USSR REVIEW

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP88T00799R000200060004-1
• Release Decision: RIPPUB
• Original Classification: S
• Document Page Count: 52
• Document Creation Date: December 27, 2016
• Document Release Date: March 1, 2012
• Sequence Number: 4
• Publication Date: October 1, 1985
• Content Type: REPORT

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1 l~ ) Intelligence 25X1
USSR Review
In this issue:
Soviet Industrial Modernization
September-October 1985
Secret
SOV UR 85-005X
October 1985
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USSR Review
The USSR Review is published by the Office of
Soviet Analysis.
Secret
SOV UR 85-005X
October 1985
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Contents
Soviet Industrial Perspective
Modernization
Since General Secretary Mikhail Gorbachev came to power last
March, the watchword of his economic policy has been
"modernization," described in Soviet economic jargon as the
transition from "extensive" to "intensive" development.
Gorbachev's program is familiar in its general outline. He proposes
to replace outmoded plant and equipment, shift investment toward
high-technology industries, and reform management and
organization to encourage innovation and reduce barriers between
science and industry. Gorbachev, however, has proclaimed his goals
more vigorously than his predecessors, and the pace of renewal that
they imply is breathtaking. Even though the more ambitious
quantitative goals for capital stock renewal are unlikely to be
achieved, Gorbachev can achieve quite a bit if he can rearrange
priorities in favor of his program. On the other hand, unless he
makes hard decisions on resource allocation, he could generate the
kind of unbalanced plans that caused so much trouble in the late
1970s and early 1980s.
The Soviet leadership realizes that it can no longer afford the luxury
of "extensive" growth-achieved by the use of larger inputs-and
must switch to a strategy of "intensive" growth-achieved by a
boost in productivity. Although all leaders since Khrushchev have
agreed on the urgency of reaching this goal and have lamented the
slow pace at which the economy is moving toward it, they have been
unable to agree on a unified means of achieving it. Differences are
also apparent in successive regimes' willingness to rely on Western
help in the modernization effort.
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or _l CI
The Soviets have tried before to switch from extensive to intensive
growth. The campaign stalled, however, because of institutional
resistance to getting rid of old plant and equipment, building
practices that favored expansion rather than replacement of fixed
capital, and sluggish technological progress stemming from perverse
managerial incentives and military priority for the resources needed
for innovation.
Gorbachev has emerged as a forceful advocate of industrial
modernization as the way to improve overall economic performance.
The goals he has proposed thus far appear much too ambitious
unless drastic shifts toward the investment sector are made at the
expense of consumption and/or defense. Nonetheless, sustained
leadership attention and less severe shifts in priorities could spur
technological progress and thus have a positive impact on economic
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Advanced Industrial Technologies in the USSR: Progress and
Problems) 23 25X1
Gorbachev has announced a major push to revitalize the Soviet
economy by accelerating the development of high-technology
industries. He hopes to reduce the USSR's lag behind the
industrialized West in both productivity and product quality. His
initiative faces major obstacles because the West is continuing to
advance in these areas, while Soviet industry, despite considerable
progress, must overcome a number of systemic weaknesses.
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Other Topics
Modernizing Basic Industries
The Soviet campaign for intensive growth directly affects the basic
industries. It calls for these basic industries to improve the quality of
their products and the efficiency of their processing to reach the
quality standards required by the modernization effort and to reduce
their consumption of raw materials and energy. Three of the basic
industries-chemicals, steel, and construction materials-are
examined to determine how this campaign is affecting their
development.
Acquiring Western Technology
Acquisition of Western manufacturing technology through both
overt and covert channels will figure prominently in Gorbachev's
industrial modernization plan, but we do not expect a return to the
high levels of imports sustained in the mid-1970s. Aggressive
Western enforcement of strict export controls could lead the Soviets
to place even greater emphasis on covert acquisition, which is
generally less effective than legal trade in ensuring assimilation and
diffusion of complex technologies.
Good Grain Crop Cuts Soviet Import Need
With the harvest nearing completion, the USSR appears headed for
a 200-million-ton grain crop-the best since the 1978 high of 237
million tons-record production of forage crops, and further growth
in production of livestock products. Total agricultural output in
1985 probably will exceed the 1983 record, thereby getting the Food
Program back on track. The favorable outlook means that Moscow
may need to import only about half as much grain as last year, when
it purchased a record 53 million tons, and that US grain sales may
plunge by more than 50 percent from last year's peak of some 22
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aecrer
The "Samotlor Disease" Is Spreading
The "Samotlor disease"-a vicious circle of flagging output from
giant oilfields and ever-increasing use of manpower and equipment
in an attempt to sustain total oil output-is spreading throughout
the West Siberian oil region. Unless large oil finds are made, the
costs of oil exploitation in the USSR will rise exponentially.
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Soviet Industrial Modernization
Perspective
Since General Secretary Mikhail Gorbachev came to power last March,
the watchword of his economic policy has been "modernization," described
in Soviet economic jargon as the transition from "extensive" to "intensive"
development based on an acceleration in technological progress and a more
effective organization of work. This issue of the USSR Review focuses on
modernization in industry, which Gorbachev believes to be crucial to his
objective of matching the productivity of the industrial powers-the
United States, Japan, and Western Europe. It reviews the program, points
out some of the uncertainties regarding its implementation, and considers
the risks that Gorbachev may be taking in stressing modernization so
heavily.
In the eyes of the leadership, the elimination of the large differences
between Soviet and Western levels of per capita production has always
been a primary policy objective. Under Stalin and Khrushchev, the USSR
made substantial progress in this direction. Since 1965, however, the gap
has narrowed hardly at all under Brezhnev, Andropov, and Chernenko. In
one sense, Soviet leaders believe that the difference between what the
Western world has done technologically and what the Soviet Union is
doing represents an opportunity as far as economic growth and popular
welfare are concerned.
Perhaps an equally powerful stimulus to industrial modernization is the
thought expressed by a prominent party spokesman on economic matters:
"In today's divided world, the strong of the capitalistic world do not take
the weak into account. And to ensure that they do not cease to take us into
account, it is necessary to prevent any military-strategic lag. The way to do
this is also the acceleration of the country's socioeconomic development."
Secret
SOV UR 85-005X
October 1985
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Secret
Efforts in the past to lift the Soviet Union on to a faster growth path
through policies promoting modernization have foundered mainly because
the prevailing incentive structure got in the way. Whereas, in a market
economy, firms discard old assets to obtain operating economies or to stay
competitive in their product lines, meeting current production targets has
dominated the decisions of Soviet managers. The pace of innovation has
also been slowed by military preemption of scarce R&D resources, skilled
manpower, and high-technology products such as electronics and
computers. In addition, the characteristic barriers in the USSR between
science and applied research and between applied research and production
have delayed the development and assimilation of new technology.
Gorbachev's program is familiar in its general outline. He proposes to
replace outmoded plant and equipment, shift investment toward high-
technology industries, and reform management and organization so as to
encourage innovation and reduce barriers between science and industry.
Gorbachev, however, has proclaimed his goals more vigorously than his
predecessors, and the pace of renewal that they imply is breathtaking:
? Rates of retirement of building and equipment are to be doubled.
? By 1990 a third of the country's fixed capital and one-half of the
machinery portion is to be new.
? Capital investment in the civilian machinery sector is to rise by 18
percent per year.
Meanwhile, computer-based planning and design and automated
production are counted on to support a resurgence in both machine
building and basic industries, such as steel and chemicals.
Realizing that his initiatives will not capture new qualitative levels of
production quickly-in a "cavalry charge" as a spokesman put it-he must
nevertheless find the resources now to shift the renewal of the country's
capital stock into high gear. The impact of accumulated investment in
modern equipment will be felt gradually. The fruits of systemic change, if
they materialize, are also some years away. To this end, Gorbachev has
been telling his planners to submit more ambitious goals for the 1986-90
Five-Year Plan. The objective appears to be an acceleration in the rate of
Soviet economic growth by one-third or more.
The basis for this spurt in production is to be a mobilization of reserves-
unleashing the "human factor." Soviet officials attribute a large share of
the upturn in the economy in 1983-85 to the measures introduced by
Andropov to tighten labor discipline and shake up the economic
bureaucracy. Gorbachev is reviving this campaign after a lull during
Chernenko's brief tenure. As one of Gorbachev's leading advisers says:
It is possible to receive relatively quick returns here, with minimal
expenditure. But these reserves and possibilities, lying closer to the
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surface, are limited ... the wide-scale introduction of the newest
achievements of science and technology in production ]will require]
time and considerable expenditure, but then the results, too, are
significant and lasting.
We know, then, one element of the Gorbachev strategy-a reliance on
uncovering "hidden reserves" in the short run. As more information on the
five-year plan-especially the structure of planned investment-becomes
available, we may learn whether he intends to back up his modernization
program with sufficient investment. If the 1986-90 plan gives generous
increases in investment to all civil claimants-the Energy Program, the
Food Program, the Consumer Goods Program, as well as to the machine-
building sector-without a substantial reduction in military spending, the
plan would be infeasible. Some reordering of priorities within the civilian
economy is necessary, or some restraint on the military's priority is
essential if industrial modernization is to do more than limp along. Defense
preempts about one-third of the production of the machine-building sector
and accounts for a much larger share of the output of computers and
electronics.
In sum, Gorbachev could be taking some considerable risks in
implementing his modernization program:
? If he tries to carry out the program without altering priorities on
investment, the impetus to growth based on human factors is likely to
trail off after a few years, leaving the shortages and disproportions
characteristic of an unbalanced plan. General disillusion might then set
in, with the population seeing Gorbachev as no more effective than
Brezhnev or Chernenko.
? A determined campaign to introduce new machinery models and throw
out outdated capital stock is likely to cause interruptions in production
not envisaged in the plan.
? If he shortchanges sectors such as energy, for example, the resulting
decline in oil exports could force the USSR to reduce imports of state-of-
the-art technology for the modernization program.
? If he tries to curb military demands for machine-building output and
R&D resources, the military could become restless while waiting for the
deferred improvements in the technological base of military industry.
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Gorbachev could relieve some of these pressures by drawing more on
foreign sources of machinery-in Eastern Europe and in the West-and by
pursuing arms control agreements that hold down Soviet military
procurement while avoiding the costs of competing with the United States
in the strategic defense arena. How much additional machinery the USSR
can extract from Eastern Europe is probably still being debated in CEMA
circles, while large increases in purchases of Western equipment will
depend on the USSR's obtaining the necessary credits. Equally important,
Soviet planners could not have known in preparing the five-year plan how
their arms control proposals would be received.
If Brezhnev could not push his modernization program through, why
should Gorbachev do better? In some ways, Gorbachev's position is less
favorable:
? Rates of growth of GNP are lower than they were through much of the
1970s, and resource constraints are tighter.
? Gorbachev must contend with a brisk upswing in US investment in
military hardware, whereas the Soviet advantage in this area was
reaching a peak in the mid-1970s.
Gorbachev, on the other hand, brings some noteworthy strengths to the
task of modernization:
? He is proceeding more rapidly than Brezhnev to consolidate his power.
He has already changed the face of the Politburo, and, unlike Brezhnev,
he has proved willing to sack ministers and managers who balk at
carrying out his instructions.
? He has brought in Nikolay Ryzhkov as Chairman of the Council of
Ministers to restructure the economic bureacracy and Nikolay Talyzin to
reorient a reluctant Gosplan.
? Although economic growth has picked up in the past few years, the
USSR's recent experience with very low growth (1979-82) has perhaps
convinced most party and government officials that Gorbachev is right
when he says "there is no other way."
? The rapid transformation of military weaponry in the West and Soviet
difficulties in matching this progress lend weight to the argument that
the industrial base deserves priority attention.
The outlook for the modernization program is thus uncertain. Even though
the more ambitious quantitative goals for capital stock renewal are unlikely
to be achieved, Gorbachev can achieve quite a bit if he can rearrange
priorities in favor of his program. The administrative approach-relentless
bureaucratic attention-to raising the quality of investment is also likely to
have a favorable impact if it is indeed pursued consistently, but a major
change in the rate of innovation probably requires some of the reforms in
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incentives and organization that are still under discussion. On the other
hand, Gorbachev's short-run mobilization strategy has its risks. Unless he
also makes hard decisions on resource allocation, he could generate the
kind of unbalanced plans that caused so much trouble in the late 1970s and
early 1980s. This would badly tarnish Gorbachev's reputation as a man
who knows what is wrong with the Soviet economy and what to do about it.
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Leadership Perceptions
Declining rates of Soviet economic growth since the
late 1960s have forced the leadership to admit that
the old growth strategy must be abandoned. For more
than a decade, Soviet leaders have called for a switch
from a policy of "extensive" growth-achieved by the
use of larger factor inputs-to one of "intensive"
growth-achieved by a boost in productivity. They
identify the key to increased productivity as a rejuve-
nated stock of plant and equipment that embodies the
latest technologies-in a word, modernization.
They freely acknowledge that this goal remains elu-
sive; productivity growth has been meager. They
admit that this reflects the advanced age of the
capital stock-fixed assets have been retained in
service twice as long as those in the major market
economies. They also blame an uncoordinated and
unfocused investment strategy and the weak link
between the creation of a new technique or machine
and its use in the production process. As a result, the
technology gap with the West remains wide, making
the import of Western machinery and technology
continually attractive. The leadership frequently ex-
presses its displeasure with this situation, not only
because of the obvious impact on growth and hard
currency requirements, but also because it believes
such a lag to be inconsonant with its position as a
superpower.
Rationale for the Old Strategy
The Stalinist growth model for industry stressed the
rapid infusion of labor, fixed capital, and raw materi-
als, and minimized the importance of productivity
growth. This differed markedly from the development
path followed by the major market economies. Even
since 1960, the USSR has recorded the most rapid
growth in employment among the major industrial
economies and also the fastest growth of fixed capital
stock, along with Japan. In sharp contrast, the rates of
growth in both labor and capital productivity have
been the lowest among the industrially developed
countries.
