USSR REVIEW

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP88T00799R000200020004-5
• Release Decision: RIPPUB
• Original Classification: S
• Document Page Count: 46
• Document Creation Date: December 27, 2016
• Document Release Date: January 10, 2012
• Sequence Number: 4
• Publication Date: February 1, 1985
• Content Type: REPORT

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USSR Review
January-February 1985
11
60(6 0-D sy~~
Project number C
I W M J K
Page number
Total number of copies
Dissem date
Extra Copies
Record Ctr
SOV UR 85-OOIX
February 1985
Copy 5 5 5
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j \ Intelligence
USSR Review
January-February 1985
The USSR Review is published by the Office of
Soviet Analysis. Comments and queries regarding the
articles are welcome
Secret
SOV UR 85-OOIX
February 1985
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Contents
The Lot of the Soviet Perspective
Consumer
Consumption levels in the USSR made some impressive gains
during the 1960s and most of the 1970s, but have risen only about
1 percent per year since 1980. The outlook for improvement in the
standard of living for the rest of the 1980s is not bright because
economic growth is likely to be slow and investment and defense will
continue to take precedence. Nevertheless, Soviet leaders will
probably try to increase consumer spending because of its perceived
link to productivity and the potential for social unrest if living
standards decline.
Living Standards in the Soviet Union and the United States
Since 1960 the USSR has inched toward its oft-proclaimed goal of
matching the US standard of living, but real Soviet per capita
consumption is still only about one-third the US level. Life for the
average Soviet citizen is drab by Western (and even some East
European) standards. Soviet consumers have seen some improve-
ments-their diet now nearly matches the US diet in daily protein
and calories, and many households have manual washing machines
and small refrigerators. Housing is still very tight, however, and
health care problems have contributed to rising death rates and
lower life expectancies. The future may see some of these problems
mitigated, but, with economic growth slowing, living standards
probably will improve more slowly than they did in the 1960s.
Page
Efforts To Improve the Food Supply
The Soviet leadership has used a variety of economic and political
approaches to manage food shortages in recent years. These meas-
ures probably have checked the potentially serious threat to social
stability that food shortages presented in the late 1970s and early
1980s.
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Because the USSR is not producing enough automobiles to meet
consumer demand, owners are keeping vehicles beyond their
planned service lives. This may become more difficult, however,
because Moscow has apparently decided not to reallocate resources
to increase substantially the production of spare parts and has taken
steps to tighten its control of gasoline consumption. The Soviets
appear to be readying plants to increase automobile production later
in this decade, but increments to production and consequently to the
domestic supply will probably be small.
Personal Care and Repair Services-The Stepchild Sector
The Soviet leadership has voiced concern that the shortage of
personal care and repair services is reducing worker productivity but
has made only token efforts to solve the problem. The service sector
continues in the doldrums, reflecting leadership stinginess in allocat-
ing resources to it and a lack of the incentives that would really
produce services for individual consumers
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Impact of Resource Allocation Policies on the Consumer) 123 25X1
If Soviet GNP growth during the rest of the 1980s is as slow as we
expect, 1.5 to 2.5 percent per year, consumers will probably enjoy
only moderate gains in the standard of living. Moreover, if the
growth rate of investment or defense spending increases, per capita
consumption could stagnate or even decline over the rest of the
decade.
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Other Topics The Soviet-Cuban Relationship: Serving Mutual Interests 27 25X1
The Soviet-Cuban relationship remains strong because each country
serves the other's interests. Cuba helps the Soviets advance their
influence in the Third World and challenge the United States in the
Caribbean Basin, while Cuba is dependent upon the Soviets for
economic and military aid. But the relationship is not immune to
strains, which occur when one side attempts to advance its foreign
policy goals at the expense of the other. The two countries have just
come through such a period of strained relations. The recent
problems have been set aside for now, but their root causes have not
disappeared.
Proposed Soviet Gas Pipeline to Eastern Europe
The USSR has proposed building a gas export pipeline to Eastern
Europe during 1986-90 with the help of its allies. The pipeline
reportedly would deliver 20-22 billion cubic meters of Soviet gas
annually to Eastern Europe. Whether the East European economies
could absorb this amount is not certain; the Soviets might use the
pipeline as a readymade vehicle to export additional gas to Western
Europe, should demand for this gas by the OECD countries
materialize during the late 1980s and early 1990s.
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The Changing Role of Soviet-Owned Banks in the West) I 35 25X1
The Soviets have maintained a small but important string of banks
in the West since the Russian revolution. Less active international
financial markets, the downturn in Bloc financial fortunes, and the
generally cooler East-West climate have impinged on bank opera-
tions in recent years, forcing Moscow to assume a greater role in
managing the day-to-day operations of these banks.
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The Lot of the Soviet Consumer
Perspective
Consumption levels in the USSR made some impressive gains during the
1960s and most of the 1970s, but have risen only slowly in the 1980s. Since
1980, per capita consumption has increased at an annual average rate of
about 1 percent. Moreover, the outlook for improvements in the standard
of living for the rest of the 1980s is not bright, for several reasons: the pros-
pect that general economic growth will be slow, a desire in the leadership to
increase spending on investment, and a continuing high priority for
defense.
In terms of the most basic measure of consumer welfare-food and diet-
the lot of the consumer is mixed. The Soviets have nearly matched the
Americans in terms of daily caloric and protein levels. In recent years,
however, Moscow's substantial efforts to improve the supply of quality
foods have achieved only marginal increases in per capita consumption of
meat, leaving much unsatisfied demand. An expansion of the special
system that makes priority foods available to workers at their places of
employment has further limited the quantity of these items available to
pensioners and others without special access (see "Living Standards in the
Soviet Union and United States" and "Efforts To Improve the Food
Supply").
Health and housing present more serious problems. Per capita health
expenditures have grown by only 1 or 2 percent a year since the 1970s-too
slowly to keep pace with a growing need for health care stemming from
such increasing problems as alcoholism and hypertension. Partly as a
result, the Soviet Union is the only major industrial nation in the world to
have a lower life expectancy now than it had 20 years ago. Housing has
similar problems: although the Soviets have built more than 2 million new
units per year since 1975, an estimated 20 percent of the urban population
still shares its living quarters with unrelated families or singles. Finding an
apartment is a major challenge for newlyweds-personal want ads for
apartments can frequently be found posted near collective markets and
public parks.
Secret
SOV UR 85-OOIX
February 1985
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The Soviet consumer is somewhat better provided with durable goods than
in the past. Overall purchases of durables have doubled since 1960. Some
two-thirds of all Soviet families now own refrigerators and washing
machines, and three-fourths own TV sets; but the quality and design of
these goods are vastly inferior to those in the United States. The
automobile is still out of reach for seven out of eight families, and those
who own a car face chronic shortages of spare parts and gasoline,
inadequate repair services, and poor roads (see "The Consumer and the
Automobile-What Future?").
In a similar vein, the consumer has made measurable progress in consump-
tion of soft goods over the past two decades, but domestic production-es-
pecially in recent years-has not kept up with rising expectations. Soviet
consumers have become much more discriminating and now refuse to
purchase unwanted or poorly made domestic products. They are much
more willing to pay premium prices for imported goods, and inventories of
domestic goods have risen sharply as a result.
Deficient repair and personal services are perhaps the sectors of the Soviet
economy most difficult for the consumer. Although the Politburo has
decreed longer service hours and higher quality repairs, it retains an
incentive system that actually discourages managers from providing the
most sought-after personal services. State-run service establishments find it
easier to fulfill their planning goals by mass-producing goods and providing
"bulk" services to large enterprises than by meeting the needs of individ-
uals (see "Personal Care and Repair Services-the Stepchild Sector").
The lot of the Soviet consumer has been a sensitive issue for Soviet leaders
since the economic slowdown of the late 1970s and early 1980s. After more
than a decade of growth in food supplies and consumer goods, they have re-
cently had to deal with growing gaps between demand and supply. A
collision between the steady growth of expectations and the slowing growth
in consumption has been at least partly responsible for declining worker
morale and productivity since the late 1970s; it provoked strikes and food
riots during the difficult winters and poor agricultural years of 1979-81.
Civil unrest due to inadequate food supplies has greatly diminished since
then, though at least one food riot reportedly occurred last summer.
General Secretary Chernenko's response, like Andropov's, has been to
reaffirm the farm policies begun under Brezhnev (notably the Food
Program) and to try to dampen expectations by telling the consumer that
increases in income must be linked to increases in productivity. He also has
continued Andropov's discipline and anticorruption program. Indeed, this
program appears to be receiving widespread support from a public that
seems to hope it will eventually lead to greater availability of goods. F__j 25X1
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Improvements in industrial growth in 1983 and 1984 have given the Soviet
leaders some slack that they can use now to reduce the imbalance between
demand and supply of consumer goods, but their ability to satisfy the
consumer over the longer term will be severely limited by the likelihood
that economic growth will continue to be slow. If GNP growth is in the
range we are projecting for the late 1980s-1.5 to 2.5 percent per year-
the leadership will have to make choices among its ambitious goals, or
reduce them all somewhat. At these growth rates, the USSR cannot,
simultaneously, increase consumption substantially to stimulate labor
productivity, modernize the economy rapidly to incorporate more efficient
plant and advanced technology, and increase defense spending significantly
in response to US defense initiatives. There will have to be tradeoffs (see
"Impact of Resource Allocation Policies on the Consumer").
Soviet leaders will probably try, as they did in the 1960s and 1970s, to bal-
ance growth in investment and defense with at least some improvement in
living standards. As Chernenko acknowledged in his November 1984
speech, they feel pressed to increase consumer spending because of its
perceived link to productivity. The leaders are no doubt keenly aware that
social unrest could occur if living standards actually declined. Their 25X1
commitment to the consumer will limit their ability to maintain high rates
of investment while accelerating the growth in defense spending.
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Living Standards in the Soviet Union
and the United States
The USSR has made only a little progress toward its
oft-proclaimed goal of catching up with the United
States in standard of living. Over the last two decades,
real Soviet per capita consumption improved slightly,
relative to that in the United States, but it is still only
about one-third the US level.' Soviet living standards
remain low by Western standards and also compare
unfavorably with those in much of Eastern Europe.
Nevertheless, from the viewpoint of the Soviet con-
sumer, some improvements have occurred since the
1960s. The Soviet diet now nearly matches that in the
United States in terms of daily protein and calories,
and many households have manual washing machines
and small refrigerators. There is still a severe shortage
of housing, however, and there are problems in health
care that have contributed to rising death rates and
lower life expectancies. At best, future improvements
in living standards may mitigate some of these prob-
lems, but slower economic growth will make progress
harder to achieve, and it probably will occur at a
slower rate than Soviet consumers experienced in the
1960s.
bad year-per capita expenditures on food, soft goods,
and durables showed an actual decline from their
1981 levels. All major categories of per capita con-
sumption rebounded somewhat in 1983, however.
Diet
Perhaps the brightest area in the comparative living
standards picture has been that of food. The Soviets
gained a little on the Americans in terms of per capita 25X1
expenditures for food, rising from about 40 percent of
the US level in 1960 to about 55 percent in 1983.
The quality of the Soviet food supply has also im-
proved. The daily caloric level of the Soviet diet
nearly matched that of the United States in 1981
(figure 1). Soviets still consumed more starches than
Americans did, but the gap has narrowed somewhat,
largely because more livestock products are now
available. Nonetheless, the Soviets have met their
recommended daily per capita caloric levels-more
calories than the current US recommended allow-
ances for adults.
Trends in Per Capita Consumption
Soviet per capita consumption has been growing more
and more slowly since the mid-1960s, and it deceler-
ated markedly in the early 1980s.2 The rate of growth
stagnated or fell in all major categories of consump-
tion, falling particularly sharply in consumer dura-
bles. In total retail sales, the estimated share of
imports of final consumer goods nearly doubled dur-
ing the 1970s, but this was not enough to offset the
growing demand for goods and services. As average
income increased, widespread gaps between the de-
mand for consumer goods and their availability be-
came more evident. The year 1982 was a particularly
' Comparisons with the United States are made by pricing each
country's goods and services in the other's currency, adjusted for
inflation. An "average" is obtained by calculating the geometric
mean of the comparisons in dollars and rubles
' Growth in real per capita consumption is a go-W general measure
of changes in a nation's standard of living because it shows the
volume of goods and services acquired by households. It cannot
indicate the lot of a particular citizen, however, because it cannot
account for distribution disparities or regional differences that
Soviet per capita protein levels nearly match US
levels. The share of protein in the Soviet food supply
has increased from one-third to one-half since the
mid-1960s-a marked improvement, though still low
by US standards. (The share of protein from livestock
products in the US food supply is 70 percent.)
