THE STATE OF THE SOVIET ECONOMY AND THE ROLE OF EAST-WEST TRADE

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP88B00443R001103900113-6
• Release Decision: RIPPUB
• Original Classification: S
• Document Page Count: 22
• Document Creation Date: December 20, 2016
• Document Release Date: November 14, 2007
• Sequence Number: 113
• Publication Date: October 26, 1981
• Content Type: REPORT

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'The State of the Soviet Economy
and the Role of East-West Trade
Office of Soviet Analysis
National Foreign Assessment Center
26 October 1981
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Overview
As the Soviet Union completes the first year of its new
five-year plan, the economy has turned sour before the long
anticipated labor and energy problems have come into play. Three
.bad harvests have left agriculture in disarray. ?Jeantvhi1e,
transportation and mater'ia'ls bottlenecks. and smaller productivity
gains have reduced industrial growth sharply. Because prospects
for raising productivity are poor, GNP growth may well be limited
to 1-2 percent on average by the mid-1980s.
Slower economic growth will present President Brezhnev and
his colleagues. with some increasingly tough and politically
painful choices regarding resource allocation and economic
rnai;agement. Annual increments to national output .in the early
1980s will be too small to permit them simultaneously to meet
mounting investment requirements, to maintain growth in defense
spending at rates of the past, and raise the standard of living
appreciably. Simply stated, something will have to give.
Given their problems, the Soviet need for Western goods and
credits will increase greatly. Western imports would help
planners deal with the basic problems confronting the Soviet
economy during the 1980s--declining productivity and resource
stringencies. Imports of Western plant and equipment, though now
only about 5 percent of total domestic investment, make a
disproportionately large contribution since their productivity is
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substantially higher than Soviet-designed equipment. Large food
imports will be required to maintain consumer morale and
.encourage labor productivity during the 1980s.
Soviet leaders, however, would be unlikely to change their
foreign policy to ward off a Western economic embargo. They do
not believe such a course is economically necessary, in part
because. they do not think--based on the Afghanistan experience--
that a comprehensive embargo can be implemtnted, much less
sustained for more than year or so. Moreover, changing Soviet
foreign policy to prevent an embargo would be'viewed as
appeasement and would undermine the position of anyone who might
recorrmend i t .
1 an embargo were implemented, however, a denial limited to
US-origin equipment, technology and foodstuffs would be
disruptive only in the short term; other Western and some East
European products would be adequate substitutes. Only if the
USSR were denied access to most Western equipment and technology
for an extended period would the Soviet economy suffer
substantial damage. Politically, the response reaction to a full
scale embargo is highly unpredictable. The Soviet leadership,
for example, might respond by taking an even more aggressive
stance internationally. They probably would :see little positive
incentive in restraining their behavior abroad and might believe
that foreign adventurism could be used to rally support for the
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economic sacrifices and the greater discipline that would be
required at home. ?
The Current State of the Soviet Economy
As the Soviet Union completes the first year of its new five
year plan, the economy has turned sour before the long
anticipated labor and energy problems have come into play. After
averaging close to 4 percent during most of the 1970s, CIA
measures of the average annual rate of GNP growth fell to just 1
percent during 1979-80. Only a weak rebound is expected this
year.
Agriculture' -
Agriculture has been Moscow's biggest headache. The Soviets
have now suffered their third st?ra-ight harvest-failure. We
estimate that the grain crop will be about 170 million tons, 19
million tons less than last year's poor crop. Because meat
production and the output of most other crops are expected to
exceed last year's depressed level, however, total farm output
should increase slightly compared with last year. Nevertheless,,
output will still fall short of the 1976 level.
While the odds are that the weather will be better next.
year, a return in the coming decade to the unusually favorable
weather patterns that existed from the mid-60s to the mid-70s
seems unlikely. Rather, the somewhat harsher conditions that
prevailed for 20 years prior to the mid-60s are likely to be the
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rule. In this environment, the gains in agricultural output that
accrued between the mid-60s and mid-70s--largely the result of
good weather--will be nearly impossible to achieve in the 1980s
unless there is a sharp reversal of current trends in the
delivery of machinery and fertilizer to agriculture.
Industry
While agriculture has grabbed most of the headlines,
industry also has been doing poorly. More than halfway through
1981, growth in almost every major sector is running behind the
pace of a year ago. Civilian industrial output grew by less than
2 1/2 percent in first-half 1981 compared with first-half 1980.