In the past, this preference for extensive development
was a rational strategy for the Soviet leadership
because of the country's resource endowment and
economic system. Until the 1960s, the Soviet economy
could draw upon an unusually large pool of underem-
ployed agricultural labor and was able to induce an
ever-growing percentage of its female population to
seek employment in urban areas. Large supplies of
cheap raw materials and fuels were available. The
high rate of growth of productive plant and equipment 25X1
was achieved by high rates of increase in fixed capital
investment, which in turn were made possible by
holding down consumption. With its control over
resource allocation, the regime could channel this
investment largely into heavy industry and energy,
with minimal shares directed to some consumer-
oriented sectors such as light industry and housing.
Investment policy was to prolong the life of productive
assets, enabling the bulk of investment to be directed
into new plant or expansion of existing plant capacity.
The economy's strong system of central planning and
direction was particularly adept at this type of re-
source mobilization.
The Need for a New Strategy
By the 1970s the Soviet leadership realized that this
extensive growth strategy could no longer be main-
tained. As Leonid Brezhnev said at the beginning of 25X1
the decade, "We have entered a stage of development
that no longer allows us to work in the old way but
calls for new methods and new solutions." Sharply
reduced birth rates, the exhaustion of the rural labor
reservoir, and the approaching ceiling in female labor
participation rates-already at 90 percent-brought
much lower growth in employment. Sources of cheap
raw materials and fuels were being depleted. Fixed
capital stock growth rates fell sharply. Falling GNP
growth squeezed allocations for all claimants, includ-
ing investment. Even with large reductions in invest-
ment growth rates, the amount of investment required
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to yield a given increase in output (the incremental
capital-output ratio) still rose substantially, alarming
Soviet economists and planners.
Soviet measures of economic performance, although
showing generally higher rates of progress than West-
ern measures of Soviet economic growth, fully docu-
mented the trend downward, particularly in the vital
area of productivity growth (see graph). The slowdown
in growth is particularly painful to a Soviet leadership
dedicated to closing the productivity gap with the
developed West. After major gains in selected areas,
little or no progress has been registered in recent five-
year-plan periods:
and boosting the pace of economic growth. He never
shaped them into a coherent strategy but continued to
pound at these themes throughout his years in power,
always lamenting that "we have not achieved the
needed breakthroughs." He emphasized the need to:
? Introduce new technology into production more
quickly.
? Replace old equipment with new equipment.
? Improve product quality.
? Improve management and the system of economic
indicators and incentives.
By meeting these intermediate objectives, the USSR
would be able to ensure a rise in labor productivity,
reduce the unit cost of output, and accelerate scientif-
? Official Soviet statistics show industrial labor pro-
ductivity to have been 30 percent of the US level in
1950, 53 percent in 1970, but leveling off to roughly
55 percent currently. Labor productivity in agricul-
ture has varied between 20 and 25 percent of the US
level since 1966.
? A Soviet foreign trade official responsible for ex-
ports has criticized the quality of Soviet machinery
and equipment, noting that less than 1 percent of
machinery exports are sold to the "capitalist coun-
tries," a position comparable to that existing in the
1960s.
? Average leadtimes for the use of both domestic and
imported technology continue to be much longer in
the USSR than in the West. Data show that about
50 percent of US and West German inventions are
implemented in about one year compared with three
years for Soviet inventions. At the end of two years,
the United States implements about 66 percent;
West Germany, 64 percent; and the USSR, 23
percent.
? According to a Soviet planning official, the USSR's
waste of metals in the production process is 75
percent greater per unit of metal input than in the
United States.
Choosing a New Strategy
Brezhnev, in the early years of his regime, identified a
mixture of goals and means to achieve these goals that
he believed to be central to achieving intensive growth
is and technical progress.
The General Secretaries since Brezhnev have all
indicated their commitment to these general goals and
their realization that a high price is being paid for the
failure to attain them (see inset). They have differed
somewhat in the emphasis placed on specific aspects
of the program laid out by Brezhnev. Yuriy Andropov
largely blamed the poor incentive system for inhibit-
ing the "speedy introduction of scientific and techno-
logical achievements and advanced experience into
production." He called for "the creation of a situation
in which those who boldly introduce new technology
do not find themselves at a disadvantage." Mikhail
Gorbachev also believes that reform is necessary in
the system of economic indicators and worker incen-
tives, but he seems to place a higher priority on
upgrading industrial machinery and equipment, call-
ing for an ambitious boost in the output of the
machine-building sector (see article "Gorbachev and
Industrial Modernization").
Some differences are also discernible in the willing-
ness of successive regimes to rely on Western help in
the modernization effort. Brezhnev's enthusiastic sup-
port for detente led him to declare that "economic and
scientific-technical ties with the capitalist states
strengthen and broaden the material basis of the
policy of peaceful coexistence." As subsequent events
unfolded-growing Soviet indebtedness and Western
trade sanctions and technology bans imposed after the
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USSR: Selected Economic Indicators, 1961-84
Average annual percent rate of growth
Overall Economic Growth Industrial Production
Soviet measure
(net material
product)
Western
measure (GNP)
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Leadership Statements on Modernization
Leonid Brezhnev at 26th Party Congress in
February 1981:
The circumstances in which the national econo-
my is to develop in the eighties make the
acceleration of scientific-technical progress even
more pressing ... close integration between sci-
ence and production is an urgent requirement of
the present day.... And it is primarily the
machine-building industry which can open wide
its doors for the new. Truly revolutionary possi-
bilities are opened up by the production and
introduction of miniature electronic control ma-
chinery and industrial robots.
The key task in the economic sphere is the
cardinal raising of labor productivity. Here we
must strive to attain the highest world levels....
We will have to automate production and ensure
the widest use of computers and robots and the
introduction of flexible technology allowing for
a quick and effective readjustment of production
for the manufacture of new output.
Before the end of the 1980s it is vital that we
achieve a fundamental watershed in raising the
efficiency of the national economy.... The first
and most obvious theory is to mobilize so as to
achieve the swiftest possible technical reequip-
ping of all branches of the national economy.
Mikhail Gorbachev to the April 1985 party plenum: 25X1
Scientific and technological progress in the ma-
jority of industries is flagging; it is developing
basically in an evolutionary manner, primarily
by improving existing technology and the partial
modernization of machinery and equipment. Of
course, these measures provide a certain return,
but it is too small. What we need is revolution-
ary change, a transfer to fundamentally new
technological systems, to the most up-to-date
machinery to provide the very greatest efficien-
cy. Essentially it is a matter of reequipping all
sectors of the national economy on the basis of
contemporary achievements in science and tech-
nology.
invasion of Afghanistan-the Soviet leadership devel-
oped a more jaundiced view of the benefits of such
trade and became acutely aware of the USSR's
vulnerability to Western economic pressures. Accord-
ing to Soviet open sources
Soviet political and scientific leaders began to fear
that excessive reliance on Western technology could
retard domestic technological progress and reinforce
the USSR's technological inferiority to and depen-
dence on the West.
It is not yet clear where Gorbachev stands on this
issue. No doubt the leadership is presently wrestling
with the problem of determining a judicious mix
between domestic and foreign equipment and technol-
ogies as a necessary input into the new 1986-90
economic plan. Gorbachev took an equivocal line on
this issue at the June 1985 CPSU Conference on S&T
Progress, noting that "We are not propounding self-
sufficiency ... but we cannot permit our country to
depend upon deliveries from the West. The experience
of recent years has taught us a great deal."
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Soviet Intensive Economic
Development: The Past Record
The preceding article on leadership perceptions shows
that the intention to switch from extensive to intensive
growth is not new. This strategy has been pushed hard
since at least the mid-1970s, but the results have been
meager. The common theme that emerges in an
assessment of Soviet efforts to accelerate productivity
growth has been the unsuitability of centralized plan-
ning and control as an institutional framework for
implementing intensive development. While admira-
bly devised for directing the resource mobilization
that promoted extensive development, it has so far
proved ill suited to stimulate the productivity im-
provements that are the core of the intensive
approach.
Intensive Development Policies
The intensive approach to sustain development ap-
proved in the mid-1970s sought as much as possible to
preserve existing resource priorities. There was some
slippage in the share of personal consumption in GNP
in the early 1980s, though part of the explanation may
lie in subnormal agricultural performance. The share
of investment has continued to creep upward. Mean-
while, the share allocated to defense has remained in
the 11.5- to 13-percent range, with little variation
since 1970. Accordingly, Moscow had to look for
relief more in the supply side of the economy, in
policies affecting labor, land, fixed capital, and pro-
ductivity. The leadership's options regarding man-
power and education policies have been limited, so the
focus of intensive development has been upon fixed
capital and technology-primarily measures to raise
their productivity. But the productivity of investment
depends on technological advances assimilated with
the investment, so investment and technology policies
are complementary.
Accelerating Retirements of Fixed Capital
Attitudes and policies toward the retirement of fixed
assets have contributed greatly to declining capital
productivity in the USSR. On average, fixed assets
have been retained in service twice as long as in the
major market economies. The annual rate of replace-
ment of capital stock in the USSR is only 3 percent,
compared with only 8 and 9 percent for the United
States and West Germany, respectively, and 11 per-
cent for Japan. Since productivity gains depend upon
adding new capital incorporating recent technology
and discarding technologically obsolescent assets, So-
viet practices clearly retard productivity
improvement.
Asset lives are prolonged at high cost through capital
repairs. In the mid-1970s, outlays for repairs were a
quarter as large as gross investment in industry and
nearly 40 percent as large as outlays for industrial
equipment. The resource drain of repairs was consid-
erable, absorbing a tenth of the industrial labor force
and a third of the stock of machine tools. Over the
lives of these assets, capital repairs generally exceeded
original investment costs.
Despite official recognition that shorter asset lives are
desirable, the steps taken in this direction have been
inadequate. The most recent change in official amor-
tization norms, in 1975, lowered average service lives
for industrial equipment from 17 to 14 years, com-
pared with average lives of 10 years in France,
Germany, and Italy and 12 years in the United
States. In actual practice, the official guidelines have
not been followed. A Soviet economist, taking into
account retirements for both wear and tear and
obsolescence, estimated an average equipment service
life of 20 years.
Replacement Rather Than Expansion. The main new
focus of Soviet investment policy-raising the share of
industrial investment devoted to replacement of old
assets-complements the campaign to shorten asset
service lives. Traditionally, with the extensive growth
approach, investment plans stressed building new
plant or expanding capacity of existing enterprise. By
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emphasizing reequipment of existing plant, Soviet
planners hoped to accelerate the introduction of new
technology to the production line by shortening the
investment cycle. Construction of new facilities is the
most time-consuming element of capital investment,
so the idea was to avoid construction by replacing
equipment in existing buildings. Reequipment might
require some reconstruction, too, but the cost was
perceived to be small compared with that of a new
plant.
The advantages of an intensified replacement effort
are severalfold, according to special surveys carried
out in the USSR. Labor productivity is said to be
about 50 percent higher and capital productivity 86
percent higher in reequipped plants than in new
plants. These results reportedly were attained with
cost savings of one-half to two-thirds and with capaci-
ty being brought on stream 3 to 3.5 times as rapidly.
Nevertheless, the Soviet replacement effort has been
much smaller than that in the United States. In the
mid-1970s, 56 percent of US industrial investment
was directed toward replacement and modernization.
In the Soviet Union the proportion was only 29
percent in the late 1970s and 35 percent in 1983. The
US proportion may be too high a standard for the
Soviet Union given slower US industrial growth, but
some Soviet economists have recommended that the
Soviet share should be doubled or tripled.
The rising share of replacement in investment has
been matched by a rising technological intensity of
investment. The key feature of this trend is the
accelerated automation of production. In Soviet offi-
cial jargon this policy panacea is termed the
"scientific-technological revolution." Automation
serves the dual objectives of facilitating substitution
of capital for labor in an era of worsening labor
shortages and raising the productivity of capital. The
growing share of high technology in production of
producer durables can be seen by comparing the
composition of total deliveries of producer durables
since the mid-1960s and those projected for the
current five-year plan (see table).
The deliveries consisting of high-technology products
may be found in the third and fourth rows of the
table. Newer machine tools included in the third row
are increasingly computer controlled. The share of
USSR: Deliveries of Investment Machinery Percent
and Equipment, by Plan Periods a
Railway equipment.
automotive equip-
ment, agricultural
machinery, construc-
tion machinery
Mining. metallurgi-
cal, hoisting equip-
ment
Stamping-pressing,
metal-cutting equip-
ment
Instruments, auto-
mation, and atomic
energy equipment
1966-70
1971-75
1976-80
1981-85
Plan
60
58
55
49
12
12
19
20
9
10
10
13
5
7
10
13
, Investment time series underlying these shares are measured in
1969 estimate prices, adjusted for selected wholesale price changes
on 1 January 1973.
high-technology products has nearly doubled since the
mid-1960s and now constitutes a quarter of total
investment. These trends in Soviet investment policy
have led to a rising dependence upon foreign technol-
ogy. Imports of high-technology products surged dur-
ing the early and middle 1970s, leveled off in the
latter part of the decade, and then showed signs of
renewed resurgence in the 1980s.
Why the Intensive Investment Campaign Stalled
Low Retirement Rates, Reproduction Instead of Re-
placement. The accelerated retirement guidelines
adopted in 1975, as noted earlier, have not been
implemented. Official retirements for wear and tear,
as reported in the annual statistical handbook, have
shown no significant change. Indeed, a Soviet invest-
ment specialist has asserted that rates of retirement of
obsolescent assets have actually declined. During the
1970s, the average age (number of years in produc-
tion) of current machinery output rose significantly.
