ANALYSIS OF SOVIET CASH FLOW

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP88G01116R000700790019-9
• Release Decision: RIPPUB
• Original Classification: S
• Document Page Count: 18
• Document Creation Date: December 22, 2016
• Document Release Date: June 30, 2011
• Sequence Number: 19
• Publication Date: February 20, 1986
• Content Type: MEMO

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EXECUTIVE SECRETARIAT
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SUSPENSE 27 Feb 86
Remarks
To 9: Please have feedback to DCI on what has
been accomplished re his request and what is
being planned.
EA utive Secretary
tibgf
Date
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CRET
20 February 1986
MEMORANDUM FOR: Chairman, National Intelligence Council
FROM: Director of Central Intelligence
SUBJECT: Analysis of Soviet Cash Flow
1. The front page story in Sunday's Times on Soviet attempts to acquire
US banks for use in technology acquisition ,together with the attached speech
by Roger Robinson suggesting that Soviet banks-are managed to use their deposits
and interbank relationships in a manner which substantially enhances the currency
available to the Soviet Union, prompts me to ask for an analysis of 25X1
question. The timeliness of such an analysis is further built up b
memorandum highlighting the currency difficulties the Soviets are now experiencing.
I attach a copy of that memorandum.
2. I understand that OGI are working 25X1
problems in this area and I would like them or an one who might be appropriate
to get together nd see what information 25X1
needs to be pul nomenon. It will almost
certainly become an issue when Senator Garn, as I understand he is contemplating,
pushes a somewhat revised form of his proposed legislation authorizing greater
Presidential control over international interactions with Soviet Bloc and
associated countries.
William J. Casey
25X1
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The Security Triad of East-West Economic Relations:
Technology Transfer, Energy Trade, and Financial Flows
Presented by
Roger W. Robinson, Jr., President of RWR, Inc.
and former Senior Director for International
Economic Affairs at the National Security
Council (1982-1985)
Heritage Foundation
on February 11, 1986
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February 11, 1986
The Security Triad of East-West Economic Relations:
Technology Transfer, Energy Trade, and Financial Flows
Presented by
Roger W. Robinson, Jr.
I am delighted to have another opportunity to speak before
the Heritage Foundation on the subject of the security
dimensions of East-West economic and commercial relations in the
post-Geneva period. I would also like to convey special thanks
to those at Heritage who are dedicating their time and energy to
this crucial family of national security issues.
I think it would surprise most people were they to step back
and assess how many of the more publicized issues and challenges
which the United States faces in the world today are directly or
indirectly underpinned by the East-West economic and financial
equation. I make this assertion because, like most endeavors in
the human condition--whether it be at the individual, state, or
national level--the proverbial "bottom-line" of the ability to
get things done rests upon economics and particularly finance.
Having said that, I must confess that after a dozen years of
active involvement in this policy area, I continue to be
somewhat troubled by the lack of a more common understanding in
the Western Alliance concerning the key elements of the
strategic or security side of East-West economic and commercial
relations. I have long referred to what I believe to be the
three most important components of strategic trade with the East
as the "Triad." They are: 1) the illegal acquisition by the
Soviet Bloc of militarily-relevant Western technology;
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2) Western energy security--specifically, the ongoing Soviet
strategy to dominate Western Europe's natural gas markets; and
3) untied and non-transparent Western financial flows to the
Warsaw Pact countries. These components of the Triad are, in my
view, the principal avenues of the West's windfall contributions
to Soviet military-related innovation, the USSR's hard currency
earnings structure, and the Soviet Union's ability to maintain
and expand its costly global commitments.
For example, hasn't it struck most Western policy-makers as
odd that the Soviet Union, which has a total annual hard
currency income of only about $35 billion from all sources
(including arms sales), can sustain a global empire which can
directly rival the United States? More specifically, how does
the USSR support such a vast array of third country commitments
-- many of which must be hard currency financed -- with annual
earnings equivalent to only about 15% of total U.S. corporate
profits in 1984 or about one third of Exxon's annual revenues
for that same year? These are central questions which I believe
call for more thorough examination. Although the brevity of my
remarks today will not permit a detailed attempt to answer these
questions, I might at least offer a framework to advance the
search.