In the postwar period, only the 1979 first-half showing was
worse.
Lagging output of industrial,materials.is a major reason for
the economy's malaise. An abrupt slowdown in the growth of the
steel and construction materials sectors (Table 1) has had a
decided effect on new fixed investment, while shortages of
nonferrous materials, lumber, and paper have become increasingly
evident.
Growth of Soviet energy production also has slowed. After
averaging almost 5 percent during most of the 1970s, primary
energy production should fall to less than 3 percent this year.
Oil output has been almost stagnant for the past year, while coal
output--which peaked at 724 million tons in 1978--will probably
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decline to 710 million tons this year. Only gas continues to do
well; the USSR should have little trouble in reaching its 1981
production goal of 16.2 trillion cubic feet. Meanwhile, spot
fuel shortages have become more frequent, reflecting a tighter
supply situation as well as distribution problems. Although the
Soviets are stepping up their efforts to increase the efficiency
of energy use in the economy, campaigns of this kind in the past
have fallen far short of their targets.
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USSR:
Average Annual Percentage Rates of Growth
of Industrial Production
1961-65
1965-70
1971-75
1976-80
Total Industry
6.6
6.3
5.9
3.4
Industrial Materials
6.8*
5.8
5.4
2.6
Ferrous metals
7.2
5.1
4.0
1.1
Nonferrous
metals
7.6
7.4
5.9
2.6
Chem cats
12.0
8.9
8.6
3.9
Construction
materials
5.4
5.7
5.4 -
1.8
Wood, pulp,
and paper
2.6
2.9
2.6
0
6.3
5.0
5.0
3.3
Electric power
11.5
7.9
7.0
4.5
Machinery
7.4
6.9
7.9
5.4
Civilian
8.9
8.2..
9.0
5.8
Military
4.1
3.6
4.5
3.4
Consuner Nondurables
4.8
6.4
3.4
1.6
Light industry 2.6
7.2
2.7
0.7
Processed foods 6.8
5.9
3.9
0.7
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The machinery sector--the foundation of the USSR's military
and civilian investment programs--has performed better than any
sector of industry in the past several years. But even the
growth of civilian machinery output--after increasing at about 6
1/2 percent per year in 1976-79--fell off to*a rate of less than
4 percent per year in 1980.
Underlying the economy's poor showing is the continuing
slowdown in the growth of labor'productivity. Productivity in
industry, for example, during the first six months grew at an
annual rate of less than 1 1/2 percent--almost one-third less
than in 1979-80 and far below the 4 1/2 percent average targeted
for the 1981-85 plan.
Output and Productivity in Soviet Industry - -
(average annual percentage change)
1951-60 1961-70 1971-75 1976-80
Output 9.2 6.4 .5..9 3.4
Manhours worked 2.6 3.0 1.5 1.6
Labor productivity. 6.4 3.3 4.4 1.8
The rising cost of exploiting raw materials explains part of
the slower growth.of industrial productivity. The quality of
mineral deposits has declined in many instances, and minerals,
energy, and timber must be obtained from remote areas, notably
Western Siberia. Declining rates of growth of investment in the
economy generally have also affected industry. Whereas fixed
capital in industry increased by 11-12 percent per year in 1951-
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65, this growth dropped to 7 1/2 percent per year in 1976-80.
Meanwhile, shortages of basic materials, such as steel and
cement, have become much more serious in recent years, creating
bottlenecks throughout the economy and disrupting and, in some
cases, halting construction activity and industrial operations.
Soviet planners, in trying to provide for the rising investment
requirements of defense industry, agriculture, and energy seem to
have shortchanged some branches producing critical industrial
materials. Economic plans were made consistent on paper only by
decreeing unrealistically large efficiency gains in these lower-
priority sectors.
Capital Formation -
Soviet planners--like their counterparts in other Warsaw
Pact countries--have apparently singled out fixed capital
investment to bear the brunt of dealing with tightening economic
constraints. Fixed investment in 1981-85 is slated to grow at an
average annual rate of only 2.4 percent. Indeed, there have been
recent indications that already modest investment plans are
undergoing further cuts. Historically, investment has increased
more rapidly--7 percent per year in?1966-75 and 3 1/2 percent
annually in 1976-80. _
The investment slowdown will affect most parts of the
economy. In particular, bottleneck sectors needing more
investment like steel, transportation, and civilian machine
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building are not likely to receive nearly as much as they
require. Only energy is slated for a sharp rise in investment
funding while defense procurement apparently will continue to
increase at past rates.
