ATTACHED PAPER ON "THE USSR'S INTERNATIONAL ECONOMIC BREAKOUT"

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP90B01013R000400190004-0
• Release Decision: RIPPUB
• Original Classification: T
• Document Page Count: 31
• Document Creation Date: December 23, 2016
• Document Release Date: August 22, 2012
• Sequence Number: 4
• Publication Date: October 30, 1986
• Content Type: MEMO

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ER 5185 86
CENTRAL INTELLIGENCE AGENCY
OFFICE OF THE DEPUTY DIRECTOR
5 November 1986
NOTE FOR: Deane Hoffman
NIO/Economics
Deane,
I am a little concerned that the paper
spends proportionately too much time examining
the problem and/or outlining the constraints
the Soviets will face, rather than the trouble
they could cause (the last 2 pages). I still
feel that the international economic arena is
one of the West's relatively unguarded fronts,
mostly because it's been our preserve for so
long, but also because the mechanisms are
becoming increasingly free of national control
(and therefore more vulnerable).
RE: NIC SC8355 86
STAT
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NIC 05019-86
30 October 1986
NOTE FOR: Director of Central Intelligence
FROM: Deane E. Hoffmann
NIO for Economics
SUBJECT: Attached Paper on "The USSR's International Economic Breakout"
1. Attached is the CIA contribution to the National Security Study
Directive on Soviet Initiatives in International Economic Affairs (NSSD
2-86). It analyzes Moscow's objectives in expanding its activities in
international financial markets and international trade and business,
highlighting the potential dangers to the system of greater Soviet
participation.
2. took the time last weekend to add material to the text
based on the discussions you held in New York Friday.
oli?0144? 4flouatOty1/4._
Deane E. Hoffma n
Attachment:
Copy
This Note Classified SECRET
When Removed from Attachment
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?,.?
SUBJECT: COMINT Paper on "The USSR's International Economic Breakout"
NIO/Econ/DHOFFMANN:rr
Distribution - w/Attachment
30 October 1986 NIC 05019-86
Copy 1 - Alix Platt, NSC (sent 28 Oct)
2 - DCI
3 - Executive Registry
4 - C/NIC (info copy)
VC/NIC
L---5-=-DDCI (Hold Copy)
6-7 - NIO/Econ
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27 October 1986
The USSR's International Economic Breakout
Over the last several months, Moscow has launched a spate of
initiatives that collectively portend a major increase in the
breadth and depth of Soviet participation in international economic
and financial areas. Many of these actions have received great
publicity--the application for participation in GATT, the
restructuring of the foreign trade apparatus and regulations on
joint ventlies, and the unexpected settling of outstanding Tsarist
bonds. At the same time, however, the Soviets have quietly worked
with Western banking and trading institutions to examine ways to
significantly expand the range of financial instruments available to
finance Soviet hard currency imports.
Soviet Motivations
Many of Moscow's recent initiatives have been little more than a
repackaging of old proposals but they have been presented with
greater skill and vigor than in the past. Heightened Soviet
interest in expanding their economic links to the West can be
ascribed to the confluence of several factors.
o Changes in senior economic management have resulted in the
ascendancy of action-oriented individuals who realize that
new tactics must be used to meet Soviet economic challenges,
particularly modernization and accelerated growth. A
revamped foreign policy apparatus is taking a more dynamic
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approach to Soviet international affairs, including economic
issues.
o The reorganization of key domestic economic sectors and the
foreign trade apparatus is an effort by Gorbachev to
streamline the bureaucracy and allow it to respond to these
challenges. The new trade policy team probably realizes that
Soviet goals in the international arena have been frustrated
in the past by conservative and ideologically constrained
approaches and, in general, by a relative ignorance of the
operations of the international financial and commercial
markets.
o The need to deyelop a competitive Soviet export sector for
manufactured goods has increased the pressure for Soviet
representation in international economic organizations.
Moscow feels that its current reliance on raw material
exports for the bulk of its trade earnings is not consonant
with its level of economic development and, moreover, makes
it too vulnerable to fluctuations in world commodity prices.
o The recent deterioration in the Soviet hard currency
position, the result of reduced earnings from both oil
exports and arms sales, has driven the Soviets to explore
alternative sources for financing imports.
