INTERNATIONAL ECONOMIC & ENERGY WEEKLY

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP97-00771R000706820001-9
• Release Decision: RIPPUB
• Original Classification: S
• Document Page Count: 43
• Document Creation Date: December 22, 2016
• Document Release Date: October 4, 2010
• Sequence Number: 1
• Publication Date: January 20, 1984
• Content Type: REPORT

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Directorate of I Seer
Intelligence
International
Economic & Energy
Weekly
-sit
DI /EEW 84-003
20 January 1984
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International
Economic & Energy
Weekly
20 January 1984
iii Synopsis
Perspective-Bread and Politics in the Middle East
Energy
International Finance
Global and Regional Developments
National Developments
17 / Risks of an Oil Price Decline
23 /Israel: Trade Union Stymies Austerity
27 Egypt's Worrisome Food Gap
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31 West Germany: Soviet Trade Relations on Trackl 25X1
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35 The Soviet Timber Industry
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Comments and queries regarding this publication are welcome. They may be
directed to Directorate of Intelligence,
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20 January 1984
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International
Economic & Energy
Weekly
Synopsis,
. violent reactions and broken government resolve
17 Risks of an Oil Price Decline
1 Perspective-Bread and Politics in the Middle East
The riots in Tunisia earlier this month underscore the dangers facing several
key financially troubled Middle Eastern states. Their fiscal problems generally
can be resolved only through austerity measures that have often provoked
Eroding discipline among OPEC countries and prospects of a seasonal cutback
in oil demand this spring could place downward pressures on prices. 25X1
23 Israel: Trade Union Stymies Austerit3E=
Finance Minister Cohen-Orgad probably will not be able to carry out his
austerity policies, largely because of a lack. of support from the Histadrut,
Israel's large labor organization
27 Egypt's Worrisome Food Gap
Agriculture, a cornerstone of the Egyptian economy, is suffering from
inadequate investment and government policies that overlook many of the
sector's pressing needs. Since continued high domestic demand and limited
arable land provide little hope that Egypt's food gap will narrow, we believe
that large imports of food will continue and that Cairo will be forced to
pressure donors for increased food aid. F1
31 West Germany: Soviet Trade Relations on Track
Although Bonn has been concerned that frictions with Moscow over INF
deployment and other security issues would spillover into the trade arena,
West German-Soviet commercial relations appear to remain on a stable
footing
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35 The Soviet Timber Industry
Although the USSR has the largest forest cover in the world and remains the
leading producer of lumber, the. Soviet timber industry has faltered since the
mid-1970s because of transportation bottlenecks, a decrease in capital and
labor inputs, and poor investment decisions. With worldwide supplies expected
to tighten over the next decade, Moscow must overcome existing domestic
production constraints if it is to take advantage of export opportunities.
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Perspective
Weekly
International
Economic & Energy
20 January 1984
The riots in Tunisia earlier this month underscore the dangers facing several
key financially troubled Middle Eastern states. Their fiscal problems generally
can be resolved only through austerity measures that impact heavily on the po-
litically volatile poor and middle classes. The Tunisian bread riots-which
shook the pro-Western Bourguiba regime and, according to unofficial counts,
left over 100 dead-were sparked by that government's decision to remove
subsidies on wheat, causing bread prices to double. Only the government's
strong show of force and its decision to rescind the price increases calmed the
situation.
Elsewhere in the Middle East, budgetary problems and the need to garner
IMF and donor support to deal with balance-of-payments difficulties have
dictated similar austerity measures. These actions, however, have often
provoked violent reactions that have broken government resolve:
? The Egyptian Government's attempt to lower subsidies for bread and other
staple commodities sparked bloody urban riots in 1977. As in Tunisia, the vi-
olence was ended by a combination of force and the repeal of the price hikes.
? In Morocco, substantial price increases-averaging 70 percent-for flour,
sugar, and edible oil in 1981 resulted in labor strikes and violence that led to
100 deaths and 300 injuries. Rabat responded with a harsh crackdown and
halved the price increases.
? Sudan's decision in 1982 to lower sugar subsidies by 60 percent led to
demonstrations in Khartoum and several provincial towns that left 21 dead.
subsidies as a palliative for growing unemployment.
Most governments in the region use subsidies to help meet middle class
expectations for higher standards of living and to provide at least minimum
consumption levels for the poor. In Egypt, subsidies help placate the govern-
ment's large urban constituency. Other countries, such as Morocco, use
Although many Arab governments are resigned to allocating large portions of
their strained budgets to the subsidy system, they recognize that the system is
inefficient and that it sacrifices their future economic development. In Egypt,
for example, bread subsidies currently amount to about $900 million, or over 3
percent of GDP; the average Egyptian family buys about 30 pita-sized loaves
per day, much of which is wasted. Cairo-prodded by key donors-has on
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three occasions since last summer gone to the brink of doubling bread prices
but each time pulled back. Instead, Egypt has sought increased aid or a
rescheduling of debt payments. Similarly, in Jordan budget resources have
been hard hit by shortfalls in Arab aid, but preliminary proposals for 1984 call
for keeping wheat subsidies intact while letting some development projects go
Recurring and deepening economic problems eventually will force more
subsidy cuts by governments in the Middle East but only as a last resort.
Serious risks exist for key donors like the United States that have "special re-
lationships" with moderate states in the region. Failure by the United States
and other donors to increase aid commitments combined with a perception that
donors are pushing austerity measures will make them easy scapegoats for
economic problems. Moreover, unrest over economic issues, especially when
followed by harsh crackdowns by government forces, could provide opportuni-
ties for Islamic fundamentalists and leftists to-cause further problems.
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Energy
PEC 1983 Production Preliminary estimates indicate that OPEC annual crude oil production in 1983
fell to 17.7 million b/d, the lowest average in 16 years and 6 percent under the
1982 level. While Iran, Kuwait, and the Neutral Zone were marginal gainers
for the year-picking up a combined total of over 400,000 b/d-Saudi
Arabian production dropped 1.3 million b/d. Average daily production for the
organization during the April through December period was 18.2 million b/d,
offsetting the 15.9-million-b/d average for the first quarter. Although the 25X1
average for the last three quarters was well above the production ceiling of
17.5 million b/d reaffirmed by OPEC last March, it was still 2 percent below
the comparable 1982 period when the same overall quota was in effect.
OPEC: Crude Oil Production Million bld
Quota
1982
Total
17.5
18.9
Algeria
0.725
0.7
Ecuador
0.2
0.2
Gabon
0.15
0.2
Indonesia
1.3
1.3
Iran
2.4
2.4
Iraq
1.2
1.0
Kuwait
1.05
0.7
Libya
1.1
1.2
Neutral Zone
b
0.3
Nigeria
1.3
1.3
Qatar
0.3
0.3
Saudi Arabia
C
6.3
UAE
1.1
1.2
Venezuela
1.675 ?
1.9
a Preliminary.
December
4th Qtr
Total
18.8
19.0
17.7
0.8
0.8
0.7
0.2
0.2
0.2
0.2
0.2
0.2
1.4
1.4
1.3
2.4
2.4
2.5
1.0
1.0
0.9
1.0
1.0
0.9
1.2
1.2
1.2
0.4
0.4
0.4
1.3
1.3
1.2
0.4
0.4
0.3
5.6
5.9
5.0
1.2
1.2
1.2
1.7
1.7
1.8
b Neutral Zone production is shared about equally between Saudi
Arabia and Kuwait and is included in each country's production
quota.
c Saudi Arabia has no formal quota; will act as swing producer to
meet market requirements.
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Energy Industry Petroleum companies operating in Canada are dissatisfied with the domestic
Protests Canadian procurement requirements of the Canadian Oil and Gas Lands Act (COGLA).
Prcurement Policies Under COGLA, the government oversees the bidding process on Canada's
large energy projects and attempts to maximize the participation of Canadian
firms. According to press reports, several major petroleum firms complained at
last week's industry-government meetings of unwarranted COGLA interfer-
ence in bidding for energy equipment and services. the 25X1
government actions have added unnecessary delay an su s an is cost 25X1
overruns to offshore energy exploration. The industry is willing to provide
Ottawa with bidding lists but objects to a new requirement that a company
provide 48-hour advance notice before tendering contracts for 14 designated
goods or services such as drill rigs, support vessels, and technical studies.
Ottawa uses the time to review the bid and, in some cases, has pressured
companies into choosing a domestic supplier. Moreover, companies have
complained that Ottawa has coerced them into accepting higher levels of
Canadian participation and increased involvement in affirmative action em-
ployment programs before they can obtain exploration leases on federal lands.
The companies believe they are taking sufficient efforts to establish a domestic
energy supply industry in Canada and resent Ottawa's attempts to increase
Canadian participation in order to "create an industry overnight." Moreover,
the firms are concerned about the ability of Canadian firms to provide safe,
cost-efficient equipment for difficult offshore energy projects. Ottawa, which
supplies the companies with much of their exploration money, is unlikely to
/ France To Boost Gaz de France-the state gas company-is set to impose a 5-percent price
Gas Price hike on its customers in early February, and the company announced a second
rate hike is likely in the fall. The price hikes are an attempt by Gaz de France
to cut its growing losses, especially given the government's recent refusal to
continue to pay the company a 13.5-percent surcharge on high-priced Algerian
gas. The price hikes are likely to dampen gas demand and could thus
exacerbate Paris's problems of disposing of increased gas deliveries from
Algeria and the Soviet Union[
4oviets Boost Oil A third-quarter surge pushed Soviet exports of crude oil and oil products to
Exports OECD countries (including Finland) to 1.5 million b/d for the first nine
months of 1983, nearly 10 percent more than the same period a year earlier.
Nearly 90 percent of these exports were for hard currency. According to
preliminary OECD data, Soviet shipments in the first half of 1983 were about
the same as in 1982, but in the third quarter they rose 27 percent above third-
quarter 1982. This volume increase will help offset the drop in oil prices. If
Soviet oil deliveries to hard currency customers continued in the fourth quarter
of 1983 at the average rate for the first three quarters, hard currency earnings
would be only $200 million below the record $14.9 billion earned in 1982. The
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increase in Soviet oil exports to OECD countries reflects increased supplies
made available to the Soviets as OPEC countries repay their Soviet debts with
oil, the continued slow growth in production last year, and stock drawdowns.
