USSR-EASTERN EUROPE: WILL MOSCOW KEEP UP TRADE PRESSURES?

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP89T00295R000300380002-5
• Release Decision: RIPPUB
• Original Classification: S
• Document Page Count: 45
• Document Creation Date: December 27, 2016
• Document Release Date: June 2, 2011
• Sequence Number: 2
• Publication Date: November 1, 1986
• Content Type: REPORT

Declassified in Part -Sanitized Copy Approved for Release 2011/12/29 :CIA-RDP89T00295R000300380002-5
~~
Trade Pressures ?
USSR-Eastern Europe:
Will Moscow Keep Up
EUR 86-1004!
November 1986
~oPy 3 8 ~
Declassified in Part -Sanitized Copy Approved for Release 2011/12/29 :CIA-RDP89T00295R000300380002-5
 Declassified in Part -Sanitized Copy Approved for Release 2011/12/29 :CIA-RDP89T00295R000300380002-5
Declassified in Part -Sanitized Copy Approved for Release 2011/12/29 :CIA-RDP89T00295R000300380002-5
 Declassified in Part -Sanitized Copy Approved for Release 2011/12/29 :CIA-RDP89T00295R000300380002-5
Directorate of Secret
Intelligence
USSR-Eastern Europe:
Will Moscow Keep Up
Trade Pressures
This paper was prepared by (Office
of European Analysis. Comments and queries are
welcome and may be directed to the Chief, East
Euro can Division, EUR
Reverse Blank Secret
EUR 86-1004!
November 1986
Declassified in Part -Sanitized Copy Approved for Release 2011/12/29 :CIA-RDP89T00295R000300380002-5
 Declassified in Part -Sanitized Copy Approved for Release 2011/12/29 :CIA-RDP89T00295R000300380002-5
Declassified in Part -Sanitized Copy Approved for Release 2011/12/29 :CIA-RDP89T00295R000300380002-5 -
 Declassified in Part -Sanitized Copy Approved for Release 2011/12/29 :CIA-RDP89T00295R000300380002-5
Trade Pressures?
Key Judgments
I-slormation available
as of 1 October 1986
was used in this report.
USSR-Eastern Europe:
Will Moscow Keep Up
how tough he is prepared to be in dealing with Eastern Europe.
Moscow has moved forcefully during the 1980s to increase the benefits
from its economic relationship with Eastern Europe. The East Europeans
have responded to rising prices of Soviet exports and Moscow's demands by
delivering substantially more in return for roughly the same level of Soviet
exports. The Soviets expect Eastern Europe during the period 1986-90 to
provide still more and better quality goods that are important in
Gorbachev's modernization plans for the Soviet economy. Improved East
European terms of trade as a result of falling Soviet oil prices, however,
will give the region better grounds for resisting some of Moscow's 25X1
demands. Gorbachev's approach to the trade dilemma is likely to reveal
during the last half of the 1970s.
Surging oil prices in the 1970s provided Moscow with a lever to squeeze a
substantial-and generally increasing- net flow of resources from Eastern
Europe. Moscow changed the pricing mechanism of the Council for
Mutual Economic Assistance in order to capture these windfall gains but
did not press its full advantage because:
? The Soviets permitted Eastern Europe to run substantial trade deficits to
cushion the impact of the rising prices and continued to accept shoddy
East European goods in payment.
? While Soviet oil prices rose sharply, they still lagged considerably behind
prices on world markets-an implicit subsidy from the USSR to Eastern
Europe.
Even with these concessions, Eastern Europe had to export a growing
volume of goods to the USSR while growth of Soviet deliveries slowed
the burden than beleaguered Poland.
Despite the generally favorable trade trends, the Soviets expressed growing
irritation over economic relations with Eastern Europe in the early 1980s.
Slower Soviet economic growth made Moscow less willing to tolerate
Eastern Europe's persistent trade deficits and failure to meet export
commitments, especially higher standards for quality. Eastern Europe
responded by accelerating still further the growth of its exports. In pressing
its demands, Moscow took little account of Eastern Europe's hard currency
debt problems and did not fill the gap caused by the abrupt reduction in
Eastern Europe's imports from the West. The degree of pressure varied,
however, with stronger countries such as East Germany bearing more of
Secret
EUR 86-1004/
November 1986
Declassified in Part -Sanitized Copy Approved for Release 2011/12/29 :CIA-RDP89T00295R000300380002-5
 Declassified in Part -Sanitized Copy Approved for Release 2011/12/29 :CIA-RDP89T00295R000300380002-5
Secret
Trade protocols for 1986-90 indicate that Moscow probably is pushing
most countries to repay their debts to the USSR by having them run
nominal trade surpluses. Moscow also is emphasizing quality in order to
halt the East European practice of shipping topline products to the West
and shoddy goods to the USSR. Even so, the protocols indicate some easing
of Soviet economic pressure. Moscow agreed to maintain oil deliveries, and
the low rate of trade growth implies a more moderate expansion of East
European exports.
We believe the recent fall in world oil prices will soon reverse the creditor-
debtor roles in the Soviet-East European economic relationship and
complicate Gorbachev's efforts to extract more resources from his allies
because:
? Lower energy prices will result in large Soviet deficits after 1986,
enabling Eastern Europe to repay quickly its estimated 16-billion-ruble
trade debt to the USSR.
? If adjustments to current trade plans are not made, the Soviets could be
some 20 to 30 billion rubles in debt to their allies by 1990.
The East Europeans may balk at providing the level of resources called for
under the current protocols as the fall in oil prices gives them economic
grounds to resist Soviet demands.
Moscow will have to decide whether the value of East European inputs is
worth the trade disputes with Eastern Europe that are likely. Some
responses could include:
? The Soviets could adhere to their economic plans for Eastern Europe by
running up large debts or by changing the CEMA price structure to
avoid indebtedness. East European leaders, however, are sure to resist
granting large trade credits to Moscow or negotiating away favorable
price developments.
? Moscow may try to narrow its trade gap by increasing exports to the re-
gion-primarily of manufactured goods and some raw materials-above
previously planned levels. Gorbachev's already heavy demands on Soviet
industry, however, will make it difficult for the USSR to generate
enough exports to erase the deficits.
Declassified in Part -Sanitized Copy Approved for Release 2011/12/29 :CIA-RDP89T00295R000300380002-5
 Declassified in Part -Sanitized Copy Approved for Release 2011/12/29 :CIA-RDP89T00295R000300380002-5
? Moscow could also consider accepting slower growth in imports from
Eastern Europe, although this would be its least preferred option, given
the important role of East European inputs.
Moscow would like to pursue a course that leaves planned trade flows
intact and maximizes Eastern Europe's contributions to meeting Soviet
economic goals. The Soviets, however, may have to resort to a combination
of options entailing both pressure and concessions. Moscow's ultimate
decision will depend on how well the Soviet economy responds to
Gorbachev's initiatives and on the economic performance and political
stability of East European countries.
Western policymakers probably can do little to affect Soviet and East
European responses to impending trade conflicts. Nonetheless, changes in
Soviet-East European trade relations that will result from these choices
may provide the West with opportunities to influence East European
regimes. An unyielding Soviet stance would be deeply resented by the East
Europeans, who would view it as economic exploitation. On the other hand,
an easing of Soviet requirements would provide additional resources that
some regimes might use to expand trade with the West. In either case,
some countries such as East Germany and Hungary could become more
willing to meet Western conditions for lowering trade barriers. To
strengthen ties to the West, however, would require tough political
decisions by the East European regimes-particularly in the case of
continued Soviet economic pressure.
Declassified in Part -Sanitized Copy Approved for Release 2011/12/29 :CIA-RDP89T00295R000300380002-5
 Declassified in Part -Sanitized Copy Approved for Release 2011/12/29 :CIA-RDP89T00295R000300380002-5
Table A-1
Soviet-East European Quantity Indexes
Official Soviet Index for Trade With
CEMA e
Hungarian Price-Deflated Index
(including residual) n
Hungarian Price-Deflated Index
(excluding residual) n
Eastern Europe
Eastern Europe
Eastern Europe
Imports
Exports
Terms of
Trade
Imports
Exports
Terms of
Trade
Imports
Exports
Terms of
Trade
1977
100
100
100
100
100
100
100
100
100
1978
105
116
91
102
115
89
100
117
85
1979
108
114
95
105
116
91
102
118
86
1980
112
115
97
107
117
92
106
116
91
1981
112
117
96
106
119
89
103
116
88
1982
107
134
80
104
131
79
101
129
78
1983
107
141
76
103
139
74
98
140
70
1984
111
150
74
108
148
72
103
151
68
a Source: Soviet foreign trade statistics; based on constant 1975
prices.
b CIA estimates based on Soviet foreign trade statistics and Hun-
garian price data taken from Hungarian statistical monthlies; based
on constant 1977 prices.
Hungarian price-deflated series for several other rea-
sons. The clearest difference is that Soviet indexes
include trade with Vietnam, Mongolia, and Cuba-
comprising 15 percent of Soviet exports and 11 per-
cent of imports in CEMA trade. Soviet indexes are
based on constant 1975 prices, whereas our estimates
use 1970 and 1977 prices as the base. Another reason
is that the Soviet quantity indexes are Laspeyres
indexes-implying that they are constructed from
Paasche price indexes-whereas the Hungarian data
are based on Fisher price indexes.
Declassified in Part -Sanitized Copy Approved for Release 2011/12/29 :CIA-RDP89T00295R000300380002-5 _
 Declassified in Part -Sanitized Copy Approved for Release 2011/12/29 :CIA-RDP89T00295R000300380002-5
Contents
Key Judgments
Temporary Breathing Room 1
Eastern Europe Maintains Trade With the West 10
The Pendulum Swings Back 15
Adjustment Options 19
Increase in Soviet Exports 19
Slower Growth in Imports From Eastern Europe 20
Moscow Weighs the Alternatives 21
Implications 22
1. Europe: Patterns of Trade Adjustment
1. Price Trends in Soviet-East European Trade, 1970-84
2. Soviet-East European Trade, 1970-84
Declassified in Part -Sanitized Copy Approved for Release 2011/12/29 :CIA-RDP89T00295R000300380002-5
 Declassified in Part -Sanitized Copy Approved for Release 2011/12/29 :CIA-RDP89T00295R000300380002-5
5.
Eastern Europe: Net Exports to the USSR, 1'970-84
8
6.
USSR-Eastern Europe: Commodity Composition of Trade, 1984
8
7.
East European Exports to Nonsocialist Countries, 1970-84
11
8.
East European Imports From Nonsocialist Countries, 1970-84
12
9.
Comparison of East European Commodity Trade With the USSR
and the West
13
10.
Soviet-East European Trade Under Different Oil Prices, 1986-90
17
Appendixes
A. CEMA Price and Quantity Indexes
B. Trends in Commodity Composition of Real Trade
Declassified in Part -Sanitized Copy Approved for Release 2011/12/29 :CIA-RDP89T00295R000300380002-5
 Declassified in Part -Sanitized Copy Approved for Release 2011/12/29 :CIA-RDP89T00295R000300380002-5
Secret
USSR-Eastern Europe:
Will Moscow Kee U
Trade Pressures?
Dramatic swings in world prices for energy and raw
materials have buffeted Soviet-East European' trade
during the past decade. Moscow's trade position was
strengthened greatly by the runup in world energy
prices during the 1970s. Although the USSR made
some concessions to help Eastern Europe adjust, it
took advantage of its windfall gains to step up the net
flow of goods from the region. The recent dramatic
drop in world oil prices, however, threatens to turn the
tables on Moscow in the coming years and put
Eastern Europe in a stronger position to resist Soviet
demands for more exports.
This assessment reviews the USSR's past success in
extracting a growing flow of resources from Eastern
Europe and examines the outlook for economic rela-
tions in light of declining energy prices. The analysis
focuses on the dilemma posed to the Soviet leadership
by the weakening of its oil "lever" on Eastern Europe.