The share of new products fell from 4.3 to 2.5 percent
of total output, while the share of machinery in
production for more than 10 years climbed from 20 to
28 percent.
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The principal reason old equipment was kept in
service was that enterprise managers and ministerial
officials were led to do so by the existing incentive
structure. In a market economy, firms discard old
assets primarily because the new capital is usually
more economical in the use of manpower and material
or because it is necessary to manufacture competitive
products. As long as current production targets re-
mained the overriding criterion for judging success,
Soviet managers had little incentive to discard obso-
lescent assets.
As we have indicated above, the USSR has raised
somewhat the proportion of replacement in total
investment but has fallen woefully short in its bottom-
line objective of accelerating capital productivity. The
explanation for this lies first in Soviet construction
practices and second in the failure of the system to
generate and assimilate the advanced technology nec-
essary to support the replacement investment
program.
Construction Practices Hinder Replacement. The ad-
vantage of the new approach, in theory, was the time
and cost savings attained by retooling without recon-
struction. Existing buildings and structures supposed-
ly could be used with little or no alteration, while
obsolescent machinery and equipment were replaced
with technologically advanced models.
The installation of automated production lines and
assembly-type operations in the process of retooling,
however, often requires some alterations of existing
factory buildings. Improvements in light and ventila-
tion are often required. Moreover, traditional Soviet
construction practices have favored heavy prefabricat-
ed concrete structures. While more durable than those
built of lighter materials, these buildings are less
amenable to the alterations that accompany equip-
ment replacement. In the same vein, Soviet construc-
tion design favors the use of overhead bridge cranes,
rather than more mobile lifting and transport equip-
ment. Bridge cranes require heavy columns and over-
head building supports that limit the possibility of
rearranging the use of floorspace.
These features of Soviet industrial construction have
required costly and time-consuming reconstruction as
part of equipment replacement programs. In effect,
the durability of Soviet construction has been self-
defeating and has required that retooling be matched
by reconstruction. The theoretical cost and time sav-
ings envisaged in the Soviet investment literature have
not been realized.
The replacement effort has also been confounded by
organizational deficiencies in construction. Soviet
construction organizations work best in building new
plants, where standardized techniques can be used on
a large scale. Reconstruction is typically carried out
on a smaller scale, requiring specialized techniques
for which construction organizations are ill prepared.
The incentive system is skewed toward those indica-
tors of construction activity that characterize new
construction. As a result, reconstruction activity has
often been performed by inefficient repair organiza-
tions belonging to the enterprises being reequipped
rather than by specialized construction organizations.
Investment in Obsolescent Technology. Since the
ultimate success of the replacement investment cam-
paign rests upon the accelerated introduction of ad-
vanced technology into the production process, tech-
nological performance has been crucial. A perceptive
Soviet economist who analyzed the reasons for the
continuing decline in the rate of return on investment
cited such external influences as the worsening quality
of natural resources, the growing share of investment
in high-cost eastern and northern regions, rising
pollution-control outlays, and reduced manpower
availabilities. However, he asserted that the principal
reason has been an insufficient rate of scientific and
technological progress.
Sluggish Technological Performance. The explana-
tions for lagging Soviet technological progress can be
found mainly in managerial incentives, the institu-
tional relationships between research and develop-
ment and production, and the technological drain
caused by the priority given to defense production.
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Weak or Perverse Incentives. Technological progress
in market economies depends upon both consumer
and supplier initiatives. In the Soviet system, the
influence of the consumer is weak, except in defense
production where the initiative comes from the Minis-
try of Defense with reinforcement from the top
leadership. Innovation has been inhibited by the
chronic seller's market that prevails for Soviet produc-
er durables-a trait that a Soviet scholar called
"planned scarcity." Under such circumstances, con-
sumer demand has provided little effective pressure
for technologically improved or lower cost products.
The potent influence of consumer sanctions has been
absent. From the point of view of suppliers, willing-
ness to pursue cost savings through asset replacement
has been deterred by what a leading Soviet investment
expert terms "self reproduction," the propensity to-
ward the perpetuation of existing technology, which
has assured sources of material supply and provides
near-certain production bonuses.
Reliance on longstanding sources of materials to avoid
supply disruptions has also slowed technical advance.
Centralized planning promises a producer an ade-
quate allocation of necessary inputs but provides no
guarantee of timely and sufficient delivery. As a
result, a good deal of Soviet machinery has been
produced in small machine shops attached to the
consuming organization rather than in large-scale
machine-building ministries. Only the specialized
ministries, however, have been able to afford to
support the research and testing facilities required to
develop advanced technology. To the degree that the
propensity toward vertical integration (self-sufficien-
cy) has prevailed, Soviet industry has forgone the
benefits of division of labor that characterize modern
industry in market economies.
Even within the 20-odd machine-building ministries,
product specialization has not matched administrative
specialization. The prevailing exceptions have been
those machinery ministries largely engaged in mili-
tary production. Even in the production of general
purpose semi fabricates-such as gears, castings, forg-
ings, and stampings-the degree of specialization has
been far lower than in US industry. Production of
single-unit customized equipment has not been orga-
nized in specialized machinery ministeries. By de-
fault, such items have been produced in the techno-
logically backward internal machine shops.
Technological backwardness is also explained by in-
sufficient supplier initiative. In market economies,
most technical progress at the plant level originates in
sales pressure by equipment suppliers. In the Soviet
system, research and development have been separat-
ed from production. The incentives for R&D organi-
zations reward expenditures of budget allocations
more than completion of projects or the satisfaction of
consumer demand. This supplier-consumer gap has
not been closed by the central planning coordination
process, nor by attempts to improve the returns from
science.
The Drag of Military Production. Still another major
deterrent to technological progress in the production
of producer durables has been the superior priority
accorded to defense production. The share of GNP
allocated to defense changed little over the past
decade, but the burden of defense on capital produc-
tivity continued to rise in terms of the preemption of
advanced technological resources and the economy's
innovational energies.
The cutting edge of improved capital productivity is
the application of high technology in the production of
producer durables. Within the Soviet industrial classi-
fication system, high technology includes the follow-
ing sectors: precision instruments, communications
and other electronic equipment, transportation ma-
chinery and equipment, and electrotechnical machin-
ery and equipment. The changing composition of
investment durables purchases, which reflects the
rising high-technology ingredients, has been shown in
the table.
The heavy defense production drain on high-technol-
ogy output may be deduced by combining information
in the reconstructed versions of Soviet interindustry
tables for 1966 and 1977 with estimates of the
breakdown of deliveries of machinery to investment
by a Soviet economist. In 1966, the military probably
accounted for more than half of final demand for the
four high-technology machinery sectors. Conclusions
for 1977 are more tentative, but they indicate that the
military procurement claim was of similar magnitude.
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The technological burden of military production ap-
pears even larger when product quality is taken into
account. Information obtained from emigres rein-
forces the presumption that the presence of military
inspectors in all plants producing defense products has
enabled the Ministry of Defense to refuse defective or
inferior output, a privilege not accorded to civilian
customers. The observers also assert that factories
that produced products with both military and non-
military applications have set higher quality standards
for their military customers.
Some notion of future trends in the high-technology
content of Soviet investment may be conveyed by
citing US experience. By the early 1980s, purchases
of office and computing machinery and communica-
tions equipment comprised over a third of the produc-
er durables component of new fixed investment. If this
definition of high-technology investment is expanded
to include scientific and engineering instruments and
photographic equipment, the share rises to nearly
half.
This rising investment imperative collides with the
continuing push to upgrade the technological content
of military production. Even though there has been
little increase in total military procurement in the
Soviet Union since the mid-1970s, the technological
sophistication of most systems has risen markedly.
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Gorbachev's Strategy
In a series of recent speeches and well-publicized
appearances, Gorbachev has emerged as a forceful
advocate of industrial modernization. The goals he
has proposed thus far reflect and build upon ideas
advanced by Brezhnev, Andropov, and Chernenko
(see the preceding article on leadership perceptions),
but they are unique for the vigor with which they are
put forth and the pace of renewal that they imply.
Unless Gorbachev is willing to shift resources drasti-
cally toward the investment sector (at the expense of
consumption and/or defense), his immediate goals
appear much too ambitious. Nonetheless, sustained
pressure by the leadership on managers and the
governmental bureaucracy-with some less wrench-
ing adjustments in priorities-could well have a posi-
tive impact on productivity in the economy. To ensure
a major, long-lasting impact on productivity growth,
the leadership would have to agree on some systemic
changes that would overturn the existing preference
given to quantity rather than quality.
Elements of the Gorbachev Program
What we know of the Gorbachev program consists of
a mixture of distant goals, intermediate objectives,
and implementing measures having to do with invest-
ment, organization, incentives, and high-level atten-
tion. Gorbachev places the acceleration of scientific
and technical progress at the center of his strategy for
industrial modernization. He proposes to accomplish
this modernization by following through on the famil-
iar theme of replacing outmoded capital stock, by
investment shifts benefiting high-technology indus-
tries, by management reforms to speed innovation,
and by organizational changes reducing barriers to
the application of scientific advances in industry.
Investment Goals
The General Secretary's investment strategy is not
much different in principle from that proposed by his
predecessors. He has, however, been more ambitious
in setting specific targets for the 1986-90 Five-Year
Plan.
Renewal of the Country's Capital Stock. The transi-
tion to intensive modernization of the economy-in
Gorbachev's words, "the technological reconstruction
of the economy"-will require a large increase in
investment in strategically important areas. To shift
the economy to an intensive footing, Gorbachev has
proposed:
? Doubling retirement rates of capital stock to accel-
erate the replacement of obsolete capital by more
efficient, state-of-the-art machinery and equipment.
? Modernization of the nation's capital stock so that
by 1990 a third of it, including up to half of the
machinery portion, is new.
? Increasing capital investment in civilian machine
building in 1986-90 by 80 percent over that of
1981-85.
? Raising the rate of growth of machine-building
output by 50 to 100 percent.
Stress on Key Industries. The qualitative side of
Gorbachev's strategy emphasizes development of the
industries that provide the advanced equipment need-
ed for industrial modernization, especially those pro-
ducing machine tools and tooling systems, robots and
flexible manufacturing systems, microelectronics,
computers and industrial controls, and telecommuni-
cations (see the article "Advanced Technologies in the
USSR"). Computer-based planning and design and
automated production are to provide the foundation
for a resurgence in machine building and a recon-
struction of the national economy as a whole. Ad-
vanced technologies will be the decisive factors for
improving the productivity and quality of production
of all industries.
Organizational Measures
Most, but not all, of Gorbachev's initiatives with
respect to management also have a familiar ring.
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a?I?
USSR: Investment Trends
(Average Annual Percentage Growth)
Allocation of investment
Investment in industry
3.5
3.8
NA
Investment in machine
3.9
3.3
NA
building
Of which:
Civilian
Components of investment
Construction-installation work
0.9
2.3
1
Machinery
6.5
4.5
9 to 10
Sources of investment
Output of machinery b
Soviet measure
8.2
6.0
9 to 12
CIA estimate
5.0
4.4
NA
Domestic production of
5.9
4.9
NA
producer durables
Implied by goals for renewing capital stock and raising retirement
rates.
b The official index of machinery output has an upward bias
because of the treatment of price and quality changes.
Reorganizing Management. Gorbachev has declared
that changes have to be made in the way resources are
managed if his modernization strategy is to be imple-
mented. His aim is to rid the system of some of the
bureaucratic tutelage that interferes with the imple-
mentation of Central Committee decisions. Several
actions already taken suggest a shift in the manage-
ment approach to science and technology (S&T)
issues:
? An experimental management program-described
as a model for the rest of industry-has begun at
the Ministry of Instrument Making, Automation
Equipment, and Control Systems. It emphasizes the
creation of more scientific-production associations
to bring research, development, and prototype pro-
duction responsibilities together under one roof.
? Plans reportedly are under way to reduce the power
of ministerial bureaucracies by forming superminis-
terial bodies for groups of related industries, begin-
ning with the agro-industrial, machine-building,
and energy sectors.
? A tenacious bureaucrat, Nikolay Baybakov, has
been replaced as chairman of the State Planning
Committee by Nikolay Talyzin, a man with some
technical expertise.
? Dzhermen Gvishiani, a leading authority on S&T
management, has been named deputy chief of the
State Planning Committee.
From time to time Gorbachev has spoken of the need
for a thoroughgoing shakeup of economic manage-
ment. In addition to the creation of super ministries,
he has advocated a reduction in the powers of existing
ministries. Occasionally he has also said that much
greater decentralization of decisionmaking is re-
quired. The February 1986 Party Congress might
reveal some changes of this nature.
Emulating Defense Industries. Gorbachev has exhort-
ed civilian industry to adopt some management and
development approaches used in the defense indus-
tries. (Defense management techniques and S&T pro-
gress in the defense sector were also singled out by
Brezhnev in the 1970s as an example for the civilian
economy.) Gorbachev held up the defense industries
as a model for the revitalization of machine building
and in particular praised the defense industries for
producing specialized equipment to meet their own
needs. He then encouraged the rest of the machine-
building industry to follow their example-a reversal
of Soviet policies of the past 20 years that have called
for reliance on centralized suppliers to meet the needs
of a variety of user industries.
Integrating Science and Production. To boost produc-
tivity in science, Gorbachev repeats the 20-year-old
call to link science to production more tightly by
eliminating the bureaucratic separation of research
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establishments, higher educational institutions, and
production. In this vein, he proposed the formation of
a department for engineering problems in the Acade-
my of Sciences and asked for greater collaboration
between the Academy and industry, particularly
through the formation of additional interindustry
scientific-technological centers modeled on the Paton
Electric Welding Institute.' He also suggested that
the volume of research performed in institutions of
higher education be increased by a factor of 2 to 2.5.