Romanian Expansion of According to a Soviet commercial representative in Bucharest, Romania will
viet Oil Imports import 1.3 million metric tons (52,000 b/d) of Soviet oil during the first half of
hi
f
t
s year in return
or unspecified Romanian agricultural goods. The an-
nouncement implies a return to at least the average annual level of oil imports
that Bucharest received from Moscow in the 1980-82 period; last year
deliveries were only 200,000 tons. If the oil trade occurs-neither country has
as yet publicly announced the deal-it will help Romania to diversify its
sources of oil. It will not, however, save hard currency for Bucharest, as the ag-
ricultural commodites could be sold to other buyers for hard currency.F_
Romania has slashed its net oil imports over the last several years to conserve
hard currency, but has been unable to boost domestic production to meet its re-
duced needs. As a result, Bucharest has continued to lobby Moscow unsuccess-
fully for oil under concessionary terms similar to those granted other CEMA
members and the current deal implies that Moscow has not changed its mind.
Countrywide Electricity In late December a blackout occurred in the Swedish electric power grid
Blackout in Sweden affecting nearly 90 percent of the Swedish population and some power
customers in Denmark. An overheated circuit breaker at a transformer
substation failed and disconnected a major power transmission line. The
blackout spread rapidly as other electric power distribution facilities shut down
because they were unable to handle the overload. Although power was restored
within two hours, damages and losses due to the blackout have been estimated
as high as $30 million. The Swedish incident and a similar countrywide
blackout in Greece last July serve to illustrate the vulnerability of large
electric power systems to disruption.
,Mexico Reopening After an 18-month hiatus, Mexican businesses are slowly regaining access to
T
rade Credit Lines trade credits that are essential to economic recovery. According to press
reporting, the International Finance Corporation-a World Bank entity that
lends to the private sector-and two US banks recently established a $100
million loan facility to finance capital goods imports. The funds will be
administered by the Mexican foreign trade bank and a large state-owned
commercial bank. Financing for exporters may also be easing;
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Creditors are still
Mexican exporters to increase sales of nonoil products.
unwilling to lend directly to private enterprises and instead are turning to the
Mexican Government to act as an intermediary. Trade financing is essential to
boost imports from $8 billion in 1983 to its goal of $14 billion in 1984 and for
Japanese Financial Aid Tokyo will
Ito the Philippines convert two-thirds of the $235 million in official project aid already pledged
/ for 1984 into quickly disbursing commodity loans,
Y goslav Debt
gotiations. ^ '
Japan will delay disbursements, however, until
Manila signs a letter of intent with the IMF. Agreement with the Fund has
been stalled by a dispute over exchange-rate policy and irregularities in
Central Bank accounts. Japanese aid will not be released until March at the
earliest
Nakasone has taken a personal interest in the financial situation in the
Philippines and has been anxious to be responsive to requests from the United
States to help Manila.
Western government creditors agreed in principle last week to refinance on
favorable terms all officially backed loans to Yugoslavia that are coming due
this year. This refinancing is contingent, however, on Belgrade's first meeting
the terms of the IMF for a standby loan. The major points still in dispute with
the IMF are proposals to raise interest rates to the level of inflation and
centralize control of foreign exchange.
The Western governments' offer-along with a similar offer from commercial
banks-gives Yugoslavia an opportunity to improve its financial position
substantially this year. Creditor insistence on the tough IMF criteria, however,
shows strong reservations about Belgrade's ability to manage the economy.
The regime recently made minor concessions to the IMF, but there is
substantial political resistance in Yugoslavia to centralized management of
foreign exchange and to higher interest rates. Belgrade will have to compro-
mise, however, to secure the debt relief.F___1
India Forgoes IMF Prime Minister Gandhi has announced that India will not seek the final $1.16
Funds billion of a $5.26 billion Extended Fund Facility (EFF) arranged with the
International Monetary Fund in late 1981. This will free the IMF resources
for loans to other countries. Neither we nor the IMF expect that India will en-
counter payment difficulties in 1984 despite a projected current account deficit
of $3.1 billion. Reduced foreign borrowing,will ease debt servicing problems
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Portugal-IMF
,,~ations
Thailand's
eteriorating Foreign
Payments
New IMF Program
Somalia
because all EFF disbursements will have been completed.
later in the 1980s when we expect India will face increased international
financial strains. With national elections required by January 1985, Gandhi
may be planning to increase domestic spending and borrowing for politically
advantageous programs beyond what the IMF would have allowed. After
April, IMF leverage over Indian economic policy will be greatly reduced
Central bank officials have informed the US Embassy that the Portuguese
economy last year did better in some, but not all, respects than required by the
terms of Lisbon's standby loan agreement with the IMF. Lisbon estimates last
year's current account deficit at about $1.7 billion, smaller than the $2.0
billion allowed by the Fund. Foreign debt increased only slightly to $13.8-13.9
billion-well under the IMF's limit of $14.6 billion. The debt structure
improved as well, as short-term debt dropped from $4 billion to $3.4-3.5
billion, while medium- and long-term debt rose by $700 million to $10.4
billion. Lisbon estimates the volume of domestic credit was below the IMF
ceiling at yearend; higher interest rates caused domestic credit growth to
slacken in the fourth quarter.
The Soares administration, however, has not yet fulfilled all the conditions in
its letter of intent to the Fund and is attempting to negotiate easier targets for
1984. According to central bank officials, the lack of progress on changing
labor and banking laws, bringing prices in line with the costs of production,
and improving control over public-sector enterprises prompted a rebuke from
the IMF last November. Lisbon is probably postponing layoffs and price. hikes
on goods produced by state-owned firms until this spring, when it, hopes to re-
ceive a $150 million structural adjustment loan from the World Bank. F_
The current account deficit rose more than 100 percent in 1983 to $2.3 billion,
according to preliminary government estimates. Thailand's worsening external
finances stem largely from a 6-percent drop in export earnings combined with
a 22-percent rise in imports. Exports have been hurt by low international
commodity prices and by the rising value of the Thai currency, which is fixed
to the US dollar. Bangkok last month moved to curb imports by restricting im-
port financing and raising interest rates. Should this fail to slow the growth of
imports, however, the current account deficit is likely to remain close to $2 bil-
lion in 1984 and will increase pressure for a politically controversial currency
devaluation while increasing 1984 foreign borrowing requirements.
Somalia and the IMF are in the final stages of negotiating a three-year, $83
million Extended Fund Facility. Mogadishu also is seeking a Compensatory
Financing Facility worth $20-30 million this year. In return for financing, the
IMF is prescribing an accelerated dismantling of the socialist economic
policies maintained by the Siad government for the past 15 years. The
government is promising to deregulate prices and abolish import and export
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licensing. Moreover, the IMF program calls for increased private-sector access
to credit while sharply limiting public-sector borrowing. The Fund is requiring
the legalization and expansion of the parallel foreign exchange market to
include all transactions except debt and other official payments; this probably
The willingness of Western creditors to finance only part of Somalia's growing
current account deficit has prompted negotiations with the IMF. Reduced
foreign exchange earnings are unlikely to recover until Saudi Arabia lifts its
ban on imports of Somali livestock; Riyadh claims they are diseased.
Moreover, Mogadishu, which has received its final shipment of oil under a
1982 Saudi grant, must begin purchasing oil on the world market unless a new
accord is negotiated. Growing food shortages and drought conditions are
increasing food imports.
Global and Regional Developments
EC Retaliates Against The EC last week decided unilaterally to implement trade restrictions against
a number of US products in response to the US move last summer to restrict
imports of specialty steel. Despite four months of negotiations with the United
States, the EC claims it was unable to arrive. at a mutually acceptable
compensation arrangement. The new restrictions include raising the duties on
methanol, vinyl acetate, and fire and burglar alarms between 6.4 and 6.7
percentage points. According to EC estimates, imports of these goods amount
to roughly $57 million annually. In addition, the Community is imposing
quotas on styrene, polyethylene, skis, hunting rifles, and other sporting goods.
The quotas are expected to cut EC imports of these items by about $23.5 mil-
lion or one-third. The restraints go into effect 1 March and will last four, years,
the same duration as the US specialty steel restrictions.
Despite calls from France for retaliation on agricultural products, other EC
countries blocked such measures in the hope that the more limited product list
would avoid triggering a US response. Moreover, the Community wants to
continue negotiations with the United States over the next six weeks in an
effort to arrange a mutually acceptable compensation agreement before the 1
March implementation date.
Agricultural Trade The EC Commission last week proposed that the Community place tariffs on
RC estrictions Against US imports of corn-gluten feed and other animal feed substitutes. Most of these
products come from the United States and now enter the EC duty free. The
Commission would place a tariff only on imports exceeding 4.5 million tons,
and it is willing to negotiate under GATT auspices a trade compensation
arrangement with the United States. The Commission argues that cheap
imported substitutes aggravate the EC agricultural glut by displacing domestic
grain and encouraging dairy surpluses.
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The EC Council probably will approve the proposals by mid-February, and
GATT consultations could start by early spring. The quotas probably will have
little immediate impact on US exports. Last year the United States sold less
than 4 million tons of the products to the Community, but the EC apparently
believes that US sales could rise in the future. Although philosophically
opposed to the Commission proposal, the United Kingdom and West Germany
probably will acquiesce in return for agreements by other EC members on
changes in the Common Agricultural Policy.
EC Commission The EC Commission this week announced 1984-85 farm price proposals that
Proposes Limited Farm provide for an average increase of only 0.8 percent in Common Agricultural
ice Hikes Policy price supports, the smallest rise in six years. If adopted by EC
agricultural ministers later this spring the package would freeze prices in the
Spanish-French
Bil eral Trade
iscussion
three EC sectors most plagued with overproduction-cereals, milk, and wine.
After translating the Commission's proposals from European Currency Units
into national currencies, West German and British farmers will see their
support prices drop the most-down 5.4 and 3.2 percent, respectively-while
Greek and French farmers will experience the largest increases-up 3.4 and
3.2 percent, respectively.