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Improving Trade Effectiveness
Reorganizing the Foreign Trade Apparatus
In late September the Soviets announced a major overhaul of the
Ministry of Foreign Trade. More than twenty ministries and seventy
large associations and enterprises are to be granted authority to
conduct trade directly with their foreign partners as of January 1,
1987. To carry out this trade, the ministries and production
associations will have foreign trade organizations placed under
their juriidiction, many of which will be transferred from the MFT.
Breaking the MFT's monopoly over foreign trade is clearly tied
to Soviet efforts to expand exports of manufactured goods by
strengthening the link between producers and world markets. In
addition, it is designed to improve the efficiency of importing
Western technology by giving end-users more say in contract
negotiations. Under the current system, negotiations are drawn out
and purchases often do not meet the requirements of end-users, as
price considerations of the
technical specifications.
While the MFT will continue
exports, it is conceivable that
foreign trade organizations win out over
to control a large portion of
purchasing authority for most
imports will fall to the various ministries. Included in the list
of ministries being granted the right to conduct trade directly are
the State Agroindustrial Committee (Gosagroprom), the State
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Committee for Supplies (Gossnab), the Ministry of Chemical Industry,
and most machine-building ministries (see table 1). It is expected
that in time additional ministries and enterprises could be granted
autonomy over their trade transactions.
At present it is uncertain as to exactly how funds will be
allocated to cover imports but it appears likely that distribution
of funds among the various sectors of the economy will continue to
be centrally determined.
As part of the reorganization, the Soviets have created a
coordinating commission made up of the heads of the major ministries
and departments engaged in trade activities. It is supposed to
provide strategic guidance to the foreign trade sector; its command
over resources, however, appears to be far less than that accorded
to the state committees formed to oversee agriculture and
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TABLE 1
Soviet Ministries with Direct Access to Foreign Trade Partners
as of 1 Janauary 1987
State Committees
Gossnab (State Committee for Supplies)
Gosagroprom (State Agroindustrial Committee)
GKNT (State Committee for Science and Technology)*
Goskomsport (State Sports Committee)*
Goskomizdat (State Publishing Committee)*
Machine-Building Ministries
Minenergomash (Ministry for Power and Machine Industries)
Mintyazhmash (Ministry of Heavy Machine-Building Industries)
Minelelqrotekhprom (Ministry of Electrical Equipment Industry)
Minavtoprom (Ministry of Automotive Industry)
Minselkhozmash (Ministry of Machine-Building for Agriculture)
Minpribor (Ministry for Instrument Making and Automation)
Minstankoprom (Ministry for Machine-tool Building Industries)
Minkhimmash (Minsitry of Chemical and Petroleum
Machine-Building)
Other
Mirmorflot (Ministry of Merchant Marine)*
Minrybkhoz (Ministry of Fisheries)*
Mingeo (Ministry of Geology)
GUGK (Main Administration for Customs)
Minkhimprom (Ministry of Chemical Industry)
Minstroimaterialov (Ministry of Building Materials Industry)
Minmedbioprom (Ministry of Medical and Biological Industries)
Tsentrosoyuz (The Central Union of Consumer Cooperatives)*
*Entities already having some control over their foreign economic
relations.
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construction.
naming of V.M.
the Council of
The commission's clout has been enhanced by the
Kamentsev, a recently appointed deputy chairman
Ministers with reportedly strong administrative
of
and
negotiating skills. The MFT and the State Committee for Foreign
Economic Relations--which administers economic and military
programs--will continue to monitor foreign trade operations but, at
least for the MFT, with reduced power. VTB appears to have gained a
greater role in controlling the distribution of scarce hard currency
funds.
Joint Ventures with the West
Moscow is likely to complement increased end-user autonomy with
the capability to conclude joint ventures with Western firms. The
Soviets probably see several advantages to such a relationship.
o Partnership with a Western firm would provide access to
established markets and trademarks that could make it easier
to sell Soviet-made goods in the West.
o Quality control by the Western partner would help assure that
products meet world market standards.
o A long-term equity relationship with a Western firm could
allow for automatic updating of production lines to keep up
with changing Western demands and technology.
o Joint ventures would also allow for transfer of technical
know-how related to organization and management of production
and the use of advanced technology that are not easily
transferred through traditional equipment purchases.