Adjusting Incentives
The new incentives approved by the leadership to
encourage innovation represent a mixture of sticks
and carrots. The threat to enterprises is the edict that
those who produce goods judged to be of lower quality
will have to reduce their prices by 30 percent. They
will then have to reimburse the state for lost revenue
with money taken from worker bonus funds.
The positive incentives center mainly on a provision of
the industrial experiment that gives enterprises more
control over investment funds to spend on renovation
projects of their own choice. By January 1987 the
experiment is to be extended to all of industry.
Another new measure raises the salaries and bonuses
of scientific workers and engineers, who have not been
paid much more than the average industrial worker.
High-Level Attention
The strongest part of the modernization program so
far has been the massive campaign to indoctrinate
party and government officials on the leadership's
determination to accelerate technical progress. The
administrative approach to modernization features, at
every level, surveys of plans for the introduction of
new technology and extensive reviews of the compre-
hensiveness and truthfulness of these plans.
' The Paton Institute was cited for successfully integrating pure and
applied research with the needs of industry to obtain new welding
technologies for nuclear reactors, ship construction, and the auto-
Gorbachev's modernization goals seem out of reach
given the present capacity of the investment sector
and the limited nature of the organizational and
incentive changes announced to date. Nonetheless, a
sustained campaign focusing on ministerial and enter-
prise plans for technical progress, coupled with some 25X1
reallocation of investment, could result in some accel-
eration of productivity growth in the economy.
The Investment Bind
Gorbachev's investment goals are unlikely to be met
in an economy in which resources are already
stretched tautly to satisfy the competing demands of
consumption, growth, and defense. To meet Gorba-
chev's goal for renewal of the Soviet capital stock, for
instance, total capital investment would have to rise
by 6 percent a year compared with the 3.7-percent
average annual growth achieved in 1981-84. If retire-
ment rates are not raised, even more new investment
would be needed to push up the share of new fixed
capital in total capital stock to one-third by 1990. A
rough calculation suggests that investment in this case
would have to rise by 9 percent per year.
The most wrenching shift is the plan to increase
investment in civilian machine building and metal-
working (MBMW) by roughly 18 percent per year
compared with the 3- to 4-percent growth characteris-
tic of investment in all MBMW during the past
decade. Just as it supplies most of the machinery for
all investment in the economy, MBMW will have to
support investment in itself. The plan will require a
pronounced shift in the assortment of machine-build-
ing products over a short period of time.
Moreover, the goal for machinery modernization-if
met from domestic sources-would, according to our
calculations, require growth in the production of
producer durables of 9 to 10 percent a year. Invest-
ment in machinery could be pushed to the levels
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planned without depending so much on faster growth
in the machine-building sector if the leadership is
willing to make certain decisions. Clearly, a substan-
tial rise in machinery imports would help fill the gap,
although Soviet statements and the status of trade
negotiations suggest that Gorbachev has not decided
whether to take this course (see the article "Acquiring
Western Technology").
Meanwhile, the Soviets do not plan to increase the
output of steel and nonferrous metals at rates com-
mensurate with the planned growth in machinery
output (see the article "Modernizing Basic Indus-
tries"). If Gorbachev's goals for saving metal in
production are not met, the machinery targets will be
put in jeopardy.
Reliance on High-Technology Industries
The last two decades have seen repeated appeals to
modernize Soviet industrial processes. Soviet progress
in the development of automated production technol-
ogy has been impeded, however, by inflexible plan-
ning and an incentive system that rewards quantity
rather than quality. In particular, Soviet managers
have not had the incentives to take the risks associated
with innovations or new technology.
In addition, production equipment is underused or left
idle as enterprises and industries targeted for recon-
struction receive new equipment without the detailed
planning regarding product and process changes and
supply and maintenance arrangements that are neces-
sary to run the equipment effectively. Trained produc-
tion engineers, programers, and operators needed to
rectify these problems remain in short supply.
Achievement of civil modernization objectives de-
pends heavily on the availability of computers and
electronics. The extremely ambitious goals for pro-
duction of computers, robotics, and the like are
intended to cover both modernization and military
requirements. Shortfalls, which are to be expected,
will force the leadership to scale back plans for either
industrial or military modernization-or both.
Looking to Defense Industry
The emulation of management practices within de-
fense industry does not-in our view-have much of a
payoff for the modernization program. We believe
four considerations, which have to do with how de-
fense industry is treated rather than how it is man-
aged, account for its generally superior technological
performance:
? The priority afforded defense needs, leading to
assignment of the best personnel and access to
critical supplies and equipment.
? The focused attention of senior leaders-including
members of the Military-Industrial Commission-
on details of the planning and production process.
? Much better endowed experimental production
bases than exist in civilian industry for testing the
compatibility of design and production techniques.
? The presence of military watchdogs at plants, ensur-
ing that standards are maintained and deadlines
met.
Moreover, the suggestion that each ministry produce
more of its own equipment seems to go in the wrong
direction if the regime wants to encourage the highest
possible quality and modernity.
scious managers.
Enlisting Science in Support of the Economy
The proposals outlined thus far by Gorbachev for
improvement of the operation and output of science
for the most part rehash previously unsuccessful
measures. In 1980, for example, the Central Commit-
tee passed a decree enhancing the role of state
standards in improving product quality. The intent
was to reduce development time and improve quality
through the use of up-to-date manufacturing methods
and equipment. Incentives and sanctions have been
introduced to encourage innovation. The use of con-
tracts to enforce mutual obligations between scientific
and industrial facilities has been increasingly stressed
in recent years. The creation of scientific production
associations which combine research institutes, de-
sign bureaus, and prototype production facilities-has
been urged by the Soviet leadership since 1973. Only
250 have been created to date, however, and attempts
by the State Committee on Science and Technology to
form more have met with resistance from turf-con-
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To promote the integration of science and production,
the new General Secretary appears to be relying
largely on jawboning and on the creation of additional
organizations-the interindustry scientific-techno-
logical centers, new departments for computers and
engineering problems within the Academy of Sci-
ences, and more scientific production associations.
Incentives Still a Major Problem
The measures adopted so far to reinforce managerial
incentives to adopt new technology appear to be too
weak to do the job. To accomplish all he says he
intends to achieve, Gorbachev will have to address
effectively the many problems impeding technological
progress in the Soviet economy. The unevenness in the
diffusion of new developments, combined with the
traditional Soviet emphasis on end products rather
than production technology, has continued to impede
industrial and economic development. In the Soviet
economy, where performance is judged primarily
against targets defined in terms of production volume,
faster assimilation of advanced technologies has been
largely incompatible with the current system of man-
agement and rewards (see the preceding article on the
past record of intensive development). So far, the
experiment in industry has not provided evidence that
technology is being introduced more rapidly because
of changes in the incentive structure.
Taken at face value, Gorbachev's stated moderniza-
tion goals are unrealistic. But, as the relative success
of the military-industrial complex demonstrates, a
good deal can be accomplished in selected sectors by
intense, consistent leadership attention and the grant-
ing of priority with respect to skilled manpower,
R&D, and material supplies.
Gorbachev seems determined to maintain the pressure
on lower level authorities to adopt more demanding
plans for technical progress. How far he is willing to
go in adjusting priorities in favor of his program is
still unknown. The annual plan for 1986 and the
1986-90 Five-Year Plan should provide some evidence
in this regard. The 1981-85 plan, for example, showed
that Brezhnev was unwilling to make hard choices on
resource allocation. The plan was balanced by approv-
ing targets that were plainly unrealistic in relation to
the resources available. The imbalances inherent in
the plan were soon reflected in economic performance.
Gorbachev has concentrated on uncovering "internal
reserves" by replacing mediocre managers and offi-
cials and enforcing stricter discipline in the work-
place. But, beyond a certain point, a bullheaded
search for potential efficiency gains can be counter-
productive, as it leads to plans and policies based on
wishful thinking.
In this connection, the repeated rejections of the draft
1986-90 plan suggest that the Soviet leadership
through the summer and early fall had not decided
how much to rely on administrative measures to
extract ambitious plans for productivity gains rather
than on additional resources to support the modern-
ization program. In Ekonomicheskaya gazeta (the
authoritative economic weekly) the managers of a
series of machine-building enterprises have told of
taking their individual plans back and "finding ways"
of raising production targets markedly without requir-
ing more labor or plant and equipment
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Advanced Industrial
Technologies in the USSR:
Progress and Problems
In his June 1985 speech, General Secretary Gorba-
chev singled out advanced technologies-microelec-
tronics, computers, and instrument making-and the
information industry as having a "revolutionary" role
in transforming the Soviet economy. He has since
announced plans to substantially increase investment
in the industries supporting these technologies. His
initiative accelerates major technology development
programs begun in the mid-1960s and responds to the
manufacturing revolution well under way in the West.
By Western assessment the Soviets have made great
strides in these areas, particularly in microelectronics,
where they have moved from almost total dependence
on Western sources for both circuit design and pro-
duction equipment to a position from which they can
go forward using indigenous resources. However, their
lag in such key technologies as microelectronics and
computers remains. Moreover, Soviet success in ap-
plying these basic technologies to manufacturing pro-
cesses depends in large measure on the USSR's ability
to overcome systemic problems in industry. In the
meantime, accelerating Western progress in both
support industries and applications will make it diffi-
cult for the Soviets to prevent the gap from widening
in terms of both productivity and product quality.F_
Key Technologies in Industrial Modernization
Advanced machine tools, robots, microelectronic de-
vices, computers, and telecommunications systems are
finding widespread applications in industrial opera-
tions:
? Computer numerically controlled (CNC) machine
tools and machining centers allow fabrication of
complex parts to consistently high tolerances and
more rapid changeover from one machined part to
another.
? Robots are highly effective in repetitive operations,
speeding production and assuring uniformly high
product quality while freeing laborers from hazard-
ous tasks.
? Computer-aided design systems enable rapid change
in product designs and documentation, saving time
and permitting more options to be considered.
? Computer-based management information systems
and networks provide precise and responsive control
of supply and production scheduling and
performance.
? Computer-to-computer data links allow rapid ex-
change and update of management, design, and
production information.
Microelectronic systems provide the control and data
storage and transfer functions for this equipment and
numerous business and manufacturing operations.
These technologies have their most substantial impact
when they are combined in computer-integrated man-
ufacturing (CIM) systems. These systems centralize
control of plant production. The most advanced inte-
grate computer-based management and design sys-
tems with computerized machining, robotics, auto-
mated inspection, automated material handling and
warehousing, and automated stock control and plan-
ning. In the West they are being widely applied in the
production of automobiles, machine tools, electronics,
computers, and weapons.' They have led to substantial
economies in labor and inventory costs, while enabling
manufacturers to respond quickly and economically to
changing demands.
The interdependence of these technologies requires a
coordinated, broad-based advance. Progress in micro-
electronics, for example, feeds advances in the entire
range of advanced machine tools, robotics, industrial
' For example, Vought is employing automated lines to assemble
the Multiple-Launch Rocket System and manufacture major B-I B
subassemblies. The IBM plant at Lexington, Kentucky, has auto-
mated lines to manufacture computer equipment, and General
Motors has automated engine parts machining and automated parts
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Advanced Machine Tools and Robots
Numerically controlled (NC) machine tool. An auto-
mated machine tool whose movements and functions
are controlled by numerical information recorded on
paper tape, punch cards, or magnetic tape. Readers
convert this information into signals that operate
servomotors that move the machine along each of its
axes.
simple tasks, such as single-point spot welding and
simple materials handling (stacking, point-to-point
transfer).
Industrial robot. A reprogrammable multifunction
manipulator that moves material, parts, tools, or
specialized devices through variable programed mo-
tions to perform a variety of tasks.
Computer numerically controlled (CNC) machine
tool. An advanced NC machine tool in which a
computer is substituted for the command portion of
the machine tool's control system. Advantages are
online program revision, automatic correction of ma-
chine inaccuracies, and the elimination of tape or
card handling. A computer may control several ma-
chines and incorporate them into an integrated manu-
facturing system.
Machining center. A complex NC machine tool,
usually under computer control, which performs all
the production functions of a machining operation,
including machine axis control, tool changing, work-
piece changing, machine scheduling, and cost control.
Manipulator. A device that moves material, parts, or
tools through limited, preset motions to perform
Flexible manufacturing system. An integrated system
of several CNC machine tools and robots, often with
automated material handling and warehousing,
which performs several machining, transfer, and in-
spection functions automatically under common con-
trol of a host computer.
Design and Management Systems
Computer-aided design (CAD) system. A system in
which a computer serves a designer workstation and a
plotting station. The system allows a designer to
develop, record, display, and interactively alter the
design of a part or assembly at a workstation termi-
nal. He may then command the plotting station to
produce engineering drawings of the design for use in
process control systems, telecommunications systems,
and computers. Telecommunications and computer
hardware or software advances expand applications
for automated manufacturing either by pushing the
state of the art (for example, robotic vision systems
and pattern recognition) or by reducing cost. Ad-
vances in machining, robotic assembly and inspection,
and computers in turn fuel new rounds of improve-
ment in electronic components and systems. This kind
of interaction underpins the dynamic growth of these
industries in the West and Japan but generally has
not characterized Soviet development.
Advanced Technologies in Soviet Industry
Gorbachev's program builds on longstanding Soviet
efforts to develop indigenous high-technology indus-
tries. These efforts have relied on:
? Centralized management, wherein specific minis-
tries have been charged with prime responsibility for
developing industrial technologies, and national-
level programs have been created to coordinate the
efforts of contributors.
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manufacturing. In its more advanced form, a CAD
system can generate NC tapes or computer programs
for controlling the manufacturing functions of ma-
chine tools and robots.
Management information system (MIS). A computer-
based system incorporating automated order process-
ing, production scheduling and supervision, and in-
ventory control. The MIS accumulates summary
data from these processes and combines them with
financial data and information on market trends,
business conditions, and monetary factors to provide
a comprehensive background and input for manage-
ment decisions.