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The package of limited increases is part of a series of Commission-inspired
austerity measures necessitated by the EC's current fiscal crisis. The Commis-
sion claims that the price proposals will save $140 million this year and must be
enacted, together with other tough reforms it proposed last July, if the
Community is to avoid running out of funds this year. The package has already
been attacked by Community farm lobbies, and protests from farmers will .
likely intensify in coming months as the EC undertakes CAP reform. F 25X1
The US Embassy in Madrid reports that, during the December summit
between Prime Minister Gonzalez and President Mitterrand, Paris proposed a
special bilateral trade agreement that would supplement agreements Spain
reaches with the EC as part of its membership application. In return for
Madrid's agreement to six-year quotas on Spanish exports of fruits, vegetables,
and wine, Mitterrand offered to accept quotas of equal duration on French
exports that pose a threat to Spanish producers. As outlined, the proposal
would technically violate the Treaty of Rome and would therefore require 25X1
approval by the remaining members of the EC and the European Commission.
Such an arrangement would reduce the benefits Madrid would receive from
EC entry and could open the door to special demands by other EC members.
Spanish officials have told US Embassy officials, however, that striking a deal
that protects the interests of French farmers is necessary to move Spain's EC
accession negotiations forward.0 25X1
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Total
Argentina
United States
Other
1978/79 a
3.7
0.9
1.4
1.4
1979/80
4.8
1.5
2.2
1.1
1980/81
3.9
0.1
2.4
1.4
1981/82
4.5
0.3
3.0
1.2
1982/83
3.6
0
2.2
1.4
1983/84 b
4.0
0.8
1.7
1.5
a Marketing year, July-June.
b Estimated.
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New Sources Qf Several recent ore deposit discoveries and technological advances could expand
Strategic Minerals the world supply of strategic metals and minerals. Oman recently began mining
chromite for the first time and has stockpiled ore equal to approximately 7 per-
cent of annual US consumption. India, already the fifth-largest producer of
manganese, has discovered a new deposit of high-grade ore. South Africa has
discovered a new mineral, Hotsonite, which can be substituted economically
for bauxite in aluminum production. In addition, an Argentine research
company has been successful in extracting rare metals-including zirconium,
beryllium, tungsten, titanium, and molybdenum-from ores using a high-
temperature florination process. They are currently negotiating loans to build
a plant to produce tungsten using the process. As a group, strategic metal
prices have fallen 60 percent from their 1981 peak. Unlike most other metals,
strategic metal prices have not rebounded during the current economic
recovery and these new developments could help sustain the soft market.F_
Argentina Back in Argentina's recent sale to Brazil of 615,000 metric tons of wheat is a first step
Brazy Wheat Market by the new Alfonsin government to expand agricultural exports and regain
traditional customers. another 200,000-
ton sale to Brazil is in the works. Argentina's share of the 4- to 5-million-ton.
Brazilian wheat import market fell from over 40 percent in the late ? 1970s to
about 3 percent in the past three years as Argentina concentrated on the more
lucrative Soviet market. To regain its position in the Brazilian market, Buenos
Aires has undercut US prices and, we believe, has offered favorable credit
arrangements. The United States has provided about one-half of Brazil's
import needs in recent years
Brazil: Wheat Imports
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USSR Announces Moscow recently announced the signing of agreements with Angola to develop
Economic Agreements a fishing complex employing 6,000 persons and to cooperate in constructing oil
th Angola depots, producing building materials, and starting farm machinery repair
workshops. The value of the projects was not disclosed. The USSR has
d
d $440
illi
i
i
id
exten
e
m
on
n econom
c a
to Angola since 1975, but only $32 mil-
lion is believed to have been used. This announcement follows disclosure that
the USSR and Cuba have agreed to provide more military aid to Angola. It
suggests a coordinated effort to demonstrate firm backing for Luanda against
increased pressures from Pretoria and South African-backed guerrillas. The
new aid agreements, however, do not provide for badly needed imports for the
deteriorating Angolan economy or for skilled technical services to revitalize
idle industries. Luanda is continuing its efforts to obtain economic aid in the
West.
National Developments
Developed Countries
New Israeli Foreign Finance Minister Cohen-Orgad on Monday announced new restrictions of
Cu fency Controls foreign currency transactions to strengthen foreign exchange reserves. Accord-
ing to press reports, Israelis traveling abroad will be allowed to purchase only
$2,000 in foreign exchange-a $3,000 limit had been imposed on 1 November.
Foreign bank accounts will no longer be permitted, and foreign stock
holdings-$700 million, according to the Bank of Israel-have to be liquidated 25X1
within a year. Dealings in gold and gold futures are now prohibited. F__1 25X1
Cohen-Orgad took this action to provide foreign exchange to finance the
growing trade deficit without having to draw down foreign exchange reserves.
After using about $150 million in reserves last year, Israeli officials probably
are afraid that additional reductions of their roughly $3.6 billion in reserves
might cause commercial bankers to restrict lending to Israel. Enforcement,
however, will be difficult, and we believe these measures will not improve the
foreign payments situation by anywhere near the $1 billion Cohen-Orgad
expects.F__~ 25X1
New Turkish Governor Yavuz Canevi has been named Governor of Turkey's Central Bank, replacing
Central Bank military appointee Osman Siklar, who resigned two weeks ago. Canevi-Vice
Governor of the Bank since 1981-is well known in the international banking
community, but he was not Prime Minister Ozal's first choice for the post. Ac-
cording to the US Embassy, President Evren rejected the first nominee
because of his lack of banking experience and his close ties to Ozal. We believe
Evren may have taken this action to remind Ozal that he does not have
absolute power over economic policy. Furthermore, we believe that Evren is
somewhat uneasy about Ozal's recent decision to put the Central Bank and
several key economic ministries under the jurisdiction of Deputy Prime
Minister Erdem, a trusted Ozal colleague. Although Carievi is not an Ozal
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signed to reduce Turkey's high rate of inflation.
confidant, the Embassy reports no major policy differences between the two.
Under Canevi, the Central Bank is likely to pursue a strict monetary policy de-
"rest German Recovery Industrial production rose 1.5 percent, and new orders jumped 2 percent in
Gains Strengths volume in November, as the West German recovery continues to gather steam.
West German
The pickup in activity pushed real GNP growth to an estimated 1.2-percent
last year, higher than expected as recently as last fall. GNP declined 1.1 and
0.3 percent in 1982 and 1981, respectively. Further improvement is expected
this year, with most growth forecasts clustered in the 2.5- to 3.0-percent range;
exports and investment are expected to play leading roles
According to a recent government report, the native West German population
Population Decline will decline by about one-third to 38.3 million by the year 2030 if present
trends continue. The report went largely unnoticed, but Bavarian Minister
President Franz Josef Strauss seized on the general issue of the falling German
population in the 1984 budget debate to lambast the cabinet for its decision to
cut maternity benefits. According.to the government report, the native West
German birth rate has been the lowest in the world since 1974. It is one-third
lower than the rate needed to maintain the current population. By contrast, the
non-German population in West Germany is expected to increase from the
current 4.5 million to 7 million in the year 2000, or 12 percent of the
population. By 2030, more than one person in four could be non-German
because of their higher birth rates and net immigration. In terms of age
groups, those under 18 will fall from 22.4 percent of the population to 15.3 per-
cent in 2030 while the over-65 group will rise from 15.1 to 23.8 percent. The
growing proportion of foreigners in the population has already led to increased
frictions with native Germans, and this trend is likely to continue. The change
in the age distribution will cause labor and military manpower shortages and
shortfalls in social security financing.
Less Developed Countries
JordanianIEquity in The Jordanian Government has moved suddenly to limit foreign bankers'
oreign Banks To Be financial interests in banks operating in Jordan to minority ownership, despite
lincreased earlier promises from the governor of the Central Bank that this would not oc-
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20 January 1984
cur. According to the US Embassy, former Prime Minister Badran issued a
decree on 27 December, just before losing his job in a government reshuffle,
that foreign banks are commercial enterprises and therefore should conform to
Jordanian law requiring at least 51-percent Jordanian ownership. The new
Minister of Industry and Trade sent letters on 15 January to the local offices
of Citibank and Chase notifying them that they must comply with the law
within three years.
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The government probably is trying to protect itself from domestic criticism
that an important sector of Jordan's economy is under foreign control. If
Amman continues to pursue this course, banking sources of the US Embassy
say they probably will pull out of Jordan. In our judgment, Amman is risking
bankers' good will that may prove important when seeking commercial loans to
deal with growing foreign payments problems.
More Budget Austerity President Soeharto has announced more budget austerity for the fiscal year
Ahead for Indonesia beginning in April following a tight budget in FY 1983/84. Projected spending
1.
in FY 1984/85 will almost certainly fall in real terms, according to the US
Embassy.. The budget reflects a shift away from import-intensive capital
investment to more domestically oriented spending programs and further
gradual reductions-in domestic fuel subsidies. Nonetheless, the government
will increase military and civil servant wages 15 percent following,a two-year
wage freeze. According to one press report, the pay raise represents an effort to
combat corruption among government employees, whose real wages will still
remain below the level of three years agog
rowing needs and dampen lenders' willingness to provide funds.
Jakarta may find it necessary to tighten spending further as the new fiscal year
progresses, particularly if its assumptions about oil prices and foreign borrow-
ing are wrong. The government estimates oil revenues will account for about
50 percent of government receipts in FY 1984/85, down from 60 percent this
year. Although the data underlying this estimate are not yet available, Jakarta
probably based its calculation on an official OPEC oil price of $29 per barrel.
Last year, Jakarta based revenue projections on a $34 per barrel price, an
assumption that proved wrong even before the fiscal year started. Soeharto is
also projecting a 20-percent increase in foreign aid and official foreign
borrowing over last year's $3.5 billion. Although foreign bankers currently are
willing to lend large amounts to Indonesia, a drop in oil prices would raise bor-
Malaysia Cuts The Malaysian Cabinet has substantially reduced project spending for the
Economic Development remaining two years of its current economic development plan. The cuts follow
Spending last fall's austerity budget, which is designed to curb large budget deficits-15
percent of GNP in 1983-and slow the rapid growth of its foreign debt.