The United States does much more food processing-
canning, freezing, and drying, as well as specialized
processing and packaging. The universal use of refrig-
eration and a flexible distribution system make fresh
foods widely available throughout the year and give
US consumers a wider choice than their Soviet coun-
terparts. The Soviet food industry is heavily oriented
toward processing food into more storable forms-
canning vegetables and making sausage, cheese, and
similar products. Freezing and packaging are at an
embryonic stage in the Soviet Union; in 1976, for
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Figure 1
US and Soviet Diets: Major Food Groups
Grain products and - Fats and oils ? Sugar
potatoes
Meat and fish E] Dairy and M Other
eggs
3,310 calories per
day per person
Source: SOVA-USDA study and "Nutrient Content of the National
Food Supply, 1981," National Food Review, Winter, 1983.
3,065 calories per
day per person
3,248 calories per
day per person
example, only one-quarter of the food products mar-
keted were packaged. Fresh fruits and vegetables
(other than the storable potatoes, cabbages, carrots,
beets, and onions) are scarce outside the short harvest
season, July through October.
The Soviet consumer's most notable "advantage" is in
alcoholic beverages. Although total Soviet per capita
consumption of alcohol only exceeds that of the
United States by an estimated 40 calories per day,
consumption patterns differ in the two countries.
Soviets drink mostly hard liquor, while Americans
drink mostly beer and wine; hard liquor, mainly
vodka, made up 70 percent of total consumption of
alcoholic beverages in the USSR (hard liquor was 20
percent of the US total in the mid-1970s). More
important, the Soviet figures do not include samogon
(homemade hard liquor), which has been estimated to
be 30 percent of alcohol consumed.
Consumer Durables
The gap between US and Soviet purchases of durable
goods is still enormous, although it is closing. Overall
Soviet per capita expenditures for consumer durables
3,410 calories per
day per person
are less than 20 percent of the US level, but they have
nearly doubled since 1960. Relative levels of expendi-
tures on durables are generally corroborated by the
data shown in table 1.
By the mid-1970s, two-thirds of all Soviet families
had a refrigerator and washing machine (figure 2) and
three-fourths had a TV set; in the United States,
almost every family has a refrigerator and TV set and
about three-fourths have washing machines. The
quality and design are vastly different in the two
countries, however. In the USSR, most washing ma-
chines are small hand-wringer models, refrigerators
are small by Western standards and have no freezing
compartment, and most TV sets are black and white
models. In the United States, virtually all washing
machines are fully automatic, refrigerators are large
and most have freezers, and over two-thirds of the TV
sets sold are color models.
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Table 1
Soviet and US Retail Sales of
Major Consumer Durables, 1982
Figure 2
Appliances in Use in the USSR and
the United States
Automobiles
1.4 ^
8.0 b
Television
7.0
16.4 c
Radios
6.0
44.1 c
Refrigerators
4.6
4.4 d
Washing machines
3.7
6.4 d
Vacuum cleaners
2.9
7.6 d
Tape recorders
3.2
28.9 d
a New and used cars; about 80 percent were new.
b New cars only.
e Production.
d Manufacturer's shipments.
Note: In 1982 the Soviet population was 16 percent larger than the
US population (270 million persons in the USSR compared with
Health Care
Annual US growth rates of per capita health expendi-
tures have consistently outstripped those in the Soviet
Union since 1960. Soviet per capita expenditures,
which were 60 percent of the US level in 1960, were
only 35 percent in 1983. This change was a function
of rapidly escalating US health costs and low Soviet
growth rates, which were on the order of 1 or 2
percent a year during the 1970s.
Although the USSR has made significant improve-
ments in its health care system, there now are signs of
serious trouble because growth in expenditures has
not kept up with the increasing demands for health
care services-demands that stem in part from grow-
ing problems associated with alcoholism, hyperten-
sion, and aging of the population. The Soviet Union is
the only major industrial nation in the world where
life expectancy is lower now than it was 20 years ago.
Moscow stopped publishing these statistics in the
early 1970s, but Western estimates indicate that the
average life expectancy for Soviet males fell from 66
years in 1960 to 62 years in 1980 (figure 3). This was
11.6 years less than the life expectancy for Soviet
females-a gap unprecedented in developed countries.
0 1960 1970 1980 1983
Note: Soviet major appliances are frequently of poor
quality by Western standards. For example, Soviet
washing machines are usually small hand-wringer
models, while virtually all US washing machines are
fully automatic. Most Soviet refrigerators are small and
have no freezing compartments; US refrigerators are
large, and most have freezers.
In contrast, life expectancy for both sexes in the
United States has increased nearly every year since
the end of the Second World War. US females in
1980 had on average a life expectancy of 7.6 more
years than US males.
Soviet health care problems are also reflected in the
death rates, which increased by about 50 percent from
their low point of 6.9 per 1,000 people in 1964 to 10.3
per 1,000 in 1980. The increase was significant for
every age group. In contrast, the US death rate
declined from 9.4 per 1,000 in 1965 to 8.7 per 1,000 in
1981. Soviet infant mortality declined substantially
between 1950 and 1970 but may now be on the rise.
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As in the United States, the major cause of death in
the Soviet Union is heart-related disease. It accounts
for over half of all deaths in the Soviet Union. US
rates are high, but they declined 15 percent during
Refrigerators
Washing machines
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Figure 3
Life Expectancy in the USSR and
the United States
1960 1980
Males
1960 1980
Females
1960-79; Soviet heart-disease-related deaths doubled
over the same period and in 1979 were 50 percent
higher than the US rate. Cancer was the second
leading cause of death in both countries. Both saw an
increase over the last two decades, but the US cancer
death rate was one-third higher than the Soviet rate in
the late 1970s.
The Soviets have made advances in combating infec-
tious diseases, but still lag well behind the United
States. The Soviet typhoid fever rate per 100,000
population in 1979 was about 30 times that in the
United States, for example, and the measles rate was
over 20 times as high. There is evidence that rickets,
caused by a vitamin D nutritional deficiency, still
exists among Soviet children, particularly in rural
areas. The United States no longer keeps statistics on
rickets because it is so rare.
Housing
The shortage of housing in the Soviet Union is severe.
Although there has been some progress during the
past 25 years, an estimated 20 percent of city dwellers
still share their living space with unrelated families or
singles.
Determining the magnitude of the shortage is difficult
because the Soviets do not publish statistics on the
number of households. The housing deficit has been
estimated from a comparison of the number of hous-
ing units constructed with the number of marriages.
In 1982, marriages outnumbered housing units built
by 766,000 (on the other hand, deaths would have
reduced this total demand for new units). The Soviets,
seeking to control this demand, have limited the
creation of new households by refusing to let singles
get on lists for available housing. At the same time,
however, the state keeps rents down through large
subsidies, spurring demand by making rents easily
affordable.
On the supply side, the primary reason Moscow has
not built more houses is the low priority given to their
construction in investment decisions. In addition, the
rising cost of new construction-reflecting an increase
in the average size of new dwellings, the provision of
more utilities, and the increased costs of materials-
has limited the number of units built.
Soviet per capita housing expenditures, which were
under 20 percent of the US level in 1960, were only
about 10 percent in the early 1980s; this is because
US growth rates in per capita expenditures for hous-
ing (3 to 4 percent a year) exceeded Soviet rates (1 to
2 percent a year). Not surprisingly, Soviet consumers
face a much more limited choice of housing. The
government owns three-quarters of all urban housing
(primarily apartments) and controls its construction
and distribution. The wait for an apartment can take
as long as 10 years, although the average is substan-
tially less. Priority is often determined by a worker's
position or the importance of his place of employment.
In contrast to the United States, where the poorest
housing is often concentrated in the core of urban
areas, Soviet housing policy has scattered substandard
housing throughout the cities, as well as in a band on
their periphery.
Living quarters are less spacious than in the West.
In the 1920s the Soviets set a national standard of 9
square meters of "living space" per urban person;
this is equivalent to 13.5 square meters of "general
space"-about the size of a room 12 feet by 12 feet.
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Figure 4
US and Soviet Passenger Travel
Between Cities by Common Carriers,
1982
Billion passenger-kilometers
Figure 5
US and Soviet Private Ownership
of Automobiles
The Soviet Union as a whole has exceeded this by
averaging 14 square meters of general space per
capita in 1980, although in half of the Soviet republics
the figures are still below the average. The 14 square
meters represent progress, but are still well below the
average US figure of 49 square meters of general
space per capita
Transportation
The typical Soviet citizen depends much more heavily
on common carriers than his American counterpart-
in part because of Moscow's greater emphasis on
public transportation, but also because of the undevel-
oped nature of the Soviet auto industry, road system,
and support services. In 1982, for example, the vol-
ume of intercity passenger traffic by common carriers
was more than twice as large in the USSR as in the
United States; 85 percent of all US intercity travel
was by private automobile, even though the United
States is trying to encourage greater use of common
carriers. Soviet travelers used railroad transportation
almost 20 times as often as US travelers did; air was
the most used US form of common carrier intercity
transportation (figure 4). The patterns are similar in
intracity transportation: Soviet streetcars, trolleys,
subways, and local buses carried more than six times
as many passengers as US local systems
The Soviet Union has entered the age of the automo-
bile, but has a long way to go before driving approach-
es the ease and convenience enjoyed in the West. In
terms of level of development, the Soviet inventory of
cars in 1980 was roughly where the US inventory was
in 1920. This represents considerable progress, howev-
er (figure 5).
Prospects for Improvements in Living Standards
Moscow has traditionally given the consumer lower
priority than investment or defense. While this priori-
ty structure has enabled Soviet GNP to grow from 49
to 55 percent of US GNP since 1960 and Soviet levels
of investment and defense to rise above US levels, it
has held Soviet per capita consumption to only about
33 percent of that in the United States. In the future,
rising expectations and a new generation of citizens
not hardened by the sacrifices endured during the
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Second World War and the postwar rebuilding years
may increase pressure for continued growth in con-
sumption. Soviet leaders have apparently recognized
that some improvement in living standards is neces-
sary to maintain worker productivity and satisfaction,
as shown by their continued support for the food
programs. Projected slower economic growth, how-
ever, will make continued progress more difficult.
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Efforts To Improve the
Food Supply
The Soviet leadership has used a variety of economic
and political approaches to manage food shortages in
recent years. Besides fostering steady-albeit slow-
growth in food production and modifying food alloca-
tion and distribution systems, it has attempted to
dampen popular expectations. These measures-cou-
pled with the regime's demonstrated willingness to
import large quantities of foodstuffs and its commit-
ment to a long-term Food Program-probably have
checked the potentially serious threat to social stabil-
ity that food shortages presented in the late 1970s and
early 1980s.
Problems With Food Supplies
Emphasis on increasing the availability of meat and
other quality foods (dairy products, fruits, and vegeta-
bles) in the Soviet diet has been a major aspect of the
leadership's approach to the problem of consumer
welfare for three decades. Considerable progress was
made in the 1960s and early 1970s, and the Soviet
diet began to resemble more closely that of the United
States and Western Europe. When various difficulties
in agriculture blocked progress in the last half of the
1970s, consumer disappointment was keen. Although
general nutritional levels in the USSR were adequate,
the consumer wanted more livestock products and
fruit, greater variety and higher quality products.
Consumer dissatisfaction with the food situation be-
came more widespread during the late 1970s and
early 1980s. In particular, as the gaps between the
demand for and the supply of livestock products and
some other highly sought-after foods appeared to
widen during this period, there was a marked increase
in labor strikes, demonstrations, and actual violence.
Food supplies became tighter for several reasons. The
quantities of meat and milk products sold in state and
cooperative stores remained essentially unchanged
from 1979 to 1980, largely because of back-to-back
poor harvests. Moreover, during the winter of 1979-80
and throughout 1980, procurements of meat and milk
from state and collective farms were generally lower
than those of the corresponding periods in the preced-
ing year. This decline in procurements, although
supplemented by large imports, led to more erratic
deliveries of meat and milk products to many regions
in the USSR.