The analysis is based on data both in nominal (current
price) and in real (constant price) terms in order to
reveal the influence of price movements on the physi-
cal quantities of goods traded.2
The quadrupling of world oil prices in 1973 provided
the lever for Moscow to extract more goods from
Eastern Europe. Following the Organization of Petro-
leum Exporting Countries (OPEC) price shock, the
Soviets modified the CEMA pricing mechanism in
order to benefit from the rising oil prices. The new
' In this paper Eastern Europe refers to the six East European
members of the Council for Mutual Economic Assistance (CEMA):
Romania. "West" refers to all nonsocialist countries.
USSR and nonsocialist countries were derived by using Hungarian
price series to deflate nominal trade figures reported by the Soviets
and East Europeans. See appendix A for methodological details.
mechanism, using average world oil prices in previous
years as a base, resulted in CEMA prices still lagging
considerably behind world prices. But the price of
Soviet oil sold to Eastern Europe nearly doubled in
1975 and more than doubled again between 1975 and
1980. Eastern Europe's oil bill in 1980 was four times
more than in 1974, although the quantity of deliveries
had increased by only a third.
The rise in Soviet oil prices reversed the slightly
favorable trend in terms of trade-the ratio of the
change in export prices to the change in import
prices-that Eastern Europe had enjoyed with the
Soviet Union throughout the 1960s. Beginning in the
mid-1970s, prices of Soviet fuel and energy-the bulk
of Soviet exports-rose much faster than did the
prices of Eastern Europe's exports of manufactured
goods and agricultural products. Eastern Europe's
terms of trade declined almost 30 percent between
1973 and 1980, according to Hungarian statistics, and
fell nearly 20 percent more from 1980 to 1983. This
sharp decline, in effect, gave the USSR a claim to
about 40 percent more of Eastern Europe's output in
return for the same amount of Soviet goods.
Temporary Breathing Room
Probably in recognition that the East European econ-
omies could not adjust immediately to the higher
prices, the Soviets refrained for a time from pressing
their full advantage. The most visible concession was
allowing large East European trade deficits-a depar-
ture from CEMA's longstanding principle of balanced
trade.' The region's nominal deficit rose from 105
million rubles in 1974 to a peak of 3.2 billion rubles in
1981 and resulted in Eastern Europe's accumulating a
substantial debt to the USSR.? Romania, the only
' According to Soviet trade data, from 1960 to 1974 Eastern Europe
had a cumulative surplus with the USSR of only 286 million rubles.
' In this paper "ruble" refers to the "transferable ruble," which the
USSR uses in measuring foreign trade flows. The transferable
ruble is distinct from the Soviet domestic ruble. In 1985 the
transferable ruble-dollar exchange rate was 0.8389.
25X1
25X1
Declassified in Part -Sanitized Copy Approved for Release 2011/12/29 :CIA-RDP89T00295R000300380002-5
 Declassified in Part -Sanitized Copy Approved for Release 2011/12/29 :CIA-RDP89T00295R000300380002-5
Secret
Table B-1
East European Oil Trade a
Milli
on metric tons
1980
1981
1982
1983
1984
1985
Imports From the USSR
Total
79.8
80.1
71.8
69.8
71.5
70.6
Bulgaria
14.7
14.7
13.4
13.4
13.4
12.0
Czechoslovakia
19.2
18.9
17.1
17.1
16.9
16.9
East Germany
19.0
19.0
17.7
17.1
17.1
17.1
Hungary
9.3
8.8
8.1
7.1
7.8
7.6
Poland
16. I
16.0
15.1
14.9
15.2
15.0
Romania
1.5
2.7
0.4
0.2
1.1
2.0
Imports from other sources
Total
22.6
16.2
18.9
24.6
25.8
27.7
Bulgaria
0.7
1.0
1.7
2.0
2.3
3.4
Czechoslovakia
0.5
0.5
0.6
0.6
0.8
0.9
East Germany
2.9
3.7
4.0
5.6
6.2
6.8
Hungary
0.8
0.5
1.9
2.7
2.2
2.1
Poland
4.3
1.3
1.1
2.4
1.7
1.1
Romania
14.5
10.2
10.6
11.3
12.6
13.4
East European oil exports
Total
20.6
19.5
18.9
25.4
26.4
24.4
Bulgaria
3.8
3.9
3.6
3.6
2.8
2.1
Czechoslovakia
1.7
1.2
1.4
1.6
1.7
1.6
East Germany
3.0
4.1
4.3
5.8
6.7
7.7
Hungary
1.7
1.4
2.5
3.9
3.9
2.0
Poland
1.6
0.8
0.6
1.4
0.4
0.6
Romania
8.8
8.1
6.5
9.1
10.9
10.4
stock declined. Poland's imports expanded by 20
percent in 1984, but they were still only a little
more than half of the 1980 figure.
? East Germany's machinery imports, after declining
by 15 percent during 1979-82, plummeted by almost
20 percent in 1983 with cuts in purchases of ma-
chinery for chemical and light industries and trans-
portation equipment. Imports rose nearly 13 percent
in 1984 with increased purchases of power and
electrical equipment, road-building equipment, trac-
tors, and passenger cars.
? Hungary and Romania increased imports in 1982
following earlier declines but registered sharp down-
turns in 1983 and 1984. Hungary received fewer
imports of mining equipment, oil drilling equipment,
hoisting machinery, tractors, and shipping and air-
line equipment. Romania cut purchases of mining
equipment, hoisting machines, light industrial
equipment, agricultural machinery, and shipping
equipment.
? Bulgaria and Czechoslovakia boosted imports over
1982-84 following declines during 1979-81.
Declassified in Part -Sanitized Copy Approved for Release 2011/12/29 :CIA-RDP89T00295R000300380002-5 __
 Declassified in Part -Sanitized Copy Approved for Release 2011/12/29 :CIA-RDP89T00295R000300380002-5
Secret
Figure 1
Price Trends in Soviet-East European
Trade, 1970-84
0 1970 75 80 84
Soviet export
prices
East European
export prices
East European
terms of trade
officials maintained that the cost of extracting 1
metric ton of oil tripled over the past 10 years as
resource development shifted into less accessible east-
ern regions of the USSR. Moscow's growing reluc-
tance to supply oil to Eastern Europe at a discount
may also have been nourished by the longstanding
realization that many of these countries enjoy higher
standards of living than the USSR. The Soviets
complained more about Eastern Europe's failure to
meet export commitments and about the quality of
East European deliveries.
In the early 1980s the Soviets moved forcefully to
redress their grievances. Despite earlier assurances
that deliveries would be maintained at the 19801eve1
during 1981-85, in 1982 Moscow abruptly cut oil
deliveries by 10 percent to Czechoslovakia, East
Germany, Hungary, and possibly Bulgaria in order to
increase hard currency sales. At the CEMA Council
Figure 2
Soviet-East European Trade,
1970-84
/f-Soviet exports
30 n Soviet imports
Soviet oil
exports
meeting in October 1983, then Soviet Premier
Tikhonov announced a tougher Soviet policy in trade
with Eastern Europe including the following points:
? Moscow would no longer tolerate large East Euro-
pean trade deficits.
? Eastern Europe would have to export better quality
machinery, food, and consumer goods to the Soviets
in order to continue receiving energy and raw
materials.
? Eastern Europe would have to shoulder the costs of
Soviet energy and raw material production by in-
vesting in resource development projects in the
Soviet Union.
The Soviets repeated these conditions in June 1984
when East European party leaders met in Moscow for
the first CEMA economic summit in 15 years.
Declassified in Part -Sanitized Copy Approved for Release 2011/12/29 :CIA-RDP89T00295R000300380002-5
 Declassified in Part -Sanitized Copy Approved for Release 2011/12/29 :CIA-RDP89T00295R000300380002-5
Secret
Eastern Europe's Ruble Debt
Information on Eastern Europe's debt to the Soviet
Union is tightly held by most East European coun-
tries, making the magnitude and, thereby, the burden
tz1'the debt di,~cult to determine. One method of
estimating the debt is to sum the bilateral trade
deficits between the USSR and Eastern Europe.
Because of the nonconvertibility of CEMA currencies,
deficits in bilateral trade usually must be made up by
the deficit country running future surpluses. Up until
1974, when rising energy costs began to inflate the
value of Soviet exports, intra-CEMA trade was gen-
erally balanced. However, with most East European
countries running annual deficits since the mid-
1970s, the Soviets have had to extend long-term
trade credits in order to cover the gaps. Between 1974
and 1985, trade deficits totalled 15.8 billion rubles.
Merely adding trade deficits in order to estimate
Eastern Europe s debt, however, overlooks service
transactions that c~ect the balance of payments. We
have several indications that the East Europeans run
sign4ficant surpluses on these invisible items that
partially o,,~`set the trade deficits and reduce the debt
to the USSR accordingly. They include thefollowing.?
? The Czechoslovak press reports that the Soviets
ship up to 3 billion cubic meters of gas a year to
Czechoslovakia, worth 350 million rubles at
CEMA prices, as transit fees for conveying Soviet
gas to Western Europe. These gas deliveries do not
require gt9`setting Czechoslovak exports and, when
reported in the trade account, cause the Czechoslo-
vak deficit to appear larger than it is.
In response, Eastern Europe has undertaken a sub-
stantial adjustment of its trade with the USSR. The
region cut its trade deficit with the Soviets from 3.2
billion rubles in 1981 to 1.1 billion rubles in 1985. All
countries except Poland reduced their trade deficits
sharply or moved into surplus
According to press reports, the Polish
debt to the USSR at the end of 1984 stood at 3.5
billion rubles, well below the 5.2 billion rubles the
Poles accumulated in trade deficits with the USSR
between 1974 and 1984.
? The 740-million-ruble deficit in nonconvertible cur-
rency trade that Hungary ran in 1983 fell to 428
million rubles after service payments were included,
according to o.,B~icial Hungarian statistics.
The pattern of nontrade surpluses by the East Euro-
peans suggests that the debt to the USSR is consider-
ably less than the 16 billion rubles of accumulated
trade deftcits. While the trade deficits may overstate
its magnitude, Eastern Europe's debt to the Soviets is
probably at least 10 billion rubles.
The following is a tabulation of Eastern Europe's
accumulated deficits (in millions of rubles) in trade
with the Soviets for the period 1974-85: a
Tota!
15,760.3
Bulgaria
3,583.3
Czechoslovakia
2,541.4
East Germany
3,931.6
Hungary
318.7
Poland
6,/62.4
Romania n
-777.1
e Source: Soviet Trade Statistics.
b Romania ran a trade surplus with the USSR over this period.
Continuing price increases for Soviet oil forced the
East Europeans to export more to close the gap.
Although OPEC oil prices peaked in 1981, CEMA
prices-locked in by the pricing mechanism-have
25X1
_ Declassified in Part -Sanitized Copy Approved for Release 2011/12/29 :CIA-RDP89T00295R000300380002-5
 Declassified in Part -Sanitized Copy Approved for Release 2011/12/29 :CIA-RDP89T00295R000300380002-5
Figure 3
East European Imports From the USSR, 1970-84
Billion rubles
Note scale change
l0
0 1970 75
East Germany F
8 8
6 ~ 6
I
4 4
i
2
2
0 1970 75 80 84 0
Nominal
0 Reala
aReal imports in 1970 rubles.