Although Kuala Lumpur has not announced which projects will be affected,
we expect cutbacks to involve a major highway extension, a Malayan Railways,
retracking/refurbishment project, a new oil refinery, and a domestic pipeline
construction project.
Reduced development spending will slow the pace of transferring a substantial
portion of the nation's corporate wealth from ethnic Chinese to ethnic Malays.
Deputy Prime Minister Musa announced last month that the government's
target of 30-percent ethnic Malay control by 1990 is no longer realistic and
that other target dates in Malaysia's master economic plan will have to be
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tarnishing the government's political imag
The IMF and Grenada's interim governing council held initial talks last month
to consider a one-year standby loan of up to $4.7 million, according to US Em-
bassy reporting. An IMF team is scheduled to visit the island later this month
to negotiate the new agreement, but no disbursement is likely before April.
Implementation of a new program-Grenada's two-month-old Extended Fund
Facility was suspended following the collapse of the Bishop regime-may
prove troublesome for the inexperienced government. The IMF apparently will
require Grenada to generate a surplus in its budget for noncapital expendi-
tures; last year's deficit was an estimated $4.4 million. Grenada's already high
tax rates and its desire to attract private investment are likely to rule out
significant tax hikes. Reduction of central government expenditures, however,
will cause public layoffs, exacerbating the already serious unemployment and
Zimbabwe Requests Rapidly dwindling stocks of corn-the dietary staple-have prompted an
Fo d Aid urgent request to Washington for 50,000 metric tons of PL 480 food aid. The
Mugabe government claims that without the aid shortages will appear in
April, a few weeks before the next harvest reaches the market. Harare is
coming up short partly as a result of the sale or donation last year of nearly
160,000 tons of corn to drought-stricken neighbors, including Zambia, Mo-
zambique, and Tanzania. In addition, Zimbabwe probably will require
additional food aid later this year. Rainfall has remained below normal, and
even the most optimistic official projections call for a corn harvest sufficient
for, at most, 10 months of normal domestic consumption. Moreover, the
growing number of Mozambicans who have migrated temporarily to
Zimbabwe in search of food are boosting demand
Soviet Loan Moscow's effort to reenter the long-term commercial credit market after an
Syndication Failing absence of almost four years is in trouble. In mid-November the Soviet
Foreign Trade Bank named a leading West German bank to head up a $150
million general purpose syndication for the USSR.
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20 January 1984
the loan is still in the preliminary discussion stage, and no
major bank has agreed to participate. The lukewarm response by Western
bankers probably reflects concern about East-West relations. Banks reportedly
are wary of making long-term loans to the USSR because they believe the
East-West political situation is too unstable. Moreover, bankers are question-
ing the USSR's need for hard currency. Unless the lead bank generates
greater interest in the syndication quickly, the Soviet attempt to test the long-
term loan market could become an embarrassment.
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Soviet Trade Officials TASS announced last Friday that two former officials of the State Committee
Executed for Foreign Economic Relations had been executed for "systematically taking
large bribes." These are the highest level officials to be executed for corruption
since Andropov became the party leader. One was the former chairman of the
association that provides foreign support for Soviet electric power stations. The
other was the former director of the import office of the same association. The
executions indicate that Secretary General Andropov's campaign against 25X1
corruption is continuing. Andropov is the Chairman of the Presidium of the
Supreme Soviet-the appellate body in capital cases of this kind-which
denied an appeal for clemency for the two.F____1 25X1
Planned Polish Price The regime's reduction in the size of planned increases in retail food prices sets
Incases back its austerity program and reflects a continuing lack of confidence. The
Bleaker Outlook for Bucharest has announced exceedingly optimistic economic targets for 1984,
government now plans increases in food. prices on 30 January averaging only
10 percent instead of the originally projected 15 percent. Prices of many staple
foods such as milk, sugar, and low-quality meats will not be raised under the
new proposals in order to help minimize the impact on low-income groups. The
prices of other items such as expensive cuts of meat-which generally are
unavailable-are scheduled to increase more than originally proposed. Retir-
ees already have been granted early pension increases, and the government is
considering additional compensation for them and for low-income workers. F_
austerity
The authorities are taking these actions to show their responsiveness to public
opinion. The party newspaper reported criticism of the most recent plans by
representatives of the unions and promised to forward the comments to the
Council of Ministers, where the decision will be made. The authorities are
likely to hope that they can improve their credibility by allowing and even en-
couraging a critical discussion of their policies. They also hope to show they
have learned from experience not to surprise the workers with large, unexpect-
ed increases. The retreat on price increases, however, will make it more
difficult for Warsaw to persuade Western creditors that it is committed to
supposedly to be achieved by increased labor productivity and worker disci-
pline and more efficient use of energy and materials. The plan calls for a
7.3-percent rise in national income, and a 6.7-percent growth in industrial
output. By contrast, in 1982 national income was officially reported to have
grown only 2.6 percent and industrial output only 1.1 percent; 1983 data is not
yet available, but the performance was probably not much better. Even more
ambitious is this year's grain output target of 29 million tons, 30 percent above
the officially claimed record level achieved in 1982. Bucharest also plans
another sizable trade surplus of $1.7 billion, according to data supplied to the
IMF last December.
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We doubt that Romania will be able to pull out of its economic tailspin this
year. Severe cuts in hard currency imports in 1982 and 1983 have reduced the
potential for industrial growth; Romania's economy is among the most
sensitive in Eastern Europe to shifts in nonagricultural imports. In addition,
agriculture has been hit by drought, livestock diseases, and reduced fertilizer
supplies. Finally, Bucharest's campaign to retire 25 percent of its $10 billion
foreign debt by 1985 will require the export of industrial and agricultural
inputs that could be used at home, as well as the continued curtailment of bad-
ly needed imports of Western technology. The consumer-already suffering
from severe food and energy shortages-will almost certainly bear the brunt of
the regime's failure to meet the unrealistic economic goals.F - - - ]
Vietnam's Trade
Deficit Narrows
Hanoi announced in December that substantially increased exports will cut its
foreign trade deficit to $630 million in 1983-a 30-percent reduction from the,
previous year. The increase in exports is primarily the result of growing sales
of light handicrafts and seafood to Communist and Western nations. This
announcement follows recent official statements proclaiming near self, ,
sufficiency in food and a major increase in economic growth
The increases in production and exports-largely the result of favorable
weather, export promotion activities, and incentive measures introduced in.
1979 to overcome severe food shortages-do not represent any fundamental
improvements in the economy. Indeed, Hanoi's reversal of some of the
incentive policies may cut short the growth in food production. Moreover,
despite the improvement in the balance of trade, foreign exchange reserves are
practically exhausted, and overdue payments of about $300 million on
Vietnam's hard currency debt of $1.5 billion is precluding access to interna-
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Risks of an Oil Price Decline
Overproduction and low demand have kept down-
ward pressure on oil prices and recently forced a
number of producers to lower prices. Eroding disci-
pline among OPEC countries and prospects of a
seasonal cutback in oil demand this spring could
place additional downward pressures on prices.
Nigeria, OPEC's weakest link, continues to suffer
economic problems that might prompt the new
government to announce a unilateral price cut. If
Nigeria or others move to increase their market
share, a downward oil price spiral could ensue. The
central factor working against such an eventuality
would once again be Saudi willingness to cut
production. At this point, Saudi Arabia appears
willing to defend the current benchmark price but
only if other producers adhere closely to their
production quotas. The political situation in the
Middle East remains unsettled, and market condi-
tions could tighten if Iran or Iraq disrupt oil flows
from the region.
Overproduction and weak demand have put down-
ward pressure on prices in recent months. OPEC
crude production in the fourth quarter averaged
about 19 million b/d, some 1.5 million b/d above
the cartel's production ceiling. We estimate non-
Communist oil consumption in the fourth quarter
rose by about 1 percent, considerably less than
most companies had anticipated. As a result, oil
inventories at yearend remained in excess of com-
pany needs, and spot prices for most crudes have
declined to about $1 below official prices.
Our concern about a replay of last year's oil price
drop is mounting, even though a number of under-
lying market conditions are working in favor of
price maintenance:
? Unlike the sharp 6-percent decline in fourth-
quarter oil use in 1982, oil consumption actually
increased in the same period in 1983.
? Weather conditions in North America are decid-
edly colder than last year, boosting consumption
of fuel oil and other heating fuels.
? The level of excess inventories is less than that of
a year ago. Oil stocks at yearend stood at 90 days
of consumption compared to 96 days at yearend
1982.
? OPEC crude production of 18.7 million b/d in
December was about 500,000 b/d below year
earlier levels.
? Spot oil prices have weakened, but the decline is
not as sharp as last year. Spot prices for most
crudes are now about $1 below official prices
compared to a $3 to $4 spread early last year.
Price Developments
Nonetheless, in addition to weak spot prices and
growing financial pressures in many oil-producing
countries, several other signals indicate a repeat of
last year's oil price slide may be developing:
? The Soviet Union reduced its price by $1 per
barrel late last year and Egypt lowered its con-
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tract prices by $0.25 to $0.50 per barrel, effective
1 January. In addition, Cairo announced it would
review oil prices monthly. Both countries are now
undercutting comparable OPEC crudes by about
$1 per barrel.
? Statoil, the Norwegian oil company, reduced the
price of its Statfjord crude by $0.20 per barrel in
early January.
? The British National Oil Corporation (BNOC)
proposed freezing contract prices for first-quarter
1984 at current levels, but still faces some buyer
resistance to its proposal.
Indonesia's Perta-
mina is marketing crude oil under arrangements
that effectively discount its oil by $1 to $2 per
barrel in an effort to boost exports.
? Ecuador lowered its crude oil price by $0.70 per
barrel in January.
? Iran recently signed crude contracts for as much
as 1 million b/d with several major customers at
prices pegged to spot prices, according to an oil
industry source. Tehran also reportedly eased
destination restrictions and will allow customers
to swap crude to third parties.
? Oman effectively lowered the selling price of its
crude $0.45 per barrel to Japanese and British
buyers by extending the payment period, accord-
ing to press reports.