In 1981 and 1982 the situation worsened. Per capita
consumption of milk declined, and per capita meat
consumption was slightly lower than in 1980. Queues
at retail stores became so widespread that informal
rationing of meat and milk products was imposed in
1981. Formal rationing, involving coupons and other
paper work, was instituted in some cities. During the
1979-82 period, the leadership was able to maintain
some growth in per capita consumption of vegetables,
fruit, and vegetable oil only by stepping up imports of
these products.
Impact on Consumption and Morale
Because food accounts for about half of the value of
total consumption, the slowdown in the growth of the
food supply seriously impeded the leadership's efforts
to improve consumer welfare. After increasing by an
average of about 3 percent per year during the first
half of the 1970s and slightly above 2 percent per year
during 1976-80, per capita consumption of all goods
grew about 2 percent in 1981 and actually declined
slightly in 1982 (see graph).
er dissatisfaction
The slowdown in consumption growth in turn eroded
popular morale, leading to greater worker apathy and
labor unrest. During the spring of 1981, for example,
some large industrial installations went on strike,
partly because of food shortages. Coming a year after
the Polish crisis, these strikes caused great concern on
the part of top Soviet officials. They were also
troublesome to regional party leaders, who already
had to contend with social tensions generated by
ethnic and cultural factors, as well as general consum-
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USSR: Average Annual Per Capita
Growth in Total Consumption and
Food Consumption-
0 Consumption of all goods and services
~ Food consumption
a The index of consumption underlying these
growth rates is constructed using 1970 expenditure
weights and consumption indexes for I I major
categories of goods and services. Where possible, the
indexes are based on physical quantities consumed.
The food consumption index, for example, is largely
based on Soviet per capita consumption data in
kilograms. Where these figures are not available,
physical production data and deflated retail sales
are substitued.
The Leadership's Response
In response to these problems, the leadership in recent
years has reaffirmed farm policies initiated under
Brezhnev to improve the technical underpinning of
agriculture and promote a more effective use of inputs
through better material incentives for farm managers
and workers. It has also taken several new initiatives
intended to improve distribution, increase supplies,
and otherwise dampen the discontent caused by the
food supply issue. These have included:
? Greater attention to the priority allocation of the
most desired foods to workers in large industrial
installations.
? A sharp upsurge in imports of farm products.
? A campaign to reduce expectations.
? Brezhnev's announcement in May 1982 of the
decadelong Food Program to upgrade and integrate
the activities involved in producing, processing, and
marketing food. 0
Changes in Allocation and Distribution. Beginning in
1979, the deteriorating food supply situation was
reflected in ever lengthening queues for various food-
stuffs. As a result, the leadership in 1980 began
making factory trade unions responsible for special
food distribution at the workplace. Although special
stores for a small elite have long been a feature of the
Soviet system, the distribution of food at important
factories or prestigious institutions was a phenomenon
of the middle and late 1970s. The decision to enlist
the trade unions in this effort was probably both an
attempt to pacify workers unhappy with queuing and
a device to raise the prestige of the unions.
Although the share of various foods that are being
distributed through these channels is not known, the
practice apparently had become so prevalent by the
early 1980s that most workplaces were distributing
special food packages to employees, at least on the
major holidays. To the extent that these packages
came from supplies targeted for state stores, however,
it meant that those without access to special distribu-
tion centers-such as people on pensions or holding
less important jobs-could not obtain as much food.
Increased Food Imports. The efforts to maintain the
country's heavy investment in livestock herds and to
mollify the consumer also have led to a sharp upsurge
in imports of farm products. Although Moscow proba-
bly regards reliance on increased imports of food,
along with grain and other feeds, as a temporary
tactic, the continuing problems in the agricultural
sector made such imports a necessity. The share of net
imports in net farm product, on a per capita basis,
grew from 1 percent in 1970 to 12 percent in 1981 and
1982. As a result, by the early 1980s nearly 40
percent of Soviet hard currency expenditures were
going for agricultural imports.
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Controlling Expectations. More recently, the Soviet
leadership has started to address the problem of
consumer expectations. In discussing food issues, the
regime has begun to admit problems and has stopped
promising quick solutions, stressed long-term im-
provements, and shifted some of the blame to poor
the availability of food products had returned to the
1981 level; fruits and vegetables showed the largest
gains.
The degree to which these production gains have
translated into gains for the consumer is unclear,
however, because consumption depends on imports as
well as on the amount of product channeled into
inventories and end uses other than consumption. In
recent years, for example, meat imports have account-
ed for 2 to 4 kilograms of per capita consumption.
Nevertheless, assuming imports in 1984 were main-
tained at the 1983 levels and there were no additions
to inventories, the amount of meat available to con-
sumers per capita (after adjustment for losses between
farm and consumer) would have increased slightly, by
about 0.5 percent in 1984. We estimate that, overall,
per capita consumption of food increased by about 2
worker performance.
General Secretary Chernenko's speeches have reflect-
ed this effort to moderate consumer expectations. In
his first speech after succeeding Andropov, he did not
promise swift progress in consumer welfare but did
say that "much is being done now" to increase the
supply of quality foods. This more balanced treatment
of consumer issues was also evident when he criticized
the present wage and bonus system for lacking "prop-
er fairness" but, on the other hand, repeated a
statement by Brezhnev: "One should never forget one
simple truth: in order to live better, it is necessary to
work better."
Adoption of the Food Program. In addition to the
above measures, which the regime clearly recognizes
do not address the USSR's fundamental agricultural
problems, the leadership has adopted a long-term
Food Program. The program was unveiled by Brezh-
nev at a party plenum in May 1982, and both
Andropov and Chernenko subsequently embraced it.
The most comprehensive attack on agriculture's prob-
lems since the Khrushchev era, it calls for shifts in
investment resources to permit the building of rural
infrastructure, increased production of agricultural
machinery, and improvements in the processing and
distribution network to reduce losses of farm prod-
ucts. It also calls for the establishment of agro-
industrial coordinating bodies at the national and
regional levels as a way of overcoming the fragmented
management structure.
Recent Performance
In 1983-84, food availability improved somewhat.
Reflecting a strong rebound in agricultural output in
1983, meat and milk production climbed to new highs
of 16.4 million tons and 96.4 million tons, respective-
ly. Although growth rates of meat and milk output
slowed in 1984, new records-16.7 million tons of
meat and 97.6 million tons of milk-were achieved.
percent in 1983 and by 2.5 percent in 1984.
Apart from the gains in food production in 1983 and
1984, the leadership's attempts to improve distribu-
tion and dampen expectations also may have helped
ease consumer unhappiness over food supplies. There
has been a visible decrease in queuing at state stores
during the past two years. In addition, with the
exception of two reports of food-related unrest this
summer, there has been an absence of reports of
disturbances occasioned by food shortages during this
period, suggesting that the population perceives the
food situation to be less difficult
Outlook
The food supply issue is likely to remain a major
leadership concern throughout this decade. Develop-
ment of the farm sector will depend strongly on
weather conditions and how the leadership imple-
ments the Food Program. Our baseline projection of
average annual growth in net farm output of 2.0 to 2.5
percent in the 1980s assumes weather conditions
approximating the 1960-83 average and some imple-
mentation of changes proposed in the Food Program.
If Soviet production of various agricultural commod-
ities rises at the average annual rates of the 1961-83
period and the pattern of food and nonfood use of
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USSR: Per Capita Consumption in
1983 and 1990
1983
1990
Goals a
1990 Projection
(Without
Imports)
(With
Imports) b
Meat (including
slaughter fat)
58
70
63 to 64
66 to 67
Milk
309
330 to 340
338
NA
Eggs (units)
253
260 to 266
292
NA
Fish
17.6
19
18 c
NA
Sugar
44.2
45.5
31
47
Vegetable oil
9.6
13.2
7.0
10.0
Potatoes
110
110
110 d
NA
Vegetables and
melons
101
126 to 135
110
112
Fruit and berries 44
66 to 70
51
56
Bread and cereal 136
products
135
135 d
NA
? The total calorie intake that would result from a diet conforming
to the indicated goals would be unrealistically high, because it
would fail to reflect the substitution of quality foods for staples-
bread and cereals, and potatoes-that would occur. The official
1990 per capita consumption goals appear to embody an effort to
reassure the consumer that the supply of staple foods will be
adequate.
b We assume for illustrative purposes that imports will be at 1982-
83 levels.
c Based on 1990 gross fish catch targets. We could not assume
continuation of the growth rates of the 1960-83 period because of
unfavorable changes in ocean fishing conditions.
d Because significantly more grain and potatoes are now produced
than required to meet 1990 targets for human consumption, we
assume that the supply in 1990 would permit consumption at
planned levels. We are unable to allocate the decreases in consump-
tion of these products associated with increased consumption of
quality foods. Thus the amounts shown represent an upper bound
rather than a best estimate of 1990 consumption.
these commodities does not change, per capita con-
sumption of quality foods will rise. Even without
imports to supplement supplies available for consump-
tion, more meat, dairy products, vegetables, and fruit
should be available in 1990 (see the table). The
projected availability will be considerably short of
goals for vegetables and fruit, but still represents a
marked improvement in the diet. The items which the
USSR would be able to supply in planned amounts
from domestic production include milk and eggs. The
quality foods for which domestic production would
need to be supplemented by imports to meet 1990 per
capita consumption targets include meat, vegetables,
fruit, sugar, vegetable oil, and fish (in small amounts).
Thus, the Soviet "food problem" is not likely to be
greatly alleviated by 1990. But the experience of the
past few years suggests that modest growth in produc-
tion and continued imports of quality foods, leader-
ship circumspection regarding promises in the con-
sumption area, and a continuation of the system of
distributing food at the workplace will probably pre-
vent food shortages from becoming the volatile issue it
threatened to become in the late 1970s and early
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The Consumer and the
Automobile-What Future?
Despite an estimated sevenfold increase in the person-
al auto stock since 1970, consumer demand for cars in
the Soviet Union, even at the relatively high prices,
continues to far exceed supply. The aggravations of
auto ownership caused by inadequate development of
fuel supply, maintenance, and repair have not stopped
consumers from buying the available supply and
keeping cars past their planned service lives. In the
future, however, consumers may find it even more
difficult to maintain and use their automobiles. Mos-
cow is taking actions to limit the gasoline supply and
has decided not to reduce the widening gap between
the supply of and the demand for spare parts.
Consumers Enter the Auto Age
The Soviet consumer entered the automotive age in
the early 1970s with a bang. Annual car production in
the USSR increased almost 250 percent, from
344,000 to 1.2 million vehicles, between 1970 and
1975 (see graph). Although exports also rose rapidly
and the stock of vehicles for official use was largely
replaced, supplies to the public were increased dra-
matically. The chance of buying a car-formerly
reserved for various elites-was brought within the
grasp of a much larger share of the population. C
Long queues developed for new automobiles, even
though the costs were high. Soviet citizens waited four
years or longer to spend the equivalent of 40 months'
salary on a bottom-of-the-line Zhiguli.' Moreover,
consumers were forced to pay for cars on a cash-and-
carry basis rather than on installment credit. Moscow
probably hoped that cash purchases would help to
draw down consumer savings. Workers with an excep-
tional performance record and those who had accept-
ed work on priority projects in undesirable locations
were rewarded with a higher priority on waiting lists.
' The car models produced by the Fiat-designed Volga Motor
Vehicle Plant are marketed domestically as Zhigulis and externally
as Ladas. Responsible for most of the increase in production since
1970, Zhigulis are more widely available and more popular than
their major competitors, the lower quality Zaporozhets and compa-
rably priced Moskviches. The Volga and Chaika cars produced in
Gor'kiy and the ZIL limousines in Moscow either are priced only
for the elite or are not available to the public
USSR: Trends in Production, Export, and
Domestic Supply of Passenger Cars
I I I I I I I I I I I I I
0 1970 75 80 83
The length of these lists created a ready demand for
used official cars. New car sales plus resales of official
cars nearly tripled the stock of private automobiles
between 1970 and 1975, from 1.3 million to 3.4
million units.
The rapid growth in the stock of personal cars taxed
the government's ability to provide the necessary
support. Owners were confronted with gas lines, traf-
fic jams, shortages of spare parts, and poor highway
systems. The number of auto service stations was
inadequate and the service sometimes incompetent.