Slower growth in investment--or even falling investment--
will not have a sharp impact on economic growth in the near
term. Even with little growth in investment, the capital stock
will continue to increase fairly rapidly for a time. But by the
mid-1980s the investment decisions taken now are bound to reduce
the growth of fixed capital in the economy considerably.
Foreign Trade
Until recently, the USSR also has been able to use foreign
trade to offset some domestic shortfalls. Capitalizing on rising
energy and gold prices as well as rising arms sales Soviet hard
currency earnings reached a record $30 billion last year. As a
result, Moscow was able to greatly increase its purchases from
the West.
o Net food imports climbed from roughly $5.5 billion in 1978
to an estimated $12.5 billion this year. Agricultural
purchases now account for almost half of Soviet hard
currency imports. Without this support the Soviet diet
would have deteriorated seriously.
o Imported steel--mainly specialty steels and large diameter
steel pipe--has likewise offset shortfalls in domestic
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production. Deliveries totaled roughly 10 million tons in
1980--10 percent of Soviet production of rolled steel in
that year.
Purchases of equipment and tubular steel pipe from foreign
suppliers have allowed stepped-up investment and
exploitation of critical energy resources.
This year, however, Moscow's trade position has taken- a turn
for the worse. The combination of record high agricultural
imports and a softening Western market for oil could double the
trade deficit to $5 billion and leave Moscow with little if any
surplus in its current account balance. Nor are the hard
currency prospects bright in the immediate years ahead. Oil
exports earnings will be squeezed by stagnant or falling
production, rising domestic consumption, and--possibly--weak
prices. The Siberian gas pipeline--the only potential large
earner of foreign exchange--wi.ll not be .fully operational until
1986 or 1987 at the earliest.
Some potential may exist for increasing arms sales (last
year Moscow added $14 billion in new military contracts to its
order books), but the export outlook for other Soviet products is
much gloomier. Sales of civilian machinery and equipment for
hard currency have plateaued and may in fact fall, while exports
of wood, metals, and non-fuel minerals are expected to grow
little if at all.
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? ?
Consumer Welfare
The year 1981 marks the third consecutive year of increasing
food shortages, mostly in the area of quality foods--meat and
dairy products. Rationing of these items, mostly in the form of
informal purchase limits, has become increasingly frequent and
widespread since last winter. Factors other than the per capita
availability of food supplies, however, have forced the
government to act: namely, large-scale diversions from the
retail food .network, the maintenance of fixed prices in state
retail outlets, and growing demand generated by wage increases.
Whatever the cause of the shortages, the consumer's mood is
generally one of pessimism and resigned acceptance. Although
some work stoppages have occurred this year, Soviet workers are
still a long way from venting their dissatisfaction as the Polish
workers have. To diminish the potential for labor unrest, the
leadership has allowed the proliferation of special food
distribution systems. Once reserved largely for the Soviet
elite, these systems have become common at the factory level.
The encouragement of special food distribution, coupled with the
traditional stoicism of the populace, has been enough to maintain
labor peace. In effect, the leadership has shifted the worst
burden of the food shortage to social groups like the elderly who
are least likely to protest.
The most serious consequence of the slowing growth in
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consumer welfare from the leadership's point of view is its
impact on labor productivity. We expect per capita consumption
to stagnate during the mid-to-late 1980s. For a population that
has enjoyed substantial improvement in living standards during
the 1960s and 1970s, any interruption in these gains is likely to
reduce worker motivation and hence productivity. The leadership
is counting upon labor productivity gains to obtain 90 percent of
the growth in industrial output and the entire growth in
agricultural output in the current Five-Year Plan. Moscow thus
faces a dilemma. It is relying upon a strategy of promoting
efficiency and productivity throughout the economy rather than
more investment to restore past rates of economic growth and
boost consumer welfare. But unless the leadership provides
sufficient increases in quality foods and goods now to a labor
force less willing to defer material satisfactions to the future,.
we do not'think this strategy will work.
Leadership Response
So far the leadership's response to growing economic
difficulties has been cautious and conservative. We have seen
for example, no sign of an effort to curb military outlays to
boost the civilian economy. Physical indicators of future levels
of defense spending--such as programs in training and investment
in defense production and R&D facilities--point to continued real
growth of about,4 percent per year. Nor has the Politburo taken
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is ?
any significant steps to change the system of planning and
management to cope with the economic slowdown. The planners'
main concession to the resource bind has been to cut investment
growth during 1981-85 to the lowest rate in the postwar period.