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20 January 1984
Key factors to watch in the coming weeks that
might portend a decline in oil prices are
? Continued OPEC crude production well in excess
of the cartel's 17.5-million-b/d quota, with Saudi
output in excess of 5.5 million b/d being a key
factor.
? Absence of a sustained rebound in oil
consumption.
? Falling spot crude prices that dip $2 to $4 below
official prices.
? Exodus of buyers for North Sea crudes, forcing
BNOC to step up spot market sales.
? A sharp decline in Nigerian production to well
below 1 million b/d.
? Saudi hints that it is no longer willing to defend
the benchmark.
? Increases in price discounts such as barter deals,
credit terms, or linkages with spot price deals in
countries such as Libya, Iran, and Nigeria
with most recent industry projections.
The near-term demand outlook will depend mainly
on the pace of the economic recovery in OECD
countries, inventory patterns, and seasonal weather
conditions. Based on available information and
projected weather patterns, we expect a modest
increase in oil consumption in early 1984 in re-
sponse to the continued economic recovery and
further erosion in real oil prices. As a result, we
expect non-Communist consumption to increase 2
percent in first-half 1984 over year-earlier levels.
We estimate first-quarter consumption at about 46
million b/d with an expected seasonal decline in
consumption to 43 million b/d in the second
quarter. Our consumption forecast is consistent
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If consumption predictions hold, inventory deci-
sions will play the key role in determining the level
of oil demand at least through first-half 1984. Oil
companies still have leeway to reduce inventories
because of overproduction and unexpectedly weak
consumption in, the fourth quarter. Prospects for
continued price weakness likely will cause reduc-
tions in excess inventories in early 1984. We esti-
mate that about 200 million barrels will be drawn
down during first-half 1984. We anticipate that the
inventory drawdown through March will approxi-
mate 2.5 million b/d, followed by little or no
seasonal stockbuilding during the second quarter.
As a result, demand for OPEC oil, including about
1 million b/d of natural gas liquids, will approxi-
mate 18.5 million b/d in first-half 1984, or some 1.5
million b/d below fourth-quarter levels. Should the
rebound in total oil consumption fail to materialize,
demand for OPEC oil in first-half 1984 could fall 1
million b/d or more below the group's current
production ceiling. Unless OPEC producers cut
production accordingly, oil prices will fall.)
The key to the near-term price outlook will be
producer cooperation. Although OPEC reaffirmed
its nine-month-old production accord in early De-
cember, this action did little to improve compli-
ance, and the cartel is not scheduled to formally
consider changes until July 1984. Given the grow-
ing financial pressures in several producing coun-
tries and the political animosity between some
members, OPEC could be hard pressed to maintain
an effective production-sharing agreement in the
months ahead. Competition between the United
Kingdom and Nigeria for market share over the
next few months could trigger price cuts by either
country and set off a downward price spiral. F_
United Kingdom
In the absence of more discipline from OPEC
countries, official oil prices of some non-OPEC
producers-especially the United Kingdom-could
again come under pressure. We expect London will
attempt to hold prices through the first quarter, but
a reduction in US domestic oil prices or a further
weakening in spot prices that causes a major buyer
exodus could force a British price reduction. Rapid
acceptance of BNOC's price proposal by the major
oil companies operating in the UK indicates that
these companies at least have little desire to see
prices fall. Indeed, recent press reports indicate
that these companies may voluntarily limit oil
output in coming months to reduce price pressures.
The companies are aware that a British cut could
trigger price cuts by other producers, especially
Nigeria, because Lagos produces oil that competes
directly with North Sea crudes. If some price
reduction does become necessary, BNOC probably
first will attempt to adjust prices of crudes other
than Brent-now priced the same as Nigeria's
Bonny Light-in an attempt to technically leave
British and Nigerian prices at parity. Any unilater-
al reduction in oil prices by the Nigerians, however,
probably would be quickly matched by the United
Kingdom.
Nigeria
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Most equity producers in Nigeria view Buhari as
experienced in oil matters; he served as chairman of
the NNPC in the 1970s. We believe this experience
will sensitize Buhari to the advantages of moving
slowly on any pricing decision because he is fully
aware of the impact of a price war on Nigeria's
economy. Indeed, General Buhari has stated pub-
licly his intention to remain in OPEC and that any
change in its OPEC membership would come only
after consultation with other cartel members. Giv-
en Buhari's oil experience, he may eventually use
the threat of a price cut and production increase to
seek financial assistance from other OPEC mem-
bers.
The US Embassy in Lagos reports that last year
Saudi Arabia loaned Nigeria $400 million to help
offset declining oil revenues. OPEC's refusal to
give Lagos a higher production quota or additional
financial aid may ultimately prompt Buhari to cut
prices.
Several other OPEC countries faced with financial
problems are under pressure to increase export
earnings. We would expect that most of these
producers would match any sizable Nigerian price
cut:
? Venezuela can no longer meet its revenue re-
quirements and comply with its 1.7 million b/d
quota by drawing down inventories to keep ex-
ports high,
The country's inventories
have been reduced to such a low level that
Caracas will need to increase production to main-
tain exports. Recent statements by Venezuelan
oil officials indicate, however, that Caracas prob-
ably will not significantly exceed its assigned
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20 January 1984
quota for fear that other producers will also
increase their current production levels.
? Iran probably will continue to tie crude oil export
prices to the prevailing spot market price. Iran's
new pricing arrangement could encourage other
OPEC members who produce comparable quality
crudes to negotiate similar deals rather than risk
losing market shares.
? Libya was unable to sell much of its December
production, and Libyan oil officials reportedly
fear continued weak demand could precipitate a
further reduction in liftings.
Saudi Arabia-The Key Player
Saudi Arabia will play the key role in determining
oil price developments from the producer side.
Although the Saudis may believe OPEC oil is still
overpriced, Riyadh is mindful of the dangers of an
uncontrolled round of price cuts. Unlike last year,
the Saudis have not issued public threats to reduce
the price of oil and have, in fact, stated their
support for the current price. As a result, we feel
the Saudis currently view defense of OPEC's $29-
per-barrel marker price as the best option available.
Indeed, Saudi production has fallen gradually from
its September 1983 peak of 6.2 million b/d to 5.6
million b/d in December; we expect January's
output will approximate 5.2 million b/d. If demand
for OPEC oil weakens during first-half 1984 as we
now expect, Riyadh probably will be willing to cut
output below 5 million b/d-perhaps as low as 4
million b/d-to defend prices. If, however, other
OPEC countries do not adhere closely to their
production ceilings and force Saudi output even
lower, Riyadh may reconsider its options and the
risk of a price collapse would increase.
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The Iran-Iraq Risk
Although we expect the market.to remain weak
over the coming months, the volatile situation in
the Middle East could cause a rapid turnabout.
Iraq's deterioriating economic situation, coupled
with the recent acquisition of French Super Eten-
dard aircraft with Exocet missiles, could prompt
Baghdad to initiate attacks against oil shipping in
the Persian Gulf in an effort to bring an end to the
conflict with Iran. Such action might induce Iran
to carry out its oft repeated threat to retaliate by
closing the Persian Gulf to shipping or to strike out
against the oil facilities of Iraq and its Gulf allies.
Any major disruption to oil flows in the region
could quickly ti lit plies and reverse market
psychology.
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Israel: Trade Union Stymies Austerity
Finance Minister Cohen-Orgad probably will not
be able to carry out his austerity policies, largely
because of a lack of support from the Histadrut,
Israel's large labor organization. The "honeymoon"
that developed when the Finance Minister took
office in October is over. Strikes and work slow-
downs have increased recently, and more are
planned to demonstrate worker opposition to nearly
200-percent inflation and Cohen-Orgad's call for a
10- to 15-percent cut in real wages this year. An
estimated 60,000 government workers-15 percent
of public-sector employees-are now involved in
such actions. Given its ties to the opposition Labor
Party, there is little incentive for the Histadrut to
compromise
The Histadrut: A Powerful Institution
Founded in 1920, the Histadrut is not only an
umbrella organization for 43 trade unions, but it is
also the largest employer in Israel. Hevrat Ovdim,
the division of the Histadrut that owns commercial
enterprises, was established in 1924 to provide jobs
for immigrants; it also represented the fulfillment
of the socialist ideology of the Histadrut's founders
that agriculture and industry should be owned by
workers. Histadrut affiliates employ one in four - .
Israeli workers, produce 90 percent of the country's
agricultural products and 25 percent of the manu-
factured goods, and control 85 percent of domestic
transportation. Management of these firms, how-
ever, is instructed to operate in the most efficient
manner and to adhere to the same labor relations'
and wage agreements that Histadrut officials nego-
tiate with the Manufacturers' Association, the um-
brella organization of private firms.
With 90 percent of the labor force as members and
a traditionally tight labor market-the average
unemployment rate since 1968 has been 3.7 per-
cent-the Histadrut has been able to dominate
Israeli Wage Negotiations
Every other year a national agreement on wages
and labor relations is negotiated between the
Histadrut and the Manufacturers' Association.
Although the government is not a party to the
national agreement, it usually applies the
agreement to public-sector workers. The national
agreement constitutes the framework within which
individual trade unions are supposed to negotiate.
The agreement also includes the cost-of-living
adjustment formula. Once each union has worked
out details of an industrywide agreement, the.
terms are extended to all workers in'the sector,
including nonunion employees. Following agree-
ment on industrywide contracts, individual firms
and workers' committees bargain over such things
as additional wages, annual leave, and promotions.
negotiations to win large real wage gains for its
members. Real wages have risen at an average
annual rate of 7.1 percent since 1975. In addition,
the Histadrut has played a key role in the develop-
ment of a pervasive system of indexation that
protects Israelis from the ravages of triple-digit
inflation.
The Histadrut has always been the power base of
the Labor Party. Its economic enterprises provided
funds for the party organization and jobs for loyal
members. In return, Labor governments protected
the interests of the Histadrut in a symbiotic-rela-
tionship that ended with the election victory in
1977 of Menachem Begin's Likud bloc and the
installation of the first nonsocialist government in
Israel's history.F_~
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Israel: Wages and Unemployment
Real Wagesa
Index: 1980=100
90 1980
aQuarterly data.
b Estimated.