To solve at least some of these problems, Soviet
consumers turned to burgeoning black markets, par-
ticularly in spare parts and gasoline. The planners
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tried to attack other problems. For example, programs
were begun to expand and improve the road system
and construct larger and improved service facilities,
but in general the measures were too little and too
late.
Production Levels Off but Consumer Stock Grows
Growth in car output in the USSR ended as abruptly
as it began when Moscow abandoned plans to expand
production capacity during 1976-80. Production in-
creased by only 10 percent during this period and
reached a plateau of just over 1.3 million cars per year
in 1978. Output has hovered within 2 percent of this
mark ever since.
Soviet consumers were nevertheless allowed to buy
increasing numbers of cars each year-although the
rate of increase was slower than in the past. Holdings
of personal cars increased to 8 million in 1980 and by
1983 reportedly reached 10 million.
Growth in the domestic supply in the 1980s was made
possible by a cutback in exports, although Moscow
carefully avoided losses in hard currency earnings.
The Soviet Union exported 238,000 cars in 1983, 28
percent less than in 1980. Exports to Communist
countries-mostly East European neighbors-were
slashed by 60 percent, however, while deliveries to the
developed West rose by more than 40 percent during
the period.
Pressure on Support Services Builds
Car ownership, now at about one car for every eight
families, still has not reached the level of the Soviets'
East European neighbors in the early 1970s or that of
the West in the 1950s. Consumers continue to line up
for the new models they prefer and hold onto them
longer than Moscow planned. We estimate that at
least 65 percent of the cars on the road in 1975 were
still in service in 1983. As with other consumer
durables, however, quality counts. The Soviets recent-
ly have reduced prices of lower quality Zaporozhets
by 25 percent, reportedly to clear backlogs of cars
gathering dust in showroom
The aggravations of car ownership have not lessened
over the years. Consumers now compete for service at
a rate of 580 cars per service bay, up from 400 per
bay in 1970. Although new service stations undoubt-
edly are more productive than those in 1970, anecdot-
al material in the Soviet press suggests that consumer
demands are far from being satisfied. Consumers
complain constantly about shortages of spare parts
and, according to Soviet officials, contribute to the
problem by hoarding parts.
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The Soviet consumer's insistence on keeping his long-
awaited and expensive automobile past the planned
service life of nine to 10 years is aggravating his
problems with spare parts and auto servicing. Because
retirements are low, the car inventory is growing in
excess of plan, causing the inventory of service sta- 25X1
tions and production of spare parts to fall even further
behind demand. If, as planners fear, consumers con-
tinue to keep older cars, these problems will become
more acute over the next five years when the 4.6 25X1
million cars added to the auto inventory in the late
1970s reach the end of their planned service lives.
Soviet statistics confirm that the gap between the
supply of and the demand for spare parts is widening.
Production of spare parts increased by an average of
8.5 percent per year between 1976 and 1981, but the
inventory of personal cars grew by an average of 18.6
percent during the same period. Plans called for the
supply of spare parts to increase by about 5.5 percent
per year in 1982-85, but the car inventory probably
will rise by 8 percent annually.
An emerging problem is the reduced availability of
gasoline. The leveling off of oil production-combined
with delays in introducing diesel trucks, lagging ex-
pansion of secondary oil-refining capacity, and grow-
ing demand from the high-priority agricultural sec-
tor-has increased the need to control gasoline
supplies. Consumers, who are using their cars more
for suburban and long-distance trips than for com-
muting, are racking up greater mileage and consum-
ing more gasoline than Moscow probably expected.
We estimate Soviet auto consumption of gasoline at
more than 300,000 barrels per day-about 20 percent
of the available supply
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Moscow has long tried to restrict gasoline consump-
tion by private autos through the use of coupon
rationing, but with little success. By 1981 Soviet
consumers were pirating nearly 100,000 barrels per
day of official gasoline through black-market sales
from truckers, according to one Soviet estimate. Over
the last few years, Moscow has increased the price of
gasoline to restrict fuel demand, with some success.
gasoline prices have in-
creased fourfold in recent years, which has in turn
dampened demand for autos. Nevertheless, higher
pump prices intended to restrict auto use may instead
encourage further illegal sales of gasoline.
Policies To Control Personal Autos
Moscow has shown increasing concern over the
growth of the fleet of privately owned automobiles but
seems to be avoiding a direct confrontation with
consumers. Steps such as production cutbacks or
further price hikes still appear to be off limits.
Nevertheless, planners' policies toward spare parts
supply and gasoline allocation could be as effective in
controlling both the growth and the use of the private
auto fleet.
Recent Soviet journal articles suggest that Moscow
will not reallocate resources to increase substantially
the production of spare parts. Furthermore, one report
indicates that production of specialized spare parts for
older cars no longer will be supported. Consumers will
have to rely more heavily on recycled used parts, and
this could make it more difficult to keep older models
in running condition. Unless the Kremlin also controls
the pilfering of spare parts from distributors and
limits consumer hoarding of spare parts, however, the
new policies will merely encourage further activity in
the black market.
More important, the Soviets intend to restrict the use
of all vehicles through policies to further control
gasoline consumption. They have moved beyond price
increases and have instituted policies to regulate fuel
consumption by truckers which-if effective-will
also bring fuel consumption by private autos under
greater control. Trucks now are being checked for
faulty odometers, which drivers tamper with to over-
state mileage in order to resell state-supplied gasoline
to consumers. Moscow is also establishing a credit
card system that will allow allocation of fuel for
specific trucking assignments and record use in a
central data bank. This procedure is intended to
remedy the sloppy or nonexistent bookkeeping at
enterprises that also has promoted fuel abuse in the
past. Although the Soviet consumer has become ex-
pert at circumventing Moscow's consumer restric-
tions, the new policies, combined with high prices for
gasoline, will make it more difficult and less attractive
for consumers to tap official gasoline supplies.
Plant Modernization Continues
Despite Moscow's concerns over the maintenance of
an aging personal auto fleet, it appears to be prepar-
ing to increase car production again later in the
1980s-perhaps as early as 1987-although a return
to rapid growth rates of the past is not foreseen.' It is
not clear, however, that the Soviet consumer is the
intended beneficiary.
The Soviets continue to acquire Western motor vehi-
cle equipment to modernize plants and expand output.
We expect them to buy motor vehicle production
equipment, technology, and technical support worth
at least $500 million from the West in 1981-85. Some
$400 million already appears to have been allocated
for upgrading and expanding the auto industry
plans to modernize the Moscow Motor Vehicle Plant
and install a flexible manufacturing system there, to
rebuild the Gor'kiy plant beginning in 1985, and to
install a fourth assembly line to manufacture a new
front-wheel-drive car at the Volga plant. A turnkey
plant in Moscow, to be supplied by Liebherr of West
Germany, will make transmissions for the new car.
The Soviets also are increasing their capacity to
produce galvanized steel at the Novolipetsk Steel
Plant,
Although this program could be intended to increase
the consumer's auto supply, it offers other options.
3 Because the Soviets lack an appropriate system for providing
adequate maintenance services, they may believe that boosting new
car production is more efficient than trying to provide more repair
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First, the productivity gains from plant modernization
could allow the Soviets to produce the same number
of cars-and improve their quality-using less skilled
labor and material resources. As a bonus, Moscow
would gain experience with Western technologies
such as industrial robots and numerically controlled
machine tools, which it regards as a prime means of
improving productivity in industry as a whole. Second,
the modernization program may allow Moscow to
increase production for export at a lower resource cost
and without reducing sales to consumers
Outlook
Consumers are unlikely to gain much ground in auto
use over the next several years. They probably will
continue receiving close to 1 million new cars per
year, but the chances of increasing sales look dim.
The probable increased production later in the decade
may improve the domestic supply, but the additions
will probably be small. Growth of the personal car
inventory itself will be sharply reduced-despite re-
cord sales-if Moscow's plans to discourage the main-
tenance of older vehicles, and thereby spur retire-
ments, are effective. Even if owners of older cars
resist, they may not be better off. With Moscow
holding the line on spare parts production, black-
market prices will increase and add to the owners'
overall costs. Finally, car owners may find it difficult
to use their cars at past rates if Moscow's policies to
limit black-market gasoline sales are effective.
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Personal Care and
Repair Services-
The Stepchild Sector
Soviet authorities have become increasingly dissatis-
fied in recent years with the state of personal care and
repair services.' They are particularly concerned
about rural areas, where per capita consumption of
services--despite some narrowing of the gap-still
lags far behind that in urban areas.
The leadership recognizes that the lack of services
lowers the general quality of life, which presumably
lowers popular morale and, thus, productivity in gen-
eral. More specifically, workers must spend consider-
able time and energy generating for themselves the
services that the state (as well as private individuals
operating on a commercial basis 2) fails to furnish.
Because they must do this during working hours,
productivity suffers. Furthermore, the acute shortage
of services in rural areas spurs the flow of workers to
the cities, despite official efforts to stem or reverse
that flow.
Growth in Consumption of Services
The services sector has grown more rapidly than
overall personal consumption (of housing, food, cloth-
ing, and so on, as well as of services). Per capita
availability of personal and repair services almost
doubled between 1970 and 1983 (table 1), while total
per capita consumption grew by about one-third.
' The services we look into in this article are included in the Soviet
category "everyday services of the population"-hereafter, "every-
day services." In the US national income accounts, most of these
services are classified as "personal services," "automotive repair
services and garages," and "miscellaneous repair services." The
Soviet category everyday services goes beyond personal care and
repairs, however. It includes some private housing construction and
repairs that we omit-partly for the sake of manageability and
partly because housing construction is not a service. In addition,
about 40 percent of the total Soviet everyday services category is
made up of the production of goods-which we have likewise
excluded. For example, almost three-quarters of total sales of state
shoemaking and repair establishments are accounted for by sales of
new shoes they produce. Repair services comprise only a little over
a quarter of their sales.
' Private individuals may eg-1 ally provide several personal care and
repair services. As is true of all activity in the so-called second
economy, estimates of the value of privately provided services are
necessarily imprecise. But recent comments by a Soviet author,
coupled with previous estimates by the CIA, suggest that the
private sector currently provides about a fifth of all personal care
Table 1
Growth in Real Per Capita
Consumption
Average annual growth
in percent
1971-75
1976-80
1981
1982
1983
Personal care and
repair service
Total (includes
private sector)'
6.0
5.3
4.2
2.4
4.3
Total personal
consumption b
2.9
2.1
2.0
-0.1
1.6
' The private sector currently provides about a fifth of the total.
b Total personal consumption includes food, soft goods, durable and
miscellaneous goods, and the following services: personal care and
repair, housing, utilities, communications, transportation, and
recreation.
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methodology in "An Index of Consumption in the USSR" in
USSR- Measures of Economic Growth and Development, 1950-80.-
Studies Prepared for the Use of the Joint Economic Committee,
Congress of the United States, December 8, 1982. Adjustments to
official figures made in the data presented above include removal of
services sold to enterprises.
Growth in per capita consumption of these services
has been faster in rural than in urban areas. The
ratio-on a per capita basis-of state-provided serv-
ices in the countryside to such services in cities rose
from about a third in 1970 to about two-thirds in
1982.
The relatively speedy growth in the consumption of
personal and repair services should not obscure the
fact, however, that they remain a Cinderella sector.
Personal care and repair services-including those
provided by the private sector-constitute only about
2.5 percent of total personal consumption in the
USSR. In the United States, the proportion is about 7
percent.
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Table 2
Services Provided by the State
Average annual growth
in real consumption of
selected state services,
in percent
1971-75
1976-80
1981
1982
1983
Repair of:
0.3
5.1
4.8
4.7
NA
Clothing,
excluding
knitwear
2.6
3.4
11.0
7.1
NA
Knitwear
NA
11.4
5.3
14.7
NA
Durable goods
(household appli-
ances, motor vehi-
cles, tools, radios,
television sets)
NA
15.7
11.7
10.5
12.0
Furniture
NA
13.0
2.9
6.9
NA
Drycleaning
9.3
5.3
3.2
3.4
2.5
Laundry
10.5
6.3
2.4
2.1
2.8
Photography
NA
10.3
3.7
5.0
7.1
Public baths
NA
2.6
1.6
3.2
3.6
Beauticians and barbers
5.0
5.6
6.1
5.5
5.7
Rental of durable goods
NA
14.3
13.0
10.3
12.5
Note: Adjustments of Soviet figures referred to in the footnote to
table 1 have not been made here. The repair and rental of durable
goods account for about 15 percent of the total everyday services
provided by the state. Laundry, photography, and beauty and hair
care are the next largest category, jointly accounting for about one-
third.