309780 "~~ 25X1
5 Secret
Declassified in Part -Sanitized Copy Approved for Release 2011/12/29 :CIA-RDP89T00295R000300380002-5 __
 Declassified in Part -Sanitized Copy Approved for Release 2011/12/29 :CIA-RDP89T00295R000300380002-5
Secret
increase and now are far above world levels.?
volume of exports during 1982-84. Machinery and
equipment deliveries accounted for 70 percent of the
region's gains in exports to the USSR. All East
European countries stepped up machinery deliveries,
and virtually every machinery category showed rapid
Real Trade: Eastern Europe Gives More
Our estimates of real trade-the physical volume of
exchanges derived by removing price effects from
trade data reported in nominal terms-show that the
East Europeans made substantial trade adjustments
even before the Soviet pressure in the early 1980s to
balance trade. The estimates of real-trade flows indi-
cate that the adjustment in trade started almost
immediately after Soviet oil prices jumped as Eastern
Europe shipped a steadily increasingly flow of goods
to the USSR. Net real exports from Eastern Europe
mounted rapidly after 1974, totaling 11 billion rubles
in 1970 prices during 1976 to 80 and nearly 20 billion
rubles between 1981 and 85.6 If the Soviets had not
allowed Eastern Europe to run nominal trade deficits
during these years, the flow of real goods to the
USSR would have been even higher.
The volume of Eastern Europe's exports to the USSR
increased by 9 percent annually during the early
1970s but slowed down in 1979-81 as a result of
economic difficulties~eclining economic growth,
worsening hard currency financial problems, and eco-
nomic dislocations arising from political turmoil in
Poland. We believe Eastern Europe's lackluster ex-
port performance during these years was an important
factor leading to Moscow's economic crackdown on
the region. Eastern Europe sharply expanded the
'Official Polish price data indicate a price of 159 rubles per ton of
Soviet oil in 1984. At 1983 ruble-dollar exchange rates-the rate
probably used when 1984 CEMA prices were set-this price
equates to $27 per barrel, which was slightly above world prices.
Using the 1984 exchange rate yields a price of $26 per barrel, 7
percent below the OPEC price.
`The figures presented here are in constant 1970 rubles; pricing
trade in a later year would put a higher value on Soviet exports
relative to the value of East European exports. For example, using
1977 prices the volume of net East European exports during 1981-
84 increased by only 4 billion rubles. Using 1984 prices would show
a net resource outflow from the USSR to Eastern Europe over the
past 10 years, albeit a declining one. Because the sign of real trade
flows and their magnitude depend on the choice of a base year, net
real exports are not a definite indicator as to who received the most
in bilateral trade in a given year. Nonetheless, they show that over
time Eastern Europe has given relatively more for its imports from
growth.
In contrast, the growth rate of Soviet real exports
slowed over this period. Export volume grew nearly
6 percent in the first half of the 1970s and then fell to
a 2-percent growth in 1976-80. There has been virtu-
ally no increase in the 1980s. Moscow's unwillingness
to maintain oil deliveries and a sharp drop in Soviet
machinery exports accounted for much of the stagna-
tion. Increases in gas and electricity exports to the
region were offset by the reduction in oil deliveries
from 80 million to 72 million tons beginning in 1982.
Machinery and equipment exports plummeted by
more than 20 percent during 1981-83.'
Country Comparisons
Every East European country increased the net re-
source flow to the USSR over the past 10 years,
although some countries responded more than others
in adjusting to rising Soviet prices. The structure of
each country's trade with the USSR played the major
role in determining the size of the adjustment, but
Soviet trade policy-based on economic and political
factors-also had an impact. In particular, Moscow
tolerated Warsaw's failure to meet trade commit-
ments in the early 1980s when political and economic
upheavals threatened Poland's stability (see table 1).
The degree of adjustment-as measured by the share
of net real exports in total trade-has varied widely.
East Germany, Czechoslovakia, and Hungary have
borne the greatest burden with large resource out-
flows to the Soviets relative to total trade. During
1981-84 the volume of net exports in 1970 prices from
25X1
Declassified in Part -Sanitized Copy Approved for Release 2011/12/29 :CIA-RDP89T00295R000300380002-5 _
 Declassified in Part -Sanitized Copy Approved for Release 2011/12/29 :CIA-RDP89T00295R000300380002-5
Secret
Figure 4
East European Exports to the USSR, 1970-84
Billion rubles
Note scale change
1 I I I I I I I I I I I I I I ~ I I I I ~ I I I I I I I I I ~ I I I I I I I I
I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I ~ I I I I I I I I I I I I I I I I I I I I I I I I
0 1970 75 80 84 0 1970 75 80 84 0 1970 75 80 84 0 1970 75 80 84
Reala
aReal exports in 1970 rubles.
Declassified in Part -Sanitized Copy Approved for Release 2011/12/29 :CIA-RDP89T00295R000300380002-5
 Declassified in Part -Sanitized Copy Approved for Release 2011/12/29 :CIA-RDP89T00295R000300380002-5
Figure 5
Eastern Europe: Net Exports
to the USSR, 1970-84
Net Real Exports
Billion 1970 rubles
Ll_O_IJ_I__1
Net Nominal Exports: Trade Balances
Billion rubles
Figure 6
USSR-Eastern Europe: Commodity
Composition of Trade, 1984
Fuels
53.9
Machinery
54.9
terms of trade movements hit these countries hardest
and required correspondingly greater adjustments.g
these countries totaled 5.5 billion rubles, 4.9 billion
rubles, and 3.2 billion rubles, respectively. In all three
countries net exports accounted for roughly one-
fourth of the total volume of trade over the period. As
some of the largest importers of energy and raw
materials and the leading exporters of machinery,
? J. Vanous and M. Marrese, in Soviet Subsidization ojTrade with
Eastern Europe, conclude that East Germany and Czechoslovakia
received the largest implicit subsidies from Moscow during the
1970s because of the political and military benefits these countries
provide to the Soviets. In terms of opportunity costs-what the
Soviets sacrificed by providing underpriced oil for overpriced
machinery-East Germany and Czechoslovakia did receive the
greatest subsidies, but they were also hit hardest by the elimination
of these subsidies. We believe that these developments were more or
less automatic consequences of the structure of these countries'
trade with the USSR rather than conscious Soviet granting and
Residual
15.0
Residual
12.7
,25X1
Declassified in Part -Sanitized Copy Approved for Release 2011/12/29 :CIA-RDP89T00295R000300380002-5
 Declassified in Part -Sanitized Copy Approved for Release 2011/12/29 :CIA-RDP89T00295R000300380002-5
Secret
Table 1
Eastern Europe: Patterns of Trade Adjustment a
East European Exports East European Imports Net Exports to the Net Exports to the
to the USSR (average From the USSR (aver- USSR USSR as a Percent of
annual percentage age annual percentage (million rubles) Total Trade
change) change)
1971-75
11.2
7.6
13.3
4.0
36
770
0.25
5.79
1976-80
12.6
7.3
12.6
2.4
-576
3,067
-1.96
17.54
1981-84
14.2
8.0
15.9
3.4
-1,619
4,902
-3.84
28.48
East Germany
1971-75
11.2
7.6
11.4
3.2
277
1,258
1.32
6.59
1976-80
10.4
4.4
10.3
0.7
-2,151
2,245
-5.70
9.76
1981-84
14.2
8.1
11.3
-0.7
-1,331
5,540
-2.60
25.45
Hungary
1971-75
17.5
11.9
16.9
8.0
56
429
0.51
4.89
1976-80
11.3
6.3
12.5
2.6
-676
1,785
-2.91
12.98
1981-84
12.6
6.6
9.7
-0.2
96
3,246
0.31
24.84
Poland
1971-75
16.2
11.2
15.0
6.7
100
739
0.60
4.92
1976-80
8.4
3.2
12.5
3.4
-1,350
1,852
-3.98
9.07
1981-84
10.2
2.3
8.3
-3.7
-3,686
2,214
-9.58
14.23
Romania
1971-75
11.7
6.8
9.6
3.1
442
553
7.58
10.40
1976-80
11.8
7.1
14.0
4.5
167
768
1.58
11.27
1981- 84
5.1
- 0.8
7.6
-1.2
128
1,080
0.95
17.47
a Source: Soviet and East European trade statistics and CIA
estimates.
b Computed in constant 1970 prices.
Declassified in Part -Sanitized Copy Approved for Release 2011/12/29 :CIA-RDP89T00295R000300380002-5
 Declassified in Part -Sanitized Copy Approved for Release 2011/12/29 :CIA-RDP89T00295R000300380002-5
Secret
The volume of Romanian, Polish, and Bulgarian net
deliveries, on the other hand, accounted for only one-
sixth of each country's trade with the USSR. The
Soviets maintained deliveries of essential commodities
to Poland during 1979-81 to keep Poland's economy
afloat despite a steep drop in Warsaw's exports to the
USSR. Despite some highly publicized aid packages,
the volume of Poland's imports from the USSR fell
slightly in 1981 and dropped by one-fifth the follow-
ing two years. By 1982 Poland's volume of exports to
the USSR began to recover as the economic and
political situation began to stabilize. Although Poland
posted by far the smallest rate of growth in net real
exports of any East European country, it still man-
aged to boost these deliveries from 1.9 billion rubles in
1976-80 to 2.2 billion rubles in 1981-84
most o t e
credits from Moscow were used to cover higher prices
rather than to pay for extra goods.
Although Sofia's trade structure with the USSR is
much like that of East Germany, Czechoslovakia, and
Hungary, the burden of adjustment in terms of net
exports-2.9 billion rubles in 1981-84-has been
significantly less. Moscow
was sharply critical of Sofia's export performance and
of reexports of Soviet oil for hard currency in recent
years, but trade in nominal and real terms did not
reflect adjustments as sharp as in other countries.
Indeed, Bulgaria received an increase in the volume of
imports from the USSR in the early 1980s. Whether
this reflects Soviet favoritism toward a close ally is
not clear.
Our figures show that Romania's trade position with
the Soviets deteriorated less than that of most other
countries. Bucharest was largely sheltered from the
fall in Eastern Europe's terms of trade because it
received little oil from the USSR rather than as a
result of Soviet concessions.
Eastern Europe Maintains Trade With the West
Adjustment to higher oil prices and Soviet trade
demands coincided with Eastern Europe's hard cur-
rency debt crisis of the early 1980s. Imports from the
West plummeted as the East Europeans imposed
austerity measures to boost hard currency surpluses to
service their debts. Worried about the risk of political
instability, most countries tried to maintain living
standards by letting the brunt of the import cuts fall
on investment rather than consumption. Soviet de-
mands for more of Eastern Europe's resources clashed
with the East Europeans' efforts to devote more funds
to modernize their domestic industries, provide more
consumer goods to domestic consumers, and export
more to the West to service hard currency debts. The
transfer of resources to both the West and the USSR
during the early 1980s slowed increases in national
income used domestically in Eastern Europe, resulting
in reduced investments and slower growth in con-
sumption, according to a study by Czechoslovak
economists.
Stripping price movements from trade data to obtain
real trade flows shows the following trends at work
that forced Eastern Europe to make similar adjust-
ments with both the West and the USSR during the
early 1980s:
? Terms of trade moved against Eastern Europe in
trade with the West as well as with the Soviets.
With the USSR, East European import prices rose
faster than prices received for exports, while export
prices of nonsocialist countries fell faster than im-
port prices.9
? The volume of Eastern Europe's imports from both
the USSR and the West fell, albeit more sharply
from the West. Real imports from the West, stag-
nant from 1977 to 1980, fell sharply in 1981-82
before rising in 1983-84. Poland and Romania
recorded the largest declines.