1982 1983b
Unemployment
Percent
Relations With Likud
Begin took office in June 1977 and was committed
to moving the economy toward a more free market
orientation. He appointed the head of the Liberal
Party, a party advocating capitalist ideas, to the
Finance portfolio. Many of Begin's campaign
promises-compulsory arbitration and nationaliza-
tion of the pension and health insurance systems-
threatened key Histadrut activities. Egyptian Presi-
dent Sadat's visit to Jerusalem in November 1977,
however, turned the Begin government's attention
to foreign policy. With Begin uninterested in eco-
nomic issues, the Histadrut easily fended off the
government's halfhearted attempts at economic
Faced with accelerating price hikes, former Fi-
nance Minister Aridor, who took office in January
1981, concentrated his efforts on cutting inflation.
Realizing that the indexation system and real wage
gains are major factors in Israel's inflation, he
Secret
20 January 1984
unsuccessfully tried to get the Histadrut to agree to
forgo real wage increases. Histadrut officials, how-
ever, are under little pressure to protect jobs by
moderating wage demands. One of the basic tenets
of Israeli policy has always been that significant
unemployment is unacceptable. In addition to the
normal reluctance to incur the political costs of
high unemployment, Israeli politicians have public-
ly stated their moral obligation to provide jobs for
foreign Jews taking up permanent residence in
A Short Honeymoon
Cohen-Orgad took office in October after Aridor
was forced to resign when his "dollarization"
plan-which we believe he intended as a device to
circumvent the indexation system-was leaked.
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Israel's Pervasive Indexation System
Most Israelis are protected from inflation by the
indexation system. As a result, the average con-
sumer has fared well in recent years despite triple-
digit inflation. Histadrut officials and Israeli poli-
ticians over the years have responded to
accelerating price hikes by increasing the amount
and frequency of adjustments rather than attack-
ing the causes of inflation. As long as Israeli
politicians will not tolerate unemployment levels
much above 7 percent and Histadrut leaders ex-
ploit this to bargain for large real wage gains,
Israel is in a vicious cycle that would be politically
risky to break.
Wages. At present, wages" are indexed at 80 to 90
percent of the increase in the consumer price index
(CPI), depending on the inflation rate, and adjust-
ments are made quarterly. Between 1975 and 1979
the compensation factor was 70 percent, and from
October 1979 to July 1983 it was 80 percent. Cost-
of-living adjustments were made annually before
1973, twice yearly from then until 1980, and
quarterly since 1980. Additional bargaining at the
industry and plant levels in the traditionally labor-
short economy has more than made up the differ-
Other Income. Pensions and welfare payments
have been fully linked to the CPI for a number of
years, and adjustments are made quarterly. This
practice stems, in our view, from a widely held
belief in Israel's egalitarian society that the elderly
and poor should be sheltered from inflation.
Financial Assets. The principal on long-term sav-
ings accounts is fully linked to the CPI, and
Israelis earn positive real rates of return averaging
3 percent. Government-issued bonds are indexed at
either 80 percent or 100 percent and also have a
real rate of return of about 3 percent.F_~
Mortgages. The principal on mortgage loans was
first indexed in 1980. Until then, mortgage pay-
ments were not linked. As a result, lenders de-
manded such large downpayments that many
young couples were excluded from the mortgage
market.
Taxes. Tax brackets are adjusted quarterly by 100
percent of the consumer price rise. Thus, Israelis
can be put into a higher tax bracket only if their
real earnings increaseF__-]
ence, resulting in large real wage gains.
Cohen-Orgad and Histadrut officials publicly stat-
ed their willingness to discuss Israel's economic
problems and to devise solutions; at the time,
Histadrut officials told US Embassy officers that,
while they would defend the cost-of-living adjust-
ment system and real wage gains, they were willing
to discuss other issues. At a meeting on 9 Novem-
ber, Histadrut Secretary General Meshel and
Cohen-Orgad agreed to set up committees that
would also include representatives of the Manufac-
turers' Association to study ways to promote ex-
ports, restrict imports, and help firms with financial
problems.
Cohen-Orgad's often-stated public calls for a de-
cline in real wages of 10 to 15 percent this year and
large price hikes in recent months have probably
eliminated any chance that he could reach agree-
ment with the Histadrut on austerity; even the
agreed-upon committees have not been established.
The Cabinet on 1 January authorized Cohen-
Orgad to negotiate a "package deal" on wages,
prices, and taxes with the Histadrut and the Manu-
facturers' Association, but Histadrut officials
quickly rejected the idea. They believe that differ-
ences between the government and the Histadrut
are too great and that the government is trying to
put the burden of economic retrenchment on wage
earners, pensioners, and those on fixed incomes,
according to reporting from the US Embassy.
Histadrut Deputy Secretary General Kessar told a
US Embassy officer that Cohen-Orgad's state-
ments are generating rank-and-file pressure for
militant action and that the worsening economic
situation could increase strike actions. I
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Histadrut officials have decided to take the same
approach to accelerating inflation that they have in
the past-lerimanding larger and more frequent
wage adjustments. A Histadrut official told a US
Embassy officer that the current wave of labor
unrest might be dampened by monthly (rather than
quarterly) cost-of-living adjustments and two (in-
stead of one) salary payments per month. We
believe these will be key Histadrut demands when
the current framework agreement expires on
1 April. He also indicated that the Histadrut would
seek government retraction of reductions in over-
time and travel allowances recently agreed to by
the Cabinet.
Cohen-Orgad has already lost the first round in
negotiations with the Histadrut over payment of an
advanced cost-of-living adjustment, demonstrating
a lack of bargaining skill that the Histadrut will
undoubtedly try to exploit in the future. The Hista-
drut received the full amount of the advance they
had demanded after making only minor concessions
to Cohen-Orgad and the Manufacturers' Associa-
tion. The US Embassy reported that the employers
and government acquiesced in the face of threats of
labor unrest that might harm exports. The US
Embassy reports that Histadrut leaders are private-
ly saying that the government has already lost
control over economic policy and that a new gov-
ernment is necessary
Given its ties to the opposition Labor Party, there is
little incentive for the Histadrut to reach an accom-
modation with Cohen-Orgad. According to recent
press reports, Labor Party officials believe it is only
a matter of time before the faltering economy
brings down the Shamir government. Histadrut
officials are probably calculating that they can get
a better deal from Labor. In any event, they believe
they could not justify acceptance of Cohen-Orgad's
proposals to their members, and, in our judgment,
Histadrut officials have nothing to lose by taking a
tough stand.
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20 January 1984
Implications for the United States
Cohen-Orgad cannot hope to carry out his austerity
policies without Histadrut acquiescence. Because
this is most unlikely, we believe Israel's balance-of-
payments situation will continue to deteriorate.
Unless commercial bankers are willing to increase
lending, Israeli officials will again look to the
United States to bail them out.
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Egypt's Worrisome Food Gap
Agriculture, a cornerstone of the Egyptian economy, is
suffering from inadequate investment and government poli-
cies that overlook many of the sector's pressing needs.
Increases in agricultural production have failed to keep up
with population growth since the mid-1960s, let alone meet
increased food demand fostered by gains in per capita
incomes. As a result, Egypt imports over 50 percent of its
food at an estimated cost of about $3 billion in 1982. These
imports utilize about 30 percent of Egypt's foreign ex-
change earnings and are increasingly worrisome with the
reemergence of foreign payments difficulties. Because con-
tinued high domestic demand and limited arable land
provide little hope that Egypt's food gap will narrow, we
believe that food imports will remain large and that Cairo
All press donors for increased food aid.
Agriculture's Declining Fortunes
The extent of government resources allocated for
agriculture has fluctuated dramatically over the
past several decades. In the mid-1950s, agricul-
ture's share of total investment was 9 percent. This
rose to over 25 percent in the mid-1960s because of
the investment program associated with the con-
struction of the Aswan High Dam. After comple-
tion of the dam in 1970, the government shifted its
attention to industrial development; by 1975, in-
vestment in agriculture had fallen to about 7
percent of GDP.
The focus of government investment also limited
agricultural growth. Few amounts were allocated
for extension services, research, cooperatives, or
inputs such as high-yield seeds and fertilizer that
would aid small farms. Instead, emphasis was
placed on large-scale projects such as the High
Dam and land reclamation, which accounted for
almost 75 percent of total agricultural investment
during the 1960s. Although these efforts helped to
add about 360,000 hectares of arable land-at an
estimated cost of about $1,100 per hectare-the
new land was generally of poor quality, and follow-
up investment to enhance productivity was slow to
materialize. Moreover, although the High Dam
increased water availability and made double- and
triple-cropping possible, new problems such as poor
drainage and untimely irrigation were fostered by
inept and disinterested local government agents.F-
Neglect of small-scale agriculture and the ineffi-
cient utilization of newly reclaimed areas had a
gradual but important negative impact. According
to academic and World Bank studies, agricultural
output grew at annual rates of 3.5 to 4 percent
during 1955-65, fell to about 2.2 percent between
1965 and 1971, and has averaged less than 2
percent in recent years. Nevertheless, the agricul-
ture sector continues to account for 20 percent of
GDP and provides employment for 36 percent of
Egypt's labor force of 13 million.
Food demand has been pushed up by rapid popula-
tion growth and rising per capita incomes. Egypt's
population has increased about 3 percent annually,
and official figures show that real incomes have
grown by an average of 4 percent annually since
1970. Income growth was spurred by oil revenues,
Suez Canal earnings, and remittances from the
nearly 1.7 million Egyptians working abroad. The
increase in real incomes has been enhanced by 25X1
government price controls. As a result, the average
Egyptian now consumes about 2,800 calories per
day-equal to nearly 115 percent of recommended
daily requirements-a level on par with many
developed countries. Government subsidies on other
items-such as petroleum, electricity, and goods
produced by public-sector companies-have added
to food demand by freeing income that would have
been spent on other items.
As food consumption rose, Egypt's agricultural
trade balance deteriorated. The turning point came
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in 1973 when net agricultural trade, including
cotton, recorded a deficit of almost $100 million.