Microelectronics
Integrated circuits, or chips. Circuits consisting of
many transistors and other electrical components
linked by conductor segments and fabricated on thin
wafers of silicon or other insulating material. Each
wafer, containing many ICs, is separated into chips
that are packaged separately.
Photolithography. Process by which elements of a
circuit design, represented in a mask template, are
transferred to the wafer by shining light through the
? Substantial infusion of R&D and production re-
sources. Analysis of institutes, plants, and associat-
ed manpower indicates that high-technology indus-
tries generally have grown the most rapidly over the
last two decades.'
? Large-scale use of foreign technology and assistance
agreements for testing and evaluation, reverse engi-
neering, startup of new plants and processes, and
improvements of manufacturing processes. The So-
viet acquisition program has concentrated on manu-
facturing technology and equipment for developing
the capability to produce advanced military equip-
ment.
mask and exposing light-sensitive material on the
wafer surface in the spatial pattern of the circuit.
Small-, medium-, large-, and very-large-scale integra-
tion (SSI, MSI, LSI, VLSI). Terms referring to
integrated circuits having 100-999, 1,000-9,999,
10,000-99,999, and 100,000 or more transistors per
chip, respectively.
Telecommunications
Analog transmission. A process in which the informa-
tion content of each communications channel is repre-
sented by a continuously varying waveform. This
process is suited to transmission of a continuously
varying input, such as voice traffic, but subject to
distortion of the information content by common
types of noise.
Digital transmission. A process in which the informa-
tion content of each communications channel is repre-
sented by combinations of pulses in an on-off format.
This process is suited to the transmission of various
types of information-voice, teleprinter, computer
data-and is particularly compatible with the use of
integrated circuits. It is less susceptible to distortion
by most forms of noise than analog transmission.
Output in these industries has risen dramatically and,
in the case of machine tools and robots, has exceeded
Western levels. But production numbers do not reflect
differences in quality. The Soviets' greatest shortfall
in all areas, moreover, lies in application. Their efforts
in the 1970s were still largely directed at improving
specific production processes rather than at develop-
ing genuinely integrated production systems embody-
ing the new technologies.
Advanced Machine Tools. In 1968 the Soviets estab-
lished a national program for numerically controlled
(NC) machine tools, designating lead ministries for
the civilian and defense industries and a third minis-
try for the control equipment. The machine tool
ministry (Minstankoprom) and the Ministry of the
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JCti CI
Aviation Industry were given responsibility for civil-
ian and defense NC machine tool production, respec-
tively, and the automation and control ministry (Min-
pribor), for control equipment. NC machine tool
production increased by about 3 percent annually
until the mid-1970s, but its share of total production
remained small (about 3 percent). In 1978 the USSR
began cutting back production of general purpose
equipment and expanding output of specialized and
automated equipment. This led to a 15-percent de-
cline in machine tool production by 1984 and an
increase in the NC machine tool share from 3 to
7 percent over this period. By contrast, computer-
operated NC machine tools constitute more than
60 percent of Western machine tool production.=
Throughout the period the USSR relied heavily on
foreign technology. It became the largest importer of
machine tools in 1970 (a position relinquished to the
United States in 1979) and entered into at least 36
scientific and technical assistance agreements with
West European companies for numerical control tech-
nology and, more recently, for flexible manufacturing
systems. The most spectacular example involves the
machine tool plant at Ivanovo. Starting in 1975, the
plant was stocked almost completely with advanced
precision machine tools-NC and CNC tools and
machining centers-purchased largely from West Eu-
ropean manufacturers. This enabled it to become in a
very short time the premier producer of machining
centers and prototype flexible machining systems in
the USSR.
Nonetheless, the best Soviet computer-operated ma-
chine tools lag about three to four years behind
Western models, and flexible manufacturing systems
are five to six years behind. The USSR is even further
behind in production and application of advanced
machine tools.
In May 1984 the Soviets launched the third stage
of a drive toward manufacturing automation. They
are pressing for large-scale production of CNC ma-
chine tools and robots and the production of flexible
manufacturing modules and cells, which combine one
or several NC machine tools with pallets and robots
for materials handling, assembly, and checkout. We
estimate the United States currently has 550 cells in
operation compared with 50 in the USSR. The Soviets
have only a few of the most advanced multimachine
flexible manufacturing systems, while US firms have
about 35
Robots. The Soviets embarked in the mid-1970s on an
ambitious program to develop and produce industrial
robots. Production figures are impressive-annual
production reached 14,000 in 1984-and the Soviets
plan to have approximately 120,000 robots in use in
the machine-building industries by 1990. Most Soviet
industrial robots, however, are akin to simple manipu-
lators, and thus too elementary to fit into flexible
manufacturing systems.
The growth of the robotics industry in the USSR is
inhibited by shortages of key electronic components
(controllers, computers, probes, and feedback devices)
and hardware (servomotors) and by quality problems.
Many industrial facilities are too antiquated and
improperly staffed to assimilate robots. Failure to
adapt manufacturing lines to take advantage of the
characteristics of newly installed robots, compounded
by poor installation and maintenance support, has led
to waste of robotic work capacity and, in the worst
cases, reduction in line production and productivity.
Thus, the USSR lags the West considerably both in
the production of advanced robots and in their inte-
gration into computer-integrated manufacturing.
These shortcomings led the USSR to reverse engineer
simpler robots (for example, US Unimate robots for
spot welding), import sophisticated freestanding ro-
bots or robotic systems from both Eastern Europe and
the West, and implement R&D and cooperative pro-
duction arrangements with Bulgaria, Czechoslovakia,
and East Germany.
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Microelectronics. In the early 1960s the Soviets con-
structed a large microelectronics R&D center near
Moscow and opened their first microelectronic pro-
duction plant. With extensive use of Western integrat-
ed circuit (IC) precision machinery and production
technology, the Soviets series-produced ICs, or chips,
at the small-scale-integration (SSI) level of complexity
by the early 1970s, medium-scale-integration (MSI)
chips in 1975, and large-scale-integration (LSI) chips
in 1977. They recently have produced a limited
number of devices at the very-large-scale-integration
(VLSI) level. Today they operate 75 microelectronics
production plants, compared with roughly 200 in the
United States and 100 in Japan.
Deficiencies in Soviet production technology are hold-
ing back advances in circuit complexity. At the LSI
and VLSI levels, sophisticated equipment is required
to reproduce accurately the extremely small circuit
line widths. The Soviets also are experiencing short-
ages of advanced, automated manufacturing and test
equipment, especially in design, photolithography,
and mask making, and of clean-room equipment,
necessary to maintain material purity
According to US estimates, the USSR has import-
ed-legally and illegally-up to 100 million ICs a
year in the past few years. This is about 10 percent of
potential Soviet production capacity from installed
equipment and about 1 percent of US IC production.
Because Soviet production yields are low, imports
account for substantially more than 10 percent of
actual Soviet production of sophisticated devices. Im-
ports are generally of higher quality than Soviet-
produced ICs and have considerably higher reliability.
In the past 10 years the Soviets also have imported
2,500 pieces of major manufacturing equipment, most
of it illegally. These efforts to upgrade production
technology cost more than $250 million.
Progress in domestic production coupled with foreign
support cut the West's lead in microelectronics tech-
nology from eight to 10 years in the mid-1970s to
approximately four to six years in 1985. The latest
generation of Soviet SAM systems and fighter, inter-
ceptor, and bomber aircraft all employ microelectron-
ic circuitry.
Computers. The promise that computers would in-
crease the efficiency of central planning and economic
control encouraged Soviet development of the com-
puter industry in the 1960s. In 1967 the Soviets
adopted the architecture of the IBM System/
360 computer for their standard mainframe comput-
er-the Ryad. Ryad models became available in
1973, and a second generation-known as Ryad-2
and copied from the IBM System/370-became
available in the late 1970s. A parallel program pro-
duced the first minicomputers in 1974 and microcom-
puters in 1976.
The USSR has been slow to apply computers to
process control, stock control, machine tool control
systems, and especially product design systems
(CAD). According to analysis of Soviet open litera-
ture, only 8 percent of all Soviet industrial facilities
had mainframe computers in 1984, including one- 25X1
third of facilities with over 500 employees. By com-
parison, nearly all US industrial facilities with more
than 100 employees have computers. Aside from
equipment shortfalls, slow software development (es-
pecially for machining operations and computer-aided
design) and severe shortages of programers and repair
technicians have constrained applications.
Although the USSR now has modern, unified com- 25X1
puter systems, its progress in computer technology
and production has been dwarfed by advances in the
West and Japan. The Soviets lag the West by an
estimated seven to eight years in mainframe technol-
ogy and four to six years in the development of
minicomputers and microcomputers.
Automated Management Systems and Telecommuni-
cations. The development of the computer and micro-
electronic industries allowed the Soviets in the late
1970s to begin introducing automated management
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systems (ASUs) on the plant, regional, and national
levels. The Soviets have plant ASUs for economic,
administrative, inventory, and product planning and
for process control. By 1975, the USSR had installed
4,400 systems of all types. We cannot fully assess the
overall impact of these plant ASUs, but reported
shortages of reliable computer hardware and soft-
ware, managerial resistance, and the failure to fully
integrate these systems into industrial operations sug-
gest that the introduction of this new technology is
still at an early stage.
Part of the difficulty the Soviets have had with ASUs
originates in the telecommunications links between
plants and other organizations in larger ASU net-
works. The Soviet civil telephone system, based on
analog transmission and electromechanical or manual
analog switches, provides notoriously poor service
characterized by high transmission error rates and
unreliable connections. Linking Soviet computers over
distances greater than a few kilometers requires in-
stalling separate, dedicated communications links.
Even equipment used to pass data without a direct
computer-to-computer link is limited to slower trans-
mission rates than are typical in the West.
The Soviet leadership has only recently initiated a
program to upgrade the national civil communications
system to standards sufficient to support integrated
industrial automation. Digital transmission will be
instituted throughout the national system, with com-
puter-controlled digital switching at local and region-
al centers, and major coaxial cables will be replaced
with fiber-optic lines. The USSR apparently intends
to support the program with substantial technology
imports, including digital and optical transmission
equipment from France and Japan and large and
small computer-program-controlled digital switches
from France and Finland.
The expansion of digital service beyond a few local
areas, however, will require series production or large
purchases of complex electronic and computer equip-
ment of the general type the Soviets have had difficul-
ty producing up to now. Completion of the entire
network, including long-distance links among digital
"islands" in major cities, within the period of the plan
will require a massive investment in new equipment
and a considerable expansion of communications
equipment production. Even if implemented according
to schedule, telecommunications would still lag the
West by about 10 years and be out of step with
development in the other advanced industries. We
believe telecommunications is the least developed of
the technologies required for broad-based Soviet in-
dustrial modernization.
Implications
The Soviets have made substantial progress in devel-
oping the technology base necessary to support broad
application of automated manufacturing. However,
they now face an even more formidable challenge in
trying to close the gap in these technologies or even to
avoid falling further behind. Their advances have
relied on a brute-force approach focusing national
priority, scarce resources, and high-level management
attention on technology development and emphasizing
imports and illegal diversion. Continued reliance on
foreign technology will provide substantial benefits
but will yield diminishing returns in closing the gap
with the West because of the inherent lag in assimi-
lating acquisitions into Soviet support industries.
Western export controls force the Soviets to rely more
on illegal acquisitions, which deny or impair the
technical contacts and training so necessary in high-
technology industry to transfer manufacturing "art."
Integrated applications of the technologies in manu-
facturing requires that they be tailored to Soviet
industrial conditions, so Western experience, short of
large-scale construction of turnkey plants, will be of
less direct benefit to the Soviets.
Diffusion of these technologies will largely determine
the impact on industrial modernization, and success in
assimilating them will depend in large measure on
overcoming systemic problems in Soviet industry.
Implementing advanced manufacturing technologies
is hindered by the problems that frustrate Soviet
innovation generally, including cumbersome planning
and prices that do not adequately reward improved
quality. Gorbachev and the central leadership that he
is assembling recognize the challenges confronting
Soviet industry, particularly its systemic problems,
but they have not yet worked out a consistent set of
policies to deal with them.
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Modernizing Basic Industries
The Soviet emphasis on intensive growth directly
affects the basic industries. Because of the sharp
increase over the last 10 years in the costs of extract-
ing and processing raw materials, the Soviets are
waging a campaign to reduce the consumption of
these materials throughout industry. In his speech to
the June 1985 CPSU conference on S&T progress,
Gorbachev emphasized the importance of such re-
source savings, which would stabilize the share of
investment devoted to extraction of fuel and raw
materials and free more investment funds to support
the drive for modernization. In the past decade,
investment in basic industries has changed very little
(see table). The rising cost of raw material develop-
ment has limited the ability of the basic industries
themselves to devote investment to improvements in
the quality of products or the efficiency of processing.
These efforts are needed to reduce their own con-
sumption of raw materials and energy and to produce
the higher quality materials required by the modern-
ization effort.
An examination of recent developments and trends in
three of the basic industries-chemicals, steel, and
construction materials-reflects these imperatives.
Although their development programs are individual-
ly tailored to meet their own peculiar needs, they all
emphasize improving the quality and variety of out-
put, reducing the consumption of raw materials and
energy, and importing Western technology when al-
ternative sources are deemed inadequate.
Chemicals
The Soviets are trying to raise the efficiency of the
chemical industry by increasing mechanization and
automation and introducing advanced technology.
This industry is critical to fulfilling plans for boosting
agricultural productivity, improving the quality and
increasing the quantity of low-cost consumer goods,
and creating new industrial and defense-related mate-
rials. The Politburo recently examined a comprehen-
sive program for the "chemicalization" of the Soviet
economy during 1986-2000. Although details have
not yet been released, the program calls for a substan-
tial increase in production of fertilizers, pesticides,
plastics, and chemical fibers.