'The fall in prices in trade with the West resulted in part from the
strengthening of the dollar against West European currencies
through 1984. Dollar-denominated measurements of Eastern
Europe's trade with the West show lower values than trade
25X1
25X1
25X1
25X1
25X1
Declassified in Part -Sanitized Copy Approved for Release 2011/12/29 :CIA-RDP89T00295R000300380002-5
 Declassified in Part -Sanitized Copy Approved for Release 2011/12/29 :CIA-RDP89T00295R000300380002-5
Figure 7
East European Exports to Nonsocialist Countries, 1970-84
Billion US S
Nole scale change
Nominal
Declassified in Part -Sanitized Copy Approved for Release 2011/12/29 :CIA-RDP89T00295R000300380002-5
 Declassified in Part -Sanitized Copy Approved for Release 2011/12/29 :CIA-RDP89T00295R000300380002-5
Secret
Figure 8
East European Imports From Nonsocialist Countries, 1970-84
Billion US S
Note scale change
1970 75 80 84 0 1970 75 80 84 0 1970 75 80 84 0 1970 75 80 84
Q Nominal
- Reala
25X1
Declassified in Part -Sanitized Copy Approved for Release 2011/12/29 :CIA-RDP89T00295R000300380002-5 _
 - Declassified in Part - Sanitized Copy Approved for Release 2011/12/29: CIA-RDP89T00295R000300380002-5
Figure 9
Comparison of East European Commodity Trade
With the USSR and the West
Machinery and
Intermediate
Food and
Equipment
Goods
Agricultural Products
1970
1975
1980
1981
1982
1983
1984
Machinery and
Equipment
1970
1975
1980
1981
1982
1983
1984
~ USSR (Billion /970 rubles]
- Nonsocialist (Billion 1970 US
Intermediate
Goods
Food and
Agricultural Products
Declassified in Part - Sanitized Copy Approved for Release 2011/12/29: CIA-RDP89T00295R000300380002-5
 Declassified in Part -Sanitized Copy Approved for Release 2011/12/29 :CIA-RDP89T00295R000300380002-5
? Eastern Europe, excluding Poland and Romania,
boosted exports at high rates in the early 1980s to
the West and to the USSR, largely on the strength
of gains in sales of machinery. The region's real
exports to the West rose an average of 7 percent per
year during the 1980s.
In the early 1980s it was widely believed that Eastern
Europe would reorient trade away from the West and
toward the USSR. After martial law was declared in
Poland, the regime announced Warsaw's plan to shift
its economic relations toward Moscow. Many in East-
ern Europe and the West expected that Eastern
Europe's financial crisis of the early 1980s would lead
to similar policies throughout the region as the coun-
tries sought to increase imports from the USSR and
to avoid hard currency outlays in trade with the West.
The similarity in Eastern Europe's trade trends with
the USSR and the West shows that for the region as a
whole a major shift in real trade did not occur. The
USSR did not provide the resources to help the East
Europeans reorient their economies. Moscow's tough
economic policy toward its allies for the most part
prevailed over any inclination to supply substitutes for
Table 2
Eastern Europe's Real Trade
With the West a
East European imports
Total
8.8
1.5
- 2.5
Bulgaria
8.4
2.4
10.5
Czechoslovakia
1.7
2.2
-1.7
East Germany
2.1
4.7
6.7
Hungary
2.1
4.4
0.5
Poland
23.3
-3.6
11.2
Romania
6.1
6.9
-13.7
East European exports
Total
7.0
5.9
6.7
Bulgaria
4.8
11.6
11.4
Czechoslovakia
3.6
4.1
4.0
East Germany
4.1
4.4
19.0
Hungary
4.3
7.5
5.7
Poland
9.5
5.1
-1.1
Romania
14.0
6.6
2.9
Western goods.
Nonetheless, several countries' trade clearly shifted
toward the USSR (see table 2) as:
? The volume of Czechoslovakia's trade with the
USSR increased almost 6 percent per year, com-
pared with 2 percent annually for nonsocialist coun-
tries during the past decade.
? The share of imports coming from the USSR rose
sharply in the early 1980s for Poland and Romania,
reflecting the steep drop in imports from the West
relative to declines in imports from the Soviets.
extremely cautious in trade with the West, refusing to
borrow to import badly needed Western goods. The
shift in real trade, nonetheless, has been slight in
comparison with the burgeoning share of the USSR in
Czechoslovakia's nominal trade.
For Poland and Romania the rising Soviet share of
real imports resulted more from their drives to reduce
hard currency outlays than from the forging of new
trade links. Rather than filling the gap resulting from
the cutback in Western imports, imports from the
Soviet Union also declined. These countries became
increasingly dependent on Soviet supplies only in the
sense that Moscow provided a larger piece of a
We believe that Czechoslovakia alone of these three
countries reoriented trade toward the USSR as a
deliberate policy. Czechoslovak leaders follow
Moscow's lead closely and have been the most vocal
among East Europeans in calling for closer CEMA
trade ties and integration. Prague has also been
shrinking pie.
25X1
25X1
? 25X1
25X1
Declassified in Part -Sanitized Copy Approved for Release 2011/12/29 :CIA-RDP89T00295R000300380002-5
 Declassified in Part -Sanitized Copy Approved for Release 2011/12/29 :CIA-RDP89T00295R000300380002-5
Secret
The rest of Eastern Europe maintained strong trade
ties to the West in the 1980s as:
? East Germany's 10 and Bulgaria's trade with the
West grew faster than their trade with the USSR.
Both exports and imports increased rapidly.
? Hungary's trade with the Soviets and the West grew
at a similar pace.
Despite the different shifts in trade shares for individ-
ual countries, the Soviets still dominate the region's
trade. Eastern Europe remains heavily dependent on
Soviet deliveries, but the degree of dependency-as
represented by the volume of trade~id not increase
greatly.
The Pendulum Swings Back
Moscow faces tough choices over the next few years in
its trade relations with Eastern Europe. The Soviets
want Eastern Europe to provide more goods to help
revitalize and modernize the Soviet economy. The
need for inputs from Eastern Europe has become even
more important as falling world oil prices have
slashed Soviet hard currency earnings, restricting
Moscow's ability to import from the West. We expect
lower world oil prices, however, to lead to a substan-
tial shift in trade relationships between the USSR and
Eastern Europe that will complicate Moscow's plans.
Whereas the rapid price hikes of the 1970s increased
the value of Soviet exports and strengthened Mos-
cow's leverage by creating substantial economic
claims on the region, the recent fall in oil prices will
reduce the value of Soviet energy exports. To get what
it wants from Eastern Europe, Moscow will have to
lean harder on the East Europeans-even harder than
10 Official East German statistics during the 1980s vary considera-
bly from the "mirror" figures reported by East Germany's nonso-
cialist trading partners. Exports appear to be overvalued and
imports undervalued. The data used in this paper are based on
estimates prepared by Wharton Econometric Forecasting Asso-
ciates that attempt to correct some of these problems in the official
data. While these estimates still yield extraordinarily high rates of
growth for the volume of East German exports to the West, we note
that these growth rates cut even by half still support the conclusion
of faster trade growth with the West than the USSR during the
during the early 1980s and harder than seemed
necessary last year when trade agreements were
completed for 1986-90.
1986-90 Trade Plans
Protocols signed between Moscow and its East Euro-
pean allies in the final months of 1985 outline the 25X1
framework for trade through 1990. Expectations by
the Soviets and East Europeans that trade prices
would rise more slowly had a marked impact on
formulation of these trade plans. Even before the
latest fall in OPEC prices, the CEMA pricing mecha-
nism indicated~n the basis of slipping OPEC prices
during the early 1980s-that the steep rise in Soviet 25X1
oil prices during the past decade would give way to
relative price stability. These price projections result-
ed in:
? Planned average annual growth of only 5 percent in
the value of total Soviet-East European trade dur-
ing 1986-90-the slowest growth in planned trade
in the past 15 years."
? Improved terms of trade for Eastern Europe as price
increases for Soviet deliveries would no longer out-
pace those for East European goods.
The protocols generally omit figures on the key
question of how total trade will be divided between
Soviet exports to and imports from Eastern Europe,
but these factors suggest that the agreements called
on Eastern Europe to run nominal trade surpluses:
? Eastern Europe's trade in 1985 was roughly in
balance (except for Poland).
? The Soviet leadership clearly feels that its allies
should repay the trade debt accumulated in the past
10 years. According to the Hungarian press, a
major task in Hungary's trade during 1986-90 will
be the repayment of ruble deficits accumulated over
the past 10 years.
"Trade protocols do not indicate if turnover targets are in nominal
or real terms. Evidence suggests, however, that these are nominal
growth targets. For example, the Hungarian press indicates that the
volume of Hungary's trade with the USSR during 1986-90 will rise
by 15 percent compared with 1981-85-with exports and imports
Declassified in Part -Sanitized Copy Approved for Release 2011/12/29 :CIA-RDP89T00295R000300380002-5
 Declassified in Part -Sanitized Copy Approved for Release 2011/12/29 :CIA-RDP89T00295R000300380002-5
Secret
? The protocol for Poland-the country with the
largest debts and in the weakest position to meet
Moscow's demands-malls for Warsaw to balance
trade over the next five-year period by running
surpluses in the last two years of the plan.
Within the turnover target given in the protocols of
380 billion rubles for 1986-90, Eastern Europe con-
ceivably could run surpluses large enough to repay the
entire 16 billion rubles in trade debt by increasing
exports in nominal terms by 7 percent annually and
holding nominal import growth to 4 percent.
We believe that in real terms the protocols also
provided for more balanced trade growth than during
the ast 10 years.
Other East European countries probably bene-
fited likewise from such terms of trade gains under
the protocols.
Moscow may have accepted slower and more bal-
anced growth in real trade so that the region could
meet other Soviet economic requirements. We strong-
ly believe that the Soviets are much more serious
about seeking' improvements in the quality of the
goods imported from Eastern Europe. Trade plans for
Czechoslovakia for 1986-90, for example, include a
list of 110 categories of machinery and equipment
exported to the USSR that are to achieve a "higher
technological standard." Hungary's trade plans with
the USSR also include an agreement that almost one-
third of Hungarian exports will be replaced by more
updated products over the next five years.
Moscow is also pressing for increased cooperation and
integration among CEMA members. In December
1985 a CEMA program for cooperation in science
and technology was signed that called for increased
cooperation in electronics, automation, nuclear power,
and new materials. To implement the program, Mos-
cow is pushing hard for the establishment of joint
production associations that will develop and produce
a variety of products, mostly in high-technology fields.
All of these areas of cooperation stressed by Moscow
are closely linked to Gorbachev's goals for his indus-
trial modernization program and would more closely
tie the East European economies to the needs of the
USSR. Even though Eastern Europe's exports were to
grow more slowly under the protocols than in previous
years, Moscow's drive for quality and integration
could be tailored to provide the USSR with more of
the East European goods important in Soviet modern-
ization plans.
Oil Shock in Reverse
Just a few months after the CEMA countries conclud-
ed their trade agreements, the price of oil on Western
markets began to plunge. Although Soviet hard cur-
rency imports already are being slashed, the collapse
of world oil prices has had little impact until now on
Soviet-East European trade; the East Europeans pay
the equivalent of about $30 per barrel of oil at ofTicial
exchange rates, and the CEMA price formula will not
incorporate the price drop for 1986 until 1987.
Beginning in 1987, however, lower oil prices should
accelerate gains for Eastern Europe in terms of trade
with the USSR compared with price projections
probably used by planners in formulating 1986-90
trade plans. World oil prices in 1986 of $15 per barrel
would cause Soviet oil prices to Eastern Europe to fall
by 13 percent in 1987. If OPEC prices hold at $15 per
barrel through 1990, CEMA oil prices will fall steadi-
ly to about $18 per barrel by 1990. CEMA oil prices
should fall even if OPEC prices move somewhat
higher.'Z
Cheaper oil will sharply cut the value of the USSR's
exports to Eastern Europe. We estimate that lower
energy prices may reduce the value of Soviet exports
by more than 22 billion rubles over the next five
years-most of it during 1988-90. The value of energy
exports in 1990 alone would be 8 billion rubles lower
than in 1985. Our estimates assume that:
? OPEC prices average $15 per barrel each year
through 1990.