This gap reached $1.1 billion in 1978 and doubled
to $2.3 billion in 1981. The deficits were largely
caused by grain imports, but imports of meat, dairy
products, and sugar were substantial as well.F__1
Food Imports and Subsidies Spark Concern
The widening gap between domestic food produc-
tion and demand has become increasingly worri-
some to Cairo with the reemergence of foreign
payments problems. Although food has accounted
for well over 30 percent of total imports since the
mid-1970s, these purchases were reasonably man-
ageable between 1978 and 1981 because of the
financial windfalls that accrued from Suez Canal
and oil earnings as well as increased inflows of
worker remittances. Beginning in 1981, however,
growing current account deficits have made financ-
ing the $3 billion food import bill a major problem.
The Egyptian Government not only subsidizes sta-
ples such as bread and flour, but it also endeavors
to provide ample supplies at low prices. These
practices have serious implications for the govern-
ment's precarious budget situation and have
sparked considerable concern among high govern-
ment officials. Food subsidies cost Cairo $1.6 bil-
lion, almost 10 percent of total government expend-
itures in FY 1982/83. Although Cairo has come
under considerable pressure to reform the subsidy
system-for both budgetary reasons and as a pre-
requisite for an IMF standby agreement-political
considerations have so far limited reform to only
token moves.
Stagnant or falling world market prices for primary
food commodities reportedly kept Egypt's public
food import bill in the $3 billion range again in
1983. The Egyptian Government has attempted to
clamp down on imports of luxury food imports, but,
with oil earnings recording only marginal increases
Secret
20 January 1984
Institutional Setting
Government controls are pervasive covering water
distribution; acreage allocations for various crops;
pricing and supply of primary inputs; and pricing
and marketing of major crops, including cotton,
wheat, maize, and rice. About 85 percent of farm-
ers use human labor to produce for their own
consumption and local markets. The other 15
percent use communally owned machinery to pro-
duce crops for off-farm sale. Over 95 percent of
land titles are for lots of about 2 hectares,. but
leasing is common, shrinking average farm size to
about 1.4 hectares.
and Suez Canal earnings limited because of the
drop in world oil trade, expenditures for food
imports continue to command about 30 percent of
foreign earnings. Concessional food aid of over
$400 million in FY 1982/83, mainly from the
United States and the European Community, has
eased the situation somewhat, but financing
Egypt's food imports continues to be a matter of
deep concern to Cairo.
Barring a drastic decline in real incomes, we.
believe food demand will continue to grow. At the
same time, we see only limited prospects for in-
creasing domestic production. The government goal
of becoming self-sufficient in cereal production by
1990-including wheat, corn, and rice-is clearly
unreachable. Aside from the limitations imposed by
Egypt's scarcity of arable land, other factors will
continue to keep demand high for imported food:
? The government is reluctant to make more than
minor changes in the politically sensitive subsidy
system; even if some food subsidies were signifi-
cantly lowered, academics argue that only a
marginal falloff in demand would occur.
? Low procurement prices discourage production of
wheat and other staples.
? There is little expectation of a significant drop in
the population growth rate by the end of the
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? There is little expectation of a significant drop in
the population growth rate by the end of the
decade or even this century.
? Academic and World Bank sources estimate that
urban sprawl is claiming 1 percent of prime
.agricultural land along the Nile per year.
Thus, should international commodity prices rise
again, Egypt's food bill will renew its upward track.
In this event, Cairo would no doubt continue to
press .major donors, mainly the United States and
the European Community, for increased food aid.
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West Germany: Soviet Trade
Relations on Tracy
Although Bonn has been concerned that frictions
with Moscow over INF deployment and. other
security issues would spill over into the trade arena,
West German-Soviet commercial relations appear
to remain on a stable footing. Trade continued to
expand during the first three quarters of 1983, even
though lower Soviet energy export prices cut Soviet
revenues. Economic factors, however, such as the
winding down of West German sales for the Siberi-
an pipeline and domestic Soviet economic prob-
lems, probably will slow trade expansion over the
next few years. Lower oil prices and the softening
of West German natural gas demand will reduce
Soviet hard currency earnings. Consequently, Mos-
cow's inclination to commit itself to new large-scale
purchases from West German firms will depend in
large part on the availability of West German
credits.
Despite Soviet calls for strengthening bilateral
economic ties, Moscow was vague in identifying
areas for future cooperation during the recent trade
meetings. Bonn, nevertheless, will seek to improve
its economic relationship with the Soviets because
it recognizes the positive-albeit marginal-impact
bilateral trade has on the domestic economy and
believes good economic relations with Moscow will
help stabilize political relations with Eastern Eu-
rope.
Recent Developments
West German-Soviet trade (exports plus imports)
continued to expand in 1983 and could top $9
billion for the year. For the first nine months,
exports to the Soviet Union jumped by almost 26
percent over the same period in 1982, largely
driven by a 50-percent increase in machinery sales.
By comparison, West German exports to the EC
remained flat, and sales to OPEC fell by almost 16
Plant, equipment, large-diameter pipe, and other
steel products account for 60 percent of West
German sales to the USSR. In addition to supply-
ing half of the large-diameter pipe and more than
one-third of the gas turbines for compressor sta-
tions on the Siberian natural gas export pipeline,
West German firms are manufacturing rotor com-
ponents for Soviet-built turbines and drilling equip-
ment for a Soviet natural gas field near Astrakhan
on the Caspian Sea. Other active projects include
modernizing and partially reconstructing a Soviet
papermill, constructing the Sayansk aluminum
smelter plant, and supplying grainhandling equip-
ment to update and expand existing facilities at
several Soviet seaports. Through September, iron
and steel exports just equaled sales for the same
period in 1982-suggesting that deliveries of steel
pipe for natural gas pipeline construction are taper-
ing off.
years-could show a surplus in 1983.
The value of imports from the Soviet Union was
down by 3 percent during the January-September
period. Although West German imports of Soviet
crude oil and products increased by 17 percent in
volume, falling prices have held down Soviet reve-
nues. In addition, the West Germans cut their
imports of natural gas by over 4 percent in volume
terms. As a result, West Germany's trade balance
with the Soviets-which has been in deficit for two
Bonn had been concerned that its support of INF
deployment in Western Europe would disrupt eco-
nomic relations with the USSR. Throughout the
summer, Moscow warned that political events
could damage commercial relations
percent.
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At the recent Mixed Economic Commission meet-
ings, however, the Soviet delegation reportedly did
not emphasize the link between deployment and
trade, but rather stressed the USSR's desire for
continued stable economic relations. During the
discussions, Moscow called for greater long-term
cooperation with West German businesses, espe-
cially in energy conservation, consumer goods, and
agriculture. Surprisingly, Moscow did not press for
increased West German purchases of gas, but
wants West Germany to increase its purchases of
Soviet-manufactured goods. West German Eco-
nomics Minister Lambsdorff apparently was con-
cerned, however, by the paucity of proposals for
joint large-scale projects. According to Embassy
reporting, Lambsdorff believes that a large coal-
conversion project in the Kansk-Achinsk region in
Siberia, one of the few major development projects
discussed, remains well in the future.
Probably as an added measure of reassurance,
Moscow resolved two longstanding complaints at
the Mixed Economic Commission meetings. The
Soviets approved the opening of automatic tele-
phone circuits between West Germany and the
Soviet Union for West German businesses, and
they agreed to issue multiple-entry visas for accred-
ited West German businessmen and their families
living in Moscow.
Bonn's Economic Perspective
Although the USSR absorbs slightly more than 2
percent of West German exports, Bonn continues to
place a high value on its economic relations with
the Soviet Union. West Germany's shipments to
the USSR account for over one-third of its exports
to the East Bloc and exceed its shipments to either
Japan or South America. The Soviet Union now is
West Germany's ninth-largest trading partner.
West Germany: Trade with the USSR, 1982
Million
US $
Share of Total
West German
Trade (percent)
3,869
.2.2
327
3.6
40
1.3
21
0.3
387
1.8
1,547
3.1
1,058
10.8
Machinery and transport
equipment
1,487
1.8
Metalworking machinery
298
9.4
Other
60
1.4
Imports
4,691
3.0
Agriculture
30
0.2
Raw materials
233
2.2
Fuels
3,695
10.1
Crude oil
793
4.3
Petroleum products
1,282
5.7
Natural gas
1,456
22.0
Chemicals
168
1.4
Manufactures
240
1.0
Machinery and transport
equipment
29
0.1
Bonn realizes that sales to the USSR have a limited
impact on overall West German economic activity.
According to West German estimates, only about
100,000 workers are directly employed in produc-
ing goods for export to the Soviet Union. Neverthe-
less, the high unemployment rate in West Germany
makes any source of employment politically impor-
Any cutback in Soviet purchases would significant-
ly affect those West German firms with substantial
ties to the Soviets. West Germany's large steel and
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West German/USSR Trade, 1982
machine tool industries depend heavily on exports;
Soviet purchases account for about 10 percent of
the industries' exports
The.USSR has been an especially welcome buffer
against hard times for West German steel firms.
West German steel production fell by almost 13
percent last year because of the worldwide steel
slump,.growing protectionism, LDC and East Bloc
debt problems, and competition from imports that
have captured about 40 percent of the domestic
market. Last year, Soviet purchases from West
German suppliers of large-diameter pipe and relat-
ed equipment accounted for about 8 percent of total
finished steel production. Moreover, unemployment
in the iron and steel industry is currently at 20
percent, more than double the overall rate. F__-]
At the current level of energy imports, Bonn does
not consider dependence on Soviet energy a signifi-
cant risk. About 10 percent of West Germany's
energy imports come from the Soviet Union, cover-.
ing only about 4 percent of primary energy needs.
Oil from the USSR-crude and products-ac-
counts for slightly more than 7 percent of total
West German oil consumption. Soviet gas now
comprises about 22 percent of total gas purchases,
a share that could grow to 30 percent in the 1990s.
Bonn claims, however, that overall energy depend-
ence on the USSR will stabilize at about 5 percent
because oil imports from the USSR are expected to
decline. Further, Bonn and the gas industry also
maintain that the Soviets are reliable suppliers, and
that, in any event, they could cope with a cutoff of
Soviet gas at least temporarily by increasing do-
mestic production and expanding imports from
other West European suppliers.