In the area of finance, I have often been curious why I've
never come across a security-oriented cash flow analysis of the
USSR -- a page divided down the middle with "sources" of hard
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currency on the left side -- for example, oil and gas exports
and the sales of arms, gold, diamonds etc.--and "uses" of hard
currency on the right side--such as imports from the West,
technology theft, underwriting Cuba and other client states,
KGB/GRU operations etc. My own guess is that a detailed
security cash flow analysis of this kind would show a formidable
annual hard currency short-fall that presumably has to be
financed through western borrowings. Declining Soviet oil
production and plummeting prices for both oil and gas --
composing approximately two-thirds of the USSR's total annual
hard currency earnings structure -- should result in an even
more active Soviet presence on the world credit markets than the
roughly $3 billion in new credits attracted in 1985. The fact
is that the level of Soviet indebtedness remained largely
unchanged during the period 1979-1984 despite the fact that the
USSR's hard currency needs apparently grew significantly. I
believe this discrepency can be, at least in part, explained by
substantial Soviet reliance on a rather hidden borrowing source
in the Eurocurrency market.
This less visible borrowing activity takes place in the vast
and amorphous interbank market where the Soviet Union has been a
major player for many years. The interbank market is formed by
the established practice among the world's banks of depositing
cash with one another to facilitate the efficient flow of funds
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and to earn extra income on excess cash. The London Interbank
Offering Rate (LIBOR) serves as the benchmark rate at which
these deposits are offered to prime potential borrowers and
usually floats at roughly 1% below the U.S. prime rate.
The six Soviet-owned banks located in the West, along with
their branches, have been major beneficiaries of this global
flow of interbank funds. The largest Soviet-owned banks in the
West include Banque Commerciale pour l'Europe du Nord or
Eurobank in Paris, Moscow Narodney Bank, London (which often
serves as the coordinating point for other Soviet banking
institutions in the West), and Ost-West Handlesbank in
Frankfurt. Other 100% Soviet-owned banking institutions are
located in Luxembourg, Zurich, Vienna, Singapore and Beirut.
The Soviets go to some lengths to obscure their complete
ownership of these institutions. For example, these banks are
incorporated under the laws of the countries in which they are
domiciled, have foreign nationals in management positions, have
what appear to be a diverse group of shareholders, and even
maintain representative offices in Moscow similar to Western
banks.
These Soviet banks engage in other banking activities
outside the interbank market and even place some of their own
deposits with major western banks. This does not, however,
offset the enormous advantage to the Soviets of having access to
a large amount of hard currency at an interest rate which is
below the U.S. prime rate and which can be used at their sole
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discretion. Access to these western deposits also permits the
Soviets to avoid more expensive and visible forms of western
financing. Afterall, why should the USSR arrange letters of
credit, bankers acceptances, or go more often to the syndicated
loan market when they can tap a largely invisible pool of
western deposits for years at a time at interest rates below
U.S. prime?
It is very difficult to estimate the precise amount of such
western funds on deposit with the Soviet Bank for Foreign
Trade, the State Bank of the USSR, and Soviet-owned banks in the
West. Nevertheless, as the Soviets maintain correspondent
banking relations with virtually every sizeable banking
institution in the world, a ballpark estimate of the aggregate
amount of western deposits with Soviet-owned banks in West would
be roughly $5 billion. I would estimate that several billion
dollars more in western deposits have been attracted directly by
the Soviet Bank for Foreign Trade and the State Bank of the
USSR. East European banks also enjoy the same favorable access
to this untied, low-cost financing source. Although these
deposits must eventually be repaid, similar to loans, they still
represent a major reservoir of cheap money. I think that it
would be very illuminating for the Administration and Congress
to get a better handle on the Soviet Union's use of this kind of
oversized, non-transparent reserve checking account for the
funding of its global activities.
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Returning for a moment to the first leg of the strategic
trade Triad -- the Soviet acquisition of militarily-sensitive
technology -- we can take satisfaction in knowing that this
problem is far better understood today than ever before. The
President instructed the bureaucracy early in his first term to
redouble its efforts to stem the flow of strategic technology to
the Warsaw Pact countries. This past fall the Department of
Defense, in coordination with the CIA, released an unclassified
White Paper which made a valiant effort to quantify, where
possible, the magnitude of our technology losses. The paper
sought to identify the estimated savings achieved by the Soviet
military research and development establishment as well the
direct costs incurred by U.S. taxpayers to defend against these
Western-sponsored advances in Soviet military strength. Whether
or not one accepts the estimates in the Department of Defense
White Paper, most informed observers would have to concede that
U.S. taxpayers are penalized to the tune of billions of dollars
annually.
Concerning the second leg of the Triad -- Western energy
security, and specifically the carefully crafted Soviet gameplan
to dominate the natural gas markets of Western Europe -- again,
the President demonstrated what will be judged by history to be
impressive vision and courage when he urged his allied
counterparts, at the Ottawa Summit in July, 1981, to limit their
level of dependency on Soviet gas supplies. Subsequent to the
Ottawa meetings, he dispatched two high level U.S. delegations
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to Europe (the first one in the fall of 1981 and the second in
early 1982) to persuade the allies to identify and develop
secure, indigenous natural gas reserves (particularly the Troll
gas field in Norway) and to halt the extension of subsidized
credits to the Soviet Bloc for energy development and other
purposes. The declaration of Martial Law in Poland in December,
1981 added urgency to these undertakings, since the Alliance
needed to send a unified signal that continued repression in
Poland would not be cost-free.