To boost the efficiency of the chemical industry, the
composition of output is being redirected toward the
production of close substitutes for those products that
require large amounts of energy and toward produc-
tion processes for certain basic chemicals that are less
energy intensive. For example, the Soviets can save
energy by producing more synthetic than artificial
fibers or by producing more caustic soda by the
diaphragm method rather than the mercury method.
Since the 1960s the chemical industry has been
dependent on Western technology to meet expansion
and modernization goals. During the 1970s, Soviet
orders of Western chemical equipment and technol-
ogy amounted to about $9 billion-some 30 percent of
total equipment orders from the West. After a lull in
such purchases during 1981-84, the Soviets are re-
turning to the plant-contracting market. Over the last
year or so, Western contractors have received inqui-
ries for new turnkey chemical projects in the USSR
totaling $5 billion. In addition, some existing plants
will be modernized with Western assistance.
The introduction of Western equipment and technol- 25X1
ogy in the chemical industry has paid off, despite
initial problems caused by poor planning and inexperi-
ence with the installation, operation, and maintenance
of complex equipment. Western equipment is now
contributing substantially to Soviet output of several
major products, including ammonia, fertilizers, plas-
tics, and synthetic fibers. In some cases, Western
equipment and technology have provided sizable sav-
ings in construction and production costs, including
economies in labor. For example, ammonia plants
incorporating imported Western technology use only 5
percent of the electricity and one-third or less of the
workers per ton of output required by older Soviet-
designed plants.
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49.5
50.9
53.7
55.3
Basic industry
9.2
11.1
10.8
10.9
11.4
11.2
Ferrous metals
2.6
3.0
3.1
3.2
3.3
3.0
Chemicals/
3.1
4.4
3.8
4.0
4.1
4.3
petrochemicals
Wood products
1.1
1.2
1.3
1.3
1.4
1.4
Pulp and paper
0.5
0.6
0.6
0.6
0.6
0.5
Construction
1.9
1.9
2.0
1.8
2.0
materials
Fuels and power
9.7
13.2
16.6
17.7
18.7
19.6
Machinery
7.7
11.0
12.4
12.5
13.3
13.6
9.8
10.3
10.9
Annual average.
Includes the light and food industries, nonferrous metals, and
some miscellaneous industries such as glass and porcelain.
Steel
Modernization of the Soviet steel industry since the
late 1970s has aimed at improving the quality of steel,
expanding the assortment of products, and increasing
efficiency. The Soviets have attempted to achieve
these goals largely by increasing productive capacities
using modern equipment and technology. The 10th
and 1 1 th Five-Year Plans called for new facilities to
be built at existing plants and for construction of new
integrated steel complexes. To help with their mod-
ernization effort, the Soviets have sought Western
steelmaking equipment and technology.
The Soviets have achieved some success in renovating
their steel industry. Dependence on inefficient open-
hearth furnaces has decreased about 13 percent since
1975, largely because of greater use of basic oxygen
furnaces. More quality steel sheet is available, largely
because of the new rolling mill at Novolipetsk built by
West Germany and Japan. The minimill at Zhlobin,
built by Italian and Austrian firms, is now providing
high-quality construction steel to Belorussia. These
newer steel facilities have a high proportion of auto-
mated operations.
The modernization path, however, has not been en-
tirely smooth. Gorbachev replaced the Minister of
Ferrous Metallurgy in July after complaining that the
ferrous metals industry would not fulfill its 11th Five-
Year Plan targets because investment was concentrat-
ed on new construction instead of "technical reequip-
ment." Also, the share of steel produced in electric
furnaces has fallen far short of plans.' Part of this
failure is due to continuing delays plaguing the Oskol
Electrometallurgical Complex, which is being built
with West German equipment and technology. The
steelmaking facilities at Oskol were to be finished by
1979, but delays caused by an inefficient management
system, deterioration of equipment already delivered
but not yet installed, and purchasing and distribution
problems have pushed back the estimated completion
date to 1988.
' Electric and basic oxygen furnaces permit the greatest control of
temperature and chemistry and are best suited for producing high-
quality steel. Also, steel is produced in smaller, more rapidly
produced batches, which can be tailored to a wide range of
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The industrial investment strategy already laid out for
1986-90, which will emphasize reconstruction rather
than new construction, apparently will apply to the
steel industry. According to the Soviet press, 50 per-
cent of investment will be used to renew existing
plants, 30 percent will go toward improving product
quality, and only 20 percent will finance expansion of
capacity. This is in sharp contrast with past five-year
plans, which allocated 75 percent of investment to
physical growth. This investment pattern, together
with Gorbachev's statement in his Time interview
that he will not continue the traditional pressure to
raise the output of such basic industries as steel and
cement, indicates that overall steel output may remain
roughly at current levels over the next five years.
larger share of cement production from the "wet"
method to the "dry" method, which uses much less
energy.
The recently adopted long-term development program
for the ferrous metals industry includes:
? Replacing open-hearth furnaces with basic oxygen
or electric furnaces.
? Reconstructing older steel plants.
? Increasing the share of steel continuously cast by a
factor of 2 to 2.5 (this process saves energy and
labor, increases steelmaking efficiency, and im-
proves the quality of the output).
? Expanding the range of steel products.
? Replacing old coke plants.
? Adding new iron ore capacity.
Western firms have landed $1 billion in contracts for
the construction of a new steel pipe plant at the
Volzhskiy pipe works and have reached the bid stage
on the construction of a new rolling mill at the Orel
steel works. In addition, Western firms probably will
be involved in the reconstruction phase of the pro-
gram-negotiations have already begun for some
deals.
Construction Materials
The Soviets hope that productivity gains in other
industries and sectors of the economy and the empha-
sis on reequipment rather than new construction will
reduce the need for construction materials. Accord-
ingly, they are devoting more attention to increasing
the efficiency of the construction materials industry
than to expanding its output. Improved refractory
materials, for example, are required by the metals
industry. The Soviets are also attempting to shift a
To make significant improvements in efficiency, how-
ever, Moscow needs to make a substantial investment
in new machinery and equipment. So far, there are no
indications that the necessary investment funds will
be allocated. Moreover, the Soviets probably will not
devote large amounts of hard currency to this effort,
although small amounts will probably be used to
bridge temporary gaps in supply for important prod-
ucts.
Outlook
The programs Moscow has tailored for the basic 25X1
industries are both sensible and necessary strategies if
the Soviets are to achieve their modernization objec-
tives. Expanding output of chemicals has a high
payoff for both the consumer and heavy industry.
Sacrificing output volume for better quality goods and
wider variety of products in metallurgy will reduce
waste and more closely meet the needs of the builders
of modern machinery. Holding down the growth in
output of construction materials and general purpose
steels chokes off excess capital construction and re-
leases more investment for new machinery. All of
these programs embody important resource-saving
strategies.
In the past, the Soviets have failed to implement
similar programs and investment policies, but the
outlook for change may be brighter today. Gorbachev
is the most aggressive economic manager since Khru-
shchev. He may capture the attention of management
through punitive measures alone. Also, the entire
economy-from defense industries to the consumer-
is now more aware of resource constraints. However, 25X1
there are still hurdles to clear. The incentive system
for managers and workers alike, which in the past was
largely responsible for failing to spur resource savings
and the introduction of new technology, is still basi-
cally unchanged (see article "Gorbachev's Strategy").
Moreover, these basic industries during 1986-90 will
be in tough competition for investment resources and
foreign exchange with priority sectors such as ma-
chine building and energy.
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Acquiring Western Technology
Western Technological Support -A Long History
Western technology has contributed heavily to Soviet
industrial modernization since the 1920s. Civilian
industry benefited from massive imports in the 1930s
and again in the 1970s. Imports included major
turnkey projects that effectively built major portions
of such key Soviet industries as chemicals, metallur-
gy, and motor vehicles. Acquisition for the defense
industry-much of it clandestine-has been continu-
ous. Use of proven Western weapon design solutions
and test data has evidently expedited weapon develop-
ment, and acquisition of Western manufacturing
equipment, processes, and know-how has enabled
Soviet defense plants to implement relatively ad-
vanced manufacturing approaches many years before
similar indigenous capabilities could be developed.
Acquisition for both civilian and defense industry
consistently has been motivated by the objective of
developing Soviet capabilities and avoiding long-term
dependence on foreign suppliers.
The priority and pace of foreign technology acquisi-
tion increased substantially during the mid-1970s
because of several factors. Liberalized export controls
in an era of detente, overdue modernization of key
basic industries, strong hard currency earnings, and
pressing military technology needs all were signifi-
cant. Flush with earnings from exports of energy
sources and raw materials, the Soviets sought West-
ern plant and equipment to alleviate developing bot-
tlenecks in long-neglected basic industries and to
improve industrial productivity.
=military writings during the early and middle
1970s also indicate that Soviet leaders were becoming
increasingly concerned about the ability of the mili-
tary-industrial complex to compete in a high-technol-
ogy arms race with the United States. The technol-
ogies required-digital electronics, phased-array
radars, sensors, sophisticated guidance and navigation
systems, composite materials, computers, and signal-
processing equipment-were relatively new to Soviet
industry and required unusual sophistication in devel-
opment and manufacturing. Defense industry effi-
ciency was also a consideration, inasmuch as the cost
of advanced systems was escalating while Soviet
economic growth was beginning to slow markedly.
The Acquisition Process
In the 1970s the Soviets increased the priority and
support of their technology acquisition efforts for both
defense and civilian industries. They created an inter-
lockin network for overt and covert ac uisitions 9FX1
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State Planning Committee (Gosplan) approves fund-
ing for all of the major acquisitions. Both programs
use some of the same international trade and scientific
Acquisition for defense programs, however, generally
benefits from advantages in collection tasking, fund-
ing, and exploitation.
Generating Requirements. The Soviets generate and
process requirements for overt and covert acquisitions
in much the same way. Prospective users usually
originate requests and pass them up through ministry
channels, where they are subject to review, justifica-
tion, and approval. Sufficiently large or important
acquisitions are considered by national-level organiza-
tions.
Research institutes, design bureaus, and industrial
plants with defense connections usually have several
advantages over their civilian counterparts. They have
access to detailed information on Western technologi-
cal trends and developments that their counterparts
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The defense-industrial sector maintains generic stand-
ing requirements for Western design and production
equipment and documentation that generally receive
priority treatment. Defense-related acquisitions also
benefit from centralized management of the require-
ments process provided by the Technical Center of the
All-Union Institute for Inter-Branch Information
(VIMI). VIMI documents and assigns priority to
acquisition requests submitted to the VPK and dis-
seminates documentary and hardware acquisitions.
Securing Funding. Proposed acquisitions are assessed
in terms of prospective benefits and the availability of
funding. Benefits are determined on a case-by-case
basis, but, as indicated previously, national defense
has priority. As a commission of the Council of
Ministers, the VPK can unilaterally mandate an
acquisition of overriding national priority.
The allocation of funds-generally hard currency-
depends on the type of acquisition and the user. Plants
and ministries usually maintain small reserves of hard
currency, and Gosplan can approve and support larger
authorizations. If the VPK assigns a high priority to
an item, it can draw upon the nationally allocated
funds it controls. The GKNT provides central control
by authorizing outlays of hard currency for technol-
ogy acquisitions.
Approved acquisitions then proceed along one of two
paths. Soviet organizations negotiate contracts for
overt imports with the intervention of the appropriate
foreign trade organization.
Monitoring Assimilation and Exploitation. The Sovi-
ets monitor and report on progress made in assimilat-
ing new technologies acquired overtly and covertly
through much the same channels. In most ministries
one or more lead R&D organizations coordinate the
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JCICI
USSR: Hard Currency Imports and Energy-Related Orders
Total imports
Machinery and
equipment imports
Total machinery and
equipment orders a
Energy-related
equipment orders
1975
1976
1977
1978
14.6
15.2
14.0
16.9
4.6
5.1
5.1
6.0
4.8
5.9
3.8
2.8
a Orders represent signed contracts in a given year, deliveries for
which run from a few months to several years.
ministry's exploitation of any acquired technology
that has broad applications across product lines.
These lead organizations work closely with plants and
design bureaus in assimilating the technology, some-
times over several years.
The system for tracking the impact of foreign acquisi-
tions responding to VPK military requirements is
pervasive, uniform, and aggressively implemented.
Ministries must evaluate acquired technology hard-
ware or intelligence information within a certain time
and report to a centralized information network on
their plans for applying it to their own projects. Later
they must report on how those projects have been
affected. Although this is done systematically in the
defense sector, followup in the civil sector appears to
be more haphazard. Reporting is likely to vary ac-
cording to the industrial ministry involved and is often
not subject to central control and followup.
Effectiveness of the Program
Foreign technology has contributed substantially to
increasing production capacity and improving product
quality in both civilian and defense industry. The hard
currency costs have been high, however. As the table
shows, hard currency outlays for imports of machin-
ery and equipment exceeded $4 billion annually by
the mid-1970s and rose to more than $6 billion in the
early 1980s. This surge resulted almost entirely from
sharp increases in orders for energy-related machin-
ery and equipment. During the 1970s, imports of
computers and associated equipment totaled $400
million, and imports of microelectronics technology
totaled several hundred million dollars. We also esti-
mate that, since the mid-1970s, ruble outlays for the
VPK military-related covert acquisitions have aver-
aged the equivalent of several hundred million dollars
annually if converted at the official exhange rate.
From 1975 to 1980 these outlays supported acquisi-
tion of at least 400,000 technical documents and
30,000 hardware samples.