Trade with the USSR serves West German politi-
cal objectives in Eastern Europe. Bonn continues to
believe that closer commercial ties with Moscow
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will contribute to stability in East-West relations
and, in particular, help keep alive prospects for
more extensive contacts with East Germany. Bonn
believes the Soviet Union holds veto power over the
development of closer West German-East German
ties-the crux of Ostpolitik
Prospects for Expanding West German-Soviet
Trade
Although Bonn has been worried that political
conflicts with Moscow might damage growing eco-
nomic relations, energy market conditions are far
more likely to slow trade expansion in the near
term. Soviet exports to the West-hence its hard
currency earnings-depend heavily on world ener-
gy markets. The USSR managed to expand the
volume of its crude oil sales to West Germany last
year, but falling oil prices reduced hard currency
earnings. Natural gas demand in Western Europe
has been soft, further cutting Soviet export earn-
ings. Moreover, this situation is not expected to
change soon. Based on projected gas demand, the
West German gas entity Ruhrgas does not antici-
pate an increase in Soviet gas purchases before
1990 beyond the minimum amounts already con-
tracted for. Although Soviet exports to West Ger-
many will increase as gas starts flowing under the
Siberian pipeline contract-we currently estimate
by as much as $250-375 million in 1985-most of
these earnings will be offset over the next decade
by pipeline loan payments. Further, the Soviets
have had little success in exporting manufactures.
Secret
20 January 1984
Soviet orders.
The absence of specifics on joint large-scale proj-
ects at the bilateral talks probably reflects Mos-
cow's reaction to the slack market for its raw
materials, a possible trade deficit with the West
Germans, and concern about the availability of
favorable credits. It further suggests that Soviet
import plans could remain conservative until ener-
gy demand in Western Europe picks up. With no
new major projects in the offing and slowing
pipeline business, West German suppliers probably
can expect a leveling off or even a decline in new
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The Soviet Timber Industry
Although the Soviet Union has the largest forest
cover in the world and remains the leading produc-
er of lumber and the second-largest harvester of
logs after the United States, performance in the
forest products industry has faltered since the mid-
1970s. Timber .production-the source of raw ma-
terial for the forest products industry-has fallen
abruptly; by 1982 timber output was 8 percent
below the level of 1970. Lumber shortages con-
strained Soviet construction, shortfalls in paper and
cardboard output limited supplies of packing mate-
rials, and hard currency earnings from timber
declined by one-third in 1981 to $1.0 billion.F_
Export markets could improve dramatically by the
end of the 1980s. Moscow-with roughly one-fifth
of global timberland- will have an opportunity to
increase its share in West European markets as a
result of forced reductions in exports by Sweden
and Finland. Scandinavian forests have been over-
cut and will not be able to sustain current export
volume for long. Other opportunities for increases
in exports may come from Japan and China. Soviet
fortunes could improve further by the turn of the
century if the rapid rate of deforestation in world
tropical forests continues. Although its vast supply
of coniferous wood is not a perfect substitute for
tropical reserves, the USSR could expand its trade
and possibly enjoy price increases. The key to
greater production, however, will be overcoming
existing production bottlenecks
Domestic Shortcomings
The decline in the timber industry stems primarily
from transportation snarls. Since 1975 the decline
in timber hauled by rail has been far greater than
USSR: Hard Currency Million US$
Forest Products Exports
Source: Official Soviet foreign trade statistics, Vneshnaya
torgovlya.
accommodate.
the decline in timber output. The reason for this
plunge was a drop in priority. Timber is not
considered a major nor a strategic rail customer-
its share of total freight tonnage is only about 4
percent. With rail lines saturated and railcars in
short supply, Soviet railroad officials chose to
divert rolling stock earmarked for timber shipment
to other uses. Moscow even imposed bans and
embargoes on timber traffic during this period as
thousands of railcars were shunted to the move-
ment of grain and other critical commodities. As a
result, severe backups occurred in logging opera-
tions. Logs piled up at downstream concentration
points and at railroad depots. According to Soviet
calculations, the amount of timber that accumulat-
ed at these transit facilities ranged from two to five
times the amount the yards were designed to
Transportation bottlenecks plagued logging as it
was expanded to more remote regions. The distance
from processing centers increased as logging camps
shifted to new woodlands in Siberia, the Urals, and
northern parts of the European USSR. F___-]
Secret
DI IEEW 84-003
20 January 1984
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USSR: Output of Forest Products
and Forest Products Hauled by Rail
- Output of forest products
- Forest products hauled by rail
Transportation problems had a ripple effect
throughout the industry. Sawmills operated at little
more than 80 percent of capacity during the
1976-80 period because of timber shortages. Pulp
and paper inventories fell to 40 percent of the
norm, with many factories relying on day-to-day
wood deliveries. Even when raw materials were
delivered, pulp and paper factories operated inter-
mittently because there were too few railcars to
transport finished goods. Moreover,
the quality of pulp deteriorated,
resulting in paper that tore easily and increased
equipment downtime.
Besides the lack of raw wood, other inputs were in
short supply. Fuel shortages hampered logging
efforts. Electricity brownouts and fluctuations
damaged machinery and limited production in the
pulp and paper sector
Secret
20 January 1984
Insufficient Capital and Labor
Both capital and labor inputs allocated to the forest
products industry grew more slowly during the 10th
Five-Year Plan (1976-80) than in previous plans.
Moscow shifted investment funds to agriculture
and energy and substantially cut back the share
allocated to the forest products industry. From
1971 to 1975, the industry's share of total invest-
ment was 4.6 percent; by 1982 it was only 3.8
percent. As a result, the condition of fixed capi-
tal-most 35 to 40 years old and at a technological
level comparable with that of the United States in
the 1930s and 1940s-has deteriorated considera-
bl
A key source of equipment replacement-
imports-dried up because of scarce hard currency
and the Western sanctions precipitated by the
invasion of Afghanistan. Although forest products
machinery was not specifically put under embargo,
the general strain in East-West relations in recent
years has caused several timber machinery barter
negotiations with Japan to be canceled or post-
poned.
The Soviet forest products industry made matters
worse through poor investment choices. The Soviets
chose a two-pronged investment strategy-con-
struction of large-scale forest complexes at Bratsk
and Ust-Ilimsk' in eastern Siberia, and renovation
of older facilities in the northwestern and Ural
regions. Both yielded disappointing results. The
Siberian complexes ran into large cost overruns,
precipitated by poor coordination, the harsh cli-
mate, delays in the delivery of construction materi-
als, and problems in retaining workers. Renovation
of existing facilities in the developed European
region disrupted production, and many projects
were abandoned in midstream when funds ran out.
Employment in the lumber industry has been
shrinking steadily since the mid-1960s, with lum-
berjacks showing the greatest decline. This man-
power shortage in logging-so critical because of
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Secret
USSR: Average Annual Growth of
Forest Products Output
Forest products industry
2.6
2.9
2.6
-0.3
2.3
0
Logging
0.8
1.2..
0.8
-2.2
0.1
-1.3
Sawmilling and
woodworking
1.4
1.2
0.1
-3.1
0
-0.7
Source: CIA's index of Soviet industrial production. These indices
are calculated to account for the distortions in Soviet data that
result from double-counting and disguised inflation.
Future Export Opportunities
the resulting slowdown in the raw material flow-
has persisted. Poor housing and lack of public
services make it difficult to recruit and retain
workers. Despite substantial wage increases, labor
turnover has remained high. To supplement the
work force in logging and milling, the Soviets have
employed prisoners, foreign workers, and university
students.
Soviet plans call for the production of forest prod-
ucts to increase by 17 to 19 percent during the
1981-85 period. We believe, however, that actual
gains will fall short of this target. Railroad bottle-
necks may ease somewhat, but we do not foresee
the dramatic increase in the availability of rolling
stock necessary to raise output to the level of the
early 1970s. Moreover, the lack of major capital
outlays will leave equipment and machinery in poor
shape.
Forest products are the USSR's fifth-largest hard
currency earner, following fuel, gold, arms, and
machinery. Japan is the major purchaser of unpro-
cessed logs and wood chips, and the United King-
dom remains the primary buyer of lumber. We
estimate that hard currency earnings from timber
and timber products will average between $1.1
billion and $1.5 billion per year in the mid-1980s.
Underlying this growth estimate is our belief that
the supply of timber for export will increase as
some production bottlenecks are reduced and as
domestic consumption is held in check to provide
for exports. We expect a modest increase in de-
mand, particularly in Japan where construction
investment has turned upward.
Export opportunities could improve dramatically
late in the 1980s. Industry analysts expect strong
upward price pressures as the housing industry
increases demand for forest products. Moreover,
Moscow will have an opportunity to increase its
Secret
20 January 1984
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USSR: Composition of Forest Products. Exports'
1960
Total: 15 million cubic meters
1980
Total: 37 million cubic meters
share of West European markets later this decade
because of forced reductions in exports by Sweden
and Finland-major Soviet competitors. Scandina-
vian forests have been overcut and will not be able
to sustain current export volumes
Substantial increases in export volume could be
derived from trade with China and Japan. Beijing
is deficient in timber resources and is searching for
sources of wood; agreements with Soviet and US
foresters have already been reached. We believe the
Soviets will attempt to develop Siberian forests
adjacent to the Chinese border and will actively
compete with US companies for sales to the Chi-
nese. Tokyo's large existing timber-processing ca-
pacity and reliance on imports suggest that Japa-
nese businessmen will be looking for increased
timber imports as economic conditions improve.
Likely future deals already under consideration
include the construction of pulp and paper plants
on Sakhalin and logging and sawmilling facilities in
the Angara-Yenisey river basin
Soviet export opportunities could increase further
in the 1990s if the rapid rate of deforestation in
world tropical forests continues. The USSR's vast
Secret
20 January 1984
supply of coniferous timber, although not a perfect
substitute for tropical reserves, could enable Mos-
cow to expand its market share. The Soviets,
however, will have to overcome production bottle-
necks and market timber aggressively if they are to
exploit these opportunities
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