The repair and rental of durable goods (including
automobiles) is the largest and fastest growing sector
in everyday services provided by the state, accounting
for about 15 percent of the total (table 2). Their swift
increase complements the rapid rise in Soviet produc-
tion of durable goods. It also is in keeping with the
official policy (originated by Khrushchev) of trying to
limit the overall demand for durables by encouraging
the public to rent rather than buy them.
Why This Sorry State of Affairs?
The unsatisfactory state of the services sector, despite
the rapid growth, is in large measure a consequence of
the regime's stinginess toward it. Investment in every-
day service facilities accounted for less than half of 1
percent of total investment in the period 1966-80.
(The share was slightly lower in 1976-80 than in
1966-70.) In keeping with this traditionally low priori-
ty, investment in services often is actually less in the
annual plans than was scheduled for them in the five-
year plan. In 1976-80, for example, capital spending
on the services sector totaled 2 billion rubles, although
the plan had scheduled 2.3 billion for that period.
The machinery and equipment used to provide con-
sumer services comes from more than 20 different
ministries. Dry cleaning and laundry equipment, for
example, is produced by factories under the Ministries
of Aviation, Road and Construction Machinery, and
Machinery for the Light and Food Industries. That
equipment is a sideline for those factories, whose
managers (and the parent ministries) give priority to
their primary product line-on which everyone's plan
fulfillment and bonuses depend. Some of the machin-
ery and equipment used in the services sector comes
secondhand from other branches of the economy.
Despite its labor-intensive nature, the services sector
has also been a stepchild with respect to manpower.
Only 2.7 million people-2.3 percent of those em-
ployed in the state sector-are employed in furnishing
everyday services. This share is up only slightly from
2.1 percent in 1970. The quality of personnel is also
reportedly low. About three-quarters of the workers in
everyday services begin work with no prior training,
and too few of them ever acquire skills. There are
serious shortages of trained workers, particularly of
repairmen of consumer durables. The sector has a
high labor turnover-workers leave for jobs with
higher pay, more prestige, better working conditions,
and the fringe benefits (like access to housing) that are
often available in more prestigious sectors.
The quality and variety of personal care and repair
services also leave much to be desired. This reflects
not only the general high-level indifference but also
the perversity of Soviet success indicators, which
judge performance mainly by fulfillment of output
targets imposed from above rather than by satisfac-
tion of consumer demand. The distortions created by
this bias are evident throughout the economy but tend
to be particularly severe in consumer services, where
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the gap between what is advantageous for the produc-
er and what is satisfying for the consumer is especially
wide. Producer interests are best served by large-scale
output of identical objects, whereas responding to
individual needs tends to require small-scale output of
individually tailored "products."
As a result of the biases of the Soviet incentive
system, personal care and repair outlets tend to:
? Provide high-cost services, often in disregard of
consumer demand, because the greater value of
such output facilitates plan fulfillment.
? Produce for bulk buyers rather than individual
consumers.' (Service outlets are authorized to sell
services and a limited amount of goods to enter-
prises. But the share of their output sold to enter-
prises has been rising, even though official policy
has decreed its decline.)
? Produce goods rather than services. (They find it
easier to meet gross output targets through the
material-intensive route of manufacturing products
than by the generally more labor-intensive route of
providing services.)
? Mass-produce goods rather than turn out custom-
made items for individuals, although the latter are
supposed to account for most of what the outlets
produce.
Measures for Improving Services
Although the regime sees that by starving consumer
services it is limiting economic efficiency, the leader-
ship has been unwilling to transfer resources into
services on a large scale. For example, we believe that
the 11th Five-Year Plan (1981-85), at least initially,
called for no increase in capital investment in services.
However, the language of the Food Program unveiled
by Brezhnev in 1982 implied that investment in rural
' As one service enterprise employee said in a letter to a Soviet
newspaper in 1983, "Our repair brigades are all too eager to service
various organizations, but they don't want to serve the public,
because it is easier for them that way. Why replace a broken belt in
a washing machine or do minor repairs on an electric razor? It's
bothersome and it only yields a few kopecks, while working in a
hospital or a kindergarten you can fix all the appliances in a block
order and there's your plan fulfilled. You receive bonuses ... and
then many of the figures for service organizations are switched to
services would rise substantially. (It is not clear
whether this increase was an addition to the originally
planned investment total or had been cut from the
investment earlier earmarked for urban service
facilities.)
Instead of providing some investment priority, the
Soviets have seemed intent on improving services
primarily by tapping unused labor, using existing
facilities more intensively, and organizing the produc-
tion and distribution of services more efficiently. In
the mid-1970s, for instance, the authorities began to
emphasize expansion of specialized service enterprises
to replace consumer service combines. At the same
time, a network of local "receiving points," where
people could bring items in need of servicing and
repair for delivery to the specialized service enter-
prises, was to be set up. The hoped-for efficiency
never materialized, however, because nobody provided
the resources. Most receiving points were woefully
small and understaffed, and the authorities generally
provided too little transport to ship the goods back
and forth.
The Andropov regime, during its short tenure, like-
wise sought to give consumer services a shot in the
arm-again, with minimal resources. Noting that
because service enterprises were only open during
working hours, workers had to leave their jobs to
acquire a service, a January 1983 resolution ordered
the enterprises to be open longer, to use more part-
time labor, and to provide more services at places of
employment. A joint resolution of the Central Com-
mittee and Council of Ministers in March 1983 again
called for increased use of part-time labor and in-
structed industrial enterprises to establish service
outlets "on the basis of their own funds." In July 1983
the Council of Ministers approved these measures:
? Collective farm members and pensioners who work
at consumer service enterprises are to receive their
full pensions. (Previously, pensioners could not re-
tain their full pensions if they earned more than 120
to 150 rubles a month.)
? Individuals may work at a second job in a service
enterprise for as much as half their normal work
time, if the primary place of employment and its
trade union approve.
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Since he became General Secretary, Chernenko has
likewise shown concern, initiating the consumer serv-
ices "experiment." This calls for intensified recruit-
ment of part-time workers in the services sector and
creates some additional incentives. The most promis-
ing part of the experiment (so far limited to enter-
prises in a few areas of the Russian Republic) is the
emphasis on rewarding service establishments for
selling directly to individual consumers.
These recent initiatives seem to have had little impact,
however. After some initial extensions, the establish-
ments seem to have gone back to their earlier hours of
operation. A February 1984 article declared that
some managers had advertised new hours but contin-
ued work on the old schedules. The major drag
probably is the lack of incentive; a manager who can
fulfill his sales plans and earn the regular bonuses
during the shorter hours has little reason to change.
Nor does it appear that employment of part-timers or
pensioners has increased much. This is largely be-
cause the managers of service establishments are
reluctant to hire them. Pensioners are viewed as
inefficient, and the employment of part-time labor is
said to complicate the computation of wages and
bonus funds.
Last, though it is too early to make a fair judgment,
the Chernenko consumer experiment is likely to be
disappointing. It does not offer enterprises significant
incentives for improving the quality (as apart from the
volume) of services.
The Outlook
The prospects for markedly better or more available
personal care and repair services in the next five-year
plan (1986-90) are not good:
? So far, the leadership seems unwilling to undertake
the expense. Instead, it apparently is still hoping for
the efficiency gains that have eluded it in the past.
? The labor shortage, which will continue through the
1980s, will be particularly hard on such labor-
intensive sectors as services.
? Finally, the outlook for expansion of private enter-
prise in services-the most promising avenue for
improvement in this sector-is poor.
Even though Andropov urged economic experimenta-
tion and receptivity to innovative ideas in some situa-
tions (the New Economic Mechanism in Hungary, for
example), he rejected a broader role for private enter-
prise activity in the consumer sphere. That rejection
probably reflected both general ideological qualms
and anxiety that it might conflict with his anticorrup-
tion campaign.
Chernenko has likewise opposed the enlargement of
private enterprise activity in the consumer sphere. In
early 1984 a noted Soviet academic, writing in a
prestigious journal, in effect suggested that the best
way to improve satisfaction of consumer demand
would be to revive the New Economic Policy (NEP),
which turned many activities over to the private sector
in the 1920s. Recently the journal retracted this
article, however, after a scathing critique of it ap-
peared in the party's theoretical journal Kommun-
ist-a signal that the leadership will not tolerate a
significantly enhanced officially sponsored role for
private entrepeneurs.
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0MIct
Impact of Resource Allocation
Policies on the Consumer
Longstanding Soviet priorities, dating from the First
Five-Year Plan, have favored heavy industry and
defense at the expense of the consumer sector of the
economy. A relatively greater emphasis on consump-
tion emerged in the post-Stalin period and has contin-
ued, in varying degree, through the Khrushchev,
Brezhnev, and Andropov years to the present. The
Soviet leadership's concern for the welfare of the
population has been reflected in investment alloca-
tions, program proposals, and import decisions. But in
public statements the leadership has been careful not
to raise consumer expectations too much, preferring to
play down the material aspects of consumption while
still stressing the link between increases in income and
labor productivity. Consumption levels have risen only
slowly in the 1980s. Per capita consumption, for
instance, showed no growth in 1982 and increased by
only about 1.5 percent in 1983. Our preliminary
estimate is that gains in 1984 were perhaps slightly
higher than in 1983.
The prospects for advances in living standards in the
USSR during the rest of the 1980s depend on overall
economic growth and on the policies adopted by the
Soviet leadership in allocating resources. Despite
some recent improvement in performance, we expect
GNP growth over the second half of the 1980s to
average only about 1.5 to 2.5 percent per year. Such
growth is too low to permit real rates of growth in
living standards, investment, and defense as high as
those of the 1970s. The leadership will have to make
choices among some of its ambitious goals or reduce
them all somewhat.
Because evidence now suggests a renewed emphasis
on investment and perhaps defense as well, the out-
look for a substantial improvement in the lot of the
consumer over the rest of the 1980s is not bright. To
assess the prospects for consumers, we examined
several policy options in which we varied our assump-
tions about resource allocation policies the Soviet
leaders might adopt and compared the results.'
'Our mechanism for trade-off analysis is SOVSIM, a large
The Balanced Policy Option
We believe one possible policy for the Soviets would
be a middle course. Such a policy would attempt to
make some simultaneous progress in consumption,
military production, and industrial modernization but
would avoid a marked swing in any one direction by
maintaining a balance in meeting the demands of the
competing claimants. The relatively good results of
1983 may provide additional impetus to choosing such
a strategy
In more specific terms, we would see this policy as one
in which achievable GNP growth would be in the
lower half of our 1.5- to 2.5-percent range over the
rest of the decade, investment growth might average
around 2.5 percent, and defense spending growth
would average about 2 percent per year. Under these
conditions, per capita consumption growth would av-
erage just under 1 percent per year. The advantage of
this balanced strategy would be to provide growth 25X1
sufficient to support a range of policy initiatives,
especially in the areas of defense and investment, and
still keep living standards from declining. It would
provide little hope, however, of a substantial improve-
ment in the standard of living over the rest of the
decade
Alternative Investment and Defense Policies
Other policy options available to the leadership could
have a more severe impact on the consumer. For
example, instead of averaging about 2.5 percent
through the remainder of the decade, investment
growth might continue at the higher 4-percent rate 25X1
experienced in 1982 and 1983. The leadership would
regard this as important for achieving industrial
modernization-a key long-term goal. In fact, there
are some indicators that point to the probability of the
Soviets' maintaining a relatively high rate of invest-
ment during the 1980s:
? Although the Soviets have not announced an official
target for total investment during the 12th Five-
Year (1986-90) Plan,
4 percent per year.
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secret
? The Soviet leaders have already adopted two expen-
sive programs as part of the 12th Five-Year Plan-
the Food Program and the long-term Energy Pro-
gram-which are likely to be a very heavy drain on
investment. Consequently, any significant reduction
from the present rate of investment growth would
put a severe crimp in the amount of investment
resources available for other essential areas such as
machine building.