The President immediately decided to implement economic
sanctions aginst the USSR by embargoing U.S. origin oil and gas
equipment destined for the Soviet energy industry. In June,
1982, with no movement toward reconciliation in Poland and
insufficient allied unity on a response to this situation, the
President extended these sanctions to include U.S. subsidiaries
and licensees located abroad. This decision temporaril
crippled progress in the construction of the USSR's major gas
export pipeline. Intensive allied consultations were then
undertaken at the Ministerial level with a view toward achieving
the President's goal of forging a durable allied consensus on
the security dimensions of East-West trade.
The positive outcome of these Ministrial deliberations led
the President to decide in November, 1982 to lift the oil and
gas equipment sanctions but only after the allies had agreed to
undertake urgent work programs in the key strategic trade areas,
including enhanced Western energy security, which were to be
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completed by the Williamsburg Summit in May, 1983. Progress was
swift in coming. The practice of offering subsidized credits
was eliminated by an understanding achieved within the OECD. An
agreement signed by some 25 nations in the International Energy
Agency in May, 1983 also represented a major accomplishment for
the Administration. The language of that agreement effectively
deprives the USSR of major European participation in
construction of the anticipated second strand of the Siberian
gas pipeline which is presently underway or will be imminently.
If abided by, this agreement will not only block Soviet
domination of Western Europe's gas markets but will also deny
the USSR between $5-$10 billion in annual projected hard curency
earnings from the second strand in the mid to late 1990's and
beyond.
I think it is important to emphasize that the mission of the
Poland-related sanctions was not, as was so often reported in
the world press, to block the first strand of the Siberian gas
pipeline project. The Administration was aware that the first
pipeline was a fait accompli. The Administration's extension of
the Poland-related sanctions represented a last-resort, tactical
decision by the President to penalize Soviet repression in
Poland and to forge a new consensus within the Alliance on the
security aspects of East-West economic relations. All of the
security-minded objectives which the President outlined to his
counterparts in Ottawa in 1981 were achieved.
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Policy Prescriptions
I would like to use the remainder of this talk to offer some
specific policy recommendations which address each of the three
legs of the strategic trade Triad.
First, on technology transfer, I recommend the continuation
of the effort to quantify the impact on the West of what these
losses mean to our long-term security, to our taxpayers, and our
intensive efforts to reduce the U.S. budget deficit. The
potential Gramm-Rudman trigger mandating reductions in our own
defense expenditures adds urgency to this task. The
infrastructure of Cocom must be substantially bolstered from its
woefully inadequate present status and an expanded array of
incentives and disincentives should be brought to the table by
the U.S. in negotiations with the allies and neutral countries
in an effort to finally subordinate commercial benefit to our
common security. The U.S. should also continuously develop new
methods designed to assist the tracking and identification of
stolen technology so that would-be diverters will operate in an
uncertain environment.
In the area of western energy security -- The Administration
should send an early signal to the allies that despite the fall
in demand for Soviet gas, we will insist that the May, 1983
International Energy Agency agreement be strictly observed,
particularly when the Soviets begin to contact Rhurgas, Gaz de
France and others for below-market second strand gas deliveries
during a future period of increased demand. In addition, the
positive direction of the current negotiations for the
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accelerated development of the Norwegian Troll gas field, as a
substitute for Soviet gas, should be politically reinforced at
the highest levels. The Administration should also do whatever
it can to defuse the dangers inherent in West Berlin becoming
100% dependent on Soviet gas stemming from an agreement signed
in 1982 and the likelihood that Turkey will become approximately
95% dependent on Soviet gas if current negotiations with the
USSR come to fruition. Also, allied willingness to provide the
West's most sophisticated oil and gas equipment and technology
to the USSR and actively assist in the extraction, processing,
and transmission of Soviet energy resources should be, in some
way, factored into allied efforts to increase emigration from
the USSR and achieve equal and verifiable reductions in nuclear
weapons. The other elements of the Triad should likewise be
considered in this context.