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o Such arrangements would allow for the transfer of Western
technology at little or no hard currency cost to the Soviets until
after production begins.
A framework for joint enterprises with other members of CEMA has
recently been introduced and the Soviets appear willing to offer
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similar business opportunities to the
officials have mentioned the possibility
Western firms on numerous occasions, both
West. High level Soviet
of joint ventures with
publicly and in private
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discussions, with Western businessmen.
the Soviet leadership has passed
a resolution that will
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permit
up to 49-percent foreign equity and allow for some management
control, repatriation of profits, and
other prerequisites to make
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such ventures attractive to Western firms.
While joint ventures with the West
buzzword among Soviet officials, there
appear to be the current
are a several other types of
arrangements that the Soviets could pursue that would provide many
of the same advantages. For example, buyback and coproduction
arrangements would allow for access to Western markets, quality
control, hard currency savings, and improved access to Western
.technology but with less direct Western involvement. Indeed, many
of the discussions under the rubric of "joint ventures" appear to be
little more than coproduction or buyback arrangements in the
manufacturing sectors.
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Purchase of Western management services could also improve
Soviet efficiency in introducing new technological processes and
organizing production. Such arrangements should be particularly
attractive to the Soviets in key sectors of the economy where they
might desire to limit the extent of Western involvement such as in
agriculture
these lines
the fall in oil prices and increased interest in joint ventures.
and the development of raw materials. Discussions along
had begun late last year but little has been said since
Increased Financial Sophistication
Although the degree of actual borrowing has yet to be
determined, Gorbachev's financial managers are clearly interested in
taking full advantage of the wide range of Western financial markets
and instruments in an effort to improve the effectiveness of Soviet
borrowing activities. Past financial managers were extremely
conservative in their financial dealings with the West--relying
heavily on Eurocurrency borrowings and government-backed
credits--and seemingly obsessed with obtaining the lowest nominal
interest rate (to the point of allowing a substantial compensating
markup in the cost of imported equipment). As a result, the USSR
often paid more for its funds and received greater adverse publicity
in doing so than other borrowers with an equal credit risk.
VTB and Soviet-owned banks in the West are already adopting a
more sophisticated approach:
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o Moscow Narodny Bank, the Soviet-owned bank based in London,
recently put together a $100 million "note issuance facility"
(NIF), a new instrument incorporating an option to issue
notes as well as raise cash through bank advances. VTB has
also recently accepted a French proposal to organize its own
o Last year, the Soviets agreed to an acceptance facility--a
financing technique in which the bank guarantees payment to
exporters foi-trade documents--with US and Canadian bankers
for grain purchases. In August, VTB arranged a 100 million
pound sterling bankers acceptance led by a British bank, the
first time the Bank of England has permitted the Soviets to
borrow in this manner.
The Soviets are also making unprecedented moves in world bond
markets. In August, VTB agreed to invest $3.2 million in a
yen-denominated bond issue, marking the first entry of the USSR into
the international bond market. Most financial analysts believe that
this venture is an indicator of Moscow's interest in marketing its
own bond issues, a cheaper source of long-term funds than syndicated
borrowing. Recent settlement with the British on Tsarist bonds in
default since 1917 removes a long-standing impediment to the
issuance of Soviet bonds.
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As part of its decision to broaden its financial dealings, the
Soviets are moving aggressively to build the requisite expertise.
Moscow
also invited Western bankers to a financial seminar in mid-October
to discuss .management of the newer financial techniques and
instruments as well as developments in marketing precious metals.
The Soviets appe-ar to have recognized that more sophisticated
financial dealings entail expanding the number of their financial
actors in the international arena. Moscow has renewed efforts to
establish a branch of VTB in Tokyo
Moscow has been
negotiating with Kuwait to establish joint banking operations to
fund projects in the USSR and in third countries.