We also considered the impact of more rapid growth
of defense spending. This might involve:
? An increase in total defense spending growth from 2
percent to 5 percent-a rate approximating that
observed during the military buildup of 1966-76.
? An increase in military procurement spending
growth from 2 percent to 6 percent.
? Larger shares of the investment pie for energy,
industrial materials, and the investment goods sec-
tors to support these military programs.
The focus of these trade-offs in the Soviet economy is
the machine-building sector-the main source of in-
vestment goods, military equipment, and consumer
durables. It is here that broad Kremlin pronounce-
ments concerning Soviet goals must be translated into
specific types of output. If investment and defense
growth continues late into the decade at the relatively
low rates of the balanced policy, production of con-
sumer goods will grow more slowly because of the
increasing constraint imposed by available resources
and productivity levels.
If investment and defense are to grow more rapidly,
Soviet leaders will probably encourage machinery
output to grow faster, but production of consumer
durables is likely to suffer even more. The results of
our analysis suggest that continuation of the higher
investment growth rate alone could be enough to
change the growth of per capita consumption from
positive to negative during the latter half of the 1980s.
If, in addition, the economy were geared up for major
defense increases, per capita consumption would be
driven down at a rate of about 1 percent annually
during the last half of the decade. Both cases suggest
a bleak outlook for the consumer as the decade draws
to a close.
Productivity Improvements
Would the consumer's prospects be less gloomy if
Soviet attempts at carrying out an intensive growth
strategy turned out to be more successful than we
think is likely? To answer this question, we assumed
that Soviet labor and capital could somehow be made
as productive as they were in the early 1970s. Such
conditions would improve overall growth of the econo-
my, and, even with high investment growth and
increased orientation toward defense, per capita con-
sumption growth could be maintained at the bal-
anced-policy rate of just under 1 percent, allowing
modest improvements in living standards. The prob-
lem, however, is that the longer term productivity
improvement required in this scenario does not seem
to be in the offing, particularly in view of the
increasing cost of introducing new plant and equip-
ment into more remote areas of the country, the
severe conditions of climate under which that equip-
ment must operate, and the cost of compensating for
the deteriorating quality of raw material reserves.
Soviet leaders, however, do recognize the importance
of productivity improvements to economic growth in
general and to their investment and defense goals in
particular. They also seem to believe that healthy per
capita consumption growth contributes to labor pro-
ductivity. This explains the efforts now being made to
improve the lot of the consumer through emphasis on
the Food Program, continuing grain and meat im-
ports, and attempts to foster growth of consumer
durables. Therefore, even though prospects for per
capita consumption growth are not bright, the Krem-
lin is not willing to dismiss entirely the consumer
claim to an improved standard of living.
A More Radical Consumer Policy
Although we do not consider it a likely eventuality,
the Soviets could undertake a more radical tilt toward
the consumer by altering the distribution of invest-
ment in favor of the consumer sectors of the economy
and reducing the commitment to defense spending.
Politically, this policy would have to be justified as a
move to preempt likely popular unrest under interna-
tional conditions benign enough to permit such a step.
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This consumerist policy would involve relatively
greater shares of investment for housing, consumer
goods, trade and services, and agriculture than would
the balanced policy. Total defense spending could be
held constant through the rest of the 1980s to main-
tain investment growth, and the volume of food and
other consumer goods imports from the West would
The Soviets might also alter the mix of their imports
to support consumer goals. For example, they might
eliminate imports of less essential machinery in favor
of additional feed grains. This would reduce the rate
of capital formation and the long-run growth of
output but facilitate more immediate growth of meat
output. Such a policy would be limited by the capacity
of Soviet ports to accept grain imports. Even so, it
could raise per capita meat availability perceptibly.
The impact on capital stock at the end of the decade
would be slight. Initially, the net effect on GNP
would be favorable. Eventually, but not until the
1990s, the reduced output brought about by the
forgone investment would nullify the greater produc-
tion of meat.
Such policies would alter the distribution of national
product in the consumer's favor. Growth in per capita
consumption within the 1986-90 period would be
boosted back toward the more favorable rates of the
early-to-middle 1970s. In addition, these outcomes
might inspire improved worker productivity that could
lead to higher rates of growth throughout the system.
We do not believe, however, that the Soviets would
adopt such a policy unless they were forced to do so by
some internal crisis such as a severe worsening of
public morale. Soviet leaders perceive the costs, in
terms of the lost opportunities to accelerate techno-
logical modernization, to be too high, and we think
they would be unlikely to allow overall defense spend-
ing to stagnate for such a prolonged period.
Prospects for the Consumer
In making decisions about resource allocations, the
Soviet leadership must deal with the issues that are
illustrated in our policy alternatives. The accompany-
ing figure summarizes the trade-off dilemma that we
believe the Soviets will face if they continue to
emphasize investment and defense. Whether we use
moderate or bullish assumptions about productivity
USSR: Impact of Increased Defense
Growth on Per Capita Consumption
Growth, 1986-90'
With increased
productivity
Defense growth b
a Investment growth is 4 percent per year in all cases.
b Average annual percentage.
Our baseline assumptions about factor productivity are
derived from the estimated historical relationship that
has existed among capital, labor, and output in the
branches of industry in the USSR since the mid-1970s.
Under the policy options associated with baseline
productivity, GNP growth approaches the lower side of
the 1.5-2.5-percent range we forecast for the 1986-90
period; under conditions of increased productivity,
it is near the upper side.
and growth prospects, living standards, as measured
by per capita consumption, are not likely to grow
substantially during the last half of the decade.
Further, if the Soviets were to accelerate defense
spending from today's 2-percent growth rate while
maintaining investment growth at 4 percent a year,
they would jeopardize even the faint hopes for slow
improvements and, in some cases, incur a decline in
living standards. Slower growth in investment would
allow a bit more room for improving the Soviet
consumer's lot in the shorter run, but such a policy
would be counter to the need to modernize much old
industrial plant and stimulate energy conservation
and substitution and could even undermine longer
range programs undertaken on behalf of the consum-
er, such as the Food Program.
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The average Soviet citizen doubtless gauges his stan-
dard of living not in terms of per capita consumption
growth but by the reality he sees around him. The
Soviets do have some flexibility to adjust the structure
of consumption to react to problems most urgently felt
by the population in areas such as food, medical
services, and housing. Nevertheless, the forecast of
per capita consumption growth in the balanced policy
option represents a fairly confined envelope within
which to deal with consumer demands.
In the future, Moscow's ability to satisfy claimants on
resources will be limited by the likelihood of slow
economic growth. Growth in the range we are project-
ing does not suggest that the Soviet economy is in
desperate straits. Rather it indicates that the leader-
ship will have to make choices among ambitious goals
or reduce them all somewhat. The lower the rate of
overall growth in the economy, the harder the choices
become. At projected growth rates, the USSR cannot
simultaneously increase consumption substantially to
stimulate labor productivity, rapidly modernize the
economy to incorporate more efficient plant and
advanced technology, and make a sharp response to a
US military buildup.
Overall, the leadership will probably try, as it has in
the last two decades, to balance growth with at least
some improvement in living standards and slow in-
creases in resources for defense. Certainly, as ac-
knowledged in General Secretary Chernenko's No-
vember 1984 speech and as hinted in the announced
1985 defense budget, the pressure to raise defense
spending substantially is strong. Also, official policy
now seems to recognize the desirability of maintaining
a relatively high rate of investment growth. However,
a decision to actually increase the rate of growth for
defense while maintaining high investment growth is
almost sure to have adverse consequences for the
consumer that would probably be unacceptable for
the leadership.
Secret 26
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The Soviet-Cuban Relationship:
Serving Mutual Interests
Despite recent strains in the Soviet-Cuban relation-
ship, the ties binding Moscow and Havana remain
strong. Cuba continues to advance Soviet efforts to
establish influence in the Third World and challenge
US domination in the Western Hemisphere, while
Cuba's economic and military development depends
substantially on Soviet aid. CEMA's willingness last
year to reschedule Cuba's debt, guarantee future
Soviet oil supplies, and assist Cuba's development of
energy resources illustrate the special treatment being
accorded Havana. As long as mutual interests are
served, the Soviet-Cuban relationship is likely to
remain the strongest of Soviet-client links in the Third
World.
As in most bilateral relationships, however, strains
emerge when each side seeks to advance its foreign
policy objectives at the other's expense. A classic
example of discord in the Soviet-Cuban relationship is
that which results from Moscow's giving a higher
priority to East-West security issues than to the
North-South economic development issues that are of
paramount concern to Cuba. Castro has frequently
resorted to diplomatic and political pressure to extract
economic and military concessions from Moscow, and
the Soviets have used pressure and propaganda to
influence the Cubans. Strains in the relationship also
developed during the period between the US interven-
tion in Grenada in October 1983 and the CEMA
conference of October 1984
Nature of the Relationship
As a Marxist-Leninist regime located in the Caribbe-
an Basin-directly in the US "strategic rear"-and
deeply committed to support of national liberation
movements in the Third World, Cuba's attraction to
the Soviets is understandably strong. The Soviets
benefit from Cuba's anti-US foreign policy, its politi-
cal skill in courting Third World radical nationalism,
and its pro-Soviet leadership in the Third World
"Nonaligned Movement." Cuba, in turn, enjoys $4-5
billion in annual Soviet economic support through
trade subsidies, development aid, and balance-of-
payments assistance-by far the highest amount Mos-
cow extends to any Third World client. Cuba receives
low-priced, Soviet-subsidized oil transfers, higher-
than-world-market prices for its sugar, and military
supplies virtually free of charge. Since 1960 the cost
of Soviet economic support to Cuba has amounted to
nearly $33 billion.
In pursuing his own foreign policy interests in the
Third World, Castro usually advances Soviet interests
by:
? Reinforcing the connections between Cuba's revolu-
tion and Third World revolutionary movements to
enhance Cuba's international role.
? Developing a personal relationship with such leftist
revolutionary leaders as the former leader of Grena-
da, Maurice Bishop, and the current Sandinista
leader, Daniel Ortega.
? Strengthening Third World socialism and radical
national movements as a way to legitimize Cuba's
own revolutionary legacy. In quest of these interests,
Castro has sent troops and technicians to Africa, the
Caribbean Basin, and the Middle East. We estimate
that as of 1983 this commitment amounted to over
40,000 military personnel and 21,000 civilian advis-
ers, technicians, and construction workers.
Havana's Soviet-backed policies in the Caribbean
Basin and Africa help portray the Soviet Union as the
Third World's "natural ally." In the case of the
Caribbean Basin, especially Central America, the
Soviets benefit from Cuba's geographic proximity and
linguistic ties as well as its cultural affinity with local
Third World leaders. Moreover, Moscow benefits
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from Third World receptivity to Cuba's presence as a
small "anti-imperialist" revolutionary state in defi-
ance of the United States-a posture that appeals to
leftist anti-imperialist movements.
? Attempting to heal the rifts within the Caribbean
leftist movement caused by the Grenada debacle, as
in the first Consultative Meeting of Anti-Imperialist
Organizations of the Caribbean, held in Havana in
June.
? Continuing its general propaganda effort condemn-
ing US policies in Central America and stressing
the US military threat to small Caribbean Basin
countries.
? Maintaining traditional contacts with insurgent
movements throughout the Third World in terms of
training, financial aid, and policy guidance.
By joining with the USSR, Cuba has been able to
draw upon Soviet economic and military support to
survive economically, protect its physical security,
project its own brand of power abroad in support of
national liberation movements, and raise its prestige
as a small-state actor in international politics. From
Havana's perspective, Moscow's economic support
and virtually free military aid:
? Make possible Cuban economic gains in public
health, housing, education, and other social services.
? Transfer technical know-how and managerial tech-
niques to Cuba's economy.
? Support Cuba's oversized and modern (by Third
World standards) armed forces.
? Improve Castro's capabilities to support revolution-
ary movements abroad through Soviet logistic back-
ing, in addition to economic and military assistance.
? Enhance the survivability of Castro's regime
through the militarization of Cuban society.
Soviet economic and military aid to Cuba is the
largest Moscow extends to Third World clients. Soviet
economic support-development aid, trade subsidies,
and balance-of-payments assistance-reached an esti-
mated $4.2 billion in 1983. Cuba has received the
equivalent of about $33 billion since the early 1960s.