The impact of foreign technology, however, depends
on how well the Soviets capitalize on their acquisi-
tions. Here the record is less impressive. As some of
the preceding articles have indicated, the Soviets have
proved to be relatively slow at assimilating foreign or
domestic technology. In acquiring technology overtly,
they can strike a relatively quick bargain and ensure
rapid Western deliveries, but must then confront the
problem of overcoming generally unresponsive con-
struction and installation bureaucracies and resistant
plant managers. Conversely, for covert technology,
the high priority, substantial funding, and systematic
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JCII CL
followup by VPK managers can overcome domestic
resistance, but more time usually is required to find
and obtain the Western item.
The impact of acquired technology-at least on indus-
trial modernization-depends especially on how
quickly and widely it is diffused. In this regard, overt
acquisitions probably have an edge. Secrecy limits
diffusion of military-related technology outside the
defense-industrial community. Moreover, technology
overtly acquired-particularly manufacturing tech-
nology-is usually more generally applicable. Diffu-
sion of openly acquired technologies provides for
fundamental technological progress in industries serv-
ing both defense and civil needs. Progress in the
Soviet computer and steelmaking industries, for ex-
ample, is primarily due to the legal purchases of
Western technology.
For industrial modernization, overt acquisitions have
clear advantages in terms of the size and effectiveness
of the transfer. The Soviets are able to purchase entire
turnkey facilities, with all necessary tooling and sup-
porting facilities, while covert acquisitions of produc-
tion equipment are selective and usually limited in
scope. As part of overt acquisitions, the seller can be
asked to provide predelivery training, often in the
vendor's plant where the equipment is being produced.
The seller's engineering personnel can supervise in-
stallation, calibration, training, and startup, and trou-
bleshooters can be dispatched to deal with subsequent
problems. Conversely, even the origin of covertly
acquired equipment is often concealed from the user,
and the manufacturer usually is not permitted access
to the facilities where it is used. As a result, a large
share of covertly acquired equipment achieves only a
part of its potential and is sometimes not even in-
that at Zelenograd for microelectronics equipped
and staffed for indigenous development, exploitation,
and reverse engineering. For example, Soviet success-
es in the microelectronics industry are attributable in
part to such efforts, but they are costly, time consum-
ing, and generally less effective than dealing directly
with Western firms
Outlook
The extent to which the Soviets will turn to the West
to support Gorbachev's modernization program is still
unclear, but the record of imports and covert acquisi-
tions suggests that Western technology will continue
to be vital. Past dependencies assure future dependen-
cies in key technologies critical to modernization. For
example, most Soviet computers are based on West-
ern models, and technology in the microelectronics
industry is nearly completely of Western origin.
Moreover, Gorbachev has signaled his intention to
continue turning to the West to aid programs-such
as computer literacy that support modernization.
On the military side, ongoing Western programs such
as Stealth and the Strategic Defense Initiative, along
with advances in such key technologies as electro-
optics, fire control, and missile guidance, indicate the
Soviet covert acquisition program probably will be at
least as aggressive as it has been since the 1970s.
There are, however, few indications of a major up-
surge in the overall level of imports. Although the
Soviet hard currency position currently is strong, soft
prices for major export items such as energy, commit-
ments to client states, and other considerations sug-
gest the Soviets will not have the reserves to sustain
large increases in imports. Soviet scientific literature
indicates, moreover, that there is some resistance to
importing Western technology. Soviet scientists and
engineers argue that they can do the job and probably
believe that Western acquisitions undermine indige-
nous technology development programs. For his part,
Gorbachev has called only for more "rational" con-
centration of imports on key projects. As in other
aspects of his modernization program, Gorbachev
apparently feels that much more can be obtained
through improved use of existing resources. Moreover,
stalled or operated.
On the other hand, covert acquisition is often the only
way to overcome Western export controls, and such
acquisitions provide substantial benefits to critical
industries such as computers, microelectronics, and
telecommunications. Covert acquisitions, in docu-
mented cases, have enabled the Soviets to advance
specific manufacturing technologies by as much as
10 years. The Soviets try to mitigate the disadvan-
tages of doing without Western training and assis-
tance by maintaining large R&D centers-such as
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we believe that the Soviets' campaign-style efforts to
solve critical technology bottlenecks by pouring mas-
sive resources into large, high-priority projects-while
effective in basic industries-would not be highly
effective in high-technology industries.
Western export controls and enforcement policies-
and trade policy generally-also will weigh heavily.
Export controls hit especially hard in the "dual-use,"
high-technology areas of computers and microelec-
tronics and their use in the advanced manufacturing
technologies crucial to the modernization program.
Aggressive enforcement of export controls by the
West could curtail open trade and thereby increasing-
ly shift the focus of acquisition to covert channels.
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Figure 1
Estimated Soviet Grain Yields, Late September 1985
Above average
Below average
~----~ KAZAKHSTAN
Mri,t of major grim t~rt:yo~raae rc?gw)o
Tne unn.d S..U. oov.,.m.m nu .oi ,ecog.~n.d
m. -,co,.oo. of E.mm. L.IV , ..d Ldm,-.
ne Son.I Umo. Oyn., eo....,y ..p,.......
~..o~..c... ,~iy .wno.n.u
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Other Topics
Good Grain Crop Cuts
Soviet Import Needs
With the harvest nearing completion, the USSR
appears headed for a grain crop of some 200 million
tons, its best since the 1978 record of 237 million tons.
Prospects are also good that the production of for-
ages-a major livestock feed-will reach an alltime
high, providing the basis for further growth in live-
stock products. As a result, total agricultural output
in 1985 probably will exceed the 1983 record. Produc-
tion at this level will benefit both the population-by
improving supplies of quality foods-and General
Secretary Gorbachev-by permitting him to claim
credit for getting the Food Program back on track.
The good crop-year also means that Moscow may
need to import only about half of the record 53 million
tons of grain purchased last year to meet its estimated
domestic requirements. US grain sales to the USSR
may plunge by more than 50 percent from last year's
peak of some 22 million tons.
Crop Developments
Prospects for well-above-average grain yields have
been partly offset by the fact that the area sown to
grain this year is the smallest in over a decade. As a
result, given normal weather for the rest of the season,
the 1985 Soviet grain crop is likely to be about
200 million tons, 20 million tons larger than both last
year's estimated output and the estimated average for
1980-84, but well below the 1978 record of 237
million tons.' The US Department of Agriculture
' The 200-million-ton figure is our best estimate of the 1985 crop.
On the basis of our analysis of best and worst case scenarios, there
is a 90-percent probability that the crop will come in between
190 million and 210 million tons and a 75-percent chance that it
currently forecasts the crop at 190 million tons.
Estimates by other Western grain analysts range from
180 million to 200 million tons.
The 1985 crop season got off to a good start last fall,
and overall crop prospects remained bright through
this spring and summer. There were some develop-
ments, however, which we believe cut the potential
size of this year's grain crop by some 25 million tons.
Most damaging were several periods of hot, dry
weather in the Volga Valley, North Caucasus,
Ukraine, and Kazakhstan. Continuation of the down-
ward trend in total grain hectarage-begun in the late
1970s-also contributed.' We estimate that since
1978 the combination of adverse weather and declin-
ing grain hectarage has cost Moscow an average of
roughly 55 million tons of potential grain output
annually.
The outlook for selected forages-hay, haylage, si-
lage, and grassmeal-is excellent. According to Soviet
data, forage procurements as of late September were
running 5 percent ahead of the record 1983 pace,
overcoming a gap of nearly 30 percent that existed in
early July. Given this performance, we believe that,
' The cutback in grain area appears to be a consequence of
Moscow's policy to greatly expand the amount of arable land put
into fallow. Between 1977 and 1984, the harvested grain area of the
USSR declined steadily from a record high of 130.4 million
hectares to 119.6 million, while fallow increased from 11.7 million
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Actual
1976-80
Average
1981
1982
1983
1984
1985
Total
205.0
158.0
180.0
195.0
179.0
199.0
By Republic
RSFSR
113.9
78.0
99.5
112.0
94.5
112.0
Ukraine
43.1
38.2
42.0
39.0
44.5
43.0
Kazakhstan
27.5
23.8
19.5
25.0
ITS
21.0
Other
20.5
18.0
19.0
19.0
22.5
23.0
By crop
Wheat
99.7
81.0
90.0
80.0
77.0
88.0
Coarse c
95.1
68.0
80.0
102.0
92.0
99.0
Other a
10.2
9.0
10.0
13.0
10.0
12.0
Measured in bunker weight, that is, gross output from the
combine, which includes excess moisture, unripe and damaged
kernels, weed seeds, and other trash. For comparison with United
States or other countries' grain output, an average discount of I 1
percent should be applied.
h The USSR has not published overall grain production or yield
statistics since 1980. Total grain production in 1981 was unofficial-
ly reported at 158 million tons. Data for Kazakhstan for 1981 and
1982 are official. All other figures represent our estimates.
Coarse grains comprise rye, barley, oats, corn, and millet.
d Other grains include pulses, buckwheat, and rice.
unless the weather deteriorates markedly in the com-
ing weeks, forage production will set a new record this
year. Since harvested forages constitute slightly more
than one-half of the nutrient content of the Soviet
livestock ration, the outlook for feed supplies is quite
good.
Remaining Uncertainties
Although all evidence suggests that the 1985 Soviet
grain crop will be the largest since 1978, there
remains some uncertainty regarding its exact size.
Excessive rainfall during the final few weeks of the
harvest could seriously hamper combining operations
and lead to losses in both grain quantity and quality.
Moreover, because the harvest is running about one
week late, slightly more grain than normal would be
lost if an early snowfall precluded its completion. The
latest Soviet harvest progress report indicates that a
risk.
Other factors could boost this year's grain production
above 200 million tons, perhaps by as much as
10 million tons. We estimate that the amount of grain
growing on land that was previously fallow increased
again this year, continuing the upward trend begun in
the late 1970s. Although fallowing sacrifices produc-
tion in the year in which the land is idled, it usually
results in higher, more stable yields in subsequent
years as long as the fallowed hectarage is maintained
in the crop rotation schedule.
In addition, Moscow almost certainly will realize
some benefit from a large-scale program in intensive
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wheat cultivation that is being undertaken on some
17 million hectares-nearly 15 percent of the area
sown to grain. According to
Soviet press reports, Moscow has purchased large
amounts of Western insecticides, herbicides, and fun-
gicides in an attempt to raise average wheat yields by
I ton per hectare on the intensively cultivated area in
the RSFSR, Kazakhstan, and the Ukraine. Because
of the experimental nature of the program, we have
been conservative in incorporating potential gains into
our 200-million-ton figure. Problems with deliveries
of the chemicals to farms and with field applications
will hold this year's results well below the planned
increase of 16 to 18 million tons. But, even so, sizable
gains of 5 million tons or more are possible because
many of the test areas experienced favorable growing
conditions this year.
Soviet Grain Requirements and Imports
The Need for Grain. A much-improved grain crop this
year, coupled with Moscow's apparent success in
restraining growth in the use of grain for livestock
feed and prospects for a record forage crop, means
that Soviet grain import needs during the marketing
year (MY) that began on 1 July will be down sharply
from a year ago. During MY 1984/85, the USSR
imported roughly 53 million tons of grain, a new
record. Assuming a 200-million-ton grain harvest this
year, Moscow would be only some 25 to 30 million
tons short of the quantity of grain we believe is
necessary to maintain recent levels of seed, food, and
industrial use and sustain growth in meat and dairy
products.' This figure could be somewhat less if
livestock feeding efficiencies continue to improve, as
Soviet agricultural policy under the new leadership of
Mikhail Gorbachev appears to be basically in keeping
with that of his three predecessors. The General
Secretary's public statements indicate that he contin-
ues to endorse the Food Program-which he played a
key role in formulating-and strongly supports:
? Reorganization offarm labor into small, semiau-
tonomous units that operate on the basis of con-
tracts with state and collective farms and are paid
according to what they produce.
? Self-financing-a system whereby farms finance
operations out of earnings-as a means of improv-
ing managerial accountability and initiative and
farm productivity.
? Private agriculture, recognizing that this sector
provides substantial quantities of quality foods
such as meat, vegetables, and fruit-albeit with the
help of state resources.
Gorbachev's one major departure from past policy is
his push to shift resources away from direct invest-
ment in farms, such as in the construction of large-
scale livestock complexes, toward development of the
rural infrastructure (storage, transportation, and
housing) and supporting industries, particularly agri-
cultural machine building. Recognizing that better
storage facilities and transportation could reduce
considerably the enormous waste and spoilage of
Soviet agricultural products, Gorbachev has made it
clear that some shifting of investment funds will be
included in the forthcoming five-year plan for the
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we believe likely.
Slack Grain-Buying Activity. Soviet grain purchases
thus far in MY 1985/86 are running well behind last
year's record pace. By the end of September, Moscow
had lined up only some 12 to 13 million tons of grain
' Because the USSR measures grain production from the field
before cleaning and drying, our bunker-weight estimate of output
must be reduced by an average of 11 percent to be comparable with
the international standard weight measure for seed, food, imports,
and other items. The discount varies according to moisture condi-
tions prior to and during harvest and according to crop size, and
thus can become either larger or smaller than average as the season
advances. Our currrent estimates indicate a standard-weight crop
of roughly 180 million tons (given a bunker-weight crop of 200
million tons) and consumption needs of about 205 to 210 million
1986-90 period.
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Although by no means assured, implementation of
these measures, combined with what we anticipate
will be increasing imports of Western farm technol-
ogy and equipment, could markedly improve the
USSR's crop and livestock production and thus bring
more food to Soviet tables. The potential gains,
however, would be several years in the making and
would be dampened by more fundamental problems
plaguing Soviet agriculture. For example, farms will
continue to face chronic shortages of agrochemicals 25X1
and equipment, low labor productivity, and high
production costs for the foreseeable future.
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Figure 2
Grain Exports to the USSR, 1976/77-1984/85
tons of grain in MY 1985/86.'
European
Community
0 1976!77- 8182 82'83 83/84 8485
1980 81,
lull-June marketing scan.