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Interest in Multilateral Economic Institutions
The Soviets are exploring the possibilities of expanding ties
with a number of multilateral institutions. To some extent,
increased participation in some international economic bodies goes
hand in hand with Moscow's efforts to enhance its ability to boost
exports. Yet such membership also provides Moscow with both an
opportunity to expand its knowledge in this area and to gain new
forums for political activism. Soviet actions to date do not appear
to be as well thought out or as carefully planned as other recent
moves on the trade front. In particular, years of neglect probably
have left Moscow without a clear understanding of the costs and
benefits of associatlon with some of these international
institutions. For example, Ivan Ivanov, head of the newly created
MFA department for international economic issues told US Embassy
officers that there were only 3 or 4 Soviet experts on GATT.
inexperience was evident in Moscow's ill-timed and incorrect
approach to the GATT at the Punta del Este meetings.
Such
Despite the recent rebuff, Soviet interest in GATT remains keen,
with an eye on eventually acceding to the agreement. The Soviets
apparently believe that membership in GATT will expand their general
knowledge of world economic conditions and trade opportunities and
help to integrate the USSR into the international economy by making
Soviet exports eligible for reduced tariffs. For example,
negotiations during the upcoming round on services could affect
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Soviet activities in international shipping. The Soviets may also
believe that GATT membership would make them less vulnerable to
economic sanctions, although it is doubtful that governments would
eschew such an option if they felt that sanctions were politically
justified.
Meeting GATT membership criteria may prove difficult, however.
Soviet officials argue that the recent reorganization of the foreign
trade sector make the Soviet economy more compatible with the aim of
the GATT. ?Although the changes could help improve the efficiency of
foreign trade, crucial trade decisions will remain centrally
controlled. Thus, the Soviets still have not accepted the concept
of free trade and international competition which form the basis of
the GATT. Moreover, with no tariffs or quota systems, the Soviets
have few direct concessions that they can offer in negotiations for
accession to the GATT. Like other centrally planned countries that
have acceded to the GATT, such as Hungary and Romania, Soviet
concessions would have to incorporate commitments to increase
imports from GATT signatories. The Soviets would have difficulty
meeting such commitments, however, given current hard currency
problems and only a limited potential for expanding exports.
While the Soviets appear to view their initial participation
within the GATT as a learning experience, in time Moscow might bring
a strong political element to the GATT forum. The meetings could be
used to criticize US actions or upset the decision-making
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process--which depends on consensus rather than votes--in favor of
developing countries. Such interference would complicate procedures
in an organization that already has difficulty in settling disputes.
While there has been some reported interest in joining the IMF,
Soviet officials have denied any intention of seeking membership.
The USSR rejected IMF membership as too restrictive after
participating in the organizing meetings as Bretton Woods in 1944.
In particular, the USSR was unwilling to give up autonomy in setting
their own trade and exchange rate practices, did not agree with the
gold subscription requirements, and refused to release sensitive
economic data such as, gold reserves and balance of payments
information. These factors are likely to continue to contribute to
the Soviet lack of interest in the organization. In addition, as a
join as a net
from its policy of
large industrial nation, the USSR would probably
creditor nation which would be a major departure
extending economic aid on a bilateral basis.
Although we expect Soviet interest in the IMF to be weak, a
number of factors could eventually cause Moscow to reconsider IMF
membership.
o The size of the Soviet economy, from which voting shares are
determined, makes it likely that the USSR would receive a
voting share large enough to gain a seat on the Executive
Board and put it in the position to influence important
Fund decisions such as structure of the Fund, changes in
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quotas and allocation of SDRs.
0 The Soviets also could use their position to influence
decisions on lending to Third World clients. In particular,
Moscow may believe its image could be enhanced as a lender
within the IMF.
o Membership could could also help to expand Soviet exports as
other members draw on the ruble portion of the Soviet
subscription, which would account for 75 percent of the total
and .could only be spent on Soviet goods.
One side benefit from joining IMF would be Moscow's ability to
subscribe to membership in the World Bank (IBRD). The costs and
benefits from joinidg_the World Bank would be much the same as the
IMF and thus, as with the IMF, World Bank membership is not likely
to be particularly attractive to the Soviets, unless their
involvement in international trade and finance increases
considerably.