In addition to serving as Cuba's chief trading partner,
the Soviet Union provides Havana with substantial
amounts of imported food, oil, and capital good
The Soviets have mod-
ernized Cuba's armed forces as a result of Havana's
interventions in Angola and Ethiopia, and shipments
of Soviet miltiary weapons over the last four years
have been the largest since the missile crisis of 1962.
These military supplies entail a heavy economic bur-
den for Moscow, amounting to $2.5 billion worth of
deliveries from 1981 to.1983, equal to the dollar value
of the total deliveries in the preceding 20 years.
Cuban and Soviet Influence-Seeking During
1983-84
Cuba used its privileged position to try to pry conces-
sions from the Soviets between the June 1984 CEMA
summit conference held in Moscow and the October
meetings in Havana. The June summit reflected
Soviet and Cuban discord over the essential develop-
ment strategy assigned to Cuba within CEMA's long-
term goals. According to the US Interests Section in
Havana, information from East European diplomats
has indicated that Cuba, in planning talks for the
CEMA summit, emphasized accelerated industrial
development rather than a continuation of its role as a
supplier of agricultural commodities. These proposals
were rejected by the USSR. In response to this rebuff,
Castro did not attend the June meetings in Moscow.
Other indicators of discord between Moscow and
Havana were evident during much of 1984. These
strains, which have not completely disappeared,
include:
? Cuba's frustration with Moscow's weak response to
the US intervention in Grenada in 1983.
? Havana's discontent with Moscow's focus on East-
West issues and relative lack of attention to Third
World development issues and the Central Ameri-
can crisis.
? Moscow's unhappiness with Cuban economic ineffi-
ciency and mismanagement, notably in the sugar
industry.
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? Soviet irritation over Cuba's large purchases of
machinery from Western Europe rather than from
CEMA countries.
? Castro's displeasure with Soviet equipment, particu-
larly navigation equipment, and with the expenses
associated with purchasing Soviet spare parts and
meeting maintenance costs.
Castro's absence from the CEMA summit in June
1984, coupled with a letter to Chernenko on the eve of
the summit which underscored Castro's unhappiness
over economic assistance to Cuba, was probably
meant to direct Soviet attention to Cuba's need for
increased economic aid and to Cuba's mounting sense
of insecurity for itself and Nicaragua in the face of
US actions. In an effort to exert added pressure in
these directions, Castro's 26 July speech made little
mention of the Soviets' contribution to the Cuban
Revolution or to Moscow's role in the economic
development of Cuba.
Following the CEMA meetings in Moscow and Cas-
tro's public irritation with the Soviets, Moscow re-
sponded with its own signs of displeasure with Ha-
vana.
As a further signal of its displeasure with the Castro
government, Moscow did not acknowledge Castro's
June letter to Chernenko in the Soviet media and sent
a low-level delegation to cover the 26th of July
celebration in Cuba. The Soviet congratulatory mes-
sage to Havana also did not mention the US threat to
Cuba or the revolutionary developments in Central
America, both of which deeply concern Castro.
The Soviets normally use these Cuban celebrations to
underscore and reinforce Soviet bilateral ties with the
Castro regime. The low-level Soviet treatment, there-
fore, was probably a part of the larger effort to
influence Castro in the direction of:
? Abandoning his short-term goal of switching to a
more rapid course of industrialization.
? Remaining a team player within CEMA by playing
the traditional role of supplying agricultural goods.
? Concentrating on higher Cuban economic efficiency
as a quid pro quo for continued high levels of
economic and military aid.
The October 1984 CEMA Meetings in Havana and
Future Prospects
A compromise on Soviet and Cuban priorities regard-
ing Cuba's economic directions may have been ad-
vanced at the October CEMA meetings in Havana.
While Cuba did not gain backing in its industrializa-
tion aims, a large, high-level Soviet representation at
the Havana meetings stressed the North-South di-
mension of the conference and noted that the confer-
ence was the first major CEMA meeting held outside
the Soviet Bloc. The Havana venue acknowledged the
role of less developed countries as members and
observers in CEMA, as well as CEMA's commitment
to equalizing the levels of development between the
European and non-European (Cuba, Mongolia, and
Vietnam) members of the organization.
After a year of Soviet-Cuban discord dating back to
the Grenada crisis, the Soviets used the October
CEMA meetings in Havana to restate their continu-
ing commitment to Cuba. Vice President Carlos
Rafael Rodriguez told foreign diplomats in November
that Cuba's CEMA partners had agreed to reschedule
Cuba's debt with them, postponing repayment of
principal five years, from 1986 to 1990. Rodriguez
also stated that the Soviet Union had committed itself
to supplying Cuba with the same quantity of petro-
leum now provided during the next five-year period
(1986-90), and that Cuba would be allowed to sell for
hard currency any Soviet oil it did not need.
The 15-year accord also emphasized development of
Cuba's domestic energy resources and nuclear power
stations, almost certainly to reduce Cuban depend-
ence on Soviet energy supplies. The accord provides
for further modernization of Cuban sugar production
and industrial plants, with special attention to the
chemical industry. The Soviets also tried to persuade
their already hard-pressed CEMA allies to share the
burden of support for CEMA's less developed mem-
bers, but only Bulgaria seems to be moving in that
direction.
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In response to the new economic arrangements with
the USSR and CEMA, Castro hailed the Soviet
Union in November. In an interview with Pravda, he
stated that "the USSR is giving Cuba all it needs for
the defense of its revolutionary gains and the acceler-
ated development of its national economy." Castro
also lavished praise on the Soviets in his December
speeches.
Outlook
Problems in the Soviet-Cuban relationship have been
set aside for now, but future problems are likely to
emerge over conflicting priorities pursued by the
Soviet patron-with its own economic difficulties and
East-West security concerns-and the Cuban client,
with its economic development problems and regional
security priorities vis-a-vis the United States. The
Soviets have made a commitment to continue their
support of the Cuban econom
Some potential
causes of strains in the future include:
? The level of Soviet oil deliveries to Cuba, especially
as Nicaraguan demands on Soviet oil supplies
increase.
? Cuba's ineffectively managed economy and growing
Soviet pressures for increased austerity and con-
sumption cutbacks.
? Moscow's inattention to Third World economic
development problems.
? Levels of Soviet military commitments to clients in
the Caribbean Basin.
? Cuba's continued desire for industrialization pro-
grams in mechanics, electronics, and other fields.
? Imposition of austerity measures in Cuba to the
extent they are perceived as a consequence of Soviet
pressure.
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Proposed Soviet Gas Pipeline
to Eastern Europe
The Soviets are pushing for East European agreement
on the joint construction of a new gas export pipeline.
Moscow wants to get more East European participa-
tion in Soviet investment projects in return for in-
creased Soviet deliveries of energy and other raw
materials. It is not certain, however, that the East
European nations could absorb the additional 20-22
billion cubic meters a year of gas that the pipeline
reportedly would deliver to them. If not, the Soviets
might attempt to sell some gas to Western Europe.
The outlook for such sales would, of course, depend on
market conditions and the willingness of prospective
Western buyers to become more dependent on Soviet
gas
Background
Moscow has for many years been trying to rectify
what it considers to be inequities in its trade with
Eastern Europe. Soviet assistance to Eastern Europe
has taken the form of price subsidies, trade credits (as
represented by chronic surpluses in trade), and the
provision of goods readily salable for hard currency
(such as oil and other raw materials) in exchange for
goods not as salable. The Kremlin seems more deter-
mined than ever to reduce the assistance to Eastern
Europe during the next five-year period. The Soviet
approach is epitomized in the October 1984 coopera-
tion agreement with East Germany:
For a continuation of the supplies of the most
important raw materials and fuels from the
USSR, the GDR will take the necessary meas-
ures in the fields of investment and the recon-
struction and modernization of its industry to
guarantee the production and supply of the
products needed in the Soviet Union and will
continue its participation in establishing a
capacity in the oil and natural gas industry
and other branches of the extraction industry.
(Italics added.
Western engineers working in the Soviet Union in
1983 were the first to report that the USSR was
planning to build a new export pipeline to the East
European countries during 1986-90. A Soviet an-
nouncement in Pravda in July 1984, after the June
summit meeting of the Council for Mutual Economic
Assistance (CEMA), indicated that the USSR-with
the assistance of the East Europeans-would build a
gas export pipeline to deliver 20-22 billion cubic
meters a year to Eastern Europe. According to East
European diplomatic sources, the project will cost
between 10 and 13 billion rubles. CEMA's total
investment projects in the 1986-90 period reportedly
will come to about 45 to 55 billion rubles, of which the
USSR will provide about half.
Previously, the CEMA countries were extensively
involved in the construction of the Druzhba (Friend-
ship) oil pipeline in 1960-64 and the Soyuz (Union)
gas pipeline in 1977-79. Each of the signatory nations
to the Soyuz gas pipeline agreement was charged with
complete construction of a large segment of the line
(including compressor stations), using its own re-
sources and manpower. Western equipment and pipe
purchased for the Soyuz pipeline were financed by
$2.5 billion in syndicated loans raised by CEMA's
International Investment Bank. These funds were
then lent to East European countries, which, in turn,
made them available to the Soviet Union. In addition,
Eastern Europe provided substantial ruble assistance.
East European contributions were to be repaid with
deliveries of resources and natural gas through 1990.
Requirements for Pipe and Equipment
The new export line is to be about 4,600 km in
length-two-thirds longer than the Soyuz line-and
1,420 mm in diameter. It reportedly is to have 40
compressor stations and run from the Yamburg gas-
field, about 150 km north of the Urengoy gasfield, to
the export terminal at Uzhgorod on the Czechoslovak
border. The route will parallel the recently completed
Siberia-to-Western Europe gas export pipeline (see
map). Construction reportedly is to begin in 1985 and
be completed in 1988.
We do not believe that the new CEMA gas export
pipeline will be a major source of equipment contracts
with West European firms, as was the recently com-
pleted gas export pipeline.
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The new gas pipeline may be intended to compensate
for possible reductions in Soviet oil deliveries to
Eastern Europe. With oil output from the key West
Siberian production region showing signs of slower
growth and that from other production regions de-
clining by about 10-12 million tons per year, Soviet
oil output during 1986-90 will at best remain con-
stant. Output in 1984 was 613 million tons-3 mil-
lion tons below the 1983 level and 11 million tons
below plan. At the annual CEMA meeting in October
1984, Soviet Premier Tikhonov announced that the
USSR would continue "to guarantee oil supplies" to
CEMA member nations and "increase future ship-
ments" of electricity and gas. The wording of the
Soviet announcement suggests that, while the USSR
will continue delivering oil to the CEMA countries,
the volume offuture oil shipments may be reduced.
There appears to be considerable foot-dragging by the
East Europeans in regard to the pipeline and other
projects.
the USSR plans to equip the pipeline with Soviet
gas turbines. Output of Soviet turbines suitable for
use on 1,420-mm gas pipelines has in fact increased in
recent years. Since the purchase of the 125 Western
gas turbines for the Siberia-to-Western Europe gas
export pipeline, the USSR has contracted to buy only
21 additional Western 25-megawatt turbines-
enough to meet about 10 percent of estimated demand
during 1984-85. A substantial amount of pipe proba-
bly will have to be imported from the West, however;
the project will require about 2.8 million tons of high-
grade large-diameter pipe.
East European Participation
Moscow apparently sees the gas pipeline as a high-
priority project and is pressing to complete bilateral
agreements with the individual East European coun-
tries.
~In 1983, Soviet gas exports to these coun-
tries totaled about 31-34 billion cubic meters or about
three-fifths of total gas consumption in Eastern Eu-
rope excluding Romania.'
Western Europe: An Alternative Market?
It is uncertain whether the East European countries
will have the pipeline network and industrial facilities
to distribute and absorb annually the additional 20-22
billion cubic meters of gas to be delivered by the
Yamburg-Uzhgorod pipeline by 1990. Even if the
East European economies can absorb the planned
amount, the pipeline would still have some capacity
for additional gas exports to Western Europe. Soviet
technical journals indicate that the net throughput of
a pipeline of this length and diameter operating,at a
pressure of 75 atmospheres is about 27 billion cubic
meters per year-5-7 billion cubic meters more than
the amount of gas that the Soviet press reports is
earmarked for Eastern Europe. Eastern Europe's abil-
ity to absorb Yamburg gas depends also on the
amount of Soviet gas received through other pipelines.