1z Average OPEC prices of $20 per barrel in 1986-90 would cause
CEMA prices to fall to $22 per barrel by the end of the 1980s. Even
if OPEC prices rose by $5 each year to reach $35 per barrel by
1990, CEMA prices would still fall by nearly 20 percent from the
Declassified in Part -Sanitized Copy Approved for Release 2011/12/29 :CIA-RDP89T00295R000300380002-5
 Declassified in Part -Sanitized Copy Approved for Release 2011/12/29 :CIA-RDP89T00295R000300380002-5
Secret
Figure 10
Soviet-East European Trade Under Different Oil Prices, 1985-90
$10 per barrel OPEC oil 1986-90
$ l 5 per barrel OPEC oil 1986-90
$20 per barrel OPEC oil 1986-90
Soviet Energy Exports to
Eastern Europe a
Billion rubles
Total Soviet Exports to
Eastern Europe n
Billion rubles
5 5
0 1985 86 87 88 89 90 0 1985 86 87 88 89 90 0 1985 86 87 88 89 90
$ l0 per barrel OPEC oil 1986-90
$ l5 per barrel OPEC oil 1986-90
Q $20 per barrel OPEC oil 1986-90
Annual East European_Trade
Surpluses
Billion rubles
Total Soviet Debt to
Eastern Europe
Billion rubles
a Assumes the volume of fuels-oil, gas, coal, and electricity-
remains unchanged and prices of various fuels move together.
bAssumes 5 percent growth in Soviet non-energy exports.
Assumes 7 percent annual growth in East European exports.
~7871~ 25X1
Declassified in Part -Sanitized Copy Approved for Release 2011/12/29 :CIA-RDP89T00295R000300380002-5
 Declassified in Part -Sanitized Copy Approved for Release 2011/12/29 :CIA-RDP89T00295R000300380002-5
Secret
? Soviet energy deliveries in volume terms to Eastern
Europe continue through 1990 at the 1985 level, as
Moscow pledged in the five-year protocols.
? Natural gas prices follow oil prices downward.
value of East European inputs is worth the trade
disputes that are likely to occur with Eastern Europe.
If we assume further that nonenergy exports grow at
5 percent per year, total Soviet exports will fall some
4 billion rubles from the 19851eve1 to 30 billion rubles
in 1990.
Combining the Soviet export slump with continued
increases in East European exports-increases that
we believe the Soviets have planned for in the 1986-90
protocols-yields a dramatic turnaround in trade
relations. After a decade of oil-related deficits, East-
ern Europe would have a surplus of 5 billion rubles in
1987, far higher than any previous imbalance in intra-
CEMA trade. Soviet deficits in only a few years
would far exceed Eastern Europe's accumulated defi-
cits over the past 10 years, enabling Eastern Europe to
repay its trade debts to the USSR as early as 1988.
Soviet deficits would continue to widen, climbing to
16 billion rubles in 1990. By 1990 the region's claims
on the USSR will total 20-30 billion rubles, according
to our projections."
Gorbachev's ambitious economic program calls for
Eastern Europe to provide resources that will help
carry out the modernization of the USSR's stock of
plant and equipment and the faster introduction of
new technologies into industry. The fall in world oil
prices-as a result of decreased hard currency earn-
ings from the sale of oil to the West-makes inputs
from Eastern Europe even more important. But it also
provides Eastern Europe the economic grounds to
resist Soviet demands. A reversal in the debtor-
creditor roles, which we project, may lead the East
Europeans to balk at providing the level of resources
to the USSR called for under the protocols. The
Gorbachev regime will have to decide whether the
"Varying the OPEC price from our assumption of a $15 per barrel
average does not change the medium-term outlook much. If OPEC
prices average $10 or $20 per barrel, East European surpluses in
The Problem of Soviet Debt
We believe that this scenario, in which price changes
generate a huge Soviet debt to Eastern Europe under
current plans, is a possible outcome. The Soviets could
point to deficits accumulated by Eastern Europe
during the runup in Soviet oil prices in the 1970s and
early 1980s as a justification for unbalanced trade,
although the Soviet deficits we project for the late
1980s are several times greater than those of a few
years ago. Soviet leaders may believe that major trade
adjustments to prevent such debts would tax domestic
producers at a time when they are being pressed to
meet the ambitious goals of Gorbachev's moderniza-
tion program.
We judge it more likely, however, that there will be
major changes in the way that CEMA conducts trade,
or in the 1986-90 trade plans in order to contain the
size of the probable Soviet debt. Both sides probably
have reason to oppose the large trade debts that would
occur under current trade plans. By becoming a
debtor to Eastern Europe, the Soviets would provide
the region with claims on future supplies of Soviet
goods.
The East Europeans are likely to accept Soviet trade
deficits to repay past trade credits extended by Mos-
cow and, once these debts are repaid, may even agree
to some Soviet indebtedness as a hedge against possi-
ble future increases in energy prices. Nevertheless,
having made large trade adjustments in response to
price movements during the past 10 years that bene-
fited the Soviets, Eastern Europe probably expects
some quid pro quo. If Gorbachev's team decides to
25X1
25X1
Declassified in Part -Sanitized Copy Approved for Release 2011/12/29 :CIA-RDP89T00295R000300380002-5 _
 Declassified in Part -Sanitized Copy Approved for Release 2011/12/29 :CIA-RDP89T00295R000300380002-5
Secret
deny Eastern Europe the benefits of the altered price
relationship, the East Europeans are almost certain to
object. Moscow's allies are unlikely to accede quietly
to granting the USSR tens of billions of rubles in
trade credits at the expense of their other economic
goals. Moreover, the East Europeans could argue that
huge and growing surpluses would violate the princi-
ple of balanced trade that is fundamental to CEMA's
trade system.
Adjustment Options
rather than rely on a single course of action.
probably choose a combination of the above options
We believe that the Soviets and East Europeans have
basically these options to avoid large Soviet trade
deficits:
? The USSR could push through changes in CEMA
pricing to negate the deterioration in its terms of
trade.
? Moscow could step up nonoil exports to offset the
fall in oil earnings.
? The USSR could reduce the rate of growth of its
imports from Eastern Europe.
By choosing the first option, the Soviets could main-
tain planned trade flows in real terms and avoid large
nominal deficits. The latter options would require
revisions in the planned deliveries for this five-year
period. In dealing with lower oil prices, Moscow will
Altering CEMA's Price Mechanism
Moscow could change the current system of pricing in
several ways in order to counter falling oil prices."
CEMA could revert to the pre-1975 practice of fixing
prices over five-year periods based on average world
prices during the previous five years. Soviet oil prices
would remain at the present high level. Moscow could
argue that such a change protects CEMA trade from
the vagaries of world markets and that Soviet oil
production costs justify the higher prices. Although
CEMA's adoption of the Bucharest formula in 1974
illustrates Moscow's power to push through proposals
benefiting the USSR, Eastern Europe successfully
"Despite reports from the CEMA summit in 1984 that the
Bucharest formula would be revised, the CEMA Executive Com-
mittee announced in January 1986 that the formula will remain
fought off a Soviet plan to accelerate the rise in
CEMA oil prices resultin from the second surge in
OPEC prices in 1979-80.
Alternatively, the Soviets could try to negotiate lower
prices for East European goods. Oleg Bogomolov,
director of the main Soviet institute for research on
CEMA, hinted at this when he remarked to US
Embassy officers in June 1986 that Moscow pays
twice the amount it should for East European goods-
a claim that cannot be confirmed. Even though the
quality of East European goods probably justifies
price discounts, across-the-board cuts in machinery
prices could reduce the incentive for Eastern Europe
to meet Soviet requirements for higher quality ma-
chinery. Lower prices probably would have to be
agreed on during protracted bilateral trade negotia-
tions for each country and for individual goods.
Increase in Soviet Exports
Moscow could offset the fall in energy prices by
increasing the volume of exports above previously
planned levels. The Soviets have already adopted such
a strategy in trade with Finland and Yugoslavia,
which, like the CEMA countries, conduct trade with
the USSR on a barter basis through clearing ac-
counts. Trade with Yugoslavia and Finland, however,
is in current world prices, thus requiring more imme-
diate attention:
Soviet officials agreed in April 1986 to supply an
additional $500 million in machinery, raw materi-
als, and semimanufactured goods to Yugoslavia to
help offset the effects of falling oil prices.
? In June, Finland and the USSR signed a supple-
mentary trade protocol that provides for increases in
Soviet deliveries of crude oil, coal, natural gas,
electricity, raw materials, automobiles, trucks, and
machinery worth more than $1 billion.
Declassified in Part -Sanitized Copy Approved for Release 2011/12/29 :CIA-RDP89T00295R000300380002-5
 Declassified in Part -Sanitized Copy Approved for Release 2011/12/29 :CIA-RDP89T00295R000300380002-5
Secret
Moscow's decision to raise exports to these countries
in response to falling oil prices may be a preview of
Soviet adjustment in CEMA trade. Indeed,
Bogomolov told a Hungarian interviewer in Septem-
ber 1986 that the fall in energy revenues that result
from CEMA price declines would make it difficult for
the Soviets to balance trade with socialist countries
and that Moscow will have to find new resources to
export. If so, Moscow probably will look to machinery
and manufactured goods to generate increases. Shift-
ing the structure of exports toward finished goods is a
longstanding goal, and Moscow could funnel deliver-
ies to those East European industries producing goods
most important in Soviet economic plans and CEMA
specialization agreements.
Slow Soviet economic growth and problems in the
USSR's trade with the West, however, will make
large increases in nonenergy exports to Eastern
Europe difficult. Machinery accounts for only about
14 percent of Soviet exports. In order just to maintain
overall nominal exports levels to Eastern Europe, the
Soviets would have to boost nonenergy exports by an
average of 11 percent annually during 1987-90. Dur-
ing the past 10 years nominal growth slumped to less
than 5 percent per year, even with rapidly rising
prices. In an era of more stable prices, the USSR
would have to step up export volumes substantially.
Moscow may attempt to raise exports by insisting that
its allies increase purchases of Soviet military equip-
ment. East Europeans successfully resisted increasing
procurement of military equipment over the past
decade by claiming they could not afford more equip-
ment purchases. Moscow's need to boost overall ex-
ports could lend weight to Soviet arguments for
Eastern Europe to step up participation in military
programs.
Increases in gas deliveries could at best offset only a
small amount of lost oil exports, especially with gas
prices following oil prices downward. Eastern Europe
is not scheduled to receive large additions of gas until
the early 1990s when the Yamburg pipeline comes on
line. Although the Soviets may be willing to acceler-
ate deliveries through existing pipelines, the East
Europeans' lack of infrastructure makes them unpre-
pared to use large increases. Moreover, gas sales-
representing only about one-fourth of the value of
energy exports to the region~ould not expand
enough to offset oil price declines.
The Soviets have promised more electricity deliveries
to Eastern Europe, but electricity makes up less than
4 percent of the value of energy deliveries and would
also do little to counter falling oil prices.
The problem of impending trade deficits is one reason
for Moscow to maintain deliveries of essential com-
modities such as oil to Eastern Europe. Although the
USSR's hard currency shortage and continued oil
production problems would appear to make diversion
of oil exports from Eastern Europe to hard currency
markets increasingly attractive to Moscow, any cuts
in deliveries would further reduce Soviet exports and
widen the USSR's trade gap with the region. In
addition, the hard currency gains from diverting oil
away from Eastern Europe to the West are less than
at any time in the past 10 years, given the relatively
high price of CEMA oil compared with world prices.
Although some East European economies could sus-
tan marginal cutbacks of Soviet oil, additional hard
currency revenues for the USSR would be small. Cuts
on the order of 50 percent would be required to recoup
even half of Moscow's lost oil revenues-a level that
would cause severe economic and political disruptions
throughout the region.
Slower Growth of Imports From Eastern Europe
Moscow could sharply curtail trade imbalances by
reducing the growth of its imports from Eastern
Europe. Every one-percentage point decrease in annu-
al growth of these imports would reduce the Soviet
deficits that we project by 5 to 6 billion rubles during
1986-90. For example, by limiting the growth of
imports from Eastern Europe to 5 percent per year-
compared with our baseline projection of 7 percent-
Moscow could trim its total deficit with Eastern
Europe by more than 11 billion rubles during 1986-
90. Moscow probably would cut purchases of low-
quality goods, perhaps putting added pressure on
Eastern Europe to raise production standards.