The leadership clearly recognizes that the economic
situation is serious; President Brezhnev has been sounding this
'theme since the late 1970s. Evidence of the leadership's rising
concern is reflected in their attempt to impress the elite with
the serious nature of the economy's problems. In August 1979 a
high-level official of Gosplan was sent to address senior foreign
ministry officials on "Problems of Economic Development." He
candidly described the large drop in labor productivity and the
shortage of capital and manpower. The gloomy nature of the
discussion was unexpected and reportedly upset the audience.
From December 1979 to February 1980 a series of meetings was.
held, this time for a group of 300 leading academicians of the
Soviet Academy of Sciences. Senior government officials revealed
that the economy was suffering "very serious problems" and in an
unprecedented move asked for suggestions and advice.
Nonetheless, the leadership's reluctance to adopt new
policies on resource allocation or economic organization also
partly reflects a less pessimistic view of the economic situation
than our own. They tend to believe that present policies
designed to improve planning and stimulate technological progress
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Ah
will be successful eventually. In addition, Soviet leaders
believe that some of their problems are transitory. They
apparently believe, for example, that:
demographic trends will lead to an upturn in the labor
supply in the 1990s;
o better weather and greater efficiency will restore growth
in farm output and help solve the food problem;
o increased production of gas and conservation will more
then offset any stagnation in oil production in the years
ahead; and
o new technological fixes and breakthroughs will improve
More generally,
performance and productivity.
they tend to make their economic assessments in
comparative terms
Western economies
challenges.
Perhaps
is
may take some solace in the fact that the
also experiencing serious difficulties and
the most important reason for the inertia in
domestic economic pol
unwillingness of the
icy, however, is the inability or
present ageing leadership to undertake -
decisive actions and fundamental reforms. The ruling group,
knowing that its remaining tenure is limited, seems incapable of
making the hard policy choices involved in shifting resource
allocations, modifying administrative arrangements, and changing
organizational structures. Such decisions would necessarily
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affect entrenched institutional interests and generate
bureaucratic. conflicts, and would be fraught with political
uncertainties. Fundamental changes in economic policy thus must.
await a leadership that recognizes the economic risks of policy
gmmobilism and that is more reform-minded than the present
leaders.
Outlook for the Economy
The economic problems now facing the Soviets are for the
most part familiar.
o Agriculture continues to suffer from chronic
organizational inefficiencies and remains vulnerable to
wide swings in performance because of climatic conditions.
Investment has had difficulty in keeping up with an-
enormous, ageing capital stock; hence, capital stock
growth must necessarily slow.
o Growth in productivity has lost much of its steam as
exhortations have lost their effectiveness and material
incentives have been dulled by shortages of consumer goods
and a buildup of excess savings.
While the problems are familiar, their intensity has
increased--leaving the Politburo with less and less room for
maneuver. In the 1960s and early 1970s, the Soviet leadership
could satisfy a number of economic priorities simultaneously.
o Average living standards rose dramatically.:
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o Productive capacity increased rapidly in all sectors of
the economy.
Sustained growth in defense spending led to major
qualitative improvements in weapons systems as well as an
impressive expansion of military forces.
A multi-sided attack on priorities will no longer be
possible in the 1980s. In this new environment, there will be
some "losers," greatly complicating decisionmaking.
o GNP growth may average less than 2 percent per year over
the current decade.
o If defense spending continues to rise at about 4 percent
per year, the defense share in increments to GNP could
rise from about 1/4 now to 1/2 in the mid-1980s, and to
2/3 by 1990.
o Slower growth in industry and steady growth in defense
means much slower growth in investment and increasing
tensions among regional interests.
o Consumer-oriented programs probably will lose out and
those responsible for public order will have to worry more
about the population's mood.
Whereas the present leadership is not disposed to undertake
new policy initiatives, economic circumstances in the mid-to-late
1980s will force the Soviet leadership then in power to decide
anew on development priorities and--perhaps--on the need for
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economic reform.
Increasing Need for Western Support ?
Because of its economic difficulties, we think that the USSR
will have an even greater need for Western goods in the 1980s.