The Soviets have been interested in establishing formal
EC-CEMA ties since the early 1970s and have actively pursued this
goal since the CEMA Summit in June 1984. Economic and trade issues
probably were an important Soviet motive in earlier years but the
present effort has a more pronounced political flavor. Moscow
clearly wants some form of official recognition for CEMA by the EC
to enhance the status of the organization within the international
community. In addition, the Soviets probably hope to establish a
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forum to discuss the entire range of East-West issues with the West
Europeans without the United States. Another longstanding Soviet
goal has been to keep relations with the EC on a multilateral basis
in order to block EC arrangements with individual East European
countries, In a major concession last year to break the deadlock,
the Gorbachev regime gave the green light for Eastern Europe to
conclude bilateral arrangements with the EC, but Moscow is still
likely to monitor closely the East Europeans' dealings with the EC.
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Other Soviet approaches to world institutions such as the United
Nations have also had a decidedly political bent. The Soviets first
broached their ideas-about an economic security initiative in
general terms at the UN last year. Soviet Foreign Minister
Shevardnadze's 23 September address to the United Nations General
Assembly included a strong pitch for a new, comprehensive system of
international security--the Soviet theme that ties together all of
Gorbachev's disparate disarmament and foreign policy initiatives.
The economic component of Gorbachev's proposal calls for the
establishment of a system of equal economic security, removal of
economic blockages and sanctions, and creation of vehicles to handle
the international debt problem. Included in this proposal is an
effort to draw up principles to govern the use of part of the funds
released from military budget reductions, which are also being
proposed by the Soviets, to provide the LDCs with some economic
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None of these ideas are new. The Soviets have simply
resurrected outdated North-South themes--areas where the Soviet
economic interests are small and the prospects for political
visability are high. By weaving them together with other proposals
on security and political issues into one overall framework,
however, the Soviets are trying to create an illusion of newness and
to lend concreteness to what Gorbachev calls "new political
thinking" embodied in a series of proposals dating back to early
1986. Soviet initiatives have not met with much enthusiasm from the
LDCs; in fact, Soviet and LDC interests on international economic
issues have been diverging over the last decade. With a new set of
policymakers in place and Gorbachev's call for new ideas, it is
possible that in time the Soviets will propose some fresh ideas,
particularly if the leadership is interested in taking a global
approach to addressing international economic problems that affect
their trade and financial position.
Future Soviet Actions
How Moscow proceeds relative to recent initiatives will depend,
in large measure, on future leadership decisions regarding (a) the
role of Western technology and equipment in Gorbachev's
modernization drive, (b) the extent of Western managerial
involvement and corporate ownership, and (c) the acceptable level of
hard currency indebtedness. Moreover, it will take some time before
these decisions are made:
o The leadership will likely spend the next year or two
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assessing the sufficiency of ongoing domestic programs--
shifts in investment priorities, management reorganizations,
and the discipline campaign--before reconsidering their
conservative positions regarding Soviet reliance on foreign
technology and equipment and systemic economic reform.
o It will take awhile for Gorbachev's new team of managers to
acquire the experience and expertise necessary to confidently
move heavily into the international financial and commercial
arenas.
Until the Soviets complete the formulation of their long term
trade strategy, we can
international economtc
expect
arena.
cautious but
In the area
steady movement into the
of joint ventures, the
first contracts could be signed as early as next year. Although
with less fanfare, the Soviets are likely to encourage expansion of
coproduction and utilization of Western management services.
Soviets are also likely to look for more opportunities to
participate in joint projects in the Third World with Western firms.
While the Soviets have used Western equipment to enhance the
competitiveness of their bids on projects in the Third World in
The
the
past, they have rarely formed direct partnerships with Western firms
when bidding on these projects. Arrangements like the one they are
negotiating with Kuwait could provide the necessary funding without
Moscow having to offer credits. More remote is the possibility of
Soviet multinationals, primarily in cooperation with Western firms.
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Progress along these lines is apt to be slow. While some
Western firms may be willing to make a relatively small investment
to gain entry into the Soviet market, most are likely to take a
wait-and-see attitude. Years of dealing with cumbersome Soviet
bureaucracies, shoddy Soviet manufactures, and unimpressive results
from joint ventures with other socialist countries will make most
businessmen wary. The Soviets themselves are apt to approach actual
negotiations cautiously. Granting the amount of Western control of
production decisions-.that would be required by the Western parties'
would go against the grain of most Soviet managers. At present, it
appears that there is still a considerable amount of uncertainty
among mid-level Soviet officials who deal regularly with Western
businessmen over what exactly joint ventures will entail.