25X1
25X1
Declassified in Part -Sanitized Copy Approved for Release 2011/12/29 :CIA-RDP89T00295R000300380002-5
 Declassified in Part -Sanitized Copy Approved for Release 2011/12/29 :CIA-RDP89T00295R000300380002-5
Secret
Moscow Weighs the Alternatives
Europe's advantage.
A key to Moscow's policy on trade with Eastern
Europe will be the success of Gorbachev's moderniza-
tion program. The plan to revitalize the Soviet econo-
my counts on more high-quality machinery and equip-
ment to modernize the capital stock. Eastern Europe
is expected to help shoulder the burden by participat-
ing in Soviet resource projects that provide for large
deliveries of East European machinery, equipment,
and manpower to the USSR. More consumer goods
and food from Eastern Europe supplement Soviet
plans to provide more incentives for workers to in-
crease productivity. If the goals of the modernization
program are not met, as seems probable, Moscow will
be less willing to alter planned trade flows to Eastern
economically burdened Poland and Romania.
Economic and political stability in Eastern Europe,
along with Moscow's modernization needs, may con-
vince Moscow that its allies should trade at planned
levels despite movements in prices. If the East Euro-
peans handle Soviet economic pressure relatively easi-
ly, the Soviets may see little need to adjust plans in
response to shifts in the terms of trade. Moscow
probably will carefully consider the situation in indi-
vidual countries in deciding how hard to push. The
Soviets may be more hardnosed in trade with East
Germany, Czechoslovakia, and Hungary~ountries
considered politically stable, relatively well off eco-
nomically, and better able to provide the quality goods
desired by the USSR-and more lenient toward
The East Europeans will resist efforts by Moscow to
take away their terms of trade gains. The 22 billion
rubles that we estimate in lost Soviet revenues from
energy exports to Eastern Europe during 1986-90
represent an equivalent saving for Eastern Europe
that the regimes probably hope can be converted into
resources for their economies. Eastern Europe's eco-
nomic outlook is dimmed by many of the same
problems facing Soviet planners-raw material con-
straints, limited hard currency import capacity, and
outdated technology. In particular, most of the coun-
tries will want to restore the investment cuts of recent
years. The East Europeans will be loath to negotiate
away to the USSR the resources badly needed for
their own economic development. For the East Euro-
peans, the problem is how to capitalize on the poten-
tial windfall gains from lower oil prices while mini-
mizing the damage to relations with Moscow.
The Soviets and the East Europeans have not given a
definite indication as to which course they will pursue.
Since the 16-billion-ruble debt owed by Eastern Eu-
rope provides some breathing room, Moscow may not
feel the need to act. But the speed and the degree to
which the turnaround in trade positions will occur
suggest that it is in Eastern Europe's, if not Moscow's,
interest to move now rather than later. Some recent
Soviet actions-such as Bogomolov's statement and
attempts to narrow the USSR's trade deficit with
Finland and Yugoslavia-indicate that Moscow is at
least aware of the roblem and may be considering
some adjustments.
Moscow probably would like to pursue a course that
leaves planned trade flows intact and maximizes
Eastern Europe's contributions to meeting Soviet eco-
nomic goals. We believe, however, that the East
Europeans will object to extending the required large
trade credits to the USSR. As a result the Soviets are
likely to resort to a combination of options entailing
both pressure and concessions:
? Efforts by Moscow to lower prices for East Europe-
an goods-particularly low quality items-are like-
ly to increase but probably will be insufficient to
counteract falling oil prices.
Failing to lower prices significantly, Moscow proba-
bly will adjust trade flows first by increasing exports
to Eastern Europe. The Soviets, however, will have
difficulty generating enough exports to erase the
deficits. The machine-building sector, which would
have to provide much of the increase, has already
been heavily tasked by Gorbachev during the next
five years in meeting domestic needs.
? If altering prices and boosting exports fall short, the
Soviets may accept slower growth in imports from
the region. We believe that this would be the
25X1
25X1
Declassified in Part -Sanitized Copy Approved for Release 2011/12/29 :CIA-RDP89T00295R000300380002-5
 Declassified in Part -Sanitized Copy Approved for Release 2011/12/29 :CIA-RDP89T00295R000300380002-5
Secret
USSR's least preferred course because it would
reduce the East European role in Soviet moderniza-
tion plans..In this case, Moscow most likely would
insist that any cuts in East European shipments be
in lower quality goods.
? Regardless of the mix of the above options that are
chosen, Moscow probably will accrue some debt to
Eastern Europe, requiring the region to run surplus-
es beyond those necessary to repay Soviet trade
credits.
Indications of exactly where the trade relationship is
heading may be forthcoming soon. The Soviets and
the East Europeans will soon conclude the annual
trade protocols for 1987. Some divergence between
these pacts and the five-year trade plans would be
further evidence that the Soviets are willing to make
adjustments. A failure to alter current trade arrange-
ments would not be a definitive sign, however, that
the Soviets are going to play hardball. Moscow's
approach to the problem is likely to evolve over time
and adapt to changing internal and external circum-
stances. For example, Moscow may postpone any
actions until it gets a better handle on the future of oil
prices and the responsiveness of the economy to recent
initiatives. Should Soviet economic problems worsen
and the modernization progam falter, Moscow would
be more inclined to keep up trade pressures on
Eastern Europe. Finally, we also expect the Soviets to
tailor the combination of options to fit the economic
and political situation in different countries. The
Soviets probably would be more willing to make
adjustments that benefit a country in crisis, such as
those they made for Poland in the early 1980s, than
for economically stronger and more politically stable
countries.
The impact of falling oil prices on Soviet-East Euro-
pean trade will provide a good test of Gorbachev's
policies toward Eastern Europe. While the modest
targets for trade growth in 1986-90 plans suggest
moderate Soviet demands for more East European
goods and closer economic ties, Moscow may have to
step up pressure on the region in order to achieve its
economic objectives. Gorbachev's ability and willing-
ness to exercise control over Eastern Europe may be
revealed by how hard he presses Moscow's economic
agenda in the face of adverse price trends and East
European opposition.
A decision by Moscow to adjust planned trade flows
would reduce the cost to Eastern Europe of contribut-
ing to Moscow's modernization program. Moreover,
Moscow would be less able to turn to Eastern Europe
to substitute for Western imports. We estimate that
Soviet hard currency shortages resulting from falling
energy exports to the West could reach $5.6 billion in
1986 with average OPEC prices of $15 per barrel.
Reductions in overall net imports from Eastern Eu-
rope implies that the Soviets could not use East
European machinery and equipment to take up the
slack.
Higher net resource flows from the USSR-as a
result of increased Soviet exports to Eastern Europe
or a reduction in planned imports by the USSR-
would clearly benefit Eastern Europe by providing it
with more goods for domestic investment or consump-
tion. Nonetheless, a cutback in the volume of East
European goods the USSR plans to import could
prove in some respects a mixed blessing for the region.
Eastern Europe would have difficulty finding alterna-
tive markets for the poor-quality goods that Moscow
probably would cut first. Soviet pressure may shift to
other aspects of the economic relationship; Soviet
insistence on scientific and technical cooperation and
integration may force structural adjustments and
higher production costs that do not appear in trade
statistics within the region. Meeting quality demands
may still cut into Eastern Europe's ability to earn
hard currency through exports to the West and to
satisfy domestic needs.
Alternatively, attempts by Moscow to deny Eastern
Europe the benefits of terms of trade gains would
probably aggravate tensions with the region. Worsen-
ing political ties to Eastern Europe in this scenario
would possibly be more costly in the long run to the
Soviets than resource gains. Squabbles over trade
25X1
25X1
Declassified in Part -Sanitized Copy Approved for Release 2011/12/29 :CIA-RDP89T00295R000300380002-5 _
 Declassified in Part -Sanitized Copy Approved for Release 2011/12/29 :CIA-RDP89T00295R000300380002-5
Secret
joint investment projects.
could also limit East European willingness to partici-
pate in CEMA's science and technology program and
their economic interests.
Western policymakers probably can do little to affect
Soviet and East European responses to impending
trade conflicts. Nonetheless, changes in Soviet-East
European trade relations that will result from these
choices may provide the West with greater opportuni-
ties to influence these regimes. Renewed East Europe-
an interest in trade with the West-whether as a
result of Soviet adjustments that give the region more
flexibility or because of resentment against the Sovi-
ets~ould lead some countries to be more willing to
meet Western conditions for lowering trade barriers.
To strengthen ties to the West, however, would
require tough political decisions by the East European
regimes-particularly in the case of continued Soviet
economic pressure. Responses would vary among East
European countries. The issue may be most important
for East Germany and Hungary-countries most
likely to be hardest pressed for goods and most
inclined in the past to risk Moscow's ire to pursue
Declassified in Part -Sanitized Copy Approved for Release 2011/12/29 :CIA-RDP89T00295R000300380002-5
 Declassified in Part -Sanitized Copy Approved for Release 2011/12/29 :CIA-RDP89T00295R000300380002-5
Declassified in Part -Sanitized Copy Approved for Release 2011/12/29 :CIA-RDP89T00295R000300380002-5
 Declassified in Part -Sanitized Copy Approved for Release 2011/12/29 :CIA-RDP89T00295R000300380002-5
Secret
Appendix A
CEMA Price and
Quantity Indexes
Hungarian price series.
Price and quantity indexes are available in several
different forms for East European trade with socialist
countries. In order to derive consistent estimates for
the quantity of Eastern Europe's trade with both the
USSR and nonsocialist countries, we relied on Hun-
garian price data. Other data series are valuable for
comparison with the results obtained from using
to correspond to the five commodity categories.
Hungary is the only East European country that
provides price series for trade in both convertible and
nonconvertible currencies for five commodity catego-
ries based on CEMA trade nomenclature. These
series were the only choice to break down trade flows
by commodity category and by region. After the series
are converted from forint prices into rubles, they are
used to deflate Soviet nominal trade series aggregated
an countries.
Hungarian price series may not accurately reflect
foreign trade price movements in other East European
countries for several reasons. The Soviets may not
charge all countries identical prices for their goods
because of bilateral investment projects that may
result in lower priced deliveries to participating coun-
tries or because of price discrimination on the part of
the USSR. A significant portion of East European
trade with the USSR-Hungary's in particular-is
valued in hard currency rather than rubles, and
presumably this trade is tied more closely to prices in
world markets than ruble-valued trade. Hungarian
statistics have a quirk in that spare parts are classified
as raw materials rather than as machinery as is done
in other East European countries. Despite these prob-
lems we believe that Hungarian prices are reasonable
proxies for foreign trade prices of other East Europe-
When using these price series to deflate trade as
reported in Soviet statistics, the problem of the un-
specified residual in Soviet trade data must be ad-
dressed. Alarge portion of the residual consists of
trade in military equipment. According to estimates
by Wharton Econometrics, in 1980 about 55 percent
of the residual in Soviet exports and roughly 25
percent of Soviet imports from Eastern Europe were
armaments. The bulk of the remaining residual falls
in the category of nonfood raw materials. For the
purpose of estimating overall real trade with the
USSR, the residual was deflated by the machinery
price indexes and added to the total trade figure. This
may be justified because East Europeans include arms
in the machinery category of trade and because price
trends of nonfood raw materials-the other large part
of the residual-tlo not differ greatly from machinery
prices. The exclusion of the residual yields quantity
indexes that differ more in comparison with Soviet
indexes but still illustrate the same trends.