Specifically, Western imports could help alleviate:
o The Productivity Lag
Imports of Western plant and equipment, though now only
about 5 percent of total domestic investment, make a
.disproportionately large contribution as they are
generally more productive than their Soviet-designed
counterparts. Moreover, imports are concentrated in those
sectors most crucial to technological progress--e.g.,
chemicals and machine building.
o Fuel Shortages
Imported Western oil and gas equipment can help to locate
and explore new oil and gas resources and to maintain
production in older oilfields.
Industrial Bottlenecks
Steel shortages, for example, are hindering production of
civilian machinery. Continued imports of steel would help
counter the effects of inadequate Soviet investment in new
steel capacity.
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o Pressure on Defense Soendinc
A continuation of high growth rates for defense despite
the low economic growth rates projected for the 1980s will
lead to an inevitable erosion of the civilian machine
building sector. Imports of Western plant and equipment
could bolster the civilian industrial base.
o Consumer Welfare
Food imports, especially grain and meat, could be crucial
to maintaining consumer morale and encouraging labor
productivity during the 1980s.
m ports of Equipment and Technology
If the USSR were denied. access to Western equipment and
the Soviets would be forced to go it alone, entailing
technology, t quality and labor productivity. Soviet
major losses in produc
leaders would most fear a decisive interruption in commerce
because the USSR's scarce stock of resources could not be
stretched to ac'corrmodate a sudden demand for import
substitutes. They would especially want to avoid a curtailment
of trade in the next several years because they believe that
Soviet economic problems will be toughest in the short and
denial limited to US-origin equipment and
medium-term. While a
technology would be disruptive in the short term, other Western
European equipment and technology provide adequate
and some East Eur
substitutes. Anarrow group of items specific to oil and gas
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exploration and production, such as submersible pumps, represents
a notable exception, but even here industry experts say that
foreign replacements could be found within a few years.
Imports of Agricultural Products
Western imports are important to Soviet planners in
supporting the growth in living standards necessary to raise
worker morale and productivity. Even with normal harvests,
Moscow will need to buy 20-30 million tons of grain annually for
at least the next several years to support announced livestock
expansion programs. If all Western suppliers were to suspend
grain sales to the USSR, Moscow would be forced to take one or
more of the following steps:
o reduce livestock herds to alleviate some of the pressure
on feed supplies;
o expand rationing and other conservation measures;
o halt meat and grain exports to client states;
o draw down strategic grain reserves.
A partial grain embargo would have a much more limited
effect. Moscow could buy most of the grain it needs from other
suppliers, as it did after the post-Afghanistan embargo, although
the USSR would have to pay premium prices for the grain and cope
with additional port congestion.
The Role of Western Credits
But any increase in purchases of Western goods will depend
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primarily on Soviet ability to obtain hard currency credits.and
the terms on which these credits are granted. Thus, Moscow will
have to rely on gold sales and on Western borrowing if it is to
avoid cutting imports of agricultural products or capital
goods. Given its low debt-service ratio, Moscow should have
little difficulty raising additional funds as long as credits are
tied to imports and the political climate does not deteriorate
greatly. The USSR, however, will want long-term credits at
interest rates lower than those now prevailing in the West.
Otherwise, the benefits of borrowing would be greatly diminished
by a rapid build up of repayment obligations. Even under
favorable circumstances the Soviet hard currency position will be
extremely tight, and Moscow's willingness to supply hard currency
goods and assistance to its East European allies will be sorely
tested.
Implications of the Economic Slowdown for Western Leverage
In summary, we judge that the threat would not cause Soviet
leaders to significantly change their foreign or domestic
policies. They believe that:
o any response to such a threat would amount to appeasement
and would undermine their position both internationally
and domestically;
their economic problems, while serious, are not cause for
panic, and should begin to ease during the 1990s; and
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o the damage caused by an embargo would not lead to domestic
turmoil. The Soviet population, in their view, has had to
endure much worse hardships and if necessary could do so
again.
Whatever the Soviet perceptions, a widespread, sustained
embargo would cause substantial disruption and dislocation.
Several major development projects would be seriously delayed,
and Moscow would have to abandon its goals for consumption of
livestock products. A partial embargo would not hurt the Soviet
Union nearly as much, although measures as limited as
administrative delays in approving equipment and technology
exports would force plan adjustments. Politically, the Soviet
leadership might respond by taking an even more aggressive stance
internationally. They probably would see little positive
incentive in restraining their behavior abroad and might believe
that foreign adventurism could be used to rally support for
economic sacrifices at home.
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