Finally, the Congress, in close coordination with the
Administration, can play an important role by focusing on the
practice of untied or so-called balance of payments lending to
potential adversaries and reaching a clearer understanding of
the amounts and Soviet use of interbank deposits. Certain
principals or guidelines should also be considered for voluntary
adoption by the Western banking community. Specifically, each
loan to a potential adversary should have an identified and
verifiable purpose -- be it an equipment purchase, a specific
project (with loan drawdowns calibrated to project expenditures)
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or a short-term commodity transaction such as grain. Every loan
should have a maturity that is strictly matched against the
duration of the underlying transaction. For example, a grain
transaction should be financed with a maximum loan maturity of
180 days rather than 3 years which would otherwise de facto
provide the Soviets with 2 1/2 years of cash for their
discretionary use. Finally, U.S. banks should aggregate their
interbank deposit exposure to all Soviet-owned entites and
periodically report these aggregate exposures to U.S. bank
regulators, if they are not already doing so. The same
practices should be applied to East-European entities. In this
connection, I am not arguing for the discontinuation of
interbank activity with the USSR -- only that specific
information be developed on the amounts and the proper use and
maturity of such deposits.
As these proposed principals to govern financial flows to
potential adversaries are prudent from a commercial as well as
security perspective, they will hopefully not present major
problems for the Western banking community. The Administration
should, in turn, urge our allies to adopt a similar approach.
To take an extreme example, how would we feel about even $10
million in untied Western cash being made available to Colonel
Kaddafi for his sole discretionary use? This particular issue
brings to mind the sound advice offered by John Le Carre in his
novel "The Honorable Schoolboy" which is embodied in the three
simple words "follow the money."
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In conclusion, there don't have to be any "losers" in the
policy recommendations being proposed in this paper.
Legitimate, non-strategic trade can go forward and expand; the
U.S. can continue to streamline and expedite its export
licensing procedures and trim the Cocom list, where indicated,
to ensure enhanced U.S. export competitiveness; Western loans
can continue to support specific trade transactions and
projects; and hopefully incentives for greater Soviet
geopolitical cooperation can be created through expanded
East-West economic and commercial relations. Nevertheless, we
simply cannot avert our eyes from those economic and financial
practices which are deleterious to our long-term security
interests; nor can we side-step the need to develop a more
comprehensive picture of how the Soviet Union funds itself and
its global activities.
I would hope that the U.S. security community, the Heritage
Foundation, and other like-minded organizations will dedicate
more resources and talented people to undertake further analyses
of these issues. I would also recommend that consideration be
given to the establishment, through legislation, of an Assistant
Secretary of Defense for International Economic Security
specifically to deal with the critical security aspects of trade
and energy relations, and global finance. If properly
structured, such a new position need not interfere or overlap
with existing positions or functions which are, for example,
responsible for the complex issue of technology transfer.
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Finally, it is imperative that we successfully come to terms
with the enormous Western contribution to the economic and
financial vitality of the Soviet Union and its client states and
formulate sensible policies accordingly.
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CONFIDENTIAL
ROUTING AND RECORD SHE
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DATE
5 February 1986
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building)
DATE
OFHCER'S
COMMENTS (Number each comment to show from whom
RKFIVEO
PORWARDEO
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to whom. Draw a lie across column after each comment.)
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CONFIDENTIAL
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CONFIDENTIAL
The Director of Central Intelligence
Wuhingtm, D.C. 20505
National Intelligence Council
NIC #00606-86
5 February 1986
MEMORANDUM FOR: Director of Central Intelligence
THROUGH: Vice Chairman, National Intelligence Council
Chairman, National Intelligence Council
Acting National Intelligence Officer for Economics
SUBJECT: Possible Substantial Decline in Soviet Hard Currency Balance
1. For a variety of reasons, the Soviet hard currency position could
deteriorate sharply in 1986. For one, the substantial decline in oil prices
will affect both oil and gas revenues, which account for 50 percent of hard
currency earnings. Also, the decline in the value of the dollar will raise
the cost of Soviet purchases made in Western Europe. Obviously, an additional
reduction in oil export volume would further exacerbate the problem.
2. Lower oil and gas export charges could reduce earnings by around $4
to $5 billion. Increased costs of purchases in Western Europe could add $3 to
$4 billion to the import bill, assuming a 20 percent year-over-year
appreciation of European currencies against the dollar. A decline in oil
volume equal to the 1985 reduction of 300,000 b/d would reduce earnings by
just under $2 billion at 1986 prices. Taken together, these changes imply a
worsening in the Soviet balance of payments of at least $7 billion and perhaps
as much as $10 to $12 billion deterioration in 1986, as compared to 1985. A
decline of $7 billion would mean a 25 percent reduction in Soviet purchasing
power this year in addition to the 10 to 15 percent decline that took place in
1985. The fall in Soviet revenues in 1986 could be even greater if the
decline in oil prices causes a reduction in purchases of Soviet arms by oil
exporting countries.
All portions Confidential
Cl By Signer
Decl OADR
CONFIDENTIAL
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