Poland regularly publishes price statistics but only for
total exports and imports without a geographical
Quantity indexes for total imports and exports in
trade with CEMA countries are published by the
USSR, but not the price data from which the quantity
indexes are derived. In addition to the problem with
the trade residual, these indexes differ from the
25X1
25X1
25X1
25X1
Declassified in Part -Sanitized Copy Approved for Release 2011/12/29 :CIA-RDP89T00295R000300380002-5
 Declassified in Part -Sanitized Copy Approved for Release 2011/12/29 :CIA-RDP89T00295R000300380002-5
Secret
Table A-1
Soviet-East European Quantity Indexes
Official Soviet Index for Trade With
CEMA a
Hungarian Price-Deflated Index
(including residual) b
Hungarian Price-Deflated Index
(excluding residual) n
Eastern Europe
Eastern Europe
Eastern Europe
Imports
Exports
Terms of
Trade
Imports
Exports
Terms of
Trade
Imports
Exports
Terms of
Trade
1977
100
100
100
100
100
100
100
100
100
1978
105
116
91
102
115
89
100
117
85
1979
108
114
95
105
116
91
102
118
86
1980
112
115
97
107
117
92
106
116
91
1981
112
117
96
106
119
89
103
116
88
1982
107
134
80
104
131
79
101
129
78
1983
107
141
76
103
139
74
98
140
70
1984
111
150
74
108
148
72
103
151
68
a Source: Soviet foreign trade statistics; based on constant 1975
prices.
n CIA estimates based on Soviet foreign trade statistics and Hun-
garian price data taken from Hungarian statistical monthlies; based
on constant 1977 prices.
Hungarian price-deflated series for several other rea-
sons. The clearest difference is that Soviet indexes
include trade with Vietnam, Mongolia, and Cuba-
comprising 15 percent of Soviet exports and 11 per-
cent of imports in CEMA trade. Soviet indexes are
based on constant 1975 prices, whereas our estimates
use 1970 and 1977 prices as the base. Another reason
is that the Soviet quantity indexes are Laspeyres
indexes-implying that they are constructed from
Paasche price indexes-whereas the Hungarian data
are based on Fisher price indexes.
Declassified in Part -Sanitized Copy Approved for Release 2011/12/29 :CIA-RDP89T00295R000300380002-5 _
 Declassified in Part -Sanitized Copy Approved for Release 2011/12/29 :CIA-RDP89T00295R000300380002-5
Secret
Table A-2
Hungarian and Polish Nonconvertible Trade Price Indexes a
1982
1983
Note: These
series represent price series for nonconvertib a tra a with all
partners. The terms of trade decline much more rapidly for trade
with just the Soviet Union because of the preponderance of high-
priced fuels in Soviet exports.
Exports
Imports
Terms of
Trade
100.0
100.0
100.0
108.0
109.2
98.9
119.6
125.7
95.1
124.3
135.0
92.1
132.0
147.3
89.6
Exports
Imports
Terms of
Trade
100.0
100.0
100.0
104.8
106.9
98.0
114.1
120.4
94.8
120.3
131.2
91.7
127.5
143.8
88.7
25X1
1X1
Declassified in Part -Sanitized Copy Approved for Release 2011/12/29 :CIA-RDP89T00295R000300380002-5
 Declassified in Part -Sanitized Copy Approved for Release 2011/12/29 :CIA-RDP89T00295R000300380002-5
Secret
Table A-3
East European-Soviet Trade Quantity Indexes a
1970
100.0
100.0
100.0
100.0
100.0
100.0
100.0
1971
114.0
110.4
96.9
113.6
104.6
93.6
105.1
1972
124.6
107.8
89.7
110.7
100.5
98.9
103.2
1973
136.0
115.5
99.3
119.2
110.5
109.0
112.7
1974
157.5
123.4
110.5
133.0
134.7
117.7
118.9
1975
167.0
121.4
117.0
146.9
138.0
116.4
132.6
1976
165.3
126.5
114.8
142.1
142.1
115.5
132.8
1977
179.3
133.1
120.8
150.1
151.1
144.8
142.6
1978
195.9
129.4
121.2
161.5
151.0
134.7
145.0
1979
189.1
140.3
119.7
168.7
157.3
139.9
148.1
1980
185.1
136.7
121.0
167.0
163.0
145.1
148.6
1981
192.4
133.6
117.0
156.9
155.3
153.8
145.8
1982
197.6
135.6
120.4
160.9
128.6
141.3
142.0
1983
204.4
143.2
111.7
164.3
124.7
140.4
141.4
1984
217.2
156.0
117.8
165.4
140.1
138.3
150.3
East European exports
1970
100.0
100.0
100.0
100.0
100.0
100.0
100.0
1971
110.7
108.9
111.6
116.1
108.6
107.7
110.6
1972
121.9
123.4
130.4
134.0
131.9
122.3
127.8
1973
130.8
124.4
132.8
147.1
135.2
127.6
132.7
1974
132.1
132.6
135.2
149.6
149.5
122.3
137.6
1975
148.1
144.1
144.0
175.6
170.8
139.0
153.0
1976
160.2
155.9
139.0
180.0
162.2
134.7
154.6
1977
180.5
166.4
148.8
200.0
183.8
161.0
171.0
1978
208.7
197.8
170.7
234.2
217.9
151.9
197.1
1979
212.4
200.0
174.3
224.6
219.1
156.3
198.4
1980
216.0
205.2
178.4
238.1
198.6
196.0
202.0
1981
212.2
217.3
195.5
256.9
162.6
199.8
203.8
1982
238.3
240.4
211.3
281.3
193.7
188.0
224.4
1983
264.8
258.9
226.7
285.1
208.6
188.0
239.3
1984
285.0
279.0
243.7
307.0
217.7
190.3
255.5
a Source: Soviet and East European foreign trade data and CIA
estimates.
Declassified in Part -Sanitized Copy Approved for Release 2011/12/29 :CIA-RDP89T00295R000300380002-5
 Declassified in Part -Sanitized Copy Approved for Release 2011/12/29 :CIA-RDP89T00295R000300380002-5
Secret
Appendix B
Trends in Commodity Composition
of Real Trade
This appendix examines the structure of Soviet-East
European trade since 1970 in real terms. It provides
details on changes over the period, including differ-
ences among East European countries in trade pat-
terns with the USSR.
Eastern Europe experienced widespread declines in
imports from the USSR during the 1980s. While
Poland and Romania suffered the sharpest declines,
all countries cut back purchases during some of these
years. Stagnation in energy deliveries, as Moscow
diverted oil exports to the West, and sharp cuts in
imports of machinery accounted for much of the fall
in imports.
Energy and Fuels
Energy has grown to dominate nominal Soviet exports
to Eastern Europe, rising from about 30 percent of
trade in 1977 to more than half in 1984. This rapid
growth, however, obscures the stagnation in the vol-
ume of deliveries in the 1980s.
In trade plans for 1981-85, the Soviets agreed to
supply 80 million tons of oil annually. These deliver-
ies, however, were cut in 1982 to about 72 million tons
when the Soviets reduced deliveries to Hungary,
Czechoslovakia, East Germany, and Bulgaria in order
to increase oil sales to hard currency customers in the
West (see tables B-1 and B-2). Deliveries continued
near this level through 1985. The Soviets for the most
part maintained deliveries to Poland because of its
economic difficulties. Deliveries to Romania, conduct-
ed on a hard currency basis and usually only a small
portion of Romania's oil imports, were phased out in
1982 and 1983. The Soviets delivered 1.1 million tons
in 1984 and 2 million tons in 1985, but these deliver-
ies represented only about half of the contracted
amounts. According to Soviet diplomatic sources,
Moscow refused to deliver more oil when Romania
was unable to provide the hard goods-products
readily salable in the West-to pay for the oil. Oil
deliveries to Bulgaria were reduced last year, accord-
ing to the Soviet Ambassador in Sofia.
In terms of fuel equivalents, total energy supplies
from the Soviets in 1984 were roughly 3 percent lower
than in 1980 despite increases in nonoil energy deliv-
eries. Moreover, East European dependency on Soviet
energy supplies, as measured by the percentage of
total East European imports and consumption, has not
increased appreciably over the past 10 years. Soviet
gas deliveries, which rose from 29 billion cubic meters
in 1980 to 34 billion cubic meters in 1984, increased
dramatically as a share of Eastern Europe's gas
consumption and partially offset the shortfall in oil.
But gas still accounts for less than a fourth of energy
imports from the USSR and a small part of total
energy supplies. Rising gas deliveries also have been
somewhat offset as a share of overall supplies by
Eastern Europe's increased production of primary
electricity. While coal and electricity deliveries from
the USSR also increased, they together account for
less than 15 percent of Soviet supplies.
Machinery and Equipment
The reduction in Soviet exports in the 1980s fell
largely on machinery, with the volume of deliveries to
Eastern Europe declining by more than 20 percent
during 1981-83. Imports rebounded by 8 percent in
1984. Much of the decrease was due to Poland's huge
cutback in imports, although all countries experienced
declines:
? Once the equal of Bulgaria as the biggest importers
of Soviet machinery, Poland received only 40 per-
cent as much in 1983 as in 1980. While little data
on the quantities of specific machinery traded are
available, the value of Polish imports of Soviet
mining and oil drilling equipment, machinery for
the food and chemical industries, agricultural ma-
chinery, hoisting machinery, and railroad rolling
Declassified in Part -Sanitized Copy Approved for Release 2011/12/29 :CIA-RDP89T00295R000300380002-5
 Declassified in Part -Sanitized Copy Approved for Release 2011/12/29 :CIA-RDP89T00295R000300380002-5
Secret
Table B-1
East European Oil Trade a
Milli
on metric tons
1980
1981
1982
1983
1984
1985
Imports From the USSR
Total
79.8
80.1
71.8
69.8
71.5
70.6
Bulgaria
14.7
14.7
13.4
13.4
13.4
12.0
Czechoslovakia
19.2
18.9
17.1
17.1
16.9
16.9
East Germany
19.0
19.0
17.7
17.1
17.1
17.1
Hungary
9.3
8.8
8.1
7.1
7.8
7.6
Poland
16.1
16.0
15.1
14.9
15.2
15.0
Romania
1.5
2.7
0.4
0.2
1.1
2.0
Imports from other sources
Total
22.6
16.2
18.9
24.6
25.8
27.7
Bulgaria
0.7
1.0
1.7
2.0
2.3
3.4
Czechoslovakia
0.5
0.5
0.6
0.6
0.8
0.9
East Germany
2.9
3.7
4.0
5.6
6.2
6.8
Hungary
0.8
0.5
1.9
2.7
2.2
2.1
Poland
4.3
1.3
1.1
2.4
1.7
1.1
Romania
14.5
10.2
10.6
11.3
12.6
13.4
East European oil exports
Total
20.6
19.5
18.9
25.4
26.4
24.4
Bulgaria
3.8
3.9
3.6
3.6
2.8
2.1
Czechoslovakia
1.7
1.2
1.4
1.6
1.7
1.6
East Germany
3.0
4.1
4.3
5.8
6.7
7.7
Hungary
1.7
1.4
2.5
3.9
3.9
2.0
Poland
1.6
0.8
0.6
1.4
0.4
0.6
Romania
8.8
8.1
6.5
9.1
10.9
10.4
stock declined. Poland's imports expanded by 20
percent in 1984, but they were still only a little
more than half of the 1980 figure.
? East Germany's machinery imports, after declining
by 15 percent during 1979-82, plummeted by almost
20 percent in 1983 with cuts in purchases of ma-
chinery for chemical and light industries and trans-
portation equipment. Imports rose nearly 13 percent
in 1984 with increased purchases of power and
electrical equipment, road-building equipment, trac-
tors, and passenger cars.
? Hungary and Romania increased imports in 1982
following earlier declines but registered sharp down-
turns in 1983 and 1984. Hungary received fewer
imports of mining equipment, oil drilling equipment,
hoisting machinery, tractors, and shipping and air-
line equipment. Romania cut purchases of mining
equipment, hoisting machines, light industrial
equipment, agricultural machinery, and shipping
equipment.
? Bulgaria and Czechoslovakia boosted imports over
1982-84 following declines during 1979-81.