Press reports indicate plans to build a gas pipeline
from the Soviet border at Brest to Warsaw in 1985.
' We are unable to determine precisely how much Soviet gas was
delivered to Eastern Europe in 1983. Soviet trade data indicate a
23-percent increase in the ruble value of gas deliveries, which would
of gas delivered to individual countries indicates an increase in
volume but a lesser amount than suggested by the ruble values
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Proposed Natural Gas Pipeline From Siberia to Eastern Europe
The United Slot.. Go.onm.nt h.. not r.co,ni.W
M. inewponation of Estonia, Latvia, and Lithuania
into the Sovi.t Union. Oth., boundary r.pr...nt.tion
~. nat n.c....rily auMOritatin..
The Pipeline at a Glance
Length: 4,600 kilometers (Yamburg-Uzhgorod)
Capacity: 32 billion cubic meters per year (gross);
26-28 billion cubic meters per year (net)
Pipe: 2.8 million tons, 1,420-mm (56- Inch) diameter
Operating pressure: 75 atmospheres
Total cost: 10-13 billion rubles
Completion: 1988
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Another gas pipeline will reportedly be laid from the
Soviet export terminal at Izmail to Bulgaria. (Some of
the gas transported through this i line however, is
probably earmarked for Turkey.)-
If West European gas demand rises more than is
currently expected during the late 1980s and early
1990s, the Soviets could use the excess capacity of the
proposed line to Eastern Europe as a readymade
vehicle to transport gas to Western Europe. This
could be of substantial help in maintaining total
Soviet hard currency exports at a time when the
ability to export oil may be diminished. The outlook
for such sales to the West would, of course, depend on
energy market conditions and the willingness of pro-
spective Western buyers to become more dependent
on Soviet gas. CIA believes that current industry and
government forecasts for West European gas demand
may be understated and do not take into account an
apparent return to improved economic growth.
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The Changing Role of Soviet-Owned
Banks in the West
The Soviets have maintained a small but important
string of banks in the West since the Russian revolu-
tion. Despite Soviet ownership and a high degree of
control, the banks-which are located in major inter-
national financial centers and possess assets of more
than $10 billion-operate as independent profit-seek-
ing Western corporations. Less active international
financial markets, the downturn in Bloc financial
fortunes, and the generally cooler East-West climate
have impinged on bank operations in recent years,
forcing Moscow to assume a greater role in managing
the day-to-day operations of these banks. An emerg-
ing scandal at the Soviet-owned Zurich bank is likely
to reinforce this trend. Because the political fallout
from a major retrenchment would be so large, how-
ever, and the cost of keeping the banks afloat is
relatively so small, Moscow would be reluctant to set
any of its banks adrift.
The Soviet Banking Network
The Soviet Union currently operates six banks (one of
which has two branches) in the West. This foreign-
based banking network, which formally began with
the chartering of Moscow Narodny Bank (MNB) in
London in 1919, has played a major role in Soviet
commercial relations with the West, both as a conduit
of hard currency into the USSR and as a promoter of
East-West trade
The Soviet-owned banks in the West vary widely with
respect to size, asset structure, and scope of activity
(see table). All of the banks are chartered by the
countries in which they are located and operate
subject to the laws and regulations of those countries.
Thus, Moscow Narodny Bank is legally a British bank
rather than a Soviet one. In fact, MNB and Wozchod
Handelsbank (Zurich) maintain business representa-
tive offices in Moscow just as any other Western
corporation might.
In practice, however, the Soviet-owned banks in the
West remain just that-Soviet owned. Stock owner-
ship is retained solely by various organizations within
the Soviet foreign trade infrastructure. The scope and
magnitude of bank operations is set in Moscow by the
State Bank (Gosbank) and the Foreign Trade Bank
(VTB), sometimes working through the Banking Su-
pervisory Council (see figure) and sometimes directly.
Upper-level bank management, like bank ownership,
is almost exclusively a Soviet domain. All of MNB's
directors and assistant directors are Soviets, as are the
general managers of its branches. The banks are,
however, largely staffed by local nationals. The staffs
generally consist of well-trained professionals who are
versed in local as well as international banking laws
and customs. Moscow hires local personnel for their
expertise in banking and local commercial practices,
but it clearly has no intention of allowing them to take
a major hand in running the banks.
Bank Activities
The primary role of the Soviet-owned banks in the
West has always been to foster and finance East-West
trade. In addition to carrying on the normal business
activities of all banks-accepting commercial depos-
its, making loans, and providing financial analysis and
advice-they make special efforts to encourage trade
with the USSR and Eastern Europe. To this end,
Soviet bankers overseas advise Westerners about So-
viet import needs and export offerings, assist business-
es in the intricacies of trade-related documentation,
provide short- and medium-term financing for specific
East-West commodity trade deals, and manage and
generate broad-based participation in East-West com-
mercial loan syndications
The banks, however, also fulfill important nonfinan-
cial roles. They provide Moscow with:
? Economic intelligence. Wozchod and MNB in Lon-
don are especially involved in analyzing the interna-
tional gold markets; Ost-West Handelsbank and
MNB in Singapore do the same for diamonds;
MNB's new subsidiary in the Netherlands is well
positioned to monitor the world spot oil market in
Rotterdam; and all the banks monitor Eurocurrency
markets.
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Bank
Location
Date
Established
Assets ^
(million US $)
Employees
Moscow Narodny Bank (MNB)
London
1919
Beirut (branch)
1963
Singapore(branch)
1971
Banque Commerciale pour I'Europe
du Nord (BCEN)-Eurobank
Paris
1921
Wozchod Handelsbank (WHB)
Zurich
1966
500.2
55
5
Ost-West Handelsbank (OWHB)
Frankfurt
1971
687.7
95
6
Donaubank
Vienna
1974
482.1
62
6
East-West United Bank (EWUB)
Luxembourg
1974
487.1
30
3
? Values are for yearend 1983 except for WHB and Donaubank
(1982). Value for MNB represents combined assets.
? Trade intelligence. All the banks observe and report
on import and export needs of potential trading
partners and analyze conditions in various local or
international commodity markets (for example, pe-
troleum products or agricultural machinery).
? Political intelligence. Knowing how major banks
evaluate the USSR's credit risk and country risk
gives the Soviet-owned banks and their supervisors
in Moscow insight into Western expectations for
East-West relations.
Recent Trends
Through the mid-1970s Moscow basically remained
aloof from the day-to-day operation of its overseas
banks. However, the banks' fundamental role, and
their relationships with each other and with Moscow,
began to change in the late 1970s under the guidance
of new State Bank Chairman Vladimir Alkhimov and
as the Soviet apparatus sustained a series of financial
setbacks:
? The repercussions of poor investments-totaling
nearly $500 million-by the foreign-based banks
depressed profits and impeded lending.
? The Polish financial crisis forced Moscow to reeval-
uate its financial relationships with its West Euro-
pean allies.
? A corresponding skepticism grew in the West over
Bloc creditworthiness in general.
? Moscow's demand for hard currency surged in 1981
and 1982 as the USSR had to pay for stepped-up
purchases of agricultural imports at the same time
that world oil market prices began to soften.
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USSR: Foreign Financial Apparatus'
CPSU Central Committee State Bank of the USSR
(Gosbank)
Capital Investment Bank of Foreign Trade Bank of the State Savings Bank of the
the USSR (Stroybank) USSR (Vneshtorgbank) USSR (Gostrudsberkassa)
Banque Commerciale pour
1' Europe du Nord SA
EUROBANK
a This figure represents the chain of command for actual banking
operations. Several of the Soviet-owned banks in the West maintain
representative offices in Moscow or elsewhere, or are part or full
owners of other businesses.
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Moscow reacted to these crises by ordering an across-
the-board retrenchment that has led to a fundamental
restructuring of its relationship with its foreign banks.
The Soviets have always kept a close eye on their
banks, but Gosbank and VTB now do a great deal
more than just set policy for the overseas banks.
Moscow now sets country lending limits, reserves the
right to approve or disapprove specific deposit opera-
tions, and is handling gold sales and purchases direct-
ly. The biggest change, however, probably has been
VTB's repeated and continuing demands to all Soviet
overseas banks to raise and forward cash-in fact, all
surplus money-to Moscow, at the expense of other
banking operations. This
impinging on the
banks' original charter-to finance East-West trade.
Overall, the Soviet foreign-based banks are undercap-
italized, less liquid than their peers, and only margin-
ally profitable. Deposits in the four largest banks have
fallen, probably because of East-West tensions, while
capital also declined at three of them because of
unprofitable operations. Total assets of the network
have also been declining-from a peak of $12.2 billion
in 1980 to about $10 billion at yearend 1983. Yearend
data for 1984 is not yet available, but early indica-
tions are that this trend has continued. Nevertheless,
while closely monitoring its overseas banks, VTB has
been careful to keep sufficient funds on deposit with
them to allow the banks to carry out their basic East-
West trade charter and service Moscow's other mone-
tary needs.
Prospects
Moscow's continued micromanagement of its banks in
the West could threaten their long-term viability. The
banking network is fundamentally sound, but the
individual banks' financial status-as well as their
stature among other international banks-has been
eroded by three years of cash drain. East-West United
Bank, which has been left without funds that it used
to place into syndication, has been largely dormant
since 1980 and had a profit of only 0.5 percent in
1982. This downward trend in liquidity and profitabil-
ity leaves the Soviet-owned banks in the West vulner-
able to further deterioration of their capital base-
and eventual insolvency.
The USSR's Swiss bank, Wozchod Handelsbank, is
reeling from the recently disclosed unauthorized gold
trading by its former head gold dealer. Although the
final accounting is not yet in, press sources speculate
that Wozchod's losses could be as high as $400
million-nearly 75 percent of the banks assets at
yearend 1983-and have a massive impact in terms of
lost credibility in the marketplace. We believe it likely
that, to forestall legal action against the bank, VTB
has told Swiss banking authorities that it will back
Wozchod no matter the cost. To what extent Woz-
chod's sister banks will be tasked to assist in keeping
it afloat is unclear.
If VTB continues its pressure on the banks to raise
large sums of hard currency quickly-or to help in a
major salvage operation for the Swiss bank-it may
force them to sell some profitable longer term invest-
ments. Several of the banks, in fact, already have had
to reduce investments to accede to Moscow's guide-
lines, an action that has led to corresponding drops in
interest income.
Soviet bank operations are also being hampered by
perceptions among Western bankers that:
? The banks are not independent financial entities but
rather political extensions of Moscow.
? Soviet managerial personnel sent to the banks in the
West are generally not selected on the basis of
professionalism and quality of training.
? The professional local bank management increas-
ingly is being prevented from making business
decisions on the basis of rational financial criteria.
In purely financial terms, the USSR could sustain the
loss of the smaller and newer banks with little effect
on its own activities in world markets. If necessary,
Moscow could support the full range of Soviet trade
activities in the West with just the two largest
banks-Moscow Narodny Bank (MNB) and Euro-
bank-although with diminished credibility and flexi-
bility. All of the important markets-gold, diamonds,
other precious metals and gems, Eurocurrencies,
bonds and other securities, and commercial paper-
are now truly international in scope and operate
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around the clock. MNB and Eurobank could easily be
Moscow's eyes and ears in these markets as well. But
the nonfinancial effects of such a retrenchment would
be substantial. As noted earlier, the foreign-based
Soviet-owned banks provide Moscow with windows to
the West through which knowledge, as well as money,
passes-in both directions.
On balance, we believe Moscow is likely to view the
cost of keeping the banks afloat as relatively small
compared with the nonfinancial effects of a massive
retrenchment and will be reluctant to set any of its
banks adrift.
25X1
25X1
Declassified in Part - Sanitized Copy Approved for Release 2012/05/10: CIA-RDP88T00799R000200020004-5
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Declassified in Part - Sanitized Copy Approved for Release 2012/05/10: CIA-RDP88T00799R000200020004-5
Declassified in Part - Sanitized Copy Approved for Release 2012/05/10: CIA-RDP88T00799R000200020004-5
 Declassified in Part - Sanitized Copy Approved for Release 2012/05/10: CIA-RDP88T00799R000200020004-5
A7GV.1 Gl
Declassified in Part - Sanitized Copy Approved for Release 2012/05/10: CIA-RDP88T00799R000200020004-5