? Average
The slow buying to date does not necessarily mean
that imports during MY 1985/86 will fall to the 25-
to 30-million-ton minimum implied by estimated do-
mestic needs. Purchases of this magnitude are already
virtually assured because of LTAs and recent trading
patterns that suggest the Soviets probably will buy
another 6 million tons of grain outside LTA obliga-
tions from countries such as Argentina, Australia,
France, India, and China. Given the favorable market
situation for grain buyers, Moscow could choose to
import even larger amounts of grain and thereby
expand the livestock sector beyond plan or add more
grain to stocks. Even so, estimates of up to 41 million
tons by grain traders, who generally see a somewhat
smaller Soviet grain crop, appear, in our view, to be
on the high side at this time.
Few Import Constraints. The USSR should encounter
few constraints either financial or logistic-on im-
porting the amounts of grain it needs this marketing
year. Although hard currency earnings probably will 25X1
for shipment during the current marketing year com-
pared with about 24 million tons a year ago. More-
over, the USSR reportedly has bought only 2.7 mil-
lion tons of US corn, in marked contrast to last year
at this time when total purchases from the United
States already stood at over 12 million tons. Moscow's
abstention from the US wheat market comes despite
high-level Soviet assurances given to Agriculture Sec-
retary Block in late August that it would buy the
remaining 1.1 million tons of wheat called for under
the US-USSR grain agreement before 1 October. As
a result, Moscow is now no longer in strict compliance
with the terms of the second year of the accord.
The USSR's reduced grain-buying activity probably
reflects more than just lower import requirements.
World grain markets are soft-prices are at their
lowest level in several years and exporters are anxious
to sell off burdensome stocks-thus putting Moscow
in a good bargaining position. Moscow's ability to
play the market is somewhat limited, however, by
various long-term agreements (LTAs) and protocols
be down about 10 percent as a result of lower oil and
gas revenues, Moscow may be able to offset part of
these losses through increased exports of gold, dia-
monds, and platinum. In addition, world grain prices
are low, Western credits and loans are readily avail-
able, and grain imports from India and China-
perhaps 2 to 3 million tons are largely on a barter
basis.' As for logistics, the massive grain import
program in MY 1984/85 proved that the Soviets have
greatly reduced the transportation bottlenecks that
previously curtailed grain shipments to the USSR.
' Recent actions indicate that Moscow may be readjusting its
thinking on LTAs in light of the growing competitiveness of world
grain markets and its own long-term hard currency outlook. For 25X1
example, in negotiations with Argentina, which is competing for a
larger share of the Soviet market, Moscow has resisted pressure to
increase commitments.
` The USSR is trying to expand its soft currency or barter grain
trade with these two countries, but neither can presently guarantee
long-term availability of exportable grain.
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Implications
The prospect of a sizable drop in Soviet grain imports
during the current marketing year means that US
sales will fall well below the record 22.3 million tons
exported in MY 1984/85. While some additional
purchases of US corn are likely in the near term,
Moscow could stay out of the US wheat market for
several more months and still be able to meet its
import needs for the marketing year as well as its
obligations under the third year of the US-USSR
grain agreement, which began on 1 October. If so, US
wheat prices f.o.b. Gulf-already at their lowest level
since 1978 in nominal terms (not adjusted for infla-
tion) and since the early 1930s when adjusted for
inflation-could decline further. Moreover, total US
corn exports during the marketing year could be
adversely affected should Moscow begin substituting
low-priced wheat-from the United States or other
exporters-for corn.
On the Soviet domestic front, the USSR's potentially
best agricultural year ever carries with it some favor-
able implications for Soviet consumers as well as for
General Secretary Gorbachev. The drop in per capita
food supplies that occurred last year should be reme-
died this year, giving new momentum to the Food
Program. More quality food on Soviet tables almost
certainly would boost worker morale and productivity,
providing an immediate growth dividend to the overall
economy. Sizable benefits over the long term, howev-
er, will depend partly on continued success in the farm
sector, a situation that is by no means certain.
Meanwhile, a potential 50-percent cutback in grain
imports from a year ago means that the USSR could
save as much as $2.5-3 billion in hard currency
outlays, helping ease the negative repercussions from
the expected downturn in hard currency earnings this
year.
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The "Samotlor Disease"
Is Spreading
The "Samotlor disease"-a vicious circle of flagging
output from giant oilfields and ever-increasing use of
manpower and equipment in an attempt to sustain
total oil output-is spreading throughout the West
Siberian oil region. Unless large oil finds are made,
the costs of oil exploitation in the USSR will rise
exponentially.
Developments associated with the aging of Samotlor,
the USSR's largest oilfield, are the principal cause for
last year's decline in nationwide oil output and for the
incipient decline in West Siberian oil output.' As
Gorbachev noted recently, Samotlor production ac-
counts for half of the 3 billion tons of oil that have
been extracted from West Siberia. Yet now one-third
of Samotlor's wells stand idle. In the first quarter of
1985, the number of flowing wells in the field declined
by nearly one-third, leading to a doubling of the
number of inactive wells there. The number of inac-
tive wells reflects the chronic shortage of pumping
equipment-a shortage that becomes more acute as
the proportion of water (water cut) in the oil-and-
water mixture produced from oil wells rises sharply.
At Samotlor, the water cut is now 55 percent, com-
pared with about 40 percent in early 1983. The high
water content in turn causes additional complications
(more corrosion of piping and equipment, more need
for storage facilities and separation equipment to
handle the water) that boost both the labor and capital
intensity of the oil-production effort.
Major Causes of the Decline in Oil Production
Two groups of factors, partly interrelated, are contrib-
uting to the spread of the "Samotlor disease." One
group-often referred to as "fixable" problems-
includes shortages of skilled manpower, poor quality
of equipment, and inadequate infrastructure. The
second group of factors embraces the aging of several
giant oilfields, with the consequent decline of their
crude oil output, rapidly escalating water production,
and a corresponding surge in demand for pumping
' After reaching 616.3 million tons in 1983, Soviet oil output slipped
to 612.7 million tons in 1984 and could well post a further decline,
equipment, well workovers, and general oilfield main-
tenance.
The "fixable" problems have long plagued the oil
industry's production effort in West Siberia and most
recently were addressed by a Politburo decision in
August 1985 and by General Secretary Gorbachev in
his September speech in Tyumen'. The Politburo
decision calls for increasing construction and assem-
bly work in the West Siberian oil and gas complex by
60 percent in the 1986-90 plan and for providing new
working capacity, a more reliable supply of electricity,
and improved transportation facilities. The Politburo
decision also calls on the factories to improve the
quantity and quality of equipment produced for the oil
and gas industries. Housing construction in the re-
gion-long a factor adversely affecting labor recruit-
ment, morale, and retention-is to increase. The
Gorbachev speech stressed these factors, together
with greater application of science and technology,
improved management, and heightened oversight by
local Communist Party units.
Implementation of these measures can do little to
improve output in the short run. In the long run, they
can ameliorate operating conditions in the West Sibe-
rian oilfields, but this offers only the prospect of
slowing the decline in output. A spate of articles in the
Soviet press has described the decline in West Siberi-
an oil production, the increased number of idle wells,
and continuing problems with poor management.
During the period January-July 1985, for example, oil
production by Glavtyumenneftegaz (which accounts
for about 90 percent of oil output in West Siberia) was
reportedly some 15 million tons below plan for the
period, because large numbers of wells ceased flowing
oil.' Although the productivity of well-repair crews
2 The share of West Siberian oil output attributable to the Glavtyu-
menneftegaz production association decreased from 97 percent in
1984 to about 90 percent in 1985 as the result of the transfer of
several oilfields from the operational control of Glavtyumennefte-
gaz to two Volga-Urals production associations.
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has increased, the number of wells being idled each
day outstrips the number being returned to service.
Efforts to return the wells to active service are
hampered by shortages of equipment. Moreover, the
seriousness, extent, and persistence of the oil indus-
try's production problems enumerated by the Soviet
media strongly suggest that far more is involved than
problems with poor management, labor, and equip-
ment supply.
Indeed, far more is involved. The age distribution of
the developed oilfields in the USSR exacerbates the
effects stemming from the aging of giant oilfields. A
large proportion of West Siberia's developed reserves
were tapped in the 1969-79 period (see chart). Conse-
quently, the peak and decline of output from these
fields are occurring in a relatively short period. Sa-
motlor, placed on stream in 1969, accounts for 40
percent of the West Siberian oil reserves tapped from
1964 to date. As illustrated by the figure, oilfield
commissionings in the 1970s were smaller than Sa-
motlor by an order of magnitude-and those in the
1980s have been much smaller yet. Because the new
commissionings are not of comparable size to the
aging fields introduced in the 1960s and 1970s, the
Soviet oil industry is now on a treadmill and faced
with the hopeless prospect of having "to run faster to
stay in place."
Only the discovery and development of new oilfields
of comparable productive capacity can offset the large
declines in output from aging giant fields at competi-
tive costs. In his Tyumen' speech, Gorbachev noted
that, when oil deposits pass their peak output, priority
attention must be given to finding and tapping new
deposits. But the odds against finding additional giant
fields in West Siberia have increased rapidly since
1975, according to Soviet geologists. Indeed, the
Soviet press states that these geologists no longer
predict the imminent discovery of a second Samotlor.
Offsetting the production losses from aging fields thus
requires the development of an increasing number of
small fields-which are proving less productive. For
example, the average now from new wells has de-
creased by 50 percent since 1980, according to the
Soviet press. These circumstances are leading some
Soviet oil officials to emphasize development of "diffi-
cult-to-extract" oil reserves. The methods required for
West Siberia: Oil Reserves Tapped, 1964-85
(A + F + C, Reserves in Field% Started Up)
million tons
;,)uu
t -0fli r
e ~c Amin-
0 964 62 hb 67 66 fig 7U 7~
74 7> -6 77 78 79 RO RI 82 63 64 61
such development, however, are costly and technically
demanding.
The Soviet oil industry has taken steps to deal with
some of the "fixable" problems. Changes in manage-
rial personnel and a large increase in the number of
well-repair crews assigned to West Siberia have sped
up the servicing of wells and undoubtedly have pre-
vented a steeper decline in oil production. But the
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negative impact of the aging process ultimately af-
fects all oilfields and will surely cause more wells to
cease flowing in the future. Soviet emphasis on short-
term production gains through more drilling and
larger water-injection programs accelerates the aging
process.
The Status of Tyumen'Oilfields
Because of the advanced age (12 to 20 years) of the
dozen largest Tyumen' oilfields, only one of three
wells in this key region flows oil naturally. Even more
ominous for the Soviet oil production outlook, less
than one out of seven newly completed wells flows
oil the rest need pumps. The number of old and new
wells inactive for lack of pumping equipment is nearly
as large as the number of Tyumen's remaining free-
flowing wells and is growing.
The supergiant Samotlor oilfield provides a stark
example of the downward course of oil output and the
difficulties encountered in attempting to sustain pro-
duction in an aging field. Currently, after 15 years of
exploitation, only one of five wells at this giant field
flows oil naturally. Nearly 2,000 high-yield oil wells
are being converted to gas-lift operation in order to
handle ever-increasing volumes of water. The fluid
produced from Samotlor's gas-lift wells already aver-
ages 70 percent water and 30 percent oil. With the
aging of other major Tyumen' fields like Fedorovo,
Mamontovo, and Var'yegan, the number of wells
awaiting pumps can be expected to grow at a much
brisker rate, and the rate of attrition in the number of
flowing wells will accelerate.
Also associated with aging of fields is a sharp increase
in problems associated with maintenance of reservoir
pressure and with advanced corrosion of oilfield
equipment and piping. Recently, for example, the new
oil minister, Vasily Dinkov, blamed below-plan per-
formance on the inability of Tyumen' oilworkers to
maintain oilfield reservoir pressures by waterflooding.
Concurrently a speech by the A1'met'yevsk party chief
complained about the serious pipeline and equipment
corrosion problems that were encountered by the
Tatar and Bashkir workers assigned to Tyumen' last
January. These problems apparently prevented them
from making their production quotas. The speech
noted that crude oil pipelines develop numerous leaks
after only one or two years of service because of
hydrogen sulfide corrosion. In normal Soviet experi-
ence, such pipelines last two or three times as long,
according to the party official. The corrosion of
water-supply and crude-oil-gathering pipelines poses
severe operational problems that affect waterflood-
pressure maintenance programs and crude oil produc-
tion operations, in turn intensifying the demand for
scarce labor, replacement equipment, and spare parts.
Outlook
In contrast to the 1970s when several giant, highly
productive oilfields were being tapped, the oil flow
from new wells in the mid-1980s is meager (for many,
less than 200 b/d)-that is, less than one-fifth the
average flow from new wells in 1975. Indeed, many of
the new wells in some fields reportedly do not flow.
This condition-in the absence of the discovery of a
"second Samotlor"-leads to a spiraling increase in
commitment of manpower and equipment for well
drilling and other oilfield activities in an attempt to
sustain the nation's oil output.
Output from the supergiant Samotlor, the driving
force behind West Siberian oil production growth for
a decade, will probably amount to only about
2.4 million b/d in 1985, down sharply from its 1980
peak level of over 3.0 million b/d. Output from the
second-generation West Siberian fields-such as Fe-
dorovo, Mamontovo, Lyantor, Agan, and Severo-
Var'yegan-is beginning to decline, and the rate of
decline is increasing. By the end of the decade, the
aging of all major fields will pose a requirement for an
added 2-3 million b/d of oil from other deposits if the
Soviets intend to compensate fully for the decline of
output from the major fields. Attempting to do so
(which in the end may be futile) by exploitation of the
smaller, poorer quality fields that have been coming
on line will entail steeply escalating costs in terms of
manpower, equipment, and logistic support.
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 25X1
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Secret
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