Declassified in Part -Sanitized Copy Approved for Release 2011/12/29 :CIA-RDP89T00295R000300380002-5
 Declassified in Part -Sanitized Copy Approved for Release 2011/12/29 :CIA-RDP89T00295R000300380002-5
Secret
Table B-2
Eastern Europe's Dependency on
Soviet Energy Deliveries a
1975
1980
1984
Percent of Total Percent of East
Percent of Total Percent of East
Percent of Total Percent of East
East European
Imports
European Con-
sumption
East European
Imports
European Con-
sumption
East European
Imports
European
Consumption
Total Energy
77
25
76
29
75
27
Oil
81
75
76
79
73
81
Gas
98
18
100
35
100
35
Coal
58
6
52
5
58
5
a Source: Soviet and East European statistics and CIA estimates;
based on barrels per day of oil equivalents.
There are several reasons for the drop in machinery
imports from the Soviets. Forced to trim import bills,
the East Europeans clearly preferred to cut back on
machinery rather than on raw materials and energy
necessary to maintain current production. A Soviet
lecturer in Moscow attributed the fall in the volume
of machinery exports to rising costs of Soviet energy
deliveries and because slower economic growth in
CEMA led to decreased investment requirements.
Soviet production shortfalls of road-building
equipment, tractors, and aviation and railroad equip-
ment forced Eastern Europe to turn to the West for
substitutes.
The Soviets may also have been reluctant to ship some
machinery to Eastern Europe that could be sold in the
West. The Soviets delivered only a third of the
number of cars in 1983 as in 1980, while Soviet
exports to the West rose by more than a third, to
144,000 units. The Hungarians received only half of
the 50,000 Lada automobiles ordered in 1983, accord-
ing to the Hungarian press.
While the East Europeans may not be eager to saddle
themselves with poorer quality Soviet machinery at a
time when planners hope to boost economic growth
through increased productivity and more efficient use
of resources, the upturn in imports from the Soviets in
1984 indicates that they may have little choice in view
of the region's desperate need for new capital and the
financial constraints restricting imports from the
West.
Intermediate Goods
Soviet deliveries of chemicals, building products, min-
erals, metals, and other nonfood materials fell by
about 4 percent in both 1982 and 1983. Poland, East
Germany, and Bulgaria experienced the largest de-
clines in intermediate products in recent years, each
receiving a lower volume from the Soviets in 1983
than in 1980. Poland was especially hard hit with
decreased imports of ores, fertilizers, wool, lumber,
and paper products. Soviet exports to the region
increased roughly 5 percentin 1984 with increased
deliveries to all countries, but Hungary and Romania
were the only countries with imports in 1984 signifi-
cantly higher than 1980 levels.
Declassified in Part -Sanitized Copy Approved for Release 2011/12/29 :CIA-RDP89T00295R000300380002-5
 Declassified in Part -Sanitized Copy Approved for Release 2011/12/29 :CIA-RDP89T00295R000300380002-5
Secret
Table B-3
Soviet Exports of Selected Goods to Eastern Europe a b
Value (million rubles)
616.3
2,142.6
5,909.1
7,793.4
9,103.5
10,492.5
12,093.0
Quantity (million tons)
40.29
63.28
79.77
80.11
71.77
69.8
71.5
Unit value (rubles per ton)
15.3
33.9
74.1
97.0
126.8
150.3
169.1
Gas
Value (million rubles)
xn
267.0
1,658.1
2,194.7
2,834.2
3,499.5
3,844.2
Quantity (billion cubic meters)
11.29
29.48
29.81
31.75
32.06
34.1
Unit value (rubles per thousand
cubic meters)
23.6
56.2
73.6
89.3
109.2
112.7
Coal
Value (million rubles)
167.3
456.5
646.8
765.5
838.3
924.3
969.9
Quantity (million tons)
13.349
15.509
17.96
17.55
17.79
17.85
17.93
Unit value (rubles per ton)
12.5
29.4
36.0
43.6
47.1
51.8
54.1
Electricity
Value (million rubles)
43.5
145.8
379.2
417.8
462.9
516.5
567.8
Quantity (billion kilowatt hours)
4.36
9.76
16.47
17.08
17.24
17.55
18.79
Unit value (rubles per thousand kilo-
watt hours)
10.0
14.9
23.0
24.5
26.9
29.4
30.2
Iron ore
Value (million rubles)
272.8
452.4
408.7
458.0
468.4
490.0
520.3
Quantity (million tons)
31.69
38.06
36.62
32.96
31.96
31.76
33.4
Unit value (rubles per ton)
8.6
11.9
11.2
13.9
14.7
15.4
15.6
Passenger cars
Value (million rubles)
70.9
241.6
321.2
154.7
158.5
145.3
175.5
Quantity (thousand units)
67.0
198.4
191.5
82.4
80.3
67.0
80.9
Unit value (rubles per unit)
1,051
1,218
1,667
1,877
1,974
2,167
2,169
Cotton fiber
Value (million rubles)
219.4
346.6
452.8
499.6
509.9
504.8
506.7
Quantity (thousand tons)
330.6
394.9
431.5
434.1
435.4
420.7
408.1
Unit value (rubles per hundred tons)
664
878
1049
1151
1171
1200
1242
a Quantities are estimated after 1975 for oil, coal, and gas.
b Source: Soviet and East European foreign trade statistics and CIA
estimates.
Includes crude and products; the unit value is higher than the
price of crude oil.
Declassified in Part -Sanitized Copy Approved for Release 2011/12/29 :CIA-RDP89T00295R000300380002-5
 Declassified in Part -Sanitized Copy Approved for Release 2011/12/29 :CIA-RDP89T00295R000300380002-5
Secret
? Hungary doubled exports during 1983-84 with
larger deliveries of pesticides and ferrous metals.
? Czechoslovakia, by far the largest supplier, in-
creased deliveries more than one-third in 1983 by
increasing exports of ores, minerals, and rolled
ferrous metals, but exports leveled off in 1984.
Machinery and industrial consumer goods-the main-
stays of Eastern Europe's exports to the USSR-grew
at a fast clip through most of the 1970s. Several years
of sluggish machinery deliveries were followed by
large boosts during 1982-84 as the East Europeans
stepped up exports to cover the rising prices on Soviet
goods and to meet Moscow's demand for more bal-
anced trade. Machinery accounts for 70 percent of the
region's gains in exports to the Soviets. Deliveries of
consumer goods and food also rose in 1984, probably
as a result of Soviet demands for more of these goods.
machinery.
Machinery
The expansion in Eastern Europe's machinery exports
reflects the fact that machinery is what the East
Europeans are best able to supply. Moreover, Moscow
apparently concluded that, although not up to West-
ern standards, East European machinery is easier to
assimilate into the Soviet economy than Western
agriculture, and shipping industries.
All East European countries have made significant
gains, and virtually every machinery category has
shown rapid growth. The value of exports rose by 50
to 85 percent in the areas of metalworking equipment,
machinery for food and light industries, power equip-
ment, and railroad rolling stock. Receipts grew by 20
to 40 percent for exports to the electrical-engineering,
Intermediate Goods
East European exports of these products-metals,
chemicals, and other semimanufactures-make up
about 7 percent of the value of deliveries to the
Soviets. These goods are often comparable in quality
to products in the West. After stagnating in real
terms in 1981 and 1982, exports of intermediate
products expanded by more than 25 percent in 1983
and 6 percent in 1984 in these ways:
? Poland nearly doubled its volume of exports in 1983
with increased deliveries of minerals, rolled ferrous
metals, paints and varnishes, and chemical products.
Food and Consumer Goods
Exports of food and consumer goods to the Soviets
account in 1983 for more than 5 percent and nearly
20 percent of the value of exports, respectively. The
volume of food exports from the region rose steadily
from 1978 to 1982 before dropping by 6 percent in
1983 after poor harvests in Eastern Europe in 1982
and 1983. Bumper harvests in 1984 allowed deliveries
to expand by roughly 6 percent as follows:
? Hungary's exports slumped by 16 percent in 1983 25X1
after rising by an average of 18 percent annually
during 1979-82.
Ex-
ports of meat and wheat, for which the Soviets
generally pay hard currency, dropped sharply: meat
from 262,000 to 236,000 tons, and the value of
wheat exports by more than one-half to 56 million
rubles. In 1984 Hungary's grain deliveries increased
by nearly two-thirds, but exports of meat continued
to decline, falling by roughly one-third to only
161,000 tons. With Hungarian meat exports to
other markets slightly higher in 1984, the drop in
deliveries to the USSR may reflect Hungarian
refusal to sell the meat for soft currency.
? Romania's food exports fell by almost one-half
during 1982-83. Romania recovered some lost
ground in 1984 with large boosts in meat exports,
but overall deliveries remained far below 1981
levels.
Declassified in Part -Sanitized Copy Approved for Release 2011/12/29 :CIA-RDP89T00295R000300380002-5
 Declassified in Part -Sanitized Copy Approved for Release 2011/12/29 :CIA-RDP89T00295R000300380002-5
Secret
Table B-4
East European-Soviet Trade in Machinery, 1980 and 1983 a
Million rubles
(except where noted)
East European
Exports
Percent of USSR
Imports
East European Percent of USSR
Imports Exports
1980
1983
1980
1983
1980
1983
1980
1983
Metalworking equipment
438.8
776.6
54
58
200.6
176.5
81
78
Power equipment
270.8
434.7
70
60
328.5
463.1
37
41
Electrical engineering equipment
434.5
536.2
78
74
89.8
95.9
69
72
Mining equipment
40.2
157.1
40
50
77.0
53.8
37
19
Oil drilling equipment
78.1
253.3
31
20
60.0
66.3
32
25
Food industry equipment
287.9
471.1
63
71
25.7
18.2
22
16
Light industry equipment
342.6
635.8
87
92
83.8
54.9
54
57
Chemical industry equipment
270.9
471.1
63
71
25.7
18.2
79
67
Road building equipment
125.6
226.4
44
43
180.0
129.0
79
67
Instruments and laboratory equipment
227.7
402.0
69
72
70.5
77.0
79
77
Agricultural machinery
722.2
939.6
94
91
152.8
168.0
76
71
Railroad rolling stock
548.5
948.5
95
96
184.1
50.8
81
56
Ships and marine equipment
796.7
988.3
64
49
69.8
37.3
50
32
Trucks
290.1
95.0
59
23
Spare parts for trucks
184.9
182.0
63
37
Spare parts for car
148.9
206.0
74
74
Passenger cars (1,000 units)
191.5
67.0
58
28
? Bulgaria boosted food exports by 13 percent during
1982-83 after deliveries had dropped 4 percent the
previous year. Bulgaria's increased exports, in the
face of poor harvests, may have resulted from Soviet
Bulgaria increased exports by 3 percent in 1984
with expanded deliveries of fruits and vegetables.
slightly.
4 percent the following year, largely because of re-
duced exports from Poland and Hungary. Both boost-
ed exports by 15 to 18 percent in 1982 but slacked oil'
by 18 and 10 percent, respectively, in 1983 with
reduced deliveries of clothing, fabrics, and footwear.
Bulgaria and East Germany increased deliveries in
1983, while those from Hungary and Romania fell
A 10-percent increase in Eastern Europe's consumer
goods exports in 1984 answered Moscow's calls for
more of these goods. Czechoslovakia and Bulgaria
boosted deliveries by 11 to 20 percent with increased
exports of clothing, furniture, medicine, and cotton
Eastern Europe's real exports of consumer goods- fabric. Polish and Hungarian exports recovered from
stagnant during 1979-81 jumped by 15 percent in their slump in 1983 with 10 to 15 percent growth,
1982 with expanded deliveries by all countries except while East Germany-the largest exporter-had a
for Romania. Exports for the region fell nearly 4-percent increase. Romanian exports stayed con-
stant.
.5X1
25X1
Declassified in Part -Sanitized Copy Approved for Release 2011/12/29 :CIA-RDP89T00295R000300380002-5 _
 Declassified in Part -Sanitized Copy Approved for Release 2011/12/29 :CIA-RDP89T00295R000300380002-5
Secret
Secret
Declassified in Part -Sanitized Copy Approved for Release 2011/12/29 :CIA-RDP89T00295R000300380002-5