Even if impediments to successful joint ventures can be
overcome, the level of investment is likely to be too small to have
much of an impact on expanding Soviet exports of manufactured goods.
Nor will the recent changes in the foreign trade apparatus likely
have much success in expanding exports. Although they will probably
improve the operation of trade by removing the MFT as a cumbersome
middleman for some trade actors, the changes do not remedy the lack
of domestic incentives for producers, the irrational price
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structure, and the inadequate technological base that underlie the
poor position of Soviet manufactured goods in world markets. In
addition, depressed earnings from traditional exports will severely
constrain purchases of foreign equipment that could compensate for
some of these shortfalls.
How the Soviets will respond to lackluster export performance is
difficult to predict. They are most likely to introduce piecemeal
adjustments to deal with some of the specific problems that develop.
They might try isolating the export-oriented producers and joint
ventures from the inefficiencies of the economy, much as the defense
industries are protected. However, the benefits of
trade--especially in--areas of technology assimilation and
diffusion--would be similarly isolated.
As long as Moscow continues its conservative approach towards
reliance on Western technology, an increased role for the USSR in
the international financial arena is unlikely. The Soviets will
probably become more adaptable to new financial instruments and more
flexible in the management of their assets. For example,
Soviet-owned banks are now permitted to hold
certain Western bonds in their portfolios. But the present
limitations on Moscow's currency earnings, coupled with some
vestiges of traditional Soviet conservatism, are likely to restrict
sharply any large-scale speculative approaches to financial
management. Gold trading and real estate scandals involving
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Soviet-owned banks and the resulting tightening of central control
from Moscow are indicative of Moscow's attitude.
The Soviets will continue their approaches to a variety of
multilateral economic organizations for both political and economic
reasons. GATT will probably remain a key area of interest to the
USSR both for the prestige factor and the chance to participate in
negotiations which they consider will affect their interests.
Lackluster trade performance and a trade sector that remains largely
under the control of central authorities will, however, undermine
Soviet arguements that their system is becoming more compatible with
the aims of the GATT.
For largely politcal
reasons the Soviets will continue to press
for formal EC-CEMA relations although probably without expectations
of anything but minimal economic gains. IMF and World Bank
membership are not likely to be pursued actively at least not at the
the present time. Disclosure requirements and less control over its
economic aid are likely to deter any serious Soviet interest. Nor
would the Soviet leadership be willing to accept being labeled as a
developing country in order to get access to World Bank credits.
The USSR will almost certainly become more active in promoting
its own solutions to international economic issues. It may perhaps
go as far as proposing new international forums for dealing with
such issues, especially if it feels strongly enough that it is being
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unjustly discriminated against by existing institutions. What forms
the new Soviet proposals are likely to take are difficult to
predict. We will probably see a repackaging of old proposals with
slightly different nuances rather than bold new proposals. To the
extent that the content of Soviet initiatives remains similar to
past proposals, international response is likely to be lukewarm at
best. In addition, the small Soviet share of world trade coupled
with the expected lackluster trade and economic performance could
weaken Soviet positions.
Impact of Soviet Actions
These Soviet initiatives will have substantial repercussions on
US policy interests. To the extent that Soviet activities on
international markets bring it closer to the international economic
community, the West probably benefits since it gives the Soviets a
greater stake in working to solve problems within the system. Such
a stake, however, is not likely to weigh heavily in Soviet decisions
where political and strategic interests are involved.
Increased cooperation with Western firms is likely to improve
Soviet assimilation of Western technology at given enterprises,
although diffusion throughout the economy is likely to continue to
be difficult. Soviet ability to make effective use of Western
equipment and technology has been constrained in the past, partly by
the inability of Soviet managers and engineers to work hand-in-hand
over an extended period with their Western counterparts. A vested
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interest by Western business in the effective use of Western
equipment and technology, backed by a sustained on-site presence,
could substantially improve their use. Moreover, Western firms
involved in joint ventures with the USSR are likely to want to
incorporate state-of-the-art technology into these projects and
could press their governments to relax COCOM controls. Furthermore,
joint ventures established outside the USSR or subsidiaries of joint
ventures in third countries could give Soviet technicians greater
access to controlled-technology without it being transferred onto
Soviet territory.
