
rate of inffationfrom its 1985 price of $31 S.
? Interest rates average about 9 percent.
? The average repayment period is eight years on
Western government-backed credits and.f~ve years
on medium- and long-term commercial credits.
? The dollar depreciates 30 percent by 1990, with
much ol'the decline occurring in 1986.
Key Results of the Hard Currency
Balance-oJ-Payments Projection
? Nortfuel, nonarms exports will surpass oil exports
as the USSR's main hard currency earner by 1988.
? Oil earnings as a percentage ol'total hard currency
revenues will declinefrom 40 percent in 1985 to less
than 20 percent by the end of the 1980s.
? Arms sales will increase their share of hard curren-
cy earnings to almost 25 percent.
? Gold and gas sales will become increasingly impor-
tant sources ol'hard currency revenues, with their
shares climbing to 12 and 17 percent, respectively,
by 1990.
Internal Factors
At present, there is considerable uncertainty sur-
rounding prospects for Soviet exports during the
1986-90 period. Resource availability and Soviet pri-
orities will be the key determinants of the actual level
of exports. As the scenarios below will show, we
believe that Moscow will have little opportunity to
return exports to 1984 levels.
Oil Exports. Because of the importance of oil reve-
nues as a source of hard currency earnings, the level
of oil exports will be the most important internal
determinant of import capacity. Each 100,000-b/d
change in oil exports from the baseline estimate
changes earnings by 2 percent (see table). Should
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Variations in Average Annual Hard
Currency Earnings and Imports a
e Assuming all changes in hard currency revenues are reflected by
changes in import levels.
b For purposes of comparison, we have constructed a "baseline"
scenario against which all the following scenarios will be compared.
Its chief characteristics are a debt service ratio of no more than 30
percent by 1990 with a resulting annual import capacity of $17.8
billion for 1986-90.
~ Assumes a lagged proportionate change in gas prices.
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Moscow be able to keep hard currency oil exports at
the 1985 level, earnings could climb by 7 percent,
resulting in a $1.8 billion improvement in annual
import capacity. In addition, Moscow has the option
to sell more oil on the hard currency market at the
expense of deliveries to its Communist allies as it did
in 1981 when faced with hard currency shortages. A
15-percent reduction in oil exports to these Commu-
nist countries during 1986-90, for example, could earn
Moscow an additional $1.6 billion per year, resulting
in a 10-percent improvement in hard currency import
purchasing power over the baseline projection.
Noit/uel Exports. Gorbachev has indicated that non-
energy exports will grow during 1986-90. If he is
successful and annual growth reaches 5 percent, these
exports will only return in nominal terms to 1982
levels by 1990 because of the estimated 25-percent
drop over the last three years. In the unlikely event
that Moscow could increase the annual growth rate to
10 percent, however, the Soviets could boost earnings
by 5 percent, allowing them to increase imports by
more than $1 billion per year.
External Factors
Perhaps even more uncertain are the projected trends
in world market conditions that will affect the
USSR's revenues and expenditure stream over the
next five years. In particular, price and demand
conditions for Soviet exports have fluctuated widely
over the last 10 years.
Energy Prices. Realized energy prices, which, accord-
ing to some analysts, might vary by as much as 50
percent from our assumed levels, could significantly
revise the level at which we think Moscow could
import over the next five years. For each dollar
change in the price of oil from the baseline assump-
tion-with a proportionate change in the gas price-
the USSR stands to lose or gain an average of $500
million per year in 1986-90.
If, as some forecasters are predicting, a price war
temporarily plunges the oil price to as low as $10 and
then keeps it below $20 through 1990, the Soviets will
face an additional 7-percent drop in their hard curren-
cy earnings-assuming gas prices follow with a pro-
portionate change. As a result, imports would have to
be reduced 11 percent from baseline levels and over
40 percent from 1984 levels, to just under $16 billion,
to maintain a dsr at or below 30 percent by 1990.
Alternatively, if a serious disruption in the world oil
supply sent prices of both oil and gas up to historical
highs for the 1986-90 period, the Soviets could raise
imports to over $25 billion.
Arms Sales. Another important contingency centers
on the hard currency market for arms, which current-
ly supplies Moscow with almost 20 percent of its hard
currency earnings. Financial difficulties could well
force the major Soviet customers to reduce arms
purchases by half, lowering annual Soviet earnings by
about another $2.6 billion below the baseline. As a
result, annual imports would be reduced from baseline
levels to $15 billion. On the other hand, a 50-percent
increase in arms sales could raise annual earnings and
imports by like amounts.
Gold Prices. Our projection is relatively less sensitive
to changes in the gold price assumption. For example,
a 50-percent change in the price of gold would
generate only a 6-percent increase or decrease in
revenues. Nonetheless, the 8-percent rise or 9-percent
decline in imports associated with such a change in
the gold price could be important when considered on
the margin.
Interest and Ir{/lation. Changes in assumed levels of
interest and inflation rates, like changes in gold
prices, result in relatively less variation in import
capacity levels. For example, a 3-percentage-point
decline ir? interest rates would boost import capacity
by only 6 percent above the baseline for the period.
Similarly, import capacity would decline by 10 per-
cent in the unlikely event interest rates were to
double. Variations in the assumed level of inflation
would have little effect on Soviet import capacity-
3 percent or less-because of its offsetting impact on
both import and export prices.
Dollar Depreciation. Estimates of the depreciation of
the dollar vis-a-vis other major currencies for 1986-90
and the resulting impact on Soviet purchasing power
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period.
are based on arbitrary assumptions. In the event
depreciation is 10 percent less than we now assume,
Soviet purchasing power could be 7 percent better
than our baseline case. Conversely, if depreciation is
10 percent worse, Moscow could stand to lose an
additional 7 percent in purchasing power over the
Gas Sales. The growth in projected earnings from gas
sales will not be sufficient to offset the decline in
estimated revenues from oil exports. This assumption,
however, is based more on projected Western demand
for Soviet gas than on the USSR's ability to supply
additional quantities. In the event Western demand is
higher than we now think likely, the Soviets stand to
gain an additional $400 million per year for each 10-
percent?boost in exports. Over 1986-90, such an
increase would allow Moscow to raise imports slightly
over baseline levels-by less than $500 million annu-
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Declassified in Part -Sanitized Copy Approved for Release 2011/12/01 :CIA-RDP87T00787R000200260002-5