Greater Soviet involvement in international trade and financial
markets would make i.4_easier for Moscow to hide the level of its
financial activities through the use of numerous instruments such as
interbank deposits, borrowing from non-bank institutions or banks
outside the BIS reporting area. In the past, Soviet reliance on
government-backed credits and a select grouping of major commercial
banks in the US and Western Europe provided Western governments with
the ability to effectively monitor, and, to some extent, control the
level and terms of Soviet borrowing.
Increased trade with the LDCs could recoup some of the lost
Soviet prestige and influence in the area. The Soviets would likely
be willing to lend to debt-ridden LDCs at attractive rates to obtain
contracts for projects, particularly those that would generate
repayments in raw materials needed for the domestic economy. While
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this would not represent a shift from current Soviet policy toward
the Third World, higher quality Soviet exports combined with LDC
debt problems would make trade with the USSR more attractive than in
the past.
Greater Soviet activity in the international economy, especially
in multilateral forums will increase the number of Soviet officials
in the West and thus the opportunities for KGB activity. The
intelligence activities undertaken as part of their participation in
the United Nations offer a clear precedent in this regard. The
opportunity to promote additional active measure campaigns would
increase. This would be particularly true with respect to IMF
decisions regarding tinancial support to various Third World
applicants.
If the regime decides in several years that it must rely more
heavily on Western technology and equipment for its modernization
efforts to succeed, we would expect to see a much bolder Soviet
entry into the international economic arena and an even greater
impact
expect
on US policy interests. Under such circumstances, we could
a major increase in the flow of Western technology to the
USSR with a commensurate rise in Soviet hard currency borrowing.
Moscow's low indebtedness, substantial reserves of near-monies such
as gold and energy, centralized control over resources, and large
unexploited internal markets would make the USSR an attractive
market for Western direct investment.
mnn cyrnvm
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Western governments would have to contend with a growing
interest group of manufactured goods exporters seeking more
favorable trading conditions--low-interest credits, reduced export
controls, better bilateral relations in general. The pressures from
the business community would be even greater if the Soviets
implement internal reforms that result in internationally
competitive joint venture and equity arrangements. In fact, the
Soviets could dangle lucrative trade deals in front of the Europeans
and reiterate the theme of Pan-Europeanism to encourage them to
adopt trade policies vis-a-vis the USSR that are at variance
policy. A similar policy could be adopted with the Japanese.
with US
Increased Soviet understanding of how international financial
and commercial markets operate carries a commensurate risk that
Moscow may attempt to manipulate these markets to the detriment of
US national security interests. The West has been moving towards
globally integrated financial and commodity markets at a geometric
pace. The capability to engage in financial, equity, and commodity
transactions has outstripped international agreements on regulatory
conditions. This fact, along with the rapid rise in transaction
volume and the relative inexperience of many of the players has, in
the minds of many experts, created the clear potential for an
international crisis precipitated by one or more shocks to the
system. Should Moscow gain the requisite expertise and market
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access, it is not inconceivable that the Soviets could effectively
precipitate such a crisis without its role being known, for example,
by the judicious placement of false data into the system or
otherwise tampering with the worldwide transmission of financial or
commercial information. We believe such actions would be unlikely,
however, as long as the USSR's growing role is paying off in
economic and even political dividends. If, on the other hand,
Moscow perceives few economic benefits and remains a minor player in
these markets, then the economic loss it would suffer would pale
compared with the potential for significant damage to Western
economic stability.
The USSR could conceivably employ such tactics for a variety of
reasons.
o Financial or commercial market disruption could be initiated
to preoccupy the interests of Western governments at a time
when the Soviets were engaged in activities--say in Eastern
Europe or the Middle East--which would otherwise result in a
united response from the alliance. In such cases Moscow
would be seeking to disrupt rather than to irreparably damage
Western trade and financial practices.
o If the Soviets come to the conclusion that they cannot
effectively compete with the West technologically and
economically and that failure in this regard carries
substantial risks to their long-term ability to maintain
strategic parity, they could potentially opt to precipitate a
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t
major and sustained economic crisis in the West. According
to some experts, such a crisis could be effectively started
should shocks to the international financial and commercial
markets quickly snowball to the point at which they cannot be
effectively controlled by Western government, financial and
regulatory institutions.
?
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